<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report Pursuant
to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (date of earliest event reported):
OCTOBER 19, 1999
MIDDLE BAY OIL COMPANY, INC.
(Exact name of Registrant as specified in its charter)
ALABAMA 0-21702 63-1081013
- ------- ------- ----------
(State or other jurisdiction (Commission File (IRS Employer
of incorporation) Number) Identification No.)
1221 Lamar, Suite 1020, Houston, Texas 77010
(Address of principal executive offices and zip code)
(713) 759-6808
Registrant's telephone number, including area code
ITEM 5 - OTHER EVENTS
SECURITIES PURCHASE AGREEMENT
On October 19, 1999, Middle Bay Oil Company, Inc. ("Middle Bay") closed
the transactions contemplated by a Securities Purchase Agreement (the
"Securities Purchase Agreement") dated as of October 19, 1999 with The
Prudential Insurance Company of America ("Prudential").
Pursuant to the Securities Purchase Agreement, Prudential purchased
1,055,042 shares of newly issued Middle Bay common stock and five-year warrants
(the "Warrants") to purchase 798,677 shares of Middle Bay common stock at an
exercise price of $1.00 per share for a total purchase price of $2,373,844.
Additionally, Middle Bay issued Prudential a five-year senior subordinated
convertible promissory note in the principal amount of $2,373,844 (the "Note").
The Note is convertible at any time into Middle Bay common stock at
$3.00
1
<PAGE>
per share (a total of 791,282 shares of Middle Bay common stock).
Interest at nine percent (9%) per annum is payable on the Note quarterly.
Middle Bay may defer fifty percent (50%) of the first eight interest payments
and add them to the principal due at maturity. The Note is subordinate to
Middle Bay's bank credit facility. Prudential (as noteholder) must approve
certain changes including changes in the credit facility and corporate
structure of Middle Bay until the Note is paid.
Sixty percent (60%) of the Warrants may be exercised by Prudential at
any time. The remaining forty percent (40%) may be exercised incrementally over
the five-year term of the Warrants. The Warrants may be exercised for cash or
reduction of the Note principal.
PARTICIPATION RIGHTS AGREEMENT
In connection with the transaction, Middle Bay, Prudential and 3TEC
Energy Company, L.L.C. ("3TEC") entered into a Participation Rights Agreement
dated as of October 19, 1999 (the "Participation Rights Agreement"). 3TEC
owns 4,755,556 shares of Middle Bay common stock, warrants entitling 3TEC to
purchase 3,600,000 additional shares of common stock and a senior
subordinated promissory note in the principal amount of $10,700,000 ("3TEC
Note") convertible at the election of 3TEC into 3,566,666 additional shares
of common stock. Under the terms of the Participation Rights Agreement, if
3TEC or its affiliates propose to sell shares of Middle Bay common stock,
common stock equivalents or the 3TEC Note, Prudential is granted the right to
"tagalong" or participate in such sale. The tagalong rights granted to
Prudential with respect to future sales of Middle Bay securities by 3TEC do
not apply to (i) sales pursuant to a registered public offering or Rule 144
under the Securities Act of 1933, as amended, (ii) a sale to any of 3TEC's
affiliates or (iii) sales which do not involve more than 5% of the
outstanding common stock (on a fully-diluted basis). The amount of shares of
Middle Bay common stock or the Note which Prudential may sell or "tagalong"
shall not exceed the product of (i) the aggregate principal amount of the
3TEC Note, or the aggregate number of shares of Middle Bay common stock, or
common stock equivalent, as applicable, to be sold by 3TEC or its affiliate,
times (ii) a fraction, the numerator of which shall be an amount equal to the
number of shares of Middle Bay common stock (on a fully diluted basis) held
by Prudential, and the denominator of which shall be the number of shares of
Middle Bay common stock (on a fully diluted basis) held by 3TEC, its
affiliates and Prudential.
REGISTRATION RIGHTS AGREEMENT
Additionally, Middle Bay, 3TEC, Shoemaker Family Partners, L.P.,
Shoeinvest II, L.P. and Prudential entered into an Amendment to Registration
Rights Agreement (the "Amendment"). The Amendment added Prudential as a party
to the Registration Rights Agreement dated as of August 27, 1999 by and among
Middle Bay, 3TEC and
2
<PAGE>
certain other shareholders (the "Registration Rights Agreement"). Under the
terms of the Registration Rights Agreement, as amended by the Amendment,
3TEC, Shoemaker Family Partners, L.P., Shoeinvest II, L.P. and Prudential
have a three-time demand right to have their shares of Middle Bay common
stock registered with the Securities and Exchange Commission (at Middle Bay's
expense) and have "piggyback rights" (with certain other shareholders of
Middle Bay having subordinate piggyback rights) to have their shares of
Middle Bay common stock registered and publicly sold along with any public
offering of securities of Middle Bay.
A copy of the Securities Purchase Agreement is filed herewith as
Exhibit 10.1, a copy of the Amendment to Registration Rights is filed herewith
as Exhibit 10.2, and a copy of the Participation Rights Agreement is filed
herewith as Exhibit 10.3, and are all incorporated herein by reference. The
October 20, 1999 press release is filed herewith as Exhibit 99.1, and is
incorporated herein by reference.
ITEM 7 FINANCIAL STATEMENTS AND EXHIBITS
Exhibits. The following exhibits are filed herewith and are incorporated
herein by reference:
10.1 Securities Purchase Agreement between The Prudential Insurance Company
of America and Middle Bay Oil Company, Inc. dated October 19, 1999.
10.2 Amendment to Registration Rights Agreement by and among Middle Bay Oil
Company, Inc., 3TEC Energy Company L.L.C., f/k/a 3TEC Energy
Corporation, Shoemaker Family Partners, L.P., Shoeinvest II, LP, and
The Prudential Insurance Company of America, dated October 19, 1999.
10.3 Participation Rights Agreement by and among Middle Bay Oil Company,
Inc., The Prudential Insurance Company of America and 3TEC Energy
Company, L.L.C., dated October 19, 1999.
99.1 Press Release issued by the Registrant on October 20, 1999.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Middle Bay Oil Company, Inc.
(Registrant)
3
<PAGE>
Date: November 2, 1999 By: /s/ Floyd C. Wilson
--------------------
Floyd C. Wilson
President, Chief Executive Officer
and Chairman of the Board
EXHIBIT INDEX
Exhibit
10.1 Securities Purchase Agreement between The Prudential Insurance Company
of America and Middle Bay Oil Company, Inc. dated October 19, 1999.
10.2 Amendment to Registration Rights Agreement by and among Middle Bay Oil
Company, Inc., 3TEC Energy Company L.L.C., f/k/a 3TEC Energy
Corporation, Shoemaker Family Partners, L.P., Shoeinvest II, LP, and
The Prudential Insurance Company of America, dated October 19, 1999.
10.3 Participation Rights Agreement by and among Middle Bay Oil Company,
Inc., The Prudential Insurance Company of America and 3TEC Energy
Company, L.L.C., dated October 19, 1999.
99.1 Press Release issued by the Registrant on October 20, 1999.
4
<PAGE>
Exhibit 10.1
EXECUTION COPY
SECURITIES PURCHASE AGREEMENT
BETWEEN
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
AND
MIDDLE BAY OIL COMPANY, INC.
