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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, 1997
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)
616 F.M. 1960 WEST, SUITE 600 77090
HOUSTON, TEXAS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(281) 580-9989
ISSUER'S TELEPHONE NUMBER
Securities registered pursuant to Section 12(b) of the Exchange Act:
Common Stock, $.001 Par Value
Warrants to purchase common stock at $4.00 per share
Securities registered pursuant to Section 12(g) of the Exchange Act: None
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
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State issuer's revenues for fiscal 1997: $7,095,395
State the aggregate market value of the voting stock held by non-affiliates
computed using $2.875, the price at which the stock sold on March 16, 1998:
$8,041,223
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 4,463,499 Shares as of March 16, 1998
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, 1998.
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TABLE OF CONTENTS
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PAGE
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PART I. 1
ITEM 1. DESCRIPTION OF BUSINESS 1
ITEM 2. DESCRIPTION OF PROPERTIES 3
Oil and Gas Properties 4
Net Production, Unit Sales and Production Cost 8
Oil and Gas Reserves 8
Drilling Activity 10
Other Property 10
ITEM 3. LEGAL PROCEEDINGS 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 11
PART II. 11
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 11
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATIONS 12
Plan of Operation 12
Capital Resources and Liquidity 12
Results of Operations - Years ended December 31, 1997,
1996 and 1995 15
ITEM 7. FINANCIAL STATEMENTS 17
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 40
PART III.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT 40
ITEM 10. EXECUTIVE COMPENSATION 40
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 40
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 40
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K 41
SIGNATURES 42
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 wholly 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's initial emphasis was on acquisition and exploitation of oil
and gas properties. In 1995, the Company changed its emphasis to
exploration, utilizing three dimensional ("3D") seismic technology.
On December 20, 1996, the Company completed the acquisition of Summit
Petroleum Corporation, an affiliate, for cash. (See NOTE F. RELATED PARTIES, to
Consolidated Financial Statements)
Although the Company's principal properties are located in Texas, the Company
also owns working interest and minor royalty leasehold interests in developed
and undeveloped oil and gas acreage in Illinois and Colorado.
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:
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1997 1996 1995
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AMOCO Production Company 12% - 11%
HPL Resources Company - - 11%
Sun Refining 15% 15% 17%
Western Gas Resources 18% 18% 18%
Conoco, Inc. - 12% -
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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.
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EMPLOYEES
On March 16, 1998, the Company had 19 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
administrative services. Experienced personnel are available in all disciplines
should the need to hire additional staff arise.
OFFICE FACILITIES
In 1997, the Company moved its executive offices to 616 F.M. 1960 West, Suite
600, Houston, Texas 77090. The Company believes that its facilities are
adequate for its current needs.
ITEM 1A. EXECUTIVE OFFICERS
Information regarding executive officers not incorporated by reference from
the Company's definitive Proxy Statement for its 1998 Annual Meeting of
Stockholders is as follows.
ROBERT R. DONNELLY, (49), President of the Company since March, 1998 and
director of the Company since July 1990. Mr. Donnelly has been the Corporate
Vice President and Treasurer of Eastland Oil Company of Midland, Texas since
1988, responsible for gas contracts, land, accounting and administration; from
1985 until 1988 Vice President in charge of land management; and from 1983 until
1985 he was land manager and in charge of partnership relations. Mr. Donnelly
has 18 years of experience in various domestic and international land and land
management positions with major and independent oil and gas companies. He
graduated from the University of Texas in 1973 with a Bachelor of Arts Degree in
Economics and is a Certified Professional Landman. He has served as Director of
the Independent Petroleum Association of America, the Permian Basin Association
of Petroleum Landmen and the West Texas Producers Forum.
HOWARD E. EHLER, (53), Chief Financial Officer and Vice President of Finance,
joined the Company February 14, 1997. Mr. Ehler is a Certified Public
Accountant and, prior to joining the Company, had 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)
and the Texas Society of Certified Public Accountants. Mr. Ehler received a BBA
degree from Texas Tech University in 1966.
MARILYN D. WADE, (46), 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.
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ITEM 2. DESCRIPTION OF PROPERTIES
OIL AND GAS PROPERTIES
The Company owns leasehold interests in developed and undeveloped oil and gas
acreage and oil and gas royalty interests located in the states of Texas,
Illinois and Colorado. 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.
GULF COAST REGION, TEXAS
COPANO BAY 3D SEISMIC EXPLORATION AND DEVELOPMENT PROJECT
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 in 1991, it was producing approximately 65 BOPD and 465 MCFD. The
Company conducted several workovers, recompletions and re-entries, and
increased production to average 52 BOPD and 828 MCFD in 1996 and 54 BOPD and
729 MCFD in 1997. During 1995, 1996 and 1997, Copano Bay properties
accounted for approximately 9%, 5% and 6%, respectively, of the Company's
total oil production and approximately 28%, 16% and 16%, respectively, of the
Company's total gas production.
Effective June 1, 1996, the Company acquired an additional 5% working interest
in this property for approximately $177,000, and now owns approximately 68% of
the working interest in this property.
In 1997, a 3D seismic survey was conducted covering a portion of Company owned
acreage and, in the beginning of 1998, a second 3D seismic survey was conducted
covering the remainder of the acreage. Both seismic surveys were conducted at
no cost to the Company and the survey data is currently being processed. When
processing is completed, the Company will be allowed to review the data to
determine if any of the data is of any value to the Company. If the Company
determines this data has any value, the Company will be allowed to purchase the
data.
PERMIAN BASIN REGION, TEXAS
CHALK MOUNTAIN 3D SEISMIC EXPLORATION AND DEVELOPMENT PROJECT
The Company held acreage adjoining a project generated by Texland Oil & Gas
Co. as a 3D seismic exploration project in July 1996 in Sterling, Tom Green and
Reagan Counties, Texas. The Company has acquired a 52.75% working interest in
approximately 3,300 acres in this project. During 1997, the Company invested
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approximately $2,000,000 in acquisition costs and drilling of three exploratory
wells and one development well in this project. One of these wells was
successful in the Fusselman formation. One of the wells established production
in the Canyon formation, but due to low production volume, additional Canyon
wells are not economically justified. Two of these wells were dry holes. In
the first quarter of 1998, the Company acquired additional acreage in the
project based on review of 3-D seismic data.
LATIGO 3D SEISMIC EXPLORATION AND DEVELOPMENT PROJECT
This project was defined and acquired as a 3D seismic exploration project in
1995 in the Northwest Shelf area of the Permian Basin in Hockley County, Texas.
The seismic survey covered 12 square miles and resulted in the leasing of
approximately 4,700 acres. Two successful exploratory wells were drilled in
this project in 1997 at a cost to the Company of approximately $1,568,000.
Average daily production from the discoveries drilled in this project in 1997
was 163 BOPD. The Company owns a 55% working interest in this project.
SUNBURST 3D SEISMIC EXPLORATION AND DEVELOPMENT PROJECT
The Sunburst project was acquired as a 3D seismic exploration project in 1995
in the Northwest Shelf area of the Permian Basin in Terry County, Texas. The
prospect was defined with a 14 square mile seismic survey and resulted in the
leasing of approximately 3,640 acres. In 1996, two exploratory wells were
drilled in this project at a cost to the Company of approximately $660,000,
with one completed in the Clearfork. Average daily production from this well
in 1997 was 11 BOE (barrel of oil equivalent). Neither of these wells
produced in economic quantities and in April, 1998, the Company sold most of
its interest in this project for $200,000 and retained a 6.875% working
interest with the Company's share of the cost of drilling the next well being
paid by the purchaser.
LAKOTA 3D SEISMIC EXPLORATION AND DEVELOPMENT PROJECT
The Lakota project was acquired as a 3D seismic exploration project in 1995 in
the Northwest Shelf area of the Permian Basin in Terry County, Texas. The
prospect was defined with a 14 square mile seismic survey and resulted in the
leasing of approximately 2,480 acres. In 1997, one exploratory well was
completed in this project as a Wolfcamp discovery at a cost to the Company of
$316,000. The Company owns a 30% working interest in this project. Average
daily production from this well in 1997 was 14 BOE. Due to lack of economic
success, no additional wells are currently planned in this project.
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 in 1997 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 owns a 100% working interest in this project.
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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. These wells combined
had a 1997 average production rate of approximately 41 BOPD and 20 MCFD gross
production before royalty burdens. The Company owns a 100% working interest in
this project.
JAMESON (STRAWN) FIELD
This field is located in Coke and Sterling Counties, Texas in which the
Company has an interest in 58 active wells which are operated by the Company
with a combined 1997 average production rate of approximately 120 BOPD and 1,500
MCFD. At the time the Company acquired the Jameson properties in 1992, 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.
In April and August 1996, the Company completed two field extension
development wells at an aggregate cost of approximately $700,000. Average
aggregate gross production rates in 1997 from these wells was approxmiately 45
BOPD and 250 MCFD. Effective June 1, 1996, the Company acquired various
additional royalty interests in this field for approximately $500,000. The
Company owns a 100% working interest in this project and net revenue interests
on individual leases range from 90% to 92%.
COPE WATERFLOOD UNIT AND ADVANCED RESERVOIR MANAGEMENT PROJECT
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 in 1990, production
had declined to 100 BOPD. Several shut-in wells were reactivated with total
unit production immediately improving to 137 BOPD.
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. Completed in 1997, the
simulation model is being utilized to improve reservoir management, potentially
enhance oil production by locating bypassed oil, determining new infill drilling
locations and designing optimum waterflood injection patterns for increased oil
recovery.
Effective May 1, 1996, the Company acquired an additional l5.75% 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
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
the unit's produced water has been reduced substantially.
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OTHER 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, for
$1,950,000 which was adjusted for revenues and expenses through the closing
date. These wells are operated by the Company and in 1997 had a combined
average production rate of approximately 62 BOPD and 215 MCFD, subject to normal
declines. The Company owns a 100% working interest in these properties.
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. The
Company realized a gain on this sale of approximately $349,000.
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.
The following table sets forth information concerning the Company's leasehold
ownership interests as of December 31, 1997.
TABLE I - LEASEHOLD INTEREST
AS OF DECEMBER 31, 1997
GROSS (b) NET (c)
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Developed Acreage (a) 20,409 15,828
Undeveloped Acreage (d) 12,732 6,937
Net Royalty Acreage 4,399
Active Working Interest Wells:
Oil 173 121
Gas 9 7
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.
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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, 1997, 1996 and 1995.
TABLE II - PRODUCTION, PRICE AND COST DATA
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FOR THE YEARS ENDED DECEMBER 31,
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1997 1996 1995
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OIL (a):
Production (Bbls) 192,580 215,913 166,652
Revenue $3,801,850 $4,566,130 $2,879,973
Average Bbls per day 528 591 457
Average Sales price per Bbl $ 19.74 $ 21.15 $ 17.28
GAS (b):
Production (Mcf) 988,109 1,002,482 1,268,772
Revenue $2,594,399 $2,392,361 $2,267,060
Average Mcf per day 2,709 2,746 3,476
Average sales price per Mcf $ 2.63 $ 2.39 $ 1.79
PRODUCTION COSTS:
Production cost $3,088,886 $2,981,837 $2,509,854
Equivalent Bbls (c) 357,265 382,993 378,114
Production cost per equivalent Bbl $ 8.65 $ 7.79 $ 6.64
Production cost per sales dollar $ 0.48 $ 0.43 $ 0.49
TOTAL REVENUES $6,396,249 $6,958,491 $5,147,033
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(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 of December 31, 1997 are based on evaluations prepared
by Williamson Petroleum Consultants, Inc., Independent Petroleum Engineers.
The estimates as of December 31, 1996 and 1995, 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 as of
December 31, 1997, 1996 and 1995, are summarized below:
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TABLE III - PROVED RESERVES
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December 31,
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1997 1996 1995
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OIL AND LIQUIDS (BBLS):
Proved developed - Producing 1,233,832 1,635,563 1,668,154
Proved developed - Non-producing 498,712 426,411 250,403
Proved undeveloped 922,455 779,506 469,052
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Total 2,654,999 2,841,480 2,387,609
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NATURAL GAS (MCF):
Proved developed - Producing 6,958,670 9,960,517 10,267,799
Proved developed - Non-producing 2,574,402 3,860,883 3,863,781
Proved undeveloped 4,326,547 4,473,153 4,337,162
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Total 13,859,619 18,294,553 18,468,742
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PRESENT VALUE OF ESTIMATED FUTURE NET
REVENUES BEFORE INCOME TAXES $17,765,076 $39,817,832 $17,687,654
----------- ----------- -----------
</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 1997, a price of $16.52 per barrel was
used, which is the average actual price in effect for the Company's oil
production on January 1, 1998. In estimating gas reserves for 1997, a
price of $2.36 per mcf, based on prices in effect at January 1, 1998, was
used.
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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, 1997, 1996 and 1995.
TABLE IV - DRILLING ACTIVITY IN WEST TEXAS
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For the Year Ended December 31,
----------------------------------------------------
1997 1996 1995
--------------- ------------- ----------------
Gross Net Gross Net Gross Net
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Exploratory:
Productive 5 2.7 1 0.6 0 0
Dry 2 1.6 2 1.7 0 0
----- ----- ----- ----- ----- -----
Total 7 4.3 3 2.3 0 0
----- ----- ----- ----- ----- -----
Developmental:
Productive 1 0.8 3 2.8 4 3.7
Dry 0 0 0 0 0 0
----- ----- ----- ----- ----- -----
Total 1 0.8 3 2.8 4 3.7
----- ----- ----- ----- ----- -----
</TABLE>
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. During
1997 the Company moved its executive offices to 616 F.M. 1960 West, Suite
600, Houston, Texas 77090, which it currently occupies under a lease expiring
in 2002. The company also sold its district office and relocated in leased
space in Midland, Texas.
ITEM 3. LEGAL PROCEEDINGS
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 68% 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 breached such
contract, and the Company is seeking monetary damages, resulting from said
breach of contract, as well as attorney fees and court costs.
-10-
<PAGE>
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 the
American Stock Exchange (AMEX) under the symbols MLD and MLDWS, respectively.
The Company's Common Stock and warrants were originally authorized for trading
on NASDAQ on May 17, 1991 and, in August 1997, the Company listed with AMEX.
The registrar and transfer agent is American Stock Transfer & Trust Company,
Inc. New York, New York. As of March 16, 1998, the Company had 1,385
shareholders of record and 4,463,499 shares outstanding.
PRICE RANGE OF COMMON STOCK
<TABLE>
HIGH LOW
----- -------
<S> <C> <C>
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
1997: (1)
First Quarter 6 1/2 2 5/8
Second Quarter 7 3/4 4 1/2
Third Quarter 5 1/8 3 1/8
Fourth Quarter 4 1 7/8
</TABLE>
(1) REFLECTS HIGH AND LOW TRADING RANGE INFORMATION RECEIVED FROM NASDAQ AND
AMEX.
(2) ON MARCH 16, 1998, THE CLOSING PRICE WAS $2.875.
(3) UNTIL THE COMMON STOCK BEGAN TRADING ON THE AMEX IN AUGUST, 1997, 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 the present
policy of the Company not to do so, but to retain its earnings (if any) for
future growth and business activities. The Company is also subject to certain
loan covenants which include restrictions on dividends, distributions and
redemptions.
On October 1, 1997, the Company issued 15,040 shares of unregistered common
stock to two directors in exchange for oil and gas working interests and a
limited partnership interest. The Company relied upon Section 4(2) of the
Securities Act of 1933 for an exemption from registering these shares based
upon there being only two purchasers, the purchasers' access to Company
information and the business sophistication of the purchasers.
-11-
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
This discussion should be read in conjunction with the audited financial
statements of Midland Resources, Inc. and Subsidiaries.
PLAN OF OPERATIONS
During 1996 and 1997 the Company's exploration efforts consumed most of its
available resources. While the Company believes its exploratory efforts have
identified possible future drilling opportunities, its ability to actively
pursue these efforts as well as to actively exploit existing developed
properties is dependent upon securing additional capital.
Beginning in early 1997 the Company determined that it should explore
strategic alternatives to raising capital though sales of equity. To assist the
Company it engaged an investment banking firm. During 1997 and continuing into
1998 the Company considered various alternative transactions, primarily
consisting of sale of all or substantially all of its assets, acquisitions of
another smaller company, merging with a company of equal size and merging with a
larger company. The Company terminated its contract with its investment banking
firm in December 1997.
On April 9, 1998, the Company announced it was pursuing a merger transaction
with Vista Resources, Inc., a privately held oil and gas exploration and
production company located in Midland, Texas. If the transaction with Vista is
not consummated, the Company expects to restrict its operations, including
future development, to a level that its current operations can support, and
continue to seek a strategic transaction as well as consider the sale of equity.
The Company's initial capitalization was through the acquisition of interests
of the seven public oil and gas income limited partnerships in exchange for
common stock and warrants of the Company. There were 2,265,522 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 of 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, 1997, 11,428 of the $4.00 warrants had been exercised.
On December 31, 1993, the Company acquired all of the issued and outstanding
common stock of Midland Resources Operating Company, Inc. (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 cash investment
in acquiring Summit was approximately $2,011,000. (See Note B of the Notes to
the Consolidated Financial Statements.)
CAPITAL RESOURCES AND LIQUIDITY
Net cash provided by operations decreased from $1,893,641 in 1996 to
$1,393,461 in 1997, for a decrease of $500,180, reflecting decreased oil and
gas production and pricing, and increased production costs and interest expense,
partially offset by lower geological and geophysical costs. Net cash used in
investing activities decreased from 1996 by $3,147,583, reflecting greater
proceeds from property sales in 1997 and the purchase of Summit in 1996. Net
cash provided by financing activities decreased from 1996 by $2,715,257,
reflecting additional borrowings
-12-
<PAGE>
for property acquisition and development in 1997 and greater debt repayments
resulting primarily from the sale of the Redfish Bay properties in 1997. In
1997, acquisition costs for proved properties were $34,993, acquisition costs
for unproven properties were $836,863 and development costs were $1,716,294.
Also, $1,536,130 was invested in an oil and gas limited partnership in 1997.
In 1996, cash payments for oil and gas property acquisition costs totaled
$761,476 for proved properties, $144,100 for unproved properties, and
$2,808,534 for development of properties.
For 1997 the Company's working capital increased $95,170 over 1996. The
principal components of this increase was the positive impact of approximately
$400,000 resulting from the sale of the Redfish Bay property in 1997 which was
offset by a reduction in current deferred tax assets of $341,000.
Management believes current debt maturities can be funded from cash flow from
operations. Management also believes that its credit facilities and its cash
flow from operations are adequate to meet its liquidity needs. Any future
drilling will depend on the Company's ability to raise additional capital
through bank borrowings, private placements or merger transactions.
At December 31, 1997, the Company has a net deferred tax asset of $1,048,193
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 October, 1996 the borrowing base under the Company's credit facility with
First Union National Bank (FUNB) was increased from $7,000,000 to $9,500,000 and
in March 1997 was reduced to $8,200,000 as a result of the sale of the Redfish
Bay properties. The borrowing base was subsequently increased and, as of
December 1, 1997, was $9,125,000. On December 17, 1997 this credit facility was
replaced with a revolving credit agreement with Compass Bank (Compass) which
provides for a credit facility of $30 million and an initial borrowing base of
$10,500,000. Concurrent with the execution of this agreement, the Company's
outstanding debt to FUNB in the amount of $9,151,615 (including accrued interest
of $26,615), was paid by an advance under the Compass agreement. Amounts
borrowed under the Compass agreement are collateralized by a first lien on
substantially all of the Company's oil and gas properties. Interest under this
agreement is payable monthly at an annual rate which, at the Company's option,
is equal to either (a) the Compass prime lending rate (8.5% at December 31,
1997) or (b) the London Interbank Offered Rate, plus 2.5%. In addition, a
commitment fee equal to 1/2% per annum on the unused portion of the borrowing
base is required. The borrowing base is reduced at the rate of $120,000 per
month beginning February 1, 1998 and, is subject to redetermination on each
April 1st and October 1st. This agreement also requires that the Company
maintain certain financial ratios and generally restricts the Company's ability
to incur debt, sell assets, materially change the nature of the Company's
business or its business structure or pay dividends. At December 31, 1997 the
balance due under this agreement was $9,651,615 and in January, 1998 a principal
reduction in the amount of $551,615 was made from the collection of sales
proceeds from properties sold in December, 1997. As of March 31, 1998, the
balance due under this facility was $9,200,000.
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, 1997, the Company was receiving $16.52
per bbl as compared to $25.00 at January 1, 1997. Fluctuations in price have a
significant impact on the Company's financial condition and liquidity.
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 Subsidiaries
(and the related notes). It should be noted that there are no audited financial
statements included herein for the year 1994. These tables are not covered by
the reports of independent certified public accountants.
-13-
<PAGE>
SUMMARY BALANCE SHEET DATA
<TABLE>
As of December 31,
--------------------------------------------------------
1997 1996 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Current assets $ 2,036,145 $ 3,644,720 $ 2,038,452 $ 1,134,999
Current liabilities 1,564,683 3,268,428 1,950,703 2,152,910
----------- ----------- ----------- -----------
Working capital 471,462 376,292 87,749 (1,017,911)
Oil and gas properties (net) 13,004,527 13,408,878 9,887,998 9,257,900
Other assets 2,579,811 1,923,048 2,196,902 2,385,641
Total assets 17,620,483 18,976,646 14,123,352 12,778,540
Long-term debt (excluding current maturities) 9,115,370 7,166,421 4,524,617 4,254,042
Other non-current liabilities 221,404 364,537 - -
Stockholders' equity $ 6,719,026 $ 8,177,260 $ 7,648,032 $ 6,371,588
----------- ----------- ----------- -----------
Stockholders' equity per common share $ 1.51 $ 1.86 $ 1.74 $ 1.90
----------- ----------- ----------- -----------
Shares outstanding 4,463,499 4,401,031 4,386,231 3,362,222
----------- ----------- ----------- -----------
SUMMARY OF OPERATIONS
Years Ended December 31,
--------------------------------------------------------
1997 1996 1995 1994
----------- ----------- ----------- -----------
Oil and gas sales $ 6,396,249 $ 6,958,491 $ 5,147,033 $ 5,265,759
Other 204,238 183,234 231,141 217,884
----------- ----------- ----------- -----------
Total operating revenues 6,600,487 7,141,725 5,378,174 5,483,643
Production costs 3,088,886 2,981,837 2,509,854 2,423,032
Exploration costs 849,534 766,855 198,453 -
Depreciation, depletion and amortization 1,964,658 1,306,287 1,033,905 1,120,841
Abandonments 93,760 - 3,000 41,676
General and administrative expenses 1,451,404 1,295,298 1,049,904 1,145,719
Impairment costs (a) 1,277,342 114,904 1,020,670 -
----------- ----------- ----------- -----------
Total operating expenses 8,725,584 6,465,181 5,815,786 4,731,268
----------- ----------- ----------- -----------
(2,125,097) 676,544 (437,612) 752,375
Gain (loss) on sale of properties (b) 462,571 36,308 (102,984) 81,962
Other income (c) 32,337 61,997 38,911 169,174
Interest expense (970,430) (722,447) (611,587) (473,048)
----------- ----------- ----------- -----------
Income (loss) before income taxes and cumulative
effect of change in accounting principle (2,600,619) 52,402 (1,113,272) 530,463
Income tax expense (benefit) (717,237) 30,280 (376,241) 204,769
----------- ----------- ----------- -----------
Income (loss) before cumulative effect of
change in accounting principle $(1,883,382) $ 22,122 $ (737,031) $ 325,694
----------- ----------- ----------- -----------
Income (loss) per common share before
cumulative effect of change (basic and diluted) $ (0.42) $ 0.01 $ (0.22) $ 0.10
----------- ----------- ----------- -----------
Weighted average shares outstanding 4,433,113 4,395,414 3,381,592 3,368,455
----------- ----------- ----------- -----------
</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
WERE 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. IN 1997, GAINS WERE
REALIZED PRIMARILY FROM THE SALE OF OIL AND GAS PROPERTIES.
(c) IN 1994, THERE WAS OTHER INCOME FROM THE SETTLEMENT OF LITIGATION REGARDING
A FORMER PROPERTY OPERATOR OF $120,090.
-14-
<PAGE>
RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
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 215,913 Bbls; an increase of 49,261 Bbls or 30%. 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.
During 1997, oil and gas sales decreased from $6,958,491 to $6,396,249; a
decrease of $562,242, or 8%. Oil production decreased from 215,913 Bbls to
192,580 Bbls; a decrease of 23,333 Bbls, or 11%. Gas production decreased from
1,002,482 mcf to 988,109 mcf; a decrease of 14,373, or 1%. Production declines
were due to the sale of the Redfish Bay properties, as well as normal production
declines on most wells, partially offset by production from new wells drilled in
1997. Average oil prices declined from $21.15 in 1996 to $19.74 in 1997.
Average gas prices increased from $2.39 in 1996 to $2.63 in 1997.
For 1997, the Company's share of income from an oil and gas limited
partnership was $72,275 which included oil and gas sales of $119,356 from
approximately 6,400 Bbls of oil produced. There was no similar item in 1996.
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. In 1997, production
costs increased from $2,981,837 in 1996 to $3,088,886, an increase of $107,049
or 4%. This was due to major repairs and workovers conducted in 1997, partially
offset by decreased production costs resulting from the sale of Redfish Bay.
During 1997 and 1996, exploration costs and abandonments were $943,294 and
$766,855, respectively, which were incurred in connection with the 3D
exploration projects discussed above. These amounts include dry hole costs of
$796,852 in 1997 and $416,892 in 1996.
In 1996, depreciation depletion and amortization (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 1997, DD&A
was $1,964,658, an increase of $658,371 from 1996, or 50%. This was due to
lower oil and gas reserves at December 31, 1997, which was due to less than
desired economic success on some wells drilled in 1997 and to lower oil prices.
