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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
COMMISSION FILE NUMBER 0-18836
MIDLAND RESOURCES, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
TEXAS 75-2286814
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NUMBER)
16701 GREENSPOINT PARK DRIVE, SUITE 200 77060
HOUSTON, TEXAS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(281) 873-4828
ISSUER'S TELEPHONE NUMBER
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.001 Par Value
Warrants to purchase common stock at $4.00 per share
Check whether the issuer (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, and (2) has been subject to such filing requirements for the past 90
days. Yes X
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. X
State issuer's revenues for fiscal 1996: $7,240,030
State the aggregate market value of the voting stock held by non-affiliates
computed using $5.75, the price at which the stock sold on March 26, 1997:
$15,703,359
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Common Stock, Par Value $.001 4,411,031 Shares as of March 26, 1997
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Report is incorporated by reference from the Issuer's
definitive Proxy Statement relating to its Annual Meeting of Stockholders, which
will be filed with the Commission no later than April 30, 1997.
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TABLE OF CONTENTS
Page
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PART I. 1
ITEM 1. DESCRIPTION OF BUSINESS. . . . . . . . . . . . . . . . . . . . . . 1
ITEM 2. DESCRIPTION OF PROPERTIES. . . . . . . . . . . . . . . . . . . . . 3
Oil and Gas Properties . . . . . . . . . . . . . . . . . . . . . . 3
Net Production, Unit Sales and Production Cost . . . . . . . . . . 6
Oil and Gas Reserves . . . . . . . . . . . . . . . . . . . . . . . 7
Drilling Activity. . . . . . . . . . . . . . . . . . . . . . . . . . 9
Other Property . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
PART II. 10
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . . . . . 10
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Plan of Operation. . . . . . . . . . . . . . . . . . . . . . . . . 11
Capital Resources and Liquidity. . . . . . . . . . . . . . . . . . 11
Results of Operations - Years ended December 31, 1996,
1995 and 1994. . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ITEM 7. FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . .36
PART III. 36
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT . . . . . . . . . . . . . . . . . . . . . . . 36
ITEM 10. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . 36
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 36
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . 36
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . 37
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
EXHIBITS
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CERTAIN STATEMENTS CONTAINED IN THIS DOCUMENT, INCLUDING WITHOUT LIMITATION
STATEMENTS CONTAINING THE WORDS "BELIEVES', "ANTICIPATES", "INTENDS", "EXPECTS",
AND WORDS OF SIMILAR IMPORT, CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT. SUCH FORWARD LOOKING
STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES, AND OTHER FACTORS
THAT MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO
BE MATERIALLY DIFFERENT
PART I.
ITEM 1. DESCRIPTION OF BUSINESS
Midland Resources, Inc., a Texas corporation, (the "Company", which
reference shall include the Company's majority owned subsidiaries), is an
independent oil and gas company engaged primarily in the exploration and
development of domestic oil and gas. The Company, incorporated June 5, 1989,
was organized in 1990 with the issue of common stock and warrants in exchange
for the partnership interests of seven former public oil and gas limited
partnerships.
The Company emphasizes the application of advanced technology to
explore for, develop and produce natural gas and oil. The Company's historical
growth has been primarily through the acquisition and subsequent development of
oil and gas properties. In 1995, the Company added three dimensional ("3D")
seismic exploration capability.
The Company also has the capability to conduct 3D numerical simulation
and modeling of petroleum reservoirs. This capability should prove valuable in
the economic assessment, reservoir management, and future development of
secondary and enhanced recovery projects. In early 1995, the Company began a
joint project with the federal government's Los Alamos National Laboratory to
develop computerized 3D reservoir modeling and simulation of the Company
operated Cope Waterflood Unit. The simulation model, currently under active
development, will be utilized to improve reservoir management and potentially
enhance oil production by locating bypassed oil, determining new infill drilling
locations and designing optimum waterflood injection patterns for increased oil
recovery. Management believes the Company is one of the few companies its size
to possess this capability.
On December 20, 1996, the Company completed the acquisition of Summit
Petroleum Corporation, an affiliate, for cash.
Although the Company's principal properties are located in Texas, the
Company also owns leasehold interests in developed and undeveloped oil and gas
acreage in North Dakota, Illinois, Colorado and Oklahoma.
REGULATION
The Company's exploration, production and marketing operations are
regulated at the federal, state and local levels. Oil and gas exploration,
development and production activities are subject to various laws and
regulations governing a wide variety of matters. For example, there are
statutes or regulations addressing conservation practices and the protection of
correlative rights, and such regulations may affect the Company's operations and
limit the quantity of oil or gas that the Company may produce and sell. Other
regulated matters include marketing, transportation and valuation of royalty
payments.
Among other regulatory matters at the federal level, the Federal
Energy Regulatory Commission ("FERC") regulates interstate transportation of
natural gas under the Natural Gas Act. The Company's gas sales are not subject
to price controls but are affected by regulation of intrastate and interstate
gas transportation. In an attempt to promote competition, the FERC has issued a
series of orders which have altered significantly the marketing and
transportation of natural gas. To date, the Company has not experienced any
material adverse effect on gas marketing as a result of these FERC orders.
However, the Company cannot predict what effect these or subsequent regulations
may have on its future gas marketing.
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ENVIRONMENTAL
As an owner and operator of oil and gas properties, the Company is
additionally subject to various federal, state and local environmental
regulations, including air and water quality control laws. These laws and
regulations may, among other things, impose liability on the lessee under an oil
and gas lease for the cost of pollution clean-up resulting from operations,
subject the lessee to liability for pollution damages, and require suspension or
cessation of operations in affected areas and impose restrictions on the
injection of liquids into subsurface aquifers that may contaminate groundwater.
Although the Company believes that it is in substantial compliance with existing
applicable environmental laws and regulations, there can be no assurance that
substantial costs for compliance will not be incurred in the future. Moreover,
it is possible that other developments, such as stricter environmental laws,
regulations and enforcement policies thereunder, could result in additional,
presently unquantifiable, costs or liabilities to the Company. Costs associated
with compliance with such laws have not been a material factor in the Company's
operations.
COMPETITION
The oil and gas industry is highly competitive. Competition for the
sale of oil and gas is principally related to pricing as it is affected by
quality and transportation costs. The price for oil and gas is widely followed
and is generally subject to worldwide market factors. Competition to acquire
oil and gas leases is significant and the Company will be competing with major
oil and gas companies which have significantly greater resources.
MAJOR CUSTOMERS
The Company had sales to the following companies that amounted to 10%
or more of revenues:
1996 1995 1994
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AMOCO Production Company - 11% -
HPL Resources Company - 11% -
Panhandle Gas Company - - 16%
Sun Refining 15% 17% 14%
Western Gas Resources 18% 18% 20%
Conoco, Inc. 12%
Because of the ready market for its oil and gas, the Company does not
consider itself dependent on any single customer or group of customers.
INSURANCE
The Company maintains insurance customary for operations of a similar
nature. No loss of production coverage has been sought.
EMPLOYEES
On March 22, 1997, the Company had 22 full-time employees, none of
which are subject to collective bargaining arrangements. From time to time, the
Company utilizes the services of independent contractors to perform various
field and other services. Experienced personnel are available in all
disciplines should the need to hire additional staff arise.
OFFICE FACILITIES
In September 1995, the Company moved its executive offices to leased
space located at 16701 Greenspoint Park Drive, Suite 200, Houston, Texas 77060.
In November 1995, the Company purchased a 3,750 square foot building and 2.0
acres of land located at 3419 Hwy. 158, Midland, Texas, from Mr. Warley and
another individual (See NOTE F. RELATED PARTIES, to Consolidated Financial
Statements), for use as a district office, warehouse and equipment yard. The
Company believes these facilities are adequate for its present needs.
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ITEM 1A. EXECUTIVE OFFICERS
Information regarding executive officers not incorporated by reference
from the Company's definitive Proxy Statement for its 1997 Annual Meeting of
Stockholders is as follows.
DEAS H. WARLEY III, (54), President and Chairman of the Board of Directors of
the Company since 1990 and has been employed in the oil and gas industry since
1979. From 1989 until the present Mr. Warley has been the president and director
of Summit Petroleum Corporation ("Summit"), a public oil and gas company until
its acquisition by the Company in 1996. Mr. Warley received a Bachelor of
Science Degree in Engineering from Arizona State University in 1971 and Master
of Science Degree in Engineering from the Air Force Institute of Technology in
1973. Mr. Warley is a member of the National Petroleum Council, the Texas
representative to the Strategic Technological Council, and a member of the
Review Panel for the Department of Energy Natural Gas and Oil Technology
Partnership. Mr. Warley is a registered Professional Engineer in the state of
Texas. He is a member of the Independent Petroleum Association of America, the
Permian Basin Petroleum Association, the North Texas Oil and Gas Association,
and the Society of Petroleum Engineers.
HOWARD E. EHLER, (52), Chief Financial Officer and Vice President of Finance,
joined the Company February 14, 1997. Mr. Ehler is a Certified Public
Accountant who has been engaged in public accounting for 30 years, with emphasis
in auditing and consulting in the oil and gas industry. Mr. Ehler was formerly
a partner with the firm of Grant Thornton. He is a member of the American
Institute of Certified Public Accountants (AICPA), the Texas Society of
Certified Public Accountants and the SEC Practice Section of the AICPA. Mr.
Ehler received a BBA degree from Texas Tech University in 1966.
JESSE Q. OZBOLT, (55), Vice President of Engineering/Operations of the Company,
joined the Company in November 1995 and has been employed in the oil and gas
industry since 1969. Prior to joining the Company, he was Vice President of
Engineering/Operations for Enex Resources Corporation, a Kingwood, Texas, based
oil and gas production company, where he had been employed since 1982. Mr.
Ozbolt received a Bachelor of Science Degree in Civil Engineering, Magna Cum
Laude, from Duke University in 1963. He is a member of the Society of Petroleum
Engineers.
MARILYN D. WADE, (45), Secretary and Administrative Manager of the Company since
1992, has been employed in various accounting, administrative and management
positions. Ms. Wade has been Administrative Manager of MRO since April 1992.
Prior to joining MRO, Ms. Wade was the accountant and office manager with
Callaway Oil and Gas from 1988, was self-employed during 1987 and 1988, and was
employed by Midland Resources, Inc. (not the registrant) from 1984 to 1987.
ITEM 2. DESCRIPTION OF PROPERTIES
OIL AND GAS PROPERTIES
The Company owns leasehold interests in developed and undeveloped oil
and gas acreage located in the states of Texas, North Dakota, Illinois, Colorado
and Oklahoma. See Item. 1. Description of Business.
TITLE TO PROPERTIES
The Company believes that its title to the various oil and gas
interests is satisfactory and consistent with the standards generally accepted
in the oil and gas industry. The interests of the Company may be subject to one
or more royalty, overriding royalty, carried and other similar interests and
contractual arrangements customary in the industry. The majority of the value
of the Company's properties is mortgaged to secure borrowings under the bank
credit facility.
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PERMIAN BASIN REGION, TEXAS
RHODA WALKER (CHERRY CANYON) FIELD
This field is located in Ward County, Texas, in which the Company has
an interest in 9 wells which are operated by the Company with a combined
average production rate of approximately 100 BOPD and 143 MCFD, subject to
normal declines. During the fourth quarter of 1995, three Rhoda Walker Field
development wells were drilled at a cost to the Company of approximately
$880,000. These wells increased oil and gas production from this field by 140%.
The Company's net revenue interest in these wells is 87.5%.
ACKERLY (DEAN) FIELD
This field is located in Dawson County, Texas, in which the Company
has an interest in 2 wells which are operated by the Company with a combined
average production rate of approximately 98 BOPD and 100 MCFD, subject to normal
declines. The Wallace #3 development well was completed in January 1996 at a
cost to the Company of approximately $402,000. The Company's net revenue
interest in these wells is 87.5%.
JAMESON (STRAWN) FIELD
This field is located in Coke and Sterling Counties, Texas in which
the Company has an interest in 56 wells which are operated by the Company with
a combined average production rate of approximately 118 BOPD and 1,446 MCFD,
subject to normal declines. At the time the Company acquired the Jameson
properties, there were 21 gross wells which were shut-in for various reasons by
the former operator. The Company has returned 15 gross wells to production and
has converted nearly 40% of the wells from producing via conventional pumping
unit to a less expensive plunger lift method of artificial lift. Before this
activity was commenced, production levels were at approximately 170 BOPD and
1,800 MCFD. Production peaked, in 1992, at 230 BOPD and 2,100 MCFD, an increase
of 35% and 17% respectively, before resuming normal decline. The Company's net
revenue interest in these wells ranges from 90% to 92%.
The leasehold encompasses 8,129 gross acres which provide
opportunities for reentries, infill drilling, and field extension development
drilling. The limits of the sand deposition have not yet been defined and a
number of locations could possibly be developed within the leasehold area. In
April and August 1996, the Company completed two field extension development
wells at an aggregate cost of approximately $700,000. Average aggregate
production rates for these wells are approximately 45 BOPD and 250 MCFD, subject
to normal declines. Effective June 1, 1996, the Company acquired various
additional royalty interests from John Gordon McGill in properties in the
Jameson Field for approximately $500,000.
COPE WATERFLOOD UNIT
The Cope Unit is located in Sterling County, Texas. This project
encompasses 2,032 gross acres and at present has 21 gross active wells, 7 of
which are injectors. At the time the Company acquired the Cope Unit, production
had declined to 100 BOPD. Several shut-in wells were reactivated with total
unit production immediately improving to 137 BOPD. The Cope Unit was operated
with a peripheral type flood pattern by former operators. The Company has
slightly modified this pattern which has resulted in an arrest of the normal
decline and constant production levels for the last 5 years.
The Company is working in conjunction with Los Alamos National
Laboratory to develop a 3D mathematical simulation model of the field. Funded
by the Department of Energy, this cooperative effort, under the Advanced
Reservoir Management Program, is the development of computer simulations to
predict fluid distribution and movement through the reservoir and, in turn,
optimize waterflood injection patterns and determine potential drilling
locations to recover bypassed hydrocarbons.
Effective May 1, 1996, the Company acquired an additional 15.75%
working interest for approximately $79,000, and now owns approximately 77% of
the working interest in this property. The Cope Unit produces from the
Spraberry
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formation. In June 1996, the Company drilled a replacement well for
one of the producing wells in the unit which was producing mostly water. The
Cope Unit oil production has been maintained at approximately 125 barrels of oil
per day and unit produced water has been reduced substantially.
3D SEISMIC EXPLORATION PROGRAM
The Company has acquired three 3D seismic exploration projects located
in Terry and Hockley Counties, Texas. The Company will be the operator for all
three projects and has a 55% working interest in two of the projects and a 30%
working interest in the third. The projects cover 16,610 gross acres and will
target 3 potentially productive reservoir zones in each project. In 1996 two
wells were drilled on one of the prospects, one was a dry hole and the Amoco
Unit No. 1 well was completed in late 1996. As of December 31, 1996, drilling
had commenced on wells in each of the other two prospects and the Company's
cumulative expenditures as of that date totaled approximately $1,824,000. Of
these wells, the Caddell No.1 well in which the Company has a 55% working
interest was completed in March 1997 at a total cost of $516,000. The second
well, Gardner No.1, is currently in the completion stage, and the Company has a
30% working interest. Estimated cost for this well is $281,000 to the Company's
interest.
In July 1996, a fourth 3D seismic exploration project was undertaken
at the junction of Sterling, Tom Green, and Reagan Counties, Texas. The Sugg No.
1 well was drilled and completed in this prospect during the first quarter of
1997, in a limited partnership, of which the Company is the general partner and
a 50% owner. Through this limited partnership the Company recovered costs of
approximately $360,000 and incurred completion costs on the Sugg well of
approximately $240,000. The Company will bear 50% of the costs of future wells
in this project. The working interest in the leases in this project vary. Once
a pump is in place, expected in April, 1997, this well is expected to produce at
approximately 200 BOPD. (See Plan of Operation.)
OTHER WEST TEXAS PROPERTIES
In August 1994, the Company acquired working interests in certain oil
and gas properties with 19 gross wells in Coke and Howard Counties, Texas, from
Ricky W. Patterson, E. W. Patterson and James A. Walton for the purchase price
of $1,950,000 which was adjusted for revenues and expenses through the closing
date. These wells are operated by the Company and in 1996 had a combined
average production rate of approximately 74 BOPD and 238 MCFD, subject to normal
declines.
In addition to the above described properties, the Company owns and
operates 21 leases located within a 150 mile radius of Midland, Texas,
containing 21 gross producing wells on 2,778 gross acres. These wells are
produced from the Yates, Spraberry and Pennsylvanian formations at depths
ranging from 1,800 feet to 9,000 feet. The production is heavily weighted to
oil and some leases have additional development opportunities.
GULF COAST REGION, TEXAS
COPANO BAY
The Copano Bay property is located in Aransas County, Texas,
approximately 50 miles northeast of Corpus Christi. The leasehold encompasses
2,355 gross acres and currently has eight gross producing wells. At the time
the Company acquired Copano Bay, it was producing approximately 65 BOPD and 465
MCFD. The Company conducted several successful workovers, recompletions and re-
entries, and increased production, which even after some initial decline,
averaged 52 BOPD and 828 MCFD in 1996. Several additional recompletion and
sidetracking opportunities have been identified. During 1994, 1995 and 1996,
Copano Bay properties accounted for approximately 16%, 9% and 5%, respectively,
of the Company's total oil production and approximately 40%, 28% and 16%,
respectively, of the Company's total gas production.
During 1995, the Bureau of Economic Geology ("BEG") of the University
of Texas at Austin initiated a comprehensive geological study of the Copano Bay
Field to identify zones where oil and gas may have been bypassed and where
additional reserves may yet be developed. The Company, as a significant
operator in the field, was asked to
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supply data and cooperated closely with the BEG in getting the study underway.
Results of the study will be supplied to the Company for its utilization in
further development of the field.
Effective June 1, 1996, the Company acquired an additional 5% working
interest from Dobbs Oil & Gas, Inc. in the Company operated Copano Bay property
in Aransas County, Texas, for approximately $177,000, and now owns approximately
68% of the working interest in this property.
REDFISH BAY
In May 1995, the Company acquired a 50 percent working interest and
operations in three State tracts in Redfish Bay field, Nueces County, Texas in
return for a commitment to expend $1,000,000 in capital expenditures over two
years. In February 1997, the Company sold its interests in this field for
$1,647,000 in order to concentrate its efforts in the Permian Basin area of West
Texas. The Company expects to realize an approximate $350,000 gain on this sale.
OTHER AREAS
The Company owns other interests in Illinois, Oklahoma, Colorado,
North Dakota, Central Texas and West Texas including 91 gross producing wells.
The value associated with these interests are small by comparison to the
Company's other properties. Commencing in 1995, the Company has participated
with Texaco, operator of the Johnsonville Waterflood Unit in Wayne County,
Illinois, in a combined 3D seismic survey and extensive modeling project to
determine the extent of additional reserves. The seismic data has been
processed and model construction has begun. The preliminary findings of this
project should be completed in 1997.
The following table sets forth information concerning the Company's
leasehold ownership interests as of December 31, 1996.
TABLE I - LEASEHOLD INTEREST
AS OF DECEMBER 31, 1996
GROSS (b) NET (c)
--------- -------
Developed Acreage (a) 21,780 15,576
Undeveloped Acreage (d) 6,640 3,197
Net Royalty Acreage 4,399
Active Working Interest Wells:
Oil 184 118
Gas 39 19
Net Royalty Wells 1.9
(a) DEVELOPED ACREAGE IS ACREAGE SPACED FOR OR ASSIGNABLE TO PRODUCTIVE
WELLS.
(b) A GROSS WELL OR ACRE IS A WELL OR ACRE IN WHICH A WORKING INTEREST IS
OWNED. THE NUMBER OF GROSS WELLS IS THE TOTAL NUMBER OF WELLS IN
WHICH A WORKING INTEREST IS OWNED. THE NUMBER OF GROSS ACRES IS THE
TOTAL NUMBER OF ACRES IN WHICH A WORKING INTEREST IS OWNED.
(c) A NET WELL OR ACRE IS DEEMED TO EXIST WHEN THE SUM OF FRACTIONAL
OWNERSHIP WORKING INTERESTS IN GROSS WELLS OR ACRES EQUALS ONE. THE
NUMBER OF NET WELLS OR ACRES IS THE SUM OF THE FRACTIONAL WORKING
INTERESTS OWNED IN GROSS WELLS OR ACRES EXPRESSED AS WHOLE NUMBERS AND
FRACTIONS THEREOF.
(d) UNDEVELOPED ACREAGE IS OIL AND GAS ACREAGE ON WHICH WELLS HAVE NOT
BEEN DRILLED OR TO WHICH NO PROVED RESERVES OTHER THAN PROVED
UNDEVELOPED RESERVES HAVE BEEN ATTRIBUTED.
NET PRODUCTION, UNIT SALES AND PRODUCTION COST
The following table summarizes the net oil and natural gas production
for the Company, the average sales price per barrel of oil and per mcf of
natural gas produced and the average production (lifting) cost per unit of
production for the years ended December 31, 1996, 1995 and 1994.
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TABLE II - PRODUCTION, PRICE AND COST DATA
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<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
OIL (a):
Production (Bbls) 215,913 166,652 171,755
Revenue $ 4,566,130 $ 2,879,973 $ 2,732,531
Average Bbls per day 591 457 471
Average Sales price per Bbl $ 21.15 $ 17.28 $ 15.91
GAS (b):
Production (Mcf) 1,002,482 1,268,772 $ 1,356,130
Revenue $ 2,392,361 $ 2,267,060 $ 2,533,228
Average Mcf per day 2,746 3,476 3,715
Average sales price per Mcf $ 2.39 $ 1.79 $ 1.87
PRODUCTION COSTS:
Production cost $ 2,981,837 $ 2,509,854 $ 2,423,032
Equivalent Bbls (c) 382,993 378,114 397,777
Production cost per equivalent Bbl $ 7.79 $ 6.64 $ 6.09
Production cost per sales dollar $ 0.43 $ 0.49 $ 0.46
TOTAL REVENUES $ 6,958,491 $ 5,147,033 $ 5,265,759
</TABLE>
(a) INCLUDES CONDENSATE.
(b) INCLUDES NATURAL GAS LIQUIDS.
(c) GAS PRODUCTION IS CONVERTED TO EQUIVALENT BBLS AT THE RATE OF 6 MCF PER
BBL, REPRESENTING THE ESTIMATED RELATIVE ENERGY CONTENT OF NATURAL GAS TO
OIL.
OIL AND GAS RESERVES
The estimates of the Company's proved oil and gas reserves, which are
located entirely within the United States, were prepared in accordance with the
guidelines established by the SEC and Financial Accounting Standards Board. The
estimates as of December 31, 1996, 1995, and 1994, are based on evaluations
prepared by E. Ralph Green and Associates, Independent Petroleum Engineers. For
information concerning costs incurred by the Company for oil and gas operations,
net revenues from oil and gas production, estimated future net revenues
attributable to the Company's oil reserves and present value of future net
revenues on a 10% discount rate and changes therein, see Notes to the Company's
consolidated financial statements. The Company emphasizes that reserve estimates
are inherently imprecise and that estimates of new discoveries are more
imprecise than those of producing oil and gas properties. Accordingly, the
estimates are subject to change as further information becomes available.
As an operator of domestic oil and gas properties, the Company has filed
Form EIA-23, "Annual Survey of Oil and Gas Reserves," with the Department of
Energy as required by Public Law 93-275 and Public Law 95-91. There are
differences between the reserves reported on Form EIA-23 and the reserves
reported herein. These differences are due to the fact that Form EIA-23
requires an operator to report on total reserves attributable to wells which are
operated by it, without regard to ownership. The reserves reported herein are
on a net interest basis.
The estimated proved oil and gas reserves and present value of estimated
future net revenues from proved oil and gas reserves for the Company for the
three years ended December 31, 1996, are summarized below:
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TABLE III - PROVED RESERVES
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<CAPTION>
December 31
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1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
OIL AND LIQUIDS (BBLS):
Proved developed - Producing 1,635,563 1,668,154 1,362,119
Proved developed - Non-producing 426,411 250,403 101,556
Proved undeveloped 779,506 469,052 714,081
------------ ------------ ------------
Total 2,841,480 2,387,609 2,177,756
------------ ------------ ------------
------------ ------------ ------------
NATURAL GAS (MCF):
Proved developed - Producing 9,960,517 10,267,799 10,414,230
Proved developed - Non-producing 3,860,883 3,863,781 2,203,390
Proved undeveloped 4,473,153 4,337,162 4,442,901
------------ ------------ ------------
Total 18,294,553 18,468,742 17,060,521
------------ ------------ ------------
PRESENT VALUE OF ESTIMATED FUTURE NET
REVENUES BEFORE INCOME TAXES $ 39,817,832 $ 17,687,654 $ 15,419,539
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The preceding tables should be read in connection with the following
definitions:
PROVED RESERVES
Estimated quantities of crude oil, natural gas and natural gas
liquids which geological and engineering data demonstrate with reasonable
certainty to be economically producible in future years from known
reservoirs under existing economic and operating conditions, e.g., prices
and costs as of the date the estimate was made, and assuming continuation
of current regulatory practices using conventional production methods and
equipment.
PROVED DEVELOPED RESERVES
Proved oil and gas reserves which are expected to be recovered
from existing wells with existing equipment and operating methods.
Developed reserves include both producing and non-producing reserves.
Producing reserves are those reserves expected to be recovered from
existing completion intervals producing to a market as of the date of
the appropriate reserve report. Non-producing reserves are reserves
that are currently shut-in awaiting a pipeline connection or in
reservoirs behind the casing or at minor depths above or below the
producing zone and are considered proved by production either from
wells in the field, by successful drill-stem tests, or by core
analyses from the particular zones. Non-producing reserves require
only moderate expense for recovery.
PROVED UNDEVELOPED RESERVES
Proved oil and gas reserves which are expected to be recoverable
from additional wells yet to be drilled or from existing wells where a
relatively major expenditure is required for completion.
In estimating oil reserves for 1996, a price of $25.00 per barrel
was used, which is the average actual price in effect for the
Company's oil production on January 1, 1997. In estimating gas
reserves for 1996, a price of $3.72 per mcf, based on prices in effect
at January 1, 1997, was used.
-8-
<PAGE>
DRILLING ACTIVITY
The following table summarizes the number of gross and net productive and
dry exploration and development wells drilled for the years ended December 31,
1996, 1995 and 1994.
TABLE IV - DRILLING ACTIVITY IN WEST TEXAS
For the Year Ended December 31,
---------------------------------------------
1996 1995
--------------- --------------
Gross Net Gross Net 1994
----- ----- ----- ----- -----
Exploratory:
Productive 1 0.6 0 0 0
Dry 2 1.7 0 0 0
----- ----- ----- ----- -----
Total 3 2.3 0 0 0
----- ----- ----- ----- -----
Development:
Productive 3 2.8 4 3.7 0
Dry 0 0 0 0 0
----- ----- ----- ----- -----
Total 3 2.8 4 3.7 0
----- ----- ----- ----- -----
OTHER PROPERTY
On July 11, 1995, the Company's office building located in Midland, Texas
was sold to an unrelated third party and, in September, 1995, the Company moved
its executive offices to leased space located at 16701 Greenspoint Park Drive,
Suite 200, Houston, Texas 77060. In November 1995, the Company purchased a
3,750 square foot building and 2.0 acres land located at 3419 Hwy. 158, Midland,
Texas, from a partnership of which Mr. Warley was a 50% owner, for use as a
district office, warehouse and equipment yard.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in litigation arising from its attempt in late 1991
to become the general partner of 27 oil and gas limited partnerships sponsored
by Merrico Resources, Inc. The Company is appealing a decision entered in the
United States Bankruptcy Court for the Western District of Oklahoma preventing
it from enforcing its election by the limited partners as the general partner.
The ultimate outcome of this matter is uncertain.
The Company is a Defendant in a lawsuit filed on July 31, 1995, styled
MANNA OIL & GAS, INC., DOBBS OIL & GAS, INC. V. MIDLAND RESOURCES, INC.,
Miresco, INC. MIDLAND RESOURCES OPERATING COMPANY, INC., Cause No. 40,677. The
case involves certain Gulf Coast properties located in Copano Bay wherein the
Company owns a 63% working interest and is the operator of the properties. The
Plaintiffs are (1) seeking a declarative judgment that the Company has failed to
meet the standards and procedures set out in the Operating Agreement; (2)
attempting to recover an unspecified sum; (3) are asking for an accounting for
the years 1993-1995; and (4) attorney fees and costs. The Company believes it
has a defensible position with respect to all of the Plaintiffs' claims and
intends to defend this case very aggressively.
The Company filed a counterclaim against Manna Oil and Gas, Inc. ("Manna")
in which the Company is seeking specific performance of an oral contract that
the Company entered into with Manna, whereby the Company and Manna agreed that
if either party acquired any additional property interest or contract rights of
any kind in the properties that are the subject of the underlying lawsuit that
said party would offer to convey to the other party their proportionate
ownership in such newly acquired property interest or contract rights. In the
alternative, the Company claims that Manna
-9-
<PAGE>
breached such contract, and the Company is seeking monetary damages,
resulting from said breach of contract, as well as attorney fees and court
costs.
There are no material proceedings to which any director, officer, or
affiliate of the Company, or any owner of record (or beneficiary) of more than 5
percent of any class of voting securities of the Company is a party adverse to
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Response is not required.
PART II.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock and its $4.00 warrants are traded on NASDAQ
under the symbols MRIX and MRIXZ, respectively. The Company's Common Stock and
warrants were authorized for trading on NASDAQ on May 17, 1991. The registrar
and transfer agent is Stock Transfer Company of America, Inc., Dallas, Texas.
As of March 26, 1997, the Company had 1,828 shareholders of record and
4,411,031 shares outstanding.
PRICE RANGE OF COMMON STOCK
HIGH LOW
------ -------
1995: (1)
First Quarter........................ 4 2 3/8
Second Quarter....................... 3 7/8 2 5/8
Third Quarter........................ 5 3/8 3 1/2
Fourth Quarter....................... 3 7/8 2 3/8
1996: (1)
First Quarter........................ 3 7/8 2 5/8
Second Quarter....................... 4 1/4 3 1/8
Third Quarter........................ 3 3/4 2 7/8
Fourth Quarter....................... 3 1/4 1 15/16
(1) REFLECTS HIGH AND LOW TRADING RANGE INFORMATION RECEIVED FROM NASDAQ.
(2) ON MARCH 26, 1997, THE BID PRICE WAS 5 3/4.
(3) THESE QUOTATIONS REFLECT INTER-DEALER PRICES, WITHOUT RETAIL MARKUP,
MARKDOWN OR COMMISSION AND MAY NOT REFLECT ACTUAL TRANSACTIONS.
The Company has not paid any dividends on its Common Stock, and it is the
present policy of the Company not to do so, but to retain its earnings for
future growth and business activities. The Company is also subject to certain
loan covenants which include restrictions on dividends, distributions and
redemptions.
On March 26, 1996 the Company issued three year warrants to purchase
15,000 shares of its common stock at $3.50 per share to Southwest Merchant
Group, Dallas, Texas as part of the consideration for investment counseling
advice. The Company relied upon Section 4(2) of the Securities Act of 1933 for
an exemption from registering the warrants based upon there being only one
purchaser, the purchasers access to Company information and the business
sophistication of the purchasers representatives. On October 23, 1996, the
Company issued a five year warrant to purchase 10,000 shares of its common stock
at $3.50 per share to Sam Brock, a member of the Company's board of directors,
in consideration of his providing expertise and assistance in helping the
Company market its hydrocarbon production. The Company relied upon Section 4(2)
of the Securities Act of 1933 for an exemption from registering the
-10-
<PAGE>
warrants based upon there being only one purchaser, his knowledge of and
access to Company information and his business sophistication.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This discussion should be read in conjunction with the audited financial
statements of Midland Resources, Inc. and Subsidiaries.
PLAN OF OPERATION
The Company's initial capitalization was through the acquisition of the
interests of the seven public oil and gas income limited partnerships in
exchange for common stock and warrants of the Company. There were 2,264,522
shares of common stock issued and, for each share of common stock issued, two
warrants were issued entitling the holder to purchase one share of common stock
at $2.50 and one share at $4.00 during the period November 1990 to November
2002. In October 1995, the Company called for redemption its $2.50 warrants.
Holders received a redemption payment of $0.05 per warrant for aggregate
payments of $63,373, which was charged to additional paid in capital. 997,009
of the $2.50 warrants were exercised, resulting in net proceeds of approximately
$1,831,000. As of December 31, 1996, none of the $4.00 warrants had been
exercised.
On December 31, 1993, the Company acquired all of the issued and
outstanding common stock of MRO through an agreement of acquisition under which
the Company issued 1,110,000 shares of common stock to Deas H. Warley III and
another former officer and director of the Company. The exchange was based on
the relative fair values of the Company and MRO, based on a determination by the
Board of Directors of each respective corporation. The overall transaction was
subject to a fairness opinion provided by an investment banking firm. The
acquisition of MRO expanded the Company's revenue base to include property
operations.
On December 20, 1996, the Company completed the acquisition of Summit
Petroleum Corporation ("Summit"), an affiliated entity engaged in oil and gas
acquisition, development and exploration activities which owned interests in
many of the same properties as the Company. The Company's total investment in
acquiring Summit is approximately $2,011,000.
The Company has increased its proved reserves by more than 50% since 1993
through acquisitions with ascertainable additional reserve potential and a
selective program of drilling, workovers, recompletions and re-entries.
Historically, the Company's growth has been primarily through the acquisition
and subsequent development of proved oil and gas properties. During 1996, the
Company escalated its development and exploration activities with the drilling
of three successful development wells and three exploratory wells, one of which
was completed as a producing well. The Company intends to continue increasing
production and reserves through exploration and further development of existing
oil and gas properties and future acquisitions. The Company estimates that it
will drill up to 38 wells in 1997 at a cost of approximately $12.6 million to
the Company's interest. The majority of these will be development wells on
recent 3D seismic discovery locations. Four of these will be exploratory wells
on separate features in the 3D seismic projects.
Management believes that the cost of its exploration and development
programs will be funded from additional debt and equity financing, and to a
lesser extent from cash flows from operations.
CAPITAL RESOURCES AND LIQUIDITY
In 1996, net cash provided by operations increased from 1995 by $321,966,
reflecting increased oil and gas revenue, partially offset by increased
exploration and production costs. Net cash used in investing activities
increased from 1995 by $1,991,104, reflecting increased expenditures for oil and
gas properties and equipment and the purchase of Summit. Net cash provided by
financing activities increased from 1995 by $1,333,550, reflecting additional
borrowings for property acquisition and development and the purchase of Summit.
In 1996, cash payments for oil and gas property acquisition costs totaled
$761,476 for proved properties, $144,100 for unproved properties, and $2,391,642
for development of properties. In 1995, acquisition costs for proven properties
were $510,832, acquisition costs for unproven properties were $198,124 and
development costs were $2,011,634.
-11-
<PAGE>
For 1996 the Company's working capital increased $288,543 over 1995. The
principal components of this increase were: (i) a refinancing of bank debt
in 1996 that removed approximately $1,200,000 of current liabilities, (ii)
increased operating income for 1996, (iii) the adverse impact of approximately
$???,000 resulting from the Redfish Bay property being held for sale in 1996,
and (iv) the use of funds for the Company's investment in its oil and gas
properties and the acquisition of Summit. The Company expects that its
future exploration and development costs will be funded from debt and/or
equity sources and to a lesser extent from operations. Management believes
current debt maturities can be funded from cash flow from operations.
At December 31, 1996, the Company has a net deferred tax asset of $330,956
which it believes can be realized based on estimates of future income from the
production of existing hydrocarbon reserves. The net asset is primarily
composed of net operating loss carry-forwards which do not begin to expire until
2005.
In December 1994, the Company's credit facility was increased to
$20,000,000 with a borrowing base of $7,000,000 and its terms were extended.
On June 1, 1995, the borrowing base was increased to $8,000,000, and
effective the same date, this note was amended to allow 25% of the borrowing
base to be used for working capital purposes and to decrease the interest
rate from prime rate plus 1.5% to prime rate plus 0.75%. In exchange, the
bank received 150,000 warrants to purchase common stock at $4.00 per share.
In October 1996, the borrowing base was increased to $9,500,000. Amounts
outstanding under this loan agreement currently bear interest at a rate
which, at the Company's option, either fluctuates with the bank's prime rate,
or which is based on the London Interbank offered rate. Interest is payable
monthly as it accrues. The credit facility also provides for the payment of
a commitment fee equal to 1/2 of 1% of the unused balance of the borrowing
base; payable quarterly. The borrowing base is reduced by $100,000 per month
beginning April 1997 with final maturity in October 2000. The balance of
this note at December 31, 1996, was $8,500,000. This note is secured by the
majority of the Company's assets.
In March 1, 1995, the Company entered into a one year gas swap agreement to
hedge against a portion of the price risk associated with gas price declines.
This swap agreement expired in February 1996, and the Company has not entered
into another contract. Losses under this contract were $21,109 and $25,860 for
1995 and 1996, respectively.
The prices of crude oil have fluctuated significantly in recent years as
well as in recent months. As of December 31, 1996, the Company was receiving
$25.00 per bbl as compared to $18.56 at January 1, 1996. Fluctuations in price
have a significant impact on the Company's financial condition and liquidity.
In the absence of rapid and dramatic decreases in oil and gas prices, management
believes it can maintain adequate liquidity for future needs.
The following tables sets forth a summary of historical financial
information for the Company. These tables should be read in conjunction with
the consolidated financial statements of Midland Resources, Inc. and Subsidiary
(and the related notes). It should be noted that there are no audited financial
statements included herein for the year 1993. These tables are not covered by
the reports of independent certified public accountants.
-12-
<PAGE>
SUMMARY BALANCE SHEET DATA
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------------------------
1996 1995 1994 1993
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Current assets $ 3,644,720 $ 2,038,452 $ 1,134,999 $ 1,444,981
Current liabilities 3,268,428 1,950,703 2,152,910 1,864,131
----------- ----------- ----------- -----------
Working capital 376,292 87,749 (1,017,911) (419,150)
Oil and gas properties (net) 13,408,878 9,887,998 9,257,900 7,991,304
Other assets 1,923,048 2,196,902 2,385,641 2,113,785
Total assets 18,976,646 14,123,352 12,778,540 11,550,070
Long-term debt (excluding current maturities) 7,166,421 4,524,617 4,254,042 3,616,628
Other non-current liabilities 364,537 - - -
Stockholders' equity $ 8,177,260 $ 7,648,032 $ 6,371,588 $ 6,069,311
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Stockholders' equity per common share $ 1.86 $ 1.74 $ 1.90 $ 1.80
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Shares outstanding 4,401,031 4,386,231 3,362,222 3,374,522
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
SUMMARY OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
1996 1995 1994 1993
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Oil and gas sales $ 6,958,491 $ 5,147,033 $ 5,265,759 $ 4,569,022
Other 183,234 231,141 217,884 82,173
----------- ----------- ----------- -----------
Total operating revenues 7,141,725 5,378,174 5,483,643 4,651,195
Production costs 2,981,837 2,509,854 2,423,032 2,091,955
Exploration costs 766,855 198,453 - -
Depreciation, depletion and amortization 1,306,287 1,033,905 1,120,841 786,918
Abandonments and dry hole costs - 3,000 41,676 25,732
General and administrative expenses 1,295,298 1,049,904 1,145,719 1,422,094
Impairment costs (a) 114,904 1,020,670 - -
----------- ----------- ----------- -----------
Total operating expenses 6,465,181 5,815,786 4,731,268 4,326,699
----------- ----------- ----------- -----------
676,544 (437,612) 752,375 324,496
Gain (loss) on sale of properties (b) 36,308 (102,984) 81,962 -
Other income (c) 61,997 38,911 169,174 51,692
Interest expense (722,447) (611,587) (473,048) (296,797)
----------- ----------- ----------- -----------
Income (loss) before income taxes and cumulative
effect of change in accounting principle 52,402 (1,113,272) 530,463 79,391
Income tax expense (benefit) 30,280 (376,241) 204,769 29,457
----------- ----------- ----------- -----------
Income (loss) before cumulative effect of
change in accounting principle $ 22,122 $ (737,031) $ 325,694 $ 49,934
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Income (loss) per common share before
cumulative effect of change $ 0.01 $ (0.22) $ 0.10 $ 0.02
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average shares outstanding 4,395,414 3,381,592 3,368,455 2,267,563
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
(a) IN 1995, CONCURRENT WITH THE COMPANY'S ADOPTION OF THE FINANCIAL ACCOUNTING
STANDARDS BOARD STATEMENT NO. 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-
LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF" ("FAS 121"), THE
COMPANY RECOGNIZED A CHARGE OF $1,020,670 FOR CERTAIN PROPERTIES WHICH ARE
HELD FOR SALE.
(b) GAIN (LOSS) ON SALE OF PROPERTIES WAS PRINCIPALLY COMPOSED OF THE LOSS ON
THE SALE OF THE COMPANY'S FORMER OFFICE FACILITIES IN MIDLAND, TEXAS, IN
1995 AND A GAIN ON THE SALE OF A WORKING INTEREST IN AN OIL AND GAS
PROPERTY TO SUMMIT PETROLEUM CORPORATION IN 1994.
(c) IN 1994, THERE WAS OTHER INCOME FROM THE SETTLEMENT OF LITIGATION REGARDING
A FORMER PROPERTY OPERATOR OF $120,090.
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<PAGE>
RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
For 1995, oil and gas sales decreased by $118,726 or 2% from 1994. This
decrease resulted mostly from normal production declines. Average gas prices
decreased from $1.87 per mcf in 1994 to $1.79 per mcf in 1995. Average oil
prices increased from $15.91 per bbl in 1994 to $17.28 per bbl in 1995.
During 1996, oil and gas sales increased from $5,147,033 in 1995 to
$6,958,491; an increase of $1,811,458 or 35%. Oil production increased from
166,652 Bbls to 215,213 Bbls; an increase of 48,561 Bbls or 29%. Gas
production decreased from 1,268,772 mcf to 1,002,482 mcf; a decrease of
266,290 mcf or 21%. Sales and net production increases resulted from price
increases as well as from production from wells drilled and completed in the
Jameson Field, and the Wallace and Wilson properties in late 1995 and early
1996. Average gas prices increased from $1.79 per mcf in 1995 to $2.39 per
mcf in 1996. Oil prices increased from $17.28 per bbl in 1995 to $21.15 per
bbl in 1996.
In 1995, production costs increased to $2,509,854; an increase of $86,822
or 4% from 1994, due primarily to property acquisitions in 1995. In 1996,
production costs increased from $2,509,854 in 1995 to $2,981,837, an increase of
$471,983 or 19%. This increase is attributable primarily to additional
producing wells as discussed above, as well as to production taxes increasing as
a result of increased oil and gas prices.
During 1996 and 1995, exploration costs were $766,855 and $198,453,
respectively, which were incurred in connection with the three 3D exploration
projects discussed above. There were no such items for 1994.
In 1995, DD&A decreased to $1,033,905; a decrease of $86,936 or 8% due to
increased estimated oil reserves. In 1996, DD&A was $1,306,287 as compared to
$1,033,905 in 1995, for an increase of $272,382 or 26%. This was due primarily
to an increase in property investments resulting from the completion of
additional wells and to the acquisition of Summit. In 1995, an impairment loss
of $1,020,670 was recognized to reduce the carrying amount of the property being
held for sale to their estimated fair value. In 1996, the impairment loss was
$114,904.
In 1995, general and administrative ("G&A") expenses decreased to
$1,049,904; a decrease of $95,815 or 8% from 1994, primarily due to an increase
in overhead recoveries from property operations of $119,531 and a reduction in
stockholder relation and promotion costs of $33,860, offset by increased salary
and benefit costs of $83,354. In 1996, G&A expenses increased from $1,049,904
in 1995 to $1,295,298, an increase of $245,394 or 23%. This increase was
attributable primarily to the write off in 1996 of approximately $115,000 of
acquisition costs associated with an attempt to acquire another public
independent oil and gas company, as well as to increased labor costs associated
with the company's relocation from Midland, Texas, to Houston, Texas.
In 1995, there was a loss on sale of properties and equipment totaling
$102,984 primarily from the sale of the office building in Midland, Texas. In
1996, there were gains of $36,308 primarily from the sales of oil and gas
properties.
In 1994, there was other income from the settlement of litigation regarding
a former property operator of $120,090. There was no such item in 1996 or 1995.
In 1995, interest expense increased to $611,587, an increase of $138,539 or
29% as a result of additional borrowings for property acquisitions and higher
interest rates. In 1996, interest expenses increased to $722,447, an increase
of $110,860 or 18%. This increase is attributable to additional borrowings to
consummate the Summit acquisition, and for property acquisitions and development
projects.
In 1994, net income was $325,694 which included management income of
$108,000 and property operations income of $68,478 due to the acquisition of
MRO. In 1995, the net loss was $737,031 primarily resulting from the impairment
loss of $1,020,670, the loss on sale of properties and equipment of $102,984
and the incurrence of exploration costs totaling $198,453. In 1996, net
income was $22,122, due primarily to higher prices for oil and gas production
and lower impairment losses, partially offset by increases in production
costs, G&A expenses and other factors discussed above.
-14-
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Midland Resources, Inc.
We have audited the accompanying consolidated balance sheet of Midland
Resources, Inc. and subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows
for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Midland
Resources, Inc. and subsidiaries at December 31, 1996, and the consolidated
results of their operations and their consolidated cash flows for the year then
ended, in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Houston, Texas
March 21, 1997
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<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Midland Resources, Inc.
We have audited the accompanying consolidated balance sheet of Midland
Resources, Inc. and subsidiary as of December 31, 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the two years ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Midland
Resources, Inc. and subsidiary at December 31, 1995, and the results of their
operations and cash flows for the two years ended December 31, 1995, in
conformity with generally accepted accounting principles.
As discussed in Note A to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 121,
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of," in 1995.
ERNST & YOUNG LLP
Fort Worth, Texas
March 5, 1996
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<PAGE>
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------------
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 366,677 $ 514,610
Accounts receivable:
Oil and gas sales, net of allowance of $29,674 in 1995 834,269 545,910
Related parties 360,479 97,681
Other 359,600 178,804
Property held for sale 1,241,515 255,073
Other current assets 104,180 106,865
Deferred tax asset 378,000 339,509
----------- -----------
Total current assets 3,644,720 2,038,452
Property and equipment, at cost 27,889,580 22,176,136
Less accumulated depreciation, depletion and amortization 14,076,100 11,816,754
----------- -----------
Property and equipment, net 13,813,480 10,359,382
Deferred tax asset - 262,554
Goodwill, net of amortization of $80,067 in 1996 and $53,377 in 1995 747,271 773,961
Contracts and leases, net of amortization of $78,411 in 1996
and $99,352 in 1995 414,633 287,690
Non-current note receivable 317,759 331,857
Other assets 38,783 69,456
----------- -----------
Total assets $18,976,646 $14,123,352
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,680,830 $ 1,224,401
Accounts payable and accrued expenses 1,194,344 726,302
Drilling advances 393,254 -
----------- -----------
Total current liabilities 3,268,428 1,950,703
Long-term debt 7,166,421 4,524,617
Deferred tax liability 47,044 -
Payable for the purchase of subsidiary and other 317,493 -
----------- -----------
Total liabilities 10,799,386 6,475,320
Stockholders' equity:
Preferred stock, $0.01 par value; 20,000,000 shares authorized,
none issued - -
Common stock, $0.001 par value; 80,000,000 shares
authorized; 4,401,031 and 4,393,531 shares issued in 1996
and 1995, respectively 4,401 4,394
Additional paid in capital 7,898,199 7,859,794
Treasury stock (7,300 shares in 1995) at cost - (15,053)
Note receivable from officer/director - (453,641)
Retained earnings 274,660 252,538
----------- -----------
Total stockholders' equity 8,177,260 7,648,032
----------- -----------
Total liabilities and stockholders' equity $18,976,646 $14,123,352
----------- -----------
----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
-17-
<PAGE>
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------------------
1996 1995 1994
---------- ----------- ----------
<S> <C> <C> <C>
Operating revenue:
Oil and gas sales $6,958,491 $ 5,147,033 $5,265,759
Management income 45,000 102,000 108,000
Property operations income 111,862 81,036 68,478
Other 26,372 48,105 41,406
---------- ----------- ----------
Total operating revenue 7,141,725 5,378,174 5,483,643
Operating costs and expenses:
Oil and gas production 2,981,837 2,509,854 2,423,032
Exploration costs 766,855 198,453 -
Depreciation, depletion and amortization 1,306,287 1,033,905 1,120,841
Dry hole and abandonment costs - 3,000 41,676
General and administrative 1,295,298 1,049,904 1,145,719
Impairment of properties 114,904 1,020,670 -
---------- ----------- ----------
Total operating costs and expenses 6,465,181 5,815,786 4,731,268
---------- ----------- ----------
676,544 (437,612) 752,375
Other income and (expenses):
Gain (loss) on sale of property and equipment 36,308 (102,984) 81,962
Interest income 61,997 19,374 8,200
Other income - 19,537 160,974
Interest expense (722,447) (611,587) (473,048)
---------- ----------- ----------
Total other income and expenses (624,142) (675,660) (221,912)
---------- ----------- ----------
Income (loss) before income taxes 52,402 (1,113,272) 530,463
Income taxes:
Current state income tax expense - - 17,669
Deferred federal income tax expense (benefit) 30,280 (376,241) 187,100
---------- ----------- ----------
Net income (loss) $ 22,122 $ (737,031) $ 325,694
---------- ----------- ----------
---------- ----------- ----------
Earnings (loss) per common share $ 0.01 $ (0.22) $ 0.10
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
-18-
<PAGE>
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Retained Treasury Note
------------------------ Paid in Earnings Stock, Receivable
Shares Amount Capital (Deficit) at cost office/director
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993 3,374,522 $ 3,375 $ 5,404,109 $ 663,875 $ (2,048) $ -
Purchase of Treasury stock
(11,300 shares) - - - - (23,417) -
Net income - - - 325,694 - -
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1994 3,374,522 3,375 5,404,109 989,569 (25,465) -
Stock options exercised 22,000 22 51,072 - - -
Warrants exercised 997,009 997 2,399,787 - - (453,641)
Warrants redeemed - - (63,373) - - -
Treasury stock contributed
to ESOP (5,000 shares) - - 2,577 - 10,412 -
Warrants issued to bank - - 65,622 - - -
Net loss - - - (737,031) - -
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1995 4,393,531 4,394 7,859,794 252,538 (15,053) (453,641)
Stock options exercised 7,500 7 17,805 - - -
Additional proceeds from 1995
warrants exercised - - 9,191 - - -
Treasury stock contributed
to ESOP (7,300 shares) - - 11,409 - 15,053 -
Reduction of note receivable
officer/director - - - - 453,641
Net income - - - 22,122
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1996 4,401,031 $ 4,401 $ 7,898,199 $ 274,660 $ - $ -
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-19-
<PAGE>
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------------
1996 1995 1994
---------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 22,122 $ (737,031) $ 325,694
Depreciation, depletion and amortization 1,306,287 1,033,905 1,120,841
Abandonments and dry hole costs - - 41,676
Impairment of properties 114,904 1,020,670 -
(Gain) loss on sale of properties and equipment (36,308) 102,984 (81,962)
Deferred income tax expense (benefit) 30,280 (376,241) 187,100
(Increase) decrease in accounts receivable
related to operations (265,521) (58,418) 31,617
Increase in other current assets (8,300) (62,798) (8,101)
Increase (decrease) in accounts payable and
accrued expenses related to operations 218,581 182,293 (128,146)
Increase (decrease) in note receivable - 28,456 (50,056)
Other 94,704 20,963 (23,111)
---------- ---------- ----------
Net cash provided by operating activities 1,476,749 1,154,783 1,415,552
Cash flows from investing activities:
Additions to oil and gas properties (3,297,218) (2,720,590) (2,347,193)
Additions to other property and equipment (40,554) (159,805) (324,834)
Sale and salvage recoveries on oil and
gas properties 32,975 - 205,304
Sale of other property and equipment 1,000 14,120 1,500
Reimbursable partnership expenditures (360,479) - -
Purchase of marketable securities (326,155) - -
Sale of marketable securities 350,332 - -
Purchase of Summit, less cash acquired (1,217,280) - -
---------- ---------- ----------
Net cash used in investing activities (4,857,379) (2,866,275) (2,465,223)
Cash flows from financing activities:
Purchase of treasury stock - - (23,417)
Net proceeds from warrants exercised 9,191 1,830,997 -
Collections on note receivable from
officer/director - 95,000 -
Warrant redemptions - (63,373) -
Net proceeds from options exercised 29,221 51,094 -
Borrowings on long-term debt 3,770,000 1,821,000 2,886,842
Principal payments on long-term debt (983,067) (1,826,056) (1,832,503)
Drilling advances 393,254 - -
Other 14,098 (9,515) -
---------- ---------- ----------
Net cash provided by financing activities 3,232,697 1,899,147 1,030,922
---------- ---------- ----------
Increase (decrease) in cash (147,933) 187,655 (18,749)
Cash, beginning of year 514,610 326,955 345,704
---------- ---------- ----------
Cash, end of year $ 366,677 $ 514,610 $ 326,955
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-20-
<PAGE>
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Midland Resources, Inc. ("Company"), was organized in 1990 with the
issue of common stock and warrants in exchange for oil and gas
partnership interests. The Company and its wholly owned subsidiaries are
headquartered in Houston, Texas. The Company is involved in the
acquisition, exploration, development and production of oil and gas and owns
producing properties and undeveloped acreage in Texas, North Dakota,
Colorado, Illinois and Oklahoma. The majority of its activities are
centered in the Permian Basin of West Texas. Midland Resources Operating
Company Inc. ("MRO"), a wholly owned subsidiary, is in the business of
oil and gas property operations. Summit Petroleum Corporation ("Summit")
is a wholly owned subsidiary engaged in oil and gas acquisition,
exploration, development, production and property operations.
(See Note B.)
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated balance sheets include the accounts
of the Company and its wholly owned subsidiaries. All significant
inter-company balance sheet accounts have been eliminated in consolidation.
All significant inter-company transactions have been eliminated from the
consolidated statements of operations and cash flows for the years ended
December 31, 1996, 1995 and 1994.
OIL AND GAS OPERATIONS
The Company follows the "successful efforts" method of accounting
for oil and gas properties. All costs associated with the acquisition
and development of proved oil and gas properties are capitalized.
Costs associated with exploratory drilling are capitalized pending
evaluation of drilling results. Costs of exploratory wells which do not
find proved results are expensed. Geological, geophysical and delay
rental costs are expensed as incurred.
Depreciation, depletion and amortization of oil and gas properties
is computed on a property-by-property basis using the
units-of-production method based upon estimated oil and gas reserve
quantities.
Oil and gas revenues are recognized under the sales method at the
point of delivery to the purchaser. No significant over or under
produced positions between the Company and its working interest partners
exist.
OTHER PROPERTY AND EQUIPMENT
The Company's building is depreciated on the straight-line method
over an estimated useful life of 30 years. All other property and
equipment is depreciated on the straight-line method over lives ranging
from 5 to 6 years.
INTANGIBLE ASSETS
Goodwill is amortized on the straight-line method over 30 years.
Property operating contracts are amortized on the straight-line method
over the lives of the respective oil and gas properties which range from
3 to 19 years. The Summit management contract (see Note F.) was being
amortized on the straight-line method over 48 months.
-21-
<PAGE>
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. (CONTINUED)
TREASURY STOCK
Treasury stock is carried at cost. Upon reissuance, the cost of
treasury shares held is reduced by the average cost per share.
ACCOUNTING FOR STOCK OPTIONS
The Company accounts for employee stock option grants in accordance
with APB Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations, whereby compensation costs are recognized only
in situations where stock compensatory plans award intrinsic value to
recipients at the date of grant.
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 amounts reported in the
financial statements and accompanying notes. Actual results could
differ from those estimates. The most significant estimates affecting
the Company's financial statements are the determination of hydrocarbon
reserves, the estimated useful lives of depreciable and amortizable
assets, and the fair value of assets held for sale.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities for the
future tax consequences of differences between the financial statement
carrying amounts of assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
applicable to the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
EARNINGS (LOSS) PER COMMON SHARE
Earnings per share for 1996 is computed on 4,395,414 weighted
average shares of common stock outstanding during the year. Loss per
share for 1995 is computed on 3,381,592 weighted average shares of
common stock outstanding. Earnings per share for 1994 is computed on
3,368,455 weighted average shares of common stock outstanding. In
accordance with generally accepted accounting principles, common stock
options and warrants are included as common stock equivalents only when
their inclusion is dilutive. The inclusion of common stock equivalents
in 1996, 1995 and 1994 would not have had a dilutive effect on earnings
(loss) per share; consequently, common stock options and warrants are
excluded from the earnings (loss) per share computation.
EMPLOYEE BENEFITS
Prior to 1995, the Company maintained a 401(k) Plan which covered
substantially all full-time employees. In 1995, the Board of Directors
authorized the restatement of the plan as the Midland Resources Operating
Company, Inc. 401(k) Employee's Stock Ownership Plan and Trust and the
contribution of 5,000 shares of treasury stock to the restated plan. An
additional 7,300 shares of treasury stock were contributed in 1996. As of
December 31, 1995 and 1996, all shares had been allocated to participants
in the plan. The Company matches
-22-
<PAGE>
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. (CONTINUED)
employee contributions up to 3 percent of gross salary. The expense
related to the Company's contributions and plan administration was $50,092,
$25,985, and $24,708 in 1996, 1995 and 1994, respectively.
ADOPTION OF ACCOUNTING PRINCIPLE
During the fourth quarter of 1995, the Company adopted the
provisions of the Financial Accounting Standards Board's Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("FAS 121"). FAS 121 requires
impairment losses to be recognized on long-lived assets used in
operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by these assets are
less than the assets' carrying amount. It also requires assets held for
sale to be valued at the lesser of their original carrying amount or
fair value. Concurrent with the adoption and a decision to market
certain oil and gas properties, the Company recognized a write-down of
$1,020,670. In 1996, the Company recognized impairment losses of
$114,904. The after tax effect of the adoption of the accounting
principle was an increase of the net loss by $673,642 or $0.20 per share in
1995 and a decrease in net income of $75,837 or $0.02 per share in 1996.