October 19, 1999
5
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE I
TERMS DEFINED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
SECTION 1.1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . .1
SECTION 1.2. ACCOUNTING TERMS AND DETERMINATIONS . . . . . . . . . . . . . 13
SECTION 1.3. GENDER AND NUMBER . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 1.4. REFERENCES TO AGREEMENT. . . . . . . . . . . . . . . . . . . 13
ARTICLE II
PURCHASE AND SALE OF SECURITIES . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 2.1. PURCHASE AND SALE . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 2.2. CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 2.3. DELIVERY. . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 2.4. PAYMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE III
RESERVATION AND ISSUANCE OF CONVERSION SHARES . . . . . . . . . . . . . . . . 14
ARTICLE IV
CERTAIN TERMS APPLICABLE TO WARRANTS. . . . . . . . . . . . . . . . . . . . . 14
SECTION 4.1. EXERCISE OF WARRANTS. . . . . . . . . . . . . . . . . . . . . 14
SECTION 4.2. ADJUSTMENT OF NUMBER OF WARRANT SHARES PURCHASABLE. . . . . 16
SECTION 4.3. NOTICES TO WARRANT HOLDERS. . . . . . . . . . . . . . . . . . 19
SECTION 4.4. RESERVATION AND ISSUANCE OF WARRANT SHARES. . . . . . . . . . 20
ARTICLE V
TRANSFER OF SECURITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 5.1. RESTRICTIONS ON TRANSFER. . . . . . . . . . . . . . . . . . . 20
SECTION 5.2. REGISTRATION, TRANSFER AND EXCHANGE OF WARRANTS. . . . . . . 20
SECTION 5.3. MUTILATED OR MISSING WARRANT CERTIFICATES . . . . . . . . . . 21
SECTION 5.4. REGISTRATION, TRANSFER AND EXCHANGE OF NOTES. . . . . . . . 21
SECTION 5.5. MUTILATED OR MISSING NOTES. . . . . . . . . . . . . . . . . 22
ARTICLE VI
CONDITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
i
<PAGE>
SECTION 6.1. CONDITIONS PRECEDENT TO PRUDENTIAL'S OBLIGATIONS
AT CLOSING. . . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 6.2. CONDITIONS PRECEDENT TO THE COMPANY'S OBLIGATIONS
AT CLOSING. . . . . . . . . . . . . . . . . . . . . . . . . 24
ARTICLE VII
REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 7.1. CORPORATE EXISTENCE AND POWER . . . . . . . . . . . . . . . . 25
SECTION 7.2. CORPORATE AND GOVERNMENTAL AUTHORIZATION; CONTRAVENTION. . . 25
SECTION 7.3. BINDING EFFECT. . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 7.4. CAPITALIZATION. . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 7.5. ISSUANCE OF SECURITIES. . . . . . . . . . . . . . . . . . . . 26
SECTION 7.6. FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . 26
SECTION 7.7. CONFLICTING AGREEMENTS AND OTHER MATTERS. . . . . . . . . . . 27
SECTION 7.8. COMPASS DEBT DOCUMENTS. . . . . . . . . . . . . . . . . . . . 27
SECTION 7.9. OUTSTANDING DEBT. . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 7.10. TRANSACTIONS WITH AFFILIATES. . . . . . . . . . . . . . . . . 27
SECTION 7.11. LITIGATION. . . . . . . . . . . . . . . . . . . . . . . . . . 28
SECTION 7.12. ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
SECTION 7.13. TAXES AND FILING OF TAX RETURNS . . . . . . . . . . . . . . . 29
SECTION 7.14. TITLE TO ASSETS . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 7.15. LICENSES, PERMITS, ETC. . . . . . . . . . . . . . . . . . . . 30
SECTION 7.16. PROPRIETARY RIGHTS . . . . . . . . . . . . . . . . . . . . . 30
SECTION 7.17. COMPLIANCE WITH LAW . . . . . . . . . . . . . . . . . . . . . 30
SECTION 7.18. ENVIRONMENTAL MATTERS . . . . . . . . . . . . . . . . . . . . 30
SECTION 7.19. Intentionally Left Blank. . . . . . . . . . . . . . . . . . . 31
SECTION 7.20. FISCAL YEAR . . . . . . . . . . . . . . . . . . . . . . . . . 31
SECTION 7.21. NO DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . . . 31
SECTION 7.22. INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . 31
SECTION 7.23. GOVERNMENT REGULATION . . . . . . . . . . . . . . . . . . . . 31
SECTION 7.24. SECURITIES LAWS . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 7.25. SEC DOCUMENTS . . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 7.26. OIL AND GAS OPERATIONS. . . . . . . . . . . . . . . . . . . . 32
SECTION 7.27. FINANCIAL AND COMMODITY HEDGING . . . . . . . . . . . . . . . 33
SECTION 7.28. BOOKS AND RECORDS . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 7.29. RESERVE REPORT. . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 7.30. NATURE OF COMPANY ASSETS. . . . . . . . . . . . . . . . . . . 34
SECTION 7.31. FULL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 7.32. YEAR 2000 COMPLIANCE. . . . . . . . . . . . . . . . . . . . . 35
SECTION 7.33. USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . 35
SECTION 7.34. NPI PLAN AND SEP/IRA PLAN . . . . . . . . . . . . . . . . . . 35
ii
<PAGE>
SECTION 7.35. CERTAIN AGREEMENTS. . . . . . . . . . . . . . . . . . . . . . 35
ARTICLE VIII
REPRESENTATIONS AND WARRANTIES OF PRUDENTIAL. . . . . . . . . . . . . . . . . 35
SECTION 8.1. NATURE OF PURCHASE. . . . . . . . . . . . . . . . . . . . . . 35
SECTION 8.2. SOURCE OF FUNDS . . . . . . . . . . . . . . . . . . . . . . . 35
ARTICLE IX
COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 9.1. MAINTENANCE OF INSURANCE. . . . . . . . . . . . . . . . . . . 36
SECTION 9.2. PAYMENT OF TAXES AND CLAIMS . . . . . . . . . . . . . . . . . 36
SECTION 9.3. COMPLIANCE WITH LAWS AND DOCUMENTS. . . . . . . . . . . . . . 36
SECTION 9.4. OPERATION OF PROPERTIES AND EQUIPMENT . . . . . . . . . . . . 36
SECTION 9.5. ADDITIONAL DOCUMENTS. . . . . . . . . . . . . . . . . . . . . 37
SECTION 9.6. MAINTENANCE OF BOOKS AND RECORDS. . . . . . . . . . . . . . . 37
SECTION 9.7. ENVIRONMENTAL MATTERS . . . . . . . . . . . . . . . . . . . . 37
SECTION 9.8. INSPECTION OF PROPERTY. . . . . . . . . . . . . . . . . . . . 37
SECTION 9.9. NEGATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . . 38
SECTION 9.10. FILING OF NASDAQ NOTIFICATION FORMS.. . . . . . . . . . . . . 39
SECTION 9.11. INTEREST ON THE NOTES AND THE OTHER NOTES . . . . . . . . . . 39
ARTICLE X
DEFAULTS; TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
SECTION 10.1. EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . 39
ARTICLE XI
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
SECTION 11.1. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
SECTION 11.2. NO WAIVERS. . . . . . . . . . . . . . . . . . . . . . . . . . 41
SECTION 11.3. EXPENSES; INDEMNIFICATION . . . . . . . . . . . . . . . . . . 41
SECTION 11.4. AMENDMENTS AND WAIVERS; SALE OF INTEREST. . . . . . . . . . . 43
SECTION 11.5. SURVIVAL. . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 11.6. LIMITATION ON INTEREST. . . . . . . . . . . . . . . . . . . . 43
SECTION 11.7. INVALID PROVISIONS. . . . . . . . . . . . . . . . . . . . . . 44
SECTION 11.8. SUCCESSORS AND ASSIGNS. . . . . . . . . . . . . . . . . . . . 44
SECTION 11.9. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . 44
SECTION 11.10. COUNTERPARTS. . . . . . . . . . . . . . . . . . . . . . . . . 44
SECTION 11.11. NO THIRD PARTY BENEFICIARIES. . . . . . . . . . . . . . . . . 44
SECTION 11.12. FINAL AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . 44
iii
<PAGE>
SECTION 11.13. SUBMISSION TO JURISDICTION; WAIVER OF SERVICE AND VENUE . . . 44
SECTION 11.14. WAIVER OF RIGHT TO TRIAL BY JURY. . . . . . . . . . . . . . . 45
SECTION 11.15. DISCLOSURE TO OTHER PERSONS . . . . . . . . . . . . . . . . . 45
ARTICLE XII
SUBORDINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
SECTION 12.1. SUBORDINATION OF PAYMENT. . . . . . . . . . . . . . . . . . . 46
SECTION 12.2. NOTES SUBORDINATED TO PRIOR PAYMENT OF COMPASS SENIOR DEBT
ON DISSOLUTION, LIQUIDATION OR REORGANIZATION OF THE COMPANY . . . . . . 46
SECTION 12.3. SUBORDINATION OF LIENS. . . . . . . . . . . . . . . . . . . . 47
SECTION 12.4. SUBORDINATION OF REMEDIES . . . . . . . . . . . . . . . . . . 47
SECTION 12.5. CONTINUING AGREEMENT. . . . . . . . . . . . . . . . . . . . . 48
SECTION 12.6. LIABILITY NOT IMPAIRED. . . . . . . . . . . . . . . . . . . . 48
SECTION 12.7. WAIVERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
SECTION 12.8. KNOWLEDGE OF THE NOTEHOLDERS. . . . . . . . . . . . . . . . . 49
SECTION 12.9. OBLIGATION OF THE COMPANY . . . . . . . . . . . . . . . . . . 49
SECTION 12.10. SUBROGATION . . . . . . . . . . . . . . . . . . . . . . . . . 49
</TABLE>
iv
<PAGE>
Exhibits
Exhibit A Senior Subordinate Convertible Promissory Note
Exhibit B Amendment to Registration Rights Agreement
Exhibit C Participation Rights Agreement
Exhibit D Form of Warrant Certificate
Exhibit E Identification of Other Securities Purchase Agreements
Exhibit F Wire Transfer Instructions
v
<PAGE>
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT is entered into effective this 19th
day of October, 1999, by and between The Prudential Insurance Company of
America, a New Jersey corporation ("PRUDENTIAL") and Middle Bay Oil Company,
Inc., an Alabama corporation (the "COMPANY").
W I T N E S S E T H:
WHEREAS, the Company has authorized and desires to issue and sell to
Prudential (a) certain shares of the Company's Common Stock, par value $0.02 per
share, (b) a Note, and (c) certain Warrants; and
WHEREAS, Prudential desires to purchase such securities from the Company
on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, and intending to be legally bound hereby, the parties hereto
agree as follows:
ARTICLE I
TERMS DEFINED
SECTION 1. DEFINITIONS. The following terms, as used herein, have the
following meanings:
"AFFILIATE" means, as to any Person, any Subsidiary of such Person, or
any other Person which, directly or indirectly, controls, is controlled by, or
is under common control with, such Person and, with respect to the Company, any
executive officer of any Subsidiary or any Person who holds five percent (5%) or
more of the voting stock of the Company. For the purposes of this definition,
"control" (including, with correlative meanings, the terms "controlled by" and
"under common control with"), as used with respect to any Person, shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities or partnership interests, or by contract or
otherwise. Prudential shall not be considered an Affiliate of the Company for
purposes of this Agreement or the other Transaction Documents.
