SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-11516
BOX ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 75-2369148
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
8201 Preston Road, Suite 600, Dallas, Texas 75225-6211
(Address of principal executive offices)
(Zip code)
(214) 890-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
There were 3,219,010 outstanding shares of Class A (Voting) Common
Stock, $1 par value, on August 4 , 1997. There were also 17,087,410
outstanding shares of Class B (Non-Voting) Common Stock, $1 par value,
on such date.
<PAGE>
BOX ENERGY CORPORATION
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of June 30, 1997
and December 31, 1996 3
Condensed Statements of Income - Three and
Six Months Ended June 30, 1997 and 1996 4
Condensed Statements of Cash Flows - Six
Months Ended June 30, 1997 and 1996 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11
PART II OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of
Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BOX ENERGY CORPORATION
CONDENSED BALANCE SHEETS
(In thousands, except share data)
June 30, December 31,
1997 1996
----------- ------------
ASSETS (Unaudited)
Current assets
Cash and cash equivalents $ 1,675 $ 2,997
Marketable securities - available
for sale 30,592 32,678
Accounts receivable - oil and
natural gas 6,021 7,093
Accounts receivable - other 711 1,456
Note receivable - Box Brothers
Holding Company 6,899 -
Prepaid expenses and other current
assets 2,204 1,961
---------- ----------
Total current assets 48,102 46,185
---------- ----------
Properties
Oil and natural gas properties
(successful-efforts method) 196,480 187,251
Other properties 3,349 3,226
Accumulated depreciation, depletion
and amortization (128,520) (116,371)
---------- ----------
Total properties 71,309 74,106
---------- ----------
Other assets
Deferred income taxes (net of
valuation allowance) 13,969 14,723
Deferred charges (net of accumulated
amortization) 1,455 1,585
---------- ----------
Total other assets 15,424 16,308
---------- ----------
Total assets $ 134,835 $ 136,599
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 5,111 $ 5,043
Accrued interest payable 391 379
Accrued transportation payable -
related party 281 263
Net Profits expense payable 1,340 1,481
---------- ----------
Total current liabilities 7,123 7,166
---------- ----------
Convertible subordinated notes payable 55,077 55,077
---------- ----------
Total liabilities 62,200 62,243
---------- ----------
Commitments and contingencies (Note 3)
Stockholders' equity
Common stock, $1.00 par value
Class A (voting) - 15,000,000 shares
authorized; 3,250,110 shares issued 3,250 3,250
Class B (non-voting) - 30,000,000
shares authorized; 17,553,010
shares issued 17,553 17,553
Additional paid-in capital 25,197 25,197
Treasury stock, at cost, 31,100 shares
Class A, and 415,800 shares Class B (3,120) -
Retained earnings 29,887 28,542
Valuation allowance for marketable
securities (132) (186)
---------- ----------
Total stockholders' equity 72,635 74,356
---------- ----------
Total liabilities and stockholders'
equity $ 134,835 $ 136,599
========== ==========
See accompanying Notes to Financial Statements.
<PAGE>
BOX ENERGY CORPORATION
CONDENSED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues
Oil sales $ 5,270 $ 4,472 $ 10,533 $ 8,905
Natural gas sales 10,635 12,163 21,406 25,660
Other income 1,062 1,226 2,255 2,369
--------- --------- --------- ---------
Total revenues 16,967 17,861 34,194 36,934
--------- --------- --------- ---------
Costs and expenses
Operating costs 1,700 1,858 3,127 3,344
Net Profits expense 2,236 2,838 4,705 7,059
Exploration expense 2,507 9,686 3,906 12,153
Depreciation, depletion and
amortization 6,928 4,197 12,154 8,181
General and administrative
expenses 2,645 3,348 5,143 5,265
Reorganization costs 435 - 638 -
Interest and financing costs 1,226 1,204 2,451 2,445
--------- --------- --------- ---------
Total costs and expenses 17,677 23,131 32,124 38,447
--------- --------- --------- ---------
Income (loss) before
income taxes (710) (5,270) 2,070 (1,513)
Income tax expense (benefit) (248) (1,797) 725 (457)
--------- --------- --------- ---------
Net income (loss) $ (462) $ (3,473) $ 1,345 $ (1,056)
========= ========= ========= =========
Income (loss) per share $ (0.02) $ (0.17) $ 0.06 $ (0.05)
========= ========= ========= =========
Weighted average shares of
common stock and common stock
equivalents outstanding 20,668 20,803 20,735 20,803
========= ========= ========= =========
See accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
BOX ENERGY CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended June 30,
1997 1996
--------- ---------
Cash flow provided by operations
Net income (loss) $ 1,345 $ (1,056)
Depreciation, depletion, and
amortization 12,154 8,181
Amortization of deferred charges 130 131
Amortization of premium on marketable
securities 31 7
Dry hole and impaired property costs 1,981 10,414
Loss on sale of assets 56 29
Deferred income tax expense 725 (457)
Decrease in accounts receivable 1,817 1,061
(Increase) in prepaid expenses and
other current assets (243) (1,124)
(Decrease) in accounts payable and
accrued expenses (43) (2,276)
--------- ---------
Net cash flow provided by
operations 17,953 14,910
--------- ---------
Cash flow from investing activities
Payments for capital expenditures (11,677) (17,481)
Sales and maturities of marketable
securities 2,730 6,020
Investment in marketable securities (597) (20,023)
Note receivable - Box Brothers
Holding Company (7,250) -
Principal repayments - Box Brothers
Holding Company 351 -
Repurchase common stock (3,120) -
Proceeds from sale of property 288 48
--------- ---------
Net cash used in investing
activities (19,275) (31,436)
--------- ---------
Net increase (decrease) in cash and cash
equivalents (1,322) (16,526)
Cash and cash equivalents at beginning of
period 2,997 21,644
--------- ---------
Cash and cash equivalents at end of
period $ 1,675 $ 5,118
========= =========
See accompanying Notes to Financial Statements.
<PAGE>
BOX ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
June 30, 1997
Note 1. Accounting Policies and Basis of Presentation
Box Energy Corporation (the "Company") was formed in 1991. The
Company was inactive until it acquired all of the assets and liabilities
of OKC Limited Partnership (the "Predecessor Partnership") on April 15,
1992, in exchange for the common stock of the Company (the "Corporate
Conversion"). The stock was then distributed to the general partners,
limited partners and other unitholders of the Predecessor Partnership.
The Company accounted for the exchange in a manner similar to a pooling
of interests and recorded the assets and liabilities at the historical
cost of the Predecessor Partnership. References to the Company include
the Predecessor Partnership unless otherwise stated.
The financial statements have been prepared according to the
instructions to Form 10-Q and, therefore, may not include all
disclosures required in financial statements prepared in conformity with
generally accepted accounting principles. Financial information provided
in this report reflects all transactions and adjustments which
management believes are necessary for a fair statement of the Company's
results of operations and financial position for the interim periods
presented. All adjustments are of a normal recurring nature. The
condensed balance sheet as of December 31, 1996 was derived from audited
financial statements but does not include all disclosures required by
generally accepted accounting principles. These financial statements
should be read together with the audited financial statements of the
Company for the year ended December 31, 1996, which are included in the
Company's Form 10-K for the period then ended. The results of operations
of the Company for the three and six months ended June 30, 1997 are not
necessarily indicative of the results for the full year 1997. No
material changes in the significant accounting policies or details of
accounts were made during the interim periods presented.
Note 2. Note Receivable - Box Brothers Holding Company
On April 29, 1997, the Company lent Box Brothers Holding Company
("BBHC") $7.25 million. The note receivable was due on May 29, 1997. The
maturity date was extended to June 3, 1997, and the original note was
replaced by a new note dated June 3, 1997, in the amount of $6.95
million, after payment of principal and interest on the original note
receivable by BBHC. The new note receivable matures May 29, 1998, and
requires monthly installment payments of principal and interest totaling
$100,000 commencing June 29, 1997. The interest rate is equal to the
prime rate of Texas Commerce Bank National Association plus 1% until
the sixth month when the rate begins to increase monthly by 0.1% over
the rate of the previous month.
BBHC pledged as collateral for the note receivable under an Amended
and Restated Pledge Agreement (the "Pledge Agreement") 1.8 million
shares or approximately 57% of the Company's Class A ("Voting") Common
Stock ("Class A Stock") owned by BBHC, 800,000 shares or approximately
94% of the outstanding common stock of CKB Petroleum, Inc. ("CKBP") and
800,000 shares or approximately 94% of the outstanding common stock of
CKB & Associates, Inc. ("Associates"). BBHC owns such shares of CKBP and
Associates.
Significant events of default, as defined by the Pledge Agreement,
are failure to pay the monthly installment within 10 days of the due
date and failure to maintain fair market value of collateral in the
amount of $2.00 for each $1.00 of unpaid principal debt. The Pledge
Agreement provides that in the event that BBHC defaults on the note, the
Company, upon five days' notice to BBHC, has the right to foreclose upon
and sell the collateral stock and to bid for and buy the stock (except
at private sale). The Pledge Agreement also provides that upon the
occurrence and during the continuance of an event of default, the
Company may direct the vote of such stock.
Note 3. Notes Payable
In December 1992, the Company issued 8 1/4% Convertible
Subordinated Notes ("Notes") in the amount of $55.1 million which mature
on December 1, 2002. The Notes are convertible at the election of the
holders any time before maturity, unless previously redeemed, into
shares of Class B (Non-Voting) Common Stock ("Class B Stock"). Interest
accrued at 8 1/4% per annum is payable semiannually on each June 1 and
December 1. The Company may redeem the Notes in whole or in part any
time after December 1, 1995 at 105.775% of the face amount. This
percentage decreases .825% each subsequent December 1. The Notes are
unsecured and subordinate in right of payment to all existing and future
senior indebtedness.
If a "change in control" as defined in the Indenture for the Notes
(the "Indenture") occurs, the Company is required to make an offer
subject to certain restrictions, to purchase all or part of the Notes at
100% of the principal amount, plus accrued interest. On April 29,1997,
the Class A Stock owned by BBHC was pledged, with other collateral, by
BBHC as collateral under the Pledge Agreement with the Company. See Note
2. Note Receivable - Box Brothers Holding Company. A default by BBHC
under the Pledge Agreement could result in a change in control of the
Company. The sale of such stock to any party other than, or not
controlled by, at least one of the four Box brothers (i.e., Don D. Box,
Thomas D. Box, Gary D. Box or Douglas D. Box) or BBHC would constitute a
change in control. In addition, if a receiver of BBHC is appointed in
the Thomas D. Box Lawsuit or otherwise, a change in control could be
deemed to have occurred. See Note 6. Contingencies - Thomas D. Box
Lawsuit. The Indenture also defines a "change in control" to have
occurred if at any time the existing Board of Directors does not have at
least three independent directors (as defined in the Indenture).
Note 4. Treasury Stock
During the second quarter the Company purchased 31,100 shares of
Class A Stock and 415,800 shares of Class B Stock at a total cost of
$3.1 million or $6.98 per share. The Company uses the cost method of
accounting for the treasury stock. The Board of Directors has approved
the repurchase of up to 1.0 million shares of the Company's common
stock.
Note 5. Related Party Transactions
A resolution adopted in 1992 by the Board of Directors authorizes
the Company to enter into transactions with affiliates if the Board of
Directors decides that the transactions are fair and reasonable to the
Company and are on terms no less favorable to the Company than can be
obtained from an unaffiliated party in an arms' length transaction.
BBHC owns approximately 57% of the Class A Stock of the Company, and 94%
of the outstanding stock of CKBP and Associates.
CKBP owns a minority interest in the pipeline transporting oil from
the Company's South Pass blocks to Venice, Louisiana. CKBP charges the
Company an oil transportation tariff of $2.75 per barrel for
transportation services. The tariff was published and filed with the
Federal Energy Regulatory Commission, which regulates such rates. The
rate has remained uniform since 1982 among all owners of the pipeline
from the South Pass Block 89 Field. For the three months ended June 30,
1997 and 1996, the Company incurred oil pipeline transportation charges
payable to CKBP in the amount of $825,000 and $678,000, respectively.
For the six months ended June 30, 1997 and 1996, the Company incurred
oil pipeline transportation charges payable to CKBP in the amount of
$1.6 million and $1.4 million, respectively. The purchase and ownership
of this pipeline by CKBP has been the subject of litigation in the
Griffin, et al. v. Box, et al litigation (the "Griffin Case"). See Note
6. Contingencies - Griffin Case.
The trial court in the Griffin, et al. v. Box, et al litigation
entered its amended final judgment in October 1994 with respect to
certain related party transactions on derivative claims against Cloyce
K. Box and Associates (the "General Partners" of the Predecessor
Partnership) and in favor of the Company. After his death in October
1993, the Estate of Cloyce K. Box (the "Estate") was substituted in the
place of Cloyce K. Box in the litigation. The Amended and Restated
Certificate and Articles of Limited Partnership of the Predecessor
Partnership (the "Partnership Agreement") provided that the General
Partners were to be indemnified for litigation expenses in certain
situations in which they were sued in their capacity as general partners
of the Predecessor Partnership. Accordingly, the Predecessor
Partnership, and later the Company, paid the legal expenses and other
defense costs of the General Partners during a large portion of the
Griffin Case litigation. These payments were required under the
Partnership Agreement because the General Partners executed written
undertakings to repay the Company for litigation expenses advanced for
them if it was later decided that such advancements were not subject to
indemnification by the Company. The Company did not pay the legal
expenses and other defense costs of the General Partners after February
1994 until the decision of the Fifth Circuit was handed down in May
1996. See Note 6. Contingencies - Griffin Case. At that time the General
Partners sought and received reimbursement of legal fees for the
period March 1994 to April 1996 totaling $1.4 million. This amount was
accrued in the second quarter of 1996. During the three and six-month
periods ended June 30, 1997, the Company reimbursed or accrued for
reimbursement $57,000 and $73,000, respectively, for legal expenses
related to this matter.
On April 29, 1997, the Company lent BBHC an aggregate of $7.25
million. On June 3, 1997, the Company converted the loan into a one-year
term loan with the same interest rate and collateral. See Note 2. Note
Receivable - Box Brothers Holding Company.
Note 6. Contingencies
Griffin Case
The case of Griffin, et al. v. Box, et al. was filed in November
1987 in the United States District Court for the Northern District of
Texas in Dallas. The plaintiffs are a small group of former unitholders
of the Predecessor Partnership, including J.R. Simplot, a former
unitholder whose units of the Predecessor Partnership have since been
converted to approximately 15% of the Company's Class B Stock. The
defendants are the General Partners, certain of their affiliates and the
Predecessor Partnership. The Estate was substituted in the place of
Cloyce K. Box in the litigation after his death in October 1993. Because
of the Corporate Conversion, the Company will receive all benefits, and
will suffer all detriments, if any, of the Predecessor Partnership in
the litigation.
In the action, plaintiffs brought derivative claims on behalf of
the Predecessor Partnership alleging that the General Partners breached
the Partnership Agreement, breached fiduciary duties and violated an
implied covenant of good faith and fair dealing in relation to three
transactions, including the 1985 purchase of an interest in an oil
pipeline by CKB Petroleum. See Note 5. Related Party Transactions.
In October 1992, the jury returned a verdict on the derivative
claims finding that the General Partners did not breach the Partnership
Agreement but breached fiduciary duties and an implied covenant of good
faith and fair dealing arising from the Partnership Agreement. The jury
awarded actual damages of approximately $20.0 million and future damages
of approximately $6.2 million in favor of the Predecessor Partnership
and against the General Partners relating to the pipeline transaction.
Punitive damages of approximately $2.2 million were awarded against
Cloyce K. Box.
In March 1994, the district court entered its initial judgment in
favor of the Company and against the Estate and Associates in the amount
of $20.1 million for past damages and against the Estate in the amount
of $2.2 million for punitive damages. In addition, the judgment imposed
a constructive trust for the benefit of the Company upon the pipeline
interest owned by CKBP, in lieu of the $6.2 million in future damages
included in the verdict.
In its amended final judgment issued in October 1994, the district
court added pre-judgment and post-judgment interest. In a separate
order, the district court granted the plaintiffs' motion for attorneys'
fees and costs without specifying the amount awarded. The plaintiffs
sought $3.5 million in attorneys' fees and costs.
The plaintiffs, the Estate, Associates and Petroleum all filed
notices of appeal in the Griffin case to the Fifth Circuit. In its
opinion in the Griffin case issued May 2, 1996, the Fifth Circuit (i)
reversed the judgment and related damages against the Estate and
Associates, and remanded the case for a new trial because of the jury's
inconsistent answers to the liability issues; (ii) ruled that the trial
court's imposition of the constructive trust was improper; (iii)
affirmed the trial court's dismissal of the plaintiffs' individual
claims for monetary damages; (iv) ruled that one plaintiff, James Lyle,
was an original limited partner and remanded the case for a new trial to
decide the number of voting shares to which he is entitled; (v) remanded
the case for further fact findings to decide whether two other
plaintiffs, Hayden McIlroy and B. R. Griffin, were original limited
partners and the amount, if any, of voting stock to which they are
entitled; (vi) affirmed the trial court's judgment that plaintiffs J. R.
Simplot and David Hawk were not entitled to voting stock; and (vii)
found that the trial court had erred in granting plaintiffs' attorneys'
fees. On October 7, 1996, the plaintiffs' application to the United
States Supreme Court for appellate review of the Fifth Circuit's
decision was denied. On June 30, 1997, the district court issued a
"Final Judgment" dismissing without prejudice the remanded case for lack
of jurisdiction. On July 22, 1997, James A. Lyle filed a Notice of
Appeal to the Fifth Circuit challenging the District Court's dismissal.