In 1996, general and administrative (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 1997,
G&A expenses were $1,451,404 for an increase of $156,106, or 12%, over 1996.
This was due primarily to increased legal and consulting fees, and to non-cash
stock based compensation expense of $217,484. These costs were partially offset
by lower costs in other areas due to cost reduction measures.
Impairment losses were $1,020,670 in 1995, $114,904 in 1996 and $1,277,342 in
1997. Impairments are recognized when estimated future net cash flows on
individual properties are less than their net capitalized cost.
In 1997, there were gains of $462,571 primarily from the sales of oil and gas
properties, including $349,000 from the sale of the Redfish Bay property.
-15-
<PAGE>
In 1996, interest expenses increased to $722,447, an increase of $110,860, or
18% from 1995. This increase is attributable to additional borrowings to
consummate the Summit acquisition and for property acquisitions and development
projects in 1996. In 1997, interest increased to $970,430, an increase of
$247,983, or 34%, due primarily to additional borrowings to fund the Company's
drilling program in 1997 and to pay $84,800 to close an interest rate swap
contract.
In 1995, the net loss was $737,031 primarily resulting from an 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. In 1997, the net loss was
$1,883,382, due primarily to property impairments, DD&A, lower oil and gas
production, exploratory dry holes and other factors discussed above.
FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis or Plan of Operation ("MD&A") contains
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1937, as amended (the "Exchange Act"). All
statements other than statements of historical fact included in MD&A, including
statements regarding the Company's operating strategy, plans, objectives and
beliefs of management for future operations, planned capital expenditures and
acquisitions are forward-looking statements. Although the Company believes that
the assumptions upon which such forward-looking statements are based are
reasonable, it can give no assurance that such assumptions will prove to be
correct.
-16-
<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 sheets of Midland
Resources, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Midland Resources, Inc. and subsidiaries at December 31, 1997 and 1996,
and the consolidated results of their operations and their consolidated cash
flows for each of the two years ended December 31, 1997, in conformity with
generally accepted accounting principles.
GRANT THORNTON LLP
Houston, Texas
March 13, 1998, except as to
Note N as to which the date is
April 9, 1998
-17-
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Midland Resources, Inc.
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Midland Resources, Inc. and subsidiary
for the year 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 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 results of their
operations and cash flows of Midland Resources, Inc. and subsidiary for the
year 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
-18-
<PAGE>
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
December 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 150,890 $ 366,677
Accounts receivable:
Oil and gas sales 670,093 834,269
Related parties 60,822 360,479
Sales of properties 563,757 -
Property operations and other 296,052 359,600
Property held for sale 200,000 1,241,515
Other current assets 57,531 104,180
Deferred tax asset 37,000 378,000
----------- -----------
Total current assets 2,036,145 3,644,720
Property and equipment, at cost 29,210,699 27,889,580
Less accumulated depreciation, depletion
and amortization 15,975,838 14,076,100
----------- -----------
Property and equipment, net 13,234,861 13,813,480
Deferred tax asset 1,011,193 -
Goodwill, net of amortization of $106,754 in
1997 and $80,067 in 1996 720,584 747,271
Contracts and leases, net of amortization of
$84,352 in 1997 and $78,411 in 1996 199,116 414,633
Non-current note receivable 302,490 317,759
Other assets 116,094 38,783
----------- -----------
Total assets $17,620,483 $18,976,646
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 583,481 $ 1,680,830
Accounts payable and accrued expenses 981,202 1,194,344
Drilling advances - 393,254
----------- -----------
Total current liabilities 1,564,683 3,268,428
Long-term debt 9,115,370 7,166,421
Deferred tax liability - 47,044
Payable for the purchase of subsidiary and other 221,404 317,493
----------- -----------
Total liabilities 10,901,457 10,799,386
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; 4,463,499 and 4,401,031 shares
issued in 1997 and 1996, respectively 4,463 4,401
Additional paid in capital 8,487,801 7,898,199
Unearned compensation (164,516) -
Retained earnings (deficit) (1,608,722) 274,660
----------- -----------
Total stockholders' equity 6,719,026 8,177,260
----------- -----------
Total liabilities and stockholders' equity $17,620,483 $18,976,646
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
-19-
<PAGE>
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
Years ended December 31,
-------------------------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Operating revenue:
Oil and gas sales $ 6,396,249 $6,958,491 $5,147,033
Management income - 45,000 102,000
Property operations income 119,012 111,862 81,036
Partnership income 72,275 - -
Other 12,951 26,372 48,105
----------- ---------- ----------
Total operating revenue 6,600,487 7,141,725 5,378,174
Operating costs and expenses:
Oil and gas production 3,088,886 2,981,837 2,509,854
Exploration costs:
Dry holes 796,852 416,892 -
Geological and geophysical 52,682 349,963 198,453
Depreciation, depletion and amortization 1,964,658 1,306,287 1,033,905
Abandonment costs 93,760 - 3,000
General and administrative 1,451,404 1,295,298 1,049,904
Impairment of properties 1,277,342 114,904 1,020,670
----------- ---------- ----------
Total operating costs and expenses 8,725,584 6,465,181 5,815,786
----------- ---------- ----------
(2,125,097) 676,544 (437,612)
Other income and (expenses):
Gain (loss) on sale of property and equipment 462,571 36,308 (102,984)
Interest income 32,337 61,997 19,374
Other income - - 19,537
Interest expense (970,430) (722,447) (611,587)
----------- ---------- ----------
Total other income and expenses (475,522) (624,142) (675,660)
----------- ---------- ----------
Income (loss) before income taxes (2,600,619) 52,402 (1,113,272)
Income taxes:
Deferred federal income tax expense (benefit) (717,237) 30,280 (376,241)
----------- ---------- ----------
Net income (loss) $(1,883,382) $ 22,122 $ (737,031)
----------- ---------- ----------
----------- ---------- ----------
Earnings (loss) per share:
Basic $ (0.42) $ 0.01 $ (0.22)
----------- ---------- ----------
----------- ---------- ----------
Diluted $ (0.42) $ 0.01 $ (0.22)
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
-20-
<PAGE>
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
Common Stock Additional Retained Treasury Note
------------------ Paid in Earnings Stock Receivable Unearned
Shares Amount Capital (Deficit) at cost officer/director Compensation
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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 - - -
Stock options exercised 36,000 36 109,276 - - - -
Warrants exercised 11,428 11 45,701 - - - -
Stock issued for property 15,040 15 52,625 - - - -
Stock-based compensation - - 382,000 - - - (382,000)
Amortization of unearned
compensation - - - - - - 217,484
Net loss - - - (1,883,382) - - -
- -------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1997 4,463,499 $4,463 $8,487,801 $(1,608,722) $ - $ - $(164,516)
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
-21-
<PAGE>
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
Years ended December 31,
------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(1,883,382) $ 22,122 $ (737,031)
Depreciation, depletion and amortization 1,964,658 1,306,287 1,033,905
Abandonments and exploratory dry holes 890,612 416,892 -
Impairment of properties 1,277,342 114,904 1,020,670
(Gain) loss on sale of properties and equipment (462,571) (36,308) 102,984
Noncash stock-based compensation 217,484 - -
Deferred income tax expense (benefit) (717,237) 30,280 (376,241)
Partnership distributions in excess of income 45,875 - -
(Increase) decrease in accounts receivable
related to operations 166,902 (265,521) (58,418)
Decrease (increase) in other current assets 22,610 (8,300) (62,798)
Increase (decrease) in accounts payable and
accrued expenses related to operations (213,142) 218,581 182,293
Decrease in note receivable - - 28,456
Other 84,310 94,704 20,963
----------- ----------- -----------
Net cash provided by operating activities 1,393,461 1,893,641 1,154,783
Cash flows from investing activities:
Additions to oil and gas properties (2,588,150) (3,714,110) (2,720,590)
Additions to other property and equipment (17,765) (40,554) (159,805)
Investment in limited partnership (1,536,130) - -
Sale and salvage recoveries on oil and
gas properties 1,657,385 32,975 -
Sale of other property and equipment 205,851 1,000 14,120
Reimbursable partnership expenditures 360,479 (360,479) -
Purchase of marketable securities - (326,155) -
Sale of marketable securities - 350,332 -
Purchase of Summit, less cash acquired (89,139) (1,217,280) -
Loan origination costs and other (119,219) - -
----------- ----------- -----------
Net cash used in investing activities (2,126,688) (5,274,271) (2,866,275)
Cash flows from financing activities:
Net proceeds from warrants exercised 45,712 9,191 1,830,997
Collections on note receivable from officer/director - - 95,000
Warrant redemptions - - (63,373)
Net proceeds from options exercised 109,312 29,221 51,094
Borrowings on long-term debt 2,617,250 3,770,000 1,821,000
Principal payments on long-term debt (1,876,849) (983,067) (1,826,056)
Drilling advances (393,254) 393,254 -
Other 15,269 14,098 (9,515)
----------- ----------- -----------
Net cash provided by financing activities 517,440 3,232,697 1,899,147
----------- ----------- -----------
Increase (decrease) in cash (215,787) (147,933) 187,655
Cash, beginning of year 366,677 514,610 326,955
----------- ----------- -----------
Cash, end of year $ 150,890 $ 366,677 $ 514,610
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
-22-
<PAGE>
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 and royalty interests in Texas, Illinois and Colorado.
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 and production. (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, 1997, 1996 and 1995.
RECLASSIFICATIONS
Certain reclassifications have been made to conform to the 1997
presentation.
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.
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 decision to market certain oil and gas
properties, the Company recognized a write-down of $1,020,670. In 1996 and
1997, the Company recognized losses of $114,904 and $1,277,342, respectively.
-23-
<PAGE>
OTHER PROPERTY AND EQUIPMENT
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.
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
Effective December 31, 1997, the Company retroactively adopted the
provisions of Statement of Financial Accounting Standards No. 128 for all
periods presented. Basic earnings per share is calculated by dividing net
income by the weighted average number of common shares outstanding during
each year. Dilutive earnings per share is calculated by dividing net income
by the weighted average number of common and dilutive potential common
shares. Stock options and warrants may be potential dilutive common shares
and are therefore considered in the earnings per share calculation, if
dilutive. The number of dilutive potential common shares is determined using
the treasury stock method. Shares used to compute basic and diluted earnings
(loss) per share were 4,433,113, 4,395,414 and 3,381,592 in 1997, 1996 and
1995, respecively.
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
-24-
<PAGE>
NOTE A. (CONTINUED)
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 employee contributions up to 3 percent of
gross salary. The expense related to the Company's contributions and plan
administration was $26,517, $50,092, and $25,985 in 1997, 1996 and 1995,
respectively.
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. 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), upon
tendering their shares, receive $0.70 per share. During 1997, payments of
$89,139 were made for 127,341 shares tendered. The Company's liability for
the purchase of these remaining shares, which is being funded through
long-term borrowings under the Company's revolving credit agreement (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, 1997, 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 wholly-owned subsidiary of the Company.
-25-
<PAGE>
NOTE B. (CONTINUED)
The following is a summary of the allocation of the cost to the assets
acquired and liabilities assumed in this acquisition:
<TABLE>
<S> <C>
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
----------
----------
</TABLE>
The following is a summary of the pro forma results of operations as though
this transaction had occurred on January 1, 1995.
<TABLE>
1996 1995
---------- ----------
<S> <C> <C>
Total revenue $7,749,621 $5,921,767
---------- ----------
Net income (loss) $ (7,396) $ (889,623)
---------- ----------
Loss per weighted average common share:
Basic $ - $ (0.26)
---------- ----------
Diluted $ - $ (0.26)
---------- ----------
</TABLE>
-26-
<PAGE>
NOTE C. LONG-TERM DEBT
The Company's long-term debt consisted of the following at December 31, 1997
and 1996:
<TABLE>
1997 1996
---------- ----------
<S> <C> <C>
$30 million revolving credit agreement with Compass
Bank, expiring December 1, 1999 $9,651,615 $ -
Credit facility with First Union National Bank
Principal balance - 8,500,000
Less discount thereon - (25,863)
Note payable to First Union National Bank - 324,711
Other, primarily secured monthly installment notes 47,236 48,403
---------- ----------
9,698,851 8,847,251
Less portion due within one year 583,481 1,680,830
---------- ----------
Long-Term Portion $9,115,370 $7,166,421
---------- ----------
</TABLE>
In December, 1997 the Company entered into a revolving credit agreement
with Compass Bank (Compass) which provides for a credit facility of $30
million and an initial borrowing base of $10,500,000. Concurrent with the
execution of this agreement, the Company's outstanding debt to First Union
National Bank (FUNB) in the amount of $9,151,615 was paid by an advance under
the Compass agreement. Amounts borrowed under the Compass agreement are
collateralized by a first lien on substantially all of the Company's oil and
gas properties. Interest under this agreement is payable monthly at an
annual rate which, at the Company's option, is equal to either (a) the
Compass prime lending rate (8.5% at December 31, 1997) or (b) the London
Interbank Offered Rate, plus 2.5%. In addition, a commitment fee equal to
1/2% per annum on the unused portion of the borrowing base is required. The
borrowing base is reduced at the rate of $120,000 per month beginning
February 1, 1998 and is subject to redetermination on each April 1st and
October 1st. This agreement also requires that the Company maintain certain
financial ratios and generally restricts the Company's ability to incur debt,
sell assets, materially change the nature of the Company's business structure
or pay dividends.
-27-
<PAGE>
NOTE C. (CONTINUED)
Future maturities of long term debt at December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998 $ 583,481
1999 9,100,918
2000 11,083
2001 3,369
----------
$9,698,851
----------
</TABLE>
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 defined 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, 1997, 11,428 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.
The Company has two employee stock option plans which reserve an aggregate
of 700,000 shares of common stock for issuance to officers and other key
employees. As of December 31, 1997 options to acquire 260,000 shares at
prices ranging from $2.375 to $4.00 were outstanding under these plans with
scheduled expiration dates of 1998 through 2002. As of December 31, 1997,
376,500 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, 1997, 50,000 options were outstanding under this plan at
exercise prices ranging from $2.75 to $3.75 and 50,000 options were available
for future grant. Options outstanding at December 31, 1997, if not exercised,
are scheduled to expire in 1999 through 2001.
In May 1997, the Shareholders ratified the Midland Resources, Inc. 1997
Board of Directors Stock Incentive Plan under which 1,000,000 options were
issued to non-employee directors, 175,000 options were issued to the advisory
director and 60,000 were issued to the corporate secretary, all to acquire
shares at $3.00 per share. 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. As of December 31, 1997, 247,000 of these options were vested.
Upon a change of control, as defined, all of these options became
exercisable. These options, if not exercised, expire in March, 2002. 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
-28-
<PAGE>
NOTE D. (CONTINUED)
compensation expenses of up to $616,250 through year 2000. In 1997,
stock-based compensation expense of $217,484 was recognized in connection
with these issuances.
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 FUNB. 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 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, 1997.
Warrants to purchase an additional 70,000 shares of common stock were
issued in 1994 through 1996 in exchange for investment banking and other
services, with exercise prices ranging from $2.50 to $2.875.
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 employee 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:
<TABLE>
1997 1996 1995
------------ ---------- ----------
<S> <C> <C> <C> <C>
Net income (loss) As reported $(1,883,382) $ 22,122 $(737,031)
Pro forma (2,078,360) (245,366) (859,861)
Earnings (loss) per share As reported:
Basic $ (0.42) $ 0.01 $ (0.22)
Diluted (0.42) 0.01 (0.22)
Pro forma:
Basic $ (0.47) $ (0.06) $ (0.25)
Diluted (0.47) (0.06) (0.25)
</TABLE>
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 1997, 1996 and
1995:
<TABLE>
<S> <C>
Expected volatility 61% to 110%
Risk free rate 6.02% to 6.49%
Expected life of options 3 to 5 years
Expected dividend yield 0%
</TABLE>
-29-
<PAGE>
A summary of the status of the Company's stock option plans at December 31,
1995, 1996 and 1997, and changes therein during the years then ended is
presented below:
<TABLE>
Employee Plans Director Plans
---------------- ------------------
Weighted Weighted
average average
exercise exercise
Shares price Shares price
---------------- ------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1995:
Outstanding, January 1, 1995 - - - -
Granted 115,000 $2.48 20,000 $2.75
Expired - - - -
Exercised (22,000) 2.38 - -
---------------- ------------------
Outstanding, December 31, 1995 93,000 $2.48 20,000 $2.75
---------------- ------------------
Options exercisable at December 31, 1995 93,000 $2.48 20,000 $2.75
---------------- ------------------
Weighted average fair value of options
granted during 1995 $2.15 $2.04
----- -----
Year ended December 31, 1996:
Outstanding, January 1, 1996 93,000 $2.48 20,000 $2.75
Granted 188,000 3.45 30,000 3.75
Expired (22,000) 2.92 - -
Exercised (7,500) 2.38 - -
---------------- ------------------
Outstanding, December 31, 1996 251,500 $3.18 50,000 $3.35
---------------- ------------------
Options exercisable at December 31, 1996 191,500 $3.01 50,000 $3.35
---------------- ------------------
Weighted average fair value of options
granted during 1996 $2.70 $3.01
----- -----
Year ended December 31, 1997:
Outstanding, January 1, 1997 251,500 $3.18 50,000 $3.35
Granted 123,000 3.33 1,235,000 3.00
Expired (78,500) 3.16 - -
Exercised (36,000) 3.06 - -
---------------- ------------------
Outstanding, December 31, 1997 260,000 $3.18 1,285,000 $3.01
---------------- ------------------
Options exercisable at December 31, 1997 181,000 $3.07 50,000 $3.00
---------------- ------------------
Weighted average fair value of options
granted during 1997 $2.05 $0.25
----- -----
</TABLE>
-30-
<PAGE>
A summary of the status of stock purchase warrants at December 31, 1995, 1996
and 1997, and changes therein during the years then ended is presented below:
<TABLE>
Weighted
average
exercise
Shares prices
-------------------
<S> <C> <C>
Year ended December 31, 1995:
Outstanding, January 1, 1995 4,554,044 $3.24
Issued 170,000 3.87
Expired/redeemed (1,267,513) 2.50
Exercised (997,009) 2.50
-------------------
Outstanding, December 31, 1995 2,459,522 $3.97
-------------------
Warrants exercisable at December 31, 1995 2,459,522 $3.97
-------------------
Weighted average fair value of warrants
issued during 1995 $0.44
-----
Year ended December 31, 1996:
Outstanding, January 1, 1996 2,459,522 $3.97
Issued 25,000 3.25
Expired - -
Exercised - -
-------------------
Outstanding, December 31, 1996 2,484,522 $3.97
-------------------
Warrants exercisable at December 31, 1996 2,484,522 $3.97
-------------------
Weighted average fair value of warrants
issued during 1996 $0.45
-----
Year ended December 31, 1997:
Outstanding, January 1, 1997 2,484,522 $3.97
Issued 50,000 3.00
Expired - -
Exercised (11,428) 4.00
-------------------
Outstanding, December 31, 1997 2,523,094 $3.89
-------------------
Warrants exercisable at December 31, 1997 2,523,094 $3.89
-------------------
Weighted average fair value of warrants
issued during 1997 $0.45
-----
</TABLE>
-31-
<PAGE>
NOTE E. MAJOR CUSTOMERS
The Company and its subsidiaries 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 1997, three purchasers accounted for 18%, 15% and 12%, respectively, of
total oil and gas revenues. 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.
NOTE F. RELATED PARTIES
Until December 1993, MRO was owned 80% by the Company's then 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 16% of the Company's outstanding common stock and 5% 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 bore interest at 7.5% and were 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.
This property was sold in 1997 at a gain of $46,500.
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 was reflected in the financial statements 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.).
-32-
<PAGE>
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 a related party at December 31, 1996, represents
reimbursements due for certain acquisition and exploration costs from a limited
partnership, formed in January, 1997, for which the Company served as general
partner. Amounts due from a related party at December 31, 1997 represents
amounts due from this partnership for property operations and drilling costs.
The limited partnership group was initially comprised of 19 individuals of which
18 were also stockholders of the Company. In addition, two of these individuals
are directors of the Company. During 1997, the Company's interest was assigned
to the Company in the form of oil and gas property interests and, effective
December 31, 1997 the Company withdrew from the partnership.
During 1997, the Company acquired working interests from two directors and a
partnership interest from one of these directors for cash consideration of
$144,879 and 15,040 shares of common stock valued at $52,625.
NOTE G. COMMITMENTS AND CONTINGENCIES
The Company is involved in litigation 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 leases its executive office space and a field office under
noncancellable operating leases expiring in 2002. Rental expense was $34,560 in
1995, $92,088 in 1996, and $93,988 in 1997. Future minimum rental commitments,
as of December 31, 1997, for these leases are as follows:
<TABLE>
<S> <C>
1998 $117,216
1999 117,216
2000 117,216
2001 117,216
2002 78,144
--------
Total 547,008
--------
</TABLE>
-33-
<PAGE>
NOTE H. INCOME TAXES
The deferred tax assets and liabilities reflected in the consolidated balance
sheets as December 31, 1997 and 1996 are as follows:
<TABLE>
1997 1996
---------- ----------
<S> <C> <C>
Deferred tax assets:
Tax loss carry-forwards $1,214,957 $1,193,719
Less valuation allowance (146,385) -
Other 80,579 9,405
---------- ----------
1,149,151 1,203,124
---------- ----------
Deferred tax liabilities:
Property and equipment 33,259 619,975
Property held for sale - 108,317
Contracts and leases 67,699 143,876
---------- ----------
100,958 872,168
---------- ----------
Net deferred tax asset $1,048,193 $ 330,956
---------- ----------
</TABLE>
For income tax purposes, the Company has net losses of approximately
$2,963,000 available for carryforward which, if not utilized, will begin to
expire in 2005. 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. In
addition, the Company has losses of approximately $610,000 which, if not
utilized, will begin to expire in 1998. Management has determined that, based
on future expectations, it is more likely than not, that approximately $431,000
of this amount will not be utilized and, accordingly, has established a
valuation allowance.
A reconciliation of the provision for income taxes to the income taxes
computed using the federal statutory rate for the years 1997, 1996 and 1995
follows:
<TABLE>
1997 1996 1995
--------- ------- ---------
<S> <C> <C> <C>
Amount computed using statutory tax $(884,211) $17,817 $(378,513)
Increase (reduction) in taxes resulting from:
Valuation allowance against
tax loss carry-forwards 146,385 - -
Nondeductible expenses 10,886 2,642 2,400
All other 9,703 9,821 (128)
--------- ------- ---------
Federal income tax (benefit) $(717,237) $30,280 $(376,241)
--------- ------- ---------
</TABLE>
-34-
<PAGE>
NOTE I. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1996, is comprised of the
following:
<TABLE>
1997 1996
----------- -----------
<S> <C> <C>
Producing oil and gas properties $27,041,136 $25,809,221
Non-producing oil and gas properties 1,582,364 1,127,605
Transportation equipment 215,749 282,532
Computer equipment and software 244,138 229,155
Office furniture and equipment 96,732 94,299
Land and buildings 14,000 96,545
Leasehold improvements 1,347 9,014
Wells in progress 15,233 241,209
----------- -----------
$29,210,699 $27,889,580
----------- -----------
----------- -----------
</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>
1997 1996
----------- -----------
<S> <C> <C>
Proved producing properties subject to depreciation,
depletion and amortization $27,041,136 $25,809,221
Less accumulated depreciation, depletion and
amortization 15,634,206 13,769,157
----------- -----------
11,406,930 12,040,064
Wells in progress 15,233 241,209
Non-producing properties 1,582,364 1,127,605
----------- -----------
Net capitalized cost $13,004,527 $13,408,878
----------- -----------
----------- -----------
</TABLE>
-35-
<PAGE>
NOTE K. (CONTINUED)
A summary of costs incurred in acquisition, development and exploration
of oil and gas properties is as follows:
<TABLE>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Incurred directly:
Acquisition costs - Proven properties $ 57,116 $2,391,228 $ 510,832
Acquisition costs - Unproven properties 296,928 922,607 198,124
Development costs 1,645,774 2,368,448 2,011,634
Exploration costs 849,534 766,855 198,453
Share of limited partnership expenditures:
Acquisition costs - Unproven properties $ 539,935 $ - $ -
Development costs 932,197 - -
Exploration costs 2,050 - -
</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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Depreciation, depletion and amortization:
Based on production $ 4.95 $ 2.91 $ 2.73
</TABLE>
NOTE L. CASH FLOWS
Supplemental disclosures of cash flow information are as follows:
<TABLE>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Cash paid during the year for:
Interest $ 896,760 $ 625,948 $ 560,456
Income taxes $ - $ - $ 30,272
Significant non-cash activities:
Issuance of stock for property $ 52,625 $ - $ -
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 $ -
Proceeds from property sales
not collected at year end $ 563,757 $ - $ -
</TABLE>
-36-
<PAGE>
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. These
estimates as of December 31, 1997 are based on evaluations prepared by
Williamson Petroleum Consultants, Inc., Independent Petroleum Engineers. The
estimates as of December 31, 1996 and 1995 are based on evaluations prepared
by E. Ralph Green and Associates, Independent Petroleum Engineers.
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>
Oil (Bbls) Gas (Mcf)
---------- -----------
<S> <C> <C>
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
Sales of minerals-in-place (252,087) (1,826,629)
Extensions, discoveries and improved recovery 549,834 349,664
Revision of previous estimates (291,648) (1,969,860)
Production (192,580) (988,109)
--------- ----------
Proved reserves, December 31, 1997 2,654,999 13,859,619
--------- ----------
Proved developed reserves (UNAUDITED):
December 31, 1995 1,918,557 14,131,580
December 31, 1996 2,061,974 13,821,400
December 31, 1997 1,732,544 9,533,072
</TABLE>
-37-
<PAGE>
NOTE M. (CONTINUED)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
RELATING TO PROVED RESERVES (UNAUDITED):
<TABLE>
Years ended December 31,
----------------------------------------
1997 1996 1995
----------- ------------ -----------
<S> <C> <C> <C>
Future cash inflows $76,605,194 $139,037,425 $79,172,668
Future production costs 34,210,308 51,857,027 38,818,603
Future development costs 8,039,963 7,231,324 5,691,375
Future income taxes (a) 5,521,700 18,372,157 7,360,573
----------- ------------ -----------
Future net cash flows 28,833,223 61,576,917 27,302,117
Annual discount (10%) for estimated
timing of cash flows 13,251,251 29,984,568 13,001,409
----------- ------------ -----------
Standardized measure of discounted
future net cash flows $15,581,972 $ 31,592,349 $14,300,708
----------- ------------ -----------
</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 carry-
forwards.