"AGREEMENT" means this Securities Purchase Agreement, as amended from
1
<PAGE>
time to time.
"AMENDMENT TO REGISTRATION RIGHTS AGREEMENT" means an Amendment to
Registration Rights Agreement to be executed by the Company 3TEC, Prudential and
the other parties thereto at Closing, in the form attached hereto as EXHIBIT B.
"AUTHORIZED OFFICER" means, as to any Person, its Chairman, its Chief
Executive Officer, its President, its Chief Operating Officer, its Financial
Officer and any Vice President.
"BUSINESS DAY" means any day except a Saturday, Sunday or other day on
which national banks in Dallas, Texas are authorized by law to close.
"CAPITAL LEASE" means, for any Person, as of any date, any lease of
property, real or personal, which would be capitalized on a balance sheet of the
lessee of such lease prepared as of such date in accordance with GAAP.
"CHANGE OF CONTROL" means the occurrence of any of the following: (a)
the sale, lease, transfer or other disposition, in one transaction or a series
of related transactions, of more than fifty percent (50%) of the value of the
Oil and Gas Interests as set forth in the most current reserve report of the
Company and its Subsidiaries (on the date hereof, the Reserve Report is the most
recent reserve report), or (b) any sale, transfer, merger, consolidation,
disposition or other transaction which results in any Person or Persons
individually or together with their Affiliates owning more than fifty percent
(50%) of the Common Stock on a Fully Diluted Basis.
"CHARTER DOCUMENTS" means, with respect to any Person, its certificate of
incorporation, articles of incorporation, bylaws, partnership agreement,
regulations, operating agreement and all other comparable charter documents.
"CLOSING" has the meaning given such term in SECTION 2.2 hereof.
"CLOSING DATE" means October 19, 1999.
"CLOSING TRANSACTIONS" means the transactions which will occur on the
Closing Date pursuant to the Transaction Documents.
"COBRA" has the meaning given such term in SECTION 7.14 hereof.
"COMMISSION" means the Securities and Exchange Commission or any entity
succeeding to any or all of its functions under the Securities Act or the
Exchange Act.
2
<PAGE>
"COMMON STOCK" means the Company's common stock, par value $0.02 per
share.
"COMMON STOCK SHARES" means the 1,055,042 shares of Common Stock to be
purchased by Prudential pursuant to this Agreement.
"COMPANY" has the meaning given such term in the preamble hereto.
"COMPANY FINANCIAL STATEMENTS" means the audited and unaudited
consolidated financial statements of the Company and its Subsidiaries (including
the related notes) included (or incorporated by reference) in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1998, and the
Company's Quarterly Report on Form 10-QSB for the quarterly period ended March
31, 1999, filed with the Commission.
"COMPASS SENIOR CREDIT AGREEMENT" means that certain Credit Agreement
dated March 27, 1998, as amended, by and among Middle Bay Oil Company, Inc. and
Enex Resources Corporation, as Borrower, and Compass Bank, as Agent and a
Lender, Bank of Oklahoma, National Association, as a Lender and the other
lenders signatory thereto.
"COMPASS SENIOR DEBT" means all Debt of the Company outstanding under the
Compass Senior Credit Agreement, including all renewals and extensions thereof.
"COMPASS SENIOR DEBT DOCUMENTS" means the Compass Senior Debt Agreement
and all promissory notes, security agreements, mortgages, deeds of trust,
assignments, guarantees and other documents, instruments and agreements executed
and delivered pursuant to the Compass Senior Credit Agreement evidencing,
securing, guaranteeing or otherwise pertaining to the Compass Senior Debt and
other obligations arising under the Compass Senior Credit Agreement, as the
foregoing may be amended, renewed, extended, supplemented, increased or
otherwise modified from time to time to the extent permitted hereunder.
"CONFIDENTIALITY AGREEMENT" means the confidentiality agreement dated
August 2, 1999, by and between the Company and Prudential.
"CONVERSION SHARES" means shares of Common Stock issued upon conversion
of the Note.
"DEBT" means, for any Person, without duplication, (a) all obligations of
such Person for borrowed money, (b) all obligations of such Person evidenced by
bonds, debentures, notes or other similar instruments, (c) all indebtedness of
such
3
<PAGE>
Person on which interest charges are customarily paid or accrued, (d) all
Guarantees by such Person, (e) the unfunded or unreimbursed portion of all
letters of credit issued for the account of such Person, (f) the present
value of all obligations in respect of Capital Leases of such Person, (g) any
obligation of such Person representing the deferred purchase price of
property or services purchased by such Person other than trade payables
incurred in the ordinary course of business and which are not more than
ninety (90) days past invoice date, (h) any indebtedness, liability or
obligation secured by a Lien on the assets of such Person whether or not such
indebtedness, liability or obligation is otherwise non-recourse to such
Person, (i) liabilities arising under future contracts, forward contracts,
swap, cap or collar contracts, option contracts, hedging contracts, other
derivative contracts and similar agreements, (j) liabilities with respect to
payments received in consideration of oil, gas or other minerals yet to be
acquired or produced at the time of payment (including obligations under
"take-or-pay" contracts to deliver gas in return for payments already
received and the undischarged balance of any production payment created by
such Person or for the creation of which such Person directly or indirectly
received payment, and (k) all liability of such Person as a general partner
or joint venturer for obligations of the nature described in (a) through (k)
preceding.
"DEFAULT" means any condition or event which constitutes an Event of
Default or which with the giving of notice or lapse of time or both would,
unless cured or waived, become an Event of Default.
"DEFAULT RATE" means the Fixed Rate plus 3% per annum.
"DEFENSIBLE TITLE" means such right, title and interest that is (a)
evidenced by an instrument or instruments filed of record in accordance with the
conveyance and recording laws of the applicable jurisdiction to the extent
necessary to prevail against competing claims of bona fide purchasers for value
without notice and (b) subject to Permitted Encumbrances, free and clear of all
Liens, claims, infringements, burdens or other defects.
"DISCLOSURE SCHEDULE" means the disclosure schedule, dated October 19,
1999, titled Middle Bay Disclosure Schedule separately provided by the Company
to Prudential on or before the date hereof, and any documents listed on such
disclosure schedule and expressly incorporated therein by reference.
"EMPLOYMENT AGREEMENT" means that certain employment agreement, dated as
of August 27, 1999, between the Company and Floyd C. Wilson.
"ENVIRONMENTAL COMPLAINT" means any complaint, summons, citation, notice,
directive, order, claim, litigation, investigation, proceeding, judgment, letter
or other communication from any federal, state, municipal or other Governmental
4
<PAGE>
Authority or any other party involving a Hazardous Discharge, Environmental
Contamination or any violation of any order, permit or Environmental Law and
Laws.
"ENVIRONMENTAL CONTAMINATION" means the presence of any Hazardous
Substances, which presence results from a Hazardous Discharge.
"ENVIRONMENTAL LAW AND LAWS" means any law, common law, ordinance,
regulation or policy of any Governmental Authority, as well as any order,
decree, permit, judgment or injunction issued, promulgated, approved, or entered
thereunder, relating to the environment, health and safety, Hazardous Substances
(including, without limitation, the use, handling, transportation, production,
disposal, discharge or storage thereof), industrial hygiene, the environmental
conditions on, under, or about any real property owned, leased or operated at
any time by the Company or any of its Subsidiaries or any real property owned,
leased or operated by any other party, including, without limitation, soil,
groundwater, and indoor and ambient air conditions or the reporting or
remediation of Environmental Contamination. Environmental Law and Laws include,
without limitation, the Clean Air Act, as amended, the Federal Water Pollution
Control Act, as amended, the Rivers and Harbors Act of 1899, as amended, the
Safe Drinking Water Act, as amended, the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), as amended, the Superfund Amendments
and Reauthorization Act of 1986 ("SARA"), as amended, the Resource Conservation
and Recovery Act of 1976 ("RCRA"), as amended, the Hazardous and Solid Waste
Amendments Act of 1984, as amended, the Toxic Substances Control Act, as
amended, the Occupational Safety and Health Act ("OSHA"), as amended, the
Hazardous Materials Transportation Act, as amended, and any other federal, state
and local law whose purpose is to conserve or protect health, the environment,
wildlife or natural resource.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and any regulation promulgated thereunder.
"ERISA AFFILIATE" means the Company or any of its Subsidiaries and any
other corporation or trade or business under common control with the Company or
any of its Subsidiaries or treated as a single employer with the Company or any
of its Subsidiaries as determined under sections 414(b), (c), (m) or (o) of the
IRC.
"EVENT OF DEFAULT" has the meaning set forth in SECTION 10.1.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, or
any successor federal statute.
5
<PAGE>
"EXHIBIT" refers to an exhibit attached to this Agreement and
incorporated herein by reference, unless specifically provided otherwise.
"FINANCIAL OFFICER" means, as to any Person, its Chief Financial Officer,
or if no Person serves in such capacity, the highest ranking executive officer
of such Person with responsibility for accounting, financial reporting,
financial compliance and similar functions.
"FIXED RATE" means nine percent (9.0%) per annum.
