UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT
UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly
period ended June 30, 1996
Commission file number 0-19767
THE HOME-STAKE ROYALTY CORPORATION
(Exact name of small business issuer as specified in its charter)
Oklahoma 73-0288040
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15 East 5th Street, Suite 2800
Tulsa, Oklahoma 74103
(Address of principal executive offices)
(918) 583-0178
Registrant's telephone number
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 The number of shares outstanding of the Registrants's common
stock, all of which comprise a single class with $40 par value, as of August 12,
1996, the latest practicable date, was 69,808.
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THE HOME-STAKE ROYALTY CORPORATION
FORM 10-QSB
JUNE 30, 1996
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets ............................. 4
Consolidated Condensed Statements of Income and Retained
Earnings for the Six Months ended June 30, 1996................... 5
Consolidated Condensed Statements of Income and Retained
Earnings for the Three Months ended June 30, 1996................. 6
Consolidated Condensed Statements of Cash Flow .................... 7
Notes to Consolidated Condensed Financial Statements............... 8
Item 2. Management's Discussion and Analysis .............................. 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ................................................. 12
Item 2. Changes in Securities ............................................. 12
Item 3. Defaults upon Senior Securities ................................... 12
Item 4. Submission of Matters to a Vote of Security Holders ............... 12
Item 5. Other Information ................................................. 12
Item 6. Exhibits and Reports on Form 8-K .................................. 13
SIGNATURES ................................................................ 14
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PART I - FINANCIAL INFORMATION
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THE HOME-STAKE ROYALTY CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
ASSETS
June 30, December 31,
1996 1995
---- ----
Current assets:
Cash.............................................. $ 1,193,387 $ 564,875
Accounts receivable............................... 684,448 1,024,200
Receivable from affiliate......................... 58,184 195,320
Prepaid expenses ................................. 149,662 144,726
---------- ----------
Total current assets 2,085,681 1,929,121
Investments (Note 2) ............................... 3,239,460 3,223,735
Property and equipment, at cost: ................... 28,098,313 28,147,639
Less accumulated depreciation,
depletion and amortization................... 18,827,520 18,356,014
----------- -----------
Net property and equipment ............... 9,270,793 9,791,625
Other assets ....................................... 23,645 21,288
----------- -----------
$14,619,579 $14,965,769
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ......... $ 783,233 $ 1,404,133
Dividends declared ............................... 94,241 94,241
Deferred compensation payable .................... 50,328 57,517
Income taxes payable ............................. 119,886 5,745
Bonus Payable .................................... 30,000 49,412
Current note payable (Note 3) .................... 964,260 964,260
----------- -----------
Total current liabilities ......... 2,041,948 2,575,308
Long-term note payable (Note 3) .................... 1,928,520 2,410,650
Deferred income taxes .............................. 581,650 488,138
Contingencies (Note 4)
Stockholders' equity:
Preferred stock, $1 par value -
200,000 shares authorized; none issued
Common stock, $40 par value -
100,000 shares authorized and issued ........... 4,000,000 4,000,000
Additional paid-in capital ....................... 6,000,000 6,000,000
Retained earnings ................................ 3,431,625 2,855,837
----------- -----------
13,431,625 12,855,837
Less treasury stock, at cost - 30,192 shares ..... 3,364,164 3,364,164
----------- -----------
Total stockholders' equity ........ 10,067,461 9,491,673
----------- -----------
$14,619,579 $14,965,769
=========== ===========
See accompanying notes
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THE HOME-STAKE ROYALTY CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
AND RETAINED EARNINGS
Six months ended June 30, 1996 and 1995
(Unaudited)
1996 1995
----------- -----------
Revenues:
Oil sales ....................................... $ 2,298,046 $ 1,930,661
Gas sales ....................................... 1,193,469 929,307
Lease bonuses and rentals ....................... 11,352 12,291
Interest and dividends .......................... 31,249 18,748
Gain on sales of assets ......................... 2,768 68,715
Income from equity affiliates ................... 134,713 104,726
Other ........................................... 96,114 58,836
----------- -----------
3,767,711 3,123,284
Costs and expenses:
Lease operating expenses ........................ 1,037,094 611,367
Production taxes ................................ 305,624 237,279
Depreciation, depletion and amortization ........ 702,786 640,770
Dry hole costs .................................. 46,420 119,470
Condemned and abandoned properties .............. (5,081) 41,920
General and administrative expense .............. 468,630 598,289
Interest expense ................................ 135,697 131,125
Property, franchise and other taxes ............. 65,459 66,735
----------- -----------
2,756,629 2,446,955
Income before provision for income taxes .......... 1,011,082 676,329
Provision for income taxes:
Current ......................................... 153,300 80,525
Deferred ........................................ 93,512 86,772
----------- -----------
246,812 167,297
----------- -----------
Net income ........................................ 764,270 509,032
Retained earnings at beginning of period .......... 2,855,837 2,632,908
Cash dividends ($2.70 per share - 1996,
$3.00 per share - 1995)....................... (188,482) (209,424)
----------- -----------
Retained earnings at end of period ................ $ 3,431,625 $ 2,932,516
=========== ===========
Weighted average number of common
shares outstanding ........................... 69,808 69,808
=========== ===========
Net income per common share ....................... $ 10.95 $ 7.29
=========== ===========
See accompanying notes.
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THE HOME-STAKE ROYALTY CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
AND RETAINED EARNINGS
Three months ended June 30, 199 and 1995
(Unaudited)
1996 1995
---- ----
Revenues:
Oil sales ...................................... $ 1,251,758 $ 1,183,809
Gas sales ...................................... 621,912 486,572
Lease bonuses and rentals ...................... 8,592 3,263
Interest and dividends ......................... 22,666 13,860
Gain on sales of assets ........................ 2,864 68,118
Income from equity affiliates .................. 66,390 108,586
Other .......................................... 58,393 27,984
----------- -----------
2,032,575 1,892,192
Costs and expenses:
Lease operating expenses ....................... 531,922 313,946
Production taxes ............................... 172,579 130,687
Depreciation, depletion and amortization ....... 351,393 320,385
Dry hole costs ................................. 44,089 36,292
Condemned and abandoned properties ............. 1,862 15,871
General and administrative expense ............. 219,824 283,741
Interest expense ............................... 65,809 86,080
Property, franchise and other taxes ............ 36,754 49,710
----------- -----------
1,424,232 1,236,712
Income before provision for income taxes ......... 608,343 655,480
Provision for income taxes:
Current ........................................ 96,950 75,000
Deferred ....................................... 62,253 111,917
----------- -----------
159,203 186,917
----------- -----------
Net income ....................................... 449,140 468,563
Retained earnings at beginning of period ......... 3,076,726 2,568,665
Cash dividends ($1.35 per share - 1996,
$1.50 per share - 1995) ..................... (94,241) (104,712)
----------- -----------
Retained earnings at end of period ............... $ 3,431,625 $ 2,932,516
=========== ===========
Weighted average number of common shares
outstanding.................................. 69,808 69,808
=========== ===========
Net income per common share ...................... $ 6.43 $ 6.71
=========== ===========
See accompanying notes
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THE HOME-STAKE ROYALTY CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 1996 and 1995
(Unaudited)
1996 1995
---- ----
Operating activities:
Oil and gas sales, net of production........ $ 3,113,619 $ 2,545,282
Lease bonuses and rentals................... 11,352 12,291
Interest and dividends...................... 31,249 18,748
Other....................................... 96,114 58,836
------------- -------------
3,252,334 2,635,157
Cash paid to suppliers and employees........ 1,654,398 1,053,182
Interest expense............................ 135,697 138,751
Property, franchise and other taxes......... 65,459 66,735
Income taxes paid........................... 5,734 (1,025)
------------- ------------
1,861,288 1,257,643
----------- ------------
Net cash provided by operating activities.. 1,391,046 1,377,514
Investing activities:
Proceeds from sales of property
and equipment........................... 16,808 152,632
Acquisition of property and equipment....... (148,517) (2,873,656)
Dividends from equity affiliates............ 42,614 56,818
------------ -----------
Net cash used in investing activities..... (89,095) (2,664,206)
Financing activities:
Proceeds from notes payable................. -- 2,435,680
Note payments............................... (482,130) (247,376)
Cash dividends paid......................... (191,309) (209,654)
------------ -----------
Net cash used in financing activities..... (673,439) 1,978,650
------------ -----------
Net increase in cash.......................... 628,512 691,958
Cash at beginning of period................... 564,875 289,219
------------ -----------
Cash at end of period......................... $ 1,193,387 $ 981,177
============ ===========
See accompanying notes.
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THE HOME-STAKE ROYALTY CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - General
The unaudited financial information provided in this report includes all normal
recurring adjustments which are, in the opinion of management, necessary to
fairly present the financial position, result of operations and cash flows of
the Company. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted or condensed. The Company believes that the
disclosures herein are adequate to make the information presented not
misleading; however, these financial statements should be read in conjunction
with the audited financial statements and related notes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1995.
The results for interim periods are not necessarily indicative of trends or of
results to be expected for the full year.
Note 2 - Summarized financial information of equity investees
Summarized income statement information for the six months ended June 30, 1996
and 1995 for The Home-Stake Oil & Gas Company ("HSOG") and Alden Pipeline
Company is presented below:
1996 1995
---- ----
Income Statement data:
Revenues........................ $ 3,600,334 $ 3,005,195
Income before income taxes...... 749,024 475,519
Net income (1).................. 499,636 367,089
(1) Includes $120,010 and $81,200 in 1996 and 1995, respectively,
attributable to the equity earnings of the Company recorded by HSOG.
Note 3 - Note payable
Note payable at June 30, 1996, represents the amounts due under the Company's
financing agreement which is due May 1, 1998, and provides for monthly
maturities of $80,355, plus interest at bank prime. In addition, the Company has
a line of credit in the amount of $700,000 available until May 1, 1997, which
provides for monthly payments of interest on the outstanding borrowings at bank
prime. There is no balance currently under this line, however the Company has
issued letters of credit in the amount of $690,000 which are also guaranteed by
this line.
The note payable and line of credit described above are collateralized by the
28,409 shares of common stock of HSOG owned by the Company and certain of the
Company's producing properties.
Note 4 - Contingencies
In August 1995, the Company was notified that a property in which it owns a 9%
working interest was subject to certain claims by surface owners regarding
possible saltwater contamination. The operator of the property, Mobil Oil
Corporation, has settled some claims and is currently pursuing resolution of
this matter with other surface owners. It is currently estimated that the
Company's share of the total claims and related costs may be approximately
$300,000. On June 13, 1996, the Company and HSOG (collectively "the Companies")
filed suit in the United States District Court for the Eastern District of
Oklahoma, against Mobil Oil Corporation and Mobil Exploration & Production U.S.,
Inc. (collectively "Mobil"). This suit is styled The Home-Stake Royalty
Corporation and The Home-Stake Oil & Gas Company v Mobil Oil Corporation and
Mobil Exploration & Production U.S., Inc. (Case No. CIV-6- 271-S). This action
alleges Mobil's breach of the related Unit Agreement; breach of fiduciary duty;
gross negligence
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Note 4 - Contingencies (continued)
and willful misconduct; and fraud in connection with Mobil's operation of the
property. The Companies are seeking actual damages, punitive damages and
equitable relief in this matter, including a declaration that Mobil is barred
from charging costs related to certain saltwater contamination claims and other
related costs to the Companies. Mobil has counter claimed for the Companies
share of environmental and operating costs which the Companies have not paid.
