<PAGE> 1
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[x] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
AMERICAN RESOURCES OFFSHORE, INC.
(Name of Registrant as Specified In Its Charter)
-------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction
applies:
--------------
2) Aggregate number of securities to which transaction
applies:
--------------
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how it
was determined)
4) Proposed maximum aggregate value of transaction:
$
--------------
5) Total fee paid
[x] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
-----------------
2) Form, Schedule or Registration Statement No.:
----------------
3) Filing Party:
----------------
4) Date Filed:
-----------------
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[AMERICAN RESOURCES OFFSHORE, INC. LETTERHEAD]
November 4, 1999
Dear Stockholder:
As two of the larger stockholders of our company, we certainly share in your
disappointment with the financial condition in which we find ourselves and the
declining price of our stock. We have been challenged by the obstacles placed in
our path which would have been difficult, if not impossible, for anyone to
overcome. The declining oil and gas prices last year and this spring, coupled
with the decline in production from our most prolific wells, the lack of a
strong debt and equity market, and unsuccessful drilling efforts, all
contributed to our uncertain financial condition and, ultimately, resulted in
our being declared in default under our loans with both our primary lender and
TECO Oil & Gas, Inc. Additionally, our common stock was de-listed from the
NASDAQ SmallCap Stock Market because it could not maintain a price level of more
than $1 per share.
For many companies in similar circumstances, the easy path would be to declare
bankruptcy. However, we truly believe that to do so would jeopardize your
investment in this company and allow our creditors to dictate our future.
Therefore, we chose a considerably more difficult path which we feel offers us a
better opportunity to preserve stockholder equity. We have devised a plan
designed to restructure our debt, reduce general and administrative expenses,
implement a more deliberate exploration and development program, dispose of our
Appalachian oil and gas properties, operations and subsidiary and locate a
long-term partner and investor. So far, we have accomplished the following for
you:
o We entered into an agreement with our primary lender, Den
norske Bank, ASA, that will allow us to pay approximately
$39.5 million for a full release of our loan which has a
principal balance of approximately $64.0 million;
o We entered into an agreement with the assignee of TECO Oil and
Gas, Inc. which will enable us to pay approximately $990,000
for a full release of our loan which has a principal balance
of $18.5 million;
o We entered into agreements with our trade creditors under
which we have paid or will pay liabilities of approximately
$20 million for amounts significantly less than face value;
<PAGE> 3
November 4, 1999
Page 2.
o We sold our Appalachian oil and gas properties, operations and
the capital stock of our subsidiary to third parties, which
was an integral step in our restructuring plan because it
provided us with a portion of the funds needed to pay our loan
to Den norske Bank, ASA, and obtain our release from certain
corporate guaranties while also allowing us to substantially
reduce our general and administrative expenses;
o We decreased our staff and eliminated office space in
Louisiana, further reducing our general and administrative
expenses; and
o We entered into agreements with Blue Dolphin Exploration and
Fidelity Oil Holdings which will provide us with the ability
to eliminate a large portion of our debt and give us an
opportunity to develop our properties.
While our journey to this point has been tenuous, we believe the proposals
discussed in our Proxy Statement will accomplish the goals we have set; and we
hope you will support our efforts to restructure our company by approving them.
Very truly yours,
Douglas L. Hawthorne Rick G. Avare
Chairman of the Board President and Chief Executive Officer
<PAGE> 4
AMERICAN RESOURCES OFFSHORE, INC.
3141 BEAUMONT CENTRE CIRCLE, SUITE 203
LEXINGTON, KENTUCKY 40513
(606) 514-7425
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
OF AMERICAN RESOURCES OFFSHORE, INC.
TO BE HELD ON DECEMBER 1, 1999
-------------------
The 1999 annual meeting of our stockholders (the "Annual Meeting") will
be held at 4:00pm on December 1, 1999 at the Marriott Griffin Gate Resort, 1800
Newtown Pike, Lexington, Kentucky. At our Annual Meeting we will ask you to
adopt the following proposals:
o PROPOSAL 1
To approve the Investment Agreement under which we will sell
to Blue Dolphin Exploration Company a number of shares of our
common stock equal to 75% of the combined voting power of all
of our outstanding voting securities after the issuance of the
shares to Blue Dolphin Exploration Company (the "Investment
Agreement").
o PROPOSAL 2
To approve the Purchase and Sale Agreement under which we will
sell to Fidelity Oil Holdings, Inc. an undivided 80% of our
interest in all of our assets in the Gulf of Mexico (the
"Purchase and Sale Agreement").
o PROPOSAL 3
To ratify the sale of all of our Appalachian oil and gas
properties and operations, formerly owned by our subsidiary,
Southern Gas Co. of Delaware, Inc., to Nami Resources Company
L.L.C.
o PROPOSAL 4
To ratify the sale of all of the stock of our wholly-owned
subsidiary that formerly owned our Appalachian assets,
Southern Gas Co. of Delaware, Inc., to Southern Gas Holdings
L.L.C. which is controlled by Leonard K. Nave who is one of
our directors.
<PAGE> 5
o PROPOSAL 5
To approve an amendment to our Amended and Restated
Certificate of Incorporation to increase the number of shares
of common stock that we are entitled to issue from 50,000,000
shares to 70,000,000 shares.
o PROPOSAL 6
If Proposal 1 is approved, to eliminate Article Eleven of our
Amended and Restated Certificate of Incorporation effective
with the closing of the Investment Agreement to end the
classification of our board of directors into three classes so
that all directors will serve terms of one year or until their
successors are duly elected and qualified.
o PROPOSAL 7
If Proposals 1 and 6 are approved, to elect as directors the
following five nominees designated by Blue Dolphin Exploration
Company to serve for a term of one year or until their
successors are duly elected and qualified, commencing with the
closing of the Investment Agreement: Ivar Siem; Michael J.
Jacobson; John P. Atwood; Andrew R. Agosto; and Douglas L.
Hawthorne.
o PROPOSAL 8
To elect as directors the following three nominees to serve
for terms of three years each or until the closing of the
Investment Agreement, whichever occurs first: Leonard K. Nave;
Len Aldridge; and Robert L. McIntyre.
o PROPOSAL 9
To ratify the selection of Ernst & Young LLP to serve as our
auditors for the year ending December 31, 1999.
At the Annual Meeting we will also transact such other business as may
properly be brought before the meeting.
The Annual Meeting may be adjourned from time to time without notice
other than the announcement of the adjournment at the Annual Meeting or at any
adjournment or adjournments of the Annual Meeting. Any business for which notice
is given may be transacted at any adjourned Annual Meeting.
The accompanying Proxy Statement describes the Investment Agreement,
the Purchase and Sale Agreement and other matters to be acted upon at the Annual
Meeting. You are encouraged to read the accompanying Proxy Statement carefully
for further information concerning the proposals that will be presented at the
Annual Meeting.
2
<PAGE> 6
Only holders of record of our outstanding shares of common stock and
preferred stock at the close of business on October 15, 1999 are entitled to
notice of and to vote at the Annual Meeting. To ensure that your vote will be
counted, please complete, date and sign the enclosed proxy card and return it
promptly in the enclosed postage paid envelope, whether or not you plan to
attend the Annual Meeting.
If you attend the Annual Meeting in person, you may change your vote at
that time.
By order of the board of directors.
Karen M. Underwood
Corporate Secretary
Lexington, Kentucky
November 4, 1999
3
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AMERICAN RESOURCES OFFSHORE, INC.
3141 Beaumont Centre Circle, Suite 203
Lexington, Kentucky 40513
(606) 514-7425
PROXY STATEMENT FOR AMERICAN RESOURCES OFFSHORE, INC.
1999 ANNUAL MEETING OF STOCKHOLDERS
GENERAL INFORMATION
We are first mailing this Proxy Statement and accompanying notice and
the enclosed proxy card to stockholders beginning on November 8, 1999. Our board
of directors is soliciting your proxy to vote your shares at our 1999 annual
meeting of stockholders (the "Annual Meeting"). We will bear all expenses
incurred in connection with this solicitation, which is expected to be primarily
by mail. We have engaged American Securities Transfer and Trust to assist in the
solicitation for a fee of approximately $3,000, plus out-of-pocket expenses. In
addition to solicitation by mail and by American Securities Transfer and Trust,
our directors, officers and regular employees may solicit your proxy by
telephone, by facsimile transmission or in person, for which they will not be
compensated. If your shares are held through a broker or other nominee (i.e. in
"street name"), we have requested that they forward this Proxy Statement to you
and obtain your voting instructions, for which we will reimburse them for their
reasonable out-of-pocket expenses.
The Annual Meeting will be held only if a quorum exists. The presence
at the meeting, in person or by proxy, of holders of a majority of the shares of
common stock and preferred stock entitled to cast a majority of aggregate votes
entitled to be cast at the Annual Meeting will constitute a quorum. If a quorum
is not present, the Annual Meeting may be adjourned from time to time until a
quorum is present. If you attend the meeting or vote your shares using the
enclosed proxy card, your shares will be counted toward a quorum, even if you
abstain from voting. Shares held by a broker or other nominee as to which they
have not received voting instructions from the beneficial owners and lack the
discretionary authority to vote on a particular matter are called "broker
non-votes." Broker non-votes will count for quorum purposes. While broker
non-votes will be counted toward a quorum, they are not entitled to vote on, or
considered present for purposes of, the matter for which the broker or nominee
lacks the authority to vote.
At the Annual Meeting you will be asked to vote on nine proposals
described in this Proxy Statement. We know of no other matters to be presented
or acted upon at the meeting. If you vote by signing and returning the enclosed
proxy card, the individuals named as proxies on the card may vote your shares,
in their discretion, on any other matter requiring a stockholder vote that comes
before the meeting.
<PAGE> 8
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
AVAILABLE INFORMATION.............................................................................................1
FORWARD-LOOKING STATEMENTS........................................................................................1
QUESTIONS AND ANSWERS ABOUT THIS PROXY STATEMENT..................................................................2
Why did you send me this Proxy Statement?................................................................2
What will be voted on at the Annual Meeting?.............................................................2
Who is entitled to vote?.................................................................................2
What vote is required to approve the proposals?..........................................................2
How are votes counted?...................................................................................3
Can Blue Dolphin Exploration Company vote at the Annual Meeting?.........................................3
What do I need to do now?................................................................................3
May I revoke my proxy?...................................................................................3
How do I vote shares held in the name of my nominee?.....................................................4
How do I vote in person?.................................................................................4
Do you recommend that we vote for all of the proposals?..................................................4
Whom should I call if I have questions?..................................................................4
SUMMARY .........................................................................................................5
OUR BUSINESS.............................................................................................5
OUR DISTRESSED FINANCIAL CONDITION.......................................................................5
PROPOSALS 1 - 7: OUR SALE OF COMMON STOCK AND ASSETS AND RELATED MATTERS.................................5
General Purposes of Proposals 1-7...............................................................6
Overview of the Transactions....................................................................7
Certain Effects of the Transactions............................................................10
Historical And Pro Forma Per Share Data........................................................11
Possible Consequences if the Transactions are Not Successfully Completed.......................11
Ratification of Disposition of Southern Gas Co. of Delaware, Inc. and its Assets...............12
Our Recommendation on Proposals 1 through 7....................................................13
Blue Dolphin Exploration's Right to Vote on Proposals 1 through 7..............................13
Management and Business Following the Transactions.............................................13
Interest of Certain Members of Management in the Transactions..................................14
No Fairness Opinion............................................................................15
No Dissenters' Rights..........................................................................15
PROPOSAL 8: ELECTION OF THREE DIRECTORS................................................................15
PROPOSAL 9: SELECTION OF AUDITORS......................................................................15
BACKGROUND OF TRANSACTIONS.......................................................................................16
</TABLE>
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<TABLE>
<S> <C>
PROPOSAL 1.......................................................................................................22
Vote Required...........................................................................................22
Relationship to Proposal 2..............................................................................22
Summary of the Investment Agreement.....................................................................22
Blue Dolphin Exploration................................................................................22
Sale of Shares..........................................................................................22
Purchase Price..........................................................................................24
Use of Proceeds from Sale of Common Stock...............................................................24
Conditions to Closing...................................................................................24
Indemnification.........................................................................................27
Termination.............................................................................................27
Other Agreements........................................................................................27
Reductions of Our Indebtedness under the DnB Note.......................................................27
Purchase of DnB Note by Blue Dolphin Exploration........................................................27
Modification of the DnB Note............................................................................28
TECO Note Settlement Agreement..........................................................................30
Voting and Support Agreements...........................................................................30
Management and Administrative Services Agreement........................................................31
Consulting Agreement....................................................................................32
New Indemnity Agreements................................................................................32
Revised Indemnity Agreements............................................................................33
PROPOSAL 2.......................................................................................................34
Vote Required...........................................................................................34
Relationship to Proposal 1..............................................................................34
Summary of Purchase and Sale Agreement..................................................................34
Fidelity Oil Holdings...................................................................................34
Sale of Assets..........................................................................................34
Purchase Price..........................................................................................34
Conditions to Closing...................................................................................35
Indemnification.........................................................................................36
Termination.............................................................................................36
PROPOSAL 3.......................................................................................................37
Vote Required...........................................................................................37
Relationship to Proposals 1 and 2.......................................................................37
Reasons for Sale........................................................................................37
Description of the Transaction..........................................................................37
Southern Gas............................................................................................37
Nami Resources..........................................................................................38
PROPOSAL 4.......................................................................................................39
Vote Required...........................................................................................39
Relationship to Proposals 1 and 2.......................................................................39
Description of Transaction..............................................................................39
</TABLE>
ii
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<TABLE>
<S> <C>
Sale of Southern Stock.........................................................................39
PROPOSAL 5.......................................................................................................40
Proposed Amendment......................................................................................40
Vote Required...........................................................................................40
Reasons for this Proposal...............................................................................40
Effect of this Proposal.................................................................................40
PROPOSAL 6.......................................................................................................43
Proposed Amendment......................................................................................43
Vote Required...........................................................................................43
Reason for the Amendment................................................................................43
Effect of Amendment.....................................................................................44
PROPOSAL 7.......................................................................................................45
Vote Required...........................................................................................45
Nominees ...............................................................................................45
PROPOSAL 8.......................................................................................................48
Vote Required...........................................................................................48
Nominees ...............................................................................................48
PROPOSAL 9.......................................................................................................50
DIRECTORS AND EXECUTIVE OFFICERS.................................................................................51
Meetings and Compensation...............................................................................54
Executive Committee.....................................................................................54
Audit Committee.........................................................................................55
Compensation Committee..................................................................................55
Family Relationships....................................................................................55
Legal Proceedings.......................................................................................55
Compliance with Section 16(a) of the Securities Exchange Act of 1934....................................56
Executive Compensation..................................................................................57
Compensation Committee Report...........................................................................58
Performance Graph.......................................................................................62
Executive Officer Employment Agreements.................................................................63
Termination of Agreements...............................................................................63
SECURITY OWNERSHIP...............................................................................................65
MARKET INFORMATION CONCERNING OUR COMMON STOCK...................................................................67
Delisting from Nasdaq...................................................................................67
Dividends...............................................................................................68
FEDERAL INCOME TAX CONSEQUENCES OF TRANSACTIONS..................................................................69
</TABLE>
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<TABLE>
<S> <C>
CERTAIN RELATIONSHIPS AND TRANSACTIONS...........................................................................70
Benefits Under Severance Agreements.....................................................................71
Rick G. Avare and Affiliates............................................................................72
Prima Capital, L.L.C....................................................................................72
MAP II, L.L.C...........................................................................................72
Leonard K. Nave.........................................................................................72
Blue Dolphin Energy Company and Affiliates..............................................................73
Blue Dolphin Exploration................................................................................73
Blue Dolphin Services...................................................................................73
Relationship Between Blue Dolphin Exploration and Fidelity Oil Holdings.................................73
LITIGATION.......................................................................................................75
OTHER BUSINESS...................................................................................................76
STOCKHOLDER PROPOSALS............................................................................................76
ANNUAL REPORT TO STOCKHOLDERS AND INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE................................76
PRO FORMA FINANCIAL STATEMENTS..................................................................................F-1
</TABLE>
APPENDIX DESCRIPTION
Appendix A -- Investment Agreement (Composite)
Appendix B -- Purchase and Sale Agreement (Composite)
Appendix C-1 -- Form of Voting and Support Agreement and
Supplemental Proxy
Appendix C-2 -- Form of Voting and Support Agreement by Den norske
Bank and Affiliates
Appendix D -- Management and Administrative Services Agreement
Appendix E -- Consulting Agreement
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AVAILABLE INFORMATION
Copies of the following agreements, all of which are discussed in this
Proxy Statement, are attached to this Proxy Statement and are incorporated by
reference into this Proxy Statement:
o Investment Agreement (composite) with Blue Dolphin Exploration
Company (Appendix A).
o Purchase and Sale Agreement (composite) with Fidelity Oil
Holdings, Inc. (Appendix B).
o Forms of Voting and Support Agreements (Appendices C-1 and
C-2).
o Management and Administrative Services Agreement with Blue
Dolphin Services Co. (Appendix D).
o Consulting Agreement with MAP II, L.L.C. (Appendix E).
Our 1998 Annual Report to Stockholders, which consists of our Annual
Report on Form 10-K for the fiscal year ended December 31, 1998 and our
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, accompanies
this Proxy Statement.
FORWARD-LOOKING STATEMENTS
We make statements that may be deemed "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, throughout this Proxy Statement and in our 1998 Annual Report to
Stockholders which accompanies this Proxy Statement. We have based these
statements on our current expectations about future events and the anticipated
effect of completing the transactions described in this Proxy Statement.
Although we believe that our expectations reflected in or suggested by our
forward-looking statements are reasonable, we cannot assure you that these
expectations will be achieved. Our actual results may differ materially from
what we currently expect.
Important factors that could cause future events to be different than
we expect include the following:
o the prices we receive from sales of our oil and gas
production;
o the expenses we must incur to run our business;
o unexpected claims against us that could create contingent
liabilities;
o the risk factors we described in our Current Report on Form
8-K filed on July 25, 1997;
o whether the many contractual conditions to our proposed
transactions with Blue Dolphin Exploration Company and
Fidelity Oil Holdings, Inc., many of which are beyond our
control, can be satisfied; and
o the failure or refusal of Blue Dolphin Exploration Company or
Fidelity Oil Holdings, Inc. to conclude the transactions with
us described in this Proxy Statement, for any reason.
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QUESTIONS AND ANSWERS ABOUT THIS PROXY STATEMENT
WHY DID YOU SEND ME THIS PROXY STATEMENT?
We sent you this Proxy Statement and the enclosed proxy card because
American Resources Offshore, Inc.'s board of directors is soliciting your proxy
to vote at the 1999 Annual Meeting of Stockholders. However, you do not need to
attend the Annual Meeting to vote your shares. Instead, you may simply complete,
sign and return the enclosed proxy card.
WHAT WILL BE VOTED ON AT THE ANNUAL MEETING?
Because of our distressed and worsening financial condition, we are
asking you to approve several important transactions that we believe will
substantially improve our financial condition, in addition to our usual annual
meeting business. Although these transactions will significantly decrease our
overall holdings of oil and gas properties, we believe that we will be in a
better position to develop our remaining oil and gas properties. This Proxy
Statement summarizes the information about these transactions and other matters
that you will be asked to vote upon at the Annual Meeting and contains
information that you need to know to vote intelligently.
WHO IS ENTITLED TO VOTE?
Only record holders of outstanding shares of common stock, par value
$.00001 per share, and the Series 1993 8% Convertible Preferred Stock, par value
$12.00 per share, at the close of business on the record date, October 15, 1999,
are entitled to notice of and to vote at the Annual Meeting.
As of the record date, 12,820,257 shares of common stock and 230,516
shares of preferred stock were outstanding and entitled to vote. The holders of
common stock and the holders of preferred stock vote together as a single class
on all matters we expect to be voted on at the Annual Meeting. As of the record
date, the holders of the common stock and the holders of preferred stock were
entitled to cast an aggregate of 13,742,321 votes.
WHAT VOTE IS REQUIRED TO APPROVE THE PROPOSALS?
Proposal 1 and Proposal 9 require the affirmative vote of a majority of
the shares of common stock and preferred stock present, in person or by proxy,
at the Annual Meeting, voting as a single class.
Each of Proposals 2 through 6 require the affirmative vote of a
majority of the combined voting power of all of the issued and outstanding
shares of common stock and preferred stock, voting as a single class.
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<PAGE> 14
The election of directors, under each of Proposal 7 and Proposal 8,
will be determined by a plurality of the votes of the shares of common stock and
preferred stock cast at the Annual Meeting.
HOW ARE VOTES COUNTED?
Holders of common stock are entitled to cast one vote for each share of
common stock owned of record on each proposal. Holders of preferred stock are
entitled to cast four votes for each share of preferred stock owned of record on
each proposal.
In the election of directors under Proposals 7 and 8, you may vote for
or against all nominees, or withhold your vote for any one or more nominees. For
each other proposal you may vote "FOR" or "AGAINST" or abstain from voting.
Since abstentions are not affirmative votes for a proposal, they have the same
effect as an "AGAINST" vote on Proposals 1 through 6.
Broker non-votes will have no effect on Proposal 1. However, broker
non-votes will have the same effect as an "AGAINST" vote on Proposals 2 through
6.
CAN BLUE DOLPHIN EXPLORATION COMPANY VOTE AT THE ANNUAL MEETING?
Yes. Blue Dolphin Exploration Company has proxies entitling it to cast
7,088,982 proxy votes on Proposals 1 through 7, which constitutes approximately
51.6% of all votes entitled to be cast at the Annual Meeting. Blue Dolphin
Exploration has advised us that it will cast all of its proxy votes in favor of
Proposals 1 through 7, thus assuring their approval.
WHAT DO I NEED TO DO NOW?
After carefully reading and considering the information contained in
this Proxy Statement, please complete, date and sign you proxy card. Then mail
your signed proxy card in the enclosed return envelope as soon as possible so
that your shares may be represented at the Annual Meeting and voted as you wish.
Properly executed proxies received by us before the Annual Meeting,
which specify how the shares are to be voted will be voted accordingly. A
properly executed proxy that does not specify how it is to be voted on a
proposal will be voted for that proposal.
MAY I REVOKE MY PROXY?
If you give a proxy, you may revoke it at any time before it is
exercised. You may revoke your proxy in any one of three ways:
o You may send in another proxy with a later date;
o You may notify our corporate secretary in writing before the
Annual Meeting that you have revoked your proxy; or
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<PAGE> 15
o You may vote in person at the Annual Meeting.
HOW DO I VOTE SHARES HELD IN THE NAME OF MY NOMINEE?
Banking institutions, brokerage firms, custodians, trustees, nominees,
and fiduciaries who are record holders of common stock and preferred stock
entitled to be voted at the Annual Meeting are requested to forward all proxy
cards, this Proxy Statement, and the accompanying materials to the beneficial
owners of such shares and to seek authority to execute proxies with respect to
such shares.
HOW DO I VOTE IN PERSON?
If you plan to attend the Annual Meeting and vote in person, we will
give you a ballot when you arrive. However, if your shares are held in the name
of your broker, bank or other nominee, you must bring an account statement or
letter from the nominee indicating that you are the beneficial owner of the
shares on October 15, 1999, the record date for voting.
DO YOU RECOMMEND THAT WE VOTE FOR ALL OF THE PROPOSALS?
Yes. We believe the transactions described in this Proxy Statement will
substantially improve our financial condition and ability to develop our
properties. YOUR BOARD OF DIRECTORS HAS APPROVED EACH OF THE PROPOSALS AS BEING
IN OUR AND YOUR BEST INTEREST AND RECOMMENDS THAT YOU VOTE FOR THE APPROVAL OF
EACH PROPOSAL.
WHOM SHOULD I CALL IF I HAVE QUESTIONS?
If you have any questions concerning this Proxy Statement, please call
our Vice President and General Counsel, David J. Stetson, Esq., at (606)
514-7425, extension 106.
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<PAGE> 16
SUMMARY
This summary highlights selected information from this Proxy Statement
and may not contain all of the information that is important to you. To
understand the transactions and the other matters to be acted upon at the Annual
Meeting and for a more complete description of the legal terms of the
transactions and the other matters, you should read this entire document,
including the information incorporated herein by reference and the Appendices
hereto. Unless otherwise defined in this Proxy Statement, capitalized terms used
in this summary have the meanings assigned to them elsewhere in this Proxy
Statement.
OUR BUSINESS
We are an independent oil and gas company engaged in the acquisition,
exploration, development, and production of oil and gas properties in the Gulf
Coast region offshore Louisiana and Texas. We recently sold our Appalachian oil
and gas properties and operations in preparation for the transactions you will
be asked to approve at the Annual Meeting.
OUR DISTRESSED FINANCIAL CONDITION
During the first quarter of 1998, we expanded our holdings in the Gulf
of Mexico by acquiring properties from TECO Oil & Gas, Inc. ("TECO") for $57.7
million, of which:
o $1.3 million was paid in cash;
o $21.4 million was paid from funds borrowed under our credit
facility with Den norske Bank, ASA ("Den norske Bank");
o $16.5 million was paid from funds borrowed under a bridge loan
obtained from Den norske Bank with a maturity date of December
31, 1998; and
o $18.5 million was paid by issuing our promissory note to TECO
with a maturity date of October 1, 1998 (the "TECO Note").
We hired an investment banking firm to assist us with a high yield debt
offering and preferred stock offering to raise additional capital and obtain
permanent debt financing to pay the $16.5 million bridge loan and the TECO Note,
and to provide the funds necessary to actively develop the properties acquired
from TECO. However, the conditions in the capital markets worsened and we were
unable to raise additional funds.
Our revenues declined in 1998 and have continued to decline in 1999.
The decline in our revenue is primarily attributable to a decline in the
production from our two largest fields during these periods and decreases in oil
and gas prices, which began in July 1998 and continued through 1999. During the
first six months of 1999, our revenues from oil and gas production decreased 36%
and our total revenues decreased 21% compared to the same period in 1998. The
indebtedness we incurred in connection with our acquisition of some of our Gulf
of Mexico
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<PAGE> 17
holdings from TECO, our inability to raise capital in the debt and equity
markets, our declining revenues and unsuccessful drilling efforts all
contributed to our current distressed financial condition. As a result:
o We defaulted on all of our indebtedness to Den norske Bank
which was approximately $63.6 million, at June 30, 1999. We
refer to the several promissory notes evidencing our
indebtedness to Den norske Bank collectively as the "DnB
Note." The DnB Note is secured by a first lien on
substantially all of our assets.
o We defaulted on the $18.5 million owed under the TECO Note.
The TECO Note is secured by a second lien on substantially all
of our assets.
o At June 30, 1999, our current liabilities exceeded our current
assets by approximately $6.3 million, excluding long-term debt
reclassified as current liabilities as a result of our default
on those liabilities.
o At December 31, 1998, we had a stockholders' deficit of $21.7
million; and at June 30, 1999, our deficit increased to $26.7
million.
o For the year ended December 31, 1998, we experienced a net
loss of $4.61 per share. For the six month period ended June
30, 1999, we experienced a net loss of $0.48 per share.
o Our independent auditor's report on our financial statements
at and for the twelve month period ended December 31, 1998,
expressed doubt about our ability to continue as a going
concern.
Because of our distressed and worsening financial condition, we are
proposing that you vote to approve Proposals 1 through 7.
PROPOSALS 1 - 7: OUR SALE OF COMMON STOCK AND ASSETS AND RELATED MATTERS
GENERAL PURPOSES OF PROPOSALS 1-7
We believe the transactions contemplated by Proposals 1 through 7 will
substantially improve our financial condition by reducing our liabilities to
trade creditors and our secured creditors. Although our overall holdings of oil
and gas properties will be substantially smaller if these transactions are
completed, we believe that we will be in a better position to develop our then
remaining oil and gas properties.
6
<PAGE> 18
OVERVIEW OF THE TRANSACTIONS
The approval by our stockholders at the Annual Meeting of Proposals 1
through 7 will have the effect of approving or ratifying the following
transactions, among others, that are encompassed by Proposals 1 through 7:
o We will sell to Blue Dolphin Exploration Company ("Blue
Dolphin Exploration") a number of shares of our common stock
that will result in Blue Dolphin Exploration owning at least
75% of the combined voting power of all classes of our voting
securities, after giving effect to Blue Dolphin Exploration's
purchase of the common stock. The purchase price for the
shares is initially set at $4,736,315 but will likely be
increased or decreased based on certain contractual price
adjustments to be determined at the closing of the purchase.
We refer to the contract between us and Blue Dolphin
Exploration relating to this transaction as the "Investment
Agreement." Stockholder approval of the Investment Agreement
is the subject of Proposal 1.
o All proceeds to us from the sale of common stock to Blue
Dolphin Exploration will be applied to reduce our liabilities
or for working capital. In part, these proceeds will be used
to settle our indebtedness under the TECO Note and to
substantially reduce our liability under the DnB Note.
o At June 30, 1999 we were liable for approximately $18.5
million of indebtedness on the TECO Note. This liability will
be settled for a final payment of approximately $990,400,
which we plan to fund from a portion of the proceeds of our
sale of common stock to Blue Dolphin Exploration.
o We will sell to Fidelity Oil Holdings, Inc. ("Fidelity Oil
Holdings") 80% of our interest in all of our oil and gas
properties located in the Gulf of Mexico. The purchase price
for the 80% interest is initially set at $25,313,685 but will
likely be increased or decreased based on certain contractual
price adjustments to be determined at the closing of the
purchase. We refer to the contract between us and Fidelity Oil
Holdings relating to this transaction as the "Purchase and
Sale Agreement." Stockholder approval of the Purchase and Sale
Agreement is the subject of Proposal 2.
o All proceeds to us from the sale of assets to Fidelity Oil
Holdings will be applied to reduce our indebtedness under the
DnB Note.
o In October 1999, we sold all of our Appalachian oil and gas
properties and operations located in Kentucky and Tennessee to
Nami Resources Company L.L.C. ("Nami Resources") in exchange
for:
7
<PAGE> 19
o the assumption by Nami Resources of $12.5 million of
our indebtedness under the DnB Note and our release
by Den norske Bank from any further liability on the
indebtedness assumed by Nami Resources; and
o our release from any further obligation under a
guarantee we issued to Austin Energy Funding with
respect to the future production rates of wells
located on the Appalachian oil and gas properties we
sold to Nami Resources.
Separately, we plan to sell the stock of our subsidiary that
formerly owned those Appalachian oil and gas properties to an
affiliate of one of our directors, Leonard K. Nave, in
exchange principally for our release from certain liabilities
we owe to Mr. Nave and his affiliates, and the buyer's
agreement to indemnify us for past operations and activities
of Southern Gas Co. of Delaware ("Southern Gas"). We are
asking you to ratify these transactions in Proposal 3 and
Proposal 4.
o Den norske Bank will sell the DnB Note and all related
security interests and liens to Blue Dolphin Exploration for a
purchase price consisting of an initial cash price and the
right to receive a contingent, future payment. Den norske Bank
has also agreed with Blue Dolphin Exploration that the initial
cash purchase price for our DnB Note will be considered paid
in full if Blue Dolphin Exploration and Fidelity Oil Holdings
cause us to repay to Den norske Bank an amount equal to that
cash purchase price using:
o all of the proceeds to us from our sale of a portion
of our Gulf of Mexico assets to Fidelity Oil
Holdings; and
o a portion of the proceeds to us from the sale of our
common stock to Blue Dolphin Exploration.
We have agreed to repay that amount, which we estimate to be
approximately $27.0 million plus interest earned on the $20.0
million purchase proceeds from Fidelity Oil Holdings.
o Den norske Bank will also be entitled to receive a possible
future payment for its sale of the DnB Note if the combined,
cumulative net revenues received by us and Fidelity Oil
Holdings that are attributable to our proved oil and gas
resources in the Gulf of Mexico as of January 1, 1999 exceed
$30.0 million during the period from January 1, 1999 through
December 31, 2001. If that occurs, Den norske Bank will be
entitled to an amount equal to 50% of those net revenues in
excess of $30.0 million during that three-year period. If any
contingent amount becomes payable to Den norske Bank, 80% of
it will be paid by Fidelity Oil Holdings and we will pay 20%.
8
<PAGE> 20
o When Blue Dolphin Exploration purchases our DnB Note, we
expect Blue Dolphin Exploration will modify the DnB Note and
related loan documents so that Blue Dolphin Exploration will:
o reduce the principal amount we owe under the DnB Note
to $5.0 million;
o defer its right to receive payments under the DnB
Note through December 31, 2000, if we remain in
compliance with the modified loan documents and the
Investment Agreement through that same date;
o forgive all of the remaining indebtedness, including
all principal and interest, under the DnB Note, if we
remain in compliance with the modified loan documents
and the Investment Agreement through December 31,
2000; and
o refrain from exercising or enforcing through December
31, 2001, any of its rights that arose because of our
defaults under the DnB Note and related liens and
loan documentation before they are modified, if we
remain in compliance with the modified loan documents
and the Investment Agreement through December 31,
2001.
o Two holders of approximately 83% of our preferred stock, both
of whom also sit on our current board of directors, will
convert their shares into shares of our common stock in
accordance with the existing terms of our preferred stock.
o We will amend our Amended and Restated Certificate of
Incorporation to increase our total authorized capital stock
from 53,000,000 to 73,000,000 shares and our authorized common
stock from 50,000,000 to 70,000,000 shares. This proposed
amendment is the subject of Proposal 5.
o We will amend our Amended and Restated Certificate of
Incorporation to eliminate staggered, three-year terms of
office for board members. This proposed amendment is the
subject of Proposal 6.
o Our officers and directors will be replaced by persons
selected by Blue Dolphin Exploration. The election of
directors designated by Blue Dolphin Exploration is the
subject of Proposal 7.
o We will enter into a consulting arrangement under which
certain of our former management personnel will assist our new
management selected by Blue Dolphin Exploration with
transition matters. For those consulting services, they will
be paid an aggregate of $35,000 per month, plus reimbursable
expenses, through February 2001. Fidelity Oil Holdings will
bear 80% of the fees paid by us under the consulting
arrangement. Because of this, the monthly cost to us of the
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<PAGE> 21
consulting arrangement will be only $7,000 per month, plus our
20% share of reimbursable costs.
o We and Blue Dolphin Services Co. ("Blue Dolphin Services"), an
affiliate of Blue Dolphin Exploration, will enter into a
contractual arrangement pursuant to which Blue Dolphin
Services will provide management and administrative services
to us. Blue Dolphin Services will be compensated by us at the
rate of $83,000 per month for its services.
These proposed transactions, which are described further below, are
subject to many contingencies. There is no assurance, therefore, that the
transactions will be successfully concluded or that, if concluded, the proposed
transactions will have the intended effect on our financial condition and
operations.
CERTAIN EFFECTS OF THE TRANSACTIONS
Following the completion of the transactions:
o Our oil and gas assets holdings will be substantially smaller,
consisting primarily of 20% of the Gulf of Mexico assets we
formerly owned.
o Our financial condition will be substantially improved:
o Our secured indebtedness will be reduced from
approximately $83.1 million as of June 30, 1999 to an
estimated $5.0 million.
o Our liabilities to trade creditors will be
substantially reduced.
o As of June 30, 1999 we had a working capital deficit
of approximately $6.0 million, excluding long-term
debt reclassified as current liabilities as a result
of our default on those liabilities. After giving pro
forma effect to the transactions as of June 30, 1999,
we would have had positive working capital of
approximately $770,000.
o Our deficit in stockholders' equity will be
eliminated. At June 30, 1999, our stockholder's
equity stood at $(26.8) million but after giving pro
forma effect as of June 30, 1999 to the transactions
we are asking you to approve at the meeting, our
stockholders' equity would have been approximately
$5.5 million.
o Blue Dolphin Exploration will own shares of our common stock
representing 75% of the combined voting power of our
outstanding voting securities and will control our management.
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<PAGE> 22
o Our existing stockholders, who collectively own 100% of the
combined voting power of our outstanding voting securities
before the transactions, will own approximately 25% of the
voting power of our voting securities after the transactions.
HISTORICAL AND PRO FORMA PER SHARE DATA
The pro forma per share data in the table below should be read in
conjunction with the unaudited pro forma consolidated financial data and the
notes thereto included elsewhere in this Proxy Statement. The pro forma per
share data does not purport to represent what our book value or net earnings
would have actually been had the transactions in Proposals 1 through 7 occurred
on the assumed dates, or to project our book value or net earnings for any
future period or date. See "Pro Forma Condensed Financial Statements
(Unaudited)."
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
---------------------------------- ---------------------------------
Historical Pro Forma HISTORICAL PRO FORMA
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Book value per share (1) ......................... $ (2.16) N/A $ (2.06) $ 0.15
Net earnings per share, basic .................... $ (4.61) $ (0.11) $ (0.48) $ 0.01
Net earnings per share, diluted .................. $ (4.61) $ (0.11) $ (0.48) $ 0.01
Weighted average number of common shares and
dilutive potential common shares outstanding ..... 10,039,455 41,704,313 10,560,834 43,539,418
</TABLE>
- --------------------
(1) As of end of period.
POSSIBLE CONSEQUENCES IF THE TRANSACTIONS ARE NOT SUCCESSFULLY COMPLETED
We believe that our failure to complete the proposed transactions
described under Proposals 1 through 7 could result in:
o our creditors filing an involuntary bankruptcy petition
against us;
o our filing of a voluntary bankruptcy petition to reorganize
and restructure;
o our inability to pursue acquisitions or exploit our oil and
gas properties;
o our inability to take advantage of business opportunities due
to doubt about our ability to satisfy our financial
obligations;
o our inability to realize the maximum value of our assets; and
o our inability to attract funds to adequately capitalize our
business.
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<PAGE> 23
If we are unable to complete the proposed transactions we believe it is
likely that we will be forced to file a petition for reorganization and
restructuring under the protection of the United States Bankruptcy Code. We
cannot predict, however, whether a bankruptcy proceeding would result in our
reorganization, rather than our liquidation. If a bankruptcy proceeding resulted
in our liquidation, we believe there is a substantial risk that little or no
value would be available for distribution to our stockholders.
RATIFICATION OF DISPOSITION OF SOUTHERN GAS CO. OF DELAWARE, INC. AND ITS ASSETS
Proposal 3 asks you to ratify our sale of substantially all of our
Appalachian oil and gas properties and operations located in Kentucky and
Tennessee to an unrelated buyer, Nami Resources. Our agreement with Mr. Nami was
closed into escrow in September, 1999. Proposal 4 asks you to separately ratify
our sale of the stock of our wholly-owned subsidiary corporation that owned
those Appalachian oil and gas properties, Southern Gas, to an affiliate of one
of our directors, Leonard K. Nave. We entered into an agreement with Mr. Nave
for this transaction in October 1998.
Our agreement with Blue Dolphin Exploration requires that we dispose of
our Appalachian oil and gas properties and operations and our wholly-owned
subsidiary, Southern Gas, that we be released from our guaranty of Southern Gas'
indebtedness in the amount of $12.5 million with Den norske Bank, and that we be
released from our performance guaranty with Austin Energy Funding. To comply
with these requirements, Southern Gas entered into an agreement to sell all of
its oil and gas properties to Nami Resources. As a result of this sale:
o Nami Resources assumed and agreed to pay $12.5 million of
indebtedness owed by Southern Gas to Den norske Bank;
o Den norske Bank released us from our guaranty of the $12.5
million of indebtedness of Southern Gas assumed by Nami
Resources; and
o Austin Energy Funding released our guarantee of the production
rates of wells on the oil and gas properties sold to Nami
Resources.
Separately, we entered into a stock purchase agreement to sell our
interest in Southern Gas to Southern Gas Holding, L.L.C. ("Southern Holding"), a
limited liability company controlled by Leonard K. Nave. Mr. Nave is one of our
directors. In exchange for our sale of the stock of Southern Gas, we received:
o a release from any further liability on our office lease in
Versailles, Kentucky, from our landlord, which was an
affiliate of Mr. Nave;
o a release from our obligation to pay severance benefits to Mr.
Nave; and
o indemnification from Southern Holding with respect to Southern
Gas' past operations and activities.
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<PAGE> 24
OUR RECOMMENDATION ON PROPOSALS 1 THROUGH 7
We believe the transactions described in this Proxy Statement will
substantially improve our financial condition and ability to develop our
properties. Our board of directors has approved each of the proposals as being
in our and your best interest and we recommend that you vote for the approval of
each of Proposals 1 through 7.
BLUE DOLPHIN EXPLORATION'S RIGHT TO VOTE ON PROPOSALS 1 THROUGH 7
Blue Dolphin Exploration has obtained irrevocable proxies from certain
of our principal stockholders that entitle Blue Dolphin Exploration to cast
7,088,982 votes at the Annual Meeting on Proposals 1 through 7. Blue Dolphin
Exploration has advised us that it will cast all of its votes in favor of these
proposals. If it does so, approval of Proposals 1 through 7 is assured.
MANAGEMENT AND BUSINESS FOLLOWING THE TRANSACTIONS
If Proposals 1 through 7 are approved by stockholders and the
transactions are successfully completed, all of our incumbent directors will be
replaced by new directors selected by Blue Dolphin Exploration, except for our
chairman, Douglas L. Hawthorne, who will remain a member of our board of
directors. In accordance with our contractual arrangements with Blue Dolphin
Exploration, two additional directors chosen by Blue Dolphin Exploration have
been added to our board of directors. Additional information on the recently
appointed and proposed new directors is set forth under the discussion of
Proposal 7.
Our executive officers also will be replaced with persons selected by
Blue Dolphin Exploration. Substantially all of our executive officers have
resigned, or will resign upon closing of the transactions we are asking you to
approve at the Annual Meeting. Biographical information on the persons that Blue
Dolphin Exploration has advised us that it expects to cause to be appointed as
new officers is contained under the caption "Directors and Executive Officers."
In a filing with the Securities and Exchange Commission ("SEC"), Blue
Dolphin Exploration has said that it presently intends to cause us to continue
to operate as an independent oil and gas company but with a primary focus on the
exploration, development and production of oil and gas properties located in the
coastal or offshore waters of the Gulf of Mexico. Blue Dolphin Exploration also
stated, however, that it intends to evaluate and review our business affairs and
financial condition from time to time. Based on its evaluation and review, as
well as general economic and industry conditions, including, but not limited to,
the price of oil and gas, existing at the time, Blue Dolphin Exploration said it
may consider from time to time various alternative courses of action. Such
actions may include the acquisition of all or some of our shares of common stock
and preferred stock through open market purchases, privately negotiated
transactions, tender offer, exchange offer, merger or otherwise.
Following the closing of the transactions, we may need external
financing to pursue our business plans. For example, we may need additional
funds for drilling exploratory or
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<PAGE> 25
development wells on our then remaining oil and gas properties or for acquiring
additional properties. Blue Dolphin Exploration has advised us that if the need
arises, it may cause us to raise money by borrowing, using our properties as
collateral, by additional sales of properties, by issuing additional debt or
equity securities or by other avenues of finance that may be available to us at
the time. Although Blue Dolphin Exploration has advised us that it has no
current plans or commitments to do so, Blue Dolphin Exploration itself or its
affiliates may provide us external financing in the future.
INTEREST OF CERTAIN MEMBERS OF MANAGEMENT IN THE TRANSACTIONS
We plan to enter into several transactions in which certain members of
our current management will have a financial interest not shared with the rest
of our stockholders. These transactions will occur only if Proposal 1 is
approved and we successfully close the Investment Agreement that is the subject
of Proposal 1.
Because the employment of substantially all of our current management
personnel will be terminated at or before closing of the Investment Agreement,
we have extended certain severance benefits to those persons whose employment
has been or will be terminated.
We will enter into a contractual arrangement with MAP II, L.L.C. under
which certain of our current officers, who will have resigned at closing of the
Investment Agreement, will continue to provide services to us on an "as needed"
basis, for which they will be compensated. The net cost to us of this consulting
arrangement will be approximately $7,000 per month plus reimbursable expenses
for the period from closing of the Investment Agreement through February 2001.
The purpose of the arrangement is to give our new management continued access to
the experience and knowledge of certain of our current officers in connection
with the management transition.
Because of cost-saving reductions in our management and staff leading
up to and at the closing of the Investment Agreement, we will require
supplemental general and administrative services from an outside source.
Accordingly, the Investment Agreement provides that we and Blue Dolphin
Services, an affiliate of Blue Dolphin Exploration, will enter into an contract
under which Blue Dolphin Services will provide the services needed. We will pay
Blue Dolphin Services a monthly fee of $83,333 for its services.
At the closing of the Investment Agreement, we intend to use the
proceeds from the Purchase and Sale Agreement and a portion of the proceeds from
the Investment Agreement to pay our indebtedness to Den norske Bank.
Additionally, in connection with the sale of our Appalachian oil and gas
properties and operations, we will be released on our guaranty of Southern Gas'
indebtedness to Den norske Bank. Furthermore, we plan to obligate ourselves to
pay 20% of any contingent compensation due to Den norske Bank under which Blue
Dolphin Exploration will purchase the DnB Note.
We expect Blue Dolphin Exploration to agree to further reduce our
remaining indebtedness under the DnB Note to approximately $5.0 million in
principal amount and will
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<PAGE> 26
also modify the note in other respects generally favorable to us. Despite any
partial forgiveness of our indebtedness by Blue Dolphin Exploration and other
favorable note modifications, we expect that Blue Dolphin Exploration will be
our single largest creditor immediately following the Investment Agreement
closing. Blue Dolphin Exploration's interest as a creditor will be secured by
liens on substantially all of our assets.
Additional information concerning these and other transactions between
us and our affiliates is contained below under the caption "Certain
Relationships and Transactions."
NO FAIRNESS OPINION
To conserve cash, our board of directors chose not to obtain a
"fairness" opinion from an investment banking firm concerning any of the
transactions described in this Proxy Statement.
NO DISSENTERS' RIGHTS
The Delaware General Corporation Law does not bestow any dissenters' or
appraisal rights upon our stockholders in connection with any of the
transactions described in this Proxy Statement.
PROPOSAL 8: ELECTION OF THREE DIRECTORS
In Proposal 8 we are asking you to elect to our board of directors
three nominees, all of whom are incumbent directors. These persons were
nominated by our board of directors and were not designated by Blue Dolphin
Exploration. If, as we expect, Proposals 1 through 7 are approved at the Annual
Meeting, and the transactions covered by those proposals are successfully
completed, these three nominees will serve as directors only until closing of
the Investment Agreement with Blue Dolphin Exploration. At that time, we expect
that they, along with all other then incumbent members of our board of directors
will resign and be replaced by the nominees elected to our board under Proposal
7. If the transactions covered by Proposals 1 through 7 are not closed, the
three nominees will serve for a term of three years each, or until their
successors are duly elected and qualified.
We recommend that you re-elect to our board of directors each of the
three nominees identified in Proposal 8.
PROPOSAL 9: SELECTION OF AUDITORS
In Proposal 9, we ask that you approve our selection of Ernst & Young
LLP to serve as our auditors for the year ended December 31, 1999. Ernst & Young
LLP were also our auditors for the preceding year.
We recommend that you vote to ratify our selection of Ernst & Young,
L.L.P. as our auditors.
15
<PAGE> 27
BACKGROUND OF TRANSACTIONS
We are an independent oil and gas company. We have engaged in the
acquisition, exploration, development and production of oil and gas properties
in the Gulf Coast region offshore Louisiana and Texas and the Appalachian
regions of Tennessee and Kentucky. On March 5, 1998, we significantly expanded
our holdings by acquiring offshore oil and gas properties in the Gulf of Mexico
from TECO for a purchase price of approximately $57.7 million. We financed
approximately 98% of the purchase price with borrowings from Den norske Bank and
TECO.
After this acquisition we expected to raise capital in the public
markets to refinance our indebtedness to Den norske Bank and TECO and to provide
adequate capital to actively develop our oil and gas properties and
significantly increase our reserve base. We retained a national investment
banking firm ("Investment Bank No. 1") to assist us in issuing preferred stock
and debt securities on favorable terms to refinance this indebtedness.
In July 1998, we started a road show to determine the level of
interest, if any, of investors in our proposed offering of preferred stock and
high-yield debt. Unfortunately, our attempt to access the high-yield debt market
coincided with the decline in oil and gas prices to their lowest levels in
recent history and as a result investor interest in our offering was minimal.
Accordingly, because of decreasing oil and gas prices and a corresponding
deterioration in our capital markets, we were not able to complete our offering
and were unable to refinance the TECO Note and the DnB Note.
In August 1998, given the continuing decline in oil and gas prices, our
inability to access the capital markets and our worsening financial condition,
the board of directors authorized management to consider other strategic options
to improve our financial condition, including a merger, our reorganization,
including selling our oil and gas properties located in Tennessee and Kentucky
and restructuring of our existing debt. To assist us in evaluating our ability
to implement and successfully complete a strategic reorganization, we retained
an outside consultant to assist us in the preparation and submission of bid
packages to various industry representatives for the sale of our oil and gas
properties located in Tennessee and Kentucky.
In September 1998, the Executive Committee of the board of directors
elected to retain the services of a regional investment banking firm
("Investment Bank No. 2") to assist us in evaluating our ability to restructure
our existing debt and identifying potential strategic merger partners.
In October 1998, management reported to the board of directors that it
had received nine expressions of interest and five bids on acquiring our oil and
gas properties located in Tennessee and Kentucky. The highest bid received was
an offer of approximately $10.5 million. After extensive deliberations, the
board of directors determined that the amount and contingencies of this offer
rendered it unacceptable. However, the board of directors authorized management
to continue to negotiate with this bidder to increase the amount of the offer
and
16
<PAGE> 28
eliminate any contingencies. Subsequent negotiations with this bidder were not
successful because this bidder would not increase the amount of its offer.
Additionally, we received an indication of interest from a potential
merger candidate ("Merger Candidate"). We retained Investment Bank No. 2 to
assist in analyzing and reviewing the terms of any proposed transaction with the
Merger Candidate. The board of directors authorized management to begin
preliminary negotiations and conduct due diligence of the Merger Candidate.
In November 1998, Investment Bank No. 1 provided us with a
presentation regarding a restructuring strategy for our debt. This strategy
would require us to (a) take an aggressive posture with our creditors,
including our primary lenders DnB and TECO, regarding repayment terms and (b)
prepare and be willing to implement a reorganization plan under the
United States Bankruptcy Code in the event we could not reach acceptable
repayment terms with all of our creditors. We estimated that Investment Bank No.
1's fees for assisting us in implementing this strategy would be in excess of
$1.0 million. The board of directors elected not to pursue this strategy for
several reasons, specifically:
o their belief that our creditors would not favorably respond to the
"aggressive" posture taken with regard to the repayment terms for
our indebtedness;
o the possibility that we would have to reorganize under the
protection of the United States Bankruptcy Code if we are not able
to reach acceptable repayment terms with our creditors;
o the potential effect a bankruptcy reorganization would have on our
stockholders; and
o the costs associated with retaining the services of Investment Bank
No. 1 to implement this strategy.
Also in November 1998, our representatives met with representatives of
Merger Candidate to discuss the possibility of a strategic merger. Our
representatives reported to the board of directors that they were not able to
reach acceptable preliminary terms for a merger with Merger Candidate and all
further discussions with Merger Candidate ended.
In December 1998, our representatives met with a venture capital
corporation ("Investor No. 1") to discuss the possibility of a strategic merger
or significant capital investment. We continued to meet with Den norske Bank and
Investor No. 1 and discussed numerous scenarios and potential transactions. On
December 18, 1998, Investor No. 1 submitted a non-binding proposal which
provided for our reorganization under Chapter 11 of the United States Bankruptcy
Code, an equity investment in us of approximately $20.0 million, $20.0 million
of new debt, and the conversion of the TECO Note into common stock. This
alternative would have required the cooperation of our secured and unsecured
creditors. We also received an indication of interest for a proposed transaction
from another investor ("Investor No. 2"). Both proposals were preliminary and
subject to a due diligence reviews by the investors. The board of directors
authorized management to continue discussions with both investors.
In January 1999, our representatives and representatives of Den norske
Bank met independently with Investor No. 1 and Investor No. 2 to discuss the
merits of their respective proposals and each investor began a due diligence
review. During this time period, Investor No. 2 completed its preliminary due
diligence review, reduced its initial offer by approximately $8.0 million and
subsequently withdrew its proposal entirely.
In February 1999, our representatives and representatives of Den norske
Bank discussed the potential sale of our oil and gas properties located in
Tennessee and Kentucky to John Schwager, one of our consultants. These
discussions centered around the assumption of the indebtedness owed by our
subsidiary, Southern Gas, to DnB. During February 1999, our representatives
continued to meet with this consultant to negotiate the terms of a proposed
transaction. However, we were not able
17
<PAGE> 29
to reach acceptable preliminary terms and all discussions ended. Also during
February 1999, we were contacted by Nami Resources regarding the potential
acquisition of our oil and gas properties located in Tennessee and Kentucky. Our
representative met with representatives of Nami Resources to discuss this
proposed transaction.
In March 1999, Investor No. 1 submitted an initial proposal. We also
received separate proposals from another investor ("Investor No. 3") and Blue
Dolphin Exploration.
o Investor No. 1 proposed to invest $32.5 million, of which
$25.0 million would be equity and $7.5 million would be debt,
in exchange for 92.5% our equity.
o Investor No. 3 proposed to acquire the DnB Note in exchange
for $22.5 million, a $10.0 million subordinated note, warrants
to acquire 10% of our outstanding common stock and a 4%
overriding royalty interest in our oil and gas properties
located in the Gulf of Mexico.
o Additionally, Investor No. 3 would extend us a
development line of credit up to $5.0 million.
o Blue Dolphin Exploration proposed an investment of
approximately $33.0 million, of which $27.0 million would come
from Fidelity Oil Holdings in exchange for an 80% interest in
our oil and gas properties located in the Gulf of Mexico and
approximately $5.0 million from the sale of our common stock
to Blue Dolphin Exploration.
On March 29, 1999 these preliminary proposals were presented to the board of
directors. Although these proposals were presented to the board of directors,
these proposals were subject to the conduct and completion of further due
diligence on behalf of Blue Dolphin Exploration, Fidelity Oil Holdings and
Investor No. 3 and, given the terms of the each of these proposals, the
cooperation of our creditors.
In May 1999, upon completion of due diligence, Investor No. 1 and
Investor No. 3 submitted revised proposals. On May 10, 1999, the board of
directors held a meeting to review and consider the revised proposals. Investor
No. 1's revised proposal included an investment of $32.5 million, subject to
certain adjustments, of which $25.0 million would be equity and $7.5 million
would be debt, in exchange for 92.5% our equity, and would require us to
reorganize under the protection of the United States Bankruptcy laws. Investor
No. 3's revised proposal included a loan in the principal amount of $28.0
million to be used to partially repay our indebtedness to Den norske Bank and a
5% overriding royalty interest in our oil and gas properties located in the Gulf
of Mexico. Furthermore, Investor No. 3's proposal was contingent upon our
ability to reach an agreement with Den norske Bank to repay the unpaid balance
of the DnB Note over the 15 month period following the closing any transaction
with Investor No. 3.
On May 11, 1999, the board of directors determined that Blue Dolphin
Exploration's proposal would be fair and in the best interest of stockholders.
As part of it's the deliberations
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<PAGE> 30
the board of directors discussed and considered numerous factors including,
without limitation, the following:
o the overall effect of a proposed transaction on our financial
condition, specifically:
(1) the amount of debt we would have after completion of a
proposed transaction,
(2) our future ability to service our debt under the terms of
the proposals of Investor No. 1 and Investor No. 3, and,
(3) with regard to Blue Dolphin Exploration's proposal, the
fact that the amount of debt we would have after
completion of that proposed transaction would be
significantly less than that under the other proposals;
o the indication of our creditor's willingness to support the
terms of the proposal submitted by Blue Dolphin Exploration;
o the costs associated with a reorganization under the United
States Bankruptcy Code, including the legal and other fees
associated with a reorganization under the United States
Bankruptcy Code;
o the possible effects a reorganization under the United States
Bankruptcy Code would have on our stockholders, specifically:
(1) we could not assure that our stockholders would have a
continuing interest in us after a reorganization, or
(2) the possibility that our reorganization could result in
our liquidation and our belief that if we were forced
into liquidation there would be little or no value
available for distribution to our stockholders;
o the ability to complete a transaction in a timely manner to
prevent the possible institution of an involuntary bankruptcy
proceeding by our creditors; and
o the ultimate effect of a proposed transaction on our
stockholders.
On June 22, 1999, we received a further revised proposal from Investor
No. 3. Under the revised terms, Investor No. 3 would acquire equity representing
80% of our outstanding capital stock in consideration for $3.0 million equity
investment and a $29.0 million loan. On June 22, 1999, the board of directors
met and determined that Investor No. 3's most recent offer was not in the best
interest of stockholders. In addition to the factors discussed above, the board
of directors considered the following additional factors:
o that the transactions with Blue Dolphin Exploration and
Fidelity Oil Holdings would likely be consummated more rapidly
than the transaction proposed by Investor No. 3 because:
(1) Blue Dolphin Exploration had engaged in a meaningful due
diligence effort,
(2) we had entered into a letter of intent with Blue Dolphin
Exploration outlining the preliminary terms of the
transactions, and
(3) we had begun negotiating terms of definitive agreements
with Blue Dolphin Exploration and Fidelity Oil Holdings;
o that a transaction with Investor No. 3 included a
significantly greater risk of non-completion than the
transaction with Blue Dolphin Exploration;
o that the transaction proposed by Investor No. 3 did not
represent a material change economically from its previous
proposal; and
o that further delay in the completion of a transaction could
further impair our financial condition and ultimately prevent
us from completing a transaction on favorable terms.
In August 1999, we entered into the Investment Agreement with Blue
Dolphin Exploration and the Purchase and Sale Agreement with Fidelity Oil
Holdings. The aggregate consideration we will receive if these agreements are
approved is approximately $30.0 million, of which $25.0 million would come from
Fidelity Oil Holdings in exchange for an 80% interest in our oil and gas
properties located in the Gulf of Mexico and approximately $5.0 million from the
sale of our common stock to Blue Dolphin Exploration.
Additionally, on August 13, 1999, we entered into an agreement with
Nami Resources for the sale of our oil and gas properties located in Tennessee
and Kentucky for a purchase price of $12.5 million and the release on our
guaranty of Southern Gas' indebtedness. One component
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<PAGE> 31
of our reorganization initially considered by our board of directors, and
discussed above, was the sale of our oil and gas properties located in Tennessee
and Kentucky. These oil and gas properties are held by our subsidiary, Southern
Gas. Prior to entering into an agreement to sale these oil and gas properties to
Nami Resources, we attempted to sell these assets to several individuals.
However, we were not able to obtain an acceptable offer for these oil and gas
properties. Furthermore, most of the proposals and indications of interest we
received, including those from Blue Dolphin Exploration and Fidelity Oil
Holdings, contemplated a sale of either Southern Gas, our oil and gas properties
located in Tennessee and Kentucky held by Southern Gas, or both. In addition to
being a strategic option considered by the board of directors, the disposition
of Southern Gas is a condition to closing of the Investment Agreement with Blue
Dolphin Exploration.