"FULLY DILUTED BASIS" means, with reference to outstanding Common Stock,
the shares of Common Stock that would be outstanding assuming that all
outstanding options, warrants and other rights to acquire Common Stock had been
exercised (regardless of whether such rights are then exercisable) and all
securities convertible into Common Stock had then been converted (regardless of
whether such securities are then convertible) and had been issued, all in
accordance with GAAP. Any reference in this Agreement or any of the other
Transaction Documents to "holder(s) of outstanding Common Stock on a Fully
Diluted Basis" or words of similar import shall be deemed to include holder(s)
of outstanding options, warrants or similar rights to acquire Common Stock or
securities convertible into Common Stock.
"GAAP" means generally accepted accounting principles, applied on a
consistent basis, set forth in Opinions of the Accounting Principles Board of
the American Institute of Certified Public Accountants and/or in statements of
the Financial Accounting Standards Board and/or their successors which are
applicable in the circumstances as of the date in question; and the requirement
that such principles be applied on a consistent basis means that the accounting
principles observed in a current period are comparable in all material respects
to those applied in a preceding period.
"GOVERNMENTAL AUTHORITY" means any national, state or county, municipal
government, domestic or foreign, any agency, board, bureau, commission, court,
department or other instrumentality of any such government, or any arbitrator in
any case that has jurisdiction over the Company or its Subsidiaries or any of
their respective properties or assets.
"GUARANTY" by any Person means any obligation, contingent or otherwise,
of such Person directly or indirectly guaranteeing any Debt or other obligation
of any other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person (a) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Debt or other obligation (whether arising by virtue of partnership arrangements,
by
6
<PAGE>
agreements to keep-well, to purchase assets, goods, securities or services,
to take-or-pay, or to maintain financial statement conditions, by "comfort
letter" or other similar undertaking of support of otherwise), or (b) entered
into for the purpose of assuring in any other manner the obligee of such Debt
or other obligation of the payment thereof or to protect such obligee against
loss in respect thereof (in whole or in part); provided, that, the term
"Guaranty" shall not include endorsements for collection or deposit in the
ordinary course of business. For purposes of this Agreement, the amount of
any Guaranty shall be the maximum amount that the guarantor could be legally
required to pay under such Guaranty.
"HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended.
"HAZARDOUS DISCHARGE" means any releasing, spilling, leaking, pumping,
pouring, emitting, emptying, discharging, injecting, escaping, leaching,
disposing or dumping of a Hazardous Substance at, from, onto, under or within
any real property owned, leased or operated at any time by the Company or any of
its Subsidiaries or any real property owned, leased or operated by any other
Person.
"HAZARDOUS SUBSTANCE" means any pollutant, toxic substance, hazardous
waste, compound, element or chemical that is defined as hazardous, toxic,
noxious, dangerous or infectious pursuant to any Environmental Law and Laws or
which is otherwise regulated by any Environmental Law and Laws.
"HOLDER" with respect to any Security, shall mean the record or
beneficial owner of such Security.
"HYDROCARBONS" means oil, condensate, gas, casinghead gas and other
liquid or gaseous hydrocarbons.
"INVESTMENT" in any Person means any investment, whether by means of
securities purchase (whether by direct purchase from such Person or from an
existing holder of securities of such Person), loan, advance, extension of
credit, capital contribution or otherwise, in or to such Person, the Guaranty of
any Debt or other obligation of such Person, or the subordination of any claim
against such Person to other Debt or other obligation of such Person; PROVIDED,
that, "Investments" shall not include advances made to employees of such Person
for reasonable travel, entertainment and similar expenses incurred in the
ordinary course of business.
"IRC" means the Internal Revenue Code of 1986, as amended from time to
time, and any regulation promulgated thereunder.
7
<PAGE>
"KNOWLEDGE" means actual knowledge after reasonable investigation
consistent with the generally accepted business practices in the oil and gas
industry.
"LAWS" means all applicable statutes, laws, ordinances, regulations,
orders, writs, injunctions, or decrees of any state, commonwealth, nation,
territory, possession, county, township, parish, municipality, or Governmental
Authority.
"LIEN" means with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset.
For the purposes of this Agreement, a Person shall be deemed to own subject to a
Lien any asset which it has acquired or holds subject to the interest of a
vendor or lessor under any conditional sale agreement or other title retention
agreement relating to such asset.
"MAJORITY NOTEHOLDER" means a Noteholder or Noteholders holding more than
fifty percent (50%) of the aggregate principal balance of the Note.
"MAJORITY WARRANTHOLDER" means a Warrant Holder or Warrant Holders who
hold more than fifty percent (50%) of the outstanding Warrant Shares.
"MAJOR SHAREHOLDERS" means 3TEC, Kaiser-Francis Oil Company, C.J. Lett,
III, Weskids, L.P., and Alvin V. Shoemaker.
"MATERIAL ADVERSE EFFECT" means, with respect to a Person, a material
adverse effect on the business, financial condition, operations, assets or
prospects of such Person or any of its Subsidiaries, and shall also mean, with
respect to the Company or any of its Subsidiaries, a material adverse effect on
such Person's ability to pay and perform its obligations under the Transaction
Documents.
"MATERIAL AGREEMENT" means any written or oral agreement, contract,
commitment, or understanding to which a Person is a party, by which such Person
is directly or indirectly bound, or to which any assets of such Person may be
subject (a) which is not cancelable by such Person upon notice of sixty (60)
days or less without liability for further payment other than nominal penalty,
(b) pursuant to which such Person acquires any material portion of the raw
materials, supplies or services used or consumed by such Person in the operation
of its business (unless such raw materials, supplies or services are readily
available to such Person from other sources on comparable terms), or (c)
pursuant to which such Person derives any material part of its revenues.
"MAXIMUM LAWFUL RATE" means the maximum rate (or, if the context so
permits or requires, an amount calculated at such rate) of interest which, at
the time in question would not cause the interest charged on the Note at such
time to exceed
8
<PAGE>
the maximum amount which Noteholders would be allowed to contract for,
charge, take, reserve, or receive under applicable Law after taking into
account, to the extent required by applicable Law, any and all relevant
payments or charges under the Transaction Documents.
"NOTEHOLDER" means any Person in whose name a Note is registered on the
Note Register.
"NOTE REDEMPTION DATE" means the date on which the entire balance of the
Note, including, without limitation, all accrued but unpaid interest thereon and
all fees payable by the Company or its Subsidiaries in connection therewith,
have been paid in full.
"NOTE REGISTER" means a register maintained by the Company setting forth
the name and address of each Noteholder and the principal amount of the Note
held by such Noteholder.
"NOTES" means the Company's Senior Subordinate Convertible Promissory
Note in the aggregate principal amount of $2,373,844 to be issued and sold by
the Company to Prudential pursuant to SECTION 2.1 hereof and any renewals,
extensions or replacements thereof, and "Note" means any of such Notes. The
Notes shall be substantially in the form of EXHIBIT A attached hereto.
"OBLIGATIONS" means all present and future indebtedness, obligations and
liabilities, and all renewals and extensions thereof, or any part thereof, of
the Company, its Subsidiaries and any other Person arising pursuant to the
Transaction Documents, and all interest accrued thereon and costs, expenses, and
attorneys' fees incurred in the enforcement or collection thereof, regardless of
whether such indebtedness, obligations and liabilities are direct, indirect,
fixed, contingent, liquidated, unliquidated, joint, several or joint and
several.
"OIL AND GAS INTEREST(s)" means (a) direct and indirect interests in and
rights with respect to oil, gas, mineral and related properties and assets of
any kind and nature, direct or indirect, including working, royalty and
overriding royalty interests, production payments, operating rights, net profits
interests, other non-working interests and non-operating interests; (b)
interests in and rights with respect to Hydrocarbons and other minerals or
revenues therefrom and contracts in connection therewith and claims and rights
thereto (including oil and gas leases, operating agreements, unitization and
pooling agreements and orders, division orders, transfer orders, mineral deeds,
royalty deeds, oil and gas sales, exchange and processing contracts and
agreements and, in each case, interests thereunder), surface interests, fee
interests, mineral servitudes, reversionary interests, reservations and
concessions; (c) easements, rights of way, licenses, permits, leases, and other
9
<PAGE>
interests associated with, appurtenant to, or necessary for the operation of any
of the foregoing; and (d) interests in equipment and machinery (including well
equipment and machinery), oil and gas production, gathering, transmission,
compression, treating, processing and storage facilities (including tanks, tank
batteries, pipelines and gathering systems), pumps, water plants, electric
plants, gasoline and gas processing plants, refineries and other tangible
personal property and fixtures associated with, appurtenant to, or necessary for
the operation of any of the foregoing.
"OTHER NOTES" means the Company notes to be issued and sold by the
Company pursuant to provisions of the Other Securities Purchase Agreements.
"OTHER SECURITIES PURCHASE AGREEMENTS" means those securities purchase
agreements as listed on EXHIBIT E attached hereto.
"OWNERSHIP INTERESTS" means the ownership interests of the Company and
its Subsidiaries in its assets, as set forth on SCHEDULE 1.1A of the Disclosure
Schedule.
"PARTICIPATION RIGHTS AGREEMENT" means a Participation Rights Agreement
to be entered into by and among the Company, Prudential and 3TEC at Closing, in
the form of EXHIBIT C attached hereto.