Discovery has just commenced in this matter, which is tentatively set for trial
in January, 1997. At this time management cannot estimate either the financial
impact of the litigation or the effect on the carrying value of the assets
affected.
The Company is involved in various other legal actions arising in the normal
course of business. In the opinion of management, the Company's liabilities, if
any, in these matters will not have a material effect on the Company's financial
position or the results of operations.
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Item 2. Management's discussion and Analysis.
Results of Operations - First six months of 1996 compared with first six months
of 1995
Net income for the first six months increased $255,238 from $509,032 in 1995 to
$764,270 in 1996. The principal reasons for this increase are as follows:
Oil sales increased 19% ($367,385) as a result of an increase in the average
price from $16.68 per barrel to $18.96 per barrel, coupled with an increase in
production volumes of 5,437 barrels. This increase in production was primarily a
result of new drilling and property acquisitions during 1995.
Gas sales increased $264,162 (28%) due to an increase in the average gas price
per mcf from $1.39 in 1995 to $1.94 in 1996, partially offset by a decrease in
production volumes from 670,720 mcf to 614,133 mcf.
Interest income increased $12,501 from 1995 primarily as a result of greater
excess funds available for investment.
Gains on sales of assets were lower in 1996 (decrease of $65,947). In the second
quarter of 1995 the Company sold several marginal properties for which there
were no comparable transactions in 1996.
Income from equity affiliates increased $29,987. The Company's principal equity
investee, HSOG, reported income of $509,661 in 1996 compared to $381,658 in
1995.
Other income was $37,278 higher due to additional "administrative overhead"
being collected from joint interest partners on Company operated wells as a
result of new wells acquired in 1995.
Lease operating expenses increased $425,727 (70%) in 1996. This increase is
principally attributable to operating costs associated with properties acquired
in 1995.
Production taxes increased $68,345 as a result of higher production values
described above.
Dry hole costs decreased $73,050 in 1996. In 1995 there were 2 dry holes (.44
net) drilled at an average gross cost of $271,500 per well; in 1996 there were 3
dry holes (.18 net) drilled at an average gross cost of $257,900 per well.
Condemned and abandoned property expense decreased $47,001, resulting in a net
credit of $5,081. This net credit was primarily the result of salvage credits of
$12,488 received on a property abandoned during the first quarter. 1995 expense
was unusually high due to the non-recurring abandonment of acreage costs
associated with two dry holes, coupled with the expiration of leases on certain
non-producing acreage owned by the Company.
General and administrative expense decreased $129,659. 1995 operations included
$132,896 associated with the Company's unsuccessful merger with The Home-Stake
Oil & Gas Company.
Results of Operations - Second quarter 1996 compared with second quarter 1995
Net income for the second quarter decreased $19,423 from $468,563 in 1995 to
$449,140 in 1996. The principal reasons for this decrease are as follows:
Oil sales increased 6% ($67,949) due to higher average prices which increased
from $17.03 per barrel in 1995 to $20.23 per barrel in 1996, partially offset by
a decrease in production volumes from 69,497 barrels to 61,886 barrels.
Gas sales increased $135,340 (28%) due to higher average prices which increased
from $1.34 per mcf in 1995 to $2.00 per mcf in 1996, partially offset by a
decrease in production volumes from 366,758 mcf to 310,374 mcf.
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Interest income increased $8,806 from 1995 primarily as a result of greater
excess funds available for investment.
Gains on sales of assets were lower in 1996 (decrease of $65,254). In the second
quarter of 1995 the Company sold several marginal properties for which there
were no comparable transactions in 1996.
Income from equity affiliates decreased $42,196. The Company's principal equity
investee, HSOG, reported income of $263,027 in 1996 compared to $390,954 in
1995.
Other income was higher due to additional "administrative overhead" being
collected from joint interest partners on Company operated wells as a result of
new wells acquired in 1995.
Lease operating expenses increased $217,976 (69%). This increase in principally
attributable to operating costs associated with properties acquired in 1995.
Production taxes increased $41,892 as a result of higher production values
described above.
Condemned and abandoned property expense decreased $14,009 due to a decrease in
the number of non-producing leaseholds whose lease terms expired in the second
quarter of 1996, as compared to 1995.
General and administrative expense decreased $63,917. 1995 operations included
$34,294 associated with the Company's unsuccessful merger with The Home-Stake
Oil & Gas Company.
Financial Condition and Liquidity
The Company's operating activities have traditionally been self-financed through
internally generated cash flows. The principal uses of cash flows have been to
fund the Company's exploration and production activities and for the payment of
dividends to stockholders. The use of borrowed funds has generally been limited
to the acquisition of producing oil & gas properties where future revenues from
such purchases are expected to fund the debt.
The Company has an exploration and development budget for 1996 of $1,680,000.
The Company has spent approximately $160,959 in the first two quarters of 1996
and has current commitments of approximately $403,300 for the remainder of the
year. In addition, the Company is actively pursuing acquisition opportunities
when they arise.
The Company has a revolving line-of-credit with Bank IV Oklahoma, N.A. in the
amount of $700,000 which expires May 1, 1997. There is no balance currently
under this line, however the Company has issued letters of credit in the amount
of $690,000 which are also guaranteed by this line.
The working capital deficit of $646,187 at December 31, 1995 has been reduced to
a surplus of $43,733 at June 30, 1996 since the Company has used cash flows to
reduce current liabilities. Product prices remain above 1995 levels and the
Company's drilling commitments are $1 million below budget; it therefore appears
likely the surplus will increase. Excess cash flows will be used to reduce the
bank note payable and fund future business operations.
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Part II. Other Information
Item 1. Legal Proceedings.
There is a complete discussion of legal proceedings in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1995
(the "Form 10-KSB"). During the second quarter of 1996 there have
been the following material changes in the status of such matters.
(a) In connection with the Company's and HSOG's (collectively "the
Companies") action against Federal Insurance Company ("Federal")
in the United States District Court for the Northern District of
Oklahoma, the Companies entered into a settlement agreement with
Federal on August 5, 1996, pursuant to which, the Companies
received an aggregate of $165,000 ($82,500 each company) and
each party agreed to dismiss all of their respective claims
against each other.
(b) In connection with the matter discussed in the Company's Form
10-KSB described as "saltwater contamination claims", the
Companies filed suit in the United States District Court for the
Eastern District of Oklahoma on June 13, 1996, against Mobil Oil
Corporation and Mobil Exploration & Production U.S., Inc.
(collectively "Mobil"). This suit is styled The Home-Stake
Royalty Corporation and The Home-Stake Oil & Gas Company v Mobil
Oil Corporation and Mobil Exploration & Production U.S., Inc.
(Case No. CIV-96-271-S). This action alleges Mobil's breach of
the Unit agreement; breach of fiduciary duty; gross negligence
and willful misconduct; and fraud in connection with Mobil's
operation of a property in which the Companies each own a 9%
working interest. The Companies are seeking actual damages,
punitive damages and equitable relief in this matter, including a
declaration that Mobil is barred from charging costs related to
certain saltwater contamination claims and other related costs to
the Companies. Mobil has counter claimed for the Companies share
of environmental and operating costs which the Companies have not
paid. Discovery has just commenced in this matter, which is
tentatively set for trial in January, 1997.
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.
None.
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Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
The following documents are included as exhibits to this Form
10-QSB.
Exhibit
Number Description
10.1 Form of Indemnity Agreement between The Home-Stake Royalty
Corporation and each Director, dated May 14, 1996.
10.2 First Amendment and Modification Agreement to Loan Agreement
dated May 1, 1996 to the Third Amended and Restated Loan
Agreement dated March 29, 1995 between the Company and Bank
IV Oklahoma, N.A.
10.3 Second Amendment and Modification Agreement to Loan
Agreement dated May 1, 1996 to the Third Amended and
Restated Loan Agreement dated March 29, 1995 between the
Company and Bank IV Oklahoma, N.A.
27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended June
30, 1996.
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Signatures
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
The Home-Stake Royalty Corporation
(Registrant)
Date: August 12, 1996 By: /s/ Robert C. Simpson
-----------------------------
Robert C. Simpson
Chairman of the Board, C.E.O.,
President and Treasurer
Date: August 12, 1996 By: /s/ Chris K. Corcoran
-----------------------------
Chris K. Corcoran
Executive Vice President,
Chief Financial Officer and
Corporate Secretary
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INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (this "Agreement") is made this 14th day of
May, 1996 by and between THE HOME-STAKE ROYALTY CORPORATION, an Oklahoma
corporation (the "Company"), and _______________________________ ("Director").
RECITALS
A. Director currently serves or has agreed to serve as a director of the
Company and while serving in such capacity is or will be performing a valuable
service to the Company.
B. The Company's Bylaws (the "Bylaws") provide for the indemnification of
the directors, officers, employees and agents of the Company.
C. Section 1031 of the Oklahoma General Corporation Act (the "Corporation
Act") provides for indemnification by a corporation of its directors, officers,
employees and agents, including advancement of expenses. The Corporation Act
also provides that the indemnification and advancement of expenses provided by
the Corporation Act shall not be deemed exclusive of any other rights to which
those seeking indemnification or advancement of expenses may be entitled under
any bylaw, agreement, vote of shareholders or disinterested directors or
otherwise, and thereby contemplates that agreements may be entered into between
a corporation and its directors with respect to the indemnification of
directors.
D. The applicability and enforcement of statutory and bylaw indemnification
provisions have raised questions concerning the adequacy and reliability of the
protection afforded thereby.
E. In order to resolve such questions and to induce Director to serve or
continue to serve as a director of the Company for the remainder of his term and
for any subsequent term to which he is elected by the shareholders of the
Company, the Company has deemed it to be in its best interest to enter into this
Agreement.