The factors discussed above are not an exhaustive list of the factors
considered by our board of directors but includes all material factors
considered. The board of directors did not quantify or attach any particular
weight to the various factors considered in reaching its determination that Blue
Dolphin Exploration's and Fidelity Oil Holding's proposal would be fair and in
the best interest of stockholders. As a result of its consideration of these
factors and other relevant considerations, the board of directors determined
that the transactions with Blue Dolphin Exploration, Fidelity Oil Holdings and
the other transactions will substantially improve our financial condition and
are advisable to and in the best interests of stockholders.
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<PAGE> 32
PROPOSAL 1
TO APPROVE THE INVESTMENT AGREEMENT UNDER WHICH WE WILL SELL TO BLUE
DOLPHIN EXPLORATION COMPANY A NUMBER OF SHARES OF OUR COMMON STOCK EQUAL TO 75%
OF THE COMBINED VOTING POWER OF ALL OF OUR OUTSTANDING VOTING SECURITIES AFTER
THE ISSUANCE OF THE SHARES TO BLUE DOLPHIN EXPLORATION COMPANY.
VOTE REQUIRED
Approval of Proposal 1 requires the affirmative vote of the holders of
a majority of the combined voting power of the common stock and preferred stock
present in person or by proxy at the Annual Meeting, voting together as a single
class.
RELATIONSHIP TO PROPOSAL 2
The closing of the Investment Agreement is conditioned upon the
simultaneous closing of the Purchase and Sale Agreement. Therefore, Proposal 1
will not be deemed to be approved unless Proposal 2 is approved also.
SUMMARY OF THE INVESTMENT AGREEMENT
The following summary of the material terms of the Investment Agreement
between us and Blue Dolphin Exploration is qualified in its entirety by
reference to the Investment Agreement, a copy of which is attached to this Proxy
Statement as Appendix A.
Blue Dolphin Exploration. Blue Dolphin Exploration is a Delaware
corporation with principal offices at 801 Travis, Suite 2100, Houston, Texas
77002. It is a wholly-owned subsidiary of Blue Dolphin Energy Company which
through its subsidiaries, including Blue Dolphin Exploration, is primarily
engaged in gathering and transporting natural gas and condensate and in the
acquisition and exploration of oil and gas properties. Blue Dolphin
Exploration's operations are conducted principally offshore in the Gulf of
Mexico and along the Texas Gulf Coast.
Sale of Shares. We entered into an Investment Agreement, dated as of
July 30, 1999, with Blue Dolphin Exploration under which we agreed to issue and
sell and Blue Dolphin Exploration agreed to purchase shares of our common stock
that will result in Blue Dolphin Exploration owning, immediately after the
closing of the agreement, 75% of the combined voting power of all classes of our
voting securities after giving effect to:
(A) the issuance of shares of common stock to Blue Dolphin
Exploration at the closing;
(B) the conversion of all shares of our preferred stock owned of
record or beneficially by Rick G. Avare and Douglas L.
Hawthorne into shares of our common stock; and
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<PAGE> 33
(C) the issuance or deemed issuance at the closing of common stock
that we are obligated to issue as a result of the issuance to
Blue Dolphin Exploration of shares of our common stock at the
closing, including shares issuable under antidilution rights
or other rights held by any person.
Based upon the number of shares of our common stock issued and
outstanding as of the date of this Proxy Statement and the number of shares of
our common stock that will be issued to Messrs. Avare and Hawthorne upon the
conversion of their shares of preferred stock, we expect to issue approximately
39,509,457 shares of our common stock to Blue Dolphin Exploration. We do not
believe that we will be obligated to issue any shares of our common stock to
Blue Dolphin Exploration under the circumstances described under paragraph (C).
At Blue Dolphin Exploration's election we will issue additional shares
of common stock under the following circumstances:
o in lieu of all or any portion of any adjustments that reduce
the cash purchase price for the shares and any undisclosed
liabilities; and
o in full or partial satisfaction of any right Blue Dolphin
Exploration has to indemnification under the Investment
Agreement, in which event the number of shares of common stock
would be increased to offset the dilution of Blue Dolphin
Exploration's post-closing ownership of the common stock that
would be incurred if no adjustment was made.
The number of additional shares of common stock will be determined by dividing
the monetary benefit that Blue Dolphin Exploration is entitled to receive by the
lesser of:
o $0.16, which represents the per share price of our common
stock;
o the closing price of our common stock on the principal
exchange or trading system on which it is then traded on the
first full business day following the closing of the
Investment Agreement; or
o the average of the high and low price of the common stock on
the same date.
Additionally, if any options or warrants which are outstanding at the
closing of the Investment Agreement are subsequently exercised, Blue Dolphin
Exploration will be issued additional shares of common stock at no additional
cost in an amount sufficient to give Blue Dolphin Exploration the number of
shares it would have received if the options and warrants had been exercised
before the closing.
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<PAGE> 34
Purchase Price. The gross purchase price for the shares of common stock
is $4,736,315, subject to the following adjustments:
1. increased by the amount of permissible expenses (including
capital expenditures approved by Blue Dolphin Exploration)
paid to operate our Gulf of Mexico oil and gas properties
during the period January 1, 1999 through the date the
Investment Agreement is closed, and decreased by the amount of
revenues received by us during the same period;
2. decreased by reductions in value caused by title defects,
environmental defects, casualty losses not covered by
insurance, and reductions in revenues;
3. decreased by all of our costs, expenses and fees relating to
transactions under the Investment Agreement, including closing
costs, attorney's fees, accounting expenses and termination
fees; and
4. decreased to the extent our total liabilities at closing
exceed $3,802,000, excluding the outstanding balance on the
DnB Note to be purchased by Blue Dolphin Exploration, certain
expenses related to the calculation of adjustments to the
purchase price, and certain expenses related to the
development and operation of oil and gas wells in which we
have a working interest.
Use of Proceeds from Sale of Common Stock. We plan to use the proceeds
from the sale of the common stock to Blue Dolphin Exploration, together with the
proceeds from our sale of assets to Fidelity Oil Holdings which is the subject
of Proposal 2, to reduce our liabilities and to augment our working capital.
In particular, we plan to make a $27.0 million partial payment on our
indebtedness to Den norske Bank contemporaneously with closing of the Investment
Agreement. This payment to Den norske Bank is a condition to Blue Dolphin
Exploration's obligation to close the Investment Agreement with us. To make that
payment, we intend to use all the proceeds from the Fidelity Oil Holdings
transaction and a portion of our proceeds from the Blue Dolphin Exploration
transaction. Additionally, we plan to use approximately $990,400 of the proceeds
from the sale of common stock to Blue Dolphin Exploration to obtain a
cancellation of our approximately $18.5 million of indebtedness under the TECO
Note. We will instruct Blue Dolphin Exploration and Fidelity Oil Holdings to
make payment of amounts they owe us under our contracts with them directly to
our creditors, including Den norske Bank and the current holder of the TECO
Note.
Conditions to Closing. The closing of the Investment Agreement is
subject to certain conditions, including but not limited to the following:
o The Purchase and Sale Agreement must be closed simultaneously
with the Investment Agreement.
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<PAGE> 35
o All of our representations and warranties must be true and
correct in all material respects.
o We must have disposed of our subsidiary, Southern Gas, and Den
norske Bank must have released us on our guarantee of Southern
Gas' $12.5 million indebtedness to Den norske Bank that is
secured by substantially all of the assets of Southern Gas and
we must have been released from our guarantee of a volumetric
production payment by Southern Gas to Austin Energy Funding
Partners.
o TECO, or any successor entity, must have released us from all
liabilities on the TECO Note.
o We must have repaid approximately $27.0 million of the
principal amount of the DnB Note.
o Blue Dolphin Exploration must have purchased the remaining
balance of the DnB Note, reduced the outstanding balance of
the DnB Note to $5.0 million and otherwise modified the DnB
Note and related documents as discussed below under "--Other
Agreements."
o Our directors and officers must have entered into agreements
to vote for and support Proposals 1 through 7.
o We must have entered into the Management and Services
Agreement and the Consulting Agreement discussed below under
"--Other Agreements."
o We must have entered into indemnity agreements with each new
director chosen by Blue Dolphin Exploration.
o All stock options outstanding under our 1994 Compensatory
Stock Option Plan and each other option or warrant issued to
our management to purchase our voting securities must have
been canceled or terminated.
o Our stockholders must have approved the Investment Agreement,
the Purchase and Sale Agreement and the amendments to our
Amended and Restated Certificate of Incorporation to increase
our authorized common stock and to eliminate the
classification of our board of directors. They must also have
elected the nominees listed in Proposal 7 as directors
effective as of the closing.
o Our then incumbent board of directors must resign effective as
of the closing.
o All of our employees except Christopher McLindon and Leon
Smith, and all employment agreements with our officers and
other employees must have been terminated on terms acceptable
to Blue Dolphin Exploration and our office in
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<PAGE> 36
Metairie, Louisiana must have been reduced in size to
approximately 1,000 square feet.
o All shares of preferred stock owned by Rick G. Avare and
Douglas L. Hawthorne, which amount to approximately 83% of our
preferred stock, must have been converted into shares of our
common stock.
o We must have paid all of our liabilities other than amounts
due under the DnB Note purchased by Blue Dolphin Exploration,
costs included in the calculation of the net purchase price
and operational expenses approved by Blue Dolphin Exploration
and these permitted liabilities must not exceed $3,802,000 by
more than $50,000.
o All of our liabilities to trade creditors associated with work
performed by us for Chevron USA, Inc. must be paid in full or
otherwise discharged and any related litigation must be
dismissed.
o The litigation pending in the United States Bankruptcy Court
in Lexington, Kentucky alleging the fraudulent transfer of the
assets of Southern Gas Co., Inc. to Southern Gas must be
settled or dismissed.
o Pending the closing, unless consented to by Blue Dolphin
Exploration, we must not have:
o made any expenditures or incurred any liabilities of
more than $500;
o borrowed any monies or issued any debt securities;
o entered into any employment contracts;
o disposed of any assets;
o amended our certificate of incorporation or bylaws;
o paid any dividends or bonuses or granted any
severance arrangements;
o issued or sold or contracted to issue and sell any
options, warrants or rights to subscribe to acquire
shares of common stock; or
o issued any shares of common stock, except as
dividends on our preferred stock and except for
options and warrants to purchase shares of common
stock that were outstanding on July 30, 1999.
We are obligated by the Investment Agreement to use commercially reasonable
efforts to satisfy the closing conditions under the Investment Agreement.
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<PAGE> 37
Indemnification. We agreed to indemnify Blue Dolphin Exploration and
its affiliates for any and all claims, liabilities, losses and damages in excess
of an aggregate of $25,000 which they incur as a result of our breach of any
representations, warranties, or agreements or our failure to perform any of our
obligations under the Investment Agreement.
Termination. The Investment Agreement may be terminated if we and Blue
Dolphin Exploration mutually consent to terminate it. Otherwise, the Investment
Agreement may be terminated:
o by Blue Dolphin Exploration if we fail to perform any material
agreement or condition;
o by us if Blue Dolphin Exploration fails to perform any
material agreement or condition;
o by us or Blue Dolphin Exploration if any governmental
administrative, legal or investigative proceeding relating to
the transactions contemplated by the Investment Agreement is
pending or threatened; or
o by us or Blue Dolphin Exploration if the Investment Agreement
and Purchase and Sale Agreement have not been closed by
December 31, 1999 if the terminating party is not in material
breach of any of its obligations under the Investment
Agreement.
OTHER AGREEMENTS
The following summaries are of various agreements that we expect will
be entered into in connection with the closing of the Investment Agreement
because they are, directly or indirectly, required by the terms of the
Investment Agreement.
Reductions of Our Indebtedness under the DnB Note. We were indebted to
Den norske Bank in the aggregate principal amount of approximately $67.4 million
at June 30, 1999. We are in default on the DnB Note and, for that reason, the
entire amount that we owe under the note is reflected in our balance sheet as a
current liability.
As a result of three transactions, we expect that our indebtedness
under the DnB Note will be reduced to only $5.0 million in principal amount at
the closing date of the Investment Agreement:
o Approximately $12.5 million of our indebtedness under the DnB
Note will be eliminated in connection with our sale of our
Appalachian assets, the ratification of which is the subject
of Proposal 3.
o Approximately $27.0 million of our indebtedness will be repaid
when we apply the net proceeds of the sale of 80% of our Gulf
of Mexico assets to Fidelity Oil
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Holdings together with a portion of the proceeds from our sale
of common stock to Blue Dolphin Exploration for that purpose.
o Remaining balance under the DnB Note will be reduced to $5.0
million in principal amount when, as discussed below, Blue
Dolphin Exploration buys the DnB Note at the closing of the
Investment Agreement and forgives our then remaining
indebtedness under the DnB Note.
Purchase of DnB Note by Blue Dolphin Exploration. Blue Dolphin
Exploration will purchase the DnB Note from Den norske Bank contemporaneously
with the closing of the Investment Agreement. Blue Dolphin Exploration will also
acquire from Den norske Bank the liens on substantially all of our assets that
secure the DnB Note, other than the assets we sell to Fidelity Oil Holdings
which will be released from those liens.
We expect that the purchase will be made by Blue Dolphin Exploration
under the terms of an agreement between Den norske Bank and its affiliate, DNB
Energy Assets, Inc., on the one hand, and Blue Dolphin Exploration and Fidelity
Oil Holdings, on the other. We expect that the term of this Agreement will
provide that Den norske Bank will receive a total purchase price consisting of
an initial cash purchase price for the DnB Note and the right to receive an
additional, contingent payment based on the future net revenues from our Gulf of
Mexico assets.
The initial cash purchase price of the DnB Note is estimated to be
approximately $27.0 million plus interest accruing on the $20.0 million proceeds
from our transaction with Fidelity Oil Holdings, subject to adjustment. Den
norske Bank will be deemed to have received full payment of the initial cash
purchase price if Blue Dolphin Exploration and Fidelity Oil Holdings cause us to
repay a portion of our indebtedness to Den norske Bank equal to that cash
purchase price using:
o all of the proceeds to us from our sale of assets to Fidelity
Oil Holdings; and
o a portion of the proceeds from our sale of common stock to
Blue Dolphin Exploration.
We expect that we will make these payments to Den norske Bank. We plan to do so
by instructing each of Fidelity Oil Holdings and Blue Dolphin Exploration to
direct payments to Den norske Bank that would otherwise be paid by them to us in
connection with the closings of their transactions with us.
We expect that Den norske Bank will also be entitled to receive an
additional, contingent payment for its sale of the DnB Note if the combined,
cumulative net revenues received by us and Fidelity Oil Holdings that are
attributable to proved oil and gas reserves that we owned in the Gulf of Mexico
as of January 1, 1999, exceed $30.0 million during the period from January 1,
1999 through December 31, 2001. The additional payment to which Den norske Bank
will be entitled will be equal to 50% of the net revenues in excess of $30.0
million during that period.
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Any contingent compensation that is due to Den norske Bank is payable on or
before March 15, 2002.
We plan to contractually obligate ourselves to pay 20% of any
contingent compensation amount due Den norske Bank by entering into an agreement
among Blue Dolphin Exploration, Fidelity Oil Holdings and us. Under the same
agreement, we will generally acknowledge and consent to the agreement for the
purchase of DnB Note and the various transactions contemplated by that
agreement.
Modification of the DnB Note. Contemporaneously with its acquisition of
the DnB Note, we expect that Blue Dolphin Exploration will agree to modify the
DnB Note and related loan and security documentation in a manner favorable to
us. We expect these modifications will be accomplished by amending the loan
documents relating to the DnB Note to provide as follows:
o Our indebtedness under the DnB Note will be reduced to $5.0
million in principal amount.
o The events of default to which we are now subject under our
existing loan documentation with Den norske Bank will be
limited so that an event of default will occur only if:
o we breach a representation, warranty, certification
or statement in the amended loan documentation or in
the Investment Agreement and, in either case, the
breach is not cured within 10 days after we are given
written notice of the breach;
o we fail to repay the indebtedness when due, if not
forgiven at December 31, 2000; or
o we fail to pay to Den norske Bank any contingent
compensation that we may owe under our agreement with
Blue Dolphin Exploration and Fidelity Oil Holdings,
as discussed under the caption "-- Purchase of DnB
Note by Blue Dolphin Exploration," above.
o The events of default to which we are now subject under our
loan documentation with Den norske Bank would be restored, and
would again become binding on us, if we default under the
modified loan documentation or breach the Investment
Agreement.
o If we remain in compliance with the modified loan documents
through December 31, 2000:
o we will not have to make payments of principal or
interest under the DnB Note during that period; and
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o we will be released from any further liability under
the DnB Note on January 1, 2001.
o The liens on our assets securing the DnB Note will be assigned
to Blue Dolphin Exploration. These liens will also be modified
so that they secure our obligation to pay our share of the
contingent compensation, if any, that may become due to Den
norske Bank under the Note Purchase Agreement. These liens
will therefore remain in place until our liability for the
contingent amount, if any, is known and is paid. Accordingly,
the liens will remain in place until December 31, 2001, even
if our liability under the DnB Note is forgiven at December
31, 2000, in accordance with the modified loan documentation.
o Blue Dolphin Exploration will refrain from exercising or
enforcing through December 31, 2001, any of its remaining
rights that arose because of our defaults under the DnB Note
and related loan documentation before they are modified, if we
do not default under the modified loan documents.
o Blue Dolphin Exploration has advised us that it will likely
agree to subordinate its lien on our assets to the right of
Den norske Bank to be paid the amount of any contingent
compensation that we may in the future owe under the
agreements, discussed under the caption "-- Purchase of DnB
Note by Blue Dolphin Exploration," above.
TECO Note Settlement Agreement. On March 6, 1999, TECO sold the $18.5
million TECO Note to R. Hale Energy Services, Inc. ("Hale Energy"). Effective
July 26, 1999, we entered into a Settlement Agreement with Hale Energy under
which Hale Energy agreed to release us from all of our liabilities relating to
the $18.5 million TECO Note in exchange for approximately $990,400 cash to be
paid at or prior to the closing of the Investment Agreement and the Purchase and
Sale Agreement.
Voting and Support Agreements. To satisfy one of our obligations under
the Investment Agreement, the following stockholders entered into Voting and
Support Agreements with Blue Dolphin Exploration granting to Blue Dolphin
Exploration irrevocable proxies to vote the shares of our common stock and
preferred stock shown opposite their names below on the matters specified in the
proxies:
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<TABLE>
<CAPTION>
COMBINED VOTING POWER
----------------------
NUMBER OF NUMBER OF
SHARES OF SHARES OF NUMBER PERCENTAGE
NAME COMMON STOCK PREFERRED STOCK OF VOTES OF VOTES
---- ------------ --------------- --------- ----------
<S> <C> <C> <C> <C>
Rick G. Avare ..................... 1,429,046 187,500 2,179,046 15.86%
Douglas L. Hawthorne .............. 202,589 3,334 215,925 1.57%
Leonard K. Nave ................... 447,659 0 447,659 3.26%
Ralph A. Currie ................... 289,500 0 289,500 2.11%
Don Poole ......................... 505,000 0 505,000 3.67%
Howard A. Settle .................. 150,000 0 150,000 1.09%
Len Aldridge ...................... 50,000 0 50,000 0.36%
Den norske Bank and affiliate ..... 500,000 0 500,000 3.64%
TECO Oil & Gas, Inc.(1) ........... 2,751,852 0 2,751,852 20.03%
--------- --------- --------- -----
Total .................... 6,325,646 190,834 7,088,982 51.59%
========= ========= ========= =====
</TABLE>
- ---------------
(1) TECO granted Hale Energy an option to purchase the shares of our common
stock that it owns. Hale Energy has entered into Voting and Support
Agreement with Blue Dolphin Exploration.
The Voting and Support Agreements give Blue Dolphin Exploration
irrevocable proxies to cast a total of 7,088,982 votes at the Annual Meeting for
approval of Proposals 1 through 7, which constitutes approximately 51.6% of all
votes entitled to be cast at the meeting. Blue Dolphin Exploration has advised
us that it presently intends to vote all shares for which it has proxies for
approval of Proposals 1 through 7, thus assuring their approval at the Annual
Meeting if it does so.
The Voting and Support Agreements also requires the stockholders who
are parties to the agreements to, among other things:
o convert their shares of preferred stock into shares of common
stock prior to the closing;
o refrain from selling, transferring or pledging their shares of
or consenting to any amendments to our Amended and Restated
Certificate of Incorporation or Bylaws; and
o cooperate fully with Blue Dolphin Exploration and to support
the transactions contemplated by the matters covered by the
irrevocable proxies.
Management and Administrative Services Agreement. The Investment
Agreement requires that on or before the closing of the Purchase and Sale
Agreement and the Investment Agreement, that we enter into a Management and
Administrative Services Agreement with Blue Dolphin Services under which Blue
Dolphin Services will provide all management and administrative services
required to operate our business, including without limitation, accounting
services, cash management, general land functions, contract negotiation and
administration, regulatory compliance, records retention and marketing.
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As consideration for the services, we will pay Blue Dolphin Services a
management fee of $83,333 per month. The management fee includes Blue Dolphin
Services' out-of-pocket expenses and administrative support costs. We will be
required to pay costs and expenses charged by outside tax, legal, engineering
and other professional advisors engaged by Blue Dolphin Services to render
services to us.
The Management and Administrative Services Agreement will continue in
force until December 31, 2000, and will continue in force thereafter on a
year-to-year basis until either we or Blue Dolphin Services gives written notice
of termination thirty days prior to the end of a calendar year.
Consulting Agreement. The Investment Agreement requires that at the
closing of the Purchase and Sale Agreement and the Investment Agreement that we
enter into a Consulting Agreement with MAP II, L.L.C. ("MAP II"), under which
MAP II will render consulting services to us in connection with our ongoing
business. The consulting services include advising and consulting with us in
connection with the conduct and development of our ongoing business operations
and the preparation of financial reports and filings with the SEC.
The Consulting Agreement requires that one or more of the following
persons must be available to render the consulting services: Rick G. Avare, our
President, David J. Stetson, our Vice President and General Counsel, Ralph A.
Currie, our Vice President of Finance and Chief Financial Officer, and Karen M.
Underwood, our Vice President for Compliance and Secretary. None of these
persons are required to devote full time to the rendition of the services and
are free to do any work or perform services for third parties unless such
activity would cause or be a conflict of interest.
As consideration for the consulting services, we will pay MAP II $7,000
per month and Fidelity Oil Holdings will fund the payment of $28,000 per month
to Map II, for a aggregate of $35,000 per month. Our payments to MAP II will be
guaranteed by Blue Dolphin Exploration. Neither MAP II nor any of the above
named persons are required to incur any out-of-pocket expenses and they will be
reimbursed for out-of-pocket expenses on a case by case basis only to the extent
that we and Fidelity Oil Holdings agree.
The Consulting Agreement automatically terminates on February 28, 2001,
unless it is sooner terminated by mutual agreement or is terminated by us or MAP
II because of a material breach by the non-terminating party.
Rick G. Avare is a member and the administrative member of MAP II.
New Indemnity Agreements. Our Amended and Restated Certificate of
Incorporation provides for indemnification of directors to the full extent
permitted by Section 145 of the Delaware General Corporation Law; however, those
rights are not exclusive and Delaware law permits indemnification agreements to
be entered into with directors.
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<PAGE> 43
Promptly after the closing of the Purchase and Sale Agreement and the
Investment Agreement and the election of the nominees listed in Proposal 7 as
directors, we will enter into Indemnity Agreements with those directors, which
will provide that we will hold harmless and indemnify each of our directors
against any and all expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by the director in
connection with any threatened, pending, or completed action suit or proceeding,
whether civil or criminal, administrative or investigative (including any action
by us or in our right) to which the director is, or was or at any time becomes
our director, employee or agent, or is or was serving or at any time serves at
our request as a director, employee or agent or another corporation,
partnership, joint venture, trust or other enterprise.
Provided, however, that we will not be required to indemnify a
director:
o except to the extent that the aggregate losses to be
indemnified exceeds the amount of the losses for which the
director is indemnified under any policy of insurance
purchased and maintained by us;
o in respect to remuneration paid to a director if it is
determined by a final judgment or other final adjudication
that the remuneration was paid in violation of the law;
o on account of any suit in which the final judgment is rendered
against the director for an accounting of profits made from
the purchase or sale by the director of our securities
pursuant to the provisions of Section 16(b) of the Securities
Exchange Act of 1934, as amended;
o on account of an action or omission of the director which is
finally adjudged to constitute willful misconduct or to have
been knowingly fraudulent or deliberately dishonest; or
o if a final decision by a court having jurisdiction in the
matter determines that the indemnification is unlawful.
Revised Indemnity Agreements. We currently have indemnity agreements
with our officers and directors that are substantially similar to the indemnity
agreements to be entered into with Blue Dolphin Exploration's nominees for
election as directors. Simultaneously with the closing of the Investment
Agreement and the Purchase and Sale Agreement, the current indemnity agreements
with our existing officers and directors will be terminated and we will enter
into indemnity agreements with our existing officers and directors that are
identical to the agreements we entered into with our new directors.
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<PAGE> 44
PROPOSAL 2
TO APPROVE THE PURCHASE AND SALE AGREEMENT UNDER WHICH WE WILL SELL TO
FIDELITY OIL HOLDINGS, INC. AN UNDIVIDED 80% OF OUR INTEREST IN ALL OF OUR
ASSETS IN THE GULF OF MEXICO.
VOTE REQUIRED
Approval of Proposal 2 requires the affirmative vote of the holders of
a majority of the combined voting power of all of the issued and outstanding
shares of common stock and preferred stock, voting together as a single class.
RELATIONSHIP TO PROPOSAL 1
The closing of the Purchase and Sale Agreement is conditioned upon the
simultaneous closing of the Investment Agreement. Therefore, Proposal 2 will not
be deemed to be approved unless Proposal 1 is approved also.
SUMMARY OF PURCHASE AND SALE AGREEMENT
The following summary of the material terms of the Purchase and Sale
Agreement is qualified in its entirety by reference to the Purchase and Sale
Agreement between us and Fidelity Oil Holdings, a composite copy of which is
attached to this Proxy Statement as Appendix B.
Fidelity Oil Holdings. Fidelity Oil Holdings is a Delaware corporation
with principal offices at 918 East Divide Avenue, Bismarck, North Dakota
58506-5650. Its principal business is the acquisition, exploration, development
and production of oil and natural gas properties throughout the United States
and the Gulf of Mexico.
Sale of Assets. We entered into a Purchase and Sale Agreement, dated as
of June 30, 1999, with Fidelity Oil Holdings under which we agreed to sell and
Fidelity Oil Holdings agreed to purchase an undivided 80% of our right, title
and interest in and to all of our Gulf of Mexico oil and gas leases, properties,
platforms, equipment, fixtures, supplies, contracts and hydrocarbons. We refer
to the various assets to be sold under the Purchase and Sale Agreement as the
"Properties."
Purchase Price. The purchase price for the 80% undivided interest in
the Properties is $25,313,685, subject to certain adjustments.
We believe the most important purchase price adjustment will be based
on the revenues and expenses attributable to the Properties during the period
January 1, 1999 through the date of closing the Purchase and Sale Agreement.
This adjustment generally:
o decreases the price to be paid by Fidelity Oil Holdings by the
amount of revenue received by us with respect to the
Properties; and
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<PAGE> 45
o increases the price by the amount equal to 80% of:
o the capital expenditures paid by us relating to the
Properties;
o the general and administrative expenses paid by us
relating to the Properties; and
o the lease operating expenses paid by us relating to
the Properties.
Other provisions of the Purchase and Sale Agreement provide that the
purchase price for the Properties will be:
o increased by any increase in our interest in hydrocarbons
produced by the Properties;
o increased by any reduction in our obligation to bear costs and
expenses attributable to the ownership or operation of the
Properties;
o decreased by $271,200 for marketing adjustments; and
o decreased by reductions in value caused by title defects,
environmental defects, casualty losses not covered by
insurance, and reductions in revenues.
We will instruct Fidelity Oil Holdings to pay the adjusted purchase
price owed to us directly to Den norske Bank to reduce the principal balance due
on the DnB Note.
Conditions to Closing. The closing of the Purchase and Sale Agreement
is subject to certain conditions, including but not limited to the following:
o the Investment Agreement must be closed simultaneously with
the Purchase and Sale Agreement;
o all of our representations and warranties must be true and
correct in all material respects;
o all of our obligations must have been performed in all
material respects;
o no proceeding by a third party including any governmental
authorities is pending or threatened that seeks to prevent the
consummation of the transactions contemplated by the Purchase
and Sale Agreement;
o all approvals required from any governmental authorities must
have been obtained;
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<PAGE> 46
o the Purchase and Sale Agreement must have been approved by our
stockholders; and
o all preferential purchase rights relating to the Properties
must have been waived or expired.
Indemnification. We agreed to indemnify Fidelity Oil Holdings for any
liabilities, losses, damages, costs and expenses attributable to:
o third party claims related to the Properties which relate to
any period prior to January 1, 1999; and
o our breach or non-performance of our covenants under the
Purchase and Sale Agreement.
We are required to indemnify Fidelity Oil Holdings only if the aggregate amount
of all claims, liabilities, losses, damages, costs and expenses exceed an
aggregate of $25,000. We are not required to indemnify Fidelity Oil Holdings for
more than $1.0 million.
Termination. The Purchase and Sale Agreement may be terminated if we
and Fidelity Oil Holdings mutually consent to terminate it. Otherwise, the
Purchase and Sale Agreement may be terminated:
o by Fidelity Oil Holdings if we fail to comply with any
material condition to the closing;
o by us if Fidelity Oil Holdings fails to comply with any
material condition to the closing;
o by us or Fidelity Oil Holdings if the Purchase and Sale
Agreement has not been closed by December 31, 1999; provided
the terminating party is not in material breach of its
obligations under the Purchase and Sale Agreement; and
o by us or Fidelity Oil Holdings if the aggregate downward
adjustment to the purchase price for title and environmental
defects and casualty events exceeds $200,000.
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<PAGE> 47
PROPOSAL 3
TO RATIFY THE SALE OF ALL OF OUR APPALACHIAN OIL AND GAS PROPERTIES AND
OPERATIONS, FORMERLY OWNED BY OUR SUBSIDIARY, SOUTHERN GAS CO. OF DELAWARE,
INC., TO NAMI RESOURCES
VOTE REQUIRED
Ratification of Proposal 3 requires the affirmative vote of the holders
of a majority of the combined voting power of all of the issued and outstanding
shares of common stock and preferred stock, voting together as a single class.
RELATIONSHIP TO PROPOSALS 1 AND 2
The closing of the Investment Agreement and Purchase and Sale Agreement
set forth in Proposals 1 and 2 is conditioned upon our sale of Southern Gas'
assets, the release from our guaranty of Southern Gas' indebtedness and the
release from all obligations under the performance guaranty with Austin Energy
Funding Partners.
REASONS FOR SALE
Our agreement with Blue Dolphin Exploration requires that we cause
Southern Gas to sale its assets, that we be released from our guaranty of
Southern Gas' indebtedness in the amount of $12.5 million with Den norske Bank
and that we be released from our performance guaranty with Austin Energy Funding
Partners. The sale of Southern Gas' assets might be deemed to be a part of the
sale of substantially all of our assets. Therefore, we are asking you to ratify
this sale.
DESCRIPTION OF THE TRANSACTION
On August 13, 1999, Southern Gas entered into an Asset Purchase
Agreement with Nami Resources under which Southern Gas agreed to sell and Nami
Resources agreed to purchase substantially all of the tangible and intangible
assets used by Southern Gas in the operation of its oil and gas properties for a
purchase price of $12.5 million, the release of our guaranty of Southern Gas'
indebtedness and the release from our obligations under the performance guaranty
with Austin. The Asset Purchase Agreement was closed into escrow on September
10, 1999, pending final closing upon satisfaction of certain conditions.
SOUTHERN GAS
Our wholly-owned subsidiary, Southern Gas, was engaged in the
acquisition, exploration, development and production of oil and gas properties
in southeastern Kentucky and Tennessee. Southern Gas also gathers and markets
its natural gas. At December 31, 1998, Southern Gas' oil and gas properties
included:
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<PAGE> 48
o Working interests ranging from 5% to 100% in 482 gross gas
wells that were producing or capable of producing;
o Leases on 2,000 undeveloped acres; and
o Three hundred miles of pipeline.
For a more detailed description of the oil and gas properties and operations
owned by Southern Gas, please refer to "Item 1. Description of Business" and
"Item 2. Description of Properties" in our Form 10-K for the fiscal year ended
December 31, 1998 which is included in our Annual Report to Shareholders which
is being mailed to stockholders along with this Proxy Statement.
NAMI RESOURCES
Nami Resources is a Kentucky limited liability company that was formed
for the purpose of purchasing Southern Gas' assets. None of our officers or
directors are members or managers of Nami Resources or have any financial
interest in Nami Resources. However, Nami Resources will employ approximately
three persons who were previously employed by Southern Gas in non-executive
positions.
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<PAGE> 49
PROPOSAL 4
TO RATIFY THE SALE OF ALL OF THE STOCK OF OUR WHOLLY-OWNED SUBSIDIARY
THAT FORMERLY OWNED OUR APPALACHIAN ASSETS, SOUTHERN GAS CO. OF DELAWARE,
INC., TO SOUTHERN GAS HOLDINGS L.L.C. WHICH IS CONTROLLED BY LEONARD K. NAVE
WHO IS ONE OF OUR DIRECTORS.
VOTE REQUIRED
Ratification of Proposal 4 requires the affirmative vote of the holders
of a majority of the combined voting power of all of the issued and outstanding
shares of common stock and preferred stock, voting together as a single class.
RELATIONSHIP TO PROPOSALS 1 AND 2
The closing of the Investment Agreement and Purchase and Sale Agreement
set forth in Proposals 1 and 2 is conditioned upon our sale of our interest in
our wholly owned subsidiary, Southern Gas.
DESCRIPTION OF TRANSACTION
Sale of Southern Stock. Our agreement with Blue Dolphin Exploration
requires that we sell our interest in our wholly owned subsidiary, Southern Gas.
We had previously sold, subject to delivery of a third-party consent, all of
Southern Gas' oil and gas properties to Nami Resources and Southern Gas' only
remaining assets were volumetric production payments receivable and tax refunds
receivable with an aggregate book value of $226,000. Southern Gas is a party to
litigation filed in Federal Bankruptcy Court by Wright Enterprises, has
continuing obligations under the sale agreement with Nami Resources, has
liabilities of approximately $68,000 and unknown contingent liabilities. It was
determined by the Board that it would be difficult to locate a third-party
purchaser within our time restraints and obtain the indemnification from a
Purchaser as required under the Investment Agreement.
To comply with the Investment Agreement, we have entered into a stock
purchase agreement to convey all our shares of Southern Gas to Southern Gas
Holding, LLC ("Southern Holding"), a Kentucky limited liability company.
Southern Holding is owned by Mr. Leonard Nave and a family trust in which
Leonard Nave is the trustee. Mr. Nave is a director of our Company and the
president of Southern Gas.
Southern Holding has agreed to acquire the Southern Gas shares for a
nominal amount and provide us with a full indemnity for all past operations and
activities, a full release from lease obligations on our office in Versailles,
Kentucky and deliver a termination and release from Mr. Nave of any severance
rights.
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<PAGE> 50
PROPOSAL 5
TO APPROVE AN AMENDMENT TO OUR AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION TO INCREASE THE NUMBER OF SHARES OF COMMON STOCK THAT WE ARE
ENTITLED TO ISSUE FROM 50,000,000 SHARES TO 70,000,000 SHARES.
PROPOSED AMENDMENT
We propose that the first paragraph of Article Four of our Amended and
Restated Certificate of Incorporation be deleted and that it will be replaced
with the following paragraph:
"The aggregate number of shares of capital stock of all
classes which the Corporation shall have authority to issue is
Seventy- three Million (73,000,000), of which Seventy Million
(70,000,000) shares having a par value of $.00001 per share
shall be of a class designated "Common Stock" (or "Common
Shares"), ONE MILLION (1,000,000) shares of preferred stock
having a par value of $12.00 per share which shall be of a
class designated SERIES 1993 8% CONVERTIBLE PREFERRED STOCK
and TWO MILLION (2,000,000) shares having a par value of
$.00001 per share shall be of a class designated "Preferred
Stock" (or "Preferred Shares"). All shares of the Corporation
shall be issued for such consideration or considerations as
the Board of Directors may from time to time determine. The
designations, voting powers, preferences, optional or other
special rights and qualifications, limitations, or
restrictions of the above classes of stock shall be as
follows:"
VOTE REQUIRED
Approval of Proposal 5 requires the affirmative vote of the holders of
a majority of the combined voting power of all of the shares of common stock and
preferred stock, voting together as a single class.
If approved by our stockholders, the amendment will become effective
simultaneously with the closing of the Investment Agreement and the Purchase and
Sale Agreement.
Blue Dolphin Exploration has proxies entitling it to cast 7,088,982
votes at the Annual Meeting on Proposals 1 through 7 which constitutes
approximately 51.6% of all votes entitled to be cast at the Annual Meeting. Blue
Dolphin Exploration has advised us that it will cast all of its votes in favor
of Proposal 5, thus assuring its approval.
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<PAGE> 51
REASONS FOR THIS PROPOSAL
We do not have enough authorized shares of common stock to meet our
issuance obligations. We have 50,000,000 shares of $.00001 par value common
stock authorized, of which at August 31, 1999:
o 12,820,257 shares were issued and outstanding;
o 201,890 shares were issued and held by us as treasury shares;
o 39,509,457 shares were reserved for issuance to Blue Dolphin
Exploration pursuant to the Investment Agreement; and
o 1,856,171 shares were reserved for issuance under certain
warrants, options and conversion rights, excluding 1,738,910
shares reserved for issuance under our 1994 Compensatory Stock
Option Plan, which will be canceled when the Purchase and Sale
Agreement and the Investment Agreement are closed.
Thus, an aggregate of 54,185,885 shares of common stock are issued or
reserved for issuance but we are only entitled to issue 50,000,000 shares of
common stock. Additionally, this proposal is made in connection with the
consummation of the transactions contemplated by the Investment Agreement. If
the Investment Agreement is approved by stockholders, Blue Dolphin Exploration
will purchase shares of common stock equal to 75% of the combined voting power
of all of our outstanding voting securities after this purchase.
The remaining shares of our common stock that are not reserved for
issuance, issued to Blue Dolphin Exploration in connection with the Investment
Agreement, if approved by stockholders, or issued as dividends to holders of our
preferred stock, will remain as authorized but unissued shares of common stock.
Our board of directors believes that increase in the number of authorized shares
of common stock is important to our future growth and will, in addition to
facilitating the consummation of the transactions contemplated by the Investment
Agreement, give us greater flexibility in considering and planning future
operations, including acquisitions and the raising of capital. While we have no
present plans for the issuance of shares of common stock other than in
connection with the Investment Agreement, the ability to issue additional shares
of common stock will enable us to act promptly if appropriate circumstances
arise which require the issuance of common stock.
EFFECT OF THIS PROPOSAL
The authorization of additional shares of common stock will not, by
itself, have any effect on the rights of the holders of shares of common stock.
However, the issuance of shares of common stock in connection with the
Investment Agreement would, and any future issuances may, have a dilutive effect
on the percentage of our equity owned by present holders of common stock.
Holders of common stock do not have preemptive rights to subscribe for
or purchase additional shares of common stock.
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<PAGE> 52
PROPOSAL 6
IF PROPOSAL 1 IS APPROVED, TO ELIMINATE ARTICLE ELEVEN OF OUR AMENDED
AND RESTATED CERTIFICATE OF INCORPORATION EFFECTIVE WITH THE CLOSING OF THE
INVESTMENT AGREEMENT TO END THE CLASSIFICATION OF OUR BOARD OF DIRECTORS INTO
THREE CLASSES SO THAT ALL DIRECTORS WILL SERVE TERMS OF ONE YEAR OR UNTIL THEIR
SUCCESSORS ARE DULY ELECTED AND QUALIFIED.
PROPOSED AMENDMENT
The board of directors has unanimously approved and recommends that the
stockholders adopt an amendment to our Amended and Restated Certificate of
Incorporation to delete Article Eleven of our Amended and Restated Certificate
of Incorporation to eliminate staggered terms of office for our board of
directors.
Article Eleven of our Amended and Restated Certificate of Incorporation
currently provides for the division of the board of directors into three classes
with each serving staggered three year terms. The purpose of dividing the
directors into three classes was to promote continuity and stability in our
management and policies by making an attempted takeover of us more difficult. A
classified board of directors extends the time required to make a change in
control of the board and tends to discourage any hostile takeover because it
takes at least two annual meetings to make a change in control of the Board,
since only a minority of the directors are elected at each meeting.
VOTE REQUIRED
Approval of Proposal 6 requires the affirmative vote of the holders of
a majority of the combined voting power of all of the issued and outstanding
shares of common stock and preferred stock entitled to be voted at the Annual
Meeting, voting together as a single class.
If approved by our stockholders, the amendment will become effective
simultaneously with the closing of the Investment Agreement and the Purchase and
Sale Agreement.
Blue Dolphin Exploration to cast 7,088,982 votes at the Annual Meeting
on Proposals 1 through 7 which constitutes approximately 51.6% of all votes
entitled to be cast at the Annual Meeting. Blue Dolphin Exploration has advised
us that it will cast all of its votes in favor of Proposal 6, thus assuring its
approval.
REASON FOR THE AMENDMENT
The board of directors believes that the elimination of the classified
board will allow stockholders to express their views annually regarding the
board in its entirety by electing all directors annually and also help to ensure
that each director will represent the interest of all stockholders.
Additionally, following the closing of the Investment Agreement, Blue Dolphin
Exploration will control our management and policies by virtue of its record
ownership of shares
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<PAGE> 53
of our common stock representing 75% of our total voting power. Consequently, we
do not need the protection from a hostile takeover that a classified board
provides.
EFFECT OF AMENDMENT
If this proposal is approved, directors will be elected for and will
serve one year terms until their successors are duly elected and qualified or
until the earlier of their death, resignation or removal.
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<PAGE> 54
PROPOSAL 7
IF PROPOSALS 1 AND 6 ARE APPROVED, TO ELECT AS DIRECTORS THE FOLLOWING
FIVE NOMINEES DESIGNATED BY BLUE DOLPHIN EXPLORATION COMPANY TO SERVE FOR A TERM
OF ONE YEAR OR UNTIL THEIR SUCCESSORS ARE DULY ELECTED AND QUALIFIED, COMMENCING
WITH THE CLOSING OF THE INVESTMENT AGREEMENT: IVAR SIEM; MICHAEL J. JACOBSON;
JOHN P. ATWOOD; ANDREW R. AGOSTO; AND DOUGLAS L. HAWTHORNE.
VOTE REQUIRED
The affirmative vote of the holders of a plurality of the shares of
common stock and preferred stock voted at the Annual Meeting, voting together as
a single class, is required to elect each director.
NOMINEES
Blue Dolphin Exploration has designated the nominees named below for
election to the board of directors. As required by the Investment Agreement, our
board of directors has nominated those persons for election to the board if the
Investment Agreement is approved by stockholders and is closed.
Blue Dolphin Exploration has proxies entitling it to cast 7,088,982
votes at the Annual Meeting on Proposals 1 through 7 which constitutes 51.6% of
all votes entitled to be cast at the Annual Meeting. Blue Dolphin Exploration
has advised us that it will cast all of its votes for the following nominees,
thus assuring their election.
NOMINEES FOR ELECTION AS DIRECTORS
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
---- --- -------------------- --------------
<S> <C> <C> <C>
Ivar Siem........................ 53 Director and Chairman of the Board of Blue October, 1999
Dolphin Energy Company
Michael J. Jacobson.............. 53 President and Chief Executive Officer of Blue
Dolphin Energy Company October, 1999
John P. Atwood................... 47 Vice President, Finance and Corporate
Development Blue Dolphin Energy Company --
Andrew R. Agosto................. 38 Chief Operating Officer of CCNG, Inc. --
Douglas L. Hawthorne............. 57 Business Consultant 1993
</TABLE>
There are no family relationships among any of the above nominees. None
of the above nominees, other than Mr. Hawthorne, owns, of record or
beneficially, any of our equity securities. Each of the nominees has consented
to being named as a nominee and to serve as a director if elected. However, if
for any reason any nominee for director is not a candidate at the
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<PAGE> 55
election, the enclosed proxy will be voted for the election of a substitute
nominee at the discretion of the person or persons voting the enclosed proxy.
The board of directors has no reason to believe that any nominee named herein
will be unable to serve.
Ivar Siem, age 53, has served as a director and Chairman of the Board
of Blue Dolphin Energy Company since 1989 and a director of Blue Dolphin
Exploration since 1989. Mr. Siem is currently a member of the boards of
directors of Avenir A/S and Grey Wolf, Inc. Since 1995, he has served on the
board of directors of Grey Wolf, Inc., during which time he served as Chairman
from 1995 to 1998 and interim President in 1995 during its restructuring. Since
1985, he has been an international consultant in energy, technology and finance.
He has served as Director of Business Development for Norwegian Petroleum
Consultants and as an independent consultant to the oil and gas exploration and
production industry based in London, England. Mr. Siem holds a Bachelor of
Science Degree in Mechanical Engineering from the University of California,
Berkley, and an executive MBA from Amos Tuck School of Business, Dartmouth
University.
Michael J. Jacobson, age 53, has served as President and Chief
Executive Officer of Blue Dolphin Energy Company since 1990 and a director of
Blue Dolphin Exploration since 1990. Mr. Jacobson has been a member of several
Boards of Directors, including Volvo Petroleum, Inc., W.L. Somner Company, Inc.,
and Flagstaff Corporation. He has been associated with the energy industry since
1968, serving in various senior management capacities since 1980. Mr. Jacobson
served as Senior Vice President and Chief Financial and Administrative Officer
for Creole International, Inc., as well as Vice President of Operations for the
parent holding company, from 1985 until joining the Company in 1990. He has also
served as Vice President and Chief Financial Officer of Volvo Petroleum, Inc.,
and for certain Fred. Olsen oil and gas interests. Mr. Jacobson holds a Bachelor
of Science Degree in Finance from the University of Colorado.
John P. Atwood, age 47, is Vice President, Finance and Corporate
Development of Blue Dolphin Energy Company. Mr. Atwood has been associated with
the energy industry since 1974, serving in various management capacities since
1981. Prior to joining Blue Dolphin Energy Company in April 1991, he served as
Senior Vice President for Glickenhaus Energy Corporation. Mr. Atwood was a
member of the senior management team, directly responsible for the financial
reporting, land and administrative functions of the company. He has also served
as Area Land Manager for CSX Oil & Gas Corporation and Division Land Manager for
Hamilton Brothers Oil Company/Volvo Petroleum, Inc. Mr. Atwood served in various
land capacities for Tenneco Oil Company from 1977 to 1981. Mr. Atwood is a
Certified Professional Landman and holds a Bachelor of Arts Degree from Oklahoma
City University and a Master of Business Administration Degree from Houston
Baptist University. Mr. Atwood served as Vice President of Land of Blue Dolphin
Energy Company from 1991 until his appointment as Vice President of Finance and
Corporate Development in 1998.
Andrew R. Agosto, age 38, is Senior Vice President and Chief Operating
Officer of CCNG, Inc. Mr. Agosto has been associated with the energy industry in
various capacities since 1982. Mr. Agosto in his capacity as Chief Operating
Officer of CCNG, Inc. is responsible for
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<PAGE> 56
the company's activities in the energy sector including exploration and
production, natural gas transportation and marketing and new business
development. Prior to joining CCNG, Inc., Mr. Agosto served in various
capacities with Shell Exploration and Production Company from 1986 to 1997,
including Area Manager - Williston Basin, Continental Division. Mr. Agosto is a
Registered Professional Petroleum Engineer. He holds a Bachelor of Science
Degree in Chemical Engineering from Texas A&M University.
Douglas L. Hawthorne, age 57, has served as a director and Chairman of
the Board of American Resources Offshore, Inc, since March 1993 and a director
of Southern Gas Co. of Delaware, Inc. since February 1994. Mr. Hawthorne has
served on the Executive Committee (since April 1997), the Compensation Committee
(since August 1996) and the Audit Committee (from August 1996 until July 1997)
of American Resources Offshore, Inc. Mr. Hawthorne has served as a director of
Bullet Sports International, Inc. since 1995 and he has been a principal of
Carillon Capital, Inc., a Dayton, Ohio investment banking firm, since 1992.
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<PAGE> 57
PROPOSAL 8
TO ELECT AS DIRECTORS THE FOLLOWING THREE NOMINEES TO SERVE FOR TERMS
OF THREE YEARS EACH OR UNTIL THE CLOSING OF THE INVESTMENT AGREEMENT, WHICHEVER
OCCURS FIRST: LEONARD K. NAVE; LEN ALDRIDGE; AND ROBERT L. MCINTYRE.
VOTE REQUIRED
The affirmative vote of the holders of a plurality of the shares of
common stock and preferred stock voted at the Annual Meeting, voting together as
a single class, is required to elect each director.
NOMINEES
Our board of directors is divided into three classes with staggered
three year terms. In accordance with our bylaws, the board of directors has
fixed the number of directors at seven. The terms of Messrs. Leonard K. Nave,
Len Aldridge and Robert L. McIntyre, expire in 1999.
Our board of directors has nominated Leonard K. Nave, Len Aldridge and
Robert L. McIntyre for election as directors at the Annual Meeting. If elected,
Messrs. Nave, Aldridge and McIntyre will hold office until our annual meeting of
2002 or until the closing of the Investment Agreement, whichever comes first.
There are no family relationships among any of our directors, nominees
for director, or executive officers. Each of the nominees has consented to being
named as a nominee and to serve as a director if elected. However, if for any
reason any nominee for director is not a candidate at the election, the enclosed
proxy will be voted for the election of a substitute nominee at the discretion
of the person or persons voting the enclosed proxy. The board of directors has
no reason to believe that any nominee named herein will be unable to serve.
Set forth below is certain information with respect to each nominee for
election as a director and each continuing director.
NOMINEES FOR ELECTION AS A DIRECTOR
<TABLE>
<CAPTION>
TERM OF OFFICE
EXPIRES IN 2002 AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
--------------- --- -------------------- --------------
<S> <C> <C> <C>
Leonard K. Nave..................... 64 Chairman, President and Chief Executive 1994
Officer of Southern Gas Co. of Delaware, Inc.
Len Aldridge........................ 62 Real Estate Management and Development 1997
Robert L. McIntyre.................. 53 Attorney at Law 1997
</TABLE>
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<PAGE> 58
DIRECTORS CONTINUING IN OFFICE
<TABLE>
<CAPTION>
TERM OF OFFICE
EXPIRES IN 2000 AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
--------------- --- -------------------- --------------
<S> <C> <C> <C>
Rick G. Avare....................... 37 President and Chief Executive Officer of the 1994
Company
David Fox, Jr....................... 78 President of Appalachian Production Company 1996
and President and Chairman of the Board of
FGO, Inc.
Ivar Siem(1)........................ 53 Director and Chairman of the Board of Blue 1999
Dolphin Energy Company
Michael J. Jacobson(1).............. 53 President and Chief Executive Officer of Blue 1999
Dolphin Energy Company
</TABLE>
<TABLE>
<CAPTION>
TERM OF OFFICE
EXPIRES IN 2001 AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
--------------- --- -------------------- --------------
<S> <C> <C> <C>
Douglas L. Hawthorne................ 57 Business Consultant 1993
Joseph P. Shields................... 52 Senior Vice President, Energy Services for New 1998
Jersey Natural Gas Company
</TABLE>
- -------------------
(1) Pursuant to the terms of the Investment Agreement, Ivar Siem and
Michael J. Jacobson were appointed to the board of directors.
Biographical information on all of the above persons is included under
the caption "Directors and Executive Officers" below.
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<PAGE> 59
PROPOSAL 9
TO RATIFY THE SELECTION OF ERNST & YOUNG LLP TO SERVE AS OUR AUDITORS
FOR THE YEAR ENDING DECEMBER 31, 1999.
Ratification of Proposal 9 requires the affirmative vote of the holders
of a majority of the combined voting power of all of the issued and outstanding
shares of common stock preferred stock voted at the Annual Meeting, voting
together as a single class.
Ernst & Young LLP served as our independent auditors for fiscal year
ended December 31, 1998. The board of directors is of the opinion that Ernst &
Young LLP is well qualified to continue such service and recommends that the
stockholders vote FOR ratification of the selection of Ernst & Young LLP. One or
more representatives of Ernst & Young LLP are expected to be present at the
Annual Meeting, to have the opportunity to make a statement if they so desire,
and to be available to respond to appropriate questions.
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<PAGE> 60
DIRECTORS AND EXECUTIVE OFFICERS
Information concerning the names, ages, positions and business
experience of our directors and executive officers is set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Rick G. Avare(1)......................... 37 Director, President and Chief Executive Officer
Douglas L. Hawthorne(1)(2)............... 57 Chairman of the Board
Leonard K. Nave(1)....................... 64 Director
David Fox, Jr.(3)........................ 78 Director
Len Aldridge(3).......................... 62 Director
Robert L. McIntyre(2).................... 53 Director
Joseph P. Shields(3)..................... 42 Director
Ivar Siem(1)(4).......................... 53 Director
Michael J. Jacobson(4)................... 53 Director
Ralph A. Currie.......................... 45 Vice President of Finance, Chief Financial Officer and Treasurer
David J. Stetson......................... 43 Vice President, General Counsel and Assistant Corporate
Secretary
Karen M. Underwood....................... 43 Vice President of Corporate Compliance and Corporate
Secretary
</TABLE>
- ---------------
(1) Member of Executive Committee.
(2) Member of Compensation Committee.
(3) Member of Audit Committee.
(4) Appointed as a director in October 1999, in accordance with the
Investment Agreement.
Our directors are elected to hold office for terms of one to three
years, respectively, or until their respective successors are duly elected and
qualified. Our officers are elected annually by the board of directors and hold
office until their successors are duly elected and qualified.
Rick G. Avare, age 37, has served as our President and Chief Executive
Officer since May 1996, and as a director since September 1994. Mr. Avare has
served on the Executive Committee of the board of directors since its
establishment in April 1997. He has also held various executive and director
positions with our subsidiaries since 1994. Mr. Avare served as our Chief
Operating Officer and Executive Vice President from August 1995 until May 1996,
and he served as our Chief Financial Officer from September 1994 through
December 1995. Mr. Avare also serves as Administrative Member of Prima Capital,
LLC and MAP II, LLC. Mr. Avare is a certified public accountant.
Douglas L. Hawthorne, age 57, has served as a director and Chairman of
the Board since March 1993 and has been a director of Southern Gas since
February 1994. Mr. Hawthorne has
49
<PAGE> 61
served on the Executive Committee since April 1997, the Compensation Committee
since August 1996 and the Audit Committee from August 1996 until July 1997. Mr.
Hawthorne has been a principal of Carillon Capital, Inc., a Dayton, Ohio
investment banking firm, since 1992.
Leonard K. Nave, age 64, has served as Chairman of the Board, Chief
Executive Officer, and President of Southern Gas since February 1994. He has
also served as one of our directors since September 1994. Mr. Nave has served on
the Executive Committee since April 1997. Mr. Nave has served as a director of
Bullet Sports International, Inc. since 1995. Mr. Nave has served as President
and a director of Woodway Farms, Inc. since August 1983. In February 1996, Mr.
Nave filed for reorganization and protection under Chapter 11 of the United
States Bankruptcy Code. This action was initiated primarily because of the
attempted enforcement of certain guaranties which Mr. Nave had signed on behalf
of an unrelated corporation. Mr. Nave's discharge from Chapter 11 was effective
March 18, 1998. Mr. Nave is a member of the Kentucky Bar Association.
David Fox, Jr., age 78, has served as a director since August 1996. Mr.
Fox has served on the Compensation Committee since August 1996, on the Audit
Committee since September 1997, and on the Audit Committee from August 1996
until July 1997. Mr. Fox has served as Vice Chairman and Secretary-Treasurer of
McJunkin Appalachian Oil Field Supply Company since 1989. He also serves as
President of Appalachian Production Co., an oil and gas producing company,
President and Chairman of the Board of FGO, Inc., a West Virginia residential
real estate development company, and as a Director of River Cities Association;
Bank One, West Virginia, Charleston; the Marshall University Foundation and the
Huntington Museum of Art. During the past five years, Mr. Fox also served as a
Director of KYOWVA Container Corporation and Bank One, West Virginia, as well as
President of the Marshall Foundation.
Len Aldridge, age 62, has served as a director and a member of the
Audit Committee since July 1997. He has served as Vice President of Limited
Partners of Lexington, a Kentucky corporation engaged in the development and
management of real estate, since March 1994. Mr. Aldridge also currently holds
the following positions: Partner of Poole & Aldridge (since 1975), Vice
President of Poole Enterprises, Inc. (since 1988), Director of Rafferty's Inc.
(since 1991), Vice President/Treasurer of Mason Headley Development (since 1994)
and Director of First Security Bank of Lexington (since 1997). Mr. Aldridge is a
certified public accountant.
Robert L. McIntyre, age 53, has served as a director and as a member of
the Compensation Committee since July 1997. From April 1992 through September
1996, he was a partner with the law firm of Breeding, McIntyre & Cunningham,
PSC, Lexington, Kentucky, managing the firm's energy, corporate, transactional
and international practice. He has been Of Counsel to the law firm of Breeding,
Cunningham, Dance and Cress, PLC, Lexington, Kentucky, since October 1996. He is
a member of the State Bar Associations of Kentucky and Texas.
Joseph P. Shields, age 42, has served as a director and a member of the
Audit Committee since June 1998. Mr. Shields has been an employee of New Jersey
Natural Gas
50
<PAGE> 62
Company since 1983 where he served as Manager of Gas Supply Operations from 1990
to 1995, as Director of Gas Supply from 1995 to 1996, as Vice President of Gas
Supply from January 1996 to January 1997, and as Senior Vice President, Energy
Services, since January 1997.
Ivar Siem, age 53, has served as a director and Chairman of the Board
of Blue Dolphin Energy Company since 1989 and a director of Blue Dolphin
Exploration since 1989. Mr. Siem is currently a member of the Boards of
Directors of Avenir A/S and Grey Wolf, Inc. Since 1995, he has served on the
board of directors of Grey Wolf, Inc., during which time he served as Chairman
from 1995 to 1998 and interim President in 1995 during its restructuring. Since
1985, he has been an international consultant in energy, technology and finance.
He has served as Director of Business Development for Norwegian Petroleum
Consultants and as an independent consultant to the oil and gas exploration and
production industry based in London, England.
Michael J. Jacobson, age 53, has served as President and Chief
Executive Officer of Blue Dolphin Energy Company since 1990 and a director of
Blue Dolphin Exploration since 1990. Mr. Jacobson has been a member of several
Boards of Directors, including Volvo Petroleum, Inc., W.L. Somner Company, Inc.,
and Flagstaff Corporation. He has been associated with the energy industry since
1968, serving in various senior management capacities since 1980. Mr. Jacobson
served as Senior Vice President and Chief Financial and Administrative Officer
for Creole International, Inc., as well as Vice President of Operations for the
parent holding company, from 1985 until joining the Company in 1990. He has also
served as Vice President and Chief Financial Officer of Volvo Petroleum, Inc.,
and for certain Fred. Olsen oil and gas interests.