"PENSION PLAN" means any employee benefit plan or welfare benefit plan
within the meaning of section 3(3) of ERISA maintained by the Company, any
Subsidiary of the Company or any ERISA Affiliate that is or was previously
covered by Title IV of ERISA or subject to the minimum funding standards under
section 412 of the IRC, including a "multiemployer plan" as such term is defined
in section 3(37) of ERISA, under which the Company or any Subsidiary of the
Company has any current or future obligation or liability and under which any
present or former employee of the Company or any Subsidiary of the Company, or
such present or former employee's dependents or beneficiaries, has any current
or future right to benefits.
"PER SHARE STOCK PRICE" means for the Common Stock on any day shall be
the last sale price, or, in case no such sale takes place on such day, the last
quoted price or, if not so quoted, the average of the high bid and low asked
prices in the over-the-counter market, as reported by the National Association
of Securities Dealers, Inc. Automated Quotations System, or such other system
then in use.
"PERMITTED ENCUMBRANCES" means (a) Liens for Taxes, assessments or other
governmental charges or levies (i) if the same shall not at the particular time
in question be due and delinquent or (ii) (if foreclosure, distraint, sale or
other
10
<PAGE>
similar proceedings shall not have been commenced or if commenced, shall have
been stayed) are being contested in good faith by appropriate proceedings and
the Company or its Subsidiaries shall have set aside on their books such
reserves (segregated to the extent required by sound accounting principles)
as may be required by GAAP or otherwise determined by its board of directors
to be adequate with respect thereto; (b) Liens of carriers, warehousemen,
mechanics, laborers, materialmen, landlords, vendors, workmen and operators
arising by operation of law in the ordinary course of business or by a
written agreement existing as of the date hereof and necessary or incident to
the exploration, development, operation and maintenance of Hydrocarbon
properties and related facilities and assets for sums not yet due or being
contested in good faith by appropriate proceedings and the Company or its
Subsidiaries shall have set aside on their books such reserves(segregated to
the extent required by sound accounting practices) as may be required by GAAP
or otherwise determined by its board of directors to be adequate with respect
thereto; (c) Liens incurred in the ordinary course of business in connection
with worker's compensation, unemployment insurance and social security
legislation (other than ERISA); (d) Liens incurred in the ordinary course of
business to secure the performance of bids, tenders, trade contracts, leases,
statutory obligations, surety and appeal bonds, performance and repayment
bonds and other obligations of a like nature; (e) Liens, easements,
rights-of-way, restrictions, servitudes, permits, conditions, covenants,
exceptions, reservations and other similar encumbrances incurred in the
ordinary course of business or existing on property and not (i) reducing the
Company's net revenue interest in any Oil and Gas Interests below that set
forth on Schedule 1.1A, (ii) increasing the Company's Working Interest in
any Oil and Gas Interest above that set forth on Schedule 1.1A or (iii) in
the aggregate materially impairing the value of the assets of the Company or
its Subsidiaries or interfering with the ordinary conduct of the business of
the Company or its Subsidiaries or rights to any of their assets; (f) Liens
created or arising by operation of law to secure a party's obligations as a
purchaser of oil and gas; (g) all rights to consent by, required notices to,
filings with, or other actions by Governmental Authorities to the extent
customarily obtained subsequent to Closing; (h) farmout, carried working
interest, joint operating, unitization, royalty, overriding royalty, sales
and similar arrangements relating to the exploration, development of, or
production from, Hydrocarbon properties entered into in the ordinary course
of business; (i) preferential rights to purchase and Third Party Consents (to
the extent not triggered by the consummation of the transactions contemplated
herein); and (j) Liens arising under or created pursuant to the Compass
Senior Debt Documents.
"PERMITTED SENIOR DEBT" means the Compass Senior Debt or other debt or
credit facility of the Company which replaces the Compass Senior Debt.
"PERSON" means an individual, a corporation, a partnership, an
association, a trust or any other entity or organization, including a government
or political
11
<PAGE>
subdivision or an agency or instrumentality thereof and shall also mean the
Company.
"PRE-DISTRIBUTION PRICE" has the meaning given such term in SECTION
4.2(c).
"PURCHASE PRICE" has the meaning given such term in SECTION 2.1.
"REDEMPTION DATE" means the date on which the entire balance of the
Notes, including, without limitation, all accrued but unpaid interest thereon
and all fees payable by the Company or its Subsidiaries in connection therewith,
have been paid in full.
"REGISTRATION RIGHTS AGREEMENT" means that certain Registration Rights
Agreement, dated as of August 27, 1999, by and among the Company, 3TEC and the
other parties thereto.
"REGISTRATION STATEMENT" has the meaning giving such term in SECTION 5.1.
"RESERVE ENGINEER" shall have the meaning set forth in SECTION 7.32.
"RESERVE REPORT" shall have the meaning set forth in SECTION 7.32.
"SEC DOCUMENTS" shall have the meaning set forth in SECTION 7.28.
"SCHEDULE" means a "schedule" attached to this Agreement and incorporated
herein by reference, unless specifically indicated otherwise.
"SECTION" refers to a "section" or "subsection" of this Agreement unless
specifically indicated otherwise.
"SECURITIES" means the Notes, the Common Stock Shares and the Warrants to
be issued and sold to Prudential and any Warrant Shares.
"SECURITIES ACT" means the Securities Act of 1933, as amended, or any
successor federal statute.
"SENIOR LENDERS" means Compass Bank, Bank of Oklahoma, National
Association and the other lenders who executed the Compass Senior Credit
Agreement.
"SERIES B CONVERTIBLE PREFERRED SHARES" shall mean those shares of Series
B Convertible Preferred Stock of the Company as set forth on SCHEDULE 1.1B of
the
12
<PAGE>
Disclosure Schedule.
"SERIES C CONVERTIBLE PREFERRED SHARES" shall mean those shares of Series
C Convertible Preferred Stock of the Company as set forth on SCHEDULE 1.1C of
the Disclosure Schedule.
"SHAREHOLDERS AGREEMENT" means that certain Shareholders Agreement, dated
as of August 27, 1999, by and among the Company and the Major Shareholders of
the Company.
"SUBSIDIARY" means, for any Person, any corporation or other entity of
which securities or other ownership interests having ordinary voting power to
elect a majority of the board of directors or other Persons performing similar
functions (including that of a general partner) are at the time directly or
indirectly owned, collectively, by such Person and any Subsidiaries of such
Person. The term Subsidiary shall include Subsidiaries of Subsidiaries (and so
on).
"TAXES" means all taxes, assessments, filing or other fees, levies,
imposts, duties, deductions, withholdings, stamp taxes, interest equalization
taxes, capital transaction taxes, foreign exchange taxes or other charges of any
nature whatsoever, from time to time or at any time imposed by law or any
federal, state or local governmental agency. "Tax" means any one of the
foregoing.
"THIRD PARTY CONSENTS" means the consent or approval of any Person other
than the Company, Prudential or any Governmental Authority.
"3TEC" shall mean 3TEC Energy Company, L.L.C., a Delaware limited
liability company.
"TRANSACTION DOCUMENTS" means this Agreement, the Notes, the Warrant
Certificates, the Registration Rights Agreement, as amended by the Amendment to
Registration Rights Agreement, the Participation Rights Agreement, the Company's
Charter Documents and all other agreements, certificates, documents or
instruments now or at any time hereafter delivered in connection with this
Agreement, as the foregoing may be renewed, extended, modified, amended or
restated from time to time.
"WARRANT CERTIFICATE" means the Warrant Certificates to be issued by the
Company evidencing Warrants issued hereunder which shall be in the form of
EXHIBIT D attached hereto.
"WARRANT EXERCISE PRICE" means $1.00 per share (subject to adjustment as
provided in SECTION 4.2).
13
<PAGE>
"WARRANT EXPIRATION DATE" means 5:00 p.m., Dallas, Texas time, five (5)
years following the Closing Date.
"WARRANT HOLDER" means any Person (i) in whose name any Warrant is
registered on the Warrant Register, or (ii) in whose name any Warrant Shares are
registered on the books and records of the Company.
"WARRANT REGISTER" means a register maintained by the Company setting
forth the name and address of each Warrant Holder, the number of Warrants held
by such Warrant Holder and the certificate number of each Warrant Certificate
held by such Warrant Holder.
"WARRANT SHARES" means the shares of Common Stock issuable upon exercise
of the Warrants.
"WARRANTS" means the Common Stock Purchase Warrants to be issued by the
Company to Prudential pursuant to SECTION 2.1 of this Agreement, each of which
shall entitle the holder thereof to purchase one (1) share of Common Stock at
the Warrant Exercise Price (subject to adjustment as provided in SECTION 4.2).
"WORKING INTERESTS" means the Company's or its Subsidiaries' share of all
of the costs, expenses, burdens, and obligations of any type or nature
attributable to the Company's or its Subsidiaries' interests in its oil and gas
properties or any well thereon.
SECTION 2. ACCOUNTING TERMS AND DETERMINATIONS. Unless otherwise
specified herein, all accounting terms used herein shall be interpreted, all
accounting determinations hereunder shall be made, and all financial statements
required to be delivered hereunder shall be prepared in accordance with GAAP as
in effect from time to time, applied on a basis consistent with the most recent
annual audited, consolidated financial statements of the Company delivered to
Prudential prior to the date hereof.
SECTION 3. GENDER AND NUMBER. Words of any gender used in this
Agreement shall be held and construed to include any other gender and words in
the singular number shall be held to include the plural, and vice versa, unless
the context requires otherwise.