Phillips Petroleum Case
In August 1990, Phillips Petroleum Company ("Phillips") brought an
action against the Predecessor Partnership now pending in state court in
Orleans Parish, Louisiana, claiming that Phillips is entitled, pursuant
to its 33% Net Profits interest in South Pass Block 89, to receive an
overriding royalty interest for months in which monthly net profits were
not achieved. In addition, Phillips claims that the net profits account
is being charged an excessive oil transportation fee. In September 1991,
this lawsuit was amended by Phillips to include a claim that the entire
$69.6 million lump sum cash payment received by the Predecessor
Partnership in its 1990 settlement of litigation with Texas Eastern
Transmission Corporation ("Texas Eastern Settlement") should have been
credited to the net profits account. Under this latter claim, Phillips
alleges damages in excess of $21.5 million. The Company previously
credited the net profits account with $5.8 million of the $69.6 million
received in the Texas Eastern Settlement, which is all of the Texas
Eastern Settlement proceeds that the Company believes should be credited
to the net profits account. On the first two claims, Phillips alleges
aggregate damages of several million dollars. Phillips further seeks
double damages, interest, attorneys' fees and cancellation of the
farmout agreement. The Company is vigorously defending the litigation on
the basis that such amounts are not payable under the Net Profits
interest and that Phillips is not entitled to any of the damages sought.
In March 1993, Phillips filed a motion for summary judgment on its claim
relating to the Texas Eastern Settlement. That motion was denied by the
court in July 1993. The trial commenced with the presentation of
evidence which concluded on April 16, 1997. The parties have filed post
trial briefs, and oral arguments have been set for August 28, 1997.
After oral arguments are presented the court will make its decision.
Devere and Nealon Cases
Two class actions, one styled Melissa Devere v. John F. Arning, Don
D. Box, Thomas D. Box, Kent R. Hance, Sr., John L. Kelsey, Alan C.
Shapiro, Norman W. Smith, Ewell Doak W alker and Box Energy Corporation,
and the other styled Caren M. Nealon and B. Peter Knudson v. John F.
Arning, Don D. Box, Thomas D. Box, Kent R. Hance, Sr., John L. Kelsey,
Alan C. Shapiro, Norman W. Smith, Ewell Doak Walker, Richard S.
Whitesell, Jr. and Box Energy Corporation, were filed in the Chancery
Court of Delaware in Wilmington in April and May 1995, respectively. In
both cases the plaintiffs are shareholders of the Company's Class B
Stock. The defendants are the Company, two current directors and several
former members of the Board of Directors. Richard S. Whitesell, Jr., a
former director, has been dismissed from the case. The actions allege
that the Company failed to make a proper response to offers or overtures
previously made to purchase the Company's stock by J.R. Simplot and
Phoenix Canada Oil Co. Ltd. and failed to solicit other offers for the
sale of the Company. The Company believes these class actions are
without legal merit and will defend the suits vigorously. The cases have
been consolidated. All of the defendants have filed or joined a motion
seeking to dismiss the consolidated case. Further, the defendants have
filed a motion to stay discovery while the motion to dismiss is pending.
The court has yet to set a briefing schedule for either motion. The
Company cannot predict when these motions will be resolved or the
outcome of these cases.
Thomas D. Box Lawsuit
On August 16, 1996, Thomas D. Box filed a lawsuit for direct and
derivative relief in the District Court for Dallas County, Texas (Tom
Box v. Gary Box, Don Box, Doug Box, Box Brothers Holding Company, Inc.
and CKB Petroleum, Inc., No 96-08451) alleging that the defendants have
breached fiduciary duties to BBHC and its subsidiary Petroleum, and
wasted or converted their assets, and asking the court for an
accounting, unspecified damages, costs and attorneys' fees and for the
appointment of a receiver for BBHC and CKBP. On or about September 20,
1996, a first amended petition was filed in this lawsuit adding the
Company as a defendant. On or about February 18, 1997, plaintiff filed a
second amended petition adding as defendants, Alan C. Shapiro, Thomas W.
Rollins, Richard D. Squires, and Bernay C. Box. The Board of Directors
appointed a special litigation committee consisting of independent
directors to investigate plaintiff's derivative claims. The special
litigation committee engaged counsel to assist the committee with its
investigation. The special litigation committee concluded that the
claims are without merit, and that it is in the Company's best interest
not to pursue the derivative action. The Company filed a motion for
summary judgment seeking dismissal of the derivative action, and is
awaiting the court's decision.
Other Contingencies
The Company is not a party to any material pending legal
proceedings other than that described or referred to above.
In May 1993, the U. S. Department of the Interior's Minerals
Management Service ("MMS") stated a new position that royalties are
payable on gas contract settlement proceeds to resolve take-or-pay,
buy-out, buy-down or pricing disputes involving a federal government oil
and gas lease. The Company has complied with all filing requirements and
disclosed the Texas Eastern Settlement to the MMS. Relying on the
holding by the U.S. Fifth Circuit Court of Appeals in a case styled
Diamond Shamrock Exploration Co. v. Hodel and a prior rule of the MMS,
the Company paid a one-sixth royalty to the MMS on $5.8 million of the
$69.6 million received in the Texas Eastern Settlement, which is all of
the royalty that the Company believes is due on the Texas Eastern
Settlement proceeds. It is uncertain whether the MMS will accept the
Company's calculation of royalty on the Texas Eastern Settlement. The
ultimate outcome of these events or potential claims made by the MMS
against the Company, if any, cannot be determined at this time.
Note 7. Subsequent Events
On July 15, 1997, Amendment No. 6 to the schedule 13D (the
"Amendment No. 6") was filed on behalf of BBHC, the Don D. Box 1996
Trust ("DDBT"), the Gary D. Box 1996 Trust ("GDBT"), the Douglas D. Box
1996 Trust ("DBT"), Gary D. Box, Douglas D. Box and Box Control LLC
("BCLC"). As disclosed in Amendment No. 6, on July 2, 1997, certain
members of BCLC (the DDBT and the GDBT) amended the Regulations of BCLC
to, among other things, (a) allow for non-members of BCLC to serve as
managers of BCLC and (b) allow for a majority of all members of BCLC to
remove and appoint managers of BCLC in accordance with the terms of the
Regulations of BCLC, as amended. In connection with such amendments and
in accordance with the Regulations of BCLC, certain members of BCLC (the
DDBT and the GDBT) acting by and through two of its co-trustees (Gary D.
Box and Douglas D. Box) removed Don D. Box as the sole manager of BCLC
and appointed Gary D. Box and Douglas D. Box to serve as co-managers of
BCLC.
In March 1997, Don D. Box filed a lawsuit in the Delaware Chancery
Court styled Don D. Box and Box Control, LLC, Plaintiffs v. Otto J.
Buis, D. James Fajack, Gary D. Box, Douglas D. Box and Box Brothers
Holding Company, Defendant; relating to management of BCLC and certain
corporate transactions related thereto. In light of the dispute among
various parties and regarding the proper membership of BBHC's Board of
Directors and the Manager(s) of BCLC, on July 22, 1997, the parties
consented to a Status Quo Order with respect to the case which requires,
among other things, that until a further court order, the business and
affairs of BBHC and subsidiaries and BCLC shall be managed by Douglas D.
Box, Gary D. Box and Don D. Box, with any actions being taken as are
unanimously approved in writing, in advance by Douglas D. Box, Gary D.
Box and Don D. Box.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion is intended to assist in the understanding
of the Company's financial position and results of operations and is
intended to be read with the financial statements, the related notes to
financial statements and the Company's Form 10-K for the year ended
December 31, 1996. This discussion contains historical information and
certain forward-looking statements that involve risks and uncertainties
about the business, long-term strategy, financial condition and future
of the Company. Statements concerning results of future exploration,
exploitation, development and acquisition expenditures, and expense and
reserve levels are forward-looking statements. These statements are
based on assumptions concerning commodity prices, drilling results and
production, administrative and interest costs that management believes
are reasonable based on currently available information of known facts
and trends; however, management's assumptions and the Company's future
performance are both subject to a wide range of business risks and there
is no assurance that these goals and projections can or will be met.
Liquidity and Capital Resources
Box Energy Corporation is an independent oil and gas exploration
and production company with activity and properties located in three
core areas: offshore Gulf of Mexico, Mississippi/Alabama and South
Texas. The Company's long-term strategy is to focus on stopping the
decline in oil and natural gas reserves in 1997 and then increasing
reserves by sustaining an acceptable annual reserve growth rate at
finding and development costs in line with our peers. The Company's
capital expenditures will entail a balanced exploration, development,
and acquisition program.
On June 30, 1997, the Company's current assets exceeded its current
liabilities by $41.0 million. Cash, cash equivalents and marketable
securities totaled $32.3 million on that date. The ratio of the
Company's current assets to current liabilities on June 30, 1997, was
approximately 6.8 to 1 compared to 8.7 to 1 on June 30, 1996. Cash flow
provided by operations for the first six months of 1997 increased by
$3.0 million to $18.0 million, constituting a 20% increase when compared
to $14.9 million for the first six months of 1996.
Proved oil and natural gas reserves from South Pass Block 89
Platform B at December 31, 1996, were approximately 20% of the Company's
total proved oil and natural gas reserves. Natural gas production from
this block is sold according to a long-term gas sales contract that
expires in July 2002. The current contract price received is
substantially more than the market price and increases 10% each year.
Because of the long-term contract and the quantity of proved natural gas
reserves from Platform B, the expected future oil and natural gas
revenue less operating costs, Net Profits expense and projected capital
costs which is then discounted annually at 10% ("Discounted Future Net
Revenue"), from this platform is approximately 35% of the total
Discounted Future Net Revenue of the Company depending upon future
projected oil prices and projected non-contract natural gas prices. Over
90% of the Discounted Future Net Revenue from Platform B is located in
the U-1/1 reservoir, of which approximately half is associated with
proved developed producing reserves in the Well B-20S and the remainder
is classified as proved undeveloped and will require a new wellbore to
produce.
The long-term gas sales contract provides that the purchaser must
take or pay for 80% of the Company's natural gas produced from wells
classified as gas wells as determined by periodic five-day production
tests and 100% of the natural gas produced from wells classified as oil
wells. The Company's net working interest deliverability ("Seller's
Delivery Capacity") after a five-day deliverability test in September
1995 was 16.2 Mmcfgd from Wells B-20S, B-11S and B-13SA. The latest
Seller's Delivery Capacity after a five-day production test in July
1997, was 5.2 MMcfgd net to the Company from Wells B-20S, B-13SA and B-07S.
For this test Well B-20S was the only well remaining in the U-1/1 reservoir
and accounted for a net 5.1 MMcfgd. During the first part of the year a
short-term gas imbalance developed with the purchaser as a result of gas
sales in excess of 80% of the Seller's Delivery Capacity. The imbalance
is expected to reverse during the second half of the year because the
purchaser will reduce the amount of gas to be purchased to approximately
40% of the Seller's Delivery Capacity. The Company expects that this will
decrease net cash flow from operations by approximately $1.7 million during
the last five months of 1997.
During the first half of 1997, the Company observed an increase in
oil production from Well B-20S that may, among other things, indicate
that the oil column is moving into the perforations of this well. The
Company would like to complete another well higher in the U-1/1
reservoir to maximize the natural gas production from this reservoir and
has proposed such a well to the working interest partners. The Company's
working interest partners have declined to drill such a well at this
time and the Company has withdrawn its proposal. The estimated gross
cost of drilling a well into this reservoir is between $15.0 million and
$20.0 million.
The Company understands that the operator, a working interest
partner, and the gas purchaser are engaged in a dispute concerning their
long-term gas sales contracts (which are similar to the Company's
contract) covering production from South Pass Block 89 . The dispute
appears to be about substituting natural gas production in accordance
with the terms of the long-term gas sales contract from South Pass Block
89 with natural gas production from South Pass Block 87. The effect on
the Company's long-term gas sales contract cannot be determined at this
time.
For the six months ended June 30, 1997, the total oil, natural gas
and oil trading revenues less operating and Net Profits expense (the
"Gross Cash Margin from Properties") for Platform B was $9.3 million or
39% of the total Gross Cash Margin from Properties of $24.1 million for
the Company. Well B-20S, the only well currently producing from the
U-1/1 reservoir, contributed approximately 18% of the oil and oil
trading revenues of Platform B and approximately 89% of the natural gas
revenues from Platform B during the six months ended June 30, 1997. For
the years ended December 31, 1996 and 1995, the Gross Cash Margin from
Properties from Platform B was 46% and 69%, respectively, of the total
Gross Cash Margin from Properties. Thus Platform B is contributing a
smaller proportion of the Company's Gross Cash Margin from Properties.
The Company expects that some of the recent successful discoveries and
planned acquisitions discussed below will further decrease the
percentage of Gross Cash Margin from Properties that is contributed by
Platform B.
During the second quarter the Company began producing the first
well from the Moselle Dome property, the Gladdis Knight #1 in the
Hosston sand at 14,200 feet. Production for the second quarter of 1997
was 28,037 net barrels of oil or 308 barrels of oil per day ("BOPD") net
to the Company's interest from this one well. A second well has been
drilled and logged to 8,400 feet. This well encountered 376 feet of net
pay in the Tuscaloosa and Eutaw sands. The gravity of the oil from the
Tuscaloosa sand is such that artificial lift, which is currently being
installed, will be required to produce the oil. The property is
characterized by multiple sands at various depths with various gravity
of oil depending on the specific zone. A 3-D seismic program will be
completed later this year which is anticipated to help define further
locations for 1998 drilling.
During July, 1997, a second Eugene Island Block 135 well completed
drilling operations and pipe was set to total depth over several
anticipated pay zones. A platform was installed in August and production
is expected to begin late in the third quarter. The Company anticipates
a third well to begin drilling from the platform before the end of the
year.
Significant fluctuations in oil and natural gas prices can have a
material effect on the Company's revenue, net income and cash flow from
operations, although the Company's long-term gas sales contract with
fixed prices escalating each year until July 2002 is thought to provide
stability for pricing related to natural gas production from South Pass
Block 89. Unforeseen mechanical, reservoir or other failure of wells,
especially those located in the U-1/1 reservoir on South Pass Block 89
Platform B, could potentially have an immediate and significant impact
on the Company's revenue, net income and net cash flow from operations.
The Company's capital expenditures for the first six months of 1997
decreased by 33% to $11.7 million from $17.5 million for the same
six-month period in the prior year. During the first two quarters of
1997 the Company invested $3.0 million in three wells on South Pass
Block 89 Platform B, $2.5 million on the Moselle Dome prospect to drill
and complete two producing wells and $1.7 million for the drilling of
the second well on Eugene Island Block 135 and the fabrication and
construction of a platform for that block. This platform is designed to
have gross production capacity of 75 MMcfgd. The Company has a 15%
working interest in this field. Other significant capital expenditures
during the six months ended June 30, 1997 included $1.7 million for
leasehold acquisition costs, $824,000 for the drilling and sub-sea
completion of the third Main Pass Block 262 well and the remainder on
various other projects.
During the 1997 Outer Continental Shelf Central Gulf of Mexico
Lease Sale, in an effort to possibly extend the discovery, the Company
along with two other bidding partners submitted the high bids on Eugene
Island Blocks 153 and 154 which are contiguous blocks to the south of
Eugene Island Block 135. In addition to the two blocks in Eugene Island,
the Company submitted the high bids on four additional blocks during the
same sale in March 1997. Two of these blocks, South Timbalier Block 213
and West Cameron Block 649 have been awarded. The bids on the remaining
two blocks were rejected.
In the Gulf of Mexico the Company's capital investment and
exploration plans for the remainder of 1997 include drilling a third
well on Eugene Island Block 135 and completing the construction of the
platform for that block at an estimated cost of $1.4 million. In
addition the Company expects to drill wells on South Timbalier Block
247, Galveston Block 282 and West Cameron Block 170 at a net cost of
$5.4 million.
The Company plans to begin drilling a second deep well on the
Moselle Dome prospect, the Butler 5-5 #1, in September of this year at
an estimated cost of $1.5 million and possibly a second shallow well
before the end of the year. The second shallow well is estimated at
$500,000 net to the Company. Also in the Mississippi and Alabama area
the Company has plans to drill exploratory wells on the Beechwood Dome
Prospect, County Line Dome Prospect and N.E. Collins Prospect at
estimated costs of $790,000, 781,000 and $790,000, respectively.
Development wells planned for the Mississippi/Alabama area include an
additional Indian Wells Field well and a N.E. Melvin Field well at a
combined estimated cost of $600,000.
In July 1997, the Company purchased various interests from Smith
Production Inc. These properties are located in the South Texas area.
Reserves associated with this purchase are approximately 2.3 million
barrels of oil equivalents net to the Company. These long life reserves
significantly increase the Company's reserves to production ratio. The
remaining capital investment and exploration plans for South Texas for
the third and fourth quarter of 1997 include three exploratory wells on
various prospects. Total investment in South Texas for the second half
of 1997 is estimated at over $13.0 million.
Additional capital expenditures may arise as significant
opportunities are presented to or identified by the Company during the
remainder of the year. Capital may be reallocated based on economic
conditions, partner constraints or property acquisitions that may be
presented to the Company. The Company believes that its capital
investment and exploration budget will be primarily funded from cash
flow from operations throughout the year with additional capital
requirements being met by existing cash and cash equivalents, sales of
marketable securities, or utilization of the Company's revolving credit
facility with a bank. The Company's $25.0 million line of credit
facility was renewed in June 1997. The line of credit with a current
borrowing base of $10.0 million is collateralized by the Company's South
Pass oil and gas properties. On August 6, 1997 the Company had $3.75
million available on the line of credit. The Company is currently
negotiating an increase in the borrowing base.