Ralph A. Currie, age 45, has served as Vice President, Treasurer and
Chief Financial Officer since 1997. He has also held various executive and
director positions with our wholly-owned subsidiaries since 1997. Mr. Currie has
served as Chief Financial Officer of American Rehabilitation Group, P.S.C., a
Kentucky-wide physical therapy company, since 1994. From 1991 to 1994, he was a
partner with the regional business and financial planning firm of Cramer, Currie
& Company, Lexington, Kentucky. Mr. Currie is a certified public accountant.
David J. Stetson, age 43, has served as Vice President since June 1998,
and as General Counsel and Assistant Corporate Secretary since January 1997. Mr.
Stetson was engaged in the private practice of law from 1982 to 1997.
Karen M. Underwood, age 43, has served as Corporate Secretary since
January 1996 and as Vice President-Corporate Compliance since July 1997. She
also has served as a director, Vice President-Administration and Corporate
Secretary of Southern Gas since February 1994.
51
<PAGE> 63
Set forth below is the name, age and position of each person who will
serve as one of our executive officers if Proposal 1 is approved.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Ivar Siem........................................... 53 President
John P. Atwood...................................... 47 Vice President and Secretary
G. Brian Lloyd...................................... 40 Vice President and Treasurer
</TABLE>
Biographical information on Mr. Atwood is included in Proposal 7 under
the caption "NOMINEES." Biographical information on Mr. Siem appears above.
G. Brian Lloyd, age 40, is Vice President, Treasurer and Secretary of
Blue Dolphin Energy Company. Mr. Lloyd is a Certified Public Accountant and has
been employed by Blue Dolphin Energy Company since December 1985. Prior to
joining Blue Dolphin Energy Company, he was an accountant for DeNovo Oil and Gas
Inc., an independent oil and gas company. Mr. Lloyd received a Bachelor of
Science Degree in Finance from Miami University, Oxford, Ohio in 1982 and
attended the University of Houston in 1983 and 1984. Mr. Lloyd has served as
Secretary of the Blue Dolphin Energy Company since May 1989, Treasurer since
September 1989 and Vice President since March 1998.
MEETINGS AND COMPENSATION
During the year ended December 31, 1998, the Board of directors met on
eleven occasions, either in person or telephonically. Each director attended at
least 75% of the meetings of the board of directors except for Robert L.
McIntyre and Joseph P. Shields who attended 64% and 63%, respectively.
During 1998, our non-employee directors, Messrs. Fox, Aldridge,
McIntyre and Shields, received $750 for each regular meeting of the board of
directors; and they were reimbursed for reasonable travel expenses incurred, if
any, in connection with their attendance at the meetings. The Chairman of the
Board, Douglas L. Hawthorne, received a total of $25,500 for his services during
1998 and was also reimbursed for reasonable travel expenses incurred by him
during the year. In addition, non-employee directors are eligible for stock
options granted under our 1994 Compensatory Stock Option Plan.
Executive Committee. The Executive Committee is composed of Messrs.
Hawthorne, Nave, Avare and Siem. The Committee has all of the powers and
authority of the board of directors in the management of the business, including
the declaration of dividends on preferred stock and the sale and issuance of
shares of common and preferred stock; provided, however, that the Committee does
not have the power or authority to approve, adopt or recommend to the
stockholders any action or matter expressly required by the Delaware General
Corporation Laws to be submitted to stockholders for approval, or to adopt,
amend or repeal any by-law. The Executive Committee met six times during 1998.
Mr. Siem was appointed to this committee in October 1999.
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<PAGE> 64
Audit Committee. The Audit Committee is composed of Messrs. Aldridge,
Fox and Shields. The Audit Committee's duties include:
o recommending the selection of independent auditors;
o reviewing the scope and results of the audit made by our
auditors;
o ensuring that disagreements, if any, as to the application of
generally accepted accounting principles are resolved to the
satisfaction of our auditors; and
o reviewing our financial reporting activities and the
accounting standards and principles we follow. The Audit
Committee met one time during 1998.
Compensation Committee. The Compensation Committee is composed of
Messrs. Hawthorne, Fox and McIntyre. The Compensation Committee makes
recommendations to the full board of directors regarding salaries and benefits
provided to executive officers and the establishment of various employee benefit
plans. The Compensation Committee met two times during 1998.
FAMILY RELATIONSHIPS
There are no family relationships among our directors, executive
officers or persons nominated or chosen to become directors or executive
officers.
LEGAL PROCEEDINGS
During the past five years, none of our directors or executive officers
or persons nominated or chosen to become directors or executive officers were
general partners or executive officers of any business either at the time a
bankruptcy petition was filed by or against such business or within two years
prior to that time.
During the past five years, none of our directors or executive officers
or persons nominated or chosen to become directors or executive officers were:
o convicted in any criminal proceeding or the subject of any
criminal proceeding (other than traffic violations and other
minor offenses);
o subject to any order, judgment or decree, not subsequently
reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining, barring,
suspending or otherwise limiting his involvement in any type
of business, securities or banking activities; or
o found by a court of competent jurisdiction in a civil
proceeding, the SEC or the Commodities Trading Commission, to
have violated a federal or state securities
53
<PAGE> 65
or commodities law, and the judgment has not been reversed,
suspended or vacated.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires our
officers and directors and persons who own more than 10% of a registered class
of our equity securities to file reports of ownership and changes in ownership
with the SEC. Officers, directors and greater than 10% stockholders are required
by SEC regulation to furnish Company with copies of all Section 16(a) forms they
file.
Based solely upon a review of the copies of such forms furnished to us
or written representations that no other reports were required, we believe that
during the 1998 fiscal year, all filing requirements applicable to its officers,
directors and greater than 10% beneficial owners were complied with except that
Leonard K. Nave inadvertently filed his Form 4 for the month of July 1998 two
weeks late. The report contained one transaction wherein stock was transferred
in payment of a loan.
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<PAGE> 66
EXECUTIVE COMPENSATION
The table below sets forth information concerning the annual and
long-term compensation for services to us and our former subsidiary, Southern
Gas, for the fiscal years ended December 31, 1998, 1997 and 1996 of those
persons who were, at December 31, 1998 the chief executive officer and the other
four most highly compensated executive officers (the "Named Officers"):
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION
-------------------------------------------------------- ---------------------------
AWARDS PAYOUTS
------------- ---------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
SALARY BONUS COMPENSATION STOCK LTIP COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) OPTIONS PAYOUTS ($)
- ---------------------------- ------- ----------- ----------- -------------- ------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Rick G. Avare............... 1998 183,429 -- 11,269(3) -- -- 10,000(2)
President and Chief 1997 166,455 140,000 12,615(3) -- -- 8,000(2)
Executive Officer 1996 137,684 50,000 17,400(4) 225,000 -- 6,846(2)
Douglas L. Hawthorne(1)..... 1998 -- -- 26,006 -- -- --
Chairman of the Board 1997 -- -- 40,000 -- -- --
1996 -- -- 60,000 -- -- --
Leonard K. Nave............. 1998 175,781 -- 5,976 -- 8,757(2)
Chairman of the Board, 1997 175,000 -- 4,655 -- -- 8,000(2)
President and Chief 1996 175,761 -- 3,281 25,000 -- 8,750(2)
Executive Officer --
Southern Gas
William M. Gray(6).......... 1998 168,261 -- 8,966 -- -- 4,189(2)
President and Chief 1997 -- -- -- -- -- --
Operating Officer of a 1996 -- -- -- -- -- --
wholly-owned subsidiary
Jack G. Bryant(7)........... 1998 150,761 -- 1,433 -- -- --
Geologist 1997 -- -- -- 105,000 -- --
1996 -- -- -- -- -- --
Jonathan C. Garret(7)....... 1998 120,761 -- 8,835 -- -- 5,202
Engineer 1997 -- -- -- 105,000 -- --
1996 -- -- -- --
Ralph A. Currie(1).......... 1998 $92,704 -- $7,558(5) -- -- $6,556(2)
Vice President & Chief 1997 $68,138 $32,000 7,200(5) -- -- --
Financial Officer 1996 -- -- -- -- -- --
</TABLE>
- -----------------------
(1) The disclosures in this table for Messrs. Hawthorne and Currie have
been provided for informational purposes only and in light of their
status as significant employees of Company. SEC rules require only the
disclosure of the four most highly compensated executive officers whose
total annual salary and bonus exceeds $100,000.
(2) Represents contribution made on behalf of the Named Officer to a 401(k)
plan.
(3) Includes car allowance of $8,937.
(4) Includes car allowance of $11,907.
(5) Includes car allowance of $7,200.
(6) Mr. Gray left our employ effective July 15, 1999.
(7) Messrs. Bryant and Garrett began their employment in December 1997.
However, pursuant to the terms of their employment agreements, Messrs.
Bryan and Garrett were granted options in fiscal 1997.
No options or stock appreciation rights were granted during 1998.
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<PAGE> 67
Shown below is information with respect to all unexercised options to
purchase our common stock granted to the Named Officers through the end of
fiscal year 1998. No options were exercised by the Named Officers during 1998.
No stock appreciation rights have been granted.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
OPTIONS EXERCISED NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-
DURING 1998 OPTIONS HELD AT YEAR END MONEY OPTIONS AT YEAR END
-------------------------- --------------------------------- ---------------------------------
SHARES VALUE
ACQUIRED REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ----------- ------------ ---------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Rick G. Avare................ 0 $ -- 493,204 0 $ 0 $ 0
Douglas L. Hawthorne......... 0 -- 354,315 0 0 0
Leonard K. Nave.............. 0 -- 271,603 0 0 0
William M. Gray.............. 0 -- 0 0 0 0
Jack G. Bryant............... 0 -- 20,000 85,000 0 0
Jonathan A. Garrett.......... 0 -- 20,000 85,000 0 0
</TABLE>
COMPENSATION COMMITTEE REPORT
The Compensation Committee of the board of directors establishes the
policies governing, and makes recommendations to the board of directors
concerning, executive compensation. None of the members of our Compensation
Committee are employed by us.
The Compensation Committee believes that the compensation of our
executive management should:
o reward individual performance and meritorious service;
o provide an incentive to improve our performance;
o reflect our progress in accomplishing our strategic goals; and
o be adequately competitive to attract and retain experienced and
talented individuals.
The Compensation Committee is of the opinion that it should establish
and recommend to the board for approval the compensation arrangements between us
and the individual(s) holding the positions of Chairman, Chief Executive Officer
and President. With respect to our other highly compensated executive officers
and all of our other officers, it is the Compensation Committee's position that
it should and will rely heavily on the recommendations made to it by our Chief
Executive Officer. The Compensation Committee believes that our Chief Executive
Officer is in the best position to evaluate the contributions made by individual
executive officers and their value to us. In making his recommendations to the
Compensation Committee, our
56
<PAGE> 68
Chief Executive Officer is expected to adhere to the general compensation
philosophy set forth above. The Compensation Committee also understands that
individual compensation recommendations will reflect the Chief Executive
Officer's consideration of such factors as position and tenure, degree of
responsibilities, planned changes in functional responsibilities and such
subjective matters as individual performance and the importance of that officer
to our successful operation. Neither our profitability nor the market price of
our stock is considered in setting the base salaries of our executive officers.
Finally, the Compensation Committee reviews the results of executive
compensation studies prepared for distribution by independent consulting firms
to determine how our compensation levels compare to other similarly situated
companies. Companies listed in various surveys whose asset size and amount of
premium income are comparable to ours are the companies with whom compensation
levels are compared on a position-by-position basis.
The primary component of compensation awarded to executive officers
during 1998 consisted of base salary. Historically, executive bonuses were paid
as a form of incentive compensation based upon the net increase in our proved
producing reserves and our net income before taxes during the bonus period. Due
to our financial position at the end of the year, no bonuses were paid to
executive officers for fiscal 1998.
The Committee is of the position that in light of the efforts that will
have to be expended as we seek to restructure our company, as previously
announced by us and discussed in our Report on Form 10-Q for the Quarter Ended
June 30, 1999 and elsewhere in this Proxy Statement, it is in the best interest
of our stockholders for some of our executive officers located in our New
Orleans office to be terminated and for each of our remaining executive officers
who are employed pursuant to an employment agreement to enter into a Release and
Termination of Employment Agreement (the "Severance Agreement"). Accordingly,
the Compensation Committee approved and the board of directors ratified the
following actions related to this matter:
o the recommendation of Rick G. Avare, our Chief Executive Officer
and President, that our senior executive officers receive
increases in their base salary levels pursuant to the terms of
their employment agreements but, due to our financial condition,
that they not receive bonuses in 1998 and 1999;
o the acceptance of the resignation of Jonathan C. Garrett;
o the execution of a Severance Agreement with each of Messrs.
William M. Gray, Jack G. Bryant and Daniel Hall, these agreements
having been negotiated on a case-by-case basis in light of each
individual's particular situation; and
o a resolution expressing the sense of the board of directors that
if, in the board's opinion, we accomplish a successful
restructuring plan, the board, upon and subject to the
recommendations of the Compensation Committee, will execute a
Severance Agreement with the individuals who serve as the:
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<PAGE> 69
o Chief Executive Officer;
o Chief Financial Officer;
o Vice President and General Counsel; and
o Vice President of Corporate Compliance and Corporate Secretary.
The Severance Agreements will generally provide for severance payments
to the specified executive officers in amounts which are negotiated on a
case-by-case basis and approved by the Compensation Committee in the event their
employment is terminated or their position, duties or salaries are materially
decreased due to or in contemplation of our restructuring. The benefits payable
under these Agreements would be in lieu of, and not in addition to, any
severance pay that would otherwise be payable to the officer under any of our
other plans or benefit agreements or arrangements.
In our opinion, the Severance Agreements are essential to help preserve
the value of the enterprise during the restructuring efforts because, as we
stated in our Report on Form 10-Q for the Quarter ended June 30, 1999 and
elsewhere in this Proxy Statement, the transaction we are contemplating with
Blue Dolphin Exploration will result in a change in control. It is the
Compensation Committee's belief that these arrangements are important in
retaining qualified management and also providing an incentive to key executives
to remain with us through a transition in ownership, if such a change were to
occur, rather than to leave us.
Our dominant strategic goals during 1998 were our continuing effort to
restructure our company and implement cost reductions. Numerical tests, designed
to measure the results of these actions, were not adopted to determine executive
compensation. Neither our profitability nor the market value of our stock was
considered in setting executive officer compensation' including any stock option
grants, during 1998. Instead, the cash compensation to executive employees
remained level or was increased pursuant to the terms of the employment
agreements which were in place with Rick G. Avare, William M. Gray, Ralph A.
Currie, David J. Stetson, Karen M. Underwood, Jack G. Bryant, Jonathan C.
Garrett, Chris McLindon, and Daniel Hall.
Stock options are awarded from time to time in order to attract, retain
and motivate key executives by aligning their interests with those of
stockholders and providing long-term incentives. During 1998, stock options were
granted to Jonathan C. Garrett pursuant to the terms of his employment agreement
in effect at that time.
During 1998, Rick G. Avare's compensation was increased by
recommendation of the Compensation Committee and approval of the board of
directors as a result of his performance during 1997. The annual cash
compensation paid to Mr. Avare, consisting solely of salary, was increased to
$183,429 from the $166,455 paid to him the previous year pursuant to the terms
of his employment agreement. Mr. Avare's compensation has not been specifically
related to our performance.
58
<PAGE> 70
During 1998, there was no increase in the compensation paid Leonard K.
Nave, the Chairman of the Board, President and Chief Executive Officer of
Southern Gas. The actual cash compensation paid to Mr. Nave, consisting solely
of salary, remained constant at $175,000. This level of compensation was first
fixed in 1993 in an employment agreement between Mr. Nave and Southern Gas
Company, Inc., which we assumed in 1994 when we acquired the Appalachian assets
of Southern Gas Company, Inc. Mr. Nave's compensation has not been specifically
related to our performance.
The compensation of William M. Gray, President and Chief Operating
Officer of our former wholly-owned subsidiary, was slightly increased in 1998
pursuant to the terms of his employment agreement. The annual cash compensation
paid to Mr. Gray was increased to $168,261 from the $165,000 annual salary set
out in the employment agreement we entered into with him in November of 1997.
Mr. Gray's compensation has not been specifically related to our performance.
The Compensation of Jack G. Bryant was paid pursuant to the terms of
the employment agreement which we entered into with him in December of 1997. The
annual cash compensation paid to Mr. Bryant was $150,761, and Mr. Bryant's
compensation has not been specifically related to our performance.
The compensation of Jonathan C. Garret was paid pursuant to the terms
of the employment agreement which we entered into with him in January of 1998.
The actual cash compensation paid to Mr. Garrett was $120,761, and Mr. Garrett's
compensation has not been specifically related to our performance.
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<PAGE> 71
PERFORMANCE GRAPH
The following graph shows the cumulative total stockholder returns on
our common stock from December 31, 1993 to December 31, 1998 and compares these
return to the performance of the CSRP Total Return Indexes for the NASDAQ Stock
Market and a peer group index over the same period. We have not declared any
dividends on our common stock during the period covered by this graph. The graph
assumes $100.00 was invested on December 31, 1993 in our common stock.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
[GRAPHIC]
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1993 1994 1995 1996 1997 1998
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
American Resources Offshore, Inc. .... $ 100.00 $ 302.70 $ 46.10 $ 40.70 $ 36.50 $ 4.40
Peer Group(1) ........................ $ 100.00 $ 130.90 $ 139.17 $ 211.91 $ 194.96 $ 109.15
NASDAQ (U.S.) Index .................. $ 100.00 $ 97.80 $ 141.40 $ 173.90 $ 213.40 $ 300.00
</TABLE>
- -------------------
(1) Our peer group consists of all crude petroleum and natural gas
exploration and production companies (Standard Industrial
Classification Code - 1311) whose common stock is listed on the NASDAQ
Stock Market.
60
<PAGE> 72
EXECUTIVE OFFICER EMPLOYMENT AGREEMENTS
On January 2, 1998, we entered into a two year employment agreement
with Jonathan C. Garrett to serve as Vice President of Engineering for a salary
of $130,000 per year with annual increases of not less than an amount equal to
the cost or living increase for the previous year. Mr. Garrett resigned his
position with us, effective July 15, 1999.
On April 13, 1998, we entered into an employment agreement with Daniel
O. Hall for a salary of $130,000 per year with annual increases of not less than
an amount equal to the cost or living increase for the previous year. Our
employment agreement with Mr. Hall expired on April 12, 1999 and was not
renewed.
On March 1, 1998, we entered into a three year employment agreement
with Karen M. Underwood to serve as Vice President of Corporate Compliance and
Corporate Secretary of Company for a salary of $65,100 for the fist year,
$67,100 for the second year and $69,000 for the third year. As discussed in
"CERTAIN RELATIONSHIPS AND TRANSACTIONS-- Benefits Under Severance Agreements,"
we have entered into a Severance Agreement with Ms. Underwood.
TERMINATION OF AGREEMENTS
The following agreements and plans which we previously entered into or
adopted have been terminated or will be terminated on or before the closing of
the Investment Agreement with Blue Dolphin Exploration and the Purchase and Sale
Agreement with Fidelity Oil Holdings:
o All employment agreements with our officers and employees.
o All indemnity agreements with our officers and employees.
o Change of Control Agreement with Rick G. Avare dated as of
November 12, 1996.
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<PAGE> 73
o 1994 Employee Stock Compensation Plan.
o 1994 Compensatory Stock Option Plan.
o 1996 Incentive Bonus Plan.
Our Investment Agreement with Blue Dolphin Exploration required us to amend
Chris McLindon's employment agreement decreasing the term from March 2001 to one
year from the date of Closing. We have agreed to pay Mr. McLindon $110,000 for
the amendment to his employment agreement. Mr. McLindon is employed by us as a
geologist.
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<PAGE> 74
SECURITY OWNERSHIP
The following table reflects certain information regarding the
beneficial ownership of our outstanding equity securities as of August 31, 1999,
to the extent known to us. This information is included for (1) persons who own
5% or more of our equity securities, (2) directors, (3) the executive officers
identified in the discussion under the heading "Executive Compensation" (the
"Named Executives"), and (4) all our officers and directors as a group. Unless
otherwise indicated, we believe that each person named below has the sole power
to vote and dispose of the equity securities beneficially owned by such person.
<TABLE>
<CAPTION>
PRO FORMA(8)
------------------------------
SHARES SHARES
BENEFICIAL OWNER TITLE BENEFICIALLY PERCENT BENEFICIALLY PERCENT
NAME/ADDRESS OF CLASS OWNED(1) OF CLASS(2) OWNED OF CLASS
- -------------------------------------- ------------------- ------------- ----------- --------------- ----------
<S> <C> <C> <C> <C> <C>
Douglas L. Hawthorne(6)............... Preferred Stock 3,334 1.45% 0
4325 Delco Dell Road Common Stock 562,162 4.20% 565,496 1.08%
Kettering, OH 45429
Leonard K. Nave(3)(5)................. Common Stock 719,262 5.41% 719,262 1.38%
160 Morgan Street
Versailles, KY 40383
Rick G. Avare(4)...................... Preferred Stock 187,500 81.34% 0
160 Morgan Street Common Stock 2,117,250 15.45% 2,305,750 4.43%
Versailles, KY 40383
David J. Fox, Jr...................... Common Stock 53,834 * 53,834 *
Appalachian Production Company
940 Fourth Avenue, Ste. 225
Huntington, WV 25701
Len Aldridge.......................... Common Stock 50,000 * 50,000 *
1999 Richmond Road
Suite 2-A
Lexington, KY 40502
Ralph A. Currie....................... Common Stock 289,500 2.22% 289,500 *
160 Morgan Street
Versailles, KY 40383
Andrew J. Kacic(7).................... Common Stock 711,540 5.19% 711,540 1.36%
6119 N. Black Bear Loop
Tucson, AZ 85715
TECO Oil & Gas, Inc................... Common Stock 2,751,852 21.13% 2,751,852 5.28%
702 N. Franklin Street
Tampa, FL 33602
Directors and Executive .............. All Classes 3,982,146 27.49% 3,983,146 7.65%
Officers as a group (9 persons)
</TABLE>
63
<PAGE> 75
- -------------
* Represents less than 1% of our outstanding stock for the indicated
class.
(1) Share information reflects the 1-for-4 reverse stock split of our
common stock effected on June 8, 1994. Preferred stock is convertible
into common stock at the rate of one share of common stock for each
share of preferred stock.
(2) Percentage assumes full exercise of outstanding options and warrants to
purchase shares of our common stock and conversion of preferred stock
into common stock.
(3) Includes 443,623 shares of common stock owned by Southern Gas Holding
Company, Inc. ("SGH"). SGH is owned 7.5% by Leonard K. Nave,
individually, and 32.5% by Leonard K. Nave, as Trustee. Mr. Nave
disclaims the beneficial ownership of such shares of our common stock
to the extent they exceed his percentage ownership of SGH.
(4) Includes 680,704 shares of common stock subject to options and
conversion rights exercisable within 60 days and 645,588 shares of
common stock owned by Prima Capital, LLC ("Prima") in which Mr. Avare
owns a 20% interest. Mr. Avare disclaims beneficial ownership of 80% of
the shares of common stock owned by Prima.
(5) Includes 271,603 shares of common stock subject to options exercisable
within 60 days.
(6) Includes 357,649 shares of common stock subject to options and
conversion rights exercisable within 60 days, 181,400 shares held in
Mr. Hawthorne's retirement plan and 1,792 shares of common stock to
which Mr. Hawthorne is entitled as a 1/3 beneficiary of the Frances R.
Hawthorne Trust.
(7) Includes 690,590 shares of common stock subject to options exercisable
within 60 days, 6,750 shares of common stock owned by the Andrew J.
Kacic Profit Sharing Plan, 6,390 shares of common stock held by
Advisory Services and 7,810 shares of common stock held by Andrew J.
Kacic & Associates.
(8) Assumes that we have issued 39,033,273 shares of common stock to Blue
Dolphin Exploration, and that the shares of preferred stock owned by
Messrs. Hawthorne and Avare are converted into common stock.
64
<PAGE> 76
MARKET INFORMATION CONCERNING OUR COMMON STOCK
DELISTING FROM NASDAQ
The common stock was listed on the Nasdaq SmallCap market on September
30, 1993 under the trading symbol "GASS". It was delisted on August 19, 1999
because we do not comply with the following requirements for continued listing:
o net tangible assets of $2.0 million, or market capitalization of
$35.0 million, or net income in the latest fiscal year or in 2 of
the last 3 fiscal years of $500,000; and
o a public float with a market value of $1.0 million; and
o a minimum bid price of $1.00.
On January 4, 1999, we were notified by the Nasdaq Stock Market that
our common stock does not comply with the above continuing listing requirements.
At a hearing before the Nasdaq Listing Qualifications Panel on May 13, 1999, we
contended that the closing of the transactions described in Proposal 1 among
other proposals might cure the above deficiencies. We requested the Nasdaq Stock
Market to delay its decision to delist our common stock; however, we were
notified on August 19, 1999 that our common stock was being delisted as of the
close of business on the same day. On August 23, 1999, we requested the Nasdaq
Hearing Review Council to review the decision of the Listing Qualifications
Panel to delist the common stock. Since August 19, 1999 our common stock has
been quoted on the OTC Bulletin Board under the trading symbol "GASS.OB".
The following table sets forth the closing high and low sales prices
of the common stock for the periods indicated, as reported by NASDAQ. These
prices are believed to be representative inter-dealer quotations, without retail
mark-up, mark-down or commissions and may not represent prices at which actual
transactions occurred.
<TABLE>
<CAPTION>
1999 1998 1997
------------------------ -------------------- ----------------------
HIGH LOW HIGH LOW HIGH LOW
--------- -------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
First Quarter................................. $ 0.563 $ 0.25 $ 3.44 $ 2.25 $ 3.88 $ 2.22
Second Quarter................................ $ 0.50 $ 0.156 $ 3.22 $ 2.25 $ 3.06 $ 1.88
Third Quarter................................. $ 0.344 $ 0.13 $ 2.59 $ 0.81 $ 3.03 $ 2.06
Fourth Quarter................................ $ 0.18(1) $ 0.07(1) $ 1.41 $ 0.22 $ 3.88 $ 2.06
</TABLE>
- ----------------
(1) These prices reflect the high and low bid price of the common stock from
October 1 to November 2 as reported on the OTC Bulletin Board.
65
<PAGE> 77
At November 3, 1999, there were 411 record holders of our common stock
and 14 record holders of our preferred stock.
DIVIDENDS
We have not in the past nor do we intend to pay cash or stock dividends
on our common stock or cash dividends on our preferred stock in the foreseeable
future. We intend to retain earnings, if any, for the future operation and
development of our business.
66
<PAGE> 78
FEDERAL INCOME TAX CONSEQUENCES OF TRANSACTIONS
Our existing stockholders will not recognize any gain or loss resulting
from the transactions described in the Proxy Statement.
The following is a summary of the material anticipated federal income
tax consequences to us of Proposals 1 through 4, and other transactions
described in this Proxy Statement. This summary is based on the federal income
tax laws as now in effect and as currently interpreted. This summary does not
take into account possible changes in tax laws or interpretations after the date
of this Proxy Statement, including amendments to applicable statues, regulations
and proposed regulations or changes in judicial or administrative rulings, some
of which may have a retroactive effect. This summary does not purport to address
all aspects of the possible federal income tax consequences and is not intended
as tax advice to any person. The summary does not address any consequences of
the transactions under any state, local, or foreign income and other tax laws.
PROPOSAL 1
We will not realize any taxable gain as a result of the sale and
issuance of shares of our common stock to Blue Dolphin Exploration.
PROPOSAL 2
We will realize a tax loss of approximately $35.0 million from the sale
of 80% of our Gulf of Mexico oil and gas assets to Fidelity Oil Holdings. This
loss will serve to offset any income realized from operations or other
transactions during the taxable year.
PROPOSAL 3
We will realize a taxable gain of less than $1.0 million upon the sale
of our Appalachian oil and gas properties and operations. This gain will be
offset by net operating losses carried over to 1999, or by current year losses
generated from the sale of assets described in Proposal 2.
PROPOSAL 4
We will not realize any net taxable gain from the sale of the stock of
Southern Gas.
OTHER TRANSACTIONS
In general, the settlement of a debt for an amount less than the
original amount due would generally cause the recognition of taxable income to
us. However, an exception exists where an entity is insolvent at the time of the
settlement. In insolvency, tax attributes, such as our net operating loss
carryover, will be reduced.
67
<PAGE> 79
At this date, we are insolvent to the extent that our liabilities
exceed the value of our assets. Based on the value of the transactions described
in this document, at June 30, 1999, our insolvency is in excess of $50.0
million. In the case of the DnB Note, the TECO Note and the settlement of
certain trade accounts payable, we will recognize taxable income only if the
amounts forgiven exceeds this amount. The cancellation of debt amount is
approximately $43.0 million, therefore, we will not recognize any taxable
income.
On a pro forma basis, if the transactions occurred on June 30, 1999, we
would have a remaining net operating loss carryover of over $25.0 million after
consideration of the transactions described in the Proxy Statement. These losses
will be limited in future tax periods by the provisions of Section 382 of the
Internal Revenue Code. Under this section, the losses will be allowed only to
the extent of a specified rate (approximately 5%) times the value of the
company. Until the transactions are closed, this computation cannot be made, but
we expect that our net operating losses will be limited and of little future
benefit to us.
68
<PAGE> 80
CERTAIN RELATIONSHIPS AND TRANSACTIONS
BENEFITS UNDER SEVERANCE AGREEMENTS
We are party to employment agreements with certain executive officers
which must be terminated as a condition to the Closing with Blue Dolphin
Exploration. The employment agreements generally provide, among other things,
that in the event we terminate the employee, the employee will be entitled to a
lump sum severance payment for compensation and benefits the employee would have
received for the remaining term of the agreement. We have negotiated Severance
Agreements with these executives for severance payments which are less than
those required under their respective employment agreements as follows:
<TABLE>
<CAPTION>
EXECUTIVE OFFICER SEVERANCE BENEFITS
--------------------- -----------------------
<S> <C>
William M. Gray $ 97,500(1)
Daniel Hall 30,000
Jack G. Bryant 55,000
Karen M. Underwood 65,000
Ralph A. Currie 125,000(2)
Rick G. Avare 125,000(3)
David J. Stetson 250,000(4)
</TABLE>
- --------------
(1) William M. Gray received office furniture valued at approximately
$20,000 and has the right to receive additional compensation of $51,500
in the event settlement with certain Chevron trade creditors is
achieved for less than $675,000. Mr. Gray's company, Americsource, LLC
was assigned our office lease located at Lakeway II, Suite 1145,
Metairie, Louisiana for a nominal sum.
(2) Ralph A. Currie received office furniture and equipment with nominal
value and his compensation could be decreased if we are unable to reach
satisfactory negotiations with our creditors.
(3) Rick G. Avare received office furniture and equipment with nominal
value and his compensation could be decreased if we are unable to reach
satisfactory negotiations with our creditors. Mr. Avare has been
assigned all rights under a split-dollar agreement which was in effect
prior to his termination.
69
<PAGE> 81
(4) David J. Stetson received office furniture and equipment with nominal
value and his compensation could be decreased based on the amount of
closing costs we incur to complete the agreements with Blue Dolphin
Exploration and Fidelity Oil Holdings.
With the exception of Jack Bryant we have agreed to provide six months
of health benefits to the above executives.
RICK G. AVARE AND AFFILIATES
Prima Capital, L.L.C. Prior to September 15, 1997, we owned a 3.5%
interest in certain producing and non-producing oil and gas properties (the
"Mississippi Properties") located in Mississippi. On September 15, 1997, we
entered into a Letter of Intent with Prima, a limited liability company in which
Rick G. Avare owns a 20% interest, providing for our acquisition of an
additional interest in the Mississippi Properties. The transaction was approved
by a majority of our disinterested directors at a special meeting of the board
of directors held on September 15, 1997 after reviewing an independent
geologist's report on the Mississippi Properties. The purchase price for the
additional interest in the Mississippi Properties was $2,800,000 payable
$1,300,000 on or before closing, which occurred on October 10, 1997, and
$1,500,000 by delivery of our interest bearing note with recourse only to the
Mississippi Properties. At September 30, 1999, the balance due on our note to
Prima was approximately $738,872.
MAP II, L.L.C. In connection with the Investment Agreement, we entered
into a consulting agreement with MAP II. Presently, Rick G. Avare, our Chief
Executive Officer and President and a member of the Board, is a member of MAP
II. However, other members of our management may become members of MAP II.
Pursuant to the terms of the consulting agreement, MAP II will provide us with
certain consulting services and, in connection with providing these services,
make available to us Messrs. Avare, Stetson, Currie and Ms. Underwood. As
consideration for the consulting services, MAP II will receive $35,000 per month
during the term of the agreement. Unless extended, the agreement expires on
February 28, 2001.
The extent to which any of the above members of our management receive
compensation, if any, from MAP II will be dependent upon the amount of services
that individual provides to MAP II is satisfaction of MAP II's obligations under
the consulting agreement.
LEONARD K. NAVE
Leonard K. Nave is a member of our board of directors and the president
of Southern Gas. Southern Holding is owned by Mr. Leonard Nave and a family
trust in which Leonard Nave is the trustee. We have entered into a stock
purchase agreement to convey all our shares of Southern Gas and Alpha Gas
Development, Inc. to Southern Holding. See "Proposal 4" for a detailed
description of our transaction with Southern Holding.
70
<PAGE> 82
BLUE DOLPHIN ENERGY COMPANY AND AFFILIATES
Blue Dolphin Energy Company is a public company whose common stock is
registered under the Securities Exchange Act of 1934, as amended, and trades on
the Nasdaq SmallCap Market under the symbol "BDCO." Blue Dolphin Exploration and
Blue Dolphin Services are wholly-owned subsidiaries of Blue Dolphin Energy
Company. Ivar Siem, who was recently appointed a member of our board of
directors, is a director and Chairman of the Board of Blue Dolphin Energy
Company. Michael J. Jacobson, also a recently-appointed member of our board of
directors, is the President of Blue Dolphin Energy Company and a director of
Blue Dolphin Exploration.
Blue Dolphin Exploration. As a result of the Investment Agreement, the
purchase of the DnB Note and other agreements, Blue Dolphin Exploration will own
a controlling interest in us and we will be indebted to Blue Dolphin Exploration
for approximately $5.0 million. See "PROPOSAL 1--Other Agreements--Purchase of
DnB Note by Blue Dolphin Exploration."
Blue Dolphin Services. In connection with the Investment Agreement, we
will enter into a Management and Services Agreement pursuant to which Blue
Dolphin Services will provide the management and administrative services
necessary to operate our business. We will pay Blue Dolphin Services a
management fee of $83,333 per month. This agreement will initially expire on
December 31, 2000 but will continue on a year-to-year basis unless terminated.
See "PROPOSAL 1--Other Agreements, Management and Administrative Services
Agreement."
RELATIONSHIP BETWEEN BLUE DOLPHIN EXPLORATION AND FIDELITY OIL HOLDINGS
Blue Dolphin Exploration and Fidelity Oil Holdings are not affiliated
with each other. Blue Dolphin Exploration and Fidelity Oil Holdings have
previously participated together in other oil and gas property acquisitions and
Blue Dolphin Exploration was instrumental in bringing to the attention of
Fidelity Oil Holdings the potential purchase by Fidelity Oil Holdings of 80%
interest of our Gulf of Mexico properties.
Blue Dolphin Exploration and Fidelity Oil Holdings worked closely with
each other in investigating and negotiating their respective agreements with us
and Den norske Bank, all with our knowledge. Blue Dolphin Exploration has
advised us that it anticipates that it and Fidelity Oil Holdings will continue
to cooperate with each other through the closing of the Investment Agreement and
the Purchase and Sale Agreement.
Although Fidelity Oil Holdings will not share in Blue Dolphin
Exploration's voting control over us, Blue Dolphin Exploration and Fidelity Oil
Holdings have entered into a Participation Agreement. We are not a party to the
Participation Agreement, however, we have been advised that the material
provisions of this agreement are:
o Blue Dolphin Exploration agreed to share with Fidelity Oil
Holdings any due diligence investigation materials obtained by
Blue Dolphin Exploration concerning our properties.
71
<PAGE> 83
o Blue Dolphin Exploration and Fidelity Oil Holdings agreed to
use commercially reasonable efforts to close the transactions
contemplated by the Investment Agreement, the Purchase and
Sale Agreement and other agreements.
o Blue Dolphin Exploration and Fidelity Oil Holdings agreed that
neither of them will (A) amend or agree to amend the
Investment Agreement, Purchase and Sale Agreement or the
agreement to purchase the DnB Note without consent of the
other, or (B) waive or agree to waive any condition to closing
under the Investment Agreement, Purchase and Sale Agreement or
the agreement to purchase the DnB Note without consent of the
other.
o Blue Dolphin Exploration is entitled to receive an assignment
from Fidelity Oil Holdings of a 10% interest in all proved oil
and gas properties purchased by Fidelity Oil Holdings from us,
but only after Fidelity Oil Holdings has recovered from the
proceeds of production from the proved properties the full
amount of certain agreed upon categories of costs incurred by
Fidelity Oil Holdings in connection with the acquisition of,
and operations on, the proved oil and gas properties.
o Blue Dolphin Exploration will receive an assignment from
Fidelity Oil Holdings of a 15% interest in all exploratory oil
and gas properties purchased by Fidelity Oil Holdings from us,
but only after Fidelity Oil Holdings has recovered from the
proceeds of production, determined on block-by-block basis,
the full amount of certain agreed upon categories of drilling
and other exploration costs incurred by Fidelity Oil Holdings
in connection with obtaining production from the exploratory
properties.
o Upon closing of the Purchase and Sale Agreement, Fidelity Oil
Holdings will pay to Blue Dolphin Exploration a finder's fee
of 1% of the adjusted purchase price Fidelity Oil Holdings
pays for the properties purchased from us under the Purchase
and Sale Agreement.
o Fidelity Oil Holdings will reimburse Blue Dolphin Exploration
from time-to-time for a portion of the transaction costs it
incurs in connection with the various transactions
contemplated by the Investment Agreement, the Sale and
Purchase Agreement and the agreement to purchase the DnB Note.
Fidelity Oil Holdings will reimburse 80% of Blue Dolphin
Exploration's transaction costs, except for transaction costs
relating to compliance with the federal securities laws, for
which Fidelity Oil Holdings will only reimburse 50% of Blue
Dolphin Exploration's costs.
o Fidelity Oil Holdings will bear 80% of the fees payable by us
under the Consulting Agreement between us and MAP II. The
Participation Agreement specifically provides that we are
entitled to separately enforce this obligation
72
<PAGE> 84
against Fidelity Oil Holdings, even though we are not a party
to the Participation Agreement.
o Fidelity Oil Holdings and Blue Dolphin Exploration are not
partners or general agents of each other.
o Fidelity Oil Holdings and Blue Dolphin Exploration will enter
into a Management Services Agreement contemporaneously with
the closing of the transactions contemplated by the Purchase
and Sale Agreement which will provide for:
o Blue Dolphin Exploration to act as an independent
contractor to Fidelity Oil Holdings and to provide
various administrative, technical and regulatory
compliance services to Fidelity Oil Holdings with
respect to the properties purchased by Fidelity Oil
Holdings under the Purchase and Sale Agreement;
o Fidelity Oil Holdings to retain substantial decision
making authority over the properties subject to the
agreement; and
o Fidelity Oil Holdings to pay Blue Dolphin Exploration
a management fee of $40,000 per month.
The Management Services Agreement contemplates that Blue Dolphin
Exploration and Fidelity Oil Holdings may in the future agree upon additional
special services to be provided to Fidelity Oil Holdings that are not covered
under the Management Services Agreement for which Blue Dolphin Exploration would
receive addition compensation to be negotiated at the time such additional
services are requested.
LITIGATION
On July 23, 1999, we were named as a party defendant in a suit filed by
Sundowner Offshore Services, Inc. ("Sundowner") which alleges, among other
things, that we owe approximately $1.3 million to Sundowner. We have entered
into a preliminary settlement agreement to pay Sundowner $800,000 at the closing
date of the Investment Agreement. We will receive a full release from Sundowner
and this litigation will be dismissed with prejudice.
On May 13, 1998, we and our wholly-owned subsidiary, Southern Gas Co.
of Delaware, Inc., were named as defendants in litigation filed by Wright
Enterprises asserting successor liability to certain alleged obligations of
Southern Gas Company, Inc., the company from which we purchased our Kentucky
operations. Based upon the allegations set forth in the complaint, we believe
there is a strong likelihood that it will be successful in the defense of this
matter; and the litigation will have no material impact on our financial
condition, operating results or cash flows.
73
<PAGE> 85
OTHER BUSINESS
The board of directors knows of no proposals to be presented for
consideration at the Annual Meeting other than the matters specified in the
Notice of Annual Meeting accompanying this Proxy Statement. Should any other
proposal properly come before the Annual Meeting, the persons named in the
enclosed proxy card will exercise their judgment in voting on other matters that
may properly come before the Annual Meeting.
STOCKHOLDER PROPOSALS
Any proposal that our stockholders intend to present at the 2000 Annual
Meeting of Stockholders must be received by our Secretary at our principal
executive offices by July 11, 2000 in order to be considered by the board of
directors for inclusion in the board of directors' proxy solicitation materials
for that meeting.
Also, in the case of stockholder proposals which are not included in
the proxy statement, the SEC's rules require any stockholder wishing to made a
nomination for director, or wishing to introduce a proposal or other business,
at our 2000 Annual Meeting to give us advance written notice thereof no later
than 45 days prior to the anniversary date of our 1999 Annual Meeting.
ANNUAL REPORT TO STOCKHOLDERS
AND INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE
This Proxy Statement incorporates by reference certain sections of our
1998 Annual Report to Stockholders which accompanies this Proxy Statement. It
consists of our Form 10-K for the fiscal year ended December 31, 1998 and our
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999. Items 1, 2,
6, 7, 7A and 8 of our 1998 Annual Report on Form 10-K and Items 1 and 2 of our
June 30, 1999 Quarterly Report on Form 10-Q (each an "Incorporated Document")
are incorporated by reference into this Proxy Statement. Otherwise, our 1998
Annual Report to Stockholders does not form any part of the material for the
solicitation of proxies.
Any statement contained in an Incorporated Document shall be deemed to
be modified or superseded for all purposes to the extent that a statement
contained herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as modified or superseded, to
constitute a part of this Proxy Statement.
You should rely only on the information contained or incorporated by
reference in this Proxy Statement to vote on the transactions and other matters
described in this Proxy Statement. We have not authorized anyone to provide you
with information that is different from what is contained in this Proxy
Statement. This Proxy Statement is dated November 4, 1999. You should not assume
that the information contained in the Proxy Statement is accurate as of any date
other than such date, and the mailing of this Proxy Statement to stockholders
will not create any implication to the contrary.
74
<PAGE> 86
INDEX TO FINANCIAL STATEMENTS
Pro Forma Financial Information
Page No.
1. Pro Forma Balance Sheet at June 30, 1999 - Unaudited F-3
2. Pro Forma Statement of Operations for the Six Months Ended
June 30, 1999 - Unaudited F-4
3. Pro Forma Statement of Operations for the Year Ended
December 31, 1998 - Unaudited F-5
F-1
<PAGE> 87
AMERICAN RESOURCES OFFSHORE, INC.
PRO FORMA CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
INTRODUCTION
The following unaudited pro forma condensed financial statements for
American Resources Offshore, Inc. (the "Company") give effect to (i) the
proposed sale of 80% of the Company's Gulf of Mexico assets, (ii) the proposed
sale of its wholly-owned subsidiary, Southern Gas Co. of Delaware, Inc., (iii)
the proposed issuance of additional common stock for consideration of
approximately $4.7 million, and (iv) various other transactions which are
expected to be entered into contemporaneously with the aforementioned
transactions.
The pro forma financial information is presented for illustrative
purposes only and does not purport to represent what the Company's results
actually would have been if such events had occurred at the dates indicated, nor
does such information purport to project the results of operations for any
future period or as of any future date. The pro forma condensed financial
information should be read in conjunction with the notes thereto together with
the Company's financial statements and the notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations," all
appearing in the Company's Annual Report, a copy of which was included with this
Proxy Statement.
The Unaudited Pro Forma Condensed Balance Sheet as of June 30, 1999
assumes that the transactions were effected on that date. The Unaudited Pro
Forma Condensed Statement of Operations for the six months ended June 30, 1999
and the Unaudited Pro Forma Condensed Statement of Operations for the year ended
December 31, 1998 assume that the transactions were effected on January 1, 1998.
F-2
<PAGE> 88
AMERICAN RESOURCES OFFSHORE, INC. AND SUBSIDIARY
PRO FORMA CONDENSED BALANCE SHEET (UNAUDITED)
JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIDELITY BLUE DEN NORSKE
OIL DOLPHIN BANK
HISTORICAL TRANSACTION(1) TRANSACTION(2) SETTLEMENT(3)
---------- -------------- -------------- ------------- -
<S> <C> <C> <C> <C>
Current assets:
Cash 279 25,042 4,669 (27,000)
Accounts and notes receivable 3,112 (2,086)
Prepaid expenses 378 (210)
-------- -------- -------- --------
Total current assets 3,769 22,746 4,669 (27,000)
Net property and equipment 61,974 (39,097)
Other assets 1,782 (1,010)
-------- -------- -------- --------
Total assets 67,525 (16,351) 4,669 (28,010)
======== ======== ======== ========
Current liabilities:
Current portion of long term
debt 834
Debt in default 82,223 (51,223)
Accounts payable 2,069 (191)
Unearned revenue 642
Accrued expenses and other 7,394 (344) (3,691)
-------- -------- -------- --------
Total current liabilities 93,162 (535) (54,914)
Long term debt, less current
portion 14 5,000
Accrued expenses
Unearned revenue 1,113
-------- -------- -------- --------
Total liabilities 94,289 (535) (49,914)
Total stockholders' equity
(capital deficiency) (26,764) (15,816) 4,669 21,904
-------- -------- -------- --------
Total liabilities and
stockholders' equity 67,525 (16,351) 4,669 (28,010)
======== ======== ======== ========
<CAPTION>
SOUTHERN OTHER
TECO NOTE GAS CO. LIABILITIES PRO
SETTLEMENT(4) TRANSACTION(5) SETTLEMENT(6) FORMA
------------- -------------- ------------- --------
<S> <C> <C> <C> <C>
Current assets:
Cash (990) (192) (1,475) 333
Accounts and notes receivable (504) 522
Prepaid expenses (115) 53
-------- -------- -------- --------
Total current assets (990) (811) (1,475) 908
Net property and equipment (13,103) 9,774
Other assets (272) (500) 0
-------- -------- -------- --------
Total assets (990) (14,186) (1,975) 10,682
======== ======== ======== ========
Current liabilities:
Current portion of long term
debt (10) (824) 0
Debt in default (18,500) (12,500) 0
Accounts payable (541) (1,288) 49
Unearned revenue (642) 0
Accrued expenses and other (3,238) (35) 86
-------- -------- -------- --------
Total current liabilities (21,738) (13,728) (2,112) 135
Long term debt, less current
portion (14) 5,000
Accrued expenses 0
Unearned revenue (1,113) 0
-------- -------- -------- --------
Total liabilities (21,738) (14,855) (2,112) 5,135
Total stockholders' equity
(capital deficiency) 20,748 669 137 5,547
-------- -------- -------- --------
Total liabilities and
stockholders' equity (990) (14,186) (1,975) 10,682
======== ======== ======== ========
</TABLE>
See accompanying notes to Pro Forma Financial Statements.
F-3
<PAGE> 89
AMERICAN RESOURCES OFFSHORE, INC. AND SUBSIDIARY
PRO FORMA CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Southern
Fidelity Oil Gas Co. Other
Historical Transaction(1) Transaction(5) Adjustments(9) Pro Forma
---------- -------------- -------------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Revenues: 9,454 (6,690) (1,091) 1,673
Oil and gas production 368 (368) 0
Transportation 3,795 (3,795) 0
Marketing 1,972 (233) 1,739
---------- ---------- ---------- ----------
Other 15,589 (6,690) (5,487) 3,412
---------- ---------- ---------- ----------
Expenses:
Oil and gas production 1,444 (822) (416) 206
Transportation 115 (115) 0
Marketing 4,044 (250) (3,732) 62
Exploration costs 791 (633) -- 158
Depreciation, depletion & amortization 6,975 (5,090) (612) 1,273
Impairment of assets 46 (37) 9
Administrative expenses 2,311 (388) (1,381)(a) 542
Other 56 (56) 0
---------- ---------- ---------- ---------- ----------
15,782 (6,832) (5,319) (1,381) 2,250
---------- ---------- ---------- ---------- ----------
Operating income (loss) (193) 142 (168) 1,381 1,162
Other income (expense)
Interest income 51 (17) (30) 4
Interest expense (4,553) 135 4,193(b) 225
Other (368) (368)
---------- ---------- ---------- ---------- ----------
(4,870) (17) 105 4,193 (589)
---------- ---------- ---------- ---------- ----------
Income (loss) before income tax expense
(benefit) (5,063) 125 (63) 5,574 573
Income tax expense (benefit) 0 0
---------- ---------- ---------- ---------- ----------
Net income (loss) (5,063) 125 (63) 5,574 573
========== ========== ========== ========== ==========
Net income (loss) (5,063) 125 (63) 5,574 573
========== ==========
Preferred dividends (4) 4 (0)
---------- ---------- ----------
Net income (loss) attributable to common
shares (5,067) 5,578 573
========== ========== ==========
Per common share:
Basic $ (0.48) $ 0.01(7)
========== ==========
Weighted average number of common
shares outstanding 10,561 41,950(7)
========== ==========
Per common share:
Diluted $ (0.48) $ 0.01(7)
========== ==========
Weighted average number of common
shares and dilutive potential common
shares 10,561 43,539(7)
========== ==========
</TABLE>
See accompanying notes to Pro Forma Financial Statements.
F-4
<PAGE> 90
AMERICAN RESOURCES OFFSHORE, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Southern Acquisition
Fidelity Oil Gas Co. of Teco Other
Historical Transaction(1) Transaction(5) Property(8) Adjustments(9) Pro Forma
---------- -------------- -------------- ----------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Oil and gas production 26,724 (20,011) (2,479) 768 5,002
Transportation 790 (790) 0
Marketing 7,751 (7,751) 0
Other 872 (437) 435
-------- -------- -------- -------- --------
36,137 (20,011) (11,457) 768 5,437
-------- -------- -------- -------- --------
Expenses:
Oil and gas production 4,967 (3,375) (912) 163 843
Transportation 235 (235) 0
Marketing 7,910 (7,910) 0
Exploration costs 5,056 (3.987) (72) 997
Depreciation, depletion & amortization 18,031 (13,608) (1,539) 518 3,402
Impairment of assets 36,735 (22,815) (8,215) 5,705
Administrative expenses 4,569 (1,457) (2,028)(a) 1,084
Other 107 (107) 0
-------- -------- -------- -------- -------- --------
77,610 (43,785) (20,447) 681 (2,028) 12,030
-------- -------- -------- -------- -------- --------
Operating income (loss) (41,473) 23,774 8,990 87 2,028 (6,594)
Other income (expense):
Interest income 101 (60) 41
Interest expense (7,437) 6,987(b) (450)
Other 239 239
-------- -------- -------- -------- -------- --------
(7,097) (60) 6,987 (170)
-------- -------- -------- -------- -------- --------
Income (loss) before income tax expense (6,764)
(benefit) (48,570) 23,774 8,930 87 9,015 2,346
--------
Income tax expense (benefit) 2,346
-------- -------- -------- -------- -------- --------
Net income (loss) (46,224) 23,774 8,930 87 9,015 (4,418)
======== ======== ======== ======== ======== ========
Net income (loss) (46,224) 23,774 8,930 87 9,015 (4,418)
======== ======== ========
Preferred dividends (49) 46 (3)
-------- -------- --------
Net income (loss) attributable to common
shares (46,273) 9,061 (4,421)
======== ======== ========
Per common share:
Basic $ (4.61) $ (0.11)(7)
======== ========
Weighted average number of common shares
outstanding 10,029 41,704 (7)
======== ========
Per common share:
Diluted $ (4.61) $ (0.11)(7)
======== ========
Weighted average number of common shares
and dilutive potential common shares 10,129 41,704 (7)
======== ========
</TABLE>
See accompanying notes to Pro Forma Financial Statements.
F-5
<PAGE> 91
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS
(1) Fidelity Oil Transaction - Sale of 80% of Gulf of Mexico oil and gas
properties and related assets and liabilities, including receivables,
payables and other accrued expenses, to Fidelity Oil Holdings, Inc. for
$25,042,485, net of adjustments. Adjustments to the purchase price include
the GOM adjustment, title, environmental and other adjustments. The sum of
these adjustments is assumed to be $0 for purposes of the pro forma
financial statements because as of the date of the pro forma financial
statements no title, environmental or other adjustments have been asserted.
The GOM adjustment is designed to reflect operating activity only,
therefore, any adjustments will be equal to the net operating revenue in
the Company at closing, leaving a net cash impact of $0. Excluding the
activities of Southern Gas Co. of Delaware, Inc. (see Note (5)) these oil
and gas properties represent all of the operating activities of the
Company, therefore, eighty percent (80%) of operating revenues and
expenses, and related assets and liabilities, have been adjusted.
(2) Blue Dolphin Transaction - Sale of common stock to Blue Dolphin Exploration
Company for $4,668,515, net of adjustments. Adjustments to the purchase
price include the GOM adjustment, title, environmental and other
adjustments. The sum of these adjustments is assumed to be $0 for purposes
of the pro forma financial statements because as of the date of the pro
forma financial statements no title, environmental or other adjustments
have been asserted. The GOM adjustment is designed to reflect operating
activity only, therefore, any adjustments will be equal to the net
operating revenue in the Company at closing, leaving a net cash impact of
$0.. The Company will issue a number of shares of common stock that will
result in Blue Dolphin Exploration Company owning, immediately after the
closing, 75% of the combined voting power of all classes of the Company's
voting securities. As of the date of these financial statements, the number
of shares to be issued is estimated to be 39,509,457.
(3) Den norske Bank Transaction - Partial settlement of the DnBank Note,
including accrued interest, for a payment of $27,000,000. The total amount
due to Den norske Bank was approximately $67,400,000 as of June 30, 1999.
Unamortized deferred financing costs of approximately $1,010,000 were
written off. See also Note (5). ( The balance due on the note is
$5,000,000. If the Company remains in compliance with the terms of the
modified note, the note plus accrued interest will be released in full on
December 31, 2000. As such, the principal and interest is classified as
long term). The pro forma net income and pro forma net income per share of
common stock exclude the impact of the after-tax effect of the income from
the settlement of the DnBank Note. The Company expects the income amount to
be approximately $21,904,000, which will be reflected as an extraordinary
item to be recognized in the fiscal quarter in which the transaction is
completed.
(4) TECO Note Settlement - Settlement of the TECO Note, including accrued
interest, for a payment of $990,400. The total amounts due on the TECO Note
is approximately
F-6
<PAGE> 92
$21,738,000 as of June 30, 1999. The pro forma net income and pro forma net
income per share of common stock exclude the impact of the after-tax effect
of the income from the settlement of the TECO Note. The Company expects the
income amount to be approximately $20,748,000, which will be reflected as
an extraordinary item to be recognized in the fiscal quarter in which the
transaction is completed.
(5) Southern Gas Transaction - Sale of all of the operating assets in Kentucky,
Tennessee and Michigan to Nami Resources Company for the assumption of
$12,500,000 of indebtedness to Den norske Bank and the release of a
guaranty with Austin Energy. Immediately subsequent to the closing of the
sale, the stock of Southern Gas Co. of Delaware, Inc. will be sold for a
nominal amount to a related party. There will be no gain or loss recognized
on the sale. All assets, liabilities, income and deductions of Southern Gas
have been eliminated from the pro forma financial statements. As of June
30, 1999, the gain from the sale of the Southern Gas assets is
approximately $669,000. The gain will be recorded in the third quarter
statement of operations but is excluded from the pro forma statement of
operations since it is non-recurring.
(6) Other Liabilities Settlement - As a condition to the transactions described
in notes (1) and (2), the Company must settle all liabilities which existed
on the effective date of January 1, 1999. The Company believes the
remaining liabilities can be settled for cash and assets of approximately
$1,975,000. Gains from the settlement of liabilities of approximately $1.7
million have been reflected in the first and second quarter statement of
operations. Additional gains of $137,000 are expected to be realized and
will be reflected in the fiscal quarter realized. The additional gains are
excluded from the pro forma statement of operations since they are
non-recurring.
(7) Pro Forma earnings per share information is based on the estimated number
of shares outstanding after giving effect to the issuance of new shares to
Blue Dolphin Exploration Company (Note 2) and the exchange of 190,834
shares of preferred stock for common stock on a one-for-one basis.
(8) Acquisition of TECO Property - Operating revenues and expenses for January
1998 relative to properties which were acquired from TECO Oil & Gas, Inc.
effective February 1, 1998.
(9) Other Adjustments:
Pro Forma Statement of Operations for the Six Months Ended June 30, 1999 -
Unaudited
(a) All administrative expenses have been reduced to reflect costs pursuant
to a Management and Administrative Services Agreement with Blue Dolphin
Services, Inc., and a Consulting Agreement with MAP II, LLC. The contracts
F-7
<PAGE> 93
provide for the payment of management fees of $1 million per year to Blue
Dolphin Services, Inc., and consulting fees of $84,000 per year to MAP II,
LLC, which will replace all previously incurred direct administrative
expenses.
(b) Interest expense has been reduced to the amount accrued on the modified
note at 9% per annum. If the interest rate varied by 1/8%, interest expense
would be increased/decreased by $3,125 for the period.
Pro Forma Statement of Operations for the Year Ended December 31, 1998 -
Unaudited
(a) All administrative expenses have been reduced to reflect costs pursuant
to a Management and Administrative Services Agreement with Blue Dolphin
Services, Inc, and a Consulting Agreement with MAP II, LLC. The contracts
provide for the payment of management fees of $1 million per year to Blue
Dolphin Services, Inc., and consulting fees of $84,000 per year to MAP II,
LLC, which will replace all previously incurred direct administrative
expenses.
(b) Interest expense has been reduced to the amount accrued on the modified
note at 9% per annum. If the interest rate varied by 1/8%, interest expense
would be increased/decreased by $6,250 for the year.
F-8
<PAGE> 94
APPENDIX A
INVESTMENT AGREEMENT (COMPOSITE)
<PAGE> 95
INVESTMENT AGREEMENT
BY AND BETWEEN
AMERICAN RESOURCES OFFSHORE, INC.