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE
NET CASH FLOWS FROM PROVED RESERVES (UNAUDITED):
<TABLE>
Years ended December 31,
--------------------------------------------
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Sales of oil and gas produced,
net of production costs $ (2,398,872) $(4,722,529) $(2,386,779)
Net changes in price and production (20,928,554) 19,074,149 1,539,078
Previously estimated development costs incurred - 35,190 120,474
Revisions of estimated future development costs (202,755) (84,478) 124,763
Revision of quantity estimates (2,752,686) 167,303 722,631
Purchases of minerals-in-place - 840,715 1,070,857
Acquisition of Summit - 2,875,995 -
Sales of minerals-in-place (2,336,161) (31,888) -
Extensions and discoveries 2,520,441 1,857,974 2,114,257
Net change in income taxes 6,042,379 (4,838,537) (514,350)
Accretion of discount 3,981,784 1,768,766 1,541,954
Changes in timing of estimated cash flows and other 64,047 348,981 (2,579,120)
------------ ----------- -----------
Changes in standardized measure (16,010,377) 17,291,641 1,753,765
Standardized measure, beginning of year 31,592,349 14,300,708 12,546,943
------------ ----------- -----------
Standardized measure, end of year $ 15,581,972 $31,592,349 $14,300,708
------------ ----------- -----------
</TABLE>
-38-
<PAGE>
NOTE N. SUBSEQUENT EVENT
On April 9, 1998, the Board of Directors approved a plan to combine with Vista
Resources Partners, L.P., a Midland, Texas based entity engaged in oil and gas
exploration and production. Consummation of any transaction pursuant to these
negotiations depends upon the satisfaction or waiver of a number of conditions,
including, without limitation, shareholder approval, execution of a definitive
agreement and receipt of a fairness opinion.
-39-
<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 1998 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission no
later than April 30, 1998.
ITEM 10. EXECUTIVE COMPENSATION
The information required in this item is incorporated by reference from the
Company's definitive Proxy Statement for its 1998 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission no
later than April 30, 1998.
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 1998 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission no
later than April 30, 1998.
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 1998 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission no
later than April 30, 1998.
-40-
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) REPORTS ON FORM 8-K: None
(b) EXHIBITS:
<TABLE>
<S> <C>
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.)
3.4 Amendment to Bylaws dated September 17, 1997
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 (Previously filed as
the same exhibit number with the Company's Annual Report on Form
10-KSB dated December 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 (Previously filed as the same
exhibit number with the Company's Annual Report on Form 10-KSB dated
December 31, 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 (Previously filed as the same
exhibit number with the Company's Annual Report on Form 10-KSB dated
December 31, 1996.)
10.23** The Company's 1997 Board of Directors Stock Incentive Plan
(Previously filed as the same exhibit number with the Company's Annual
Report on Form 10-KSB dated December 31, 1996.)
10.24** Purchase and Sale Agreement between the Company and Redfish Bay
Development Corporation and PI Energy Corporation dated effective
February 1, 1997 (Previously filed as the same exhibit number with
the Company's Annual Report on Form 10-KSB dated December 31, 1996.)
10.25** Warrant to purchase 10,000 shares of Common Stock issued to Sam R.
Brock, dated October 23, 1996 (Previously filed as the same exhibit
number with the Company's Annual Report on Form 10-KSB dated December
31, 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 (Previously filed as the same exhibit number with
the Company's Annual Report on Form 10-KSB dated December 31, 1996.)
10.27 Revolving Credit Agreement between the Company and Compass Bank dated
December 17, 1997
10.28 Amendment to Credit Agreement with Compass Bank dated March 26, 1998
10.29 Amendment to Credit Agreement with Compass Bank dated April 14, 1998
21 Subsidiaries of the registrant
23.1 Consent of Ernst & Young LLP, independent auditors dated April 14,
1998
23.2 Consent of Grant Thornton LLP, independent auditors dated April 14,
1998
</TABLE>
- -------------
* 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.
-41-
<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 15, 1998 By: /s/ Robert R. Donnelly
-------------------------------------
Robert R. Donnelly, 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 15, 1998 By: /s/ Robert R. Donnelly
-------------------------------------
Robert R. Donnelly, President
Director
Date: April 15, 1998 By: /s/ Howard E. Ehler
-------------------------------------
Howard E. Ehler, Chief Financial Officer,
Vice President
Date: April 15, 1998 By:
-------------------------------------
Deas H. Warley III, Director
Date: April 15, 1998 By: /s/ Sam R. Brock
-------------------------------------
Sam R. Brock, Director
Date: April 15, 1998 By: /s/ Wayne M. Whitaker
-------------------------------------
Wayne M. Whitaker, Chairman,
Director
Date: April 15, 1998 By: /s/ Darrell M. Dillard
-------------------------------------
Darrell M. Dillard, Director
-42-
<PAGE>
INDEX TO EXHIBITS
<TABLE>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. EXHIBIT PAGE
- ------------ ------- --------
<S> <C> <C>
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.)
3.4 Amendment to Bylaws dated September 17, 1997
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 (Previously filed as
the same exhibit number with the Company's Annual Report on Form
10-KSB dated December 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 (Previously filed as the same
exhibit number with the Company's Annual Report on Form 10-KSB dated
December 31, 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 (Previously filed as the same
exhibit number with the Company's Annual Report on Form 10-KSB dated
December 31, 1996.)
10.23** The Company's 1997 Board of Directors Stock Incentive Plan
(Previously filed as the same exhibit number with the Company's Annual
Report on Form 10-KSB dated December 31, 1996.)
10.24** Purchase and Sale Agreement between the Company and Redfish Bay
Development Corporation and PI Energy Corporation dated effective
February 1, 1997 (Previously filed as the same exhibit number with
the Company's Annual Report on Form 10-KSB dated December 31, 1996.)
10.25** Warrant to purchase 10,000 shares of Common Stock issued to Sam R.
Brock, dated October 23, 1996 (Previously filed as the same exhibit
number with the Company's Annual Report on Form 10-KSB dated December
31, 1996.)
</TABLE>
-43-
<PAGE>
<TABLE>
<S> <C> <C>
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 (Previously filed as the same exhibit number with
the Company's Annual Report on Form 10-KSB dated December 31, 1996.)
10.27 Revolving Credit Agreement between the Company and Compass Bank dated
December 17, 1997
10.28 Amendment to Credit Agreement with Compass Bank dated March 26, 1998
10.29 Amendment to Credit Agreement with Compass Bank dated April 14, 1998
21 Subsidiaries of the registrant
23.1 Consent of Ernst & Young LLP, independent auditors dated April 14,
1998
23.2 Consent of Grant Thornton LLP, independent auditors dated April 14,
1998
</TABLE>
- -------------
* 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.
-44-
<PAGE>
CERTIFICATE OF SECRETARY
I, Marilyn D. Wade, the duly elected and qualified Secretary of Midland
Resources, Inc. (the "Company"), do hereby certify that the following
Resolution of the Board of Directors of the Company was duly and validly
adopted at a properly convened meeting thereof on the 17th day of September,
1997, adopted in accordance with the Bylaws of the Company and remains in
full force and effect on the date hereof without modification or amendment:
RESOLVED, that this corporation Amend SECTION 3.2. SPECIAL MEETINGS.,
so the text reads as follows:
"Except as otherwise provided by law or by the Articles of Incorporation,
special meetings of the shareholders may be called by the Chairman of the
Board of Directors, the President, any two of the directors, or by the
Company pursuant to written request by the holders of not less than
one-tenth of all the shares having voting power at such meeting, and
shall be held at the principal office of the Corporation, if called by
holder(s) of not less than one-tenth of all the shares having voting
power at such meeting, or if called as otherwise provided herein, at such
other place, and in either case, at such time, as may be stated in the
notice calling such meeting. Business transacted at any special meeting
of shareholders shall be limited to the purpose stated in the notice of
such meeting given in accordance with the terms of Section 3.3."
. FURTHER RESOLVED, Amend SECTION 3.4. CLOSING OF TRANSFER BOOKS AND FIXING
RECORD DATE., by changing the heading thereof to read
"SECTION 3.4. RECORD DATE FOR SHAREHOLDER NOTICE." and adding the
following at the end thereof:
"The record date for determining those shareholders entitled to vote at a
special meeting of shareholders called by holder(s) of not less than
one-tenth of all the shares having voting power at such meeting, shall be
a date established by the Board of Directors within twenty business days
following written receipt of the request to call such meeting by such
holder(s) of not less than one-tenth of all the shares having voting power
at such meeting delivered to the Secretary of the Corporation. In the
absence of the Board of Directors establishing such a record date within
twenty business, such record date shall be deemed as the first business
day following the expiration of the twenty business days within which
the Board had to establish such a record date."
FURTHER RESOLVED, Amend SECTION 3.7. VOTING AT MEETINGS., by adding
the following to the end thereof:
"The Board of Directors may establish procedures to be followed in counting
votes on any matter, whether by proxy or in person, not inconsistent with
the Articles of Incorporation or the laws of the State of Texas. Such
procedures may address whether or not, and to what extent and how, all
shares a shareholder is entitled to vote shall be voted, when any such
shareholder submits a ballot or proxy that does not contain voting
directions thereon as to any one or more matters, or attempts to vote less
than all shares owned by such shareholder. To the extent to Board of
Directors adopts any such procedures, it shall give notice thereof to those
shareholders entitled to vote at any meeting of shareholders at which such
procedures have been adopted."
<PAGE>
. FURTHER RESOLVED, Amend SECTION 4.1 NUMBER, QUALIFICATION AND TERM., by
deleting the second and third sentences and replacing them with the
following:
"The Board of Directors shall consist of not less than three nor more than
eleven members. The exact number of directors shall be five until changed,
within the preceding limits, by resolution amending such exact number, duly
adopted by at least seventy-five percent (75%) of the entire Board, or the
affirmative vote of the shareholders holding a majority of the shares
entitled to vote on the election of directors; and provided that no
decrease shall effect a shortening of the term of any incumbent director."
Signed this 27th day of January, 1998.
___________________________________________
Marilyn D. Wade
Secretary
(SEAL)
<PAGE>
REVOLVING CREDIT AGREEMENT
$30,000,000.00 MASTER NOTE
SECURED REDUCING REVOLVING LINE OF CREDIT
FROM
COMPASS BANK
TO
MIDLAND RESOURCES, INC.,
MIDLAND RESOURCES OPERATING COMPANY, INC.
and
SUMMIT PETROLEUM CORPORATION
December 17, 1997
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<C> <S> <C>
ARTICLE I. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II. THE LOAN. . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.01 The Revolving Line . . . . . . . . . . . . . . . . . . . . . . . . 10
2.02 Advances and Payments of Principal Under the Note. . . . . . . . . 11
2.03 Prepayment and Conversion. . . . . . . . . . . . . . . . . . . . . 11
2.04 Interest Rate and Payments of Interest . . . . . . . . . . . . . . 12
2.05 Increased Cost of Loans. . . . . . . . . . . . . . . . . . . . . . 14
2.06 Substitute Rate. . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.07 Change of Law. . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.08 Advances to Satisfy Obligations of Borrower. . . . . . . . . . . . 17
2.09 Mandatory Prepayment of the Notes. . . . . . . . . . . . . . . . . 17
2.10 Borrowing Base Determination . . . . . . . . . . . . . . . . . . . 17
2.11 Assignment of Production . . . . . . . . . . . . . . . . . . . . . 19
2.12 Commitment Fee . . . . . . . . . . . . . . . . . . . . . . . . . . 20
2.13 Facility Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
2.14 Addition of Borrowing Base Properties. . . . . . . . . . . . . . . 20
2.15 Letters of Credit. . . . . . . . . . . . . . . . . . . . . . . . . 20
2.16 Repayment of Letters of Credit . . . . . . . . . . . . . . . . . . 21
2.17 Letter of Credit Fee . . . . . . . . . . . . . . . . . . . . . . . 21
ARTICLE III. CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 21
3.01 Receipt of Note, Agreement and Certificate of Compliance . . . . . 21
3.02 Assignments of First Union Loan Documents. . . . . . . . . . . . . 21
3.03 Receipt of Organizational Documents. . . . . . . . . . . . . . . . 22
3.04 Receipt of Certified Copy of Corporate Proceedings and
Certificates of Incumbency . . . . . . . . . . . . . . . . . . . . 22
3.05 Receipt of Certificates of Authority and Certificates of Good
Standing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
3.06 UCC Search . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
3.07 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
3.08 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . 22
3.09 Request for Advance. . . . . . . . . . . . . . . . . . . . . . . . 22
3.10 Accuracy of Representations and Warranties and No Event of
Default. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
3.11 Legal Matters Satisfactory to Counsel to Bank. . . . . . . . . . . 23
3.12 No Material Adverse Change . . . . . . . . . . . . . . . . . . . . 23
3.13 Status of Title. . . . . . . . . . . . . . . . . . . . . . . . . . 23
3.14 Security Instruments . . . . . . . . . . . . . . . . . . . . . . . 23
3.15 Legal Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
3.16 Opinion of Counsel for Borrower. . . . . . . . . . . . . . . . . . 23
3.17 Documents Required for Subsequent Disbursements. . . . . . . . . . 23
ARTICLE IV. REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . . . 24
4.01 Existence and Good Standing. . . . . . . . . . . . . . . . . . . . 24
4.02 Due Authorization. . . . . . . . . . . . . . . . . . . . . . . . . 24
4.03 Valid and Binding Obligations. . . . . . . . . . . . . . . . . . . 24
4.04 Title to Borrowing Base Properties . . . . . . . . . . . . . . . . 25
4.05 Oil and Gas Leases . . . . . . . . . . . . . . . . . . . . . . . . 25
4.06 Interest in the Borrowing Base Properties. . . . . . . . . . . . . 25
4.07 Oil and Gas Contracts. . . . . . . . . . . . . . . . . . . . . . . 25
4.08 Producing Wells. . . . . . . . . . . . . . . . . . . . . . . . . . 26
</TABLE>
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4.09 Purchasers of Production . . . . . . . . . . . . . . . . . . . . . 26
4.10 Scope and Accuracy of Financial Statements . . . . . . . . . . . . 26
4.11 Liabilities, Litigation and Restrictions . . . . . . . . . . . . . 26
4.12 Margin Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
4.13 Authorizations and Consents. . . . . . . . . . . . . . . . . . . . 27
4.14 Compliance with Laws, Rules, Regulations and Orders. . . . . . . . 27
4.15 Proper Filing of Tax Returns and Payment of Taxes Due. . . . . . . 27
4.16 ERISA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
4.17 Investment Company Act Compliance. . . . . . . . . . . . . . . . . 28
4.18 Public Utility Holding Company Act Compliance. . . . . . . . . . . 28
4.19 Environmental Laws . . . . . . . . . . . . . . . . . . . . . . . . 28
ARTICLE V. AFFIRMATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . . 29
5.01 Use of Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
5.02 Maintenance and Access to Records. . . . . . . . . . . . . . . . . 29
5.03 Quarterly Unaudited Financial Statements of Borrower . . . . . . . 30
5.04 Annual Audited Financial Statements of MRI . . . . . . . . . . . . 30
5.05 Compliance Certificate . . . . . . . . . . . . . . . . . . . . . . 30
5.06 Statement of Material Adverse Change in Condition. . . . . . . . . 30
5.07 Additional Information . . . . . . . . . . . . . . . . . . . . . . 30
5.08 Compliance with Laws and Payment of Assessments and Charges. . . . 30
5.09 Maintenance of Existence and Good Standing . . . . . . . . . . . . 31
5.10 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . 31
5.11 Initial Expenses of Bank . . . . . . . . . . . . . . . . . . . . . 31
5.12 Subsequent Expenses of Bank. . . . . . . . . . . . . . . . . . . . 31
5.13 Maintenance of Tangible Property . . . . . . . . . . . . . . . . . 32
5.14 Maintenance of Insurance . . . . . . . . . . . . . . . . . . . . . 32
5.15 Inspection of Tangible Assets/Right of Audit . . . . . . . . . . . 32
5.16 Payment of Note and Performance of Obligations . . . . . . . . . . 32
5.17 ERISA Reports. . . . . . . . . . . . . . . . . . . . . . . . . . . 32
5.18 Tangible Net Worth Requirement . . . . . . . . . . . . . . . . . . 32
5.19 Cash Flow to Debt Service Ratio. . . . . . . . . . . . . . . . . . 33
5.20 Compliance with Environmental Laws . . . . . . . . . . . . . . . . 33
5.21 Hazardous Substances Indemnification . . . . . . . . . . . . . . . 33
5.22 Changes in Management. . . . . . . . . . . . . . . . . . . . . . . 34
5.23 Operating Accounts . . . . . . . . . . . . . . . . . . . . . . . . 34
ARTICLE VI. NEGATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . . . 34
6.01 Other Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . 34
6.02 Guaranty of Payment or Performance . . . . . . . . . . . . . . . . 35
6.03 Loans, Advances or Investments . . . . . . . . . . . . . . . . . . 35
6.04 Mortgages or Pledges of Assets . . . . . . . . . . . . . . . . . . 35
6.05 Nature of Business . . . . . . . . . . . . . . . . . . . . . . . . 35
6.06 Sales of Assets. . . . . . . . . . . . . . . . . . . . . . . . . . 35
6.07 Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
6.08 Payment of Accounts Payable. . . . . . . . . . . . . . . . . . . . 36
6.09 Cancellation of Insurance. . . . . . . . . . . . . . . . . . . . . 36
6.10 Changes in Business Structure. . . . . . . . . . . . . . . . . . . 36
6.11 Transactions with Affiliates . . . . . . . . . . . . . . . . . . . 36
6.12 Hedging Transactions . . . . . . . . . . . . . . . . . . . . . . . 36
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6.13 New Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . 36
ARTICLE VII. EVENTS OF DEFAULT. . . . . . . . . . . . . . . . . . . . . . . 36
7.01 Enumeration of Events of Default . . . . . . . . . . . . . . . . . 36
7.02 Rights Upon Event of Default . . . . . . . . . . . . . . . . . . . 38
7.03 Rights Upon Unmatured Event of Default . . . . . . . . . . . . . . 38
ARTICLE VIII. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . 38
8.01 Security Interests in Deposits and Right of Offset or Banker's
Lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
8.02 Survival of Representations, Warranties and Covenants. . . . . . . 39
8.03 Notices and Other Communications . . . . . . . . . . . . . . . . . 39
8.04 Parties in Interest. . . . . . . . . . . . . . . . . . . . . . . . 39
8.05 Renewals and Extensions. . . . . . . . . . . . . . . . . . . . . . 39
8.06 No Waiver by Bank. . . . . . . . . . . . . . . . . . . . . . . . . 39
8.07 INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . 40
8.08 GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . . . . . 40
8.09 Incorporation of Exhibits. . . . . . . . . . . . . . . . . . . . . 40
8.10 Survival Upon Unenforceability . . . . . . . . . . . . . . . . . . 40
8.11 Rights of Third Parties. . . . . . . . . . . . . . . . . . . . . . 40
8.12 Amendments or Modifications of this Agreement. . . . . . . . . . . 40
8.13 Agreement Construed as an Entirety . . . . . . . . . . . . . . . . 41
8.14 Number and Gender. . . . . . . . . . . . . . . . . . . . . . . . . 41
8.15 AGREEMENT SUPERSEDES ALL PRIOR AGREEMENTS. . . . . . . . . . . . . 41
8.16 Controlling Provision Upon Conflict. . . . . . . . . . . . . . . . 41
8.17 Time, Place and Method of Payments . . . . . . . . . . . . . . . . 41
8.18 Counterpart Execution. . . . . . . . . . . . . . . . . . . . . . . 41
8.19 Amended, Restated and Combined Agreement . . . . . . . . . . . . . 41
EXHIBITS
EXHIBIT A Compliance Certificate
EXHIBIT B Note
EXHIBIT C Security Instruments
EXHIBIT D Form of Request for Advance
SCHEDULES
1.01(a) Borrowing Base Properties
3.16 Opinion of Borrower's Counsel
4.10 Purchasers of Production
4.12 Litigation
</TABLE>
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SECURED REDUCING REVOLVING CREDIT AGREEMENT
THIS CREDIT AGREEMENT, is entered into as of the 17th day of
December 1997, by and among MIDLAND RESOURCES, INC. ("MRI"), a Texas
corporation, MIDLAND RESOURCES OPERATING COMPANY, INC., a Texas corporation,
and SUMMIT PETROLEUM CORPORATION, a Colorado corporation (individually and
collectively, "BORROWER"), and COMPASS BANK, a Texas chartered bank (the
"BANK").
W I T N E S S E T H
WHEREAS, MRI is a party to that certain Credit Agreement dated
October 31, 1996 with First Union National Bank of North Carolina (the "First
Union Loan Agreement"); and
WHEREAS, pursuant to Assignment of Notes and Liens of even date
herewith, First Union National Bank of North Carolina ("First Union") has
assigned to Bank all of First Union's right, title and interest in and to the
First Union Loan Agreement, the Indebtedness of MRI to First Union arising
thereunder, all liens and security interests securing such Indebtedness, and
all documents and instruments executed and/or delivered pursuant thereto or
in connection therewith (collectively the "First Union Loan Documents"); and
WHEREAS, Borrower and Bank desire to enter into this Credit
Agreement to amend and restate the First Union Loan Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained, and the mutual benefits to be derived herefrom,
Bank and Borrower agree as follows:
ARTICLE I. DEFINITIONS
As used in this Agreement, the following terms shall have the
meanings indicated:
"AFFILIATE" means, as applied to any Person, any other Person,
directly or indirectly, controlling, controlled by, or under common control
with, that Person. For purposes of this definition, "control" (including,
with correlative meanings, the terms "controlling", "controlled by", and
"under common control with"), as applied to any Person, means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of that Person, whether through the ownership of
voting securities, by contract, or otherwise.
"AGREEMENT" means this Credit Agreement, as the same may be amended
or supplemented from time to time.
"BANK" has the meaning set forth in the preamble hereof.
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"BORROWER" has the meaning set forth in the preamble hereof.
"BORROWING BASE" means the maximum loan amount supported by the
Borrowing Base Properties, as determined by Bank from time to time in
accordance with Section 2.10 of this Agreement.
"BORROWING BASE PROPERTIES" means those Oil and Gas Properties of
Borrower that are to be made subject to the liens created by certain of the
Security Instruments to secure the Obligations, which initial Borrowing Base
Oil and Gas Properties are described in Schedule 1.01(a) attached hereto and
made a part hereof, together with such additional Oil and Gas Properties as
are subsequently added to the Borrowing Base Properties pursuant to Section
2.14.
"BUSINESS DAY" shall mean: (a) for all purposes, a day other than a
Saturday, Sunday or legal holiday for commercial banks under the laws of the
State of Texas or the laws of the United States of America, and (b) in
addition, for purposes of any LIBOR Loan, a day that satisfies the
requirements of clause (a) and is a day on which commercial banks in London,
England are open for domestic or international business.
"COMPLIANCE CERTIFICATE" means the certificate of the president or
vice president of Borrower required to be submitted to Bank from time to time
pursuant to this Agreement, which certificate shall be in the form attached
hereto as Exhibit "A."
"ENVIRONMENTAL LAWS" means (a) the following federal laws as they
may be cited, referenced and amended from time to time: the Clean Air Act,
the Clean Water Act, the Safe Drinking Water Act, the Comprehensive
Environmental Response, Compensation and Liability Act, the Endangered
Species Act, the Resource Conservation and Recovery Act, the Occupational
Safety and Health Act, the Hazardous Materials Transportation Act, the
Superfund Amendments and Reauthorization Act, and the Toxic Substances
Control Act; (b) any and all environmental statutes of any state in which
property of Borrower is situated, as they may be cited, referenced and
amended from time to time; (c) any rules or regulations promulgated under or
adopted pursuant to the above federal and state laws; and (d) any other
federal, state or local statute or any requirement, rule, regulation, code,
ordinance or order adopted pursuant thereto, including, without limitation,
those relating to the generation, transportation, treatment, storage,
recycling, disposal, handling or release of Hazardous Substances.
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended from time to time, and the regulations and published
interpretations thereof.
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<PAGE>
"ERISA AFFILIATE" means any trade or business (whether or not
incorporated) which together with Borrower would be treated as a single
employer under Section 4001 of ERISA.
"EVENT OF DEFAULT" means any of the events specified in Section
7.01 of this Agreement.
"FIRST UNION" means First Union National Bank of North Carolina.
"FIRST UNION LOAN AGREEMENT" has the meaning set forth in the
recitations of this Agreement.
"FIRST UNION LOAN DOCUMENTS" has the meaning set forth in the
recitations of this Agreement.
"FINANCIAL STATEMENTS" means the statements of the financial
condition of the indicated Person, as at the point in time and for the period
indicated and consisting of at least a consolidated balance sheet, income
statement and statement of cash flows, and, when the foregoing are audited,
accompanied by the certification of such Person's independent certified
public accountants and footnotes to any of the foregoing, all of which shall
be prepared in accordance with GAAP applied on a basis consistent with that
of the preceding year.
"FLOATING RATE" means the Index Rate in effect from time to time.