NOW, THEREFORE, in consideration of Director's agreement to serve or
continue to serve as a director of the Company after the date hereof, the
parties hereto agree as follows:
1. Definitions.
As used in this Agreement, the following terms shall have the following
meanings:
(a) Change in Control. A "Change in Control" shall be deemed to have
occurred if (i) any "person" [as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")], other than persons currently holding securities representing 15% or
more of the combined voting power of the outstanding securities of the
Company, becomes the "beneficial owner" (as such term is defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of the
Company representing 15% or more of the combined voting power of the
outstanding securities of the Company, or (ii) during any period of two
consecutive years, individuals who at the beginning of such period
constitute the Board of Directors of the Company and any new director whose
election by the Board of Directors or nomination for election by the
shareholders of the Company was approved by a vote of at least two-thirds
(2/3) of the directors then still in office who either were directors at
the beginning of the period or whose election or nomination
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for election was previously so approved, cease for any reason to constitute
a majority thereof, or (iii) the shareholders of the Company approve (A) a
merger or consolidation of the Company with any other entity (other than a
merger or consolidation with The Home-Stake Royalty Corporation or a merger
or consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent, either by
remaining outstanding or by being converted into voting securities of the
surviving entity, at least 80% of the combined voting power of the voting
securities of the Company or such surviving entity outstanding immediately
after such merger or consolidation), (B) a plan of complete liquidation of
the Company or (C) an agreement or agreements for the sale or disposition,
in a single transaction or series of related transactions, by the Company
of all or substantially all of the property and assets of the Company.
Notwithstanding the foregoing, events otherwise constituting a Change in
Control in accordance with the foregoing shall not constitute a Change in
Control if such events are solicited by the Company and are approved,
recommended or supported by the Board of Directors of the Company in
actions taken prior to, and with respect to, such events.
(b) Reviewing Party. A "Reviewing Party" means (i) a quorum of the
Board of Directors of the Company who, at the time of the vote, are not
named defendants or respondents in the proceeding, (ii) if such a quorum
cannot be obtained, or even if obtainable a quorum of disinterested
directors so directs, special legal counsel selected by a majority vote of
a quorum of the Board of Directors of the Company or (iii) the
shareholders.
2. Indemnification of Director.
The Company hereby agrees that it shall hold harmless and indemnify
Director to the fullest extent authorized and permitted by the provisions of the
Bylaws and the provisions of the Corporation Act, or by any amendment thereof,
but in the case of any such amendment, only to the extent that such amendment
permits the Company to provide broader indemnification rights than the Bylaws or
Corporation Act permitted the Company to provide prior to such amendment, or
other statutory provision authorizing or permitting such indemnification which
is adopted after the date hereof.
3. Insurance.
(a) Insurance Policies. So long as Director may be subject to any
possible claim or threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that Director is or was a director of the Company, to
the extent that the Company maintains one or more insurance policy or
policies providing directors' and officers' liability insurance, Director
shall be covered by such policy or policies in accordance with its or their
terms, to the maximum extent of the coverage applicable to any director or
officer then serving the Company.
(b) Maintenance of Insurance. The Company shall not be required to
maintain any policy or policies of insurance if such insurance is not
reasonably available or if, in the reasonable business judgment of the
Board of Directors of the Company which shall be conclusively established
by such determination by the Board of Directors or any appropriate
committee thereof, either (i) the premium cost for such insurance is
substantially disproportionate to the amount of coverage thereunder or (ii)
the coverage provided by such insurance is so limited by exclusions that
there is insufficient benefit from such insurance.
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<PAGE>
4. Additional Indemnification.
Subject only to the exclusions set forth in Section 5 hereof, the Company
hereby agrees that it shall hold harmless and indemnify Director:
(a) against any and all judgments, penalties (including excise and
similar taxes), fines, settlements and reasonable expenses, including
attorneys' fees and court costs, actually and reasonably incurred by
Director in connection with any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative, arbitrative or
investigative, any appeal in such an action, suit, or proceeding, and any
inquiry or investigation that could lead to such an action, suit, or
proceeding, including, without limitation, an action by or on behalf of the
shareholders of the Company or by or in the right of the Company, to which
Director is, was or at any time becomes a party, or is threatened to be
made a party, by reason of the fact that Director is, was or at any time
becomes a director, officer, employee or agent of the Company, or is or was
serving or at any time serves at the request of the Company as a director,
officer, partner, venturer, proprietor, trustee, employee, agent or similar
functionary of another corporation, partnership, joint venture, sole
proprietorship, trust, nonprofit entity, employee benefit plan, or other
enterprise; and
(b) otherwise to the fullest extent as may be provided to Director by
the Company under the provisions of the Corporation Act permitting such
indemnification.
5. Limitations on Additional Indemnification.
No indemnification pursuant to this Agreement shall be paid by the Company:
(a) in respect to any transaction if it shall be determined by the
Reviewing Party, or by final judgment or other final adjudication, that
Director derived an improper personal benefit;
(b) in respect to the return by Director of any remuneration paid to
Director if it shall be determined by the Reviewing Party, or by final
judgment or other final adjudication, that such remuneration was not
approved by the shareholders of the Company and was thereby in violation of
law;
(c) on account of Director's conduct which is determined by the
Reviewing Party, or by final judgment or other final adjudication, to have
involved acts or omissions not in good faith, intentional misconduct or a
knowing violation of law;
(d) if the Reviewing Party or a court having jurisdiction in the matter
shall determine that such indemnification is in violation of the Bylaws or
the law.
6. Advancement of Expenses.
In the event of any threatened or pending action, suit or proceeding in
which Director is a party or is involved and which may give rise to a right of
indemnification under this Agreement, following written request to the Company
by Director, the Company shall pay promptly to Director amounts to cover
expenses incurred by Director in such proceeding (including, without limitation,
payments of retainers for legal services) in advance of its final disposition
upon the receipt by the Company of (i) a written
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<PAGE>
affirmation by the Director of his good faith belief that he has met the
standard of conduct necessary for indemnification and (ii) a written undertaking
executed by or on behalf of Director to repay the advance if it shall ultimately
be determined that Director is not entitled to be indemnified by the Company for
such expenses as provided in this Agreement or the Bylaws and (iii) satisfactory
evidence as to the amount of such expenses.
7. Fee to Director.
If the Director is not an officer or employee of the Company, the Company
agrees to pay to the Director, in addition to any other payments due to the
Director under any other contract or arrangement, an amount equal to $150.00 per
hour for each hour which the Director spends in connection with any action, suit
or proceeding to which the Director is a party or otherwise becomes involved as
a result of Director's position as a Director of the Company, plus the amount of
all reasonable out-of-pocket expenses incurred by the Director.
8. Repayment of Expenses.
Director agrees that Director shall reimburse the Company for all
reasonable expenses paid by the Company in defending any civil, criminal,
administrative or investigative action, suit or proceeding against Director in
the event and only to the extent that it shall be determined by final judgment
or other final adjudication that Director is not entitled to be indemnified by
the Company for such expenses under the provisions of the Corporation Act or any
applicable law.
9. Determination of Indemnification; Burden of Proof.
With respect to all matters concerning the rights of Director to
indemnification and payment of expenses under this Agreement or under the
provisions of the Bylaws now or hereafter in effect, the Company shall appoint a
Reviewing Party and any determination by the Reviewing Party shall be conclusive
and binding on the Company. If under applicable law, the entitlement of Director
to be indemnified under this Agreement depends on whether a standard of conduct
has been met, the burden of proof of establishing that Director did not act in
accordance with such standard of conduct shall rest with the Company. Director
shall be presumed to have acted in accordance with such standard and entitled to
indemnification or advancement of expenses hereunder, as the case may be,
unless, based upon a preponderance of the evidence, it shall be determined by
the Reviewing Party that Director did not meet such standard. For purposes of
this Agreement, unless otherwise expressly stated herein, the termination of any
action, suit or proceeding by judgment, order, settlement, whether with or
without court approval, or conviction, or upon a plea of nolo contendere or its
equivalent shall not create a presumption that Director did not meet any
particular standard of conduct or have any particular belief or that a court has
determined that indemnification is not permitted by applicable law.
10. Effect of Change in Control.
If there has not been a Change in Control after the date of this Agreement,
the determination of the (i) rights of Director to indemnification and payment
of expenses under this Agreement or under the provisions of the Bylaws, (ii)
standard of conduct and (iii) evaluation of the reasonableness of amounts
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<PAGE>
claimed by Director shall be made by the Reviewing Party or such other body or
persons as may be permitted by the Corporation Act. If there has been a Change
in Control after the date of this Agreement, such determination and evaluation
shall be made by a special, independent counsel who is selected by Director and
approved by the Company, which approval shall not be unreasonably withheld, and
who has not otherwise performed services for Director or the Company.
11. Continuation of Indemnification.
All agreements and obligations of the Company contained herein shall
continue during the period that Director is a director, officer, employee or
agent of the Company, or is or was serving at the request of the Company as a
director, officer, partner, venturer, proprietor, trustee, employee, agent or
similar functionary of another corporation, partnership, joint venture, sole
proprietorship, trust, nonprofit entity, employee benefit plan, or other
enterprise, and shall continue thereafter so long as Director shall be subject
to any possible claim or threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative, arbitrative or
investigative, any appeal in such an action, suit, or proceeding, by reason of
the fact that Director was a director of the Company or served in any other
capacity referred to herein.
12. Notification and Defense of Claim.
Promptly after receipt by Director of notice of the commencement of any
action, suit or proceeding, Director shall, if a claim in respect thereof is to
be made against the Company under this Agreement, notify the Company of the
commencement thereof; provided, however, that delay in so notifying the Company
shall not constitute a waiver or release by Director of rights hereunder and
that omission by Director to so notify the Company shall not relieve the Company
from any liability which it may have to Director otherwise than under this
Agreement. With respect to any such action, suit or proceeding as to which
Director notifies the Company of the commencement thereof:
(a) The Company shall be entitled to participate therein at its own
expense; and
(b) Except as otherwise provided below, to the extent that it may wish, the
Company, jointly with any other indemnifying party similarly notified, shall be
entitled to assume the defense thereof and to employ counsel reasonably
satisfactory to Director. After notice from the Company to Director of its
election to so assume the defense thereof, the Company shall not be liable to
Director under this Agreement for any legal or other expenses subsequently
incurred by Director in connection with the defense thereof other than
reasonable costs of investigation or as otherwise provided below. Director shall
have the right to employ counsel of his own choosing in such action, suit or
proceeding but the fees and expenses of such counsel incurred after notice from
the Company of assumption by the Company of the defense thereof shall be at the
expense of Director unless (i) the employment of counsel by Director has been
specifically authorized by the Company, such authorization to be conclusively
established by action by disinterested members of the Board of Directors though
less than a quorum; (ii) representation by the same counsel of both Director and
the Company would, in the reasonable judgment of Director and the Company, be
inappropriate due to an actual or potential conflict of interest between the
Company and Director in the conduct of the defense of such action, such conflict
of interest to be conclusively established by an opinion of counsel to the
Company to such effect; (iii) the counsel employed by the Company and reasonably
satisfactory to Director has advised Director in writing that such counsel's
representation of Director would likely involve such counsel in representing
differing interests which could adversely affect the judgment or loyalty of such
counsel to Director, whether it be a conflicting, inconsistent, diverse or other
interest; or (iv) the Company shall not in fact have employed counsel to assume
-5-
<PAGE>
the defense of such action, in each of which cases the fees and expenses of
counsel shall be paid by the Company. The Company shall not be entitled to
assume the defense of any action, suit or proceeding brought by or on behalf of
the Company or as to which a conflict of interest has been established as
provided in (ii) hereof. Notwithstanding the foregoing, if an insurance company
has supplied directors' and officers' liability insurance covering an action,
suit or proceeding, then such insurance company shall employ counsel to conduct
the defense of such action, suit or proceeding unless Director and the Company
reasonably concur in writing that such counsel is unacceptable.