In December 1992, the Company issued $55.1 million of 8 1/4%
Convertible Subordinated Notes which are currently outstanding and due
December 1, 2002 ("Notes"). In the event of a "change in control" as
defined in the Indenture for the Notes (the "Indenture"), the Company is
required to make an offer to repurchase the Notes at 100% of the
principal amount thereof, plus accrued interest. Box Brothers Holding
Company ("BBHC") owns 57% of the Class A ("Voting") Common Stock ("Class
A Stock") of the Company. A sale or other disposition of those shares
to any entity, person or group of persons not controlled by, or outside
of, Don D. Box, Gary D. Box, Douglas D. Box and Thomas D. Box, would
constitute a "change in control" under the Notes. In addition, if a
receiver of BBHC is appointed in the Thomas D. Box lawsuit or otherwise,
a "change in control" could be deemed to have occurred. The Indenture
also defines a "change in control" to have occurred if at any time the
existing Board of Directors does not have at least three independent
directors as defined in the Indenture.
On April 29, 1997, the Company lent BBHC an aggregate of $7.25
million. On June 3, 1997, the Company converted the loan into a one-year
term loan with the same interest rate and collateral. See Notes to the
Financial Statements - Note 2. Note Receivable - Box Brothers Holding
Company. The loan and its terms were approved by all of the Company's
directors who are not affiliated or associated with BBHC. Proceeds of
the loan were used by BBHC to retire existing indebtedness secured by
the pledge of Class A Stock owned by BBHC. Under one of the pledge
agreements securing the retired indebtedness, the institution of
proceedings for the appointment of a receiver for BBHC gave the holder
of the indebtedness the right to accelerate the indebtedness and
foreclose on the collateral, which could have resulted in a "change of
control" under the Indenture for the Company's 8 1/4% Convertible
Subordinated Notes. See Note 3. Notes Payable. Such change of control
would have required the Company to tender for the outstanding Notes at
100% of the principal amount, plus accrued interest. Since an action was
pending to appoint a receiver for BBHC, the Board considered it
advisable and appropriate to facilitate a refinancing of BBHC's
indebtedness. See Notes to the Financial Statements - Note 6.
Contingencies - Thomas D. Box Lawsuit. If a receiver is appointed in the
action, a "change of control" could be deemed to have occurred. Because
the market value of the collateral is more than 200% of the loan amount,
the Company believes that it will collect the loan in full, with all
accrued interest.
If a "change in control" were to occur the Company may not have the
current liquidity to repurchase the Notes if all were tendered, and
certain debt covenants in the $25.0 million credit facility regarding
current ratios may not be met. Therefore, the credit line may not be
available without a debt covenant waiver or renegotiation of the credit
facility. In addition, the capital resources needed to implement the
long-term strategy would be reduced to reliance on cash flow from
operations in the short term.
During the second quarter the Company purchased 31,100 shares of
Class A Stock and 415,800 shares of Class B ("Non-Voting") Common Stock
("Class B Stock") at a total cost of $3.1 million or $6.98 per share.
The Board of Directors has approved the repurchase of up to 1.0 million
shares of the Company's common stock.
The Company's balance sheets reflect a net deferred income tax
asset of $14.0 million on June 30, 1997, and $14.7 million on December
31, 1996. This asset arises primarily as a result of federal income tax
loss carryforwards and temporary differences between the book basis and
tax basis of the Company's oil and natural gas properties. The net
operating loss carryforwards were generated in 1992, 1993 and 1996 and
will expire in 2007, 2008 and 2011, respectively. Based on the Company's
current projections, the deferred tax asset is expected to reverse
during the next several years as significant taxable income is generated
and the reserves near Platform "B" are depleted. Such projection assumes
that the Company's natural gas production from Platform "B" will be sold
under its long-term sales contract at prices significantly higher than
current spot market prices. If actual taxable income from future
operations is substantially less than the current projections, the
deferred tax asset would be impaired, causing an increase in the
valuation allowance and a significant charge to earnings.
The Company and Phillips Petroleum Company are engaged in
litigation concerning the Net Profits Interest in South Pass Block 89.
The trial commenced with the presentation of evidence which concluded on
April 16, 1997. Both parties have filed post trial briefs and oral
arguments are set for August 28, 1997. After oral arguments the court
will make its decision. If an adverse judgment or settlement occurs, the
Company believes that there could be a significant impact on its cash
flow from operations, the current liquidity of its balance sheet, the
income statement and the net deferred income tax asset.
The Company's liquidity and capital resources could be adversely
affected if the Company were to make a significant acquisition of
properties, by certain possible outcomes of litigation, a material
decline in oil or natural gas prices received by the Company or a
material decline in oil or natural gas production or reserves.
Results of Operations
Net income for the first six months of 1997 was $1.3 million, or
$0.06 per share, constituting an increase of $2.4 million or $0.11 per
share when compared to the net loss of $1.1 million, or $0.05 per share,
during the first six months of 1996. A net loss for the three months
ended June 30, 1997, of $462,000 or $0.02 per share reflects a $3.0
million improvement from the net loss for the three months ended June
30, 1996. The increase in the net income or decrease in the net loss was
primarily a result of a decrease in exploration expense or more
specifically dry hole expense for the second quarter of 1996 partially
offset by lower revenues during the three and six months ended June 30,
1997, compared to the prior year.
Net sales volumes and average sales prices of the Company's oil and
natural gas production (including the proceeds from the sale of liquids
extracted from the natural gas) for the three and six months ended June
30, 1997 and 1996, were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, Increase June 30, Increase
1997 1996 (Decrease) 1997 1996 (Decrease)
------ ------ ---------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Net sales volumes:
Oil (Mbbls): 302 224 78 556 466 90
Natural gas (Mmcf): 2,145 2,424 (279) 3,937 4,235 (298)
Average sales prices:
Oil (per Bbl) $17.45 $ 9.96 $(2.51) $18.94 $19.11 $(0.17)
Natural gas (per Mcf) $ 4.96 $ 5.02 $(0.06) $ 5.44 $ 6.06 $(0.62)
</TABLE>
Natural gas sales decreased $4.3 million or 17% for the first six
months of 1997 compared to the first six months of 1996, primarily as a
result of a 659,546 Mcf decrease in natural gas production from South
Pass Block 89 Platform B. This decrease has been partially offset by an
increase in production from other properties and an increase in the
contract gas price for natural gas sales from South Pass Block 89. In
March 1996, Well B-11S located on South Pass Block 89 Platform "B" began
to produce high levels of sand. As a result the well was shut-in and
production curtailed. In addition, Well B-20 located on the same
platform has experienced an expected decline in natural gas production.
The decrease in production from Platform B has caused natural gas
revenues to be $6.7 million lower for the six months ended June 30,
1997, compared to the same period in the prior year.
However, natural gas production from other areas, primarily
Platform C producing from South Pass Blocks 86 and 89 and Platform "D"
producing from South Pass Block 87 and West Delta Block 128, increased
by a net of 362,617 Mcf for the six months ended June 30, 1997, compared
to the same period in the prior year which partially offset the decrease
in gas sales from Platform "B" by $1.5 million. Also offsetting the
decrease was an increase in the contract price for natural gas sales
from South Pass Block 89 subject to the long-term gas sales contract
which increases 10% per year and which resulted in additional natural
gas sales totaling $1.4 million. The average sales price for spot gas
sales decreased slightly from $2.68 per Mcf for the six months ended
June 30, 1996 to $2.60 per Mcf for the same period of 1997. The decrease
in spot prices lowered natural gas revenues by $183,000.
During the three months ended June 30, 1997, natural gas sales
decreased $1.5 million or 13% compared to the three months ended June
30, 1996, again primarily as a result of lower natural gas sales volumes
from Platform B in South Pass Block 89. This decrease has been partially
offset by an increase in the contract gas price for natural gas sales
from South Pass Block 89. Natural gas sales from Platform B decreased
208,728 Mcf which caused natural gas revenues to decrease $2.1 million.
The net increase in the contract gas price for natural gas sales from
South Pass Block 89 offset the decrease by $696,000.
Oil sales for the six month period ended June 30, 1997, compared to
the six months ended June 30, 1996, increased $1.6 million or 18%
primarily as a result of a 90,666 barrel increase in oil sales volumes.
Oil production from new wells was 47,506 barrels and increased oil sales
revenue by $835,000. The first Moselle Dome well began producing in late
March of this year and produced 28,037 barrels of oil during the second
quarter of 1997. In addition, the second producing well on the Indian
Wells property produced 15,397 barrels of oil during the first six
months of 1997. The remaining 43,160 barrel and $836,000 increase was
primarily from Platform C and Platform D in South Pass Blocks 86, 87,
and 89 partially offset by a decrease in production on South Pass Block
89 Platform B. Average oil prices decreased slightly from $19.12 to
$18.93 or 1%. The decrease in average prices caused oil revenues to be
$42,000 lower.
Oil sales for the three months ended June 30, 1997 increased
$798,000 or 18% primarily as a result of a 78,255 increase in oil sales
volumes which was partially offset by a $2.53 decrease in the average
oil price. Oil production from new wells was 39,564 barrels and
increased oil sales revenue by $677,000. The new production was from the
Moselle Dome property which produced 28,037 barrels of oil during the
second quarter of 1997 and the Indian Wells property which produced an
additional 8,590 barrels of oil during the second quarter of 1997. The
remaining 38,691 barrels and $782,000 increase was primarily from
Platform C and Platform D in South Pass Blocks 86, 87, and 89 partially
offset by a decrease in production on South Pass Block 89 Platform B.
Average oil prices decreased from $19.98 to $17.45 or 13%. The decrease
in average prices caused oil revenues to be $661,000 lower.
Net Profits expense decreased $2.4 million or 33% for the six
months ended June 30, 1997, compared to the six months ended June 30,
1996, and decreased $602,000 or 21% for the three months ended June 30,
1997, compared to the three months ended June 30, 1996. The decrease in
Net Profits expense primarily resulted from lower oil and natural gas
revenues of $5.2 million and $1.2 million for the six and three months
ended June 30, 1997, respectively, from South Pass Block 89. Such
decrease caused the Net Profits expense to be $1.7 million lower for the
six months ended June 30, 1997, compared to the same period in 1996 and
$388,000 for the three months ended June 30, 1997, compared to the same
period in the prior year. In addition, capital and operating expenses
for South Pass Block 89 increased almost $2.0 million in the first six
months of 1997 and $672,000 for the second quarter when compared to the
prior year periods as a result of drilling costs incurred for Platform
"B" Well B-11S and Well B-9S. The increase in capital and operating
expenses decreased the Net Profits expense by $647,000 for the six
months and $222,000 for the three months ended June 30, 1997.
Exploration expense decreased $8.2 million or 68% during the six
months ended June 30, 1997, compared to the six months ended June 30,
1996, and decreased $7.2 million or 74% during the three months ended
June 30, 1997 compared to the three months ended June 30, 1996. The
decrease for both periods was primarily a result of lower dry hole costs
during the second quarter of 1997. During the second quarter of 1996 the
Company drilled a dry hole on Ship Shoal Block 352 at a total cost of
$7.8 million.
Depreciation, depletion and amortization expense for both the six
and three month periods ended June 30, 1997, increased for the following
three reasons: First, the cost base subject to depreciation, depletion
and amortization was higher in the first two quarters of 1997 compared
to 1996 primarily due to the reallocation of platform capital costs to
the depreciable basis on Platforms C and D in South Pass Blocks 86 and
87. Second, several new properties became producing properties after the
second quarter of 1996 and therefore were subject to depreciation,
depletion and amortization. Finally, the Company increased production
from Platforms C and D in the South Pass area.
General and administrative expenses decreased $122,000 during the
six months ended June 30, 1997, compared to the six months ended June
30, 1996. The decrease was primarily a result of lower salaries and
benefits expenses which resulted from the reduction in the average
number of employees. The decrease was partially offset by higher year to
date legal fees and expenses which related primarily to the Phillips
Petroleum Litigation. In addition general and administrative expense
decreased $703,000 or 20% during the second quarter of 1997 compared to
the second quarter of 1996. The decrease related to lower salaries and
legal fees and expenses. During the second quarter of 1996 the Company
was requested to reimburse legal fees and costs payable to the Cloyce K.
Box Estate for litigation costs incurred with respect to the Griffin
case. Payment was required because of the General Partners' execution of
a written undertaking to repay the Company for any such litigation
expenses advanced for them if it is later decided that such advancements
were not subject to indemnification by the Company.
Reorganization costs were incurred during the first six months of
1997 because of a "change in control" which first occurred when BBHC
replaced the existing Board of Directors by a written consent effective
July 30, 1996, and again occurred when the voting control of BBHC
transferred in February 1997. The "change in control" triggered the
applicability of severance agreements which then resulted in the payment
of severance benefits in applicable situations. In the second quarter of
1997, the accrued expense for the severance agreements were primarily
associated with employees who terminated for "good reason" as defined in
the agreements. Further severance agreement payments may be necessary if
employees terminate for "good reason," which the agreements define very
much to the benefit of the employee, or are terminated by the Company.
The total estimated remaining liability if all severance agreements were
exercised is between $2.0 million and $3.0 million.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Incorporated herein by this reference is the discussion of
litigation set forth in Part I, Item 1, Notes to the Financial
Statements - Note 6. Contingencies of this Form 10-Q.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
On April 16, 1997, the Board of Directors appointed John E. Goble,
Jr. and William E. Greenwood to fill the two existing vacancies on the
Board of Directors. On April 25, 1997, Richard D. Squires resigned from
the Board of Directors and on April 28, 1997, David Preng was appointed
to the Board of Directors.
On July 15, 1997, Amendment No. 6 to the schedule 13D (the
"Amendment No. 6") was filed on behalf of BBHC, the Don D. Box 1996
Trust ("DDBT"), the Gary D. Box 1996 Trust ("GDBT"), the Douglas D. Box
1996 Trust ("DBT"), Gary D. Box, Douglas D. Box and Box Control LLC
("BCLC"). As disclosed in Amendment No. 6, on July 2, 1997, certain
members of BCLC (the DDBT and the GDBT) amended the Regulations of BCLC
to, among other things, (a) allow for non-members of BCLC to serve as
managers of BCLC and (b) allow for a majority of all members of BCLC to
remove and appoint managers of BCLC in accordance with the terms of the
Regulations of BCLC, as amended. In connection with such amendments and
in accordance with the Regulations of BCLC, certain members of BCLC (the
DDBT and the GDBT) acting by and through two of its co-trustees (Gary D.
Box and Douglas D. Box) removed Don D. Box as the sole manager of BCLC
and appointed Gary D. Box and Douglas D. Box to serve as co-managers of
BCLC.
In March 1997, Don D. Box filed a lawsuit in the Deleware Chancery
Court styled Don D. Box and Box Control, LLC, Plaintiffs v. Otto J.
Buis, D. James Fajack, Gary D. Box, Douglas D. Box and Box Brothers
Holding Company, Defendant; relating to management of BCLC and certain
corporate transactions related thereto. In light of the dispute among
various parties and regarding the proper membership of BBHC's Board of
Directors and the Manager(s) of BCLC, on July 22, 1997, the parties
consented to a status Quo Order with respect to the case which requires,
among other things, that until a further court order the business and
affairs of BBHC and subsidiaries and BCLC shall be managed by Douglas D.
Box, Gary D. Box and Don D. Box, with any actions being taken as are
unanimously approved in writing, in advance by Douglas D. Box, Gary D.
Box and Don D. Box.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3.1* Certificate of Incorporation, as amended.
3.2++ By-Laws as amended.
4.1* Form of Indenture.
10.1* Amended and Restated Certificate and Articles of
Limited Partnership of OKC Limited Partnership.
10.2* Restatement and Amendment of Gas Purchase Contract
Dated July 15, 1982, as amended October 5, 1982 and
December 21, 1982 and December 26, 1984.
10.3* Farmout Agreement with Aminoil USA, Inc., effective
May 1, 1977, dated May 9, 1977.
10.4* Transportation Agreement with CKB Petroleum, Inc.
dated March 1, 1985, as amended on April 19, 1989.
10.5* Agreement of Compromise and Amendment to Farmout
Agreement, dated July 3, 1989.
10.6* Settlement Agreement with Texas Eastern Transmission
Corporation, dated November 14, 1990.
10.7* Guarantee of Panhandle Eastern Corporation, dated
November 21, 1990.
10.8* Bill of Sale and Assumption of Obligations from OKC
Limited Partnership, dated April 15, 1992.
10.9* Asset Purchase Agreement, dated April 15, 1992.
10.10* 1992 Incentive Stock Option Plan of Box Energy
Corporation.
10.11* 1992 Non-Qualified Stock Option Plan of Box Energy
Corporation.
10.12** Pension Plan of Box Energy Corporation, effective
April 16, 1992.
10.13# First Amendment to the Pension Plan of Box Energy
Corporation dated December 16, 1993.
10.14## Second Amendment to the Pension Plan of Box Energy
Corporation dated December 31, 1994.
10.15+ Form of Executive Severance Agreement dated as of
December 12, 1995, by and between Box Energy
Corporation and key employees.
10.16+ Form of Letter Agreement regarding severance benefits
dated as of December 12, 1995, by and between Box
Energy Corporation and employees not covered by
Executive Severance Agreements.
10.17 Amended and Restated Promissory Note between Box
Energy Corporation and Box Brothers Holding Company.
10.18 Amended and Restated Pledge Agreement between Box
Energy Corporation and Box Brothers Holding Company.
10.19 Employment Agreement by and between Box Energy
Corporation and James A. Watt.
11.1 Statement regarding computation of earnings per
share.
27 Financial Data Schedule
(b) The Company did not file a Form 8-K during the quarter ended
June 30, 1997.
--------------
*Incorporated by reference to the Company's Registration Statement
on Form S-2 (file number 33-52156) filed with the Commission and
effective on December 1, 1992.
**Incorporated by reference to the Company's Form 10-K (file number
0-19967) for the fiscal year ended December 31, 1992 filed with the
Commission and effective on or about March 30, 1993.
#Incorporated by reference to the Company's Form 10-K (file number
0-19967) for the fiscal year ended December 31, 1993 filed with the
Commission and effective on or about March 30, 1994.