"GAAP" means generally accepted accounting principles, applied on a
consistent basis, as set forth in Opinions of the Accounting Principles Board
of the American Institute of Certified Public Accountants and/or in
statements of the Financial Accounting Standards Board and/or their
respective successors and which are applicable in the circumstances as of the
date in question. Accounting principles are applied on a "consistent basis"
when the accounting principles observed in a current period are comparable in
all material respects to those accounting principles applied in a preceding
period.
"HAZARDOUS SUBSTANCES" means flammables, explosives, radioactive
materials, hazardous wastes, asbestos or any material containing asbestos,
polychlorinated biphenyls (PCBs), toxic substances or related materials,
petroleum and petroleum products and associated oil or natural gas
exploration, production and development wastes or any substances defined as
"hazardous substances", "hazardous materials", "hazardous wastes" or "toxic
substances" under the Comprehensive Environmental Response, Compensation and
Liability Act, as amended, the Superfund Amendments and Reauthorization Act,
as amended, the Hazardous Materials Transportation Act, as amended, the
Resource Conservation and Recovery Act, as amended, the Toxic Substances
Control Act, as
3
<PAGE>
amended, or any other Environmental Laws now or hereafter enacted or
promulgated by any regulatory authority or governmental body.
"HEDGING TRANSACTION" means a swap, collar, floor, cap, forward,
futures or other similar contract (including sales contracts for a term of
greater than one year with fixed prices) entered into by Borrower with any
other Person, which is intended to reduce or eliminate the risk of
fluctuations in the price of oil or gas.
"INDEBTEDNESS" means, as to any Person, (a) all items of
indebtedness or liability (other than capital, surplus, deferred credits and
reserves, as such) which in accordance with GAAP would be included in
determining total liabilities as shown on the liability side of a balance
sheet as at the date as of which Indebtedness is to be determined, (b)
indebtedness secured by any mortgage, pledge or lien existing on or
encumbering property owned by the Person whose Indebtedness is being
determined, whether or not the indebtedness secured thereby shall have been
assumed, and (c) all indebtedness of others which such Person has directly or
indirectly guaranteed, endorsed (otherwise than for collection or deposit in
the ordinary course of business), discounted with recourse, agreed
(contingently or otherwise) to purchase or repurchase or otherwise acquire,
or in respect of which such Person has agreed to supply or advance funds
(whether by way of loan, purchase of securities or capital contribution,
through a commitment to pay for property or services regardless of the
nondelivery of such property or the nonfurnishing of such services or
otherwise), or in respect of which such Person has otherwise become directly
or indirectly liable, contingently or otherwise, whether now existing or
hereafter arising.
"INDEX RATE" means, at any time, the prime rate established in THE
WALL STREET JOURNAL'S "MONEY RATES" or similar table. If multiple prime
rates are quoted in the table, then the highest prime rate will be the Index
Rate. In the event that the prime rate is no longer published by THE WALL
STREET JOURNAL in the "MONEY RATES" or similar table, then Bank may select an
alternative published index based upon comparable information as a substitute
Index Rate. Upon the selection of a substitute Index Rate, the applicable
interest rate shall thereafter vary in relation to the substitute index.
Such substitute index shall be the same index that is generally used as a
substitute by Bank on all Index Rate loans. The Index Rate is eight and
one-half percent (8.50%) as of the date of this Agreement.
"INDEX RATE LOAN" means any Loan for which interest thereon is to
be computed at the Floating Rate in accordance with this Agreement.
"INTEREST RATE(S)" means the Floating Rate or the LIBOR Rate, as
applicable.
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<PAGE>
"INTEREST PERIOD" means as to any LIBOR Loan the period commencing
on and including the date of such Loan (or on the effective date of the
election pursuant to Section 2.04(B) by which such Loan became a LIBOR Loan)
and ending on and including the day preceding the same day (or if there is no
such same day, the day preceding the last day) in the 1st, 2nd, or 3rd
calendar month thereafter, as selected by the Borrower in accordance with
Section 2.04(B), and thereafter such period commencing on and including the
day immediately following the last day of the then ending Interest Period for
such Loan and ending on and including the day preceding the day corresponding
to the first day of such Interest Period (or if there is no such
corresponding day, the day preceding the last day), in the 1st, 2nd or 3rd
calendar month thereafter, as so selected by the Borrower; provided, however,
that if any such Interest Period would otherwise end on a day prior to a day
that is not a Business Day it shall be extended so as to end on the day prior
to the next succeeding Business Day unless the same would fall in a different
calendar month, in which case such Interest Period shall end on the day
preceding the first Business Day preceding such next succeeding Business Day.
"INVESTMENT" in any Person means any stock, bond, note or other
evidence of Indebtedness or any other security (other than current trade and
customer accounts) of, or loan to, such Person.
"LEASES" means oil and gas leases and all oil, gas and mineral
leases constituting any part of the Borrowing Base Properties.
"LETTERS OF CREDIT" means letters of credit to be issued by the
Bank for the account of the Borrower pursuant to Section 2.15, in the form
acceptable to the Bank, and all extensions, renewals and modifications
thereof.
"LIBOR" means, in respect to any Interest Period, the rate per
annum determined by the Bank to be the quotient of (a) the rate quoted, on an
immediately available funds basis, to the Bank, at approximately 10:00 a.m.
local time in Houston, Texas on the date one (1) Business Day prior to the
first day of such Interest Period, for the offering by leading banks in the
London interbank market of Dollars for deposit with the Bank for a period
comparable to such Interest Period and in an amount comparable to the amount
of the Loan determined by the Bank to be outstanding during such Interest
Period and as to which the LIBOR Rate is to be determined, divided by (b)
1.0, minus the Reserve Percentage expressed as a decimal, for such Interest
Period.
"LIBOR LOAN" means any Loan from time to time for which interest
thereon is to be computed on the basis of the LIBOR Rate.
"LIBOR RATE" means a rate per annum equal to the sum of LIBOR for
the Interest Period for which interest is to be
5
<PAGE>
determined at the LIBOR Rate, PLUS two and one-half percent (2.5%) per annum.
"LIMITATION PERIOD" means any period while any amount remains owing
on the Note and interest on such amount calculated at the Floating Rate, plus
any fees payable hereunder and deemed to be interest under applicable law,
would exceed the Maximum Rate.
"LOAN" means, singly, any advance by Bank to Borrower pursuant to
this Agreement and "LOANS" means, cumulatively, the aggregate sum of all
money advanced by Bank to Borrower pursuant to this Agreement.
"LOAN DOCUMENTS" means this Agreement and all promissory notes,
security agreements, guaranties, and other instruments, documents, and
agreements executed and delivered pursuant to or in connection with this
Agreement, as such instruments, documents, and agreements may be amended,
modified, renewed, extended, or supplemented from time to time.
"LOAN EXCESS" means, at any point in time, the amount, if any, by
which the outstanding balance on the Loans evidenced by the Note plus the
aggregate of the face amount of all outstanding Letters of Credit exceeds the
Revolving Commitment then in effect.
"MARKETABLE TITLE" means good and indefeasible title and ownership,
free and clear of all mortgages, liens and encumbrances, except for Permitted
Encumbrances.
"MATURITY DATE" means December 1, 1999.
"MAXIMUM RATE" means the maximum non-usurious interest rate
permissible under applicable laws of the State of Texas or those of the
United States of America applicable to Bank.
"MONTHLY BORROWING BASE REDUCTION" means the amount of the
automatic monthly reduction to the Borrowing Base, as determined by Bank from
time to time in accordance with Section 2.10 of this Agreement.
"MRI" has the meaning set forth in the preamble of this Agreement.
"MULTI-EMPLOYER PLAN" means a plan described in Section 4001(a)(3)
of ERISA which covers employees of Borrower or any ERISA Affiliate.
"NOTE" means that certain promissory note in the original face
amount of $30,000,000.00, dated of even date herewith, made by Borrower
payable to the order of Bank, in the form attached hereto as Exhibit "B,"
together with all deferrals, renewals, extensions, amendments, modifications
or rearrangements thereof, which
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<PAGE>
promissory note shall evidence the advances to Borrower by Bank pursuant to
Section 2.01 hereof.
"OBLIGATIONS" means all obligations, indebtedness, and liabilities
of Borrower to Bank, now existing or hereafter arising, including, but not
limited to, the indebtedness evidenced by the Note, whether direct, indirect,
related, unrelated, fixed, contingent, specified, unspecified, joint,
several, or joint and several, and all interest and fees accruing thereon and
all attorneys' fees and other expenses incurred in the enforcement or
collection thereof.
"OIL AND GAS PROPERTIES" means fee, leasehold or other interests in
or under mineral estates or oil, gas and other liquid or gaseous hydrocarbon
leases with respect to properties situated in the United States, including,
without limitation, overriding royalty and royalty interests, leasehold
estate interests, net profits interests, production payment interests and
mineral fee interests, together with all contracts executed in connection
therewith, all oil, gas and other minerals produced and to be produced
therefrom, all proceeds thereof, and all tenements, hereditaments,
appurtenances and properties, real or personal, appertaining, belonging,
affixed or incidental thereto.
"PERMITTED ENCUMBRANCES" means:
(A) Liens for taxes, assessments, or similar charges, incurred in the
ordinary course of business that are not yet due and payable;
(B) Liens of mechanics, materialmen, warehousemen, carriers, or other
similar liens, securing obligations incurred in the ordinary course of
business that are not yet due and payable;
(C) Encumbrances consisting of zoning restrictions, easements, or
other restrictions on the use of real property, none of which
materially impairs the use of such property by Borrower in the
operation of its business, and none of which is violated in any
material respect by existing or proposed operations;
(D) Liens in favor of Bank;
(E) The following, if the validity or amount thereof is being
contested in good faith by appropriate and lawful proceedings, so long
as levy and execution thereon have been stayed and continue to be
stayed, and in Bank's sole judgment they do not, in the aggregate,
materially detract from the value of the property of Borrower or any
Subsidiary, or materially impair the use thereof in the operation of
its business:
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(1) Claims or liens for taxes, assessments, or similar charges;
and
(2) Claims or liens of mechanics, materialmen, warehousemen,
carriers, or other similar liens.
"PERMITTED HEDGING TRANSACTIONS" means Hedging Transactions that:
(a) encumber not more than seventy-five (75%) of Borrower's monthly
production of proved producing reserves as forecast in the most recent
engineering evaluation performed by Bank pursuant to Section 2.10; (b) are
based upon strike prices equal to or higher than the prices utilized by Bank
in its most recent engineering evaluation performed pursuant to Section 2.10;
(c) are placed with a counter-party approved by Bank, in its sole discretion;
and (d) in which Borrower's interest is pledged to Bank pursuant to a
security agreement in form and substance satisfactory to Bank.
"PERSON" means an individual, company, corporation, partnership,
limited partnership, joint venture, trust, association, unincorporated
organization or a government or any agency or political subdivision thereof.
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"PROHIBITED TRANSACTION" means any transaction set forth in Section
406 of ERISA or Section 4975 of the Internal Revenue Code of 1954, as amended
from time to time.
"PROVED RESERVES" means the estimated quantities of crude oil,
condensate, natural gas liquids and natural gas which geological and
engineering data demonstrate with reasonable certainty to be recoverable by
primary producing mechanisms in future years from known reservoirs underlying
lands or interests therein constituting Oil and Gas Properties, under
existing economic and operating conditions. Reserves which can be produced
economically through application of improved recovery techniques (e.g., fluid
injection) will be included in Proved Reserves when successful testing by a
pilot project or the operation of an installed program in the reservoir
provides support for the engineering analysis on which the pilot project or
installed program was based. In general, the economic productivity of the
estimated proved reserves is supported by actual production or a conclusive
formation test; however, in certain instances proved reserves are assigned to
reservoirs on the basis of a combination of electrical and other type logs
and core analyses which indicate these reservoirs are analogous to similar
reservoirs in the same field which are producing or have demonstrated the
ability to produce on a formation test.
"REPORTABLE EVENT" means any of the events set forth in Section
4043 of ERISA.
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"REQUEST FOR ADVANCE" means the written request by Borrower, signed
by the president or any vice president of MRI, for an advance by Bank
pursuant to this Agreement, which Request for Advance shall be in a form, and
shall include the information and accompanying supporting documentation, as
prescribed in Exhibit "D" attached hereto.
"REQUIRED NUMBER" means: in the case of notices hereunder (i)
relative to borrowings, prepayments, elections of the LIBOR Rate, selections
of Interest Periods for, or other transactions in respect of, LIBOR Loans:
two (2) Business Days; or (ii) relative to all transactions in respect of
Index Rate Loans: one (1) Business Day; it being understood, however, that
in the case of notices involving transactions in respect of more than one
type of Loan (such as a change in type of Loan in accordance with Section
2.04(B)), "Required Number" means that number of days, as indicated above in
respect of the Loans involved, which would constitute the longest applicable
period of time.
"RESERVE PERCENTAGE" means for any Interest Period, the average
(for such Interest Period) maximum rate at which reserves (including any
marginal, supplemental, or emergency reserves) are required to be maintained
during such Interest Period under Regulation D of the Federal Reserve Board
by member banks of the Federal Reserve System as it applies to the Bank
against "Eurocurrency liabilities" (as such term is used in Regulation D).
Without limiting the effect of the foregoing, the Reserve Percentage shall
reflect any other reserves required to be maintained by member banks by
reason of any regulatory change against (i) any category of liabilities that
includes deposits by reference to which the interest rate for LIBOR Loans is
to be determined as provided in this Agreement or (ii) any category of
extensions of credit or other assets that include LIBOR Loans. As of the
date of this Agreement the Reserve Percentage is zero.
"REVOLVING COMMITMENT" means the obligation of Bank, subject to the
provisions of this Agreement and existing only through the last Business Day
prior to the Maturity Date, to advance to Borrower funds, not to exceed at
any one time outstanding an amount equal to the lesser of: (a) Thirty Million
Dollars ($30,000,000.00), or (b) the Borrowing Base then in effect.
"SECURITY INSTRUMENTS" means the security instruments described on
Exhibit "C," in form and substance satisfactory to Bank, to be executed by
Borrower pursuant to Section 3.14, and any and all other instruments or
documents hereafter executed in connection with or as security for the
payment of the Note.
"SUBSIDIARY" means (a) any corporation in which Borrower, directly
or indirectly through its Subsidiaries, owns more than fifty percent (50%) of
the stock of any class or classes having by the terms thereof the ordinary
voting power to elect a majority of the directors of such corporation; and
(b) any partnership,
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association, joint venture, or other entity in which Borrower, directly or
indirectly through its Subsidiaries, has more than a fifty percent (50%)
equity interest at the time.
"TANGIBLE NET WORTH" means the total assets of Borrower exclusive
of (a) those assets classified as intangible, including, without limitation,
goodwill, patents, trademarks, trade names, copyrights, franchises and
deferred charges, (b) treasury stock and minority interests in any Person,
(c) cash set apart and held in a sinking or other analogous fund established
for the purpose of redemption or other retirement of capital stock, (d) to
the extent not already deducted from total assets, allowances for
depreciation, depletion, obsolescence and/or amortization of properties,
uncollectible accounts, and contingent but probable liabilities as to which
an amount can be established, (e) deferred taxes and (f) all assets arising
from advances to officers, former officers or sales representatives of
Borrower made outside of the ordinary course of business; less total
liabilities of Borrower; all of the above being determined in accordance with
GAAP.
"UNMATURED EVENT OF DEFAULT" means any event or occurrence which
solely with the lapse of time or the giving of notice or both will ripen into
an Event of Default.
Undefined financial accounting terms used in this Agreement shall
be defined in accordance with GAAP.
ARTICLE II. THE LOAN
2.01 THE REVOLVING LINE. Upon the terms and conditions (including,
without limitation, the right of Bank to terminate the Revolving Commitment
hereunder upon an Event of Default or an Unmatured Event of Default) and
relying on the representations and warranties contained in this Agreement,
Bank agrees, for a period from and after the date hereof through the last
Business Day prior to the Maturity Date, to make advances for the account of
Borrower from time to time following receipt of a Request for Advance;
provided, however, that the aggregate principal amount of all Loans plus the
aggregate face amount of all Letters of Credit at any one time outstanding
shall not exceed the Revolving Commitment.
Through the last Business Day prior to the Maturity Date, Borrower
may use this revolving credit by borrowing, prepaying and reborrowing, all in
accordance with the terms and conditions of this Agreement. The borrowings
made by Borrower pursuant to the Revolving Commitment shall be made at the
principal office of Bank and shall be evidenced by the Note. The entire
principal amount of the Note is due on the Maturity Date. Each Borrower,
other than MRI, hereby appoints MRI as its agent and attorney-in-fact for
purposes of submitting all Requests for Advance hereunder and for purposes of
giving and receiving all notices and other communications permitted or
required by this Agreement and either receiving or directing the disposition
of all advances and letter
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of credit, respectively, made or issued by Bank pursuant to this Agreement.
Each Borrower, other than MRI, hereby ratifies, adopts and confirms all acts
heretofore or hereafter taken by MRI on behalf of such Borrower in connection
with this Agreement and/or any of the other Loan Documents executed in
connection herewith.
2.02 ADVANCES AND PAYMENTS OF PRINCIPAL UNDER THE NOTE. Each time
an advance is made against or payment is made on the Note, Bank is hereby
irrevocably authorized by Borrower to make appropriate entries of such in its
records in accordance with the usual and customary practices of accounting
for advances and payments on notes; provided, however, the failure of Bank to
do so shall not relieve Borrower of its correct liability hereunder or under
the Note.
The aggregate unpaid amount of advances reflected by the notations
by Bank on its records or the ledger sheets affixed to the Note shall be
deemed rebuttably presumptive evidence of the principal amount owing on the
Note. The liability for payment of principal and interest evidenced by the
Note shall be limited to principal amounts actually advanced to Borrower and
outstanding under this Agreement and interest on such amounts calculated in
accordance with this Agreement. Interest provided for in the Note and herein
shall be calculated on unpaid sums actually advanced and outstanding under
the Note pursuant to the terms of this Agreement and only for the period from
the date or dates of such advances until repayment.
2.03 PREPAYMENT AND CONVERSION. Upon the Required Number of days
notice to the Bank, the Borrower may: (a) without the payment of penalty or
premium, prepay the principal of the Loans, or (b) voluntarily convert the
applicable Interest Rate of any Loan prior to the termination of the
applicable Interest Period in whole or in part, from time to time; any
partial payment or conversion to be made in the sum of not less than $500,000
or any $100,000 increment in addition thereto; PROVIDED that with respect to
any such prepayment or conversion of any Loan upon which interest is being
calculated at the LIBOR Rate the Borrower shall reimburse the Bank on demand
for any costs, including administrative costs, incurred by the Bank as a
result of such prepayment or conversion and any loss incurred or to be
incurred by the Bank in the redeployment of the funds released by any such
prepayment. Such loss shall be the difference, as reasonably determined by
Bank, between (i) Bank's gross return hereunder with respect to that portion
of the Loans which is prepaid, based on the applicable Interest Rate for such
portion of the Loans and (ii) any lesser amount realized by Bank in deploying
the funds received in repayment, or otherwise realized from that portion of
the Loans so prepaid, during the period from the date of the prepayment until
the end of the Interest Period for that portion of the Loans prepaid;
provided that Bank shall use its best efforts to redeploy such funds in a
commercially reasonable manner.
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2.04 INTEREST RATE AND PAYMENTS OF INTEREST.
(A) Interest on Index Rate Loans shall be calculated on the basis of
a year of 365 or 366 days, as appropriate. Interest on LIBOR Loans
shall be calculated on the basis of a 360-day year, counting the
actual number of days elapsed. Interest on the outstanding principal
balance of the Loans shall accrue for each day at either the Floating
Rate for such day or the LIBOR Rate for the Interest Period which
includes such day, all as elected and specified (including
specification as to length of Interest Period, as permitted by the
definition of that term, with respect to any election of the LIBOR
Rate) by the Borrower in accordance with Section 2.04(B); provided
that:
(i) In the absence of an election by the Borrower of the LIBOR
Rate, or, having made such election but upon the Required Number
of days prior to the end of the then current Interest Period the
Borrower fails or is not entitled under the terms of this
Agreement to elect to continue such Interest Rate and specify the
applicable Interest Period therefor, then upon the expiration of
such then current Interest Period, interest on the Loans shall
accrue for each day at the Floating Rate for such day, until the
Borrower, pursuant to Section 2.04(B), elects a different
Interest Rate and specifies the Interest Period for the Loans.
(ii) Interest accruing on any LIBOR Loan during any Interest
Period shall be payable on the last Business Day of such then
current Interest Period; PROVIDED, that all accrued interest on
any LIBOR Loan converted or prepaid pursuant to Section 2.03
shall be paid immediately upon such prepayment or conversion.
(B) By at least the Required Number of days prior to the advance of
any Loan hereunder, Borrower shall select the initial Interest Rate to
be charged on such Loan, and from time to time thereafter the Borrower
may elect, on at least the Required Number of days' irrevocable prior
written (or telephoned, promptly confirmed by written) notice to the
Bank, to change the Interest Rate on any Loan to any other Interest
Rate (including, when applicable, the selection of the Interest
Period); PROVIDED that; (i) the Borrower shall not select an Interest
Period that extends beyond the Termination Date; (ii) except as
otherwise provided in Section 2.03 no such change from the LIBOR Rate
to another Interest Rate shall become effective on a day other than
the day, which must be a Business Day, next following the last day of
the
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Interest Period last effective for such LIBOR Loan; (iii) any
elections made by the Borrower pursuant to this Section 2.04(B) shall
be in the amount of $100,000, plus any additional increment of
$100,000; (iv) notwithstanding anything herein to the contrary, the
Borrower may not make any election under this Section 2.04(B) that
would result in Loans outstanding at more than three (3) different
LIBOR Rates without the written agreement of the Bank to do so; and
(v) the first day of each Interest Period as to a LIBOR Loan shall be
a Business Day.
(C) Interest on Index Rate Loans shall be paid monthly in arrears on
the first day of each calendar month commencing with any month during
which interest begins to accrue at the Floating Rate, as elected by
Borrower pursuant to Section 2.04(B), and on the date the principal of
such Loans shall be due (at stated maturity, on acceleration, or
otherwise).
(D) Interest on past-due principal shall accrue at the greater of the
applicable Floating Rate plus three percent (3.00%) or LIBOR plus five
percent (5.00%) until such principal is paid in full, and shall be
payable upon demand by the Bank.
(E) The Bank shall notify the Borrower of the current Index Rate and
of the current LIBOR Rate from time to time upon request by the
Borrower.
(F) It is the intention of the parties hereto to conform strictly to
applicable usury laws as in effect from time to time. Accordingly, if
any transactions contemplated hereby would be usurious under
applicable Law (including the laws of the United States of America, or
of any other jurisdiction whose laws may be mandatorily applicable),
then, in that event, notwithstanding anything to the contrary in this
Agreement, or any other agreement entered into in connection with this
Agreement, it is agreed the aggregate of all consideration that
constitutes interest under applicable law that is contracted for,
charged, or received under this Agreement, or under any of the other
aforesaid agreements or otherwise in connection with this Agreement
shall under no circumstances exceed the Maximum Rate, and any excess
shall be credited to the Borrower by Bank (or, if such consideration
shall have been paid in full, such excess refunded to the Borrower by
Bank). All sums paid, or agreed to be paid, to the Bank for use,
forbearance, and detention of the indebtedness of the Borrower by the
Bank shall, to the extent permitted by applicable laws, be amortized,
pro rated, allocated, and spread throughout the full term of such
indebtedness
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until such indebtedness is paid in full so that the actual rate of
interest is uniform, but does not exceed the Maximum Rate,
throughout the full term thereof. If at any time the applicable
Interest Rate, which shall be deemed for purposes of this Section
2.04(F), only, to include any other fees, charges, or other forms
of consideration which constitute interest under applicable law
that is contracted for, charged, or received under this Agreement
or any other agreement entered into in connection with this
Agreement, exceeds the Maximum Rate, the rate of interest to accrue
pursuant to this Agreement shall be limited, notwithstanding
anything to the contrary in this Agreement, to the Maximum Rate,
but any subsequent reductions in the Interest Rate otherwise
provided for herein shall not reduce the interest to accrue
pursuant to this Agreement below the Maximum Rate until the total
amount of interest accrued pursuant to this Agreement equals the
amount of interest that would have accrued if a varying rate per
annum equal to the otherwise applicable Interest Rate had at all
times been in effect. If the total amount of interest paid or
accrued pursuant to this Agreement under the foregoing provisions
is less than the total amount of interest that would have accrued
if a varying rate per annum equal to the otherwise applicable
Interest Rate had at all times been in effect, then the Borrower
agrees to pay upon final maturity of the Loans an amount equal to
the difference between (a) the lesser of (i) the amount of interest
that would have accrued if the Maximum Rate had at all times been
in effect or (ii) the amount of interest that would have accrued if
a varying rate per annum equal to the otherwise applicable Interest
Rate had at all times been in effect, and (b) the amount of
interest accrued in accordance with the other provisions of this
Agreement.