(c) The Company shall not be liable to indemnify Director under this
Agreement for any amounts paid in settlement of any action or claim effected
without its written consent. The Company shall not settle any action or claim in
any manner which would impose any liability or penalty on Director without
Director's written consent. Neither the Company nor Director shall unreasonably
withhold consent to any proposed settlement.
13. Enforcement.
(a) The Company expressly confirms and agrees that it has entered into this
Agreement and assumed the obligations imposed on the Company hereby in order to
induce Director to serve as a director of the Company and acknowledges that
Director is relying upon this Agreement in continuing in such capacity.
(b) If a claim for indemnification or advancement of expenses is not paid
in full by the Company within thirty (30) days after a written claim by Director
has been received by the Company, Director may at any time assert the claim and
bring suit against the Company to recover the unpaid amount of the claim. In the
event Director is required to bring any action to enforce rights or to collect
monies due under this Agreement and is successful in such action, the Company
shall reimburse Director for all of Director's reasonable attorneys' fees and
expenses in bringing and pursuing such action.
14. Proceedings by Director.
The Company shall not be liable to make any payment under this Agreement in
connection with any action, suit or proceeding, or any part thereof, initiated
by Director unless such action, suit or proceeding, or part thereof, was
authorized by the Company, such authori-zation to be conclusively established by
action by disinterested members of the Board of Directors though less than a
quorum.
15. Effectiveness.
This Agreement is effective for, and shall apply to, (i) any claim which is
asserted or threatened before, on or after the date of this Agreement but for
which no action, suit or proceeding has been brought prior to the date hereof
and (ii) any action, suit or proceeding which is threatened before, on or after
the date of this Agreement but which is not pending prior to the date hereof.
This Agreement shall not apply to any action, suit or proceeding which was
brought before the date of this Agreement. So long as the foregoing is
satisfied, this Agreement shall be effective for, and be applicable to, acts or
omissions occurring prior to, on or after the date hereof.
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<PAGE>
16. Nonexclusivity.
The rights of Director under this Agreement shall not be deemed exclusive,
or in limitation of, any rights to which Director may be entitled under any
applicable common or statutory law, or pursuant to the Bylaws, vote of
shareholders or otherwise.
17. Other Payments.
The Company shall not be liable to make any payment under this Agreement in
connection with any action, suit or proceeding against Director to the extent
Director has otherwise received payment of the amounts otherwise payable by the
Company hereunder.
18. Subrogation.
In the event the Company makes any payment under this Agreement, the
Company shall be subrogated, to the extent of such payment, to all rights of
recovery of Director with respect thereto, and Director shall execute all
agreements, instruments, certificates or other documents and do or cause to be
done all things necessary or appropriate to secure such recovery rights to the
Company including, without limitation, executing such documents as shall enable
the Company to bring an action or suit to enforce such recovery rights.
19. Survival; Continuation.
The rights of Director under this Agreement shall inure to the benefit of
Director, his heirs, executors, administrators, personal representatives and
assigns, and this Agreement shall be binding upon the Company, its successors
and assigns. The rights of Director under this Agreement shall continue so long
as Director may be subject to any action, suit or proceeding because of the fact
that Director is or was a director, officer, employee or agent of the Company or
is or was serving at the request of the Company as a director, officer, partner,
venturer, proprietor, trustee, employee, agent or similar functionary of another
corporation, partnership, joint venture, sole proprietorship, trust, nonprofit
entity, employee benefit plan, or other enterprise. If the Company, in a single
transaction or series of related transactions, sells, leases, exchanges, or
otherwise disposes of all or substantially all of its property and assets, the
Company shall, as a condition precedent to any such transaction, cause effective
provision to be made so that the persons or entities acquiring such property and
assets shall become bound by and replace the Company under this Agreement.
20. Amendment and Termination.
No amendment, modification, termination or cancellation of this Agreement
shall be effective unless made in writing signed by both parties hereto.
21. Headings.
Section headings of the sections and paragraphs of this Agreement have been
inserted for convenience of reference only and do not constitute a part of this
Agreement.
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<PAGE>
22. Choice of Law.
This Agreement shall be governed by and construed in accordance with the
internal laws of the State of Oklahoma without giving effect to the principles
of conflicts of laws thereof.
23. Notices.
All notices and other communications hereunder shall be in writing and
shall be deemed to have been duly given if delivered personally, mailed by
certified mail (return receipt requested) or sent by overnight delivery service,
cable, telegram, facsimile transmission or telex to the parties at the following
addresses or at such other addresses as shall be specified by the parties by
like notice:
(a) if to the Company:
The Home-Stake Royalty Corporation
15 East 5th Street, Suite 2800
Tulsa, Oklahoma 74103
Attention: President
(b) if to the Director:
--------------------------------
--------------------------------
--------------------------------
--------------------------------
Notice so given shall, in the case of notice so given by mail, be deemed to be
given and received on the fourth calendar day after posting, in the case of
notice so given by overnight delivery service, on the date of actual delivery
and, in the case of notice so given by cable, telegram, facsimile transmission,
telex or personal delivery, on the date of actual transmission or, as the case
may be, personal delivery.
24. Severability.
If any provision of this Agreement shall be held to be illegal, invalid or
unenforceable under any applicable law, then such contravention or invalidity
shall not invalidate the entire Agreement. Such provision shall be deemed to be
modified to the extent necessary to render it legal, valid and enforceable, and
if no such modification shall render it legal, valid and enforceable, then this
Agreement shall be construed as if not containing the provision held to be
invalid, and the rights and obligations of the parties shall be construed and
enforced accordingly.
25. Complete Agreement.
This Agreement and those documents expressly referred to herein embody the
complete agreement and understanding among the parties and supersede and preempt
any prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any way.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Indemnification
Agreement to be executed on the day and year first above written.
THE HOME-STAKE ROYALTY CORPORATION
By:________________________________________
Its:__________________________________
___________________________________________
Director
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FIRST AMENDMENT AND MODIFICATION AGREEMENT
TO LOAN AGREEMENT
This First Amendment and Modification Agreement to Loan Agreement (the
"Agreement") is effective as of the 1st day of May, 1996 in Tulsa, Oklahoma, by
and between THE HOME-STAKE ROYALTY CORPORATION, an Oklahoma corporation
("Borrower"), whose mailing address, principal place of business and chief
executive offices are at 2800 First National Tower, Tulsa, Oklahoma, and BANK IV
Oklahoma, N.A., a national banking association (the "Bank"), whose address is
515 South Boulder (or P.O. Box 2360, 74101), Tulsa, Oklahoma 74103.
R E C I T A L S
A. Borrower and the Bank made, executed and entered into that certain Third
Amended and Restated Loan Agreement dated as of the 29th day of March, 1995 (the
"Loan Agreement"), which described and defined a financing arrangement wherein
the Borrower was entitled to borrow and the Bank agreed to lend (i) up to the
principal amount of $500,000.00, in the form of a revolving line of credit as
evidenced by that certain Promissory Note (the "Revolving Note") dated March 29,
1995 in the face amount of $500,000.00, and (ii) the principal amount of
$4,821,324.00 in the form of a term loan, as evidenced by that certain
Promissory Note (the "Term Note") dated as of March 29, 1995 in the face amount
of $4,821,324.000. As of the date hereof, there is outstanding the principal
amount of $3,133,845.00 under the Term Note and no principal is oustanding under
the Revolving Note in addition to interest accrued in accordance with the terms
thereof. (Except as specifically defined herein, all capitalized terms used
herein shall have the same meaning as set forth in the Loan Agreement.)
B. Repayment of the Term Note and Revolving Note, along with any and all
other Indebtedness of Borrower to the Bank, is secured by a first priority
security interest in and to the Collateral as defined in the Loan Agreement and
the Security Instruments.
C. Borrower has requested that the Bank renew and extend the maturity of
the Revolving Note and Term Note to May 1, 1997, and May 1, 1998, respectively,
and modify certain covenants as provided herein and the Bank is willing to do so
subject to the terms and conditions set forth herein, and in connection
therewith, the parties desire to amend and modify the Loan Agreement and other
Loan Documents as set forth herein.
NOW, THEREFORE, in consideration of the foregoing recitals, the conditions,
covenants, representations and warranties set forth herein, and for other good
and valuable consideration, the receipt, sufficiency and adequacy of which are
hereby acknowledged, the parties hereby mutually agree as follows:
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<PAGE>
1. Renewal Revolving Note. Concurrently with the execution of this
Agreement, Borrower shall execute and deliver to the Bank that certain
Promissory Note (the "Renewal Revolving Note") of even date herewith in the face
amount of $500,000.00 due and payable at 1 maturity on May 1, 1997, such Renewal
Revolving Note to be in the form as shown in Exhibit "A" attached hereto and
made a part hereof, thereby evidencing Borrower's obligation to repay advances
under the Revolving Loan and thereby amending and modifying, but not
extinguishing the indebtedness of, the Revolving Note. All references in the
Loan Agreement and the Loan Documents to the term "Revolving Note" shall be
amended throughout to be deemed to refer to the Renewal Revolving Note and all
references in the Loan Agreement and the Loan Documents to the term "Revolving
Loan" shall be deemed amended throughout to refer to the loan evidenced by the
Renewal Revolving Note.
2. Renewal Term Note. Concurrently with the execution of this Agreement,
Borrower shall execute and deliver to the Bank that certain Promissory Note (the
"Renewal Term Note") of even date herewith in the face amount of $3,133,845.00,
due and payable at maturity on May 1, 1998, such Renewal Term Note to be in the
form as shown in Exhibit "B" attached hereto and made a part hereof, thereby
amending and modifying, but not extinguishing the indebtedness of, the Term
Note. All references in the Loan Agreement and the Loan Documents to the "Term
Note" shall be amended throughout to be deemed to refer to the Renewal Term Note
and all references in the Loan Agreement and the Loan Documents to the term
"Term Loan" shall be deemed amended throughout to refer to the loan evidenced by
the Renewal Term Note. Further, all references in the Loan Agreement and the
Loan Documents to the term "Notes" shall be amended throughout to be deemed to
refer to the Renewal Term Note and the Renewal Revolving Note.