AND
BLUE DOLPHIN EXPLORATION COMPANY
<PAGE> 96
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE 1
PURCHASE AND SALE............................................................................1
1.1 Certain Definitions........................................................1
1.2 Closing....................................................................1
1.3 Issuance of the Shares.....................................................2
1.4 Purchase Price for the Shares..............................................3
1.5 Closing Deliveries.........................................................3
ARTICLE 2
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY...............................................................................4
2.1 Organization and Status....................................................4
2.2 Subsidiaries and Joint Ventures............................................4
2.3 Capitalization.............................................................4
2.4 Authority..................................................................5
2.5 No Violation of Agreements or Governing Documents..........................5
2.6 Company SEC Reports and Financial Statements...............................5
2.7 Governmental Filings.......................................................6
2.8 Year 2000..................................................................6
2.9 Liabilities of the Company.................................................6
2.10 Absence of Certain Changes or Events.......................................7
2.11 Proceedings................................................................8
2.12 Employees..................................................................8
2.13 Employee Benefit Plans.....................................................9
2.14 Title to and Condition of Real Property...................................11
2.15 Intellectual Property.....................................................11
2.16 Certain Contracts and Arrangements........................................12
2.17 Status of Contracts.......................................................13
2.18 Insurance.................................................................13
2.19 Permits and Licenses......................................................13
2.20 Bank Account Balances; Powers of Attorney.................................14
2.21 Taxes.....................................................................14
2.22 Related Party Interests...................................................14
2.23 Transactions with Management..............................................15
2.24 No Operating Restrictions.................................................15
2.25 Brokers and Finders.......................................................15
2.26 Investment Company; Public Utility Holding Act............................15
2.27 Registration Rights.......................................................15
2.28 Schedules; Untrue Statements..............................................15
</TABLE>
<PAGE> 97
<TABLE>
<S> <C>
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
RELATING TO THE PROPERTIES..................................................................16
3.1 Proceeds of Production....................................................16
3.2 Invoices..................................................................16
3.3 Gas Imbalances............................................................16
3.4 Gas Prepayments...........................................................16
3.5 Wells.....................................................................16
3.6 AFEs......................................................................17
3.7 Casualty..................................................................17
3.8 Title.....................................................................17
3.9 Pricing...................................................................17
3.10 Equipment.................................................................17
3.11 Leases....................................................................17
3.12 Governmental Qualification................................................18
3.13 Adverse Changes in Production Rates or Oil and Gas Reserves...............18
3.14 Environmental Laws........................................................18
3.15 Reserve Information.......................................................18
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF INVESTOR..................................................19
4.1 Organization..............................................................19
4.2 Authority.................................................................19
4.3 No Violations.............................................................19
4.4 Brokers...................................................................19
4.5 Bankruptcy................................................................19
4.6 Investment Experience.....................................................19
4.7 Investment Intent.........................................................20
4.8 Registration or Exemption Requirements....................................20
4.9 SEC Reports of Investor's Parent..........................................20
ARTICLE 5
OBLIGATIONS PENDING CLOSING.................................................................20
5.1 Inspection of the Company.................................................21
5.2 Return of Data............................................................21
5.3 Acquisition Proposals.....................................................21
5.4 Operation in the Ordinary Course of Business..............................21
5.5 Breaches of Representations and Warranties................................22
5.6 Material Adverse Effect...................................................22
5.7 Proxy Materials...........................................................22
5.8 Negative Covenants........................................................23
5.9 Overhead Reduction Measures During Interim Period.........................24
5.10 Waivers of Affiliate Claims...............................................25
5.11 Cancellation or Exercise of Options.......................................25
5.12 AFE's Prior Closing.......................................................25
5.13 Voting and Support Agreement..............................................25
5.14 Consulting Agreement......................................................25
</TABLE>
<PAGE> 98
<TABLE>
<S> <C>
5.15 Management and Administrative Services Agreement..........................25
5.16 Board of Directors Appointments...........................................26
ARTICLE 6
CONDITIONS TO CLOSING.......................................................................26
6.1 Conditions Precedent to Obligations of Investor...........................26
6.2 Conditions Precedent to Obligations of the Company........................30
6.3 Commercially Reasonable Efforts...........................................32
ARTICLE 7
TERMINATION AND WAIVER......................................................................32
7.1 Termination...............................................................32
7.2 Effect of Termination.....................................................33
7.3 Waiver....................................................................33
7.4 Expense on Termination....................................................33
ARTICLE 8
OTHER COVENANTS.............................................................................33
8.1 Antidilution Protection...................................................33
8.2 Registration Rights.......................................................34
8.3 Filing Expenses...........................................................37
ARTICLE 9
INDEMNIFICATION.............................................................................37
9.1 Indemnification of Investor...............................................37
9.2 Indemnification of the Company............................................37
9.3 Indemnification Procedure.................................................37
9.4 Indemnity Shares..........................................................38
9.5 Indemnification Threshold.................................................39
9.6 Survival of Indemnifiable Claims..........................................39
ARTICLE 10
MISCELLANEOUS...............................................................................39
10.1 Certain Definitions.......................................................39
10.2 Further Assurances........................................................49
10.3 Public Announcements......................................................49
10.4 Expenses..................................................................49
10.5 Notices and Waivers.......................................................49
10.6 Survival..................................................................49
10.7 Gender and Certain References.............................................50
10.8 Successors and Assigns....................................................50
10.9 Applicable Law............................................................50
10.10 Disputes..................................................................50
10.11 Arbitration...............................................................51
</TABLE>
<PAGE> 99
<TABLE>
<S> <C>
10.12 Severability; Judicial Modification.......................................52
10.13 Amendment and Entirety....................................................52
10.14 Rights of Parties.........................................................52
10.15 Time of Essence...........................................................52
10.16 Counterparts .............................................................53
</TABLE>
EXHIBIT 1.4(B)(1) GOM OPERATIONS ADJUSTMENT..........................
EXHIBIT 5.13 VOTING AND SUPPORT AGREEMENT............................
EXHIBIT 5.14 CONSULTING AGREEMENT....................................
EXHIBIT 5.15 MANAGEMENT AND ADMINISTRATIVE SERVICES AGREEMENT........
<PAGE> 100
INVESTMENT AGREEMENT
This INVESTMENT AGREEMENT (this "AGREEMENT") is entered into on this
30th day of July 1999, by and between American Resources Offshore, Inc., a
Delaware corporation (the "COMPANY") with its principal office at 160 Morgan
Street, Versailles, Kentucky 40383, and Blue Dolphin Exploration Company, a
Delaware corporation (the "INVESTOR") (collectively, the "PARTIES" or
individually, a "PARTY").
R E C I T A L S:
WHEREAS, Investor desires to purchase from the Company and the Company
desires to sell to Investor, on the terms and conditions herein set forth,
shares of the Company's common stock, par value $.00001 per share (the "COMMON
STOCK"); and
WHEREAS, the transactions contemplated by this Agreement represents one
of several substantially contemporaneous and mutually contingent transactions
whereby the Company intends to Transfer substantially all of its assets and
properties, subject to, among other things, the approval of such Transfers by
the shareholders of the Company.
NOW, THEREFORE, for and in consideration of the premises, and the
mutual and dependent promises contained herein, and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto, intending to be legally bound, hereby agree as follows:
ARTICLE 1
PURCHASE AND SALE
1.1 Certain Definitions. As used in this Agreement, each
parenthetically capitalized term in the introduction, recitals and other
Sections of this Agreement has the meaning so ascribed to it, and other
capitalized terms have the meaning given them in Section 10.1.
1.2 Closing. Consummation of the transactions contemplated by this
Agreement (the "CLOSING") shall take place at the offices of Porter & Hedges,
L.L.P., at 700 Louisiana, Suite 3500, Houston, Texas 77002 immediately following
the Shareholders Meeting or at such other time and place as all parties hereto
may mutually agree in writing. The date upon which the Closing occurs is
referred to herein as the "CLOSING DATE."
<PAGE> 101
1.3 Issuance of the Shares.
(a) Subject to the terms and conditions of this Agreement, the
Company agrees to issue to Investor at the Closing, free and clear of all
Encumbrances, and Investor agrees to purchase and accept from the Company the
number of shares of Common Stock described below:
(1) The Company shall issue to Investor a number of
shares of Common Stock that will result in Investor owning, immediately
after the Closing, 75% of the combined voting power of all classes of
the Company's voting securities after giving effect to:
(A) the issuance of such shares to Investor
at Closing;
(B) the conversion of all shares of
Preferred Stock owned beneficially or of record by
Rick G. Avare and Douglas L. Hawthorne into Common
Stock pursuant to their respective Voting and Support
Agreements; and
(C) the issuance or deemed issuance at
Closing of voting securities that the Company becomes
obligated to issue as a result of the issuance to
Investor of shares of Common Stock at Closing,
including pursuant to antidilution rights or other
rights to of any Person to acquire Common Stock.
The shares of Common Stock issuable to Investor pursuant to this
Section 1.3(a)(1) are referred to as the "PRIMARY SHARES."
(2) In addition to the Primary Shares, the Company
shall also issue to Investor at Closing and from time-to-time
thereafter shares of Common Stock if Investor elects to receive
additional shares of Common Stock:
(A) in lieu of all or any portion of the
downward cash adjustments to which Investor would
otherwise be entitled pursuant to Section 1.4(b); or
(B) in full or partial satisfaction of any
right of the Investor to indemnification from the
Company pursuant to Article 9.
Such additional shares of Common Stock that Investor chooses to
receive, if any, are referred to as the "ADJUSTMENT SHARES." Investor
shall not be required to accept any Adjustment Shares in lieu of cash.
If Investor chooses to receive Adjustment Shares, the number of shares
of Adjustment Shares shall be determined by dividing the dollar amount
of the aggregate downward cash adjustment in the Purchase Price or
indemnification amount, as the case may be, by the price per share of
Common Stock described in Section 9.4(b). The Primary Shares and the
Adjustment Shares, if any, are collectively referred to herein as the
"SHARES."
2
<PAGE> 102
1.4 Purchase Price for the Shares.
(a) In consideration for the issuance of the Shares and the
other representations, warranties, covenants and agreements contained herein,
Investor shall pay to the Company a purchase price of $4,736,315 which amount
shall be subject to adjustments set forth in Section 1.4(b) (the purchase price,
as adjusted pursuant to this Agreement, being referred to as the "PURCHASE
PRICE"). The Purchase Price shall be payable at closing by wire transfer on the
Closing Date of immediately available funds to such of the Company's creditors
and in such amounts as the Company shall direct in writing and the balance of
the Purchase Price not so directed to the Company's creditors shall be paid into
the Company's bank account as designated by the Company. The Company shall
provide written directions to Investor for payment of the Purchase Price
(including all pertinent wire transfer instructions) at least five Business Days
before the Closing Date.
(b) The $4,736,315 price payable by Investor to the Company
pursuant to Section 1.4(a)(1) shall be subject to each of the following
adjustments at Closing:
(1) The Purchase Price shall be adjusted in
accordance with the GOM Operations Adjustment, which shall be
calculated as set forth on Exhibit 1.4(b)(1) hereto.
(2) The Purchase Price shall be reduced by all
Transaction Costs.
(3) The Purchase Price shall be reduced by the
amount, if any, by which the total liabilities of the Company
at the Closing Date, other than Permitted Liabilities (defined
below) exceed $3,802,000.
(c) "PERMITTED LIABILITIES" shall mean and include:
(1) amounts due under the Residual Note;
(2) costs included in the calculation of the GOM
Operations Adjustment; and
(3) AFEs which the Company has committed to pay and
which are approved by Investor pursuant to Section 5.12.
(d) The determination of the Purchase Price shall be made in
accordance with generally accepted accounting principles as consistently applied
by the Company.
1.5 Closing Deliveries. On the Closing Date: (a) the Company shall
deliver to Investor duly and validly issued certificates representing the
Shares, in such denominations as Investor shall request no later than five
Business Days prior to Closing or if no such request is made, in a single
certificate; (b) the Company and Investor shall deliver to one another all other
documents,
3
<PAGE> 103
instruments and agreements as required under this Agreement; and (c) Investor
shall pay to the Company the Purchase Price for the Shares.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
As material inducements for the execution, delivery and performance of
this Agreement and the transactions contemplated hereby, the Company hereby
makes to Investor the representations and warranties set forth in this Article 2
and Article 3 as of the date hereof and the Closing Date, except as specifically
set forth in the "EXCEPTION SCHEDULE" in a numbered paragraph that corresponds
to the section for which disclosure is made.
2.1 Organization and Status. The Company is a corporation duly
organized, validly existing and in good standing under the Laws of the State of
Delaware, and is duly qualified and in good standing as a foreign corporation in
each jurisdiction where its properties (whether owned, leased or operated) or
its business conducted require such qualification, except where the failure to
be so qualified would not have a Material Adverse Effect. The Company has all
requisite corporate power and authority to own, operate and lease its property
and to carry on its businesses as is now being conducted. The Company has
delivered to Investor complete and accurate copies of its Certificate of
Incorporation ("CERTIFICATE OF INCORPORATION") and Bylaws ("BYLAWS"), and the
charter documents and bylaws of each of its subsidiaries, each as amended to the
date hereof.
2.2 Subsidiaries and Joint Ventures. Except as disclosed on Section 2.2
of the Exception Schedule the Company has no subsidiaries and owns no stock or
other interest in any other corporation or in any partnership or limited
liability Company, or other venture or entity. Except as disclosed on Section
2.2 of the Exception Schedule, the Company owns all of the issued and
outstanding capital stock and other ownership interests of each of its
subsidiaries, free and clear of all Encumbrances, and there are no existing
options, warrants, calls, subscriptions, convertible securities or other
securities, commitments or obligations of any character relating to the
securities of any such subsidiary. As of the Closing, the Company will have no
subsidiaries.
2.3 Capitalization. (a) The Company has authorized capital stock
consisting of 50,000,000 shares of Common Stock, of which 12,811,036 shares are
issued and 210,890 shares are held in treasury on the date hereof and 3,000,000
shares of Preferred Stock, of which 230,516 shares are issued and outstanding on
the date hereof. The shares of Preferred Stock are convertible into an aggregate
of 230,516 shares of Common Stock and have voting rights of four votes per share
of Preferred Stock. Except as described in Section 2.3(a),of the Exception
Schedule there are no arrearages in the payment of dividends on the Preferred
Stock. All of the outstanding shares of capital stock of the Company have been
duly authorized and are validly issued, fully paid and nonassessable, and no
shares were issued, and no options were granted, in violation of preemptive or
similar rights of any shareholder or in violation of any applicable Securities
Act.
4
<PAGE> 104
(b) Except as set forth on Section 2.3(b) of the Exception
Schedule, there are no preemptive rights or any outstanding subscriptions,
options, warrants, rights, convertible securities or other agreements or
commitments of the Company of any character relating to the issued or unissued
capital stock or other securities of the Company. All shares of capital stock
issuable by the Company under the terms of antidilution agreements have been
issued. The occurrence of the transactions contemplated by this Agreement will
not give rise to any obligation of the Company to issue additional capital stock
or other securities pursuant to antidilution rights or any other arrangement,
except as contemplated by this Agreement. There are no outstanding obligations
of the Company to repurchase, redeem or otherwise acquire any of its outstanding
securities.
2.4 Authority. The Company has the corporate power and authority and,
except for the approval of its stockholders, has taken all corporate action
necessary to execute and deliver this Agreement and the Purchase and Sale
Agreement and to consummate the transactions contemplated by such agreements.
This Agreement and the Purchase and Sale Agreement and the transactions
contemplated by such agreements have been duly and validly authorized by the
Board of Directors of the Company, validly executed and delivered by the Company
and, as of the Closing Date, will have been duly and validly approved by the
shareholders of the Company. This Agreement and the Purchase and Sale Agreement,
and the documents and instruments required pursuant to such agreements,
constitute the valid and binding obligations of the Company, enforceable in
accordance with their respective terms, except as enforcement may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar Laws in
effect relating to the rights and remedies of creditors, as well as to general
principles of equity (regardless of whether such enforceability is considered in
a Proceeding in equity or at law).
2.5 No Violation of Agreements or Governing Documents. Except as
described in Section 2.5 of the Exception Schedule, neither the execution and
delivery of this Agreement or the Purchase and Sale Agreement by the Company nor
consummation of transactions contemplated hereby and thereby by the Company will
(a) conflict with the Certificate of Incorporation or the Bylaws of the Company
or the charter documents or bylaws of any of its subsidiaries, (b) result in any
breach or termination of, or constitute an event which with notice or lapse of
time, or both, would become a default under, or result in the creation of any
Encumbrance upon any asset of the Company under, or create any rights of
termination, cancellation, modification, amendment, or acceleration in any
person under, any Contract, (c) violate any Order, (d) require the consent,
approval, authorization, or order of any person or Governmental Authority (other
than the shareholders of the Company at the Shareholders Meeting) not heretofore
obtained other than those consents or approvals specifically contemplated
hereby, or (e) result in the loss or modification or any license, franchise,
permit or other authorization granted to or otherwise held by the Company.
2.6 Company SEC Reports and Financial Statements. To the Knowledge of
the Company, the Company has filed with the SEC, and has made available to
Investor true and complete copies of, all forms, reports, schedules, statements,
and other documents required to be filed by it since December 31, 1995 under the
Securities Exchange Act of 1934 (the "EXCHANGE ACT") or the Securities Act (each
of such forms, reports, schedules, statements, and other documents, to the
extent
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filed and publicly available before the date of this Agreement, other than
preliminary filings, is referred to as a "SEC DOCUMENT"). Each SEC Document has
been timely filed from May 31, 1998 through the Closing Date. Each SEC Document,
at the time filed, (a) did not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading and (b) complied in all material respects with
the applicable requirements of the Exchange Act and the Securities Act, as the
case may be, and the applicable rules and regulations of the SEC thereunder. The
financial statements included in the SEC Documents (the "FINANCIAL STATEMENTS")
comply as to form in all material respects with applicable accounting
requirements and with the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto or, in the case of the
unaudited statements, as permitted by Form 10-Q of the SEC) and fairly present
(subject, in the case of the unaudited statements, to normal, recurring audit
adjustments) the consolidated financial position of the Company and its
consolidated subsidiaries as at the dates thereof and the consolidated results
of their operations and cash flows for the periods then ended. The certified
public accountants who have certified certain financial statements of the
Company included in the SEC Documents are independent public accountants as
required by the Securities Act and the rules and regulations thereunder.
Investor acknowledges that the Independent Auditors' Report with respect to the
Financial Statements as of and for the period ended December 31, 1998 reflects
that substantial doubts exist about the Company's ability to continue as a going
concern.
2.7 Governmental Filings. To the Knowledge of the Company, no notices,
reports or other filings are required to be made by the Company or its
subsidiaries with, nor are any consents, registrations, approvals, permits or
authorizations required to be obtained by the Company or its subsidiaries from,
any Governmental Authority in connection with the execution and delivery of this
Agreement by the Company and the consummation by the Company of the transactions
contemplated hereby.
2.8 Year 2000. To the Knowledge of the Company, all computer systems
and computers software used by the Company recognize and manipulate date
information relating to dates on or after January 1, 2000 and the operation and
functionality of such computer systems and such computer software will not be
adversely affected by the advent of the year 2000 or any manipulation of data
featuring information relating to dates before, on or after January 1, 2000
("MILLENNIUM FUNCTIONALITY"), except in each case of such computer systems and
computer software, the failure of which to achieve Millennium Functionality,
individually or in the aggregate, would not be reasonably likely to have a
Material Adverse Effect. The costs of the adaptions necessary to achieve
Millennium Functionality are not reasonably likely to have a Material Adverse
Effect.
2.9 Liabilities of the Company. The Company does not have any
liabilities or obligations, either accrued, absolute, contingent, or otherwise,
other than those (a) reflected or reserved against in the December 31, 1998
audited consolidated balance sheet of the Company, or (b) incurred in the
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ordinary course of business since December 31, 1998 and which individually and
in the aggregate would not have a Material Adverse Effect.
2.10 Absence of Certain Changes or Events. Since the January 1, 1999,
the Company has not:
(a) suffered any event, condition or circumstance that has
had, or is reasonably likely to have, a Material Adverse Effect;
(b) changed any accounting methods, principles or practices;
(c) conducted any business which is outside the ordinary
course of business or not substantially in the manner that the Company
previously conducted its business; or
(d) mortgaged, pledged or subjected to lien, charge, security
interest or to any other Encumbrance other than Permitted Encumbrances any of
its assets, or amended, modified, or extended any existing lien on or security
interest in any such assets;
(e) Transferred or agreed to Transfer of any of its assets
other than oil and gas leases abandoned as non-commercial, and oil and gas
equipment sold for fair market value in the ordinary course of business for
consideration not in excess of $5,000 in the aggregate;
(f) waived or released any rights, including cancellation of
any debt or accounts receivable;
(g) settled any claims or Proceedings involving (i) any
payment by the Company of an amount over $5,000 in the aggregate, (ii) any
stipulations of fact or admissions of liability in any Proceeding, or (iii) any
obligation on the part of the Company of a continuing nature;
(h) except as set forth in Section 2.23 of the Exception
Schedule, entered into any agreement with any of its shareholders, directors,
officers, employees, or other Affiliates;
(i) permitted or suffered any amendment, cancellation,
modification or termination of any contract, agreement, license, permit or
arrangement to which it is a party or to which any of its properties or assets
is subject, other than with respect to pricing changes in spot market gas
purchase Contracts having a term of 30 days or less;
(j) lost, canceled, terminated, amended or modified any
material lease to which it is a party;
(k) failed to pay when due any lease obligation, obligation
for borrowed money, or failed to pay any trade account payable within 60 days of
its due date, or defaulted in respect of any
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other contractual obligation to which the Company is subject, except for
billings and invoices being contested in good faith which are described in
Section 2.11 of the Exception Schedule; or
(l) loaned or advanced any funds to its directors, officers,
employees, agents, shareholders, or other Affiliates or to any of its
shareholders except for loans or advances made in accordance with customary
practices of the Company (consistent with good business practice) for the
purpose of defraying ordinary and necessary business expenses incurred by
employees in the usual course and scope of their employment and for which proper
supporting documentation has been obtained by the Company.
2.11 Proceedings. Except as listed on Section 2.11 of the Exception
Schedule, no Proceeding is pending or, to the Company's Knowledge, threatened
against or relating to the Company, its officers or directors in their
capacities as such, or any of the Company's properties, businesses or
subsidiaries.
2.12 Employees.
(a) Each of the Company and each of its subsidiaries has
complied with all Laws relating to the employment of labor, including,
without limitation, provisions thereof relating to wages, hours, equal
opportunity, collective bargaining, the payment of social security and
other employment-related taxes, and occupational safety and health.
(b) Each individual who is currently performing or has
performed services to or for either the Company or any ERISA Affiliate
as an independent contractor could not reasonably be found by the
Internal Revenue Service or any Governmental Authority to be an
employee of either the Company or such ERISA Affiliate, as applicable,
while such individual was providing services as an independent
contractor. The term "ERISA Affiliate" means any other employer that
is, or at any relevant time was, together with the Company, treated as
a "single employer" under Section 414 of the Internal Revenue Code of
1986, as amended (the "CODE").
(c) Neither the Company nor any subsidiary is a party to or
bound by any collective bargaining or other labor agreement. Neither
the Company nor any subsidiary has any labor relations problem pending.
To the Knowledge of the Company and any subsidiary, there are no union
organizing efforts involving any employees of the Company or any
subsidiary.
(d) There are no workers' compensation claims pending against
the Company or any subsidiary at the Closing Date and, to the Knowledge
of the Company or any subsidiary at the Closing Date, there exists no
set of circumstances that is reasonably likely to give rise to such a
claim.
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(e) To Knowledge of the Company, no employee of the Company or
any subsidiary of the Company at the Closing Date is subject to any
confidentiality or noncompetition agreement or any other Contract or
restriction of any kind that would impede in any way the ability of
such employee to carry out fully all activities of such employee in
furtherance of the business of the Company or any subsidiary or that
would conflict with the business of the Company.
2.13 Employee Benefit Plans.
(a) The only "employee pension benefit plans," (as defined in
Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") including, without limitation, any "multiemployer plan" as defined in
Section 3(37) of ERISA), employee welfare benefit plans (as defined in Section
3(1) of ERISA), maintained, contributed to, or required to be contributed to by
the Company or any ERISA Affiliate with respect to any employees of the Company
or any ERISA Affiliate, or pursuant to which the Company or any ERISA Affiliate
may have any liability with respect to any employees of the Company or any ERISA
Affiliate, any former employees of the Company or any ERISA Affiliate or any
current or former director or officer of the Company (each, a "PLAN") are listed
on Schedule 2.13. Without liming the generality of the preceding sentence, the
term "Plan" shall include all arrangements, contracts, policies, or practices
(whether written or unwritten, qualified or unqualified, funded or unfunded and
including any that have been frozen or terminated) relating to any of the
following benefits: pension, profit sharing, retirement, supplemental
retirement, stock, stock option, basic and supplemental accidental death and
dismemberment, basic and supplemental life and health insurance, post-retirement
medical or life, welfare, dental, vision, savings, bonus, deferred compensation,
incentive compensation, business travel and accident, holiday, vacation,
severance pay, salary continuation, sick pay, sick leave, short and long term
disability, tuition refund, service award, company car, scholarship, relocation,
patent award, fringe benefit, or other employee benefits.
(b) Set forth on Schedule 2.13 is a true and complete list of:
(i) each employment or consulting agreement, arrangement or other understanding
that is currently in effect to which the Company or any ERISA Affiliate is a
party, by which such entity is bound or pursuant to which such entity is an
obligator or a beneficiary, (ii) each agreement, arrangement or other
understanding that could result in any severance payment or benefit payable by
the Company or any ERISA Affiliate, whether as a result of the Company's
execution and performance of the transactions contemplated by this Agreement or
otherwise, to any employee, former employee, director, or officer of the Company
or any ERISA Affiliate and (iii) each agreement, arrangement or other
understanding that could result in a "parachute payment" as defined in Section
280G of the Code (each, an "EXECUTIVE COMPENSATION PLAN"), whether as a result
of the Company's execution and performance of the transactions contemplated by
this Agreement or otherwise.
(c) As applicable, with respect to each of the Plans, the
Company has delivered to Investor true and complete copies of (i) all Plan
documents (including all amendments and modifications thereof) and, in the case
of an unwritten Plan, a written description thereof, and in
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either case all related agreements including, without limitation, trust
agreements and amendments thereto, insurance contracts, and investment
management agreements, (ii) the two most recent annual reports (Form 5500 and
all schedules thereto) filed with the Internal Revenue Service, actuarial
reports, financial reports or trustee reports, (iii) the current summary plan
descriptions and all modifications thereto and (iv) copies of any private letter
rulings, requests and applications for determination and determination letters
issued with respect to the Plans within the past five years. As applicable, with
respect to each of the Executive Compensation Plans, the Company has delivered
to Investor true and complete copies of all Executive Compensation Plan
documents (including all amendments and modifications thereof), and, in the case
of an unwritten Executive Compensation Plan, a written description thereof, and
in either case related agreements including, without limitation, trust
agreements and amendments thereto, insurance contracts, and investment
management agreements.
(d) The Company and each ERISA Affiliate are in compliance in
all respects with all Laws, including ERISA and the Code, applicable to the
Plans. Each Plan has been maintained, operated and administered in compliance in
all respects with its terms and any related documents or agreements and the
applicable provisions of ERISA and the Code.
(e) Any Plan which is an "employee pension benefit plan"
within the meaning of Section 3(2) of ERISA and which are intended to meet the
qualification requirements of Section 401(a) of the Code (each a "PENSION PLAN")
now meet, and at all times since their inception have met, the requirements for
such qualification and the related trusts are now, and at all times since their
inception have been, exempt from taxation under Section 501(a) of the Code.
(f) All Pension Plans have received determination letters from
the IRS to the effect that such Pension Plans are qualified and the related
trust are exempt from federal income Taxes and no determination letter with
respect to any Pension Plan has been revoked nor, to the Knowledge of the
Company and any subsidiary, is there any reason for such revocation, nor has any
Pension Plan been amended since the date of its most recent determination letter
in any respect which would adversely affect its qualification. Neither the
Company nor any ERISA Affiliate has ever contributed to, or been required to
contribute to any "multiemployer plan" (within the meaning of Section 3(37) of
ERISA) and neither the Company nor any ERISA Affiliate has any liability
(contingent or otherwise) relating to the withdrawal or partial withdrawal from
a multiemployer plan.
(g) No Plan is (or at any time has been) subject to Part 3,
Subtitle B of Title I of ERISA or Title IV of ERISA.
(h) There are no currently pending audits or investigations by
any Governmental Authority involving the Plans, no threatened or currently
pending claims (except for individual claims for benefits payable in the normal
operation of the Plans), Proceedings involving any Plan, any fiduciary thereof
or service provider thereto and, to the Knowledge of the Company and any
subsidiary, there is no set of circumstances which exists that will give rise to
any such claim or Proceeding.
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(i) None of the Company, any ERISA Affiliate, or any employee
of the Company or any ERISA Affiliate has engaged in or, in connection with the
transactions contemplated by this Agreement, will engage in a "prohibited
transaction" within the meaning of Section 406 of ERISA or Section 4975 of the
Code and no such person or entity has breached any duty imposed by Title I of
ERISA with respect to any Plan. To the Knowledge of the Company and any
subsidiary, no other person or entity has engaged or will engage in such a
prohibited transaction or breach with respect to any Plan. None of the assets of
any Plan is invested in any property constituting "employer real property" or an
"employer security" within the meaning of Section 407 of ERISA.
(j) Any insurance premium under any insurance policy related
to a Plan for any period up to and including the Closing shall have been paid or
accrued and booked on or before the Closing, and, with respect to any such
insurance policy or premium payment obligation, none of the Company, any ERISA
Affiliate or Investor shall be subject to a retroactive rate adjustment, loss
sharing arrangement or other actual or contingent liability.
(k) No Plan provides benefits, including, without limitation,
death or medical benefits, beyond termination of service or retirement, other
than (i) coverage mandated by law or (ii) death or retirement benefits under a
Plan qualified under Section 401(a) of the Code.
(l) With respect to each Plan that is a "group health plan"
within the meaning of Section 607 of ERISA and that is subject to Section 4980B
of the Code, the Company and each ERISA Affiliate comply, and have complied, in
all respects with the continuation coverage requirements (including, without
limitation, any requirement to provide any notice to any individual) of those
provisions and Part 6 of Title I of ERISA.
2.14 Title to and Condition of Real Property. The Company does not own
any real property other than the Properties. Schedule 2.14 contains a list of
all real property (other than the Properties) currently leased or occupied by
the Company or its subsidiaries (the "LEASED REAL PROPERTY"), including the
dates of and parties to all leases and any amendments thereof and a list of all
real property previously leased or occupied by the Company or its subsidiaries.
All Leased Real Property (including improvements thereon) is in satisfactory
condition and repair consistent with its present use, and is available for
immediate use in the conduct of the Company business. Neither the operations of
the Company or its subsidiaries on any Leased Real Property, nor any
improvements on the Leased Real Property, violates any applicable Law, except
where such violation would not have a Material Adverse Effect on the Company.
The Leased Real Property includes all real property necessary to conduct the
business of the Company and its subsidiaries. None of the Leased Real Property
has been condemned or otherwise taken by public authority and no such
condemnation is, to the Knowledge of the Company, threatened or contemplated.
2.15 Intellectual Property. The Company owns, or has a valid license to
use, all software, seismic data and interpretations, maps, well logs, patents,
trademarks, service marks, trade names, copyrights, trade secrets, technology,
know-how and other intellectual property (collectively, the "INTELLECTUAL
PROPERTY") that is or has been used on the premises of the Company in the
conduct of
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the business of the Company. Schedule 2.15 contains a complete and accurate list
of all patents, patent applications, trademarks and service marks and related
applications, trade names and copyrights owned by or licensed to the Company.
Schedule 2.15 also contains a description of all agreements or licenses relating
to the acquisition by, or license to the Company of, such Intellectual Property
or under which the Company has sold or granted a right to use any Intellectual
Property. All Intellectual Property owned by the Company is owned by it free and
clear of any Encumbrance. The conduct of the Company's business does not
conflict with or infringe upon any Intellectual Property rights of any other
person and no claims of conflict or infringement are pending or threatened
against the Company or its subsidiaries. The Company has made all necessary
filings and recordations and has paid all required fees and Taxes to maintain
ownership of the Intellectual Property.
2.16 Certain Contracts and Arrangements. Schedule 2.16, contains a
complete and accurate list of each of the following types of Contracts:
(a) Contracts, including any mortgage, note or other
instrument, relating to the borrowing of money or the incurrence of
indebtedness or the guaranty of any obligation for the borrowing of
money;
(b) any Contract, purchase order or acknowledgment form for
the purchase, sale, lease or other disposition of equipment, products,
materials or capital assets, or for the performance of services, with
respect to which the annual aggregate dollar amount either due to, or
payable by, the Company or exceeds $5,000;
(c) Contracts for the joint performance of work or services,
joint venture agreements and all other Contracts pertaining to
investments by the Company in other Entities;
(d) Contracts with respect to the sale or disposition of the
Company's capital stock or other securities;
(e) any Contracts or understandings with outside advisors,
consultants, or investment bankers, including any agreements or
understandings with Jefferies & Co., Inc. and M2 Capital, Inc.;
(f) Contracts with parties other than employees of the Company
pursuant to which the Company or any of its employees are subject to
confidentiality or noncompetition obligations; and
(g) any other Contract not described in any other Schedule
which contains unfulfilled obligations, is not terminable without
payment of premium or penalty upon 30 days' notice or less and the
annual amount either due to or payable by the Company or any of its
subsidiaries exceeds $25,000 for any single contract or $50,000 in the
aggregate.
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Complete and accurate copies of all such Contracts that are in written form have
been delivered to Investor.
2.17 Status of Contracts. Except as set forth in Section 2.17 of the
Exception Schedule, the Company is not in violation of, in default under, or to
its Knowledge, in alleged violation of or in alleged default under any Contract,
and there has not occurred any event which with lapse of time or giving of
notice or both would constitute such a violation or default. The Company is not
aware of any default by any other party to any Contract or of any event which
(whether with or without notice, lapse of time or both) would constitute a
material default by any other party with respect to obligations of that party
under any Contract, and, to the Knowledge of the Company, there are no facts
that exist indicating that any of the Contracts may be totally or partially
terminated or suspended by the other parties. Neither the Company nor any of its
subsidiaries at the Closing Date has granted any waiver or forbearance with
respect to any of the Contracts. Neither the Company nor any of its subsidiaries
is a party to, or bound by, any Contract that the Company can reasonably foresee
will result in any material loss to the Company upon the performance thereof
(including any liability for penalties or damages, whether liquidated, direct,
indirect, incidental or consequential). The Company has not guaranteed, and is
not otherwise liable for, the payment or performance by any of its subsidiaries
under contract, instrument or other obligation.
2.18 Insurance. Schedule 2.18 contains a complete and accurate list of
all policies of fire, liability, worker's compensation and other forms of
insurance insuring the Company, its officers or directors, its assets or its
operations (the "POLICIES"), setting forth the applicable deductible amounts.
All of the Policies are valid, enforceable and in full force and effect, all
premiums with respect to the Policies covering all periods up to and including
the date as of which this representation is being made have been paid and no
notice of cancellation or termination has been received with respect to any
Policy. The Policies are sufficient for compliance with all requirements of Law
and Contracts to which the Company or any of its subsidiaries is a party and
provide insurance for the risks and in the amounts and types of coverage usually
obtained by persons using or holding similar properties in similar businesses.
Complete and accurate copies of the Policies and all endorsements thereto have
been delivered to Investor. The Company has not been refused any insurance
coverage and no insurance coverage has been canceled during the three years
preceding the date of this Agreement. None of the Policies permit the insurer to
retroactively increase or assess premiums based on subsequent claims history.
There are no pending Claims made by the Company under the Policies or any other
insurance Contracts.
2.19 Permits and Licenses. Schedule 2.19 contains a complete and
accurate list of all Permits held by the Company, listed by Governmental
Authority issuing such Permits. Each of the Company and its subsidiaries holds,
and at all times has held, all Permits necessary for the lawful conduct of its
business pursuant to all applicable Laws. Each of the Company and its
subsidiaries is in compliance with each of the terms of the applicable Permits,
and there are no claims of violation by the Company or any of its subsidiaries
of any of such Permits. Complete and accurate copies of all Permits held by the
Company and its subsidiaries have been delivered to Investor. All Governmental
Authorities that have issued any Permits to or with respect to the Company, its
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business, or subsidiaries have consented or prior to the Closing will have
consented (where such consent is necessary) to the consummation of the
transactions contemplated by this Agreement without requiring modification of
the rights or obligations of the Company or its subsidiaries under any of such
Permits.
2.20 Bank Account Balances; Powers of Attorney. Schedule 2.20 lists (a)
the name, address and contact person of each bank or other financial institution
in which the Company has an account, safe deposit box or line of credit; (b) the
account number, account name and type of account; (c) the dollar amount of each
account including any restrictions on the account; and (d) the names of all
persons authorized to draw thereon or have access thereto; and the names of all
persons, if any, holding powers of attorney to act for the Company.
2.21 Taxes. The Company and its subsidiaries have filed on a timely
basis all federal, state, local, foreign and other returns, reports, forms,
declarations and information returns required to be filed by them with respect
to Taxes (as defined below) which relate to the business, results of operations,
financial condition, properties or assets of the Company or its subsidiaries for
all periods (collectively, the "RETURNS") and have paid on a timely basis all
Taxes shown to be due on the Returns. All Returns filed are complete and
accurate in all material respects and no additional Taxes are owed by the
Company or its subsidiaries with respect to the periods covered by the Returns
or for any other period. The Company has provided Investor with complete and
accurate copies of all Returns for each of the Company's fiscal years ended on
or after December 31, 1992. Neither the Company nor any of its subsidiaries has
any liability for Taxes of any person (other than themselves), whether arising
under federal, state, local or foreign law, as a transferee or successor, by
contract, or otherwise. Except as set forth on Section 2.21 of the Exception
Schedule, neither the Company nor any of its subsidiaries is currently the
beneficiary of any extension of time within which to file any Return. Except as
set forth on Section 2.21 of the Exception Schedule, no Returns have been
examined by the applicable taxing authorities for any period and, except as set
forth on Section 2.21 of the Exception Schedule, the Company has not received
any notice of audit with respect to any Return or any fiscal year and there are
no outstanding agreements or waivers extending the applicable statutory periods
of limitation for Taxes for any period. No claim has ever been made by an
authority in a jurisdiction where the Company or its subsidiaries do not file
Returns that they are or may be subject to taxation by that jurisdiction. All
Taxes that are or have been required to be withheld or collected by the Company
or any of its subsidiaries or predecessors have been duly withheld and collected
and, to the extent required, have been properly paid or deposited as required by
applicable laws.
2.22 Related Party Interests. Except as described in reasonable detail
in Section 2.13 or Section 2.22 of the Exception Schedule, no shareholder,
officer or director, or former officers or directors of the Company (or any
entity owned or controlled by one or more of such parties) (a) has any interest
in any property, real or personal, tangible or intangible, used in or pertaining
to the Company's business, (b) is indebted to the Company or its subsidiaries,
or (c) has any financial interest, direct or indirect, in any outside business
which has significant transactions with the Company. True and complete copies of
all agreements listed on Section 2.13 and Section 2.22 of the
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Exception Schedule have been provided to Investor. The Company is not indebted
to any of its shareholders, directors or officers (or any entity owned or
controlled by one or more of such parties), except for amounts due under normal
salary arrangements and for reimbursement of ordinary business expenses. The
consummation of the transactions contemplated by this Agreement or the Purchase
and Sale Agreement will not (either alone or upon the occurrence of any act or
event, or with the lapse of time, or both) result in any payment (severance or
other) becoming due from the Company to any of its shareholders, officers,
directors or employees (or any entity owned or controlled by one or more of such
parties).
2.23 Transactions with Management. Except as set forth in Section 2.13
or Section 2.22 of the Exception Schedule, the Company is not a party to any
Contract with any of its shareholders, directors, officers, employees, or
agents, or with any former shareholder, director, officer, employee, or agent of
the Company.
2.24 No Operating Restrictions. No power of attorney or similar
authorization given by the Company or any of its subsidiaries is presently in
effect or outstanding. No Contract (i) limits or burdens the freedom of the
Company to compete in any line of business or with any person or (ii) limits or
burdens the operations of the Company in, or creates rights in favor of other
persons with respect to, the ownership of property or conduct of operations
within, any area of mutual interest or other geographic area or geological zone.
2.25 Brokers and Finders. The Company has incurred no obligation or
liability, contingent or otherwise, for brokers', finders' or investment
bankers' fees in respect of the matters contemplated by this Agreement,
including the Southern Disposition.
2.26 Investment Company; Public Utility Holding Act. The Company is not
an "investment company" as defined in the Investment the Company Act of 1940, as
amended, and the rules and regulations promulgated thereunder, and the Company
is not a "holding company" or and "affiliate" of a holding company or public
utility as defined in the Public Utility Holding Company Act of 1940, as
amended, and the rules and regulations promulgated thereunder.
2.27 Registration Rights. Except for the registration rights granted
herein, or set forth in Section 2.27 of the Exception Schedule, the Company has
not agreed to register under the Securities Act the sale of any of securities
issued or guaranteed by it.
2.28 Schedules; Untrue Statements. All schedules furnished by the
Company pursuant to this Agreement are true, complete and accurate in all
respects and neither omit or contain items required by this Agreement to be
contained therein or omitted therefrom, respectively. This Agreement and all
other documents and information furnished by the Company or any of their
Affiliates or their respective representatives to Investor and its Affiliates or
their respective representatives pursuant hereto or in connection with the
transactions contemplated by this Agreement do not include any untrue statement
of a material fact or omit to state any material fact necessary to make the
statements made herein and therein not misleading.
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ARTICLE 3
REPRESENTATIONS AND WARRANTIES
RELATING TO THE PROPERTIES
As additional material inducements for the execution, delivery and
performance of this Agreement and the transactions contemplated hereby, the
Company hereby makes to Investor the representations and warranties set forth in
this Article 3, except as specifically set forth in Exception Schedule in a
numbered paragraph that corresponds to the section for which disclosure is made,
that as of the date hereof and the Closing Date. Such representations and
warranties are in addition to, and not in lieu of, other representations and
warranties of the Company contained herein.
3.1 Proceeds of Production. To the Company's Knowledge, (a) all
proceeds of production of Hydrocarbons from the Properties are currently being
paid to the operator of such Properties, for the Company's account, without the
furnishing of indemnity (other than customary warranties contained in division
orders, transfer orders or production sales contracts); and (b) no material
portion of such proceeds are being held in suspense. Schedule 3.1 describes all
Hydrocarbon properties owned by the Company after giving effect to the closing
of the Purchase and Sale Agreement and the Southern Disposition.
3.2 Invoices. Except as set forth in Section 3.2 of the Exception
Schedule, the Company has paid all joint-interest billings and other invoices
Attributable to the ownership or operation of the Properties, to the extent that
such billings and invoices have been received by the Company and have become due
and payable.
3.3 Gas Imbalances. To the Company's Knowledge, there exist no
production imbalances affecting the Properties.
3.4 Gas Prepayments. Except as set forth in Section 3.4 of the
Exception Schedule, the Company is not obligated, by virtue of a prepayment,
take-or-pay, production payment or other arrangement, to deliver Hydrocarbons
produced from the Properties on or after the January 1, 1999, without receiving
full price for such production.
3.5 Wells. Schedule 3.5 lists all wells located on the Properties. To
the Company's Knowledge, (a) all of the wells located on the Properties have
been drilled and completed within the boundaries of the applicable Leases or
within the limits otherwise permitted by contract, pooling or unitization
agreement or applicable Law, (b) all drilling, completion, development,
operation, plugging and abandonment of the wells located on the Properties have
been conducted in material compliance with all applicable Laws and (c) except as
set forth in Section 3.5 of the Exception Schedule, there are no wells located
on the Properties that (i) the Company is currently obligated by law or contract
to plug and abandon; (ii) the Company will be obligated by law or contract to
plug and abandon with the lapse of time or notice or both because the well is
not currently capable of
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producing Hydrocarbons in commercial quantities; or (iii) are subject to
exceptions to a requirement to plug and abandon issued by a Governmental
Authority having jurisdiction over the Properties.
3.6 AFEs. Except as set forth on Section 3.6 of the Exception Schedule,
there are no outstanding authorizations for expenditure (approved or proposed)
that (a) require the drilling of wells or other material development operations
to earn or to continue to hold all or any portion of the Properties or (b)
obligate the Company to make payments of any material amounts in connection with
the drilling of wells or other material capital expenditures affecting the
Properties.
3.7 Casualty. To the Company's Knowledge, no Casualty Event has
occurred on or since January 1, 1999.
3.8 Title.
(a) Except as provided in Section 3.8(a) of the Exception
Schedule, after giving effect to the transactions contemplated by the Purchase
and Sale Agreement, the Company has Marketable Title to the Properties and shall
defend title to the Properties against all claims and demands of all Persons
whomsoever claiming title to the Properties, or any part thereof, by, through or
under the Company, but not otherwise.
(b) Except as provided in Section 3.8(b) of the Exception
Schedule, after giving effect to the transactions contemplated by the Purchase
and Sale Agreement, the Company has good and indefeasible title to the Platforms
entitling the Company to an undivided ownership interest in each Platform equal
to the Company's Working Interest for the Property upon which each Platform is
located and the Company shall defend title to the Platforms against all claims
and demands of all Persons whomsoever claiming title to the Company's undivided
ownership in the Platforms, or any part thereof, by, through or under the
Company, but not otherwise.
3.9 Pricing. To the Company's Knowledge, the prices being received for
the production of Hydrocarbons from the Properties do not violate any Contract
or Law.
3.10 Equipment. To the Company's Knowledge, the Equipment is in good
repair, working order and operating condition and is adequate for the operation
of the Properties.
3.11 Leases. To the Company's Knowledge, (a) the Leases are in full
force and effect, by operations approved by the MMS in accordance with
applicable Law; (b) the Company has made available to the Investor true and
correct copies of the Leases, including any amendments thereto; (c) the Company
has duly performed all of the material obligations under the Leases that are now
or will prior to the Closing be required to be performed by the Company; (d) the
Company has not received any notice of default under the Leases, nor is any such
notice pending; and (e) all rentals and royalties (including minimum royalties,
shut-in or otherwise) required to be paid to perpetuate the Leases to the
Execution Date have been timely and properly paid to the proper Persons and in
the proper amounts.
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3.12 Governmental Qualification. The Company is qualified with the MMS
to own interests in federal Hydrocarbon leases on the Outer Continental Shelf,
including the Properties.
3.13 Adverse Changes in Production Rates or Oil and Gas Reserves. (a)
From the date of this Agreement until the day immediately preceding the Closing
Date, the average daily production from the Properties (in all cases net to the
Company's interest in the Properties) shall not be less than (i) 14,000 Mcf. per
day of natural gas, and (ii) 950 barrels per day of oil and other liquid
Hydrocarbons. True and complete copies of the report of each of Netherland,
Sewell & Associates, Inc. and Ryder Scott Company Petroleum Engineers estimating
the Hydrocarbon reserves attributable to the Company's interest in the
Properties as of January 1, 1999, have been given to the Investor prior to the
date of this Agreement.
(b) Since January 1, 1999, there has been no material loss of,
or decline in, any proved category of Hydrocarbon reserves attributable to the
Company's interest in the Properties below that estimated for the Company's
interest in the Properties in either of the reserve reports of Netherland,
Sewell & Associates, Inc. or Ryder Scott Company Petroleum Engineers as of
January 1, 1999, other than declines in reserve volumes as a result of actual
production of Hydrocarbons since January 1, 1999 or a reduction in the prices
used to calculate reserve volumes.
3.14 Environmental Laws. To the Company's Knowledge, (a) the Company's
and each of its subsidiary's assets have been, and are being, operated in
material compliance with all applicable Environmental Laws except for minor
matters of non-compliance for which potential fines or costs of compliance do
not exceed $50,000; and (b) there exists no condition or circumstance whereby
the Company or the Company's successor would be obligated to expend any sum of
money in excess of $50,000 in connection with any remedial action relating to
any environmental condition which, if not performed, would result in a violation
of applicable Environmental Laws.
3.15 Reserve Information. The information supplied by the Company to
the independent petroleum engineering consultants for the Company for purposes
of preparing the reserve reports and estimates of such consultants included in
the SEC Reports ("RESERVE REPORTS"), including, without limitation, production,
costs of operation and development, current prices for production, agreements
relating to current and future operations and sales of production (including all
financial hedging arrangements), was true and correct in all material respects
on the date supplied and was prepared in accordance with customary industry
practices. Netherland, Sewell & Associates, Inc. and Ryder Scott Company
Petroleum Engineers, who prepared estimates of the amount and value of proved
reserves of the Company as set forth in the SEC Reports, are independent with
respect to the Company. The information with respect to the estimated quantities
of the Company's proved reserves and the present value of such reserves included
in the SEC Reports was prepared in accordance with the rules and guidelines set
forth in the rules and regulations of the SEC for inclusion of reserve
information in financial statements filed with the SEC.
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ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF INVESTOR
As material inducements for the execution, delivery and performance of
this Agreement by the Company, Investor hereby represents and warrants to the
Company that as of the date hereof and the Closing Date:
4.1 Organization. Investor is a corporation duly organized, validly
existing and in good standing under the Laws of Delaware, and has all the
necessary powers to own its business as now owned and operated by it.
4.2 Authority. Investor has the absolute and unrestricted right, and
all requisite corporate power and authority to enter into and perform its
obligations under this Agreement. This Agreement and the transactions
contemplated hereby have been duly authorized by the Board of Director's of
Investor, validly executed and delivered by Investor This Agreement, and the
documents and instruments required hereunder constitutes the valid and binding
obligations of Investor enforceable in accordance with their respective terms,
except as enforcement may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar Laws in effect relating to the rights and
remedies of creditors, as well as to general principles of equity (regardless of
whether such enforceability is considered in a Proceeding in equity or at law.
4.3 No Violations. Neither the execution and delivery of this agreement
by Investor nor the consummation of the transactions contemplated hereby will
(i) violate any order, writ, injunction or decree, to which the Investor is
subject or by which Investor or any of its assets, business or operations may be
bound or affected, or (ii) require the consent, approval, authorization or order
of any person or Governmental Authority or court under any agreement,
arrangement, commitment, order, writ, injunction or decree not heretofore
obtained.
4.4 Brokers. Investor has incurred no obligation or liability,
contingent or otherwise, for brokers', finders' or investment bankers' fees in
respect of the matters provided for in this Agreement that will be the
responsibility of the Company; and any such obligation or liability that might
exist shall be the sole obligation of Investor.
4.5 Bankruptcy. There are no bankruptcy, reorganization or arrangement
Proceedings pending, being contemplated by or, to Investor's knowledge,
threatened against Investor.
4.6 Investment Experience. Investor is an "accredited investor" as
defined in Rule 501(a) of Regulation D under the Securities Act. Investor is
aware of the Company's business affairs and financial condition and has had
access to and has acquired sufficient information about the Company to reach an
informed and knowledgeable decision to acquire the Shares. Investor has such
business and financial experience as is required to give it the capacity to
protect its own interests in connection with the purchase of the Shares.
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4.7 Investment Intent. Investor has not been formed for the purpose of
acquiring the Shares. Investor is purchasing the Shares for its own account as
principal, for investment purposes only, and not with a present view to, or for,
resale, distribution or fractionalization thereof, in whole or in part, within
the meaning of the Securities Act. Investor understands that its acquisition of
the Shares has not been registered under the Securities Act or registered or
qualified under any state securities law in reliance on specific exemptions
therefrom, which exemptions may depend upon, among other things, the bona fide
nature of Investor's investment intent as expressed herein. Investor will not,
directly or indirectly, offer, sell, pledge, transfer or otherwise dispose of
(or solicit any offers to buy, purchase or otherwise acquire or take a pledge
of) any of the Shares except in compliance with the Securities Act, applicable
state Securities Act, and the rules and regulations promulgated thereunder.
4.8 Registration or Exemption Requirements. Investor further
acknowledges and understands that the Shares may not be resold or otherwise
transferred except in a transaction registered under the Securities Act or
unless an exemption from such registration is available. Investor understands
that the certificate(s) evidencing the Shares will be imprinted with a legend
that prohibits the transfer of the Shares unless (i) they are registered or such
registration is not required, and (ii) if the transfer is pursuant to an
exemption from registration other than Rule 144 under the Securities Act and, if
the Company shall so request in writing, an opinion of counsel reasonably
satisfactory to the Company is obtained to the effect that the transaction is so
exempt.
4.9 SEC Reports of Investor's Parent. Investor has made available to
the Company true and complete copies of its parent corporation's Annual Report
on Form 10-K for the year ended December 31, 1998 and its Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999. The financial statements
included in such SEC reports comply as to form in all material respects with
applicable accounting requirements and with the published rules and regulations
of the SEC with respect thereto, have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis during the periods
involved (except as may be indicated in the notes thereto or, in the case of the
unaudited statements, as permitted by Form 10-Q of the SEC) and fairly present
(subject, in the case of the unaudited statements, to normal, recurring audit
adjustments) the consolidated financial position of the Investor's parent and
its parent's consolidated subsidiaries as at the dates thereof and the
consolidated results of their operations and cash flows for the periods then
ended. The certified public accountants who have certified certain financial
statements included in such SEC filings of Investor's parent are independent
public accountants as required by the Securities Act and the rules and
regulations thereunder.
ARTICLE 5
OBLIGATIONS PENDING CLOSING
The Company covenants and agrees that during the Interim Period it will
in good faith observe and perform the obligations set forth in this Article 5.
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5.1 Inspection of the Company. Investor and its officers, attorneys,
accountants and authorized representatives shall continue to have the right,
during normal business hours, to inspect the Company's assets, properties, books
and records, and to consult with the Company's officers, directors, employees,
suppliers, customers, creditors, agents, attorneys and accountants concerning
the Company's assets, properties, ownership and operation, as long as such
access is not unreasonably disruptive to the Company's operations. Such
inspections may reasonably include, for example, environmental and other
physical inspections of the Company's properties, review of the Company's books,
records of account, tax records, and stock books and records, and a review of
records of corporate proceedings, contracts, trademarks, interment records and
other business activities and matters in which Investor may have an interest in
light of the transactions contemplated by this Agreement. Investor agrees to
maintain all information it learns from such inspections in confidence and will
not disclose such information except to its officers, directors, employees,
attorneys, accountants, creditors, prospective lenders and their attorneys, and
other authorized representatives unless such information is or becomes public
knowledge through no fault of Investor.
5.2 Return of Data. Investor agrees that if this Agreement is
terminated for any reason whatsoever, Investor shall, at the Company's request,
promptly return to the Company all information and data furnished by or on
behalf of the Company to Investor or Investor's Affiliates in connection with
this Agreement or Investor's investigation of the Company, and Investor shall
deliver to the Company or destroy all copies, extracts or excerpts of such
information and data and all documents generated by Investor that contain any
portion of such information or data.
5.3 Acquisition Proposals. Except for the Purchase and Sale Agreement,
the Company shall not directly or indirectly (i) solicit, initiate or encourage
any inquiries or Acquisition Proposals from any Person or (ii) participate in
any discussions or negotiations regarding, furnish to any Person other than
Investor or its representatives any information with respect to, or otherwise
assist, facilitate or encourage any Acquisition Proposal by any other Person.
"ACQUISITION PROPOSAL" means any proposal for a merger, consolidation or other
business combination involving the Company or for the Transfer of any interest
in, or a material portion of, the assets or securities of the Company. The
Company shall promptly communicate to Investor the terms of any such written
Acquisition Proposals which any the Company or the Company may receive or any
written inquiries made to any of them or any of their respective directors,
officers, representatives or agents.
5.4 Operation in the Ordinary Course of Business. The Company shall
continue to operate in the usual and ordinary course, and shall not take or fail
to take any action which would cause or permit any representation, warranty or
covenant of the Company contained in this Agreement to be untrue, inaccurate or
incomplete as of the Closing Date. Without limiting the generality of the
immediately preceding sentence, the Company shall maintain the goodwill the
Company and its business now enjoy, preserve intact the Company's present
organization and the manner in which it heretofore has conducted business, and
preserve the Company's relationships with others having business dealings with
the Company. The Company shall also maintain insurance on
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all its properties and with respect to the conduct of its business of such kinds
and in such amounts as is customary in the type of business in which it is
engaged, but not less than that carried by it on December 31, 1998. The Company
shall, however, be excused from its obligations under this Section 5.4 if, and
to the extent that, other provisions of this Agreement specifically require the
Company to conduct its affairs in a manner contrary to this Section 5.4.
5.5 Breaches of Representations and Warranties. The Company shall
notify Investor of the discovery by the Company that any representation or
warranty of the Company contained in this Agreement is or becomes untrue or will
be untrue on the Closing Date. Such disclosure shall be made in writing and
within the earlier of 48 hours after discovery or the Closing.
5.6 Material Adverse Effect. The Company shall promptly notify Investor
in writing of, and describe in reasonable detail, the occurrence of any event,
or the existence of any condition or circumstance, that may have a Material
Adverse Effect.
5.7 Proxy Materials.
(a) The Company covenants and agrees that promptly after
execution of this Agreement, the Company will prepare and file with the SEC a
notice of shareholders meeting and proxy statement in form and substance
satisfactory to Investor (the "NOTICE AND PROXY STATEMENT") for a meeting of the
shareholders of the Company at which the following shall be submitted to the
shareholders of the Company for approval (the "SHAREHOLDERS MEETING"):
(1) the Agreement;
(2) the Purchase and Sale Agreement;
(3) an increase in the authorized shares of capital
stock and Common Stock;
(4) an elimination of the staggered board of
directors;
(5) election of new directors designated by Investor;
(6) sale of capital stock of SGC;
(7) sale of substantially all the assets of SGC; and
(8) each of the transactions contemplated hereby
(collectively, the "PROXY ITEMS").
(b) The Company further covenants and agrees that it will use
Commercially Reasonable Efforts to promptly answer any questions and comply with
any comments to the Notice and Proxy Statement which are rendered by the staff
of the SEC (and are not subsequently withdrawn or abandoned), and shall
otherwise use its Commercially Reasonable Efforts to cause the Notice and Proxy
Statement to be cleared by the staff of the SEC for mailing to the Company
shareholders at the earliest possible date.
(c) The Company further represents and warrants to the
Investor that the Notice and Proxy Statement: (i) will be prepared and
circulated by the Company at least 21 days prior to
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the Shareholders Meeting; (ii) will be prepared and circulated pursuant to and
in compliance with Section 14(a) of the Exchange Act, Regulation 14A of the SEC,
all Nasdaq Requirements and all other applicable Laws; (iii) will contain all
notices and disclosures to shareholders required by the Delaware General
Corporation Law with respect to the Proxy Items and the transactions
contemplated thereby; and (iv) will not contain any statement which, at the time
and in the light of the circumstances under which it is made, is false or
misleading with respect to any material fact, or which omits to state any
material fact necessary in order to make the statements therein not false or
misleading or necessary to correct any statement in any earlier communication
with respect to the solicitation of a proxy for the same meeting or subject
matter which has become false or misleading.
(d) The Company covenants and agrees that: (i) all Common
Stock and Preferred Stock owned of record or beneficially by Management will be
voted in favor of the approval of all Proxy Items and all transactions
contemplated by the Proxy Items at the Shareholders Meeting or any adjournment
thereof; (ii) the Board of Directors of the Company shall recommend in the
Notice and Proxy Statement that all shareholders of the Company vote for
approval of the Proxy Items and all transactions contemplated thereby, and such
recommendation will not be revoked or modified.