2.05 INCREASED COST OF LOANS.
(A) Notwithstanding any other provisions herein, if as a result of
any regulatory change
(i) the basis of taxation of payments to Bank of the principal
of, or interest on, any LIBOR Loan or any other amounts due under
this Agreement in respect of any such LIBOR Loan (except for
taxes imposed on the overall net income or receipts of Bank, and
franchise or other taxes imposed generally on Bank), by the
jurisdiction (or any political subdivision therein) in which Bank
has its principal office (if such other taxes do not specifically
affect the cost to Bank of making the Loans) is changed;
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(ii) any reserve, special deposit, or similar requirement
(including without limitation any reserve requirement under
regulations of the Board of Governors of the Federal Reserve
System) against assets of, deposits with, or for the account of,
or credit extended by Bank, is imposed, increased, modified, or
deemed applicable; or
(iii) any other condition affecting this Agreement or any LIBOR
Loan is imposed on Bank or (in the case of LIBOR Loans) the
London interbank market;
and the result of any of the foregoing is to increase the actual
direct cost to Bank of making or maintaining any such LIBOR Loan or to
reduce the amount of any sum received by Bank hereunder in respect
thereof (and such increase or reduction shall not have been
compensated by a corresponding increase in the interest rate
applicable to the respective Loans), by an amount deemed by Bank to be
material (such increases in cost and reductions in amounts receivable
being herein called "Increased Costs"), then the Borrower shall pay to
Bank, within thirty (30) days after its demand, such additional amount
or amounts as will compensate Bank for those Increased Costs. The
Bank will not demand to be compensated by Borrower for such Increased
Costs unless the Bank generally makes such demands to its other LIBOR
Loan customers who are similarly situated. A certificate of Bank
setting forth the basis for the determination of such amount necessary
to compensate the Bank as aforesaid, accompanied by documentation
showing reasonable support for such increased costs or reduced sums
received by Bank, shall be delivered to the Borrower and shall be
conclusive, save for manifest error, as to such determination and such
amount.
(B) Notwithstanding the foregoing provisions of this Section 2.05, in
the event that by reason of any regulatory change the Bank either
(i) incurs Increased Costs based on, or measured by, the excess above
a specified level of the amount of a category of deposits or other
liabilities of Bank that 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
such Bank that includes LIBOR Loans or (ii) becomes subject to
restrictions on the amount of such a category of liabilities or assets
that it may hold, then, if Bank so elects by notice to the Borrower,
the obligation of Bank to make or convert Loans of any other type into
LIBOR Loans hereunder shall be suspended until the earlier of
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the date such regulatory change ceases to be in effect or the date
the Borrower and Bank agree upon an alternative method of
determining the interest rate payable by the Borrower on LIBOR
Loans, and all LIBOR Loans of Bank then outstanding shall be
converted into an Index Rate Loan (if not otherwise prohibited
under the terms of this Agreement) at the Borrower's option.
(C) Bank agrees that upon the occurrence of any regulatory change
giving rise to the operation of the first paragraph of this Section
2.05, it will, if requested by the Borrower and to the extent
permitted by law or by the relevant government authority, for a period
of thirty (30) days endeavor in good faith to avoid or minimize the
increase in cost or reduction in amount receivable resulting from such
regulatory change; PROVIDED, however, that such change can be made in
such a manner that Bank, in its sole determination, suffers no
economic, legal, regulatory, or other disadvantage. Any expense
incurred by Bank in so doing shall be paid by the Borrower on delivery
to the Borrower of a certificate as to the amount of such expense,
which certificate shall be conclusive in the absence of manifest
error. Nothing in this paragraph shall affect or postpone the
obligations of the Borrower set forth in any other paragraph of this
Section 2.05.
2.06 SUBSTITUTE RATE. Anything herein to the contrary
notwithstanding, if within two (2) Business Days prior to the first day of
any Interest Period for a LIBOR Loan the Bank is not, for any reason
whatsoever, quoted rates for the offering of Dollars for deposit with it in
the London interbank market for a period and amount relevant to the
computation of the rate of interest on LIBOR Loans for such Interest Period,
the Bank shall give the Borrower prompt notice thereof and on what would
otherwise be the first day of such Interest Period such Loans shall be made
as Index Rate Loans (if not otherwise prohibited under the terms of this
Agreement), at the Borrower's option in accordance with the election
procedures set forth in Section 2.04(B); PROVIDED, however, that prior to the
effective date of such election, interest shall be calculated at the Floating
Rate.
2.07 CHANGE OF LAW. Notwithstanding any other provision herein, in
the event that any change in any applicable law, rule or regulation or in the
interpretation or administration thereof shall make it unlawful for the Bank
to (i) honor any commitment it may have hereunder to make any LIBOR Loan,
then such commitment shall terminate, or (ii) maintain any LIBOR Loan, then
all LIBOR Loans of the Bank then outstanding shall be repaid and converted to
Index Rate Loans (if not otherwise prohibited under the terms of this
Agreement) at the Borrower's option in accordance with the election
procedures set forth in Section 2.04(B); PROVIDED, however, that prior to the
effective date of such election, interest shall be
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calculated at the Floating Rate. Any remaining commitment of Bank hereunder
to make LIBOR Loans (but not other Loans) shall terminate forthwith. Upon
the occurrence of any such change, the Bank shall promptly notify the
Borrower thereof, and shall furnish to the Borrower in writing evidence
thereof certified by the Bank.
Any repayment or conversion of any LIBOR Loan which is required
under this Section 2.07 or under 2.05(B) shall be effected by payment
thereof, together with accrued interest thereon, on demand, and concurrently
there shall occur the borrowing of the corresponding Index Rate Loan as
provided herein.
If any repayment to Bank of any LIBOR Loan (including conversions
thereof) is made under this Section 2.07 on a day other than a day otherwise
scheduled for a payment of principal of or interest on such Loan, the
Borrower shall pay to Bank upon its request such amount or amounts as will
compensate it for the amount by which the rate of interest on such Loan
immediately prior to such repayment exceeds the stated rate of interest on
relending or reinvesting the funds received in connection with such
prepayment, in each case for the period from the date of such prepayment to
the Business Day next succeeding the last day of such then current Interest
Period, all as determined by Bank in its good faith discretion.
2.08 ADVANCES TO SATISFY OBLIGATIONS OF BORROWER. Bank may, but
shall not be obligated to, make advances hereunder and apply same to the
satisfaction of any condition, warranty, representation or covenant of
Borrower contained in this Agreement, and the funds so advanced and applied
shall be part of the Loan proceeds advanced under this Agreement and
evidenced by the Note.
2.09 MANDATORY PREPAYMENT OF THE NOTES. In the event that Bank or
Borrower determine that a Loan Excess exists, Borrower shall immediately, but
in no event later than thirty (30) days following the earlier of either: (a)
Borrower becoming aware that a Loan Excess exists, or (b) notice from Bank of
any such determination, (i) prepay the principal of the Note in an aggregate
amount at least equal to such Loan Excess or (ii) add to the Borrowing Base
Properties additional Oil and Gas Properties of Borrower sufficient in value,
as determined by Bank in its sole discretion pursuant to Section 2.10, to
increase the Borrowing Base to equal the unpaid principal amount of the Note
plus all accrued, unpaid interest.
2.10 BORROWING BASE DETERMINATION.
a. BORROWING BASE PROPERTIES. The initial Borrowing Base
attributable to the Borrowing Base Properties is hereby established at
$10,500,000.00 effective as of the date hereof. Subject to the other
provisions of this Agreement, the Borrowing Base shall be automatically
reduced on the first day of each month, commencing on February 1, 1998, by
the Monthly
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Borrowing Base Reduction, which is initially established at $120,000.00. On
or before April 1, 1998, Borrower shall furnish to Bank a petroleum
engineering report relative to the Proved Reserves that are attributable to
the Borrowing Base Properties effective as of January 1, 1998, as well as
such other information as Bank may request regarding volumes of production
produced and sold, contracts, pricing, gross revenues, expenses, and other
information and engineering and geological data as may relate to the
Borrowing Base Properties (collectively the "Borrowing Base Property Data").
Upon receipt of such Borrowing Base Property Data, Bank shall, in the normal
course of business, redetermine the Borrowing Base and the Monthly Borrowing
Base Reduction attributed to the Borrowing Base Properties, which
redetermination shall become effective upon written notification from Bank to
Borrower, and which, subject to the other provisions of this Agreement, shall
be the basis on which the Borrowing Base shall thereafter be calculated until
the effective date of the next redetermination of the Borrowing Base and the
Monthly Borrowing Base Reduction as set forth in this Section. Thereafter,
on or before each succeeding October 1 and April 1 until the Maturity Date,
Borrower shall furnish to Bank a report, in form and substance satisfactory
to Bank, which report shall set forth, as of each preceding July 1 or January
1, as applicable, such Borrowing Base Property Data as Bank may request
attributable to the Borrowing Base Properties. Each report to be provided on
or before each April 1 shall be a complete report relating to the Borrowing
Base Properties, which may be prepared by Borrower, but which shall be
reviewed and concurred with in writing by an independent petroleum engineer
or firm of engineers satisfactory to Bank. Each report to be provided on or
before each October 1 shall simply update the previous complete report, and
may be prepared by Borrower's own engineers and shall be certified by the
President of MRI. Upon receipt of each such report, Bank shall, in the
normal course of business, make a determination of the Borrowing Base and the
Monthly Borrowing Base Reduction which shall become effective upon written
notification from Bank to Borrower, and which, subject to the other
provisions of this Agreement, shall be the basis on which the Borrowing Base
attributable to the Borrowing Base Properties shall thereafter be calculated
until the effective date of the next redetermination of the Borrowing Base
and the Monthly Borrowing Base Reduction as set forth in this Section.
Beginning with the delivery of the Borrowing Base Property Data due
by April 1, 1998, and continuing as and when Borrower is required to provide
to Bank each semi-annual report, as required by the provisions of this
Section, Borrower shall contemporaneously pay an engineering fee of $7,500.00
to Bank for Bank's analysis of such report and redetermination of the
Borrowing Base and the Monthly Borrowing Base Reduction. At any time
engineering reviews are requested by Borrower in connection with a Borrowing
Base redetermination, other than the semi-annual reviews required by Bank, an
additional fee of $7,500.00 shall be paid to
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Bank for Bank's analysis of such report and redetermination of the Borrowing
Base.
b. EQUITY CUSHION. The Borrowing Base shall represent
Bank's determination, in accordance with its customary lending practices in
effect from time to time, of the maximum loan amount that may be supported by
the Borrowing Base Properties. Borrower and Bank acknowledge that (i) due to
the uncertainties of the oil and gas extraction process, the Borrowing Base
Properties are not subject to evaluation with a high degree of accuracy and
are subject to potential rapid deterioration in value, and (ii) for this
reason and the difficulties and expenses involved in liquidating and
collecting against the Borrowing Base Properties, Bank's determination of the
maximum loan amount with respect to the Borrowing Base Properties contains an
equity cushion, which equity cushion is acknowledged by Borrower as essential
for the adequate protection of Bank.
c. UNSCHEDULED BORROWING BASE REDETERMINATIONS. In addition
to scheduled redeterminations of the Borrowing Base, the Bank may redetermine
the Borrowing Base and the Monthly Borrowing Base Reduction at any time, and
from time to time, which redetermination shall become effective upon written
notification from Bank to Borrower and which, subject to the other provisions
of this Agreement, shall be the basis on which the Borrowing Base shall
thereafter be calculated until the effective date of the next redetermination
of the Borrowing Base and the Monthly Borrowing Base Reduction, as set forth
in this Section.
2.11 ASSIGNMENT OF PRODUCTION. Certain of the Security
Instruments covering the Borrowing Base Properties contain an assignment unto
and in favor of Bank of all oil, gas and other minerals produced and to be
produced from or attributable to the Oil and Gas Properties that constitute
part of the Borrowing Base Properties, together with all of the revenues and
proceeds attributable to such production, and such Security Instruments
further provide that all such revenues and proceeds which may be so collected
by Bank pursuant to the assignment shall be applied to the payment of the
Note and the satisfaction of all other Indebtedness to be secured by such
Security Instruments. Such Security Instruments further provide that the
Bank grants to Borrower a license to receive and collect the revenues and
proceeds attributable to such production unless and until an Event of Default
shall occur, and upon the occurrence of an Event of Default, the Bank, acting
in its sole discretion, shall have the right to terminate Borrower's license
to collect such revenues and proceeds. Borrower hereby appoints Bank as its
agent and attorney-in-fact for all purposes deemed by Bank to be necessary or
desirable in connection with such assignment of production, including, but
not limited to, completing the letter transfer orders delivered to Bank
pursuant to Sections 3.14 and/or 3.17 hereof, which power is coupled with an
interest and is not revocable.
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2.12 COMMITMENT FEE. As consideration for the commitment of Bank
to make Loans to Borrower through the Maturity Date pursuant to this
Agreement, Borrower agrees to pay to Bank within five (5) Business Days of
receipt of Bank's statement as to quarterly periods ending March 31, June 30,
September 30 and December 31 of each year (except the first period shall be
for a period of time from the Closing to December 31, 1997) during the period
commencing on the date of this Agreement to and including the Maturity Date
and at the Maturity Date, a fee equal to 1/2 of 1% per annum (computed on the
basis of 365 or 366 days, as the case may be) multiplied by an amount equal
to the daily average excess, if any, of the Borrowing Base over the sum of:
(x) the aggregate principal amount outstanding on the Note, plus (y) the
aggregate face amount of all outstanding Letters of Credit, throughout the
period from the date of this Agreement or previous calculation date provided
above, whichever is later, to the relevant calculation date or the Maturity
Date, as the case may be.
2.13 FACILITY FEE. As consideration for the commitment of Bank to
make Loans to Borrower pursuant to this Agreement, Borrower shall pay to Bank
at Closing a fee ("FACILITY FEE") equal to one-half of one percent (.5%) of
the initial Revolving Commitment, and if and when the Revolving Commitment is
subsequently increased, then Borrower shall pay to Bank an additional
Facility Fee equal to one half of one percent (.5%) of the amount by which
such increased Revolving Commitment exceeds the highest Revolving Commitment
amount previously in effect.
2.14 ADDITION OF BORROWING BASE PROPERTIES. Borrower may, from
time to time upon thirty (30) days prior written notice to Bank, propose to
add Oil and Gas Properties of Borrower to the Borrowing Base Properties. Any
such proposal to add Oil and Gas Properties of Borrower to the Borrowing Base
Properties shall be accompanied by an engineering report applicable to such
Oil and Gas Properties that conforms to the requirements of Section 2.10,
evidence sufficient to establish that Borrower has Marketable Title to such
Oil and Gas Properties, and such other data as Bank may reasonably request.
Any such additions shall become effective at such time as: (a) Bank has made
its determination in the ordinary course of business of the amount by which
the Borrowing Base would be increased as the result of such addition and (b)
the conditions set forth in Article III hereof, to the extent they are
applicable to such additional Borrowing Base Properties of Borrower, have
been satisfied.
2.15 LETTERS OF CREDIT. Subject to the terms and conditions of
this Agreement, the Bank agrees to issue standby Letters of Credit for the
account of the Borrower from time to time following receipt of a Request for
Advance three (3) Business Days prior to the requested date of issuance in
such amount as the Borrower may request in an aggregate amount of up to (i)
One Million Dollars ($1,000,000.00), but (ii) not to exceed at any time the
unborrowed portion of the Revolving Commitment. The amount of
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any such Letters of Credit issued under the Revolving Commitment shall be
deemed to be a Loan and to reduce the amount available under the Revolving
Commitment and shall be governed by the terms of this Agreement. The Bank
may require in connection with the issuance of any Letter of Credit that
Borrower execute the Bank's then-current form of application for a Letter of
Credit, but if there is any conflict between the terms of any such
application and the terms of this Agreement, the terms of this Agreement
shall control. No Letter of Credit shall have an expiration date that is
later than one year from the date of its issuance, or, if sooner, beyond the
Maturity Date.
2.16 REPAYMENT OF LETTERS OF CREDIT. If drawn upon by the
beneficiary of a Letter of Credit, all amounts so drawn shall be due and
payable by the Borrower immediately upon receipt of Bank's statement therefor.
2.17 LETTER OF CREDIT FEE. As consideration for the issuance by
the Bank of Letters of Credit for the account of the Borrower, the Borrower
agrees to pay to the Bank a fee of one and one-half percent (1.5%), per
annum, of the amount of each such Letter of Credit (subject to a $500.00
minimum fee per year on each Letter of Credit), the first such per annum fee
for each Letter of Credit to be payable in advance of the issuance of such
Letter of Credit, with successive per annum fees to be paid in advance of the
anniversary date of the issuance of such Letter of Credit if it is to remain
in effect beyond such anniversary date.
ARTICLE III. CONDITIONS
The obligation of Bank to make advances of the Loans and/or to
issue Letters of Credit referred to in Article II of this Agreement is
subject to the prior or contemporaneous satisfaction of the following
conditions precedent stated in this Article III.
3.01 RECEIPT OF NOTE, AGREEMENT AND CERTIFICATE OF COMPLIANCE.
Bank shall have received the Note, multiple counterparts of this Agreement,
as requested by Bank, and the Certificate of Compliance duly executed by an
authorized officer for Borrower.
3.02 ASSIGNMENTS OF FIRST UNION LOAN DOCUMENTS. Bank shall have
received an Assignment of Notes and Liens from First Union pursuant to which
First Union has assigned to Bank all rights, titles and interests in and to
the First Union Loan Documents, on terms and conditions satisfactory to Bank
in its sole discretion, in consideration of a payment by Bank to First Union
of the cash sum of not more than $9,151,614.58, which shall constitute an
advance by Bank pursuant to and evidenced by the Note.
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3.03 RECEIPT OF ORGANIZATIONAL DOCUMENTS. Bank shall have
received from each Borrower its Articles of Incorporation and its bylaws,
certified as being true and correct by the secretary or an assistant
secretary of each respective Borrower.
3.04 RECEIPT OF CERTIFIED COPY OF CORPORATE PROCEEDINGS AND
CERTIFICATES OF INCUMBENCY. Bank shall have received from Borrower copies of
all resolutions of its board of directors authorizing the transactions set
forth in this Agreement, and the execution of this Agreement, the Note, and
those of the Security Instruments to which it is a party, such copy or copies
to be certified by the secretary or an assistant secretary as being true and
correct and in full force and effect as of the date hereof. In addition,
Bank shall have received from each Borrower a certificate of incumbency
signed by the secretary or an assistant secretary of such Borrower setting
forth (a) the names of the officers executing this Agreement, the Note, and
those of the Security Instruments to which it is a party, (b) the office(s)
to which such Persons have been elected and in which they presently serve and
(c) an original specimen signature of each such person.
3.05 RECEIPT OF CERTIFICATES OF AUTHORITY AND CERTIFICATES OF GOOD
STANDING. Bank shall have received certificates, as of the most recent dates
practicable, of the Secretary of State of the state in which each Borrower is
incorporated attesting to such Borrower's existence, and of each state in
which such Borrower is qualified to do business as a foreign corporation
attesting to such qualification, and from the department of revenue or
taxation of each of the foregoing states, as to the good standing of such
Borrower;
3.06 UCC SEARCH. Bank shall have received the results of a
Uniform Commercial Code search showing all financing statements and other
documents or instruments on file against each Borrower in the Offices of the
Secretaries of State of the State of Texas and in the counties in which
Borrowing Base Properties are located, such search to be as of a date no more
than ten (10) days prior to the date of the Closing.
3.07 FEES. Bank shall have contemporaneously received the fee
required by Section 2.13.
3.08 FINANCIAL STATEMENTS. Bank shall have received the Financial
Statements of Borrower as of September 30, 1997, showing financial
information consistent with that previously provided to Bank.
3.09 REQUEST FOR ADVANCE. Bank shall have received from Borrower
a Request for Advance.
3.10 ACCURACY OF REPRESENTATIONS AND WARRANTIES AND NO EVENT OF
DEFAULT. The representations and warranties contained in Article IV of this
Agreement shall be true and correct in all
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material respects on the date of the making of such Loans or advances with
the same effect as though such representations and warranties had been made
on such date; and no Event of Default shall have occurred and be continuing
or will have occurred at the completion of the making of such Loans or
advances.
3.11 LEGAL MATTERS SATISFACTORY TO COUNSEL TO BANK. All legal
matters incident to the consummation of the transactions hereby contemplated
shall be satisfactory to counsel for Bank.
3.12 NO MATERIAL ADVERSE CHANGE. No material adverse change shall
have occurred since the date of this Agreement in the condition, financial or
otherwise, of Borrower.
3.13 STATUS OF TITLE. Bank shall have been satisfied that
Borrower has Marketable Title to its Borrowing Base Properties, and that
Borrower owns record title to an undivided net revenue interest in the
production from each Oil and Gas Property that is a Borrowing Base Property
that is not less than the net revenue interest therein attributed to Borrower
in the Loan Documents, as amended from time to time, as well as an undivided
working interest in each such Oil and Gas Property that is not greater than
the working interest therein attributed to Borrower in the Loan Documents, as
amended from time to time (unless there is a corresponding increase in the
net revenue interest attributed to such party therein).
3.14 SECURITY INSTRUMENTS. As security for the payment of the
Note and the performance of the Obligations of Borrower under this Agreement,
Bank shall have received the Security Instruments, duly executed by Borrower.
3.15 LEGAL FEES. All legal fees and disbursements owed to Bank's
special counsel who provided representation to the Bank in connection with
this Agreement or any amendment hereto and in connection with the review of
title to the Borrowing Base Properties shall have been paid.
3.16 OPINION OF COUNSEL FOR BORROWER. Bank shall have received an
opinion of counsel for Borrower regarding the matters set forth on Schedule
3.16 attached to this Agreement, in form and substance satisfactory to Bank,
subject to such customary assumptions, exceptions and qualifications as may
be acceptable to Bank, in its discretion.
3.17 DOCUMENTS REQUIRED FOR SUBSEQUENT DISBURSEMENTS. As of the
time of funding any additional advances to Borrower that are made in
conjunction with the addition of any new Borrowing Base Properties owned by
Borrower, Borrower shall have duly delivered to Bank: (i) the Security
Instruments that are necessary or appropriate, in the opinion of Bank,
relating to such additional Borrowing Base Properties, and (ii) Transfer
Order Letters
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applicable to the production of oil and gas from any additional Oil and Gas
Properties added to the Borrowing Base Properties.
ARTICLE IV. REPRESENTATIONS AND WARRANTIES
To induce Bank to enter into this Agreement and to make the Loan
hereunder, each Borrower represents and warrants to Bank (which
representations and warranties will survive the delivery of the Note) that:
4.01 EXISTENCE AND GOOD STANDING. Borrower is a corporation, duly
organized, legally existing and in good standing under the laws of its
jurisdiction of incorporation and is duly qualified and in good standing as a
foreign corporation in all jurisdictions wherein the property owned or the
business transacted by it makes such qualification necessary, other than
those jurisdictions wherein the failure to so qualify does not have a
material adverse effect on Borrower.
4.02 DUE AUTHORIZATION. The execution and delivery by Borrower of
this Agreement and the borrowings hereunder; the execution and delivery by
Borrower of the Note and the Security Instruments; and the repayment by
Borrower of Indebtedness evidenced by the Note and interest and fees provided
in the Note and this Agreement are (a) within the corporate power of
Borrower; (b) have been duly authorized by all necessary corporate action;
and (c) do not and will not (i) require the consent of any regulatory
authority, governmental body, or any other Person, (ii) violate any provision
of law, the certificate of incorporation, the articles of incorporation, or
the bylaws of Borrower, (iii) cause a default to occur under the terms and
provisions of any indenture, instrument or other agreement to which Borrower
is a party or by which its property may be presently bound or encumbered, or
(iv) result in or require the creation or imposition of any mortgage, lien,
pledge, security interest, charge or other encumbrance in, upon or of any of
the properties or assets of Borrower under any such indenture, instrument or
other agreement, other than under any of the Security Instruments.
4.03 VALID AND BINDING OBLIGATIONS. This Agreement, the Note, and
the Security Instruments are the legal, valid and binding obligations of and
enforceable against Borrower in accordance with their respective terms
(subject to any applicable bankruptcy, insolvency or other laws of general
application affecting creditors' rights and judicial decisions interpreting
any of the foregoing). In addition, the First Union Loan Agreement, the
First Union Loan Documents, and the Indebtedness evidenced thereby, are the
legal, valid and binding obligations of each Borrower that is party thereto
in accordance with their respective terms (subject to any applicable
bankruptcy, insolvency or other laws of general application affecting
creditors' rights and judicial decisions interpreting any of the foregoing),
and Borrower is not in default in any material respect of any of its
obligations under the First
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Union Loan Documents, and has no defenses to the obligation to repay or
perform, respectively, any of the Indebtedness of other obligations evidenced
thereby.
4.04 TITLE TO BORROWING BASE PROPERTIES. Borrower has Marketable
Title to all of its Borrowing Base Properties.
4.05 OIL AND GAS LEASES. The Leases which constitute any part of
the Borrowing Base Properties are in full force and effect, are valid,
subsisting leases covering the entire estates to which they pertain and all
rentals, royalties and other amounts due and payable in accordance with the
terms of the Leases, overriding royalties, net profits or other production
burdens have been duly paid or provided for; the obligations to be performed
under the Leases have been duly performed; and Borrower is not aware of any
default by any third party under any of the Leases with respect to such third
party's obligations.
4.06 INTEREST IN THE BORROWING BASE PROPERTIES. With respect to
each of the Borrowing Base Properties, the ownership of Borrower in such
property will, with respect to the wells, units and/or tracts of land
described in Schedule 1.01(a) hereto in connection with such property, (i)
entitle Borrower to receive (subject to the terms and provisions of this
Agreement) a decimal share of the oil and gas produced from, or allocated to,
such wells, units and/or tracts equal to not less than the decimal share set
forth in Schedule 1.01(a) in connection with such wells, units and/or tracts,
and (ii) cause Borrower to be obligated to bear a decimal share of the cost
of exploration, development and operation of such wells, units and/or tracts
of land not greater than the decimal share set forth in Schedule 1.01(a) in
connection with such wells, units and/or tracts, unless any increase in
Borrower's share of costs is accompanied by a pro-rata increase in Borrower's
share of revenue. Except as set forth in the instrument and agreements, if
any, more particularly described in Schedule 1.01(a), all such shares of
production which Borrower is entitled to receive, and shares of expenses
which Borrower is obligated to bear, are not subject to change, except for
changes attributable to future elections by Borrower not to participate in
operations proposed pursuant to customary forms of applicable joint operating
agreements, and except for changes attributable to changes in participating
areas under any federal units wherein participating areas may be formed,
enlarged or contracted in accordance with the rules and regulations of the
applicable governmental authority.