3. Line of Credit Commitment. The last sentence of paragraph 2.3 of the
Loan Agreement is hereby amended in its entirety to read as follows: This
commitment shall expire, unless earlier terminated at 2:00 p.m., Tulsa, Oklahoma
time on May 1, 1997.
4. Ratification of Mortgage and Security Interests. Borrower hereby
ratifies, confirms and reaffirms all security interests, liens and other
encumbrances created under the Loan Agreement, the Security Instruments, this
Agreement, and all other Loan Documents as security for repayment of Borrower's
Indebtedness (as that term is defined in Paragraph 3.6 of the Loan Agreement, as
amended and modified by this Agreement to contemplate the matters provided
therein or herein) and all other unreleased security agreements, mortgages and
deeds of trust in favor of the Bank, all of which shall continue in full force
and effect and with the same priority as security for repayment and satisfaction
of the Indebtedness and all extensions, modifications and renewals thereof,
including but not limited to the Renewal Term Note and the Renewal Revolving
Note.
5. Modification, Ratification, Representations and Warranties. The terms
and provisions of the Loan Agreement and all other Loan Documents executed in
connection therewith shall be deemed amended, modified, and changed throughout
so as to reflect consistently the matters provided herein. As extended, amended,
modified, renewed or changed consistent herewith, the terms and provisions of
the Loan Agreement and all other Loan Documents shall remain in full force and
effect and Borrower hereby ratifies, reaffirms and reasserts, as of the date
2
<PAGE>
hereof except as 2 specifically amended herein, all covenants, representations,
warranties, agreements and statements contained therein. Further, and in
addition to the representations, warranties and covenants hereby ratified and
reaffirmed, Borrower, as applicable, certifies, covenants, represents, and
warrants to and with the Bank as follows:
a. Borrower is validly organized and existing and in good standing under
and by virtue of the laws of the State of Oklahoma and Borrower is
duly qualified to do business and is in good standing in every state
and jurisdiction in which it does or will do business.
b. The execution and delivery of this Agreement and all other documents
to be executed and delivered by Borrower to the Bank pursuant hereto,
and the due observance and performance by Borrower of its terms,
provisions and covenants are within Borrower's powers, have been duly
authorized, will not contravene or violate any law or term or
provision of Borrower's Certificate of Incorporation or By-laws or any
corporate resolution of its shareholders or directors and will not
contravene, violate or constitute a default under any contract,
indenture, agreement or undertaking to which Borrower is a party or by
the terms of which Borrower or any of its property or assets is bound.
c. Borrower's financial statements dated as of December 31, 1995, copies
of which have been furnished to the Bank, have been prepared in
conformity with GAAP, show all material liabilities, direct and
contingent (to the extent required by GAAP to be reflected therein),
and fairly present the financial condition of Borrower as of such date
and the results of its operations for the period then ended, and since
such date there has been no material adverse change in the business,
financial condition or operations of Borrower.
d. The Collateral is free of title defects, subject to no lien of any
kind except liens in favor of the Bank or otherwise permitted by the
Loan Agreement.
e. Except as set forth on Exhibit "C" attached hereto and made a part
hereof, there is no action, suit, investigation or proceeding
threatened or pending before any Tribunal against or affecting the
Borrower or any properties or rights of the Borrower or any claim
thereof which if adversely determined, would result in a liability of
greater than $100,000.00, or would otherwise result in any material
adverse change in the business or condition, financial or otherwise,
of the Borrower. Further, the Borrower is not in default with respect
to any judgment, order, writ, injunction, decree, rule or regulation
of any Tribunal, the default of which would materially impair the
ability of the Borrower to carry on its business substantially as now
conduct. Exhibit "G" to the Loan Agreement is hereby amended
consistent herewith.
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<PAGE>
6. Obligations Unaffected. Except as otherwise specified herein, the terms
and conditions hereof shall in no manner impair, limit, restrict or otherwise
affect the obligations of Borrower to the Bank pursuant to and as evidenced by
the Loan Documents. As a material inducement to the Bank to execute and deliver
this Agreement, Borrower hereby acknowledge that there are no claims or offsets
against, or defenses or counterclaims to, the terms or provisions of the
obligations created or evidenced by the Loan Documents, including but not
limited to the Renewal Term Note and the Renewal Revolving Note. In the event of
a conflict between the terms and conditions of this Agreement and the terms and
conditions of the other Loan Documents, the terms and conditions of this
Agreement shall control.
7. "Loan Documents" and "Loan Agreement". The term "Loan Documents" as used
in the Loan Agreement shall be interpreted to include this Agreement, the
Renewal Revolving Note, the Renewal Term Note and all of the other documents
heretofore or hereafter creating, evidencing, securing and/or relating to the
Secured Obligations of Borrower to the Bank as contemplated or referenced
herein. The term "Loan Agreement" as may be used in any of the Loan Documents
shall be interpreted to mean the Loan Agreement, together with and as modified
by this Agreement. The term "Secured Obligations" as used in the Loan Agreement
or any other Loan Documents shall be interpreted to include the Renewal Term
Note and the Renewal Revolving Note in addition to all other obligations
described therein.
8. Bank's legal Fees, Costs and Expenses. In consideration of and as a
condition precedent to the Bank's agreement to the execution, amendments and
modifications described herein, Borrower agrees to and shall pay promptly all
fees, including but not limited to the Bank's attorneys' fees, expenses and
charges with respect to and in connection with this Agreement and all other
documents contemplated hereby, including but not limited to, recording and
filing fees, and fees and expenses of counsel employed by the Bank in connection
with the documentation and closing of the transactions, amendments and
modifications contemplated hereby, and Borrower hereby agrees to pay promptly
all hereafter incurred fees, including but not limited to attorneys' fees,
expenses and charges of the Bank which are incidental to the enforcement,
defense, amendment, modification, extension, renewal or change of the Loan
Agreement, this Agreement or any other Loan Documents.
9. Separability. If any provision of this Agreement and the other Loan
Documents is held invalid or unenforceable for any reason, such invalidity or
unenforceability shall not affect the other provisions hereof, and this
Agreement and the other Loan Documents shall be construed and enforced as if
such provision had not been included herein.
10. Binding Effect. Except as otherwise expressly provided herein, this
Agreement will remain in effect until all of Borrower's obligations to Bank
under this Agreement have been fully discharged. This Agreement shall be binding
upon Borrower and Guarantor, their respective heirs, successors and assigns, as
applicable, and shall inure to the benefit of the Bank, its successors and
assigns.
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<PAGE>
11. Headings. The headings used herein are for convenience and
administrative purposes only and do not constitute substantive matters to be
considered in construing the terms and provisions of this Agreement.
12. Governing Law. This Agreement shall be governed and interpreted in
accordance with the laws of the State of Oklahoma.
IN WITNESS WHEREOF, this Agreement has been duly executed by the
parties as of the day and year first above written.
THE HOME-STAKE ROYALTY CORPORATION,
an Oklahoma corporation
By: /s/ Chris K. Corcoran
___________________________________________
Chris K. Corcoran, Executive Vice-President
"Borrower"
BANK IV Oklahoma, N.A., a national banking association
By: /s/ Robert O. Laird
___________________________________________
Robert O. Laird, Vice President
"Bank"
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<PAGE>
EXHIBIT "A"
PROMISSORY NOTE
$500,000.00 Tulsa, Oklahoma
May 1, 1996
1. FOR VALUE RECEIVED the undersigned, THE HOME-STAKE ROYALTY CORPORATION,
an Oklahoma corporation, promises to pay to the order of BANK IV OKLAHOMA, N.A.,
an Oklahoma corporation ("Payee") the principal amount of this Note or such
amount thereof as shall be advanced and outstanding, together with interest on
the unpaid balance of such amount at the rate hereinafter set forth. This Note
is issued pursuant to that certain Third Amended and Restated Loan Agreement
(the "Original Loan Agreement") dated March 29, 1995 as amended by that certain
First Amendment and Modification Agreement (the "First Amendment") of even date
herewith (the Original Loan Agreement as amended by the First Amendment being
referred to as the "Loan Agreement") by and between Payee, as Lender, and Maker
as Borrower, and is subject to the provisions therein set forth. The obligations
represented by this Note are secured by the Loan Documents described in the
Agreement.
2. Principal Amount. FIVE HUNDRED THOUSAND AND NO/100 DOLLARS
($500,000.00).
3. Payments. All accrued interest on the unpaid balance of this Note is due
and payable on the first day of each calendar month, commencing June 1, 1996 and
continuing on the first day of each month thereafter until May 1, 1997, at which
time all principal and accrued and unpaid interest shall be due and payable to
Payee in full. Interest on this Note shall accrue from the date of the first
advance under this Note and any payment shall be applied first to the payment of
interest then due and second to the reduction of unpaid principal.
4. Interest Rate. Interest shall accrue on the outstanding principal
balance at the "Prime Rate". The term "Prime Rate" means that rate of interest
computed as an average of corporate loan rates quoted by a certain number of the
nation's largest banks, as announced from time to time in the Wall Street
Journal, Southwest Edition as the "prime rate". The Prime Rate shall be adjusted
daily as announced, calculated on the basis of a year of 360 days and a month of
30 days. Changes in the rate charged on this Note are effective, without notice,
on the same day as the effective change in the Prime Rate as established from
time to time. In any case where a payment of principal and/or interest on this
Note, or any part thereof, is due on a day on which the Bank is not open for
normal banking business, the undersigned shall be entitled to delay such
payments until the next succeeding business day, but interest shall continue to
accrue until the payment is in fact made.
5. Interest Rate After Maturity. Matured and unpaid principal, whether by
acceleration or otherwise, shall bear interest at the Prime Rate plus five
percent (5%) per annum.
6. Prepayment Penalties. This Note may be prepaid, in whole or in part, at
any time, without premium or penalty.
7. Default. If the principal or any installment of interest due upon this
Note is not paid as and when the same becomes due and payable (whether by
demand, extension, acceleration or otherwise), or any party now or hereafter
liable (directly or indirectly) for payment of this Note makes an assignment for
benefit of creditors, has an order for relief entered under the United States
Bankruptcy Code, as amended, seeks the benefits of any other bankruptcy,
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insolvency or reorganization law, or becomes insolvent, or any receiver, trustee
or like officer is appointed to take custody, possession or control of any
property of any such party, or upon the occurrence of any event of default under
the Agreement or any other Loan Documents, the holder hereof may, after the
expiration of any grace or notice period as provided in the Loan Agreement,
without further notice and without presentment or demand for payment, declare
all of the unpaid balance hereof to be immediately due and payable. Such right
of acceleration is cumulative and in addition to any other right or rights of
acceleration under the Agreement and any other writing now or hereafter
evidencing or securing payment of any of the indebtedness evidenced hereby.
8. Costs and Attorneys' Fees. If this Note is placed in the hands of an
attorney for collection, or suit is brought on same, or the same is collected
through Probate, Bankruptcy or other judicial proceeding, or Payee is required
to defend the priority of the security, then the undersigned shall pay all of
Payee's reasonable costs and expenses including but not limited to a reasonable
amount as attorneys' fees.