##Incorporated by reference to the Company's Form 10-K (file number
0-19967) for the fiscal year ended December 31, 1994 filed with the
Commission and effective on or about March 30, 1995.
+Incorporated by reference to the Company's Form 10-K (file number
0-19967) for the fiscal year ended December 31,1995 filed with the
Commission and effective on or about March 30, 1996.
++Incorporated by reference to the Company's Form 10-K (file number
1-11516) for the fiscal year ended December 31,1996 filed with the
Commission and effective on or about March 30, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
BOX ENERGY CORPORATION
Date: August 12, 1997 By: /S/ Don D. Box
-------------------- -----------------------------
Don D. Box
Chief Executive Officer
Date: August 12, 1997 By: /S/ J. Burke Asher
-------------------- -----------------------------
J. Burke Asher
Chief Accounting Officer
BOX ENERGY CORPORATION
AMENDED AND RESTATED PROMISSORY NOTE
BETWEEN BOX ENERGY CORPORATION
AND BOX BROTHERS HOLDING COMPANY
Exhibit 10.17
AMENDED AND RESTATED PROMISSORY NOTE
$6,950,000.00 Dallas, Texas
June 3, 1997
FOR VALUE RECEIVED, BOX BROTHERS HOLDING COMPANY, a Delaware
corporation, its permitted successors and assigns, whose address is 1105
North Market Street, Suite 1300, Wilmington, Delaware 19801, (the
"Maker"), promises to pay to the order of BOX ENERGY CORPORATION, a
Delaware corporation, its successors and assigns, at 8201 Preston Road,
Suite 600, Dallas, Texas 75225-6211 (the "Payee"), the principal sum of
SIX MILLION NINE HUNDRED FIFTY THOUSAND AND NO/100 DOLLARS
($6,950,000.00), together with interest on the unpaid principal balance
from time to time remaining from the date hereof until maturity at a
rate per annum equal to the following: (i) during the first six (6)
months of the term of this Note, at the lesser of (a) the Prime Rate (as
herein defined) from time to time in effect plus one percent (1%)
("Applicable Rate") or (b) the Highest Lawful Rate, each change in the
Highest Lawful Rate to become effective without notice to the Maker on
the effective date of such change; and thereafter, (ii) beginning on the
sixth (6th) month following the date hereof and continuing on or before
the same day of each month thereafter, the Applicable Rate shall
increase by a margin of .1% each month over the rate for the immediately
preceding month, but in no event shall such Applicable Rate exceed the
Highest Lawful Rate. The term "Prime Rate" as used herein shall mean the
prime rate of Texas Commerce Bank National Association ("Bank") as
announced from time to time by Bank. The term "Highest Lawful Rate"
means the (a) maximum nonusurious interest rate, if any, that at any
time or from time to time may be contracted for, taken, reserved,
charged, or received on the indebtedness evidenced by this Note under
applicable law. Both principal and interest are payable in lawful money
of the United States of America at the office of the Payee, at the
address provided above, or at such other place as the Payee shall
designate in writing to the Maker.
This Note shall be due and payable as follows:
(i) Monthly installments of principal and accrued interest,
each in the amount of $100,000.00, shall be due and payable, commencing
on June 29, 1997, and continuing on the 29th day of each month
thereafter; and
(ii) All outstanding principal together with all accrued and
unpaid interest shall be due and payable in full on or before May 29,
1998 (the "Maturity Date").
Interest charges shall be calculated on amounts outstanding
hereunder on the actual number of days said amounts are outstanding on
the basis of a 365/366 day year, as the case may be. All past due
principal and interest on this Note shall bear interest from maturity of
such principal or interest up to but excluding the date of actual
payment at a rate per annum equal to the lesser of (i) the Highest
Lawful Rate or (ii) ten percent (10%) per annum computed on the basis of
the actual number of days elapsed over a year of 365/366 days, as the
case may be (the "Default Rate").
Each provision in this Note and each other document executed in
connection herewith or as security herefor, is expressly limited so that
in no event whatsoever shall the amount paid, or otherwise agreed to be
paid, to the Payee for the use, forbearance or detention of the money
lent or to be lent under this Note or otherwise (including any sums paid
as required by any covenant or obligation contained herein or in any
other agreement between the Maker and the Payee which is for the use,
forbearance or detention of such money), exceed that amount of money
which would cause the effective rate of interest to exceed the Highest
Lawful Rate, and all amounts owed under this Note and such other
agreements shall be held to be subject to reduction to the effect that
such amounts so paid or agreed to be paid which are for the use,
forbearance or detention of money under this Note or such other
agreements shall in no event exceed that amount of money which would
cause the effective rate of interest to exceed the Highest Lawful Rate.
Anything in this Note or any other agreement between the Maker and the
Payee to the contrary notwithstanding, the Maker shall never be required
to pay unearned interest on this Note or ever be required to pay
interest on this Note at a rate in excess of the Highest Lawful Rate,
and if the effective rate of interest which would otherwise be payable
with respect to this Note would exceed the Highest Lawful Rate, or if
the Payee shall receive any unearned interest or shall receive monies
that are deemed to constitute interest which would increase the
effective rate of interest payable by the Maker with respect to this
Note to a rate in excess of the Highest Lawful Rate, then (i) the amount
of interest which would otherwise be payable by the Maker with respect
to this Note shall be reduced to the amount allowed under applicable law
and (ii) any unearned interest paid by the Maker or any interest paid by
the Maker in excess of the Highest Lawful Rate shall be in the first
instance credited on the principal of this Note with the excess thereof,
if any, refunded to the Maker. It is further agreed that, without
limitation of the foregoing, all calculations of the rate of interest
contracted for, charged or received by the Payee under this Note, or
under any other agreement between the Maker and the Payee, which are
made for the purpose of determining whether such rate exceeds the
Highest Lawful Rate applicable to the Payee, shall be made, to the
extent permitted by usury laws applicable to the Payee (now or hereafter
enacted), by (a) characterizing any non-principal payment as an expense,
fee or premium rather than as interest and (b) amortizing, prorating and
spreading in equal parts during the period of the full stated term of
the indebtedness evidenced by this Note all interest at any time
contracted for, charged or received by the Payee in connection
therewith.
This Note is secured by that Amended and Restated Security
Agreement dated this same date (the "Security Agreement") executed by
the Maker in favor of the Payee. Said Security Agreement is incorporated
herein by reference, and the provisions thereof are controlling should
there be a conflict between the provisions hereof and thereof. Any
default by Maker under said Security Agreement or under any other
financing arrangement between Maker and Payee will be considered a
default under this Note. In event of any such default, all unpaid
principal and accrued and unpaid interest will accelerate and become
immediately due and payable, upon notice from Payee as provided in the
Security Agreement. Failure of the holder to exercise this option with
respect to any such default shall not constitute a wavier of the Payee's
rights as to any continuing or subsequent breaches. Enforcement by the
holder of this note of any security for the payment hereof shall not
constitute any election by it of remedies so as to preclude the exercise
of any other remedy available to it.
In the event default is made in the payment of this Note in
whatever manner its maturity may be brought about and if this Note is
thereupon placed in the hands of attorneys for collection, or if the
same is collected through probate, bankruptcy or other similar
proceedings, the Maker promises to pay all reasonable attorneys' fees
and expenses incurred by the Payee in connection with such default or
collection proceedings.
This Note and the Security Agreement shall be construed in
accordance with and governed by the laws of the State of Texas and any
applicable laws of the United States of America The Maker hereby
irrevocably agrees that in the event of any dispute involving this Note
or any other instruments executed in connection herewith, venue for such
dispute shall lie in any court of competent jurisdiction in Dallas
County, Texas. Maker and each drawer, accepter, endorser, guarantor,
surety, accommodation party or any other person or entity now or
hereafter primarily or secondarily liable upon or for payment of all or
any part of the principal or interest of this Note ("Obligated
Party(ies)") hereby, jointly and severally, consent that the time of
payment of this Note may be extended from time to time by the holder
hereof without notice to them and without affecting their liability
hereon. Except with respect to notices expressly provided for in the
Security Agreement, each of Maker and each Obligated Party(ies) hereby,
jointly and severally, waives presentment for payment, protest, notice
of acceleration, demand, notice of intent to accelerate and notice of
protest, any and all lack of diligence or delay in collection or the
filing of suit hereon, and all exemptions which Maker or may now or
hereafter be entitled to under the applicable law.
This Note may be prepaid, in whole or in part, without notice or
penalty. All payments (including prepayments) received by the Payee
shall be applied first to the payment of accrued and unpaid interest and
the balance, if any, to the reduction of the principal balance hereof.
This Amended and Restated Promissory Note is a modification,
restatement and extension of the Promissory Note (Single Payment) dated
April 29, 1997, in the original principal amount of $7,250,000.00
executed by Maker payable to the order of Payee and is not delivered in
payment or satisfaction of amounts owing thereunder.
WITNESS: MAKER
BOX BROTHERS HOLDING COMPANY,
a Delaware corporation
/s/ Rebecca Hastings
--------------------
/s/ Robbie Holloway
--------------------
By: /s/ Steven J. Craig
----------------------
Name: Steven J. Craig
-------------------
Title: Vice President
-------------------
BOX ENERGY CORPORATION
AMENDED AND RESTATED PLEDGE AGREEMENT
BETWEEN BOX ENERGY CORPORATION
AND BOX BROTHERS HOLDING COMPANY
Exhibit 10.18
AMENDED AND RESTATED PLEDGE AGREEMENT
This Amended and Restated Pledge Agreement ("Agreement") is made
and entered into as of the 3rd day of June, 1997, by and between BOX
ENERGY CORPORATION, a Delaware corporation ("Secured Party") and BOX
BROTHERS HOLDING COMPANY, a Delaware corporation ("Debtor").
For and in consideration of the mutual covenants and conditions
contained herein and good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Debtor and Secured Party
hereby agree as follows:
ARTICLE 1
DEFINITIONS
Unless the context otherwise requires, as used in this Agreement
and the Note, the following terms shall have the following meanings,
which meanings shall be equally applicable to both the singular and
plural form of such terms:
1.1 Additional Collateral. The term "Additional Collateral" shall
mean those Assets of Debtor subjected to a security interest or lien in
favor of Secured Party pursuant to the provisions of Section 3.3 hereof.
1.2 Additional Collateral Value. The term "Additional Collateral
Value" shall mean as of any date of determination an amount equal to the
Fair Market Value of all Collateral other than the Pledged Stock on the
date of determination.
1.3 Agreement. The term "Agreement" shall mean this Security
Agreement, with any and all exhibits and schedules attached hereto as
the same may be, subject to Section 8.2 hereof, amended, supplemented or
otherwise modified in writing from time to time.
1.4 Asset. The term "Asset" shall mean any interest or right in
any kind of property or asset, whether real, personal or mixed, owned or
leased, tangible or intangible, and whether now held or hereafter
acquired, including, without limitation (i) all of the issued and
outstanding shares of capital stock of any subsidiary of Debtor now
owned or hereafter acquired by Debtor and (ii) all of the issued and
outstanding shares of capital stock of Box Energy Corporation now owned
or hereafter acquired by Debtor.
1.5 Business Day. The term "Business Day" shall mean a day, other
than a Saturday or Sunday, or legal holiday in the State of Texas, on
which commercial banks are open for business with the public in Dallas,
Texas.
1.6 Class A Collateral Value. The term "Class A Collateral Value"
shall mean as of any date of determination an amount equal to the
product of (i) an amount equal to the greater of (x) the Trading Price
of the Class A Common Stock of Box Energy Corporation on such date and
(y) 90% of the average Trading Price of the Class A Common Stock of Box
Energy Corporation for the thirty (30) day period ending on (and
including) the date determination times (ii) the number of shares of
Class A Common Stock of Box Energy Corporation pledged by Debtor as
security for the Secured Obligations on such date.
1.7 Class A Shares. The term "Class A Shares" shall have the
meaning given it in Section 3.1(a) hereof.
1.8 Closing Date. The term "Closing Date" shall be the effective
date of this Agreement.
1.9 Collateral. The term "Collateral" shall have the meaning set
forth in Section 3.1 hereof.
1.10 Collateral Request. The term "Collateral Request" shall mean a
written request from Secured Party for "Additional Collateral", such
"Collateral Request" to be effective only upon a day when the Collateral
Value of all Collateral of Debtor in which Secured Party then has a
perfected security interest does not equal or exceed the Minimum
Collateral Value.
1.11 Collateral Value. The term "Collateral Value" shall mean, as
of any date of determination, the sum of (i) the Class A Collateral
Value as of such date plus (ii) the Fair Market Value of the common
stock of CKB Petroleum, Inc. and CKB & Associates, Inc. (the "Subsidiary
Stock").
1.12 Event of Default. The term "Event of Default" shall mean the
occurrence of any of the events set forth in Section 7.1 hereof.
1.13 Fair Market Value. The term "Fair Market Value" shall mean
that value assigned to an Asset(s) by Debtor at any time of
determination of the Collateral Value of the Additional Collateral
(other than freely tradable capital stock of Box Energy Corporation)
hereunder. Within thirty (30) calendar days after Debtor has notified
Secured Party in writing of the Fair Market Value it assigned to such
Asset(s), Secured Party shall notify Debtor in writing whether it agrees
or disagrees with the assigned Fair Market Value. If Secured Party
disagrees with such assigned Fair Market Value, representatives of
Debtor and representatives of Secured Party shall meet and endeavor to
agree in arm's length good faith negotiations on the Fair Market Value
of said Asset(s). If, after negotiation for a period not to exceed
thirty (30) calendar days from Secured Party's notification that it
disagrees with Debtor's assigned Fair Market Value, the parties cannot
agree on the Fair Market Value of a particular Asset(s), Debtor shall
select an independent appraiser from a list of three (3) such
independent appraisers provided by Secured Party, which appraiser shall
appraise the Asset(s) and determine its Fair Market Value. If the Fair
Market Value assigned to an Asset(s) by Debtor is overstated by an amount
equal to or greater than ten percent (10%) of the Fair Market Value
determined by the appraiser, Debtor shall bear one hundred percent
(100%) of the fees and expenses of the appraiser. Otherwise the fees and
expenses of the appraiser shall be borne by Secured Party.
1.14 Highest Lawful Rate. The term "Highest Lawful Rate" shall mean
the maximum nonusurious rate of interest, if any, that at any time or
from time to time may be contracted for, taken, reserved, charged or
received with respect to the Note or on other amounts, if any, due to
Secured Party pursuant to this Agreement or any other Operative
Document, under laws applicable to Secured Party.
1.15 Initial Collateral. The term "Initial Collateral" shall mean
the property identified in Section 3.1(a-c) herein.
1.16 Loan. The term "Loan" shall mean the aggregate of all amounts
due under this Agreement and the Note.
1.17 Maturity Date. May 29, 1998, or such earlier date as the
Secured Obligations shall become due through acceleration.
1.18 Minimum Collateral Value. The term "Minimum Collateral Value"
shall mean that amount of Collateral Value equal to two dollars ($2.00)
for each one dollar ($1.00) of unpaid Principal Debt.
1.19 Note. The term "Note" shall mean that promissory note dated
even date herewith by Debtor payable to the order of Secured Party in
the original principal amount of $6,950,000.
1.20 Operative Documents. The term "Operative Documents" shall mean
this Agreement and the Note.
1.21 Permitted Encumbrances. The term "Permitted Encumbrances"
shall mean:
(a) Liens for taxes, assessments or similar charges which are not
yet due, or liens for taxes, assessments or similar charges which are
past due for which adequate reserves with respect thereto are maintained
on its books in accordance with generally accepted accounting principles
and which are being diligently contested in good faith and have not
proceeded to judgment;
(b) imperfections and irregularities in title to any Asset which
in the aggregate do not materially impair the fair market value or use
of such Asset for the purposes for which it is or may reasonably be
expected to be held;
(c) non-consensual liens arising in the ordinary course of
business imposed by law (other than a lien imposed by ERISA), including
carrier's, mechanic's, materialmen's, landlord's, warehousemen's or
other similar liens, with respect to obligations not incurred in
connection with any violations of law and which are not delinquent or,
if delinquent, are being diligently contested in good faith and for
which adequate reserves with respect thereto are maintained on its books
in accordance with generally accepted accounting principles.
(d) Liens consisting of pledges or deposits made in connection
with obligations under unemployment insurance, social security, workers'
compensation laws or similar legislation;
(e) Liens consisting of pledges or deposits of property to secure
insurance in the ordinary course of business, the performance of bids,
tenders, contracts (other than contracts for the payment of money),
leases, licenses, franchises, performance bonds and other obligations of
a like nature incurred in the ordinary course of business;
(f) Liens consisting of deposits of property to secure statutory
obligations of Debtor in the ordinary course of its business;
(g) all other non-consensual liens arising in the ordinary course
of Debtor's business or incidental to the ownership of Debtor's Assets;
provided, that no Permitted Encumbrance referred to in subclauses (a)
through (g) above shall (1) secure indebtedness, (2) in the aggregate
materially detract from the value of the material Assets of Debtor and
its Subsidiaries or materially impair the use thereof in the operation
of the business of Debtor and its Subsidiaries, or (3) be
disadvantageous in any material respect to Secured Party; and
(h) Liens on Assets of Debtor other than the Collateral, including
liens on Assets of Debtor that ultimately become Additional Collateral
to the extent that such liens arise prior to the date upon which such
Assets become Additional Collateral.
1.22 Person. The term "Person" shall mean an individual
corporation, partnership, association, joint stock company, trust or
trustee thereof, estate or executor thereof, unincorporated organization
or joint venture, court or governmental unit or any agency or
subdivision thereof, or any other legally recognizable entity.
1.23 Pledged Stock. The term "Pledged Stock" shall mean the issued
and outstanding shares of Class A Common Stock of Box Energy
Corporation, a Delaware corporation and the Subsidiary Stock owned
beneficially and of record by Debtor and pledged to Secured Party
pursuant to the provisions of this Agreement.