(e) The Company covenants and agrees that the approval by a
majority of the voting power represented by the outstanding shares of the Common
Stock and the Preferred Stock are the only votes of the holders of any class or
series of the Company capital stock necessary to approve the Proxy Items. The
Preferred Stock have no rights to vote as a class on any of the Proxy Items.
5.8 Negative Covenants. Except as expressly permitted by this
Agreement, from the date hereof until the Closing Date, without first obtaining
the express written consent of Investor, the Company will not:
(a) Prohibition of Certain Employment Contracts. Enter into
any contracts of employment;
(b) Prohibition of Certain Loans. Borrow for any purpose or
issue debt securities, except as is otherwise agreed to in writing by Investor;
(c) Prohibition of Certain Commitments. Make any expenditure
or incur any liability (whether or not in the ordinary course of business) of
more than $500 except (i) pursuant to Section 5.12 (AFEs Prior to Closing) with
respect to certain AFE's, or (ii) as is otherwise agreed to in writing Investor;
(d) Disposal of Assets. Sell, dispose of, or encumber, any
property or assets, except (i) sales of oil and gas production in the usual and
ordinary course of business; (ii) as disclosed in Schedules to this Agreement;
or (iii) as may be approved in writing by Investor;
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(e) No Amendment to Certificate of Incorporation. Amend its
Certificate of Incorporation or Bylaws or merge or consolidate with or into any
other corporation or change in any manner the rights of its Common Stock or
Preferred Stock or the character of its business;
(f) No Issuance, Sale, or Purchase of Securities. Issue or
sell, or issue options or rights to subscribe to, or enter into any contract or
commitment to issue or sell (upon conversion or otherwise), any shares of its
equity securities, except upon exercise of employee stock options or warrants
that were outstanding as of the date hereof and except for the issuance of
Common Stock to pay accrued regular dividends on Preferred Stock;
(g) Reclassifications. Subdivide or in any way reclassify any
shares of its equity securities, or acquire, or agree or acquire, any shares of
its equity securities;
(h) Prohibition on Dividends. Declare or pay any dividend on
shares of its equity securities (other than as required by Preferred Stock) or
make any other distribution of assets to the holders thereof;
(i) Severance Arrangements. Increase the compensation payable
to, or grant any severance arrangements to any officer, director, employee,
consultant except as disclosed in Section 2.23 of the Exception Schedule;
(j) Bonus Payments. Pay any bonuses to any officer, director,
employee, consultant or agent; and
(k) Other Changes. Take or fail to take any action that would
cause its representations and warranties in Article 2 or Article 3 hereof
(including Section 2.10) to become untrue at or prior to Closing.
5.9 Overhead Reduction Measures During Interim Period. Within five
Business Days after the date of this Agreement, the Company shall implement and
not rescind the following measures to reduce its expenses:
(a) The Company shall enter into agreements with certain of
its employees including William Gray, Jon Garrett, Jack Bryant, Daniel Hall, and
Susan Frisard pursuant to which such the Company and each such employee agree to
(1) terminate the employment of such person, (2) terminate any employment or
indemnity agreements with such employee, and (3) release each one another from
any further liabilities or obligation. The terms and conditions of each such
termination arrangement shall be in form and substance reasonably satisfactory
to Investor.
(b) The Company shall close its office in Metairie, Louisiana
and shall terminate its office lease there except with approximately 1,500
square feet currently leased by the Company on the 11th Floor of the building in
which its Metairie office located, all on terms reasonably satisfactory to the
Investor.
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5.10 Waivers of Affiliate Claims. The Company shall obtain and deliver
to Investor at Closing copies of written waivers in form and substance
satisfactory to Investor from each of the Company's Affiliates (including
officers, directors, employees and consultants whose employment or consulting
arrangement is terminated during the Interim Period) pursuant to which such
persons waive and relinquish any and all rights and causes of action, including
without limitation indemnification or contribution rights and claims, whether
then known or unknown, that such person may have or that may arise after the
Closing Date, against any of the Company's Affiliates which in any way arise out
of or in connection with events or circumstances existing on or prior to the
Closing Date, including, but not limited to those agreements set forth in
Section 2.23 of the Exception Schedule.
5.11 Cancellation or Exercise of Options. The Company covenants and
agrees that it will, not later than forty-five (45) days prior to Closing, send
written notice to each holder of options granted pursuant to its 1994
Compensatory Stock Option Plan that (i) the Company has entered into an
agreement to sell substantially all of its assets as part of a reorganization,
(ii) the holder has forty-five (45) days to exercise such holder's options
granted pursuant to that plan, and (iii) any unexercised options will be
canceled prior to the Closing, all in accordance with the applicable terms of
the grant agreements pursuant to which such options were granted.
5.12 AFE's Prior Closing. The Company shall notify Investor of any
authority for expenditures ("AFE") received by the Company, and the Company
shall attempt to farmout the operations to which the AFE relates on the best
terms obtainable, failing which the Company shall not consent to the AFE unless:
(i) it receives written consent from Investor to approve the AFE, or the
Company's commercial bank advances the necessary cost of the AFE to the Company
on terms approved by Investor.
5.13 Voting and Support Agreement. Within seven (7) days after the date
of this Agreement, the Company shall cause each of the stockholders named below
to execute and deliver to the Investor a Voting and Support Agreement in
substantially the form attached hereto as Exhibit 5.13: Rick G. Avare; Douglas
Hawthorne; Leonard Nave; Ralph Currie; D. Poole; H. Settle; L. Aldridge; DnB;
and TECO. The Company represents and warrants that such stockholders own and
have the right to vote Common Stock or Preferred Stock, or both, which in the
aggregate represents at least 52% of the voting power of all classes of the
Company's voting securities.
5.14 Consulting Agreement. Contemporaneously with the execution and
delivery of this Agreement, the Company and the other parties thereto shall
enter into the Consulting Agreement in substantially the form attached hereto as
Exhibit 5.14 and the Company shall perform its obligations under the Consulting
Agreement in accordance with its terms.
5.15 Management and Administrative Services Agreement. On or before the
Closing Date, the Company and the other parties thereto shall enter into the
Management and Administrative Services Agreement in substantially the form
attached hereto as Exhibit 5.15 and the Company shall
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perform its obligations under the Management and Administrative Services
Agreement in accordance with its terms.
5.16 Board of Directors Appointments. Upon execution and delivery of
this Agreement, by the Company and Investor, the Company shall cause the
following to occur in a manner satisfactory to Investor in form and substance:
(a) the number of directors constituting the Board of Directors of the Company
shall be increased to nine members; and (b) two nominees selected by Investor
shall be appointed to the Company's Board of Directors to serve until the next
meeting of the Company's stockholders at which directors are elected.
ARTICLE 6
CONDITIONS TO CLOSING
6.1 Conditions Precedent to Obligations of Investor.
(a) The obligations of Investor to consummate the transactions
contemplated by this Agreement shall be subject to the satisfaction of the
following conditions, or to the waiver thereof by Investor in the manner
contemplated by Section 7.3 at or before the Closing:
(1) Representations and Warranties of the Company
True at Closing. The representations and warranties of the Company
herein contained shall be true as of and at the Closing with the same
effect as though made at such date, except as affected by transactions
permitted or contemplated by this Agreement;
(2) Covenants and Agreements to Have Been Performed.
The Company shall have performed and complied with all covenants and
other agreements required by this Agreement to be performed or complied
with by the Company before the Closing Date;
(3) Closing Certificate. The Company shall have
delivered to Investor a truthful certificate at the Closing dated as of
the Closing Date and executed by the Company's chief executive officer,
chief financial officer and chief legal officer confirming the matters
in Section 6.1(a)(1) and (2);
(4) Issuance of Stock. The Company shall have
tendered for delivery to Investor certificates representing the Shares,
free and clear of any Encumbrance;
(5) Purchase Price Adjustments. The total reduction
in the Purchase Price pursuant to Section 1.4(b)(3) shall not exceed
$50,000;
(6) Closing Date Liabilities. All liabilities of the
Company other than Permitted Liabilities shall have been paid or
otherwise discharged, or the Company shall have sufficient cash
resources on the Closing Date (after giving effect to the consummation
of the
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transactions contemplated by this Agreement and the Purchase Agreement)
to pay any remaining liabilities in full in accordance with their
respective terms;
(7) Proceedings. No Proceeding by any private person
or entity or a Governmental Authority shall be pending or threatened
that seeks to restrain, enjoin or otherwise prohibit, the consummation
of the transactions contemplated hereby or to seek damages therefrom;
(8) Casualty Event. No Casualty Event shall have
occurred during the Interim Period that materially and adversely
affects the value of (a) a Property that is producing Hydrocarbons at
the time such Casualty Event occurs, (b) any other material Property or
(c) a Platform;
(9) Purchase and Sale Agreement. All conditions
precedent have been satisfied without waiver and the transactions
contemplated in the Purchase and Sale Agreement shall close
simultaneously with the Closing;
(10) Southern Assumption and Release. The
transactions contemplated by the Southern Assumption and Release shall
have been completed in such a manner that is in form and substance
satisfactory to Investor;
(11) Southern Disposition. The transactions
contemplated by the Southern Disposition shall have been completed in a
manner that is in form and substance satisfactory to Investor;
(12) TECO Settlement. The transactions contemplated
by the TECO Settlement shall have been completed in such manner that is
in form and substance satisfactory to Investor;
(13) DnB Note Paydown. The DnB Note Paydown shall
occur simultaneously with the Closing;
(14) Residual Note. The DnB Note shall have been
purchased by Investor at or before the Closing on terms and conditions
satisfactory to Investor;
(15) Note Modification Agreement. The Note
Modification Agreement shall have been executed and delivered by the
Company and all other parties thereto;
(16) Voting and Support Agreement. Each party that
has delivered a Voting and Support Agreement to Investor shall have
performed his obligations thereunder in accordance with its terms;
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(17) New Director Indemnity Agreements. The Company
shall have entered into an Indemnity Agreement with each new director
elected at the Shareholders Meeting, such agreements to be in
substantially the form of the Indemnity Agreements to which previously
elected directors of the Company are parties and otherwise in form and
substance satisfactory to Investor;
(18) Option and Warrant Termination. All of the stock
options outstanding under the Company's 1994 Compensatory Stock Option
Plan and each other option or warrant to purchase any of the Company's
securities held by any member of Management shall have been canceled or
terminated in form and substance satisfactory to Investor prior to the
Closing;
(19) Venture Arrangements. The Company shall have
either terminated or reduced its interest in each of its Joint
Ventures, as instructed by Investor, all in form and substance
satisfactory to Investor;
(20) Split-Dollar Plan Termination. The Split-Dollar
Agreement dated June 30, 1998 by and among the Company, Rick G. Avare,
and Diane L. Avare, Trustee of the Rick G. Avare Irrevocable Life
Insurance Trust dated April 6, 1995 shall have been terminated or
assigned to Rick G. Avare, all in form and substance satisfactory to
Investor;
(21) Incentive Bonus Plan. The Company's Incentive
Bonus Plan dated November 12, 1996 shall have been terminated;
(22) Subsidiaries. Any subsidiaries of the Company
after giving effect to the Southern Disposition, shall have been
dissolved or sold in form and substance satisfactory to Investor;
(23) Shareholder Approval. The Company shall have
received Shareholder Approval for the transactions contemplated by each
of the Proxy Items, including the election of Investor's nominees to
the Company's Board of Directors, effective as of the Closing;
(24) Director Resignations. The Company shall have
received and accepted the resignation of each the following individuals
as directors of the Company, in each case effective as of the Closing:
(A) Douglas Hawthorne
(B) Leonard Nave
(C) David Fox
(D) Joe Shields
(E) Len Aldridge
(F) Robert McIntyre;
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(25) Employment Agreements. The Company's employment
of, and employment agreements with, each of the following individuals
shall have been terminated, such termination to be in form and
substance satisfactory to Investor:
(A) Rick G. Avare
(B) William Gray
(C) Ralph Currie
(D) David Stetson
(E) Jon Garrett
(F) Jack Bryant
(G) Daniel Hall
(H) Karen Underwood;
(26) At-Will Employees. Each of the following at-will
employees of the Company shall have been terminated from their
respective positions with the Company:
(A) Susan Frisard
(B) Tammy Farris
(C) Diana Highley
(D) Debbie Mullins;
(27) Preferred Stock. All shares of the Preferred
Stock reflected in the Company's Annual Report on Form 10-K for the
year ended December 31, 1998 as being owned by Rick G. Avare or Douglas
L. Hawthorne shall have been converted on a one-for-one basis to shares
of Common Stock, such conversion to be in form and substance
satisfactory to Investor;
(28) Opinions of Counsel. Investor shall have
received a favorable opinion, dated as of the Closing Date, from (i)
David J. Stetson, general counsel of the Company, (ii) Phillip E.
Allen, counsel to the Company, as to certain securities laws matters,
and (iii) from Schully, Roberts, Slattery & Jaubert with respect to any
preferential rights to purchase and title matters, each in form and
substance satisfactory to Investor;
(29) Certificates of Public Officials. The Company
shall have delivered to Investor certificates of existence and good
standing with respect to the Company issued by the Secretary of State
of their respective states of incorporation or other appropriate
Governmental Authority;
(30) Resolutions. The Company shall have delivered to
Investor copies of resolutions, certified as of the Closing Date by the
President and Chief Executive Officer and Secretary of the Company,
duly adopted by the Company's Board of Directors approving this
Agreement and the transactions contemplated hereby, and approving and
authorizing the
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Company's execution and delivery of, and performance of its
obligations under this Agreement and Purchase and Sale Agreement;
(31) Satisfaction of Encumbrances. With respect to
any Encumbrances against any of the Company's assets or Properties
(whether or not reflected on the Exception Schedule), (i) the
indebtedness or liabilities underlying such Encumbrances (other than
the Residual Note) shall have been paid or otherwise satisfied in full
and, (ii) the Encumbrances (other than those securing the Residual
Note) shall have been released of record or Investor shall have
received originally executed releases thereof in recordable form
satisfactory to Investor, all in form and substance satisfactory to
Investor;
(32) McClindon Employment Agreement. Effective as of
the Closing Date, that certain employment contract between the Company
and Christopher McClindon shall be amended to reduce the term of the
agreement to one year from the Closing Date, all in form and substance
satisfactory to Investor;
(33) Dismissal from Wright Litigation. The litigation
filed in the United States Bankruptcy Court in Lexington, Kentucky,
case No. 98-05023, styled Castil Williams v. Alpha Gas Development
Inc., Alpha Gas Development of Texas, Inc., American Resources of
Delaware, Inc., et al. alleging, among other things, that the transfer
of assets of Southern Gas Company Inc. to Southern Gas Co. of Delaware,
Inc., was fraudulent, shall have been either settled or dismissed, all
in form and substance satisfactory to Investor; and
(34) Settlement of Chevron Contract Liabilities. All
liabilities of the Company shall have been paid in full or otherwise
discharged, all in form and substance satisfactory to Investor, that
arise out of or in connection with that certain Contract entitled "Well
Drilling and Completion Services Contract South Timbalier 21 Field
Offshore, Louisiana" by and between the Company and Chevron U.S.A. Inc.
and the Company's performance of such contract, including liabilities
or alleged liabilities to Sundowner Offshore Services, Inc.
(b) Other. The items set forth in Section 6.1(a) and all other
items required to be delivered hereunder, or as may be reasonably requested by
Investor to facilitate the Closing, shall be in form and substance satisfactory
to Investor.
6.2 Conditions Precedent to Obligations of the Company.
(a) The obligations of the Company to consummate the
transactions contemplated by this Agreement shall be subject to the satisfaction
of the following conditions, or to the waiver thereof by the Company in the
manner contemplated by Section 7.3 at or before the Closing:
(1) Representations and Warranties of Investor True
at Closing. The representations and warranties of the Investor herein
contained shall be true as of and at
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the Closing with the same effect as though made at such date, except as
affected by transactions permitted or contemplated by this Agreement;
(2) Covenants and Agreements to Have Been Performed.
The Investor shall have performed and complied with all covenants and
other agreements required by this Agreement to be performed or complied
with by the Investor before the Closing Date;
(3) Closing Certificate. The Investor shall have
delivered to Investor a truthful certificate at the Closing dated as of
the Closing Date and executed by the Company's duly authorized officer
of Investor confirming the matters in Section 6.1(b)(1) and (2);
(4) Performance. Investor shall have performed in all
material respects the obligations, covenants and agreements required
hereunder to be performed by it at or prior to the Closing;
(5) Simultaneous Closing of Purchase and Sale
Agreement. All conditions precedent have been satisfied and the
transactions contemplated in the Purchase and Sale Agreement shall
close simultaneously with the transactions contemplated by this
Agreement;
(6) Note Modification Agreement. The Note
Modification Agreement shall have been executed and delivered by the
Investor;
(7) Shareholder Approval. The Company shall have
received Shareholder Approval for the transactions contemplated by
this Agreement and;
(8) Resolutions. Investor shall have delivered to the
Company copies of resolutions, certified as of the Closing Date by the
President and Secretary of Investor, duly adopted by Investor's Board
of Directors approving this Agreement and consummation of the
transactions contemplated hereby, and approving and authorizing
Investor's execution and delivery of, and performance of its
obligations under this Agreement;
(9) Opinion of Investor's Counsel. The Company shall
have received a favorable opinion, dated the Closing Date, from Porter
& Hedges, L.L.P., counsel to Investor, with respect to the matters set
forth in Section 4.1, Section 4.2, and Section 4.3;
(10) Proceedings. No Proceeding by any private person
or entity or a Governmental Authority shall be pending or threatened
that seeks to restrain, enjoin or otherwise prohibit, the consummation
of the transactions contemplated hereby or to seek damages therefrom;
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(11) Venture Arrangements. If Investor shall require
the Company to either terminate or reduce its interest in each of its
Joint Ventures, such action shall be taken in form and substance
satisfactory to the Company;
(12) Purchase Price Adjustments. The total reduction
in the Purchase Price pursuant to Section 1.4(b)(3) shall not exceed
$50,000, excluding (i) any reductions waived by Investor and (ii) any
reductions for liabilities of the Company the incurrence or existence
of which a constitute breach of this Agreement by the Company; and
(13) Tender of Purchase Price. On the Closing Date,
Investor shall have tendered to the Company the Purchase Price for the
Shares payable at Closing as provided in Section 1.4.
(b) Other. The items in Section 6.2(a) and all other items
required to be delivered hereunder by the Investor or as may be reasonably
requested by the Company to facilitate the Closing, shall be in form and
substance satisfactory to the Company.
6.3 Commercially Reasonable Efforts. Each of Company and the Investor
shall use Commercially Reasonable Efforts to cause the occurrence of the events
contained in Section 6.1 and Section 6.2, respectively, to be satisfied at or
before the Closing, to the extent that the occurrence of such events is within
the control of any such Party.
ARTICLE 7
TERMINATION AND WAIVER
7.1 Termination. Anything contained in this Agreement to the contrary
notwithstanding, this Agreement may be terminated and the transactions
contemplated hereby abandoned at any time (whether before or after the
Shareholder Approval) prior to the Closing Date:
(a) By Mutual Consent. By mutual consent of Investor and the
Company.
(b) By Investor Because of Failure to Perform Agreements or
Conditions Precedent. By Investor, if the Company has failed to perform any
material agreement set forth herein, or if any condition set forth in Section
6.1 hereof has not been met and has not been waived;
(c) By the Company Because of Failure to Perform Agreements or
Conditions Precedent. By the Company, if Investor has failed to perform any
material agreement set forth herein, or if any condition set forth in Section
6.2 hereof has not been met and has not been waived;
(d) By the Company or Investor Because of Legal Proceedings.
By either Investor, or the Company if any Proceeding shall be pending or
threatened by a Governmental
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Authority or before any court or Governmental Authority, in which it is sought
to restrain, prohibit, or otherwise affect the consummation of the transactions
contemplated hereby; and
(e) By Investor or the Company. By either Investor or the
Company if the terminating party is not in material breach of any of its
obligations hereunder and if the transactions contemplated by this Agreement
have not been consummated on or before December 31, 1999.
7.2 Effect of Termination. In the event of the termination and
abandonment of this Agreement pursuant to and in accordance with the provisions
of Sections 7.1(a), (d), or (e) hereof, this Agreement shall become void and
have no effect, without any liability on the part of any party hereto (or its
shareholders or controlling persons or directors or officers), except as
provided in Section 7.4. Upon termination of this Agreement pursuant to Section
7.1(b) or (c), the parties hereto shall be entitled to exercise any rights and
remedies at law or in equity to which they may be entitled.
7.3 Waiver. Subject to the requirements of any applicable Law, any of
the terms or conditions of this Agreement may be waived at any time by the party
which is entitled to the benefit thereof. The failure of any party at any time
or times to require performance of any provision hereof shall in no manner
affect the right to enforce the same. No waiver by any party of any condition,
or of the breach of any provision of this Agreement in one or more instances
shall be deemed to be or construed as a further or continuing waiver of any such
condition or breach or a waiver of any other condition or the breach of any
other provision.
7.4 Expense on Termination. If the transactions contemplated hereby are
abandoned pursuant to and in accordance with the provisions of Section 7.1(a),
(d) or (e) hereof, all expenses will be paid by the party incurring them.
ARTICLE 8
OTHER COVENANTS
8.1 Antidilution Protection. The Shares purchased hereunder and shall
be subject to the following adjustments:
(a) The number of shares of Common Stock held by Investor
shall be adjusted upon issuance of any shares of Common Stock issued on or after
the Closing Date pursuant to any options, warrants, convertible securities,
subscription rights, or antidilution rights outstanding as of
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<PAGE> 133
the Closing Date. The additional number of shares to be issued to Investor under
this provision (the "ANTIDILUTION SHARES") shall be determined as follows:
X = .75
---
X+Y
X = number of Antidilution Shares.
Y = number of shares issued by the Company on or after
the Closing Date pursuant to any options, warrants,
convertible securities, subscription rights, or
antidilution rights outstanding as of the Closing
Date.
8.2 Registration Rights. The Company covenants and agrees that with
respect to the Shares (including any shares issued pursuant to Section 8.1 or
Section 8.4) that:
(a) Demand Registration Rights. The Company covenants and
agrees with Investor that within thirty (30) days after receipt of a written
request from Investor, the Company shall file a registration statement (and
thereafter use its best efforts to cause such registration statement to become
effective under Securities Act) with respect to the offering and sale or other
disposition of the Shares (all such securities, together with the Piggy Back
Securities, when the context requires, the "REGISTRABLE SECURITIES"). The
Company shall continuously maintain the effectiveness of such registration
statement for the lesser of (i) 180 days after the effective date of the
registration statement or (ii) the consummation of the distribution by the
holders of the Registrable Securities covered by such registration statement
(the "TERMINATION DATE"); provided, however, that if at the Termination Date,
the securities offered are covered by a registration statement which also covers
other securities and which is required to remain in effect beyond the
Termination Date, the Company shall maintain in effect such registration
statement as it relates to the Registrable Securities for so long as such
registration statement (or any subsequent registration statement) remains or is
required to remain in effect for any of such other securities. Except with
respect to requests to register on Form S-3 (or any successor or similar
short-form registration statement ("SHORT-FORM REGISTRATION")), the Company
shall not be required to comply with more than three requests for registration
pursuant to this Section 8.2. The Company shall be required to comply with an
unlimited number of Short-form Registrations. All expenses of such registration
shall be borne by the Company, including Investor's attorney's fees, if any.
Investor hereby acknowledges that it has been advised by the Company that the
Company is not currently eligible to use Form S-3 for resales of Registrable
Securities.
(b) Piggy-back Registration Rights. The Company covenants and
agrees with Investor that, in the event the Company proposes to file a
registration statement under the Act with respect to the firm commitment
offering of Common Stock (other than in connection with an exchange offer or a
registration statement on Form S-4 or S-8 or other similar registration
statements not available to register securities so requested to be included),
the Company shall in
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each case give written notice of such proposed filing to the Investor at least
30 days before the earlier of the anticipated or the actual effective date of
the registration statement and at least ten days before the initial filing of
such registration statement and such notice shall offer to Investor the
opportunity to include in such registration statement the Shares (the
"PIGGY-BACK SECURITIES"). If Investor desires inclusion of Piggy-back Securities
in such registration statement, it shall so inform the Company by written
notice, given within 10 days of the giving of such notice by the Company in
accordance with the provisions herein. The Company shall permit, or shall cause
the managing underwriter of a proposed offering to permit, the holders of
Piggy-back Securities requested to be included in the registration to include
such securities in the proposed offering on the same terms and conditions as
applicable to securities of the Company, if any, included therein for the
account of any Person other than the Company and Investor. Notwithstanding the
foregoing, if any such managing underwriter shall advise the Company in writing
that, in its opinion, the distribution of securities by holders thereof,
including all or a portion of the Piggy-back Securities, requested to be
included in the registration concurrently with the securities being registered
by the Company would materially adversely affect the distribution of such
securities by the Company for its own account, then Investor shall delay their
offering and sale of Piggy-back Securities (or the portions thereof so
designated by such managing underwriter) for such period, not to exceed 90 days,
as the managing underwriter shall request, provided that if any other securities
are included in such registration statement for the account of any Person other
than the Company and Investor, then such securities so included shall be
apportioned among holders who wish to be included therein pro rata according to
amounts so requested to be included by each such Person. No such delay shall in
any event impair any right granted hereunder to make subsequent requests for
inclusion pursuant to the terms of this Section 8.2(b). The Company shall
continuously maintain in effect any registration statement with respect to which
the Piggy-back Securities have been requested to be included (and so included)
for a period of not less than (i) 180 days after the effectiveness of such
registration statement or (ii) the consummation of the distribution by the
Investor ("PIGGY-BACK TERMINATION DATE"); provided, however, that if at the
Piggy-back Termination Date, the Piggy-back Securities are covered by a
registration statement which is, or is required to remain, in effect beyond the
Piggy-back Termination Date, then the Company shall maintain in effect the
registration statement as it relates to the Piggy-back Securities for so long as
such registration statement remains or is required to remain in effect for any
of such other securities. All expenses of such registration shall be borne by
the Company, other than underwriters and brokers fees and commissions.
(c) Other Matters. In connection with the registration of
Registrable Securities in accordance with Paragraph (a) or (b) above, the
Company agrees to:
(i) use its best efforts to register or qualify the
Registrable Securities for offer or sale under state
securities or Blue Sky laws of such jurisdictions in which
Investor shall designate; provided, that in no event shall the
Company be obligated to qualify to do business in any
jurisdiction where it is not now so qualified or to take any
action which would subject it to general service of process in
any jurisdiction where it is not now so subject, and use its
best efforts to do any and all other acts and
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things which may be necessary or advisable to enable
Investor to consummate the Transfer of such securities in
any jurisdiction;
(ii) enter into indemnity and contribution
agreements, each in customary form, with each underwriter, if
any, and Investor included in such registration statement;
and, if requested, enter into an underwriting agreement
containing customary representations, warranties, covenants,
allocation of expenses, and customary closing conditions
including opinions of counsel, accountants' cold comfort
letters and petroleum engineers' reports, with any underwriter
who participates in the offering of Registrable Securities;
(iii) not issue or create any Registrable Securities
with registration rights superior to or in parity with the
Registrable Securities granted hereunder;
(iv) pay all expenses in connection with the
registration of the Shares under the Securities Act and
compliance with the provisions of clause (i) above; and
In connection with the registration of Registrable Securities
in accordance with Paragraph (b) above, the Investor agrees to enter into an
underwriting agreement containing customary representations, warranties,
covenants, allocation of expenses, and customary closing conditions, with any
underwriter who participates in the offering of Registrable Securities.
(d) Restrictions on Public Sale by the Company. The Company
agrees (i) not to effect any public sale or distribution of any securities
similar to the Registrable Securities or any securities convertible into or
exchangeable or exercisable for such securities (or any option or other right
for such securities)during the 15-day period prior to, and during the 90-day
period beginning on the effective date of any registration statement under which
the Registrable Securities are registered in accordance with Section 8(a) (other
than as part of such registration).
(e) Rule 144. With a view to making available to the Investor
the benefits of certain rules of the SEC that may permit the sale of Registrable
Securities to the public without registration, the Company hereby covenants and
agrees to use its best efforts to: (i) file in a timely manner all reports and
other documents required to be filed by it under the Securities Act and the
Exchange Act and the rules and regulations adopted by the SEC thereunder
necessary to permit sales under Rule 144 under the Securities Act, and the
Company will take such further action to the extent required from time to time
to enable Investor to sell Registrable Securities (whether or not any such
securities have been the subject of a demand or piggy-back request under Section
8 hereof) without registration under the Securities Act within the limitation of
the exemptions provided by (a) Rule 144 under the Securities Act, as such Rule
may be amended from time to time, or (b) any similar rule or regulation
hereafter adopted by the SEC and (ii) promptly furnish Investor a copy of all
such reports and documents. Upon the request of Investor, the Company will
deliver to the Investor a written statement as to whether it has complied with
such requirements.
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8.3 Filing Expenses. The Company agrees to pay all expenses of, or
relating to, any reports required to be filed by Investor with the SEC pursuant
to Section 13(d) or Section 16(a) of the Exchange Act and regulations thereunder
with respect this Agreement and its ownership of the Company's Common Stock.
ARTICLE 9
INDEMNIFICATION
9.1 Indemnification of Investor. In addition to any other remedies
available to Investor under this Agreement, at law or in equity, the Company
shall indemnify, defend and hold harmless Investor and its Affiliates against
and in respect of any and all Claims that such indemnified persons shall incur
or suffer, which arise, result from or relate to (a) any breach of, or failure
by the Company to perform, any of its representations, warranties, covenants or
agreements in or under this Agreement, and (b) any act or omission occurring, or
event or circumstance existing, in whole or in part, before the Closing Date
which relates to the Company (including, without limitation, its business and
properties).
9.2 Indemnification of the Company. In addition to any other remedies
available to the Company under this Agreement, at law or in equity, Investor
shall indemnify, defend and hold harmless the Company against and in respect of
any and all Claims that the Company shall incur or suffer, which arise, result
from or relate to any breach of, or failure by Investor to perform, any of its
representations, warranties, covenants or agreements in or under this Agreement.
9.3 Indemnification Procedure. Promptly upon the discovery of facts
giving rise to a claim for indemnity under this Article 9 or the receipt of
notice of any Claim, judicial or otherwise, with respect to any matter as to
which indemnification may be claimed under this Article 9 the indemnified party
shall give written notice thereof to the indemnifying party together with such
information respecting such matter as the indemnified party shall then have;
provided, however, that the failure of the indemnified party to give notice as
provided herein shall not relieve the indemnifying party of any obligations, to
the extent the indemnifying party is not materially prejudiced thereby. If
indemnification is sought with respect to a third-party (i.e., one who is not a
party to this Agreement) Claim asserted or brought against an indemnified party,
the indemnifying party shall be entitled to participate in and to assume the
defense thereof, jointly with any other indemnifying party similarly notified,
to the extent that it may wish, with counsel reasonably acceptable to such
indemnified party. After an indemnifying party notifies an indemnified party of
the former's election to so assume the defense of such a third-party Claim, the
indemnifying party, shall not be liable to such indemnified party for any legal
or other expenses subsequently incurred by the latter in connection with the
defense thereof, other than reasonable and necessary costs of investigation,
unless the indemnifying party has failed to assume and diligently prosecute the
defense of such third-party Claim and to employ counsel reasonably acceptable to
such indemnified person. An indemnifying party who elects not to assume the
defense of a third-party Claim shall not be liable for the fees and expenses of
more than one counsel in any single jurisdiction for all parties indemnified by
such indemnifying party with
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respect to such Claim or with respect to Claims separate but similar or related
in the same jurisdiction arising out of the same general allegations.
Notwithstanding any of the foregoing to the contrary, the indemnified party will
be entitled to select its own counsel and assume the defense of any action
brought against it if the indemnifying party fails to select counsel reasonably
acceptable to the indemnified party of if counsel fails to diligently prosecute,
the expenses of such defense to be paid by the indemnifying party. No
indemnifying party shall consent to entry of any judgment or enter into any
settlement with respect to a claim without the consent of the indemnified party,
which consent shall not be unreasonably withheld. No indemnified party shall
consent to entry of any judgment or enter into any settlement of any such action
the defense of which has been assumed by an indemnifying party without the
consent of such indemnifying party, which consent shall not be unreasonably
withheld.
9.4 Indemnity Shares.
(a) If Investor incurs any Claims resulting from the breach by
the Company of any representation, warranty, covenant or agreement contained in
this Agreement, Investor shall be entitled to additional shares of Common Stock
in satisfaction of such Claims (the "INDEMNITY SHARES").
(b) The Indemnity Shares shall be calculated as follows:
N = D x 1 x A
- ---
P 1-B
where:
N = number of Indemnity Shares;
D = the dollar amount of Claims for which Investor
is entitled to indemnity;
P = the price per share of the Common Stock
shall be the lesser of (i) $0.16 or (ii) the
Closing price of the Common Stock on the
principal exchange or trading system on
which the Common Stock is then traded on the
first full Business Day following the
Closing of the Agreement, or if transaction
reporting in the Common Stock is not then
available for the Common Stock, the average
of the high bid and low ask price for the
same date;
B = the decimal equivalent of the fully diluted
percentage of the Common Stock owned by the
Investor at the time the Indemnity Shares
are issued for "D"; and
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A = a factor necessary to prevent dilution of
Investor as a result of antidilution rights
triggered by the Indemnity Shares.
9.5 Indemnification Threshold. Except as provided below, no party shall
be entitled to indemnification pursuant to this Article until such time as the
aggregate dollar amount of its indemnifiable Claims exceeds $25,000 (the
"INDEMNIFICATION THRESHOLD") after which the indemnified party shall be fully
indemnified in accordance with this Article for all indemnifiable Claims,
including Claims included in calculating the Indemnification Threshold.
Indemnification for Claims that should have properly been included in the
calculation of the Purchase Price shall not, however, be subject to the
Indemnification Threshold.
9.6 Survival of Indemnifiable Claims. No party shall be entitled to
indemnification pursuant to this Article unless demand for indemnification is
made on or before March 31, 2001, except that Investor's right to
indemnification for the breach of the following Sections which shall survive for
the applicable statute of limitations for Claims against the Company in respect
of the subject matter of such Sections: Section 2.13, Employee Benefit Plans;
Section 2.21, Taxes; and Section 3.14, Environmental Laws.
ARTICLE 10
MISCELLANEOUS
10.1 Certain Definitions.
(a) As used in this Agreement, each of the following terms has
the meaning ascribed to it in this Section 10.1:
(1) "AAA" shall have the meaning set forth in
Section 10.11(a).
(2) "ACQUISITION PROPOSAL" shall have the meaning set
forth in Section 5.3.
(3) "AFE" shall have the meaning set forth in Section
5.12.
(4) "AFFILIATE" when used to indicate a relationship
with any Person, means: (i) any corporation or organization of which
such Person is an officer, director or partner or is directly or
indirectly the beneficial owner of at least 10% of the outstanding
shares of any class of equity securities or financial interest therein;
(ii) any trust or other estate in which such Person has a beneficial
interest or as to which such Person serves as trustee or in any similar
fiduciary capacity; (iii) the mother, father, brother, sister, child or
spouse of such Person, or of such Person's spouse; or (iv) any Person
that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, or is
acting as agent on behalf of, or as an officer or director of, such
Person. As used in the
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definition of Affiliate, the term "control" (including the terms
"controlling," "controlled by" or "under common control with") means
the possession, direct or indirect, of the power to direct, cause the
direction of or influence the management and policies of a Person,
whether through the ownership of voting securities, by contract,
through the holding of a position as a director or officer of such
Person, or otherwise.
(5) "AGREEMENT" means and includes this Agreement and
the schedules and exhibits hereto.
(6) "ANTIDILUTION SHARES" shall have the meaning set
forth in Section 8.1.
(7) "ARBITRATOR" shall have the meaning set forth in
Section 10.11(a).
(8) "ATTRIBUTABLE" shall mean reasonably and properly
allocable or attributable, using applicable rules of allocability,
attribution or causation.
(9) "BUSINESS DAY" means any day other than Saturday
or Sunday on which national banking associations in Houston, Texas are
open for business.
(10) "BYLAWS" shall have the meaning set forth in
Section 2.1.
(11) "CASUALTY EVENT", with respect to any asset of
the Company, shall mean (a) a fire, explosion, hurricane or other
catastrophic casualty event affecting such asset, or (b) the taking of
such asset by a Governmental Authority through condemnation or eminent
domain.
(12) "CERTIFICATE OF INCORPORATION" shall have the
meaning set forth in Section 2.1.
(13) "CLAIMS" mean any claims, demands, actions,
costs, damages, losses, diminution in value (including to the Shares),
expenses, obligations, liabilities, recoveries, judgments, settlements,
Proceedings, causes of action or deficiencies, including interest,
penalties (including civil and criminal penalties) and attorneys' fees.
(14) "CLOSING" shall have the meaning set forth in
Section 1.2.
(15) "CLOSING DATE" shall have the meaning set forth
in Section 1.2.
(16) "CODE" shall have the meaning set forth in
Section 2.12.
(17) "COMMERCIALLY REASONABLE EFFORTS" shall mean the
efforts (including the incurrence of reasonable out-of-pocket costs and
expenses) that would be undertaken by
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a reasonable, similarly-situated participant in the oil and gas
industry, taking into account all relevant commercial, legal and other
considerations.
(18) "COMMON STOCK" shall have the meaning set forth
in the recitals of this Agreement.
(19) "CONSULTING AGREEMENT" means that certain
Consulting Agreement referred to in Section 5.14.
(20) "CONTRACT" shall mean any agreement,
commitments, arrangements, leases, oil and gas leases, insurance
policies or other instruments (including notes, loans or borrowing
agreements) listed or described in any schedule hereto or any other
contract, instrument, commitment or arrangement to which the Company is
a party or by which the Company or its assets, businesses or operations
may be bound or affected or under which the Company or its assets,
businesses or operations receive benefits, in each case whether oral or
written, and in each case that has not been fully performed by all
parties.
(21) "DISPUTE" shall have the meaning set forth in
Section 10.10.
(22) "DNB" means DnB Energy Assets, Inc.
(23) "DNB NOTE" means those promissory notes issued
in connection with that certain First Amended and Restated Credit
Agreement dated November 1, 1997 among the Company, SGC and Den Norske
Bank, as amended by that certain First Amendment to First Amended and
Restated Credit Agreement dated March 5, 1998 among the Company, SGC
and DnB.
(24) "DNB NOTE PAYDOWN" means a $27.0 million paydown
by the Company on the DnB Note.
(25) "ENCUMBRANCE" means any mortgage, deed of trust,
lien, privilege, security interest, pledge, collateral assignment,
conditional sales arrangement, or any other burden, adverse claim, or
encumbrance.
(26) "ENTITY" means a corporation, general
partnership (including a limited liability partnership), limited
partnership, joint venture, limited liability the Company, trust,
estate, Governmental Authority or other entity.
(27) "ENVIRONMENTAL LAWS" mean all Laws or Orders of
any Governmental Authority pertaining to health, the environment,
wildlife or natural resources, including the Clean Air Act; the
Comprehensive Environmental, Response, Compensation, and Liability Act
of 1980; the Federal Water Pollution Control Act or Clean Water Act;
the Rivers and Harbors Act of 1899; the Occupational Safety and Health
Act of 1970; the
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Resource Conservation and Recovery Act of 1976; the Safe Drinking Water
Act; the Toxic Substances Control Act; the Hazardous & Solid Waste
Amendments Act of 1984; the Superfund Amendments and Reauthorization
Act of 1986; the Hazardous Materials Transportation Act; and state and
local Laws, including common law, pertaining to health, the
environment, wildlife or natural resources.
(28) "ERISA" shall have the meaning set forth in
Section 2.13.
(29) "EQUIPMENT" means all wells, wellbores, pipe,
pipelines, gathering lines, compressors, materials, inventory,
facilities (other than Platforms), supplies and equipment and any and
all other personal, real, movable and immovable property, fixtures or
equipment that are located on, or presently used in connection with,
the drilling for, or operation, production, treatment or transportation
of, Hydrocarbons from the Properties, and any replacements, attachments
or accessories now or hereafter attached, added or affixed.
(30) "EXCHANGE ACT" shall have the meaning set forth
in Section 2.6.
(31) "EXCEPTION SCHEDULE" shall have the meaning set
forth in the first paragraph of Article 2.
(32) "FIDELITY" means Fidelity Oil Holdings, Inc., a
Delaware corporation.
(33) "FINANCIAL STATEMENTS" shall have the meaning
set forth in Section 2.6.
(34) "GOM OPERATIONS ADJUSTMENT" shall mean the price
adjustment referred to in Section 1.4(b)(1) and calculated in
accordance with Exhibit 1.4(b)(1) hereto.
(35) "GOVERNMENTAL AUTHORITY" (OR "GOVERNMENTAL")
means a federal, state, tribal or local governmental body, agency,
division, board, department, commission, court or other authority,
including the MMS.
(36) "HAZARDOUS SUBSTANCE" means, without limitation,
(i) any flammable explosives, radon, radioactive materials, asbestos,
urea formaldehyde foam insulations, polychlorinated biphenyls, benzene,
petroleum and petroleum products, methane, or (ii) hazardous materials,
hazardous wastes, biomedical wastes, hazardous or toxic substances or
related materials defined as such in the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended (42 U.S.C.
Sections 9601 et seq.), the Resource Conservation and Recovery Act, as
amended (42 U.S.C. Sections 6901 et seq.), or any other Environmental
Laws.
(37) "HYDROCARBON" shall mean gas, oil, casinghead
gas, drip gasoline, natural gasoline and all other liquid and gaseous
hydrocarbons.
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(38) "INDEMNITY SHARES" shall have the meaning set
forth in Section 9.4.
(39) "INTELLECTUAL PROPERTY" shall have the meaning
set forth in Section 2.15.
(40) "INTERIM PERIOD" shall mean from the date hereof
until the Closing Date.
(41) "INVESTOR" shall have the meaning set forth in
the introductory paragraph of this Agreement.
(42) "KNOWLEDGE", when referring to the Company or
any of its subsidiaries, shall mean those facts that are actually
known, or those facts which should be known, to Rick Avare, David
Stetson, Ralph Currie or Karen Underwood after due and appropriate
inquiry in the exercise of reasonable diligence, taking into account
the scope and nature of the responsibilities of the individual in
question, and includes any facts that are known by such individuals
regardless of whether such individuals are adverse to the Company in
respect of the matters as to which such individual's knowledge is
attributed to the Company.
(43) "JOINT VENTURES" means (i) that certain Program
Agreement dated January 1, 1994 among Aquila Energy resources, IP
Petroleum, Victoria Gas, Browning Offshore, MG Oil and Gas and
Louisiana Offshore Ventures, (ii) that certain Program Agreement dated
April 1, 1995 among IP Petroleum, The William G. Helis Co., MG Oil and
Gas, TECO Gas & Oil, Houston Energy & Development and Texas 3D
Ventures, and (iii) that certain Agreement of Limited Partnership of
Texas 3D Ventures dated April 1, 1995.
(44) "LAW" means any constitutional provision,
statute, act, code, regulation, rule, ordinance, Order, court decision,
common law, or other law, ruling or Order of a Governmental Authority.
(45) "LEASED REAL PROPERTY" shall have the meaning
set forth in Section 2.14.
(46) "LEASES" means the leases described in Schedule
3.1 (including record title, operating rights, overriding royalties,
net profits interests and all other types of interests).
(47) "MANAGEMENT" means as of the date hereof, all
executive officers and directors of the Company.
(48) "MANAGEMENT AND ADMINISTRATIVE SERVICES
AGREEMENT" means that certain agreement in substantially the form
attached hereto as Exhibit 5.15 to be executed on
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the Closing Date by and between Blue Dolphin Services, Inc. and the
Company providing for, among other things, the provision of certain
management and administrative services to the Company.
(49) "MARKETABLE TITLE" shall mean, in the case of
each Property, such right, title and interest (owned beneficially and
of record) that:
(i) entitles Company, with respect to a
particular Property, to receive not less than the percentage
set forth on Schedule 3.1 as the Net Revenue Interest or NRI
of such Property of all Hydrocarbons produced from, or
otherwise attributable to, such Property, without reduction,
suspension or termination throughout the productive life of
such Property (including reductions resulting from gas
imbalances);
(ii) obligates Company to bear not more than
the percentage set forth on Schedule 3.1 as the Working
Interest or WI of such Property of all costs and expenses
attributable to the ownership or operation of such Property,
without increase throughout the productive life of such
Property (unless Company's Net Revenue Interest in such
Property is proportionately increased); and
(iii) is free and clear of any Encumbrances,
except for Permitted Encumbrances.
(50) "MATERIAL ADVERSE EFFECT" means, when used with
respect to any person or Entity, any event, condition, circumstance or
change that is or is reasonably likely to be materially adverse to the
business, operations, business prospects, assets, liabilities,
condition (financial or otherwise) of such person or Entity. When used
with respect to the Company, the existence of a Material Adverse Effect
shall be determined (unless otherwise expressly provided) by reference
to the Company only, on an unconsolidated basis without regard to the
ownership interest of the Company in any subsidiary, and after giving
effect to the transactions contemplated by the Purchase and Sale
Agreement.
(51) "MILLENNIUM FUNCTIONALITY" shall have the
meaning set forth in Section 2.8.
(52) "MMS" means the United States Minerals
Management Service.
(53) "NASDAQ REQUIREMENTS" means the published rules
and regulations of the National Association of Securities Dealers,
Inc., as amended, that are applicable to the Company from time-to-time
in connection with the quotation and trading of its capital stock on
the NASDAQ National Market, the NASDAQ Small Cap Market or the NASDAQ
OTCBB systems.
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(54) "NOTE MODIFICATION AGREEMENT" means an agreement
to be negotiated and entered between the Company and Investor on or
before August 6, 1999, addressing the terms and conditions on which the
Investor agrees that it will, on the terms and subject to the
conditions to be therein set forth: (i) defer its right to payments
under the Residual Note for a period to be determined; (ii) waive
certain defaults and events of default under the terms of the Residual
Note and related loan documentation existing as of the Closing; and
(iii) forgive all or a portion of the Company's indebtedness evidenced
by the Residual Note.
(55) "NOTICE AND PROXY STATEMENT" shall have the
meaning set forth in Section 5.7.
(56) "NRI" or "NET REVENUE INTEREST" shall mean, with
regard to any Property, the decimal or percentage share of Hydrocarbon
production from or allowable to such Property, after deductions for all
overriding royalties and burdens on production (including lessor
royalties) applicable thereto, that an owner of a Working Interest is
entitled to receive.
(57) "ORDER" means a Governmental or arbitral order,
judgment, ruling, decree, decision, notice, writ, injunction or award.
(58) "PARTY" and "PARTIES" shall have the meanings
set forth in the introductory paragraph.
(59) "PERMIT" means a Governmental permit,
certificate, license, franchise or authorization.
(60) "PERMITTED ENCUMBRANCES" means, with respect to
a particular Property:
(A) lessors' royalties, overriding
royalties, reversionary interests and similar burdens
affecting such Property if the net cumulative effect
of such burdens does not reduce the Company's
interest in all Hydrocarbons produced from a
particular Property below the "Net Revenue Interest"
or "NRI" set forth on Schedule 3.1 for such Property;
(B) division orders and sales contracts
terminable without penalty upon no more than 90 days'
notice to the purchaser of the Hydrocarbons from
Investor;
(C) operator's, vendor's tax and similar
liens or Encumbrances securing obligations that were
not due and payable prior to the Closing Date, or if
due, are being contested in good faith by the
Company;
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(D) any Encumbrances created by Law for
royalty, bonus, deferred bonus payments or rental or
for compliance with the terms of the Leases;
(E) the terms and provisions of (i) the
Leases and Contracts, and (ii) all Easements, Permits
and Orders to the extent such Leases, Contracts,
Easements, Permits and Orders do not operate to
increase the Working Interest of the Company in the
Properties or decrease the Net Revenue Interest of
the Company in the Properties;
(F) Easements in favor of third parties so
long as such easements do not adversely affect the
current and continuous use and operation of the
Properties;
(G) all rights reserved to or vested in any
Governmental Authority to control or regulate any of
the Properties in any manner, and all applicable
Laws; and
(H) those items set forth on Schedule
10.1(a)(60).
(61) "PERMITTED LIABILITIES" shall have the meaning
set forth in Section 1.4(c).
(62) "PERSON" means a natural person or Entity.
(63) "PLATFORMS" means all platforms that are located
on, or presently used in connection with, the drilling for, or
operation, production, treatment or transportation of, Hydrocarbons
from the Properties.
(64) "POLICIES" shall have the meaning set forth in
Section 2.18.
(65) "PREFERRED STOCK" means the Company's preferred
stock, par value $12.00 per share, designated "1993 8% Convertible
Preferred Stock."
(66) "PROCEEDING" means a judicial, administrative or
arbitral proceeding, including a lawsuit or Governmental investigation.
(67) "PROPERTIES" mean the Leases;
(68) "PROXY ITEMS" shall have the meaning set forth
in Section 5.7.
(69) "PURCHASE AND SALE AGREEMENT" means that certain
agreement by and between the Company and Fidelity in the form executed
and delivered on the date hereof.
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(70) "PURCHASE PRICE" shall have the meaning set
forth in Section 1.3.
(71) "RECORDS" means records (including software) in
the possession of the Company with respect to lease and land records,
geological and geophysical records, operations, production and
engineering records, accounting records, and facility and well records.
(72) "RESIDUAL NOTE" means that outstanding portion
of the Note purchased by Investor from DnB after the DnB Note Paydown
and Southern Assumption and Release.
(73) "RETURNS" shall have the meaning set forth in
Section 2.21.
(74) "SEC" means the Securities and Exchange
Commission.
(75) "SEC DOCUMENTS" shall have the meaning set forth
in Section 2.6.
(76) "SECURITIES ACT" means the Securities Act of
1933, the Securities Exchange Act of 1934 and all other Laws concerning
or regulating the sale or registration of securities.
(77) "SGC" means Southern Gas Co. of Delaware, Inc.,
a Delaware corporation and wholly-owned subsidiary of the Company.
(78) "SHAREHOLDER APPROVAL" means the approval at the
Shareholder meeting of each of the Proxy Items by the required vote of
the holders of the (i) Preferred Stock and (ii) Common Stock.
(79) "SHAREHOLDERS MEETING" shall have the meaning
set forth in Section 5.7.
(80) "SHARES" shall have the meaning set forth in the
recitals of this Agreement.
(81) "SOUTHERN ASSUMPTION AND RELEASE" means (i) the
assumption by SGC of $12.5 million in principal amount of indebtedness
payable on the DnB Note and (ii) the release of the Company by DnB of
$12.5 million due on the DnB Note.
(82) "SOUTHERN DISPOSITION" means (i) the sale of
SGC's capital stock or assets, or both, and (ii) the release of the
Company from all obligations and liabilities arising from that certain
Performance Guaranty dated May 22, 1996 between the Company and Austin
Energy Funding Partners, that provides for SGC's performance under a
volumetric production payment, such release in form and substance
satisfactory to Investor.
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(83) "STOCK" means the capital stock authorized by
the Certificate of Incorporation, as amended, of the Company.
(84) "TAXES" means all federal, state, local or
foreign taxes, charges, fees, levies or other assessments, including,
without limitation, all net income, gross income, gross receipts,
premium, sales, use, ad valorem, transfer, franchise, profits, license,
withholding, payroll, employment, excise, estimated severance, stamp,
occupation, property or other taxes, fees, assessments or charges of
any kind whatsoever, together with any interest and any penalties
(including penalties for failure to file in accordance with applicable
information reporting requirements), and additions to tax.
(85) "TECO" TECO Oil & Gas, Inc., a Florida
corporation.
(86) "TECO NOTE" means that certain promissory note
dated March 5, 1998, in the original principal amount of $18,500,000 by
the Company as maker and TECO as the original payee.
(87) "TECO SETTLEMENT" means the (i) release of all
liabilities of the Company pursuant to the TECO Note, (ii) cancellation
of the TECO Warrants, and (iii) cancellation of all other liabilities
and obligations of the Company to TECO or to any holder or transferee
of the TECO Note, the TECO Warrants or shares of Common Stock issued
pursuant to the TECO Warrants.
(88) "TECO WARRANTS" means (i) those 600,000 warrants
exercisable at $2.67 per share for Common Stock originally issued to
TECO and (ii) those warrants originally issued to TECO and exercisable
at $.00001 per share for Common Stock.
(89) "THIRD PARTY" means a Person other than the
Company, the Company's Affiliates, Investor, Investor's Affiliates,
Fidelity, Fidelity's Affiliates or a Governmental Authority.
(90) "TRANSACTION COSTS" means all costs, expenses,
and fees of the Company relating to the transactions contemplated by
this Agreement, and each transaction to be completed as a condition to
closing hereunder including closing costs, attorney's fees, accounting
expenses or termination fees. Transaction Costs shall not, however,
include any expenses associated with the exercise of registration
rights pursuant to Article 8.
(91) "TRANSFER" means a sale, assignment, transfer,
conveyance, gift, exchange, abandonment or other disposition (including
an assignment of contractual rights or a delegation of contractual
obligations), whether voluntary, involuntary or by operation of Law.
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(92) "VOTING AND SUPPORT AGREEMENT" means a Voting
and Conversion Agreement and Irrevocable Proxy dated the date hereof by
and among the Investor and certain owners of the Company's Common Stock
and Preferred Stock in substantially the form of Exhibit 5.13.
(93) "WI" or "WORKING INTEREST" shall mean the
property interest which entitles the owner thereof to explore and
develop land for Hydrocarbons, whether under any Lease, a compulsory
pooling order or otherwise.
(b) Grammatical variants of such definitions set forth herein
shall have correlative meanings.
10.2 Further Assurances. From time to time, as and when requested by
any party hereto, any other party hereto shall execute and deliver, or cause to
be executed and delivered, such documents and instruments and shall take, or
cause to be taken, such further or other actions as may be reasonably necessary
to effectuate the transactions contemplated hereby, including, without
limitation, the transfer to Investor of the entire legal and beneficial
ownership of all issued and outstanding capital stock of each the Company, free
and clear of all Encumbrances.
10.3 Public Announcements. The Company and Investor shall consult with
each other with regard to all publicity and other releases issued concerning
this Agreement and the transactions contemplated hereby and, except as required
by applicable Law or the stock exchange requirements, neither Party shall issue
any such publicity or other release without the prior written consent of the
other Party.
10.4 Expenses. Except as otherwise provided herein, each Party shall be
solely responsible for all costs and expenses incurred by it in connection with
the transactions contemplated hereby (including fees and expenses of its own
counsel and consultants).
10.5 Notices and Waivers. Any notice, instruction, authorization,
request, demand or waiver hereunder shall be in writing, and shall be delivered
either by personal delivery, by telegram, telex, telecopy or similar facsimile
means, by certified or registered mail, return receipt requested, or by courier
or delivery service, addressed to the parties hereto at the address indicated
beneath their respective signatures on the execution pages of this Agreement, or
at such other address and number as a party shall have previously designated by
written notice given to the other parties in the manner hereinabove set forth.
Notices shall be deemed given when received, if sent by facsimile means
(confirmation of such receipt by confirmed facsimile transmission being deemed
receipt of communications sent by facsimile means); and when delivered and
receipted for (or upon the date of attempted delivery where delivery is
refused), if hand-delivered, sent by express courier or delivery service, or
sent by certified or registered mail, return receipt requested.
10.6 Survival. All representations and warranties contained in this
Agreement shall survive the Closing, and all covenants and agreements contained
in this Agreement shall survive the Closing
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in accordance with their terms. Any Claims asserted against the Company by
Investor or by the Company against Investor relative to this Agreement during
such periods shall survive the expiration thereof.
10.7 Gender and Certain References. Whenever the context requires, the
gender of all words used herein shall include the masculine, feminine and
neuter, and the number of all words shall include the singular and plural.
References to Articles or Sections shall be to Articles or Sections of this
Agreement unless otherwise specified. The headings and captions used in this
Agreement are solely for convenient reference and shall not affect the meaning
or interpretation of any article, section or paragraph herein, or this
Agreement. The terms "hereof," "herein" or "hereunder" shall refer to this
Agreement as a whole and not to any particular article, section or paragraph.
The terms "including" or "include" are used herein in an illustrative sense and
not to limit a more general statement. When computing time periods described by
a number of days before or after a stated date or event, the stated date or date
on which the specified event occurs shall not be counted and the last day of the
period shall be counted. Unless otherwise specified, all references herein to
days, weeks, months or years shall be to calendar days, weeks, months or years.
Unless otherwise specified herein, any obligation otherwise due on a
non-Business Day shall not be due until the next Business Day.
10.8 Successors and Assigns. This Agreement shall bind, inure to the
benefit of and be enforceable by the parties hereto and their respective
successors and permitted assigns, and if an individual, by his or her executors,
administrators, and beneficiaries of his or her estate by will or the laws of
descent and distribution. This Agreement and the rights and obligations
hereunder shall not be assignable or delegable by any party; provided, however,
that before Closing Investor shall be entitled to assign its rights and delegate
its duties hereunder to any corporate Affiliate, and after Closing Investor
shall be entitled to assign its rights and delegate its duties hereunder to any
Person, but no such assignment or delegation shall have the effect of
terminating Investor's duties or obligations as provided herein.
10.9 Applicable Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND OF THE UNITED STATES
APPLICABLE IN TEXAS, EXCLUDING, HOWEVER, (i) ANY PROVISION OF SUCH LAWS THAT
WOULD RENDER INVALID ANY PROVISION OF THIS AGREEMENT, AND (ii) ANY RULE OF
CONFLICT-OF-LAWS THAT WOULD DIRECT OR REFER THE RESOLUTION OF ANY ISSUE TO THE
LAWS OF ANY OTHER JURISDICTION. Each party hereto hereby acknowledges and agrees
that it has consulted legal counsel in connection with the negotiation of this
Agreement and that it has bargaining power equal to that of the other parties
hereto in connection with the negotiation and execution of this Agreement.
Accordingly, the parties hereto agree that the rule that an agreement shall be
construed against the draftsman shall have no application in the construction or
interpretation of this Agreement.
10.10 Disputes. This Section 10.10 shall apply to any dispute arising
under or otherwise Attributable to this Agreement or the transactions
contemplated hereby (whether arising in contract, tort or otherwise, and whether
arising at law or in equity), including (a) any dispute regarding
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the construction, interpretation, performance, validity or enforceability of any
provision of this Agreement or whether any Person is in compliance with, or
breach of, any provisions of this Agreement, and (b) the applicability of this
Section 10.10 to a particular dispute (collectively, a "DISPUTE"). The
provisions of this Section 10.10 shall be the exclusive method of resolving
Disputes.