The results of operations during 1995 of the properties held for sale was
a net loss of approximately $8,000.
FINANCIAL INSTRUMENTS
The carrying amount of cash approximates fair value. Interest
rates associated with substantially all the Company's long-term debt are
linked to current market rates. The rates associated with the Company's
standby letter of credit also approximate current market rates. As a
result, management believes that the carrying amount approximates the
fair value of the Company's credit facilities.
NOTE B. PURCHASE OF SUBSIDIARY CORPORATION
On September 18, 1996, the Company, through MRI Acquisition Corp. (a
wholly owned subsidiary), acquired 81.5% of the issued and outstanding common
stock and all outstanding stock options of Summit Petroleum Corporation (See
Note F.) for cash of $1,081,188 and cancellation of a note receivable from an
officer/stockholder of both the Company and Summit of $479,648. In December
1996, the Summit stockholders approved a plan of merger whereby Summit became
a wholly owned subsidiary of the Company. Pursuant to this plan,
stockholders possessing the remaining 18.5% interest (443,633 shares) will,
upon tendering their shares, receive $0.70 per share. The Company's
liability for the purchase of these remaining shares, which is being funded
through long-term borrowings under the Company's credit facility (See Note
C.), is included as a non-current liability in the accompanying balance
sheet. The purchase price ($0.70 per share and $0.6375 per option) was based
on the fair value of Summit's net assets as determined by the Board of
Directors of each respective corporation. The transaction was subject to a
fairness opinion provided by a recognized investment banking firm relative to
these values. In addition to the purchase price, the Company incurred
$139,254 in costs directly related to this acquisition, resulting in a total
investment through December 31, 1996, of $2,010,633. This acquisition is
accounted for under the purchase method of accounting, which provides that
the results of operations are combined from the date of acquisition
(September 18, 1996). In December 1996, MRI Acquisition Corp. was dissolved
and Summit became a subsidiary of the Company.
-23-
<PAGE>
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B. (CONTINUED)
The following is a summary of the allocation of the cost to the assets
acquired and liabilities assumed in this acquisition:
Current assets, including cash of $3,162 $ 155,742
Current liabilities (250,701)
Oil and gas properties 2,408,259
Other assets 20,773
Contracts and leases 200,000
Deferred income tax liability
(non-current) (279,729)
Long-term debt (243,711)
-------------
Total $ 2,010,633
-------------
-------------
The following is a summary of the pro forma results of operations as
though this transaction had occurred on January 1, 1995.
1996 1995
---- ----
Total revenue $ 7,749,621 $ 5,921,767
------------ ------------
------------ ------------
Net income (loss) $ (7,396) $ (889,623)
------------ ------------
------------ ------------
Earnings (loss) per weighted
average common share $ (0.002) $ (0.26)
------------ ------------
------------ ------------
-24-
<PAGE>
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C. NOTE PAYABLE AND LONG-TERM DEBT
The Company's debt consisted of the following at December 31, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
$20,000,000 credit facility with First Union National Bank of North Carolina
("FUNB"), expiring October 2000, and secured by oil and gas properties,
requiring the Company to maintain certain financial and profitability ratios
and restricting the Company's ability to incur debt, sell assets,
substantially change the ownership or management of the Company or pay
dividends. The facility provided for a borrowing base of $8,000,000 at
December 31, 1995, and $9,500,000 at December 31, 1996, with monthly
reductions in the borrowing base of $100,000 beginning April 1997. Interest
is payable monthly. At December 31, 1995, interest was computed at FUNB's
prime (8.5%) plus 0.75%. At December 31, 1996, interest on this loan was
subject to the arrangement discussed below:
Principal balance $8,500,000 $5,660,000
Less discount thereon (25,863) (56,896)
$150,000 revolving credit loan agreement, expiring October 1997, with
FUNB, collateralized by oil and gas properties and bearing interest at
FUNB's prime plus 0.75% and 1.5% at December 31, 1995. Interest
payable monthly. - -
Note payable to FUNB in monthly installments of $9,000, plus interest at
a rate equal to prime (8.25% at December 31, 1996) plus 1.5%;
collateralized by a first lien on Summit's oil and gas properties. 327,335 -
Note payable secured by the Company's interest in a pipeline facility.
Payments, including interest at 12% per annum, are dependent upon
levels of throughput. - 75,384
Other, primarily secured monthly installment notes 45,779 70,530
---------- ----------
8,847,251 5,749,018
Less portion due within one year 1,680,830 1,224,401
---------- ----------
$7,166,421 $4,524,617
---------- ----------
---------- ----------
</TABLE>
Advances under the Company's $20,000,000 credit facility currently bears
interest, at the Company's option, based on (a) a base rate equal to the greater
of (i) the bank's prime rate (8.25% at December 31, 1996) or (ii) the rate
published by the Federal Reserve Bank of New York; or (b) a rate based on the
London Interbank Offered Rate (LIBOR). Advances under (a) bear interest at
the base rate plus 0.25% and advances under (b) bear interest at the LIBOR
rate plus 2.75%. As of December 31, 1996, the Company's effective interest
rate under this arrangement was 8.75%. The FUNB facility is subject to a
commitment fee of 1/2 of 1% on the unused portion of the borrowing base.
Summit's note payable to bank is subject to a loan agreement which
provides for a borrowing base of $500,000. This agreement restricts the
Company's ability to incur debt, make investments and loans, pay dividends,
sell assets, enter into merger agreements or change the nature of its
business. The agreement also restricts the use of loan proceeds advanced
under the agreement and, it further requires the maintenance of certain
financial ratios. This agreement, which provided for an expiration date of
December 12, 1997, was paid in full in March 1997, with the proceeds from a
long-term borrowing by the Company under its credit facility with FUNB.
Accordingly, this debt is presented as long-term debt in the accompanying
financial statements.
-25-
<PAGE>
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C. (CONTINUED)
The following information relates to short term bank borrowings during
1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Balance, December 31, $ - $ -
Interest rate at December 31, - 9.25%
Maximum balance outstanding during the year $ - $150,000
Average balance during the year (computed monthly) $ - $106,083
Weighted average interest rate during the year (computed daily) - 9.89%
Remaining borrowing base at December 31, $ - $150,000
</TABLE>
Future maturities of long term debt at December 31, 1996 are as follows:
1997 $1,680,830
1998 1,206,517
1999 1,203,011
2000 4,737,094
2001 3,496
2002 and thereafter 16,303
-----------
$8,847,251
-----------
-----------
NOTE D. ISSUANCE OF COMMON STOCK AND WARRANTS
In November, 1990, the Company issued 2,264,522 shares of common stock,
as discussed in Note A, based on an exchange value of $2.00 per share. For
each share of common stock issued, two warrants were issued entitling the
holder to purchase one share of common stock at $2.50 and one share at $4.00
during the period from November 1990 to November 2002. On October 6, 1995,
the 90 day common stock market price requirement (as determined in the
Warrant Agreement) was met and the Company called its $2.50 warrants.
Holders of record on December 22, 1995 received a redemption payment of $0.05
per warrant for aggregate payments of $63,373, which was charged to
additional paid in capital. 997,009 of the $2.50 warrants were exercised. As
of December 31, 1996, none of the $4.00 warrants had been exercised.
The warrants are subject to certain antidilution provisions contained in
the warrant agreement, which could cause adjustments to the exercise price and
the number of shares issuable.
In August 1994, the Company retained investment banking services for which
it issued 5,000 warrants per month, entitling the holder to purchase one share
of common stock at the closing market price on the day preceding the issue of
the warrant for a term of five years. The exercise prices range from $1.75 to
$3.375. The Company issued 30,000 warrants under this agreement, none of which
have been exercised as of December 31, 1996.
-26-
<PAGE>
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D. (CONTINUED)
Under the 1994 Midland Resources, Inc. Long-Term Incentive Plan, 115,000
stock options with a five year term were granted to officers and other key
employees in 1995. As of December 31, 1995, there were 93,000 options
outstanding under this plan. Each option entitles the holder to purchase one
share of common stock for the fair market value of common stock on the date
of the grant of the option. Under the Company's 1996 Long-Term Incentive
Plan, an additional 400,000 options are available for grant to officers and
key employees. During 1996, 218,000 additional options were granted and
options to purchase 7,500 shares of common stock were exercised and 22,000
options expired. As of December 31, 1996, there were 251,500 options
outstanding under this plan with exercise prices ranging from $2.375 to
$3.813. These options, if not exercised, are scheduled to expire in 1999
through 2001. As of December 31, 1996, options to purchase an additional
448,500 shares were available for future grant.
Under the Midland Resources, Inc. 1995 Directors' Stock Option Plan,
20,000 stock options with a five year term were granted to directors in 1995.
As of December 31, 1995, all 20,000 options were outstanding under this plan.
In 1996, an additional 30,000 stock options were granted to directors. Each
option entitles the holder to purchase one share of common stock for the fair
market value of common stock on the date of the grant of the option. As of
December 31, 1996, 50,000 options were outstanding at exercise prices ranging
from $2.75 to $3.75 and 50,000 options were available for future grant.
Options outstanding at December 31, 1996, if not exercised, are scheduled to
expire in 1999 through 2001.
The Summary of the status of the Company's stock option plans at
December 31, 1996 and 1995, and changes during the years then ended is
presented below:
<TABLE>
<CAPTION>
1996 1995
------------------------ ---------------------
Weighted Weighted
average average
exercise exercise
Shares price Shares price
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Options outstanding, beginning of year 113,000 $ 2.52 - $-
Granted 218,000 3.50 135,000 2.52
Expired (22,000) 2.92 - -
Exercised (7,500) 2.38 (22,000) 2.38
-------- ------- -------- -------
Options outstanding, end of year 301,500 $ 3.20 113,000 $ 2.51
-------- ------- -------- -------
Options exercisable, end of year 241,500 $ 3.08 113,000 $ 2.51
-------- ------- -------- -------
-------- ------- -------- -------
Weighted average fair value of
options granted during the year $ 2.75 $ 2.13
------- -------
------- -------
</TABLE>
The following applies to all options outstanding at December 31, 1996:
Number outstanding 301,500
Range of exercise prices $2.375 to $3.813
Weighted average exercise price $3.20
Weighted average remaining
contractual life 3.95 years
-27-
<PAGE>
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D. (CONTINUED)
Effective January 1, 1996, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards No. 123, which
provides for an alternative method to valuation of the compensation element
of stock based compensation plans. The Company applies APB 25 and related
Interpretations in accounting for stock-based compensation. Had compensation
costs been determined based on the fair value at the grant dates for awards
consistent with the method of FASB Statement 123, the Company's net income
(loss) and related per share amounts would have been reduced to the pro forma
amounts indicated below:
1996 1995
----------- -------------
Net income (loss) As reported $ 22,122 $ (737,031)
Pro forma (245,366) (895,861)
Earnings (loss) per share As reported $ 0.01 $ (0.22)
Pro forma (0.06) (0.27)
The fair value of each option granted is estimated on the date of the
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for the grants issued in 1995 and 1996:
Expected volatility 75% to 110%
Risk free rate 6.06% to 6.49%
Expected life of options 3 to 5 years
Expected dividend yield 0%
In February 1997, an additional 88,000 options were issued to employees
at an option price of $3.125 per option.
In February 1997, the Board of Directors approved the Midland Resources,
Inc. 1997 Board of Directors Stock Incentive Plan which permits the issuance
of options, warrants or other rights to acquire up to 1,235,000 shares of the
Company's common stock. Options to acquire an aggregate of 1,235,000 shares
at $3.00 per share were issued to four directors, one advisory director and
one employee. These options are vested as certain stipulated trading prices
for the Company's common stock are achieved and, exercisability is further
restricted by time delay provisions which limited the number of vested shares
that may be exercised each year beginning in March, 1998. Also, in February,
1997, the Company issued a five year warrant to purchase 50,000 shares to a
consultant for future services. These options and warrants are expected to
give rise to the recognition of compensation expenses of up to $616,250 in
years 1997 through 2000.
In June 1995, the Company issued 150,000 warrants to purchase common
stock at $4.00 per share for a term of seven years to its bank. In exchange
the Company's credit facility loan agreement was amended to reduce the
interest rate by 0.75% and allow 25% of its borrowing base to be used for
working capital purposes. The fair value of the
-28-
<PAGE>
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D. (CONTINUED)
warrants at the date of grant was recorded as debt discount and additional
paid in capital. None of these warrants have been exercised as of December
31, 1996.
NOTE E. MAJOR CUSTOMERS
The Company and its subsidiary operate exclusively within the United
States and their revenues and operating income are derived predominately from
the oil and gas industry. Oil and gas production is sold to various
purchasers and the receivables are generally uncollateralized. The Company
has not experienced significant credit losses on its oil and gas accounts and
management is of the opinion that significant credit risk does not exist.
Management is of the opinion that the loss of any one purchaser would not
have an adverse effect on the ability of the Company to sell its oil and gas
production.
In 1996, three purchasers accounted for 18%, 12% and 15%, respectively,
of total oil and gas revenues. In 1995, four purchasers accounted for 18%,
17%, 11% and 11%, respectively, of total oil and gas revenues. In 1994,
three purchasers accounted for 20%, 16% and 14%, respectively, of total oil
and gas revenues.
NOTE F. RELATED PARTIES
Until December 1993, MRO was owned 80% by the Company's President and
Chairman of the Board of Directors, Mr. Deas H. Warley III and 20% by a
former Vice President and Board Member, Sal J. Pagano. Mr. Warley currently
owns approximately 32% of the Company's outstanding common stock and 10.3% of
the related $4.00 warrants.
Effective November 1, 1995, the Company purchased a building and land in
Midland County, Texas, for $78,996 from Mr. Warley and another individual for
use as a district office. Mr. Warley and the other individual each financed
50% of the purchase price less the down payment of $10,496. The two $34,250
ten year notes bear interest at 7.5% and are payable in equal monthly
installments of $407 each. The cost to the Company was based on an
independent written appraisal and certain improvements completed before the
property was purchased.
In December 1995, Mr. Warley borrowed $582,805 from the Company under an
eighteen month term note bearing 7.5% interest, secured by 287,947 shares of
the Company's common stock. Mr. Warley used these funds to exercise his
233,122 warrants to buy common stock at $2.50 per share. The balance of the
note payable to Mr. Warley discussed above was netted against this note
receivable and he made a cash payment of $95,000 leaving a balance of
$453,641 at December 31, 1995. This amount is reflected in the accompanying
balance sheet as a reduction of stockholders' equity at December 31, 1995.
This note was paid in full in September 1996 by offsetting the balance of
$479,648 against the payment to Mr. Warley for his stock and options in
Summit Petroleum Corporation (See Note B.).
MRO serves as operator for most of the Company's oil and gas properties
and also collects and disburses revenues on certain of these properties.
Effective January 1, 1994, the Company sold a ten percent working
interest in the Ned Wilson property located in Ward County, Texas to Summit
for $85,696, which was the Company's cost adjusted for revenues and expenses
through December 31, 1993.
Effective August 1, 1994, Summit participated with the Company in the
acquisition of certain properties in Coke and Howard Counties. The purchase
price of these properties was $1,950,000, which was adjusted for revenues and
expenses from August 1, 1994 through the closing date of August 15, 1994.
Summit acquired ten percent of the Company's interest in these properties for
ten percent of the purchase price adjusted for revenues and expenses and ten
percent of the transaction costs.
-29-
<PAGE>
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE F. (CONTINUED)
During 1995, Summit participated with the Company in the acquisition of
certain oil and gas leases and seismic options in the Sunburst Project, Terry
County, Texas, and the Latigo and Lakota Projects, Hockley County, Texas in
exchange for a commitment from the Company and Summit to expend certain
monies in connection with acquiring an interest in certain oil and gas
leases, seismic options, conducting 3D geological surveys, interpretation of
3D seismic data and the drilling of two or more test wells. Summit acquired
its five percent interest working interest in proportion to its share of the
commitment.
Effective September 1, 1995, Summit participated with the Company in the
acquisition of additional working interests in certain Redfish Bay properties
in Nueces County, Texas. Summit acquired its four percent working interest
on the same basis as the Company.
The amounts due from related party at December 31, 1995, represent
undistributed oil and gas revenues, joint interest expenditures incurred in
the Company's normal operations and development of oil and gas properties as
well as management fees due from Summit. The amount due from a related party
at December 31, 1996, represents reimbursements due for certain acquisition
and exploration costs from a newly formed limited partnership for which the
Company is general partner. The limited partnership group is comprised of 19
individuals of which 18 are also stockholders of the Company. In addition,
two of these individuals are directors of the Company.
NOTE G. COMMITMENTS AND CONTINGENCIES
The Company is involved in litigation arising from its attempt in late
1991 to become the general partner of 27 oil and gas limited partnerships
sponsored by Merrico Resources Inc. The Company is appealing a decision
entered in the United States Bankruptcy Court for the Western District of
Oklahoma that precludes the Company from enforcing its election by the
limited partners as the general partner. The ultimate outcome of this matter
is uncertain.
The Company was a plaintiff in litigation which sought to recover unpaid
revenues due from and questionable charges paid to a former property
operator, from January 1985 to June 1987. A settlement agreement and release
was entered into between the Company and the defendant. Income related to
this matter of $120,090 was recorded in 1994.
The Company is involved in other claims and disputes arising in the
ordinary course of business. Management believes the ultimate resolution of
these matters will not have a material effect on the consolidated financial
statements.
The Company is contingently liable for an letter of credit in the amount
of $50,000 issued by its bank in favor of an insurance company to secure
performance under a $200,000 bond for its operations in Redfish Bay.
The Company is contingently liable for an irrevocable letter of credit
issued by its bank in favor of the seller of certain oil and gas properties
purchased by the Company in 1995. This letter of credit, in the amount of
$850,000, is to secure performance by the Company of its development
obligations with respect to these properties. Remaining development
obligations with respect to these properties were approximately $77,000 and
$420,000 as of December 31, 1996 and 1995, respectively.
The Company has exploration commitments with respect to unproven oil and
gas properties acquired during 1995 of approximately $1,000,000 as of
December 31, 1996.
During 1995, the Company began leasing its executive office space and
incurred rental expense of $34,560 in 1995 and $92,088 in 1996. Future
minimum rental commitments, as of December 31, 1996, for this noncancellable
lease expiring in July 1997 are $49,885.
-30-
<PAGE>
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H. INCOME TAXES
The deferred tax assets and liabilities reflected in the consolidated
balance sheets as December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Deferred tax assets:
Tax loss carry-forwards $ 1,193,719 $ 1,012,225
Other 9,405 3,332
Property held for sale - 339,509
-------------- --------------
1,203,124 1,355,066
Deferred tax liabilities:
Property and equipment 619,975 655,188
Property held for sale 108,317 -
Contracts and leases 143,876 97,815
-------------- --------------
872,168 753,003
-------------- --------------
Net deferred tax asset $ 330,956 $ 602,063
-------------- --------------
-------------- --------------
</TABLE>
For income tax purposes, the Company has a net loss of approximately
$2,874,000 available for carryforward which, if not utilized, will begin to
expire in 2005. Summit has losses of approximately $610,000 which, if not
utilized, will begin to expire in 2000. Management has determined that,
based on future expectations, it is more likely than not that the Company's
future taxable income will be sufficient to fully utilize these losses prior
to their expiration.
A reconciliation of the provision for income taxes to the income taxes
computed using the federal statutory rate for the years 1996, 1995 and 1994
follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- ----------- -----------
<S> <C> <C> <C>
Amount computed using statutory tax $ 17,817 $ (378,513) $ 180,357
Increase (reduction) in taxes resulting from:
Nondeductible entertainment expenses 2,642 2,400 4,388
State income tax 890 - 11,662
All other 8,931 (128) (9,307)
--------- ----------- -----------
Effective federal income tax (benefit) $ 30,280 $ (376,241) $ 187,100
--------- ----------- -----------
</TABLE>
-31-
<PAGE>
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 and 1995, is comprised of
the following:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Producing oil and gas properties $ 25,809,221 $ 21,246,244
Non-producing oil and gas properties 1,127,605 259,441
Transportation equipment 282,532 264,565
Computer equipment and software 229,155 214,809
Office furniture and equipment 94,299 90,465
Land and buildings 96,545 94,674
Leasehold improvements 9,014 5,938
Wells in progress 241,209 -
------------- -------------
$ 27,889,580 $ 22,176,136
------------- -------------
------------- -------------
</TABLE>
NOTE J. HEDGING ACTIVITIES
Effective March 1, 1995, the Company entered into a one year gas swap
agreement to hedge against a portion of the price risk associated with gas
price declines. This agreement covers approximately 50% of the Company's
total estimated gas production. The Company's price under this agreement is
a minimum of $1.50 per mcf with a 40% participation in prices over $1.50.
This swap agreement expired in February, 1996, and the Company has not
entered into another contract. Losses under this contract were $21,109 and
$25,860 for 1995 and 1996, respectively. Gains or losses relating to the
swap agreement are measured, settled and recognized at the end of each month
as part of oil and gas sales.
NOTE K. OIL AND GAS INFORMATION
Capitalized costs related to the Company's oil and gas producing
activities are as follows:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Proved producing properties subject to depreciation,
depletion and amortization $ 25,809,221 $ 21,246,244
Less accumulated depreciation, depletion and
amortization 13,769,157 11,617,687
------------- -------------
12,040,064 9,628,557
Wells in progress 241,209 -
Non-producing properties 1,127,605 259,441
------------- -------------
Net capitalized cost $ 13,408,878 $ 9,887,998
------------- -------------
------------- -------------
</TABLE>
-32-
<PAGE>
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K. (CONTINUED)
A summary of costs incurred in acquisition, development and exploration
of oil and gas properties is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ --------- ------------
<S> <C> <C> <C>
Acquisition costs - Proven properties $ 2,391,228 $ 510,832 $ 1,854,685
Acquisition costs - Unproven properties 922,607 198,124 -
Development costs 2,368,448 2,011,634 460,317
Exploration costs 766,855 198,453 32,191
</TABLE>
Depreciation, depletion and amortization per equivalent barrel of oil
produced (gas is converted to equivalent barrels at the rate of 6 mcf per
barrel) are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ --------- ------------
<S> <C> <C> <C>
Depreciation, depletion and amortization:
Based on production $ 2.91 $ 2.73 $ 2.82
</TABLE>
NOTE L. CASH FLOWS
Supplemental disclosures of cash flow information are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ --------- ------------
<S> <C> <C> <C>
Cash paid during the year for:
Interest $ 625,948 $ 560,456 $ 470,615
Income taxes $ - $ 30,272 $ 26,557
Significant non-cash activities:
Issuance of warrants to bank $ - $ 75,000 $ -
Note receivable from sale of building $ - $ 344,875 $ -
Note payable from purchase of district
office, warehouse and yard $ - $ 68,500 $ -
Note receivable from officer/director
for exercise of warrants, net of
note payable $ - $ 548,641 $ -
Treasury stock contributed to ESOP $ 26,462 $ 12,989 $ -
Development costs incurred, unpaid at year end $ 110,700 $ - $ -
Non-cash reduction in note receivable
officer/director $ 479,648 $ - $ -
</TABLE>
NOTE M. OIL AND GAS RESERVES (UNAUDITED)
The estimates of the Company's proved oil and gas reserves, which are
located entirely within the United States, were prepared in accordance with the
guidelines established by the Securities and Exchange Commission and Financial
Accounting Standards Board which require that reserve estimates be prepared
under existing economic and operating conditions, with no provision for price
and cost escalators, except by contractual agreement. The estimates as of
December 31, 1996, 1995 and 1994 are based on evaluations prepared by E. Ralph
Green and Associates, Independent Petroleum Engineers.
-33-
<PAGE>
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M. (CONTINUED)
Management emphasizes that reserve estimates are inherently imprecise and
are expected to change as new information is available and as economic
conditions in the industry change.
CHANGES IN PROVED RESERVE QUANTITIES (UNAUDITED):
<TABLE>
<CAPTION>
Oil (Bbls) Gas (Mcf)
---------- ----------
<S> <C> <C>
Proved reserves, December 31, 1993 1,402,068 12,983,493
Extensions, discoveries and improved recovery 571,751 3,600,305
Revision of previous estimates 221,209 1,102,643
Purchase of minerals-in-place 160,302 762,498
Sales of minerals-in-place (5,819) (32,288)
Production (171,755) (1,356,130)
---------- ----------
Proved reserves, December 31, 1994 2,177,756 17,060,521
Extensions, discoveries and improved recovery 298,140 370,722
Revision of previous estimates 8,285 760,412
Purchase of minerals-in-place 70,080 1,545,859
Production (166,652) (1,268,772)
---------- ----------
Proved reserves, December 31, 1995 2,387,609 18,468,742
Sales of minerals-in-place (1,521) (16,519)
Extensions, discoveries and improved recovery 279,444 223,243
Revision of previous estimates 171,677 (1,124,321)
Purchase of minerals-in-place 44,528 327,466
Purchase of Summit 175,656 1,418,424
Production (215,913) (1,002,482)
---------- ----------
Proved reserves, December 31, 1996 2,841,480 18,294,553
---------- ----------
---------- ----------
Proved developed reserves (UNAUDITED):
December 31, 1994 1,463,675 12,617,620
December 31, 1995 1,918,557 14,131,580
December 31, 1996 2,061,974 13,821,400
</TABLE>
-34-
<PAGE>
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M. (CONTINUED)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
RELATING TO PROVED RESERVES (UNAUDITED):
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------------------
1996 1995 1994
-------------- ------------- -------------
<S> <C> <C> <C>
Future cash inflows $ 139,037,425 $ 79,172,668 $ 67,876,078
Future production costs 51,857,027 38,818,603 34,287,213
Future development costs 7,231,324 5,691,375 6,027,125
Future income taxes (a) 18,372,157 7,360,573 5,507,170
-------------- ------------- -------------
Future net cash flows 61,576,917 27,302,117 22,054,570
Annual discount (10%) for estimated
timing of cash flows 29,984,568 13,001,409 9,507,627
-------------- ------------- -------------
Standardized measure of discounted
future net cash flows $ 31,592,349 $ 14,300,708 $ 12,546,943
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
(a) Future income taxes are computed at current statutory rates on future net
cash flows before income taxes less the income tax bases of the oil and
gas properties, available loss carry-forwards and statutory depletion
carryforwards.
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE
NET CASH FLOWS FROM PROVED RESERVES (UNAUDITED):
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------------------
1996 1995 1994
-------------- ------------- -------------
<S> <C> <C> <C>
Sales of oil and gas produced,
net of production costs $ (4,722,529) $ (2,386,779) $ (2,253,972)
Net changes in price and production costs 19,074,149 1,539,078 (381,338)
Previously estimated development costs incurred 35,190 120,474 138,543
Revisions of estimated future development costs (84,478) 124,763 (1,300,266)
Revision of quantity estimates 167,303 722,631 1,646,549
Purchases of minerals-in-place 840,715 1,070,857 1,120,026
Acquisition of Summit 2,875,995 - -
Sales of minerals-in-place (31,888) - (31,562)
Extensions and discoveries 1,857,974 2,114,257 1,291,585
Net change in income taxes (4,838,537) (514,350) 183,778
Accretion of discount 1,768,766 1,541,954 1,391,782
Changes in timing of estimated cash flows and other 348,981 (2,579,120) (119,633)
-------------- ------------- -------------
Changes in standardized measure 17,291,641 1,753,765 1,685,492
Standardized measure, beginning of year 14,300,708 12,546,943 10,861,451
-------------- ------------- -------------
Standardized measure, end of year $ 31,592,349 $ 14,300,708 $ 12,546,943
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
-35-
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required in this item is incorporated by reference from the
Company's definitive Proxy Statement for its 1997 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission no
later than April 30, 1997.
ITEM 10. EXECUTIVE COMPENSATION
The information required in this item is incorporated by reference from the
Company's definitive Proxy Statement for its 1997 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission no
later than April 30, 1997.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in this item is incorporated by reference from the
Company's definitive Proxy Statement for its 1997 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission no
later than April 30, 1997.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in this item is incorporated by reference from the
Company's definitive Proxy Statement for its 1997 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission no
later than April 30, 1997.
-36-
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) REPORTS ON FORM 8-K: None
(B) EXHIBITS:
3.1* Articles of Incorporation
3.2* Bylaws
3.3** Articles of Amendment to the Articles of Incorporation.
(Previously filed as the same exhibit number with the Company's
Annual Report on Form 10-KSB dated December 31, 1994, and
incorporated herein by reference.)
4.1* Specimen Common Stock Certificate
4.2* Warrant Agreement for $2.50 and $4.00 warrants
4.4* Specimen $4.00 Warrant Certificate
10.1 Credit agreement between the Company and First Union National
Bank of North Carolina dated October 31, 1996
10.2** 1994 Midland Resources, Inc. Long-Term Incentive Plan.
(Previously filed as the same exhibit number the Company's Annual
Report on Form 10-KSB dated December 31, 1994.)
10.3** Employment Contract between the Company and Deas H. Warley III
dated January 1, 1995. (Previously filed as the same exhibit
number the Company's Annual Report on Form 10-KSB dated December
31, 1994.)
10.9** Agreement of Acquisition between the Company and Miresco, Inc.
dated December 31, 1993. (Previously filed as the same exhibit
number with the Company's Current Report on Form 8-K dated
December 31, 1993.)
10.14** Sunburst Prospect Purchase and Sale Agreement, Stipulation of
Interest and Exploration and Development Agreement dated July 14,
1995, between the Company and Seneca Resources Corporation and
Pathfinder Oil & Gas, Inc. (Previously filed as the same exhibit
number with the Company's Quarterly Report on Form 10-QSB dated
June 30, 1995.)
10.15** Latigo Prospect Purchase and Sale Agreement, Stipulation of
Interest and Exploration and Development Agreement dated July 14,
1995, between the Company and Seneca Resources Corporation and
Pathfinder Oil & Gas, Inc. (Previously filed as the same exhibit
number with the Company's Quarterly Report on Form 10-QSB dated
June 30, 1995.)
10.16** Lakota Prospect Purchase and Sale Agreement, Stipulation of
Interest and Exploration and Development Agreement dated July 11,
1995, between the Company, AXEM - Blackbird L.L.C., Summit
Petroleum Corporation and Pathfinder Oil & Gas, Inc. (Previously
filed as the same exhibit number with the Company's Quarterly
Report on Form 10-QSB dated June 30, 1995.)
10.20 Amendment to Employment Contract between the Company and Deas H.
Warley III dated January 8, 1996
10.21** Agreement and Plan of Merger between the Company, MRI Acquisition
and Summit dated July 17, 1996 (Previously files as Exhibit
99.(a)(3) with the Company's Schedule 14D-1 dated July 18, 1996.)
10.22 Agreement of Limited Partnership of Chalk Mountain Exploration,
LTD dated January 14, 1997, between the Company as General
Partner and the limited partners named therein
10.23 The Company's 1997 Board of Directors Stock Incentive Plan
10.24 Purchase and Sale Agreement between the Company and Redfish Bay
Development Corporation and PI Energy Corporation dated effective
February 1, 1997
10.25 Warrant to purchase 10,000 shares of Common Stock issued to Sam
R. Brock, dated October 23, 1996
10.26 Promissory Note dated December 15, 1995, by Deas H. Warley III as
maker, and the Company in the principal amount of $582,805 and
repaid September 19, 1996
21 Subsidiaries of the registrant
23.1 Consent of Ernst & Young LLP, independent auditors dated April
11, 1997
23.2 Consent of Grant Thornton LLP, independent auditors dated April
11, 1997
- -------------------------------
* Previously filed as the same exhibit number with the Company's
Registration Statement on Form 10 and incorporated herein by
reference.
** Incorporated herein by reference as indicated.
-37-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MIDLAND RESOURCES, INC.
Date: April 14, 1997 By:/s/ Deas H. Warley III
---------------------------------
Deas H. Warley III, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated:
Date: April 14, 1997 By:/s/ Deas H. Warley III
---------------------------------
Deas H. Warley III, Chairman, President,
Director
Date: April 14, 1997 By:/s/ Howard E. Ehler
---------------------------------
Howard E. Ehler, Chief Financial Officer,
Vice President
Date: April 14, 1997 By:/s/ Robert R. Donnelly
---------------------------------
Robert R. Donnelly, Director
Date: April 14, 1997 By:/s/ Sam R. Brock
---------------------------------
Sam R. Brock, Director
Date: April 14, 1997 By:/s/ Wayne M. Whitaker
---------------------------------
Wayne M. Whitaker, Director
Date: April 14, 1997 By:/s/ Darrell M. Dillard
---------------------------------
Darrell M. Dillard, Director
-38-
<PAGE>
INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NO. EXHIBIT PAGE
------- ------- -----------
(A) REPORTS ON FORM 8-K: None
(B) EXHIBITS:
3.1* Articles of Incorporation
3.2* Bylaws. .
3.3** Articles of Amendment to the Articles of Incorporation.
(Previously filed as the same exhibit number with the
Company's Annual Report on Form 10-KSB dated December 31,
1994, and incorporated herein by reference
4.1* Specimen Common Stock Certificate .
4.2* Warrant Agreement for $2.50 and $4.00 warrants
4.4* Specimen $4.00 Warrant Certificate
10.1 Credit agreement between the Company and First Union
National Bank of North Carolina dated October 31, 1996
10.2** 1994 Midland Resources, Inc. Long-Term Incentive Plan.
(Previously filed as the same exhibit number the Company's
Annual Report on Form 10-KSB dated December 31, 1994.)
10.3** Employment Contract between the Company and Deas H.
Warley III dated January 1, 1995. (Previously filed as the
same exhibit number the Company's Annual Report on
[caad 214]Form 10-KSB dated December 31, 1994.)
10.9** Agreement of Acquisition between the Company and Miresco,
Inc. dated December 31, 1993. (Previously filed as the same
exhibit number with the Company's Current Report on Form 8-K
dated December 31, 1993.)
10.14** Sunburst Prospect Purchase and Sale Agreement, Stipulation
of Interest and Exploration and Development Agreement dated
July 14, 1995, between the Company and Seneca Resources
Corporation and Pathfinder Oil & Gas, Inc. (Previously
filed as the same exhibit number with the Company's
Quarterly Report on Form 10-QSB dated June 30, 1995.)
10.15** Latigo Prospect Purchase and Sale Agreement, Stipulation
of Interest and Exploration and Development Agreement dated
July 14, 1995, between the Company and Seneca Resources
Corporation and Pathfinder Oil & Gas, Inc. (Previously
filed as the same exhibit number with the Company's
Quarterly Report on Form 10-QSB dated June 30, 1995.)
10.16** Lakota Prospect Purchase and Sale Agreement, Stipulation
of Interest and Exploration and Development Agreement dated
July 11, 1995, between the Company, AXEM - Blackbird L.L.C.,
Summit Petroleum Corporation and Pathfinder Oil & Gas, Inc.
(Previously filed as the same exhibit number with the
Company's Quarterly Report on Form 10-QSB dated June 30,
1995.)
10.20 Amendment to Employment Contract between the Company and
Deas H. Warley III dated January 8, 1996
10.21** Agreement and Plan of Merger between the Company, MRI
Acquisition and Summit dated July 17, 1996. (Previously
files as Exhibit 99.(a)(3) with the Company's Schedule 14D-1
dated July 18, 1996.)
10.22 Agreement of Limited Partnership of Chalk Mountain
Exploration, LTD dated January 14, 1997, between the Company
as General Partner and the limited partners named therein
10.23 The Company's 1997 Board of Directors Stock Incentive Plan
10.24 Purchase and Sale Agreement between the Company and Redfish
Bay Development Corporation and PI Energy Corporation dated
effective February 1, 1997
10.25 Warrant to purchase 10,000 shares of Common Stock issued to
Sam R. Brock, dated October 23, 1996
10.26 Promissory Note dated December 15, 1995, by Deas H.
Warley III as maker, and the Company in the principal amount
of $582,805 and repaid September 19, 1996
21 Subsidiaries of the registrant
23.1 Consent of Ernst & Young LLP, independent auditors dated
April 11, 1997
23.2 Consent of Grant Thornton LLP, independent auditors dated
April 11, 1997
- -------------------------------------
* Previously filed as the same exhibit number with the Company's
Registration Statement on Form 10 and incorporated herein by
reference.
** Incorporated herein by reference as indicated.
-39-
<PAGE>
CREDIT AGREEMENT
DATED AS OF OCTOBER 31, 1996
BETWEEN
MIDLAND RESOURCES, INC.,
AS BORROWER
AND
FIRST UNION NATIONAL BANK OF NORTH CAROLINA,
AS LENDER
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I
DEFINITIONS AND ACCOUNTING MATTERS
Section 1.01 TERMS DEFINED ABOVE . . . . . . . . . . . . . . . . . . 1
Section 1.02 CERTAIN DEFINED TERMS . . . . . . . . . . . . . . . . . 1
Section 1.03 ACCOUNTING TERMS AND DETERMINATIONS . . . . . . . . . . 15
ARTICLE II
COMMITMENTS
Section 2.01 LOAN AND LETTERS OF CREDIT. . . . . . . . . . . . . . . 15
Section 2.02 BORROWINGS, CONTINUATIONS, CONVERSIONS
AND LETTERS OF CREDIT . . . . . . . . . . . . . . . . . 16
Section 2.03 CHANGES OF COMMITMENT . . . . . . . . . . . . . . . . . 17
Section 2.04 FEES. . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 2.05 LENDING OFFICES . . . . . . . . . . . . . . . . . . . . 18
Section 2.06 NOTE. . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 2.07 PREPAYMENTS . . . . . . . . . . . . . . . . . . . . . . 19
Section 2.08 BORROWING BASE. . . . . . . . . . . . . . . . . . . . . 20
Section 2.09 ASSUMPTION OF RISKS . . . . . . . . . . . . . . . . . . 21
Section 2.10 OBLIGATION TO REIMBURSE AND TO PREPAY . . . . . . . . . 21
ARTICLE III
PAYMENTS OF PRINCIPAL AND INTEREST
Section 3.01 REPAYMENT OF LOANS. . . . . . . . . . . . . . . . . . . 23
Section 3.02 INTEREST. . . . . . . . . . . . . . . . . . . . . . . . 23
ARTICLE IV
PAYMENTS; COMPUTATIONS; ETC.
Section 4.01 PAYMENTS. . . . . . . . . . . . . . . . . . . . . . . . 24
Section 4.02 COMPUTATIONS. . . . . . . . . . . . . . . . . . . . . . 24
Section 4.03 SET-OFF.. . . . . . . . . . . . . . . . . . . . . . . . 24
Section 4.04 TAXES . . . . . . . . . . . . . . . . . . . . . . . . . 25
-i-
<PAGE>
Section 4.05 DISPOSITION OF PROCEEDS . . . . . . . . . . . . . . . . 27
ARTICLE V
CAPITAL ADEQUACY
Section 5.01 ADDITIONAL COSTS. . . . . . . . . . . . . . . . . . . . 28
Section 5.02 LIMITATION ON LIBOR LOANS . . . . . . . . . . . . . . . 29
Section 5.03 ILLEGALITY. . . . . . . . . . . . . . . . . . . . . . . 30
Section 5.04 BASE RATE LOANS PURSUANT TO SECTIONS 5.01, 5.02
AND 5.03 . . . . . . . . . . . . . . . . . . . . . . . 30
Section 5.05 COMPENSATION. . . . . . . . . . . . . . . . . . . . . . 30
ARTICLE VI
CONDITIONS PRECEDENT
Section 6.01 INITIAL FUNDING . . . . . . . . . . . . . . . . . . . . 31
Section 6.02 INITIAL AND SUBSEQUENT LOANS. . . . . . . . . . . . . . 32
Section 6.03 CONDITIONS RELATING TO LETTERS OF CREDIT. . . . . . . . 33
ARTICLE VII
REPRESENTATIONS AND WARRANTIES
Section 7.01 CORPORATE EXISTENCE . . . . . . . . . . . . . . . . . . 33
Section 7.02 FINANCIAL CONDITION . . . . . . . . . . . . . . . . . . 33
Section 7.03 LITIGATION. . . . . . . . . . . . . . . . . . . . . . . 34
Section 7.04 NO BREACH . . . . . . . . . . . . . . . . . . . . . . . 34
Section 7.05 AUTHORITY . . . . . . . . . . . . . . . . . . . . . . . 34
Section 7.06 APPROVALS . . . . . . . . . . . . . . . . . . . . . . . 34
Section 7.07 USE OF LOANS. . . . . . . . . . . . . . . . . . . . . . 35
Section 7.08 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . 35
Section 7.09 TAXES . . . . . . . . . . . . . . . . . . . . . . . . . 36
Section 7.10 TITLES, ETC.. . . . . . . . . . . . . . . . . . . . . . 36
Section 7.11 NO MATERIAL MISSTATEMENTS . . . . . . . . . . . . . . . 37
Section 7.12 INVESTMENT COMPANY ACT. . . . . . . . . . . . . . . . . 37
Section 7.13 PUBLIC UTILITY HOLDING COMPANY ACT. . . . . . . . . . . 37
Section 7.14 SUBSIDIARIES. . . . . . . . . . . . . . . . . . . . . . 37
Section 7.15 LOCATION OF BUSINESS AND OFFICES. . . . . . . . . . . . 37
Section 7.16 DEFAULTS. . . . . . . . . . . . . . . . . . . . . . . . 37
Section 7.17 ENVIRONMENTAL MATTERS . . . . . . . . . . . . . . . . . 38
Section 7.18 COMPLIANCE WITH THE LAW . . . . . . . . . . . . . . . . 39
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Section 7.19 INSURANCE . . . . . . . . . . . . . . . . . . . . . . . 39
Section 7.20 GAS IMBALANCES. . . . . . . . . . . . . . . . . . . . . 40
Section 7.21 HEDGING AGREEMENTS. . . . . . . . . . . . . . . . . . . 40
ARTICLE VIII
AFFIRMATIVE COVENANTS
Section 8.01 FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . 40
Section 8.02 LITIGATION. . . . . . . . . . . . . . . . . . . . . . . 42
Section 8.03 MAINTENANCE, ETC. . . . . . . . . . . . . . . . . . . . 42
Section 8.04 ENVIRONMENTAL MATTERS . . . . . . . . . . . . . . . . . 43
Section 8.05 FURTHER ASSURANCES. . . . . . . . . . . . . . . . . . . 44
Section 8.06 PERFORMANCE OF OBLIGATIONS. . . . . . . . . . . . . . . 44
Section 8.07 ENGINEERING REPORTS . . . . . . . . . . . . . . . . . . 44
Section 8.08 TITLE INFORMATION . . . . . . . . . . . . . . . . . . . 45
Section 8.09 ADDITIONAL COLLATERAL . . . . . . . . . . . . . . . . . 46
Section 8.10 ERISA INFORMATION AND COMPLIANCE. . . . . . . . . . . . 46
Section 8.11 MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . 47
Section 8.12 NOTICE TO PURCHASERS OF HYDROCARBONS. . . . . . . . . . 47
Section 8.13 SUMMIT ACQUISITION. . . . . . . . . . . . . . . . . . . 47
ARTICLE IX
NEGATIVE COVENANTS
Section 9.01 DEBT. . . . . . . . . . . . . . . . . . . . . . . . . . 47
Section 9.02 LIENS . . . . . . . . . . . . . . . . . . . . . . . . . 48
Section 9.03 INVESTMENTS, LOANS AND ADVANCES . . . . . . . . . . . . 48
Section 9.04 DIVIDENDS, DISTRIBUTIONS AND REDEMPTIONS. . . . . . . . 49
Section 9.05 SALES AND LEASEBACKS. . . . . . . . . . . . . . . . . . 49
Section 9.06 NATURE OF BUSINESS. . . . . . . . . . . . . . . . . . . 49
Section 9.07 LIMITATION ON LEASES. . . . . . . . . . . . . . . . . . 49
Section 9.08 MERGERS, ETC. . . . . . . . . . . . . . . . . . . . . . 50
Section 9.09 PROCEEDS OF NOTE. . . . . . . . . . . . . . . . . . . . 50
Section 9.10 ERISA COMPLIANCE. . . . . . . . . . . . . . . . . . . . 50
Section 9.11 SALE OR DISCOUNT OF RECEIVABLES . . . . . . . . . . . . 51
Section 9.12 CURRENT RATIO.. . . . . . . . . . . . . . . . . . . . . 51
Section 9.13 TANGIBLE NET WORTH. . . . . . . . . . . . . . . . . . . 52
Section 9.14 CASH FLOW COVERAGE. . . . . . . . . . . . . . . . . . . 52
Section 9.15 SALE OF OIL AND GAS PROPERTIES. . . . . . . . . . . . . 52
Section 9.16 ENVIRONMENTAL MATTERS . . . . . . . . . . . . . . . . . 52
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Section 9.17 TRANSACTIONS WITH AFFILIATES. . . . . . . . . . . . . . 52
Section 9.18 SUBSIDIARIES. . . . . . . . . . . . . . . . . . . . . . 52
Section 9.19 NEGATIVE PLEDGE AGREEMENTS. . . . . . . . . . . . . . . 52
Section 9.20 GAS IMBALANCES, TAKE-OR-PAY OR OTHER PREPAYMENTS. . . . 53
Section 9.21 ACCOUNTS. . . . . . . . . . . . . . . . . . . . . . . . 53
ARTICLE X
EVENTS OF DEFAULT; REMEDIES
Section 10.01 EVENTS OF DEFAULT. . . . . . . . . . . . . . . . . . . 53
Section 10.02 REMEDIES . . . . . . . . . . . . . . . . . . . . . . . 55
ARTICLE XI
MISCELLANEOUS
Section 11.01 WAIVER . . . . . . . . . . . . . . . . . . . . . . . . 56
Section 11.02 NOTICES. . . . . . . . . . . . . . . . . . . . . . . . 56
Section 11.03 PAYMENT OF EXPENSES, INDEMNITIES, ETC. . . . . . . . . 56
Section 11.04 AMENDMENTS, ETC. . . . . . . . . . . . . . . . . . . . 58
Section 11.05 SUCCESSORS AND ASSIGNS . . . . . . . . . . . . . . . . 59
Section 11.06 ASSIGNMENTS AND PARTICIPATIONS . . . . . . . . . . . . 59
Section 11.07 INVALIDITY . . . . . . . . . . . . . . . . . . . . . . 60
Section 11.08 COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . 60
Section 11.09 REFERENCES . . . . . . . . . . . . . . . . . . . . . . 60
Section 11.10 SURVIVAL . . . . . . . . . . . . . . . . . . . . . . . 60
Section 11.11 CAPTIONS . . . . . . . . . . . . . . . . . . . . . . . 61
Section 11.12 NO ORAL AGREEMENTS. . . . . . . . . . . . . . . . . . 61
Section 11.13 GOVERNING LAW; SUBMISSION TO JURISDICTION. . . . . . . 61
Section 11.14 INTEREST . . . . . . . . . . . . . . . . . . . . . . . 62
Section 11.15 CONFIDENTIALITY. . . . . . . . . . . . . . . . . . . . 63
Section 11.16 EFFECTIVENESS. . . . . . . . . . . . . . . . . . . . . 63
Section 11.17 EXCULPATION PROVISIONS . . . . . . . . . . . . . . . . 63
Exhibit A - Form of Note
Exhibit B - Form of Borrowing, Continuation and Conversion Request
Exhibit C - Form of Compliance Certificate
Exhibit D - Form of Legal Opinion of Michener, Larimore, Swindle, Whitaker,
Flowers, Sawyer, Reynolds & Chalk, L.L.P.
Exhibit E - List of Security Instruments
Exhibit F - Form of Letter in Lieu
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Schedule I - Borrowing Base
Schedule 7.02 - Liabilities
Schedule 7.03 - Litigation
Schedule 7.09 - Taxes
Schedule 7.10 - Titles, etc.
Schedule 7.14 - List of Subsidiaries and Partnerships
Schedule 7.17 - Environmental Matters
Schedule 7.19 - Insurance
Schedule 7.20 - Gas Imbalances
Schedule 7.21 - Hedging Agreements
Schedule 9.01 - Debt
Schedule 9.02 - Liens
Schedule 9.03 - Investments, Loans and Advances
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THIS CREDIT AGREEMENT dated as of October 31, 1996 is between:
MIDLAND RESOURCES, INC., a corporation formed under the laws of the State of
Texas (the "BORROWER") and FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a
national banking association (the "LENDER").
R E C I T A L S
A. The Borrower has requested that the Lender amend, extend and rearrange
all of the Existing Indebtedness (as defined in Section 1.01) and provide
certain loans and make extensions of credit to the Borrower.
B. The Lender has agreed to amend, extend and rearrange the Existing
Indebtedness and to make such loans and extensions of credit subject to the
terms and conditions of this Agreement.
C. In consideration of the mutual covenants and agreements herein
contained and of the loans and commitments hereinafter referred to, the parties
hereto agree to amend and restate the Existing Loan Agreement (as defined in
Section 1.01) as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING MATTERS
Section 1.01 TERMS DEFINED ABOVE. As used in this Agreement, the
terms "BORROWER" and "LENDER" shall have the meanings indicated above.
Section 1.02 CERTAIN DEFINED TERMS. As used herein, the following
terms shall have the following meanings (all terms defined in this Article I or
in other provisions of this Agreement in the singular to have the same meanings
when used in the plural and VICE VERSA):
"ADDITIONAL COSTS" shall have the meaning assigned such term in
Section 5.01(a).
"AFFECTED LOANS" shall have the meaning assigned such term in
Section 5.04.
"AFFILIATE" of any Person shall mean (i) any Person directly or
indirectly controlled by, controlling or under common control with
such first Person, (ii) any director or officer of such first Person
or of any Person referred to in clause (i) above and (iii) if any
Person in clause (i) above is an individual, any member of the
immediate family (including parents, spouse and children) of such
individual and any trust whose principal beneficiary is such
individual or one or more members of such immediate family and any
Person who is controlled by any such
<PAGE>
member or trust. As used in this definition, any Person which owns
directly or indirectly 10% or more of the securities having ordinary
voting power for the election of directors or other governing body of a
corporation or 10% or more of the partnership or other ownership
interests of any other Person (other than as a limited partner of such
other Person) will be deemed to "CONTROL" (including, with its
correlative meanings, "CONTROLLED BY" and "UNDER COMMON CONTROL WITH")
such corporation or other Person.
"AGREEMENT" shall mean this Credit Agreement, as the same may
from time to time be amended or supplemented.
"APPLICABLE LENDING OFFICE" shall mean for each Type of Loan, the
lending office of the Lender (or an Affiliate of the Lender)
designated for such Type of Loan on the signature pages hereof or such
other offices of the Lender (or of an Affiliate of the Lender) as the
Lender may from time to time specify to the Borrower as the office by
which Loans of such Type are to be made and maintained.
"APPLICABLE MARGIN" shall mean (i) one fourth of one percent (1\4
of 1%) per annum with respect to Base Rate Loans; and (ii) two and
three-fourths of one percent (2 and 3/4 of 1%) per annum with respect
to LIBOR Loans.
"BASE RATE" shall mean, with respect to any Base Rate Loan, for
any day, the higher of (i) the Federal Funds Rate for any such day
plus 1/2 of 1% or (ii) the Prime Rate for such day. Each change in
any interest rate provided for herein based upon the Base Rate
resulting from a change in the Base Rate shall take effect at the time
of such change in the Base Rate.
"BASE RATE LOANS" shall mean Loans that bear interest at rates
based upon the Base Rate.
"BORROWING BASE" shall mean at any time an amount equal to the
amount determined in accordance with Section 2.08.
"BUSINESS DAY" shall mean any day other than a day on which
commercial banks are authorized or required to close in Charlotte,
North Carolina and, where such term is used in the definition of
"Quarterly Date" or if such day relates to a borrowing or continuation
of, a payment or prepayment of principal of or interest on, or a
conversion of or into, or the Interest Period for, a LIBOR Loan or a
notice by the Borrower with respect to any such borrowing or
continuation, payment, prepayment, conversion or Interest Period, any
day which is also a day on which dealings in Dollar deposits are
carried out in the London interbank market.
"CLOSING DATE" shall mean October 31, 1996.
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"CODE" shall mean the Internal Revenue Code of 1986, as amended
from time to time and any successor statute.
"COMMITMENT" shall mean the Lender's obligation to make the Loans
pursuant to Section 2.01(a) and to issue Letters of Credit as provided
in Section 2.01(b) in an aggregate amount not to exceed the lesser of
(i) $20,000,000 or (ii) the then effective Borrowing Base.
"CONSOLIDATED NET INCOME" shall mean with respect to the Borrower
and its Consolidated Subsidiaries, for any period, the aggregate of
the net income (or loss) of the Borrower and its Consolidated
Subsidiaries after allowances for taxes for such period, determined on
a consolidated basis in accordance with GAAP; PROVIDED that there
shall be excluded from such net income (to the extent otherwise
included therein) the following: (i) the net income of any Person in
which the Borrower or any Consolidated Subsidiary has an interest
(which interest does not cause the net income of such other Person to
be consolidated with the net income of the Borrower and its
Consolidated Subsidiaries in accordance with GAAP), except to the
extent of the amount of dividends or distributions actually paid in
such period by such other Person to the Borrower or to a Consolidated
Subsidiary, as the case may be; (ii) the net income (but not loss) of
any Consolidated Subsidiary to the extent that the declaration or
payment of dividends or similar distributions or transfers or loans by
that Consolidated Subsidiary is not at the time permitted by operation
of the terms of its charter or any agreement, instrument or
Governmental Requirement applicable to such Consolidated Subsidiary,
or is otherwise restricted or prohibited in each case determined in
accordance with GAAP, (iii) the net income (or loss) of any Person
acquired in a pooling-of-interests transaction for any period prior to
the date of such transaction, (iv) any extraordinary gains or losses,
including gains or losses attributable to Property sales not in the
ordinary course of business and (v) the cumulative effect of a change
in accounting principles and any gains or losses attributable to
writeups or writedowns of assets.
"CONSOLIDATED SUBSIDIARIES" shall mean each Subsidiary of the
Borrower (whether now existing or hereafter created or acquired) the
financial statements of which shall be (or should have been)
consolidated with the financial statements of the Borrower in
accordance with GAAP; PROVIDED, HOWEVER, such term shall not include
Summit until the Summit Acquisition has occurred.
"DEBT" shall mean, for any Person the sum of the following
(without duplication): (i) all obligations of such Person for borrowed
money or evidenced by bonds, debentures, notes or other similar
instruments (including principal, interest, fees and charges); (ii)
all obligations of such Person (whether contingent or otherwise) in
respect of bankers' acceptances, letters of credit, surety or other
bonds and similar instruments; (iii) all obligations of such Person to
pay the deferred purchase price of Property or services (other than
for borrowed money);
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(iv) all obligations under leases which shall have been, or should have
been, in accordance with GAAP, recorded as capital leases in respect of
which such Person is liable (whether contingent or otherwise); (v) all
obligations under leases which require such Person or its Affiliate to
make payments over the term of such lease, including payments at
termination, which are substantially equal to at least eighty percent
(80%) of the purchase price of the Property subject to such lease plus
interest as an imputed rate of interest; (vi) all Debt (as described in
the other clauses of this definition) and other obligations of others
secured by a Lien on any asset of such Person, whether or not such Debt
is assumed by such Person; (vii) all Debt (as described in the other
clauses of this definition) and other obligations of others guaranteed
by such Person or in which such Person otherwise assures a creditor
against loss of the Debtor or obligations of others; (viii) all
obligations or undertakings of such Person to maintain or cause to be
maintained the financial position or covenants of others or to purchase
the Debt (as described in the other clauses of this definition) or
Property of others; (ix) any capital stock of such Person which such
Person has a mandatory obligation to redeem such stock; (x) any Debt
(as described in the other clauses of this definition) of a Special
Entity for which such Person is liable either by agreement or because
of a Governmental Requirement; (xi) obligations to deliver goods or
services including Hydrocarbons in consideration of advance payments;
(xii) obligations to pay for goods or services whether or not such
goods or services are actually received or utilized by such Person;
(xiii) all obligations of such Person under Hedging Agreements; and
(xiv) the undischarged balance of any production payment created by
such Person or for the creation of which such Person directly or
indirectly received payment.
"DEFAULT" shall mean an Event of Default or an event which with
notice or lapse of time or both would become an Event of Default.
"DOLLARS" and "$" shall mean lawful money of the United States of
America.
"EFFECTIVE DATE" shall have the meaning assigned such term in
Section 11.16.
"ENGINEERING REPORTS" shall have the meaning assigned such term
in Section 2.08.
"ENVIRONMENTAL LAWS" shall mean any and all Governmental
Requirements pertaining to health or the environment in effect in any
and all jurisdictions in which the Borrower or any Subsidiary is
conducting or at any time has conducted business, or where any
Property of the Borrower or any Subsidiary is located, including
without limitation, the Oil Pollution Act of 1990 ("OPA"), the Clean
Air Act, as amended, the Comprehensive Environmental, Response,
Compensation, and Liability Act of 1980 ("CERCLA"), as amended, the
Federal Water Pollution
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Control Act, as amended, the Occupational Safety and Health Act of 1970,
as amended, the Resource Conservation and Recovery Act of 1976 ("RCRA"),
as amended, the Safe Drinking Water Act, as amended, the Toxic
Substances Control Act, as amended, the Superfund Amendments and
Reauthorization Act of 1986, as amended, the Hazardous Materials
Transportation Act, as amended, and other environmental conservation or
protection laws. The term "oil" shall have the meaning specified in
OPA, the terms "hazardous substance" and "release" (or "threatened
release") have the meanings specified in CERCLA, and the terms "solid
waste" and "disposal" (or "disposed") have the meanings specified in
RCRA; provided, however, that (i) in the event either OPA, CERCLA or
RCRA is amended so as to broaden the meaning of any term defined
thereby, such broader meaning shall apply subsequent to the effective
date of such amendment and (ii) to the extent the laws of the state in
which any Property of the Borrower or any Subsidiary is located
establish a meaning for "oil," "hazardous substance," "release," "solid
waste" or "disposal" which is broader than that specified in either OPA,
CERCLA or RCRA, such broader meaning shall apply.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time, and any successor statute.
"ERISA AFFILIATE" shall mean each trade or business (whether or not
incorporated) which together with the Borrower or any Subsidiary would
be deemed to be a "single employer" within the meaning of section
4001(b)(1) of ERISA or subsections (b), (c), (m) or (o) of section 414
of the Code.