1.24 Potential Event of Default. The term "Potential Event of
Default" shall mean the occurrence of any breach of or failure to
perform in accordance with any of the covenants set forth in this
Agreement which, if not timely cured by Debtor within the specified cure
or grace periods, would become an Event of Default.
1.25 Principal Debt. The term "Principal Debt" shall mean the
aggregate unpaid principal balance of the Note due to Secured Party at
the time in question, whether matured, unmatured, due, not yet due, or
in default.
1.26 Secured Obligations. The term "Secured Obligations" shall mean
all obligations owing by Debtor to Secured Party under the Operative
Documents, including principal, interest, liabilities, obligations,
covenants, and duties owing to Secured Party or any of their respective
heirs, successors and assigns, present or future arising under this
Agreement or the Note, whether or not for the payment of money, whether
arising by reason of an extension of credit, loan, indemnification, or
in any other manner. The term includes, without limitation, all
reasonable charges, expenses, fees, attorneys' fees and disbursements
and any other sum chargeable to Debtor under this Agreement or any other
Operative Document.
1.27 Subsidiary Stock. The term "Subsidiary Stock" shall have the
meaning given it in Section 1.11 hereof.
1.28 Tom Box Litigation. The term "Tom Box Litigation" shall mean
those two actions presently pending in which Tom Box is the Plaintiff
and Debtor is, among others, the defendant, to wit: Tom Box v. Gary
Box, Don Box, Doug Box, Box Brothers Holding Company, Inc. [sic] and Box
Energy Corporation, Cause No. 96-08451 pending in the 193rd District
Court, Dallas, Texas and Tom Box v. Gary Box, Don Box and Doug Box,
Defendants, and Box Brothers Holding Company, Inc. [sic], Cause No. 3-96
CV2362-X pending in the United States District Court for the Northern
District of Texas.
1.29 Stated Interest Rate. The term "Stated Interest Rate" shall
mean the rate of interest payable under the Note.
1.30 Trading Price. The term "Trading Price" shall mean the average
of the "high" and "low" price at the closing of trading on a given day,
as published in The Wall Street Journal. For purposes of determining
the "Trading Price," if no Class A shares have traded on a particular
day during a period for which the Trading Price is being calculated,
such day shall be excluded in calculating the Trading Price for such
period.
ARTICLE II
AMOUNT AND TERMS OF LOAN
2.1 Principal Debt. Debtor acknowledges an initial Principal Debt
of $6,950,000 to be due and owing to Secured Party as of the Closing
Date.
2.2 Note. The initial Principal Debt shall be evidenced by the
Note.
2.3 Interest Rate. The outstanding principal balance of the Note
shall bear interest at the Stated Interest Rate from the date of the
Note until maturity.
2.4 Computation of Interest. Subject to the provisions of Section
2.7 hereof, all interest payable hereunder shall be computed at the
Stated Interest Rate for the actual number of days elapsed during any
period for which interest is calculated.
2.5 Payments. All payment and prepayments of principal, interest
and other charges or fees hereunder shall be made in lawful currency of
the United States of America, in immediately available funds. All such
payments shall be payable at Secured Party's address set forth below or
at such other place or places as Secured Party may from time to time
designate in writing to Debtor. If any payment of principal or interest
on the Note, or if any other payment or fee provided for in the
Operative Documents, falls due on a day other than a Business Day, then
such due date will be extended to the next succeeding Business Day, and
interest will accrue through the actual date of such payment and be
payable by Debtor in respect of any such extension of principal. The
Secured Obligations shall be due and payable in accordance with the
terms of the Note. The entire Principal Debt, together with all accrued
but unpaid interest thereon, and together with all other sums (if any)
due and owing by Debtor to Secured Party pursuant to the Operative
Documents, shall be due and payable, if not sooner paid, or if not
otherwise renewed or extended, on or before the Maturity Date.
2.6 Voluntary Prepayments. Debtor may, at its option, voluntarily
prepay the Secured Obligations in whole or in part at any from time to
time, without notice, penalty or charge.
2.7 Maximum Interest; Controlling Agreement. It is the intention
of the parties hereto to conform strictly to the usury laws in force
that apply to this transaction. Accordingly, all agreements between
Secured Party and Debtor (including, without limitation, the Operative
Documents), whether now existing or hereafter arising and whether
written or oral, are hereby limited so that in no contingency, whether
by reason of acceleration of the maturity of the Secured Obligations or
otherwise, shall the interest (and all other sums that are deemed to be
interest) contracted for, charged or received by Secured Party with
respect to the Operative Documents, exceed the Highest Lawful Rate. If,
from any circumstance whatsoever, interest under the Operative Documents
would otherwise be payable in excess of the Highest Lawful Rate, and if
under any circumstance Secured Party shall ever receive anything of
value deemed interest by applicable law in excess of the Highest Lawful
Rate, then Secured Party's receipt of such excess interest shall be
deemed unintentional and the same shall, be in the first instance
credited to the unpaid principal of the Note with the excess thereof, if
any, refunded to Debtor. If the Secured Obligations are prepaid or the
maturity of the Secured Obligations (or any portion thereof) is
accelerated, then unearned interest, if any, shall be canceled and, if
theretofore paid, shall be in the first instance credited on the Secured
Obligations, with the excess thereof, if any, refunded to Debtor. All
interest paid or agreed to be paid to Secured Party shall, to the extent
allowed by applicable law, be amortized, prorated, allocated, and spread
throughout the full period until payment in full of the principal
(including the period of any renewal or extension) so that the interest
for such full period shall not exceed the Highest Lawful Rate.
Notwithstanding that the parties hereto in good faith deemed each and
every fee provided by this Agreement and the other Operative Documents
to a bona fide fee for services rendered and to be rendered separate and
apart from the lending of money or the provision of credit, if any such
fee is ever determined by a tribunal or by Secured Party to constitute
interest, then the treatment of such fee for usury purposes shall be
controlled by the provisions of this Section 2.7.
ARTICLE III
SECURITY AGREEMENT
3.1 Security Interest. Upon the terms hereof, Debtor hereby grants
to Secured Party a security interest in and to, and lien on, the rights,
titles, and interests of Debtor in and to all of the following Assets
(all of the following Assets being herein sometimes collectively called
the "Collateral"):
(a) 1,840,525 shares of the issued and outstanding Class A
(Voting) Common Stock of Box Energy Corporation, a Delaware corporation,
as evidenced by certificate no. BEA 977 issued in the name of Debtor
(the "Class A Shares");
(b) 800,000 shares of Common Stock, par value $.01, of CKB
Petroleum, Inc., a Texas corporation, as evidenced by certificates nos.
1 and 2 issued in the name of Debtor;
(c) 800,000 shares of Common Stock, par value $.01 of CKB &
Associates, Inc., a Texas corporation, as evidenced by certificate no. 8
issued in the name of Debtor;
(d) all Additional Collateral when and as delivered by Debtor to
Secured Party pursuant to the provisions of Section 3.3 of this
Agreement;
(e) all stock or other securities or property which are issued
pursuant to conversion, exercise of rights, stock splits,
recapitalization, stock dividends, subscriptions, warrants, rights or
options, or other corporate acts which are referable to, or issued in
connection with, the Collateral (such distributions herein called the
"Additional Pledged Securities") and all distributions, whether cash or
non-cash, in the nature of a partial or complete liquidation,
dissolution or winding up which are referable to the Collateral (such
distributions herein called the "Liquidating Distributions"); and
(f) all substitutions for and replacements of, and proceeds and
products of any and all of the foregoing Collateral.
3.2 Delivery of Pledged Stock. On the Effective Date, Debtor shall
place the Initial Collateral in pledge by delivering the Certificates
evidencing the Initial Collateral to, and depositing them with Secured
Party. Debtor shall deliver to Secured Party, concurrently herewith,
undated assignments separate from the Certificates duly executed in
blank together with all other documents and assignments deemed
appropriate by Secured Party in form suitable to enable Secured Party to
effect the transfer of all or any portion of the Collateral to the
extent hereinafter provided.
3.3 Additional Collateral. (a) If Secured Party determines at any
time prior to maturity, that the Collateral held by Secured Party does
not have a Collateral Value equal to or in excess of the Minimum
Collateral Value, then Debtor shall promptly, upon receipt of Secured
Party's Collateral Request, grant to Secured Party a security interest
(subject to Permitted Encumbrances) in such of the Additional Collateral
(in the order and as designated by Debtor) as is required such that the
Collateral Value of all Collateral held by Secured Party equals or
exceeds the Minimum Collateral Value. Within five (5) Business Days
after receipt of Secured Party's Collateral Request, Debtor shall
execute and deliver security agreements in form and content (i)
satisfactory to Secured Party and (ii) consistent with this Agreement,
along with such UCC 1 Financing Statements, blank stock powers, and
other documents reasonably required by Secured Party, including without
limitation, notice of the Collateral Value of such Additional Collateral
(other than Class A Common Stock of Box Energy Corporation).
3.4 Obligations Secured. The security interests and liens herein
granted shall secure the payment in full and the performance of the
Secured Obligations and any and all renewals, extensions, increases or
modifications of any of the foregoing.
3.5 Partial Release of Security Interests. If and to the extent
that Secured Party shall hold security interests in any Collateral whose
aggregate Collateral Value exceeds the Minimum Collateral Value, then,
upon Debtor's written request, Secured Party shall promptly release its
security interests in such of the aggregate excess Collateral (i) as
shall be designated by Debtor; provided, that all Additional Collateral
(other than the Class A Common Stock of Box Energy Corporation) shall be
released prior to the designation by Debtor of any Class A Common Stock
of Box Energy Corporation and (ii) as shall leave pledged to Secured
Party Collateral having an aggregate Collateral Value equal to or in
excess of the Minimum Collateral Value. Secured Party's release of its
security interests in the such Additional Collateral shall be
accomplished by Secured Party's prompt execution and delivery to Debtor
of collateral release forms furnished by Secured Party in form and
content consistent with this Agreement, along with such UCC-3 and other
documents reasonably requested by Debtor.
3.6 Intentions of the Parties Regarding Additional Collateral. It
is the intention of the parties that, so long as any of the Secured
Obligations remain outstanding, Secured Party shall have the benefit of,
and be secured by, a pledge of, or security interest in, Collateral
having a Collateral Value equal to, but not less or more than the
Minimum Collateral Value. Therefore, as Collateral Value may vary from
time to time, adjustment in the aggregate Collateral held by Secured
Party may be appropriate, either by increasing or decreasing the
security interest held by Secured Party. No limitation of the right of
either Secured Party or Debtor to cause such adjustment is intended by
this Agreement, except that neither party may request an adjustment (i)
more often than thirty (30) calendar days from the date of the last
request from either party or (u) for dollar amounts of less than
$100,000. The method of such adjustment(s) is detailed in Sections 3.3
and 3.5 hereof.
3.7 No Further Financing Statements. Without the prior written
consent of Secured Party, Debtor will not affirmatively permit any
financing statement to be filed in any public office involving any of
the Collateral unless such financing statement relates to a Permitted
Encumbrance, which consent shall not be unreasonably withheld.
ARTICLE IV
DEBTOR'S COVENANTS AND AGREEMENTS
Debtor hereby covenants and agrees that, so long as this Agreement
is in effect and until all Secured Obligations are satisfied in full,
unless compliance shall have been waived in writing by Secured Party,
Debtor will do the following:
4.1 Reports. Debtor shall furnish an annual financial statement to
Secured Party as soon as available and in any event within sixty (60)
calendar days after the end of each fiscal year. Each annual financial
statement shall either be audited, compiled or reviewed by independent
certified public accountants selected by Debtor. Each annual financial
statement shall contain a balance sheet as of the end of such fiscal
year and statements of income and cash flows, for such fiscal year, each
setting forth in comparative form, to the extent possible, the
corresponding figures for the preceding fiscal year.
4.2 Notice of Change. Debtor will promptly notify Secured Party in
writing of (i) any change of location of its principal offices, (ii) any
significant acquisition, disposition or reorganization of any corporate
subsidiary or Affiliate and (iii) change of Debtor's name (corporate
names and assumed names).
4.3 Records and Inspections. Debtor will at all times keep
complete and accurate records pertaining to the Collateral, which
records shall be current and located at Debtor's principal place of
business. Upon reasonable written notice, Secured Party shall have the
right to enter any such location, at any reasonable time or times during
regular business hours, for reasonable periods, to inspect the
Collateral and to inspect and to make copies or extractions from
Debtor's books and records which directly pertain to the Collateral, all
at Secured Party's expense. Unless there is an Event of Default, Secured
Party may not conduct more than two (2) inspections covering a period of
not more than two (2) Business Days each per year.
4.4 Protection of Business Records. Debtor hereby agrees to take
the reasonable protective actions to preserve its business records.
4.5 Opinion of Counsel. Upon the Closing Date, Debtor shall
deliver to Secured Party an opinion of counsel, in form and content
satisfactory to Secured Party containing such matters concerning Debtor
and the perfection of Secured Party's secured interests in the
Collateral as Secured Party may request.
4.6 Further Assurances.
(a) Debtor covenants and agrees to from time to time promptly
execute and deliver to Secured Party all such other security agreements,
assignments, certificates, writings and financing statements as Secured
Party reasonably requests in order to perfect or evidence the liens and
security interests herein granted. Debtor further agrees that if Debtor
shall at any time acquire any Additional Pledged Securities or
Liquidating Distributions, and whether such acquisition shall be by
purchase, exchange, reclassification, stock dividend, or otherwise,
Debtor shall forthwith (and without the necessity for any request or
demand by Secured Party) deliver the certificates representing such
shares to Secured Party, in the same manner and with the same effect as
described in Section 3 hereof. Upon delivery, such shares shall
thereupon constitute "Collateral" and shall be subject to the liens and
security interests herein created, for the purposes and upon the terms
and conditions set forth in this Agreement and the other Operative
Documents. Debtor agrees that, in lieu of filing a separate financing
statement, Secured Party may file this Agreement as a financing
statement, at Secured Party's cost.
(b) Debtor will promptly execute and deliver or cause the
execution and delivery of, all applications, certificates, instruments,
registration statements, and all other documents and papers Secured
Party may reasonably request in connection with properly documenting the
transactions contemplated hereby or effectuating any of the transactions
described herein, including, without limitation, the obtaining of any
consent, approval, registration, qualification, or authorization of any
other Person necessary or appropriate for the effective exercise of any
rights under this Agreement. Without limiting the generality of the
foregoing, Debtor agrees that in the event Secured Party shall exercise
any rights to sell, transfer, or otherwise dispose of, or vote, consent,
or take any other action in connection with any of the Collateral
pursuant to this Agreement, Debtor shall execute and deliver all
applications, certificates, and other documents as Secured Party may
reasonably request and shall otherwise promptly, fully and diligently
cooperate with Secured Party and any other necessary Persons, in making
any application for the prior consent or approval of any other Person to
the exercise by Secured Party of any rights relating to all or any of
the Collateral.
(c) Subject to the Permitted Encumbrances, Debtor will preserve,
warrant, and defend the liens and security interests created hereby in
the Collateral against the claims of all Persons whomsoever; will
maintain and preserve such liens and security interests at all times as
contemplated by the Operative Documents; will not at any time assign,
transfer, or otherwise dispose of its right, title and interest in and
to any of the Collateral; will not at any time directly or indirectly
create, assume, or suffer to exist any lien, warrant, put, option, or
other rights of third Persons and restrictions in the Collateral, other
than the liens and security interests created by this Agreement and any
Permitted Encumbrance; and will not do or suffer any matter or thing
whereby the liens and security interests created by this Agreement in
and to the Collateral might or could be impaired.
4.7. Conversions; etc. Should the Pledged Stock, or any other
securities comprising a part of the Collateral, or any part thereof,
ever be in any manner converted by issuers into another property of the
same or another type or any money or other proceeds other than dividends
ever be paid or delivered to Debtor as a result of Debtor's rights in
the Pledged Stock, or any other securities comprising a part of the
Collateral, then in any such event (except as otherwise provided
herein), all such property, money and other proceeds shall be and/or
become part of the Collateral, and Debtor covenants forthwith to pay or
deliver to Secured Party all of the same which is susceptible of
delivery; and at the same time, if Secured Party deems it necessary and
so requests, Debtor will properly endorse or assign the same to Secured
Party. Without limiting the generality of the foregoing, Debtor hereby
agrees that the shares of capital stock of the surviving corporation in
any merger or consolidation involving issuers of any of any securities
comprising a part of the Collateral shall be deemed to constitute the
same property as the Collateral. With respect to any such property of a
kind requiring an additional security agreement, financing statement or
other writing to perfect a security interest therein in favor of Secured
Party, Debtor will forthwith execute and deliver to Secured Party
whatever Secured Party shall reasonably deem necessary or proper for
such purpose.
4.8. No Duty to Fix or Preserve Rights. Secured Party shall have
no duty to fix or preserve against prior parties to the Collateral nor
shall Secured Party ever be liable for failure to use diligence to
collect any amount payable with respect to the Collateral, or any part
thereof, but shall be liable only to account to Debtor for what Secured
Party may actually collect or receive thereon.
ARTICLE V
REPRESENTATION AND WARRANTIES
5.1 Representations and Warranties. Debtor represents and warrants
to Secured Party as follows:
A. Debtor is a corporation duly organized, validly existing
and is in good standing under the laws of the State of Delaware, is duly
qualified to do business and is in good standing as a foreign
corporation in all states where such qualification is required and has
all necessary corporate power and authority to enter into this
Agreement, to execute each of the Operative Documents and to pledge the
Collateral for the purposes and upon the terms set forth herein and to
perform all of its obligations hereunder and thereunder and to operate
its businesses.
B. Debtor has taken all requisite corporate action to
authorize the execution and delivery of and performance of its
obligations under the Operative Documents. Each of the Operative
Documents and all other documents required by this Agreement constitutes
the legal, valid and binding obligation of Debtor enforceable against
Debtor in accordance with its terms.