SECTION 4. REFERENCES TO AGREEMENT. Use of the words "herein",
"hereof", "hereinabove", and the like are and shall be construed as references
to this Agreement.
14
<PAGE>
ARTICLE II
PURCHASE AND SALE OF SECURITIES
SECTION 1. PURCHASE AND SALE. Subject to the satisfaction of the terms
and conditions set forth herein and in reliance upon the representations and
warranties of the parties set forth herein and in the other Transaction
Documents (a) Prudential agrees to purchase from the Company and the Company
agrees to issue and sell to Prudential, 1,055,042 shares of Common Stock and
798,677 Warrants for an aggregate purchase price of $2,373,844 (the "COMMON
STOCK SHARES PURCHASE PRICE"), and (b) Prudential agrees to purchase from the
Company and the Company agrees to issue and sell to Prudential the Note for the
purchase price of $2,373,844 (the "NOTE PURCHASE PRICE," and together with the
Common Stock Shares Purchase Price, the "PURCHASE PRICE").
SECTION 2. CLOSING. Closing of the purchase and sale of the Securities
(the "CLOSING") shall take place at the offices of Prudential at 10:00 a.m. on
the Closing Date, or at such other time, date and place as may be agreed upon in
writing by the Company and Prudential.
SECTION 3. DELIVERY. At the Closing, the Company shall deliver to
Prudential, against payment therefor, certificates evidencing the Common Stock
Shares, the Note and the Warrant Certificate purchased by Prudential hereunder,
in each case duly issued and in form sufficient to vest title thereto fully in
Prudential, free and clear of all Liens, claims and encumbrances.
SECTION 4. PAYMENT. At the Closing, Prudential shall pay the Purchase
Price to the Company by wire transfer of immediately available funds for credit
to the Company's account #1576583304 at Bank One, Texas, N.A. as identified in a
written instruction of the Company, in the form of EXHIBIT F attached hereto,
delivered to Prudential on or before the date of Closing.
ARTICLE III
RESERVATION AND ISSUANCE OF CONVERSION SHARES
The Company will at all times have authorized, and reserve and keep
available, free from preemptive rights, for the purpose of enabling it to
satisfy any obligation to issue Conversion Shares upon the Noteholder's exercise
of its conversion rights under the Note, the number of shares of Common Stock
deliverable upon such conversion rights. The Company covenants that all
Conversion Shares issued by it will, upon issuance in accordance with the terms
of
15
<PAGE>
this Agreement, be fully paid and nonassessable and free from all Taxes with
respect to the issuance thereof and free from all Liens other than Liens
arising by, through or under the Noteholder to whom such Conversion Shares
were issued.
ARTICLE IV
CERTAIN TERMS APPLICABLE TO WARRANTS
SECTION 1. EXERCISE OF WARRANTS.
(a) One-half of the Warrants may be exercised in whole or in part at
any time until the Warrant Expiration Date at which time the Warrants shall
expire and shall thereafter no longer be exercisable.
(b) The other half of the Warrants (the "RESTRICTED WARRANTS") may be
exercised, in whole or in part, until the Warrant Expiration Date, as follows:
(i) up to 20% of the Restricted Warrants may be exercised during the
one (1) year period commencing on the Closing Date;
(ii) up to 40% of the Restricted Warrants (inclusive of any prior
exercise under this subsection (b)) may be exercised during the
one (1) year period commencing twelve (12) months after the
Closing Date;
(iii) up to 60% of the Restricted Warrants (inclusive of any prior
exercise under this subsection (b)) may be exercised during the
one (1) year period commencing twenty-four (24) months after the
Closing Date;
(iv) up to 80% of the Restricted Warrants (inclusive of any prior
exercise under this subsection (b)) may be exercised during the
one (1) year period commencing thirty-six (36) months after the
Closing Date; and
(v) up to 100% of the Restricted Warrants (inclusive of any prior
exercise under this subsection (b)) may be exercised during the
one (1) year period commencing forty-eight (48) months after the
Closing Date;
Notwithstanding the foregoing, in any event, the Restricted Warrants may
be exercised at the earlier of:
16
<PAGE>
(i) the conversion of all or part of the Note into shares of Common
Stock, subject to the restrictions set forth below in SECTION
4.1(c);
(ii) a Change of Control; or
(iii) the payment in full of the Note.
(c) If the entire amount of principal and interest due and payable
under the Note is converted to Common Stock, all of the Restricted Warrants
shall be immediately exercisable in whole or in part at any time until the
Warrant Expiration Date. If less than the entire amount of principal and
interest due and payable under the Note is converted, a pro-rata portion of the
Restricted Warrants based upon the amount of the Note which is converted
compared to the total amount of the Note prior to conversion, shall be
immediately exercisable in whole or in part at any time until the Warrant
Expiration Date. For example, if fifty percent (50%) of the Note is converted,
one half of the Restricted Warrants would be exercisable.
(d) The Warrants shall be exercised by presentation of the Warrant
Certificate evidencing the Warrants to be exercised, with the form of election
to purchase on the reverse thereof duly completed and signed, to the Company at
the offices of the Company as set forth on the signature page of this Agreement,
together with payment of the aggregate Warrant Exercise Price for the number of
Warrant Shares in respect of which such Warrants are being exercised in lawful
money of the United States of America; PROVIDED, that, to the extent the Warrant
Holder exercising such Warrants is also the holder of a Note, such Warrant
Holder or Noteholder may elect, by written notice to the Company delivered with
such presentation, to elect to pay the applicable Warrant Exercise Price by
offsetting the next scheduled payment of such Note by an amount equal to the
aggregate Warrant Exercise Price payable in connection with such exercise of
Warrants. Upon such presentation, the Company shall issue and cause to be
delivered to or upon the written order of the registered Holder of such Warrants
and in such name or names as such registered Holder may designate, a certificate
or certificates for the aggregate number of Warrant Shares issued upon such
exercise of such Warrants. Any Person so designated to be named therein shall
be deemed to have become holder of record of such Warrant Shares as of the date
of exercise of such Warrants; PROVIDED, that, no Warrant Holder will be
permitted to designate that such Warrant Shares be issued to any Person other
than such Warrant Holder unless each condition to transfer contained in
ARTICLE V hereof which would be applicable to a transfer of Warrants or Warrant
Shares has been satisfied.
(e) If less than all of the Warrants evidenced by a Warrant
Certificate are exercised at any time, a new Warrant Certificate or Certificates
shall be issued for the remaining number of Warrants evidenced by such Warrant
Certificate. All
17
<PAGE>
Warrant Certificates surrendered upon exercise of Warrants shall be canceled.
(f) The Company shall not be required to issue fractional shares of
Common Stock upon exercise of any Warrants issued by it, but shall pay for any
such fraction of a share an amount in cash equal to the value of such fractional
share determined by the Company's board of directors in good faith.
(g) The Company will pay all Taxes attributable to the initial
issuance of Warrant Shares upon the exercise of the Warrants issued by it;
PROVIDED, that, each Warrant Holder shall use its reasonable efforts to avoid
any such Tax on the issuance of Warrant Shares; and PROVIDED, further that, the
Company shall not be required to pay any income Tax or any other Tax which may
be payable in respect of any transfer involved in the issue of any Warrant
Certificate or any certificate for Warrant Shares in a name other than that of
the registered holder of a Warrant Certificate surrendered upon the exercise of
such a Warrant, and the Company shall not be required to issue or deliver such
certificates unless or until the Person or Persons requesting the issuance
thereof shall have paid to the Company the amount of such Tax or shall have
established to the satisfaction of the Company that such Tax has been paid.
SECTION 2. ADJUSTMENT OF NUMBER OF WARRANT SHARES PURCHASABLE. The
number of Warrant Shares purchasable upon the exercise of each Warrant is
subject to adjustment from time to time upon the occurrence of any of the events
enumerated in this SECTION 4.2.
(a) In the event that the Company shall at any time after the date of
this Agreement declare a dividend on the Common Stock in shares of its capital
stock (whether shares of such Common Stock or of capital stock of any other
class of the Company), split or subdivide the outstanding Common Stock, or
combine the outstanding Common Stock into a smaller number of shares, the number
of Warrant Shares purchasable upon an exercise of each Warrant after the time of
the record date for such dividend or of the effective date of such split,
subdivision or combination shall be adjusted to equal the number of shares of
Common Stock which a Holder having the same number of shares of Common Stock as
the number of Warrant Shares into which each Warrant is exercisable immediately
prior to such record date or effective date, as the case may be, would own or be
entitled to receive after such record date or effective date.