"ERISA EVENT" shall mean (i) a "Reportable Event" described in
Section 4043 of ERISA and the regulations issued thereunder, (ii) the
withdrawal of the Borrower, any Subsidiary or any ERISA Affiliate from a
Plan during a plan year in which it was a "substantial employer" as
defined in Section 4001(a)(2) of ERISA, (iii) the filing of a notice of
intent to terminate a Plan or the treatment of a Plan amendment as a
termination under Section 4041 of ERISA, (iv) the institution of
proceedings to terminate a Plan by the PBGC or (v) any other event or
condition which might constitute grounds under Section 4042 of ERISA for
the termination of, or the appointment of a trustee to administer, any
Plan.
"EVENT OF DEFAULT" shall have the meaning assigned such term in
Section 10.01.
"EXCEPTED LIENS" shall mean: (i) Liens for taxes, assessments or
other governmental charges or levies not yet due or which are being
contested in good faith by appropriate action and for which adequate
reserves have been maintained; (ii) Liens in connection with workmen's
compensation, unemployment insurance or other social security, old age
pension or public liability obligations not yet due or which are being
contested in good faith by appropriate action and for which adequate
reserves have been maintained in accordance with GAAP; (iii)
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operators', vendors', carriers', warehousemen's, repairmen's,
mechanics', workmen's, materialmen's, construction or other like Liens
arising by operation of law in the ordinary course of business or
incident to the exploration, development, production, operation and
maintenance of Oil and Gas Properties or statutory landlord's liens,
each of which is in respect of obligations that have not been
outstanding more than 90 days or which are being contested in good faith
by appropriate proceedings and for which adequate reserves have been
maintained in accordance with GAAP; (iv) any Liens reserved in leases or
farmout agreements for rent or royalties and for compliance with the
terms of the farmout agreements or leases in the case of leasehold
estates, to the extent that any such Lien referred to in this clause
does not materially impair the use of the Property covered by such Lien
for the purposes for which such Property is held by the Borrower or any
Subsidiary or materially impair the value of such Property subject
thereto; (v) encumbrances (other than to secure the payment of borrowed
money or the deferred purchase price of Property or services),
easements, restrictions, servitudes, permits, conditions, covenants,
exceptions or reservations in any rights of way or other Property of the
Borrower or any Subsidiary for the purpose of roads, pipelines,
transmission lines, transportation lines, distribution lines for the
removal of gas, oil, coal or other minerals or timber, and other like
purposes, or for the joint or common use of real estate, rights of way,
facilities and equipment, and defects, irregularities, zoning
restrictions and deficiencies in title of any rights of way or other
Property which in the aggregate do not materially impair the use of such
rights of way or other Property for the purposes of which such rights of
way and other Property are held by the Borrower or any Subsidiary or
materially impair the value of such Property subject thereto; (vi)
deposits of cash or securities to secure the performance of bids, trade
contracts, leases, statutory obligations and other obligations of a like
nature incurred in the ordinary course of business; (vii) Liens
permitted by the Security Instruments; and (viii) Liens created by
operating leases which are permitted by Section 9.07.
"EXISTING INDEBTEDNESS" shall mean the outstanding indebtedness
under the Existing Loan Agreement.
"EXISTING LOAN AGREEMENT" shall mean that certain Loan Agreement
dated as of October 14, 1993 between the Borrower and the Lender, as
amended by that certain First Amendment to Loan Agreement dated as of
December 20, 1993, that certain Second Amendment to Loan Agreement
dated as of August 11, 1994, that certain Third Amendment to Loan
Agreement dated as of December 29, 1994, that certain Fourth Amendment
to Loan Agreement dated as of July 5, 1995 and that certain Fifth
Amendment to Loan Agreement dated as of September 23, 1996.
"FEDERAL FUNDS RATE" shall mean, for any day, the rate per annum
(rounded upwards, if necessary, to the nearest 1/100 of 1%) equal to
the weighted average of the rates on overnight federal funds
transactions with a member of the Federal Reserve System arranged by
federal funds brokers on such day, as published by
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the Federal Reserve Bank of New York on the Business Day next succeeding
such day, provided that (i) if the date for which such rate is to be
determined is not a Business Day, the Federal Funds Rate for such day
shall be such rate on such transactions on the next preceding Business
Day as so published on the next succeeding Business Day, and (ii) if
such rate is not so published for any day, the Federal Funds Rate for
such day shall be the average rate charged to the Lender on such day on
such transactions.
"FINANCIAL STATEMENTS" shall mean the financial statement or
statements of the Borrower and its Consolidated Subsidiaries described
or referred to in Section 7.02.
"FIRST UNION CORPORATION" shall mean First Union Corporation of
North Carolina, a North Carolina corporation.
"GAAP" shall mean generally accepted accounting principles in the
United States of America in effect from time to time.
"GOVERNMENTAL AUTHORITY" shall include the country, the state,
county, city and political subdivisions in which any Person or such
Person's Property is located or which exercises valid jurisdiction over
any such Person or such Person's Property, and any court, agency,
department, commission, board, bureau or instrumentality of any of them
including monetary authorities which exercises valid jurisdiction over
any such Person or such Person's Property. Unless otherwise specified,
all references to Governmental Authority herein shall mean a
Governmental Authority having jurisdiction over, where applicable, the
Borrower, its Subsidiaries or any of their Property or the Lender or any
Applicable Lending Office.
"GOVERNMENTAL REQUIREMENT" shall mean any law, statute, code,
ordinance, order, determination, rule, regulation, judgment, decree,
injunction, franchise, permit, certificate, license, authorization or
other directive or requirement (whether or not having the force of law),
including, without limitation, Environmental Laws, energy regulations
and occupational, safety and health standards or controls, of any
Governmental Authority.
"GUARANTORS" shall mean Midland Resources Operating, Inc. (formerly
known as Miresco, Inc.), a Texas corporation, MRI Acquisition Corp., a
Texas corporation and any other Person, now or hereafter a Subsidiary of
the Borrower.
"GUARANTY AGREEMENTS" shall mean the agreements executed by the
Guarantors in form and substance satisfactory to the Lender guarantying,
unconditionally, payment of the Indebtedness, as the same may be
amended, modified or supplemented from time to time.
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"HEDGING AGREEMENTS" shall mean any commodity, interest rate or
currency swap, cap, floor, collar, forward agreement or other exchange
or protection agreements or any option with respect to any such
transaction.
"HIGHEST LAWFUL RATE" shall mean the maximum nonusurious interest
rate, if any, that at any time or from time to time may be contracted
for, taken, reserved, charged or received on the Note or on other
Indebtedness under laws applicable to the Lender which are presently in
effect or, to the extent allowed by law, under such applicable laws
which may hereafter be in effect and which allow a higher maximum
nonusurious interest rate than applicable laws now allow.
"HYDROCARBON INTERESTS" shall mean all rights, titles, interests
and estates now or hereafter acquired in and to oil and gas leases, oil,
gas and mineral leases, or other liquid or gaseous hydrocarbon leases,
mineral fee interests, overriding royalty and royalty interests, net
profit interests and production payment interests, including any
reserved or residual interests of whatever nature.
"HYDROCARBONS" shall mean oil, gas, casinghead gas, drip gasoline,
natural gasoline, condensate, distillate, liquid hydrocarbons, gaseous
hydrocarbons and all products refined or separated therefrom.
"INDEBTEDNESS" shall mean any and all amounts owing or to be owing
by the Borrower or any Subsidiary to the Lender in connection with the
Loan Documents and the Letter of Credit Agreements, and any Hedging
Agreement now or hereafter arising between the Borrower or any
Subsidiary and Lender and permitted by the terms of this Agreement and
all renewals, extensions and/or rearrangements of any of the above.
"INDEMNIFIED PARTIES" shall have the meaning assigned such term in
Section 11.03(b).
"INDEMNITY MATTERS" shall mean any and all actions, suits,
proceedings (including any investigations, litigation or inquiries),
claims, demands and causes of action made or threatened against a Person
and, in connection therewith, all losses, liabilities, damages
(including, without limitation, consequential damages) or reasonable
costs and expenses of any kind or nature whatsoever incurred by such
Person whether caused by the sole or concurrent negligence of such
Person seeking indemnification.
"INITIAL FUNDING" shall mean the funding of the initial Loans or
issuance of the initial Letters of Credit pursuant to Section 6.01
hereof.
"INITIAL RESERVE REPORT" shall mean the report prepared by the
Borrower, dated September 6, 1996 with respect to the Oil and Gas
Properties of the
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Borrower as of September 1, 1996, a copy of which has been delivered to
the Lender.
"INTEREST PERIOD" shall mean, with respect to any LIBOR Loan, the
period commencing on the date such LIBOR Loan is made and ending on the
numerically corresponding day in the first, second or third calendar
month thereafter, as the Borrower may select as provided in Section 2.02
(or such longer period as may be requested by the Borrower and agreed to
by the Lender), except that each Interest Period which commences on the
last Business Day of a calendar month (or on any day for which there is
no numerically corresponding day in the appropriate subsequent calendar
month) shall end on the last Business Day of the appropriate subsequent
calendar month.
Notwithstanding the foregoing: (i) no Interest Period may commence
before and end after the Termination Date; (ii) no Interest Period for
any LIBOR Loan may end after the due date of any installment, if any,
provided for in Section 3.01 hereof to the extent that such LIBOR Loan
would need to be prepaid prior to the end of such Interest Period in
order for such installment to be paid when due; (iii) each Interest
Period which would otherwise end on a day which is not a Business Day
shall end on the next succeeding Business Day (or, if such next
succeeding Business Day falls in the next succeeding calendar month, on
the next preceding Business Day); and (iv) no Interest Period shall have
a duration of less than one month and, if the Interest Period for any
LIBOR Loans would otherwise be for a shorter period, such Loans shall
not be available hereunder.
"LC COMMITMENT" at any time shall mean $1,000,000.
"LC EXPOSURE" at any time shall mean the difference between (i) the
aggregate face amount of all undrawn and uncancelled Letters of Credit
and the aggregate of all amounts drawn under all Letters of Credit and
not yet reimbursed, minus (ii) the aggregate amount of all cash securing
outstanding Letters of Credit pursuant to Section 2.10(b).
"LETTER OF CREDIT AGREEMENTS" shall mean the written agreements
with the Lender, as issuing lender for any Letter of Credit, executed or
hereafter executed in connection with the issuance by the Lender of the
Letters of Credit, such agreements to be on the Lender's customary form
for letters of credit of comparable amount and purpose as from time to
time in effect or as otherwise agreed to by the Borrower and the Lender.
"LETTERS OF CREDIT" shall mean the letters of credit issued
pursuant to Section 2.01(b) and all reimbursement obligations pertaining
to any such letters of credit, and "Letter of Credit" shall mean any one
of the Letters of Credit and the reimbursement obligations pertaining
thereto.
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"LIBOR" shall mean the rate of interest determined on the basis of
the rate for deposits in Dollars for a period equal to the applicable
Interest Period commencing on the first day of such Interest Period
appearing on Telerate Page 3750 as of 11:00 a.m. (London time) two (2)
Business Days prior to the first day of the applicable Interest Period.
In the event that such rate does not appear on Telerate Page 3750,
"LIBOR" shall be determined by the Agent to be the rate per annum at
which deposits in Dollars are offered by leading reference banks in the
London interbank market to First Union at approximately 11:00 a.m.
(London time) two Business Days prior to the first day of the applicable
Interest Period for a period equal to such Interest Period and in an
amount substantially equal to the amount of the applicable Loan.
"LIBOR LOANS" shall mean Loans the interest rates on which are
determined on the basis of rates referred to in the definition of "LIBOR
Rate".
"LIBOR RATE" shall mean, with respect to any LIBOR Loan, a rate per
annum (rounded upwards, if necessary, to the nearest 1/100 of 1%)
determined by the Lender to be equal to the quotient of (i) LIBOR for
such Loan for the Interest Period for such Loan divided by (ii) 1 minus
the Reserve Requirement for such Loan for such Interest Period.
"LIEN" shall mean any interest in Property securing an obligation
owed to, or a claim by, a Person other than the owner of the Property,
whether such interest is based on the common law, statute or contract,
and whether such obligation or claim is fixed or contingent, and
including but not limited to (i) the lien or security interest arising
from a mortgage, encumbrance, pledge, security agreement, conditional
sale or trust receipt or a lease, consignment or bailment for security
purposes or (ii) production payments and the like payable out of Oil and
Gas Properties. The term "LIEN" shall include reservations, exceptions,
encroachments, easements, rights of way, covenants, conditions,
restrictions, leases and other title exceptions and encumbrances
affecting Property. For the purposes of this Agreement, the Borrower or
any Subsidiary shall be deemed to be the owner of any Property which it
has acquired or holds subject to a conditional sale agreement, or leases
under a financing lease or other arrangement pursuant to which title to
the Property has been retained by or vested in some other Person in a
transaction intended to create a financing.
"LOAN DOCUMENTS" shall mean this Agreement, the Note and the
Security Instruments.
"LOANS" shall mean Base Rate Loans or LIBOR Loans.
"MATERIAL ADVERSE EFFECT" shall mean any material and adverse
effect on (i) the assets, liabilities, financial condition, business,
operations or affairs of the Borrower and its Subsidiaries taken as a
whole as reflected in the Financial
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Statements or from the facts represented or warranted in this Agreement
or any Security Instrument, or (ii) the ability of the Borrower and its
Subsidiaries taken as a whole to carry out their business as at the
Closing Date or as proposed as of the Closing Date to be conducted or
meet their obligations under the Loan Documents on a timely basis.
"MORTGAGED PROPERTY" shall mean the Property owned by the Borrower
and which is subject to the Liens existing and to exist under the terms
of the Security Instruments.
"MULTIEMPLOYER PLAN" shall mean a Plan defined as such in Section
3(37) or 4001(a)(3) of ERISA.
"NOTE" shall mean the Note provided for by Section 2.06, together
with any and all renewals, extensions for any period, increases,
rearrangements, substitutions or modifications thereof.
"OIL AND GAS PROPERTIES" shall mean Hydrocarbon Interests; the
Properties now or hereafter pooled or unitized with Hydrocarbon
Interests; all presently existing or future unitization, pooling
agreements and declarations of pooled units and the units created
thereby (including without limitation all units created under orders,
regulations and rules of any Governmental Authority) which may affect
all or any portion of the Hydrocarbon Interests; all operating
agreements, contracts and other agreements which relate to any of the
Hydrocarbon Interests or the production, sale, purchase, exchange or
processing of Hydrocarbons from or attributable to such Hydrocarbon
Interests; all Hydrocarbons in and under and which may be produced and
saved or attributable to the Hydrocarbon Interests, including all oil in
tanks, the lands covered thereby and all rents, issues, profits,
proceeds, products, revenues and other incomes from or attributable to
the Hydrocarbon Interests; all tenements, hereditaments, appurtenances
and Properties in any manner appertaining, belonging, affixed or
incidental to the Hydrocarbon Interests; and all Properties, rights,
titles, interests and estates described or referred to above, including
any and all Property, real or personal, now owned or hereinafter
acquired and situated upon, used, held for use or useful in connection
with the operating, working or development of any of such Hydrocarbon
Interests or Property (excluding drilling rigs, automotive equipment or
other personal property which may be on such premises for the purpose of
drilling a well or for other similar temporary uses) and including any
and all oil wells, gas wells, injection wells or other wells, buildings,
structures, fuel separators, liquid extraction plants, plant
compressors, pumps, pumping units, field gathering systems, tanks and
tank batteries, fixtures, valves, fittings, machinery and parts,
engines, boilers, meters, apparatus, equipment, appliances, tools,
implements, cables, wires, towers, casing, tubing and rods, surface
leases, rights-of-way, easements and servitudes together with all
additions, substitutions, replacements, accessions and attachments to
any and all of the foregoing.
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"OTHER TAXES" shall have the meaning assigned such term in Section
4.04(b).
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any
entity succeeding to any or all of its functions.
"PERSON" shall mean any individual, corporation, company, voluntary
association, partnership, joint venture, trust, unincorporated
organization or government or any agency, instrumentality or political
subdivision thereof, or any other form of entity.
"PLAN" shall mean any employee pension benefit plan, as defined in
Section 3(2) of ERISA, which (i) is currently or hereafter sponsored,
maintained or contributed to by the Borrower, any Subsidiary or an ERISA
Affiliate or (ii) was at any time during the preceding six calendar
years, sponsored, maintained or contributed to, by the Borrower, any
Subsidiary or an ERISA Affiliate.
"POST-DEFAULT RATE" shall mean, in respect of any principal of any
Loan or any other amount payable by the Borrower under this Agreement or
the Note which is not paid when due, a rate per annum during the period
commencing on the date of an Event of Default until such amount is paid
in full or all Events of Default are cured or waived equal to 2% per
annum above the Base Rate as in effect from time to time plus the
Applicable Margin (if any), but in no event to exceed the Highest Lawful
Rate provided that, for a LIBOR Loan, the "Post-Default Rate" for such
principal shall be, for the period commencing on the date of the Event
of Default and ending on the earlier to occur of the last day of the
Interest Period therefor or the date all Events of Default are cured or
waived, 2% per annum above the interest rate for such Loan as provided
in Section 3.02(ii), but in no event to exceed the Highest Lawful Rate.
"PRIME RATE" shall mean the rate of interest from time to time
announced publicly by the Lender at the Principal Office as its prime
commercial lending rate. Such rate is set by the Lender as a general
reference rate of interest, taking into account such factors as the
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 actually charged to
any customer and that the Lender may make various commercial or other
loans at rates of interest having no relationship to such rate.
"PRINCIPAL OFFICE" shall mean the principal office of the Lender,
presently located at 301 South College Street, TW-10, Charlotte, North
Carolina 28288-0608 or such other location as designated by the Lender
from time to time.
"PROPERTY" shall mean any interest in any kind of property or
asset, whether real, personal or mixed, or tangible or intangible.
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"QUARTERLY DATES" shall mean the last day of each March, June,
September, and December, in each year, the first of which shall be
December 31, 1996; provided, however, that if any such day is not a
Business Day, such Quarterly Date shall be the next succeeding Business
Day.
"REDETERMINATION DATE" shall have the meaning assigned such term in
Section 2.08(a).
"REGULATION D" shall mean Regulation D of the Board of Governors of
the Federal Reserve System (or any successor), as the same may be
amended or supplemented from time to time.
"REGULATORY CHANGE" shall mean any change after the Closing Date in
any Governmental Requirement (including Regulation D) or the adoption or
making after such date of any interpretations, directives or requests
applying to a class of lenders (including the Lender or its Applicable
Lending Office) of or under any Governmental Requirement (whether or not
having the force of law) by any Governmental Authority charged with the
interpretation or administration thereof.
"RESERVE REPORT" shall mean a report, in form and substance
satisfactory to the Lender, setting forth, as of each June 30 (or such
other date in the event of an unscheduled redetermination); (i) the oil
and gas reserves attributable to the Borrower's and Guarantors' Oil and
Gas Properties together with a projection of the rate of production and
future net income, taxes, operating expenses and capital expenditures
with respect thereto as of such date, based upon the pricing assumptions
consistent with SEC reporting requirements at the time and (ii) such
other information as the Lender may reasonably request. The term
"Reserve Report" shall also include the information to be provided by
the Borrower as of December 31 of each year pursuant to Section 8.07(a).
"RESPONSIBLE OFFICER" shall mean, as to any Person, the Chief
Executive Officer, the President or any Vice President of such Person
and, with respect to financial matters, the term "Responsible Officer"
shall include the Chief Financial Officer of such Person. Unless
otherwise specified, all references to a Responsible Officer herein
shall mean a Responsible Officer of the Borrower.
"SCHEDULED REDETERMINATION DATE" shall have the meaning assigned
such term in Section 2.08(d).
"SEC" shall mean the Securities and Exchange Commission or any
successor Governmental Authority.
"SECURITY INSTRUMENTS" shall mean the Letters of Credit, the Letter
of Credit Agreements, the agreements or instruments described or
referred to in Exhibit E, and any and all other agreements or
instruments now or hereafter executed and
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delivered by the Borrower or any other Person (other than participation
or similar agreements between the Lender and any other lender or
creditor with respect to any Indebtedness pursuant to this Agreement) in
connection with, or as security for the payment or performance of the
Note or this Agreement, or reimbursement obligations under the Letters
of Credit, as such agreements may be amended, supplemented or restated
from time to time.
"SPECIAL ENTITY" shall mean any joint venture, limited liability
company or partnership, general or limited partnership or any other type
of partnership or company other than a corporation in which the Borrower
or one or more of its other Subsidiaries is a member, owner, partner or
joint venturer and owns, directly or indirectly, at least a majority of
the equity of such entity or controls such entity, but excluding any tax
partnerships that are not classified as partnerships under state law.
For purposes of this definition, any Person which owns directly or
indirectly an equity investment in another Person which allows the first
Person to manage or elect managers who manage the normal activities of
such second Person will be deemed to "control" such second Person (E.G.
a sole general partner controls a limited partnership).
"SUBSIDIARY" shall mean (i) any corporation of which at least a
majority of the outstanding shares of stock having by the terms thereof
ordinary voting power to elect a majority of the board of directors of
such corporation (irrespective of whether or not at the time stock of
any other class or classes of such corporation shall have or might have
voting power by reason of the happening of any contingency) is at the
time directly or indirectly owned or controlled by the Borrower or one
or more of its Subsidiaries or by the Borrower and one or more of its
Subsidiaries and (ii) any Special Entity. Unless otherwise indicated
herein, each reference to the term "Subsidiary" shall mean a Subsidiary
of the Borrower; PROVIDED, HOWEVER, such term shall not include Summit
until the Summit Acquisition has occurred.
"SUMMIT" means Summit Petroleum Corporation, a Colorado corporation.
"SUMMIT ACQUISITION" shall mean the acquisition described in
Section 8.13.
"TANGIBLE NET WORTH" shall mean, as at any date, the sum of the
following for the Borrower and its Consolidated Subsidiaries determined
(without duplication) in accordance with GAAP:
(i) the amount of preferred stock and common stock at par plus the
amount of the additional paid in capital of the Borrower, PLUS
(ii) the retained earnings (or, in the case of a retained earnings
deficit, MINUS the amount of such deficit), MINUS
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(iii) the sum of the following: cost of treasury shares and
the book value of all assets of the Borrower and its Consolidated
Subsidiaries which should be classified as intangibles (without
duplication of deductions in respect of items already deducted in
arriving at surplus and retained earnings) excluding intangibles
arising directly from oil and gas drilling, but in any event including
as such intangibles the following: goodwill, research and development
costs, trademarks, trade names, copyrights, patents and franchises,
unamortized debt discount and expense, all reserves and any writeup in
the book value of assets resulting from a revaluation thereof or
resulting from any changes in GAAP subsequent to December 31, 1995.
"TAXES" shall have the meaning assigned such term in
Section 4.04(a).
"TERMINATION DATE" shall mean, unless the Commitment is sooner
terminated pursuant to Sections 2.03(b) or 10.02 hereof, October 31,
2000.
"TYPE" shall mean, with respect to any Loan, a Base Rate Loan or
a LIBOR Loan.
Section 1.03 ACCOUNTING TERMS AND DETERMINATIONS. Unless
otherwise specified herein, all accounting terms used herein shall be
interpreted, all determinations with respect to accounting matters hereunder
shall be made, and all financial statements and certificates and reports as
to financial matters required to be furnished to the Lender hereunder shall
be prepared, in accordance with GAAP, applied on a basis consistent with the
audited financial statements of the Borrower referred to in Section 7.02
(except for changes concurred with by the Borrower's independent public
accountants).
ARTICLE II
COMMITMENTS
Section 2.01 LOAN AND LETTERS OF CREDIT.
(a) LOANS. The Lender agrees, on the terms of this Agreement, to
make Loans to the Borrower during the period from and including the Closing
Date to and up to, but excluding, the Termination Date in an aggregate
principal amount at any one time outstanding up to but not exceeding the
amount of the Commitment as then in effect; PROVIDED, HOWEVER, that the
aggregate principal amount of all such Loans by the Lender hereunder at any
one time outstanding together with the LC Exposure shall not exceed the
Commitment. Subject to the terms of this Agreement, during the period from
the Closing Date to and up to, but excluding, the Termination Date, the
Borrower may borrow, repay and reborrow the amount described in this
Section 2.01(a).
(b) LETTERS OF CREDIT. During the period from and including the
Closing Date but excluding the Termination Date, the Lender agrees to
extend credit for the account
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of the Borrower or any Subsidiary at any time and from time to time by
issuing renewing extending or reissuing Letters of Credit; provided
however, the LC Exposure at any one time outstanding shall not exceed the
lesser of (i) the LC Commitment or (ii) the Commitment, as then in effect,
minus the aggregate principal amount of all Loans then outstanding.
(c) LIMITATION ON TYPES OF LOANS. Subject to the other terms and
provisions of this Agreement, at the option of the Borrower, the Loans may
be Base Rate Loans or LIBOR Loans; provided that no more than three (3)
LIBOR Loans may be outstanding at any time.
Section 2.02 BORROWINGS, CONTINUATIONS, CONVERSIONS AND LETTERS OF
CREDIT.
(a) BORROWINGS. The Borrower shall give the Lender advance notice as
hereinafter provided of each borrowing hereunder, which shall specify the
aggregate amount of such borrowing, the Type and the date (which shall be a
Business Day) of the Loans to be borrowed and (in the case of LIBOR Loans)
the duration of the Interest Period therefor.
(b) MINIMUM AMOUNTS. If the initial borrowing consists in whole or
in part of LIBOR Loans, such LIBOR Loans shall be in amounts of at least
$1,000,000 or any whole multiple of $10,000 in excess thereof.
(c) NOTICES. All borrowings, continuations and conversions shall
require advance written notice to the Lender in the form of Exhibit B
hereto (or telephonic notice promptly confirmed by such a written notice),
which in each case shall be irrevocable, from the Borrower to be received
by the Lender not later than 11:00 a.m. Charlotte, North Carolina time at
least one Business Day prior to the date of each Base Rate Loan borrowing
and three Business Days prior to the date of each LIBOR Loan borrowing,
continuation or conversion. Without in any way limiting the Borrower's
obligation to confirm in writing any telephonic notice, the Lender may act
without liability upon the basis of telephonic notice believed by the
Lender in good faith to be from the Borrower prior to receipt of written
confirmation. In each such case, the Borrower hereby waives the right to
dispute the Lender's record of the terms of such telephonic notice except
in the case of gross negligence or willful misconduct by the Lender.
(d) CONTINUATION OPTIONS. Subject to the provisions made in this
Section 2.02(d), the Borrower may elect to continue all or any part of any
LIBOR Loan beyond the expiration of the then current Interest Period
relating thereto by giving advance notice as provided in Section 2.02(c) to
the Lender of such election, specifying the amount of such Loan to be
continued and the Interest Period therefor. In the absence of such a
timely and proper election, the Borrower shall be deemed to have elected to
convert such LIBOR Loan to a Base Rate Loan pursuant to Section 2.02(e).
All or any part of any LIBOR Loan may be continued as provided herein,
provided that (i) any continuation of any such Loan shall be (as to each
Loan as continued for an applicable
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Interest Period) in amounts of at least $1,000,000 or any whole multiple
of $10,000 in excess thereof and (ii) no Default shall have occurred and
be continuing. If a Default shall have occurred and be continuing, each
LIBOR Loan shall be converted to a Base Rate Loan on the last day of the
Interest Period applicable thereto.
(e) CONVERSION OPTIONS. The Borrower may elect to convert all or any
part of any LIBOR Loan on the last day of the then current Interest Period
relating thereto to a Base Rate Loan by giving advance notice to the Lender
of such election. Subject to the provisions made in this Section 2.02(e),
the Borrower may elect to convert all or any part of any Base Rate Loan at
any time and from time to time to a LIBOR Loan by giving advance notice as
provided in Section 2.02(c) to the Lender of such election. All or any
part of any outstanding Loan may be converted as provided herein, provided
that (i) any conversion of any Base Rate Loan into a LIBOR Loan shall be
(as to each such Loan into which there is a conversion for an applicable
Interest Period) in amounts of at least $1,000,000 or any whole multiple of
$10,000 in excess thereof and (ii) no Default shall have occurred and be
continuing. If no Default shall have occurred and be continuing, each Base
Rate Loan may be converted into a LIBOR Loan.
(f) ADVANCES. Not later than 11:00 a.m. Charlotte, North Carolina
time on the date specified for each borrowing hereunder, the Lender shall
make available the amount of the Loans to be made on such date in
immediately available funds, for the account of the Borrower. The amount
shall, subject to the terms and conditions of this Agreement, be made
available to the Borrower by transferring the same, in immediately
available funds, to an account of the Borrower, designated by the Borrower
and maintained at the Principal Office.
(g) LETTERS OF CREDIT. The Borrower shall give the Lender advance
notice to be received by the Lender not later than 11:00 a.m. Charlotte,
North Carolina time not less than three (3) Business Days prior thereto of
each request for the issuance and at least thirty (30) Business Days prior
to the date of the renewal or extension of a Letter of Credit hereunder
which request shall specify the amount of such Letter of Credit, the date
(which shall be a Business Day) such Letter of Credit is to be issued,
renewed or extended, the duration thereof, the name and address of the
beneficiary thereof and such other information as the Lender may reasonably
request all of which shall be reasonably satisfactory to the Lender.
Subject to the terms and conditions of this Agreement, on the date
specified for the issuance, renewal or extension of a Letter of Credit, the
Lender shall issue such Letter of Credit to the beneficiary thereof.
In conjunction with the issuance of each Letter of Credit, the
Borrower and the Subsidiary, if the account party, shall execute a Letter
of Credit Agreement. In the event of any conflict between any provision of
a Letter of Credit Agreement and this Agreement, the Borrower and the
Lender hereby agree that the provisions of this Agreement shall govern.
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The Lender will send to the Borrower, immediately upon issuance of any
Letter of Credit, or an amendment thereto, a true and complete copy of such
Letter of Credit, or such amendment thereto.
Section 2.03 CHANGES OF COMMITMENT.
(a) The Commitment shall at all times be equal to the lesser of
(i) $20,000,000 or (ii) the Borrowing Base as determined from time to time.
(b) The Borrower shall have the right to terminate or to reduce the
amount of the Commitment at any time or from time to time upon not less
than three (3) Business Days' prior notice to the Lender of each such
termination or reduction, which notice shall specify the effective date
thereof and the amount of any such reduction (which shall not be less than
$1,000,000 or any whole multiple of $1,000,000 in excess thereof) and shall
be irrevocable and effective only upon receipt by the Lender.
(c) The Commitment once terminated or reduced may not be reinstated.
Section 2.04 FEES.
(a) The Borrower shall pay to the Lender a commitment fee on the
daily average unused amount of the Commitment for the period from and
including the Closing Date up to but excluding the earlier of the date the
Commitment is terminated or the Termination Date, at a rate per annum equal
to one-half of one percent (1/2 of 1%). Accrued commitment fees shall be
payable quarterly in arrears on each Quarterly Date and on the earlier of
the date the Commitment is terminated or the Termination Date.
(b) The Borrower agrees to pay the Lender commissions for issuing the
Letters of Credit on the daily average outstanding of the maximum liability
of the Lender existing from time to time under such Letter of Credit
(calculated separately for each Letter of Credit) at the rate of one and
one-half of one percent (1-1/2%) per annum, provided that each Letter of
Credit shall bear a minimum commission of $350. Each Letter of Credit
shall be deemed to be outstanding up to the full face amount of the Letter
of Credit until the Lender has received the cancelled Letter of Credit or a
written cancellation of the Letter of Credit from the beneficiary of such
Letter of Credit in form and substance acceptable to the Lender or for any
reductions in the amount of the Letter of Credit (other than from a
drawing), written notification from the beneficiary of such Letter of
Credit. Such commissions are payable in advance at issuance of the Letter
of Credit or quarterly in arrears on each Quarterly Date as agreed to with
the Lender upon issuance of each Letter of Credit.
(c) Upon each amendment or transfer of any Letter of Credit to a
successor beneficiary in accordance with its terms, the Borrower shall pay
the sum of $75 to the Lender.
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(d) The Borrowers agree to pay facility fees to the Lender which
shall be payable on the date of any increase of the Borrowing Base above
the then current Borrowing Base and shall be equal to 1% of each
incremental increase of the Borrowing Base. All such facility fees are
non-refundable.
Section 2.05 LENDING OFFICES. The Loans of each Type shall be made
and maintained at the Lender's Applicable Lending Office for Loans of such Type.
Section 2.06 NOTE. The Loans shall be evidenced by a single
promissory note of the Borrower in substantially the form of Exhibit A
hereto, dated the Closing Date, payable to the order of the Lender in a
principal amount equal to the Commitment and otherwise duly completed. The
date, amount, Type, interest rate and Interest Period of each Loan and all
payments made on account of the principal thereof, shall be recorded by the
Lender on its books for the Note, and, prior to any transfer, may be endorsed
by the Lender on a schedule attached to such Note or any continuation thereof
or on any separate record maintained by the Lender. Failure to make any such
notation or attach a schedule shall not affect the Lender's or the Borrower's
rights or obligations in respect of the Loans or affect the validity of such
transfer by the Lender of the Note.
Section 2.07 PREPAYMENTS.
(a) The Borrower may prepay the Base Rate Loans upon not less than
one (1) Business Day's prior notice to the Lender, which notice shall
specify the prepayment date (which shall be a Business Day) and the amount
of the prepayment (which shall be at least $50,000 or the remaining
principal balance outstanding on the Note) and shall be irrevocable and
effective only upon receipt by the Lender, provided that interest on the
principal prepaid, accrued to the prepayment date, shall be paid on the
prepayment date. The Borrower may not prepay any LIBOR Loans prior to the
end of an Interest Period (provided that this sentence shall not affect the
Borrower's obligation to prepay Loans pursuant to Sections 2.07(b) or (c)
or Section 10.01 hereof).
(b) If, after giving effect to any termination or reduction of the
Commitment pursuant to Section 2.03(b), the outstanding aggregate principal
amount of the Loans plus the LC Exposure exceeds the Commitment, the
Borrower shall (i) prepay the Loans on the date of such termination or
reduction in an aggregate principal amount equal to the excess, together
with interest on the principal amount paid accrued to the date of such
prepayment and (ii) if any excess remains after prepaying all of the Loans,
pay to the Lender an amount equal to the excess to be held as cash
collateral as provided in Section 2.10(b) hereof.
(c) Upon any redetermination of the amount of the Borrowing Base in
accordance with Section 2.08, if the redetermined Borrowing Base is less
than the aggregate outstanding principal amount of the Loans plus the LC
Exposure, then the Borrower shall within thirty (30) days of receipt of
written notice thereof: (i) prepay the Loans in an aggregate principal
amount equal to such excess, together with interest on the
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principal amount paid accrued to the date of such prepayment and (ii) if
a Borrowing Base deficiency remains after prepaying all of the Loans
because of LC Exposure, the Borrower shall pay to the Lender an amount
equal to such Borrowing Base deficiency to be held as cash collateral
as provided in Section 2.10(b) hereof.
(d) Upon any reduction pursuant to Schedule I, if the Borrowing Base
is less than the aggregate outstanding principal amount of the Loans plus
the LC Exposure, then the Borrower shall on the date of such reduction
prepay the Loans by the amount of such excess, together with interest
thereon accrued to the date of such prepayment.
(e) Prepayments permitted or required under this Section 2.07 shall
be without premium or penalty, except as required under Section 5.05 for
prepayment of LIBOR Loans. Any prepayment made may be reborrowed subject
to the then effective Commitment.
Section 2.08 BORROWING BASE.
(a) During the period from and after the Closing Date until the
Borrowing Base is redetermined pursuant to this Section 2.08 or adjusted
pursuant to Section 8.08(c), the amount of the Borrowing Base shall be
$9,500,000, such Borrowing Base to reduce monthly as provided in Schedule
I; PROVIDED, HOWEVER, until the Summit Acquisition occurs, $310,542 of the
Borrowing Base shall be unavailable except for use in consummating the
Summit Acquisition. The Borrowing Base shall be determined in accordance
with Section 2.08(b) by the Lender and is subject to redetermination in
accordance with Section 2.08(d). Upon any redetermination of the Borrowing
Base, such redetermination shall remain in effect subject to the reductions
as set forth in the then effective Schedule I until the next successive
Redetermination Date. "REDETERMINATION DATE" shall mean the date that the
redetermined Borrowing Base becomes effective subject to the notice
requirements specified in Section 2.08(e) both for scheduled
redeterminations and unscheduled redeterminations. So long as the
Commitment is in effect or any LC Exposure or Loans are outstanding
hereunder, this facility shall be governed by the then effective Borrowing
Base and Schedule I.
(b) Upon receipt of the reports required by Section 8.07 and such
other reports, data and supplemental information as may from time to time
be reasonably requested by the Lender (the "ENGINEERING REPORTS"), the
Lender will promptly redetermine the Borrowing Base and Schedule I. Such
redetermination will be in accordance with its normal and customary
procedures for evaluating oil and gas reserves and other related assets as
such exist at that particular time. The Lender may, in its sole
discretion, make adjustments to the rates, volumes and prices and other
assumptions set forth therein in accordance with its normal and customary
procedures for evaluating oil and gas reserves and other related assets as
such exist at that particular time.
(c) The Lender may exclude any Oil and Gas Property or portion of
production therefrom or any income from any other Property from the
Borrowing Base, at any time,
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because title information is not reasonably satisfactory, such Property is
not Mortgaged Property or such Property is not assignable.
(d) So long as the Commitment is in effect and until payment in full
of all Loans hereunder, on or around the fifteenth Business Day of each
March and September, commencing March 15, 1997 (each being a "SCHEDULED
REDETERMINATION DATE"), the Lender shall redetermine the amount of the
Borrowing Base in accordance with Section 2.08(b). In addition, the Lender
may initiate a redetermination of the Borrowing Base at any other time as
it so elects; provided, however, that the Lender may initiate only one such
unscheduled redetermination between any two Scheduled Redetermination Dates
by specifying in writing to the Borrower the date on which the Borrower is
to furnish a Reserve Report in accordance with Section 8.07(b) and the date
on which such redetermination is to occur. In addition, the Borrower may
request additional Borrowing Base reviews between any two Scheduled
Redetermination Dates.
(e) The Lender shall promptly notify in writing the Borrower of the
new Borrowing Base and each new Schedule I. Any new Borrowing Base and
substitute Schedule I shall be effective without the necessity of the
Borrower's consent or signature. Any redetermination of the Borrowing Base
shall not be in effect until written notice is received by the Borrower.
Section 2.09 ASSUMPTION OF RISKS. The Borrower assume all risks
of the acts or omissions of any beneficiary of any Letter of Credit or any
transferee thereof with respect to its use of such Letter of Credit. Neither
the Lender (except in the case of willful misconduct or gross negligence on
the part of the Lender or any of its employees) nor its correspondents shall
be responsible for the validity, sufficiency or genuineness of certificates
or other documents or any endorsements thereon, even if such certificates or
other documents should in fact prove to be invalid, insufficient, fraudulent
or forged; for errors, omissions, interruptions or delays in transmissions or
delivery of any messages by mail, telex, or otherwise, whether or not they be
in code; for errors in translation or for errors in interpretation of
technical terms; the validity or sufficiency of any instrument transferring
or assigning or purporting to transfer or assign any Letter of Credit or the
rights or benefits thereunder or proceeds thereof, in whole or in part, which
may prove to be invalid or ineffective for any reason; the failure of any
beneficiary or any transferee of any Letter of Credit to comply fully with
conditions required in order to draw upon any Letter of Credit; or for any
other consequences arising from causes beyond the Lender's control or the
control of its correspondents. In addition, the Lender shall not be
responsible for any error, neglect, or default of any of its correspondents;
and none of the above shall affect, impair or prevent the vesting of the
Lender's or its rights or powers hereunder or under the Letter of Credit
Agreements, all of which rights shall be cumulative. The Lender and its
correspondents may accept certificates or other documents that appear on
their face to be in order, without responsibility for further investigation
of any matter contained therein regardless of any notice or information to
the contrary. In furtherance and not in limitation of the foregoing
provisions, the Borrower agrees that any action, inaction or omission taken
or not taken by the Lender or by any correspondent for the Lender in good
faith in connection with any Letter of Credit, or any
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related drafts, certificates, documents or instruments, shall be binding on
the Borrower and shall not put the Lender or its correspondents under any
resulting liability to the Borrower.
Section 2.10 OBLIGATION TO REIMBURSE AND TO PREPAY.
(a) If a disbursement by the Lender is made under any Letter of
Credit, the Borrower shall pay to the Lender within two (2) Business Days
after notice of any such disbursement is received by the Borrower, the
amount of each such disbursement made by the Lender under the Letter of
Credit (if such payment is not sooner effected as may be required under
this Section 2.10 of this Agreement or under other provisions of the Letter
of Credit) together with interest on the amount disbursed from and
including the date of disbursement until payment in full of such disbursed
amount at a varying rate per annum equal to (i) the then applicable
interest rate for Base Rate Loans through the second Business Day after
notice of such disbursement is received by the Borrower and (ii) the Post-
Default Rate for Base Rate Loans (but in no event to exceed the Highest
Lawful Rate) for the period from and including the third Business Day
following the date of such disbursement to and including the date of
repayment in full of such disbursed amount. The obligations of the
Borrower under this Agreement and each Letter of Credit shall be absolute,
unconditional and irrevocable and shall be paid or performed strictly in
accordance with the terms of this Agreement under all circumstances
whatsoever, including, without limitation, but only to the fullest extent
permitted by applicable law, the following circumstances: (i) any lack of
validity or enforceability of this Agreement, any Letter of Credit or any
of the Security Instruments; (ii) any amendment or waiver of (including any
default), or any consent to departure from this Agreement (except to the
extent permitted by any amendment or waiver), any Letter of Credit or any
of the Security Instruments; (iii) the existence of any claim, set-off,
defense or other rights which the Borrower may have at any time against the
beneficiary of any Letter of Credit or any transferee of any Letter of
Credit (or any Persons for whom any such beneficiary or any such transferee
may be acting), the Lender or any other Person, whether in connection with
this Agreement, any Letter of Credit, the Security Instruments, the
transactions contemplated hereby or any unrelated transaction; (iv) any
statement, certificate, draft, notice or any other document presented under
any Letter of Credit proves to have been forged, fraudulent, insufficient
or invalid in any respect or any statement therein proves to have been
untrue or inaccurate in any respect whatsoever; (v) payment by the Lender
under any Letter of Credit against presentation of a draft or certificate
which appears on its face to comply, but does not comply, with the terms of
such Letter of Credit; and (vi) any other circumstance or happening
whatsoever, whether or not similar to any of the foregoing.
Notwithstanding anything in this Agreement to the contrary, the Borrower
will not be liable for payment or performance that results from the gross
negligence or willful misconduct of the Lender, except (i) where the
Borrower or any Subsidiary actually recovers the proceeds for itself or the
Lender of any payment made by the Lender in connection with such gross
negligence or willful misconduct or (ii) in cases where the Lender makes
payment to the named beneficiary of a Letter of Credit.
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(b) In the event of the occurrence of any Event of Default, a payment
or prepayment pursuant to Sections 2.07(b) and (c) hereof or the maturity
of the Note, whether by acceleration or otherwise, an amount equal to the
LC Exposure shall be deemed to be forthwith due and owing by the Borrower
to the Lender as of the date of any such occurrence; and the Borrower's
obligation to pay such amount shall be absolute and unconditional, without
regard to whether any beneficiary of any such Letter of Credit has
attempted to draw down all or a portion of such amount under the terms of a
Letter of Credit, and, to the fullest extent permitted by applicable law,
shall not be subject to any defense or be affected by a right of set-off,
counterclaim or recoupment which the Borrower may now or hereafter have
against any such beneficiary, the Lender or any other Person for any reason
whatsoever. Such payments shall be held by the Lender as cash collateral
securing the LC Exposure in an account or accounts at the Principal Office;
and the Borrower hereby grants to and by its deposit with the Lender grants
to the Lender a security interest in such cash collateral. In the event of
any such payment by the Borrower of amounts contingently owing under
outstanding Letters of Credit and in the event that thereafter drafts or
other demands for payment complying with the terms of such Letters of
Credit are not made prior to the respective expiration dates thereof, the
Lender agrees, if no Event of Default has occurred and is continuing or if
no other amounts are outstanding under any of the Loan Documents, to remit
to the Borrower amounts for which the contingent obligations evidenced by
the Letters of Credit have ceased.
(c) Notwithstanding anything to the contrary contained herein, if no
Default has occurred and is continuing and subject to availability under
the Commitment (after reduction for LC Exposure), to the extent the
Borrower has not reimbursed the Lender for any drawn upon Letter of Credit
within two (2) Business Days after notice of such disbursement has been
received by the Borrower, the amount of such Letter of Credit reimbursement
obligation shall automatically be funded by the Lender as a Base Rate Loan
hereunder and used by the Lender to pay such Letter of Credit reimbursement
obligation. If a Default has occurred and is continuing, or if the funding
of such Letter of Credit reimbursement obligation as a Base Rate Loan would
cause the aggregate amount of all Loans outstanding to exceed the
Commitment (after reduction for LC Exposure), such Letter of Credit
reimbursement obligation shall not be funded as a Base Rate Loan, but
instead shall accrue interest as provided in Section 2.10(a).
ARTICLE III
PAYMENTS OF PRINCIPAL AND INTEREST
Section 3.01 REPAYMENT OF LOANS. On the Termination Date the
Borrower shall repay the outstanding principal amount of the Note.
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Section 3.02 INTEREST. The Borrower will pay to the Lender
interest on the unpaid principal amount of each Loan for the period
commencing on the date such Loan is made to but excluding the date such Loan
shall be paid in full, at the following rates per annum:
(i) if such a Loan is a Base Rate Loan, the Base Rate (as in
effect from time to time) plus the Applicable Margin (as in effect
from time to time), but in no event to exceed the Highest Lawful Rate;
and
(ii) if such a Loan is a LIBOR Loan, for each Interest Period
relating thereto, the LIBOR Rate for such Loan plus the Applicable
Margin (as in effect from time to time), but in no event to exceed the
Highest Lawful Rate.
Notwithstanding the foregoing, the Borrower will pay to the Lender interest
at the applicable Post-Default Rate on any principal of any Loan, and (to the
fullest extent permitted by law) on any other amount payable by the Borrower
hereunder, under any Loan Document or under the Note, for the period
commencing on the date of Event of Default until the same is paid in full or
all Events of Default are cured or waived.
Accrued interest on the Base Rate Loans shall be payable monthly commencing
on November 30, 1996, and accrued interest on each LIBOR Loan shall be
payable on the last day of each month during the Interest Period and on the
last day of the Interest Period therefor, except that interest payable at the
Post-Default Rate shall be payable from time to time on demand and interest
on any LIBOR Loan that is converted into a Base Rate Loan (pursuant to
Section 5.04) shall be payable on the date of conversion (but only to the
extent so converted).
Promptly after the determination of any interest rate provided for herein or
any change therein, the Lender shall notify the Borrower thereof. Each
determination by the Lender of an interest rate or fee hereunder shall,
except in cases of manifest error, be final, conclusive and binding on the
parties.
ARTICLE IV
PAYMENTS; COMPUTATIONS; ETC.
Section 4.01 PAYMENTS. Except to the extent otherwise provided
herein, all payments of principal, interest and other amounts to be made by
the Borrower under this Agreement, the Note and the Letter of Credit
Agreements shall be made in Dollars, in immediately available funds, to the
Lender at such account as the Lender shall specify by notice to the Borrower
from time to time, not later than 11:00 a.m. Charlotte, North Carolina time
on the date on which such payments shall become due (each such payment made
after such time on such due date to be deemed to have been made on the next
succeeding Business Day). Such payments shall be made without (to the fullest
extent permitted by applicable law) defense, set-off or counterclaim. Each
payment to be made to the Lender under this Agreement or the Note shall be
paid promptly to the Lender, in immediately available funds. Except as
provided in the
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definition of "Interest Period", if the due date of any payment under this
Agreement or the Note would otherwise fall on a day which is not a Business
Day such date shall be extended to the next succeeding Business Day and
interest shall be payable for any principal so extended for the period of
such extension. At the time of each payment of any principal of or interest
on any borrowing to the Lender, the Borrower shall notify the Lender of the
Loans to which such payment shall apply. In the absence of such notice the
Lender may specify the Loans to which such payment shall apply, but to the
extent possible such payment or prepayment will be applied first to the Loans
comprised of Base Rate Loans.
Section 4.02 COMPUTATIONS. Interest on LIBOR Loans and fees shall
be computed on the basis of a year of 360 days and actual days elapsed
(including the first day but excluding the last day) occurring in the period
for which payable, unless such calculation would exceed the Highest Lawful
Rate, in which case interest shall be calculated on the per annum basis of a
year of 365 or 366 days, as the case may be. Interest on Base Rate Loans
shall be computed on the basis of a year of 365 or 366 days, as the case may
be, and actual days elapsed (including the first day but excluding the last
day) occurring in the period for which payable.
Section 4.03 SET-OFF. The Borrower agrees that, in addition to
(and without limitation of) any right of set-off, bankers' lien or
counterclaim the Lender may otherwise have, the Lender shall have the right
and be entitled, at its option, to offset balances held by it or by any of
its Affiliates for account of the Borrower or any Subsidiary at any of its
offices, in Dollars or in any other currency, against any principal of or
interest on any of the Loans or any other amount payable to the Lender
hereunder, which is not paid when due (regardless of whether such balances
are then due to the Borrower), in which case it shall promptly notify the
Borrower thereof, provided that Lender's failure to give such notice shall
not affect the validity thereof.
Section 4.04 TAXES.
(a) PAYMENTS FREE AND CLEAR. Any and all payments by the Borrower
hereunder shall be made, in accordance with Section 4.01, free and clear
of and without deduction for any and all present or future taxes,
levies, imposts, deductions, charges or withholdings, and all
liabilities with respect thereto, EXCLUDING, taxes imposed on its
income, and franchise or similar taxes imposed on it, by (i) any
jurisdiction (or political subdivision thereof) of which the Lender, is
a citizen or resident or in which the Lender has an Applicable Lending
Office, (ii) the jurisdiction (or any political subdivision thereof) in
which the Lender is organized, or (iii) any jurisdiction (or political
subdivision thereof) in which the Lender is presently doing business in
which taxes are imposed solely as a result of doing business in such
jurisdiction (all such non-excluded taxes, levies, imposts, deductions,
charges, withholdings and liabilities being hereinafter referred to as
"TAXES"). If the Borrower shall be required by law to deduct any Taxes
from or in respect of any sum payable hereunder to the Lender (i) the
sum payable shall be increased by the amount necessary so that after
making all required deductions (including deductions applicable to
additional sums payable under this Section 4.04) the Lender shall
receive an amount equal to the sum it would have received had no such
deductions been made, (ii) the Borrower shall make such deductions and
(iii) the Borrower shall pay the full
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amount deducted to the relevant taxing authority or other Governmental
Authority in accordance with applicable law.
(b) OTHER TAXES. In addition, to the fullest extent permitted by
applicable law, the Borrower agrees to pay any present or future stamp
or documentary taxes or any other excise or property taxes, charges or
similar levies that arise from any payment made hereunder or from the
execution, delivery or registration of, or otherwise with respect to,
this Agreement or any Security Instrument (hereinafter referred to as
"OTHER TAXES").
(c) INDEMNIFICATION. TO THE FULLEST EXTENT PERMITTED BY
APPLICABLE LAW, THE BORROWER WILL INDEMNIFY THE LENDER FOR THE FULL
AMOUNT OF TAXES AND OTHER TAXES (INCLUDING, BUT NOT LIMITED TO, ANY
TAXES OR OTHER TAXES IMPOSED BY ANY GOVERNMENTAL AUTHORITY ON AMOUNTS
PAYABLE UNDER THIS SECTION 4.04) PAID BY THE LENDER, AND ANY LIABILITY
(INCLUDING PENALTIES, INTEREST AND EXPENSES) ARISING THEREFROM OR WITH
RESPECT THERETO, WHETHER OR NOT SUCH TAXES OR OTHER TAXES WERE CORRECTLY
OR LEGALLY ASSERTED UNLESS THE PAYMENT OF SUCH TAXES WAS NOT CORRECTLY
OR LEGALLY ASSERTED AND THE LENDER'S PAYMENT OF SUCH TAXES OR OTHER
TAXES WAS THE RESULT OF ITS GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. ANY
PAYMENT PURSUANT TO SUCH INDEMNIFICATION SHALL BE MADE WITHIN THIRTY
(30) DAYS AFTER THE DATE THE LENDER MAKES WRITTEN DEMAND THEREFOR. IF
THE LENDER RECEIVES A REFUND OR CREDIT IN RESPECT OF ANY TAXES OR OTHER
TAXES FOR WHICH THE LENDER HAS RECEIVED PAYMENT FROM THE BORROWER IT
SHALL PROMPTLY NOTIFY THE BORROWER OF SUCH REFUND OR CREDIT AND SHALL,
IF NO DEFAULT HAS OCCURRED AND IS CONTINUING, WITHIN THIRTY (30) DAYS
AFTER RECEIPT OF A REQUEST BY THE BORROWER (OR PROMPTLY UPON RECEIPT, IF
THE BORROWER HAS REQUESTED APPLICATION FOR SUCH REFUND OR CREDIT
PURSUANT HERETO), PAY AN AMOUNT EQUAL TO SUCH REFUND OR CREDIT TO THE
BORROWER WITHOUT INTEREST (BUT WITH ANY INTEREST SO REFUNDED OR
CREDITED), PROVIDED THAT THE BORROWER, UPON THE REQUEST OF THE LENDER,
AGREES TO RETURN SUCH REFUND OR CREDIT (PLUS PENALTIES, INTEREST OR
OTHER CHARGES) TO THE LENDER IN THE EVENT THE LENDER IS REQUIRED TO
REPAY SUCH REFUND OR CREDIT.
(d) LENDER REPRESENTATIONS.
(i) Lender represents that it is either (1) a corporation
organized under the laws of the United States of America or any
state thereof or (2) it is entitled to complete exemption from
United States withholding tax imposed on or with respect to any
payments, including fees, to be made to it pursuant to this
Agreement (A) under an applicable provision of a tax convention to
which the United States of America is a party or (B) because it is
acting through a branch, agency or office in the United States of
America and any payment to be received by it hereunder is
effectively connected with a trade or business in the United States
of America. If Lender is not a corporation organized under the
laws of the United States of America or any state thereof, it
agrees to provide to the Borrower
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on the Closing Date, or on the date of its delivery of the
assignment pursuant to which it becomes a Lender, and at such other
times as required by United States law or as the Borrower shall
reasonably request, two accurate and complete original signed
copies of either (A) Internal Revenue Service Form 4224 (or
successor form) certifying that all payments to be made to it
hereunder will be effectively connected to a United States trade or
business (the "FORM 4224 CERTIFICATION") or (B) Internal Revenue
Service Form 1001 (or successor form) certifying that it is
entitled to the benefit of a provision of a tax convention to which
the United States of America is a party which completely exempts
from United States withholding tax all payments to be made to it
hereunder (the "FORM 1001 CERTIFICATION"). In addition, the Lender
agrees that if it previously filed a Form 4224 Certification it
will deliver to the Borrower a new Form 4224 Certification prior to
the first payment date occurring in each of its subsequent taxable
years; and if it previously filed a Form 1001 Certification, it
will deliver to the Borrower a new certification prior to the first
payment date falling in the third year following the previous
filing of such certification. Lender also agrees to deliver to the
Borrower such other or supplemental forms as may at any time be
required as a result of changes in applicable law or regulation in
order to confirm or maintain in effect its entitlement to exemption
from United States withholding tax on any payments hereunder,
PROVIDED that the circumstances of the Lender at the relevant time
and applicable laws permit it to do so. If the Lender determines,
as a result of any change in either (i) a Governmental Requirement
or (ii) its circumstances, that it is unable to submit any form or
certificate that it is obligated to submit pursuant to this Section
4.04(d), or that it is required to withdraw or cancel any such form
or certificate previously submitted, it shall promptly notify the
Borrower of such fact. If Lender is organized under the laws of a
jurisdiction outside the United States of America, unless the
Borrower has received a Form 1001 Certification or Form 4224
Certification satisfactory to it indicating that all payments to be
made to the Lender hereunder are not subject to United States
withholding tax, the Borrower shall withhold taxes from such
payments at the applicable statutory rate. Lender agrees to
indemnify and hold harmless from any United States taxes,
penalties, interest and other expenses, costs and losses incurred
or payable by the Borrower as a result of its reliance on any such
form or certificate which Lender has provided to it pursuant to
this Section 4.04(d).
(ii) For any period with respect to which Lender has failed to
provide the Borrower with the form required pursuant to Section
4.04(d), if any, (other than if such failure is due to a change in
a Governmental Requirement occurring subsequent to the date on
which a form originally was required to be provided), the Lender
shall not be entitled to indemnification under Section 4.04 with
respect to taxes imposed by the United States which taxes would not
have been imposed but for such failure to provide such forms;
PROVIDED, HOWEVER, that should Lender, which is otherwise exempt
from or subject to a reduced rate of withholding tax becomes
subject to taxes because of its failure to deliver a form required
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hereunder, the Borrower shall take such steps as the Lender shall
reasonably request to assist the Lender to recover such taxes.
(iii) If the Lender claims any additional amounts payable
pursuant to this Section 4.04(d), it shall use reasonable efforts
(consistent with legal and regulatory restrictions) to file any
certificate or document requested by the Borrower or to change the
jurisdiction of its Applicable Lending Office or to contest any tax
imposed if the making of such a filing or change or contesting such
tax would avoid the need for or reduce the amount of any such
additional amounts that may thereafter accrue and would not, in its
sole determination, be otherwise disadvantageous to the Lender.
Section 4.05 DISPOSITION OF PROCEEDS. The Security Instruments
contain an assignment by the Borrower unto and in favor of the Lender of all
production and all proceeds attributable thereto which may be produced from or
allocated to the Mortgaged Property, and the Security Instruments further
provide in general for the application of such proceeds to the satisfaction of
the Indebtedness and other obligations described therein and secured thereby.
Notwithstanding the assignment contained in such Security Instruments, until the
occurrence of an Event of Default, the Lender agrees that it will neither notify
the purchaser or purchasers of such production nor take any other action to
cause such proceeds to be remitted to the Lender, but the Lender will instead
permit such proceeds to be paid to the Borrower and used by Borrower in
conducting its business.
ARTICLE V
CAPITAL ADEQUACY
Section 5.01 ADDITIONAL COSTS.