9. Waivers. Maker and any party which may be or become liable for the
payment of any sums of money payable on this Note (including any surety,
endorser or guarantor) severally waive presentment and demand for payment,
protest, notice of protest and nonpayment, and notice of the intention to
accelerate, and agree that their liability on this note shall not be affected by
any renewal or extension in the time of payment hereof, by any indulgences or by
any release or change in any security for the payment of this note, regardless
of the number of such renewals, extensions, indulgences, releases or changes.
10. Right of Offset. Any indebtedness due from holder hereof to the
undersigned or any party hereto including, but without limitation, any deposits
or credit balances due from holder, is pledged to secure payment of this Note
and any other obligation to holder of the undersigned or any party hereto, and
may at any time while the whole or any part of such obligation remains unpaid,
either before or after maturity hereof, be appropriated, held or applied toward
the payment of this Note or any other obligation to holder of the undersigned or
any party hereto.
11. Governing Law. This Note has been executed and delivered in Tulsa
County, Oklahoma and shall be governed by and construed according to the laws of
the State of Oklahoma.
THE HOME-STAKE ROYALTY CORPORATION
an Oklahoma corporation
By: _______________________________________
Name: Chris K. Corcoran
Title: Executive Vice-President
2
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EXHIBIT "B"
PROMISSORY NOTE
$3,133,845.00 Tulsa, Oklahoma
May 1, 1996
1. FOR VALUE RECEIVED the undersigned, THE HOME-STAKE ROYALTY CORPORATION,
an Oklahoma corporation, promises to pay to the order of BANK IV OKLAHOMA, N.A.,
a national banking association ("Payee"), the principal amount of this Note
together with interest on the unpaid balance of such amount at the rate
hereinafter set forth. This Note is issued pursuant to that certain Third
Amended and Restated Loan Agreement (the "Original Loan Agreement") dated March
29, 1995, as amended by that certain First Amendment and Modification Agreement
(the "First Amendment") of even date herewith (the Original Loan Agreement as
amended by the First Amendment being referred to as the "Loan Agreement") by and
between Payee, as Lender, and Maker as Borrower, and is subject to the
provisions therein set forth. The obligations represented by this Note are
secured by the Loan Documents described in the Agreement.
2. Principal Amount. THREE MILLION ONE HUNDRED THIRTY THREE THOUSAND EIGHT
HUNDRED FORTY-FIVE AND NO/100 DOLLARS ($3,133,845.00)
3. Payments. All accrued interest on the unpaid balance of this Note
together with principal payments of $80,355.00 each are due and payable on the
first day of each calendar month, commencing June 1, 1996 and continuing on the
first day of each month thereafter until May 1, 1997, at which time all
principal and accrued and unpaid interest shall be due and payable to Payee in
full. Interest on this Note shall accrue from the date of the first advance
under this Note and any payment shall be applied first to the payment of
interest then due and second to the reduction of unpaid principal.
4. Interest Rate. Interest shall accrue on the outstanding principal
balance at the "Prime Rate". The term "Prime Rate" means that rate of interest
computed as an average of corporate loan rates quoted by a certain number of the
nation's largest banks, as announced from time to time in the Wall Street
Journal, Southwest Edition as the "prime rate". The Prime Rate shall be adjusted
daily as announced, calculated on the basis of a year of 360 days and a month of
30 days. Changes in the rate charged on this Note are effective, without notice,
on the same day as the effective change in the Prime Rate as established from
time to time. In any case where a payment of principal and/or interest on this
Note, or any part thereof, is due on a day on which the Bank is not open for
normal banking business, the undersigned shall be entitled to delay such
payments until the next succeeding business day, but interest shall continue to
accrue until the payment is in fact made.
5. Interest Rate After Maturity. Matured and unpaid principal, whether by
acceleration or otherwise, shall bear interest at the Prime Rate plus five
percent (5%) per annum.
6. Prepayment Penalties. This Note may be prepaid, in whole or in part, at
any time, without premium or penalty.
7. Default. If the principal or any installment of interest due upon this
Note is not paid as and when the same becomes due and payable (whether by
demand, extension, acceleration or otherwise), or any party now or hereafter
liable (directly or indirectly) for payment of this Note makes an assignment for
benefit of creditors, has an order for relief entered under the United States
Bankruptcy Code, as amended, seeks the benefits of any other bankruptcy,
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insolvency or reorganization law, or becomes insolvent, or any receiver, trustee
or like officer is appointed to take custody, possession or control of any
property of any such party, or upon the occurrence of any event of default under
the Loan Agreement or any other Loan Documents, the holder hereof may, after the
expiration of any grace or notice period as provided in the Loan Agreement,
without further notice and without presentment or demand for payment, declare
all of the unpaid balance hereof to be immediately due and payable. Such right
of acceleration is cumulative and in addition to any other right or rights of
acceleration under the Agreement and any other writing now or hereafter
evidencing or securing payment of any of the indebtedness evidenced hereby.
8. Costs and Attorneys' Fees. If this Note is placed in the hands of an
attorney for collection, or suit is brought on same, or the same is collected
through Probate, Bankruptcy or other judicial proceeding, or Payee is required
to defend the priority of the security, then the undersigned shall pay all of
Payee's reasonable costs and expenses including but not limited to a reasonable
amount as attorneys' fees.
9. Waivers. Maker and any party which may be or become liable for the
payment of any sums of money payable on this Note (including any surety,
endorser or guarantor) severally waive presentment and demand for payment,
protest, notice of protest and nonpayment, and notice of the intention to
accelerate, and agree that their liability on this note shall not be affected by
any renewal or extension in the time of payment hereof, by any indulgences or by
any release or change in any security for the payment of this note, regardless
of the number of such renewals, extensions, indulgences, releases or changes.
10. Right of Offset. Any indebtedness due from holder hereof to the
undersigned or any party hereto including, but without limitation, any deposits
or credit balances due from holder, is pledged to secure payment of this Note
and any other obligation to holder of the undersigned or any party hereto, and
may at any time while the whole or any part of such obligation remains unpaid,
either before or after maturity hereof, be appropriated, held or applied toward
the payment of this Note or any other obligation to holder of the undersigned or
any party hereto.
11. Governing Law. This Note has been executed and delivered in Tulsa
County, Oklahoma and shall be governed by and construed according to the laws of
the State of Oklahoma.
THE HOME-STAKE ROYALTY CORPORATION,
an Oklahoma corporation
By: _______________________________________
Name: Chris K. Corcoran
Title: Executive Vice-President
2
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EXHIBIT "C"
ITEM 3. LEGAL PROCEEDINGS
The Home-Stake Oil Gas Company and The Home-Stake Royalty Corporation v
Federal Insurance Company, Case No. CJ 94-04950, Tulsa County District Court,
State of Oklahoma.
This action was filed by The Home-Stake Companies on December 6, 1994,
against Federal Insurance Company ("Federal") alleging breach of contract and
breach of duty of good faith and fair dealing arising out of Federal's refusal
to pay on claims made by The Home-Stake Companies under their directors and
officers liability policies related to costs incurred by The Home-Stake
Companies in the successful defense of The Home-Stake Companies' directors in a
lawsuit styled Norvell, et al. v. Brock, et al. Federal has answered and
asserted a counterclaim against the Companies seeking to recover $113,914 plus
attorneys fees and costs, based on a theory of misrepresentation. Discovery is
ongoing in this matter, which is set for trial in October, 1996.
Bureau of Indian Affairs
The Company is involved in a dispute with the Bureau of Indian Affairs
representing the Kiowa Indian Tribe over the application of a Communitization
Agreement between the Company and the Kiowa Indians covering the Susie No. 5 and
Susie No. 6 wells in Caddo County, Oklahoma. Both the Susie No. 5 and Susie No.
6 wells predominantly produce oil. Between the dates of first production for
each well and September 20, 1991, the Company, as operator, disbursed revenues
from the two wells according to the terms of the Communitization Agreement.
However, on September 20, 1991, the Tulsa Division of the Bureau of Land
Management threatened to retroactively rescind the Communitization Agreement as
to the two wells and later contended that oil was not a communitized substance
under the Communitization Agreement, that the Company had erroneously paid
royalties to certain non-Indian royalty owners and that all royalties should
have been paid to the Kiowa Indians. Since September 20, 1991, the Company has
placed all royalty proceeds in escrow pending resolution of this dispute. On
February 22, 1993, the State Director of the Bureau of Land Management upheld
the Tulsa Division's legal conclusion that oil is not a communitized substance
under the terms of the Communitization Agreement and, accordingly, that all
royalties should have been paid to the Kiowa Indians. The Company appealed this
decision.
On July 12, 1994, the Interior Board of Land Appeals of the United States
Department of the Interior, Office of Hearings and Appeals (the "Appeals
Board"), upheld the earlier holdings that oil was not a communitized substance
under the terms of the Communitization Agreement. In November 1994, the Company
filed a petition with the Appeals Board asking for a clarification and
reconsideration of certain aspects of this decision. The Appeals Board has not
yet acted on such petition. Unless the decision is reversed or changed by the
Appeals Board on reconsideration or by a Federal Court upon appeal, The
Home-Stake Companies would be liable to the Kiowa Indians for their portion of
the additional royalties and severance taxes. The Home-Stake Companies estimate
their liability to be approximately $70,000 if the decision is not reversed at a
later date, however, it may be able to recover some of the royalties paid to the
non-Indian recipients.
Texas Gas Production Taxes
On May 4, 1992, the Company was notified that the Comptroller of the State
of Texas had issued a Notice of Tax Due on March 6, 1992, for Texas Gas
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Production Taxes allegedly due on settlement payments received by the Company
and other parties in 1988. The assessed amount of such taxes was $144,517, plus
interest. This amount was assessed against the party paying the settlement
payments ("the assessed party"). The assessed party was pursuing administrative
relief before the Texas Comptroller's Office and filed a Request for
Redetermination and Statement of Grounds on April 6, 1992. In September, 1995
the Company was notified by the assessed party that in meetings with the
Comptroller of the State of Texas it had been agreed that there would be no
taxes due on the settlement payments and the assessment would be withdrawn.
Saltwater Contamination Claims
In August 1995, the Company was notified that a property in which it owns a
9% working interest was subject to certain claims by surface owners regarding
possible saltwater contamination. The operator of the property has settled some
claims and is currently pursuing resolution of this matter with other surface
owners. It is currently estimated that the Company's share of the total claims
and related costs may be approximately $300,000. The Company believes that
because of the existence of certain legal defenses to any claims asserted
against it and/or the availability of insurance for any costs for which it may
become obligated, it will not be required to pay its share of such costs. The
ultimate resolution of this matter is not expected to have a material effect on
the Company's financial position, results of operations or cash flows.