(b) In the event that the Company shall at any time after the date of
this Agreement issue any shares of Common Stock without consideration or at a
price per share less than $1.00, or issue options, rights or warrants to
subscribe for or purchase such Common Stock (or securities convertible into such
Common Stock) without consideration or at a price per share (or having a
conversion price per share,
18
<PAGE>
if a security convertible into such Common Stock) less than $1.00, the number
of Warrant Shares purchasable upon an exercise of each Warrant after the date
of such issuance shall be adjusted to equal the product obtained by
multiplying the number of Warrant Shares into which each Warrant is
exercisable immediately prior to the date of such issuance by a fraction, the
numerator shall be the number of shares of Common Stock outstanding on a
Fully Diluted Basis immediately after such issuance, and the denominator of
which shall be the number of shares of Common Stock outstanding on a Fully
Diluted Basis immediately prior to such issuance plus the number of shares of
such Common Stock which the aggregate offering price of the total number of
shares of such Common Stock so to be issued or to be offered for subscription
or purchase (or the aggregate initial conversion price of the convertible
securities so to be offered) would purchase at $1.00 per share. In case such
subscription price may be paid in a consideration part or all of which shall
be in a form other than cash, the value of such consideration shall be as
determined by an investment banker reasonably acceptable to the Warrant
Holder (the cost of the engagement of said investment banking firm to be
borne by the Company). Shares of such Common Stock owned by or held for the
account of the Company or any Subsidiary thereof shall not be deemed
outstanding for the purpose of any such computation. Such adjustment shall
be made successively whenever the date of such issuance is fixed (which date
of issuance shall be the record date for such issuance if a record date
therefor is fixed); and, in the event that such shares or options, rights or
warrants are not so issued, the number of Warrant Shares into which each
Warrant is exercisable shall again be adjusted to be such number of Warrant
Shares into which each Warrant is exercisable if the date of such issuance
had not been fixed.
(c) In case the Company shall make a distribution to all holders of
Common Stock (including any such distribution made in connection with a
consolidation or merger in which the Company is the surviving corporation) of
shares of it stock, evidences of its indebtedness, assets, or rights, options or
warrants (other than those referred to in subsection (b) of this Section 4.2) to
subscribe for or purchase such shares, evidences of indebtedness, or assets, the
number of Warrant Shares into which each Warrant is exercisable after such date
of distribution shall be adjusted to equal the product obtained by multiplying
the number of Warrant Shares purchasable upon an exercise of each Warrant
immediately prior to such date by a fraction, the numerator of which shall be
the Per Share Stock Price for the trading day immediately preceding the day of
distribution ("PRE-DISTRIBUTION PRICE"), and the denominator of which shall be
the Pre-Distribution Price less the fair market value of the distribution (as
determined in good faith by the Board of Directors of the Company) applicable to
one share of Common Stock. Such adjustment shall be made successively whenever
a date for such distribution is fixed (which date of distribution shall be the
record date for such issuance if a record date therefor is fixed); and, if such
distribution is not so
19
<PAGE>
made, the number of Warrant Shares into which each Warrant is exercisable
shall again be adjusted to be such number of Warrant Shares which would then
be in effect if the date of such distribution had not been fixed.
(d) No adjustment in the number of Warrant Shares purchasable upon an
exercise of each Warrant shall be required unless such adjustment would require
an increase or decrease of at least one-tenth of one percent (.1%) in such
number of Warrant Shares; PROVIDED that any adjustments which by reason of this
SECTION 4.2(d) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment. All calculations under this SECTION
4.2 shall be made to the nearest hundredth of one percent.
(e) The Warrant Exercise Price in effect immediately prior to any
adjustment of the number of Warrant Shares into which each Warrant is
exercisable shall be simultaneously adjusted (but not below the par value of the
Common Stock) by multiplying the Warrant Exercise Price immediately prior to
such adjustment by a fraction, the numerator of which shall be the number of
Warrant Shares into which each Warrant is exercisable immediately prior to such
adjustment, and the denominator of which shall be the number of Warrant Shares
into which each Warrant is exercisable immediately after such adjustment.
(f) In the event of any capital reorganization of the Company, or of
any reclassification of any Common Stock for which any Warrant is exercisable
(other than a subdivision or combination of outstanding shares of such Common
Stock), or in case of the consolidation of the Company with or the merger of the
Company with or into any other corporation or of the sale of the properties and
assets of the Company as, or substantially as, an entirety to any other Person,
each Warrant shall after such capital reorganization, reclassification of such
Common Stock, consolidation, merger or sale be exercisable, upon the terms and
conditions specified in this Agreement, for the number of shares of stock or
other securities or assets to which a holder of the number of Warrant Shares
purchasable (at the time of such capital reorganization, reclassification of
such Common Stock, consolidation, merger or sale) upon exercise of such Warrant
would have been entitled upon such capital reorganization, reclassification of
such Common Stock, consolidation, merger or sale; and in any such case, if
necessary, the provisions set forth in this SECTION 4 with respect to the rights
thereafter of such Warrant shall be appropriately adjusted so as to be
applicable, as nearly as may reasonably be, to any shares of stock or other
securities or assets thereafter deliverable on the exercise of such Warrants.
The Company shall not effect any such consolidation, merger or sale, unless
prior to or simultaneously with the consummation thereof, the successor
corporation (if other than the Company) resulting from such consolidation or
merger or the corporation purchasing such assets or the appropriate corporation
or entity shall assume, by written instrument, the obligation to deliver to each
Warrant
20
<PAGE>
Holder the shares of stock, securities or assets to which, in accordance with
the foregoing provisions, such Warrant Holder may be entitled pursuant to
this SECTION 4.2(f).
(g) If any question shall at any time arise with respect to the
adjusted number of Warrant Shares, such question shall be determined by the
independent firm of certified public accountants of recognized national standing
selected by the Warrant Holder.
(h) Notwithstanding anything in this SECTION 4.2 to the contrary, the
Company shall not be permitted to take any action described in this SECTION 4.2
(such as, but not by way of limitation, any dividend, consolidation merger or
reorganization) if such action is prohibited under any other provision of this
Agreement.
(i) Notwithstanding that the number of Warrant Shares purchasable upon
the exercise of each Warrant may have been adjusted pursuant to the terms
hereof, the Company shall nonetheless not be required to issue fractions of
Warrant Shares upon exercise of each Warrant or to distribute certificates that
evidence fractional shares, but instead shall pay to the holder of each Warrant
the cash value of any such fractional Warrant Shares.
SECTION 3. NOTICES TO WARRANT HOLDERS. Upon any adjustment of the
number of Warrant Shares issuable upon an exercise of the Warrants or any
adjustment of the Warrant Exercise Price pursuant to SECTION 4.3, the Company
shall promptly, but in any event within thirty (30) days thereafter, cause to be
given to each Warrant Holder, at its address appearing on the Warrant Register,
by first class mail, postage prepaid, a certificate signed by the Company's
Financial Officer setting forth the number of Warrant Shares issuable upon the
exercise of each Warrant as so adjusted and the Warrant Exercise Price as so
adjusted, and describing in reasonable detail the facts accounting for such
adjustment and the method of calculation used. Where appropriate, such
certificate may be given in advance and included as part of the notice required
to be mailed under the other provisions of this SECTION 4.3.
In the event:
(a) that the Company shall authorize the issuance to all holders of
its Common Stock of rights or warrants to subscribe for or purchase capital
stock of the Company or of any other subscription rights or warrants; or
(b) that the Company shall issue any shares of Common Stock without
consideration or at a price per share less than $1.00, or issue options, rights,
or
21
<PAGE>
warrants to subscribe for or purchase such Common Stock (or securities
convertible into such Common Stock) without consideration or at a price per
share (or having a conversion price per share, if a security convertible into
such Common Stock) less than $1.00; or
(c) that the Company shall authorize the distribution to all holders
of its Common Stock of shares of its stock, evidences of its indebtedness,
assets, or rights, options, or warrants to subscribe for or purchase such
shares, evidences of indebtedness or assets; or
(d) of any consolidation or merger to which the Company is a party and
for which approval of any shareholders of the Company is required, or of the
conveyance or transfer of the properties and assets of the Company substantially
as an entirety, or of any capital reorganization or reclassification or change
of the Common Stock (other than a change in par value, or from par value to no
par value, or from no par value to par value, or as a result of a subdivision or
combination); or
(e) of the voluntary dissolution, liquidation or winding up of the
Company; or
(f) that the Company proposes to take any other action which would
require an adjustment of the Warrant Exercise Price of the Warrants issued by it
pursuant to SECTION 4.2;
then the Company shall cause to be given to each Warrant Holder at such
Warrant Holder's address appearing on the Warrant Register, at least twenty (20)
days prior to the applicable date hereinafter specified, by first class mail,
postage prepaid, a written notice stating the date as of which the holders of
record of Common Stock to be entitled to receive any such rights, warrants or
distribution are to be determined, or the date on which any such consolidation,
merger, conveyance, transfer, dissolution, liquidation or winding up is expected
to become effective, and the date as of which it is expected that the holders of
record of Common Stock shall be entitled to exchange their shares for securities
or other property, if any, deliverable upon such reclassification,
consolidation, merger, conveyance, transfer, dissolution, liquidation or winding
up.
SECTION 4. RESERVATION AND ISSUANCE OF WARRANT SHARES. The Company will
at all times have authorized, and reserve and keep available, free from
preemptive rights, for the purpose of enabling it to satisfy any obligation to
issue Warrant Shares upon the exercise of the Warrants, the number of shares of
Common Stock deliverable upon exercise of all outstanding Warrants. The Company
covenants that all Warrant Shares issued by it will, upon issuance in accordance
with the terms of this Agreement, be fully paid and nonassessable and free from
all
22
<PAGE>
Taxes with respect to the issuance thereof and free from all Liens other than
Liens arising by, through or under the Warrant Holder to whom such Warrant
Shares were issued.