(a) EURODOLLAR REGULATIONS, ETC. The Borrower shall pay directly to
Lender from time to time such amounts as the Lender may determine to be
necessary to compensate the Lender for any costs which it determines are
attributable to its making or maintaining of any LIBOR Loans or issuing or
participating in Letters of Credit hereunder or its obligation to make any
LIBOR Loans or issue any Letters of Credit hereunder, or any reduction in
any amount receivable by the Lender hereunder in respect of any of such
LIBOR Loans, Letters of Credit or such obligation (such increases in costs
and reductions in amounts receivable being herein called "ADDITIONAL
COSTS"), resulting from any Regulatory Change which: (i) changes the basis
of taxation of any amounts payable to the Lender under this Agreement or
the Note in respect of any of such LIBOR Loans or Letters of Credit (other
than taxes imposed on the overall net income of the Lender or of its
Applicable Lending Office for any of such LIBOR Loans by the jurisdiction
of the Principal Office or Applicable Lending Office); or (ii) imposes or
modifies any reserve, special deposit, minimum capital, capital ratio or
similar requirements relating to any extensions of credit or other assets
of, or any deposits with or other liabilities of the
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Lender, or the Commitment or the Eurodollar interbank market; or (iii)
imposes any other condition affecting this Agreement or the Note (or
any of such extensions of credit or liabilities) or the Commitment.
The Lender will notify the Borrower of any event occurring after the
Closing Date which will entitle the Lender to compensation pursuant to
this Section 5.01(a) as promptly as practicable after it obtains
knowledge thereof and determines to request such compensation, and will
designate a different Applicable Lending Office for the Loans affected
by such event if such designation will avoid the need for, or reduce
the amount of, such compensation and will not, in the sole opinion of
the Lender, be disadvantageous to it, provided that it shall have no
obligation to so designate an Applicable Lending Office located in the
United States. If the Lender requests compensation from the Borrower
under this Section 5.01(a), the Borrower may, by notice to the Lender,
suspend the obligation of the Lender to make additional Loans of the
Type with respect to which such compensation is requested until the
Regulatory Change giving rise to such request ceases to be in effect
(in which case the provisions of Section 5.04 shall be applicable).
(b) REGULATORY CHANGE. Without limiting the effect of the provisions
of Section 5.01(a), in the event that, by reason of any Regulatory Change
or any other circumstances arising after the Closing Date affecting the
Lender, the Eurodollar interbank market or the Lender's position in such
market, the Lender either (i) incurs Additional Costs based on or measured
by the excess above a specified level of the amount of a category of
deposits or other liabilities of the Lender which includes deposits by
reference to which the interest rate on LIBOR Loans is determined as
provided in this Agreement or a category of extensions of credit or other
assets of the Lender which includes LIBOR Loans or (ii) becomes subject to
restrictions on the amount of such a category of liabilities or assets
which it may hold, then, if the Lender so elects by notice to the Borrower,
the obligation of the Lender to make additional LIBOR Loans shall be
suspended until such Regulatory Change or other circumstances ceases to be
in effect (in which case the provisions of Section 5.04 shall be
applicable).
(c) CAPITAL ADEQUACY. Without limiting the effect of the foregoing
provisions of this Section 5.01 (but without duplication), the Borrower
shall pay directly to the Lender from time to time on request such amounts
as the Lender may reasonably determine to be necessary to compensate it or
its parent or holding company for any costs which it determines are
attributable to the maintenance by it or its parent or holding company (or
any Applicable Lending Office), pursuant to any Governmental Requirement
following any Regulatory Change, of capital in respect of the Commitment,
the Note, the Loans or any interest held by it in any Letter of Credit
(such compensation to include, without limitation, an amount equal to any
reduction of the rate of return on assets or equity of the Lender or its
parent or holding company (or any Applicable Lending Office) to a level
below that which the Lender or its parent or holding company (or any
Applicable Lending Office) could have achieved but for such Governmental
Requirement). The Lender will notify the Borrower that it is entitled to
compensation pursuant to this Section 5.01(c) as promptly as practicable
after it determines to request such compensation.
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(d) COMPENSATION PROCEDURE. If Lender notifies the Borrower of the
incurrence of additional costs under this Section 5.01, such notice to the
Borrower shall set forth the basis and amount of its request for
compensation. Determinations and allocations by the Lender for purposes of
this Section 5.01 of the effect of any Regulatory Change pursuant to
Section 5.01(a) or (b), or of the effect of capital maintained pursuant to
Section 5.01(a), on its costs or rate of return of maintaining Loans or its
obligation to make Loans or issue Letters of Credit, or on amounts
receivable by it in respect of Loans or Letters of Credit, and of the
amounts required to compensate the Lender under this Section 5.01, shall be
conclusive and binding for all purposes, provided that such determinations
and allocations are made on a reasonable basis and in good faith. Any
request for additional compensation under this Section 5.01 shall be paid
by the Borrower within thirty (30) days of the receipt by the Borrower of
the notice described in this Section 5.01(d).
Section 5.02 LIMITATION ON LIBOR LOANS. Anything herein to the
contrary notwithstanding, if, on or prior to the determination of any LIBOR Rate
for any Interest Period:
(i) the Lender determines (which determination shall be
conclusive absent manifest error) that quotations of interest rates
for the relevant deposits referred to in the definition of "LIBOR" in
Section 1.02 are not being provided in the relevant amounts or for the
relevant maturities for purposes of determining rates of interest for
LIBOR Loans as provided herein; or
(ii) the Lender determines (which determination shall be
conclusive absent manifest error) that the relevant rates of interest
referred to in the definition of "LIBOR" in Section 1.02 upon the
basis of which the rate of interest for LIBOR Loans for such Interest
Period is to be determined are not likely to adequately cover the cost
to the Lender of making or maintaining LIBOR Loans;
then the Lender shall give the Borrower prompt notice thereof, and so long as
such condition remains in effect, the Lender shall be under no obligation to
make additional LIBOR Loans.
Section 5.03 ILLEGALITY. Notwithstanding any other provision of this
Agreement, in the event that it becomes unlawful for the Lender or its
Applicable Lending Office to honor its obligation to make or maintain LIBOR
Loans hereunder, then the Lender shall promptly notify the Borrower thereof and
the Lender's obligation to make LIBOR Loans shall be suspended until such time
as the Lender may again make and maintain LIBOR Loans (in which case the
provisions of Section 5.04 shall be applicable).
Section 5.04 BASE RATE LOANS PURSUANT TO SECTIONS 5.01, 5.02 AND
5.03. If the obligation of the Lender to make LIBOR Loans shall be suspended
pursuant to Sections 5.01, 5.02 or 5.03 ("AFFECTED LOANS"), all Affected Loans
which would otherwise be made by the Lender shall be made instead as Base Rate
Loans (and, if an event referred to in Section 5.01(b) or Section 5.03 has
occurred and the Lender so requests by notice to the Borrower, all Affected
Loans then outstanding shall be automatically converted into Base Rate Loans on
the date
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specified by the Lender in such notice) and, to the extent that Affected
Loans are so made as (or converted into) Base Rate Loans, all payments of
principal which would otherwise be applied to the Affected Loans shall be
applied instead to Base Rate Loans.
Section 5.05 COMPENSATION. The Borrower shall pay to the Lender
within thirty (30) days of receipt of written request of Lender (which request
shall set forth, in reasonable detail, the basis for requesting such amounts and
which shall be conclusive and binding for all purposes provided that such
determinations are made on a reasonable basis), such amount or amounts as shall
compensate it for any loss, cost, expense or liability which the Lender
determines are attributable to:
(i) any payment, prepayment or conversion of a LIBOR Loan
properly made by the Lender or the Borrower for any reason (including,
without limitation, the acceleration of the Loans pursuant to Section
10.02) on a date other than the last day of the Interest Period for
such Loan; or
(ii) any failure by the Borrower for any reason (including but
not limited to, the failure of any of the conditions precedent
specified in Article VI to be satisfied) to borrow, continue or
convert a LIBOR Loan on the date for such borrowing, continuation or
conversion specified in the relevant notice given pursuant to
Section 2.02(c).
Without limiting the effect of the preceding sentence, such compensation shall
include an amount equal to the excess, if any, of (i) the amount of interest
which would have accrued on the principal amount so paid, prepaid or converted
or not borrowed for the period from the date of such payment, prepayment or
conversion or failure to borrow to the last day of the Interest Period for such
Loan (or, in the case of a failure to borrow, the Interest Period for such Loan
which would have commenced on the date specified for such borrowing) at the
applicable rate of interest for such Loan provided for herein over (ii) the
interest component of the amount the Lender would have bid in the London
interbank market for Dollar deposits of leading banks in amounts comparable to
such principal amount and with maturities comparable to such period (as
reasonably determined by the Lender).
ARTICLE VI
CONDITIONS PRECEDENT
Section 6.01 INITIAL FUNDING.
The obligation of the Lender to make the Initial Funding is subject to
its receipt by the Lender of all fees payable pursuant to Section 2.04 on or
before the Closing Date and the receipt by the Lender of the following documents
and satisfaction of the other conditions provided in this Section 6.01, each of
which shall be satisfactory to the Lender in form and substance:
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(a) A certificate of the Secretary or an Assistant Secretary of the
Borrower setting forth (i) resolutions of its board of directors with
respect to the authorization of the Borrower to execute and deliver the
Loan Documents to which it is a party and to enter into the transactions
contemplated in those documents, (ii) the officers of the Borrower (y) who
are authorized to sign the Loan Documents to which Borrower is a party and
(z) who will, until replaced by another officer or officers duly authorized
for that purpose, act as its representative for the purposes of signing
documents and giving notices and other communications in connection with
this Agreement and the transactions contemplated hereby, (iii) specimen
signatures of the authorized officers, and (iv) the articles or certificate
of incorporation and bylaws of the Borrower, certified as being true and
complete. The Lender may conclusively rely on such certificate until it
receives notice in writing from the Borrower to the contrary.
(b) A certificate of the Secretary or an Assistant Secretary of each
Guarantor setting forth (i) resolutions of its board of directors with
respect to the authorization of such Guarantor to execute and deliver the
Loan Documents to which it is a party and to enter into the transactions
contemplated in those documents, (ii) the officers of such Guarantor (y)
who are authorized to sign the Loan Documents to which such Guarantor is a
party and (z) who will, until replaced by another officer or officers duly
authorized for that purpose, act as its representative for the purposes of
signing documents and giving notices and other communications in connection
with this Agreement and the transactions contemplated hereby, (iii)
specimen signatures of the authorized officers, and (iv) the articles or
certificate of incorporation and bylaws of such Guarantor, certified as
being true and complete. The Lender may conclusively rely on such
certificate until it receives notice in writing from such Guarantor to the
contrary.
(c) Certificates of the appropriate state agencies with respect to
the existence, qualification and good standing of the Borrower and
Guarantors.
(d) A compliance certificate which shall be substantially in the form
of Exhibit C, duly and properly executed by a Responsible Officer and dated
as of the date of the Initial Funding.
(e) The Note, duly completed and executed.
(f) The Security Instruments described on Exhibit E, duly completed
and executed in sufficient number of counterparts for recording, if
necessary.
(g) An opinion of Michener, Larimore, Swindle, Whitaker, Flowers,
Sawyer, Reynolds & Chalk, L.L.P., special counsel to the Borrower,
substantially in the form of Exhibit D hereto.
(h) A certificate of insurance coverage of the Borrower evidencing
that the Borrower is carrying insurance in accordance with Section 7.19
hereof.
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(i) Title information as the Lender may require from attorneys
satisfactory to the Lender setting forth the status of title to at least
eighty percent (80%) of the value of the Oil and Gas Properties included in
the Initial Reserve Report.
(j) List of purchasers of Hydrocarbons produced from the Borrower's
Mortgaged Properties.
(l) Such other documents as the Lender or special counsel to the
Lender may reasonably request.
Section 6.02 INITIAL AND SUBSEQUENT LOANS. The obligation of the
Lender to make Loans to the Borrower upon the occasion of each borrowing
hereunder and to issue, renew, extend or reissue Letters of Credit for the
account of the Borrower (including the Initial Funding) is subject to the
further conditions precedent that, as of the date of such Loans and after giving
effect thereto: (i) no Default shall have occurred and be continuing; (ii) no
Material Adverse Effect shall have occurred; and (iii) the representations and
warranties made by the Borrower in Article VII and in the Security Instruments
shall be true on and as of the date of the making of such Loans or issuance,
renewal, extension or reissuance of a Letter of Credit with the same force and
effect as if made on and as of such date and following such new borrowing,
except to the extent such representations and warranties are expressly limited
to an earlier date or the Lender may expressly consent in writing to the
contrary. Each request for a borrowing or issuance, renewal, extension or
reissuance of a Letter of Credit by the Borrower hereunder shall constitute a
certification by the Borrower to the effect set forth in the preceding sentence
(both as of the date of such notice and, unless the Borrower otherwise notifies
the Lender prior to the date of and immediately following such borrowing as of
the date thereof).
Section 6.03 CONDITIONS RELATING TO LETTERS OF CREDIT. In addition to
the satisfaction of all other conditions precedent set forth in this Article VI,
the issuance, renewal, extension or reissuance of the Letters of Credit referred
to in Section 2.01(b) hereof is subject to the following conditions precedent:
(a) At least three (3) Business Days prior to the date of the
issuance and at least thirty (30) Business Days prior to the date of the
renewal, extension or reissuance of each Letter of Credit, the Lender shall
have received a written request for a Letter of Credit.
(b) Each of the Letters of Credit shall (i) be issued by the Lender,
(ii) contain such terms and provisions as are reasonably required by the
Lender, (iii) be for the account of the Borrower or a Subsidiary, and
(iv) expire not later than the earlier of one (1) year from the date of
issuance, renewal, extension or reissuance or two (2) days before the
Termination Date.
(c) The Borrower shall have duly and validly executed and delivered
to the Lender a Letter of Credit Agreement pertaining to the Letter of
Credit.
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ARTICLE VII
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Lender that (each
representation and warranty herein is given as of the Closing Date and shall be
deemed repeated and reaffirmed on the dates of each borrowing and issuance,
renewal, extension or reissuance of a Letter of Credit as provided in Section
6.02):
Section 7.01 CORPORATE EXISTENCE. Each of the Borrower and each
Subsidiary: (i) is a corporation duly organized, legally existing and in good
standing under the laws of the jurisdiction of its incorporation; (ii) has all
requisite power, and has all material governmental licenses, authorizations,
consents and approvals necessary to own its assets and carry on its business as
now being or as proposed to be conducted; and (iii) is qualified to do business
in all jurisdictions in which the nature of the business conducted by it makes
such qualification necessary and where failure so to qualify would have a
Material Adverse Effect.
Section 7.02 FINANCIAL CONDITION. The audited consolidated balance
sheet of the Borrower and its Consolidated Subsidiaries as at December 31, 1995
and the related consolidated statement of income, stockholders' equity and cash
flow of the Borrower and its Consolidated Subsidiaries for the fiscal year ended
on said date, with the opinion thereon of Ernst & Young L.L.P. heretofore
furnished to the Lender and the unaudited consolidated balance sheet of the
Borrower and its Consolidated Subsidiaries as at June 30, 1996 and their related
consolidated statements of income, stockholders' equity and cash flow of the
Borrower and its Consolidated Subsidiaries for the three-month period ended on
such date heretofore furnished to the Lender, are complete and correct and
fairly present the consolidated financial condition of the Borrower and its
Consolidated Subsidiaries as at said dates and the results of its operations for
the fiscal year and the three-month period on said dates, all in accordance with
GAAP, as applied on a consistent basis (subject, in the case of the interim
financial statements, to normal year-end adjustments). Neither the Borrower nor
any Subsidiary has on the Closing Date any material Debt, contingent
liabilities, liabilities for taxes, unusual forward or long-term commitments or
unrealized or anticipated losses from any unfavorable commitments, except as
referred to or reflected or provided for in the Financial Statements or in
Schedule 7.02. Since December 31, 1995, there has been no change or event
having a Material Adverse Effect. Since the date of the Financial Statements,
neither the business nor the Properties of the Borrower or any Subsidiary have
been materially and adversely affected as a result of any fire, explosion,
earthquake, flood, drought, windstorm, accident, strike or other labor
disturbance, embargo, requisition or taking of Property or cancellation of
contracts, permits or concessions by any Governmental Authority, riot,
activities of armed forces or acts of God or of any public enemy.
Section 7.03 LITIGATION. Except as disclosed to the Lender in
Schedule 7.03 hereto, at the Closing Date there is no litigation, legal,
administrative or arbitral proceeding, investigation or other action of any
nature pending or, to the knowledge of the Borrower threatened against or
affecting the Borrower or any Subsidiary which involves the possibility of
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any judgment or liability against the Borrower or any Subsidiary not fully
covered by insurance (except for normal deductibles) and which would have a
Material Adverse Effect.
Section 7.04 NO BREACH. Neither the execution and delivery of the
Loan Documents, nor compliance with the terms and provisions hereof will
conflict with or result in a breach of, or require any consent which has not
been obtained as of the Closing Date under, the respective charter or by-laws of
the Borrower or any Subsidiary, or any Governmental Requirement or any agreement
or instrument to which the Borrower or any Subsidiary is a party or by which it
is bound or to which it or its Properties are subject, or constitute a default
under any such agreement or instrument, or result in the creation or imposition
of any Lien upon any of the revenues or assets of the Borrower or any Subsidiary
pursuant to the terms of any such agreement or instrument other than the Liens
created by the Loan Documents.
Section 7.05 AUTHORITY. The Borrower and each Subsidiary have all
necessary corporate power and authority to execute, deliver and perform their
obligations under the Loan Documents to which they are respectively a party; and
the execution, delivery and performance by the Borrower and each Subsidiary of
the Loan Documents to which they are respectively a party, have been duly
authorized by all necessary corporate action on their part; and the Loan
Documents constitute the legal, valid and binding obligations of the Borrower
and each Subsidiary, enforceable in accordance with their terms.
Section 7.06 APPROVALS. No authorizations, approvals or consents of,
and no filings or registrations with, any Governmental Authority are necessary
for the execution, delivery or performance by the Borrower or any Subsidiary of
the Loan Documents to which it is a party or for the validity or enforceability
thereof, except for the recording and filing of the Security Instruments as
required by this Agreement.
Section 7.07 USE OF LOANS. The proceeds of the Initial Loan shall be
used to refinance the Existing Indebtedness and the proceeds of subsequent Loans
shall be used (i) to acquire and develop proved oil and gas reserves, (ii) the
Summit Acquisition and (iii) for working capital. The Borrower is not engaged
principally, or as one of its important activities, in the business of extending
credit for the purpose, whether immediate, incidental or ultimate, of buying or
carrying margin stock (within the meaning of Regulation G, U or X of the Board
of Governors of the Federal Reserve System) and no part of the proceeds of any
Loan hereunder will be used to buy or carry any margin stock.
Section 7.08 ERISA.
(a) The Borrower, each Subsidiary and each ERISA Affiliate have
complied in all material respects with ERISA and, where applicable, the
Code regarding each Plan.
(b) Each Plan is, and has been, maintained in substantial compliance
with ERISA and, where applicable, the Code.
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(c) No act, omission or transaction has occurred which could result
in imposition on the Borrower, any Subsidiary or any ERISA Affiliate
(whether directly or indirectly) of (i) either a civil penalty assessed
pursuant to section 502(c), (i) or (l) of ERISA or a tax imposed pursuant
to Chapter 43 of Subtitle D of the Code or (ii) breach of fiduciary duty
liability damages under section 409 of ERISA.
(d) No Plan (other than a defined contribution plan) or any trust
created under any such Plan has been terminated since September 2, 1974.
No liability to the PBGC (other than for the payment of current premiums
which are not past due) by the Borrower, any Subsidiary or any ERISA
Affiliate has been or is expected by the Borrower, any Subsidiary or any
ERISA Affiliate to be incurred with respect to any Plan. No ERISA Event
with respect to any Plan has occurred.
(e) Full payment when due has been made of all amounts which the
Borrower, any Subsidiary or any ERISA Affiliate is required under the terms
of each Plan or applicable law to have paid as contributions to such Plan,
and no accumulated funding deficiency (as defined in section 302 of ERISA
and section 412 of the Code), whether or not waived, exists with respect to
any Plan.
(f) The actuarial present value of the benefit liabilities under each
Plan which is subject to Title IV of ERISA does not, as of the end of the
Borrower's most recently ended fiscal year, exceed the current value of the
assets (computed on a plan termination basis in accordance with Title IV of
ERISA) of such Plan allocable to such benefit liabilities. The term
"actuarial present value of the benefit liabilities" shall have the meaning
specified in section 4041 of ERISA.
(g) None of the Borrower, any Subsidiary or any ERISA Affiliate
sponsors, maintains, or contributes to an employee welfare benefit plan, as
defined in section 3(1) of ERISA, including, without limitation, any such
plan maintained to provide benefits to former employees of such entities,
that may not be terminated by the Borrower, a Subsidiary or any ERISA
Affiliate in its sole discretion at any time without any material
liability.
(h) None of the Borrower, any Subsidiary or any ERISA Affiliate
sponsors, maintains or contributes to, or has at any time in the preceding
six calendar years sponsored, maintained or contributed to, any
Multiemployer Plan.
(i) None of the Borrower, any Subsidiary or any ERISA Affiliate is
required to provide security under section 401(a)(29) of the Code due to a
Plan amendment that results in an increase in current liability for the
Plan.
Section 7.09 TAXES. Except as set out in Schedule 7.09, each of the
Borrower and its Subsidiaries has filed all United States Federal income tax
returns and all other tax returns which are required to be filed by them and
have paid all material taxes due pursuant to such returns or pursuant to any
assessment received by the Borrower or any Subsidiary. The charges,
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accruals and reserves on the books of the Borrower and its Subsidiaries in
respect of taxes and other governmental charges are, in the opinion of the
Borrower, adequate. No tax lien has been filed and, to the knowledge of the
Borrower, no claim is being asserted with respect to any such tax, fee or other
charge.
Section 7.10 TITLES, ETC.
(a) Except as set out in Schedule 7.10, the Borrower and its
Subsidiaries have good and defensible title to its material (individually
or in the aggregate) Properties, free and clear of all Liens except Liens
permitted by Section 9.02. Except as set forth in Schedule 7.10, after
giving full effect to the Excepted Liens, the Borrower owns the net
interests in production attributable to the Hydrocarbon Interests reflected
in the most recently delivered Reserve Report and the ownership of such
Properties shall not in any material respect obligate the Borrower to bear
the costs and expenses relating to the maintenance, development and
operations of each such Property in an amount in excess of the working
interest of each Property set forth in the most recently delivered Reserve
Report. All information contained in the most recently delivered Reserve
Report is true and correct in all material respects as of the date thereof.
(b) All leases and agreements necessary for the conduct of the
business of the Borrower and its Subsidiaries are valid and subsisting, in
full force and effect and there exists no default or event or circumstance
which with the giving of notice or the passage of time or both would give
rise to a default under any such lease or leases, which would affect in any
material respect the conduct of the business of the Borrower and its
Subsidiaries.
(c) The rights, properties and other assets presently owned, leased
or licensed by the Borrower and its Subsidiaries including, without
limitation, all easements and rights of way, include all rights, Properties
and other assets necessary to permit the Borrower and its Subsidiaries to
conduct their business in all material respects in the same manner as its
business has been conducted prior to the Closing Date.
(d) All of the assets and Properties of the Borrower and its
Subsidiaries which are reasonably necessary for the operation of its
business are in good working condition and are maintained in accordance
with prudent business standards.
Section 7.11 NO MATERIAL MISSTATEMENTS. No written information,
statement, exhibit, certificate, document or report furnished to the Lender by
the Borrower or any Subsidiary in connection with the negotiation of this
Agreement contained any material misstatement of fact or omitted to state a
material fact or any fact necessary to make the statement contained therein not
materially misleading in the light of the circumstances in which made and with
respect to the Borrower and its Subsidiaries taken as a whole. There is no fact
peculiar to the Borrower or any Subsidiary which has a Material Adverse Effect
or in the future is reasonably likely to have (so far as the Borrower can now
foresee) a Material Adverse Effect and which has not been set forth in this
Agreement or the other documents, certificates and statements furnished to the
Lender by
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or on behalf of the Borrower or any Subsidiary prior to, or on, the Closing Date
in connection with the transactions contemplated hereby.
Section 7.12 INVESTMENT COMPANY ACT. Neither the Borrower nor any
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.
Section 7.13 PUBLIC UTILITY HOLDING COMPANY ACT. Neither the
Borrower nor any 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" of a "holding company," or a "public utility" within the
meaning of the Public Utility Holding Company Act of 1935, as amended.
Section 7.14 SUBSIDIARIES. Except as set forth on Schedule 7.14, the
Borrower has no Subsidiaries.
Section 7.15 LOCATION OF BUSINESS AND OFFICES. The Borrower's
principal place of business and chief executive offices are located at the
address stated on the signature page of this Agreement. The principal place of
business and chief executive office of each Subsidiary are located at the
addresses stated on Schedule 7.14.
Section 7.16 DEFAULTS. Neither the Borrower nor any Subsidiary is in
default nor has any event or circumstance occurred which, but for the expiration
of any applicable grace period or the giving of notice, or both, would
constitute a default under any material agreement or instrument to which the
Borrower or any Subsidiary is a party or by which the Borrower or any Subsidiary
is bound which default would have a Material Adverse Effect. No Default
hereunder has occurred and is continuing.
Section 7.17 ENVIRONMENTAL MATTERS. Except (i) as provided in
Schedule 7.17 or (ii) as would not have a Material Adverse Effect (or with
respect to (c), (d) and (e) below, where the failure to take such actions would
not have a Material Adverse Effect):
(a) Neither any Property of the Borrower or any Subsidiary nor the
operations conducted thereon violate any order or requirement of any court
or Governmental Authority or any Environmental Laws;
(b) Without limitation of clause (a) above, no Property of the
Borrower or any Subsidiary nor the operations currently conducted thereon
or, to the best knowledge of the Borrower, by any prior owner or operator
of such Property or operation, are in violation of or subject to any
existing, pending or threatened action, suit, investigation, inquiry or
proceeding by or before any court or Governmental Authority or to any
remedial obligations under Environmental Laws;
(c) All notices, permits, licenses or similar authorizations, if any,
required to be obtained or filed in connection with the operation or use of
any and all Property of the
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Borrower and each Subsidiary, including without limitation past or present
treatment, storage, disposal or release of a hazardous substance or solid
waste into the environment, have been duly obtained or filed, and the
Borrower and each Subsidiary are in compliance with the terms and
conditions of all such notices, permits, licenses and similar
authorizations;
(d) All hazardous substances, solid waste, and oil and gas
exploration and production wastes, if any, generated at any and all
Property of the Borrower or any Subsidiary have, during the time period
owned by the Borrower, been transported, treated and disposed of in
accordance with Environmental Laws and so as not to pose an imminent and
substantial endangerment to public health or welfare or the environment,
and, to the best knowledge of the Borrower, all such transport carriers and
treatment and disposal facilities have been and are operating in compliance
with Environmental Laws and so as not to pose an imminent and substantial
endangerment to public health or welfare or the environment, and are not
the subject of any existing, pending or threatened action, investigation or
inquiry by any Governmental Authority in connection with any Environmental
Laws;
(e) The Borrower has taken all steps reasonably necessary to
determine and has determined that no hazardous substances, solid waste, or
oil and gas exploration and production wastes, have been disposed of or
otherwise released and there has been no threatened release of any
hazardous substances on or to any Property of the Borrower or any
Subsidiary except in compliance with Environmental Laws and so as not to
pose an imminent and substantial endangerment to public health or welfare
or the environment;
(f) To the extent applicable, all Property of the Borrower and each
Subsidiary currently satisfies all design, operation, and equipment
requirements imposed by the OPA or scheduled as of the Closing Date to be
imposed by OPA during the term of this Agreement, and the Borrower does not
have any reason to believe that such Property, to the extent subject to
OPA, will not be able to maintain compliance with the OPA requirements
during the term of this Agreement; and
(g) Neither the Borrower nor any Subsidiary has any known contingent
liability in connection with any release or threatened release of any oil,
hazardous substance or solid waste into the environment.
Section 7.18 COMPLIANCE WITH THE LAW. Neither the Borrower nor any
Subsidiary has violated any Governmental Requirement or failed to obtain any
license, permit, franchise or other governmental authorization necessary for the
ownership of any of its Properties or the conduct of its business, which
violation or failure would have (in the event such violation or failure were
asserted by any Person through appropriate action) a Material Adverse Effect.
Except for such acts or failures to act as would not have a Material Adverse
Effect, the Oil and Gas Properties (and properties unitized therewith) have been
maintained, operated and developed in a good and workmanlike manner and in
conformity
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with all applicable laws and all rules, regulations and orders of all duly
constituted authorities having jurisdiction and in conformity with the
provisions of all leases, subleases or other contracts comprising a part of the
Hydrocarbon Interests and other contracts and agreements forming a part of the
Oil and Gas Properties; specifically in this connection, (i) after the Closing
Date, no Oil and Gas Property is subject to having allowable production reduced
below the full and regular allowable (including the maximum permissible
tolerance) because of any overproduction (whether or not the same was
permissible at the time) prior to the Closing Date and (ii) none of the wells
comprising a part of the Oil and Gas Properties (or properties unitized
therewith) are deviated from the vertical more than the maximum permitted by
applicable laws, regulations, rules and orders, and such wells are, in fact,
bottomed under and are producing from, and the well bores are wholly within, the
Oil and Gas Properties (or in the case of wells located on properties unitized
therewith, such unitized properties).
Section 7.19 INSURANCE. Schedule 7.19 attached hereto contains an
accurate and complete description of all material policies of fire, liability,
workmen's compensation and other forms of insurance owned or held by the
Borrower and each Subsidiary. All such policies are in full force and effect,
all premiums with respect thereto covering all periods up to and including the
date of the closing have been paid, and no notice of cancellation or termination
has been received with respect to any such policy. Such policies are sufficient
for compliance with all requirements of law and of all agreements to which the
Borrower or any Subsidiary is a party; are valid, outstanding and enforceable
policies; provide adequate insurance coverage in at least such amounts and
against at least such risks (but including in any event public liability) as are
usually insured against in the same general area by companies engaged in the
same or a similar business for the assets and operations of the Borrower and
each Subsidiary; will remain in full force and effect through the respective
dates set forth in Schedule 7.19 without the payment of additional premiums; and
will not in any way be affected by, or terminate or lapse by reason of, the
transactions contemplated by this Agreement. Schedule 7.19 identifies all
material risks, if any, which the Borrower and its Subsidiaries and their
respective Board of Directors or officers have designated as being self insured.
Neither the Borrower nor any Subsidiary has been refused any insurance with
respect to its assets or operations, nor has its coverage been limited below
usual and customary policy limits, by an insurance carrier to which it has
applied for any such insurance or with which it has carried insurance during the
last three years.
Section 7.20 GAS IMBALANCES. As of the Closing Date, except as set
forth on Schedule 7.20 or on the most recent certificate delivered pursuant to
Section 8.07(c), on a net basis there are no gas imbalances, take or pay or
other prepayments with respect to the Borrower's Oil and Gas Properties which
would require the Borrower to deliver Hydrocarbons produced from the Oil and Gas
Properties at some future time without then or thereafter receiving full payment
therefor exceeding 1,000,000 cubic feet of gas in the aggregate.
Section 7.21 HEDGING AGREEMENTS. Schedule 7.21 sets forth, as of the
Closing Date, a true and complete list of all Hedging Agreements (including
commodity price swap agreements, forward agreements or contracts of sale which
provide for prepayment for deferred shipment or delivery of oil, gas or other
commodities) of the Borrower and each Subsidiary, the material terms thereof
(including the type, term, effective date, termination date and notional
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amounts or volumes), the net mark to market value thereof, all credit support
agreements relating thereto (including any margin required or supplied), and the
counterparty to each such agreement.
ARTICLE VIII
AFFIRMATIVE COVENANTS
The Borrower covenants and agrees that, so long as the Commitment is in
effect and until payment in full of all Indebtedness hereunder, all interest
thereon and all other amounts payable by the Borrower hereunder:
Section 8.01 FINANCIAL STATEMENTS. The Borrower shall deliver, or
shall cause to be delivered, to the Lender:
(a) As soon as available and in any event within ninety-five (95)
days after the end of each fiscal year of the Borrower, the audited
consolidated and unaudited consolidating statements of income,
stockholders' equity, changes in financial position and cash flow of the
Borrower and its Consolidated Subsidiaries for such fiscal year, and the
related consolidated and consolidating balance sheets of the Borrower and
its Consolidated Subsidiaries as at the end of such fiscal year, and
setting forth in each case in comparative form the corresponding figures
for the preceding fiscal year, and accompanied by the related opinion of
independent public accountants of recognized national standing acceptable
to the Lender which opinion shall state that the audited financial
statements fairly present the consolidated financial condition and results
of operations of the Borrower and its Consolidated Subsidiaries as at the
end of, and for, such fiscal year and that such financial statements have
been prepared in accordance with GAAP except for such changes in such
principles with which the independent public accountants shall have
concurred and such opinion shall not contain a "going concern" or like
qualification or exception and a certificate of such accountants stating
that, in making the examination necessary for their opinion, they obtained
no knowledge, except as specifically stated, of any Default.
(b) As soon as available and in any event within fifty (50) days
after the end of each of the first three fiscal quarterly periods of each
fiscal year of the Borrower, consolidated and consolidating statements of
income, stockholders' equity, changes in financial position and cash flow
of the Borrower and its Consolidated Subsidiaries for such period and for
the period from the beginning of the respective fiscal year to the end of
such period, and the related consolidated and consolidating balance sheets
as at the end of such period, and setting forth in each case in comparative
form the corresponding figures for the corresponding period in the
preceding fiscal year, accompanied by the certificate of a Responsible
Officer, which certificate shall state that said financial statements
fairly present the consolidated and consolidating financial condition and
results of operations of the Borrower and its Consolidated Subsidiaries in
accordance with
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GAAP, as at the end of, and for, such period (subject to normal year-end
audit adjustments).
(c) Promptly after the Borrower knows that any Default or any
Material Adverse Effect has occurred, a notice of such Default or Material
Adverse Effect, describing the same in reasonable detail and the action the
Borrower proposes to take with respect thereto.
(d) Promptly upon receipt thereof, a copy of each other report or
letter submitted to the Borrower or any Subsidiary by independent
accountants in connection with any annual, interim or special audit made by
them of the books of the Borrower and its Subsidiaries and a copy of any
response by the Borrower or any Subsidiary or the Board of Directors of the
Borrower or any Subsidiary to such letter or report.
(e) Promptly upon its becoming available, each financial statement,
report, notice or proxy statement sent by the Borrower to stockholders
generally and each regular or periodic report and any registration
statement, prospectus or written communication (other than transmittal
letters) in respect thereof filed by the Borrower with or received by the
Borrower in connection therewith from any securities exchange or the SEC or
any successor agency.
(f) Promptly after the furnishing thereof, copies of any statement,
report or notice furnished to or any Person pursuant to the terms of any
indenture, loan or credit or other similar agreement, other than this
Agreement and not otherwise required to be furnished to the Lender pursuant
to any other provision of this Section 8.01.
(g) From time to time such other information regarding the business,
affairs or financial condition of the Borrower or any Subsidiary
(including, without limitation, any Plan or Multiemployer Plan and any
reports or other information required to be filed under ERISA) as the
Lender may reasonably request.
The Borrower will furnish to the Lender, at the time it furnishes each set of
financial statements pursuant to paragraph (a) or (b) above, a certificate
substantially in the form of Exhibit C hereto executed by a Responsible Officer
(i) certifying as to the matters set forth therein and stating that no Default
has occurred and is continuing (or, if any Default has occurred and is
continuing, describing the same in reasonable detail), and (ii) setting forth in
reasonable detail the computations necessary to determine whether the Borrower
is in compliance with Sections 9.12, 9.13 or 9.14 as of the end of the
respective fiscal quarter or fiscal year.
Section 8.02 LITIGATION. The Borrower shall promptly give to the
Lender notice of: (i) all legal or arbitral proceedings, and of all proceedings
before any Governmental Authority affecting the Borrower or any Subsidiary,
except proceedings which, if adversely determined, would not have a Material
Adverse Effect, and (ii) of any litigation or proceeding against or adversely
affecting the Borrower or any Subsidiary in which the amount involved is not
covered in full by insurance (subject to normal and customary deductibles and
for which the insurer has
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not assumed the defense), or in which injunctive or similar relief is sought.
The Borrower will, and will cause each of its Subsidiaries to, promptly notify
the Lender of any claim, judgment, Lien or other encumbrance affecting any
Property of the Borrower or any Subsidiary if the value of the claim, judgment,
Lien, or other encumbrance affecting such Property shall exceed $100,000.
Section 8.03 MAINTENANCE, ETC.
(a) The Borrower shall and shall cause each Subsidiary to: preserve
and maintain its corporate existence and all of its material rights,
privileges and franchises; keep books of record and account in which full,
true and correct entries will be made of all dealings or transactions in
relation to its business and activities; comply with all Governmental
Requirements if failure to comply with such requirements will have a
Material Adverse Effect; pay and discharge all taxes, assessments and
governmental charges or levies imposed on it or on its income or profits or
on any of its Property prior to the date on which penalties attach thereto,
except for any such tax, assessment, charge or levy the payment of which is
being contested in good faith and by proper proceedings and against which
adequate reserves are being maintained; upon reasonable notice, permit
representatives of the Lender, during normal business hours, to examine,
copy and make extracts from its books and records, to inspect its
Properties, and to discuss its business and affairs with its officers, all
to the extent reasonably requested by the Lender; and keep, or cause to be
kept, insured by financially sound and reputable insurers all Property of a
character usually insured by Persons engaged in the same or similar
business similarly situated against loss or damage of the kinds and in the
amounts customarily insured against by such Persons and carry such other
insurance as is usually carried by such Persons including, without
limitation, environmental risk insurance to the extent reasonably
available.
(b) Contemporaneously with the delivery of the financial statements
required by Section 8.01(a) to be delivered for each year, the Borrower
will furnish or cause to be furnished to the Lender a certificate of
insurance coverage from the insurer in form and substance satisfactory to
the Lender and, if requested, will furnish the Lender copies of the
applicable policies.
(c) The Borrower will and will cause each Subsidiary to operate its
Properties or cause such Properties to be operated in a careful and
efficient manner in accordance with the practices of the industry and in
compliance with all applicable contracts and agreements and in compliance
in all material respects with all Governmental Requirements.
(d) The Borrower will and will cause each Subsidiary to, at its own
expense, do or cause to be done all things reasonably necessary to preserve
and keep in good repair, working order and efficiency all of its Oil and
Gas Properties and other material Properties including, without limitation,
all equipment, machinery and facilities, and from time to time will make
all the reasonably necessary repairs, renewals and replacements so
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that at all times the state and condition of its Oil and Gas Properties and
other material Properties will be fully preserved and maintained, except to
the extent a portion of such Properties is no longer capable of producing
Hydrocarbons in economically reasonable amounts. The Borrower will and
will cause each Subsidiary to promptly: (i) pay and discharge, or make
reasonable and customary efforts to cause to be paid and discharged, all
delay rentals, royalties, expenses and indebtedness accruing under the
leases or other agreements affecting or pertaining to its Oil and Gas
Properties, (ii) perform or make reasonable and customary efforts to cause
to be performed, in accordance with industry standards, the obligations
required by each and all of the assignments, deeds, leases, sub-leases,
contracts and agreements affecting its interests in its Oil and Gas
Properties and other material Properties, (iii) will and will cause each
Subsidiary to do all other things necessary to keep unimpaired, except for
Liens described in Section 9.02, its rights with respect thereto and
prevent any forfeiture thereof or a default thereunder, except to the
extent a portion of such Properties is no longer capable of producing
Hydrocarbons in economically reasonable amounts and except for dispositions
permitted by Section 9.15 hereof.
Section 8.04 ENVIRONMENTAL MATTERS.
(a) The Borrower will and will cause each Subsidiary to establish and
implement such procedures as may be reasonably necessary to continuously
determine and assure that any failure of the following does not have a
Material Adverse Effect: (i) all Property of the Borrower and its
Subsidiaries and the operations conducted thereon and other activities of
the Borrower and its Subsidiaries are in compliance with and do not violate
the requirements of any Environmental Laws, (ii) no oil, hazardous
substances or solid wastes are disposed of or otherwise released on or to
any Property owned by any such party except in compliance with
Environmental Laws, (iii) no hazardous substance will be released on or to
any such Property in a quantity equal to or exceeding that quantity which
requires reporting pursuant to Section 103 of CERCLA, and (iv) no oil, oil
and gas exploration and production wastes or hazardous substance is
released on or to any such Property so as to pose an imminent and
substantial endangerment to public health or welfare or the environment.
(b) The Borrower will promptly notify the Lender in writing of any
threatened action, investigation or inquiry by any Governmental Authority
of which the Borrower has knowledge in connection with any Environmental
Laws, excluding routine testing and corrective action.
(c) The Borrower will and will cause each Subsidiary to provide
environmental audits and tests in accordance with American Society for
Testing and Materials standards as reasonably requested by the Lender (or
as otherwise required to be obtained by the Lender by any Governmental
Authority) in connection with any future acquisitions of Oil and Gas
Properties or other material Properties.
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Section 8.05 FURTHER ASSURANCES. The Borrower will and will cause
each Subsidiary to cure promptly any defects in the creation and issuance of the
Note and the execution and delivery of the Security Instruments and this
Agreement. The Borrower at its expense will and will cause each Subsidiary to
promptly execute and deliver to the Lender upon request all such other
documents, agreements and instruments to comply with or accomplish the covenants
and agreements of the Borrower or any Subsidiary in the Security Instruments and
this Agreement, or to further evidence and more fully describe the collateral
intended as security for the Note, or to correct any omissions in the Security
Instruments, or state more fully the security obligations set out herein or in
any of the Security Instruments, or to perfect, protect or preserve any Liens
created pursuant to any of the Security Instruments, or to make any recordings,
to file any notices, or obtain any consents, all as may be necessary or
appropriate in connection therewith.
Section 8.06 PERFORMANCE OF OBLIGATIONS. The Borrower will pay the
Note according to the reading, tenor and effect thereof; and the Borrower will
and will cause each Subsidiary to do and perform every act and discharge all of
the obligations provided to be performed and discharged by them under the
Security Instruments and this Agreement, at the time or times and in the manner
specified.
Section 8.07 ENGINEERING REPORTS.
(a) Not less than thirty (30) days prior to each Scheduled
Redetermination Date, commencing with the Scheduled Redetermination Date to
occur on March 15, 1997, the Borrower shall furnish to the Lender a Reserve
Report. The February 15 Reserve Report of each year shall be prepared by
certified independent petroleum engineers or other independent petroleum
consultant(s) acceptable to the Lender and the August 15 Reserve Report of
each year shall be prepared by or under the supervision of the chief
engineer of the Borrower who shall certify such Reserve Report to be true
and accurate and to have been prepared in accordance with the procedures
used in the immediately proceeding February 15 Reserve Report.
(b) In the event of an unscheduled redetermination, the Borrower
shall furnish to the Lender a Reserve Report prepared by or under the
supervision of the chief engineer of the Borrower who shall certify such
Reserve Report to be true and accurate and to have been prepared in
accordance with the procedures used in the immediately preceding Reserve
Report. For any unscheduled redetermination requested by the Lender, the
Borrower shall provide such Reserve Report with an "as of" date as required
by the Lender as soon as possible, but in any event no later than 30 days
following the receipt of the request by the Lender.
(c) With the delivery of each Reserve Report, the Borrower shall
provide to the Lender, a certificate from a Responsible Officer certifying
that, to the best of his knowledge and in all material respects: (i) the
information contained in the Reserve Report and any other information
delivered in connection therewith is true and correct, (ii) the Borrower
owns good and defensible title to the Oil and Gas Properties evaluated
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in such Reserve Report and such Properties are free of all Liens except for
Liens permitted by Section 9.02, (iii) except as set forth on an exhibit to
the certificate, on a net basis there are no gas imbalances, take or pay or
other prepayments with respect to its Oil and Gas Properties evaluated in
such Reserve Report which would require the Borrower to deliver
Hydrocarbons produced from such Oil and Gas Properties at some future time
without then or thereafter receiving full payment therefor, (iv) none of
its Oil and Gas Properties have been sold since the date of the last
Borrowing Base determination except as set forth on an exhibit to the
certificate, which certificate shall list all of its Oil and Gas Properties
sold and in such detail as reasonably required by the Lender, (v) attached
to the certificate is a list of its Oil and Gas Properties added to and
deleted from the immediately prior Reserve Report, (vi) attached to the
certificate is a list of all Persons disbursing proceeds to the Borrower
from its Oil and Gas Properties, (vii) except as set forth on a schedule
attached to the certificate all of the Oil and Gas Properties evaluated by
such Reserve Report are Mortgaged Property and (viii) any change in working
interest or net revenue interest in its Oil and Gas Properties occurring
and the reason for such change.
(d) As soon as available after the end of each fiscal quarter of each
fiscal year of the Borrower, the Borrower shall provide to the Lender any
changes in the list of purchasers provided to the Lender pursuant to
Section 6.01(j).
Section 8.08 TITLE INFORMATION.
(a) On or before the delivery to the Lender of each Reserve Report
required by Section 8.07(a), the Borrower will deliver title information in
form and substance acceptable to the Lender covering enough of the Oil and
Gas Properties evaluated by such Reserve Report that were not included in
the immediately preceding Reserve Report, so that the Lender shall have
received together with title information previously delivered to the
Lender, satisfactory title information on at least eighty percent (80%) of
the value of the Oil and Gas Properties evaluated by such Reserve Report.
(b) The Borrower shall cure any title defects or exceptions which are
not Excepted Liens raised by such information, or substitute acceptable
Mortgaged Properties with no title defects or exceptions except for
Excepted Liens covering Mortgaged Properties of an equivalent value, within
90 days after a request by the Lender to cure such defects or exceptions.
(c) If the Borrower is unable to cure any title defect requested by
the Lender to be cured within the 90 day period or the Borrower does not
comply with the requirements to provide acceptable title information
covering eighty percent (80%) of the value of the Oil and Gas Properties
evaluated in the most recent Reserve Report, such default shall not be a
Default or an Event of Default, but instead the Lender shall have the right
to exercise the following remedy in their sole discretion from time to
time, and any failure to so exercise this remedy at any time shall not be a
waiver as to future exercise of the remedy by the Lender. To the extent
that the Lender is not satisfied with title to any Mortgaged Property after
the time period in Section 8.08(b) has elapsed, such
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unacceptable Mortgaged Property shall not count towards the eighty percent
(80%) requirement, and the Lender may send a notice to the Borrower and the
Lender that the then outstanding Borrowing Base shall be reduced by an
amount as determined by the Lender to cause the Borrower to be in
compliance with the requirement to provide acceptable title information on
eighty percent (80%) of the value of the Oil and Gas Properties. This new
Borrowing Base shall become effective immediately after receipt of such
notice.
Section 8.09 ADDITIONAL COLLATERAL.
(a) Should the Borrower acquire any additional Oil and Gas
Properties, the Borrower will grant to the Lender as security for the
Indebtedness a first-priority Lien interest (subject only to Excepted
Liens) on the Borrower's interest in any Oil and Gas Properties not already
subject to a Lien of the Security Instruments, which Lien will be created
and perfected by and in accordance with the provisions of deeds of trust,
security agreements and financing statements, or other Security
Instruments, all in form and substance satisfactory to the Lender in its
sole discretion and in sufficient executed (and acknowledged where
necessary or appropriate) counterparts for recording purposes.
(b) Concurrently with the granting of the Lien or other action
referred to in Section 8.07(a) above, the Borrower will provide to the
Lender title information in form and substance satisfactory to the Lender
in its sole discretion with respect to the Borrower's interests in such Oil
and Gas Properties.
Section 8.10 ERISA INFORMATION AND COMPLIANCE. The Borrower will
promptly furnish and will cause the Subsidiaries and any ERISA Affiliate to
promptly furnish to the Lender (i) promptly after the filing thereof with the
United States Secretary of Labor, the Internal Revenue Service or the PBGC,
copies of each annual and other report with respect to each Plan or any trust
created thereunder, (ii) immediately upon becoming aware of the occurrence of
any ERISA Event or of any "prohibited transaction," as described in section 406
of ERISA or in section 4975 of the Code, in connection with any Plan or any
trust created thereunder, a written notice signed by a Responsible Officer
specifying the nature thereof, what action the Borrower, the Subsidiary or the
ERISA Affiliate is taking or proposes to take with respect thereto, and, when
known, any action taken or proposed by the Internal Revenue Service, the
Department of Labor or the PBGC with respect thereto, and (iii) immediately upon
receipt thereof, copies of any notice of the PBGC's intention to terminate or to
have a trustee appointed to administer any Plan. With respect to each Plan
(other than a Multiemployer Plan), the Borrower will, and will cause each
Subsidiary and ERISA Affiliate to, (i) satisfy in full and in a timely manner,
without incurring any late payment or underpayment charge or penalty and without
giving rise to any lien, all of the contribution and funding requirements of
section 412 of the Code (determined without regard to subsections (d), (e), (f)
and (k) thereof) and of section 302 of ERISA (determined without regard to
sections 303, 304 and 306 of ERISA), and (ii) pay, or cause to be paid, to the
PBGC in a timely manner, without incurring any late payment or underpayment
charge or penalty, all premiums required pursuant to sections 4006 and 4007 of
ERISA.
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Section 8.11 MANAGEMENT. Deas H. Warley, III shall remain as
Chairman of the Board of Directors and Chief Executive Officer of the Borrower.
Section 8.12 NOTICE TO PURCHASERS OF HYDROCARBONS. The Borrower
will, upon the request of the Lender, join with the Lender in notifying the
purchaser or purchasers of Hydrocarbons produced from the Borrower's Mortgaged
Properties of the existence of the Security Instruments and the provisions of
Section 4.05 of this Agreement, such notification to be in the form of the
letter-in-lieu attached hereto as Exhibit F.
Section 8.13 SUMMIT ACQUISITION. Prior to January 31, 1997, the
Borrower will acquire the remaining outstanding stock of Summit (the "SUMMIT
ACQUISTION").
ARTICLE IX
NEGATIVE COVENANTS
The Borrower covenants and agrees that, so long as the Commitment is in
effect and until payment in full of all Loans hereunder, all interest thereon
and all other amounts payable by the Borrower hereunder, without the prior
written consent of the Lender:
Section 9.01 DEBT. Neither the Borrower nor any Subsidiary will
incur, create, assume or suffer to exist any Debt, except:
(a) the Note or other Indebtedness or any guaranty of or suretyship
arrangement for the Note or other Indebtedness;
(b) Debt of the Borrower existing on the Closing Date which is
reflected in the Financial Statements or is disclosed in Schedule 9.01, and
any renewals or extensions (but not increases) thereof;
(c) accounts payable (for the deferred purchase price of Property or
services) from time to time incurred in the ordinary course of business
which, if greater than 90 days past the invoice or billing date, are being
contested in good faith by appropriate proceedings if reserves adequate
under GAAP shall have been established therefor;
(d) Debt under capital leases (as required to be reported on the
financial statements of the Borrower pursuant to GAAP) not to exceed
$100,000;
(e) Debt of the Borrower and its Subsidiaries under Hedging
Agreements with the Lender or otherwise approved by the Lender not to
exceed 80% of projected proved developed producing volumes for commodities
and not to exceed the notional amount of the debt for interest rates; and
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(f) Debt associated with bonds or surety obligations required by
Governmental Requirements in connection with the operation of the Oil and
Gas Properties.
(g) other Debt not to exceed $200,000 in the aggregate at any time.
Section 9.02 LIENS. Neither the Borrower nor any Subsidiary will
create, incur, assume or permit to exist any Lien on any of its Properties (now
owned or hereafter acquired), except:
(a) Liens securing the payment of any Indebtedness;
(b) Excepted Liens;
(c) Liens securing leases allowed under Section 9.01(d) but only on
the Property under lease;
(d) Liens disclosed on Schedule 9.02; and
(e) Liens on cash or securities of the Borrower securing the Debt
described in Section 9.01(f).
Section 9.03 INVESTMENTS, LOANS AND ADVANCES. Neither the Borrower
nor any Subsidiary will make or permit to remain outstanding any loans or
advances to or investments in any Person, except that the foregoing restriction
shall not apply to:
(a) investments, loans or advances reflected in the Financial
Statements or which are disclosed to the Lender in Schedule 9.03;
(b) accounts receivable arising in the ordinary course of business;
(c) direct obligations of the United States or any agency thereof, or
obligations guaranteed by the United States or any agency thereof, in each
case maturing within one year from the date of creation thereof;
(d) commercial paper maturing within one year from the date of
creation thereof rated in the highest grade by Standard & Poors Corporation
or Moody's Investors Service, Inc.;
(e) deposits maturing within one year from the date of creation
thereof with, including certificates of deposit issued by, the Lender or
any office located in the United States of any other bank or trust company
which is organized under the laws of the United States or any state
thereof, has capital, surplus and undivided profits aggregating at least
$100,000,000.00 (as of the date of the Lender's or bank or trust company's
most recent financial reports) and has a short term deposit rating of no
lower than A2 or P2, as such
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rating is set forth from time to time, by Standard & Poors Corporation or
Moody's Investors Service, Inc., respectively;
(f) deposits in money market funds investing exclusively in
investments described in Section 9.03(c), 9.03(d) or 9.03(e);
(g) other investments, loans or advances not to exceed $50,000 in the
aggregate at any time;
(h) investments by the Borrower in direct ownership interests in
additional Oil and Gas Properties and gas gathering systems related
thereto;
(i) an investment in 29,101 shares of stock of Enex Resources
Corporation; and
(j) 1,956,552 shares of common stock of Summit.
Section 9.04 DIVIDENDS, DISTRIBUTIONS AND REDEMPTIONS. The Borrower
will not declare or pay any dividend, purchase, redeem or otherwise acquire for
value any of its stock now or hereafter outstanding, return any capital to its
stockholders or make any distribution of its assets to its stockholders, except
that the Borrower may (i) declare and deliver stock dividends and (ii) if no
Default or Event of Default shall have occurred and be continuing, purchase
shares of its stock by the payment of cash in an amount not to exceed (A)
$20,000 during any calendar quarter and (B) $200,000 in the aggregate.
Section 9.05 SALES AND LEASEBACKS. Neither the Borrower nor any
Subsidiary will enter into any arrangement, directly or indirectly, with any
Person whereby the Borrower or any Subsidiary shall sell or transfer any of its
Property, whether now owned or hereafter acquired, and whereby the Borrower or
any Subsidiary shall then or thereafter rent or lease as lessee such Property or
any part thereof or other Property which the Borrower or any Subsidiary intends
to use for substantially the same purpose or purposes as the Property sold or
transferred.
Section 9.06 NATURE OF BUSINESS. Neither the Borrower nor any
Subsidiary will allow any material change to be made in the character of its
business as an independent oil and gas exploration and production company.
Section 9.07 LIMITATION ON LEASES. Neither the Borrower nor any
Subsidiary will create, incur, assume or suffer to exist any obligation for the
payment of rent or hire of Property of any kind whatsoever (real or personal
including capital leases but excluding leases of Hydrocarbon Interests), under
leases or lease agreements which would cause the aggregate amount of all
payments made by the Borrower and its Subsidiaries pursuant to all such leases
or lease agreements to exceed $150,000 in any period of twelve consecutive
calendar months during the life of such leases.
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Section 9.08 MERGERS, ETC. Neither the Borrower nor any Subsidiary
will merge into or with or consolidate with any other Person, or sell, lease or
otherwise dispose of (whether in one transaction or in a series of transactions)
all or substantially all of its Property or assets to any other Person, except
that (i) any Subsidiary may merge into, consolidate with or transfer any of its
Property to the Borrower and (ii) any Subsidiary may merge with Summit provided
that immediately after giving effect thereto, no event shall occur and be
continuing which constitutes a Default or an Event of Default hereunder and
Summit shall be the surviving corporation.
Section 9.09 PROCEEDS OF NOTE. The Borrower will not permit the
proceeds of the Note to be used for any purpose other than those permitted by
Section 7.07. Neither the Borrower nor any Person acting on behalf of the
Borrower has taken or will take any action which might cause any of the Loan
Documents to violate Regulation G, U or X or any other regulation of the Board
of Governors of the Federal Reserve System or to violate Section 7 of the
Securities Exchange Act of 1934 or any rule or regulation thereunder, in each
case as now in effect or as the same may hereinafter be in effect.
Section 9.10 ERISA COMPLIANCE. The Borrower will not at any time:
(a) Engage in, or permit any Subsidiary or ERISA Affiliate to engage
in, any transaction in connection with which the Borrower, any Subsidiary
or any ERISA Affiliate could be subjected to either a civil penalty
assessed pursuant to section 502(c), (i) or (l) of ERISA or a tax imposed
by Chapter 43 of Subtitle D of the Code;
(b) Terminate, or permit any Subsidiary or ERISA Affiliate to
terminate, any Plan in a manner, or take any other action with respect to
any Plan, which could result in any liability to the Borrower, any
Subsidiary or any ERISA Affiliate to the PBGC;
(c) Fail to make, or permit any Subsidiary or ERISA Affiliate to fail
to make, full payment when due of all amounts which, under the provisions
of any Plan, agreement relating thereto or applicable law, the Borrower, a
Subsidiary or any ERISA Affiliate is required to pay as contributions
thereto;
(d) Permit to exist, or allow any Subsidiary or ERISA Affiliate to
permit to exist, any accumulated funding deficiency within the meaning of
Section 302 of ERISA or section 412 of the Code, whether or not waived,
with respect to any Plan;
(e) Permit, or allow any Subsidiary or ERISA Affiliate to permit, the
actuarial present value of the benefit liabilities under any Plan
maintained by the Borrower, any Subsidiary or any ERISA Affiliate which is
regulated under Title IV of ERISA to exceed the current value of the assets
(computed on a plan termination basis in accordance with Title IV of ERISA)
of such Plan allocable to such benefit liabilities. The term "actuarial
present value of the benefit liabilities" shall have the meaning specified
in section 4041 of ERISA;
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(f) Contribute to or assume an obligation to contribute to, or permit
any Subsidiary or ERISA Affiliate to contribute to or assume an obligation
to contribute to, any Multiemployer Plan;
(g) Acquire, or permit any Subsidiary or ERISA Affiliate to acquire,
an interest in any Person that causes such Person to become an ERISA
Affiliate with respect to the Borrower, any Subsidiary or any ERISA
Affiliate if such Person sponsors, maintains or contributes to, or at any
time in the six-year period preceding such acquisition has sponsored,
maintained, or contributed to, (1) any Multiemployer Plan, or (2) any other
Plan that is subject to Title IV of ERISA under which the actuarial present
value of the benefit liabilities under such Plan exceeds the current value
of the assets (computed on a plan termination basis in accordance with
Title IV of ERISA) of such Plan allocable to such benefit liabilities;
(h) Incur, or permit any Subsidiary or ERISA Affiliate to incur, a
liability to or on account of a Plan under sections 515, 4062, 4063, 4064,
4201 or 4204 of ERISA;
(i) Contribute to or assume an obligation to contribute to, or permit
any Subsidiary or ERISA Affiliate to contribute to or assume an obligation
to contribute to, any employee welfare benefit plan, as defined in section
3(1) of ERISA, including, without limitation, any such plan maintained to
provide benefits to former employees of such entities, that may not be
terminated by such entities in their sole discretion at any time without
any material liability; or
(j) Amend or permit any Subsidiary or ERISA Affiliate to amend, a
Plan resulting in an increase in current liability such that the Borrower,
any Subsidiary or any ERISA Affiliate is required to provide security to
such Plan under section 401(a)(29) of the Code.