10.11 Arbitration.
(a) If a Dispute arises, the Parties shall attempt to resolve
it through negotiations. If the Parties are unable to resolve the Dispute within
20 days of the commencement of such negotiations, either Party may submit the
Dispute to binding arbitration before a sole arbitrator (the "ARBITRATOR")
pursuant to this Section 10.11(a) by notifying the other Party and designating a
proposed Arbitrator. If the other Party objects to such proposed Arbitrator, it
may, on or before the 10th day following delivery of such notice, notify the
other Party of its objection. The Parties shall then attempt to agree upon a
mutually acceptable Arbitrator. If they are unable to do so within 10 days
following delivery of the notice described in the immediately-preceding
sentence, either Party may request the American Arbitration Association (or
successor body) (the "AAA") to designate the Arbitrator. Each Party and each
proposed Arbitrator shall disclose to the other Party any business, personal or
other relationship or Affiliation that may exist between such Party and such
proposed Arbitrator, and any Party may disapprove of such proposed Arbitrator on
the basis of such relationship or Affiliation. If the Arbitrator so chosen shall
die, resign or otherwise fail or become unable to serve as Arbitrator, a
replacement Arbitrator shall be chosen in accordance with this Section 10.11(a).
(b) The Arbitrator shall expeditiously (and, if possible,
within 45 days after the Arbitrator's selection) hear and decide all matters
concerning the Dispute. Any arbitration hearing shall be held in Houston, Texas.
The arbitration shall be conducted in accordance with the then-current
Commercial Arbitration Rules of the AAA (excluding rules governing the payment
of arbitration, administrative or other fees or expenses to the Arbitrator or
the AAA), to the extent that such Rules do not conflict with the terms of this
Agreement. Except as expressly provided to the contrary in this Agreement, the
Arbitrator shall have the power (i) to gather such materials, information,
testimony and evidence as it deems relevant to the dispute before it (and each
Party will provide such materials, information, testimony and evidence requested
by the Arbitrator, except to the extent any information so requested is
proprietary, subject to a third-party confidentiality restriction or to an
attorney-client or other privilege) and (ii) to grant injunctive relief and
enforce specific performance.
(c) If it deems necessary, the Arbitrator may propose to the
Parties that one or more other experts be retained to assist it in resolving the
Dispute. The retention of such other experts shall require the consent of both
Parties, which shall not be unreasonably withheld. Each Party, the Arbitrator
and any proposed expert shall disclose to the other Party any business, personal
or other relationship or affiliation that may exist between such Party (or the
Arbitrator) and such
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proposed expert; and either Party may disapprove of such proposed expert on the
basis of such relationship or affiliation.
(d) The decision of the Arbitrator (which shall be rendered in
writing) shall be final, nonappealable and binding upon the Parties and may be
enforced in any court of competent jurisdiction. The responsibility for paying
the costs and expenses of the arbitration, including compensation to the
Arbitrator and any experts retained by the Arbitrator, shall be allocated
between the Parties in a manner determined by the Arbitrator to be fair and
reasonable under the circumstances. Each Party shall be responsible for the fees
and expenses of its respective counsel, consultants and witnesses, unless the
Arbitrator determines that compelling reasons exist for allocating all or a
portion of such costs and expenses to one or more other Parties.
10.12 Severability; Judicial Modification. If any term, provision,
covenant, or restriction of this Agreement (including any arbitration provision
of this Agreement) is held by a court of competent jurisdiction to be invalid,
void, or unenforceable, the remainder of this Agreement and the other terms,
provisions, covenants and restrictions hereof shall remain in full force and
effect and shall in no way be affected, impaired or invalidated. It is hereby
stipulated and declared to be the intention of the parties that they would have
executed this Agreement had the terms, provisions, covenants and restrictions
which may be hereafter declared invalid, void, or unenforceable not initially
been included herein.
10.13 Amendment and Entirety. This Agreement may be amended, modified,
or superseded only by written instrument executed by all parties hereto. This
Agreement sets forth the entire agreement and understanding of the parties with
respect to the transactions contemplated hereby and supersedes all prior
agreements, arrangements, and understandings relating to the subject matter
hereof. In the event of any conflict or inconsistency between the provisions of
this Agreement and the contents or provisions of any schedule or exhibit hereto,
the provisions of this Agreement shall control. Except as expressly permitted by
this Agreement, the contents of schedules and exhibits hereto shall not be
deemed to negate or modify any representation, warranty, covenant or agreement
contained in this Agreement. Without limiting the generality of the preceding
sentence, any representation, warranty, covenant or other agreement contained in
any document, instrument or agreement delivered pursuant hereto or entered into
in connection herewith is made in addition to, and not in lieu of, any
representation, warranty, covenant or other agreement contained herein.
10.14 Rights of Parties. Nothing in this Agreement, whether express or
implied, is intended to confer any rights or remedies under or by reason of this
Agreement on any Persons other than the parties hereto and their respective
successors and assigns, nor shall any provision give any third Persons any right
of subrogation or action over against any party to this Agreement. Without
limiting the generality of the foregoing, it is expressly understood that this
Agreement does not create any third party beneficiary rights.
10.15 Time of Essence. Time is of the essence in the performance of
this Agreement.
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10.16 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original and all which together
shall constitute one and the same instrument.
[SIGNATURE PAGE FOLLOWS]
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SIGNATURE PAGE FOR
INVESTMENT AGREEMENT
IN WITNESS WHEREOF, this Investment Agreement is executed and delivered
on and as of the day first above written.
THE COMPANY:
AMERICAN RESOURCES OFFSHORE, INC.
By: /s/ David Stetson
-----------------------------------
Name: David Stetson
Title: Vice President and General Counsel
Address: 160 Morgan Street
P.O. Box 87
Versailles, Kentucky 40383
Telecopy No. (606) 873-4689
INVESTOR:
BLUE DOLPHIN EXPLORATION COMPANY
By: /s/ John P. Atwood
-----------------------------------
John P. Atwood
Vice President Finance and
Corporate Development
Address: 801 Travis, Suite 2100
Houston, Texas 77002
Telecopy No. (713) 227-7626
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APPENDIX B
PURCHASE AND SALE AGREEMENT (COMPOSITE)
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EXECUTION VERSION
===============================================================================
PURCHASE AND SALE AGREEMENT
BETWEEN
AMERICAN RESOURCES OFFSHORE, INC.
AND
FIDELITY OIL HOLDINGS, INC.
JULY 30, 1999
===============================================================================
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PURCHASE AND SALE AGREEMENT
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE 1
DEFINITIONS
1.1 DEFINITIONS......................................................1
1.2 RULES OF CONSTRUCTION............................................7
ARTICLE 2
PURCHASE AND SALE
2.1 PURCHASE AND SALE OF ASSETS......................................7
2.2 QUITCLAIMED ASSETS...............................................8
ARTICLE 3
PURCHASE PRICE
3.1 PURCHASE PRICE; METHOD OF PAYMENT................................9
3.2 ALLOCATION OF PURCHASE PRICE.....................................9
ARTICLE 4
TITLE AND ENVIRONMENTAL MATTERS
4.1 MARKETABLE TITLE.................................................9
4.2 PERMITTED ENCUMBRANCES..........................................10
4.3 NOTICE OF TITLE DEFECT..........................................11
4.4 REMEDIES FOR TITLE DEFECTS; TITLE INCREASES.....................11
4.5 VALUE OF PROPERTY; TITLE DEFECT................................12
4.6 CONSENTS........................................................12
4.7 CASUALTY EVENTS.................................................13
4.8 ENVIRONMENTAL ADJUSTMENTS.......................................13
4.9 OTHER ADJUSTMENTS...............................................14
4.10 FORWARD SALES...................................................14
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ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF SELLER
5.1 ORGANIZATION AND QUALIFICATION..................................14
5.2 POWER...........................................................14
5.3 AUTHORIZATION...................................................14
5.4 BROKERS.........................................................14
5.5 FOREIGN PERSON..................................................15
5.6 BANKRUPTCY......................................................15
5.7 LITIGATION......................................................15
5.8 GOVERNMENTAL QUALIFICATION......................................15
5.9 CONSENTS........................................................15
5.10 LEASES..........................................................15
5.11 CONTRACTS.......................................................15
5.12 PROCEEDS OF PRODUCTION..........................................16
5.13 INVOICES........................................................16
5.14 GAS IMBALANCES..................................................16
5.15 GAS PREPAYMENTS.................................................16
5.16 ACCESS..........................................................16
5.17 WELLS...........................................................16
5.18 PERMITS.........................................................16
5.19 ENVIRONMENTAL LAWS..............................................17
5.20 INSURANCE.......................................................17
5.21 AFES............................................................17
5.22 CASUALTY........................................................17
5.23 TITLE...........................................................17
5.24 PRICING.........................................................17
5.25 EQUIPMENT.......................................................17
5.26 ADVERSE CHANGES IN PRODUCTION RATES OR OIL AND GAS RESERVES.....18
5.27 ACCURACY OF REPRESENTATIONS.....................................18
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF PURCHASER
6.1 EXISTENCE.......................................................18
6.2 POWER...........................................................18
6.3 AUTHORIZATION...................................................18
6.4 BROKERS.........................................................19
6.5 SECURITIES LAWS.................................................19
6.6 BANKRUPTCY......................................................19
6.7 GOVERNMENTAL QUALIFICATION......................................19
</TABLE>
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<TABLE>
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ARTICLE 7
PRE-CLOSING COVENANTS OF SELLER
7.1 OPERATIONS......................................................19
7.2 ACCESS..........................................................19
7.3 NO SHOP.........................................................20
7.4 BREACHES OF REPRESENTATIONS AND WARRANTIES......................20
7.5 ESTIMATES OF ADJUSTED PURCHASE PRICE............................20
ARTICLE 8
PRE-CLOSING COVENANTS OF PURCHASER
8.1 CONFIDENTIALITY.................................................20
8.2 RETURN OF DATA..................................................20
8.3 INDEMNITY REGARDING ACCESS......................................20
ARTICLE 9
SELLER'S CONDITIONS OF CLOSING
9.1 REPRESENTATIONS AND WARRANTIES..................................21
9.2 PERFORMANCE.....................................................21
9.3 PROCEEDINGS.....................................................21
9.4 INVESTMENT AGREEMENT TRANSACTION................................21
9.5 SHAREHOLDER APPROVAL............................................21
9.6 GOVERNMENT APPROVALS............................................21
9.7 PREFERENTIAL PURCHASE RIGHTS....................................21
ARTICLE 10
PURCHASER'S CONDITIONS OF CLOSING
10.1 REPRESENTATIONS AND WARRANTIES..................................21
10.2 PERFORMANCE.....................................................22
10.3 PROCEEDINGS.....................................................22
10.4 INVESTMENT AGREEMENT TRANSACTION................................22
10.5 RELEASE OF LIENS................................................22
10.6 GOVERNMENTAL APPROVALS..........................................22
10.7 PREFERENTIAL PURCHASE RIGHTS....................................22
10.8 MATERIAL ADVERSE CHANGE.........................................22
10.9 LEGAL OPINION...................................................22
</TABLE>
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ARTICLE 11
CLOSING
11.1 TIME AND PLACE OF CLOSING.......................................23
11.2 CLOSING OBLIGATIONS.............................................23
11.3 ALLOCATION OF REVENUES AND EXPENSES.............................23
ARTICLE 12
POST-CLOSING COVENANTS
12.1 POST-CLOSING ADJUSTMENTS........................................24
12.2 PAYMENTS RECEIVED IN ERROR......................................24
12.3 SALES TAXES.....................................................24
12.4 RECORDATION OF ASSIGNMENT.......................................24
12.5 ACCESS TO EMPLOYEES.............................................24
12.6 FURTHER ASSURANCES..............................................25
12.7 CONFIDENTIALITY.................................................25
12.8 REVENUE REIMBURSEMENT OBLIGATIONS...............................25
ARTICLE 13
ASSUMED OBLIGATIONS; INDEMNIFICATION
13.1 ASSUMED OBLIGATIONS.............................................25
13.2 INDEMNIFICATION.................................................26
13.3 LIMITATIONS ON INDEMNIFICATION..................................27
ARTICLE 14
INDEPENDENT INVESTIGATION AND DISCLAIMER
14.1 INDEPENDENT INVESTIGATION AND DISCLAIMER........................28
ARTICLE 15
TERMINATION
15.1 RIGHT OF TERMINATION............................................29
15.2 EFFECT OF TERMINATION...........................................29
ARTICLE 16
ARBITRATION
16.1 DISPUTES........................................................30
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16.2 ARBITRATION.....................................................30
ARTICLE 17
GENERAL PROVISIONS
17.1 GOVERNING LAW...................................................31
17.2 ENTIRE AGREEMENT; AMENDMENTS....................................31
17.3 WAIVER..........................................................32
17.4 TRANSFERS.......................................................32
17.5 NOTICES.........................................................32
17.6 EXPENSES........................................................33
17.7 SEVERABILITY....................................................33
17.8 PUBLICITY.......................................................33
17.9 SPECIFIC PERFORMANCE............................................33
17.10 CONSEQUENTIAL AND PUNITIVE DAMAGES..............................33
17.11 NO THIRD-PARTY BENEFICIARY......................................33
17.12 COUNTERPARTS....................................................34
</TABLE>
EXHIBITS
2.1(a) Leases
2.1(e) Contracts
2.1(i) Quitclaimed Assets
3.2 Allocated Value
4.1(a) Interest
4.1(b) Platforms
4.2(i) Terminable Sales Contracts
4.6(b) Pending MMS Consents
4.6(c) Pending MMS Approval
5.6 Bankruptcy
5.7 Litigation
5.10(e) Lease Rentals and Royalties
5.11 Contracts (in Default)
5.13 Unpaid Invoices
5.15 Prepayments
5.17 Wells
5.17(c) Plugging Obligations
5.20 Insurance
5.21 Outstanding AFEs
5.23 Liens and Encumbrances
v
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7.5 Form of Closing Settlement Statement
11.3 General and Administrative Expenses
12.8 Revenue Reimbursement Obligations
SCHEDULES
11.3 1999 Revenue and Expenses
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PURCHASE AND SALE AGREEMENT
This PURCHASE AND SALE AGREEMENT (this "Agreement") is entered into on
July 30, 999 (the "Execution Date") by and between AMERICAN RESOURCES OFFSHORE,
INC., a Delaware corporation ("Seller"), and FIDELITY OIL HOLDINGS, INC., a
Delaware corporation "Purchaser") (collectively, the "Parties" or individually,
a "Party").
RECITALS
A. Seller desires to sell to Purchaser, and Purchaser desires to
purchase from Seller, certain Hydrocarbon (defined below) properties and
related assets on the terms and conditions set forth in this Agreement.
B. The transaction contemplated by this Agreement represents one of
several substantially contemporaneous and mutually contingent transactions
whereby Seller intends to Transfer (defined below) substantially all of its
assets and properties, subject to, among other things, the approval of such
Transfers by the shareholders of Seller.
NOW, THEREFORE, for and in consideration of the mutual agreements
contained herein, Seller and Purchaser hereby agree as follows:
ARTICLE 1
DEFINITIONS
1.1 DEFINITIONS. As used herein, the following terms have the
following respective meanings set forth below or in the provision referenced
below (and grammatical variants of such terms have correlative meanings):
"AAA" shall have the meaning set forth in Section 16.2(a).
"ADJUSTED PURCHASE PRICE shall have the meaning set forth in
Section 3.1.
"AGREEMENT" shall have the meaning set forth in the
introductory paragraph.
"ALLOCATED VALUE" shall have the meaning set forth in Section
3.2.
"ARBITRATOR" shall have the meaning set forth in Section
16.2(a).
"ASSETS" shall have the meaning set forth in Section 2.1.
"ASSIGNMENTS" shall have the meaning set forth in Section
11.2(a).
"ASSUMED OBLIGATIONS" shall have the meaning set forth in
Section 13.1.
"BDSI" shall mean Blue Dolphin Services, Inc., a Delaware
corporation.
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"BUSINESS DAY" shall mean any day other than Saturday or
Sunday on which national banking associations in Houston, Texas are
open for business.
"CASUALTY EVENT", with respect to any Asset, shall mean (a) a
fire, hurricane or other catastrophic casualty event causing material
damage to such Asset, or (b) the taking of such Asset by a
Governmental Authority through condemnation or eminent domain which
materially and adversely impairs the value of such Asset.
"CLAIM NOTICE" shall have the meaning set forth in Section
13.2(c)(ii).
"CLOSING" shall have the meaning set forth in Section 11.1.
"CLOSING DATE" shall have the meaning set forth in Section
11.1.
"CLOSING SETTLEMENT STATEMENT" shall have the meaning set
forth in Section 7.5.
"CODE" shall mean the Internal Revenue Code of 1986, as
amended.
"COMMERCIALLY REASONABLE EFFORTS" shall mean the efforts
(including the incurrence of reasonable out-of-pocket costs and
expenses) that would be undertaken by a reasonable, similarly-situated
participant in the oil and gas industry, taking into account all
relevant commercial, legal and other considerations.
"CONFIDENTIALITY AGREEMENT" shall mean the Confidentiality
Agreement, dated January 4, 1999, between Seller and Blue Dolphin
Exploration Company, as confirmed by Purchaser on January 11, 1999.
"CONTRACTS" shall have the meaning set forth in Section
2.1(e).
"CONTROL" shall mean the possession, directly or indirectly,
through one or more intermediaries, of (a) more than 50% of the equity
interests in an Entity, or (b) the power or authority, through
ownership of voting securities, by contract or otherwise, to exercise
a controlling influence over the management of the Entity.
"CURE DEADLINE" shall have the meaning set forth in Section
4.4.
"DISPUTE" shall have the meaning set forth in Section 16.1.
"EASEMENT" shall mean easement, right-of-way or servitude.
"EFFECTIVE DATE" shall mean 12:01 a.m. Central Standard Time
on January 1, 1999.
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"ENCUMBRANCE" shall mean mortgage, deed of trust, lien,
privilege, security interest, pledge, collateral assignment,
conditional sales arrangement or other burden or encumbrance.
"ENTITY" shall mean a corporation, general partnership
(including a limited liability partnership), limited partnership,
joint venture, limited liability company, trust, estate, Governmental
Authority or other entity.
"ENVIRONMENTAL DEFECT" shall have the meaning set forth in
Section 4.8.
"ENVIRONMENTAL DEFECT ADJUSTMENT AMOUNT" shall have the
meaning set forth in Section 4.8.
"ENVIRONMENTAL LAWS" shall mean all Laws or Orders of any
Governmental Authority pertaining to health, the environment, wildlife
or natural resources, including the Clean Air Act; the Comprehensive
Environmental, Response, Compensation, and Liability Act of 1980; the
Federal Water Pollution Control Act or Clean Water Act; the Rivers and
Harbors Act of 1899; the Occupational Safety and Health Act of 1970;
the Resource Conservation and Recovery Act of 1976; the Safe Drinking
Water Act; the Toxic Substances Control Act; the Hazardous & Solid
Waste Amendments Act of 1984; the Superfund Amendments and
Reauthorization Act of 1986; the Hazardous Materials Transportation
Act; and state and local Laws, including common law, pertaining to
health, the environment, wildlife or natural resources.
"EQUIPMENT" shall have the meaning set forth in Section
2.1(c).
"EXECUTION DATE" shall have the meaning set forth in the
introductory paragraph.
"GOVERNMENTAL AUTHORITY" (or "GOVERNMENTAL") shall mean a
federal, state, tribal or local governmental body, agency, division,
board, department, commission, court or other authority, including the
MMS.
"HEDGE AGREEMENTS" shall have the meaning set forth in
Section 12.8.
"HYDROCARBON" shall mean gas, oil, casinghead gas, drip
gasoline, natural gasoline and all other liquid and gaseous
hydrocarbons.
"INDEMNIFIED PERSON" shall have the meaning set forth in
Section 13.2(c)(i).
"INDEMNIFY" shall mean to protect, defend, release and hold
harmless.
"INDEMNIFYING PARTY" shall have the meaning set forth in
Section 13.2(c)(i).
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"INTERIM PERIOD" shall mean the period from the Execution
Date through the Closing Date.
"INVESTMENT AGREEMENT" shall mean that certain Investment
Agreement of even date herewith between Seller and Blue Dolphin
Exploration, Inc.
"LAW" shall mean a constitutional provision, statute, act,
code, regulation, rule, ordinance, Order, court decision, common law,
or other law or ruling.
"LEASES" shall have the meaning set forth in Section 2.1(a).
"LOSSES" shall mean losses; liabilities; demands; claims;
causes of action; Proceedings; assessments; cleanup, remediation and
restoration obligations; judgments; awards; damages; natural resource
damages; fines; fees; penalties; and costs and expenses (including
litigation costs and attorneys' and experts' fees and expenses).
"MARKETABLE TITLE" shall have the meaning set forth in
Section 4.1.
"MMS" shall mean the United States Minerals Management
Service.
"NRI" or "NET REVENUE INTEREST" shall mean, with regard to
any Property, the decimal or percentage share of Hydrocarbon
production from or allowable to such Property, after deductions for
all overriding royalties and burdens on production (including lessor
royalties) applicable thereto, that an owner of a Working Interest is
entitled to receive.
"NOTICE PERIOD" shall have the meaning set forth in Section
13.2(c)(ii).
"OPERATING AGREEMENT CONSENTS" shall have the meaning set
forth in Section 4.6(a).
"ORDER" shall mean a Governmental or arbitral order,
judgment, ruling, decree, decision, notice, writ, injunction or award.
"PARTY" and "PARTIES" shall have the meanings set forth in
the introductory paragraph.
"PENDING MMS CONSENTS" shall have the meaning set forth in
Section 4.6(c).
"PERMIT" shall mean a Governmental permit, certificate,
license, franchise or authorization.
"PERMITTED ENCUMBRANCES" shall have the meaning set forth in
Section 4.2.
"PERSON" shall mean a natural person or an Entity.
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"PLATFORMS" shall have the meaning set forth in Section
2.1(b).
"POST-CLOSING MMS CONSENTS" shall have the meaning set forth
in Section 4.6(d).
"POST-CLOSING SETTLEMENT STATEMENT" shall have the meaning
set forth in Section 12.1.
"PROCEEDING" shall mean a judicial, administrative or
arbitral proceeding, including a lawsuit or Governmental
investigation.
"PROPERTIES" shall have the meaning set forth in Section
2.1(a).
"PURCHASE PRICE" shall have the meaning set forth in Section
3.1(a).
"PURCHASE PRICE ADJUSTMENT AMOUNT" shall mean the sum of the
Title Defect Adjustment Amount, the Environmental Defect Adjustment
Amount, the Revenue Adjustment, any reduction resulting from a
Casualty Event not reimbursed by insurance and any other adjustments
to the Purchase Price required or contemplated by this Agreement or
otherwise agreed to in writing by the Parties, in each case subject to
any limits or thresholds set forth in this Agreement pertaining to the
specified adjustment.
"PURCHASER" shall have the meaning set forth in the
introductory paragraph.
"PURCHASER'S AFFILIATES" shall mean (a) any other Entity that
Controls, is Controlled by, or is under common Control with,
Purchaser; (b) any director, officer or employee of Purchaser or of an
Entity described in clause (a) of this definition; and (c) any agent,
consultant or representative that Purchaser has engaged in connection
with the ownership or operation of the Assets or the transactions
contemplated hereby.
"QUITCLAIMED ASSETS" shall have the meaning set forth in
Section 2.1(i).
"RECORDS" shall have the meaning set forth in Section 2.1(h).
"REQUIRED CONSENTS" shall mean the Operating Agreement
Consents, the Pending MMS Consents and the Post-Closing MMS consents.
"RESERVE MATTERS" shall mean the existence or extent of
Hydrocarbon reserves; the recoverability of (or the cost of
recovering) any such reserves; the value of such reserves; any product
pricing assumptions; the ability to sell Hydrocarbon production after
the Closing or any conditions thereon; and geological, geophysical and
seismic matters.
"REVENUE ADJUSTMENT" shall have the meaning set forth in
Section 11.3.
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"SECURITIES LAWS" shall mean the Securities Act of 1933, the
Securities Exchange Act of 1934, and all other Laws concerning or
regulating the sale or registration of securities.
"SELLER" shall have the meaning set forth in the introductory
paragraph.
"SELLER'S AFFILIATES" shall mean (a) any other Entity that
Controls, is Controlled by, or is under common Control with, Seller;
(b) any director, officer or employee of Seller or of an Entity
described in clause (a) of this definition; and (c) any agent,
consultant or representative that Seller has engaged in connection
with the ownership or operation of the Assets or the transactions
contemplated hereby.
"SELLER'S KNOWLEDGE" shall mean those facts that are actually
known, or those facts which should be known, to Rick Avare, David
Stetson, Ralph Currie or Karen Underwood after due and appropriate
inquiry in the exercise of reasonable diligence, taking into account
the scope and nature of the responsibilities of the individual in
question, and includes any facts that are known by such individuals
regardless of whether such individuals are adverse to the Seller in
respect of the matters as to which such individual's knowledge is
attributed to Seller.
"THIRD PARTY" shall mean a Person other than Seller, Seller's
Affiliates, Purchaser, Purchaser's Affiliates or a Governmental
Authority.
"THIRD PARTY LOSS" shall mean a Loss that is asserted by a
Third Party or a Governmental Authority.
"TITLE DEADLINE" shall have the meaning set forth in Section
4.3.
"TITLE DEFECT" shall have the meaning set forth in Section
4.3.
"TITLE DEFECT ADJUSTMENT AMOUNT" shall have the meaning set
forth in Section 4.4(b).
"TITLE DEFECT VALUE" shall have the meaning set forth in
Section 4.3.
"TITLE INCREASE" shall have the meaning set forth in Section
4.4(c).
"TITLE INCREASE ADJUSTMENT AMOUNT" shall have the meaning set
forth in Section 4.4(c).
"TRANSFER" shall mean a sale, assignment, transfer,
conveyance, gift, exchange or other disposition (including an
assignment of contractual rights or a delegation of contractual
obligations), whether voluntary, involuntary or by operation of Law.
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"WI" or "WORKING INTEREST shall mean the property interest
which entitles the owner thereof to explore and develop land for
Hydrocarbons, whether under a Lease, a compelling pooling order or
otherwise.
1.2 RULES OF CONSTRUCTION. In construing this Agreement, the following
rules shall be used (unless the context clearly requires otherwise): (a) any
references to a Law, Lease, Contract, Order or Permit refer to such Lease,
Contract, Order or Permit as it has been amended, restated, modified or
supplemented; (b) any references to "Articles" or "Sections" refer to Articles
or Sections of this Agreement; (c) the titles of the Articles and Sections are
for convenience only and shall not be used in construing this Agreement; (d)
any references to "Exhibits" refer to the Exhibits attached hereto, each of
which is made a part hereof for all purposes; (e) if there is any conflict or
inconsistency between the text of this Agreement and any Exhibit, the text of
this Agreement shall control; and (f) because both Parties have participated in
the preparation and negotiation of this Agreement, the rule that ambiguities in
agreements are to be construed against the party that prepared them is
inapplicable.
ARTICLE 2
PURCHASE AND SALE
2.1 PURCHASE AND SALE OF ASSETS. On the Closing Date, but effective as
of the Effective Date, subject to the other provisions of this Agreement,
Seller agrees to sell, Transfer and deliver to Purchaser, and Purchaser agrees
to purchase and pay for, an undivided eighty percent (80%) of Seller's right,
title and interest in and to the following assets (said eighty percent (80%)
undivided interest being referred to as the "Assets"):
(a) the leases described on Exhibit 2.1(a) (including record
title, operating rights, overriding royalties, net profits interests
and all other types of interests) (the "Leases", each of the Leases
described in this Section 2.1(a) is referred to individually as a
"Property" and collectively as the "Properties");
(b) all platforms that are located on, or presently used in
connection with, the drilling for, or operation, production, treatment
or transportation of, Hydrocarbons from the Properties and the caisson
and deck owned by Seller related to the OCS-G 12501 B-1 Well located
on Block 297 Galveston Area (the "Platforms");
(c) all wells, wellbores, pipe, pipelines, gathering lines,
compressors, materials, inventory, facilities (other than Platforms),
supplies and equipment and any and all other personal, real, movable
and immovable property, fixtures or equipment that are located on, or
presently used in connection with, the drilling for, or operation,
production, treatment or transportation of, Hydrocarbons from the
Properties, and any replacements, attachments or accessories now or
hereafter attached, added or affixed (the "Equipment");
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(d) all Hydrocarbons attributable to the Assets produced on
and after the Effective Date;
(e) all contracts and agreements (other than Leases) to the
extent transferable that are attributable to the ownership or
operation of the Assets, including, without limitation, the following
(collectively, the "Contracts"):
(i) the contracts and agreements that are listed on
Exhibit 2.1(e); and
(ii) any other operating agreements, participation
agreements, unit, pooling and communitization agreements and
declarations, Hydrocarbon purchase and sale agreements,
farmin or farmout agreements, bottom-hole contribution
agreements, balancing agreements, processing agreements,
gathering agreements, compression agreements, transportation
agreements, and any other contracts and agreements that are
attributable to the ownership or operation of the Assets
whether or not set forth on Exhibit 2.1(e);
(f) all Orders, Permits and Easements that are attributable
to the Assets;
(g) all other rights, privileges, benefits, powers and
obligations conferred or imposed upon Seller as the owner of the
Assets;
(h) to the extent attributable to the Assets and not
prohibited by Law or an agreement to which Seller is a party, the
rights to copy the following records in the possession of Seller: (i)
lease and land records, (ii) geological and geophysical records, (iii)
operations, production and engineering records, (iv) accounting
records, and (v) facility and well records (collectively, the
"Records"); and
(i) the other assets described on Exhibit 2.1(i) (the
"Quitclaimed Assets").
2.2 QUITCLAIMED ASSETS. NOTWITHSTANDING ANYTHING IN THIS AGREEMENT,
THE ASSIGNMENT OR THE OTHER CLOSING DOCUMENTS TO THE CONTRARY, SELLER MAKES NO
REPRESENTATIONS, WARRANTIES, COVENANTS OR INDEMNITIES OF ANY TYPE WHATSOEVER
WITH RESPECT TO THE QUITCLAIMED ASSETS (OR ANY OTHER ASSETS THAT ARE INCLUDED
IN THE DEFINITION OF "ASSETS" SOLELY BECAUSE THEY ARE ATTRIBUTABLE TO THE
QUITCLAIMED ASSETS), AND PURCHASER MAY NOT ASSERT ANY TITLE DEFECT OR OTHER
CLAIM WITH RESPECT TO ANY QUITCLAIMED ASSET; IT BEING AGREED BY PURCHASER THAT
IT IS ACQUIRING THE QUITCLAIMED ASSETS "AS-IS," "WHERE-IS," WITH ALL FAULTS.
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ARTICLE 3
PURCHASE PRICE
3.1 PURCHASE PRICE; METHOD OF PAYMENT. (a) The purchase price for the
Assets shall be Twenty-Five Million Three Hundred Thirteen Thousand Six Hundred
Eighty-Five and No/100 Dollars ($25,313,685) (the "Purchase Price"), which
amount shall be (i) increased by the Title Increase Adjustment Amount, (ii)
decreased or increased by an amount equal to the Purchase Price Adjustment
Amount and (iii) decreased by $271,200 (representing marketing adjustments)
(the purchase price, as so adjusted, is referred to herein as the "Adjusted
Purchase Price"). The Adjusted Purchase Price shall be either (a) paid by
Purchaser to Seller at Closing or (b) paid by Purchaser to the holder of the
DnB Note to reduce the principal balance thereof. All payments made by
Purchaser to reduce the outstanding principal balance of the DnB Note (whether
prior to or contemporaneous with Closing) shall be credited towards the amounts
due by Purchaser to Seller hereunder upon confirmation by Seller of any such
payments by Purchaser to the holder of the DnB Note.
(b) All amounts required under this Agreement to be paid by either
Party to the other Party shall be made by wire transfer of
immediately-available funds to Seller or Purchaser, as the case may be, at such
bank account in the United States as Seller or Purchaser may designate in
writing to the other Party at least five Business Days prior to the date on
which such payment is to be made.
3.2 ALLOCATION OF PURCHASE PRICE. Exhibit 3.2 contains the allocation
of the value of each Property as mutually agreed by the Parties (the "Allocated
Value"). Seller and Purchaser agree not to assert, in connection with any tax
return, tax audit or similar proceedings, any allocation of the consideration
that differs from any such agreed-upon in writing allocation. Seller and
Purchaser shall each prepare an IRS Form 8594 in accordance with such Allocated
Value.
ARTICLE 4
TITLE AND ENVIRONMENTAL MATTERS
4.1 MARKETABLE TITLE. (a) As used herein, the term "Marketable Title"
shall mean, in the case of each Property, such right, title and interest (owned
beneficially and of record) that, except for Permitted Encumbrances and as
otherwise set forth on Exhibit 4.1(a):
(i) entitles Seller, with respect to a particular Property,
now and in the future to receive not less than eighty percent (80%) of
the percentage set forth on Exhibit 4.1(a) as the Net Revenue Interest
or NRI of such Property of all Hydrocarbons produced from, or
otherwise attributable to, such Property, without reduction,
suspension or termination (including reductions resulting from gas
imbalances, if any);
(ii) obligates Seller, with respect to a particular Property,
now and in the future to bear not more than eighty percent (80%) of
the percentage set forth on Exhibit 4.1(a) as the Working Interest or
WI of such Property of all costs and expenses attributable to the
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ownership or operation of such Property, without increase (unless
Seller's Net Revenue Interest in such Property is proportionately
increased); and
(iii) is free and clear of any Encumbrances;
(b) Except as set forth on Exhibit 4.1(b), in the case of a Property
on which there is currently located a Platform (other than the Platform on
South Timbalier Block 211, which Platform is not owned by Seller), the term
"Marketable Title" shall also mean such right, title and interest that except
for Permitted Encumbrances and as otherwise set forth on Exhibit 4.1(a):
(i) entitles Seller, with respect to a particular Platform,
now and in the future, to an ownership interest in such Platform of
not less than eighty percent (80%) of the percentage set forth on
Exhibit 4.1(a) as Seller's Net Revenue Interest or NRI of the Property
on which the Platform is located, without reduction, suspension or
termination throughout the productive life of such Property;
(ii) obligates Seller, with respect to a particular Platform,
now and in the future to bear not more than the percentage set forth
on Exhibit 4.1(a) as the Working Interest or WI of the Property on
which the Platform is located of all costs and expenses attributable
to the ownership or operation of such Platform, without increase
(unless Seller's ownership interest in the Platform is proportionately
increased); and
(iii) is free and clear of any Encumbrances.
4.2 PERMITTED ENCUMBRANCES. As used herein, the term "Permitted
Encumbrances" shall mean, with respect to a particular Property:
(a) lessors' royalties, overriding royalties, reversionary
interests and similar burdens affecting such Property if the net
cumulative effect of such burdens does not reduce Seller's interest in
all Hydrocarbons produced from a particular Property below the "Net
Revenue Interest" or "NRI" set forth on Exhibit 4.1(a) for such
Property;
(b) division orders and sales contracts terminable without
penalty upon no more than 30 days' notice to the purchaser of the
Hydrocarbons from the Properties;
(c) operator's, vendor's, tax and similar liens or
Encumbrances securing obligations that were not due and payable prior
to the Closing Date or, if due, are being contested by Seller in good
faith;
(d) any Encumbrances created by Law for royalty, bonus,
deferred bonus payments or rental or for compliance with the terms of
the Leases;
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(e) the terms and provisions of (i) the Leases and Contracts,
and (ii) all Easements, Permits and Orders that are included within
the Assets to the extent such Leases, Contracts, Easements, Permits
and Orders do not operate to increase the Working Interest of Seller
in any of the Properties or decrease the Net Revenue Interest of
Seller in any of the Properties;
(f) Easements in favor of third parties so long as such
Easements do not adversely affect the continued use and operation of
the Properties;
(g) all rights reserved to or vested in any Governmental
Authority to control or regulate any of the Properties in any manner,
and all applicable Laws but in each case only to the extent such
rights to control or regulate or the enforcement of such Laws are not
provoked by the breach by Seller or its predecessor in interest of any
Law;
(h) the Required Consents; provided, however, that this
Section 4.2(h) does not affect Purchaser's rights under Section 4.6 or
Section 15.1(g); and
(i) those items set forth on Exhibit 4.2(i).
4.3 NOTICE OF TITLE DEFECT. Purchaser shall notify Seller in writing,
by 5:00 p.m. Central Standard Time on August 20, 1999 (the "Title Deadline"),
of any matter ("Title Defect") that would cause Seller's title to any of the
Properties or Platforms not to be Marketable Title, in each case together with
a reasonably detailed explanation of (a) the nature of such Title Defect, (b)
the Property or Platform affected thereby, (c) the Allocated Value for such
Property or Platform, and (d) Purchaser's proposed Title Defect Value (as
hereinafter defined) for such Title Defect. Any matters that would otherwise
constitute Title Defects but that are not specifically raised in writing (with
the explanation as contemplated in the immediately-preceding sentence) by
Purchaser on or before the Title Deadline shall conclusively be deemed waived
by Purchaser. As used herein, the term "Title Defect Value" shall mean with
respect to each Title Defect, the reduction in the "Allocated Value" of the
affected Property or Platform that results from the existence of such Title
Defect, as determined pursuant to Section 4.5, taking into account all relevant
considerations, other than the potential deductibility of such Title Defect
Value for federal, state or local income tax purposes.
4.4 REMEDIES FOR TITLE DEFECTS; TITLE INCREASES. (a) Until September
15, 1999 (the "Cure Deadline"), Seller shall have the right, but not the
obligation, to attempt to cure any Title Defect for which it receives notice
from Purchaser on or before the Title Deadline.
(b) With respect to any Title Defect for which Seller receives notice
from Purchaser on or before the Title Deadline but which is not cured on or
before the Cure Deadline, the Purchase Price shall be reduced by the Title
Defect Value for such Title Defect. The aggregate amount of all reductions to
the Purchase Price under this Section 4.4(b) is referred to as the "Title
Defect Adjustment Amount."
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Such remedy shall constitute Purchaser's sole remedy for Title Defects under
this Agreement. Notwithstanding the foregoing, there shall be no reductions to
the Purchase Price under this Section 4.4(b) unless and until the aggregate
amount of all Title Defect Values shall exceed a threshold of $50,000, in which
case the deduction shall include the threshold amount.
(c) To the extent that same are discovered by either Party prior to
the Title Deadline, the Purchase Price shall be increased (a "Title Increase")
by an amount equal to the value allocated to the following:
(i) any increase in Seller's interest in all Hydrocarbons
produced from, or otherwise attributable to, a Property or Platform
above the Net Revenue Interest or NRI set forth on Exhibit 4.1(a) for
such Property; and
(ii) any reduction in Seller's obligation to bear costs and
expenses attributable to the ownership or operation of a Property or
Platform below the Working Interest or WI set forth on Exhibit 4.1(a)
for such Property (unless Seller's Net Revenue Interest in such
Property or Platform is proportionately reduced);
in each case with such values to be agreed upon by Seller and Purchaser (taking
into account the Allocated Value for such Property) or otherwise determined
pursuant to the procedures set forth in Section 4.5. The aggregate amount of
all increases to the Purchase Price under this Section 4.4(c) is referred to as
the "Title Increase Adjustment Amount." Notwithstanding the other provisions of
this Section 4.4(c), there shall be no increases to the Purchase Price under
this Section 4.4(c) unless and until the aggregate amount of all Title
Increases shall exceed a threshold of $50,000, in which case the increase shall
include the threshold amount. Purchaser shall promptly notify Seller of any
records or other title documentation which would result in a Title Increase.
4.5 VALUE OF PROPERTY; TITLE DEFECT. If the Parties are unable to
agree upon (a) whether a Title Defect exists, (b) a Title Defect Value, (c) the
value allocated to a Title Increase or (d) the Environmental Defect Adjustment
Amount, then such Dispute shall be resolved pursuant to Article 16, and the
Closing shall be postponed until the fifth Business Day following the
resolution of such Dispute provided, however, no postponement of the Closing
shall affect the rights of Seller or Purchaser to terminate this Agreement
pursuant to Section 15.1(d).
4.6 CONSENTS. The Parties acknowledge that the Transfer of certain
Assets to Purchaser requires the consent of Third Parties and Governmental
Authorities, and that the following provisions shall govern the Parties'
efforts to obtain such consents:
(a) Operating Agreement Consents. Although Seller believes
that there are no preferential purchase rights that are applicable to
the transactions contemplated by this Agreement because Seller is
selling substantially all of its assets, the Parties acknowledge that
the Transfer of Seller's interest in the Assets may require the
consent and waiver of preferential purchase rights of certain working
interest owners ("Operating Agreement
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Consents"). Seller shall use Commercially Reasonable Efforts to obtain
the Operating Agreement Consents prior to Closing.
(b) Pending MMS Consents. The Parties acknowledge that with
respect to the Properties set forth on Exhibit 4.6(b), MMS approval
for the Transfer of the Properties in question has not been obtained
because (i) the MMS has not yet approved Transfers to Seller for
certain Properties, (ii) certain assignments have not yet been
submitted to the MMS for approval by the operator or (iii) the MMS has
rejected certain Transfers (collectively referred to as the "Pending
MMS Consents"). The Parties shall use Commercially Reasonable Efforts
before and after the Closing to obtain all of the Pending MMS
Consents; provided, however, the failure to obtain a Pending MMS
Consent prior to the Closing shall not cause the Property affected
thereby to be excluded from the sale hereunder or the Purchase Price
to be reduced.
(c) Post-Closing MMS Consents. The Parties acknowledge that
the Transfer of the Properties that are located in federal offshore
waters requires the approval, after the Closing, of the MMS (the
"Post-Closing MMS Consents"). The Parties shall use Commercially
Reasonable Efforts to obtain all of the Post-Closing MMS Consents
after the Closing; provided, however, the costs of all filing fees and
supplemental bonds shall be borne by Purchaser.
4.7 CASUALTY EVENTS. If a Casualty Event occurs during the Interim
Period, or it is determined that a Casualty Event has occurred since the
Effective Date, the Purchase Price shall not be reduced if there is insurance
for the full amount of any loss incurred by the Casualty Event, and Seller
shall assign to Purchaser the right to receive all insurance proceeds or
condemnation awards attributable to such Casualty Event. If the full amount of
the loss resulting from the Casualty Event is not covered by insurance, a
downward adjustment shall be made to the Purchase Price equal to the difference
between the loss resulting from the Casualty Event and the amount of the
insurance proceeds Seller will be entitled to receive.
4.8 ENVIRONMENTAL ADJUSTMENTS. To the extent that Purchaser due
diligence reveals the representation contained in Section 5.19 is not true and
correct (an "Environmental Defect"). Purchaser shall notify Seller of any
Environmental Defect by the Title Deadline or any Environmental Defect shall
conclusively be deemed waived by Purchaser. Seller shall have until the Cure
Deadline to cure any Environmental Defect, but if any Environmental Defect is
not cured, the Parties shall, with respect to each Property affected by an
Environmental Defect which is not cured by Seller by the Cure Deadline, attempt
in good faith to agree upon an appropriate downward adjustment to the Purchase
Price to account for such matters (the "Environmental Defect Adjustment
Amount"). PURCHASER SHALL HAVE INSPECTED OR WAIVED (AND UPON CLOSING SHALL BE
DEEMED TO HAVE BEEN WAIVED) ITS RIGHT TO INSPECT THE PROPERTIES AND SATISFIED
ITSELF TO THE ENVIRONMENTAL CONDITION OF THE PROPERTIES, INCLUDING, BUT NOT
LIMITED TO, CONDITIONS RELATED TO NATURALLY OCCURRING RADIOACTIVE MATERIALS.
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4.9 OTHER ADJUSTMENTS. Purchaser and Seller shall make other
adjustments that the Parties mutually agree upon based on other matters
discovered by Purchaser during the course of Purchaser's due diligence
investigation of the Assets.
4.10 FORWARD SALES. It is expressly agreed that forward sales of
Hydrocarbons related to the Properties shall not be considered a Title Defect,
however, an adjustment to the Purchase Price shall be made in accordance with
the provisions of Section 11.3.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Purchaser that:
5.1 ORGANIZATION AND QUALIFICATION. Seller is a corporation duly
organized, validly existing and in good standing under the Laws of the State of
Delaware, and it is duly qualified to carry on its business in all
jurisdictions where the Assets are located except to the extent to be so
qualified will not have a material adverse effect on the Assets or the
ownership of the Assets by Purchaser.
5.2 POWER. Seller has the corporate power and authority to enter into
and perform this Agreement and the transactions contemplated hereby. Subject to
receipt of approval of Seller's shareholders and the Required Consents, the
execution, delivery and performance of this Agreement by Seller, and the
transactions contemplated hereby, will not violate or result in a default or
breach of, or give rise to any rights or remedies in favor of any Person under,
(a) any provision of the certificate of incorporation or bylaws of Seller, (b)
any material agreement or instrument to which Seller is a party or by which
Seller or any of the Assets are bound (including any Lease or Contract), or (c)
any Permit, Order or Law applicable to Seller.
5.3 AUTHORIZATION. The execution, delivery and performance of this
Agreement and the transactions contemplated hereby have been duly and validly
authorized by all requisite corporate action on the part of Seller except for
approval of Seller's shareholders. This Agreement has been duly executed and
delivered on behalf of Seller, and at the Closing all documents and instruments
required hereunder to be executed and delivered by Seller will have been duly
executed and delivered. This Agreement does, and such documents and instruments
shall, constitute legal, valid and binding obligations of Seller enforceable in
accordance with their terms, subject, however, to the effect of bankruptcy,
insolvency, reorganization, moratorium and similar Laws from time to time in
effect relating to the rights and remedies of creditors, as well as to general
principles of equity (regardless of whether such enforceability is considered
in a Proceeding in equity or at law).
5.4 BROKERS. Seller has incurred no obligation or liability,
contingent or otherwise, for brokers', finders' or investment bankers' fees in
respect of the matters provided for in this Agreement that will be the
responsibility of Purchaser; and any such obligation or liability that might
exist shall be the sole obligation of Seller.
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5.5 FOREIGN PERSON. Seller is not a "foreign person" within the
meaning of Section 1445 and 7701 of the Code, because Seller is not a
nonresident alien, foreign corporation, foreign partnership, foreign trust or
foreign estate, as those terms are defined in the Code and any regulations
promulgated thereunder.
5.6 BANKRUPTCY. Except as set forth in Exhibit 5.6, there are no
bankruptcy, reorganization or arrangement proceedings pending, being
contemplated by or, to Seller's Knowledge, threatened against Seller which
relate to current obligations of Seller.
5.7 LITIGATION. Except as set forth on Exhibit 5.7, there is no
Proceeding pending or, to Seller's Knowledge, threatened, against Seller or
involving the Assets, directly or indirectly.
5.8 GOVERNMENTAL QUALIFICATION. Seller is qualified with the MMS to
own interests in federal Hydrocarbon leases on the Outer Continental Shelf,
including the Properties.
5.9 CONSENTS. To Seller's Knowledge, except for the Required Consents
and approval of Seller's shareholders, the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby does not
require (a) a consent, approval or authorization of a Person or a Governmental
Authority, (b) a registration, declaration or other filing with a Governmental
Authority (except for filings with the Texas General Land Office for Leases
issued by the State of Texas), or (c) the offer of the Assets to any Person
pursuant to any preferential purchase right or right of first refusal and will
not result in any default under any agreement or instrument to which Seller is
a party or by which the Assets are owned. Seller has no reason to believe that
the MMS will not grant the Pending MMS Consents or the Post-Closing MMS
Consents.
5.10 LEASES. To Seller's Knowledge, (a) the Leases are in full force
and effect, by operations approved by the MMS in accordance with applicable
Law; (b) Seller has made available to Purchaser true and correct copies of the
Leases, including any amendments thereto; (c) Seller or each operator of the
Properties has duly performed all of the material obligations under the Leases
that are now or will prior to the Closing be required to be performed by Seller
or such operator; (d) Seller nor any operator of the Properties has received
any notice of a default under the Leases, nor is any such notice pending; and
(e) except as set forth on Exhibit 5.10, all rentals and royalties (including
minimum royalties, shut-in or otherwise) required to be paid to perpetuate the
Leases to the Execution Date have been timely and properly paid to the proper
Persons and in the proper amounts.
5.11 CONTRACTS. The Contracts described in Section 2.1(e) represent
all contracts and agreements which are material to the ownership and operation
of the Assets and which individually obligate Seller to expend funds in excess
of $5,000 or perform acts in the future with respect to the Assets which
require an expenditure by Seller in excess of $5,000 and which are not
contracts or agreements which (a) are documents recorded of record in any
parish or county where the Properties are located or in counties or parishes
adjacent to the offshore blocks where the Properties are located; (b) are on
file with the MMS, General Land Office of Texas or the State of Louisiana; or
(c) have not
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been terminated or expired by their own terms. Seller is not in default of any
such Contracts and, to Seller's Knowledge, no other party is in material breach
thereof. Seller has made available to Purchaser true and correct copies of the
Contracts, including any amendments thereto. Except as provided in Exhibit
5.11, such Contracts are in full force and effect and Seller has received no
notice or threat regarding a default or any action to alter, terminate or
rescind any such Contract.
5.12 PROCEEDS OF PRODUCTION. To Seller's Knowledge, (a) all proceeds
of production of Hydrocarbons from the Properties are currently being paid to
the operator of such Properties, for Seller's account or to Seller, without the
furnishing of indemnity (other than customary warranties contained in division
orders, transfer orders, letters-in-lieu of transfer and division orders or
production sales contracts); and (b) no material portion of such proceeds are
being held in suspense.
5.13 INVOICES. Except as provided in Section 5.13, Seller has paid all
joint-interest billings and other invoices attributable to the ownership or
operation of the Properties, to the extent that such billings and invoices have
been received by Seller and have become due and payable.
5.14 GAS IMBALANCES. To Seller's Knowledge there exist no production
imbalances affecting the Properties.
5.15 GAS PREPAYMENTS. Except as provided in Exhibit 5.15, Seller is
not obligated, by virtue of a prepayment, take-or-pay, production payment or
other arrangement, to deliver Hydrocarbons produced from the Properties on or
after the Effective Date without receiving full price for such production.
5.16 ACCESS. Seller has afforded Purchaser access to all of the
Records in Seller's possession unless prohibited by agreements with a third
party.
5.17 WELLS. Exhibit 5.17 lists all wells (producing and non-producing)
located on the Properties that have not previously been plugged and abandoned.
To Seller's Knowledge, (a) all of the wells located on the Properties have been
drilled and completed within the boundaries of the applicable Leases or within
the limits otherwise permitted by contract, pooling or unitization agreement or
applicable Law, (b) all drilling, completion, development, operation, plugging
and abandonment of the wells located on the Properties have been conducted in
material compliance with all applicable Laws and (c) except as set forth in
Exhibit 5.17(c), there are no wells located on the Properties that (i) Seller
or the operator of any Property is obligated by law or contract to commence
plugging and abandonment operations pursuant to any notice provided to Seller
by any operator of the Properties; or (ii) are subject to exceptions to a
requirement to plug and abandon issued by a Governmental Authority having
jurisdiction over the Properties.
5.18 PERMITS. To Seller's Knowledge, (a) either Seller or the current
operator of the Properties has all Permits that it requires, or is required to
have, to own and operate the Assets; (b) such Permits are in full force and
effect; (c) there exist no material violations of such Permits; and (d)
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there are no Proceedings that are pending or threatened that may result in a
civil or criminal penalty or the revocation, cancellation, suspension or
adverse modification of such Permits.
5.19 ENVIRONMENTAL LAWS. To Seller's Knowledge, (a) the Assets have
been, and are being, operated in compliance with all applicable Environmental
Laws except for minor matters of non-compliance for which potential fines or
costs of compliance do not exceed $50,000; and (b) there exists no condition or
circumstance whereby Seller or Seller's successor would be obligated to expend
any sum of money in excess of $50,000 in connection with any remedial action
relating to any environmental condition which, if not performed, would result
in a violation of applicable Environmental Laws.
5.20 INSURANCE. Exhibit 5.20 sets forth the insurance presently
maintained by Seller with respect to the Properties. Such insurance is in full
force and effect, and Seller has paid all premiums that have become due
thereunder.
5.21 AFES. Except as set forth on Exhibit 5.21, there are no
outstanding authorizations for expenditure (approved or proposed) that (a)
require the drilling of wells or other material development operations to earn
or to continue to hold all or any portion of the Properties or (b) obligate
Seller to make payments of any material amounts in connection with the drilling
of wells or other material capital expenditures affecting the Properties.
5.22 CASUALTY. To Seller's Knowledge, no Casualty Event has occurred
since the Effective Date.
5.23 TITLE. Except as set forth on Exhibit 5.23, (a) Seller has not
Transferred or Encumbered the Properties or the Platforms which Transfer or
Encumbrance shall cause a reduction in Seller's interest in the Properties or
Platforms specified in Exhibit 4.1(a) and (b), the Assets shall be conveyed to
Purchaser with no warranty whatsoever, implied, expressed or statutory;
provided, however, subject to the Permitted Encumbrances, Seller shall warrant
and defend title to eighty percent (80%) of the interests specified on Exhibit
4.1(a) in the Properties, Equipment and Platforms against all claims and
demands of all Persons whomsoever claiming title to the Properties, Equipment
and Platforms, or any part thereof, by, through or under Seller, but not
otherwise. For purposes of clause (b) only, "Seller" shall include any
subsidiary or affiliate of Seller and any other Person in which Seller is a
partner, investor or otherwise invested or committed to invest.
5.24 PRICING. To Seller's Knowledge, the prices being received for the
production of Hydrocarbons from the Properties do not violate any agreement to
which Seller is a party or Law.
5.25 EQUIPMENT. To Seller's Knowledge, the Equipment comprising the
Assets is in good repair, working order and operating condition and is adequate
for the operation of the Properties.
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5.26 ADVERSE CHANGES IN PRODUCTION RATES OR OIL AND GAS RESERVES.
(a) From the date of this Agreement until the day immediately
preceding the Closing Date, the average daily production from the
Properties shall not be less than (i) 14,000 Mcf. per day of natural
gas, and (ii) 950 barrels per day of oil and other liquid
Hydrocarbons. True and complete copies of the report of each of
Netherland, Sewell & Associates, Inc. and Ryder Scott Company
Petroleum Engineers estimating the Hydrocarbon reserves attributable
to the Properties as of January 1, 1999, have been given to the
Purchaser prior to the date of this Agreement.
(b) Since the Effective Date, there has been no material loss
of, or decline in, any proved category of Hydrocarbon reserves
attributable to the Properties below that estimated for the Properties
in either of the reserve reports of Netherland, Sewell & Associates,
Inc. or Ryder Scott Company Petroleum Engineers as of January 1, 1999,
other than declines in reserve volumes as a result of actual
production of Hydrocarbons since the Effective Date or a reduction in
the prices used to calculate reserve volumes.
5.27 ACCURACY OF REPRESENTATIONS. No representation or warranty by
Seller in this Agreement contains an untrue statement of a material fact or
omits or will omit to state a material fact necessary to make the statements
contained in any such representation or warranty not misleading. There is no
fact known to Seller that materially and adversely affects (or may materially
and adversely affect) the operation, prospects or condition of any portion of
the Assets that has not been set forth in this Agreement.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser represents and warrants to Seller that:
6.1 EXISTENCE. Purchaser is a corporation duly organized, validly
existing and in good standing under the Laws of the State of Delaware, and it
is duly qualified to carry on its business in the jurisdictions where the
Assets are located.
6.2 POWER. Purchaser has the corporate power and authority to enter
into and perform this Agreement and the transactions contemplated hereby. The
execution, delivery and performance of this Agreement by Purchaser, and the
transactions contemplated hereby, will not violate (a) any provision of the
certificate of incorporation or bylaws of Purchaser, (b) any material agreement
or instrument to which Purchaser is a party or by which Purchaser is bound, or
(c) any Permit, Order or Law applicable to Purchaser.
6.3 AUTHORIZATION. The execution, delivery and performance of this
Agreement and the transactions contemplated hereby have been duly and validly
authorized by all requisite corporate action on the part of Purchaser. This
Agreement has been duly executed and delivered on behalf of
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Purchaser, and at the Closing all documents and instruments required hereunder
to be executed and delivered by Purchaser will have been duly executed and
delivered. This Agreement does, and such documents and instruments shall,
constitute legal, valid and binding obligations of Purchaser enforceable in
accordance with their terms, subject, however, to the effect of bankruptcy,
insolvency, reorganization, moratorium and similar Laws from time to time in
effect relating to the rights and remedies of creditors, as well as to general
principles of equity (regardless of whether such enforce ability is considered
in a Proceeding in equity or at law).
6.4 BROKERS. Purchaser has incurred no obligation or liability,
contingent or otherwise, for brokers', finders' or investment bankers' fees in
respect of the matters provided for in this Agreement that will be the
responsibility of Seller; and any such obligation or liability that might exist
shall be the sole obligation of Purchaser.
6.5 SECURITIES LAWS. Purchaser is an experienced and knowledgeable
investor in the oil and gas business. Purchaser is not acquiring the Properties
with a view to, or for offer of resale in connection with, a non-exempt
distribution thereof within the meaning of the Securities Act of 1933, or a
distribution thereof in violation of any applicable Securities Laws.
6.6 BANKRUPTCY. There are no bankruptcy, reorganization or arrangement
proceedings pending, being contemplated by or, to Purchaser's Knowledge,
threatened against Purchaser.
6.7 GOVERNMENTAL QUALIFICATION. Purchaser is qualified with the MMS to
own the Properties.
ARTICLE 7
PRE-CLOSING COVENANTS OF SELLER
7.1 OPERATIONS. During the Interim Period, except as otherwise
approved by Purchaser in writing, Seller (a) shall, and shall use Commercially
Reasonable Efforts to cause the operators of the Properties to, maintain the
Assets in the ordinary course of business in accordance with past practices,
(b) shall not Transfer or Encumber any Assets other than (i) the sale of
Hydrocarbons in the ordinary course of business after production and (ii) the
sale of Equipment and other personal property or fixtures in the ordinary
course of business where the same has become obsolete, is no longer necessary
for the operation of the Properties or is replaced by an item or items of at
least equal suitability, and (c) shall maintain in full force and effect the
insurance described in Exhibit 5.20.
7.2 ACCESS. During the Interim Period, Seller shall (a) provide
Purchaser access during Seller's normal business hours to the Assets (including
the Records) that are in Seller's possession and the employees of Seller, and
(b) use Commercially Reasonable Efforts to provide Purchaser access to the
Properties (it being acknowledged by Purchaser that Seller is not the operator
of any Property except Galveston Block 418) and any other Assets that are not
in Seller's possession.
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7.3 NO SHOP. During the Interim Period, Seller shall not, directly or
indirectly, initiate or participate in discussions with, or otherwise solicit
from, any Person any proposals or offers relating to, or deliver information to
any Person for purposes of evaluating, one or more transactions of the type
contemplated hereby involving the Assets.
7.4 BREACHES OF REPRESENTATIONS AND WARRANTIES. Seller shall promptly
notify Purchaser of the discovery by Seller that any representation or warranty
of Seller contained in this Agreement is or becomes untrue or will be untrue on
the Closing Date.