4.07 OIL AND GAS CONTRACTS. Borrower is not obligated, by virtue
of any prepayment under any contract providing for the sale by Borrower of
hydrocarbons which contains a "take-or-pay" clause or under any similar
prepayment agreement or arrangement, including, without limitation, "gas
balancing agreements", to deliver a material amount of hydrocarbons produced
from the Borrowing Base Properties at some future time without then or
thereafter receiving full payment therefor (I.E., in the case of
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oil, not in excess of sixty (60) days, and in the case of gas, not in excess
of ninety (90) days). The Borrowing Base Properties are not subject to any
contractual, or other arrangement for the sale of crude oil which cannot be
cancelled on ninety (90) days' (or less) notice, unless the price provided
for therein is equal to or greater than the prevailing market price in the
vicinity. The Borrowing Base Properties are not subject to any gas sales
contract that contains any material terms which are not customary in the
industry within the region in which the Borrowing Base Properties affected
thereby are located. The Borrowing Base Properties are not subject to any
regulatory refund obligation and no facts exist which might cause the same to
be imposed.
4.08 PRODUCING WELLS. All producing wells located on the
Borrowing Base Properties have been, during all times that such were under
the direction or control of Borrower and, to the knowledge of Borrower, at
all other times, drilled, operated and produced in conformity with all
applicable laws, rules, regulations and orders of all regulatory authorities
having jurisdiction, are subject to no penalties on account of past
production, and are bottomed under and are producing from, and the well bores
are wholly within, the Borrowing Base Properties or on Oil and Gas Properties
which have been pooled, unitized or communitized with the Borrowing Base
Properties.
4.09 PURCHASERS OF PRODUCTION. The persons who are purchasing
Borrower's interests in oil and gas produced from the Borrowing Base
Properties as of the calendar month during which the Loans are made hereunder
are identified on Schedule 4.09 attached hereto.
4.10 SCOPE AND ACCURACY OF FINANCIAL STATEMENTS. All Financial
Statements submitted and to be submitted to Bank hereunder are and will be
complete and correct in all material respects; are and will be prepared in
accordance with GAAP and practices consistently applied; and do and will
fairly reflect the financial condition and the results of the operations of
Borrower in all material respects as of the dates and for the period stated
therein (subject only to normal year-end audit adjustments with respect to
such unaudited interim statements); and no material adverse change has since
occurred in the condition, financial or otherwise, of Borrower or its
Subsidiaries (taken as a whole).
4.11 LIABILITIES, LITIGATION AND RESTRICTIONS. Except as
disclosed in the Financial Statements, Borrower has no liabilities, direct or
contingent, which may materially and adversely affect its business or assets.
Except as described on the Financial Statements or on Schedule 4.11, there is
no litigation or other action of any nature pending before any court,
governmental instrumentality, regulatory authority or arbitral body or, to
the knowledge of Borrower, threatened against or affecting Borrower, or any
of its Subsidiaries, which might reasonably be expected to result in any
material, adverse change in the business
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or assets of Borrower or its Subsidiaries (taken as a whole). No unusual or
unduly burdensome restriction, restraint or hazard exists by contract, law,
governmental regulation or otherwise relative to the business or material
properties of Borrower other than such as relate generally to Persons engaged
in the business activities conducted by Borrower.
4.12 MARGIN STOCK. None of the proceeds of the Loans will be used
for the purpose of buying or carrying margin stock.
4.13 AUTHORIZATIONS AND CONSENTS. No authorization, consent,
approval, exemption, franchise, permit or license of, or filing with, any
governmental or public authority or any third party is required to authorize,
or is otherwise required in connection with the valid execution and delivery
by Borrower of this Agreement, the Note, and the Security Instruments to
which it is a party or any instrument contemplated hereby, the repayment by
Borrower of advances against the Note and interest and fees provided in the
Note and this Agreement, or the performance by Borrower of its obligations
under any of the foregoing.
4.14 COMPLIANCE WITH LAWS, RULES, REGULATIONS AND ORDERS. To the
best of the knowledge and belief of Borrower, neither the business nor any of
the activities of Borrower, as presently conducted, violates any law or any
rule, regulation or directive of any applicable judicial, administrative or
other governmental instrumentality (including, but not by way of limitation,
any law or any rule, regulation or directive of any judicial, administrative
or other governmental instrumentality relating to zoning, to any
Environmental Law, to the stabilization of wages or prices or to the
development, production, transportation or purchase or sale of oil, gas or
other hydrocarbons) the result of which violation would have a material
adverse effect on Borrower or its Subsidiaries (taken as a whole), and
Borrower possesses all licenses, approvals, registrations, permits and other
authorizations necessary to enable it to carry on its business in all
material respects as now conducted, and all such licenses, approvals,
registrations, permits and other authorizations are in full force and effect;
and Borrower has no reason to believe that it will be unable to obtain the
renewal of any such licenses, approvals, registrations, permits and other
authorizations.
4.15 PROPER FILING OF TAX RETURNS AND PAYMENT OF TAXES DUE.
Borrower has duly and properly filed all United States Income Tax returns and
all other tax returns which are required to be filed, and has paid all taxes
due pursuant to said returns or pursuant to any assessment received, except
such taxes, if any, as are being contested in good faith and as to which
adequate provisions and disclosures have been made; and the respective
charges and reserves on the books of Borrower with respect to any taxes or
other governmental charges are adequate.
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4.16 ERISA. Borrower is in compliance in all material respects
with all applicable provisions of ERISA. Neither a Reportable Event nor a
Prohibited Transaction has occurred and is continuing with respect to any
plan; no notice of intent to terminate a plan has been filed, nor has any
plan been terminated; no circumstances exist which constitute grounds under
Section 4042 of ERISA entitling the PBGC to institute proceedings to
terminate, or appoint a trustee to administrate a plan, nor has the PBGC
instituted any such proceedings; neither Borrower nor any ERISA Affiliate has
completely or partially withdrawn under Sections 4201 or 4204 of ERISA from a
Multi-employer plan; Borrower and each ERISA Affiliate have met their minimum
funding requirements under ERISA with respect to all of their plans and the
present value of all vested benefits under each plan exceeds the fair market
value of all plan assets allocable to such benefits, as determined on the
most recent valuation date of the plan and in accordance with the provisions
of ERISA and the regulations thereunder for calculating the potential
liability of Borrower or any ERISA Affiliate to the PBGC or the plan under
Title IV of ERISA; and neither Borrower nor any ERISA Affiliate has incurred
any liability to the PBGC under ERISA.
4.17 INVESTMENT COMPANY ACT COMPLIANCE. Borrower is not, nor is
it directly or indirectly controlled by or acting on behalf of any person or
entity which is, an investment company or an "affiliated person" of an
investment company within the meaning of the Investment Borrower Act of 1940.
4.18 PUBLIC UTILITY HOLDING COMPANY ACT COMPLIANCE. Borrower is
not a "holding company", or an "affiliate" of a "holding company" or of a
"subsidiary company" of a "holding company", within the meaning of the Public
Utility Holding Company Act of 1935, as amended.
4.19 ENVIRONMENTAL LAWS. To the best of the knowledge and belief
of Borrower:
(a) no property of Borrower is currently on, or has ever been on,
any federal or state list of superfund sites as listed on the
Environmental Protection Agency National Priority List or any comparable
state registries or list in any state of the United States (collectively
"Superfund Sites");
(b) no Hazardous Substances have in the past been generated,
transported, and or disposed of, by Borrower at any Superfund Site;
(c) except in accordance with a valid permit, license,
certificate or approval of the relevant regulatory authority or
governmental body, there has been no emission, spill, release, disposal
or discharge of any Hazardous Substance into or upon (i) the air, (ii)
soils or any improvements located
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thereon, (iii) surface water or groundwater, or (iv) the sewer, septic
system or waste treatment, storage or disposal system servicing any
property of Borrower; and
(d) no complaint, order, directive, claim, citation, notice of
environmental report, notice of investigation or other notice by any
regulatory authority or governmental body or any other Person with
respect to (i) air emissions, (ii) spills, releases or discharges to
soils or any improvements located thereon, surface water, groundwater or
the sewer, septic system or waste treatment, storage or disposal systems
servicing any property of Borrower, (iii) solid or liquid waste
disposal, (iv) the use, generation, storage, transportation or disposal
of any Hazardous Substance, or (v) other environmental, health or safety
matters affecting any property of Borrower, any improvements located
thereon, or the business thereon conducted, has been received by
Borrower, nor has Borrower been given oral or written notice thereof;
provided, however, that the representations and warranties set forth in
subparagraphs (c) and (d) above shall apply only to events and conditions
which either resulted in (i) a continuing lien or encumbrance on the property
of Borrower or (ii) otherwise materially affect Borrower's use or operation
of its property or Borrower's ability to repay the Indebtedness evidenced by
the Note.
ARTICLE V. AFFIRMATIVE COVENANTS
Borrower covenants, so long as any Indebtedness of Borrower to Bank
remains unpaid under this Agreement or Bank remains obligated to make
advances hereunder, to:
5.01 USE OF FUNDS. Use the proceeds advanced under the Loan to
refinance preexisting debt, acquire Oil and Gas Properties, conduct oil and
gas exploration and development, obtain standby Letters of Credit and use as
working capital for other ordinary business activities of Borrower, and
furnish Bank such evidence as it may reasonably require with respect to such
use.
5.02 MAINTENANCE AND ACCESS TO RECORDS. Keep adequate records in
accordance with good accounting practices, of all of Borrower's transactions
so that at any time, and from time to time, its true and complete financial
condition may be readily determined and, at Bank's reasonable request, make
all financial records and records relating to the Borrowing Base Properties
available for Bank's inspection and permit Bank to make and take away copies
thereof for Bank's internal use only and subject to such confidentiality
agreements as Borrower may reasonably require.
5.03 QUARTERLY UNAUDITED FINANCIAL STATEMENTS OF BORROWER.
Deliver to Bank, on or before the fiftieth (50th) day after the end of each
of the first three calendar quarters of each
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fiscal year, unaudited consolidated and consolidating Financial Statements of
Borrower as at the end of such period and from the beginning of such fiscal
year to the end of the respective period, as applicable, which Financial
Statements shall be certified by the president or chief financial officer of
MRI as being true and correct, subject to changes resulting from year-end
audit adjustments.
5.04 ANNUAL AUDITED FINANCIAL STATEMENTS OF MRI. Deliver to Bank,
on or before the one hundred and twentieth (120th) day after the close of
each fiscal year of MRI, a copy of the annual audited consolidated Financial
Statements of MRI.
5.05 COMPLIANCE CERTIFICATE. Deliver to Bank a Compliance
Certificate: (a) at the time of Borrower's execution of this Agreement, and
(b) at the time of delivery of each of the Financial Statements pursuant to
Sections 5.03 and 5.04 above.
5.06 STATEMENT OF MATERIAL ADVERSE CHANGE IN CONDITION. Deliver
to Bank, promptly upon any officer of the Borrower having knowledge of any
material adverse change in the condition, financial or otherwise, of Borrower
or its Subsidiaries (or any event or circumstance that would result in any
such material adverse change in condition including, but not limited to,
litigation and changes in business), a statement of the president or vice
president of Borrower, setting forth the change in condition or event or
circumstance likely to result in any such change and the steps being taken by
Borrower or the applicable Subsidiary with respect to such change in
condition or event or circumstance.
5.07 ADDITIONAL INFORMATION. Furnish to Bank, promptly upon
Bank's reasonable request, such additional financial or other information
concerning the assets, liabilities, operations, and transactions of Borrower,
in its possession or to which it has access, including, without limitation,
information concerning the Borrowing Base Properties.
5.08 COMPLIANCE WITH LAWS AND PAYMENT OF ASSESSMENTS AND CHARGES.
Comply with all applicable statutes and government regulations, including,
without limitation, ERISA, and pay all taxes, assessments, governmental
charges, claims for labor, supplies, rent, its share of all costs and
expenses incurred under any joint operating agreement, and other obligations
which, if unpaid, might become a lien against its property, except any of the
foregoing being contested in good faith and as to which satisfactory accruals
have been provided and unless failure to comply or pay would not have a
material adverse effect on the assets of Borrower and its Subsidiaries (taken
as a whole).
5.09 MAINTENANCE OF EXISTENCE AND GOOD STANDING. Maintain
Borrower's corporate existence and good standing in the jurisdiction of its
incorporation, and in all jurisdictions wherein
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the property now owned or hereafter acquired or business now or hereafter
conducted necessitates same, other than those jurisdictions wherein the
failure to so qualify will not have a material adverse effect on Borrower.
5.10 FURTHER ASSURANCES. Promptly cure any defects in the
execution and delivery of this Agreement, the Note, the Security Instruments,
or any other instrument referred to herein or executed in connection with the
Note, and upon notice, immediately execute and deliver to Bank, all such
other and further instruments as may be reasonably required or desired by
Bank from time to time in compliance with the covenants and agreements made
in this Agreement.
5.11 INITIAL EXPENSES OF BANK. Pay all fees and expenses of
special legal counsel for Bank, incurred in connection with the negotiation
and preparation of this Agreement, the Note, the Security Instruments, or any
other instrument referred to herein or executed in connection with the Note,
the satisfaction of the conditions precedent set forth in Article III of this
Agreement and the consummation of the transactions contemplated in this
Agreement.
5.12 SUBSEQUENT EXPENSES OF BANK. Upon request, promptly
reimburse Bank for all reasonable amounts expended, advanced or incurred by
Bank to collect the Note or to enforce the rights of Bank under this
Agreement, the Note, the Security Instruments, or any other instrument
referred to herein or executed in connection with the Note, which amounts
shall be deemed compensatory in nature and liquidated as to amount upon
notice to Borrower by Bank and which amounts will include, but not be limited
to, (a) all court costs, (b) attorneys' fees, (c) fees of auditors and
accountants, (d) investigation expenses, (e) internal fees of Bank's in-house
legal counsel, (f) fees and expenses incurred in connection with Bank's
participation as a member of the creditors' committee in a case commenced
under Title 11 of the United States Code or other similar law of the United
States, the State of Texas or any other jurisdiction, (g) fees and expenses
incurred in connection with lifting the automatic stay prescribed in Sections
362 Title 11 of the United States Code, and (h) fees and expenses incurred in
connection with any action pursuant to Sections 1129 Title 11 of the United
States Code, incurred by Bank in connection with the collection of any sums
due under this Agreement, together with interest at the Floating Rate per
annum, calculated on a basis of a year of three hundred sixty-five (365) or
three hundred sixty-six (366) days, on each such amount from the date of
notification to Borrower that the same was expended, advanced or incurred by
Bank until the date it is repaid to Bank, with the obligations under this
Section 5.12, surviving the non-assumption of this Agreement in a case
commenced under Title 11 of the United States Code or other similar law of
the United States, the State of Texas or any other jurisdiction and being
binding upon Borrower or a trustee,
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receiver or liquidator of any such party appointed in any such case.
5.13 MAINTENANCE OF TANGIBLE PROPERTY. Maintain all of Borrower's
tangible property in good repair and condition and make all necessary
replacements thereof and operate such property in a good and workmanlike
manner in accordance with standard industry practices, unless the failure to
do so would not have a material adverse effect on Borrower and its
Subsidiaries (taken as a whole) or the value of the Borrowing Base Properties.
5.14 MAINTENANCE OF INSURANCE. Continue to maintain, or cause to
be maintained, insurance with respect to the properties and business of
Borrower against such liabilities, casualties, risks and contingencies and in
such amounts as is customary in the industry, in an amount and form, and
underwritten by an insurer or insurers, as are acceptable to Bank in its sole
discretion, and furnish to Bank, at the execution of this Agreement and
annually thereafter, certificates evidencing such insurance.
5.15 INSPECTION OF TANGIBLE ASSETS/RIGHT OF AUDIT. Permit (or
cause to be permitted) any authorized representative of Bank, to visit and
inspect (at the risk of Bank and/or such representative) any tangible asset
of Borrower, and/or to audit the books and records of Borrower during normal
business hours.
5.16 PAYMENT OF NOTE AND PERFORMANCE OF OBLIGATIONS. As to
Borrower, pay the Note according to the reading, tenor and effect thereof, as
modified hereby, and do and perform every act and discharge all of the
obligations provided to be performed and discharged hereunder.
5.17 ERISA REPORTS. Promptly after the filing or receiving
thereof, copies of all reports, including annual reports, and notices which
Borrower files with or receives from the PBGC or the U.S. Department of Labor
under ERISA; and promptly after Borrower knows or has reason to know that any
Reportable Event or Prohibited Transaction has occurred with respect to any
plan or that the PBGC or Borrower has instituted or will institute
proceedings under Title IV of ERISA to terminate any plan, Borrower will
deliver to Bank a certificate of the chief financial officer of Borrower
setting forth details as to such Reportable Event or Prohibited Transaction
or plan termination and the action Borrower proposes to take with respect
thereto.
5.18 TANGIBLE NET WORTH REQUIREMENT. Borrower shall maintain a
total Tangible Net Worth of not less than $6,000,000.00, increasing by: (x)
fifty percent (50%) of net income (excluding losses) of Borrower subsequent
to September 30, 1997, and (y) one hundred percent (100%) of any increases in
shareholders' equity resulting from the sale or issuance of stock of any
Borrower subsequent to September 30, 1997.
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5.19 CASH FLOW TO DEBT SERVICE RATIO. Borrower will maintain
(calculated in accordance with GAAP) a ratio of quarterly Cash Flow to
quarterly Debt Service of not less than 1.25 to 1.0. For the purposes of
calculating this ratio:
(a) "Cash Flow" shall be defined as the sum of net income plus
depreciation and other non-cash charges less non-cash income of
Borrower, and
(b) "Debt Service" shall be defined as the sum of (i) actual
principal amounts paid by Borrower during such quarter on Indebtedness
other than in connection with this Loan; and (ii) principal amounts
required to be paid by Borrower during such quarter in connection with
this Loan.
5.20 COMPLIANCE WITH ENVIRONMENTAL LAWS. Comply in all material
respects with any and all requirements of law, including, without limitation,
Environmental Laws, (a) related to any natural or environmental resource or
media located on, above, within, in the vicinity of, related to or affected
by any Borrowing Base Properties or any other property of Borrower, or (b)
required for the performance or conduct of its operations, including, without
limitation, all permits, licenses, registrations, approvals and
authorizations, and, in this regard, comply fully and in a timely manner
with, and cause all employees, crew members, agents, contractors,
subcontractors and future lessees (pursuant to appropriate lease provisions)
of Borrower while such Persons are acting within the scope of their
relationship with Borrower, to so comply with, all requirements of law,
including, without limitation, Environmental Laws, and other requirements
with respect to the property of Borrower and the operation thereof necessary
or appropriate to enable Borrower to fulfill its obligations under all
requirements of law, including, without limitation, Environmental Laws,
applicable to the use, generation, handling, storage, treatment, transport
and disposal of any Hazardous Substances now or hereafter located or present
on or under any such property.
5.21 HAZARDOUS SUBSTANCES INDEMNIFICATION. Indemnify and hold Bank
harmless from and against any and all claims, losses, damages, liabilities,
fines, penalties, charges, administrative and judicial proceedings and
orders, judgments, remedial actions, requirements and enforcement actions of
any kind, and all costs and expenses incurred in connection therewith
(including, without limitation, attorneys' fees and expenses), arising
directly or indirectly, in whole or in part, out of (a) the presence of any
Hazardous Substances on, under or from its property, whether prior to or
during the term hereof, or (b) any activity carried on or undertaken on or
off its property, whether prior to or during the term hereof, and whether by
Borrower or any predecessor in title or any employees, agents, contractors or
subcontractors of Borrower or any predecessor in title, or any third Persons
at any time occupying or present on such property, in connection with the
handling, treatment, removal, storage, decontamination, cleanup,
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transportation or disposal of any Hazardous Substances at any time located or
present on or under such property; with the foregoing indemnity further
applying to any residual contamination on or under the property of Borrower,
or any property of any other Person, or affecting any natural resources, and
to any contamination of any property or natural resources arising in
connection with the generation, use, handling, storage, transportation or
disposal of any Hazardous Substances, irrespective of whether any of such
activities were or will be undertaken in accordance with applicable
requirements of law, including, without limitation, Environmental Laws, and
surviving satisfaction of all Indebtedness of Borrower to Bank and the
termination of this Agreement, provided, further, that the claims and other
actions of any kind against Bank which give rise to such indemnity are not
barred by the applicable statute of limitations at the time such claims or
actions are instituted and such indemnity shall not extend to any act or
omission by Bank or any Affiliate of Bank or any of Bank's employees or
agents with respect to the relevant property subsequent to Bank becoming the
owner of, taking possession of to the exclusion of Borrower or assuming
operations of any property previously owned by Borrower and with respect to
which property such claim, loss, damage, liability, fine, penalty, charge,
proceeding, order, judgment, action or requirement arises subsequent to the
acquisition of title thereto, taking possession thereof or assumption of
operations thereon by Bank or any Affiliate of Bank or any of Bank's
employees or agents. Notwithstanding anything herein to the contrary, the
provisions of this Section 5.21 shall survive any termination of this
Agreement and shall survive the payment and performance in full of all
Obligations owed by Borrower to Bank.
5.22 CHANGES IN MANAGEMENT. Notify Bank of any change in the
senior management of Borrower existing as of the date hereof.
5.23 OPERATING ACCOUNTS. Maintain all principal operating
accounts of Borrower with Bank.
ARTICLE VI. NEGATIVE COVENANTS
Without the prior written consent of Bank and so long as any part
of the principal or interest on the Note shall remain unpaid or Bank remains
obligated to make advances hereunder, Borrower and its Subsidiaries will not:
6.01 OTHER INDEBTEDNESS. Incur, create, assume or suffer to exist
any Indebtedness exceeding an aggregate of $250,000 at any time, whether by
way of loan or the issuance or sale of securities except (a) Loans hereunder,
(b) loans by Bank under other credit arrangements, (c) Indebtedness owed to
Bank by any Affiliates of Borrower, and (d) unsecured accounts payable
incurred in the ordinary course of business which are not overdue or if
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overdue, are acceptable to Bank and are being contested in good faith by
appropriate proceedings.
6.02 GUARANTY OF PAYMENT OR PERFORMANCE. Guaranty any contract or
obligation of any Person, except for any Indebtedness owed to Bank by any
Affiliates of Borrower, and except that the foregoing restriction shall not
apply to endorsements of instruments for collection in the ordinary course of
business.
6.03 LOANS, ADVANCES OR INVESTMENTS. Make or agree to make or
allow to remain outstanding any loans or advances to, or Investments in, or
purchase or otherwise acquire all or substantially all of the assets of, or
any shares of stock or similar interest in, any Person, including Affiliates
of Borrower, in amounts which exceed $100,000 in the aggregate, except
advances or extensions of credit in the form of accounts receivable incurred
in the ordinary course of business and ownership of the stock of Borrower's
Subsidiaries.
6.04 MORTGAGES OR PLEDGES OF ASSETS. Create, incur, assume or
permit to exist, any mortgage, pledge, security interest, lien or encumbrance
on any of its properties or assets (now owned or hereafter acquired), except
that the foregoing restrictions shall not apply to any matters that would
constitute or result in Permitted Encumbrances.
6.05 NATURE OF BUSINESS. Permit any material change to be made in
the character of its business as conducted as of the date hereof, or permit
any Subsidiary to permit any material change to be made in the character of
such Subsidiary's business as conducted as of the date hereof.
6.06 SALES OF ASSETS. Sell, lease, assign, transfer or otherwise
dispose of, in one or any series of related transactions, all or any part of
its assets, if such transfer is material to Borrower's operations, nor enter
into any arrangement, directly or indirectly, with any Person to sell and
rent or lease back such assets or any part thereof which are intended to be
used for substantially the same purpose or purposes as the assets sold or
transferred; PROVIDED, HOWEVER, that Bank will consent to sales of assets
representing not more than ten percent (10%) of the net present value, as
calculated by Bank in its sole discretion, of the Oil and Gas Properties that
are included in the Borrowing Base Properties at any time, subject to a
contemporaneous reduction in the Borrowing Base, in an amount determined by
Bank in its sole discretion, as the result of the removal of such Oil and Gas
Properties from the Borrowing Base Properties, and if a Loan Excess would
result from such reduction in the Borrowing Base, such Loan Excess shall be
repaid contemporaneously with the consummation of such sale.
6.07 DIVIDENDS AND DISTRIBUTIONS. Declare or pay any dividend
from Borrower or make any distribution on, or purchase, redeem or otherwise
acquire for value, any interest in Borrower or its Subsidiaries.
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6.08 PAYMENT OF ACCOUNTS PAYABLE. Allow any account payable to
remain unpaid after its due date, except such as are overdue that are
acceptable to Bank, are being contested in good faith, and as to which
adequate provision or accrual has been made.
6.09 CANCELLATION OF INSURANCE. Allow any insurance policy
required to be carried hereunder to be terminated or lapse or expire without
provision for adequate renewal thereof.
6.10 CHANGES IN BUSINESS STRUCTURE. Consolidate or merge with, or
purchase (for cash or securities) all or substantially all of the assets or
all or any part of the capital stock of any corporation, firm, association or
enterprise, or allow any such entity to be merged into Borrower, nor shall
Borrower dissolve or liquidate.
6.11 TRANSACTIONS WITH AFFILIATES. Enter into any transaction
between or among Borrower and/or any Subsidiaries with any Affiliate on terms
that are less favorable than could be obtained in an arms-length transaction
with a Person that is not an Affiliate.
6.12 HEDGING TRANSACTIONS. Enter into any Hedging Transactions
other than Permitted Hedging Transactions.
6.13 NEW SUBSIDIARIES. Form or acquire any new Subsidiaries not
in existence and owned by Borrower as of the date of this Agreement.