C. The execution, delivery and performance by Debtor of the
Operative Documents to which Debtor is a party, the compliance by Debtor
with the terms and provisions thereof and the consummation of each of
the transactions contemplated thereby, do not and shall not, by the
lapse of time, the giving of notice or otherwise, (i) constitute a
violation of any federal, state or local law, rule or regulation, order,
writ, judgment, injunction, or decree presently binding on Debtor or a
breach of any provision contained in the certificate of incorporation or
bylaws of Debtor, (ii) constitute a breach of any material provision
contained in any indenture, loan or credit agreement, mortgage or deed
of trust, or any other material agreement, lease or instrument to which
Debtor is a party or by which Debtor or its Assets are bound, (iii)
constitute a tortious interference with any material contractual
obligation of Debtor or (iv) result in or require the creation or
imposition of any lien, security interest charge or other encumbrance
whatsoever upon any of the Assets of Debtor (other than Permitted
Encumbrances and liens in favor of Secured Party arising pursuant to the
provisions of this Agreement).
D. No consent, approval, license, exemption of or filing or
registration with, giving of notice, to, or other authorization of or
by, any court, administrative agency or other governmental authority is
or will be required in connection with the execution, delivery or
performance by Debtor of this Agreement and the other Operative
Documents or for the valid consummation of the Transactions contemplated
by this Agreement and the other Operative Documents.
E. Neither this Agreement nor any statement or document
referred to herein or delivered to Secured Party by or on behalf of
Debtor contains any untrue statement of a material fact or omits to
state a material fact necessary to make the statements made herein or
therein not misleading. Except for the Tom Box Litigation, there is no
fact peculiar to Debtor which materially and adversely affects or is
likely to materially and adversely affect the business, conditions or
operations (financial or otherwise) of Debtor taken as a whole, which
has not been set forth in this Agreement or in other documents,
certificates and written statements furnished or otherwise available to
Secured Party by or on behalf of Debtor contemporaneously with the
transactions contemplated hereby.
F. Debtor presently has good and marketable title to and
ownership of the Collateral, free and clear of all liens, claims,
security interests and encumbrances except those of Secured Party and
any Permitted Encumbrances.
G. The pledge, assignment and delivery of the Initial
Collateral pursuant to this Agreement creates in favor of Secured Party
a valid first priority security interest in the Initial Collateral which
security interest is perfected and senior to any liens, security
interest, encumbrances, warrants, options, puts, calls or other such
rights of third persons and adverse claims. As of the Closing Date, the
Collateral Value of the Initial Collateral is greater than $13,900,000.
The certificate(s) representing the Initial Collateral have been
delivered to and are in the physical possession of Secured Party and a
duly executed blank stock power for each such certificate has been
delivered to Secured Party.
H. Debtor is in compliance with all laws, rules,
regulations, order and decrees that are applicable to Debtor or the
Collateral or any of its respective Assets.
I. All of the Collateral consisting of Pledged Stock has
been offered, issued, sold and delivered in compliance with, or are
exempt from, all federal and state laws and rules and regulations of
federal and state regulatory bodies governing the offering, issuance,
sale and delivery of securities. Each security which is part of the
Collateral has been duly authorized, validly issued and fully paid and
is nonassessable and has not been issued in violation of any preemptive
or similar right.
J. Debtor is generally able to pay its obligations as they
become due, has sufficient capital to carry on its business and
transactions and all businesses and transactions in which it intends to
engage, and the current value of Debtor's Assets, at fair market value,
exceeds the sum of its liabilities (including contingent, unliquidated
and unmatured liabilities). Debtor will not be rendered insolvent by the
execution and delivery of the Operative Documents and the consummation
of the transactions contemplated thereby and the capital remaining in
Debtor is not now and will not foreseeably become unreasonably small to
permit Debtor to carry on its current business and transactions, as well
as all businesses and transactions in which it intends to engage. Debtor
does not intend to, nor does it reasonably believe it will, incur debts
beyond its ability to repay the same as they mature.
K. No event has occurred and is continuing that constitutes
an Event of Default or, except for the Tom Box Litigation, Potential
Event of Default. Debtor is not in default or in violation under any
charter document or indenture, or under any credit or loan agreement,
indenture, lease, franchise, marketing agreement, license, mortgage,
deed of trust, or any other material agreement, undertaking or
arrangement (written or oral) to which it is a party or under which it
or any of its Assets may be bound.
L. Except as disclosed to Secured Party and except for the
Tom Box Litigation, there are no material actions, suits or proceedings
pending, or, to the best knowledge of Debtor, threatened against or
affecting the Assets of Debtor, or the consummation of the transactions
contemplated hereby, at law or in equity or before or by any
governmental authority or instrumentality or before any arbitrator of
any kind, and, to the best knowledge of Debtor, there is no valid basis
for any such action, proceeding or investigation. Debtor is not subject
to any judgment, order, writ, injunction or decree of any court or
governmental agency. There is not a reasonable likelihood of an adverse
determination of any pending proceeding which would, individually or in
the aggregate, have a material adverse effect on the business or
operations or financial condition of Debtor.
M. Except as disclosed to Secured Party, Debtor (i) has no
contingent or direct liabilities or unrealized or anticipated losses
which in the aggregate are material; (ii) has no material commitments of
an unusual or burdensome character, and (iii) is not a party to, or
bound by, any contract or agreement or subject to any charter or other
corporate restriction having a material adverse effect on the financial
condition or business operations of Debtor.
N. Debtor is not a party to any reorganization, arrangement,
composition, readjustment, dissolution, rehabilitation, liquidation, or
similar proceeding under any provision of any law, nor has it consented
to the filing of any petition against it under any such law.
O. None of the transactions contemplated in connection with
this Agreement and for its duration violate any provision of the
securities laws of the United States, including the Securities Act of
1933, as amended, and the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder by the Securities
Exchange Commission, or the securities and "blue sky" laws of the
various states.
P. There are no material labor disputes (a) pending or (b)
to the best knowledge of Debtor, threatened or anticipated between
Debtor and any group or groups of its employees.
Q. All tax returns of Debtor required by law to be filed
have been filed and all taxes imposed upon Debtor or its Assets, which
are due and payable, have been paid, or otherwise dealt with under the
Plan; and no amounts of taxes not reflected on such returns are
presently payable by Debtor other than taxes which are being or will be
diligently contested in good faith by appropriate legal proceedings,
none of which, individually or collectively, will have a material and
adverse effect on the financial condition or business operation of
Debtor.
R. The securities constituting the Class A Shares are and
will be freely marketable and subject to a shelf registration that will
permit Secured Party to freely transfer the securities without any
further registration in the event Secured Party forecloses on the
Collateral following an Event of Default.
ARTICLE VI
COVENANTS AND OTHER AGREEMENTS
6.1 Affirmative Covenants. During the term of this Agreement and
so long as any of the Secured Obligations remain unpaid, Debtor agrees
and covenants that:
A. Debtor will timely (i) file all required tax returns; and
(ii) pay or contest all taxes, assessments and other government
charges or levies imposed upon it or upon its income, profits or Assets.
B. Debtor will maintain, preserve and protect the Collateral
and its other Assets.
C. Debtor will carry on and conduct its business in the same
manner and the same fields of enterprise as it is presently engaged,
and, using its business judgment, Debtor will do all things necessary to
preserve its respective existence, good standing or qualifications as a
domestic corporation in the jurisdiction of its incorporation and as a
foreign corporation in every jurisdiction in which the character of its
Assets or the nature of the business transacted by it at any time makes
qualification as a corporation necessary, provided, however, nothing
herein shall be construed to prevent Debtor from modifying or otherwise
dealing with its business and its Assets in the good faith exercise of
its business judgment.
D. Debtor shall conduct its business and affairs in
compliance with all Laws, regulations, and orders applicable thereto
which are material to Debtor, to Secured Party, or to any Collateral.
E. Debtor shall maintain the free marketability of the
securities constituting the Class A Shares and shall maintain in effect
a shelf registration that will permit Secured Party to freely transfer
such securities without any further registration in the event Secured
Party forecloses on such securities following an Event of Default.
6.2 Negative Covenants. During the term of this Agreement and so
long as any of the Secured Obligations remain unpaid, Debtor covenants
and agrees that it shall not, without Secured Party's prior written
consent do any of the following:
A. Substantially change its method of accounting except
approved by its independent certified public accountants.
B. Enter into any material agreement or arrangement that
would be violated or breached by the performance of its obligations
under the Operative Documents.
C. Fail to maintain the free marketability of the securities
constituting the Collateral and/or fail to maintain in effect a shelf
registration that will permit Secured Party to freely transfer such
securities without any further registration in the event Secured Party
forecloses on such securities following an Event of Default.
D. After the occurrence of an Event of Default, pay any
dividends, or return any capital to its stockholders or authorize or
make any other distribution, payment or delivery of property or cash to
stockholders as such, or redeem, retire, purchase or otherwise acquire
directly or indirectly, for a consideration any shares of any class of
its capital stock now or hereafter outstanding, or set aside any funds
for any of the foregoing purposes. Without Secured Party's consent,
which shall not be unreasonably withheld, wind up, liquidate, dissolve
the affairs of Debtor or enter into any transaction or merger or
consolidation, or convey, sell, lease, or otherwise dispose of (or agree
to do nay of the foregoing at any future time) all or substantially all
or a substantial part of its property or assets or any part of such
property or assets essential to the conduct of its business
substantially as now conducted, or any of its notes receivable,
installment or conditional sales agreements, or accounts receivable.
E. Make any investments in any of its existing direct or
indirect subsidiaries or any new direct or indirect subsidiaries of
Debtor. Lend money or credit or make advances to any Person except
advances made to employees of the Debtor for the payment by them of
items for which an expense report or voucher will be filed and which
items will constitute ordinary and necessary business expenses of
Debtor.
ARTICLE VII
EVENTS OF DEFAULT AND REMEDIES
7.1 Events of Default. The occurrence of any one or more of the
following events shall constitute an Event of Default;
A. Subject to paragraph 7.2, if any payment of principal or
interest under the Note is not paid within ten (10) calendar days of its
due date; or
B. If Debtor fails or neglects to perform, keep or observe
any of the material and substantial terms, provisions, conditions or
covenants contained in this Agreement, the Note or any other Operative
Document executed in connection with the transactions contemplated by
this Agreement (other than the payments referred to in section 7.1 A
above), which are required to be performed, kept or observed by Debtor
and such failure or neglect shall not have been remedied within
forty-five (45) calendar days after written notice thereof from Secured
Party received by Debtor, or
C. If any representation, warranty or certification made by
Debtor herein or in any certificate or other writing, delivered in
connection with the transactions contemplated by the Operative Documents
shall prove to be false, incorrect or incomplete in any material
respect; or
D. If the validity or enforceability of any lien, charge,
security interest, mortgage, pledge or other encumbrance granted to
Secured Party to secure the Secured Obligations shall be determined by
counsel to Secured Party (and so stated in a written opinion of such
counsel), to be materially impaired in any respect or, if any other
lien, charge, security interest, mortgage, pledge or other encumbrance,
other than a Permitted Encumbrance, shall be created or imposed upon the
Collateral; or
E. If Debtor shall suspend or discontinue its business
operations for a period in excess of thirty (30) calendar days or shall
totally abandon its business; or
F. There shall be commenced against Debtor an involuntary
proceeding to appoint a receiver, custodian, liquidator, trustee or
other officer with similar liquidation powers of Debtor or of the whole
or any substantial part of Debtor's Assets and an order, judgment or
decree approving the petition in any such proceeding shall be entered
and such order, judgment or decree shall continue undischarged for a
period of ninety (90) calendar days or more and, as a result of the
entry of such order, judgment or decree, the prospect of repayment of
the obligation evidenced by the Note shall become impaired; or
G. An involuntary case shall be commenced against Debtor
under any chapter of the United States Bankruptcy Code and relief is
ordered against Debtor and the petition is controverted but is not
dismissed within ninety (90) calendar days after the commencement of the
case; or
H. If Debtor shall (i) be unable or admit in writing its
inability to pay, or shall generally fail to pay, its debts as they
become due; (ii) file (or take any action for the purpose of filing) a
petition commencing a voluntary case concerning Debtor under any
chapter of the United States Bankruptcy Code or a petition to take
advantage of any insolvency act or other act for the relief or aid of
debtors; (iii) make an assignment for the benefit of its creditors; (iv)
file a petition or answer seeking for itself reorganization,
arrangement, composition, readjustment, liquidation, dissolution or
similar relief under the federal bankruptcy laws or any other applicable
law, (v) become insolvent (howsoever such insolvency may be evidenced),
be adjudicated insolvent; or (vi) shall petition or apply to any
tribunal for the appointment of any receiver, liquidator or trustee of
or for it or any substantial part of its Assets; or
I. If a court of competent jurisdiction shall enter an order
which enjoins, restrains or affirmatively prevents Debtor from
conducting all or any material part of its business affairs in the
ordinary course of business and such order shall remain undischarged or
unstayed for a period in excess of thirty (30) calendar days.
7.2 Debtor's Right to have Collateral Sold. At any time, upon
Secured Party's receipt of a written request from Debtor, Debtor may
designate a specific portion of the Collateral held by Secured Party to
be sold to Debtor's designee as promptly as market conditions will allow
in order to maximize the value of the designated Collateral, provided,
however, that after giving pro forma effect to the proposed sale of
Collateral and the proposed prepayment of the Secured Obligations, the
Collateral Value of the remaining Collateral shall equal or exceed the
Minimum Collateral Value. Following Secured Party's receipt of such
request and designation, Debtor and Secured Party shall cooperate in the
sale(s) of Collateral, the net proceeds of which sale(s) shall be paid
to Secured Party, as received, and shall be credited to the next
installments due on the Note in the order of their maturities.
7.3 Rights of Parties Before and After the Occurrence of an Event
of Default.
(a) Exercising Shareholder Rights Prior to an Event of Default.
Unless and until an Event of Default shall occur,
(i) Debtor shall be entitled to receive all cash dividends
paid to Debtor in respect of or attributable to the securities
comprising a part of the Collateral. Notwithstanding the foregoing,
Secured Party shall be entitled to receive, whether or not an Event of
Default has occurred, any and all other Additional Pledged Securities
and Liquidating Distributions. All such sums, stock dividends,
distributions, proceeds, or other property which constitute Additional
Pledged Securities or Liquidating Distributions shall, if received by
any entity other than Secured Party, be held in trust for the benefit of
Secured Party and shall forthwith be delivered to Secured Party
(accompanied by proper instruments of assignment and/or stock and/or
bond powers executed by Debtor in accordance with Secured Party's
instructions) to be held subject to the terms of this Agreement. Any
cash proceeds of the Collateral, other than cash dividends which Debtor
is then permitted to receive and retain under this Agreement, which come
into the possession of Secured Party shall be applied by Secured Party
to the Secured Obligations then due or, if no Secured Obligation is then
due, to the installment(s) due under the Note in the inverse order of
maturity.
(ii) Debtor shall have the right to vote and give consents
with respect to all of the securities comprising a part of the
Collateral and to consent to, ratify, or waive notice of any and all
meetings; provided that such right shall in no case be exercised for
any purpose contrary to, or in violation of, any of the terms or the
provisions of this Agreement or any other Operative Document.
(b) Exercising Shareholder Rights After the Occurrence of an Event
of Default. Upon the occurrence and during the continuance of an Event
of Default, Secured Party, with respect to the Collateral but without
the consent of Debtor, may:
(i) At any time vote or consent in respect of any of the
securities compromising part of the Collateral and authorize any such
securities to be voted and such consents to be given, ratify and waive
notice of any and all meetings, and take such other action as shall seem
desirable to Secured Party, in its discretion, to protect or further the
interests of Secured Party in respect of any of the Collateral as though
it were the outright owner thereof, and, Debtor hereby irrevocably
constitutes and appoints Secured Party its sole proxy and
attorney-in-fact, with full power of substitution to vote and act with
respect to any and all such pledged securities standing in the name of
Debtor or with respect to which Debtor is entitled to vote and act. The
proxy and power of attorney herein granted are coupled with interests,
are irrevocable, and shall continue throughout the term of this
Agreement.
(ii) In respect of any securities comprising a part of the
Collateral, join in and become a party to any plan of recapitalization,
reorganization, or readjustment (whether voluntary or involuntary) as
shall seem desirable to Secured Party in respect of any such pledged
securities, and deposit any such pledged securities under any such plan;
make any exchange, substitution, cancellation, or surrender of such
pledged securities required by any such plan and take such action with
respect to any such pledged securities as may be required by any such
plan or for the accomplishment thereof; and no such disposition,
exchange, substitution, cancellation, or surrender shall be deemed to
constitute a release of pledged securities from the security interest of
this Agreement;
(iii) Receive all payments of whatever kind made upon or
with respect to any securities comprising a part of the Collateral; and
(iv) In furtherance of Secured Party's rights and remedies
under subparagraphs (i), (ii) and (iii) above, Secured Party at its
option, may have any or all of the Collateral registered in its name or
that of its nominee, and Debtor hereby covenants that, upon Secured
Party's request, Debtor will cause the issuer of the Collateral to
effect such registration.
(c) Right of Sale After the Occurrence of an Event of Default.