Section 9.11 SALE OR DISCOUNT OF RECEIVABLES. Neither the Borrower
nor any Subsidiary will discount or sell (with or without recourse) any of its
notes receivable or accounts receivable.
Section 9.12 CURRENT RATIO. The Borrower will not permit its ratio
of (i) consolidated current assets to (ii) consolidated current liabilities
(excluding current maturities of the Note) to be less than 1.0 to 1.0 at any
time. For purposes of this Section 9.12, "CONSOLIDATED CURRENT ASSETS" shall
mean assets which would, in accordance with GAAP, be included as current assets
on a consolidated balance sheet of the Borrower and its Subsidiaries and
"CONSOLIDATED CURRENT LIABILITIES" shall mean liabilities which would, in
accordance with GAAP, be included as current liabilities on a consolidated
balance sheet of the Borrower and its Subsidiaries.
Section 9.13 TANGIBLE NET WORTH. The Borrower will not permit its
Tangible Net Worth to be less than $5,000,000 at any time.
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Section 9.14 CASH FLOW COVERAGE. The Borrower will not permit its
Cash Flow Coverage Ratio as of the end of any fiscal quarter of the Borrower
(calculated quarterly at the end of each fiscal quarter) to be greater than 5.0
to 1.00 for any fiscal quarter. For the purposes of this Section 9.14, "CASH
FLOW COVERAGE RATIO" shall mean the ratio of (i) consolidated liabilities
excluding current trade payables and deferred taxes to (ii) annualized
Consolidated Net Income for each fiscal quarter as determined in accordance with
GAAP, plus non-cash charges and dry hole expense, less non-cash revenues.
Section 9.15 SALE OF OIL AND GAS PROPERTIES. The Borrower will not,
and will not permit any Subsidiary to, sell, assign, farm-out, convey or
otherwise transfer any Oil and Gas Property or any interest in any Oil and Gas
Property except for (i) the sale of Hydrocarbons in the ordinary course of
business; (ii) farmouts of undeveloped acreage and assignments in connection
with such farmouts; (iii) the sale or transfer of equipment that is no longer
necessary for the business of the Borrower or such Subsidiary or is replaced by
equipment of at least comparable value and use and (iv) sales in the ordinary
course of business and between Scheduled Redetermination Dates of Oil and Gas
Properties which shall not exceed $250,000 in the aggregate.
Section 9.16 ENVIRONMENTAL MATTERS. Neither the Borrower nor any
Subsidiary will cause or permit any of its Property to be in violation of, or do
anything or permit anything to be done which will subject any such Property to
any remedial obligations under any Environmental Laws, assuming disclosure to
the applicable Governmental Authority of all relevant facts, conditions and
circumstances, if any, pertaining to such Property where such violations or
remedial obligations would have a Material Adverse Effect.
Section 9.17 TRANSACTIONS WITH AFFILIATES. Neither the Borrower nor
any Subsidiary will enter into any transaction, including, without limitation,
any purchase, sale, lease or exchange of Property or the rendering of any
service, with any Affiliate unless such transactions are otherwise permitted
under this Agreement, are in the ordinary course of its business and are upon
fair and reasonable terms no less favorable to it than it would obtain in a
comparable arm's length transaction with a Person not an Affiliate.
Section 9.18 SUBSIDIARIES. The Borrower shall not create any
additional Subsidiaries. The Borrower shall not and shall not permit any
Subsidiary to sell or to issue any stock or ownership interest of a Subsidiary
except to the Borrower or any Guarantor and except in compliance with Section
9.03.
Section 9.19 NEGATIVE PLEDGE AGREEMENTS. Neither the Borrower nor
any Subsidiary will create, incur, assume or suffer to exist any contract,
agreement or understanding (other than this Agreement and the Security
Instruments) which in any way prohibits or restricts the granting, conveying,
creation or imposition of any Lien on any of its Property or restricts any
Subsidiary from paying dividends to the Borrower, or which requires the consent
of or notice to other Persons in connection therewith.
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Section 9.20 GAS IMBALANCES, TAKE-OR-PAY OR OTHER PREPAYMENTS. The
Borrower will not allow gas imbalances, take-or-pay or other prepayments with
respect to the Oil and Gas Properties of the Borrower or any Guarantor which
would require the Borrower or any Guarantor to deliver Hydrocarbons produced on
Oil and Gas Properties at some future time without then or thereafter receiving
full payment therefor to exceed 1,000,000 cubic feet of gas in the aggregate on
a net basis for the Borrower and the Guarantors.
Section 9.21 ACCOUNTS. Neither the Borrower nor any Subsidiary will
maintain a checking, savings or deposit account with any financial institution,
except (i) those accounts maintained with the Lender and (ii) any accounts with
an aggregate balance of $100,000 or less.
ARTICLE X
EVENTS OF DEFAULT; REMEDIES
Section 10.01 EVENTS OF DEFAULT. One or more of the following events
shall constitute an "EVENT OF DEFAULT":
(a) the Borrower shall default in the payment or prepayment when due
of any principal of or interest on any Loan, of any reimbursement
obligation for a disbursement made under any Letter of Credit, or any fees
or other amount payable by it hereunder or under any Security Instrument
and such default, other than a default of a payment or prepayment of
principal or interest, shall continue unremedied for a period of three
(3) Business Days; or
(b) the Borrower or any Subsidiary shall default in the payment when
due of any principal of or interest on any of its other Debt aggregating
$200,000 or more, or any event specified in any note, agreement, indenture
or other document evidencing or relating to any such Debt shall occur if
the effect of such event is to cause, or (with the giving of any notice or
the lapse of time or both) to permit the holder or holders of such Debt (or
a trustee or agent on behalf of such holder or holders) to cause, such Debt
to become due prior to its stated maturity; or
(c) any representation, warranty or certification made or deemed made
herein or in any Security Instrument by the Borrower or any Subsidiary, or
any certificate furnished to the Lender pursuant to the provisions hereof
or any Security Instrument, shall prove to have been false or misleading as
of the time made or furnished in any material respect; or
(d) the Borrower shall default in the performance of any of its
obligations under Article IX or any other Article of this Agreement other
than under Article VIII; or the Borrower shall default in the performance
of any of its obligations under Article VIII or any Security Instrument
(other than the payment of amounts due which shall be governed by Section
10.01(a)) and such default shall continue unremedied for a period
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of thirty (30) days after the earlier to occur of (i) notice thereof to the
Borrower by the Lender or (ii) the Borrower otherwise becoming aware of
such default; or
(e) the Borrower shall admit in writing its inability to, or be
generally unable to, pay its debts as such debts become due; or
(f) the Borrower shall (i) apply for or consent to the appointment
of, or the taking of possession by, a receiver, custodian, trustee or
liquidator of itself or of all or a substantial part of its property,
(ii) make a general assignment for the benefit of its creditors,
(iii) commence a voluntary case under the Federal Bankruptcy Code (as now
or hereafter in effect), (iv) file a petition seeking to take advantage of
any other law relating to bankruptcy, insolvency, reorganization, winding-
up, liquidation or composition or readjustment of debts, (v) fail to
controvert in a timely and appropriate manner, or acquiesce in writing to,
any petition filed against it in an involuntary case under the Federal
Bankruptcy Code, or (vi) take any corporate action for the purpose of
effecting any of the foregoing; or
(g) a proceeding or case shall be commenced, without the application
or consent of the Borrower, in any court of competent jurisdiction, seeking
(i) its liquidation, reorganization, dissolution or winding-up, or the
composition or readjustment of its debts, (ii) the appointment of a
trustee, receiver, custodian, liquidator or the like of the Borrower of all
or any substantial part of its assets, or (iii) similar relief in respect
of the Borrower under any law relating to bankruptcy, insolvency,
reorganization, winding-up, or composition or adjustment of debts, and such
proceeding or case shall continue undismissed, or an order, judgment or
decree approving or ordering any of the foregoing shall be entered and
continue unstayed and in effect, for a period of 60 days; or (iv) an order
for relief against the Borrower shall be entered in an involuntary case
under the Federal Bankruptcy Code; or
(h) a judgment or judgments for the payment of money in excess of
$250,000 in the aggregate shall be rendered by a court against the Borrower
or any Subsidiary and the same shall not be discharged (or provision shall
not be made for such discharge), or a stay of execution thereof shall not
be procured, within thirty (30) days from the date of entry thereof and the
Borrower or such Subsidiary shall not, within said period of 30 days, or
such longer period during which execution of the same shall have been
stayed, appeal therefrom and cause the execution thereof to be stayed
during such appeal; or
(i) the Security Instruments after delivery thereof shall for any
reason, except to the extent permitted by the terms thereof, cease to be in
full force and effect and valid, binding and enforceable in accordance with
their terms, or cease to create a valid and perfected Lien of the priority
required thereby on any of the collateral purported to be covered thereby,
except to the extent permitted by the terms of this Agreement, or the
Borrower shall so state in writing; or
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(j) any Letter of Credit becomes the subject matter of any order,
judgment, injunction or any other such determination, or if the Borrower or
any other Person shall petition or apply for or obtain any order
restricting payment by the Lender under any Letter of Credit or extending
the Lender's liability under any Letter of Credit beyond the expiration
date stated therein or otherwise agreed to by the Lender; or
(k) the Borrower discontinues its usual business or suffers to exist
any material change in its ownership, control or management; or
(l) any Guarantor takes, suffers or permits to exist any of the
events or conditions referred to in paragraphs (e), (f), (g) or (h) hereof
or if any provision of any guaranty agreement related thereto shall for any
reason cease to be valid and binding on such Guarantor or if such Guarantor
shall so state in writing; or
(m) any Subsidiary takes, suffers or permits to exist any of the
events or conditions referred to in paragraphs (e), (f), (g) or (h) hereof.
Section 10.02 REMEDIES.
(a) In the case of an Event of Default other than one referred to in
clauses (e), (f) or (g) of Section 10.01 or in clauses (l) of (m) to the
extent it relates to clauses (e), (f) or (g), the Lender shall, by notice
to the Borrower, cancel the Commitment and/or declare the principal amount
then outstanding of, and the accrued interest on, the Loans and all other
amounts payable by the Borrower hereunder and under the Note (including
without limitation the payment of cash collateral to secure the LC Exposure
as provided in Section 2.10(b) hereof) to be forthwith due and payable,
whereupon such amounts shall be immediately due and payable without
presentment, demand, protest, notice of intent to accelerate, notice of
acceleration or other formalities of any kind, all of which are hereby
expressly waived by the Borrower.
(b) In the case of the occurrence of an Event of Default referred to
in clauses (e), (f) or (g) of Section 10.01 or in clauses (l) or (m) to the
extent it relates to clauses (e), (f) or (g), the Commitment shall be
automatically cancelled and the principal amount then outstanding of, and
the accrued interest on, the Loans and all other amounts payable by the
Borrower hereunder and under the Note (including without limitation the
payment of cash collateral to secure the LC Exposure as provided in Section
2.10(b) hereof) shall become automatically immediately due and payable
without presentment, demand, protest, notice of intent to accelerate,
notice of acceleration or other formalities of any kind, all of which are
hereby expressly waived by the Borrower.
(c) All proceeds received after maturity of the Note, whether by
acceleration or otherwise shall be applied first to reimbursement of
expenses and indemnities provided for in this Agreement and the Security
Instruments; second to accrued interest on the Note; third to fees; fourth
to principal outstanding on the Note and other Indebtedness; fifth to serve
as cash collateral to be held by the Lender to secure the LC Exposure; and,
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to the extent of any excess, to the Borrower or as otherwise required by
any Governmental Requirement.
ARTICLE XI
MISCELLANEOUS
Section 11.01 WAIVER. No failure on the part of the Lender to
exercise and no delay in exercising, and no course of dealing with respect to,
any right, power or privilege under any of the Loan Documents shall operate as a
waiver thereof, nor shall any single or partial exercise of any right, power or
privilege under any of the Loan Documents preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The remedies
provided herein are cumulative and not exclusive of any remedies provided by
law.
Section 11.02 NOTICES. All notices and other communications provided
for herein and in the other Loan Documents (including, without limitation, any
modifications of, or waivers or consents under, this Agreement or the other Loan
Documents) shall be given or made by telex, telecopy, courier or U.S. Mail or in
writing and telexed, telecopied, mailed or delivered to the intended recipient
at the "Address for Notices" specified below its name on the signature pages
hereof or in the Loan Documents, except that for notices and other
communications to the Lender other than payment of money, the Borrower need only
send such notices and communications to the Lender care of the Houston address
of First Union Corporation; or, as to any party, at such other address as shall
be designated by such party in a notice to each other party. Except as
otherwise provided in this Agreement or in the other Loan Documents, all such
communications shall be deemed to have been duly given when transmitted, if
transmitted before 1:00 p.m. local time on a Business Day (otherwise on the next
succeeding Business Day) by telex or telecopier and evidence or confirmation of
receipt is obtained, or personally delivered or, in the case of a mailed notice,
three (3) Business Days after the date deposited in the mails, postage prepaid,
in each case given or addressed as aforesaid.
Section 11.03 PAYMENT OF EXPENSES, INDEMNITIES, ETC. The Borrower
agrees:
(a) whether or not the transactions hereby contemplated are
consummated, to pay all reasonable expenses of the Lender in the
administration (both before and after the execution hereof and including
advice of counsel as to the rights and duties of the Lender with respect
thereto) of, and in connection with the negotiation, syndication,
investigation, preparation, execution and delivery of, recording or filing
of, preservation of rights under, enforcement of, and refinancing,
renegotiation or restructuring of, the Loan Documents and any amendment,
waiver or consent relating thereto (including, without limitation, travel,
photocopy, mailing, courier, telephone and other similar expenses of the
Lender, the cost of environmental audits, surveys and appraisals at
reasonable intervals, the reasonable fees and disbursements of counsel and
other outside consultants for the Lender and, in the case of enforcement,
the reasonable fees and disbursements of counsel for the Lender); and
promptly reimburse the Lender for all amounts expended, advanced or
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incurred by the Lender to satisfy any obligation of the Borrower under this
Agreement or any Security Instrument, including without limitation, all
costs and expenses of foreclosure;
(b) TO INDEMNIFY THE LENDER AND ITS AFFILIATES AND EACH OF THEIR
OFFICERS, DIRECTORS, EMPLOYEES, REPRESENTATIVES, AGENTS, ATTORNEYS,
ACCOUNTANTS AND EXPERTS ("INDEMNIFIED PARTIES") FROM, HOLD EACH OF THEM
HARMLESS AGAINST AND PROMPTLY UPON DEMAND PAY OR REIMBURSE EACH OF THEM
FOR, THE INDEMNITY MATTERS WHICH MAY BE INCURRED BY OR ASSERTED AGAINST OR
INVOLVE ANY OF THEM (WHETHER OR NOT ANY OF THEM IS DESIGNATED A PARTY
THERETO) AS A RESULT OF, ARISING OUT OF OR IN ANY WAY RELATED TO (I) ANY
ACTUAL OR PROPOSED USE BY THE BORROWER OF THE PROCEEDS OF ANY OF THE LOANS,
(II) THE EXECUTION, DELIVERY AND PERFORMANCE OF THE LOAN DOCUMENTS, (III)
THE OPERATIONS OF THE BUSINESS OF THE BORROWER AND ITS SUBSIDIARIES, (IV)
THE FAILURE OF THE BORROWER OR ANY SUBSIDIARY TO COMPLY WITH THE TERMS OF
ANY SECURITY INSTRUMENT OR THIS AGREEMENT, OR WITH ANY GOVERNMENTAL
REQUIREMENT, (V) ANY INACCURACY OF ANY REPRESENTATION OR ANY BREACH OF ANY
WARRANTY OF THE BORROWER OR ANY GUARANTOR SET FORTH IN ANY OF THE LOAN
DOCUMENTS, (VI) THE ISSUANCE, EXECUTION AND DELIVERY OR TRANSFER OF OR
PAYMENT OR FAILURE TO PAY UNDER ANY LETTER OF CREDIT, OR (VII) THE PAYMENT
OF A DRAWING UNDER ANY LETTER OF CREDIT NOTWITHSTANDING THE NON-COMPLIANCE,
NON-DELIVERY OR OTHER IMPROPER PRESENTATION OF THE MANUALLY EXECUTED
DRAFT(S) AND CERTIFICATION(S), (VIII) ANY ASSERTION THAT THE LENDER WAS NOT
ENTITLED TO RECEIVE THE PROCEEDS RECEIVED PURSUANT TO THE SECURITY
INSTRUMENTS OR (IX) ANY OTHER ASPECT OF THE LOAN DOCUMENTS, INCLUDING,
WITHOUT LIMITATION, THE REASONABLE FEES AND DISBURSEMENTS OF COUNSEL AND
ALL OTHER EXPENSES INCURRED IN CONNECTION WITH INVESTIGATING, DEFENDING OR
PREPARING TO DEFEND ANY SUCH ACTION, SUIT, PROCEEDING (INCLUDING ANY
INVESTIGATIONS, LITIGATION OR INQUIRIES) OR CLAIM AND INCLUDING ALL
INDEMNITY MATTERS ARISING BY REASON OF THE ORDINARY NEGLIGENCE OF ANY
INDEMNIFIED PARTY, BUT EXCLUDING ALL INDEMNITY MATTERS ARISING SOLELY BY
REASON OF CLAIMS OF THE LENDER'S SHAREHOLDERS AGAINST THE LENDER OR BY
REASON OF THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT ON THE PART OF THE
INDEMNIFIED PARTY; AND
(c) TO INDEMNIFY AND HOLD HARMLESS FROM TIME TO TIME THE INDEMNIFIED
PARTY FROM AND AGAINST ANY AND ALL LOSSES, CLAIMS, COST RECOVERY ACTIONS,
ADMINISTRATIVE ORDERS OR PROCEEDINGS, DAMAGES AND LIABILITIES TO WHICH ANY
SUCH PERSON MAY BECOME SUBJECT (I) UNDER ANY ENVIRONMENTAL LAW APPLICABLE
TO THE BORROWER OR ANY SUBSIDIARY OR ANY OF THEIR PROPERTIES, INCLUDING
WITHOUT LIMITATION, THE TREATMENT OR DISPOSAL OF HAZARDOUS SUBSTANCES ON
ANY OF THEIR PROPERTIES, (II) AS A RESULT OF THE BREACH OR NON-COMPLIANCE
BY THE BORROWER OR ANY SUBSIDIARY WITH ANY ENVIRONMENTAL LAW APPLICABLE TO
THE BORROWER OR ANY SUBSIDIARY, (III) DUE TO PAST OWNERSHIP BY THE BORROWER
OR ANY SUBSIDIARY OF ANY OF THEIR
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PROPERTIES OR PAST ACTIVITY ON ANY OF THEIR PROPERTIES WHICH, THOUGH LAWFUL
AND FULLY PERMISSIBLE AT THE TIME, COULD RESULT IN PRESENT LIABILITY, (IV)
THE PRESENCE, USE, RELEASE, STORAGE, TREATMENT OR DISPOSAL OF HAZARDOUS
SUBSTANCES ON OR AT ANY OF THE PROPERTIES OWNED OR OPERATED BY THE BORROWER
OR ANY SUBSIDIARY, OR (V) ANY OTHER ENVIRONMENTAL, HEALTH OR SAFETY
CONDITION IN CONNECTION WITH THE LOAN DOCUMENTS, PROVIDED, HOWEVER, NO
INDEMNITY SHALL BE AFFORDED UNDER THIS SECTION 11.03(C) IN RESPECT OF ANY
PROPERTY FOR ANY OCCURRENCE ARISING FROM THE ACTS OR OMISSIONS OF THE
LENDER DURING THE PERIOD AFTER WHICH SUCH PERSON, ITS SUCCESSORS OR ASSIGNS
SHALL HAVE OBTAINED POSSESSION OF SUCH PROPERTY (WHETHER BY FORECLOSURE OR
DEED IN LIEU OF FORECLOSURE, AS MORTGAGEE-IN-POSSESSION OR OTHERWISE).
(d) No Indemnified Party may settle any claim to be indemnified
without the consent of the indemnitor, such consent not to be unreasonably
withheld; provided, that the indemnitor may not reasonably withhold consent
to any settlement that an Indemnified Party proposes, if the indemnitor
does not have the financial ability to pay all its obligations outstanding
and asserted against the indemnitor at that time, including the maximum
potential claims against the Indemnified Party to be indemnified pursuant
to this Section 11.03.
(e) In the case of any indemnification hereunder, the Lender shall
give notice to the Borrower of any such claim or demand being made against
the Indemnified Party and the Borrower shall have the non-exclusive right
to join in the defense against any such claim or demand provided that if
the Borrower provides a defense, the Indemnified Party shall bear its own
cost of defense unless there is a conflict between the Borrower and such
Indemnified Party.
(f) THE FOREGOING INDEMNITIES SHALL EXTEND TO THE INDEMNIFIED PARTIES
NOTWITHSTANDING THE SOLE OR CONCURRENT NEGLIGENCE OF EVERY KIND OR
CHARACTER WHATSOEVER, WHETHER ACTIVE OR PASSIVE, WHETHER AN AFFIRMATIVE ACT
OR AN OMISSION, INCLUDING WITHOUT LIMITATION, ALL TYPES OF NEGLIGENT
CONDUCT IDENTIFIED IN THE RESTATEMENT (SECOND) OF TORTS OF ONE OR MORE OF
THE INDEMNIFIED PARTIES OR BY REASON OF STRICT LIABILITY IMPOSED WITHOUT
FAULT ON ANY ONE OR MORE OF THE INDEMNIFIED PARTIES. TO THE EXTENT THAT AN
INDEMNIFIED PARTY IS FOUND TO HAVE COMMITTED AN ACT OF GROSS NEGLIGENCE OR
WILLFUL MISCONDUCT, THIS CONTRACTUAL OBLIGATION OF INDEMNIFICATION SHALL
CONTINUE BUT SHALL ONLY EXTEND TO THE PORTION OF THE CLAIM THAT IS DEEMED
TO HAVE OCCURRED BY REASON OF EVENTS OTHER THAN THE GROSS NEGLIGENCE OR
WILLFUL MISCONDUCT OF THE INDEMNIFIED PARTY.
(g) The Borrower's obligations under this Section 11.03 shall survive
any termination of this Agreement and the payment of the Note and shall
continue thereafter in full force and effect.
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(h) The Borrower shall pay any amounts due under this Section 11.03
within thirty (30) days of the receipt by the Borrower of notice of the
amount due.
Section 11.04 AMENDMENTS, ETC. Any provision of this Agreement or
any Security Instrument may be amended, modified or waived with the Borrower's
and the Lender's prior written consent.
Section 11.05 SUCCESSORS AND ASSIGNS. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
Section 11.06 ASSIGNMENTS AND PARTICIPATIONS.
(a) The Borrower may not assign its rights or obligations hereunder
or under the Note or any Letters of Credit without the prior consent of the
Lender.
(b) The Lender may, upon the written consent of the Borrower (which
consent shall not be unreasonably withheld) assign to one or more assignees
all or a portion of its rights and obligations under this Agreement. Any
assignment will become effective upon the execution and delivery of the
assignment to the Borrower. Upon receipt and acceptance of such executed
assignment, the Borrower, will, at its own expense, execute and deliver a
new Note to the assignor and/or assignee, as appropriate, in accordance
with their respective interests as they appear. Upon the effectiveness of
any assignment pursuant to this Section 11.06(b), the assignee will become
a "Lender," if not already a "Lender," for all purposes of this Agreement
and the Security Instruments. The assignor shall be relieved of its
obligations hereunder to the extent of such assignment (and if the
assigning Lender no longer holds any rights or obligations under this
Agreement, such assigning Lender shall cease to be a "Lender" hereunder
except that its rights under Sections 4.04, 5.01, 5.05 and 11.03 shall not
be affected).
(c) The Lender may transfer, grant or assign participations in all or
any part of its interests hereunder pursuant to this Section 11.06(c) to
any Person, PROVIDED that: (i) the Lender shall remain the "Lender" for all
purposes of this Agreement and the transferee of such participation shall
not constitute a "Lender" hereunder; and (ii) no participant under any such
participation shall have rights to approve any amendment to or waiver of
any of the Loan Documents except to the extent such amendment or waiver
would (x) extend the final maturity of the Loans, (y) reduce the interest
rate (other than as a result of waiving the applicability of any post-
default increases in interest rates) or fees applicable to any of the
Commitment or Loans or Letters of Credit in which such participant is
participating, or postpone the payment of any thereof, or (z) release all
or substantially all of the collateral (except as expressly provided in the
Security Instruments) supporting any of the Commitment or Loans or Letters
of Credit in which such participant is participating. In the case of any
such participation, the participant shall not have any rights under this
Agreement or any of the Security Instruments (the participant's rights
against the Lender in respect of such participation to be those set forth
in the agreement creating such participation), and all amounts payable by
the Borrower hereunder shall be
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determined as if the Lender had not sold such participation, PROVIDED that
such participant shall be entitled to receive additional amounts under
Article V on the same basis as if it were a Lender and be indemnified under
Section 11.03 as if it were a Lender. In addition, each agreement creating
any participation must include an agreement by the participant to be bound
by the provisions of Section 11.15.
(d) The Lender may furnish any information concerning the Borrower in
its possession from time to time to assignees and participants (including
prospective assignees and participants); provided that, such Persons agree
to be bound by the provisions of Section 11.15 hereof.
(e) Notwithstanding anything in this Section 11.06 to the contrary,
the Lender may assign and pledge the Note to any Federal Reserve Bank or
the United States Treasury as collateral security pursuant to Regulation A
of the Board of Governors of the Federal Reserve System and any operating
circular issued by such Federal Reserve System and/or such Federal Reserve
Bank. No such assignment and/or pledge shall release the Lender from its
obligations hereunder.
(f) Notwithstanding any other provisions of this Section 11.06, no
transfer or assignment of the interests or obligations of the Lender or any
grant of participations therein shall be permitted if such transfer,
assignment or grant would require the Borrower to file a registration
statement with the SEC or to qualify the Loans under the "Blue Sky" laws of
any state.
Section 11.07 INVALIDITY. In the event that any one or more of the
provisions contained in any of the Loan Documents or the Letters of Credit, the
Letter of Credit Agreements shall, for any reason, be held invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision of any of the other Loan Documents.
Section 11.08 COUNTERPARTS. This Agreement may be executed in any
number of counterparts, all of which taken together shall constitute one and the
same instrument and any of the parties hereto may execute this Agreement by
signing any such counterpart.
Section 11.09 REFERENCES. The words "herein," "hereof," "hereunder"
and other words of similar import when used in this Agreement refer to this
Agreement as a whole, and not to any particular article, section or subsection.
Any reference herein to a Section shall be deemed to refer to the applicable
Section of this Agreement unless otherwise stated herein. Any reference herein
to an exhibit or schedule shall be deemed to refer to the applicable exhibit or
schedule attached hereto unless otherwise stated herein.
Section 11.10 SURVIVAL. The obligations of the parties under Section
4.04, Article V, and Sections 11.03 and 11.15 shall survive the repayment of the
Loans and the termination of the Commitment. To the extent that any payments on
the Indebtedness or proceeds of any collateral are subsequently invalidated,
declared to be fraudulent or preferential, set aside or
-61-
<PAGE>
required to be repaid to a trustee, debtor in possession, receiver or other
Person under any bankruptcy law, common law or equitable cause, then to such
extent, the Indebtedness so satisfied shall be revived and continue as if such
payment or proceeds had not been received and the Lender's Liens, security
interests, rights, powers and remedies under this Agreement and each Security
Instrument shall continue in full force and effect. In such event, each
Security Instrument shall be automatically reinstated and the Borrower shall
take such action as may be reasonably requested by the Lender to effect such
reinstatement.
Section 11.11 CAPTIONS. Captions and section headings appearing
herein are included solely for convenience of reference and are not intended to
affect the interpretation of any provision of this Agreement.
Section 11.12 NO ORAL AGREEMENTS. THE LOAN DOCUMENTS EMBODY THE
ENTIRE AGREEMENT AND UNDERSTANDING BETWEEN THE PARTIES AND SUPERSEDE ALL OTHER
AGREEMENTS AND UNDERSTANDINGS BETWEEN SUCH PARTIES RELATING TO THE SUBJECT
MATTER HEREOF AND THEREOF. THE LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
Section 11.13 GOVERNING LAW; SUBMISSION TO JURISDICTION.
(A) THIS AGREEMENT AND THE NOTE SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS EXCEPT TO THE EXTENT
THAT UNITED STATES FEDERAL LAW PERMITS THE LENDER TO CHARGE INTEREST AT THE
RATE ALLOWED BY THE LAWS OF THE STATE WHERE THE LENDER IS LOCATED. TEX.
REV. CIV. STAT. ANN. ART. 5069, CH. 15 (WHICH REGULATES CERTAIN REVOLVING
CREDIT LOAN ACCOUNTS AND REVOLVING TRI-PARTY ACCOUNTS) SHALL NOT APPLY TO
THIS AGREEMENT OR THE NOTES.
(B) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THE LOAN DOCUMENTS
SHALL BE BROUGHT IN THE COURTS OF THE STATE OF TEXAS OR OF THE UNITED
STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF TEXAS, AND, BY EXECUTION AND
DELIVERY OF THIS AGREEMENT, THE BORROWER HEREBY ACCEPTS FOR ITSELF AND (TO
THE EXTENT PERMITTED BY LAW) IN RESPECT OF ITS PROPERTY, GENERALLY AND
UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. THE BORROWER
HEREBY IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING, WITHOUT LIMITATION, ANY
OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON
CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH
ACTION OR PROCEEDING IN SUCH RESPECTIVE JURISDICTIONS. THIS SUBMISSION TO
JURISDICTION IS NON-EXCLUSIVE AND DOES NOT PRECLUDE THE LENDER FROM
OBTAINING JURISDICTION OVER THE BORROWER IN ANY COURT OTHERWISE HAVING
JURISDICTION.
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<PAGE>
(C) EACH OF THE BORROWER AND THE LENDER HEREBY (I) IRREVOCABLY AND
UNCONDITIONALLY WAIVE, TO THE FULLEST EXTENT PERMITTED BY LAW, TRIAL BY
JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY
SECURITY INSTRUMENT AND FOR ANY COUNTERCLAIM THEREIN; (II) IRREVOCABLY
WAIVE, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE
TO CLAIM OR RECOVER IN ANY SUCH LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE
OR CONSEQUENTIAL DAMAGES, OR DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL
DAMAGES; (III) CERTIFY THAT NO PARTY HERETO NOR ANY REPRESENTATIVE OR AGENT
OF COUNSEL FOR ANY PARTY HERETO HAS REPRESENTED, EXPRESSLY OR OTHERWISE, OR
IMPLIED THAT SUCH PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO
ENFORCE THE FOREGOING WAIVERS, AND (IV) ACKNOWLEDGE THAT IT HAS BEEN
INDUCED TO ENTER INTO THIS AGREEMENT, THE SECURITY INSTRUMENTS AND THE
TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY BY, AMONG OTHER THINGS, THE
MUTUAL WAIVERS AND CERTIFICATIONS CONTAINED IN THIS SECTION 11.13.
Section 11.14 INTEREST. It is the intention of the parties hereto
that Lender shall conform strictly to usury laws applicable to it. Accordingly,
if the transactions contemplated hereby would be usurious as to the Lender under
laws applicable to it (including the laws of the United States of America and
the State of Texas or any other jurisdiction whose laws may be mandatorily
applicable to the Lender notwithstanding the other provisions of this
Agreement), then, in that event, notwithstanding anything to the contrary in the
Loan Documents or any agreement entered into in connection with or as security
for the Note, it is agreed as follows: (i) the aggregate of all consideration
which constitutes interest under law applicable to the Lender that is contracted
for, taken, reserved, charged or received by the Lender any of the Loan
Documents or agreements or otherwise in connection with the Note shall under no
circumstances exceed the maximum amount allowed by such applicable law, and any
excess shall be cancelled automatically and if theretofore paid shall be
credited by the Lender on the principal amount of the Indebtedness (or, to the
extent that the principal amount of the Indebtedness shall have been or would
thereby be paid in full, refunded by the Lender to the Borrower); and (ii) in
the event that the maturity of the Note is accelerated by reason of an election
of the holder thereof resulting from any Event of Default under this Agreement
or otherwise, or in the event of any required or permitted prepayment, then such
consideration that constitutes interest under law applicable to the Lender may
never include more than the maximum amount allowed by such applicable law, and
excess interest, if any, provided for in this Agreement or otherwise shall be
cancelled automatically by the Lender as of the date of such acceleration or
prepayment and, if theretofore paid, shall be credited by the Lender on the
principal amount of the Indebtedness (or, to the extent that the principal
amount of the Indebtedness shall have been or would thereby be paid in full,
refunded by the Lender to the Borrower). All sums paid or agreed to be paid to
the Lender for the use, forbearance or detention of sums due hereunder shall, to
the extent permitted by law applicable to the Lender, be amortized, prorated,
allocated and spread throughout the full term of the Loans evidenced by the Note
until payment in full so that the rate or amount of interest on account of any
Loans hereunder does not exceed the maximum amount allowed by such applicable
law. If at any time and from time to time (i) the amount of interest payable to
the Lender on any date shall be computed at the Highest Lawful Rate applicable
to the Lender
-63-
<PAGE>
pursuant to this Section 11.14 and (ii) in respect of any subsequent interest
computation period the amount of interest otherwise payable to the Lender would
be less than the amount of interest payable to the Lender computed at the
Highest Lawful Rate applicable to the Lender, then the amount of interest
payable to the Lender in respect of such subsequent interest computation period
shall continue to be computed at the Highest Lawful Rate applicable to the
Lender until the total amount of interest payable to the Lender shall equal the
total amount of interest which would have been payable to the Lender if the
total amount of interest had been computed without giving effect to this Section
11.14. To the extent that Article 5069-1.04 of the Texas Revised Civil Statutes
is relevant for the purpose of determining the Highest Lawful Rate, the Lender
elects to determine the applicable rate ceiling under such Article by the
indicated weekly rate ceiling from time to time in effect.
Section 11.15 CONFIDENTIALITY. In the event that the Borrower
provides to the Lender written confidential information belonging to the
Borrower, if the Borrower shall denominate such information in writing as
"confidential", the Lender shall thereafter maintain such information in
confidence in accordance with the standards of care and diligence that each
utilizes in maintaining its own confidential information. This obligation of
confidence shall not apply to such portions of the information which (i) are in
the public domain, (ii) hereafter become part of the public domain without the
Lender breaching its obligation of confidence to the Borrower, (iii) are
previously known by the Lender from some source other than the Borrower, (iv)
are hereafter developed by the Lender without using the Borrower's information,
(v) are hereafter obtained by or available to the Lender from a third party who
owes no obligation of confidence to the Borrower with respect to such
information or through any other means other than through disclosure by the
Borrower, (vi) are disclosed with the Borrower's consent, (vii) must be
disclosed either pursuant to any Governmental Requirement or to Persons
regulating the activities of the Lender, or (viii) as may be required by law or
regulation or order of any Governmental Authority in any judicial, arbitration
or governmental proceeding. Further, the Lender may disclose any such
information to any independent petroleum engineers or consultants, any
independent certified public accountants, any legal counsel employed by such
Person in connection with this Agreement or any Security Instrument, including
without limitation, the enforcement or exercise of all rights and remedies
thereunder, or any assignee or participant (including prospective assignees and
participants) in the Loans; provided, however, that the Lender shall receive a
confidentiality agreement from the Person to whom such information is disclosed
the same obligation to maintain the confidentiality of such information as is
imposed upon it hereunder. Notwithstanding anything to the contrary provided
herein, this obligation of confidence shall cease three (3) years from the date
the information was furnished, unless the Borrower requests in writing at least
thirty (30) days prior to the expiration of such three year period, to maintain
the confidentiality of such information for an additional three year period.
The Borrower waives any and all other rights it may have to confidentiality as
against the Lender arising by contract, agreement, statute or law except as
expressly stated in this Section 11.15.
Section 11.16 EFFECTIVENESS. This Agreement shall be effective on
the Closing Date (the "EFFECTIVE DATE").
-64-
<PAGE>
Section 11.17 EXCULPATION PROVISIONS. EACH OF THE PARTIES HERETO
SPECIFICALLY AGREES THAT IT HAS A DUTY TO READ THIS AGREEMENT AND THE SECURITY
INSTRUMENTS AND AGREES THAT IT IS CHARGED WITH NOTICE AND KNOWLEDGE OF THE TERMS
OF THIS AGREEMENT AND THE SECURITY INSTRUMENTS; THAT IT HAS IN FACT READ THIS
AGREEMENT AND IS FULLY INFORMED AND HAS FULL NOTICE AND KNOWLEDGE OF THE TERMS,
CONDITIONS AND EFFECTS OF THIS AGREEMENT; THAT IT HAS BEEN REPRESENTED BY
INDEPENDENT LEGAL COUNSEL OF ITS CHOICE THROUGHOUT THE NEGOTIATIONS PRECEDING
ITS EXECUTION OF THIS AGREEMENT AND THE SECURITY INSTRUMENTS; AND HAS RECEIVED
THE ADVICE OF ITS ATTORNEY IN ENTERING INTO THIS AGREEMENT AND THE SECURITY
INSTRUMENTS; AND THAT IT RECOGNIZES THAT CERTAIN OF THE TERMS OF THIS AGREEMENT
AND THE SECURITY INSTRUMENTS RESULT IN ONE PARTY ASSUMING THE LIABILITY INHERENT
IN SOME ASPECTS OF THE TRANSACTION AND RELIEVING THE OTHER PARTY OF ITS
RESPONSIBILITY FOR SUCH LIABILITY. EACH PARTY HERETO AGREES AND COVENANTS THAT
IT WILL NOT CONTEST THE VALIDITY OR ENFORCEABILITY OF ANY EXCULPATORY PROVISION
OF THIS AGREEMENT AND THE SECURITY INSTRUMENTS ON THE BASIS THAT THE PARTY HAD
NO NOTICE OR KNOWLEDGE OF SUCH PROVISION OR THAT THE PROVISION IS NOT
"CONSPICUOUS."
[SIGNATURES BEGIN NEXT PAGE]
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<PAGE>
The parties hereto have caused this Agreement to be duly executed as
of the day and year first above written.
BORROWER: MIDLAND RESOURCES, INC.
By:
-------------------------------
Name: Deas H. Warley III
Title: President
Address for Notices:
16701 Greenspoint Park Drive, Suite 200
Houston, Texas 77060
Telecopier No.: (713) 873-5058
Telephone No.: (713) 873-4828
Attention: Alan Barth
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<PAGE>
LENDER: FIRST UNION NATIONAL BANK OF
NORTH CAROLINA
By:
--------------------------------
Name: Michael J. Kolosowsky
Title: Vice President
Lending Office for Base Rate Loans
LIBOR Loans:
First Union National Bank of North Carolina
301 South College Street, TW-10
Charlotte, North Carolina 28288-0608
Telecopier No.: (704) 383-0288
Telephone No.: (704) 383-0281
Address for Notices:
First Union Corporation of North Carolina
First City Tower, Suite 2255
1001 Fannin
Houston, Texas 77002
Telecopier No.: (713) 650-6354
Telephone No.: (713) 650-0452
Attention: Jay M. Chernosky
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<PAGE>
SCHEDULE 7.02
LIABILITIES
None, except for the Interest Rate Swap Transaction between Borrower and Lender
set forth in Schedule 7.21.
Sched 7.02
<PAGE>
SCHEDULE 7.03
LITIGATION
All legal proceedings are as described in Item 3 of Borrower's Form 10-KSB for
the year ended December 31, 1995.
Sched 7.03
<PAGE>
SCHEDULE 7.09
TAXES
None.
Sched 7.09
<PAGE>
SCHEDULE 7.10
TITLES, ETC.
None.
Sched 7.10
<PAGE>
SCHEDULE 7.14
LIST OF SUBSIDIARIES AND PARTNERSHIPS
Midland Resources Operating Company, Inc.
MRI Acquisition Corp.
Sched 7.14
<PAGE>
SCHEDULE 7.17
ENVIRONMENTAL MATTERS
None.
Sched 7.17
<PAGE>
SCHEDULE 7.19
INSURANCE
As set forth in the attached certificates of insurance.
Sched 7.19
<PAGE>
SCHEDULE 7.20
GAS IMBALANCES
None.
Sched 7.20
<PAGE>
SCHEDULE 7.21
HEDGING AGREEMENTS
Interest Rate Swap Transaction between Borrower and Lender as set forth in the
attached.
Sched 7.21
<PAGE>
SCHEDULE 9.01
DEBT
None, except for the Interest Rate Swap Transaction between Borrower and Lender
set forth in Schedule 7.21.
Sched 9.01
<PAGE>
SCHEDULE 9.02
LIENS
Liens.
Sched 9.02
<PAGE>
SCHEDULE 9.03
INVESTMENTS, LOANS & ADVANCES
None.
Sched 9.03
<PAGE>
EXHIBIT A
FORM OF NOTE
$_________________________ ___________________, 199__
FOR VALUE RECEIVED, MIDLAND RESOURCES, INC., a ____________ corporation
(the "BORROWER") hereby promises to pay to the order of FIRST UNION NATIONAL
BANK OF NORTH CAROLINA, a national banking association (the "LENDER"), at its
Principal Office at 301 South College Street, TW-10, Charlotte, North Carolina
28288-0608, the principal sum of _____________ Dollars ($____________) (or
such lesser amount as shall equal the aggregate unpaid principal amount of the
Loans made by the Lender to the Borrower under the Credit Agreement, as
hereinafter defined), in lawful money of the United States of America and in
immediately available funds, on the dates and in the principal amounts provided
in the Credit Agreement, and to pay interest on the unpaid principal amount of
each such Loan, at such office, in like money and funds, for the period
commencing on the date of such Loan until such Loan shall be paid in full, at
the rates per annum and on the dates provided in the Credit Agreement.
The date, amount, Type, interest rate, Interest Period and maturity of each
Loan made by the Lender to the Borrower, and each payment made on account of the
principal thereof, shall be recorded by the Lender on its books and, prior to
any transfer of this Note, may be endorsed by the Lender on the schedules
attached hereto or any continuation thereof or on any separate record maintained
by the Lender.
This Note is the Note referred to in the Credit Agreement dated as of
October 31, 1996 between the Borrower and the Lender and evidences Loans made by
the Lender thereunder (such Credit Agreement as the same may be amended or
supplemented from time to time, the "CREDIT AGREEMENT"). Capitalized terms used
in this Note have the respective meanings assigned to them in the Credit
Agreement.
This Note is issued pursuant to the Credit Agreement and is entitled to the
benefits provided for in the Credit Agreement and the Security Instruments. The
Credit Agreement provides for the acceleration of the maturity of this Note upon
the occurrence of certain events, for prepayments of Loans upon the terms and
conditions specified therein and other provisions relevant to this Note.
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS
OF THE STATE OF TEXAS.
MIDLAND RESOURCES, INC.
By:
-------------------------------------
Name:
Title:
A - 1
<PAGE>
EXHIBIT B
FORM OF BORROWING, CONTINUATION AND CONVERSION REQUEST
_____________________, 199__
MIDLAND RESOURCES, INC., a ___________ corporation (the "BORROWER"),
pursuant to the Credit Agreement dated as of October 31, 1996 (together with all
amendments or supplements thereto, the "CREDIT AGREEMENT") between the Borrower
and FIRST UNION NATIONAL BANK OF NORTH CAROLINA, (the "LENDER") hereby makes the
requests indicated below (unless otherwise defined herein, capitalized terms are
defined in the Credit Agreement):
/ / 1. Loans:
(a) Aggregate amount of new Loans to be $______________________;
(b) Requested funding date is _________________, 199__;
(c) $_____________________ of such borrowings are to be LIBOR Loans;
$_____________________ of such borrowings are to be Base Rate Loans;
and
(d) Length of Interest Period for LIBOR Loans is:
_________________________.
/ / 2. LIBOR Loan Continuation for LIBOR Loans maturing on
_____________________:
(a) Aggregate amount to be continued as LIBOR Loans is
$____________________;
(b) Aggregate amount to be converted to Base Rate Loans is
$____________________;
(c) Length of Interest Period for continued LIBOR Loans is
________________________.
B-1
<PAGE>
/ / 3. Conversion of Outstanding Base Rate Loans to LIBOR Loans:
Convert $__________________ of the outstanding Base Rate Loans to
LIBOR Loans on ____________________ with an Interest Period of
______________________.
/ / 4. Conversion of outstanding LIBOR Loans to Base Rate Loans:
Convert $__________________ of the outstanding LIBOR Loans with
Interest Period maturing on ______________________, 199_, to Base
Rate Loans.
The undersigned certifies that he is the _____________________ of the
Borrower, and that as such he is authorized to execute this certificate on
behalf of the Borrower. The undersigned further certifies, represents and
warrants on behalf of the Borrower that the Borrower is entitled to receive the
requested borrowing, continuation or conversion under the terms and conditions
of the Credit Agreement.
MIDLAND RESOURCES, INC.
By:
------------------------------------
Name:
Title:
B-2
<PAGE>
EXHIBIT C
FORM OF COMPLIANCE CERTIFICATE
The undersigned hereby certifies that he is the ________________ of MIDLAND
RESOURCES, INC., a ____________ corporation (the "BORROWER") and that as such he
is authorized to execute this certificate on behalf of the Borrower. With
reference to the Credit Agreement dated as of October 31, 1996, together with
all amendments or supplements thereto being the "AGREEMENT") between the
Borrower and FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a national banking
association (the "LENDER"), the undersigned represents and warrants as follows
(each capitalized term used herein having the same meaning given to it in the
Agreement unless otherwise specified):
(a) The representations and warranties of the Borrower contained
in Article VII of the Agreement and in the Security Instruments and
otherwise made in writing by or on behalf of the Borrower pursuant to
the Agreement and the Security Instruments were true and correct when
made, and are repeated at and as of the time of delivery hereof and
are true and correct at and as of the time of delivery hereof, except
to the extent such representations and warranties are expressly
limited to an earlier date or the Lender has expressly consented in
writing to the contrary.
(b) The Borrower has performed and complied with all agreements
and conditions contained in the Agreement and in the Security
Instruments required to be performed or complied with by it prior to
or at the time of delivery hereof.
(c) Since __________________, no change has occurred, either in
any case or in the aggregate, in the condition, financial or
otherwise, of the Borrower or any Subsidiary which would have a
Material Adverse Effect.
(d) There exists, and, after giving effect to the loan or loans
with respect to which this certificate is being delivered, will exist,
no Default under the Agreement or any event or circumstance which
constitutes, or with notice or lapse of time (or both) would
constitute, an event of default under any loan or credit agreement,
indenture, deed of trust, security agreement or other agreement or
instrument evidencing or pertaining to any Debt of the Borrower or any
Subsidiary, or under any material agreement or instrument to which the
Borrower or any Subsidiary is a party or by which the Borrower or any
Subsidiary is bound.
(e) Attached hereto are the detailed computations necessary to
determine whether the Borrower is in compliance with Sections 9.___,
9.___ and 9.___ as of the end of the [fiscal quarter][fiscal year]
ending_____________________.
C-1
<PAGE>
EXECUTED AND DELIVERED this ____ day of ______________.
MIDLAND RESOURCES, INC.
By:
-------------------------------------
Name:
Title:
C-2
<PAGE>
EXHIBIT E
LIST OF SECURITY INSTRUMENTS
1. Mortgage, Security Agreement, Assignment of Production and Financing
Statement dated June 26, 1991 from the Borrower in favor of First City,
Texas-Midland, N.A. with respect to its oil and gas properties located in
Illinois and as assigned to the Lender on October 14, 1993.
2. Mortgage, Security Agreement, Assignment of Production and Financing
Statement dated February 28, 1992 from the Borrower in favor of First City,
Texas-Midland, N.A. with respect to its oil and gas properties located in
Illinois and as assigned to the Lender on October 14, 1993.
3. Mortgage, Security Agreement, Assignment of Production and Financing
Statement dated October 14, 1993 from the Borrower in favor of the Lender
with respect to its oil and gas properties located in Illinois.
4. Deed of Trust, Security Agreement, Assignment of Production and Financing
Statement dated June 26, 1991 from the Borrower in favor of First City,
Texas-Midland, N.A. with respect to its oil and gas properties located in
Texas and assigned to the Lender on October 14, 1993.
5. Deed of Trust, Security Agreement, Assignment of Production and Financing
Statement dated February 28, 1992 from the Borrower in favor of First City,
Texas-Midland, N.A. with respect to its oil and gas properties located in
Texas, as amended by Amendment of Deed of Trust, Security Agreement,
Assignment of Production and Financing Statement dated March 5, 1993 and
assigned to the Lender on October 14, 1993.
6. Deed of Trust, Security Agreement, Assignment of Production and Financing
Statement dated February 28, 1992 from the Borrower in favor of First City,
Texas-Midland, N.A. with respect to its oil and gas properties located in
Texas, as amended by Amendment of Deed of Trust, Security Agreement,
Assignment of Production and Financing Statement dated March 5, 1993 and
assigned to the Lender on October 14, 1993.
7. Deed of Trust, Security Agreement, Assignment of Production and Financing
Statement dated February 28, 1992 from Miresco, Inc., now known as Midland
Resources Operating Company, Inc. ("MIDLAND OPERATING"), in favor of First
City, Texas-Midland, N.A. with respect to its oil and gas properties
located in Texas, as amended by Amendment of Deed of Trust, Security
Agreement, Assignment of Production and Financing Statement dated March 5,
1993 and assigned to the Lender on October 14, 1993.
E-1
<PAGE>
8. Deed of Trust, Security Agreement, Assignment of Production and Financing
Statement dated October 14, 1993 from the Borrower in favor of the Lender
with respect to its oil and gas properties located in Texas, as amended by
First Amendment of Deed of Trust, Security Agreement, Assignment of
Production and Financing Statement dated August 11, 1994 and Second
Amendment of Deed of Trust, Security Agreement, Assignment of Production
and Financing Statement dated December 29, 1994.
9. Deed of Trust, Security Agreement, Assignment of Production and Financing
Statement dated October 14, 1993 from the Borrower in favor of the Lender
with respect to its oil and gas properties located in Texas, as amended by
First Amendment of Deed of Trust, Security Agreement, Assignment of
Production and Financing Statement dated December 29, 1994.
10. Deed of Trust, Security Agreement, Assignment of Production and Financing
Statement dated August 15, 1994 from the Borrower in favor of the Lender
with respect to its oil and gas properties located in Texas, as amended by
First Amendment of Deed of Trust, Security Agreement, Assignment of
Production and Financing Statement dated December 29, 1994.
11. Deed of Trust, Security Agreement, Assignment of Production and Financing
Statement dated September 23, 1994 from the Borrower in favor of the Lender
with respect to its oil and gas properties located in Texas, as amended by
First Amendment of Deed of Trust, Security Agreement, Assignment of
Production and Financing Statement dated December 29, 1994.
12. Deed of Trust, Security Agreement, Assignment of Production and Financing
Statement dated June 1, 1995 from the Borrower in favor of the Lender.
13. Security Agreement dated October 14, 1993 from the Borrower in favor of the
Lender, as amended by First Amendment of Security Agreement dated December
29, 1994 .
14. Security Agreement dated August 11, 1994 from the Borrower in favor of the
Lender with respect to stock of Midland Operating, as amended by First
Amendment of Security Agreement dated December 29, 1994.
15. Security Agreement dated September 23, 1996 from MRI Acquisition Corp.
("MRI") with respect to stock of Summit Petroleum Corporation.
16. Guaranty Agreement dated August 11, 1994 from Midland Operating in favor of
the Lender, as amended by First Amendment to Guaranty Agreement dated
December 29, 1994.
E-2
<PAGE>
17. Guaranty Agreement dated September 23, 1996 from MRI in favor of the
Lender.
18. Amended, Restated and Consolidated Mortgage, Deed of Trust, Assignment of
Production, Security Agreement and Financing Statement dated October 31,
1996 executed by the Borrower with respect to its oil and gas properties
located in Texas.
19. Financing Statement executed by the Borrower with respect to item 18 above.
20. Second Amendment to Security Agreement dated October 31, 1996 between the
Borrower and the Lender.
21. Financing Statement Amendment executed by the Borrower with respect to item
20 above.
22. Second Amendment to Security Agreement dated October 31, 1996 between the
Borrower and the Lender with respect to the stock of Midland Operating.
23. Financing Statement executed by the Borrower with respect to item 22 above.
24. First Amendment to Security Agreement dated October 31, 1996 between MRI
and the Lender with respect to the stock of Summit Petroleum Corporation.
25. Financing Statement executed by MRI with respect to item 25 above.
26. Guaranty Agreement dated October 31, 1996 executed by Midland Operating in
favor of the Lender.
27. Guaranty Agreement dated October 31, 1996 executed by MRI in favor of the
Lender.
28. Financing Statement Amendments amending previously filed financing
statements to reflect Borrower's change of address.
E-3
<PAGE>
AMENDMENT TO EMPLOYMENT CONTRACT
This Amendment to Employment Contract ("Amendment") effective January 1,
1996, by and between Midland Resources, Inc., a Texas corporation, referred to
in this Amendment as "Employer", located at 16701 Greenspoint Park Drive, Suite
200, Houston, Texas 77060 and Deas H. Warley III referred to in this Agreement
as "Employee".
WITNESSETH:
WHEREAS, the Employer and the Employee desire to amend the terms of the
Employment Contract (the "Agreement") between them effective January 1, 1995;
NOW, THEREFORE, in consideration of the premises and mutual covenants
hereinafter set forth, the parties agree to amend the Agreement as follows:
1. TERM OF EMPLOYMENT. The term of the Agreement, as set forth in paragraph
1.1 thereof is hereby extended through December 31, 2000. On the anniversary of
the effective date of this Amendment, the term of the Agreement shall be
automatically extended for an additional period of one (1) year, provided that
(i) the Employee is employed by the Employer on such anniversary and (ii)
neither party has, within three (3) months prior to such anniversary given the
other party written notice that the Agreement shall not be automatically
extended thereafter.
2. RATIFICATION. Except as herein amended, the provisions of the Agreement
remain in full force and effect and are hereby ratified and confirmed.
EXECUTED at Houston, Texas this 8th of January, 1996.
EMPLOYER
By: /s/ Deas H. Warley III
----------------------------------
Deas H. Warley III - President
By: /s/ Sam R. Brock
----------------------------------
Sam R. Brock, Director
Compensation Committee Member
By: /s/ Robert R. Donnelly
----------------------------------
Robert R. Donnelly, Director
Compensation Committee Member
EMPLOYEE
/s/ D.H. Warley III
----------------------------------
Deas H. Warley III
<PAGE>
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THE INTERESTS IN THIS LIMITED PARTNERSHIP HAVE NOT BEEN REGISTERED UNDER EITHER
THE FEDERAL OR STATE SECURITIES LAWS AND ARE RESTRICTED AS TO TRANSFER. SUCH
RESTRICTIONS INCLUDE PROVIDING EVIDENCE SATISFACTORY TO THE GENERAL PARTNER THAT
ANY TRANSFER IS IN COMPLIANCE WITH FEDERAL AND STATE SECURITIES LAWS.
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AGREEMENT OF LIMITED PARTNERSHIP
OF
CHALK MOUNTAIN EXPLORATION, LTD.
This agreement of limited partnership is made and entered into on January
14, 1997. It is between Midland Resources, Inc. , a Texas corporation, referred
to in this agreement as the "General Partner" or "MRI", and the persons and
entities shown as the Limited Partners on Exhibit "A", attached hereto,
including the initial limited partner, together with any additional or
substituted Limited Partners admitted to the Partnership in accordance with the
terms of this agreement, all of whom are referred to in this agreement as
"Limited Partners".
ARTICLE I
DEFINITIONS
The following terms have the following meanings when used in this
agreement:
"Act" means the Texas Revised Limited Partnership Act.
"Area of Mutual Interest" means that acreage within the boundary on the map
as marked on EXHIBIT "E" attached hereto, in Reagan, Sterling and Tom Green
Counties, Texas. The Area of Mutual Interest does not include interests in any
geological formation the rights to which are not conveyed in EXHIBIT B
"Affiliate" means any person or entity that controls or is controlled by
the General Partner. In this definition, the term "control" includes the
ownership of more than 50% of the beneficial interest in the person or entity.
"Agreement" or "partnership agreement" means this agreement of limited
partnership, including any amendments that may be made.
"Bankruptcy" means, as to any partner, the partner's taking or acquiescing
in the taking, of any action seeking relief under, or advantage of, any
applicable debtor relief, liquidation, receivership, conservatorship,
bankruptcy, moratorium, rearrangement, insolvency, reorganization, or similar
law affecting the rights or remedies of creditors generally, as in effect from
time to time. For the purpose of this definition, the term "acquiescing" shall
include, without limitation, the failure to file, within ten
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days after its entry, a petition, answer or motion to vacate or to discharge
any order, judgment or decree providing for any relief under any such law.
"Capital contribution(s)" means the contribution(s) made to the capital of
the Partnership from time to time by a partner in cash or property.