ARTICLE VII. EVENTS OF DEFAULT
7.01 ENUMERATION OF EVENTS OF DEFAULT. Any of the following
events shall be considered an Event of Default as that term is used herein:
(a) Default shall be made by Borrower in the payment of any
installment of principal on the Note,
(b) Default shall be made by Borrower in the payment of any
installment of interest on the Note, or any fees or other monetary
obligation payable hereunder, and such default shall remain unremedied
in excess of five (5) days after notice being given by Bank,
(c) Default shall be made by Borrower in the due observance or
performance of any affirmative covenant required in this Agreement, the
Note, or any Security Instrument, and such default shall remain
unremedied for in excess of thirty (30) days after the earlier of: (i)
such default becoming known to Borrower, or (ii) notice being given by
Bank.
(d) Default shall be made by Borrower in the due observance or
performance of any negative covenant required in this Agreement, the
Note, or any Security Instruments.
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(e) Any representation or warranty herein made by Borrower proves to
have been untrue in any material respect, or any representation, statement
(including Financial Statements), certificate or data furnished or made by
Borrower to Bank in connection herewith proves to have been untrue in any
material respect as of the date the facts therein set forth were stated or
certified;
(f) Default shall be made by Borrower (as principal or guarantor or
other surety) in payment or performance of any bond, debenture, note or
other evidence of Indebtedness for borrowed money, or any other credit
agreement, loan agreement, indenture, promissory note or similar agreement
or instrument executed in connection with any of the foregoing in excess
of $25,000 in the aggregate; and such default shall remain unremedied for
in excess of the period of grace, if any, with respect thereto, with the
effect of accelerating the maturity of any such Indebtedness;
(g) Borrower applies for or consents to the appointment of a
receiver, trustee or liquidator of it or all or a substantial part of its
assets, or (ii) files a voluntary petition commencing a case under Title
11 of the United States Code, seeking liquidation, reorganization or
rearrangement or taking advantage of any bankruptcy, insolvency, debtor's
relief or other similar law of the United States, the State of Texas or any
other jurisdiction, or (iii) makes a general assignment for the benefit of
creditors, or (iv) is unable, or admits in writing its inability to pay its
debts generally as they become due, or (v) files an answer admitting the
material allegations of a petition filed against it in any case commenced
under Title 11 of the United States Code or any reorganization, insolvency,
conservatorship or similar proceeding under any bankruptcy, insolvency,
debtor's relief or other similar law of the United States, the State of
Texas or any other jurisdiction;
(h) An order, judgment or decree shall be entered against Borrower by
any court of competent jurisdiction or by any other duly authorized
authority, on the petition of a creditor or otherwise, granting relief
under Title 11 of the United States Code or under any bankruptcy,
insolvency, debtor's relief or other similar law of the United States, the
State of Texas or any other jurisdiction, approving a petition seeking
reorganization or an arrangement of its debts or appointing a receiver,
trustee, conservator, custodian or liquidator of it or all or any
substantial part of its assets, and the failure to have such order,
judgment or decree dismissed within ten (10) days of its entry;
(i) Borrower has concealed, removed, or permitted to be concealed or
removed, any part of its property, with intent to hinder, delay or defraud
its creditors or any of them; or has made or suffered a transfer of any of
its property which may be fraudulent under any bankruptcy, fraudulent
conveyance or
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similar law; or has made any transfer of its property to or
for the benefit of a creditor at a time when other creditors similarly
situated have not been paid; or has suffered or permitted, while insolvent,
any creditor to obtain a lien upon any of its property through legal
proceedings or distraint which is not vacated within thirty (30) days from
the date thereof.
7.02 RIGHTS UPON EVENT OF DEFAULT. Upon the happening of an Event
of Default specified in Subsections 7.01 (g) or (h), the entire aggregate
principal amount of all Indebtedness then outstanding hereunder and the
interest accrued thereon shall automatically become immediately due and
payable, and upon the happening and continuation of any other Event of
Default, Bank may declare the entire aggregate principal amount of all
Indebtedness then outstanding hereunder and the interest accrued thereon
immediately due and payable. In either case, the entire principal and
interest shall thereupon become immediately due and payable, without notice
(including, without limitation, notice of intent to accelerate maturity or
notice of acceleration of maturity) and without presentment, demand, protest,
notice of protest or other notice of default or dishonor of any kind, except
as provided to the contrary elsewhere herein, all of which are hereby
expressly waived by Borrower.
Upon the happening and continuation of any Event of Default, all
obligations (if any) of Bank hereunder shall immediately cease and terminate
unless and until Bank shall reinstate the same in writing.
7.03 RIGHTS UPON UNMATURED EVENT OF DEFAULT. Upon the happening
and during the continuation of an Unmatured Event of Default, all obligations
of Bank to Borrower hereunder shall, at the option of Bank, be suspended.
ARTICLE VIII. MISCELLANEOUS
8.01 SECURITY INTERESTS IN DEPOSITS AND RIGHT OF OFFSET OR
BANKER'S LIEN. Borrower hereby transfers, assigns and pledges to Bank and/or
grants to Bank a security interest (as security for the payment and/or
performance of the obligations of Borrower under this Agreement and the Note,
with such interest of Bank to be retransferred, reassigned and/or released by
Bank at the expense of Borrower upon payment in full and/or complete
performance by Borrower of all such obligations) and the right, exercisable
at such time as any obligation hereunder shall mature, whether by
acceleration of maturity or otherwise of offset or banker's lien against all
funds or other property of Borrower now or hereafter or from time to time on
deposit with or in the possession of Bank, including, without limitation, all
certificates of deposit and other depository accounts.
8.02 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. All
representations and warranties of Borrower and all covenants and agreements
herein made shall survive the execution
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and delivery of the Note and this Agreement and shall remain in force and
effect so long as any debt is outstanding under the Note, or any renewal or
extension of this Agreement or the Note, or Bank remains obligated to make
advances hereunder.
8.03 NOTICES AND OTHER COMMUNICATIONS. Notices, requests and
communications hereunder shall be in writing and shall be sufficient in all
respects if delivered to the relevant address indicated below (including
delivery by registered or certified United States mail, telex, telegram or
hand):
(a) If to Bank:
COMPASS BANK
24 Greenway Plaza, 14th Floor
Houston, Texas 77046
Attention: Energy Lending
Fax: (713) 968-8292
(b) If to Borrower:
MIDLAND RESOURCES, INC.
616 FM 1960 West, Suite 600
Houston, Texas 77090-3027
Attention: D. H. Warley, III
Fax: (281) 580-1051
Any party may, by proper written notice hereunder to the other,
change the individuals or addresses to which such notices to it shall
thereafter be sent.
8.04 PARTIES IN INTEREST. All covenants and agreements herein
contained by or on behalf of Borrower shall be binding upon Borrower and its
successors and assigns and inure to the benefit of Bank and its successors
and assigns.
8.05 RENEWALS AND EXTENSIONS. All provisions of this Agreement
relating to the Note shall apply with equal force and effect to each and all
promissory notes hereafter executed which in whole or in part represent a
renewal, extension, amendment, modification or rearrangement of any part of
the Indebtedness originally represented by the Note.
8.06 NO WAIVER BY BANK. No course of dealing on the part of Bank,
its officers or employees, nor any failure or delay by Bank with respect to
exercising any of its rights, powers or privileges under this Agreement, the
Note, the Security Instruments or any other instrument referred to herein or
executed in connection with the Note shall operate as a waiver thereof. The
rights and remedies of Bank under this Agreement, the Note, the Security
Instruments or any other instrument referred to herein or executed in
connection with the Note shall be cumulative and the exercise or partial
exercise of any such right or remedy shall not preclude the exercise of any
other right or remedy. In the event that Borrower is unable to satisfy any
covenant, warranty or
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condition herein, no advance of loan proceeds by Bank shall have the effect
of precluding Bank from thereafter declaring any such continuing inability to
be an Event of Default as hereinabove provided.
8.07 INDEMNIFICATION. BORROWER HEREBY RELEASES AND AGREES TO
INDEMNIFY AND HOLD BANK AND ITS OFFICERS, EMPLOYEES, DIRECTORS, AGENTS AND
ATTORNEYS (COLLECTIVELY THE "BANK PARTIES") HARMLESS, FROM AND AGAINST ALL
CLAIMS, DAMAGES, LIABILITIES AND EXPENSES, KNOWN OR UNKNOWN, ACCRUED AND
UNACCRUED, INCLUDING ANY OF THE FOREGOING ALLEGED TO HAVE RESULTED FROM
NEGLIGENCE OF ANY OF THE BANK PARTIES, UNLESS ATTRIBUTABLE TO BANK PARTIES'
OWN GROSS NEGLIGENCE OR WILFUL MISCONDUCT, THAT MAY NOW OR HEREAFTER BE
ASSERTED AGAINST ANY OF BANK PARTIES IN CONNECTION WITH OR ARISING OUT OF ANY
INVESTIGATION, LITIGATION OR PROCEEDING DIRECTLY OR INDIRECTLY RELATING TO OR
ARISING OUT OF ANY OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT.
8.08 GOVERNING LAW. THIS AGREEMENT AND THE NOTE SHALL BE DEEMED
TO BE CONTRACTS MADE UNDER AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND
GOVERNED BY THE LAWS OF THE STATE OF TEXAS.
8.09 INCORPORATION OF EXHIBITS. The Exhibits attached to this
Agreement are incorporated herein for all purposes and shall be considered a
part of this Agreement.
8.10 SURVIVAL UPON UNENFORCEABILITY. In the event any one or more
of the provisions contained in this Agreement, the Note, the Security
Instruments or in any other instrument referred to herein or executed in
connection with the Note shall, for any reason, be held to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision hereof or of any other
instrument referred to herein or executed in connection herewith.
8.11 RIGHTS OF THIRD PARTIES. All provisions herein are imposed
solely and exclusively for the benefit of Bank and Borrower and no other
Person shall have standing to require satisfaction of such provisions in
accordance with their terms or be entitled to assume that Bank will refuse to
make advances in the absence of strict compliance with any or all thereof and
any or all of such provisions may be freely waived in whole or in part by
Bank at any time if in its sole discretion it deems it advisable to do so.
8.12 AMENDMENTS OR MODIFICATIONS OF THIS AGREEMENT. Neither this
Agreement nor any provision hereof may be changed, waived, discharged or
terminated orally, but only by an instrument in writing signed by the party
against whom enforcement of the change, waiver, discharge or termination is
sought.
8.13 AGREEMENT CONSTRUED AS AN ENTIRETY. This Agreement, for
convenience only, has been divided into Articles and Sections and it is
understood that the rights, powers, privileges, duties and other legal
relations of the parties hereto shall be determined from this Agreement as an
entirety and without regard to
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the aforesaid division into Articles and Sections and without regard to
headings prefixed to said Articles or Sections.
8.14 NUMBER AND GENDER. Whenever the context requires, reference
herein made to the single number shall be understood to include the plural
and likewise the plural shall be understood to include the singular. Words
denoting sex shall be construed to include the masculine, feminine, and
neuter, when such construction is appropriate, and specific enumeration shall
not exclude the general, but shall be construed as cumulative.
8.15 AGREEMENT SUPERSEDES ALL PRIOR AGREEMENTS. THIS AGREEMENT,
TOGETHER WITH THE NOTE AND THE SECURITY INSTRUMENTS, CONSTRUED TOGETHER WITH
THE REVOLVING CREDIT AGREEMENT AND ALL INSTRUMENTS EXECUTED PURSUANT THERETO,
REPRESENT, COLLECTIVELY, THE FINAL AGREEMENT BETWEEN THE PARTIES HERETO WITH
RESPECT TO THE SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE
OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES AND
SHALL SUPERSEDE ANY PRIOR AGREEMENT BETWEEN THE PARTIES HERETO, WHETHER
WRITTEN OR ORAL, RELATING TO THE SUBJECT MATTER HEREOF. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
8.16 CONTROLLING PROVISION UPON CONFLICT. In the event of a
conflict between the provisions of this Agreement and those of the Note, the
Security Instruments or any other instrument referred to herein or executed
in connection with the Note, the provisions of this Agreement shall control.
8.17 TIME, PLACE AND METHOD OF PAYMENTS. All payments required
pursuant to this Agreement or the Note shall be made in immediately available
funds; shall be deemed received by Bank on the next Business Day following
receipt if such receipt is after 3:00 p.m., on any Business Day, and shall be
made at the principal banking quarters of Bank.
8.18 COUNTERPART EXECUTION. This Agreement may be executed as one
instrument signed by all parties or in separate counterparts hereof, each of
which counterparts shall be considered an original and all of which shall be
deemed to be one instrument, and any signed counterpart shall be deemed
delivered by the party signing it if sent to any other party hereto by
electronic facsimile transmission.
8.19 AMENDED, RESTATED AND COMBINED AGREEMENT. This Agreement
amends and restates the First Union Loan Agreement, as such has been
heretofore amended. All Security Instruments previously executed pursuant to
the First Union Loan Agreement, as amended, shall continue to secure all
indebtedness and obligations evidenced by and/or arising under this
Agreement, the Note, and the other Loan Documents executed pursuant hereto.
Upon the Closing, the Guarantors, as defined in the First Union Loan
Agreement, shall thereupon be released from their respective guarantees,
although certain of such Guarantors have become Borrowers hereunder, and the
Security Instruments that such Guarantors have heretofore executed
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securing such guarantees shall continue in force and effect, in order to
secure Borrower's Indebtedness to Bank hereunder.
IN WITNESS WHEREOF, this Agreement is executed as of the date first
above written.
BORROWER:
MIDLAND RESOURCES, INC.
By: ________________________________
D. H. Warley, III
President
MIDLAND RESOURCES OPERATING
COMPANY, INC.
By: ________________________________
D. H. Warley, III
President
SUMMIT PETROLEUM CORPORATION
By: ________________________________
D. H. Warley, III
President
BANK:
COMPASS BANK
By: ________________________________
Kathleen J. Bowen
Vice President
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SCHEDULE 1.01(A)
BORROWING BASE PROPERTIES
This Schedule 1.01(a) sets forth the description of the initial Borrowing
Base Properties covered by the Agreement to which this Schedule 1.01(a) is
attached. All of the terms defined in the Agreement are used in this Schedule
1.01(a) with the same meanings given therein.
The Borrowing Base Properties include:
(a) All of Borrower's right, title and interest in and to the oil, gas
and mineral leases described herein and/or lands described in and subject to
such oil, gas and mineral leases (regardless, as to such leases and/or lands,
of any surface acreage and/or depth limitations set forth in any description
of any of such oil, gas and mineral leases), and all of Borrower's right,
title and interest in and to any of the oil, gas and minerals in, on or under
the lands, if any, described on this Schedule 1.01(a), including, without
limitation, all contractual rights, fee interests, leasehold interests,
overriding royalty interests, non-participating royalty interests, mineral
interests, production payments, net profits interests, or any other interest
measured by or payable out of production of oil, gas or other minerals from
the oil, gas and mineral leases and/or lands described herein; and
(b) All of the foregoing interests of Borrower as such interests may be
enlarged by the discharge of any payments out of production or by the removal
of any charges or encumbrances together with Borrower's interests in, to and
under or derived from all renewals and extensions of any oil, gas and mineral
leases described herein, it being specifically intended hereby that any new
oil and gas lease (i) in which an interest is acquired by Borrower after the
termination or expiration of any oil and gas lease, the interests of Borrower
in, to and under or derived from which are subject to the lien and security
interest hereof, and (ii) that covers all or any part of the property
described in and covered by such terminated or expired leases, shall, to the
extent, and only to the extent such new oil and gas lease may cover such
property, be considered a renewal or extension of such terminated or expired
lease; and
(c) All right, title and interest of Borrower in, to and under or
derived from any operating, farmout, and bidding agreements, assignments and
subleases, whether or not described in this Schedule 1.01(a), to the extent,
and only to the extent, that such agreements, assignments and subleases (i)
cover or include any of Borrower's present right, title and interest in and
to the leases and/or lands described in this Schedule 1.01(a), or (ii) cover
or include any other undivided interests now or hereafter held by Borrower
in, to and under the described leases and/or lands, including, without
limitation, any future operating, farmout and bidding agreements,
assignments, subleases and pooling, unitization and communitization
agreements and the units created
Page 1.01(a)-1
<PAGE>
thereby (including, without limitation all units formed under orders,
regulations, rules or other official acts of any governmental body or agency
having jurisdiction) to the extent and only to the extent that such
agreements, assignments, subleases, or units cover or include the described
leases and/or lands; and
(d) All right, title, and interest of Borrower in, to and under or
derived from all presently existing and future advance payment agreements,
oil, casinghead gas and gas sales, exchange, and processing contracts and
agreements including, without limitation, those contracts and agreements that
are described on this Schedule 1.01(a) to the extent, and only to the extent,
those contracts and agreements cover or include the described leases and/or
lands herein; and
(e) All right, title and interest of Borrower in, to and under or
derived from all existing and future permits, licenses, easements and similar
rights and privileges that relate to or are appurtenant to any of the
described leases and/or lands.
Notwithstanding the intention of this Agreement to cover all of the
right, title and interest of Borrower in and to the described leases and/or
lands, Borrower hereby specifically warrants and represents that the
interests covered by this Schedule 1.01(a) are not greater than the working
interest nor less than the net revenue interest, overriding royalty interest,
net profit interest, production payment interest or other interest payable
out of or measured by production set forth in connection with each oil and
gas well described in this Schedule 1.01(a). In the event Borrower owns any
other or greater interest, such additional interest shall also be covered by
and included in this Agreement. The designation "Working Interest" or "W.I."
means an interest owned in an oil, gas, and mineral lease that determines the
cost bearing percentage of the owner of such interest. The designation "Net
Revenue Interest" or "NRI" means net revenue interest, or that portion of the
production attributable to the owner of a working interest after deduction
for all royalty burdens, overriding royalty burdens, or other burdens on
production, except severance, production, windfall profits and other similar
taxes. The designation "Overriding Royalty Interest" or "ORRI" means an
interest in production which is free of any obligation for the expense of
exploration, development and production, bearing only its pro rata share of
severance, production, windfall profits and other similar taxes.
Page 1.01(a)-2
<PAGE>
PROPERTY DESCRIPTION
SUBJECT LEASES
LESSOR LESSEE LEASE DATE BOOK/PAGE
[to come]
SUBJECT WELLS
<TABLE>
<CAPTION>
______________________________________________________________________________
Working Net Revenue
Wells Interest Interest
______________________________________________________________________________
<S> <C> <C> <C>
[to come]
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
</TABLE>
Page 1.01(a)-3
<PAGE>
Page 1.01(a)-4
<PAGE>
SCHEDULE 3.16
FORM OF OPINION OF BORROWER'S COUNSEL
<PAGE>
SCHEDULE 4.09
PURCHASERS OF PRODUCTION
See pages 4.09-2 and 4.09-3 attached hereto.
4.09-1
<PAGE>
SCHEDULE 4.11
LITIGATION
None
4.09-1
<PAGE>
EXHIBIT "A"
COMPLIANCE CERTIFICATE
[bracketed information need not be included
in Certificate delivered at Closing]
I, D. H. Warley, III, the President of MIDLAND RESOURCES, INC. (the
"Company"), pursuant to Section 5.05 of the Loan Agreement dated as of
December 17, 1997, by and among COMPASS BANK, ("Bank"), the Company and
certain co-borrowers that are Subsidiaries of the Company (the "Agreement")
do hereby certify, as of the date hereof, that to my knowledge:
1. No Event of Default (as defined in the Agreement) has occurred and is
continuing, and no Unmatured Event of Default (as defined in the
Agreement) has occurred and is continuing[, except for the following
events (include actions taken to cure such situations):
____________________________________________________________
____________________________________________________________
____________________________________________________________
____________________________________________________________
____________________________________________________________
__________________________________________________________];
2. No material adverse change has occurred in the business prospects,
financial condition, or the results of operations of the Company
since the date of the previous Financial Statements (as defined in
the Agreement) provided to Bank[, except for the following changes
(include actions taken to cure such situations):
____________________________________________________________
__________________________________________________________];
3. Each of the representations and warranties of the Company contained
in Article IV of the Agreement is true and correct in all respects[,
except for the following matters (include actions taken to cure such
situations):
____________________________________________________________
_____________________________________________________]; and
[4. The consolidated financial condition of the Company and its
Subsidiaries for the quarter ending __________ is as follows:
A-1
<PAGE>
<TABLE>
<CAPTION>
DATE OR REQUIRED ACTUAL
TIME RATIO OR RATIO OR
FINANCIAL COVENANT PERIOD AMOUNT AMOUNT
------------------ ------ ------ ------
<S> <C> <C> <C>
(a) Tangible Net Worth At all times not < $6,000,000.00 __________
plus 50% of net
income (excluding
losses) subsequent
to 09/30/97, plus
100% of any increases
in shareholders' equity
resulting from the sale
or issuance of stock
of any Borrower
subsequent to 09/30/97
(b) Ratio of quarterly Each quarter not < 1.25:1.00 __________
Cash Flow to beginning
quarterly Debt with the
Service quarter ending
12/31/97
(c) Additional At all times not > $250,000.00 _________]
Debt
</TABLE>
This certificate is executed this ______ day of ____, 199_.
MIDLAND RESOURCES, INC.
By: ____________________________________
D. H. Warley, III
President
A-2
<PAGE>
EXHIBIT "B"
NOTE
$30,000,000.00 Houston, Texas December 17, 1997
On the dates hereinafter prescribed, for value received, MIDLAND
RESOURCES, INC., a Texas corporation, MIDLAND RESOURCES OPERATING COMPANY,
INC., a Texas corporation, and SUMMIT PETROLEUM CORPORATION, a Colorado
corporation (the "Borrower"), having an address at 616 FM 1960 West, Suite
600, Houston, Texas, 77090-3027, promises to pay to the order of COMPASS BANK
(herein called "Bank"), at its principal offices at 24 Greenway Plaza, 14th
Floor, Houston, Harris County, Texas 77046, (i) the principal amount of
THIRTY MILLION AND NO/100 DOLLARS ($30,000,000.00) or the principal amount
advanced pursuant to the terms of the Loan Agreement (defined herein) as of
the date of maturity hereof, whether by acceleration or otherwise, whichever
may be the lesser, and (ii) interest on the principal balance from time to
time advanced and remaining unpaid from the date of the advance until
maturity at a rate of interest equal to lesser of (a) the "Interest Rate" (as
defined in the Loan Agreement), or (b) the Maximum Rate (as hereinafter
defined). Any increase or decrease in interest rate resulting from a change
in the Maximum Rate shall be effective immediately when such change becomes
effective, without notice to Borrower, unless Applicable Law (as defined
below) requires that such increase or decrease not be effective until a later
time, in which event such increase or decrease shall be effective at the
earliest time permitted under the provisions of such law.
Notwithstanding the foregoing, if during any period the Interest Rate
exceeds the Maximum Rate, the rate of interest in effect on this Note shall
be limited to the Maximum Rate during each such period, but at all times
thereafter the rate of interest in effect on this Note shall be the Maximum
Rate until the total amount of interest accrued on this Note equals the total
amount of interest which would have accrued hereon if the Floating Rate had
at all times been in effect.
All payments on this Note shall be applied first to accrued interest and
the balance, if any, to principal.
This Note is a revolving credit note and it is contemplated that by
reason of prepayments hereon there may be times when no indebtedness is owing
hereunder; but notwithstanding such occurrence, this Note shall remain valid
and in full force and effect as to each principal advance made hereunder
subsequent to each such occurrence. Each principal advance and each payment
hereof made pursuant to this Note shall be reflected by Bank's records and
the aggregate unpaid amounts reflected by such records shall constitute
rebuttably presumptive evidence of the principal and unpaid, accrued interest
remaining outstanding on this Note.
"Maximum Rate" means the Maximum Rate of non-usurious interest permitted
from day to day by applicable law, including as to Article 5069-1.04, Vernon's
Texas Revised Civil Statutes Annotated (and as the same may be incorporated by
--------------
INITIAL FOR
IDENTIFICATION
B-1
<PAGE>
reference in other Texas statutes), but otherwise without limitation, that
rate based upon the "indicated weekly rate ceiling."
"Applicable Law" means that law in effect from time to time and
applicable to this Note which lawfully permits the charging and collection of
the highest permissible lawful, non-usurious rate of interest on this Note,
including laws of the State of Texas and laws of the United States of
America. It is intended that Article 1.04, Title 79, Revised Civil Statutes
of Texas, 1927, as amended (Article 5069-1.04, as amended, Vernon's Texas
Civil Statutes) shall be included in the laws of the State of Texas in
determining Applicable Law; and for the purpose of applying said Article 1.04
to this Note, the interest ceiling applicable to this Note under said Article
1.04 shall be the indicated weekly rate ceiling from time to time in effect.
Borrower and Bank hereby agree that Chapter 15 of Subtitle 3, Title 79,
Revised Civil Statutes of Texas, 1925, as amended, shall not apply to this
Note or the loan transaction evidenced by, and referenced in, the Loan
Agreement (hereinafter defined) in any manner, including without limitation,
to any account or arrangement evidenced or created by, or provided for in,
this Note.
"Business Day" shall mean any day on which banks are open for general
banking business in the State of Texas, other than a Saturday, a Sunday, a
legal holiday or any other day on which banks in the State of Texas are
required or authorized by law or executive order to close.
The principal sum of this Note, after giving credit for unadvanced
principal, if any, remaining at final maturity, shall be due and payable on
or before the Maturity Date, as prescribed in the Loan Agreement defined
below; interest to accrue upon the principal sum from time to time owing and
unpaid hereunder shall be due and payable in monthly installments, as it
accrues, with the first such monthly installment of interest hereon being due
and payable on the first day of February 1998, and with such subsequent
installments of interest being due and payable on the first day of each
succeeding month thereafter; provided, however, the final installment of
interest hereunder shall be due and payable not later than the maturity of
the principal sum hereof, howsoever such maturity may be brought about.
When the first (1st) day of a calendar month falls upon a Saturday,
Sunday or legal holiday, the payment of interest and principal, if any, due
upon such date shall be due and payable upon the next succeeding Business Day.