7.5 ESTIMATES OF ADJUSTED PURCHASE PRICE. Seller shall prepare and
deliver to Purchaser, at least five Business Days prior to the Closing Date,
Seller's estimate of the Adjusted Purchase Price (the "Closing Settlement
Statement") which shall be prepared utilizing the form attached hereto as
Exhibit 7.5. The Closing Settlement Statement shall include, without
limitation, the Title Defect Adjustment Amount, the Environmental Defect
Adjustment Amount and the Revenue Adjustment amount as well as the sum of the
Allocated Values of any Properties excluded from the sale hereunder. The
Parties shall negotiate in good faith and attempt to agree on the Closing
Settlement Statement prior to the Closing. If the Parties are unable to agree
on the Closing Settlement Statement, the Adjusted Purchase Price shall be based
upon the arithmetic average of the Parties' respective proposed amounts with
final adjustments to the Purchase Price occurring within one hundred twenty
(120) days of the Closing in accordance with Section 12.1. Notwithstanding the
foregoing or any disputes to the value of any adjustments, if any proposed
adjustment to the Purchase Price proposed by Purchaser would entitle Purchaser
or Seller to terminate this Agreement in accordance with Article 15, Purchaser
or Seller shall have the right to terminate this Agreement prior to Closing.
ARTICLE 8
PRE-CLOSING COVENANTS OF PURCHASER
8.1 CONFIDENTIALITY. The Parties hereby ratify their obligations under
the Confidentiality Agreement.
8.2 RETURN OF DATA. Purchaser agrees that if this Agreement is
terminated for any reason whatsoever, Purchaser shall, at Seller's request,
promptly return to Seller all information and data furnished by or on behalf of
Seller to Purchaser or Purchaser's Affiliates in connection with this Agreement
or Purchaser's investigation of the Assets, and Purchaser shall deliver to
Seller or destroy all copies, extracts or excerpts of such information and data
and all documents generated by Purchaser that contain any portion of such
information or data except to the extent necessary to enforce Purchaser's
rights hereunder.
8.3 INDEMNITY REGARDING ACCESS. Purchaser shall Indemnify Seller and
Seller's Affiliates from and against all Losses that are attributable to the
exercise by Purchaser or Purchaser's Affiliates of the access rights granted by
Section 7.2(b).
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ARTICLE 9
SELLER'S CONDITIONS OF CLOSING
Seller's obligation to consummate the transactions contemplated hereby
is subject to the satisfaction or waiver of the following conditions on or
before the scheduled date of the Closing:
9.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties
of Purchaser contained in Article 6 shall be true and correct in all material
respects on the Closing Date as though made on and as of the Closing Date.
9.2 PERFORMANCE. Purchaser shall have performed in all material
respects the obligations, covenants and agreements required hereunder to be
performed by it at or prior to the Closing (including under Section 11.2).
9.3 PROCEEDINGS. No Proceeding by a Third Party or a Governmental
Authority shall be pending or threatened that seeks to restrain, enjoin or
otherwise prohibit, the consummation of the transactions contemplated hereby.
9.4 INVESTMENT AGREEMENT TRANSACTION. All conditions precedent have
been satisfied and the transaction contemplated in the Investment Agreement
shall close simultaneously with the transactions contemplated by this
Agreement.
9.5 SHAREHOLDER APPROVAL. The transactions contemplated by this
Agreement have been approved by the Shareholders of Seller.
9.6 GOVERNMENT APPROVALS. All approvals of Governmental Authorities
(other than those required by the MMS) have been obtained.
9.7 PREFERENTIAL PURCHASE RIGHTS. All preferential purchase rights
relating to the Properties which Purchaser, in its sole discretion, has
determined are applicable to the transactions contemplated by this Agreement,
have been validly waived or the period for exercising such preferential
purchase rights have expired and there is no pending or threatened challenge or
proceeding disrupting or threatening to disrupt any such waiver or expiration.
ARTICLE 10
PURCHASER'S CONDITIONS OF CLOSING
Purchaser's obligation to consummate the transactions contemplated
hereby is subject to the satisfaction or waiver of the following conditions on
or before the scheduled date of the Closing:
10.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Seller contained in Article 5 shall be true and correct in all
material respects on the Closing Date as though made on and as of the Closing
Date.
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10.2 PERFORMANCE. Seller shall have performed in all material respects
the obligations, covenants and agreements required hereunder to be performed by
it at or prior to the Closing (including under Section 11.2).
10.3 PROCEEDINGS. No Proceeding by a Third Party or a Governmental
Authority shall be pending or threatened that seeks to restrain, enjoin or
otherwise prohibit, the consummation of the transactions contemplated hereby.
10.4 INVESTMENT AGREEMENT TRANSACTION. No amendment of the Investment
Agreement shall have occurred except as consented to in writing by Purchaser
and the transactions contemplated in the Investment Agreement shall close
simultaneously with the transactions contemplated by this Agreement without
waiver of any conditions precedent to the obligation of any Party thereto,
except as shall have been consented to in writing by Purchaser.
10.5 RELEASE OF LIENS. The liens and encumbrances set forth on Exhibit
5.23 have been released.
10.6 GOVERNMENTAL APPROVALS. All approvals of Governmental Authorities
(other than those required from the MMS) have been obtained.
10.7 PREFERENTIAL PURCHASE RIGHTS. All preferential purchase rights
relating to the Properties which Purchaser, in its sole discretion, has
determined are applicable to the transactions contemplated by this Agreement,
have been validly waived or the period for exercising such preferential
purchase rights have expired and there is no pending or threatened challenge or
proceeding disrupting or threatening to disrupt any such waiver or expiration.
10.8 MATERIAL ADVERSE CHANGE. No material adverse change has occurred
in the condition of the Assets taken as a whole (excluding market conditions
affecting the industry generally).
10.9 LEGAL OPINION. Seller shall deliver to Purchaser (i) an opinion
of its General Counsel, as to customary corporate matters of Seller (including
due incorporation, existence, authorization, execution and delivery), in form
and substance acceptable to the Parties; and (ii) such other evidence of such
corporate matters (including good-standing certificates, certified
organizational documents and Board resolutions, and incumbency certificates) as
Purchaser may reasonably request.
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ARTICLE 11
CLOSING
11.1 TIME AND PLACE OF CLOSING. Subject to the conditions stated in
this Agreement, the consummation of the transactions contemplated hereby (the
"Closing") shall occur contemporaneously with the closing under the Investment
Agreement; provided, however, that if all of the conditions to the Closing set
forth in Articles 9 and 10 have not been satisfied or waived by such scheduled
date or any extended scheduled date for the Closing, the Party whose
obligations are subject to the conditions that have not been satisfied or
waived shall have the right to extend the scheduled date of the Closing for
successive periods of up to seven days each until such conditions shall have
been satisfied or waived; and provided further, that the Closing is subject to
postponement pursuant to Section 4.5. Notwithstanding any right to extend the
Closing pursuant to this Section 11.1 or Section 4.5, the right to terminate
this Agreement pursuant to Section 15.1(d) shall not be altered by any such
extension. The date the Closing actually occurs is referred to herein as the
"Closing Date." The Closing shall be held in Houston, Texas at the offices of
Porter & Hedges, L.L.P., or at such other location as may be mutually agreed
upon by Seller and Purchaser.
11.2 CLOSING OBLIGATIONS. At the Closing, the following events shall
occur:
(a) Seller shall execute, acknowledge and deliver to
Purchaser, assignments, conveyances and bills of sale, which shall (i)
be in form and substance acceptable to the Parties, (ii) contain a
special warranty of title, (iii) be in a form acceptable to the MMS
(or the General Land Office of the State of Texas), and (iii) Transfer
the Assets to Purchaser (collectively, the "Assignments");
(b) Seller and Purchaser shall execute and acknowledge, and
Seller shall deliver to Purchaser, transfer orders or letters in lieu
thereof directing all Third Parties paying for production of
Hydrocarbons from the Properties to make payment to Purchaser of
proceeds attributable to such production on and after the Effective
Date;
(c) Purchaser shall pay the Adjusted Purchase Price;
(d) Seller shall deliver to Purchaser the releases of liens
and encumbrances set forth on Exhibit 5.23.
(e) Seller shall deliver to Purchaser the legal opinion
required by Section 10.10.
11.3 ALLOCATION OF REVENUES AND EXPENSES. Subject to the terms
contained in Exhibit 11.3, at Closing an adjustment shall be made to the
Purchase Price (the "Revenue Adjustment") equal to the difference between (x)
all revenue attributable to the Assets received by Seller from the Effective
Date through and including the Closing Date less (y) (i) eighty percent (80%)
of the capital expenditures paid by Seller relating to the Properties
(including, without limitation, drilling costs) from the Effective Date through
and including the Closing Date, (ii) eighty
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percent (80%) of the general and administrative expenses of Seller as specified
in Exhibit 11.3 and (iii) eighty percent (80%) of the lease operating expenses
paid by Seller relating to the Properties from the Effective Date through and
including the Closing Date. The Revenue Adjustment shall be based on actual
receipts and payments where such information is available and, if not
available, estimates subject to the post-Closing adjustment as provided in
Section 12.1.
ARTICLE 12
POST-CLOSING COVENANTS
12.1 POST-CLOSING ADJUSTMENTS. On or before ninety (90) days after
Closing, Seller and Purchaser shall review any additional information available
to prepare a settlement statement (the "Post-Closing Settlement Statement")
pertaining to the Revenue Adjustment provided for in Section 11.3 to determine
if additional adjustments to the Purchase Price beyond the adjustments made at
Closing (whether to account for expenses and revenues not considered in making
the adjustments at Closing, correct errors made in the adjustments made at
Closing or to utilize actual data in cases where estimates were made) are
necessary. Within one hundred twenty (120) days after Closing, Seller and
Purchaser shall attend to finalizing the Post-Closing Settlement Statement and
Seller or Purchaser, as the case may be, shall immediately pay any sums due and
owing to the other Party.
12.2 PAYMENTS RECEIVED IN ERROR. Any revenue received by Purchaser
attributable to the Assets received by Purchaser for periods prior to the
Effective Date shall immediately be forwarded to the Seller. Any revenue
received by Seller attributable to the Assets for periods after the Effective
Date which have not been accounted for in the Closing Settlement Statement or
the Post-Closing Settlement Statement or which are attributable to any period
after the Closing Date shall immediately be forwarded to Purchaser.
12.3 SALES TAXES. The Parties intend that the sale hereunder be exempt
from any sales or use taxes, and the Purchase Price does not include any such
taxes. If the sale hereunder is found to be subject to any sales or use taxes,
however, Purchaser shall be liable for such taxes.
12.4 RECORDATION OF ASSIGNMENT. Purchaser shall (a) record each
Assignment in the appropriate county and parish records, (b) file each
Assignment with the MMS and any other appropriate Governmental Authorities, and
(c) pay all recordation fees and filing fees in connection therewith. Within a
reasonable period after the Closing, Purchaser shall furnish Seller with a
schedule setting forth recording or filing information for each county, parish
or other Governmental Authority in whose records each Assignment was recorded
or filed.
12.5 ACCESS TO EMPLOYEES. Seller and Purchaser each shall use
Commercially Reasonable Efforts to afford the other access to (a), in the case
of Seller, employees of Seller who remain employees of Seller after the Closing
and are familiar with the ownership and operation of the Assets and (b) in the
case of Purchaser, employees of Purchaser that Seller shall reasonably request
for its proper corporate purposes, including the defense of Proceedings. Such
access may include interviews
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or attendance at depositions or legal proceedings; provided, however, that in
any event all out-of-pocket expenses (including wages and salaries) reasonably
incurred by either Party in connection with this Section 12.5 shall be paid or
promptly reimbursed by the Party requesting such services.
12.6 FURTHER ASSURANCES. After the Closing, Seller and Purchaser shall
take such further actions and execute, acknowledge and deliver such additional
documents and instruments as may be necessary or useful in carrying out the
transactions contemplated hereby.
12.7 CONFIDENTIALITY. After the Closing and until the third
anniversary thereof, Seller shall maintain as confidential, and shall not
disclose or show to any Third Party, any Records or other confidential
information regarding the Assets. This Section 12.7 shall not apply to the
extent that any particular information (a) becomes generally available to the
oil and gas industry other than through the breach of the foregoing obligation,
or (b) must be disclosed by Seller to comply with applicable Law, Orders or
stock exchange requirements.
12.8 REVENUE REIMBURSEMENT OBLIGATIONS. Purchaser and Seller agree and
acknowledge that Seller will remain liable on those forward sales contracts and
other financial instruments described on Schedule 12.8 (the "Hedge
Agreements"), and from and after Closing Purchaser shall remit to Seller each
month an amount equal to the positive sum of (a) the total consideration
received by Purchaser from the sale of Hydrocarbons produced from the
Properties for a particular month less the product of (x) the volume of
Hydrocarbons sold from the Properties (calculated on an MMBtu equivalent basis)
and (y) the price per MMBtu equivalent received by Seller for the equivalent
notional quantity of Hydrocarbons for such month pursuant to the Hedge
Agreements and (b) in the event that the volume of Hydrocarbons produced from
the Properties in any month does not equal eighty percent (80%) of the notional
quantities used to calculate payments due under the Hedge Agreements, an amount
equal to eighty percent (80%) of the amounts due by Seller to the
counterparties under the Hedge Agreements resulting from the physical
Hydrocarbon production shortfall (the "Hedge Agreement Adjustment"). If the
Hedge Agreement Adjustment amount is a negative number, Seller shall remit to
Purchaser the sum indicated by such number if it was not negative with the
invoice or statement forwarded to Purchaser pursuant to this Section 12.8.
Seller shall send Purchaser an invoice each month indicating the amounts due to
Seller by Purchaser and Purchaser shall pay such amounts to Seller within
fifteen (15) days of receipt of such invoice. Purchaser's obligations pursuant
to this Section 12.8 shall survive until the termination of Seller's
obligations under the Hedge Agreements as such Hedge Agreements are in force
and effect on the date hereof.
ARTICLE 13
ASSUMED OBLIGATIONS; INDEMNIFICATION
13.1 ASSUMED OBLIGATIONS. If the Closing occurs, Purchaser shall be
deemed to have assumed, and shall pay, perform or otherwise discharge all
liabilities and obligations that are attributable to the ownership or operation
of the Assets on and after the Effective Date, including such liabilities and
obligations arising under (i) the Leases and Contracts, (ii) the Easements,
Permits
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and Orders that are included in the Assets, and (iii) Laws (including
Environmental Laws) applicable to the Assets (collectively, the "Assumed
Obligations").
13.2 INDEMNIFICATION.
(a) SELLER'S INDEMNITIES. Seller shall Indemnify Purchaser
from and against all Losses (i) for third party claims attributable to
the Assets and which relate to any period prior to the Effective Date
and, except for claims made under the special warranty contained in
the Assignment, are claims which do not relate to matters for which
adjustments to the Purchase Price were possible pursuant to the terms
of this Agreement or (ii) that are attributable to any breach or
non-performance by Seller of its covenants contained in Article 12.
(b) PURCHASER'S INDEMNITIES. Purchaser shall Indemnify Seller
and Seller's Affiliates from and against all Losses that (i) are
attributable to the Assets and that relate to any period after the
Effective Date (including, without limitation, the Assumed
Obligations) or (ii) are attributable to any breach or nonperformance
by Purchaser of its covenants contained in Article 12.
(c) EXCLUSIVITY; ASSERTION OF CLAIMS. The Indemnities in
Section 13.2(a) shall constitute the sole and exclusive remedy of
Purchaser and Purchaser's Affiliates for the matters described
therein; and the Indemnities in Section 13.2(b) constitute the sole
and exclusive remedy of Seller and Seller's Affiliates for the matters
described therein. All claims for Indemnification by any Person that
is Indemnified under Section 13.2(a) or (b) must be asserted and
resolved in accordance with the following provisions:
(i) Any Person claiming Indemnification hereunder is
referred to as the "Indemnified Person," and any Party from
whom Indemnification is sought is referred to as the
"Indemnifying Party."
(ii) If any Third Party Losses are asserted against
or sought to be collected from an Indemnified Person, the
Indemnified Person shall with reasonable promptness notify
the Indemnifying Party of the Third Party Losses, specifying
the nature of and specific basis for such Losses and the
amount or the estimated amount thereof to the extent then
feasible (the "Claim Notice"). The Indemnifying Party will
have 30 days from the date the Claim Notice is delivered (the
"Notice Period") to notify the Indemnified Person (A) whether
or not it disputes the liability of the Indemnifying Party to
the Indemnified Person with respect to such Third Party
Losses and (B) whether or not it desires, at the sole cost
and expense of the Indemnifying Party, to defend the
Indemnified Person against such Third Party Losses; provided,
however, that any Indemnified Person is hereby authorized
prior to and during the Notice Period to file any motion,
answer or other pleading that it shall deem necessary or
appropriate to protect its interests or those of the
Indemnifying Party (and of which it has given notice and
opportunity to comment to the Indemnifying Party) and that
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are not prejudicial to the Indemnifying Party. If the
Indemnifying Party does not notify the Indemnified Person
within the Notice Period that it disputes its liability to
the Indemnified Person with respect to such Third Party
Losses, the amount of such Third Party Losses will be
conclusively deemed a liability of the Indemnifying Party. If
the Indemnifying Party notifies the Indemnified Person within
the Notice Period that it desires to defend the Indemnified
Person against such Third Party Losses and except as
hereinafter provided, the Indemnifying Party will have the
right to defend by all appropriate Proceedings, and with
counsel of its own choosing. If the Indemnified Person
desires to participate in, but not control, any such defense
or settlement, it may do so at its sole cost and expense. If
requested by the Indemnifying Party, the Indemnified Person
agrees to cooperate with the Indemnifying Party and its
counsel in contesting any Third Party Losses that the
Indemnifying Party elects to contest, or, if appropriate and
related to the claim in question, in making any counterclaim
against the Third Party or Governmental Authority asserting
the Third Party Losses, or any cross-complaint against any
Person. No claim may be settled or otherwise compromised
without the prior consent of the Indemnifying Party.
(iii) If any Indemnified Person has a claim for
Losses against any Indemnifying Party hereunder that does not
involve a Third Party Loss, the Indemnified Person must send
a Claim Notice with respect to such claim to the Indemnifying
Party. If the Indemnifying Party does not notify the
Indemnified Person within the Notice Period that it disputes
its liability to the Indemnified Person with respect to such
Losses, the amount of such Losses will be conclusively deemed
a liability of the Indemnifying Party.
(d) EXCEPTIONS. The Indemnification obligations set forth in
Sections 13.2(a) and (b) shall not apply to (i) a matter for which the
Indemnified Person has received credit as an adjustment to the
Purchase Price; (ii) either Party's costs and expenses with respect to
the negotiation and consummation of this Agreement and the
transactions contemplated hereby; or (iii) any Title Defect claims of
Purchaser, which are governed exclusively by Sections 4.1 through 4.5
(but Section 13.2(a) shall apply to the special warranty of title
contained in the Assignment).
13.3 LIMITATIONS ON INDEMNIFICATION. The Parties' liabilities under
this Article 13 shall be limited as follows:
(a) Thresholds. Seller shall have no liability under Section
13.2(a) unless and until the aggregate amount paid by Seller
thereunder shall exceed a threshold of $25,000 and upon reaching such
amount, the threshold amount shall be included in any claim. Purchaser
shall have no liability under Section 13.2(b) unless and until the
aggregate amount paid by Purchaser thereunder shall exceed a threshold
of $25,000 and upon reaching such amount, the threshold amount shall
be included in any claim
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(b) Maximum Liability. Seller's maximum aggregate liability
under Section 13.2(a) shall not exceed $1,000,000. Purchaser's maximum
aggregate liability under Section 13.2(b) shall not exceed $1,000,000.
(c) Survival Periods. The Indemnities in Sections 13.2(a)(ii)
and 13.2(b)(ii) with respect to covenants to be performed after the
Closing shall survive until March 31, 2001. Following the applicable
date described in the immediately-preceding sentence, neither Party
shall have any rights thereunder, except with respect to matters for
which a Claim Notice has been delivered on or prior to such date.
There shall be no similar limitations on the survival of the
Indemnities in Sections 13.2(a)(i) and 13.2(b)(i), which shall survive
for the applicable statute-of-limitations period. The representations
and warranties of Seller contained in this Agreement shall terminate
at Closing.
ARTICLE 14
INDEPENDENT INVESTIGATION AND DISCLAIMER
14.1 INDEPENDENT INVESTIGATION AND DISCLAIMER.
(a) Purchaser acknowledges that (i) it has had, and pursuant
to this Agreement will have prior to the Closing, access to the Assets
and the employees of Seller and the opportunity to inspect the Assets,
and (ii) in making its decision to enter into this Agreement and
consummate the transactions contemplated hereby, Purchaser has relied
solely on the basis of its own independent investigation of the Assets
and upon the representations and warranties of Seller set forth in
Article 5 and the special warranty of title to be made by Seller in
the Assignment. Accordingly, Purchaser acknowledges that, except as
expressly set forth herein, Seller has not made, AND SELLER HEREBY
EXPRESSLY DISCLAIMS AND NEGATES, ANY REPRESENTATION OR WARRANTY,
EXPRESSED (ORALLY OR IN WRITING), IMPLIED, AT COMMON LAW, BY STATUTE,
OR OTHER WISE, OR OTHER RIGHT OF RECOURSE (EVEN AS TO RETURN OF THE
PURCHASE PRICE) RELATING TO (A) THE CONDITION OF THE ASSETS (INCLUDING
ANY IMPLIED OR EXPRESSED WARRANTY OF MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE, ABSENCE OF LATENT DEFECTS OR REDHIBITORY VICES, OR
OF CONFORMITY TO MODELS OR SAMPLES OF MATERIALS, OR ENVIRONMENTAL
CONDITION), (B) ANY INFRINGEMENT BY SELLER OF ANY PATENT OR
PROPRIETARY RIGHT OF ANY THIRD PARTY, AND (C) ACCURACY, COMPLETENESS
OR MATERIALITY OF ANY INFORMATION, DATA OR OTHER MATERIALS (WRITTEN OR
ORAL) FURNISHED TO PURCHASER BY OR ON BEHALF OF SELLER (INCLUDING WITH
RESPECT TO RESERVE MATTERS, SUCCESS OF WELLS (INCLUDING WELLS THAT ARE
DRILLED AFTER THE EFFECTIVE DATE), COMPLIANCE WITH LAWS, ENVIRONMENTAL
CONDITIONS AND OTHER MATTERS); IT BEING AGREED BY PURCHASER THAT IT IS
ACQUIRING THE ASSETS "AS-IS," "WHERE-IS," WITH ALL FAULTS; provided,
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however, that (a) the foregoing disclaimer and negation of
representations and warranties, (b) Purchaser's independent
investigation of the Assets, (c) any failure on Purchaser's part to
conduct such investigation, or (d) the occurrence of the Closing,
shall not affect or impair the representations, warranties, covenants,
Indemnities or other obligations of Seller under this Agreement or
under the agreements to be executed by Seller at the Closing,
including the special warranty of title to be made by Seller in the
Assignment, and any other express rights of Purchaser hereunder or
thereunder.
(b) Each Party hereby waives any rights it may have under
applicable Law to rescind this transaction, including for failure of
consideration, redhibitory vices, lesion beyond moiety or otherwise.
ARTICLE 15
TERMINATION
15.1 RIGHT OF TERMINATION. This Agreement and the transactions
contemplated hereby may be terminated:
(a) by mutual consent of Seller and Purchaser, at any time at
or prior to the Closing;
(b) by Seller, at its option, if the conditions in Article 9
have not been satisfied by the scheduled date of the Closing;
(c) by Purchaser, at its option, if the conditions in Article
10 have not been satisfied by the scheduled date of the Closing;
(d) by either Seller or Purchaser, by notice to the other
Party at any time on or after December 31, 1999, if the Closing shall
not have occurred by such date;
(e) by Purchaser or Seller if the sum of the aggregate
downward adjustment to the Purchase Price for Title Defects,
Environmental Defects and Casualty Events exceeds $200,000; or
(f) by Purchaser or Seller if the preferential purchase right
waivers required by Purchaser relating to the Properties have not been
obtained on or before September 1, 1999.
provided, however, that a Party may not exercise any right of termination
pursuant to Section 15.1(b), (c) or (d) if the event giving rise to such
termination right shall be due to the breach by such Party of its obligations
under this Agreement.
15.2 EFFECT OF TERMINATION. If this Agreement is terminated pursuant
to Section 15.1, this Agreement shall become void and of no further force or
effect (except for the provisions of this
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Sections 15.2, 5.4 and 6.4; and Articles 8, 16 and 17; all of which shall
survive such termination and continue in full force and effect); provided,
however, that, if either Party is in breach of its obligations under this
Agreement at the time this Agreement is so terminated, such defaulting Party
shall continue to be liable to the other Party for damages in respect of such
breach, and such liability shall not be affected by such termination.
ARTICLE 16
ARBITRATION
16.1 DISPUTES. This Article 16 shall apply to any dispute arising
under or otherwise attributable to this Agreement or the transactions
contemplated hereby (whether arising in contract, tort or otherwise, and
whether arising at law or in equity), including (a) any dispute regarding the
construction, interpretation, performance, validity or enforceability of any
provision of this Agreement or whether any Person is in compliance with, or
breach of, any provisions of this Agreement, and (b) the applicability of this
Article 16 to a particular dispute (collectively, a "Dispute"). The provisions
of this Article 16 shall be the exclusive method of resolving Disputes.
16.2 ARBITRATION.
(a) If a Dispute arises, the Parties shall attempt to resolve
it through negotiations. If the Parties are unable to resolve the
Dispute within 20 days of the commencement of such negotiations,
either Party may submit the Dispute to binding arbitration before a
sole arbitrator (the "Arbitrator") pursuant to this Article 16 by
notifying the other Party and designating a proposed Arbitrator. If
the other Party objects to such proposed Arbitrator, it may, on or
before the 10th day following delivery of such notice, notify the
other Party of its objection. The Parties shall then attempt to agree
upon a mutually-acceptable Arbitrator. If they are unable to do so
within 10 days following delivery of the notice described in the
immediately-preceding sentence, either Party may request the American
Arbitration Association (or successor body) (the "AAA") to designate
the Arbitrator. Each Party and each proposed Arbitrator shall disclose
to the other Party any business, personal or other relationship or
affiliation that may exist between such Party and such proposed
Arbitrator, and any Party may disapprove of such proposed Arbitrator
on the basis of such relationship or affiliation. If the Arbitrator so
chosen shall die, resign or otherwise fail or become unable to serve
as Arbitrator, a replacement Arbitrator shall be chosen in accordance
with this Section 16.2.
(b) The Arbitrator shall expeditiously (and, if possible,
within 45 days after the Arbitrator's selection) hear and decide all
matters concerning the Dispute. Any arbitration hearing shall be held
in Houston, Texas. The arbitration shall be conducted in accordance
with the then-current Commercial Arbitration Rules of the AAA
(excluding rules governing the payment of arbitration, administrative
or other fees or expenses to the Arbitrator or the AAA), to the extent
that such Rules do not conflict with the terms of this Agreement.
Except as expressly provided to the contrary in this Agreement, the
Arbitrator shall have the power
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(i) to gather such materials, information, testimony and evidence as
it deems relevant to the dispute before it (and each Party will
provide such materials, information, testimony and evidence requested
by the Arbitrator, except to the extent any information so requested
is proprietary, subject to a third-party confidentiality restriction
or to an attorney-client or other privilege) and (ii) to grant
injunctive relief and enforce specific performance.
(c) If it deems necessary, the Arbitrator may propose to the
Parties that one or more other experts be retained to assist it in
resolving the Dispute. The retention of such other experts shall
require the consent of both Parties, which shall not be unreasonably
withheld. Each Party, the Arbitrator and any proposed expert shall
disclose to the other Party any business, personal or other
relationship or affiliation that may exist between such Party (or the
Arbitrator) and such proposed expert; and either Party may disapprove
of such proposed expert on the basis of such relationship or
affiliation.
(d) The decision of the Arbitrator (which shall be rendered
in writing) shall be final, nonappealable and binding upon the Parties
and may be enforced in any court of competent jurisdiction. The
responsibility for paying the costs and expenses of the arbitration,
including compensation to the Arbitrator and any experts retained by
the Arbitrator, shall be allocated between the Parties in a manner
determined by the Arbitrator to be fair and reasonable under the
circumstances. Each Party shall be responsible for the fees and
expenses of its respective counsel, consultants and witnesses, unless
the Arbitrator determines that compelling reasons exist for allocating
all or a portion of such costs and expenses to one or more other
Parties.
ARTICLE 17
GENERAL PROVISIONS
17.1 GOVERNING LAW. THIS AGREEMENT AND ALL INSTRUMENTS EXECUTED IN
ACCORDANCE WITH IT SHALL BE GOVERNED BY AND INTERPRETED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO CONFLICT-OF-LAW RULES THAT WOULD
DIRECT APPLICATION OF THE LAWS OF ANOTHER JURISDICTION, EXCEPT TO THE EXTENT
THAT IT IS MANDATORY THAT THE LAW OF SOME OTHER JURISDICTION, WHEREIN THE
ASSETS ARE LOCATED, SHALL APPLY.
17.2 ENTIRE AGREEMENT; AMENDMENTS. This Agreement, including all
Exhibits attached hereto and made a part hereof, together with the
Confidentiality Agreement, constitute the entire agreement between the Parties
with respect to the transactions contemplated hereby and supersede all prior
agreements, understandings, negotiations and discussions, whether oral or
written, of the Parties with respect to such transactions. No amendment of this
Agreement shall be binding unless executed in writing by both Parties.
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17.3 WAIVER. No waiver by a Party of any of the provisions of this
Agreement (a) shall be binding upon a Party unless executed in writing by such
Party, (b) shall be deemed or shall constitute a waiver by such Party of any
other provisions hereof (whether or not similar), and (c) shall not constitute
a continuing waiver by such Party.
17.4 TRANSFERS. Except as expressly provided herein to the contrary,
neither Party hereto shall Transfer this Agreement or any of its rights or
obligations hereunder without the prior written consent of the other Party, and
any such Transfer made without such consent shall be void. Except as otherwise
provided herein, this Agreement shall be binding upon and inure to the benefit
of the Parties and their respective successors and permitted Transferees.
Seller agrees that the restrictions in this Section 17.4 shall not, after the
Closing, obligate Purchaser to obtain the written consent of Seller prior to
any Transfer by Purchaser of its ownership interest in the Assets, and
Purchaser agrees that any such Transfer shall not release Purchaser from any of
its liabilities or obligations hereunder.
17.5 NOTICES. Any notice, request, consent, approval, waiver or other
communication provided or permitted to be given under this Agreement shall be
in writing and shall be delivered in person or sent by U.S. mail, overnight
courier or fax to the appropriate address set forth below. Any such
communication shall be effective upon actual receipt; provided, however, that,
in the case of delivery by fax after the normal business hours of the
recipient, such communication shall be effective on the next Business Day
following the transmission of such fax. For purposes of notice, the addresses
of the parties shall be as follows:
For Seller:
American Resources Offshore, Inc.
160 Morgan Street
P.O. Box 87
Versailles, Kentucky 40383
Attention: Mr. David Stetson
Telecopy: (606) 873-4689
with a copy to:
Blue Dolphin Services, Inc.
801 Travis, Suite 2100
Houston, Texas 77002
Attention: Mr. John P. Atwood, Vice President
Telecopy: (713) 227-7626
32
<PAGE> 194
For Purchaser:
Fidelity Oil Holdings, Inc.
Schuchart Building
918 East Divide-Suite 200
Bismarck, ND 58501
Attn: Mr. John F. Renner, President and Chief
Executive Officer
Telecopy: (701) 221-3904
Each Party shall have the right, upon giving 10 days' prior notice to the other
Party in the manner provided in this Section 17.5, to change its address for
purposes of notice.
17.6 EXPENSES. Except as otherwise provided herein, each Party shall
be solely responsible for all costs and expenses incurred by it in connection
with the transactions contemplated hereby (including fees and expenses of its
own counsel and consultants).
17.7 SEVERABILITY. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of Law or public
policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any
adverse manner with respect to any Party. Upon such determination that any term
or other provision is invalid, illegal or incapable of being enforced, the
Parties shall negotiate in good faith to modify this Agreement so as to effect
the original intent of the Parties as closely as possible.
17.8 PUBLICITY. Seller and Purchaser shall consult with each other
with regard to all publicity and other releases issued concerning this
Agreement and the transactions contemplated hereby and, except as required by
applicable Law or the stock exchange requirements, neither Party shall issue
any such publicity or other release without the prior written consent of the
other Party.
17.9 SPECIFIC PERFORMANCE. Because of the unique nature of the Assets
and the difficulty of calculating damages for breach of this Agreement, each
Party shall have the right (pursuant to Section 16.2(b)) to enforce specific
performance by the other Party of its obligations under this Agreement.
17.10 CONSEQUENTIAL AND PUNITIVE DAMAGES. THE PARTIES (FOR THEMSELVES
AND THEIR RESPECTIVE AFFILIATES) WAIVE ANY RIGHTS TO CONSEQUENTIAL, PUNITIVE OR
EXEMPLARY DAMAGES RESULTING FROM A BREACH OF THIS AGREEMENT, INCLUDING LOSS OF
PROFITS.
17.11 NO THIRD-PARTY BENEFICIARY. Except as expressly provided herein,
this Agreement is not intended to create, nor shall it be construed to create,
any rights in any Third Party, under doctrines concerning third-party
beneficiaries or otherwise.
33
<PAGE> 195
17.12 COUNTERPARTS. This Agreement may be executed in counterparts
(including faxed counterparts). Each such counterpart shall be deemed an
original, but all such counterparts together shall constitute one and the same
instrument.
34
<PAGE> 196
IN WITNESS WHEREOF, the parties have executed this Agreement on the
Execution Date.
SELLER
AMERICAN RESOURCES OFFSHORE, INC.
By: /s/ David J. Stetson
----------------------------------
David J. Stetson, Vice President
PURCHASER
FIDELITY OIL HOLDINGS, INC.
By: /s/ John F. Renner
----------------------------------
John F. Renner, President and
Chief Executive Officer
[SIGNATURE PAGE TO PURCHASE AND SALE AGREEMENT BETWEEN AMERICAN RESOURCES
OFFSHORE, INC. AND FIDELITY OIL HOLDINGS, INC.]
<PAGE> 197
APPENDIX C-1
FORM OF VOTING AND SUPPORT AGREEMENT
AND
SUPPLEMENTAL PROXY
<PAGE> 198
VOTING AND SUPPORT AGREEMENT
AND IRREVOCABLE PROXY
July ___, 1999
Blue Dolphin Exploration Company
801 Travis, Suite 2100
Houston, Texas 77002
Dear Sirs:
The undersigned understands that Blue Dolphin Exploration Company
("Investor"), and American Resources Offshore, Inc. (the "Company") are entering
into an Investment Agreement (the "Agreement") pursuant to which Company will
sell and Investor will purchase a number of shares of the Company's common
stock, par value $.00001 per share (the "Common Stock"), that will result in
Investor owning, immediately after the Closing (as defined in the Agreement),
75% of the voting power of all classes of the Company's voting securities.
The undersigned is a stockholder of the Company (the "Stockholder") and is
entering into this letter agreement to induce the Investor to enter into the
Agreement and to consummate the transactions contemplated thereby. Capitalized
terms used herein without definition have the meanings given them in the
Agreement
The Stockholder confirms his agreement with Investor as follows:
1. The Stockholder represents, warrants to Investor that:
(a) the undersigned is the record or beneficial owner of the number
of shares of Common Stock set forth beneath his name below
(collectively, the "Shares") free and clear of all liens, claims,
charges, encumbrances, voting agreements and commitments of any
kind whatsoever, except as specifically set forth in the schedule
attached to this letter agreement;
(b) the undersigned has full legal right, power, authority and
capacity to execute and deliver this letter agreement, and to
perform and observe the provisions of this letter agreement; and
(c) this letter agreement has been duly executed and delivered by
Stockholder and constitutes a legal, valid and binding obligation
of Stockholder, enforceable against Stockholder in accordance
with its terms.
<PAGE> 199
Blue Dolphin Exploration Company
July ___, 1999
Page 2
2. The Stockholder agrees that, from the date hereof until the Agreement
is terminated in accordance with its terms, the undersigned will not, and will
not permit any entity controlled by Stockholder to, (i) contract to sell, sell
or otherwise transfer or dispose of any of the Shares or any interest therein or
securities convertible there into or any voting rights with respect thereto,
other than with Investor's prior written consent, (ii) consent to any amendment
to the certificate of incorporation or bylaws of the Company or (iii) encumber
any of the Shares.
3. The Stockholder agrees that, immediately prior to the Closing Date,
but in any event not later than 5:00 p.m. two (2) days before the Closing Date,
the undersigned will cause all shares of Series 1993 8% Convertible Preferred
Stock and securities convertible into Common Stock, including, but not limited
to, options, warrants and rights (collectively, the "Convertible Securities"),
if any, owned by the Stockholder to be converted and exercised into Common Stock
and shall cause all other Convertible Securities to be canceled without cost to
the Company.
4. The Stockholder agrees, from the date hereof until the Agreement is
terminated in accordance with its terms, that: (i) the undersigned shall vote or
cause to be voted all of the Shares owned by the Stockholder, or over which the
Stockholder has voting power or control, directly or indirectly, to approve (a)
the Agreement, (b) the Purchase and Sale Agreement, (c) the Southern
Disposition, (d) a 10-for-1 reverse stock split of the Common Stock, (e) each of
the transactions contemplated thereby and (f) for the directors nominated for
election which have been designated by the Investor (collectively, the "Proxy
Items"); (ii) the undersigned will cause the holders of record of Common Stock
beneficially owned by the undersigned to grant an irrevocable proxy,
substantially in the form of Exhibit A hereto, to the Investor; and (iii) that
the Shares will not be voted in favor of any other Acquisition Proposal during
such period.
5. The Stockholder agrees to cooperate fully with Investor in connection
with the Agreement and to support transactions contemplated thereby. The
Stockholder agrees that the undersigned will not, and will not instruct its
agents, employees or representatives or the officers, employees, agents or
representatives of the Company to, directly or indirectly, (i) solicit or
initiate, or encourage the submission of, any Acquisition Proposal or (ii)
participate in any discussions or negotiations regarding, or furnish to any
person any information with respect to, or take any other action to facilitate
any inquiries or the making of any proposal that constitutes, or may reasonably
be expected to lead to, any Acquisition Proposal.
6. None of the information relating to the Stockholder to be supplied in
writing by the Stockholder specifically for inclusion in the Notice and Proxy
Statement (and any amendments thereto), at the time the Notice and Proxy
Statement is first published, sent or given to the Company's stockholders, shall
contain any untrue statement of a material fact or omit to state any
<PAGE> 200
Blue Dolphin Exploration Company
July ___, 1999
Page 3
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
7. This letter agreement constitutes the entire agreement among the
parties hereto with respect to the subject matter hereof and supersedes all
other prior agreements and understandings, both written and oral, among the
parties with respect to the subject matter hereof and shall not be assigned by
operation of law or otherwise; provided that the Investor may assign any of its
rights and obligations to any of its affiliates, but no such assignment shall
relieve the Stockholder of its obligations hereunder.
8. The invalidity or unenforceability of any provision of this letter
agreement in any jurisdiction shall not affect the validity or enforceability of
any other provisions of this letter agreement, which shall remain in full force
and effect in such jurisdiction, or the validity or enforceability of such
provision in any other jurisdiction. The Stockholder acknowledges that Investor
will be irreparably harmed and that there will be no adequate remedy at law for
a violation of any of the covenants or agreements of the Stockholder contained
herein. It is accordingly agreed that, in addition to any other remedies that
may be available to Investor upon the breach by the Stockholder of such
covenants and agreements, Investor shall have the right to obtain injunctive
relief to restrain any breach or threatened breach of such covenants or
agreements or otherwise to obtain specific performance of any of such covenants
or agreements.
9. This letter agreement shall be governed by and construed in accordance
with the laws of the State of Delaware without regard to the principles of
conflicts of laws thereof. Any judicial proceeding brought against any party
hereto with respect to this letter agreement, or any transaction contemplated
hereby, may be brought in the Federal District Court for the Southern District
of Texas and, by execution and delivery of this letter agreement, each of the
parties hereto (i) accepts, generally and unconditionally, the nonexclusive
jurisdiction of such court and any related appellate court, and irrevocably
agrees to be bound by any judgment rendered thereby in connection with this
letter agreement, subject, in each case, to all rights to appeal such decisions
to the extent available to the parties and (ii) irrevocably waives any objection
it may now or hereafter have as to the venue of any such suit, action or
proceeding brought in such a court or that such court is an inconvenient forum.
Each party hereto hereby waives personal service of process and consents that
service of process upon it may be made by certified or registered mail, return
receipt requested, at its address specified in this letter agreement, and
service so made shall be deemed completed on the fifth business day after such
service is deposited in the mail. Nothing herein shall affect the right to serve
process in any other manner permitted by law. EACH PARTY HEREBY WAIVES TRIAL BY
JURY IN ANY JUDICIAL PROCEEDING INVOLVING,
<PAGE> 201
Blue Dolphin Exploration Company
July ___, 1999
Page 4
DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR
CONNECTED WITH THIS LETTER AGREEMENT WHETHER SOUNDING IN CONTRACT, TORT OR
OTHERWISE.
10. The Stockholder as the record owner of the number of shares of Common
Stock set forth beneath its name below, for good and valuable consideration the
legal sufficiency of which is hereby acknowledged by the undersigned, agrees to,
and hereby grants to Investor an irrevocable proxy pursuant to the provisions of
Section 212 of the Delaware General Corporation Law to vote at all annual and
special meetings of the stockholders of Company, and any postponements or
adjournments thereof, or to execute and deliver written consents or otherwise
act with respect to, all shares of Common Stock now owned by the undersigned as
fully, to the same extent and with the same effect as the undersigned might or
could do under any applicable laws or regulations governing the rights and
powers of shareholders of a Delaware corporation in connection with the approval
of the Proxy Items. The undersigned hereby affirms that this proxy is given as a
condition of this letter agreement and as such is coupled with an interest and
is irrevocable. This proxy shall terminate on________,____________.
THIS PROXY, AS IT IS COUPLED WITH AN INTEREST, IS IRREVOCABLE AND SHALL
REMAIN IN FULL FORCE AND EFFECT AND BE ENFORCEABLE AGAINST ANY DONEE, TRANSFEREE
OR ASSIGNEE OF THE COMMON STOCK.
11. This letter agreement may be executed in counterparts, each of which
shall be deemed to be an original, but all of which shall constitute one and the
same instrument.
12. This letter agreement may be terminated at the option of any party at
any time after termination of the Agreement in accordance with its terms.
<PAGE> 202
Blue Dolphin Exploration Company
July ___, 1999
Page 5
Please confirm that the foregoing correctly states the understanding
between us by signing and returning to us a counterpart hereof.
Very truly yours,
---------------------------------------------------
[NAME OF SHAREHOLDER]
---------------------------------------------------
Number of shares of Common Stock owned beneficially
---------------------------------------------------
Number of shares of Common Stock owned of record
Confirmed on the date first above written
BLUE DOLPHIN EXPLORATION COMPANY
By:
---------------------------
---------------------------
<PAGE> 203
Blue Dolphin Exploration Company
July ___, 1999
Page 6
EXHIBIT A
IRREVOCABLE PROXY
The undersigned as the record owner of _____________________, shares of
common stock, par value $.00001 per share (the "Common Stock"), of American
Resources Offshore, Inc. (the "Company"), for good and valuable consideration
the legal sufficiency of which is hereby acknowledged by the undersigned, agrees
to, and hereby grants to Blue Dolphin Exploration Company, a Delaware
corporation ("Blue Dolphin"), an irrevocable proxy pursuant to the provisions of
Section 212 of the Delaware General Corporation Law and that certain Voting and
Support Agreement and Irrevocable Proxy, dated as of July ___, 1999, between
Blue Dolphin and [Stockholder] (the "Voting Agreement"), to vote at all annual
and special meetings of the stockholders of the Company, and any postponements
or adjournments thereof, or to execute and deliver written consents or otherwise
act with respect to, all shares of Common Stock now owned by the undersigned as
fully, to the same extent and with the same effect as the undersigned might or
could do under any applicable laws or regulations governing the rights and
powers of shareholders of a Delaware corporation in connection with the approval
of the (i) Investment Agreement, (ii) Purchase and Sale Agreement, (iii)
Southern Disposition, (iv) a 10-for-1 reverse stock split of the Common Stock,
(v) each of the transactions contemplated thereby and (vi) the election of
directors of the Company, all as contemplated by and defined in the Voting
Agreement. The undersigned hereby affirms that this proxy is given as a
condition of said Voting Agreement and as such is coupled with an interest and
is irrevocable. This proxy shall terminate on December 31, 1999.
THIS PROXY, AS IT IS COUPLED WITH AN INTEREST, IS IRREVOCABLE AND SHALL
REMAIN IN FULL FORCE AND EFFECT AND BE ENFORCEABLE AGAINST ANY DONEE, TRANSFEREE
OR ASSIGNEE OF THE COMMON STOCK.
Dated this ______ day of July, 1999.
--------------------------
(Signature of Shareholder)
<PAGE> 204
SUPPLEMENTAL PROXY
WHEREAS, the undersigned as the record owner of ____________________ ,
shares of common stock, par value $.00001 per share (the "Common Stock"), of
American Resources Offshore, Inc. (the "Company"), has granted an irrevocable
proxy to Blue Dolphin Exploration Company, a Delaware corporation ("Blue
Dolphin") dated _________________ , 1999 (the "Irrevocable Proxy"); and
WHEREAS, the undersigned desires to extend such matters to which Blue
Dolphin may exercise such Irrevocable Proxy.
NOW THEREFORE, the undersigned for good and valuable consideration the
legal sufficiency of which is hereby acknowledged by the undersigned, agrees to,
and hereby grants to Blue Dolphin the right to exercise such Irrevocable Proxy
to vote at all annual and special meetings of the stockholders of the Company,
and any postponements or adjournments thereof, or to execute and deliver written
consents or otherwise act with respect to, all shares of Common Stock now owned
by the undersigned as fully, to the same extent and with the same effect as the
undersigned might or could do under any applicable laws or regulations governing
the rights and powers of shareholders of a Delaware corporation in connection
with (i) those matters set forth in the Voting and Support Agreement and
Irrevocable Proxy, (ii) the approval of the increase in authorized shares of
capital stock, (ii) the approval of the elimination of the staggered board of
directors, and (iii) any other matters that may properly come before the annual
meeting.
The undersigned hereby affirms that this proxy is coupled with an interest
and is irrevocable. This proxy shall terminate on December 31, 1999.
THIS PROXY, AS IT IS COUPLED WITH AN INTEREST, IS IRREVOCABLE AND SHALL
REMAIN IN FULL FORCE AND EFFECT AND BE ENFORCEABLE AGAINST ANY DONEE, TRANSFEREE
OR ASSIGNEE OF THE COMMON STOCK.
Dated this ______ day of September, 1999.
--------------------------
(Signature of Shareholder)
<PAGE> 205
APPENDIX C-2
FORM OF VOTING AND SUPPORT AGREEMENT
BY
DEN NORSKE BANK
AND
AFFILIATES
<PAGE> 206
VOTING AND SUPPORT AGREEMENT
AND IRREVOCABLE PROXY
September ___, 1999
Blue Dolphin Exploration Company
801 Travis, Suite 2100
Houston, Texas 77002
Dear Sirs:
The undersigned understands that Blue Dolphin Exploration Company
("Investor"), and American Resources Offshore, Inc. (the "Company") are entering
into an Investment Agreement (the "Agreement") pursuant to which Company will
sell and Investor will purchase a number of shares of the Company's common
stock, par value $.00001 per share (the "Common Stock"), that will result in
Investor owning, immediately after the Closing (as defined in the Agreement),
75% of the voting power of all classes of the Company's voting securities.
The undersigned is a stockholder of the Company (the "Stockholder") and is
entering into this letter agreement to facilitate the consummation of the
transactions contemplated by the Agreement. Capitalized terms used herein
without definition have the meanings given them in the Agreement
The Stockholder confirms his agreement with Investor as follows:
1. The Stockholder represents, warrants to Investor that:
(a) the undersigned is the record or beneficial owner of the number
of shares of Common Stock set forth beneath his name below
(collectively, the "Shares") free and clear of all liens, claims,
charges, encumbrances, voting agreements and commitments of any
kind whatsoever, except as specifically set forth in the schedule
attached to this letter agreement;
(b) the undersigned has full legal right, power, authority and
capacity to execute and deliver this letter agreement, and to
perform and observe the provisions of this letter agreement; and
(c) this letter agreement has been duly executed and delivered by
Stockholder and constitutes a legal, valid and binding obligation
of Stockholder, enforceable against Stockholder in accordance
with its terms.
<PAGE> 207
Blue Dolphin Exploration Company
September _____, 1999
Page 2
2. The Stockholder agrees that, from the date hereof until the earlier of
(a) the date the Agreement is terminated in accordance with its terms
or (b) December 15, 1999, the undersigned will not, and will not
permit any entity controlled by Stockholder to, (i) contract to sell,
sell or otherwise transfer or dispose of any of the Shares or any
interest therein or securities convertible there into or any voting
rights with respect thereto, other than with Investor's prior written
consent, (ii) consent to any amendment to the certificate of
incorporation or bylaws of the Company or (iii) encumber any of the
Shares.
3. The Stockholder agrees that, immediately prior to the Closing Date,
but in any event not later than 5:00 p.m. two (2) days before the
Closing Date, the undersigned will cause all shares of Series 1993 8%
Convertible Preferred Stock and securities convertible into Common
Stock, including, but not limited to, options, warrants and rights
(collectively, the "Convertible Securities"), if any, owned by the
Stockholder to be exercised and converted into Common Stock and shall
cause all other Convertible Securities to be canceled without cost to
the Company.
4. The Stockholder agrees, from the date hereof until the earlier of (a)
the date the Agreement is terminated in accordance with its terms or
(b) December 15, 1999, that: (i) the undersigned shall vote or cause
to be voted all of the Shares owned by the Stockholder, or over which
the Stockholder has voting power or control, directly or indirectly,
to approve (a) the Agreement, (b) the Purchase and Sale Agreement, (c)
the Southern Disposition, (d) an amendment to the Company's
Certificate of Incorporation to increase the authorized capital, (e)
an amendment to the Company's Certificate of Incorporation to
eliminate the staggered board of directors, (f) each of the
transactions contemplated thereby and (g) for the directors nominated
for election which have been designated by the Investor (collectively,
the "Proxy Items"); (ii) the undersigned will cause the holders of
record of Common Stock beneficially owned by the undersigned to grant
an irrevocable proxy, substantially in the form of Exhibit A hereto,
to the Investor; and (iii) that the Shares will not be voted in favor
of any other Acquisition Proposal during such period.
5. Through is acceptance of this letter agreement, Investor acknowledges
and agrees that (i) Stockholder and its affiliates (collectively
"DNB") are secured creditors of the Company; (ii) the Company is in
default of its obligations to DNB; (iii) Stockholder is entering into
this letter agreement strictly in its capacity as the holder of Common
Stock of the Company and only with respect to its rights as a holder
of such Common Stock; (iv) nothing contained herein or otherwise
related to the terms of this letter agreement or the proxy shall
alter, impair or otherwise affect DNB's rights as a creditor of the
Company; and (v) except as may be otherwise expressly agreed in
writing with Investor, DNB is free to take any and all actions
available to it as a creditor of the Company, including actions which
may prevent or impede the transactions contemplated by the Agreement,
the Purchase and Sale Agreement, the Southern Disposition and/or any
other agreements involving the Company. Despite Stockholder's
exception of this letter agreement, DNB will remain free to oppose
<PAGE> 208
Blue Dolphin Exploration Company
September _____, 1999
Page 3
the Agreement, the Purchase and Sale Agreement and the transactions
contemplated thereby in its capacity as a creditor of the Company,
except as may be otherwise expressly agreed in writing by DNB.
6. This letter agreement shall not be assigned by operation of law or
otherwise; provided that the Investor may assign any of its rights and
obligations to any of its affiliates, but no such assignment shall
relieve the Stockholder of its obligations hereunder.
7. The invalidity or unenforceability of any provision of this letter
agreement in any jurisdiction shall not affect the validity or
enforceability of any other provisions of this letter agreement, which
shall remain in full force and effect in such jurisdiction, or the
validity or enforceability of such provision in any other
jurisdiction. The Stockholder acknowledges that Investor will be
irreparably harmed and that there will be no adequate remedy at law
for a violation of any of the covenants or agreements of the
Stockholder contained herein. It is accordingly agreed that, in
addition to any other remedies that may be available to Investor upon
the breach by the Stockholder of such covenants and agreements,
Investor shall have the right to obtain injunctive relief to restrain
any breach or threatened breach of such covenants or agreements or
otherwise to obtain specific performance of any of such covenants or
agreements.
8. This letter agreement shall be governed by and construed in accordance
with the laws of the State of Delaware without regard to the
principles of conflicts of laws thereof. Any judicial proceeding
brought against any party hereto with respect to this letter
agreement, or any transaction contemplated hereby, may be brought in
the Federal District Court for the Southern District of Texas and, by
execution and delivery of this letter agreement, each of the parties
hereto (i) accepts, generally and unconditionally, the nonexclusive
jurisdiction of such court and any related appellate court, and
irrevocably agrees to be bound by any judgment rendered thereby in
connection with this letter agreement, subject, in each case, to all
rights to appeal such decisions to the extent available to the parties
and (ii) irrevocably waives any objection it may now or hereafter have
as to the venue of any such suit, action or proceeding brought in such
a court or that such court is an inconvenient forum. Each party hereto
hereby waives personal service of process and consents that service of
process upon it may be made by certified or registered mail, return
receipt requested, at its address specified in this letter agreement,
and service so made shall be deemed completed on the fifth business
day after such service is deposited in the mail. Nothing herein shall
affect the right to serve process in any other manner permitted by
law. EACH PARTY HEREBY WAIVES TRIAL BY JURY IN ANY JUDICIAL PROCEEDING
INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT
OF, RELATED TO, OR CONNECTED WITH THIS LETTER AGREEMENT WHETHER
SOUNDING IN CONTRACT, TORT OR OTHERWISE.
<PAGE> 209
Blue Dolphin Exploration Company
September _____, 1999
Page 4
9. The Stockholder as the record owner of the number of shares of
Common Stock set forth beneath its name below, for good and valuable
consideration the legal sufficiency of which is hereby acknowledged by the
undersigned, agrees to, and hereby grants to Investor an irrevocable proxy
pursuant to the provisions of Section 212 of the Delaware General Corporation
Law to vote at all annual and special meetings of the stockholders of Company,
and any postponements or adjournments thereof, or to execute and deliver written
consents or otherwise act with respect to, all shares of Common Stock now owned
by the undersigned as fully, to the same extent and with the same effect as the
undersigned might or could do under any applicable laws or regulations governing
the rights and powers of shareholders of a Delaware corporation in connection
with the approval of the Proxy Items. The undersigned hereby affirms that this
proxy is given as a condition of this letter agreement and as such is coupled
with an interest and is irrevocable. This proxy shall terminate on December 31,
1999.
THIS PROXY, AS IT IS COUPLED WITH AN INTEREST, IS IRREVOCABLE AND SHALL
REMAIN IN FULL FORCE AND EFFECT AND BE ENFORCEABLE AGAINST ANY DONEE, TRANSFEREE
OR ASSIGNEE OF THE COMMON STOCK.
10. This letter agreement may be executed in counterparts, each of
which shall be deemed to be an original, but all of which shall constitute one
and the same instrument.
11. This letter agreement may be terminated at the option of any party
at any time after termination of the Agreement in accordance with its terms.
<PAGE> 210
Blue Dolphin Exploration Company
September _____, 1999
Page 5
Please confirm that the foregoing correctly states the understanding
between us by signing and returning to us a counterpart hereof.
Very truly yours,
---------------------------------------------------
[NAME OF SHAREHOLDER]
---------------------------------------------------
Number of shares of Common Stock owned beneficially
---------------------------------------------------
Number of shares of Common Stock owned of record
Confirmed on the date first above written
BLUE DOLPHIN EXPLORATION COMPANY
By:
-------------------------------------
-------------------------------------
<PAGE> 211
Blue Dolphin Exploration Company
September _____, 1999
Page 6
EXHIBIT A
IRREVOCABLE PROXY
The undersigned as the record owner of _______________ , shares of common
stock, par value $.00001 per share (the "Common Stock"), of American Resources
Offshore, Inc. (the "Company"), for good and valuable consideration the legal
sufficiency of which is hereby acknowledged by the undersigned, agrees to, and
hereby grants to Blue Dolphin Exploration Company, a Delaware corporation ("Blue
Dolphin"), an irrevocable proxy pursuant to the provisions of Section 212 of the
Delaware General Corporation Law and that certain Voting and Support Agreement
and Irrevocable Proxy, dated as of September ___, 1999, between Blue Dolphin and
[Stockholder] (the "Voting Agreement"), to vote at all annual and special
meetings of the stockholders of the Company, and any postponements or
adjournments thereof, or to execute and deliver written consents or otherwise
act with respect to, all shares of Common Stock now owned by the undersigned as
fully, to the same extent and with the same effect as the undersigned might or
could do under any applicable laws or regulations governing the rights and
powers of shareholders of a Delaware corporation in connection with the approval
of the (i) Investment Agreement, (ii) Purchase and Sale Agreement, (iii)
Southern Disposition, (iv) an amendment to the Company's Certificate of
Incorporation to increase the authorized capital, (v) an amendment to the
Company's Certificate of Incorporation to eliminate the staggered board of
directors, (vi) each of the transactions contemplated thereby and (vii) the
election of directors of the Company, all as contemplated by and defined in the
Voting Agreement. The undersigned hereby affirms that this proxy is given as a
condition of said Voting Agreement and as such is coupled with an interest and
is irrevocable. This proxy shall terminate on December 31, 1999.
THIS PROXY, AS IT IS COUPLED WITH AN INTEREST, IS IRREVOCABLE AND SHALL
REMAIN IN FULL FORCE AND EFFECT AND BE ENFORCEABLE AGAINST ANY DONEE, TRANSFEREE
OR ASSIGNEE OF THE COMMON STOCK.
Dated this ______ day of September, 1999.
--------------------------
(Signature of Shareholder)
<PAGE> 212
APPENDIX D
MANAGEMENT AND ADMINISTRATIVE SERVICES AGREEMENT
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========================================
MANAGEMENT AND ADMINISTRATIVE
SERVICES AGREEMENT
BY AND BETWEEN
BLUE DOLPHIN SERVICES, INC.
AND
AMERICAN RESOURCES OFFSHORE, INC.