Upon the occurrence and during the continuance of an Event of Default,
Secured Party may sell, without recourse to judicial proceedings, with
the right (except at private sale) to bid for and buy, free from any
right of redemption, the Collateral or any part thereof, upon five (5)
days notice (which notice is agreed to be reasonable notice for the
purposes hereof) to Debtor of the time and place of any public sale or
the time after which any private sale is to be made, for cash, upon
credit or for future delivery, at Secured Party's option and in Secured
Party's complete discretion:
(i) At public sale, including a sale at any broker's board or
exchange;
(ii) At private sale in any manner which will not require the
securities comprising a part of the Collateral or any part thereof, to
be registered in accordance with The Securities Act of 1933, as amended,
or the rules and regulations promulgated thereunder, or any other law or
regulation, at their best price reasonably obtainable by Secured Party
at any such private sale or other disposition in the manner mentioned
above. Secured Party is also hereby authorized, but not obligated, to
take such actions, give such notices, obtain such consents, and do such
other things as Secured Party may deem required or appropriate in the
event of sale or disposition of any of the Collateral. Debtor
understands that, with respect to securities comprising a part of the
Collateral which are not publicly traded, Secured Party may in its
discretion approach a restricted number of potential purchasers and that
a sale under such circumstances may yield a lower price for such
Collateral, or any portion thereof, than would otherwise be obtainable
if the same were registered and sold in the open market. Debtor agrees
(a) that in the event Secured Party shall so sell such Collateral, or
any portion thereof, at such private sale or sales, Secured Party shall
have the right to rely upon the advice and written opinion of any member
firm of a national securities exchange as to the best price reasonably
obtainable upon such a private sale thereof (any expense borne by
Secured Party in obtaining such advice to be paid by Debtor as an
expense related to the exercise by Secured Party of its rights
hereunder), and (B) that such reliance shall be conclusive evidence
that Secured Party handled such matter in a commercially reasonable
manner.
In case of any sale by the Secured Party of the Collateral on
credit or for future delivery (it being understood however that Secured
Party is taking the credit risk with respect to any such sale on
credit), the Collateral sold may be retained by Secured Party until the
selling price is paid by the purchaser, but Secured Party shall incur no
liability in case of failure of the purchaser to take up and pay for the
Collateral so sold. In case of any such failure, such Collateral so sold
may be again similarly sold.
In connection with the sale of any non-publicly traded securities
comprising a part of the Collateral, Secured Party is authorized, but
not obligated, to limit prospective purchasers to the extent deemed
necessary or desirable by Secured Party to render such sale exempt from
the registration requirements of The Securities Act of 1933, as amended,
and any applicable state securities laws, and no sale so made in good
faith by Secured Party shall be deemed not to be "commercially
reasonable" because so made.
(d) After the occurrence of an Event of Default, Secured Party
shall have and may exercise the following rights and remedies, which
individual remedies shall not be exclusive and which shall be cumulative
and in addition to each and every other remedy set forth herein and in
the Note and the other agreements and documents executed in connection
with the transactions contemplated:
(i) The right to (i) accelerate the entire outstanding
Principal Debt, together with all accrued but unpaid interest and all
other sums due and payable by Debtor to Secured Party, without
presentment or protest, both of which Debtor hereby expressly waives,
and (ii) immediately, without further extensions or periods of grace,
enforce payment of the Secured Obligations by exercising any and all of
the rights granted herein.
(ii) All of the rights and remedies available to a secured
party under the Uniform Commercial Code as enacted in the State of Texas
or other applicable jurisdiction, as amended (the "UCC"), or other
applicable law, or otherwise existing at law or in equity.
(iii) The right to: (i) to the fullest extent permitted by
applicable law, enter upon the premises of Debtor, or any other place or
places where the Collateral is located, and remove the Collateral
therefrom to premises controlled by Secured Party, in order to
effectively collect, preserve, protect and liquidate the Collateral;
and/or (ii) require Debtor to assemble the Collateral and make it
available to Secured Party at a place other than one controlled by
Debtor to be designated by Secured Party in its sole discretion.
7.4 No Waiver. No delay, failure or omission of Secured Party to
exercise any right upon the occurrence of an Event of Default shall
impair any such right or shall be construed to be a waiver of any such
Event of Default or an acquiescence therein. Secured Party may, from
time to time, in a writing waive compliance by the other parties with
any of the terms of this Agreement and its rights and remedies upon any
Event of Default and Debtor agrees that no such waiver by Secured Party
shall ever be legally effective unless such item of waiver shall be
acknowledged in writing by Secured Party. No waiver of any Event of
Default shall impair any right or remedy of Secured Party. No single,
partial or full exercise of any right of Secured Party shall preclude
any other or further exercise thereof. The acceptance by Secured Party
at any time or from time to time of a partial payment or partial
performance of any of Debtor's obligations set forth herein shall not be
deemed a waiver, reduction, or modification or release from any Event of
Default then existing. No waiver by Secured Party of any Event of
Default shall be deemed to be a waiver of any then existing or
subsequent Event of Default.
7.5 Application of Proceeds. All amounts realized by Secured Party
with respect to the Collateral or the Secured Obligations, including
amounts realized with respect to the sale of the Collateral under or by
virtue of the Operative Documents, including any sums which may be held
by Secured Party, or the proceeds of any thereof, shall be applied (i)
first, to the payment of the reasonable costs and expenses owing
hereunder, under the Note or under any other Operative Document,
including reasonable reimbursement to Secured Party, and its agents and
attorneys, of all expenses, liabilities and advances made or furnished
or incurred by or on behalf of Secured Party, in enforcing collection of
the Secured Obligations or for the acquisition, protection, sale and
delivery of the Collateral; (ii) second, to the payment of accrued and
unpaid interest on and the outstanding principal of the Note; (iii) to
the payment of all other amounts payable by Debtor under the Operative
Documents; and (iv) fourth the surplus, if any, to Debtor, or to
whomever shall be lawfully entitled to receive the same, plus interestt
the Stated Interest Rate from three (3) Business Days following the date
of sale or other disposition.
7.6 Notification of Sale. Reasonable notification of the time and
place of any public sale of the Collateral, or reasonable notification
of the time after which private sale or other intended disposition of
the Collateral is to be made, shall be sent to Box Brothers Holding
Company, c/o Kevin Thomason, Rohde Thomason LLP, Founders Square, 900
Jackson Street, Suite 630, Dallas, Texas 75202, and to any other person
entitled under the UCC to notice; provided that if any of the Collateral
threatens to decline speedily in value or is of the type customarily
sold on a recognized market, Secured Party may sell or otherwise dispose
of the Collateral upon such notice as is reasonable under the
circumstances. It is agreed that notice sent or given not less than five
(5) calendar days prior to the taking of the action to which the notice
relates is reasonable notification and notice for the purposes of this
paragraph.
ARTICLE VIII
MISCELLANEOUS
8.1 Secured Party's Expenses and Attorneys Fees. Secured Party
shall be entitled to recover from Debtor all reasonable costs incurred
by Secured Party in enforcing or protecting the security interests or
any of its rights or remedies with respect of the Collateral under this
Agreement or any other Operative Document or collecting or enforcing the
Secured Obligations, including, without limitation, all court costs,
attorneys' fees, and other out-of-pocket expenses. If, at any time or
times hereafter, Secured Party employs an attorney or attorneys to file
a petition or to take any other litigation action with respect to
collection of the Secured Obligations, or to protect, sell, take
possession of, or liquidate any of the Collateral or to attempt to
enforce any security interest or lien in the Collateral, or any other
right or remedy under the Operative Documents, all of the reasonable
attorney's fees arising from such collection effort, and any expenses,
costs and charges relating thereto, shall constitute part of the Secured
Obligations secured by the Collateral, all of which shall be payable on
demand, plus interest thereon at the Stated Interest Rate from thirty
(30) calendar days following Secured Party's receipt of Debtor's written
demand for payment.
8.2 Notices. Etc. Unless otherwise set forth herein, all notices,
demands, requests and other communications hereunder shall be given in
writing (including telecopy) and mailed, telecopied or delivered:
If to Secured Party: Box Energy Corporation
8201 Preston Road, Suite 600
Dallas, Texas 75225
Attention: James A. Watt
Telecopy No.: (214) 890-8030
with a copy to: Kelly, Hart & Hallman, P.C.
201 Main Street, Suite 2500
Fort Worth, Texas 76102
Attention: Billie J. Ellis, Jr.
Telecopy No.: (817) 878-9280
If to Debtor: Box Brothers Holding Company
8201 Preston Road, Suite 600
Dallas, Texas 75225
Attention: Don D. Box
Telecopy No.: (214) 890-8096
with a copy to: Rohde Thomason LLP
Founders Square
900 Jackson Street, Suite 630
Dallas, Texas 75202
Attention: Kevin Thomason
Telecopy No.: (214) 630-6331
If any such communication is given by mail it will be effective on the
earlier of receipt or the third calendar day after deposit in the United
States mail with first class or airmail postage prepaid; if given by
telecopier, when received; or if given by personal delivery, when
delivered. Any party to this Agreement shall have the right to change
its or his address for the purpose of this Agreement by giving at least
three (3) Business Days written notice of any such change to each other
party hereto.
8.3 Prior Agreements Superseded; Modification. Any agreement
previously executed between Debtor and Secured Party concerning the
subject matter of the Operative Documents, other than the Operative
Documents shall, upon the execution of this Agreement, be of no further
force or effect. No modification of or supplement to this Agreement or
any other written agreement between the parties hereto shall be valid or
effective (or serve as a basis of reliance by way of estoppel) unless
the same is in writing and signed by the party against whom it is sought
to be enforced. In the event of any conflict between the provisions of
this Agreement and the Note, the terms of this Agreement shall control.
8.4 Survival of Agreements. All of the various representations,
warranties, covenants and agreements in the Operative Documents shall
survive the execution and of this Agreement and the Note and the
performance hereof and thereof, including, without limitation, the
making or granting of the security interests and the delivery of the
Note, and shall survive until all of the Secured Obligations is paid in
full.
8.5 No Obligation Beyond Maturity. Debtor agrees and acknowledges
that upon the maturity of the Loan, Secured Party shall have no
obligation to renew, extend, modify or rearrange the Loan and shall have
the right to require all amounts due and owing under the Loan to be paid
in full on the Maturity Date.
8.6 Parties Bound. This Agreement and the Note shall be binding
upon and inure to the benefit of Debtor and Secured Party, and their
respective heirs, legal representatives, successors and assigns,
provided, that Debtor may not, without the prior written consent of
Secured Party, assign any of its rights, powers, duties or obligations
hereunder.
8.7 Number and Gender. Whenever used herein, the singular number
shall include the plural and the plural the singular, and the use of any
gender shall be applicable to all genders. The duties, covenants,
obligations and warranties of Debtor and of Secured Party in this
Agreement shall be the several obligations of Debtor and of Secured
Party and of either of them if either is more than one entity.
8.8 No Third Party Beneficiary. This Agreement, when executed, is
for the sole benefit of Secured Party and Debtor and is not for the
benefit of any third party.
8.9 Execution in Counterparts. This Agreement may be executed in
any number of counterparts and by the parties hereto in separate
counterparts, each of which when so executed and delivered shall be
deemed to be an original, and all of which taken together shall
constitute but one and the same instrument.
8.10 Severability of Provisions. Any non-material provision of this
Agreement which is prohibited or unenforceable in any jurisdiction
shall, as to such jurisdiction, be ineffective to the extent of such
prohibition or unenforceability, without invalidating the remaining
provisions hereof or affecting the validity or enforceability of such
provision in any other jurisdiction.
8.11 Time of the Essence. All parties hereto hereby agree that in
this Agreement and all agreements executed pursuant hereto that time
shall be considered of the essence.
8.12 Termination Reinstatement.
(a) Debtor agrees that this Agreement and the security
interests granted hereunder shall terminate only when all Secured
Obligations have been fully paid and performed, at which time Secured
Party upon Debtor's request shall reassign and redeliver (or cause to be
reassigned and redelivered) to Debtor, or to such Person or Persons as
Debtor shall designate in writing, against receipt, such of the
Collateral (if any) as shall not have been sold or otherwise applied by
Secured Party pursuant to the terms hereof and shall still be held by it
hereunder. Any such reassignment shall be without recourse upon, or
representation or warranty by, Secured Party (other than that Secured
Party has not sold, encumbered or otherwise transferred any interest in
the Collateral except as provided in this Agreement) and shall be at the
sole cost and expense of Debtor.
(b) This Agreement shall continue to be effective or be
reinstated, as the case may be, if at any time any amount received by
Secured Party in respect of the Secured Obligations is rescinded or must
otherwise be restored or returned by Secured Party upon the filing of
any bankruptcy proceeding by or of Debtor or upon the appointment of any
intervenor or conservator of, or trustee or similar official for, Debtor
or any substantial part of its assets, or otherwise, all as though such
payments had not been made.
8.13 Remedies Cumulative. The rights and remedies provided herein
and in the Note and all of the other agreements, instruments and
documents constituting the Operative Documents, are cumulative and are
in addition to and not exclusive of any rights or remedies provided by
law, including, but without limitation, the rights and remedies of a
secured party under the Uniform Commercial Code.
8.14 Release of Claims. Debtor, by its execution of this Agreement,
hereby declares that it has no setoffs, counterclaims, defenses or other
causes of action against Secured Party arising out of the Loan and/or
any documents mentioned herein or otherwise; and, to the extent any such
setoffs, counterclaims, defenses or other causes of action may exist,
whether known or unknown, such items are hereby expressly waived and
released by Debtor.
8.15 Secured Party Not a Joint Venture. Notwithstanding anything to
the contrary contained in this Agreement or any Operative Document,
Secured Party, by entering into this Agreement or by any action taken
pursuant hereto, will not be deemed a partner or joint venturer with
Debtor, and Debtor will indemnify, and hold Secured Party harmless from
any and all claims, demands, losses, damages and expenses made or
incurred resulting from or arising out of any such construction or
alleged construction of any agreement between Secured Party and Debtor
or their relationship.
8.16 GOVERNING LAW/VENUE. THIS AGREEMENT AND THE NOTE SHALL BE
DEEMED CONTRACTS AND INSTRUMENTS MADE UNDER THE LAWS OF THE STATE OF
TEXAS AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND
GOVERNED BY THE LAWS OF THE STATE OF TEXAS AND THE LAWS OF THE UNITED
STATES OF AMERICA. EXCEPT WITH RESPECT TO SPECIFIC LIENS, OR THE
PERFECTION THEREOF. EVIDENCED BY THIS AGREEMENT COVERING PERSONAL
PROPERTY WHICH BY THE LAWS APPLICABLE THERETO ARE REQUIRED TO BE
CONSTRUED UNDER THE LAWS OF ANOTHER JURISDICTION. EXCLUSIVE JURISDICTION
AND VENUE FOR ALL DISPUTES ARISING UNDER THIS AGREEMENT SHALL RESIDE IN
A COURT OF COMPETENT JURISDICTION LOCATED IN DALLAS, DALLAS COUNTY,
TEXAS. DEBTOR AGREES TO SUBMIT ITSELF TO THE JURISDICTION OF THE TEXAS
COURTS AND AGREES THAT IN THE EVENT DEBTOR FAILS TO DESIGNATE A
REGISTERED AGENT IN THE STATE OF TEXAS, DEBTOR MAY BE SERVED BY SERVICE
UPON THE TEXAS SECRETARY OF STATE IN ACCORDANCE WITH SECTION 17.044 OF
THE TEXAS CIVIL PRACTICE AND REMEDIES CODE.
8.17 ENTIRETY; WRITTEN LOAN AGREEMENT. THIS AGREEMENT AND THE NOTE
EMBODY THE ENTIRE AGREEMENT BETWEEN THE PARTIES AND SUPERSEDE ALL PRIOR
AGREEMENTS AND UNDERSTANDINGS, IF ANY, RELATING TO THIS SUBJECT MATTER
HEREOF. THIS AGREEMENT AND THE NOTE REPRESENT THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE
NO ORAL AGREEMENTS BETWEEN THE PARTIES. IN THE EVENT OF ANY CONFLICT
BETWEEN THE TERMS HEREOF AND OF THE NOTE, THE TERMS HEREOF SHALL
CONTROL.
8.18 Amendment and Restatement. This Agreement is a renewal,
amendment and restatement of the Pledge Agreement ("Original Pledge
Agreement") dated as of April 29, 1997 by Debtor in favor of Secured
Party and, as such, all of the terms and provisions herein supersede in
their entirety the terms and provisions of the Original Pledge
Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the
day and year first above written.
DEBTOR:
BOX BROTHERS HOLDING COMPANY,
a Delaware corporation
By: /S/ Steven J. Craig
--------------------
Name: Steven J. Craig
Title: Vice President
SECURED PARTY:
BOX ENERGY CORPORATION,
a Delaware corporation
By: /S/ James A. Watt
--------------------
Name: James A. Watt
Title: President
Box Energy Corporation
Employment Agreement by and Between
Box Energy Corporation
and James A. Watt
Exhibit 10.19
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made and entered into as of the 17th
day of March, 1997, between BOX ENERGY CORPORATION, a Delaware
corporation (the "Company"), and James A. Watt (the"Employee").
In consideration of the mutual promises and covenants herein set
forth and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the
Employee agree as follows:
1. Employment. The Company hereby employs the Employee as
President and Chief Operating Officer of the Company upon the terms and
conditions and for the compensation herein provided, and the Employee
agrees to be so employed and to render the services as specified.
2. Term of Employment. The term of employment of the Employee
hereunder (the "Term") will be for a period of five years from the date
of this Agreement, subject to earlier termination of employment in
accordance with Section 5 hereof, renewable upon mutual agreement of the
parties. If this Agreement is not renewed at the end of the Term
because the Company does not agree to such renewal, notwithstanding the
termination of the Agreement, the Employee will be entitled to receive
the termination benefit provided in Section 6(b) hereof.
3. Duties. During the Term, the Employee agrees to devote his
full and exclusive business time and attention to the business of the
Company or any subsidiary thereof, except for vacations and sick leave
and charitable, educational and civic activities that do not detract
from the performance of his duties hereunder, in a professional and
prudent manner in accordance with the Company's policy consistent with
the Employee's position, and to devote his skill, energy, experience and
judgment to perform all duties carefully, efficiently and to the
satisfaction of the Company. The Employee shall have all the requisite
powers and agrees to perform all of the duties associated with the
position of President and Chief Operating Officer of the Company,
subject to such policies and guidelines as may be established by the
Company and agreements to which the Company is a party. The Employee
agrees not to engage in any other activity or own any interest that
would conflict with the interests of the Company or would interfere with
the Employee's responsibilities to the Company and the performance of
his duties hereunder.