"Certificate" means the certificate of limited partnership to be filed by
the General Partner with the Secretary of State of Texas in accordance with this
agreement.
"Code" means the Internal Revenue Code of 1986, as amended and in effect
from time to time.
"Percentage interest" means the interest of a partner in the capital and
profits and losses of the Partnership as initially set forth in EXHIBIT "A",
attached hereto.
"Person" means an individual or a corporation or other entity.
"Prospect Area" means the lease interests in the acreage conveyed by the
Bill of Sale and Assignment of Oil and Gas Leases attached hereto as EXHIBIT
"B".
"Required interest" means one or more of the Limited Partners having among
them more than 50% of the Percentage Interest of all Limited Partners in their
capacity as such.
"Transfer" means the mortgage, pledge, hypothecation, transfer, sale,
assignment or other disposition of any part or all of an interest in the
Partnership by any partner, whether voluntarily, by operation of law or
otherwise.
ARTICLE II
GENERAL
FORMATION
2.01 By this agreement, the General Partner and the Limited Partners form
and establish the Partnership pursuant to the Act. Prior to conducting any
business in any jurisdiction, the General Partner shall promptly file the
Certificate as required by the Act and comply with all other legal
requirements for the formation and operation of the Partnership. Except as
expressly provided in this agreement, the Act shall govern the rights and
liabilities of the partners.
The Partnership shall be formed by the General Partner and the initial
limited partner, who notwithstanding any other provision herein, following
formation shall, (i) not be required to contribute capital to the
Partnership, (ii) shall withdraw from the partnership upon the admission of
the first additional limited partner who shall make a cash capital
contribution, (iii) shall not be entitled to any distribution or
allocation of profits or losses. Any other provision
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contained herein that may be construed as inconsistent with the formation
of the Partnership by the General Partner and the initial limited partner
shall be construed so as to permit such action.
NAME
2.02 The name of the Partnership shall be CHALK MOUNTAIN EXPLORATION, LTD.
The General Partner may change the name of the Partnership or adopt such
trade or fictitious names as it may determine appropriate.
INVESTMENT
2.03 Each of the Limited Partners represents that he (a) understands the
high degree of risk associated with exploration drilling for oil and gas,
development drilling for oil and gas, and producing oil and gas, (b) has to
his satisfaction, had an opportunity to ask questions of the General
Partner and receive whatever information he believes is necessary to make a
decision to invest in the Partnership. (c) has consulted and received a
report by an independent consulting geologist regarding the Prospect Area,
(d) has sufficient resources to withstand the complete loss of his
investment in the Partnership, and (d) is acquiring an interest in the
Partnership for investment for his own account, and not with a view to any
sale or distribution of that interest.
ARTICLE III
COMMENCEMENT DATE; TERM OF PARTNERSHIP
The Partnership shall commence and be effective on the date the Certificate
is filed with the Secretary of State of Texas. The Partnership shall continue
until terminated as provided in this agreement or on December 31, 2046,
whichever occurs first.
ARTICLE IV
PURPOSES
The purposes of the Partnership shall be to explore for oil and gas, drill
for oil and gas, and operate oil and gas wells in the Prospect Area and the Area
of Mutual Interest.
ARTICLE V
GENERAL PARTNER AND PLACE OF BUSINESS
The General Partner of the Partnership is Midland Resources, Inc.,
hereafter sometimes referred to as MRI, with offices at 16701 Greenspoint Park
Drive, Suite 200, Houston, Texas 77060. The
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address of the General Partner is the principal place of business of the
Partnership. Any requests for information concerning the Partnership shall be
directed to the General Partner at the principal place of business of the
Partnership. Deas H. Warley III shall serve as the registered agent of the
Partnership. The address of the registered agent of the Partnership is 16701
Greenspoint Park Drive, Suite 200, Houston, Texas 77060. The address and the
name of the registered agent of the Partnership may be changed as the General
Partner may designate by written notice to the Limited Partners and by filing
an amended Certificate with the Secretary of State.
ARTICLE VI
CAPITAL CONTRIBUTIONS
GENERAL PARTNER'S CONTRIBUTION
6.01 At the time of execution of this agreement, the General Partner as
such shall be obligated to contribute such sums to the capital of the
Partnership as may be necessary to complete and equip the initial well to be
drilled on the Prospect Area to produce into the tanks, should such well be
determined to be completed. In exchange for such obligation and the other
obligations of the General Partner contained herein, the General Partner will
have the percentage interest in the Partnership set forth in Exhibit "A".
The General Partner shall fulfill its obligation at such time and in such
manner so as to fully and timely complete and equip such initial well. Upon
the drilling of any additional wells after the initial well, including the
acquisition of additional acreage and related activities, the General
Partner commits to, and will, contribute to the capital of the Partnership
the amount equal to its then percentage interest in the Partnership
multiplied by any AFE cost (as defined and used in Section 6.02).
LIMITED PARTNERS' CONTRIBUTIONS
6.02 (a) The Limited Partners shall contribute to the capital of the
Partnership, as the initial Limited Partner Capital, the sum
of $750,000, in the percentages and amounts shown on Exhibit
"A", attached hereto. In exchange for these contributions,
the Limited Partners will have the respective percentage
interests in the Partnership set forth in Exhibit "A".
(b) The $750,000 amount is the total estimated Prospect Area
land cost, seismic cost, and dry hole cost of the initial
well proposed to be drilled in the Prospect Area plus
contingency funds, all as set forth in the AFE attached
hereto as EXHIBIT "D". If actual costs incurred with
respect to drilling such well should from time to time
exceed such amount, the Limited Partners in proportion
to their percentage interest agree to pay over to the
General Partner as additional Limited Partner Capital an
amount equal to any excess required not later than 10
days after each call is made therefor by the General
Partner.
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(c) The Partnership may drill additional wells on the Prospect
Area as well as acquire land and drill additional wells
in the Area of Mutual Interest. An Authorization for
Expenditures ("AFE") estimating the costs of drilling
any additional well and acquiring any additional acreage
shall be prepared according to standards and procedures
generally accepted within the industry among industry
partners, for each such well and shall be delivered by
the General Partner to each Limited Partner, who,
subject to Section 7.04, agrees not later than 14 days
after receipt of same to contribute to the capital of the
Partnership as additional Partner Capital an amount
equal to his then percentage interest in the Partnership
multiplied by the AFE cost. If actual costs incurred on
behalf of the Partnership with respect to a given well
exceed the estimated costs, the Partners agree to fund
the excess in the manner outlined in this Section 6.02 for
such an excess applicable to the initial well.
LIMITED LIABILITY FOR LIMITED PARTNERS
6.03 The liability of the Limited Partners to the Partnership is limited to
the amount of their respective capital contributions agreed to be made in
paragraph 6.02 plus an additional amount during the calendar year ending
December 31, 1997 equal to the negative cash flow, if any, experienced by
the Partnership in that year requiring an additional infusion of capital by
all Partners for the year. The Limited Partners are entitled to a return of
their respective capital contributions only as provided in this partnership
agreement.
ARTICLE VII
CAPITAL ACCOUNTS
ESTABLISHMENT OF CAPITAL ACCOUNTS
7.01 Separate capital accounts shall be established and maintained for each
partner in accordance with Section 1.704-1 (b) (2) (iv) of the Treasury
Regulations, as amended from time to time.
CREDITS AND DEBITS
7.02 All capital contributions of a partner, its allocable share of
Partnership income and loss, and cash or property distributions made to
such partner shall be credited or charged to such partner's individual
capital account as the case may be. To the extent an allocation or
adjustment is not specifically described by this agreement, that item shall
be reflected in the partners' capital accounts in accordance with Section
1.704-1 (b)(2)(iv) of the Treasury Regulations, as amended from time to
time.
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The capital accounts shall not bear interest.
SPECIAL ALLOCATION OF COST
7.03 Special allocation of costs shall be made as follows:
(a) General Partner: Capital account to be applied in the following
order:
First-Leasehold costs.
Second-Lease and well equipment costs.
Third-Intangible drilling costs.
(b) Limited Partners: Capital accounts are to be applied in the
following order:
First-Intangible drilling costs.
Second-Lease and well equipment cost.
Third-Leasehold costs.
SPECIAL ALLOCATION FOR NON CONSENT
7.04 (a) If any partner fails to make a capital contribution pursuant to
Section 6.02 (c) ("Non Consenting Partner") the General Partner
shall give notice to the remaining partners who shall thereafter
have 7 days within which to notify the General Partner of their
willingness to contribute pro rata (or as they may agree among
themselves) the amount of the Non Consenting Partners capital
contribution. If enough partners agree ("Consenting Partners")
to make the full amount of the Non Consenting Partner's capital
contribution then the General Partner shall so notify the
Consenting Partners and the project which required the Section
6.02 capital call ("Non Consent Project") shall be done.
(b) With respect to a Non Consent Project, the General Partner shall
establish and maintain as reasonably as possible, a separate
accounting of the costs and revenues thereof. The Consenting
Partners shall bear and be specially allocated the entire cost
and risk of conducting such Non Consent Project in proportion to
the Section 6.02(c) capital contribution they made for such Non
Consent Project. The allocation of costs among the Consenting
Partners shall be in the manner set forth in Section 7.03.
(c) If the Non Consent Project results in oil or gas production, then
the Non Consenting Partner shall be deemed to have consented to a
special allocation to the Consenting Partners, of the revenue and
expenses from all production from such Non Consent Project, in
proportion to their capital contributions for such Non Consent
Project. Such special allocation of revenue and expenses
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shall continue until such time as the Consenting Partners
collectively are allocated net proceeds equal to 300% of the
amount of the capital call the Non Consenting Partner did not
make.
(d) If (i) the General Partner determines that not enough Consenting
Partners agreed to fund the entire amount of the Section 6.02(c)
Non Consenting Partner's capital contribution and therefor the
Non Consent Project cannot be accomplished, and (ii) one cost
component of the Non Consent Project consisted of exercising one
or more of the options to acquire acreage contained in EXHIBIT
"B"; then the General Partner shall notify the party to whom the
option shall revert back to (which may be itself) the names of
those partners who did express a willingness to make the capital
contribution required by Section 6.02(c) and the amount such
partners were willing to contribute.
ACCOUNTING FOR PARTNER'S LOANS
7.05 Loans made by a partner to the Partnership shall not be considered
capital contributions.
RETURN OF CAPITAL
7.06 No partner has the right to demand the return of its capital
contribution other than in cash and except as provided in this
agreement.
LIQUIDATION
7.07 When the Partnership is liquidated, each partner with a deficit in its
capital account will be obligated to contribute to the capital of the
Partnership an amount of cash equal to the deficit in the capital
account balance. The cash must be paid within 30 days after the date
of the liquidation, and the amounts so contributed may be paid to the
creditors of the Partnership or distributed to the other partners in
the ratio of the then positive balances in their respective capital
accounts.
PARTITION
7.08 All interests in the property owned by the Partnership shall be deemed
owned by the Partnership as an entity. No partner, individually, shall
have any ownership of such property or interest except as a partner in
the Partnership. Each of the partners irrevocably waives, during the
term of the Partnership and during any period of its liquidation
following any dissolution, any right that it may have to maintain any
action for partition with respect to any of the assets of the
Partnership.
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ARTICLE VIII
TRANSACTIONS WITH GENERAL PARTNER AND CONTROL AND MANAGEMENT
TRANSACTIONS WITH GENERAL PARTNER
8.01 The General Partner will sell to the Partnership its interest in the
Prospect Area, the Area of Mutual Interest and certain related seismic
data pursuant to a Bill of Sale and Assignment of Oil and Gas Leases,
substantially in the form attached hereto as EXHIBIT "B". A
subsidiary of the General Partner will supervise the drilling of all
wells and act as operator of any wells pursuant to the terms of the
A.A.P.L. Form 610 Operating Agreement attached hereto as EXHIBIT "C".
The General Partner is entitled to receive reimbursement of all direct
out of pocket costs incurred on behalf of the Partnership, in addition
to amounts received by its subsidiary pursuant to the Operating
Agreement.
ROLE OF GENERAL PARTNER
8.02 (a) The General Partner has full, exclusive and complete discretion
in the management and control of the Partnership for any of the
purposes set forth in Article IV of this agreement, unless
specifically stated otherwise in this agreement.
(b) The General Partner agrees to conduct the operations
contemplated under this agreement in a careful and prudent
manner, and in accordance with good industry practice.
(c) The General Partner (or any successor to the General Partner)
agrees to serve as general partner of the Partnership until the
Partnership is terminated without reconstitution as provided
below.
GENERAL PARTNER'S AUTHORITY
8.03 Subject to any limitations expressly set forth in this agreement, the
General Partner is expressly authorized to perform any of the following
acts on behalf of the Partnership:
(a) Any and all acts necessary or appropriate to the acquisition and
management of the Partnership and interests in the Partnership;
(b) Maintenance of all necessary Partnership books and records;
(c) Commencement of litigation or defense of litigation, including
settlement of any litigation, involving the Partnership;
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(d) Establishment of bank accounts in which all Partnership funds
shall be deposited and from which payments shall be made;
(e) Procuring and maintaining insurance with responsible companies as
may be available in such amounts and covering such risks as are
deemed appropriate by the General Partner;
(f) Taking and holding all real, personal and mixed property of the
Partnership in the name of the Partnership;
(g) Executing and delivering, on behalf of and in the name of the
Partnership, contracts, agreements and other documents;
(h) Coordinating all accounting and clerical functions of the
Partnership and employing accountants, lawyers, engineers and
other management or service personnel as may from time to time be
required to carry on the business of the Partnership;
(i) Filing tax returns and making elections on behalf of the
Partnership as provided under the Code.
LIMITATIONS
8.04 Notwithstanding the generality of the General Partner' s authority,
the General Partner is not empowered, without the consent of a required
interest, to:
(a) Do any act in contravention of this partnership agreement;
(b) Do any act that would make it impossible to carry out the
ordinary business of the Partnership, except as specifically
permitted by the terms of this agreement;
(c) Confess a judgment against the Partnership;
(d) Possess Partnership property or assign any rights in specific
Partnership property for other than a Partnership purpose;
(e) Require any partner to make any contribution to the capital of
the Partnership not provided for in this agreement;
(f) Mortgage or pledge any assets of the Partnership to secure
Partnership loans exceeding $100,000 in the aggregate;
(g) Amend this partnership agreement.
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OTHER AND COMPETING ACTIVITIES
8.05 Any partner may engage in or possess an interest in other business
ventures of any nature or description, independently or with others,
similar to, or competitive with the business conducted by the Partnership.
Neither the Partnership nor any partner shall have any rights in or to such
independent ventures of the income or profits derived form these other
activities.
LIABILITY OF GENERAL PARTNER
8.06 The General Partner is not liable, responsible or accountable in
damages or otherwise to the Limited Partners or the Partnership for any act
performed by the General Partner in good faith and within the scope of this
agreement. The General Partner is liable to the Limited Partners only for
conduct that involves gross negligence, bad faith or fraud.
INDEMNIFICATION OF GENERAL PARTNER
8.07 The Partnership shall indemnify and hold harmless the General Partner
and its officers, directors, agents and representatives from and against
any loss, damage, liability, cost or expense (including reasonable
attorneys' fees) arising out of any act or failure to act by the General
Partner, specifically including its sole, partial or concurrent negligence
to the greatest extent permitted under the Act.
CONTRACTS WITH AFFILIATES
8.08 Notwithstanding anything in this agreement to the contrary, it is
understood and agreed that the Partnership may employ any partner and any
person affiliated with any partner to render services on behalf of the
Partnership and may compensate the person rendering the services on
customary terms and at competitive rates. Neither the Partnership nor the
other partners shall have any rights in or to any profits derived form any
fees paid by the Partnership for such services.
TAX MATTERS PARTNER
8.09 The General Partner is authorized and required to represent the
Partnership in connection with all examinations of the Partnership affairs
by tax authorities, including administrative and judicial proceedings, and
to expend Partnership funds for professional services and costs in
connection with such examinations.
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ARTICLE IX
RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS
LIMITED LIABILITY
9.01 Other than as provided in paragraphs 6.03 and 7.05, the Limited
Partners have no personal liability whatsoever, whether to the Partnership,
the General Partner, or any creditor of the Partnership, for any of the
debts or losses of the Partnership beyond their respective capital
contributions to the Partnership.
NO MANAGEMENT RIGHTS
9.02 The Limited Partners may not take part in the management of the
Partnership or transact any business for or on behalf of the Partnership.
All management responsibility is vested in the General Partner, subject to
the approval of the Limited Partners in those specific instances described
in this agreement.
NO AUTHORITY TO BIND PARTNERSHIP
9.03 The Limited Partners have no power or authority to sign for or to bind
the Partnership. All authority to act on behalf of the Partnership is
vested in the General Partner.
ARTICLE X
PERCENTAGE INTERESTS; ALLOCATIONS AND DISTRIBUTIONS
ACCOUNTING PRINCIPLES
10.01 The net income and net loss of the Partnership (and each item of
income, gain, loss, deduction or credit entering into the computation of
net income and net loss) shall be determined on an annual basis in
accordance with the accounting method followed by the Partnership for
federal income tax purposes.
PERCENTAGE INTERESTS
10.02 The phrase "Percentage Interest- of each partner means that
particular partner's interest in the capital, net income, net loss and
distributions of the Partnership as set forth in Exhibit "A", attached
hereto.
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ALLOCATIONS
10.03 All net income, net losses and credits and items of gain or loss of
the Partnership shall be allocated to each given partner from time to time
in accordance with such partner's Percentage Interest, except as modified
by Article VII herein.
DISTRIBUTIONS
10.04 All net cash flow available for distribution to the partners, subject
to the establishment of reasonable reserves, shall be distributed monthly
to the partners in accordance with their respective Percentage Interests,
except as modified by Article VII herein.
COMPLIANCE WITH TREASURY REGULATIONS
10.05 It is intended that the allocation and distribution provisions set
forth in this Article X apply in a manner consistent with the provisions of
Sections 704 and 706 of the Code, and the Treasury Regulations promulgated
for those sections. The General Partner shall have reasonable discretion to
apply the allocation and distribution provisions set forth in this Article
X in any manner consistent with Sections 704 and 706 of the Code and the
Treasury Regulations.
ARTICLE XI
LOANS TO PARTNERSHIP
Pursuant to a written agreement approved by the General Partner, any
partner may lend funds to the Partnership for Partnership business. The amount
of any loan or advance by the partner shall bear interest at the lesser of: (i)
3 % in excess of the base rate as published from time to time by Texas Commerce
Bank, N.A., or (ii) the maximum permissible interest rate allowable under
applicable usury laws. Loans made under this provision of this agreement shall
be deemed an obligation of indebtedness from the Partnership to the partner,
payable prior to any distributions to the partners.
ARTICLE XII
TRANSFERS OF PARTNERSHIP INTERESTS
RESTRICTION ON TRANSFERS BY PARTNERS, LOANS.
12.01 The Limited Partners may not transfer any or all of their respective
interests in the Partnership without the prior written consent of the
General Partner. The General Partner may withhold consent if the terms of
Section 12.02 and 12.03 are not met. By way of exception to the transfer
restriction of this paragraph, any Limited Partner may encumber pursuant to
a bank Uniform Commercial Code security agreement his interest in the
Partnership for the purpose
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of obtaining a loan the proceeds of which are to be delivered to the
Partnership as a capital contribution. Notwithstanding any provision of
this agreement to the contrary, the General Partner may pledge its interest
in the Partnership without restriction to secure borrowings under its bank
or other corporate loan agreements.
TRANSFER BY PARTNERS
12.02 Before any Partner may sell or otherwise transfer all or any part of
his interest in the Partnership to other than an immediate family member if
an individual or a wholly owned subsidiary if a corporation, he must first
notify the Partners in writing in the manner herein provided as to the
Partnership Interest he intends to sell or transfer, giving the name of the
proposed transferee, and the price and terms upon which the sale or
transfer is to be made; and thereupon, the other Partners shall have an
exclusive option for a period of thirty (30) days after the date of such
notice to purchase, at the price and the terms set out in the notice, all
of the Partnership Interest to be disposed of. Such right to purchase shall
be pro rata according to the remaining Partners interest in the
Partnership, or as the Partners may agree among themselves. If the option
is not exercised, the selling partner, subject to the provisions of
paragraph 12.01, may sell his Partnership Interest at the price, on the
terms, and to the transferee stated in the notice at any time within thirty
(30) days after the option expires, but not thereafter unless and until he
gives a new notice to the remaining Limited Partners and they again fail to
exercise their option. At the time of closing, the parties involved shall
execute all assignments and other documents necessary to effectuate the
sale and carry out the terms of the offer under the laws of the State of
Texas.
TRANSFER REQUIREMENTS
12.03 No permitted assignee or transferee of all or part of the interest of
the Limited Partners in the Partnership shall have the right to become a
substitute limited partner unless all of the following occur:
(a) The transferring Limited Partner has stated the intention that
the assignee become a limited partner in his or her own right in
the instrument of assignment;
(b) The assignee has executed an instrument reasonably satisfactory
to the General Partner, accepting and adopting the terms and
provisions of this agreement;
(c) The assignor or assignee pays any reasonable expenses in
connection with the admission of the assignee as a Limited
Partner;
(d) The General Partner reasonably believes the transfer will not
cause the Partnership to be taxed as a corporation;
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(e) The assignor and assignee provides evidence satisfactory to the
General Partner that the transfer will not create liability to
the Partnership under the federal or state securities laws.
(f) The assignment will not cause a dissolution of the Partnership;
and
(g) The General Partner consents to the assignee becoming a
substitute limited partner.
GENERAL PARTNER AS LIMITED PARTNER
12.04 To the extent that the General Partner owns an interest as a Limited
Partner, the General Partner shall, with respect to such interest, enjoy
all the rights and be subject to all the obligations and duties of a
Limited Partner to the extent of such interest.
TRANSFER BY GENERAL PARTNER
12.05 In addition to the requirements of Section 12.02, the General
Partner may not transfer any or all of its interest in the Partnership
without the prior written consent of a Required Interest. If a transfer is
approved, the transferee assumes all of the obligations of the General
Partner and the General Partner shall be relieved of all further
obligations and responsibilities. If a transfer of the General Partner's
interest is approved, the transfer will not cause the dissolution of the
Partnership, which may continue with the transferee as the General Partner
the same as if the transferee had been the initial General Partner.
The restrictions on the transfer of the General Partner's interest in the
Partnership do not apply to a transfer by the General Partner to an affiliate of
the General Partner.
ARTICLE XIII
DISSOLUTION AND TERMINATION
EVENTS OF DISSOLUTION
13.01 The Partnership shall be dissolved and its business wound up on the
earliest occurrence of any one of the following events:
(a) The expiration of the term of the Partnership as set forth in
Article III;
(b) The General Partner's determination, with the Limited Partners'
prior written consent, that the Partnership should be dissolved;
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(c) The dissolution, withdrawal or bankruptcy of the General Partner,
unless the Partnership is reconstituted in the manner prescribed
in paragraph 13.02 of this agreement. The dissolution, withdrawal
or bankruptcy of the General Partner will not result in the
dissolution of the Partnership so long as the successor to the
General Partner's interest in the Partnership, in accordance with
paragraph 13.02, assumes all of the General Partner's obligations
under this agreement. or
(d) The vote of the Required Interest within 30 days following the
date Deas H. Warley III ceases to be the principal executive
officer of the General Partner or the operator designated in
EXHIBIT "C".
ELECTION OF NEW GENERAL PARTNER
13.02 At the time of the dissolution, withdrawal or bankruptcy of the
General Partner, the business of the Partnership shall be continued on the
terms and subject to the conditions of this agreement if, within 30 days
after such event, the Limited Partners unanimously elect that the business
of the Partnership should be continued and, in such election, designate one
or more persons to be substituted as general partner. New General
Partner(s) elected by this procedure will succeed to all of the powers,
privileges and obligations of the then-existing General Partner. The
interest in the Partnership of the General Partner who is succeeded by new
General Partner(s) will become a Limited Partner's interest in the
Partnership. In the event of a dissolution, withdrawal or bankruptcy of the
General Partner and the failure of the Limited Partners to elect to
continue the business of the Partnership, the Partnership shall be
terminated forthwith.
NO RELEASE FROM LIABILITIES
13.03 It is understood and agreed that no dissolution of the Partnership
releases or relieves any of the parties to this agreement of their
contractual obligations under this agreement.
DISTRIBUTIONS IN LIQUIDATION
13.04 If the business of the Partnership is not continued, the General
Partner shall, if possible, act as liquidator. If the General Partner has
itself dissolved, withdrawn from the Partnership or declared or suffered a
bankruptcy, and if the Partnership is not reconstituted with a new General
Partner as provided in this agreement, a Limited Partner shall act as
liquidator. The liquidator shall liquidate the assets of the Partnership,
make appropriate adjustments to the capital accounts of the partners and
distribute the proceeds in the following order of priorities, so far as the
proceeds will go:
(a) To the payment of debts of the Partnership (other than loans made
from the partners to the Partnership), including the expenses of
liquidation;
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(b) To the repayment of any loans that have been made by the partners
to the Partnership, but if the amount available for such
repayment is insufficient, then pro rata up to the amounts
available;
(c) To all partners pro rata in accordance with their respective
capital account balances, as adjusted, up the amounts of those
capital accounts;
(d) To all partners pro rata according to their respective Percentage
Interests in the Partnership.
DISTRIBUTIONS IN KIND
13.05 In the event any or all of the assets of the Partnership cannot be
liquidated, those assets are to be distributed in kind according to the
priorities set forth in paragraph 13.04. Assets of the Partnership
distributed to the partners shall be held and owned by the partners as
tenants in common. In the event of the distribution of the Partnership
properties in kind, the fair market value of such assets shall be
determined by agreement of the partners. The amount of gain or loss which
would have been realized by the Partnership for federal income tax purposes
if the assets had been sold at such fair market value rather than
distributed in kind shall be treated as gain or loss from a disposition of
the assets of the Partnership, and allocated among the partners in
accordance with Article X, such allocations then being reflected in the
partners' respective capital accounts.
ARTICLE XIV
ACCOUNTING
FISCAL YEAR
14.01 The fiscal year of the Partnership shall be the calendar year.
BOOKS AND RECORDS
14.02 The General Partner shall keep or cause to be kept full and accurate
records of all transactions of the Partnership in accordance with
principles and practices generally accepted for the cash or accrual method
of accounting.
INSPECTION OF RECORDS
14.03 Any partner may, for any proper purpose during regular business
hours, inspect and copy any of the Partnership books and records at the
principal place of business of the Partnership as provided in Article V, or
make other reasonable inquiries as the Partnership affairs. Costs
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of reproducing or copying Partnership books and records shall be at the
expense of the requesting partner.
TAX RETURNS
14.04 Within 90 days after the end of each fiscal year, the General Partner
shall prepare, or cause to the prepared, state and federal income tax
returns for the Partnership and in connection with those tax returns, make
any available or necessary elections. The returns shall be filed by the
General Partner on or before the due date (including extensions).
ARTICLE XV
REPORTS AND STATEMENTS
Within 90 days after the end of each fiscal year of the Partnership, the
General Partner will deliver to the Limited partners, at the Partnership's
expense, financial statements setting forth, as of the end of and for that
fiscal year, the following:
(a) A profit and loss statement and a balance sheet of the
Partnership;
(b) The balance in the capital account of each partner;
(c) Any other information that, in the judgment of the General
Partner, is reasonable necessary for the Limited Partner to be
advised of the results of operations of the Partnership.
ARTICLE XVI
BANK ACCOUNTS
The General Partner shall open and maintain a special bank account or
accounts in which all funds of the Partnership shall be deposited. Withdrawals
from this account or these accounts may be made on the signature or signatures
of those persons designated by the General Partner.
The General Partner may not commingle the assets of the Partnership with
the assets of any other entity or person. However, the revenues and other
receipts of the Partnership may be deposited in a central account in the name of
the General Partner or an affiliate of the General Partner so long as separate
entries are made on the books and records of the Partnership and on the books
and records of the affiliate reflecting deposits in the bank account of the
affiliate with respect to amounts received from the Partnership and withdrawals
from the bank accounts made for the purpose of disbursing funds to the
Partnership or for the purpose of paying liabilities of the Partnership.
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ARTICLE XVII
NOTICES
Whenever any notice is required or permitted to be given under this
agreement, the notice must be in writing and signed by or on behalf of the
person giving the notice. The notice will be deemed to have been given when
delivered by personal delivery or deposited in the United States mail, postage
prepaid, certified mail, return receipt requested, properly addressed to the
persons who must receive notice at the addresses listed in this agreement or as
changed by written notice given according to this provision of this agreement.
ARTICLE XVIII
MISCELLANEOUS
COUNTERPARTS
18.01 This partnership agreement may be executed in any number of
counterparts with the same effect as if all parties had all signed the same
document. All counterparts shall be construed together and shall constitute
one agreement.
SIGNATURE PAGES
18.02 Each partner authorizes the General Partner to attach to this
partnership agreement an executed signature page containing the signature
of such partner.
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Executed and dated as follows:
GENERAL PARTNER: MIDLAND RESOURCES, INC.
By:
--------------------------------------
Name Printed: Deas H. Warley III
Title: President
Address: 16701 Greenspoint Park Dr.
Suite 200
Houston, Texas 77060
Date:
------------------------------------
INITIAL LIMITED PARTNER: -----------------------------------------
Deas H. Warley III
16701 Greenspoint Park Dr., Suite 200
Houston, Texas 77060
Date:
------------------------------------
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MIDLAND RESOURCES, INC.
1997 BOARD OF DIRECTORS STOCK INCENTIVE PLAN
Section 1. General Purpose of Plan; Definitions.
The name of this plan is the Midland Resources, Inc.1997 Board of Directors
Stock Incentive Plan (the "Plan"). The Plan was adopted by the Board on February
25, 1997. The purpose of the Plan is to create an incentive to the Board of
Directors, key employees and advisors, that is linked directly to increases in
stockholder value as reflected in the trading price of the Company's common
stock and will therefore inure to the benefit of all stockholders of the
Company.
For purposes of the Plan, the following terms shall be defined as set forth
below:
(1) Administration" means the Board and the Committee in accordance with
Section 2.
(2) "Board" means the Board of Directors of the Company.
(3) "Code" means the Internal Revenue Code of 1986, as amended from time to
time, or any successor thereto.
(4) "Committee" means the Board.
(5) "Company" means Midland Resources, Inc. a Texas corporation (or any
successor corporation).
(6) "Deferred Stock" means an award made pursuant to Section 7 below of the
right to receive Stock at the end of a specified deferral period.
(7) "Disability" means the inability of a Participant to perform
substantially his duties and responsibilities to the Company by reason of a
physical or mental disability or infirmity (i) for a continuous period of six
months, or (ii) at such earlier time as the Participant submits medical evidence
satisfactory to the Administrator that he has a physical or mental disability or
infirmity which will likely prevent him from returning to the performance of his
work duties for six months or longer. The date of such Disability shall be on
the last day of such six-month period or the day on which the Participant
submits such satisfactory medical evidence, as the case may be.
(8) "Effective Date" shall mean the date provided pursuant to Section 11.
(10) "Eligible Employee" means an officer, director, employee, consultant
or advisor of the Company or any Subsidiary.
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(11) "Fair Market Value" means, as of any given date, with respect to any
awards granted hereunder, (A) if the Stock is publicly traded, the price of the
Stock on such date as reported in the Wall Street Journal, or the average of the
closing price of the Stock on each day on which the Stock was traded over a
period of up to twenty trading days immediately prior to such date, (B) the fair
market value of the Stock as determined in accordance with a method prescribed
in the agreement evidencing any award hereunder, or (C) the fair market value of
the Stock as otherwise determined by the Administrator in the good faith
exercise of its discretion.
(12) "Limited Stock Appreciation Right" means a Stock Appreciation Right
that can be exercised only in the event of a "Change of Control" (as defined in
the award evidencing such Limited Stock Appreciation Right).
(13) "Non-Qualified Stock Option" means any Stock Option that is not an
Incentive Stock Option, including any Stock Option that provides (as of the time
such option is granted) that it will not be treated as an Incentive Stock
Option.
(14) "Parent Corporation" means any corporation (other the Company) in an
unbroken chain of corporations ending with the Company, if each of the
corporations in the chain (other than the Company) owns stock possessing 50% or
more of the combined voting power of all classes of stock in one of the other
corporations in the chain.
(15) "Participant" means any Eligible Employee, consultant or advisor to
the Company selected by the Administrator, pursuant to the Administrator's
authority in Section 2 below, to receive grants of Stock Options, Stock
Appreciation Rights, Limited Stock Appreciation Rights, Restricted Stock awards,
Deferred Stock awards, Performance Shares or any combination of the foregoing.
(16) "Performance Share " means an award of shares of Stock pursuant to
Section 7 that is subject to restrictions based upon the attainment of specified
performance objectives.
(17) "Restricted Stock" means an award granted pursuant to Section 7 of
shares of Stock subject to certain restrictions.
(18) "Stock" means the common stock, no par value, of the Company.
(19) "Stock Appreciation Right" means the right pursuant to an award
granted under Section 6 to receive an amount equal to the difference between (A)
the Fair Market Value, as of the date such Stock Appreciation Right or portion
thereof is surrendered, of the shares of Stock covered by such right or such
portion thereof, and (B) the aggregate exercise price of such right or such
portion thereof.
(20) "Stock Option " means any option to purchase shares of Stock granted
pursuant to Section 5.
(21) "Subsidiary" means any corporation (other than the Company) in an
unbroken chain of
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corporations beginning with the Company, if each of the corporations (other
than the last corporation) in the unbroken chain owns stock possessing 50% or
more of the total combined voting power of all classes of stock in one of the
other corporations in the chain.
SECTION 2. ADMINISTRATION.
The Plan shall be administered by the Board or the Committee.
Pursuant to the terms of the Plan, the Administrator shall have the power
and authority to grant to Eligible Employees, consultants and advisors to the
Company, pursuant to the terms of the Plan: (a) Stock Options, (b) Stock
Appreciation Rights or Limited Stock Appreciation Rights, (c) Restricted Stock,
(d) Performance Shares, (e) Deferred Stock or (f) any combination of the
foregoing.
In particular, the Administrator shall have the authority:
(a) to select those Eligible Employees, consultants and advisors of
the Company who shall be Participants;
(b) to determine whether and to what extent Stock Options, Stock
Appreciation Rights, Limited Stock Appreciation Rights, Restricted Stock,
Deferred Stock, Performance Shares or a combination of the foregoing, are
to be granted hereunder to Participants;
(c) to determine the number of shares of Stock to be covered by each
such award granted hereunder;
(d) to determine the terms and conditions, not inconsistent with the
terms of the Plan, of any award granted hereunder (including, but not
limited to, (x) the restrictions applicable to Restricted or Deferred Stock
awards and the conditions under which restrictions applicable to such
Restricted or Deferred Stock shall lapse, and (y) the performance goals and
periods applicable to the award of Performance Shares); and
(e) to determine the terms and conditions, not inconsistent with the
terms of the Plan, which shall govern all written instruments evidencing
the Stock Options, Stock Appreciation Rights, Limited Stock Appreciation
Rights, Restricted Stock, Deferred Stock, Performance Shares or any
combination of the foregoing.
The Administrator shall have the authority, in its discretion, to adopt,
alter and repeal such administrative rules, guidelines and practices governing
the Plan as it shall from time to time deem advisable; to interpret the terms
and provisions of the Plan and any award issued under the Plan (and any
agreements relating thereto); and to otherwise supervise the administration of
the Plan.
All decisions made by the Administrator pursuant to the provisions of the
Plan shall be final and binding on all persons, including the Company and the
Participants.
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SECTION 3. STOCK SUBJECT TO PLAN.
The total number of shares of Stock reserved and available for issuance
under the Plan shall be 1,235,000. Such shares may consist, in whole or in part,
of authorized and unissued shares or treasury shares.
To the extent that (i) a Stock Option expires or is otherwise terminated
without being exercised, or (ii) any shares of Stock subject to any Restricted
Stock, Deferred Stock or Performance Share award granted hereunder are
forfeited, such shares shall again be available for issuance in connection with
future awards under the Plan. If any shares of Stock have been pledged as
collateral for indebtedness incurred by a Participant in connection with the
exercise of a Stock Option and such shares are returned to the Company in
satisfaction of such indebtedness, such shares shall again be available for
issuance in connection with future awards under the Plan.
In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend or other change in corporate structure
affecting the Stock, a substitution or adjustment shall be made in (i) the
aggregate number of shares reserved for issuance under the Plan, (ii) the
kind, number and option price of shares subject to outstanding Stock Options
granted under the Plan, and (iii) the kind, number and purchase price of
shares issuable pursuant to awards of Restricted Stock, Deferred Stock and
Performance Shares, as may be determined by the Administrator, in its sole
discretion. Such other substitutions or adjustments shall be made as may be
determined by the Administrator, in its sole discretion. Am adjusted option
price shall also be used to determine the amount payable by the Company upon
the exercise of any Stock Appreciation Right or Limited Stock Appreciation
Right associated with any Stock Option. In connection with any event described
in this paragraph, the Administrator may provide, in its discretion, for the
cancellation of any outstanding awards and payment in cash or other property
therefor.
SECTION 4. ELIGIBILITY.
Members of the Board of Directors, officers (including officers who are
directors of the Company), employees of the Company, and consultants and
advisors to the Company who are responsible for or are in a position to
contribute to the management, growth and/or profitability of the business of
the Company shall be eligible to be granted Stock Options, Stock Appreciation
Rights, Limited Stock Appreciation Rights, Restricted Stock awards, Deferred
Stock awards or Performance Shares hereunder. The Participants under the Plan
shall be selected from time to time by the Administrator, in its sole
discretion, from among the Eligible Employees, consultants and advisors to
the Company recommended by the senior management of the Company, and the
Administrator shall determine, in its sole discretion, the number of shares
of Stock covered by each award.
SECTION 5. STOCK OPTIONS.
Stock Options may be granted alone or in addition to other awards granted
under the Plan. Any Stock Option granted under the Plan shall be in such form as
the Administrator may from time to time
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<PAGE>
approve, and the provisions of Stock Option awards need not be the same with
respect to each optionee. Recipients of Stock Options shall enter into a
subscription and/or award agreement with the Company, in such form as the
Administrator shall determine, which agreement shall set forth, among other
things, the exercise price of the option, the term of the option and
provisions regarding exercisability of the option granted thereunder.
The Stock Options granted under the Plan shall be Non-Qualified Stock
Options.
The Administrator shall have the authority to grant any Eligible Employee
Non-Qualified Stock Options,(with or without Stock Appreciation Rights or
Limited Stock Appreciation Rights). Consultants and advisors may only be granted
Non-Qualified Stock Options (with or without Stock Appreciation Rights or
Limited Stock Appreciation Rights). More than one option may be granted to the
same optionee and be outstanding concurrently hereunder.
Stock Options granted under the Plan shall be subject to the following
terms and conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Administrator shall deem
desirable:
(1.) OPTION PRICE. The option price per share of Stock purchasable under a
Stock Option shall be determined by the Administrator in its sole discretion at
the time of grant and shall not, in any event, be less than the par value (if
any) of the Stock.
(2) OPTION TERM. The term of each Stock Option shall be fixed by the
Administrator, but no Stock Option shall be exercisable more than ten years
after the date such Stock Option is granted.
(3) EXERCISABILITY. Stock Options shall be exercisable at such time or
times and subject to such terms and conditions as shall be determined by the
Administrator at or after grant. The Administrator may provide, in its
discretion, that any Stock Option shall be exercisable only in installments, and
the Administrator may waive such installment exercise provisions at any time in
whole or in part based on such factors as the Administrator may determine, in
its sole discretion, including but not limited to in connection with any "change
in control" of the Company, as defined in any stock option agreement.
Notwithstanding the foregoing, the exercisablity of any Stock Options granted
hereunder, unless specifically stated otherwise, shall contain the following
limitations on exercise, and any grant of Stock Options designated as Bonus
Options shall become exercisable as stated in (iv) below:
(i) one-fourth (1/4) of the total Stock Options (excluding Bonus Options)
granted to any one individual at any one time shall become exercisable only upon
the price per share of the Company's common stock trading at $6.50 or more
during three out of five consecutive trading days. The term "trades" means a
transaction effected on NASDAQ or any recognized stock exchange on which the
Company's stock is authorized for trading.
(ii) one-half (1/2) of the total Stock Options (excluding Bonus Options)
granted to any one individual at any one time shall become exercisable only upon
the price per share of the Company's
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common stock trading at $7.50 or more during three out of five consecutive
trading days.
(iii) one-fourth (1/4) of the total Stock Options (excluding Bonus Options)
granted to any one individual at any one time shall become exercisable only upon
the price per share of the Company's common stock trading at $8.50 or more
during three out of five consecutive trading days.
(iv) all (100%) Stock Options granted as Bonus Options to any one
individual at any one time shall become exercisable only upon the price per
share of the Company's common stock trading at $10.00 or more during three out
of five consecutive trading days.
(4) VESTING. Stock Options may contain provisions regarding the vesting
of any right to exercise such option as shall be determined by the Administrator
at grant.
(5) METHOD OF EXERCISE. Subject to Sections 5(3) and (4) above, Stock
Options may be exercised in whole or in part at any time during the option
period, by giving written notice of exercise to the Company specifying the
number of shares to be purchased, accompanied by payment in full of the purchase
price in cash or its equivalent as determined by the Administrator. As
determined by the Administrator, in its sole discretion, payment in whole or in
part may also be made (i) by means of any cashless exercise procedure approved
by the Administrator, (ii) in the form of unrestricted Stock already owned by
the optionee, or (iii) in the case of the exercise of a Non-Qualified Stock
Option, in the form of Restricted Stock or Performance Shares subject to an
award hereunder (based, in each case, on the Fair Market Value of the Stock on
the date the option is exercised). If payment of the option exercise price of a
Non-Qualified Stock Option is made in whole or in part in the form of Restricted
Stock or Performance Shares, the shares received upon the exercise of such Stock
Option (to the extent of the number of shares of Restricted Stock or Performance
Shares surrendered upon exercise of such Stock Option) shall be restricted in
accordance with the original terms of the Restricted Stock or Performance Share
award in question, except that the Administrator may direct that such
restrictions shall apply only to that number of shares equal to the number of
shares surrendered upon the exercise of such option. An optionee shall generally
have the rights to dividends and any other rights of a stockholder with respect
to the Stock subject to the option only after the optionee has given written
notice of exercise, has paid in full for such shares, and, if requested, has
given the representation described in paragraph (1) of Section 10.
The Administrator may require the voluntary surrender of all or a
portion of any Stock Option granted under the Plan as a condition precedent to
the grant of a new Stock Option. Subject to the provisions of the Plan, such new
Stock Option shall be exercisable at the price, during such period and on such
other terms and conditions as are specified by the Administrator at the time the
new Stock Option is granted. To the extent applicable, upon their surrender,
Stock Options shall be canceled and the shares previously subject to such
canceled Stock Options shall again be available for grants of Stock Options and
other awards hereunder.
(6) LOANS. The Company may not make loans available to Stock Option
holders in connection with the exercise of outstanding options granted under the
Plan.
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(7) NON-TRANSFERABILITY OF OPTIONS. Unless otherwise determined by the
Administrator no Stock Option shall be transferable by the optionee, and all
Stock Options shall be exercisable, during the optionee's lifetime, only by the
optionee.
(8) TERMINATION OF EMPLOYMENT OR SERVICE. If an optionee's employment
with or service as a consultant or advisor to the Company terminates by reason
of death, Disability or for any other reason, the Stock Option may thereafter be
exercised to the extent provided in the applicable option or award agreement, or
as otherwise determined by the Administrator.
SECTION 6. STOCK APPRECIATION RIGHTS AND LIMITED STOCK APPRECIATION RIGHTS.
(1) GRANT AND EXERCISE. Stock Appreciation Rights and Limited Stock
Appreciation Rights may be granted either alone ("Free Standing Rights") or in
conjunction with all or part of any Stock Option granted under the Plan
('Related Rights'). In the case of a Non-Qualified Stock Option, Related Rights
may be granted either at or after the time of the grant of such Stock Option.
A Related Right or applicable portion thereof granted in conjunction
with a given Stock Option shall terminate and no longer be exercisable upon the
termination or exercise of the related Stock Option, except that, unless
otherwise provided by the Administrator at the time of grant, a Related Right
granted with respect to less than the full number of shares covered by a related
Stock Option shall only be reduced if and to the extent that the number of
shares covered by the exercise or termination of the related Stock Option
exceeds the number of shares not covered by the Related Right.
A Related Right may be exercised by an optionee, in accordance with
paragraph (2) of this Section 6, by surrendering the applicable portion of the
related Stock Option. Upon such exercise and surrender, the optionee shall be
entitled to receive an amount determined in the manner prescribed in paragraph
(2) of this Section 6. Stock Options which have been so surrendered, in whole or
in part, shall no longer be exercisable to the extent the Related Rights have
been so exercised.
(2) TERMS AND CONDITIONS. Stock Appreciation Rights shall be subject
to such terms and conditions, not inconsistent with the provisions of the Plan,
as shall be determined from time to time by the Administrator, including the
following:
(a) Stock Appreciation Rights that are Related Rights ("Related Stock
Appreciation Rights") shall be exercisable only at such time or times and to the
extent that the Stock Options to which they relate shall be exercisable in
accordance with the provisions of Section 5 and this Section 6 of the Plan;
PROVIDED, however, that no Related Stock Appreciation Right shall be exercisable
during the first six months of its term, except that this additional limitation
shall not apply in the event of death or Disability of the optionee prior to the
expiration of such six-month period.
(b) Upon the exercise of a Related Stock Appreciation Right, an
optionee shall be entitled to
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receive up to, but not more than, an amount in cash or that number of shares
of Stock (or in some combination of cash and shares of Stock) equal in value
to the excess of the Fair Market Value of one share of Stock as of the date
of exercise over the option price per share specified in the related Stock
Option multiplied by the number of shares of Stock in respect of which the
Related Stock Appreciation Plight is being exercised, with the Administrator
having the right to determine the form of payment.
(c) Related Stock Appreciation Rights shall be transferable only when
and to the extent that the underlying Stock Option would be transferable under
paragraph (6) of Section 5 of the Plan.
(d) Upon the exercise of a Related Stock Appreciation Right, the Stock
Option or part thereof to which such Related Stock Appreciation Right is related
shall be deemed to have been exercised for the purpose of the limitation set
forth in Section 3 of the Plan on the number of shares of Stock to be issued
under the Plan, but only to the extent of the number of shares issued under the
Related Stock Appreciation Right.
(e)Stock Appreciation Plights that are Free Standing Rights ("Free
Standing Stock Appreciation Rights") shall be exercisable at such time or times
and subject to such terms and conditions as shall be determined by the
Administrator at or after grant; PROVIDED, HOWEVER, that no Free Standing Stock
Appreciation Right shall be exercisable during the first six months of its term,
except that this limitation shall not apply in the event of death or Disability
of the recipient of the Free Standing Stock Appreciation Right prior to the
expiration of such six-month period.
(f) The term of each Free Standing Stock Appreciation Right shall be
fixed by the Administrator, but no Free Standing Stock Appreciation Fight shall
be exercisable more than ten years after the date such right is granted.
(g) Upon the exercise of a Free Standing Stock Appreciation Right, a
recipient shall be entitled to receive up to, but not more than, an amount in
cash or that number of shares of Stock (or any combination of cash or shares of
Stock) equal in value to the excess of the Fair Market Value of one share of
Stock as of the date of exercise over the price per share specified in the Free
Standing Stock Appreciation Right (which price shall be no less than 100% of the
Fair Market Value of the Stock on the date of grant) multiplied by the number of
shares of Stock in respect to which the right is being exercised, with the
Administrator having the right to determine the form of payment.
(h) Free Standing Stock Appreciation Rights shall be transferable only
when and to the extent that a Stock Option would be transferable under
paragraph (6) of Section 5 of the Plan.
(i) In the event of the termination of employment or service of a
Participant who has been granted one or more Free Standing Stock Appreciation
Fights, such rights shall be exercisable at such time or times and subject to
such terms and conditions as shall be determined by the Administrator at or
after grant.
(j) Limited Stock Appreciation Rights may only be exercised within the
30-day period following
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a "Change of Control" (as defined by the Administrator in the agreement
evidencing such Limited Stock Appreciation Right) and, with respect to
Limited Stock Appreciation Rights that are Related Fights ("Related Limited
Stock Appreciation Rights"), only to the extent that the Stock Options to
which they relate shall be exercisable in accordance with the provisions of
Section 5 and this Section 6 of the Plan; PROVIDED, HOWEVER, that no Related
limited Stock Appreciation Right shall be exercisable during the first six
months of its term, except that this additional limitation shall not apply in
the event of death or Disability of the optionee prior to the expiration of
such six-month period.
(k) Upon the exercise of a Limited Stock Appreciation Right, the
recipient shall be entitled to receive an amount in cash equal in value to the
excess of the "Change of Control Price" (as defined in the agreement evidencing
such Limited Stock Appreciation Right) of one share of Stock as of the date of
exercise over (A) the option price per share specified in the related Stock
Option, or (B) in the case of a Limited Stock Appreciation Right which is a Free
Standing Stock Appreciation Right, the price per share specified in the Free
Standing Stock Appreciation Right, such excess to be multiplied by the number of
shares in respect of which the Limited Stock Appreciation Right shall have been
exercised.
SECTION 7. RESTRICTED STOCK, DEFERRED STOCK AND PERFORMANCE SHARES.
(1) General. Restricted Stock, Deferred Stock or Performance Share
awards may be issued either alone or in addition to other awards granted under
the Plan. The Administrator shall determine the Eligible Employees, consultants
and advisors to whom, and the time or times at which, grants of Restricted
Stock, Deferred Stock or Performance Share awards shall be made; the number of
shares to be awarded; the price, if any, to be paid by the recipient of
Restricted Stock, Deferred Stock or Performance Share awards; the Restricted
Period (as defined in paragraph (3) hereof) applicable to Restricted Stock or
Deferred Stock awards; the performance objectives applicable to Performance
Share or Deferred Stock awards; the date or dates on which restrictions
applicable to such Restricted Stock or Deferred Stock awards shall lapse during
such Restricted Period; and all other conditions of the Restricted Stock,
Deferred Stock and Performance Share awards. The Administrator may also
condition the grant of Restricted Stock, Deferred Stock awards or Performance
Shares upon the exercise of Stock Options, or upon such other criteria as the
Administrator may determine, in its sole discretion. The provisions of
Restricted Stock, Deferred Stock or Performance Share awards need not be the
same with respect to each recipient.
(2) Awards and Certificates. The prospective recipient of a Restricted
Stock, Deferred Stock or Performance Share award shall not have any rights with
respect to such award, unless and until such recipient has executed an agreement
evidencing the award (a "Restricted Stock Award Agreement," "Deferred Stock
Award Agreement" or "Performance Share Award Agreement," as appropriate) and
delivered a fully executed copy thereof to the Company, within a period of sixty
days (or such other period as the Administrator may specify) after the award
date. Except as otherwise provided below in this Section 7(2), (i) each
Participant who is awarded Restricted Stock or Performance Shares shall be
issued a stock certificate in respect of such shares of Restricted Stock or
Performance Shares; and (ii) such certificate shall be registered in the name of
the Participant, and shall bear an appropriate legend referring to the terms,
conditions, and restrictions applicable to such award.
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The Company may require that the stock certificates evidencing
Restricted Stock or Performance Share awards hereunder be held in the custody of
the Company until the restrictions thereon shall have lapsed, and that, as a
condition of any Restricted Stock award or Performance Share award, the
Participant shall have delivered a stock power, endorsed in blank, relating to
the Stock covered by such award.
With respect to Deferred Stock awards, at the expiration of the
Restricted Period, stock certificates in respect of such shares of Deferred
Stock shall be delivered to the participant, or his legal representative, in a
number equal to the number of shares of Stock covered by the Deferred Stock
award.
(3) Restrictions and Conditions. The Restricted Stock, Deferred Stock
and Performance Share awards granted pursuant to this Section 7 shall be subject
to the following restrictions and conditions:
(a) Subject to the provisions of the Plan and the Restricted Stock
Award Agreement, Deferred Stock Award Agreement or Performance Share Award
Agreement, as appropriate, governing such award, during such period as may be
set by the Administrator commencing on the grant date (the "Restricted Period"),
the Participant shall not be permitted to sell, transfer, pledge or assign
shares of Restricted Stock, Performance Shares or Deferred Stock awarded under
the Plan; PROVIDED, HOWEVER; that the Administrator may, in its sole discretion,
provide for the lapse of such restrictions in installments and may accelerate or
waive such restrictions in whole or in part based on such factors and such
circumstances as the Administrator may determine, in its sole discretion,
including, but not limited to, the attainment of certain performance related
goals, the Participant's termination of employment or service, death or
Disability or the occurrence of a "Change of Control" as defined in the
agreement evidencing such award.
(b) Except as provided in paragraph (3)(a) of this Section 7, the
Participant shall generally have, with respect to the shares of Restricted Stock
or Performance Shares, all of the rights of a stockholder with respect to such
stock during the Restricted Period. The Participant shall generally not have the
rights of a stockholder with respect to stock subject to Deferred Stock awards
during the Restricted Period; PROVIDED, HOWEVER; that dividends declared during
the Restricted Period with respect to the number of shares covered by a Deferred
Stock award shall be paid to the Participant. Certificates for shares of
unrestricted Stock shall be delivered to the Participant promptly after, and
only after, the Restricted Period shall expire without forfeiture in respect of
such shares of Restricted Stock, Performance Shares or Deferred Stock, except as
the Administrator, in its sole discretion, shall otherwise determine.
(c) The rights of holders of Restricted Stock, Deferred Stock and
Performance Share awards upon termination of employment or service for any
reason during the Restricted Period shall be set forth in the Restricted Stock
Award Agreement, Deferred Stock Award Agreement or Performance Share Award
Agreement, as appropriate, governing such awards.
SECTION 8. AMENDMENT AND TERMINATION.
10
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The Board may amend, alter or discontinue the Plan, but no amendment,
alteration, or discontinuation shall be made that would impair the rights of a
Participant under any award theretofore granted without such Participant's
consent.
The Administrator may amend the terms of any award theretofore granted,
prospectively or retroactively, but, subject to Section 3 above, no such
amendment shall impair the rights of any holder without his or her consent.
SECTION 9. UNFUNDED STATUS OF PLAN.
The Plan is intended to constitute an "unfunded" plan for incentive
compensation. With respect to any payments not yet made to a Participant by the
Company, nothing contained herein shall give any such Participant any rights
that are greater than those of a general creditor of the Company.
SECTION 10. GENERAL PROVISIONS.
(1) The Administrator may require each person purchasing shares
pursuant to a Stock Option to represent to and agree with the Company in writing
that such person is acquiring the shares without a view to distribution thereof.
The certificates for such shares may include any legend which the Administrator
deems appropriate to reflect any restrictions on transfer.
All certificates for shares of Stock delivered under the Plan shall be
subject to such stop-transfer orders and other restrictions as the Administrator
may deem advisable under the rules, regulations, and other requirements of the
Commission, any stock exchange upon which the Stock is then listed, and any
applicable federal or state securities law, and the Administrator may cause a
legend or legends to be placed on any such certificates to make appropriate
reference to such restrictions.
(2) Nothing contained in the Plan shall prevent the Board from adopting
other or additional compensation arrangements, subject to stockholder approval
if such approval is required; and such arrangements may be either generally
applicable or applicable only in specific cases. The adoption of the Plan shall
not confer upon any employee, consultant or advisor of the Company any right to
continued employment or service with the Company, as the case may be, nor shall
it interfere in any way with the right of the Company to terminate the
employment or service of any of its employees, consultants or advisors at any
time.
(3) Each Participant shall, no later than the date as of which the
value of an award first becomes includible in the gross income of the
Participant for federal income tax purposes, pay to the Company, or make
arrangements satisfactory to the Administrator regarding payment of, any
federal, state, or local taxes of any kind required by law to be withheld with
respect to the award. The obligations of the Company under the Plan shall be
conditional on the making of such payments or arrangements, and the Company
shall, to the extent permitted by law, have the right to deduct any such taxes
from any payment of any kind otherwise due to the Participant.
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(4) No member of the Board or the Administrator, nor any officer or
employee of the Company acting on behalf of the Board or the Administrator,
shall be personally liable for any action, determination, or interpretation
taken or made in good faith with respect to the Plan, and all members of the
Board or the Administrator and each and any officer or employee of the Company
acting on their behalf shall, to the extent permitted by law, be fully
indemnified and protected by the Company in respect of any such action,
determination or interpretation.
SECTION 11. EFFECTIVE DATE OF PLAN.
The Plan became effective (the "Effective Date") on February 25, 1997.
SECTION 12. TERMINATION OF PLAN.
No Stock Option, Stock Appreciation Fight, Limited Stock Appreciation
Right, Restricted Stock, Deferred Stock or Performance Share award shall be
granted pursuant to the Plan on or after the tenth anniversary of the Effective
Date, but awards theretofore granted may extend beyond that date.
MIDLAND RESOURCES, INC.
-------------------------------------------
Deas H. Warley III, President
12
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Exhibit to
MIDLAND RESOURCES, INC.
1997 BOARD OF DIRECTORS STOCK INCENTIVE PLAN
Form of Option Granted Directors
MIDLAND RESOURCES, INC.
STOCK OPTION AGREEMENT
(STOCK OPTION ONLY)
A Stock Option ("Option") is hereby granted by Midland Resources, Inc., a
Texas corporation ("Company"), to the member of the Board of Directors named
below ("Optionee"), for and with respect to common stock of the Company, $.001
par value per share ("Common Stock"), subject to the following terms and
conditions:
1. TERMS OF OPTION. Subject to the provisions set forth herein and the
terms and conditions of the Midland Resources, Inc. 1997 Board of Directors
Stock Incentive Plan ("Plan"), the terms of which are hereby incorporated
by reference, and in consideration of the agreements of Optionee herein
provided, the Company hereby grants to Optionee: an option to purchase from
the Company the number of shares of Common Stock, ("Shares") at the
purchase price per share, and with the terms, all as set forth below. At
the time of exercise of the Option, payment of the purchase price must be
made in cash, or if the committee ("Committee") of the Board of Directors
of the Company charged with the administration of the Plan in its
discretion agrees to so accept, then by the delivery to the Company of
other Common Stock owned by Optionee, valued at its fair market value on
the date of exercise, or in some combination of cash and such Common Stock
so valued.