Other Matters
The Company is also involved in various other minor actions arising in the
normal course of business. In the opinion of management, the Company's
liabilities, if any, in these matters and all others discussed in this Form
10-KSB will not have a material effect on the Company's financial position,
results of operations or cash flows.
2
SECOND AMENDMENT AND MODIFICATION AGREEMENT
TO LOAN AGREEMENT
This Second Amendment and Modification Agreement to Loan Agreement (the
"Agreement") is effective as of the 19th day of July, 1996 in Tulsa, Oklahoma,
by and between THE HOME-STAKE ROYALTY CORPORATION, an Oklahoma corporation
("Borrower"), whose mailing address, principal place of business and chief
executive offices are at 2800 First National Tower, Tulsa, Oklahoma, and BANK IV
Oklahoma, N.A., a national banking association (the "Bank"), whose address is
515 South Boulder (or P.O. Box 2360, 74101), Tulsa, Oklahoma 74103.
R E C I T A L S
A. Borrower and the Bank made, executed and entered into that certain
Third Amended and Restated Loan Agreement dated as of the 29th day of March,
1995 (the "Original Loan Agreement"), as amended by that certain First Amendment
and Modification Agreement (the "First Amendment") dated as of May 1, 1996,
which described and defined a financing arrangement wherein the Borrower was
entitled to borrow and the Bank agreed to lend (i) up to the principal amount of
$500,000.00, in the form of a revolving line of credit which has been renewed
and extended and is currently evidenced by that certain Promissory Note (the
"Revolving Note") dated as of May 1, 1996 in the face amount of $500,000.00, and
(ii) a term loan which has been renewed and extended and is currently evidenced
by that certain Promissory Note (the "Term Note") dated as of May 1, 1996 in the
face amount of $3,133,845.00. (The Original Loan Agreement, as amended by the
First Amendment thereto, is hereinafter referred to as the "Loan Agreement"). As
of the date hereof, the principal amount of $2,892,780.00 is outstanding under
the Term Note in addition to interest accrued in accordance with the terms
thereof and as of the date hereof, there is no principal outstanding under the
Revolving Note. (Except as specifically defined herein, all capitalized terms
used herein shall have the same meaning as set forth in the Loan Agreement.)
B. Repayment of the Term Note and Revolving Note, along with any and
all other Indebtedness of Borrower to the Bank, is secured by a first priority
security interest in and to the Collateral as defined in the Loan Agreement and
the Security Instruments.
C. Borrower has requested that the Bank increase the principal amount
for which Borrower is entitled to borrow under the Revolving Loan from $500,000
to $700,000 and the Bank is willing to do so subject to the terms and conditions
set forth herein, and in connection therewith, the parties desire to amend and
modify the Loan Agreement and other Loan Documents as set forth herein.
NOW, THEREFORE, in consideration of the foregoing recitals, the
conditions, covenants, representations and warranties set forth herein, and for
other good and valuable consideration, the receipt, sufficiency and adequacy of
which are hereby acknowledged, the parties hereby mutually agree as follows:
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1. Renewal Revolving Note. Concurrently with the execution of this
Agreement, Borrower shall execute and deliver to the Bank that certain
Promissory Note (the "Renewal Revolving Note") of even date herewith in the face
amount of $700,000.00 due and payable at maturity on May 1, 1997, such Renewal
Revolving Note to be in the form as shown in Exhibit "A" attached hereto and
made a part hereof, thereby evidencing Borrower's obligation to repay advances
under the Revolving Loan and thereby amending, modifying and increasing, but not
extinguishing the indebtedness of, the Revolving Note. All references in the
Loan Agreement and the Loan Documents to the term "Revolving Note" or "Renewal
Revolving Note" shall be amended throughout to be deemed to refer to the Renewal
Revolving Note described in this Agreement and all references in the Loan
Agreement and the Loan Documents to the term "Revolving Loan" shall be deemed
amended throughout to refer to the loan evidenced by the Renewal Revolving Note
described in this Agreement.
2. Ratification of Mortgage and Security Interests. Borrower hereby
ratifies, confirms and reaffirms all security interests, liens and other
encumbrances created under the Loan Agreement, the Security Instruments, this
Agreement, and all other Loan Documents as security for repayment of Borrower's
Indebtedness (as that term is defined in Paragraph 3.6 of the Loan Agreement, as
amended and modified by this Agreement to contemplate the matters provided
therein or herein) and all other unreleased security agreements, mortgages and
deeds of trust in favor of the Bank, all of which shall continue in full force
and effect and with the same priority as security for repayment and satisfaction
of the Indebtedness and all extensions, modifications and renewals thereof,
including but not limited to the Term Note and the Renewal Revolving Note.
Further, as a condition precedent to the execution hereof by the Bank, Borrower
shall make, execute and deliver to the Bank such Amendments to Mortgages or
Deeds of Trust in form and substance acceptable to the Bank whereby the Security
Instruments shall be amended consistent herewith.
3. Modification, Ratification, Representations and Warranties. The
terms and provisions of the Loan Agreement and all other Loan Documents executed
in connection therewith shall be deemed amended, modified, and changed
throughout so as to reflect consistently the matters provided herein. As
extended, amended, modified, renewed or changed consistent herewith, the terms
and provisions of the Loan Agreement and all other Loan Documents shall remain
in full force and effect and Borrower hereby ratifies, reaffirms and reasserts,
as of the date hereof except as specifically amended herein, all covenants,
representations, warranties, agreements and statements contained therein.
Further, and in addition to the representations, warranties and covenants hereby
ratified and reaffirmed, Borrower, as applicable, certifies, covenants,
represents, and warrants to and with the Bank as follows:
a. Borrower is validly organized and existing and in good
standing under and by virtue of the laws of the State of Oklahoma and
Borrower is duly qualified to do business and is in good standing in
every state and jurisdiction in which it does or will do business.
2
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b. The execution and delivery of this Agreement and all other
documents to be executed and delivered by Borrower to the Bank pursuant
hereto, and the due observance and performance by Borrower of its
terms, provisions and covenants are within Borrower's powers, have been
duly authorized, will not contravene or violate any law or term or
provision of Borrower's Certificate of Incorporation or By-laws or any
corporate resolution of its shareholders or directors and will not
contravene, violate or constitute a default under any contract,
indenture, agreement or undertaking to which Borrower is a party or by
the terms of which Borrower or any of its property or assets is bound.
c. Borrower's financial statements dated as of March 31, 1996,
copies of which have been furnished to the Bank, have been prepared in
conformity with GAAP, show all material liabilities, direct and
contingent (to the extent required by GAAP to be reflected therein),
and fairly present the financial condition of Borrower as of such date
and the results of its operations for the period then ended, and since
such date there has been no material adverse change in the business,
financial condition or operations of Borrower.
d. The Collateral is free of title defects, subject to no lien
of any kind except liens in favor of the Bank or otherwise permitted by
the Loan Agreement.
e. Except as set forth on Exhibit "C" attached to the First
Amendment, there is no action, suit, investigation or proceeding
threatened or pending before any Tribunal against or affecting the
Borrower or any properties or rights of the Borrower or any claim
thereof which if adversely determined, would result in a liability of
greater than $100,000.00, or would otherwise result in any material
adverse change in the business or condition, financial or otherwise, of
the Borrower. Further, the Borrower is not in default with respect to
any judgment, order, writ, injunction, decree, rule or regulation of
any Tribunal, the default of which would materially impair the ability
of the Borrower to carry on its business substantially as now conduct.
4. Obligations Unaffected. Except as otherwise specified herein, the
terms and conditions hereof shall in no manner impair, limit, restrict or
otherwise affect the obligations of Borrower to the Bank pursuant to and as
evidenced by the Loan Documents. As a material inducement to the Bank to execute
and deliver this Agreement, Borrower hereby acknowledge that there are no claims
or offsets against, or defenses or counterclaims to, the terms or provisions of
the obligations created or evidenced by the Loan Documents, including but not
limited to the Term Note and the Renewal Revolving Note. In the event of a
conflict between the terms and conditions of this Agreement and the terms and
conditions of the other Loan Documents, the terms and conditions of this
Agreement shall control.
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5. "Loan Documents" and "Loan Agreement". The term "Loan Documents" as
used in the Loan Agreement shall be interpreted to include this Agreement, the
Renewal Revolving Note, the Term Note and all of the other documents heretofore
or hereafter creating, evidencing, securing and/or relating to the Indebtedness
of Borrower to the Bank as contemplated or referenced herein. The term "Loan
Agreement" as may be used in any of the Loan Documents shall be interpreted to
mean the Loan Agreement, together with and as modified by this Agreement. The
term "Secured Obligations" as used in the Loan Agreement or any other Loan
Documents shall be interpreted to include the Term Note and the Renewal
Revolving Note and all further amendments, modifications, extensions or renewals
thereto in addition to all other obligations described therein.
6. Bank's legal Fees, Costs and Expenses. In consideration of and as a
condition precedent to the Bank's agreement to the execution, amendments and
modifications described herein, Borrower agrees to and shall pay promptly all
fees, including but not limited to the Bank's attorneys' fees, expenses and
charges with respect to and in connection with this Agreement and all other
documents contemplated hereby, including but not limited to, recording and
filing fees, and fees and expenses of counsel employed by the Bank in connection
with the documentation and closing of the transactions, amendments and
modifications contemplated hereby, and Borrower hereby agrees to pay promptly
all hereafter incurred fees, including but not limited to attorneys' fees,
expenses and charges of the Bank which are incidental to the enforcement,
defense, amendment, modification, extension, renewal or change of the Loan
Agreement, this Agreement or any other Loan Documents.
7. Separability. If any provision of this Agreement and the other Loan
Documents is held invalid or unenforceable for any reason, such invalidity or
unenforceability shall not affect the other provisions hereof, and this
Agreement and the other Loan Documents shall be construed and enforced as if
such provision had not been included herein.
8. Binding Effect. Except as otherwise expressly provided herein, this
Agreement will remain in effect until all of Borrower's obligations to Bank
under this Agreement have been fully discharged. This Agreement shall be binding
upon Borrower, its successors and assigns, as applicable, and shall inure to the
benefit of the Bank, its successors and assigns.
9. Headings. The headings used herein are for convenience and admin-
istrative purposes only and do not constitute substantive matters to be consid-
ered in construing the terms and provisions of this Agreement.
10. Governing Law. This Agreement shall be governed and interpreted in
accordance with the laws of the State of Oklahoma.
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IN WITNESS WHEREOF, this Agreement has been duly executed by the
parties as of the day and year first above written.