_____________, 1999
========================================
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TABLE OF CONTENTS
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ARTICLE 1
DEFINITIONS
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1.1 DEFINED TERMS...................................................................................1
1.2 OTHER TERMS.....................................................................................2
1.3 CONSTRUCTION....................................................................................2
ARTICLE 2
SERVICES PROVIDED BY BDSI
2.1 APPOINTMENT.....................................................................................3
2.2 ACCEPTANCE......................................................................................3
2.3 LEGAL OWNERSHIP.................................................................................3
2.4 DUTIES RETAINED BY ARO..........................................................................3
2.5 EVIDENCE OF AUTHORITY; ATTORNEY-IN-FACT.........................................................3
2.6 AUTHORIZED PERSONNEL............................................................................3
ARTICLE 3
MANAGEMENT SERVICES
3.1 GENERAL.........................................................................................3
3.2 MANAGEMENT SERVICES.............................................................................4
(a) Accounting.............................................................................4
(b) Cash Management........................................................................4
(c) General Land Functions; Land Title and Lease Records...................................4
(d) Contracts..............................................................................4
(e) Contract Administration................................................................4
(f) Reporting to and Meeting With ARO......................................................5
(g) Management Reports.....................................................................5
(h) SEC Compliance.........................................................................5
(i) Records................................................................................5
(j) AFE's..................................................................................5
(k) Technical and Operational Expertise....................................................6
(l) Compliance and Regulatory Filings......................................................6
(m) Insurance..............................................................................6
(n) Marketing..............................................................................6
(o) Administrative Functions...............................................................6
(p) Tax....................................................................................6
(q) Legal Proceedings......................................................................6
(r) Other..................................................................................6
3.3 SUPERVISION OF BDSI.............................................................................6
3.4 SPECIAL SERVICES................................................................................7
3.5 FILES AND RECORDS...............................................................................7
3.6 BILLING AND PAYMENT.............................................................................7
ARTICLE 4
MANAGEMENT FEE
4.1 MANAGEMENT FEE..................................................................................7
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(Continued)
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4.2 SUPPLEMENTAL SERVICES FEES......................................................................7
4.3 MISCELLANEOUS EXPENSES..........................................................................7
4.4 REMEDIES FOR FAILURE TO PAY.....................................................................8
(a) Interest...............................................................................8
(b) Cost of Collection.....................................................................8
ARTICLE 5
INDEMNITY
5.1 BDSI'S INDEMNIFICATION..........................................................................8
5.2 ARO'S INDEMNIFICATION...........................................................................8
5.3 NO ASSUMPTION OF LIABILITIES....................................................................9
ARTICLE 6
CONFIDENTIALITY
ARTICLE 7
CONFLICTS
ARTICLE 8
ACCESS AND AUDIT
8.1 BOOKS AND RECORDS..............................................................................10
8.2 RIGHT TO AUDIT.................................................................................10
8.3 MAINTENANCE OF RECORDS.........................................................................10
ARTICLE 9
RELATIONSHIPS OF THE PARTIES
9.1 RELATIONSHIPS..................................................................................10
9.2 TAXATION.......................................................................................10
ARTICLE 10
REPRESENTATION AND WARRANTIES
10.1 REPRESENTATION AND WARRANTIES OF BDSI..........................................................11
(a) Organization..........................................................................11
(b) Authority and Conflicts...............................................................11
(c) Authorization.........................................................................11
(d) Enforceability........................................................................11
10.2 REPRESENTATIONS AND WARRANTIES OF ARO..........................................................12
(a) Organization..........................................................................12
(b) Authority and Conflicts...............................................................12
(c) Authorization.........................................................................12
(d) Enforceability........................................................................12
(e) Compliance with Law and Permits.......................................................12
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TABLE OF CONTENTS
(Continued)
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ARTICLE 11
TERM
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11.1 TERM...........................................................................................13
11.2 HOLD OVER......................................................................................13
ARTICLE 12
NOTICES
ARTICLE 13
GENERAL
13.1 GOVERNING LAW..................................................................................14
13.2 ASSIGNMENT.....................................................................................14
13.3 INTEGRATION....................................................................................14
13.4 WAIVER OR MODIFICATION.........................................................................14
13.5 INVALID PROVISIONS.............................................................................14
13.6 FORCE MAJEURE..................................................................................15
13.7 MULTIPLE COUNTERPARTS..........................................................................15
13.8 DISPUTE RESOLUTION.............................................................................15
</TABLE>
LIST OF EXHIBITS
Exhibit A Dispute Resolution Procedures
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MANAGEMENT AND ADMINISTRATIVE SERVICES AGREEMENT
THIS MANAGEMENT AND ADMINISTRATIVE SERVICES AGREEMENT (this
"Agreement") is dated effective as of __________, 1999 and is by and between
AMERICAN RESOURCES OFFSHORE, INC., a Delaware corporation ("ARO"), and BLUE
DOLPHIN SERVICES, INC., a Delaware corporation ("BDSI"). ARO and BDSI may be
referred to collectively as the "Parties" or individually as a "Party".
RECITALS:
A. ARO is engaged in the business of exploring for and producing
oil and gas in the Gulf of Mexico.
B. Blue Dolphin Exploration Company ("BDEX"), an affiliate of
BDSI, has entered into that certain Investment Agreement dated
July __, 1999 (the "Investment Agreement") whereby BDEX will
acquire 75% of the issued and outstanding common stock of ARO.
C. It is the intention of the Parties that BDSI will manage the
business and operations of ARO.
NOW, THEREFORE, for and in consideration of the mutual and dependent
covenants, conditions, and agreements hereinafter set forth, the Parties agree
as follows:
ARTICLE 1
DEFINITIONS
1.1 DEFINED TERMS. As used in this Agreement, each of the following
capitalized terms shall have the meaning ascribed to them in this Section unless
otherwise specified or clearly required by the context in which such term is
used:
"AFE" shall mean authority for expenditures.
"AGREEMENT" shall have the meaning set forth in the
introductory paragraph hereof.
"AGREEMENT YEAR" shall have the meaning ascribed in Section
11.1.
"ARO" shall have the meaning set forth in the Recitals hereof.
"BDEX" shall have the meaning set forth in the Recitals
hereof.
"BDSI" shall have the meaning set forth in the introductory
paragraph hereof.
"BUSINESS DAY" shall mean a day other than any day that
banking institutions are required or permitted to be closed under the
laws of the State of Texas.
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"CODE" shall have the meaning set forth in Section 9.2.
"COMMENCEMENT DATE" shall mean _________, 1999.
"CONFIDENTIAL INFORMATION" shall mean all information
disclosed by either Party to the other Party relating to the disclosing
Party's business and operations.
"ENFORCEABILITY LIMITATIONS" shall mean applicable bankruptcy,
reorganization or moratorium statutes, equitable principles or other
similar laws affecting the rights of creditors generally.
"HYDROCARBON" shall mean gas, oil, casinghead gas, drip
gasoline, natural gasoline and all other liquid and gaseous
hydrocarbons.
"INVESTMENT AGREEMENT" shall have the meaning set forth in the
Recitals hereof.
"IRS" shall have the meaning set forth in Section 9.2.
"LIABILITY" shall have the meaning set forth in Section 5.1.
"MANAGEMENT FEE" shall have the meaning set forth in Section
4.1.
"MANAGEMENT SERVICES" shall have the meaning set forth in
Section 3.2.
"TERM" shall mean the term of this Agreement as set forth in
Article 11.1.
"TERMINATION DATE" shall have the meaning set forth in Article
11.1.
1.2 OTHER TERMS. Other capitalized terms used in this Agreement and not
defined in Section 1.1 shall have the meanings given them throughout this
Agreement.
1.3 CONSTRUCTION. The headings in this Agreement are inserted for
convenience of reference only and shall not affect the interpretation of this
Agreement. Whenever the context requires, each term stated in either the
singular or the plural shall include the singular or the plural, and the gender
of all words used in this Agreement includes the masculine, the feminine and the
neuter. Except as otherwise noted, references to Articles and Sections refer to
articles and sections of this Agreement, and all references to Exhibits are to
exhibits attached hereto, each of which is made a part hereof for all purposes.
Use of the word "including" shall mean, without limitation, by reason of
enumeration. The use of the words "hereof," "hereunder," "hereto," "herein,"
"hereinafter," "hereinabove" and "hereinbelow" shall be references to this
Agreement in its entirety and not only to a particular Article, Section or
Exhibit in which such reference appears.
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ARTICLE 2
SERVICES PROVIDED BY BDSI
2.1 APPOINTMENT. ARO hereby appoints BDSI to provide the Management
Services by and on behalf of, and for the account of, ARO, pursuant to and as
set forth in this Agreement
2.2 ACCEPTANCE. BDSI hereby accepts the appointment provided for above
and agrees to perform the duties and obligations herein imposed in a good and
workmanlike manner as a reasonable person in the industry in material compliance
with all applicable agreements, laws, rules and regulations and using a good
faith effort which BDSI reasonably believes advances and protects the interests
of ARO.
2.3 LEGAL OWNERSHIP. BDSI shall not take title to any properties owned
of record or beneficially by ARO during the Term of this Agreement. Any addition
to the assets of ARO by purchase, lease or otherwise on behalf of ARO shall be
acquired in the name of ARO.
2.4 DUTIES RETAINED BY ARO. ARO shall be responsible for all duties and
obligations which BDSI is not specifically required or authorized to perform on
behalf of ARO pursuant to the terms of this Agreement.
2.5 EVIDENCE OF AUTHORITY; ATTORNEY-IN-FACT. If BDSI determines it is
necessary to fulfill its obligations under this Agreement, BDSI shall prepare
and ARO shall execute and deliver to BDSI (i) letters of instruction to all
appropriate third parties instructing such third parties to deal with BDSI with
respect to all matters relating to ARO and to provide directly to BDSI all
payments, invoices, notices, requests, demands, and other communications
relating to ARO and its properties and assets; and (ii) powers of attorney
authorizing and empowering certain employees of BDSI to carry out the rights and
duties set forth herein.
2.6 AUTHORIZED PERSONNEL. With respect to any approval or consent
required from ARO pursuant to the terms of this Agreement, BDSI may rely on any
authorization, consent or other instructions received from either [___] or
[___]. ARO may remove the authority granted to the foregoing individuals and/or
authorize additional individuals to provide such consents, approvals or
instructions by providing BDSI with a written statement of authorization signed
by the president of ARO.
ARTICLE 3
MANAGEMENT SERVICES
3.1 GENERAL. BDSI will provide competent and suitable qualified
personnel to perform the Management Services and agrees to use all reasonable
efforts to fulfill such services diligently in accordance with the standards
imposed on BDSI in this Agreement.
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3.2 MANAGEMENT SERVICES. The managed, administrative and advisory
services to be provided by BDSI to ARO pursuant to this Agreement shall include
the following (the "Management Services"):
(a) Accounting. BDSI shall maintain in good order the books
and accounts, ledgers and records of ARO shall perform all day-to-day
accounting functions of ARO including, without limitation, accounting
matters relating to paying and receiving, billing, gas balancing,
repayments under external or internal loan arrangements and contract
coordination. In addition, BDSI shall do all things necessary and usual
and customary in the industry to assist the outside auditors in
completing ARO's annual financial audit.
(b) Cash Management. BDSI shall deposit all monies received by
ARO into a centralized cash management account of ARO ("Cash Account").
Consistent with existing cash management practices of BDSI for managed
accounts, such Cash Account will be utilized for the receipt of monies
to satisfy obligations pertaining to ARO.
To the extent ARO has funds available in the Cash Account
pertaining to ARO and subject to the approval rights provided below,
all costs, expenditures, fees, and other payments due by ARO shall be
paid out of the Cash Account. BDSI shall never be obligated to make
advances to ARO for the purchase covering shortfalls in the Cash
Account. Notwithstanding BDSI's payment of expenses on behalf of ARO,
ARO shall be responsible for all amounts due and expenses incurred in
connection with the organization and operation of ARO. To the extent
that BDSI becomes aware of a cash shortfall with respect to ARO's funds
in the Cash Account, BDSI shall notify ARO of such shortfall.
(c) General Land Functions; Land Title and Lease Records. BDSI
shall perform all day-to-day general land functions relating to ARO's
assets including, without limitation, the maintenance of all oil and
gas lease and land files, title conveyances, payment of delay rentals
and shut-in well reports. BDSI shall liaise with any outside legal
counsel approved by ARO for land and related matters where required and
shall provide land information for audit and tax returns.
(d) Contracts. BDSI shall negotiate all contracts for ARO
including, but not limited to loan agreements, leases, AFEs, proposed
operations under joint operating agreements, division orders, gas sales
contracts, pooling agreements, assignments, gas balancing agreements,
farmout and farmin agreements and unit declarations, the purchase of
land and the acquisition of permits, easements, rights-of-way and other
property rights necessary for ARO's assets, with such persons as may be
reasonable or necessary. BDSI shall notify ARO of any significant
procurement of materials.
(e) Contract Administration. BDSI shall administer all
agreements of ARO including, without limitation:
(i) compliance with insurance requirements
established by ARO from time to time;
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(ii) establishment and maintenance of bank
accounts;
(iii) review of all invoices, preparation of
recommendations for payment of all, or
specified portions, of invoiced costs;
(iv) settlement recommendations for any disputes
arising from invoices; and
(v) delivery of lien waivers, or releases, in
form and substance reasonably acceptable to
ARO, to lenders under any credit agreement
or a title company issuing an owner's or
mortgagee's title insurance policy, as may
be applicable and compliance with all
applicable federal, state and local taxes
(including excise and sales taxes) which may
be applicable to ARO's assets.
(f) Reporting to and Meeting With ARO. BDSI shall prepare and
furnish periodic progress and status reports to ARO and such other
reports as ARO may from time to time request. All reports furnished to
ARO by BDSI shall be in a form acceptable to ARO, in ARO's reasonable
discretion. Additionally, BDSI shall cause its personnel to meet with
representatives of ARO from time to time as reasonably requested by ARO
to review the reports provided to ARO.
(g) Management Reports. BDSI shall provide ARO with reports
which are consistent, in form and substance, with reports prepared by
ARO prior to the Parties entering into this Agreement.
(h) SEC Compliance. BDSI shall prepare or cause to be prepared
all filings necessary or required by the Securities Laws and applicable
laws of any exchange upon which the shares of the Company's stock are
traded.
(i) Records. BDSI shall maintain on behalf of ARO all
certificates, licenses, permits and approvals from all governmental
agencies with jurisdiction over ARO's assets, all contracts (including,
without limitation, purchase orders) negotiated with persons providing
services in connection with ARO's assets, the results of any tests or
analyses obtained in connection with ARO's assets and copies of
invoices, checks and other accounting materials related to ARO's assets
as may be reasonably requested by ARO for tax and accounting purposes.
BDSI shall prepare revisions to the plans and specifications of ARO's
assets to reflect the final configuration of ARO's assets and maintain
such additional records relating to ARO's assets as may be reasonable
or necessary to permit ARO to operate, maintain and, if applicable,
further expand the existing ARO assets. All records shall be maintained
in strict compliance with all regulatory requirements of the FERC, DOT
and any other state, federal or local governmental agency having
jurisdiction over all or any portion of ARO's assets.
(j) AFE's. Review and make decisions with respect to AFE's
proposed by the operators or other interest owners of the properties
owned by ARO.
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(k) Technical and Operational Expertise. Provide ARO with
technical and operational expertise to assist ARO in connection with
decisions regarding the operations of ARO's assets, including capital
expenditures and major repairs and maintenance requirements. BDSI's
responsibility in this regard shall include without limitation, the
duty to review and timely respond to election notices and AFEs sent by
all operators of ARO's assets.
(l) Compliance and Regulatory Filings. Use all reasonable
efforts to ensure that ARO complies fully with all federal, state and
municipal laws, ordinances, regulations and orders relative to ARO's
assets and shall prepare and file all regulatory filings required to be
filed by ARO with respect to its assets. BDSI shall use all reasonable
efforts to cause the appropriate parties to remedy any violation of any
such law, ordinance, rule, regulation or order which comes to its
attention and shall promptly notify ARO of any such violation.
(m) Insurance. Provide the necessary insurance for ARO as
determined by ARO's Board of Directors or as required under the
insurance provisions of the applicable operating agreement for
properties owned by ARO to the extent such insurance is not provided to
ARO by the operator. Such insurance shall be provided at ARO's cost and
expense and the cost of such insurance is not included in the
Management Fee.
(n) Marketing. Market or cause to be marketed ARO's share of
Hydrocarbon production from its properties to the extent ARO has the
right to market such production under the terms of the applicable
operating agreement. Any third-party costs and expenses incurred in
connection with such marketing efforts shall be borne by ARO.
(o) Administrative Functions. Perform all other reasonable or
necessary administrative functions relating to ARO and its assets not
specifically set forth in Section 3.2, including accounting,
engineering, planning, financial, reporting, public relations,
governmental, technical services and such other services necessary for
ARO to continue its business and operations.
(p) Tax. Prepare or cause to be prepared all required tax
filings and retain all legal and accounting professionals as deemed
necessary by BDSI.
(q) Legal Proceedings. Institute or defend claims and other
legal actions or proceedings relating to ARO or its accounts or
operations. BDSI shall have the right to select the legal counsel.
(r) Other. Provide such other services and support consistent
with the foregoing duties and obligations.
3.3 SUPERVISION OF BDSI. ARO has entered into this Agreement to
delegate the day-to-day management of ARO to BDSI as an agent of ARO subject to
the control and supervision of ARO's Board of Directors and subject to the
various provisions contained within this Agreement.
The Parties agree that:
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(a) All actions of BDSI undertaken pursuant to this Agreement
shall be subject to the general direction of ARO's Board of Directors,
and BDSI shall promptly respond to all notices, requests or inquiries
from ARO's Board of Directors to permit ARO to direct BDSI's
performance of the Management Services. ARO, however, shall not have
the right to exercise control over BDSI's day-to-day actions in
providing Management Services under this Agreement;
(b) BDSI shall not be obligated to perform the Management
Services or any other or additional act for, or on behalf of, ARO
requiring it to incur, directly or indirectly, any cost or expense
which is not paid for, or reimbursed by, ARO pursuant to Article hereof
except as provided herein; and
(c) All activities, duties and responsibilities not
specifically retained by ARO are hereby delegated to BDSI; provided,
however, that ARO may at any time and from time to time perform
activities, duties and responsibilities not specifically delegated to
BDSI in this Agreement by notifying BDSI of such activity, duty and
responsibility to be performed by ARO.
3.4 SPECIAL SERVICES. In addition to the Management Services set out in
Section 3.2, ARO may request additional services which, if agreed to in writing
by BDSI, shall be subject to additional billing in an amount mutually agreed on
by BDSI and ARO.
3.5 FILES AND RECORDS. All files and records maintained by BDSI
regarding ARO's assets shall be the property of BDSI. However, ARO shall be
entitled to review BDSI's files from time to time during regular business hours
and shall be entitled (at ARO's sole cost and expense) to copies of such files
to the extent such files affect ARO's assets.
3.6 BILLING AND PAYMENT. BDSI shall submit an invoice on or before the
fifteenth (15th) day of each month. The invoice shall specify the amounts due to
BDSI by ARO including, without limitation, the Management Fee for the month and
any other amounts which may be due to BDSI by ARO pursuant to this Agreement.
All invoices rendered to ARO shall be due and payable within twenty (20) days
following receipt thereof.
ARTICLE 4
MANAGEMENT FEE
4.1 MANAGEMENT FEE. In consideration for the performance of the
Management Services by BDSI, ARO shall pay to BDSI a fee (the "Management Fee")
equal to ONE MILLION AND NO/100 DOLLARS ($1,000,000) per year, payable in
monthly installments of EIGHTY-THREE THOUSAND THREE HUNDRED THIRTY-THREE DOLLARS
($83,333).
4.2 SUPPLEMENTAL SERVICES FEES. Fees, if any, for special services
pursuant to Section 3.4 are in addition to the Management Fee.
4.3 MISCELLANEOUS EXPENSES. The Management Fee shall be inclusive of
all reasonable out-of-pocket expenses, administrative support costs (including,
without limitation, costs related to
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the operation of ARO's Metairie, Louisiana office) and other costs other than
those specified in this Agreement or charged by outside tax, legal, engineering
and other professional advisers appointed by BDSI pursuant to this Agreement or
otherwise approved by ARO. Such charges by outside consultants shall be borne
directly by ARO or, if paid by BDSI, shall be reimbursed by ARO on receipt of a
copy of the relevant invoice from BDSI.
4.4 REMEDIES FOR FAILURE TO PAY. In the event that ARO shall fail to
pay any invoice for the Management Fee or any other amount due to BDSI under
this Agreement by the date it is due:
(a) Interest. Except as to any portions of the applicable past
due amounts that are subject to a bona fide dispute by ARO of which ARO
has advised BDSI in writing, BDSI shall be entitled to receive interest
on any such past due amounts at a monthly rate equal to the lesser of
(x) the prime rate (or reference rate, as the case may be) per annum of
Chase Bank of Texas plus two percent (2%) per annum or (y) the maximum
non-usurious rate permitted under applicable law; and
(b) Cost of Collection. BDSI shall be entitled to receive
reimbursement from ARO for any and all costs and expenses incurred in
collecting past due amounts from ARO, including without limitation
attorney's fees, legal expenses and court costs.
ARTICLE 5
INDEMNITY
5.1 BDSI'S INDEMNIFICATION. TO THE EXTENT PERMITTED BY LAW AND
NOTWITHSTANDING ANY OTHER TERM OF THIS AGREEMENT OR ANY JOINT OPERATING
AGREEMENT TO THE CONTRARY, BDSI, FROM AND AFTER THE COMMENCEMENT DATE, SHALL
DEFEND, INDEMNIFY AND HOLD ARO HARMLESS FROM AND AGAINST ANY AND ALL DAMAGE,
LOSS, COST, EXPENSE, OBLIGATION, CLAIM OR LIABILITY, INCLUDING REASONABLE
COUNSEL FEES AND REASONABLE EXPENSES OF INVESTIGATING, DEFENDING AND PROSECUTING
LITIGATION (COLLECTIVELY, "LIABILITY") SUFFERED BY ARO AS A RESULT OF (i) ANY
MATERIAL BREACH OF THIS AGREEMENT BY BDSI EXCEPT TO THE EXTENT BDSI IS
EXCULPATED FROM LIABILITY FROM SUCH BREACH UNDER THE EXPRESS TERMS OF THIS
AGREEMENT WHICH PRESCRIBE STANDARDS OF CARE BY WHICH BDSI MUST PERFORM HEREUNDER
OR (ii) ANY ACT OF FRAUD, WILLFUL MISCONDUCT OR GROSS NEGLIGENCE OF BDSI.
5.2 ARO'S INDEMNIFICATION. TO THE EXTENT PERMITTED BY LAW AND
NOTWITHSTANDING ANY OTHER TERM OF THIS AGREEMENT OR ANY JOINT OPERATING
AGREEMENT TO THE CONTRARY, ARO, FROM AND AFTER THE COMMENCEMENT DATE, SHALL
DEFEND, INDEMNIFY AND HOLD BDSI HARMLESS FROM AND AGAINST ANY AND ALL LIABILITY
SUFFERED BY BDSI AS A RESULT OF ITS PERFORMANCE UNDER THIS AGREEMENT, OTHER THAN
SUCH LIABILITY THAT ARISES AS A RESULT OF (i) ANY MATERIAL BREACH OF THIS
AGREEMENT BY BDSI OR (ii) ANY ACT OF FRAUD, WILLFUL MISCONDUCT OR GROSS
NEGLIGENCE OF BDSI, BUT INCLUDING WITHOUT LIMITATION LIABILITIES ARISING OUT OF
THE SOLE OR
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CONCURRENT NEGLIGENCE (BUT NOT GROSS NEGLIGENCE) OF BDSI OR BDSI'S STRICT
LIABILITY OR THE CONDITION OF THE ASSETS.
5.3 NO ASSUMPTION OF LIABILITIES. BDSI has not assumed or accepted any
liability for any of the obligations, debts or liabilities of ARO either related
to ARO's assets or otherwise. ARO has not assumed or accepted any liability for
any of the obligations, debts or liabilities of BDSI either related to ARO's
assets or otherwise.
ARTICLE 6
CONFIDENTIALITY
The Parties hereto agree to hold the Confidential Information in the
strictest of confidence and shall not disclose such Confidential Information to
any third Party. Further, each Party agrees not to copy or reproduce the
Confidential Information without the prior written consent of the other Party
hereto. However, a Party may disclose the Confidential Information to its
respective responsible officers, directors, employees, consultants, commercial
lenders, and legal counsel, but only to the extent necessary to carry out the
purposes for which the Confidential Information was disclosed, and each Party
agrees to instruct all such persons not to disclose such Confidential
Information to third Parties without the prior written consent of the other
Party hereto. The obligations set out in this Article 6 shall not apply to
Confidential Information (if any) which is already known to a Party hereto at
the time that it is disclosed, or which, before being divulged by the receiving
Party: (a) has become publicly known through no wrongful act of the receiving
Party; (b) has been rightfully received from a third Party without restriction
on disclosure and without breach of this Article 6; (c) has been independently
developed by the receiving Party; (d) has been approved for release by written
authorization of the non-receiving Party; or (e) has been disclosed pursuant to
requirements of a governmental agency, a law, or an order of a court having
competent jurisdiction. The Parties hereby acknowledge that the unauthorized
disclosure or use of such Confidential Information could cause irreparable harm
and significant injury, the extent of which may be difficult or impossible to
ascertain. Accordingly, the Parties agree that each shall have the right to seek
an immediate injunction enjoining any breach of this Article 6. The Parties
recognize and agree that nothing contained in this Agreement shall be construed
as granting any rights, by way of license or otherwise, to any Confidential
Information disclosed pursuant to this Agreement. All analyses, compilations,
studies and other documents which are prepared for the internal use of a Party
and which reflect any of the Confidential Information will be kept confidential
to the same extent as the Confidential Information.
ARTICLE 7
CONFLICTS
ARO acknowledges that BDSI or its affiliates (other than ARO) may own,
manage and operate additional oil and gas properties and interest in the future
that may compete with ARO's business. Specifically, BDSI or its affiliates
(other than ARO) may own or acquire interest in the oil and gas properties
comprising ARO's assets or in oil and gas properties adjacent to or in the
vicinity of ARO's assets. ARO acknowledges and agrees that neither BDSI or its
affiliates shall have no liability or accountability to ARO for any such
competing activities or interests or any profits or value generated therefrom.
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ARTICLE 8
ACCESS AND AUDIT
8.1 BOOKS AND RECORDS. All books, records, files, data and other
information relating to ARO's assets or the operation of this Agreement shall be
available for inspection by ARO and its employees and agents during normal
business hours on three (3) Business Days prior notice; provided, however, to
the extent possible, BDSI shall provide ARO's employees with inspection rights
for less substantial reviews upon receipt of reasonable notice.
8.2 RIGHT TO AUDIT. ARO by itself or through its appointed
representatives shall have the right to audit the above mentioned books and
records not more than once per year on sixty (60) days prior notice and for
twenty four (24) months after the termination of this Agreement.
8.3 MAINTENANCE OF RECORDS. BDSI shall maintain and make available for
the purposes of audit all books and records of account and supporting
documentation for a period of at least twenty four (24) months following the end
of the year to which they relate. Thereafter they shall be presumed to be
correct save to the extent that exceptions have been raised by ARO as a result
of any audit. In the event of any dispute, the Parties shall agree on the
appointment of an independent, nationally recognized firm of accountants who
shall be appointed to adjudicate the dispute and whose decision shall be final
and binding in the absence of manifest error. In connection with any such
dispute, the unsuccessful Party shall be responsible for all third Party costs
incurred with respect to such adjudication and each Party shall be responsible
for their own costs incurred in connection with the adjudication of such
dispute.
ARTICLE 9
RELATIONSHIPS OF THE PARTIES
9.1 RELATIONSHIPS. BDSI shall perform its duties hereunder as an
independent contractor and it is expressly agreed that this Agreement shall not
create a partnership, joint venture or association. This Agreement shall not
impose a fiduciary duty, or any other heightened standard, upon BDSI in the
performance of its duties hereunder. All matters pertaining to the employment,
supervision, compensation, promotion and discharge of any employees or personnel
of BDSI are the responsibility of BDSI, which is in all respects the employer of
such employees. All such employment arrangements are solely BDSI's concern and
ARO shall have no liability with respect thereto.
9.2 TAXATION. This Agreement is not intended to create, and shall not
be construed to create, a relationship, a partnership, or an association for
profit between or among the Parties. Notwithstanding any provisions herein that
the rights and liabilities hereunder are several and not joint or collective, or
that this Agreement and operations hereunder shall not constitute a partnership,
if for federal income tax purposes, this Agreement and the operation hereunder
are regarded as a partnership, each Party thereby affected elects to be excluded
from the application of all of the provisions of Subchapter "K", Chapter 1,
Subtitle "A", of the Internal Revenue Code of 1986, as amended (the "Code"), as
permitted and authorized by Section 761 of the Code and the regulations
promulgated thereunder. BDSI is authorized and directed to execute on behalf of
each Party hereby affected such evidence of this election as may be required by
the Secretary of the Treasury of the United States or the Federal Internal
Revenue Service ("IRS"), including, specifically, but not by way
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of limitation, all of the returns, statements, and the data required by Federal
Regulation 1.761(2). Should there be any requirements that each Party hereby
affected give further evidence of this election, each such Party shall execute
such documents and furnish such other evidence as may be required by the IRS or
as may be necessary to evidence this election. No Party shall give any notices
or take any other action inconsistent with the election made hereby. If any
present or future income tax laws of the State or States in which the area
covered by this Agreement is located or any future income tax laws of the United
States contain provisions similar to those in Subchapter "K", Chapter 1,
Subtitle "A", of the Code, under which an election similar to that provided by
Section 761 of the Code is permitted, each Party hereby affected shall make such
election as may be permitted or required by such laws. In making the foregoing
election, each Party states that the income derived by such Party from
operations hereunder can be adequately determined without the computation of
partnership taxable income.
ARTICLE 10
REPRESENTATION AND WARRANTIES
10.1 REPRESENTATION AND WARRANTIES OF BDSI. BDSI agrees and represents
and warrants to ARO as follows:
(a) Organization. BDSI is a corporation duly organized,
validly existing and in good standing under the laws of the State of
Delaware.
(b) Authority and Conflicts. BDSI has full corporate power and
authority to carry on its business as presently conducted, to enter
into this Agreement and to perform its obligations under this
Agreement. The execution and delivery of this Agreement by BDSI does
not, and the consummation of the transactions contemplated by this
Agreement shall not, (i) violate or be in conflict with, or require the
consent of any person or entity under, any provision of BDSI's
Certificate of Incorporation or other governing documents, (ii)
conflict with, result in a breach of, constitute a default (or an event
that with the lapse of time or notice, or both, would constitute a
default) under, or require any consent, authorization or approval under
any agreement or instrument to which BDSI is a Party or is bound, or
(iii) violate any provision of or require any consent, authorization or
approval under any judgment, decree, judicial or administrative order,
award, writ, injunction, statute, rule or regulation applicable to
BDSI.
(c) Authorization. The execution and delivery of this
Agreement have been and the performance of this Agreement and the
transactions contemplated hereby shall be at the time required to be
performed hereunder, duly and validly authorized by all requisite
corporate action on the part of BDSI.
(d) Enforceability. This Agreement has been duly executed and
delivered on behalf of BDSI, and constitutes a legal, valid and binding
obligation of BDSI enforceable in accordance with its terms, except as
enforceability may be limited by Enforceability Limitations.
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10.2 REPRESENTATIONS AND WARRANTIES OF ARO. ARO represents and warrants
to BDSI as follows:
(a) Organization. ARO is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware
and is qualified to do business in and is in good standing under the
laws of each other state in which ARO's assets are located.
(b) Authority and Conflicts. ARO has full corporate power and
authority to carry on its business as presently conducted, to enter
into this Agreement and to perform its obligations under this
Agreement. The execution and delivery of this Agreement by ARO does
not, and the consummation of the transactions contemplated by this
Agreement shall not, (i) violate or be in conflict with, or require the
consent of any person or entity under, any provision of ARO's
Certificate of Incorporation or other governing documents, (ii)
conflict with, result in a breach of, constitute a default (or an event
that with the lapse of time or notice, or both would constitute a
default) under, or require any consent, authorization or approval under
any agreement or instrument to which ARO is a Party that affects ARO's
assets, or (iii) violate any provision of or require any consent,
authorization or approval under any judgment, decree, judicial or
administrative order, award, writ, injunction, statute, rule or
regulation applicable to ARO.
(c) Authorization. The execution and delivery of this
Agreement have been, and the performance of this Agreement and the
transactions contemplated hereby shall be at the time required to be
performed hereunder, duly and validly authorized by all requisite
corporate action on the part of ARO.
(d) Enforceability. This Agreement has been duly executed and
delivered on behalf of ARO and constitutes the legal, valid and binding
obligation of ARO enforceable in accordance with its terms, except as
enforceability may be limited by Enforceability Limitations.
(e) Compliance with Law and Permits. To the best of ARO's
knowledge except as disclosed in the Investment Agreement, ARO and its
assets are in compliance with the provisions and requirements of all
laws, rules, regulations, ordinances, orders, decisions and decrees of
all governmental authorities having jurisdiction with respect to its
assets or the ownership or operation of any thereof. To the best of
ARO's knowledge, except as disclosed in the Investment Agreement, all
necessary governmental permits, licenses, approvals, consents,
certificates and other authorizations with regard to the ownership of
its assets have been obtained and maintained in effect and no
violations exist or have been recorded in respect of such permits,
licenses, approvals, consents, certificates or authorizations. To the
best of ARO's knowledge, except as disclosed in the Investment
Agreement, none of the documents or materials filed with or furnished
to any governmental authority with respect to its assets or the
ownership thereof contains any untrue statement of a material fact or
omits any statement of a material fact necessary to make the statements
therein not misleading.
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ARTICLE 11
TERM
11.1 TERM. Unless sooner terminated pursuant to this Section 11.1, this
Agreement shall be effective as of the Commencement Date and shall continue in
force for the remainder of 1999 and all of 2000 and shall continue thereafter
for each subsequent calendar year on a year-to-year basis (each calendar year
beginning with 1999 being an "Agreement Year") until terminated by either BDSI
or ARO by providing written notice of such termination thirty (30) days prior to
the end of an Agreement Year. This Agreement shall terminate at the close of
business on the last day (the "Termination Date") of the Agreement Year in which
proper notice of termination was given by either Party hereto. In addition, in
the event either BDSI or ARO fails to comply with any of the terms and
conditions of this Agreement or breaches any representation contained herein and
such failure or breach continues for ten (10) days after the delivery of written
notice, the defaulting party will be liable for any and all costs, expenses,
losses or liabilities sustained or incurred by the non-defaulting party.
Notwithstanding any termination of this Agreement, BDSI and ARO expressly agree
that all provisions of this Agreement that contemplate performance after the
expiration or earlier termination hereof shall survive such expiration or
earlier termination of this Agreement.
11.2 HOLD OVER. Notwithstanding the terms of Section 12.1 above, if ARO
desires it and ARO notifies BDSI in writing of such desire at least fifteen (15)
days prior to the scheduled Termination Date, then this Agreement shall be
extended and not terminated for a period of up to six (6) calendar months in
order to allow ARO to identify and contract with a replacement service provider.
During such hold over period, all of the provisions of this Agreement shall
apply in a manner modified to be consistent with such shortened Agreement Year;
provided, however, BDSI shall be entitled to receive an upwards adjustment of
the Management Fee of not less than ten percent (10%) should such period of the
extension of this Agreement exceed three (3) calendar months.
ARTICLE 12
NOTICES
All notices required or permitted under this Agreement shall be in
writing and, (i) if by air courier, shall be deemed to have been given one (1)
Business Day after the date deposited with a recognized carrier of overnight
mail, with all freight or other charges prepaid, (ii) if by telegram, shall be
deemed to have been given one Business Day after delivered to the wire service,
(iii) if by telex, provided an answer back is received, shall be deemed to have
been given when sent, (iv) if mailed, shall be deemed to have been given three
(3) Business Days after the date when sent by registered or certified mail,
postage prepaid, and (v) if sent by telecopier, shall be deemed to have been
given when sent, addressed as follows:
ARO: American Resources Offshore, Inc.
160 Morgan Street
Versailles, Kentucky 40383
Attention: President
Telecopier: (606) 873-4689
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BDSI: Blue Dolphin Services, Inc.
801 Travis, Suite 2100
Houston, Texas 77002
Attention: G. Brian Lloyd, Vice President
Telecopier: (713) 227-7626
Either Party to this Agreement may change the address provided for
above by notifying the other Party in writing at least thirty (30) days prior to
the date such address change shall become effective.
ARTICLE 13
GENERAL
13.1 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS WITHOUT GIVING EFFECT TO ANY
PRINCIPLES OR CONFLICTS OR LAWS.
13.2 ASSIGNMENT. No assignment of this Agreement or any of the rights
or obligations set forth herein by either Party shall be valid without the
specific written consent of the other Party.
13.3 INTEGRATION. This Agreement, the Exhibits hereto and the other
agreements to be entered into by the Parties under the provisions of this
Agreement, if any, set forth the entire agreement and understanding of the
Parties in respect of the transactions contemplated hereby and supersede all
prior agreements, prior arrangements and prior understandings relating to the
subject matter hereof.
13.4 WAIVER OR MODIFICATION. This Agreement may be amended, modified,
superseded or canceled, and any of the terms, covenants, representations,
warranties or conditions hereof may be waived, only by a written instrument
executed by a duly authorized officer of BDSI and ARO, or, in the case of a
waiver or consent, by or on behalf of the Party or Parties waiving compliance or
giving such consent. The failure of any Party at any time or times to require
performance of any provision hereof shall in no manner affect its right at a
later time to enforce the same. No waiver by any Party of any condition, or of
any breach of any covenant, agreement, representation or warranty contained in
this Agreement, in any one or more instances, shall be deemed to be or construed
as a further or continuing waiver of any such condition or breach or waiver of
any other condition or of any breach of any other covenant, agreement,
representation or warranty.
13.5 INVALID PROVISIONS. If any provision of this Agreement is held to
be illegal, invalid or unenforceable under present or future laws effective
during the term hereof, such provision shall be fully severable; this Agreement
shall be construed and enforced as if such illegal, invalid or unenforceable
provision had never comprised a part hereof; and the remaining provisions of
this Agreement shall remain in full force and effect and shall not be affected
by the illegal, invalid or unenforceable provision or by its severance from this
Agreement.
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13.6 FORCE MAJEURE. The Parties hereto shall be excused for failure to
perform the respective obligations hereunder (other than a failure relating to
payment obligations imposed hereunder) to the extent that such failure is
directly or indirectly caused by an occurrence commonly known as force majeure,
including, without limitation, delays arising from fire, earthquake, flood or
other acts of God, acts or orders of a government, agency or instrumentality
thereof, acts of a public enemy, riots, embargoes, strikes or other consorted
acts of workers, casualties or accidents, failure or delay in deliveries or
materials or transportation, shortages of labor or materials, communications
failure or any other causes, circumstances or contingencies, that are beyond the
reasonable control of the Party unable to perform. The Party claiming a force
majeure event shall, to the extent reasonably possible, remedy such force
majeure event with all reasonable dispatch.
13.7 MULTIPLE COUNTERPARTS. This Agreement may be executed in a number
of identical counterparts, each of which for all purposes is to be deemed an
original, and all of which constitute, collectively, one agreement; but in
making proof of this Agreement, it shall not be necessary to produce or account
for more than one such counterpart.
13.8 DISPUTE RESOLUTION. All disputes among BDSI and ARO arising out of
any matters which are the subject of this Agreement shall be resolved through
the mediation and binding arbitration procedure set forth in Exhibit A.
Compliance with this Section 14.8 and the procedures set forth in Exhibit A
shall constitute a condition precedent to either Party seeking judicial
enforcement of any provisions of this Agreement. The Parties agree that the
provisions of Exhibit A are a severable, independent arbitration agreement
separately enforceable from the remainder of this Agreement.
EXECUTED as of the date first set forth above.
AMERICAN RESOURCES OFFSHORE, INC.
By:
------------------------------------
Printed Name:
--------------------------
Title:
---------------------------------
BLUE DOLPHIN SERVICES, INC.
By:
------------------------------------
Printed Name:
--------------------------
Title:
---------------------------------
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EXHIBIT A
ATTACHED TO AND MADE A PART OF
MANAGEMENT AND ADMINISTRATIVE SERVICES AGREEMENT
DATED ________________, 1999,
BETWEEN BLUE DOLPHIN SERVICES, INC. AND AMERICAN RESOURCES OFFSHORE, INC.
DISPUTE RESOLUTION PROCEDURES
Upon the occurrence of any dispute between BDSI and ARO in connection with their
rights and obligations under this Agreement, BDSI and ARO will first attempt in
good faith to resolve all disputes by negotiations between management level
persons who have authority to settle the controversy. If either Party believes
further negotiations are futile, such Party may initiate mediation by so
notifying the other Party in writing. Both Parties shall then attempt in good
faith to resolve the dispute by mediation in Houston, Texas, employing
management level persons with authority to settle the dispute, in accordance
with the Center for Public Resources Model Procedure for Mediation of Business
Disputes, as such procedure may be modified by agreement of the Parties. If the
dispute has not been resolved pursuant to mediation within sixty (60) days after
initiating the mediation process, the dispute shall be finally resolved through
binding arbitration, as follows:
(1) If any dispute or controversy shall arise between the Parties out of
this Agreement, the alleged breach thereof or any tort in connection
therewith, or out of the refusal to perform the whole or any part
thereof, and the Parties shall be unable to agree with respect to the
matter or matters in dispute or controversy, the same shall be
submitted to arbitration before a panel of arbitrators in accordance
with the Texas General Arbitration Act, V.A.C.S. art. 224, et. seq. and
the provisions of this Exhibit A. The panel of arbitrators shall be
chosen as follows: Upon the written demand of either Party and within
ten (10) working days from the date of such demand, each Party shall
name an arbitrator and these two so named shall promptly thereafter
choose a third. If either Party shall fail to name an arbitrator within
ten (10) working days from such demand, the other Party shall name the
second arbitrator as well as the first, or if the two arbitrators shall
fail within ten (10) working days from their appointment to agree upon
and appoint the third arbitrator, then upon written application by
either Party such third arbitrator may be appointed by the senior Judge
in active service of the United States District Court for the Southern
District of Texas; and if said Judge shall fail to act, then such third
arbitrator shall be appointed by the President of the Center for Public
Resources, Inc. The arbitrators selected to act hereunder shall be
qualified by education, experience, and training to pass upon the
particular matter or matters in dispute.
(2) The panel of arbitrators so chosen shall proceed promptly to hear and
determine the matter or matters in dispute, after giving the Parties
due notice of hearing and a reasonable opportunity to be heard. The
procedure of the arbitration proceedings shall be in accordance with
the Center for Public Resources Rules for Non-Administered Arbitration
of Business Disputes, as may be modified by the panel of arbitrators.
Unless otherwise determined by the arbitrators, the hearing and
presentations of the Parties shall not exceed two days cumulative. The
location of all arbitration proceedings hereunder shall be Houston,
Texas, unless the panel of arbitrators determines that another venue is
more appropriate. The award of the
Exhibit A, Page 1
<PAGE> 233
panel of arbitrators or a majority thereof shall be made within
forty-five (45) days after the appointment of the third arbitrator,
subject to any reasonable delay due to unforeseen circumstances. In the
event of the panel or a majority thereof failing to make an award
within sixty (60) days after the appointment of the third arbitrator,
new arbitrators may at the election of either Party be chosen in like
manner as if none had been previously selected.
(3) The award of the arbitrators, or a majority thereof, shall be in
writing and shall be final and binding on the Parties as to the
question or questions submitted, and the Parties shall abide by such
award and perform the conditions thereof. The award of the arbitrators
shall be based on the applicable law and facts, the merits of the
Parties' positions in the controversy or dispute, and the arbitrators'
assessment of the fairness and reasonableness of any settlement
proposal of any Party. The award shall not provide or create any rights
or benefits in any person or entity which is not a Party to this
Agreement, as this Agreement and any arbitration thereunder shall not
be construed as a third Party beneficiary contract. Unless otherwise
determined by the arbitrators, all expenses in connection with such
arbitration shall be divided equally between the Parties thereto,
except that the expenses of counsel, witnesses, and employees of each
Party shall be borne solely by the Party incurring them, and the
compensation of any arbitrator named by a Party shall be borne solely
by such Party; provided that if court proceedings to stay litigation or
compel arbitration are necessary, the Party who unsuccessfully opposes
such proceedings shall pay all reasonable associated costs, expenses
and attorney's fees of such court proceedings.
(4) The arbitrators shall not be required to explain reasons for the award,
but may do so. No transcript or other recording shall be made of the
arbitration proceedings. Except (i) in connection with a suit for
enforcement of the award, (ii) as required by law, court order or
regulation, (iii) when reasonably necessary to explain the terms and
conditions of the award to outside attorneys, auditors, and insurers,
or (iv) as part of good faith compliance with disclosure obligations
under applicable law, the arbitration proceedings, the award, and the
Parties' actions in connection with the arbitration are confidential
and shall not be disclosed to third Parties, and no disclosure of or
reference to the arbitration, the award, or of the Parties' statements
or actions in connection with the arbitration shall be made to any
third Party. All offers, promises, conduct, statements, and evidence,
whether oral or written, made in the course of the arbitration by any
of the Parties, their agents, employees, experts, or attorneys are
confidential. Such offers, promises, conduct, statements, and evidence
shall be considered inadmissible under Rule 408 of the Federal Rules of
Evidence and any similar state provisions, and shall be inadmissible
for any purpose, including impeachment. However, evidence that is
otherwise admissible shall not be rendered inadmissible as a result of
its use in the arbitration.
(5) The award of the panel of arbitrators and the obligation to abide by
same and perform the conditions thereof shall be enforceable in the
state district courts in Harris County, Texas, or in any federal court
having jurisdiction. Each Party shall bear its own attorneys' fees in
connection with any appeal or enforcement of an arbitration award, or
in any other court litigation arising out of this Agreement.
Exhibit A, Page 2
<PAGE> 234
(6) The provisions of this Exhibit A shall not limit the obligation of a
Party to defend, indemnify of hold harmless the other Party against
court proceedings or other claims, losses, damages or expenses as
provided in Article 5 of the Management and Administrative Services
Agreement to which this Agreement is attached as Exhibit B.
Exhibit A, Page 3
<PAGE> 235
APPENDIX E
CONSULTING AGREEMENT
<PAGE> 236
EXECUTION VERSION
CONSULTING AGREEMENT
This Consulting Agreement (this "Agreement"), is entered into as of the
30th day of July, 1999, by and between American Resources Offshore, Inc., a
Delaware corporation, ("ARO") and MAP II, L.L.C., a Kentucky limited liability
company ("Consultant"). ARO and Consultant may be referred to herein as
collectively, the "Parties" or individually as a "Party".
RECITALS:
A. As a condition to closing the transactions between ARO and Blue
Dolphin Exploration Company pursuant to that certain Investment Agreement dated
effective as of July, 1999, (the "Investment Agreement"), ARO has agreed to
enter into a consulting agreement with Consultant.
B. The Parties desire to enter into an agreement setting forth the terms
and conditions under which Consultant will provide services to ARO in
fulfillment of the conditions of the Investment Agreement.
NOW, THEREFORE, for and in consideration of these premises and of the
mutual covenants and agreements set out herein, the Parties agree as follows:
AGREEMENTS:
1. Services as a Consultant. ARO does hereby agree to employ, and
Consultant agrees to provide, the services of Consultant, such services to be
performed in the capacity of a consulting representative in connection with the
ongoing business of ARO. The services to be provided by Consultant to ARO
pursuant to this Agreement shall include the following:
(a) Advising and consulting with ARO from time to time as reasonably
requested by ARO or its duly authorized representatives in connection with
the ongoing operations and development of the business of ARO;
(b) Advising and consulting with ARO in the preparation of filings
required with the Securities and Exchange Commission;
(c) Advising and consulting with ARO in connection with all financial
reporting;
(d) Advising and consulting with ARO in connection with the conduct
of audits of ARO by ARO's auditors; and
<PAGE> 237
(e) Make available, from time to time and with reasonable notice, the
services of Rick Avare, David Stetson, Ralph Curry and Karen Underwood in
connection with the consulting services provided for in (a)-(d) above.
Notwithstanding the foregoing, if any of the above referenced individuals
(i) terminates his or her employment with consultant or (ii) dies or
becomes incapacitated rendering such individual unable to perform the
services, this Agreement shall not be terminated and the compensation
provided for in paragraph 4 below shall not be reduced by ARO so long as
the services can be and are performed by any one of the individuals
specified.
2. No Management Responsibility. Consultant assumes no responsibility
under this Agreement other than to render the consulting services provided for
herein in good faith. This Agreement does not delegate to Consultant any
management responsibility or decision-making powers with respect to ARO.
3. Term. This Agreement shall commence upon the closing of the
transactions contemplated by the Investment Agreement and shall continue until
February 28, 2001 (the "Term of Employment") unless sooner terminated pursuant
to the provisions of this Agreement.
4. Compensation. ARO shall pay to Consultant during the term of this
Agreement a fee of $35,000 per month for services rendered pursuant to this
Agreement by Consultant. In the event the term of this Agreement commences after
the first day of any month, the compensation to be paid to Consultant for the
partial month shall be proportionately reduced. Consultant shall not participate
in any group health, accident and life insurance plans, or any pension or other
benefit plan sponsored by ARO. In performing the consulting services, Consultant
shall not be required to incur any out-of-pocket expenses unless ARO has agreed
to reimburse Consultant for each out-of-pocket expense.
5. Non-Exclusive Services. Consultant and ARO agree that the services
provided hereunder are not being provided on a "full time" basis and that,
during the term of this Agreement, Consultant shall be free to do any work,
perform any services, or serve as a consultant for a third party unless such
activity would cause or be a conflict of interest with ARO.
6. Confidentiality. Consultant recognizes that during the term of this
Agreement, Consultant may have access to confidential and proprietary
information and trade secrets of ARO. Consultant agrees that he will not
divulge, distribute or disseminate any such information to any third party
during the term of this Agreement or for any period thereafter.
7. Personal Services Contract. Consultant acknowledges and agrees that
this Agreement is a personal services contract and may not be assigned by
Consultant.
8. Termination. This Agreement may be terminated prior to the end of the
Term of Employment as follows:
(a) By the Parties upon the mutual written consent of both Parties;
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<PAGE> 238
(b) By ARO if Consultant (i) breaches any covenant, term or condition
contained in this Agreement (ii) commits an act of theft, fraud or
dishonesty against ARO or (iii) fails or refuses to perform the services to
be provided by Consultant pursuant to this Agreement;
(c) By Consultant if ARO breaches any covenant, term or condition of
this Agreement; and
(d) Pursuant to the terms of paragraph 4 above.
If this Agreement is terminated pursuant to (a), (b) or (c) above, any
obligations of ARO to pay consulting fees to Consultant as provided herein,
shall terminate effective as of the date of termination of this Agreement, said
fees to be prorated through the date of termination. If Consultant terminates
this Agreement pursuant (c) above, Consultant shall be entitled to the fees that
would be due to Consultant during the remainder of the term of this Agreement,
if, and only if, the breach of this Agreement by ARO which has occurred giving
rise to Consultant's termination pursuant to (c) above is the non-payment of
fees or expenses to which Consultant is entitled and such breach has continued
for a period of ninety (90) consecutive days.
9. Miscellaneous.
9.1 Independent Contractor. Nothing contained in this Agreement
shall be construed to as a partnership agreement and Consultant shall not be
deemed to be an employee or agent of ARO. Neither Party has any authority to
bind the other in any respect, it being intended that Consultant is an
independent contractor responsible for his own actions.
9.2 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS. ARO AND CONSULTANT
AGREE THAT IN THE EVENT OF A DISPUTE ARISING BETWEEN THE PARTIES, THE PARTIES
AGREE TO SUBJECT THEMSELVES TO THE JURISDICTION OF THE DISTRICT COURTS OF HARRIS
COUNTY, TEXAS, AND THE FEDERAL DISTRICT COURTS FOR THE SOUTHERN DISTRICT OF
TEXAS, HOUSTON DIVISION.
9.3 Modifications. No provision of this Agreement may be changed
or modified, except by written agreement signed by the Parties.
9.4 Legal Compliance. Consultant agrees to abide by all
applicable laws and regulations, both state and federal, in the performance of
his duties pursuant to this Agreement.
9.5 Entire Agreement. This Agreement contains the entire
understanding of the Parties in connection with the subject matter hereof and
supersedes all previous verbal or written agreements.
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<PAGE> 239
9.6 Notices. Any notice required or permitted to be given under
this Agreement shall be in writing and shall be considered to have been given if
sent by certified mail to Consultant at:
MAP II, L.L.C.
1532 Lakewood Drive
Lexington, Kentucky 40502
and to ARO at:
American Resources Offshore, Inc.
c/o Blue Dolphin Services, Inc.
801 Travis, Suite 2100
Houston, Texas 77002
Attention: John P. Atwood
Telecopier: (713) 227-7626
9.7 Invalidity. If any of the provisions of this Agreement
shall be held invalid, such invalidity shall not affect any other provisions
which can be given effect without the invalid provisions and to this end, the
provisions of this Agreement are intended to be and shall be deemed severable.
9.8 Descriptive Headings. The descriptive headings of the
several sections of this Agreement are inserted for convenience only and shall
not control or affect the meaning or construction of any provision hereof.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK)
4
<PAGE> 240
IN WITNESS THEREOF, this Agreement has been executed as of the date first
written above.
AMERICAN RESOURCES OFFSHORE, INC.
By: /s/ David Stetson
------------------------------------
Printed Name: David Stetson
--------------------------
Title: V.P. & General Counsel
---------------------------------
MAP II, L.L.C.
By: /s/ Rick G. Avare
------------------------------------
Printed Name: Rick G. Avare
--------------------------
Title: Administrative Member
---------------------------------
The undersigned hereby executes this Agreement for the sole purpose of
guaranteeing the payments to be made by ARO to Consultant as provided in
paragraph 4.
BLUE DOLPHIN EXPLORATION COMPANY
/s/ John P. Atwood
----------------------------------------
John P. Atwood, Vice President
----------------------------------------
Finance & Corporate Development
----------------------------------------
<PAGE> 241
(FRONT SIDE OF PROXY CARD)
PROXY AMERICAN RESOURCES OFFSHORE, INC. PROXY
PROXY SOLICITATION ON BEHALF OF THE BOARD OF DIRECTORS FOR THE
1999 ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON WEDNESDAY, DECEMBER 1, 1999
The undersigned stockholder of American Resources Offshore, Inc., a
Delaware corporation (the "Company"), hereby appoints Rick G. Avare and David J.
Stetson, and each of them, with full power of substitution, the attorneys and
proxies of the undersigned to vote all of the shares of Common Stock, par value
$.00001 per share, and Series 1993 8% Convertible Preferred Stock, par value
$12.00 per share, of the Company which the undersigned is entitled to vote at
the Annual Meeting of Stockholders of the Company to be held at the
Marriott Griffin Gate Resort, 1800 Newton Pike, Lexington, Kentucky 40511 on
December 1, 1999 at 4:00 p.m., Lexington time, and at any adjournments
thereof, as follows:
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR EACH OF THE
PROPOSALS AND FOR THE ELECTION OF THE NOMINEES SET FORTH ON THE REVERSE AS
DIRECTORS.
THIS PROXY IS TO BE VOTED AS DIRECTED. IN THE ABSENCE OF SPECIFIC DIRECTION,
THIS PROXY WILL BE VOTED FOR EACH OF THE PROPOSALS, FOR THE ELECTION OF IVAR
SIEM, MICHAEL J. JACOBSON, JOHN P. ATWOOD, ANDREW R. AGOSTO AND DOUGLAS L.
HAWTHORNE AS DIRECTORS FOR A ONE YEAR TERM COMMENCING UPON CLOSING OF THE
INVESTMENT AGREEMENT AND FOR THE ELECTION OF LEONARD K. NAVE, LEN ALDRIDGE AND
ROBERT L. MCINTYRE AS DIRECTORS FOR A THREE YEAR TERM OR UNTIL THE CLOSING OF
THE INVESTMENT AGREEMENT, WHICH EVER OCCURS FIRST.
IMPORTANT: SIGNATURE REQUIRED ON REVERSE SIDE
PLEASE DATE, SIGN AND MAIL YOUR
PROXY CARD BACK AS SOON AS POSSIBLE!
ANNUAL MEETING OF STOCKHOLDERS
AMERICAN RESOURCES OFFSHORE, INC.
DECEMBER 1, 1999
<PAGE> 242
(REVERSE SIDE OF PROXY CARD)
<TABLE>
<S> <C> <C> <C>
A |X| PLEASE MARK YOUR VOTES AS IN THIS EXAMPLE.
1. Approval of the Investment Agreement under which we will sell
to Blue Dolphin Exploration Company a number of shares of our
common stock equal to 75% of the combined voting power of all
of our outstanding voting securities after the issuance of the
shares to Blue Dolphin Exploration Company.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
2. Approval of the Purchase and Sale Agreement under which we
will sell to Fidelity Oil Holdings, Inc. an undivided 80% of
our interest in all of our assets in the Gulf of Mexico.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
3. Ratification of the sale of substantially all of our
Appalachian oil and gas properties and operations formerly
owned by our subsidiary, Southern Gas Co. of Delaware, Inc.,
to Nami Resources Company L.L.C.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
4. Ratification of the sale of the stock of our wholly-owned
subsidiary that formerly owned our Appalachian assets,
Southern Gas Co. of Delaware, Inc., to Southern Gas Holding
LLC which is controlled by Leonard K. Nave who is one of our
directors.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
5. Approval of an amendment to the Company's Amended and Restated
Certificate of Incorporation to increase the number of shares
of common stock that we are entitled to issue from 50,000,000
to 70,000,000 shares.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
6. If Proposal 1 is approved, to eliminate Article Eleven of our
Amended and Restated Certificate of Incorporation effective
with the closing of the Investment Agreement to end the
classification of our board of directors.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
FOR (except as WITHHOLD Nominees: Ivar Siem
marked to the VOTE Michael J. Jacobson
contrary below) John P. Atwood
7. Election of [ ] [ ] Andrew R. Agosto
Directors Douglas L. Hawthorne
If Proposals 1 and 6 are approved, the above nominees, if elected, will serve
for a one year term commencing upon closing of the Investment Agreement.
(INSTRUCTION: To withhold authority to vote for any individual nominee, print
that nominee's name on the line below.)
- --------------------------------------------------------------------------------
FOR (except as WITHHOLD Nominees: Leonard K. Nave
marked to the VOTE Len Aldridge
contrary below) Robert L. McIntyre
8. Election of [ ] [ ]
Directors
(INSTRUCTION: To withhold authority to vote for any individual nominee, print
that nominee's name on the line below.)
- --------------------------------------------------------------------------------
The above nominees, if elected, will serve for a three year term or until the
closing of the Investment Agreement, which ever occurs first.
9. Ratification of the selection of Ernst & Young LLP to serve
as independent auditors for the year ending December 31, 1999.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
10. As such proxies may in their discretion determine upon such other
matters (including procedural and other matters relating to the conduct
of the meeting), as may properly be presented to the annual meeting and
any adjournments or postponements thereof.
</TABLE>
THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE NOTICE OF ANNUAL MEETING OF
STOCKHOLDERS AND THE PROXY STATEMENT FURNISHED HEREWITH. PLEASE SIGN, DATE AND
RETURN THIS PROXY PROMPTLY IN THE ENCLOSED, PRE-ADDRESSED STAMPED ENVELOPE.
Signature(s) of Stockholder ___________________________________________________
Dated this ____ day of _____________, 1999
Note: Please sign exactly as your name appears on your stock certificate.
When signing as executor, administrator, trustee or other
representative, please give your full title. All joint owners should
sign.
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