Name of Optionee:
Address:
Social Security No.:
Number of Shares
Subject to Option:
Number of Shares
Granted as Bonus Options:
Option Price Per Share: $3.00
Date of Option Grant: February 25, 1997
Expiration of Option: March 1, 2002
Vesting :
(i) [ ] of the Shares subject to the Option shall vest and
become exercisable once the price per share of the Company's common stock
trades at $6.50 or more during three out of five consecutive trading days.
The term "trades" means a transaction effected on NASDAQ or any recognized
stock exchange on which the Company's stock is authorized for trading.
(ii) [ ] of the Shares subject to the Option shall vest and
become exercisable once the price per share of the Company's common stock
trades at $7.50 or more during three out of five consecutive trading days.
(iii) [ ] of the Shares subject to the Option shall vest and
become exercisable once the price per share of the Company's common stock
trades at $8.50 or more during three out of five consecutive trading days.
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<PAGE>
(iv) [ ] of the Shares subject to the Option granted as Bonus
Options shall vest and become exercisable once the price per share of the
Company's common stock trades at $10.00 or more during three out of five
consecutive trading days.
(v) Notwithstanding (i) through (iv) above, all Shares subject to the
Option, including Bonus Options, shall vest and become exercisable upon a
Change in Control, as defined herein.
2. EXERCISE.
A. ACCEPTANCE. The exercise of the Option is conditioned upon the
acceptance by Optionee of the terms hereof as evidenced by his execution of
this agreement in the space provided therefor at the end hereof and the
return of an executed copy to the Secretary of the Company no later than
March 28, 1997.
B. GENERAL EXERCISE RESTRICTIONS. Notwithstanding the vesting and
exercisability set forth above, the exercise of the Option is further
restricted as follows:
(a) No non Bonus Option Shares may be exercised prior to March 1, 1998;
(b) Up to [ ] of non Bonus Option Shares that have vested may
be exercised at any time on and after March 1, 1998;
(c) Up to an additional [ ] of non Bonus Option Shares that have
vested may be exercised at any time on and after March 1, 1999;
(d) Up to an additional [ ] of non Bonus Option Shares that have
vested may be exercised at any time on and after March 1, 2000;
(e) Once the [ ] Bonus Option Shares have vested all such Bonus
Option Shares may be exercised at any time; and
(f) Notwithstanding (a) through (e) above, there shall be no restriction
on the exercise of all Shares subject to the Option, including Bonus
Options, upon a Change in Control, as defined herein.
C. EXERCISE RESTRICTIONS ON TERMINATION AS DIRECTOR. If Optionee's
position as a director of the Company terminates due to the voluntary
resignation of Optionee or Optionee's failure or refusal to stand for re-
election, then the Options that have vested shall continue to be
exercisable only in the manner and to the extent set forth in paragraph B
above. Notwithstanding the limitations in paragraph B above, if Optionee's
position as a director with the Company is terminated for any other reason
including his disability or death, all vested Options shall immediately
become exercisable.
D. EXPIRATION OF OPTION ON TERMINATION AS DIRECTOR. If Optionee's
position as a director of the Company terminates due to the voluntary
resignation of Optionee or Optionee's failure or refusal to stand for re-
election, then the Option shall expire on the earlier of 90 days after such
termination or the date the Option expires in accordance with its terms. If
Optionee's position as a director with the Company is terminated for any
other reason including his disability or death, the Option shall expire on
the earlier of the first anniversary of such termination or the date the
Option expires in accordance with its terms.
E. EXERCISE OF VESTED SHARES ONLY AND TERMINATION OF UN-VESTED SHARES.
During such 90 day or one year period referred to in paragraph D above, the
Option may be exercised as provided herein by Optionee with respect to only
that number of Shares which had vested on the date of any such
14
<PAGE>
termination and the Option shall be canceled with respect to all un-vested
shares of Common Stock; provided that in the event Optionee shall die at a
time when the Option, or any portion thereof is exercisable by him, the
exercisable portion of the Option shall be exercisable in whole or in part
during the applicable period set forth herein by a legatee or legatees of
the Option under Optionee's will, or by his executors, personal
representatives or distributees, with respect to the number of shares of
Common Stock which Optionee could have purchased hereunder on the date of
his death and the Option shall be canceled with respect to all remaining
shares of Common Stock.
F. NOTICE OF ELECTION TO EXERCISE. Written notice of an election to
exercise any portion of the Option, specifying the portion thereof being
exercised and the exercise date, shall be given by Optionee, or his
personal representative in the event of Optionee's death, (I) by delivering
such notice at the principal executive offices of the Company no later than
the exercise date, or (ii) by mailing such notice, postage prepaid,
addressed to the Secretary of the Company at the principal executive
offices of the Company at least three business days prior to the exercise
date.
G. CHANGE IN CONTROL. The term " Change in Control" shall mean(i) if (A)
Deas H. Warley III shall have beneficial ownership of fewer than 40% of the
number of shares of Common Stock (on a fully diluted basis) beneficially
owned by him on January 1, 1997, after taking into account any subdivision
or combination of Common Stock, at any time prior to the first anniversary
of the grant of this Option, or (B) at any time prior to the second
anniversary of the grant of this Option Deas H. Warley III shall have
beneficial ownership of fewer than 30% of the number of shares of Common
Stock beneficially owned by him on January 1, 1997, after taking into
account any subdivision or combination of Common Stock, (it being
understood that Deas H. Warley III shall be deemed to have beneficial
ownership of any shares held by any member of his immediate family or the
trustee of any trust created for the benefit of any such family member), or
(ii) the acquisition in one or more transactions of Common Stock by any
Person or group (within the meaning of Section 13(d)(3) of the Exchange
Act) together with any affiliate of such Person or member of such group of
beneficial ownership, direct or indirect, of securities of the Company
representing 25% or more of the combined voting power of the Company's then
outstanding voting securities or that amount of securities of the Company
entitling such Person or group to elect a majority of the members of the
board of directors of the Company, or (iii) the sale, transfer or other
disposition in one or more transactions of all or substantially all of the
assets of the Company or (iv) the merger or consolidation of the Company
with or into another Person, other than a wholly-owned subsidiary of the
Company or (v) the Company proceeds to acquire its Common Stock (or
undertakes a corporate reorganization or recapitalization or other action)
if the effect of such acquisition (or other action) would be either (1) to
reduce substantially or to eliminate any public market for the shares of
the Company's Common Stock or (2) to remove the Company from registration
under the Securities Exchange Act of 1934 ("Exchange Act") or (3) to
require the Company to make a filing under Section 13(e) of the Exchange
Act or (4) to cause a delisting of the Company's Common Stock from the
National Association of Securities Dealers, Inc. Automated Quotation System
(unless such stock is delisted as a result of being listed on a national
securities exchange) or to cause a delisting of the Company's Common Stock
from a national securities exchange, or (vi) either the Company and/or one
or more of the significant subsidiaries of the Company is materially or
completely liquidated or is the subject of any voluntary or involuntary
dissolution or winding up.
3. ASSIGNABILITY. The Option may be exercised only by Optionee during his
lifetime and may not be transferred other than by will or the applicable
laws of descent or distribution. The Option shall not otherwise be
transferred, assigned, pledged or hypothecated for any purpose whatsoever
and is not subject, in whole or in part, to execution, attachment, be
similar process. Any attempted assignment, transfer, pledge or
hypothecation or other disposition of the Option, other than in accordance
with the
15
<PAGE>
terms set forth herein, shall be void and of no effect.
4. STATUS AS SHAREHOLDERS. Neither Optionee nor any other person entitled to
exercise the Option under the terms hereof shall be, or have any of the
rights or privileges of, a shareholder of the Company in respect of any of
the shares of Common Stock issuable on exercise of the Option, unless and
until the purchase price for such shares shall have been paid in full and
the shares issued.
5. SURRENDER OF AGREEMENT, NOTATION. In the event the Option shall be
exercised in whole, this agreement shall be surrendered to the Company for
cancellation. In the event the Option shall be exercised in part, or a
change in the number or designation of the Common Stock shall be made, this
agreement shall be delivered by Optionee to the Company for the purpose of
making appropriate notation thereon, or of otherwise reflecting, in such
manner as the Company shall determine, the partial exercise or the change
in the number or designation of the Common Stock.
6. ADMINISTRATIVE REGULATIONS. The Option shall be exercised in accordance
with such administrative regulations as the Committee shall from time to
time adopt.
7. TEXAS LAWS. The Option and this agreement shall be construed,
administrative and governed in all respects under and by the laws of the
State of Texas.
8. RESTRICTIONS. SECURITIES LAW. Neither the Option nor the Shares of
Common Stock to be received upon the exercise thereof have at the date of
grant been registered pursuant to the Securities Act of 1933, ("Securities
Act") as amended or any state securities laws. The Shares issuable upon
exercise of the Option may not be transferred, sold or otherwise disposed
of without registration under the Securities Act and any applicable state
security laws, or exemption therefrom. The Shares issuable upon the
exercise of the Option will not be transferred on the records of the
Company and new certificates issued unless evidence satisfactory to the
Company is presented that such transfer will not be a violation of the
Securities Act or any applicable state securities laws, and to evidence
such restriction each certificate of Common Stock issued to Optionee shall
bear the following or similar restrictive legend:
"The shares represented by this certificate have not been registered under
the Securities act of 1933, as amended, or the securities laws of any
state, pursuant to one or more exemptions therefrom. Such shares may not
be sold, transferred or otherwise disposed of in the absence of any such
registration unless the Company is furnished with an opinion of counsel
reasonably satisfactory to the Company to the effect that such transfer is
exempt from registration under such laws."
MIDLAND RESOURCES, INC
By:
Deas H. Warley III, President
The undersigned hereby accepts the foregoing Option and the terms and
conditions hereof.
------------------------------------------
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<PAGE>
PURCHASE AND SALE AGREEMENT
BY AND BETWEEN
REDFISH BAY DEVELOPMENT CORPORATION AND
PI ENERGY CORPORATION
BUYER
AND
MIDLAND RESOURCES, INC. AND
SUMMIT PETROLEUM CORPORATION
SELLER
DATED EFFECTIVE FEBRUARY 1, 1997
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
ARTICLE 1: SUBJECT MATTER, DEFINITIONS AND RULES OF CONSTRUCTION
1.01 Subject Matter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.02 Definitions.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.02.01 "Affiliate". . . . . . . . . . . . . . . . . . . . . . . . 1
1.02.02 "Agreed Rate". . . . . . . . . . . . . . . . . . . . . . . 1
1.02.03 "Agreement". . . . . . . . . . . . . . . . . . . . . . . . 1
1.02.04 "Assets" . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.02.05 "Assumed Liabilities". . . . . . . . . . . . . . . . . . . 3
1.02.06 "Business Day" . . . . . . . . . . . . . . . . . . . . . . 3
1.02.07 "Closing". . . . . . . . . . . . . . . . . . . . . . . . . 3
1.02.08 "Closing Date" . . . . . . . . . . . . . . . . . . . . . . 3
1.02.09 "Code" . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.02.10 "Contracts". . . . . . . . . . . . . . . . . . . . . . . . 4
1.02.11 "Corporate Documents" . . . . . . . . . . . . . . . . . . 4
1.02.12 "Easements". . . . . . . . . . . . . . . . . . . . . . . . 4
1.02.13 "Effective Date" . . . . . . . . . . . . . . . . . . . . . 4
1.02.14 "Excluded Assets" . . . . . . . . . . . . . . . . . . . . 4
1.02.15 "Excluded Facilities". . . . . . . . . . . . . . . . . . . 4
1.02.16 "Facilities" . . . . . . . . . . . . . . . . . . . . . . . 4
1.02.17 "Governmental Body". . . . . . . . . . . . . . . . . . . . 4
1.02.18 "Hydrocarbon Inventory". . . . . . . . . . . . . . . . . . 5
1.02.19 "Hydrocarbons" . . . . . . . . . . . . . . . . . . . . . . 5
1.02.20 "Identification Date". . . . . . . . . . . . . . . . . . . 5
1.02.21 "Included Facilities". . . . . . . . . . . . . . . . . . . 5
1.02.22 "Knowledge". . . . . . . . . . . . . . . . . . . . . . . . 5
1.02.23 "Leases" . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.02.24 "Line Fill". . . . . . . . . . . . . . . . . . . . . . . . 5
1.02.25 "Losses" . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.02.26 "Material Contracts" . . . . . . . . . . . . . . . . . . . 5
1.02.27 "Other Contracts". . . . . . . . . . . . . . . . . . . . . 6
1.02.28 "Other Property" . . . . . . . . . . . . . . . . . . . . . 6
1.02.29 "Party". . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.02.30 "Person" . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.02.31 "Plugging and Abandonment" . . . . . . . . . . . . . . . . 7
1.02.32 "Property" . . . . . . . . . . . . . . . . . . . . . . . . 7
1.02.33 "Tax" . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.02.34 "Third Person" . . . . . . . . . . . . . . . . . . . . . . 7
1.03 Other Definitions in this Agreement. . . . . . . . . . . . . . . . . . . 7
1.04 Rules of Construction . . . . . . . . . . . . . . . . . . . . . . . . . . 8
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1.04.01 General. . . . . . . . . . . . . . . . . . . . . . . . . . 8
1.04.02 Articles.. . . . . . . . . . . . . . . . . . . . . . . . . 9
1.04.03 Exhibits and Schedules.. . . . . . . . . . . . . . . . . . 9
1.04.04 Other Agreements.. . . . . . . . . . . . . . . . . . . . . 9
1.05 Pi Energy Corporation.. . . . . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE 2: SALE AND PURCHASE
2.01 Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.02 Purchase Price and Payment. . . . . . . . . . . . . . . . . . . . . . . . 9
2.03 Adjustments to the Purchase Price.. . . . . . . . . . . . . . . . . . . . 9
2.03.01 Upward Adjustments.. . . . . . . . . . . . . . . . . . . . 9
2.03.02 Downward Adjustments.. . . . . . . . . . . . . . . . . . .10
2.04 Allocation of Purchase Price. . . . . . . . . . . . . . . . . . . . . . .11
2.05 Transfer of the Assets, Etc.. . . . . . . . . . . . . . . . . . . . . . .11
2.06 Method of Payment.. . . . . . . . . . . . . . . . . . . . . . . . . . . .11
ARTICLE 3: REPRESENTATIONS AND WARRANTIES
3.01 Seller. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
3.01.01 Organization and Standing. . . . . . . . . . . . . . . . .11
3.01.02 Authority. . . . . . . . . . . . . . . . . . . . . . . . .12
3.01.03 Validity of Agreement. . . . . . . . . . . . . . . . . . .12
3.01.04 No Violation. . . . . . . . . . . . . . . . . . . . . . .12
3.01.05 Legal Proceedings. . . . . . . . . . . . . . . . . . . . .12
3.01.06 Compliance with Applicable Laws. . . . . . . . . . . . . .12
3.01.07 Contracts. . . . . . . . . . . . . . . . . . . . . . . . .12
3.01.08 Assets . . . . . . . . . . . . . . . . . . . . . . . . . .13
3.01.09 Authorizations for Expenditures. . . . . . . . . . . . . .13
3.01.10 Equipment. . . . . . . . . . . . . . . . . . . . . . . . .13
3.01.11 Wells. . . . . . . . . . . . . . . . . . . . . . . . . . .14
3.01.12 Exchange of Equipment. . . . . . . . . . . . . . . . . . .14
3.01.13 Payout Balances. . . . . . . . . . . . . . . . . . . . . .14
3.01.14 No Preferential Rights . . . . . . . . . . . . . . . . . .14
3.01.15 No Consents Required . . . . . . . . . . . . . . . . . . .14
3.01.16 Prepayment.. . . . . . . . . . . . . . . . . . . . . . . .14
3.01.17 Payments. . . . . . . . . . . . . . . . . . . . . . . . .14
3.01.18 Conduct of Business. . . . . . . . . . . . . . . . . . . .15
3.01.19 Jaffe Agreement. . . . . . . . . . . . . . . . . . . . . .15
3.01.20 Losses.. . . . . . . . . . . . . . . . . . . . . . . . . .15
3.01.21 Changes. . . . . . . . . . . . . . . . . . . . . . . . . .15
3.01.22 Imbalances . . . . . . . . . . . . . . . . . . . . . . . .15
3.02 Buyer.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
3.02.01 Organization and Standing. . . . . . . . . . . . . . . . .16
3.02.02 Authority. . . . . . . . . . . . . . . . . . . . . . . . .16
3.02.03 Validity of Agreement. . . . . . . . . . . . . . . . . . .16
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3.02.04 No Violation.. . . . . . . . . . . . . . . . . . . . . . .16
3.02.05 No Consents Required.. . . . . . . . . . . . . . . . . . .16
3.02.06 Securities Representation. . . . . . . . . . . . . . . . .16
3.03 Disclaimer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
ARTICLE 4: COVENANTS
4.01 Covenants of Buyer. . . . . . . . . . . . . . . . . . . . . . . . . . . .19
4.01.01 Performance Bonds, Guaranties, Etc. . . . . . . . . . . .19
4.01.02 Assumption of Assumed Liabilities. . . . . . . . . . . . .19
4.02 Covenants of Seller and Buyer.. . . . . . . . . . . . . . . . . . . . . .19
4.02.01 Recording. . . . . . . . . . . . . . . . . . . . . . . . .19
4.02.02 Brokers. . . . . . . . . . . . . . . . . . . . . . . . . .19
4.02.03 Certain Filings, Consents and Permits. . . . . . . . . . .19
4.02.04 Post-Closing Access. . . . . . . . . . . . . . . . . . . .20
4.02.05 Employee Matters.. . . . . . . . . . . . . . . . . . . . .20
4.02.06 Final Recapitulation Settlement; Subsequent Audits and
Settlements. . . . . . . . . . . . . . . . . . . . . . . .20
4.02.07 Further Assurances.. . . . . . . . . . . . . . . . . . . .21
4.02.08 Files Transfer.. . . . . . . . . . . . . . . . . . . . . .21
4.02.09 Plugging and Abandonment.. . . . . . . . . . . . . . . . .22
ARTICLE 5: TAXES
5.01 Payment and Apportionment of Real Property Taxes and Personal Property
Taxes.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
5.01.01 Real and Personal Property Taxes.. . . . . . . . . . . . .22
5.01.02 Liability and Right to Pursue Claims.. . . . . . . . . . .22
5.02 Other Taxes.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
5.03 Sales Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
5.04 Tax Proceedings.. . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
5.05 Purchase Price Allocation.. . . . . . . . . . . . . . . . . . . . . . . .23
ARTICLE 6: ENVIRONMENTAL MATTERS
6.01 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
6.02 Seller Representations. . . . . . . . . . . . . . . . . . . . . . . . . .24
6.02.01 Disclosure . . . . . . . . . . . . . . . . . . . . . . . .24
6.02.02 Past Use of Property Interest. . . . . . . . . . . . . . .24
6.03 Seller's Indemnity. . . . . . . . . . . . . . . . . . . . . . . . . . . .24
6.04 Limitations.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
6.05 Buyer's Responsibilities. . . . . . . . . . . . . . . . . . . . . . . . .25
6.06 Exclusive Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . .25
ARTICLE 7: INDEMNITY
7.01 General Indemnification.. . . . . . . . . . . . . . . . . . . . . . . . .26
7.01.01 Seller.. . . . . . . . . . . . . . . . . . . . . . . . . .26
7.01.02 Buyer. . . . . . . . . . . . . . . . . . . . . . . . . . .26
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7.02 Method of Asserting Claims, Etc.. . . . . . . . . . . . . . . . . . . . .27
7.02.01 Third Person Claims. . . . . . . . . . . . . . . . . . . .27
7.02.02 Other Claims.. . . . . . . . . . . . . . . . . . . . . . .28
7.03 Payment.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
7.03.01 Payment of Undisputed Amount.. . . . . . . . . . . . . . .28
7.03.02 Interest. . . . . . . . . . . . . . . . . . . . . . . . .28
7.03.03 Disputed Claims. . . . . . . . . . . . . . . . . . . . . .28
ARTICLE 8: CONDITIONS PRECEDENT
8.01 Conditions Precedent of Buyer.. . . . . . . . . . . . . . . . . . . . . .28
8.01.01 Representations and Warranties True at Closing.. . . . . .29
8.01.02 Compliance with Agreement. . . . . . . . . . . . . . . . .29
8.01.03 Certified Resolutions and Officers' Certificate. . . . . .29
8.01.04 Injunction.. . . . . . . . . . . . . . . . . . . . . . . .29
8.01.05 Conveyance.. . . . . . . . . . . . . . . . . . . . . . . .29
8.01.06 Letters in Lieu. . . . . . . . . . . . . . . . . . . . . .29
8.01.07 No Material Adverse Change.. . . . . . . . . . . . . . . .29
8.02 Conditions Precedent of Seller. . . . . . . . . . . . . . . . . . . . . .30
8.02.01 Representations and Warranties True at Closing.. . . . . .30
8.02.02 Compliance with Agreement. . . . . . . . . . . . . . . . .30
8.02.03 Certified Resolutions and Officers' Certificate. . . . . .30
8.02.04 Injunction.. . . . . . . . . . . . . . . . . . . . . . . .30
8.02.05 Conveyance.. . . . . . . . . . . . . . . . . . . . . . . .30
8.02.06 Letters in Lieu. . . . . . . . . . . . . . . . . . . . . .30
ARTICLE 9: MISCELLANEOUS
9.01 Notices.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
9.02 Modification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
9.03 Governing Law.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
9.04 Assignment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
9.05 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
9.06 Invalidity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
9.07 Entire Agreement and Construction.. . . . . . . . . . . . . . . . . . . .32
9.08 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
9.09 Waivers and Amendments. . . . . . . . . . . . . . . . . . . . . . . . . .32
9.10 Survival of Warranties, Representations and Covenants. . . . . . . . . .33
9.11 Article Headings. . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
9.12 Dispute Resolution. . . . . . . . . . . . . . . . . . . . . . . . . . . .33
9.12.01 Selection of Arbitrator. . . . . . . . . . . . . . . . . .33
9.12.02 Qualifications of Arbitrator.. . . . . . . . . . . . . . .33
9.12.03 Suit Prohibited. . . . . . . . . . . . . . . . . . . . . .34
9.12.04 Damages. . . . . . . . . . . . . . . . . . . . . . . . . .34
9.12.05 Decision. . . . . . . . . . . . . . . . . . . . . . . . .34
9.12.06 AAA Rules. . . . . . . . . . . . . . . . . . . . . . . . .34
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EXHIBITS AND SCHEDULES
- --------------------------------------------------------------------------------
Exhibits and Schedules are described on the pages noted below.
EXHIBITS
Exhibit A (Assignment) . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Exhibit B (Bill of Sale) . . . . . . . . . . . . . . . . . . . . . . . . . . .11
SCHEDULES
Schedule 3.01.05 (Legal Proceedings) . . . . . . . . . . . . . . . . . . . . .12
Schedule 3.01.06 (Non-Compliance With Laws). . . . . . . . . . . . . . . . . .12
Schedule 3.01.07 (Certain Contracts) . . . . . . . . . . . . . . . . . . . . .12
Schedule 3.01.08 (Breaches of Material Contracts). . . . . . . . . . . . . . .13
Schedule 3.01.09 (Pending AFE Items) . . . . . . . . . . . . . . . . . . . . .13
Schedule 3.01.11A (Allowables) . . . . . . . . . . . . . . . . . . . . . . . .14
Schedule 3.01.11B (P&A Obligations). . . . . . . . . . . . . . . . . . . . . .14
Schedule 3.01.12 (Exchange/Removal of Equipment) . . . . . . . . . . . . . . .14
Schedule 3.01.13 (Payout Balances) . . . . . . . . . . . . . . . . . . . . . .14
Schedule 3.01.15 (Consents). . . . . . . . . . . . . . . . . . . . . . . . . .14
Schedule 3.01.18 (Non-Standard Operations) . . . . . . . . . . . . . . . . . .15
Schedule 3.01.19 (Jaffe Contract Balance). . . . . . . . . . . . . . . . . . .15
Schedule 4.02.02 (Brokers and Finders) . . . . . . . . . . . . . . . . . . . .19
Schedule A (Leases). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Schedule B (Easements) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Schedule C (Excluded Facilities) . . . . . . . . . . . . . . . . . . . . . . . 4
Schedule D (Material Contracts). . . . . . . . . . . . . . . . . . . . . . . . 5
Schedule E (Marine Equipment). . . . . . . . . . . . . . . . . . . . . . . . . 6
Schedule F (Excluded Yard Inventory/Equipment) . . . . . . . . . . . . . . . . 6
Schedule G (Property, Accounting Unit, Allocated Value). . . . . . . . . . . . 7
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PURCHASE AND SALE AGREEMENT
This Agreement dated effective as of February 1, 1997, is made and entered
into by and between REDFISH BAY DEVELOPMENT CORPORATION, a Texas corporation,
and PI ENERGY CORPORATION, a Texas corporation, both having offices at 333 Clay
Street, Suite 4310, Houston, TX 77002 (collectively, jointly and severally,
"Buyer") and MIDLAND RESOURCES, INC., a Texas corporation, and SUMMIT PETROLEUM
CORPORATION, a Colorado corporation, both having offices at 16701 Greens Point
Park Drive, #200, Houston, Texas 77060 (collectively, jointly and severally,
"Seller").
ARTICLE 1
SUBJECT MATTER, DEFINITIONS AND RULES OF CONSTRUCTION
1.01 SUBJECT MATTER. The subject matter of this Agreement is the sale,
assignment, transfer and conveyance of Seller's and Seller's Affiliates'
interest in the Assets, the purchase of the Assets and the assumption of the
Assumed Liabilities by Buyer, and the terms and conditions upon which the sale
shall take place.
1.02 DEFINITIONS. For purposes of this Agreement, except as otherwise expressly
provided or unless the context otherwise requires, the terms defined in this
Article have the meanings herein assigned to them and the capitalized terms
defined elsewhere in this Agreement, by inclusion in quotation marks and
parentheses, shall have the meanings so ascribed to them.
1.02.01 "AFFILIATE" means, with respect to any specified Person, any
other Person directly or indirectly controlling or controlled by or
under direct or indirect common control with such specified Person. For
the purposes of this definition, "control" means the power to direct the
management and policies of such Person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative
to the foregoing, it being understood and agreed that with respect to a
corporation, control shall mean a direct or indirect ownership of more
than 50 percent of the voting stock.
1.02.02 "AGREED RATE" means a rate per annum calculated on a 360-day
basis which is equal to the lesser of :
(a) a rate which is two percent above the prime rate of interest as
published by the WALL STREET JOURNAL under the heading "Money Rates"
or another similar heading in its first issue of each calendar month
(adjusted each month to reflect any changes in the rate), or
(b) the maximum rate from time to time permitted by applicable Law.
1.02.03 "AGREEMENT" means this Purchase and Sale Agreement, including the
Schedules and Exhibits.
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1.02.04 "ASSETS" means the Leases, Other Property, Easements, and
Contracts, but not including the following (the "Excluded Assets"):
(a) all trade credits, accounts receivable, notes receivables and
other receivables attributable to Seller's interest in the Assets with
respect to any period of time prior to the Effective Date;
(b) all deposits, cash, checks in process of collection, cash
equivalents and funds attributable to Seller's interest in the Assets
with respect to any period of time prior to the Effective Date; and
(c) all funds attributable to Third Persons for production prior to
the Effective Date but suspended or impounded by Seller;
(d) all claims and causes of action of Seller
(i) arising from acts, omissions or events, or damage to or
destruction of property, occurring prior to the Effective Date,
or
(ii) affecting any of the Excluded Assets;
(e) except as set forth in Article 4.03.06, all rights, titles,
claims and interests of Seller
(i) under any policy or agreement of insurance or indemnity;
(ii) under any bond; or
(iii) to any insurance or condemnation proceeds or awards;
(f) the claims of Seller for refunds of or loss carry forwards with
respect to
(i) Taxes attributable to any period prior to the Effective
Date; or
(ii) Taxes attributable to any of the Excluded Assets;
(g) all amounts due or payable to Seller as adjustments or refunds
under any Contracts affecting the Assets, with respect to any period
prior to the Effective Date, specifically including, without
limitation, amounts recoverable from audits under operating
agreements;
(h) all amounts due or payable to Seller as adjustments to insurance
premiums related to the Assets with respect to any period prior to the
Effective Date;
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(i) all proceeds, benefits, income or revenues accruing (and any
security or other deposits made) with respect to
(i) the Assets prior to the Effective Date; and
(ii) any of the Excluded Assets;
(j) any pipelines, easements, fixtures, tanks or equipment located on
the Assets which belong to Third Persons;
(k) records and documents subject to confidentiality provisions,
claims of privilege, or other restrictions on access, except as
otherwise expressly provided herein;
(l) all corporate, financial, legal and tax records of Seller, except
as otherwise expressly provided herein; and
(m) the Excluded Facilities.
1.02.05 "ASSUMED LIABILITIES" means:
(a) all liabilities, duties, and obligations that arise from
ownership or operation of the Assets on and after the Effective Date
or otherwise expressly assumed under this Agreement;
(b) liabilities and obligations with respect to Plugging and
Abandonment;
(c) all duties, liabilities and obligations that arise under the
Contracts (including the Jaffe Agreement defined below) on and after
the Effective Date.
1.02.06 "BUSINESS DAY" means any day when commercial banks are generally
open for regular business in the states of New York and Texas.
1.02.07 "CLOSING" means the closing of the transactions contemplated by
this Agreement at 10:00 a.m., local time, at Seller's offices in Houston,
Texas, on the Closing Date or at such other time or place as the Parties
may mutually agree upon in writing.
1.02.08 "CLOSING DATE" means February 28, 1997, subject to extension as
provided herein, or such other date as the Parties may mutually agree upon
in writing.
1.02.09 "CODE" means the United States Internal Revenue Code of 1986, as
amended.
1.02.10 "CONTRACTS" means the Material Contracts and the Other Contracts.
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1.02.11 "CORPORATE DOCUMENTS" means a corporation's articles of
incorporation (or certificate of incorporation) and by-laws or the
equivalent documents.
1.02.12 "EASEMENTS" means Seller's non-exclusive rights to the use and
occupancy of the surface (including the surface of submerged lands),
including, without limitation, tenements, appurtenances, surface leases,
easements, permits, licenses, servitudes and rights-of-way in any way
appertaining, belonging, affixed or incidental to or used in connection
with the ownership or operation of the Leases including, without
limitation, those set forth on Schedule B.
1.02.13 "EFFECTIVE DATE" shall mean 7:00 a.m. on February 1, 1997, at the
location of the Assets.
1.02.14 "EXCLUDED ASSETS" means the assets excluded from the
definition of Assets as stated in Article 1.02.04.
1.02.15 "EXCLUDED FACILITIES" means Facilities that are:
(a) neither located on nor used in connection with the Leases;
(b) not located on the Leases or Easements and that are used in
connection with the Leases or Easements, and Seller's retained
properties; or
(c) identified on Schedule C.
1.02.16 "FACILITIES" means facilities and equipment that are customarily
used directly in the production of Hydrocarbons, including, but not limited
to injection facilities, disposal facilities, field separators, liquid
extractors, compressors, gathering systems, lines, LACT units, plants,
platforms, tanks and the like.
1.02.17 "GOVERNMENTAL BODY" means any federal, state, county, municipal,
or other federal, state or local governmental authority or judicial or
regulatory agency, board, body, department, bureau, commission,
instrumentality, court, tribunal or quasi-governmental authority in any
jurisdiction (domestic or foreign) having jurisdiction over any Asset or
Party to this transaction, or any of the transactions or matters
contemplated by this Agreement.
1.02.18 "HYDROCARBON INVENTORY" means all processed merchantable oil,
condensate and natural gas liquids inventories in storage or existing in
oil stock tanks above the outlet flange delivery point and credited to the
Assets as of the Effective Date.
1.02.19 "HYDROCARBONS" means crude oil, natural gas, casinghead gas,
condensate, sulphur, natural gas liquids, plant products and other liquid
or gaseous hydrocarbons (of whatever
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nature and kind, including coalbed gas), all other gases (including
CO(2)), and all other minerals and gases of every kind and character
which may be covered by or included in the Assets.
1.02.20 "IDENTIFICATION DATE" means January 1, 1997.
1.02.21 "INCLUDED FACILITIES" means the Facilities that are
(a) located on or off of, but used solely in connection with the
Leases; or
(b) located entirely on and used in connection with the Leases;
except for the Excluded Facilities.
1.02.22 "KNOWLEDGE" means the actual knowledge of a Party's corporate
officers after reasonable inquiry.
1.02.23 "LEASES" means the interests in the oil, gas or mineral leases
and other interests set forth on Schedule A.
1.02.24 "LINE FILL" means all Hydrocarbons in lines, gathering
systems, plant equipment, treating and separation equipment and
gunbarrels located on or allocable to the Assets and occurring prior to
the delivery point or outlet flange for liquids or prior to the gas
sales meter for gases.
1.02.25 "LOSSES" means any and all losses, costs, expenses,
liabilities, claims, demands, penalties, fines, assessments,
settlements, damages and any related expenses of whatever kind or
nature, or otherwise including, without limitation, legal, accounting,
consulting and investigation expenses and litigation costs, but
excluding consequential damages of a Party other than losses directly
attributable to a cessation or reduction of the production of
Hydrocarbons.
1.02.26 "MATERIAL CONTRACTS" means the contracts of Seller material to
the Leases and Other Property, and material to the transportation,
marketing and processing of Hydrocarbons produced therefrom, listed on
Schedule D, insofar and only insofar as they specifically relate to the
Leases and Other Property, but specifically excluding Easements and
Leases.
1.02.27 "OTHER CONTRACTS" means any contracts, agreements or
arrangements of Seller affecting the Leases and Other Property other
than the Material Contracts, insofar and only insofar as they
specifically relate to the Leases and Other Property, but specifically
excluding the Easements and the Leases.
1.02.28 "OTHER PROPERTY" means all of Seller's or its Affiliates'
right, title and interest in and to the following, but specifically
excluding the Excluded Facilities:
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(a) all wells, equipment, fixtures and personal property of any kind
located on the Leases, Easements, or the lands subject to the
Contracts as of the Identification Date, or used solely in connection
with the production, separation, storage, treatment, gathering or
transportation of Hydrocarbons therefrom, including, but not limited
to, tubing, casing, wellheads, pumping units, production units,
compressors, valves, meters, pipelines, gathering lines, flowlines,
tanks, heaters, separators, dehydrators, pumps, injection units, gates
and fences, pulling machines, warehouse stocks, and microwave
equipment;
(b) the boats, barges, and marine equipment described on Schedule E;
(c) except as set forth on Schedule F, yard inventory and yard
equipment that is charged to or is reasonably chargeable to the
Leases, or Easements, and which have been used primarily in connection
with the Leases, Easements, and Contracts;
(d) subject to required Third Person consents, all licenses,
authorizations, permits, variances and similar rights and interests
related to the Leases, Easements, Contracts, and the property defined
in (a) through (d) above;
(e) subject to Article 4.02.08, the applicable general operating
records, lease operating statements, well files (including applicable
well logs and production data), production records, logs, information
and engineering data relating to the Assets, lease files, land files,
regulatory reports and certificates, abstracts and title work
pertaining to the Leases, Easements, Contracts, and property defined
in (a) through (d) above, but excluding: environmental compliance
files (other than the portions of such files which pertain to the
Assets), legal files not pertaining to Assumed Liabilities,
attorney-client communications or attorney work product materials and
other similar documents covered by privilege, interpretations of
technical data, records and documents subject to confidentiality
provisions, and auditor's reports;
(f) Hydrocarbon Inventory and Line Fill;
(g) all rights, interests and benefits to gas imbalances with respect
to the Properties;
(h) the Included Facilities;
(i) all other rights, privileges, benefits and powers conferred upon
the owner and holder of the Leases, Easements, and Contracts, and
property defined in (a) through (h) above.
1.02.29 "PARTY" means either Buyer or Seller.
1.02.30 "PERSON" means any individual, corporation, partnership, limited
liability company,
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joint venture, association, joint stock company, trust, estate,
unincorporated organization, other business entity or any Governmental
Body.
1.02.31 "PLUGGING AND ABANDONMENT" means all plugging and abandonment
of wells, and associated removal of Other Property, the removal, capping
or burying of all associated flowlines, the restoration of the surface,
site clearance, and any disposal of related waste materials, including
naturally occurring radioactive material (NORM) and asbestos on the
Other Property removed. Plugging and Abandonment does not cover cleanup
of polluted lands, air or water other than routine surface cleanup of
the drillsite area normally associated with plugging and abandonment.
1.02.32 "PROPERTY" means an accounting unit or property designation as
set forth on Schedule G which is utilized by Seller for allocation of
revenues and expenses from the associated Leases.
1.02.33 "TAX" means any and all fees (including, without limitation,
documentation, license, recording, filing and registration fees), taxes
(including without limitation, production, gross receipts, ad valorem,
value added, windfall profit tax, environmental tax, turnover, sales,
use, property (tangible and intangible), stamp, leasing, lease, user,
leasing use, excise, franchise, transfer, heating value, fuel, excess
profits, occupational, interest equalization, lifting, oil, gas, or
mineral production or severance, and other taxes), levies, imposts,
duties, charges or withholdings of any nature whatsoever, imposed by any
Governmental Body or taxing authority thereof, domestic or foreign,
together with any and all penalties, fines, additions to Tax and
interest thereon, whether or not such Tax shall be existing or hereafter
adopted.
1.02.34 "THIRD PERSON" means a Person other than a Party or an
Affiliate of a Party.
1.03 OTHER DEFINITIONS IN THIS AGREEMENT. The following terms shall
have the respective meanings ascribed to them in the Articles in which
they are defined, as found on the following pages of this Agreement:
TERM PAGE
---- ----
Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Allocated Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Assignments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Claim Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
Deeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Disputed Claim. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Environmental Claims. . . . . . . . . . . . . . . . . . . . . . . . . . .23
Environmental Condition . . . . . . . . . . . . . . . . . . . . . . . . .23
Environmental Law . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Environmental Matter. . . . . . . . . . . . . . . . . . . . . . . . . . .24
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<PAGE>
Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Final Recap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Final Recap Statement . . . . . . . . . . . . . . . . . . . . . . . . . .20
Indemnified Party . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
Indemnifying Party. . . . . . . . . . . . . . . . . . . . . . . . . . . .27
Jaffe Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
Laws. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
Notice Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
Property Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Purchase Price. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Real and Personal Property Taxes. . . . . . . . . . . . . . . . . . . . .22
Remediation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Remediation Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
1.04 RULES OF CONSTRUCTION. For purposes of this Agreement:
1.04.01 GENERAL. Unless the context otherwise requires
(a) "or" is not exclusive;
(b) an accounting term not otherwise defined has the meaning assigned
to it in accordance with accounting principles that are generally
accepted in the United States of America;
(c) words in the singular include the plural and words in the plural
include the singular;
(d) words in the masculine include the feminine and words in the
feminine include the masculine;
(e) any date specified for any action that is not a Business Day
shall be deemed to mean the first Business Day after such date; and
(f) a reference to a Person includes its successors and assigns.
1.04.02 ARTICLES. References to Articles are, unless otherwise
specified, to Articles of this Agreement. Neither the captions to Articles
nor the Table of Contents shall be deemed to be a part of this Agreement.
1.04.03 EXHIBITS AND SCHEDULES. The Exhibits and Schedules form part of
this Agreement and shall have the same force and effect as if set out in
the body of this Agreement.
1.04.04 OTHER AGREEMENTS. References herein to any agreement or other
instrument shall,
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unless the context otherwise requires (or the definition thereof
otherwise specifies), be deemed references to that agreement or
instrument as it may from time to time be changed, amended or extended.
There is no incorporation by reference unless stated.
1.05 PI ENERGY CORPORATION. Pi Energy Corporation joins in this Agreement as
Seller only for assuring and guaranteeing to Seller the performance of all of
Buyer's covenants, agreements, and obligations under this Agreement; Pi Energy
Corporation shall not have any right, title, or interest in the Assets.
ARTICLE 2
SALE AND PURCHASE
2.01 ASSETS. At the Closing, Seller shall and shall cause its Affiliates to
sell, assign, transfer and convey to Redfish Bay Development Corporation the
Assets and Buyer shall purchase and pay for the Assets and assume the Assumed
Liabilities.
2.02 PURCHASE PRICE AND PAYMENT. The purchase price shall be $1,725,000.00,
adjusted pursuant to Article 2.03 ("Purchase Price").
2.03 ADJUSTMENTS TO THE PURCHASE PRICE. The Purchase Price shall be adjusted as
follows:
2.03.01 UPWARD ADJUSTMENTS. The Purchase Price shall be adjusted upward
by the following:
(a) the amount of all direct costs and expenditures chargeable to
Seller's interest incurred and paid by or on behalf of Seller
(including prepayments of expenditures) that are attributable to
(i) the drilling, completion, recompletion, reworking,
operation and maintenance of the Assets on and after the
Effective Date,
(ii) bonuses, lease rentals and shut-in payments due after (and
expressly excluding those due before) the Effective Date,
(iii) ad valorem, property and other Taxes that are allocated
to the Buyer pursuant to Article 5, and
(iv) amounts relating to obligations arising under the Contracts
with respect to operations or production after the Effective
Date;
(b) the value (based on the average December 1996 sales price from
the Properties) of the Hydrocarbon Inventory net of all Taxes and
Burdens, and less an appropriate deduction based on industry practice
for basic sediment, water and other
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non-merchantable liquids;
(c) the payments received by Seller from Third Persons for overhead
under operating agreements for operations conducted during the period
after the Effective Date;
(d) any other amount agreed upon by Seller and Buyer.
2.03.02 DOWNWARD ADJUSTMENTS. The Purchase Price shall be adjusted
downward by the following:
(a) the amount of all proceeds received by Seller that are
attributable to the ownership and operation of the Assets on or after
the Effective Date, including, without limitation gross proceeds (net
of Burdens) for Hydrocarbons sold; and
(b) the amount of
(i) all direct unrelated Third Person costs and expenditures
chargeable to Seller's interest and not paid by Seller that are
attributable to the drilling, completion, recompletion,
reworking, operation and maintenance of the Assets prior to the
Effective Date,
(ii) all bonuses, lease rentals and shut-in payments due prior
to the Effective Date and not paid by Seller, and
(iii) amounts relating to obligations arising under the
Contracts, and COPAS charges all with respect to operations and
production prior to the Effective Date and not paid by Seller and
paid or assumed by Buyer;
(c) the amount of the Phase One Development Fund that remains unspent
under the terms of the Jaffe Agreement (defined below), as stated on
Schedule 3.01.19; and
(d) any other amount agreed upon by Seller and Buyer.
2.03.03 NO ADJUSTMENT. The Purchase Price shall not be adjusted with
respect to the failure to install storm chokes as disclosed in Schedule
3.01.06.
2.04 ALLOCATION OF PURCHASE PRICE. Schedule G sets forth an allocation of the
Purchase Price among Properties and other designated items that comprise the
Assets, which allocation was prepared by Buyer (the "Allocated Value"). The
allocation has been provided for the purpose of establishing a basis for certain
Taxes, and for making adjustments under this Agreement. If necessary to
determine the Allocated Value of a portion of any Property for which an
Allocated Value is set forth on Schedule G, Seller's engineering performed prior
to the execution of this Agreement and used to
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establish the Allocated Value for the entire Property (if any) shall govern
the allocation to such portion, and if no such engineering was performed,
such allocation shall be determined on a reasonable engineering basis
consistent with the evaluation implicit in the Allocated Value shown on
Schedule G.
2.05 TRANSFER OF THE ASSETS, ETC. At the Closing, Seller and Buyer shall
execute and acknowledge, and Seller shall deliver, an assignment in the form of
Exhibit A (the "Assignment"), the bill of sale which is contained in Exhibit B
(the "Bill of Sale"), as well as such certificates or other documents as are
required to effect the transfer of the Assets, or the subsequent operation
thereof. Buyer and Seller shall also execute and deliver such change of
operator forms as are required by applicable Governmental Bodies to transfer
operatorship of the Assets to Buyer.
2.06 METHOD OF PAYMENT. Any amount payable under this Agreement shall be
payable in immediately available funds by means of a wire transfer, if to
Seller, to Seller's account at First Union National Bank, ABA # 053-000-219, for
the benefit of Midland Resources, Inc., account number 2000000482590 (with
immediate telephone notice to Mr. Ric Miller, telephone number (713) 873-4828,
or if to Buyer, to Buyer's account as may be designated by Buyer.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
3.01 SELLER. Seller represents and warrants to Buyer that:
3.01.01 ORGANIZATION AND STANDING. Seller has been duly organized,
validly existing in good standing under the laws of the State of Texas and
is in good standing as a foreign corporation in all jurisdictions where the
nature of its properties or business requires it.
3.01.02 AUTHORITY. Seller has the corporate power and authority to enter
into and perform this Agreement and to consummate the transactions
contemplated hereby. The execution, delivery and performance by Seller of
this Agreement and the consummation of the transactions contemplated hereby
have been duly authorized by all requisite corporate action and this
Agreement has been duly executed and delivered by Seller.
3.01.03 VALIDITY OF AGREEMENT. This Agreement is a legal, valid and
binding obligation of Seller enforceable against Seller in accordance with
the terms of this Agreement, except as enforcement may be limited by
bankruptcy, insolvency or other similar Laws affecting the enforcement of
creditors' rights in general. The enforceability of Seller's obligations
under this Agreement is subject to general principles of equity (regardless
of whether such enforceability is considered in a proceeding in equity or
at law).
3.01.04 NO VIOLATION. The execution and delivery of this Agreement and
the performance by the Seller of the terms of this Agreement do not
conflict with or result in a violation of the Corporate Documents of Seller
or any agreement, instrument, order, writ, judgment or decree
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to which Seller is a party or is subject.
3.01.05 LEGAL PROCEEDINGS. Except as set forth on Schedule 3.01.05, as of
the date of this Agreement, there are no pending suits, actions,
arbitrations, mediations or proceedings as to which Seller has been served
process or received notice before any court or Governmental Body which
would adversely affect the Assets, or hinder, impede or prevent Seller from
consummating the transactions contemplated by this Agreement. To Seller's
Knowledge, there are no pending suits, actions, arbitrations, mediations or
proceedings as to which Seller has not been served process or received
notice, or that are threatened before any court or Governmental Body which
would adversely affect the Assets, or hinder, impede or prevent Seller from
consummating the transactions contemplated by this Agreement.
3.01.06 COMPLIANCE WITH APPLICABLE LAWS. Except as set forth on Schedule
3.01.06, Seller, in the operation of those Assets that Seller operates and,
to Seller's Knowledge, the operator in the case of those Assets Seller does
not operate, is in compliance with any applicable laws, orders, rules,
regulations, judgments or decrees of any Governmental Bodies, including the
common or civil law, including but not limited to those relating to
occupational safety and health, consumer product safety, employee benefits,
environmental laws, zoning laws or regulations or other applicable laws or
regulations ("Laws").
3.01.07 CONTRACTS. Except as set forth on Schedule 3.01.07, the Assets
are not subject to:
(a) any instrument or agreement evidencing or related to indebtedness
for borrowed money, whether directly or indirectly; or
(b) any agreement not entered into in the ordinary course of
business.
3.01.08 ASSETS. With respect to the Assets,
(a) all Material Contracts are to Seller's Knowledge in full force
and effect and are the valid and legally binding obligations of the
parties thereto and are enforceable in accordance with their
respective terms;
(b) Seller is not in material breach or default with respect to any
of its obligations pursuant to any such Material Contract;
(c) all payments (including, without limitation, valid calls for
advance payment under unit or operating agreements) due by Seller
thereunder have been made by Seller;
(d) to Seller's Knowledge, and except to the extent stated in
Schedule 3.01.08, no other party to any Material Contract relating to
any Asset is in material breach or default with respect to any of its
obligations thereunder to the extent such breach or
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default would have a material adverse impact on Seller or any of the
Assets; and
(e) neither Seller nor, to Seller's Knowledge, any other party to any
Material Contract has given notice of any action to terminate, cancel,
rescind, or procure a judicial reformation of a Material Contract or
any provision thereof.
3.01.09 AUTHORIZATIONS FOR EXPENDITURES. Except as set forth on
Schedule 3.01.09,
(a) there are no outstanding calls under Authorizations for
Expenditures for payments which are due or which Seller has committed
to make which have not been made;
(b) there are no material operations with respect to which Seller has
become a non-consenting party where the effect of such non-consent is
not disclosed on Schedule G, and
(c) there are no commitments for the expenditure of funds for
drilling or other capital projects other than projects with respect to
which the operator is not required under the applicable operating
agreement to seek consent.
3.01.10 EQUIPMENT. All equipment and machinery used by Seller to operate
the Assets has been maintained in accordance with good oil field practices
and past practices in the field and to Seller's Knowledge all other
equipment and machinery used by Third Persons to operate the Assets has
been so maintained.
3.01.11 WELLS. Except to the extent set forth on Schedule 3.01.11A, to
Seller's Knowledge, no well included in the Assets is subject to penalties
on allowables because of any overproduction or any other violation of
applicable Laws. Since the Identification Date, Seller has not, except in
the reasonable and fair conduct of operations, increased the rate of
production from the Properties from prior average rates, or depleted the
Line Fill. Except for the wells listed in Schedule 3.01.11B, there are
no wells located on the Leases that Seller or operator is currently
obligated by order of any Governmental Body to plug and abandon within a
time certain.
3.01.12 EXCHANGE OF EQUIPMENT. Except as set forth in Schedule 3.01.12,
since the Identification Date with respect to each of the Assets,
(a) Seller has not exchanged any Other Property for property of
lesser value, and
(b) Seller has not removed any idle or other equipment or inventory
from the Assets.
3.01.13 PAYOUT BALANCES. The payout balances (or expenditure balances)
with respect to
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any of the Contracts or any of the Assets that are subject to future
change on account of reversionary interests, non-consent penalties or
similar agreements or arrangements are set forth on Schedule 3.01.13 and
are correct as of the dates shown on such statements.
3.01.14 NO PREFERENTIAL RIGHTS. The Assets are free of any preferential
rights to purchase, rights of first refusal, required consents to assign,
maintenance of uniform interest clause, or similar restrictions,
conditions, or requirements for an effective and unrestricted transfer of
the Assets to Buyer.
3.01.15 NO CONSENTS REQUIRED. Except as set forth on Schedule 3.01.15 and
except for consents and filings required from Governmental Bodies as part
of an ordinary course transfer, no consents, approvals or other action by,
or filing with any Person or Governmental Body is required in connection
with the execution, delivery and performance by Seller of this Agreement.
3.01.16 PREPAYMENT. Seller has not received any payments by virtue of a
prepayment arrangement under any Contract (or entered into a prepayment
arrangement) for the sale of Hydrocarbons, of a production payment or of
any other arrangement (other than gas balancing arrangements), which would
obligate Seller to deliver Hydrocarbons produced from the Assets at some
future time without receiving full payment therefor.
3.01.17 PAYMENTS. To Seller's Knowledge, all payments of any kind
required to be made by Seller to Third Persons or an Affiliate of Seller
under any Contract or otherwise with respect to the Assets have been
properly and timely paid, except for any such payments which are being
contested in good faith.
3.01.18 CONDUCT OF BUSINESS. Except as set forth on Schedule 3.01.18,
limited to Seller's knowledge as to Assets relating to Leases of which
Seller is not the operator and not so limited as to the remainder of the
Assets, since the Identification Date the Assets have been operated in
accordance with good oilfield practices consistent with past practices and
in the ordinary course of business.
3.01.19 JAFFE AGREEMENT. That certain Purchase and Sale Agreement,
Stipulation of Interest and Development Agreement between Midland
Resources, Inc. and Jaffe Energy, Inc. et al. dated February 14, 1995 (the
"Jaffe Agreement"), remains in force and effect and, to the Knowledge of
Seller, neither Assignee nor Assignors (as identified in the Jaffe
Agreement) are in material default of any of its covenants, conditions,
representations or warranties. None of the Assignors has asserted any
breach of the Jaffe Agreement by Assignee. Assignee has properly spent the
Phase One Development Fund (as defined in the Jaffe Agreement) under the
terms of the Jaffe Agreement and in accordance with the Phase One
Development Plan (as defined in the Jaffe Agreement), except to the extent
of the outstanding balance identified on Schedule 3.01.19 attached to this
Agreement. Buyer has the right to assume the Jaffe Agreement without
condition. The Effective Date of the Jaffe Agreement is April 10,
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1995, and Buyer, as assignee of the Jaffe Agreement, has until 7:00 a.m.
on April 10, 1997, to complete expenditure of the Phase One Development
Fund.
3.1.20 LOSSES. Since the Effective Date, no material portion of any
Asset has been destroyed by fire or other casualty, taken in condemnation
or under the right of eminent domain, and no proceedings for such purposes
are pending or threatened.
3.1.21 CHANGES. Since the Effective Date Seller has not: waived or
compromised any rights or claims in excess of $10,000 with respect to the
Assets; incurred any material obligations or liabilities with respect to
the Assets; entered into any new material agreements or commitments with
respect to the Assets; abandoned any property which includes Leases and is
capable of producing Hydrocarbons in paying quantities; modified in any
material respect any of the Leases or the Material Contracts; encumbered,
sold or otherwise disposed of an of the Assets, other than Other Property
which is replaced by equivalent property or which is consumed in normal
operations; made or obligated itself to make any single expenditure for
Seller's interest on any well in excess of $10,000 other than expenditures
that are permitted under existing applicable operating agreements;
accelerated the rate of production from the Leases other than in the
ordinary course of business and consistent with standard oilfield
practices; or diminished the Hydrocarbons used for Line Fill from the
quantities present at the time the assets were identified for sale or
thereafter otherwise than in the ordinary course of business and consistent
with standard oilfield practices.
3.1.22 IMBALANCES. There is no imbalance in the production, delivery, and
sale of Hydrocarbons from the Leases, whether at the wellhead, at a plant,
at a pipeline interconnect, or otherwise. Seller is entitled to share
according to its interest of record in the production, delivery, and sale
of all Hydrocarbons produced from the Leases.
3.2 BUYER. Buyer represents and warrants to Seller that:
3.2.1 ORGANIZATION AND STANDING. Buyer has been duly organized, validly
existing in good standing under the laws of the State of Texas and is in
good standing as a foreign corporation in all jurisdictions where the
nature of its properties or business requires it and is duly qualified to
own Texas State leases, or will so qualify in the course of accepting the
Assignment.
3.2.2 AUTHORITY. Buyer has the corporate power and authority to enter
into and perform this Agreement and to consummate the transactions
contemplated hereby. The execution, delivery and performance by Buyer of
this Agreement and the consummation of the transactions contemplated hereby
have been duly authorized by all requisite corporate action and this
Agreement has been duly executed and delivered.
3.2.3 VALIDITY OF AGREEMENT. This Agreement is a legal, valid and
binding obligation of Buyer enforceable against Buyer in accordance with
the terms of this Agreement, except as
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enforcement may be limited by bankruptcy, insolvency or other similar
Laws affecting the enforcement of creditors' rights in general. The
enforceability of Buyer's obligations under this Agreement is subject
to general principles of equity (regardless of whether enforceability is
considered in a proceeding in equity or at law).
3.2.4 NO VIOLATION. The execution and delivery of this Agreement and the
performance by Buyer of the terms of this Agreement do not conflict with or
result in a violation of the Corporate Documents of Buyer or of any
agreement, instrument, order, writ, judgment or decree to which Buyer is a
party or is subject.
3.2.5 NO CONSENTS REQUIRED. No consents, approvals or other action by,
or filing with any Person or Governmental Body is required in connection
with the execution, delivery and performance by Buyer of this Agreement.
3.2.6 SECURITIES REPRESENTATION. Buyer is an experienced and
knowledgeable investor and operator in the oil and gas business and is
acquiring the Assets for Buyer's own account and not with a view to, or for
offer of resale in connection with, a distribution thereof, within the
meaning of the Securities Act of 1933.
3.3 DISCLAIMER. THERE ARE NO WARRANTIES, REPRESENTATIONS OR IMPLIED COVENANTS
BETWEEN THE PARTIES EXCEPT THE MATTERS EXPRESSLY PROVIDED FOR IN THIS AGREEMENT
AND THE EXHIBITS AND SCHEDULES ATTACHED HERETO AND THE DOCUMENTS, CONVEYANCES
AND INSTRUMENTS TO BE DELIVERED BY THE PARTIES AT AND AFTER CLOSING. THE
PARTIES RESPECTIVELY DISCLAIM ANY OTHER WARRANTIES OR REPRESENTATIONS INCLUDING,
WITHOUT LIMITATION, ANY WARRANTIES AND REPRESENTATIONS IMPLIED UNDER ANY STATUTE
OR LAW. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT:
3.3.1 ALL THE INFORMATION, STATISTICS, SUMMARIES, AND FACSIMILES
FURNISHED BY OR ON BEHALF OF SELLER HEREWITH, HEREUNDER, OR PRIOR TO THE
EXECUTION OF THIS AGREEMENT ARE FURNISHED OR WILL BE FURNISHED FOR BUYER'S
USE AT BUYER'S SOLE RISK. ALL SUCH INFORMATION HAS BEEN COMPILED OR
PREPARED BY SELLER BASED UPON ITS FILES AND RECORDS AND SUCH INFORMATION IS
BELIEVED TO BE CORRECT, BUT SELLER MAKES NO REPRESENTATION, EXPRESS OR
IMPLIED, AS TO THE ACCURACY, CORRECTNESS, COMPLETENESS, OR THE ADEQUACY OF
SAME AND DOES NOT WARRANT OR GUARANTEE SUCH INFORMATION IN ANY WAY. SELLER
HAS MADE NO STATEMENTS OR REPRESENTATIONS CONCERNING THE PRESENT OR FUTURE
VALUE OF THE ANTICIPATED INCOME, COSTS, OR PROFITS, IF ANY, TO BE DERIVED
FROM THE PROPERTIES. BUYER IS RESPONSIBLE FOR MAKING SUCH INDEPENDENT
INVESTIGATION AND EVALUATION OF THE PROPERTIES AS BUYER SHALL DEEM
APPROPRIATE, REALIZING THAT SELLER DOES NOT ASSUME AND SHALL
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HAVE NO LIABILITY TO BUYER OR ANY OTHER PARTY FOR ANY RELIANCE WHICH MAY
BE PLACED ON THE INFORMATION, STATISTICS, SUMMARIES, OR FACSIMILES
FURNISHED HEREWITH OR HEREUNDER OR ANY STATEMENTS MADE HEREIN.