In no event shall the aggregate of the interest on this Note, plus any
other amounts paid in connection with the loan evidenced by this Note which
would under Applicable Law be deemed "interest," ever exceed the maximum
amount of interest which, under Applicable Law, could be lawfully charged on
this Note. Bank and Borrower specifically intend and agree to limit
contractually the interest payable on this Note to not more than an amount
determined at the Maximum Rate. Therefore, none of the terms of this Note or
any other instruments pertaining to or securing this Note shall ever be
construed to create a contract to pay interest at a rate in excess of the
Maximum Rate, and neither Borrower nor any other party liable herefor shall
ever be liable for interest in excess of that determined at the Maximum Rate,
and the provisions of this paragraph shall
--------------
INITIAL FOR
IDENTIFICATION
B-2
<PAGE>
control over all provisions of this Note or of any other instruments
pertaining to or securing this Note. If any amount of interest taken or
received by Bank shall be in excess of the maximum amount of interest which,
under Applicable Law, could lawfully have been collected on this Note, then
the excess shall be deemed to have been the result of a mathematical error by
the parties hereto and shall be refunded promptly to Borrower. All amounts
paid or agreed to be paid in connection with the indebtedness evidenced by
this Note which would under Applicable Law be deemed "Interest" shall, to the
extent permitted by Applicable Law, be amortized, prorated, allocated and
spread throughout the full term of this Note.
This Note is secured by all security agreements, collateral assignments,
mortgages and lien instruments executed by Borrower (or by any other party)
in favor of Bank, including those executed simultaneously herewith, those
executed heretofore and those hereafter executed, and including specifically
and without limitation the "Security Instruments" described and defined in
the Loan Agreement of even date between Borrower and Bank (the "Loan
Agreement").
This Note is the Revolving Note issued pursuant to the Loan Agreement.
It amends, restates, rearranges and extends that certain promissory note
dated October 31, 1996 in the face amount of $20,000,000.00, executed by
Midland Resources, Inc. and payable to the order of First Union Bank of North
Carolina ("First Union"), which has been assigned to Bank by First Union
pursuant to an Assignment of Notes and Liens of even date herewith. All
liens and security interests held by or benefiting First Union to secure the
indebtedness evidenced by such prior note have been assigned to Bank, and
shall continue to secure the indebtedness evidenced by this Note. Reference
is hereby made to the Loan Agreement for a statement of the rights and
obligations of the holder of this Note and the duties and obligations of
Borrower in relation thereto; but neither this reference to the Loan
Agreement nor any provisions thereof shall affect or impair the absolute and
unconditional obligation of Borrower to pay any outstanding and unpaid
principal of and interest on this Note when due, in accordance with the terms
of the Loan Agreement. Each advance and each payment made pursuant to this
Note shall be reflected by notations made by Bank on its records and the
aggregate unpaid amounts reflected by the notations on the records of Bank
shall be deemed rebuttably presumptive evidence of the principal amount owing
under this Note.
In the event of default in the payment when due of any of the principal
of or any interest on this Note, or in the event of default under the terms
of the Loan Agreement or any of the Security Instruments, or if any event
occurs or condition exists which authorizes the acceleration of the maturity
of this Note under any agreement made by Borrower, Bank (or other holder of
this Note) may, at its option, without presentment or demand or any notice to
Borrower or any other person liable herefor, declare the unpaid principal
balance of and accrued interest on this Note to be immediately due and
payable.
If this Note is collected by suit or through the Probate or Bankruptcy
Court, or any judicial proceeding, or if this Note is not paid at maturity,
however such maturity may be brought about, and is placed in the hands of an
attorney for collection, then Borrower agrees to pay reasonable attorneys' fees,
--------------
INITIAL FOR
IDENTIFICATION
B-3
<PAGE>
not to exceed 10% of the full amount of principal and interest owing hereon
at the time this Note is placed in the hands of an attorney.
Borrower and all sureties, endorsers and guarantors of this Note waive
demand, presentment for payment, notice of nonpayment, protest, notice of
protest, notice of intent to accelerate maturity, notice of acceleration of
maturity, and all other notices, filing of suit and diligence in collecting
this Note or enforcing any of the security herefor, and agree to any
substitution, exchange or release of any such security or the release of any
party primarily or secondarily liable hereon and further agrees that it will
not be necessary for Bank, in order to enforce payment of this Note by them,
to first institute suit or exhaust its remedies against any Borrower or
others liable herefor, or to enforce its rights against any security herefor,
and consent to any one or more extensions or postponements of time of payment
of this Note on any terms or any other indulgences with respect hereto,
without notice thereof to any of them. Bank may transfer this Note, and the
rights and privileges of Bank under this Note shall inure to the benefit of
Bank's representatives, successors or assigns.
Executed this 17th day of December 1997.
MIDLAND RESOURCES, INC.
By: _____________________________
B-4
<PAGE>
MIDLAND RESOURCES OPERATING COMPANY, INC.
By: _____________________________
SUMMIT PETROLEUM CORPORATION
By: _____________________________
B-5
<PAGE>
EXHIBIT "C"
SECURITY INSTRUMENTS
The Security Instruments securing the obligations of Borrower and
Indebtedness to Bank shall include the following, each in form and substance
satisfactory to Bank:
1. PRIOR SECURITY INSTRUMENTS all Security Instruments executed pursuant
to, and as defined in, the First Union Loan Agreement shall continue in force
and effect to secure the Indebtedness and Obligations of Borrower arising
pursuant to this Agreement, with such amendments thereof to be executed by
Borrower as are necessary or appropriate from time to time, in the good faith
opinion of Bank, to evidence the fact that Bank is successor in interest to
the rights of First Union under such Security Instruments, and that such
Security Instruments continue to relate to all Indebtedness and Obligations
arising under this Agreement.
2. DEED OF TRUST, MORTGAGE, SECURITY AGREEMENT, AND ASSIGNMENT OF
PRODUCTION covering Borrower's interest in all Borrowing Base Properties, the
personal property and equipment therein and thereon, the production of oil,
gas, and other minerals therefrom, and all of the products and proceeds
thereof.
3. SECURITY AGREEMENT granting Bank a first priority security interest in
all of Borrower's accounts, equipment, machinery, fixtures, inventory,
chattel paper, documents, contracts, instruments and general intangibles
relating to or arising out of the Borrowing Base Properties, whether now
owned or hereafter acquired, and all products and proceeds thereof.
4. FINANCING STATEMENTS in connection with the Security Instruments
described in the preceding paragraph, in form and number satisfactory to Bank
as Bank, from to time, may specify (including additional or supplemental
financing statements, amendments thereto, and continuation statements
thereof).
5. LETTERS IN LIEU OF TRANSFER ORDERS covering Borrower's interest in oil
and gas produced from any additional Borrowing Base Properties and in the
proceeds from the sale thereof, pursuant to the assignment of production
included in the Deeds of Trust referenced above.
6. OTHER SECURITY INSTRUMENTS. Such other instruments as are necessary or
appropriate from time to time, in the good faith opinion of Bank, to perfect to
the satisfaction of Bank Bank's liens, security interests, and other rights in
the Borrowing Base Properties and in any and all other collateral covered by or
described in (or, as evidenced by the Agreement, intended to have
C-1
<PAGE>
been covered by) any of the other Security Instruments described above.
POWER OF ATTORNEY. To the fullest extent permitted by Law, Borrower hereby
appoints Bank as its attorney-in-fact (without requiring Bank to act as such)
to execute any Security Instrument in the name of Borrower, and to perform
all other acts that Bank deems appropriate to perfect and continue its liens,
security interests, and other rights in, and to protect and preserve, the
Borrowing Base Properties and other collateral covered by or described in
(or, as evidenced by the Agreement, intended to have been covered by) any of
the Security Instruments described above, but only to the extent required of
Borrower under the terms of this Agreement. This power of attorney is
coupled with an interest and shall be irrevocable until the full and final
payment and performance of all of Borrower's Indebtedness and Obligations to
Bank.
C-2
<PAGE>
EXHIBIT "D"
FORM OF REQUEST FOR ADVANCE, CONTINUATION OR CONVERSION
COMPASS BANK
24 GREENWAY PLAZA, 14th Floor
HOUSTON, TEXAS 77046
Attention: Energy Lending Group
RE: Revolving Credit Agreement dated as of December 17, 1997, by and
between MIDLAND RESOURCES, INC., MIDLAND RESOURCES OPERATING
COMPANY, INC. and SUMMIT PETROLEUM CORPORATION and Compass Bank
(as amended, restated, or supplemented from time to time, the
"CREDIT AGREEMENT")
Ladies and Gentlemen:
Pursuant to the Credit Agreement, the Borrower hereby makes the
requests indicated below:
/ / 1. Loans:
(a) Amount of new Loan: $_________________
(b) Requested funding date: ________________, 19__
(c) $_______________ of such Loan is to be an Index Rate Loan;
$_______________ of such Loan is to be a LIBOR Loan.
Requested Interest Period for LIBOR Loan:_______ months.
/ / 2. Continuation or conversion of LIBOR Loan maturing on _________, 19__:
(a) Amount to be continued as a LIBOR Loan is $_________________, with an
Interest Period of ____ months;
(b) Amount to be converted to an Index Rate Loan is $________________.
/ / 3. Conversion of Index Rate Loan:
(a) Requested conversion date: ________________, 19__.
(b) Amount to be converted to a LIBOR Loan is $____________, with an
Interest Period of _______ months.
The undersigned certifies that he is the President of Midland
Resources, Inc., has obtained all consents necessary, and as such he is
authorized to execute this request 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.
Each capitalized term used but not defined herein shall have the
meaning assigned to such term in the Credit Agreement.
<PAGE>
Very truly yours,
MIDLAND RESOURCES, INC.
By: ______________________________
D. H. Warley, III
President
E-1
<PAGE>
FIRST AMENDMENT TO
SECURED REDUCING REVOLVING CREDIT AGREEMENT
DATED DECEMBER 17, 1997
BY AND AMONG
MIDLAND RESOURCES, INC.,
MIDLAND RESOURCES OPERATING COMPANY, INC.,
SUMMIT PETROLEUM CORPORATION
AND
COMPASS BANK
This First Amendment ("FIRST AMENDMENT") by and between MIDLAND
RESOURCES, INC. ("MRI"), a Texas corporation, MIDLAND RESOURCES OPERATING
COMPANY, INC., a Texas corporation, and SUMMIT PETROLEUM CORPORATION, a
Colorado corporation (individually and collectively, "BORROWER") and COMPASS
BANK, a Texas state chartered bank ("BANK") is executed on this 26th day of
March, 1998, to be effective, however, as of December 31, 1997.
W I T N E S S E T H:
Borrower and Bank entered into a Secured Reducing Revolving Credit
Agreement dated December 17, 1997 (the "Credit Agreement").
Borrower has requested that Bank amend the definition of Tangible
Net Worth, as set forth in the Credit Agreement, and Bank is willing to enter
into the requested amendment, subject to and conditioned upon the provisions
set forth herein.
NOW, THEREFORE, in consideration of the promises herein contained,
and each intending to be legally bound hereby, the parties agree as follows:
I. AMENDMENTS TO CREDIT AGREEMENT.
ARTICLE I of the Credit Agreement is hereby amended by replacing
the following defined terms:
"TANGIBLE NET WORTH" means the total assets of Borrower exclusive of
(a) those assets classified as intangible, including, without limitation,
goodwill, patents, trademarks, trade names, copyrights, franchises and
deferred charges, (b) treasury stock and minority interests in any Person,
(c) cash set apart and held in a sinking or other analogous fund
established for the purpose of redemption or other retirement of capital
stock, (d) to the extent not already deducted from total assets, allowances
for depreciation, depletion, obsolescence and/or amortization of
properties, uncollectible accounts, and contingent but probable liabilities
as to which an amount can be established, and (e) all assets arising from
advances to officers, former officers or sales representatives of Borrower
made outside of the ordinary course of business; less total liabilities of
Borrower; all of the above being determined in accordance with GAAP;
PROVIDED, HOWEVER, that notwithstanding any of the foregoing categories of
<PAGE>
assets that are excluded from the calculation of Tangible Net Worth, the
following items are hereby expressly INCLUDED in Tangible Net Worth: (x)
deferred taxes, and (y) those certain contracts and leases owned by
Borrower and reflected on its consolidated balance sheet as the contracts
and leases acquired in connection with MRI's acquisition in 1993 of Midland
Resources Operating Company, Inc.
II. REAFFIRMATION OF REPRESENTATIONS AND WARRANTIES. To induce the
Bank to enter into this First Amendment, Borrower hereby reaffirms, as of the
date hereof, its representations and warranties contained in Article IV of
the Credit Agreement and in all other documents executed pursuant thereto,
and additionally represents and warrants as follows:
A. The execution and delivery of this First Amendment and the performance
by the Borrower of its obligations under this First Amendment are within
Borrower's power, have been duly authorized by all necessary corporate
action, have received all necessary governmental approval (if any shall be
required), and do not and will not contravene or conflict with any
provision of law or of the charter or by-laws of the Borrower or of any
agreement binding upon Borrower.
B. This First Amendment represents the legal, valid and binding
obligations of Borrower enforceable against Borrower in accordance with its
terms subject as to enforcement only to bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement
of creditors' rights generally.
C. Since the date of the Credit Agreement, no change, event or state of
affairs has occurred and is continuing which would constitute an Event of
Default or an Unmatured Event of Default.
III. DEFINED TERMS. Terms used herein that are defined in the Credit
Agreement shall have the same meanings herein, unless the context otherwise
requires.
IV. REAFFIRMATION OF CREDIT AGREEMENT. This First Amendment shall be
deemed to be an amendment to the Credit Agreement, and the Credit Agreement,
as amended hereby, is hereby ratified, adopted and confirmed in each and
every respect.
V. GOVERNING LAW. THIS FIRST AMENDMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE
APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. This First Amendment has
been entered into in Harris County, Texas, and it shall be performable for
all purposes in Harris County, Texas. Courts within the State of Texas shall
have jurisdiction over any and all disputes between the Borrower and the
Bank, whether in law or equity, including, but not limited to, any and all
disputes arising out of or relating to this First Amendment or any other Loan
Documents; and venue in any such dispute whether in federal or state court
shall be laid in Harris County, Texas.
-2-
<PAGE>
VI. SEVERABILITY. Whenever possible each provision of this First
Amendment shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this First Amendment shall be
prohibited by or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of
this First Amendment.
VII. EXECUTION IN COUNTERPARTS. This First Amendment may be executed
in any number of counterparts and by the different parties on separate
counterparts on different dates, and each such counterpart shall be deemed to
be an original, but all such counterparts shall together constitute but one
and the same agreement.
VIII. SECTION CAPTIONS. Section captions used in this First Amendment
are for convenience of reference only, and shall not affect the construction
of this First Amendment.
IX. SUCCESSORS AND ASSIGNS. This First Amendment shall be binding
upon the Borrower, the Bank and its respective successors and assigns, and
shall inure to the benefit of the Borrower, the Bank and the respective
successors and assigns of the Bank.
X. NON-APPLICATION OF CHAPTER 15 OF TEXAS CREDIT CODE. The
provisions of Chapter 15 of the Texas Credit Code (Vernon's Texas Civil
Statutes, Article 5069-15) are specifically declared by the parties hereto
not to be applicable to this First Amendment or any of the other Loan
Documents or to the transactions contemplated hereby.
XI. NOTICE OF FINAL AGREEMENT. THE WRITTEN CREDIT AGREEMENT, AS
HEREBY AMENDED, REPRESENTS THE FINAL AGREEMENT AMONG THE BANK, BORROWER AND
ANY GUARANTOR OR OTHER OBLIGOR, IF ANY, 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.
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment
to be duly executed as of the day and year first above written.
BORROWER:
MIDLAND RESOURCES, INC.
By: /s/ D. H. Warley, III
---------------------------------------
D. H. Warley, III
President
-3-
<PAGE>
MIDLAND RESOURCES OPERATING COMPANY, INC.
By: /s/ D. H. Warley, III
---------------------------------------
D. H. Warley, III
President
SUMMIT PETROLEUM CORPORATION
By: /s/ D. H. Warley, III
---------------------------------------
D. H. Warley, III
President
BANK:
COMPASS BANK
By: /s/ Kathleen J. Bowen
---------------------------------------
Kathleen J. Bowen
Vice President
-4-
<PAGE>
SECOND AMENDMENT TO
SECURED REDUCING REVOLVING CREDIT AGREEMENT
DATED DECEMBER 17, 1997
BY AND AMONG
MIDLAND RESOURCES, INC.,
MIDLAND RESOURCES OPERATING COMPANY, INC.,
SUMMIT PETROLEUM CORPORATION
AND
COMPASS BANK
This Second Amendment ("SECOND AMENDMENT") by and between MIDLAND
RESOURCES, INC. ("MRI"), a Texas corporation, MIDLAND RESOURCES OPERATING
COMPANY, INC., a Texas corporation, and SUMMIT PETROLEUM CORPORATION, a Colorado
corporation (individually and collectively, "BORROWER") and COMPASS BANK, a
Texas state chartered bank ("BANK") is executed on this 14th day of April, 1998,
to be effective, however, as of December 31, 1997.
W I T N E S S E T H:
Borrower and Bank entered into a Secured Reducing Revolving Credit
Agreement dated December 17, 1997, and a First Amendment thereto executed on
March 26, 1998 (collectively, the "Credit Agreement").
Borrower has requested that Bank amend the Tangible Net Worth
Requirement, as set forth in Section 5.18 of the Credit Agreement, and Bank is
willing to enter into the requested amendment, subject to and conditioned upon
the provisions set forth herein.
NOW, THEREFORE, in consideration of the promises herein contained, and
each intending to be legally bound hereby, the parties agree as follows:
I. AMENDMENTS TO CREDIT AGREEMENT.
ARTICLE I of the Credit Agreement is hereby amended by adding the
following defined terms:
"FIRST AMENDMENT" means that certain First Amendment to this
Agreement executed by Bank and Borrower on March 26, 1998.
"SECOND AMENDMENT" means that certain Second Amendment to this
Agreement executed by Bank and Borrower on April 14, 1998.
SECTION 5.18 of the Credit Agreement is amended in its entirety to
read as follows:
5.18 TANGIBLE NET WORTH REQUIREMENT. Borrower shall maintain a
total Tangible Net Worth of not less than $5,500,000.00, increasing
by: (x) fifty percent
<PAGE>
(50%) of net income (excluding losses) of Borrower subsequent to
December 31, 1997, and (y) one hundred percent (100%) of any increases
in shareholders' equity resulting from the sale or issuance of stock
of any Borrower subsequent to December 31, 1997.
II. CERTAIN WAIVERS. Bank hereby waives Borrower's non-compliance with
the provisions of Section 5.18 of the Credit Agreement, TANGIBLE NET WORTH
REQUIREMENT, for the quarter ending December 31, 1997. This Second Amendment
shall not be deemed to be a waiver by Bank of any other covenant, condition or
obligation on the part of Borrower under the Credit Agreement, as hereby
amended, except as expressly set forth herein. In addition, this Second
Amendment shall in no respect evidence any commitment by the Bank to grant any
future waivers of any covenant, condition or obligation on the part of Borrower
under the Credit Agreement, as hereby amended. Any further waivers or consents
must be specifically agreed to in writing in accordance with Section 8.12 of the
Credit Agreement.
III. REAFFIRMATION OF REPRESENTATIONS AND WARRANTIES. To induce the Bank
to enter into this Second Amendment, Borrower hereby reaffirms, as of the date
hereof, its representations and warranties contained in Article IV of the Credit
Agreement and in all other documents executed pursuant thereto, and additionally
represents and warrants as follows:
A. The execution and delivery of this Second Amendment and the
performance by the Borrower of its obligations under this Second Amendment
are within Borrower's power, have been duly authorized by all necessary
corporate action, have received all necessary governmental approval (if any
shall be required), and do not and will not contravene or conflict with any
provision of law or of the charter or by-laws of the Borrower or of any
agreement binding upon Borrower.
B. This Second Amendment represents the legal, valid and binding
obligations of Borrower enforceable against Borrower in accordance with its
terms subject as to enforcement only to bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement
of creditors' rights generally.
C. Since the date of the Credit Agreement, no change, event or state of
affairs has occurred and is continuing which would constitute an Event of
Default or an Unmatured Event of Default.
IV. DEFINED TERMS. Terms used herein that are defined in the Credit
Agreement shall have the same meanings herein, unless the context otherwise
requires.
V. REAFFIRMATION OF CREDIT AGREEMENT. This Second Amendment shall be
deemed to be an amendment to the Credit Agreement, and the Credit Agreement, as
amended hereby, is hereby ratified, adopted and confirmed in each and every
respect.
-2-
<PAGE>
VI. GOVERNING LAW. THIS SECOND AMENDMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE APPLICABLE
LAWS OF THE UNITED STATES OF AMERICA. This Second Amendment has been entered
into in Harris County, Texas, and it shall be performable for all purposes in
Harris County, Texas. Courts within the State of Texas shall have jurisdiction
over any and all disputes between the Borrower and the Bank, whether in law or
equity, including, but not limited to, any and all disputes arising out of or
relating to this Second Amendment or any other Loan Documents; and venue in any
such dispute whether in federal or state court shall be laid in Harris County,
Texas.
VII. SEVERABILITY. Whenever possible each provision of this Second
Amendment shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Second Amendment shall be
prohibited by or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Second Amendment.
VIII. EXECUTION IN COUNTERPARTS. This Second Amendment may be executed
in any number of counterparts and by the different parties on separate
counterparts on different dates, and each such counterpart shall be deemed to be
an original, but all such counterparts shall together constitute but one and the
same agreement.
IX. SECTION CAPTIONS. Section captions used in this Second Amendment are
for convenience of reference only, and shall not affect the construction of this
Second Amendment.
X. SUCCESSORS AND ASSIGNS. This Second Amendment shall be binding upon
the Borrower, the Bank and its respective successors and assigns, and shall
inure to the benefit of the Borrower, the Bank and the respective successors and
assigns of the Bank.
XI. NON-APPLICATION OF CHAPTER 15 OF TEXAS CREDIT CODE. The provisions
of Chapter 15 of the Texas Credit Code (Vernon's Texas Civil Statutes, Article
5069-15) are specifically declared by the parties hereto not to be applicable to
this Second Amendment or any of the other Loan Documents or to the transactions
contemplated hereby.
XII. NOTICE OF FINAL AGREEMENT. THE WRITTEN CREDIT AGREEMENT, AS HEREBY
AMENDED, REPRESENTS THE FINAL AGREEMENT AMONG THE BANK, BORROWER AND ANY
GUARANTOR OR OTHER OBLIGOR, IF ANY, 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.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to
be duly executed as of the day and year first above written.
BORROWER:
MIDLAND RESOURCES, INC.
By:
-------------------------------------
Robert R. Donnelly
President
MIDLAND RESOURCES OPERATING COMPANY, INC.
By:
-------------------------------------
Robert R. Donnelly
President
SUMMIT PETROLEUM CORPORATION
By:
-------------------------------------
Robert R. Donnelly
President
BANK:
COMPASS BANK
By:
-------------------------------------
Kathleen J. Bowen
Vice President
-4-
<PAGE>
SUBSIDIARIES OF THE REGISTRANT
Midland Resources Operating Company, Inc.
616 F.M. 1960 West, Suite 600
Houston, Texas 77090
Incorporated in the State of Texas
Summit Petroleum Corporation
616 F.M. 1960 West, Suite 600
Houston, Texas 77090
Incorporated in the State of Colorado
<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 and the Registration Statement (Form S-8 No. 333-26541) pertaining
to Midland Resources, Inc. 1997 Board of Directors Stock Incentive Plan and
Business Consultant Agreement 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, 1997.
ERNST & YOUNG LLP
Fort Worth, Texas
April 14, 1998
<PAGE>
CONSENT OF GRANT THORNTON LLP, INDEPENDENT AUDITORS
We have issued our report dated March 13, 1998, accompanying the consolidated
financial statements included in the Annual Report of Midland Resources, Inc.
on Form 10-KSB for the year ended December 31, 1997. We hereby consent to
the incorporation by reference of said report in the Registration Statements
of Midland Resources, Inc. on Forms S-8 (File No. 333-26541 and File No.
33-94708).
GRANT THORNTON LLP
Houston, Texas
April 14, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1997 JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<CASH> 150,890 366,677 514,610
<SECURITIES> 0 0 0
<RECEIVABLES> 1,026,967 1,554,348 822,395
<ALLOWANCES> 0 0 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 2,036,145 3,644,720 2,038,452
<PP&E> 29,210,699 27,889,580 22,176,136
<DEPRECIATION> 15,975,838 14,076,100 11,816,754
<TOTAL-ASSETS> 17,620,483 18,976,646 14,123,352
<CURRENT-LIABILITIES> 1,564,683 3,268,428 1,905,703
<BONDS> 9,115,370 7,166,421 4,524,617
0 0 0
0 0 0
<COMMON> 4,463 4,401 4,394
<OTHER-SE> 6,714,563 8,172,859 7,643,638
<TOTAL-LIABILITY-AND-EQUITY> 17,620,483 18,976,646 14,123,352
<SALES> 6,396,249 6,958,491 5,147,033
<TOTAL-REVENUES> 7,095,395 7,240,030 5,417,085
<CGS> 3,088,886 2,981,837 2,509,854
<TOTAL-COSTS> 8,725,584 6,465,181 6,530,357
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 970,430 722,447 611,587
<INCOME-PRETAX> (2,600,619) 52,402 (1,113,272)
<INCOME-TAX> (717,237) 30,280 (376,241)
<INCOME-CONTINUING> (1,883,382) 22,122 (737,031)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (1,883,382) 22,122 (737,031)
<EPS-PRIMARY> (.42) .01 (.22)
<EPS-DILUTED> (.42) .01 (.22)
</TABLE>