THE HOME-STAKE ROYALTY CORPORATION,
an Oklahoma corporation
By: /s/ Chris K. Corcoran
___________________________________________
Chris K. Corcoran, Executive Vice-President
"Borrower"
BANK IV Oklahoma, N.A., a national banking association
By: /s/ Robert O. Laird
__________________________________________
Robert O. Laird, Vice President
"Bank"
5
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EXHIBIT "A"
PROMISSORY NOTE
$700,000.00 Tulsa, Oklahoma
July 19, 1996
1. FOR VALUE RECEIVED the undersigned, THE HOME-STAKE ROYALTY
CORPORATION, an Oklahoma corporation, promises to pay to the order of BANK IV
OKLAHOMA, N.A., an Oklahoma corporation ("Payee") the principal amount of this
Note or such amount thereof as shall be advanced and outstanding, together with
interest on the unpaid balance of such amount at the rate hereinafter set forth.
This Note is issued pursuant to that certain Third Amended and Restated Loan
Agreement (the "Original Loan Agreement") dated March 29, 1995 as amended by
that certain First Amendment and Modification Agreement (the "First Amendment")
dated as of May 1, 1996, and as further amended by that certain Second Amendment
and Modification Agreement (the "Second Amendment") of even date herewith (the
Original Loan Agreement as amended by the First Amendment and Second Amendment
thereto being referred to as the "Loan Agreement") by and between Payee, as
Lender, and Maker as Borrower, and is subject to the provisions therein set
forth. The obligations represented by this Note are secured by the Loan
Documents described in the Agreement.
2. Principal Amount. SEVEN HUNDRED THOUSAND AND NO/100 DOLLARS
($700,000.00).
3. Payments. All accrued interest on the unpaid balance of this Note is
due and payable on the first day of each calendar month, commencing August 1,
1996 and continuing on the first day of each month thereafter until May 1, 1997,
at which time all principal and accrued and unpaid interest shall be due and
payable to Payee in full. Interest on this Note shall accrue from the date of
the first advance under this Note and any payment shall be applied first to the
payment of interest then due and second to the reduction of unpaid principal.
4. Interest Rate. Interest shall accrue on the outstanding principal
balance at the "Prime Rate". The term "Prime Rate" means that rate of interest
computed as an average of corporate loan rates quoted by a certain number of the
nation's largest banks, as announced from time to time in the Wall Street
Journal, Southwest Edition as the "prime rate". The Prime Rate shall be adjusted
daily as announced, calculated on the basis of a year of 360 days and a month of
30 days. Changes in the rate charged on this Note are effective, without notice,
on the same day as the effective change in the Prime Rate as established from
time to time. In any case where a payment of principal and/or interest on this
Note, or any part thereof, is due on a day on which the Bank is not open for
normal banking business, the undersigned shall be entitled to delay such
payments until the next succeeding business day, but interest shall continue to
accrue until the payment is in fact made.
5. Interest Rate After Maturity. Matured and unpaid principal, whether
by acceleration or otherwise, shall bear interest at the Prime Rate plus five
percent (5%) per annum.
6. Prepayment Penalties. This Note may be prepaid, in whole or in part,
at any time, without premium or penalty.
7. Default. If the principal or any installment of interest due upon
this Note is not paid as and when the same becomes due and payable (whether by
demand, extension, acceleration or otherwise), or any
1
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party now or hereafter liable (directly or indirectly) for payment of this Note
makes an assignment for benefit of creditors, has an order for relief entered
under the United States Bankruptcy Code, as amended, seeks the benefits of any
other bankruptcy, insolvency or reorganization law, or becomes insolvent, or any
receiver, trustee or like officer is appointed to take custody, possession or
control of any property of any such party, or upon the occurrence of any event
of default under the Agreement or any other Loan Documents, the holder hereof
may, after the expiration of any grace or notice period as provided in the Loan
Agreement, without further notice and without presentment or demand for payment,
declare all of the unpaid balance hereof to be immediately due and payable. Such
right of acceleration is cumulative and in addition to any other right or rights
of acceleration under the Agreement and any other writing now or hereafter
evidencing or securing payment of any of the indebtedness evidenced hereby.
8. Costs and Attorneys' Fees. If this Note is placed in the hands of an
attorney for collection, or suit is brought on same, or the same is collected
through Probate, Bankruptcy or other judicial proceeding, or Payee is required
to defend the priority of the security, then the undersigned shall pay all of
Payee's reasonable costs and expenses including but not limited to a reasonable
amount as attorneys' fees.
9. Waivers. Maker and any party which may be or become liable for the
payment of any sums of money payable on this Note (including any surety,
endorser or guarantor) severally waive presentment and demand for payment,
protest, notice of protest and nonpayment, and notice of the intention to
accelerate, and agree that their liability on this note shall not be affected by
any renewal or extension in the time of payment hereof, by any indulgences or by
any release or change in any security for the payment of this note, regardless
of the number of such renewals, extensions, indulgences, releases or changes.
10. Right of Offset. Any indebtedness due from holder hereof to the
undersigned or any party hereto including, but without limitation, any deposits
or credit balances due from holder, is pledged to secure payment of this Note
and any other obligation to holder of the undersigned or any party hereto, and
may at any time while the whole or any part of such obligation remains unpaid,
either before or after maturity hereof, be appropriated, held or applied toward
the payment of this Note or any other obligation to holder of the undersigned or
any party hereto.
11. Governing Law. This Note has been executed and delivered in Tulsa
County, Oklahoma and shall be governed by and construed according to the laws of
the State of Oklahoma.
THE HOME-STAKE ROYALTY CORPORATION
an Oklahoma corporation
By: ________________________________________
Name: Chris K. Corcoran
Title: Executive Vice-President
2
<PAGE>
EXHIBIT "B"
Not Used.
<PAGE>
EXHIBIT "C"
ITEM 3. LEGAL PROCEEDINGS
The Home-Stake Oil Gas Company and The Home-Stake Royalty Corporation v Federal
Insurance Company, Case No. CJ 94-04950, Tulsa County District Court, State of
Oklahoma.
This action was filed by The Home-Stake Companies on December 6, 1994,
against Federal Insurance Company ("Federal") alleging breach of contract and
breach of duty of good faith and fair dealing arising out of Federal's refusal
to pay on claims made by The Home-Stake Companies under their directors and
officers liability policies related to costs incurred by The Home-Stake
Companies in the successful defense of The Home-Stake Companies' directors in a
lawsuit styled Norvell, et al. v. Brock, et al. Federal has answered and
asserted a counterclaim against the Companies seeking to recover $113,914 plus
attorneys fees and costs, based on a theory of misrepresentation. Discovery is
ongoing in this matter, which is set for trial in October, 1996.
Bureau of Indian Affairs
The Company is involved in a dispute with the Bureau of Indian Affairs
representing the Kiowa Indian Tribe over the application of a Communitization
Agreement between the Company and the Kiowa Indians covering the Susie No. 5 and
Susie No. 6 wells in Caddo County, Oklahoma. Both the Susie No. 5 and Susie No.
6 wells predominantly produce oil. Between the dates of first production for
each well and September 20, 1991, the Company, as operator, disbursed revenues
from the two wells according to the terms of the Communitization Agreement.
However, on September 20, 1991, the Tulsa Division of the Bureau of Land
Management threatened to retroactively rescind the Communitization Agreement as
to the two wells and later contended that oil was not a communitized substance
under the Communitization Agreement, that the Company had erroneously paid
royalties to certain non-Indian royalty owners and that all royalties should
have been paid to the Kiowa Indians. Since September 20, 1991, the Company has
placed all royalty proceeds in escrow pending resolution of this dispute. On
February 22, 1993, the State Director of the Bureau of Land Management upheld
the Tulsa Division's legal conclusion that oil is not a communitized substance
under the terms of the Communitization Agreement and, accordingly, that all
royalties should have been paid to the Kiowa Indians. The Company appealed this
decision.
On July 12, 1994, the Interior Board of Land Appeals of the United
States Department of the Interior, Office of Hearings and Appeals (the "Appeals
Board"), upheld the earlier holdings that oil was not a communitized substance
under the terms of the Communitization Agreement. In November 1994, the Company
filed a petition with the Appeals Board asking for a clarification and
reconsideration of certain aspects of this decision. The Appeals Board has not
yet acted on such petition. Unless the decision is reversed or changed by the
Appeals Board on reconsideration or by a Federal Court upon appeal, The
Home-Stake Companies would be liable to the Kiowa Indians for their portion of
the additional royalties and severance taxes. The Home-Stake Companies estimate
their liability to be approximately $70,000 if the decision is not reversed at a
later date, however, it may be able to recover some of the royalties paid to the
non-Indian recipients.
Texas Gas Production Taxes
On May 4, 1992, the Company was notified that the Comptroller of the
State of Texas had issued a Notice of Tax Due on March 6, 1992, for Texas Gas
Production Taxes allegedly due on settlement
<PAGE>
payments received by the Company and other parties in 1988. The assessed amount
of such taxes was $144,517, plus interest. This amount was assessed against the
party paying the settlement payments ("the assessed party"). The assessed party
was pursuing administrative relief before the Texas Comptroller's Office and
filed a Request for Redetermination and Statement of Grounds on April 6, 1992.
In September, 1995 the Company was notified by the assessed party that in
meetings with the Comptroller of the State of Texas it had been agreed that
there would be no taxes due on the settlement payments and the assessment would
be withdrawn.
Saltwater Contamination Claims
In August 1995, the Company was notified that a property in which it
owns a 9% working interest was subject to certain claims by surface owners
regarding possible saltwater contamination. The operator of the property has
settled some claims and is currently pursuing resolution of this matter with
other surface owners. It is currently estimated that the Company's share of the
total claims and related costs may be approximately $300,000. The Company
believes that because of the existence of certain legal defenses to any claims
asserted against it and/or the availability of insurance for any costs for which
it may become obligated, it will not be required to pay its share of such costs.
The ultimate resolution of this matter is not expected to have a material effect
on the Company's financial position, results of operations or cash flows.
Other Matters
The Company is also involved in various other minor actions arising in
the normal course of business. In the opinion of management, the Company's
liabilities, if any, in these matters and all others discussed in this Form
10-KSB will not have a material effect on the Company's financial position,
results of operations or cash flows.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,193,387
<SECURITIES> 0
<RECEIVABLES> 684,448
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,085,681
<PP&E> 28,098,313
<DEPRECIATION> 18,827,520
<TOTAL-ASSETS> 14,619,579
<CURRENT-LIABILITIES> 2,041,948
<BONDS> 1,928,520
0
0
<COMMON> 4,000,000
<OTHER-SE> 6,000,000
<TOTAL-LIABILITY-AND-EQUITY> 14,619,579
<SALES> 3,502,867
<TOTAL-REVENUES> 3,767,711
<CGS> 0
<TOTAL-COSTS> 1,342,718
<OTHER-EXPENSES> 41,339
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 135,697
<INCOME-PRETAX> 1,011,082
<INCOME-TAX> 246,812
<INCOME-CONTINUING> 764,270
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 764,270
<EPS-PRIMARY> 10.95
<EPS-DILUTED> 10.95
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