SPECIFICALLY, BUT WITHOUT LIMITING THE GENERALITY OF THE FOREGOING:
(a) THE DESCRIPTION OF LEASES INCLUDED IN THE PROPERTIES, THE ACREAGE
PURPORTED TO BE COVERED THEREBY, DEPTH LIMITATIONS (IF ANY), ROYALTY
AND OTHER BURDENS AFFECTING SAME, AND QUANTUM OF INTEREST HAVE BEEN
DERIVED STRICTLY FROM SELLER'S RECORDS AND SELLER HAS NOT UNDERTAKEN
ANY EXAMINATION OF TITLE TO VERIFY SAME, SELLER WARRANTS TITLE TO THE
PROPERTIES ONLY AS TO ANY CLAIMS BROUGHT BY, THROUGH, OR UNDER SELLER,
BUT NOT OTHERWISE, AND BUYER SHOULD THEREFORE UNDERTAKE SUCH TITLE
EXAMINATION AS IT DEEMS APPROPRIATE PRIOR TO CLOSING; AND
(b) ANY DESCRIPTION OF WELLS AND EQUIPMENT INCLUDED IN THE PROPERTIES
HAS BEEN COMPILED STRICTLY FROM SELLER'S RECORDS, RATHER THAN FROM AN
ON-THE-GROUND INVENTORY. PRIOR TO CLOSING, BUYER SHOULD UNDERTAKE SUCH
INSPECTION OR INVENTORY AS IT DEEMS APPROPRIATE TO DETERMINE WHETHER
THE EQUIPMENT SO DESCRIBED IS IN FACT IN PLACE.
3.3.2 SELLER MAKES NO WARRANTY OR REPRESENTATION WHATSOEVER AS TO THE
REGULATORY STATUS OF THE PROPERTIES, AND BUYER SHOULD SATISFY ITSELF AS TO
SUCH MATTERS PRIOR TO CLOSING.
3.3.3 CONVEYANCE OF THE PROPERTIES WILL BE MADE WITHOUT WARRANTIES,
EXPRESS OR IMPLIED IN FACT OR IN LAW, AS TO MERCHANTABILITY, DURABILITY,
USE, OPERATION, FITNESS FOR ANY PARTICULAR PURPOSE, CONDITION, OR SAFETY OF
THE PROPERTIES, COMPLIANCE WITH REGULATORY AND ENVIRONMENTAL REQUIREMENTS
OR OTHERWISE.
3.3.4 BUYER HEREBY AGREES THAT IT HAS INSPECTED OR BEEN GIVEN THE
OPPORTUNITY TO INSPECT THE PROPERTIES, INCLUDING, WITHOUT LIMITATION, THE
LEASES AND THE CONTRACTS, WELLS, PERSONAL PROPERTY, AND EQUIPMENT ASSIGNED
AND CONVEYED HEREIN AND THAT IT ACCEPTS THE SAME "AS IS" AND "WITH ALL
FAULTS." BUYER RELEASES SELLER FROM LOSSES (AS DEFINED HEREIN) WITH RESPECT
TO THE PROPERTIES, WHETHER OR NOT CAUSED BY OR ATTRIBUTABLE TO SELLER'S
NEGLIGENCE AND WHETHER OR NOT ARISING FROM OR IN CONNECTION
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WITH OR DURING THE PERIOD OF SELLER'S OWNERSHIP, OPERATION, OR USE OF
THE PROPERTIES. WITHOUT LIMITING THE ABOVE, BUYER WAIVES ITS RIGHT TO
RECOVER FROM SELLER AND FOREVER RELEASES AND DISCHARGES SELLER FROM ANY
AND ALL LOSSES, PENALTIES, FINES, LIENS, JUDGMENTS, COSTS AND EXPENSES
WHATSOEVER (INCLUDING, WITHOUT LIMITATION, ATTORNEY FEES AND COSTS),
WHETHER DIRECT OR INDIRECT, KNOWN OR UNKNOWN, FORESEEN OR UNFORESEEN,
THAT MAY ARISE ON ACCOUNT OF OR IN ANY WAY BE CONNECTED WITH THE
PHYSICAL CONDITION OF THE PROPERTIES OR ANY LAW OR REGULATION
APPLICABLE THERETO, INCLUDING, WITHOUT LIMITATION, THE COMPREHENSIVE
ENVIRONMENTAL RESPONSE, COMPENSATION AND LIABILITY ACT OF 1980, AS
AMENDED (42 U.S.C. 9601 ET. SEQ.), THE RESOURCE CONVERSATION AND
RECOVERY ACT OF 1976 (42 U.S.C. 6901 ET. SEQ)., THE CLEAN WATER ACT (33
U.S.C. 466 ET. SEQ.), THE SAFE DRINKING WATER ACT (14 U.S.C. 1401-1450),
THE HAZARDOUS MATERIALS TRANSPORTATION ACT (49 U.S.C. 1801 ET. SEQ.), THE
TOXIC SUBSTANCE CONTROL ACT (16 U.S.C. 2601-2629) AND ALL APPLICABLE STATE
OR LOCAL LAWS.
3.3.5 BUYER AND SELLER WAIVE ANY RIGHT, CLAIM, LOSS, OR DAMAGE UNDER THE
TEXAS DECEPTIVE TRADE PRACTICES ACT RELATING TO THIS AGREEMENT OR ITS
NEGOTIATION, EXECUTION, OR PERFORMANCE.
ARTICLE 4
COVENANTS
4.1 COVENANTS OF BUYER. Buyer covenants with Seller as follows:
4.1.1 PERFORMANCE BONDS, GUARANTIES, ETC. With respect to any surety
bonds, performance bonds, guarantees or financial assurances relating to
the Assets, on which Seller or its Affiliates are principals or guarantors,
Buyer shall cause such surety bonds, performance bonds, guarantees or
financial assurances to be replaced or otherwise released within 90 days
after the Closing Date. Buyer shall reimburse Seller for any amounts paid
by Seller with respect to such surety bonds, performance bonds, guarantees
or financial assurances related to periods on and after the Closing Date
until replaced by Buyer's instruments.
4.1.2 ASSUMPTION OF ASSUMED LIABILITIES. At the Closing, with effect as
of the Effective Date, Buyer shall assume the Assumed Liabilities.
4.2 COVENANTS OF SELLER AND BUYER. Seller and Buyer covenant to each other as
follows:
4.2.1 RECORDING. Buyer shall be solely responsible for promptly
recording the Assignments, Deeds, and any other documents related to the
conveyance of the Assets, at Buyer's expense, and shall promptly furnish
Seller with the recording information. Seller shall
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cooperate fully in the preparation and execution of, and Buyer shall be
responsible for preparing and making, all filings with state and
federal agencies for change of operator, and shall promptly provide
Buyer with the original approved copies of all such filings, or
confirmation thereof. All governmental office recording and filing
fees shall be paid by Buyer.
4.2.2 BROKERS. The Parties represent to each other, that no broker,
finder, financial advisor or similar person has been retained by a Party
except as set forth in Schedule 4.02.02.
4.2.3 CERTAIN FILINGS, CONSENTS AND PERMITS. Buyer and Seller shall
cooperate with one another in:
(a) determining whether any filings are required to be made or
consents, approvals, permits or authorizations are required to be
obtained under any Laws; and
(b) making any such filings, furnishing information required in
connection therewith and seeking timely to obtain any such consents,
permits, authorizations, approvals or waivers.
4.2.4 POST-CLOSING ACCESS. Except as otherwise expressly provided
herein, from and after the Closing Date, Buyer and Seller shall reasonably
cooperate and afford each other or cause to be afforded to their respective
officers, employees, accountants and other representatives access, upon
reasonable notice, during business hours, to review and copy the books,
documents, databases or other records relating to the Assets, not including
the Excluded Assets, (and the Parties shall cooperate and assist one
another in identifying and locating such books, documents, databases,
records, or employees files or other information the Parties), interview,
depose or seek testimony of employees, provide assistance in proceedings
with employees as witnesses or advisors, investigate the physical premises,
take photographs or videotapes, identify employees and contractors with
knowledge of any matter which is the subject of a claim for which a Party
has responsibility and make such employees available to such Party and
provide reasonable office space to do any of the foregoing in connection
with any matter affecting or alleged to affect the Party requesting such
access.
4.2.5 EMPLOYEE MATTERS. Buyer shall have the right to solicit the field
employees of Seller who work directly on or in connection with the Assets
("Employees"), and shall have the right to offer employment to and hire any
such Employees.
4.2.6 FINAL RECAPITULATION SETTLEMENT; SUBSEQUENT AUDITS AND SETTLEMENTS.
With respect to final recapitulation and audits;
(a) During the 60 days following the Closing Date, Seller and Buyer
shall each have the right, during normal business hours, to audit,
inspect, and copy the books and records of the other relating to the
Assets and production and sale of Hydrocarbons from the Assets.
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(b) Within 60 days after the Closing Date, Seller shall provide to
Buyer, for Buyer's review, a proposed final recapitulation settlement
in the form of the Preliminary Settlement Statement (the "Final Recap
Statement") to account for all adjustments to the Purchase Price known
as of such date pursuant to Article 2.03 (the "Final Recap"). Buyer
shall have the right, within 30 days after receipt of the Final Recap
Statement, to audit the Final Recap Statement. If Buyer disagrees
with the Final Recap Statement, Buyer and Seller shall use best
efforts to reach agreement within 15 days following Buyer's audit of
the Final Recap Statement.
(c) Should the Parties be unable to resolve any disagreements, such
disagreement shall, at the earliest practicable date, be referred, by
either or both of the Parties, to a mutually acceptable accounting
firm (the "Accounting Firm"), along with all audit reports, work
papers, schedules and calculations related to the matter in dispute.
Within 25 days after such submission, the Accounting Firm shall issue
a letter report determining the Final Recap, which shall be final and
binding. Any fees and expenses incurred in resolving disputes shall
be borne equally by the Parties.
(d) Payment of any amounts owed under the Final Recap is due 30 days
from the date Seller and Buyer agree on the Final Recap Statement, or
ten days from the determination of the Final Recap by the Accounting
Firm, whichever is later. Interest will be applied at the Agreed Rate
to any amounts if not paid when due.
(e) Following the Closing
(i) revenue received by either Party that belongs to the other
Party shall be remitted to the other Party at least monthly, and
(ii) invoices received by a Party that are the obligation of the
other Party shall be forwarded to the other Party within ten days
of receipt of the invoice.
4.2.7 FURTHER ASSURANCES. Each Party shall, from time to time at the
request of the other, and without further consideration, execute and
deliver such other instruments of sale, transfer, conveyance, assignment,
clarification and termination and take such other action as the Party
making the request may reasonably require to effect the intentions of the
Parties, including those required to sell, transfer, convey and assign to,
and vest in Buyer, and to place Buyer in possession of the Assets and to
transfer, assign or convey the Excluded Assets to Seller. Seller intends
to convey the Assets at Closing; however, in the event it is determined
after Closing that:
(a) any part of the Assets was not in fact conveyed to Buyer, and
that the title to any part of the Assets is incorrectly in the name of
Seller; or
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(b) any Excluded Asset is conveyed to Buyer and that the title to
such Excluded Asset is incorrectly in the name of Buyer;
then each Party shall take all such action reasonably necessary to
correctly convey any part of Assets to Buyer, or any part of the Excluded
Assets to Seller.
4.2.8 FILES TRANSFER. Seller shall deliver, at Seller's premises within
15 days after the Closing Date, the originals of all the files and records
described in item (e) set forth in the definition of Other Property except
where such original files also relate to a property retained by Seller, in
which case Seller shall deliver copies of such files and shall provide
Buyer with access to the original files as reasonably requested by Buyer
(but Buyer shall always receive the originals of well logs for the wells
completed or attempted to be completed within depths included within the
Assets). In the event Seller has delivered originals of files to Buyer,
Seller shall have the right to make copies of all originals. Seller and
Buyer shall be equally responsible for the cost of copying these materials.
BUYER SHALL ACCEPT ALL FILES AND RECORDS DESCRIBED IN ITEM (e) OF THE
DEFINITION OF OTHER PROPERTY WITHOUT ANY WARRANTY OR REPRESENTATION
REGARDING ACCURACY OR CORRECTNESS THEREOF.
4.2.9 PLUGGING AND ABANDONMENT. Upon Closing, Buyer shall assume all of
Seller's Plugging and Abandonment obligations associated with the Assets as
of the Effective Date and shall conduct such Plugging and Abandonment
operations in compliance with applicable Laws and in a good and workmanlike
manner.
ARTICLE 5
TAXES
5.1 PAYMENT AND APPORTIONMENT OF REAL PROPERTY TAXES AND PERSONAL PROPERTY
TAXES. With respect to Taxes:
5.1.1 REAL AND PERSONAL PROPERTY TAXES. All ad valorem taxes, real
property taxes and personal property taxes ("Real and Personal Property
Taxes") for the year in which the Effective Date occurs shall be
apportioned as of the Effective Date between Seller and Buyer. Seller
shall be liable for the portion of such Real and Personal Property Taxes
based upon the number of days in the year occurring prior to the Effective
Date, and Buyer shall be liable for the portion of such taxes based upon
the number of days in the year occurring on and after the Effective Date.
For any year in which an apportionment is required, Buyer shall file all
required reports and returns incident to these taxes and shall remit to the
appropriate taxing authorities all such taxes assessed for the year in
which the Effective Date occurs. Seller shall pay to Buyer, at the time of
Buyer's remittance, Seller's share of such taxes.
5.1.2 LIABILITY AND RIGHT TO PURSUE CLAIMS. Seller shall retain
liability for all adjustments, examinations or claims relating to Taxes
that are paid by Seller and that are allocated to Seller
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pursuant to this Article 5.01. Seller shall administer and defend any
examination, claim or adjustments arising in connection with Taxes
which are allocated to Seller pursuant to this Article 5.01.
5.2 OTHER TAXES. All excise, severance, windfall profit and other Taxes
relating to production of Hydrocarbons attributable to the Assets prior to the
Effective Date shall be allocated to Seller, and all such Taxes relating to
production on or after the Effective Date shall be apportioned to Buyer. Buyer
shall file any reports or returns not filed as of the Closing, and shall remit
to the proper taxing authorities any such Taxes allocated to Seller, but not
paid as of the Closing. Seller shall pay Seller's share of such Taxes at the
time Buyer remits such Taxes.
5.3 SALES TAXES. The Purchase Price does not include any sales Taxes or other
transfer Taxes imposed in connection with the sale of the Assets. Buyer shall
pay any sales Tax or other transfer Tax, as well as any applicable conveyance,
transfer and recording fee, and real estate transfer stamps or taxes imposed on
the transfer of the Assets pursuant to this Agreement. If Buyer is of the
opinion that it is exempt from the payment of any such sales Tax or other
transfer Tax, Buyer shall furnish to Seller the appropriate tax exemption
certificate.
5.4 TAX PROCEEDINGS. In the event Buyer or any of Buyer's Affiliates receives
notice of any examination, claim, adjustment or other proceeding relating to the
liability for Taxes of or with respect to Seller for any period Seller is or may
be liable under Article 5.01.02, Buyer shall notify Seller in writing within 20
days of receiving notice thereof. As to any such Taxes for which Seller is or
may be liable under Article 5.01.02, Seller shall, at Seller's expense, control
or settle the contest of such examination, claim, adjustment or other
proceeding, and shall indemnify Buyer against all Losses in connection
therewith. The Parties shall cooperate with each other and with their
respective Affiliates in the negotiations and settlement of any proceeding
described in this Article 5.04. Buyer shall provide, or cause to be provided,
to Seller necessary authorizations, including powers of attorney, to control any
proceeding which Seller is entitled to control pursuant to Article 5.
5.5 PURCHASE PRICE ALLOCATION. The allocation of Purchase Price provided for
in Article 2.04 is intended to comply with the allocation method required by
Section 1060 of the Code. Buyer and Seller shall cooperate to comply with all
substantive and procedural requirements of Section 1060 and regulations
thereunder, including without limitation the filing by Buyer and Seller of an
IRS Form 8594 with their federal income tax returns for the taxable year in
which the Closing occurs. .
ARTICLE 6
ENVIRONMENTAL MATTERS
6.1 DEFINITIONS. For the purposes of this Agreement, the following terms have
the following meanings:
6.1.1 "Environmental Claims" means actions, claims, or proceedings by
Third Persons associated with the Property Interests and based on
Environmental Conditions or
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Environmental Law in connection with any chemical substance on or
originating from a Property Interest prior to the Effective Date,
except for the portion of any such claim associated with Remediation.
6.1.2 "Environmental Condition" means a condition that exists prior to
the Effective Date, and only to the extent in existence on the Effective
Date, with respect to the air, land, soil, surface, subsurface strata,
surface water, ground water, or sediments which causes a Property Interest
to be subject to Remediation under, or not in compliance with, an
Environmental Law or a lease or agreement, excluding Plugging and
Abandonment.
6.1.3 "Environmental Law" means any Law relating to pollution, the
protection of the environment, or the release or disposal of waste
materials, but shall not include any Law associated with Plugging and
Abandonment.
6.1.4 "Environmental Matter" means an Environmental Condition or an
Environmental Claim.
6.1.5 "Expenses" means the actual amounts expended under a Remediation
Plan to remedy an Environmental Condition, and amounts expended to
determine the extent of the Environmental Condition and to determine the
appropriate means of Remediation, but not Buyer's investigation expenses
(including costs of surveys, audits or analyses) prior to Buyer notifying
Seller of the potential Environmental Condition.
6.1.6 "Property Interest" means any single Lease or Easement.
6.1.7 "Remediation" means actions taken to correct an Environmental
Condition and implement the terms of a Remediation Plan.
6.1.8 "Remediation Plan" means the written plan, and any amendments
thereof, that sets forth the actions to be taken to effect any necessary
Remediation of a single Environmental Condition or a group of related and
reasonably proximate Environmental Conditions, and necessary to bring a
Property Interest or Property Interests into compliance with Environmental
Law, or a lease or agreement and, if appropriate, approved by any
applicable Governmental Body.
6.2 SELLER REPRESENTATIONS. Seller represents and warrants to Buyer that:
6.2.1 DISCLOSURE. Seller has no Knowledge of any facts or circumstances
that are likely to result in Losses to Seller or Buyer under this Agreement
for any single Environmental Matter in excess of $25,000.00.
6.2.2 PAST USE OF PROPERTY INTEREST. To the Seller's Knowledge, at no
time have the Property Interests been used by Seller or others as a
landfill or for waste disposal, other than
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such activities associated with normal oil field operations.
6.2.3 OFFSITE DISPOSAL. To the Seller's Knowledge, at no time have
hazardous waste or hazardous substances from the Property Interests been
disposed of otherwise than in accordance with applicable law.
6.3 SELLER'S INDEMNITY. Except as set forth in Article 6.04, Seller shall
indemnify, defend, and hold Buyer harmless from any and all:
6.3.1 Expenses;
6.3.2 Losses associated with Environmental Claims;
6.3.3 breaches of any representation, warranty, covenant, or agreement of
Seller in Article 6.02.
6.4 LIMITATIONS. With regard to Article 6.03:
6.4.1 Seller shall be liable for all Expenses or Losses under Article
6.03 except as follows:
(a) Seller shall not be liable for Expenses or Losses less than a
cumulative total of $25,000;
(b) Seller shall not be liable for Expenses or Losses in excess of a
cumulative total of $125,000; and
(c) Seller shall be responsible only for Expenses and Losses under
Article 6.03 with respect to which Buyer gives Seller written notice
prior to 45 days from the Effective Date.
6.4.2 If Buyer timely claims Expenses and Losses in excess of $125,000,
then either Buyer or Seller may elect within 60 days after the Closing Date
to rescind the transaction called for by this Agreement, and Buyer shall
promptly reconvey the Assets to Seller. In the event of such a
reconveyance, Buyer shall indemnify and hold harmless Seller from all
Losses and Expenses (of any kind) relating to the Assets during the period
of time between the Closing Date and the date of reconveyance, and Seller
shall indemnify and hold harmless Buyer from all Losses and Expenses (of
any kind) relating to the Assets during all other periods of time. In the
event of reconveyance, Buyer shall be entitled to recovery, only from
production of Hydrocarbons from the Leases after the Effective Date and
before reconveyance, of its expenses incurred in the operation and
development of the Assets during its period of ownership of the Assets, and
Seller shall be entitled to all other income from the Assets.
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6.05 BUYER'S RESPONSIBILITIES. Except in the event of reconveyance as provided
in Article 6.04, Buyer shall indemnify, defend, and hold Seller harmless from
any and all Expenses or Losses resulting from Environmental Matters arising with
respect to the Property Interests on or after the Effective Date.
6.06 EXCLUSIVE REMEDIES. The rights and remedies granted each Party in Article
6 are exclusive rights and remedies against the other Party related to any
defined Environmental Condition and to any Environmental Claims asserted in
writing after the Closing.
ARTICLE 7
INDEMNITY
7.01 GENERAL INDEMNIFICATION.
7.1.1 SELLER. For the period set forth in Article 7.01.03, and except
with respect to Taxes (which are covered by Article 5), and Environmental
Matters (which are covered by Article 6), Seller shall indemnify, defend
and hold harmless Buyer from and against all Losses based upon, arising out
of, in connection with, or relating to:
(a) any breach of any covenant or agreement of Seller contained in
this Agreement;
(b) any breach of any representation or warranty of Seller contained
in this Agreement;
(c) any matter arising in connection with the ownership or operation
of or production of Hydrocarbons from the Assets on or after April 10,
1995, and prior to the Effective Date;
(d) all actions, proceedings, claims, litigation, arbitration,
mediation or other dispute resolution procedure pending as of the
Effective Date relating to or affecting the Assets; and
(e) the matters set forth on Schedules 3.01.05.
7.01.02 BUYER. For the period set forth in Article 7.01.03, and except
with respect to Taxes (which are covered in Article 5) and Environmental
Matters (which are covered by Article 6), Buyer shall indemnify, defend and
hold harmless Seller from and against all Losses based upon, arising out
of, in connection with, or relating to:
(a) any breach of any covenant or agreement of Buyer contained in
this Agreement;
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(b) any breach of any representation or warranty of Buyer contained
in this Agreement;
(c) if the Closing occurs, any matter arising in connection with the
ownership or operation of or production of Hydrocarbons from the
Assets from and after the Effective Date; and
(d) the Assumed Liabilities.
7.01.03 DURATION. The indemnities set forth in Articles 7.01.01(a), (c),
and (d), and in Article 7.01.02, shall apply only to Losses as to which
claims are asserted under Article 7.02 on or before three years after the
Closing Date. The indemnity set forth in Article 7.01.01(e) shall survive
without limit. The indemnities set forth in Articles 7.01.01(b) and
7.01.02(b) shall survive for a period of one year after the Closing Date.
7.02 METHOD OF ASSERTING CLAIMS, ETC. Except for claims under Article 5
(Taxes) and claims for reimbursement for Remediation under Article 6
(Environmental), all claims for indemnification under this Agreement shall be
asserted and resolved as provided in this Article 7.02. The provisions of
Articles 7.02.01 and 7.02.02 shall be covenants and not conditions to the
defense and indemnity obligations to which they apply.
7.02.01 THIRD PERSON CLAIMS. In the event that any claim for which a
Party providing indemnification (the "Indemnifying Party") would be
liable to a Party or any of its officers, directors, employees, agents
or representatives entitled to indemnification hereunder (the
"Indemnified Party") is asserted against or sought to be collected by a
Third Person, the Indemnified Party shall promptly notify the
Indemnifying Party of such claim, specifying the nature of such claim
and the amount or the estimated amount thereof to the extent then
feasible (which estimate shall not be conclusive of the final amount of
such claim) (the "Claim Notice"). The Indemnifying Party shall have 30
days from its receipt of the Claim Notice (the "Notice Period") to
notify the Indemnified Party
(a) whether or not it disputes its liability to the Indemnified Party
hereunder with respect to such claim, and
(b) if it does not dispute such liability, whether or not it desires,
at its sole cost and expense, to defend the Indemnified Party against
such claim; provided, however, that the Indemnified Party is hereby
authorized prior to and during the Notice Period to file any motion,
answer or other pleading, submission or document which it shall deem
necessary or appropriate to protect its interests.
In the event that the Indemnifying Party notifies the Indemnified Party
within the Notice Period that it does not dispute such liability and
desires to defend against such claim or demand, then, except as hereinafter
provided, the Indemnifying Party shall have the right to
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defend such claim or demand by appropriate proceedings, which
proceedings shall be promptly settled or prosecuted to a final
conclusion, in such a manner as to avoid any risk of the Indemnified
Party becoming subject to liability. If the Indemnified Party desires
to participate in, but not control, any such defense or settlement, it
may do so at its own cost and expense. If the Indemnifying Party
disputes its liability with respect to such claim, or elects not to
defend against such claim, whether by not giving timely notice as
provided above or otherwise, the Indemnified Party shall have the right
but not the obligation to defend against such claim, and the amount of
any such claim, or if the same be contested by the Indemnifying Party or
by the Indemnified Party, then that portion thereof as to which such
defense is unsuccessful, shall be conclusively deemed to be a liability of
the Indemnifying Party hereunder (subject, if it has timely disputed
liability, to a determination in accordance with Article 7.03.03 that the
disputed liability is covered by this Article 7.)
7.02.02 OTHER CLAIMS. In the event that the Indemnified Party shall
have a claim against the Indemnifying Party hereunder which does not
involve a claim or demand being asserted against or sought to be
collected from it by a Third Person, the Indemnified Party shall
promptly send a Claim Notice with respect to such claim to the
Indemnifying Party. If the Indemnifying Party does not notify the
Indemnified Party within the Notice Period that it disputes such claim,
the amount of such claim shall be conclusively deemed a liability of the
Indemnifying Party hereunder.
7.03 PAYMENT. Payments for claims asserted under Article 7.02 shall be made as
follows:
7.03.01 PAYMENT OF UNDISPUTED AMOUNT. In the event that the Indemnifying
Party is required to make any payment, the Indemnifying Party shall
promptly pay the Indemnified Party the amount so determined. If there
should be a dispute as to the amount or manner of determination of any
indemnity obligation owed, the Indemnifying Party shall nevertheless pay
when due such portion, if any, of the obligation as shall not be subject to
dispute. The difference, if any, between the amount of the obligation
ultimately determined as properly payable and the portion, if any
theretofore paid, shall bear interest at the Agreed Rate. Upon the payment
in full of any claim, the Indemnifying Party shall be subrogated to the
rights of the Indemnified Party against any Person or other entity with
respect to the subject matter of such claim.
7.03.02 INTEREST. If all or part of any indemnification obligation under
this Agreement is not paid when due upon resolution of the claim, then the
Indemnifying Party shall pay on demand to the Indemnified Party interest at
the Agreed Rate on the unpaid amount of the obligation for each day from
the date the amount became due until payment in full.
7.03.03 DISPUTED CLAIMS. If the Indemnifying Party shall notify the
Indemnified Party during the Notice Period that it disputes any claim
asserted under Article 8.02 (the "Disputed Claim"), the Disputed Claim
shall be subject to arbitration as provided in this Agreement.
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ARTICLE 8
CONDITIONS PRECEDENT
8.01 CONDITIONS PRECEDENT OF BUYER. The obligations of Buyer to consummate the
transactions contemplated by this Agreement are subject to the following
conditions:
8.01.01 REPRESENTATIONS AND WARRANTIES TRUE AT CLOSING. The
representations and warranties of Seller contained in this Agreement or in
any certificate or document delivered pursuant to the provisions hereof, or
in connection with the transactions contemplated hereby, were true and
complete when made, and shall be true and complete on and as of the Closing
Date as though such representations and warranties were made at and as of
such date except as otherwise expressly provided herein.
8.01.02 COMPLIANCE WITH AGREEMENT. On and as of the Closing Date, Seller
shall have performed and complied with all agreements, covenants, and
conditions required by this Agreement to be performed and complied with
prior to or on the Closing Date.
8.01.03 CERTIFIED RESOLUTIONS AND OFFICERS' CERTIFICATE. Seller shall
have delivered to Buyer
(a) a certificate dated the Closing Date signed by the Secretary or
an Assistant Secretary of Seller with respect to the action of
Seller's Board of Directors authorizing the transactions contemplated
by this Agreement, and
(b) a certificate, dated the Closing Date and signed by the President
or a Vice President of Seller certifying in such detail as Buyer may
reasonably request to the fulfillment of the conditions specified in
Articles 8.02.01 and 8.02.02.
8.01.04 INJUNCTION. On the Closing Date, there shall be no injunction,
writ, or preliminary restraining order or any order of any nature issued by
a court or other Governmental Body of competent jurisdiction directing that
the transaction provided for herein or any of them not be consummated as
herein provided or imposing any conditions on the consummation of the
transactions contemplated hereby and no material proceeding or lawsuit
shall have been commenced or threatened by any Governmental Body or other
Person with respect to any of the transactions contemplated by this
Agreement.
8.01.05 CONVEYANCE. Seller shall execute, acknowledge and deliver to
Buyer the Assignment and Bill of Sale, as well as change of operator forms
required by applicable Laws and such other documents as may be necessary to
carry out the purpose of this Agreement.
8.01.06 LETTERS IN LIEU. Buyer and Seller shall execute, acknowledge and
deliver all Letters in Lieu.
8.01.07 NO MATERIAL ADVERSE CHANGE. Since the Effective Date, there
shall not have occurred with respect to the Assets as a whole any
material adverse change in the condition
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or value thereof other than changes in the ordinary course of business,
changes occurring on account of normal declines in production, changes
in the value of such properties other than changes resulting from events
or circumstances that affect the oil and gas industry generally.
8.02 CONDITIONS PRECEDENT OF SELLER. The obligations of Seller to consummate
the transactions contemplated by this Agreement are subject to the following
conditions:
8.02.01 REPRESENTATIONS AND WARRANTIES TRUE AT CLOSING. The
representations and warranties of Buyer contained in this Agreement or in
any certificate or document delivered pursuant to the provisions hereof, or
in connection with the transactions contemplated hereby, were true and
complete when made, and shall be true and complete on and as of the Closing
Date as though such representations and warranties were made at and as of
such date except as otherwise expressly provided herein.
8.02.02 COMPLIANCE WITH AGREEMENT. On and as of the Closing Date, Buyer
shall have performed and complied with all agreements, covenants, and
conditions required by this Agreement to be performed and complied with
prior to or on the Closing Date.
8.02.03 CERTIFIED RESOLUTIONS AND OFFICERS' CERTIFICATE. Buyer shall
have delivered to Seller
(a) a certificate dated the Closing Date signed by the Secretary or
an Assistant Secretary of Buyer with respect to the action of Buyer's
Board of Directors authorizing the transactions contemplated by this
Agreement, and
(b) a certificate dated the Closing Date and signed by the President
or a Vice President of Buyer certifying in such detail as Seller may
reasonably request to the fulfillment of the conditions specified in
Articles 8.01.01 and 8.01.02
8.02.04 INJUNCTION. On the Closing Date, there shall be no injunction,
writ, or preliminary restraining order or any order of any nature issued by
a court or other Governmental Body of competent jurisdiction directing that
the transactions provided for herein or any of them not be consummated as
herein provided or imposing any conditions on the consummation of the
transactions contemplated hereby and no material proceeding or lawsuit
shall have been commenced or threatened by any Governmental Body or other
Person with respect to any of the transactions contemplated by this
Agreement.
8.02.05 CONVEYANCE. Buyer shall execute, acknowledge and deliver to
Seller such documents as may be necessary to carry out the purposes of
this Agreement.
8.02.06 LETTERS IN LIEU. Buyer and Seller shall execute, acknowledge and
deliver the Letters in Lieu.
ARTICLE 9
MISCELLANEOUS
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9.01 NOTICES. All notices, consents, requests, demands, and other
communications hereunder shall be in writing and shall be deemed to have been
duly given or delivered if
9.01.01 delivered by hand,
9.01.02 delivered by a recognized overnight commercial courier (receipt
requested), or
9.01.03 sent by telecopier (with receipt confirmed), provided that a copy
is promptly thereafter mailed in the United States by first-class postage
prepaid mail,
to the Party as follows (or to such other address as any Party shall have last
designated by 15 days' notice to the other Parties).
If to Buyer:
Redfish Bay Development Corporation
Pi Energy Corporation
333 Clay Street, Suite 4310
Houston, TX 77002
Fax: (713) 650-9208
If to Seller:
Midland Resources, Inc. and
Summit Petroleum Corporation
16701 Greens Point Park Drive, Suite 200
Houston, TX 77060
Fax: (713) 873-5058
A notice shall also be deemed given if an original, photocopy or facsimile is
actually received by the Persons designated to receive notice, regardless of the
manner of transmission.
9.02 MODIFICATION. This Agreement, including the Exhibits and Schedules, shall
not be modified except by an instrument in writing signed by the Parties.
9.03 GOVERNING LAW. This Agreement shall be governed by and construed and
enforced in accordance with the Laws of the State of Texas, except those laws
and principles governing conflicts of law.
9.04 ASSIGNMENT. This Agreement and the rights and obligations created
hereunder shall not be assigned prior to Closing by either Party except that
Buyer may assign its rights to a single subsidiary of Buyer provided Buyer
remains primarily liable for the performance of all obligations hereunder.
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Subsequent to Closing either Party may assign their obligations hereunder
provided the Party remains primarily liable for the performance of the Party's
obligations hereunder. Subsequent to Closing neither Party may assign its
rights or interests under this Agreement except in connection with a sale of all
or substantially all of the Assets of the Party or in connection with a merger
or similar transaction. Seller's obligations under this Agreement shall not be
expanded in any manner by a transfer of Assets by Buyer, and Buyer's rights
hereunder shall not be limited in any manner by a transfer of Assets.
9.05 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
9.06 INVALIDITY. If any of the provisions of this Agreement including the
Schedules is held invalid or unenforceable, such invalidity or unenforceability
shall not affect in any way the validity or enforceability of any other
provision of this Agreement. In the event any provision is held invalid or
unenforceable, the Parties shall attempt to agree on a valid or enforceable
provision which shall be a reasonable substitute for such invalid or
unenforceable provision in light of the tenor of this Agreement and, on so
agreeing, shall incorporate such substitute provision in this Agreement.
9.07 ENTIRE AGREEMENT AND CONSTRUCTION. This Agreement contains the entire
agreement between the Parties with respect to the transactions contemplated
hereby and all prior understandings and agreements shall merge herein. There
are no additional terms, whether consistent or inconsistent, oral or written,
which are intended to be part of the Parties' understandings which have not been
incorporated into this Agreement and the Schedules and Exhibits. The Parties
agree that they have jointly participated in the drafting and preparation of
this Agreement and that the language of this Agreement shall be construed as a
whole according to its fair meaning and not strictly for or against any of the
Parties hereto.
9.08 EXPENSES. Except as otherwise expressly provided herein, each Party shall
bear its fees, costs and expenses in connection with the transactions
contemplated herein, including, without limitation, all legal and accounting
fees and disbursements and fees and expenses of other advisors retained by such
Party.
9.09 WAIVERS AND AMENDMENTS. All amendments and other modifications hereof
shall be in writing and signed by each of the Parties. Either Party may by
written instrument
9.09.01 waive any inaccuracies in any of the representations or
warranties made to it by any other Party contained in this Agreement or
in any instruments and documents delivered to it pursuant to this
Agreement, or
9.09.02 waive compliance or performance by the other Party with or of any
of the covenants or agreements made to it by the other Party contained in
this Agreement.
The delay or failure on the part of a Party hereto to insist, in any one
instance or more, upon strict
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performance of any of the terms or conditions of this Agreement, or to
exercise any right or privilege herein conferred shall not be construed as a
waiver or any such terms, conditions, rights or privileges but the same shall
continue and remain in full force and effect. All rights and remedies are
cumulative. The waiver of a condition to Closing by a Party regarding a
warranty, representation or covenant shall not constitute a waiver of a
breach of such warranty, representation or covenant; provided, however, that
the Parties shall attempt in good faith to agree prior to Closing upon the
resolution of a breach of a representation or warranty that arises after the
date of this Agreement which could result in liability to the breaching Party
and of which the other Party has actual Knowledge, and if the Parties cannot
agree upon a resolution, the breach shall be deemed waived if the Closing
occurs.
9.10 SURVIVAL OF WARRANTIES, REPRESENTATIONS AND COVENANTS. All representations
and warranties contained in this Agreement shall survive the Closing and
continue with respect to claims made on or before one year following the Closing
Date. The covenants, indemnities and agreements contained in this Agreement
shall survive the Closing and continue in accordance with their respective
terms.
9.11 ARTICLE HEADINGS. The Article headings in this Agreement are for
convenience of reference only and shall not be deemed to alter or affect the
interpretation of any provision thereof.
9.12 DISPUTE RESOLUTION. Except as expressly provided to the contrary in this
Agreement, the parties shall submit every dispute relating to this Agreement to
binding arbitration as follows:
9.12.01 SELECTION OF ARBITRATOR. The parties shall use reasonable
efforts to select a mutually acceptable arbitrator. If the parties fail
to agree on an arbitrator within 15 days, either party may request the
judge of the United States District Court for the Southern District of
Texas having greatest tenure, but not yet on retired or senior status,
to appoint an arbitrator. If that judge fails to do so within 30 days,
either party may request the judge of that court next senior to name the
arbitrator, and if that judge fails to do so after ten days, either
party may make the request of the judge of that court next senior, and
so on, until the arbitrator is appointed.
9.12.02 QUALIFICATIONS OF ARBITRATOR. Each arbitrator shall be
knowledgeable about matters affecting the issue(s) for which such
arbitrator is appointed (and where applicable, shall be a professional in
the matter in dispute) or shall be a former member of the Texas or federal
judiciary, and shall be required to meet the qualification requirements of
the Commercial Arbitration Rules of the American Arbitration Association
(the "AAA Rules"). If prior to rendering a decision an arbitrator resigns
or becomes unable to serve, the arbitrator will be replaced using the
mechanism set forth herein.
9.12.03 SUIT PROHIBITED. No party will commence or prosecute any suit or
action against another party other than as may be necessary to compel
arbitration or to enforce the award of an arbitrator.
-32-
<PAGE>
9.12.04 DAMAGES. The arbitrator shall not have any authority to award
consequential, exemplary or punitive damages. The sole forum for the
arbitration shall be Harris County, Texas and all hearings shall be
conducted in Harris County, Texas.
9.12.05 DECISION. The decision of the arbitrator shall be rendered in
writing and shall be final and binding upon the parties. Any party shall
have the right to entry of judgment, by any court of competent
jurisdiction, upon the decision of the arbitrator. Unless declared
otherwise by the arbitrator:
(a) The expenses of arbitration, including compensation to the
arbitrator, shall be borne equally by the parties;
(b) each party shall bear the compensation and expenses of its own
counsel, witnesses and employees; and
(c) if the testimony of a witness is obtained by both parties, the
costs associated with obtaining such testimony shall be borne equally
between the parties.
9.12.06 AAA RULES. Matters not specifically provided for herein shall be
governed by the AAA Rules.
IN WITNESS WHEREOF, the Parties hereto have entered into this Agreement as of
the date first herein above written.
PI DEVELOPMENT CORPORATION
By:
------------------------------------
Jon M. Fleming,
Vice President and General Counsel
REDFISH BAY DEVELOPMENT CORPORATION
By:
------------------------------------
Jon M. Fleming, President
MIDLAND RESOURCES, INC.
-33-
<PAGE>
By:
------------------------------------
Deas H. Warley, President
SUMMIT PETROLEUM CORPORATION
By:
------------------------------------
Deas H. Warley, President
-34-
<PAGE>
WARRANT CERTIFICATE
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND NEITHER THE SECURITIES
NOR ANY INTEREST THEREIN MAY BE SOLD, TRANSFERRED, PLEDGED OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION UNDER
SUCH ACT AND THE RULES AND REGULATIONS THEREUNDER; PROVIDED FURTHER,
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE NOT TRANSFERABLE BY
OR FROM THE WARRANT HOLDER NAMED HEREIN WITHOUT THE EXPRESS WRITTEN
CONSENT OF MIDLAND RESOURCES, INC.
Issue Date: OCTOBER 23, 1996 10,000 Warrants to
Void after 5:00 P.M. Purchase Common Stock
SEPTEMBER 30, 2001 Certificate No. SB-1
WARRANTS TO PURCHASE COMMON STOCK OF
MIDLAND RESOURCES, INC.
Midland Resources, Inc., a Texas corporation (the "Company") , hereby
certifies that, for value received, SAM R. BROCK, the holder of these Warrants
(the"Warrants," and each right to purchase a share of Common Stock, a "Warrant"
) is entitled, subject to the terms set forth below, at any time, or from time
to time, to purchase from the Company 10,000 fully paid and nonassessable shares
of Common Stock of the Company. These Warrants and all rights hereunder, to the
extent such rights shall not have been exercised, shall terminate and become
null and void at 5:00 p.m., Houston, Texas time, on SEPTEMBER 30, 2001 (the
"Expiration Date"). For purpose of these Warrants, the term "Common Stock"
shall mean the common stock, par value $0.001 per share of Midland Resources,
Inc. having such rights and privileges as exist on the date hereof.
These Warrants shall be subject to the following terms and conditions:
SECTION 1. EXERCISE OF WARRANT; RESERVATION OF COMMON STOCK; EXERCISE
PRICE; ADJUSTMENTS RELATIVE TO EXERCISE OF WARRANT.
A. EXERCISE OF WARRANTS. Subject to the conditions set forth in this
Section 1, the holder of any warrant may, at such holder's option, exercise such
holder's rights under all or any part of the Warrants to purchase one share of
Common Stock in exchange for one Warrant ( the "Warrant Shares") at a price per
share (the "Exercise Price") equal to $2.875, payable in cash, at any time and
from time to time prior to the Expiration Date. The Warrant Shares and the
Exercise Price are subject to certain adjustments set forth in this Section 1,
and the terms "Warrant Shares" and "Exercise Price" as used herein shall as of
any time be deemed to include all such adjustments to be given effect as of such
time in accordance with the terms hereof.
1
<PAGE>
B. RESERVATION OF COMMON STOCK. The Company covenants that, while
these Warrants are exercisable, it shall reserve from its authorized and
unissued Common Stock a sufficient number of shares to provide for the
delivery of stock pursuant to an exercise of these Warrants. The Company
further covenants that all shares of Common Stock that may be issued upon the
exercise of these Warrants shall, upon issuance, be duly and validly issued,
fully paid and nonassessable, and free from all taxes, liens, and charges
with respect to the purchase and issuance of the shares.
C. RECAPITALIZATION. (1) The existence of these Warrants shall
not affect in any way the right or power of the Company or its shareholders to
make or authorize any or all adjustments, recapitalization, reorganizations, or
other changes in the Company's capital structure or its business, or any merger
or consolidation of the Company or any issue of bonds, debentures, preferred or
prior preference stocks ahead of or affecting the Common Stock or the rights
thereof, or the dissolution or liquidation of the Company, or any sale or
transfer of all or any part of its assets or business, or any other corporate
act or proceeding, whether of a similar character or otherwise.
(2). The consideration payable per share upon exercise shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a subdivision or consolidation of shares
or other capital adjustment, or the payment of a stock dividend or other
increase or decrease in such shares, effected without receipt of consideration
by the Company; provided, however, that any fractional shares resulting from any
such adjustment shall be eliminated for the purposes of such adjustments.
(3). Subject to any required action by the shareholders, if the
Company shall be the surviving or resulting corporation in any merger or
consolidation, the Warrant granted hereunder shall pertain to and apply to the
securities or rights to which a holder of the number of shares of Common Stock
subject to the Warrants would have been entitled. In the event of any merger or
consolidation pursuant to which the Company is not the surviving or resulting
corporation, there shall be substituted for the shares of Common Stock subject
to any unexercised portions of the Warrants, an appropriate number of shares of
each class of stock or other securities of the surviving or consolidated
corporation which were distributed to the shareholders of the Company in respect
of such shares of Common Stock. Provided, however, that the Warrants may be
canceled by the Company as of the effective date of any such reorganization,
merger or consolidation or of any dissolution or liquidation of the Company by
giving notice to the holder hereof of its intention to do so and by permitting
the purchase during the thirty (30) day period next preceding such effective
date of all or any portion of the shares subject to the Warrants.
(4). No adjustment of the Exercise Price shall be made in an amount
that is less than 1% of the Exercise Price, but any such lesser adjustment shall
be carried forward and made at the time of and together with the next subsequent
adjustment.
SECTION 2. METHOD OF EXERCISE OF WARRANTS.
These Warrants may be exercised by the delivery of this Certificate,
along with the Warrant Exercise Form attached hereto as Exhibit "A" duly
executed by the holder, to the Company at its principal office, accompanied by
payment of the Exercise Price for the number of shares of
2
<PAGE>
Common Stock specified. The Warrants may be exercised for less than the full
number of shares of Common Stock called for hereby by delivery of this
Certificate in the manner and at the place provided above, accompanied by
payment for the number of shares of Common Stock being purchased. If the
Warrants should be exercised in part only, the Company shall, upon surrender
of this Certificate for cancellation, execute and deliver a new Certificate
evidencing the right of the holder to purchase the balance of the shares
purchasable hereunder. Upon receipt by the Company of this Certificate at
the principal office of the Company, in proper form for exercise, accompanied
by the full Exercise Price in cash or certified or bank cashier's check, the
holder shall be deemed to be the holder of record of the shares of Common
Stock issuable upon such exercise, notwithstanding that the stock transfer
books of the Company shall then be closed or that certificates representing
such Common Stock shall not then be actually delivered to the holder.
As soon as practicable after the exercise of these Warrants in whole
or in part and, in any event, within ten days thereafter, the Company at its
expense will cause to be issued in the name of and delivered to the holder a
certificate or certificates for the number of fully paid and nonassessable
shares of Common Sock (and a certificate representing the balance of any
unexercised Warrants) to which the holder shall be entitled upon such exercise.
Each certificate for shares of Common Stock so delivered shall be in such
denominations as may be requested by the holder and shall be registered in the
name of the holder or such other name as the holder may designate.
SECTION 3. RIGHTS OF HOLDER.
These Warrants do not entitle the holder to any voting rights, to any
other rights of a stockholder of the Company, or to any other rights whatsoever,
except for the rights specified in this Certificate. No dividends are or shall
be payable, or shall accrue, on or with respect to these Warrants or any
interest represented by these Warrants or on the shares that may be purchased
upon the exercise hereof until or unless, and except to the extent that, these
Warrants are exercised.
SECTION 4. NOTICE.
Any and all notices concerning these Warrants shall be given to the
holder of this Warrant by publication and/or by written notice to the address of
the holder on the warrant register for the Warrants maintained by the Company.
No notice or notices concerning these Warrants are required except as specified
in this Certificate.
SECTION 5. MUTILATED OR MISSING WARRANT CERTIFICATES.
Upon receipt by the Company of evidence reasonably satisfactory to it
of the loss, theft, destruction or mutilation of this Warrant Certificate, and
(in the case of loss, theft or destruction) of reasonably satisfactory
indemnification and upon surrender and cancellation of this Warrant Certificate
(if mutilated) the Company will execute and deliver a new Warrant Certificate of
like tenor and date.
3
<PAGE>
SECTION 6. MISCELLANEOUS.
A. GOVERNING LAW. These Warrants shall be performable in, subject
to and construed in accordance with the laws of the State of Texas.
B. RESTRICTIVE LEGEND. The Holder hereof, upon exercise of these
Warrants, understands and agrees that the share(s) certificate(s) to be issued
will bear a restrictive legend similar to the legend contained hereon and stop
transfer restrictions will be placed against such shares until compliance with
the legend is determined to the satisfaction of the Company.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed, as of the day and year first above written.
MIDLAND RESOURCES, INC.
By:
------------------------------
Deas H. Warley III,
President
4
<PAGE>
WARRANT EXERCISE FORM
DATE:_____________________, 19____
TO: MIDLAND RESOURCES, INC.
The undersigned, the holder of the attached Warrants, hereby irrevocably
elects to exercise all or part of the purchase right represented by such
Warrants for, and to purchase thereunder,______________shares of Common Stock,
Par Value $0.001 Per Share of Midland Resources, Inc. (the "Company") and
herewith makes payment of $____________to the Company, evidenced by delivery
of____________________, and requests that the certificate of such shares be
issued in the name of, and be delivered to,_________________________________,
whose address is____________________________________________________________.
------------------------------------
(Name of Holder)
------------------------------------
(Authorized Signatory)
------------------------------------
(Address)
------------------------------------
5
<PAGE>
PROMISSORY NOTE
$582,805 Houston, Texas December 15, 1995
FOR VALUE RECEIVED, the undersigned, DEAS H. WARLEY, III ("Maker"), hereby
promises to pay to the order of MIDLAND RESOURCES, INC. (the "Payee"), the
principal sum of FIVE HUNDRED EIGHTY-TWO THOUSAND EIGHT HUNDRED FIVE DOLLARS
($582,805.00), or so much thereof as may be advanced and outstanding, together
with interest on the unpaid principal balance as hereinafter set forth, in
lawful money of the United States of America.
Interest shall accrue upon the principal balance of this Note from the
dates of each advance at a varying interest rate per annum equal to the lesser
of (a) the Maximum Rate (hereinafter defined), or (b) Seven and One-Half Percent
(7.5%), calculated on the basis of the number of days elapsed in a calendar year
consisting of three hundred sixty-five (365) days; provided, however, if at any
time a rate of interest specified in clause (b) above would exceed the Maximum
Rate, thereby causing the interest on the indebtedness evidenced by this Note to
be limited to the Maximum Rate, then any subsequent increase in the Maximum Rate
shall not reduce the rate of interest on the indebtedness evidenced by this Note
below the Maximum Rate until the total amount of interest accrued on the
indebtedness evidenced by this Note equals the amount of interest which would
have accrued on the indebtedness evidenced by this Note if the rate specified in
clause (b) above had at all times been in effect. Each change in the rate of
interest charged hereunder shall become effective on the effective date of each
change in the Maximum Rate. Payee will give notice to Maker of each such change
in the Maximum Rate. As used herein, the term "Maximum Rate" means the maximum
non-usurious interest rate that at any time or from time to time may be
contracted for, taken, reserved, charged or received on the indebtedness
evidenced by this Note under the laws of the United States of America or the
State of Texas which are presently in effect, or which may hereafter be in
effect and which allow a higher maximum non-usurious interest rate than that
which is now allowed. To the extent that Article 5069-1.04, Title 79, Texas
Revised Civil Statutes, 1925, as amended (the "Act") is relevant to the
determination of the Maximum Rate, the Payee hereby elects to determine such
applicable legal rate under the Act pursuant to the "indicated rate ceiling"
from time to time in effect, as referred to and defined in Article 1.04(a)(1) of
the Act; subject, however, to the limitations on such indicated rate ceiling
referred to in Article 1.04(b)(2) of the Act, and further subject to any right
the Payee may have in the future to change the method of determining the Maximum
Rate.
All past due principal and interest shall bear interest from maturity until
paid at the lesser of Seven and One-Half Percent (7.5%), or the Maximum Rate.
This Note shall be due and payable as follows:
The remaining principal balance of and all accrued and unpaid interest
on this Note, if any, shall be due and payable in full on June 15,
1997.
<PAGE>
This Note may be prepaid, in whole or in part, at any time, without
penalty.
If any payment is not received by Payee within ten (10) days after the date
same is due hereunder, Maker shall pay to Payee a late charge in the amount
equal to five percent (5%) of such delinquent payment, subject, however, to the
provisions of this Note limiting interest to the Maximum Rate.
If any payment of principal and/or interest on this Note shall become due
on a Saturday, Sunday or any other day on which Payee is not open for business,
such installment shall be paid on the next succeeding business day on which
Payee is open for business.
All payments made under this Note shall be applied first to interest due
and any balance shall be applied in reduction of principal.
The payment of this Note is secured by that certain Security Agreement (the
"Security Agreement") of even date herewith, from Maker for the benefit of
Payee, covering certain personal property owned by Maker. All of the
provisions, terms, covenants and conditions contained in the Security Agreement
are incorporated herein by this reference and Maker covenants and agrees to
perform them, or cause them to be performed, strictly in accordance with their
terms. ANYTHING HEREIN TO THE CONTRARY NOTWITHSTANDING, PAYEE SHALL HAVE NO
RECOURSE AGAINST MAKER FOR PAYMENT OF ANY AMOUNTS DUE OR PERFORMANCE OF ANY
OBLIGATIONS UNDER THIS NOTE, SAVE AND EXCEPT SUCH COLLATERAL AS MAY BE SUBJECT
FROM TIME TO TIME TO THE SECURITY AGREEMENT.
If default is made in the payment of any installment of principal or
interest under this Note, and such default is not cured within five (5) days
after written notice thereof is given by Payee to Maker, or upon the occurrence
of any default Security Agreement or any other instrument evidencing, securing
or relating to this Note and the expiration of any applicable cure period
thereunder, then in any such event the Payee may, at its option, declare the
entire unpaid principal balance of and accrued and unpaid interest on this Note
to be immediately due and payable without further notice or demand, foreclose
all liens and security interests securing the payment of this Note, or any part
thereof, and offset against this Note any sum or sums owed by the Payee to
Maker, all at the option of the Payee. Failure of the Payee to exercise any
such option shall not constitute a waiver of Payee's right to exercise the same
in the event of any subsequent default.
Notwithstanding anything to the contrary contained in this Note or in any
other agreement entered into in connection with or securing the indebtedness
evidenced by this Note, whether now existing or hereafter arising and whether
written or oral, it is agreed that the aggregate of all interest, and any other
charges constituting interest, or adjudicated as constituting interest, and
contracted for, chargeable or receivable under this Note or otherwise in
connection with this loan transaction, shall under no circumstances exceed the
total amount of interest which would have been earned at the Maximum Rate. In
the event that maturity of this Note is accelerated by the Payee as a result of
a default under this Note or under any other document executed as security for
or in connection with this Note, or by voluntary prepayment of this Note by
Maker, or otherwise, then the total amount of earned interest may never exceed
the total amount of interest which would have been earned at the Maximum Rate,
computed from the dates each advance of the loan proceeds is made until payment.
<PAGE>
If from any circumstances the Payee shall ever receive interest, or any other
charges constituting interest, or adjudicated as constituting interest, in
excess of the total amount of interest which would have been earned at the
Maximum Rate, the amount of such excess interest shall be applied to the
reduction of the principal amount owing on this Note or on account of any other
principal indebtedness of Maker to the Payee, and not to the payment of
interest; or if the amount of such excess interest exceeds the unpaid principal
balance of this Note and such other indebtedness, the amount of such excess
interest that exceeds the unpaid principal balance of this Note and such other
indebtedness shall be refunded to Maker. All sums paid or agreed to be paid to
the Payee for the use, forbearance or detention of the indebtedness of Maker to
the Payee shall be amortized, prorated allocated, and spread throughout the term
of this Note until payment in full so that the actual rate of interest on
account of such indebtedness is uniform throughout the term of this Note.
Maker and any and all sureties, guarantors and endorsers of this Note
hereby waive any and all demand, presentment, notice of nonpayment or dishonor,
notice of intent to accelerate, notice of acceleration, diligence in collecting,
grace, notice and protest, and extensions for any period or periods of time and
partial payments, before or after maturity.
If any efforts are made to collect or enforce this Note or any installment
due under this Note, the Maker agrees to pay all costs and fees, including
reasonable attorneys' fees, incurred in connection with such collection efforts.
Should this Note be signed or endorsed by more than one person and/or
entity, all of the obligations contained in this Note shall be considered the
joint and several obligations of each maker and endorser of this Note.
This Note shall be construed according to and governed by the laws of the
State of Texas; provided, however, that nothing herein shall limit or impair any
right which Payee may have under applicable laws of the United States of America
to charge a rate of interest on sums evidenced by this Note at a rate which
exceeds the maximum rate of interest allowed under the laws of the State of
Texas. The obligations of the Maker under this Note are performable in Harris
County, Texas.
The words "Payee" and "Maker", whenever used in this Note, shall include
the respective heirs, distributees, personal representatives, successors and
assigns of Payee and Maker.
EXECUTED as of the day and year above first written.
MAKER:
-----------------------------
DEAS H. WARLEY, III
<PAGE>
SUBSIDIARIES OF THE REGISTRANT
Midland Resources Operating Company, Inc.
16701 Greenspoint Park Drive, Suite 200
Houston, Texas 77060
Incorporated in the State of Texas
Summit Petroleum Corporation
16701 Greenspoint Park Drive, Suite 200
Houston, Texas 77060
Incorporated in the State of Texas
<PAGE>
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-94708) pertaining to the Midland Resources, Inc. Long-Term Incentive
Plan, Midland Resources, Inc. 1995 Directors' Stock Option Plan and Midland
Resources Operating Co., Inc. 401(k) Employees' Stock Ownership Plan and Trust
of our report dated March 5, 1996, with respect to the consolidated financial
statements of Midland Resources, Inc. included in this annual report (Form
10-KSB) for the year ended December 31, 1996.
ERNST & YOUNG LLP
Fort Worth, Texas
March 27, 1997
<PAGE>
CONSENT OF GRANT THORNTON LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-94708) pertaining to the Midland Resources, Inc. Long-Term Incentive
Plan, Midland Resources, Inc. 1995 Directors' Stock Option Plan and Midland
Resources Operating Co., Inc. 401(k) Employees' Stock Ownership Plan and Trust
of our report dated March 21, 1997, with respect to the consolidated financial
statements of Midland Resources, Inc. included in this annual report (Form
10-KSB) for the year ended December 31, 1996.
GRANT THORNTON LLP
Houston, Texas
March 27, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 366,677
<SECURITIES> 0
<RECEIVABLES> 1,554,348
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,644,720
<PP&E> 27,889,580
<DEPRECIATION> 14,076,100
<TOTAL-ASSETS> 18,976,646
<CURRENT-LIABILITIES> 3,268,428
<BONDS> 7,166,421
0
0
<COMMON> 4,401
<OTHER-SE> 8,172,859
<TOTAL-LIABILITY-AND-EQUITY> 18,976,646
<SALES> 6,958,491
<TOTAL-REVENUES> 7,240,030
<CGS> 2,981,837
<TOTAL-COSTS> 6,465,181
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 722,447
<INCOME-PRETAX> 52,402
<INCOME-TAX> 30,280
<INCOME-CONTINUING> 22,122
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,122
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