4. Compensation. During the period of employment, the Company
will compensate the Employee as follows:
(a) Salary. The Company will pay the Employee for services
rendered a base salary at the rate of $210,000 per year, subject to such
withholding of taxes and other amounts as may be required by law, such
salary to be paid in equal periodic installments in accordance with the
Company's normal salary payment dates for employees. Salary will be
reviewed annually and may be increased at the sole discretion of the
Board of Directors.
(b) Bonus. In addition to base salary, the Employee will be
entitled to an annual performance bonus, with a target bonus amount of
50% of base salary, and based on performance goals and targets as
determined in the sole discretion of the Board of Directors or, if so
delegated, of the Chief Executive Officer.
(c) Benefits. During the period of employment hereunder, the
Employee shall be entitled to participate in all employee benefit plans
and programs for employees generally that the Company has in effect on
the date hereof or may hereafter establish in the future, in its sole
and absolute discretion, but the Company shall not be required to
establish any such plan or program and may discontinue any existing plan
or program at any time. The Employee shall be entitled to four weeks
paid vacation each year during the period of employment. The Company
will provide the Employee with a membership in a luncheon or petroleum
club and membership in appropriate professional associations.
(d) Stock. The Company will recommend to the Compensation
Committee of the Board of Directors the granting to the Employee,
subject to shareholder approval of appropriate stock plans, 15,000
shares of restricted Class B common stock of the Company and stock
options to purchase 100,000 shares of Class B common stock, both to vest
20% per year from the date hereof (in the event of termination of
employment, except termination by the Company for Cause (as hereinafter
defined) or by the Employee other than for Good Reason (as hereinafter
defined), such restricted stock and unvested options to fully vest and
be exercisable for 30 days following termination), and to be subject to
such restrictions and provisions as will be established by the
Compensation Committee. If the exercise price of such stock options
should be greater than the market price of the Class B common stock on
the date hereof, then the Employee will be entitled to receive on the
date or dates of the exercise of such stock options a cash bonus in an
amount equal to the difference between the exercise price of such stock
options minus the market price of the Class B common stock on the date
hereof, multiplied by the number of shares purchased by the Employee
upon the exercise of such stock option. The Employee will be eligible
for the award of periodic stock options as they may be granted in the
future at the discretion of the Compensation Committee.
(e) Reimbursements and Expenses. The Company will reimburse the
Employee for reasonable and necessary expenses incurred by the Employee
on the Company's business in accordance with such procedures as the
Company may from time to time establish, including documentation of such
expenses by the Employee. The Employee will be entitled to an
automobile allowance in an amount determined by the Chief Executive
Officer, and the Employee will be responsible for all costs and expenses
associated with such automobile.
(f) Relocation Expenses. The Company will reimburse the Employee
for normal moving expenses to relocate the Employee's residence from
Houston, Texas and, for a period not to exceed six months, will
reimburse the Employee, upon presentation of supporting documentation,
for a temporary apartment in Dallas and reasonable travel expenses
between Dallas and Houston. In the event that the Employee's residence
in Houston shall not have been sold within six months after the date
hereof, the Company will reimburse the Employee for 95% of the amount by
which the appraised value (the appraiser to be reasonably selected by
the Employee) of such residence six months from the date hereof exceeds
the gross sales price of such residence when it is sold. If the
Employment of the Employee shall terminate, except by way of resignation
of the Employee other than for Good Reason, and the Employee's residence
in Houston shall not have been sold and the Employee shall have
purchased a residence in Dallas, then the Company shall purchase for
cash one of such residences from the Employee, as selected by the
Employee, as promptly as practicable after selection by the Employee,
but in no event later than 60 days after such selection. In the case of
the Dallas residence, the purchase price shall be the prior purchase
price paid by the Employee therefor plus all out-of-pocket expenses
incurred by the Employee directly relating to such prior purchase,
including, without limitation, appraisal and survey costs and up front
lender fees and "points." In the case of the Houston residence, the
purchase price shall be 100% of the appraised value (the appraiser to be
reasonably selected by the Employee) of such residence. In each such
case the Company shall pay all customary closing costs and expenses of
such purchase and sale, including, without limitation, title insurance
for the property.
5. Termination.
(a) Death or Disability. The employment of the Employee shall
terminate immediately upon the death of the Employee. In the event of
illness, accident or other disability (physical or mental) of the
Employee as a result of which the Employee is unable to perform the
duties required hereunder for such period of time provided by the
Company's then disability policy, the Company may terminate the
employment of the Employee by written notice to the Employee, which
termination shall be effective upon the date of sending of such notice.
(b) Employee Misconduct. The Company may terminate the employment
of the Employee for "Cause" by written notice to the Employee, which
termination shall be effective upon the date of sending of such
notice,if the Employee, as determined by the Board of Directors of the
Company (i) shall have been convicted of a felony or entered a plea of
nolo contendere; (ii) shall have been involved in any act of material
fraud, theft or other material misconduct detrimental to the best
interests of the Company; (iii) shall have engaged in gross negligence
or willful misconduct with respect to his duties to the Company; (iv)
shall have engaged in competitive behavior against the Company,
misappropriated or aided in misappropriating a material opportunity of
the Company, secured or attempted to secure a personal benefit not fully
disclosed to and approved by the Board of Directors in connection with
any transaction of or on behalf of the Company; or (v) shall have failed
to substantially perform his duties hereunder, other than by reasons
specified in Section 7(a) hereof, and such failure continues more than
10 days after written notice thereof from the Company to the Employee
specifying in reasonable detail the manner of nonperformance, provided,
however, that no notice and opportunity to cure by the Employee shall be
required if the nonperformance is the same as or substantially similar
to that described in a previous notice.
(c) Resignation for Good Reason. The Employee may terminate
employment for "Good Reason" upon the occurrence and continuation for a
period of 30 days after written notice to the Company from the Employee
of any of the following: (i) any change in the Employee's duties or
responsibilities that results in the Employee not having duties and
responsibilities substantially equivalent to or greater than those the
Employee had immediately prior to such change or (ii) any failure to pay,
or any reduction of, the Employee's salary or reduction in the Employee's
participation in Company benefit plans or programs that are then available
to employees generally, provided that any reduction in performance,
incentive or bonus compensation awards, as long as the reductions also
apply to other employees, shall not constitute "Good Reason."
6. Termination Payments. Upon the termination of the employment
of the Employee prior to the expiration of the Term, the Employee shall
be entitled to the following:
(a) Death, Disability, For Cause or Resignation. In the event of
the termination of the Employee's employment by reason of death or
disability pursuant to Section 5(a) hereof, the termination of the
Employee's employment by the Company for Cause pursuant to Section 5(b),
or the resignation of the Employee other than for Good Reason pursuant
to Section 5(c), then the Employee shall be entitled to receive:
(i) all salary which is accrued and unpaid as of the date of
such termination;
(ii) all unpaid accumulated and accrued benefits due under
any benefit plan or program in which the Employee was a participant; and
(iii) all payments due with respect to accrued and unpaid
reimbursable expenses incurred by the Employee prior to the date of such
termination of employment.
(b) Without Cause or For Good Reason. Unless provided for in
Section 6(c) hereof, in the event of the termination of the Employee's
employment by the Company without Cause or the termination of employment
by the Employee for Good Reason, then the Employee shall be entitled to
receive a lump-sum cash payment equal to the sum of (i) the amount of
the Employee's then current annual base salary, plus (ii) the greater of
(A) the Employee's target bonus amount for the then current year or (B)
50% of the amount of the Employee's then annual base salary. In
addition, the Company will provide the Employee with executive
outplacement services of the Employee's choice for up to one year.
(c) Change of Control. In the event of the termination of the
Employee's employment by the Company without Cause or the termination of
employment by the Employee for Good Reason, in each case within one year
after a Change of Control (as defined below) and:
(i) such Change of Control shall occur within two years after
the date hereof, then the Employee shall be entitled to receive a
lump-sum cash payment equal to three times the sum of (I) the amount of
the Employee's then current annual base salary, plus (II) the greater of
(A) the Employee's target bonus amount for the then current year or (B)
50% of the amount of the Employee's then annual base salary; or (ii)
such Change of Control shall occur during the period commencing two
years after the date hereof and ending four years after the date hereof,
then the Employee shall be entitled to receive a lump-sum cash payment
equal to two times the sum of (I) the amount of the Employee's then
current annual base salary, plus (II) the greater of (A) the Employee's
target bonus amount for the then current year or (B) 50% of the amount
of the Employee's then annual base salary; or (iii) such Change of
Control shall occur more than four years after the date hereof, then the
Employee shall be entitled to receive a lump-sum cash payment equal to
the sum of (I) the amount of the Employee's then current annual base
salary, plus (II) the greater of (A) the Employee's target bonus amount
for the then current year or (B) 50% of the amount of the Employee's
then annual base salary. If the payment to the Employee provided in this
Section 6(c), together with all other payments, distributions and
acceleration of rights benefiting the Employee pursuant to any
agreement, plan, program or arrangement of the Company, including the
acceleration of vesting of stock options and restricted stock, shall be
subject to the excise tax imposed by Section 4999 of the Internal
Revenue Code of 1986, as amended (the "Code"), or any successor
provision, by reason of being contingent on a change in the ownership or
effective control of the Company pursuant to Section 280G of the Code, or
any successor provision, or subject to any comparable state or local
taxes; then the Employee shall be entitled to receive an additional
payment or payments in an amount (after taking into account federal,
state and local income taxes payable by the Employee as a result of the
receipt of such amount) necessary to place the Employee in the same
after-tax position as would have been the case if no such excise tax
were imposed.
The Company shall also provide the Employee with executive outplacement
services of the Employee's choice for up to one year.
"Change of Control" means (i) a merger or consolidation to which the
Company is a party if all persons who were stockholders of the Company
immediately prior to the effective date of such merger or consolidation
become beneficial owners (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) of less than 50%
of the total combined voting power for election of directors of the
surviving corporation or entity following the effective date of such
merger or consolidation; (ii) the acquisition or holding of direct or
indirect beneficial ownership (as defined under Rule 13d-3 of the
Exchange Act) of securities of the Company representing in the aggregate
30% or more of the total combined voting power of the Company's then
issued and outstanding voting securities by any person, entity or group
of associated persons or entities acting in concert, other than Box
Brothers Holding Company, any employee benefit plan of the Company or of
any subsidiary of the Company, or any entity holding such securities for
or pursuant to the terms of any such plan, beginning from and after such
time as Box Brothers Holding Company shall no longer have direct or
indirect beneficial ownership (as so defined) of securities of the
Company representing in the aggregate a larger percentage of the total
combined voting power of the Company's then issued and outstanding
securities than that held by any other person, entity or group; (iii)
during such time as Box Brothers Holding Company, Inc. owns or controls
a majority of the voting power for the election of directors of the
Company, a change in the ownership of a majority of the voting power for
the election of directors of Box Brothers Holding Company, Inc. such
that the entity, voting trust or group holding such voting power of Box
Brothers Holding Company, Inc. shall not include and be controlled by
Don D. Box or any affiliate of Don D. Box; (iv) the sale of all or
substantially all of the assets of the Company to any person or entity
that is not a wholly owned subsidiary of the Company; or (v) the
approval by the stockholders of the Company of any plan or proposal for
the liquidation of the Company or its subsidiaries, other than into the
Company.
7. Nondisclosure. (a) The Employee hereby acknowledges that in
connection with employment by the Company, the Employee will be exposed
to and may obtain certain information, including, without limitation,
information, trade secrets, formulae, technical data and know-how,
regarding the business and operations of the Company (collectively,
"Confidential Information"); Confidential Information, however, shall
not include information disclosed or otherwise made available to the
general public, information disclosed to third parties by the Company
without restriction on such third parties and information released from
confidential treatment by written consent of the Company. The Employee
further acknowledges that such Confidential Information is unique,
valuable, considered trade secrets and deemed proprietary by the
Company.
(b) The Employee agrees that all Confidential Information is and
will remain the property of the Company. The Employee further agrees,
for the duration of the Term and thereafter, to hold in strictest
confidence all Confidential Information, and not, directly or
indirectly, to duplicate, sell, use, lease, commercialize, disclose or
otherwise divulge to any person or entity any portion of the
Confidential Information or use any Confidential Information for the
Employee's benefit or profit or allow any person, entity or third party,
other than the Company and its authorized employees to use or otherwise
gain access to any Confidential Information.
(c) All written Confidential Information and all memoranda, notes,
records or other documents made or compiled by, or otherwise made
available to, the Employee concerning the business of the Company or its
affiliates shall be the Company's property and shall be delivered to the
Company upon the termination of the Employee's employment hereunder or
at any time upon the request of the Company. The Employee shall not at
any time have or claim any right, title or interest in any material or
matter of any sort prepared for or used in connection with the business
or promotion of the Company or its affiliates.
8. Non-Solicitation. The Employee further agrees that during
employment by the Company and for a period of one year after termination
of employment, except when acting on behalf of the Company, the Employee
will not, directly or indirectly in any manner or capacity induce any
person, who at any time during the Employee's employment was an the
employee of the Company, to discontinue his or her employment with the
Company or to interfere with the business of the Company.
9. Assignment. The Employee may not delegate the performance of
any of the Employee's obligations or duties hereunder, or assign any
rights hereunder. Any such purported delegation or assignment in the
absence of such written consent shall be null and void and of no force
or effect. Subject to the foregoing, this Agreement shall be binding
upon and shall inure to the benefit of the respective successors and
assigns of the parties hereto.
10. Survival of Covenants. Notwithstanding anything contained in
this Agreement, upon the expiration of the Term or in the event this
Agreement is terminated for any reason whatsoever, the covenants and
agreements of the Employee contained in Sections 9 and 10 hereof shall
survive any such expiration or termination and shall not lapse.
11. Severability. In case any one or more provisions contained in
this Agreement shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this Agreement;
this Agreement shall be construed as if such invalid, illegal or
unenforceable provision had never been contained herein.
12. Waiver of Default. Any waiver by either party of a breach of
any provision in this Agreement shall not operate as or be construed as
a waiver of any subsequent breach thereof.
13. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT
REGARD TO ITS RULES REGARDING CONFLICT OF LAWS.
14. Entire Agreement. This Agreement represents the entire
agreement between the parties hereto with respect to the subject matter
hereof and supersedes any and all prior agreements and understandings
with respect to such subject matter.
15. Amendment. This Agreement may not be amended, altered or
modified in any respect, except by an instrument in writing signed by
the parties hereto.
16. Notices. Notices given pursuant to the provisions of this
Agreement shall be in writing and shall be deemed given: upon receipt if
personally delivered or sent by facsimile transmission, or three days
after deposit if sent by certified mail, return receipt requested, to
the following address:
To the Company: Box Energy Corporation
8201 Preston Road, Suite 600
Dallas, Texas 75225-6211
Attention: Don D. Box
Facsimile Number: (214) 890-8096
To the Employee: James A. Watt
3537 Haynie Avenue
Dallas, Texas 75205
or such other address as shall be furnished in writing by either party
to the other party.
17. Headings. Section headings contained in this Agreement are
for reference purposes only and shall not affect the meaning or
interpretation of this Agreement.
18. Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together
shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement effective as of the day and year first above written.
BOX ENERGY CORPORATION
By /s/ Don D. Box
-------------------
Don D. Box
Chairman of the Board and
Chief Executive Officer
EMPLOYEE:
/s/ James A. Watt
-------------------
James A. Watt
BOX ENERGY CORPORATION
COMPUTATION OF EARNINGS PER SHARE
Exhibit 11.1
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income for primary income per share $ (462) $ (3,473) $ 1,345 $ (1,056)
Interest expense on 8 1/4% convertible
subordinated notes 1,133 1,133 2,253 2,266
Income tax effect (assumed to be 35%) (397) (397) (789) (793)
-------- -------- -------- --------
Net income for fully-diluted
income per share $ 274 $ (2,737) $ 2,809 $ 417
======== ======== ======== ========
Primary income per share $ (0.02) $ (0.17) $ 0.06 $ (0.05)
======== ======== ======== ========
Fully-diluted income per share $ 0.01 $ (0.10) $ 0.11 $ 0.02
======== ======== ======== ========
Calculation of weighted average shares
Class A (Voting) common stock 3,246 3,250 3,248 3,250
Class B (Non-Voting) common stock 17,422 17,553 17,487 17,553
Stock options considered common
stock equivalents 0 0 0 0
-------- -------- -------- --------
Total shares used for primary
income per share 20,668 20,803 20,735 20,803
Contingent shares from remaining
stock options granted 279 604 279 601
Contingent shares from 8 1/4% convertible
subordinated notes 5,007 5,007 5,007 5,007
-------- -------- -------- --------
Total shares used for fully-diluted
income per share 25,954 26,414 26,021 26,411
======== ======== ======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BOX ENERGY
CORPORATION'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000874992
<NAME> BOX ENERGY CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,675
<SECURITIES> 30,592
<RECEIVABLES> 6,732
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 48,102
<PP&E> 199,829
<DEPRECIATION> 128,520
<TOTAL-ASSETS> 134,835
<CURRENT-LIABILITIES> 7,123
<BONDS> 55,077
0
0
<COMMON> 20,803
<OTHER-SE> 51,832
<TOTAL-LIABILITY-AND-EQUITY> 134,835
<SALES> 31,939
<TOTAL-REVENUES> 34,194
<CGS> 23,892
<TOTAL-COSTS> 29,673
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,451
<INCOME-PRETAX> 2,070
<INCOME-TAX> 725
<INCOME-CONTINUING> 1,345
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,345
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