ARTICLE V
TRANSFER OF SECURITIES
SECTION 1. RESTRICTIONS ON TRANSFER. Prudential understands that the
Securities have not been registered under the Securities Act or any state
securities Laws, and that accordingly, they will not be fully transferable
except as permitted under various exemptions contained in the Securities Act and
applicable state securities Laws, or upon satisfaction of the requirements of
the Securities Act and applicable state securities Laws. Prudential
acknowledges that it must bear the economic risk of its investment in the
Securities for an indefinite period of time (subject, however, to the payment
terms of the Note, and the Company's obligations pursuant to the Registration
Rights Agreement) since they have not been registered under the Securities Act
and applicable state securities Laws and therefore cannot be sold unless they
are subsequently registered or an exemption from registration is available. The
Company agrees that it will effect the transfer of the Securities on its books
and records upon receipt of an opinion of counsel stating that Prudential's
proposed sale or transfer of the Securities by the Holder of such Securities is
exempt from the registration and prospectus delivery requirements of the
Securities Act.
SECTION 2. REGISTRATION, TRANSFER AND EXCHANGE OF WARRANTS. (a) The
Company shall maintain at the offices of the Company as set forth on the
signature pages of this Agreement, the Warrant Register for registration of the
Warrants and Warrant Certificates and transfers thereof. On the Closing Date,
the Company shall register the outstanding Warrants and Warrant Certificates
issued to Prudential. The Company may deem and treat the registered Warrant
Holders as the absolute owners of the Warrants registered to such Holders and
(notwithstanding any notation of ownership or other writing on the Warrant
Certificates made by any Person) for the purpose of any exercise thereof or any
distribution to the Warrant Holders, and for all other purposes.
(b) Upon satisfaction of each condition set forth in SECTION 5.1
hereof, the Company shall register the transfer of any outstanding Warrants in
the Warrant Register upon surrender of the Warrant Certificate(s) evidencing
such Warrants to the Company at the offices of the Company as set forth on the
signature pages of this Agreement, accompanied (if so required by it) by a
written instrument or instruments of transfer in form satisfactory to it, duly
executed by the registered
23
<PAGE>
Warrant Holder or by the duly appointed legal representative thereof. Upon
any such registration of transfer, new Warrant Certificate(s) evidencing such
transferred Warrants shall be issued to the transferee(s) and the surrendered
Warrant Certificate(s) shall be canceled. If less than all the Warrants
evidenced by a Warrant Certificate(s) surrendered for transfer are to be
transferred, a new Warrant Certificate(s) shall be issued to the Warrant
Holder surrendering such Warrant Certificate(s) evidencing such remaining
number of Warrants.
(c) Warrant Certificates may be exchanged at the option of the Warrant
Holder(s) thereof, when surrendered to the Company at the offices of the Company
as set forth on the signature pages of this Agreement, for another Warrant
Certificate or other Warrant Certificates of like tenor and representing in the
aggregate a like number of Warrants. Warrant Certificates surrendered for
exchange shall be canceled.
(d) No charge shall be made for any such transfer or exchange except
for any Tax or other governmental charge imposed in connection therewith.
SECTION 3. MUTILATED OR MISSING WARRANT CERTIFICATES. If any Warrant
Certificate shall be mutilated, lost, stolen or destroyed, the Company shall
issue, in exchange and substitution for and upon cancellation of the mutilated
Warrant Certificate, or in lieu of and substitution for the Warrant Certificate
lost, stolen or destroyed, a new Warrant Certificate of like tenor and
representing an equivalent number of Warrants, but only upon receipt of evidence
reasonably satisfactory to the Company of such loss, theft or destruction of
such Warrant Certificate and, if requested, indemnity reasonably satisfactory to
it. The unsecured indemnity of a Holder that is an institutional investor with
at least $1,000,000,000 of assets shall be satisfactory. No service charge
shall be made for any such substitution, but all expenses and reasonable charges
associated with procuring such indemnity and all stamp, Tax and other
governmental duties that may be imposed in relation thereto shall be borne by
the holder of such Warrant Certificate.
SECTION 4. REGISTRATION, TRANSFER AND EXCHANGE OF NOTES. (a) The
Company shall maintain at the offices of the Company as set forth on the
signature pages of this Agreement, the Note Register for registration of the
Notes and transfers thereof. On the Closing Date, the Company shall register
the outstanding Notes issued to Prudential. The Company may deem and treat the
registered Noteholder as the absolute owner of the Note registered to such
Holder and (notwithstanding any notation of ownership or other writing on the
Note made by any Person) for the purpose of any exercise thereof or any
distribution to the Noteholder, and for all other purposes.
(b) Upon satisfaction of each condition set forth in SECTION 5.1
hereof,
24
<PAGE>
the Company shall register the transfer of any outstanding Note in the Note
Register upon surrender of such Note to the Company at the offices of the
Company as set forth on the signature pages of this Agreement, accompanied
(if so required by it) by a written instrument or instruments of transfer in
form satisfactory to it, duly executed by the registered Noteholder or by the
duly appointed legal representative thereof. Upon any such registration of
transfer, a new Note evidencing such transferred Note shall be issued to the
transferee and the surrendered Note shall be canceled. If less than all of
the principal amount of a Note surrendered for transfer is to be transferred,
a new Note shall be issued to the Noteholder surrendering such Note
evidencing such remaining principal balance.
(c) The Notes may be exchanged at the option of the Noteholders
thereof, when surrendered to the Company at the offices of the Company as set
forth on the signature pages of this Agreement, for another Note or other Notes
of like tenor and representing in the aggregate a like number of Notes. Notes
surrendered for exchange shall be canceled.
(d) No charge shall be made for any such transfer or exchange except
for any Tax or other governmental charge imposed in connection therewith.
SECTION 5. MUTILATED OR MISSING NOTES. If any Note shall be mutilated,
lost, stolen or destroyed, the Company shall issue, in exchange and substitution
for and upon cancellation of the mutilated Note, or in lieu of and substitution
for the Note lost, stolen or destroyed, a new Note of like tenor and
representing the same outstanding principal, but only upon receipt of evidence
satisfactory to the Company of such loss, theft or destruction of such Note and,
if requested, indemnity satisfactory to it. The unsecured indemnity of a Holder
that is an institutional investor with at least $1,000,000,000 of assets shall
be satisfactory. No service charge shall be made for any such substitution, but
all expenses and reasonable charges associated with procuring such indemnity and
all stamp, Tax and other governmental duties that may be imposed in relation
thereto shall be borne by the holder of such Note.
ARTICLE VI
CONDITIONS
SECTION 1. CONDITIONS PRECEDENT TO PRUDENTIAL'S OBLIGATIONS AT CLOSING.
The obligations of Prudential to purchase the Securities pursuant to Section 2.1
are subject to the satisfaction of each of the conditions precedent set forth in
this Section 6.1 on or before the Closing Date. In the event all of the
conditions precedent set forth in this Section 6.1 are not satisfied by such
time, Prudential may,
25
<PAGE>
at its option, terminate this Agreement and the other Transaction Documents
and all obligations of Prudential hereunder and thereunder.
(a) CLOSING DELIVERIES. The Company shall have delivered to
Prudential, in form and substance satisfactory to Prudential each of the
following:
(i) the Note to be purchased by Prudential pursuant to SECTION
2.1 duly executed and delivered by the Company and payable to Prudential;
(ii) certificates issued to Prudential evidencing the Common
Stock Shares to be purchased by Prudential pursuant TO SECTION 2.1;
(iii) Warrant Certificates issued to Prudential by the Company
evidencing the Warrants to be purchased by Prudential pursuant to SECTION
2.1;
(iv) the Amendment to Registration Rights Agreement duly
executed and delivered by the Company, 3TEC, Prudential and the other
parties thereto;
(v) the Participation Rights Agreement duly executed and
delivered by the Company, Prudential and 3TEC;
(vi) a favorable opinion of Hinkle Elkouri Law Firm, L.L.C.,
counsel for the Company, in form and substance satisfactory to Prudential
and its counsel;
(vii) all resolutions, certificates and documents Prudential may
request relating to (A) the organization, existence, good standing and
foreign qualification of the Company and each of its Subsidiaries, (B)
the corporate authority for the execution, delivery and enforceability of
this Agreement and the consummation of the Closing Transactions, (C) the
stock ownership of the Company and each of its Subsidiaries, (D) evidence
of all resolutions and related documents necessary to increase the
Company's outstanding capital, if necessary, and (E) such other matters
relevant to the foregoing as Prudential shall reasonably request, all of
which shall be in form and substance satisfactory to Prudential and its
counsel;
(viii) if applicable, the waiting period applicable to the
transactions contemplated hereby under the HSR Act shall have expired or
been terminated and all filings required to be made prior to the Closing
Date, and all consents, approvals, permits and authorizations required to
be obtained prior to the Closing Date from, any Governmental Authority in
connection
26
<PAGE>
with execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby shall have been made or obtained.
(ix) evidence satisfactory to Prudential that all Closing
Transactions have been consummated;
(x) a certificate from an Authorized Officer of the Company
certifying that (A) neither a Default nor an Event of Default has
occurred, and (B) each and every representation and warranty of the
Company in the Transaction Documents is true and correct in all material
respects;
(xi) written consent to the incurrence of the Debt to evidenced
by the Notes and the issuance of the Common Stock Shares and the Warrants
by the lenders party to the Compass Senior Credit Agreement and 3TEC; and
(xii) such other documents, instruments and agreements as
Prudential shall reasonably request in light of the transactions
contemplated hereunder.
The documents, certificates and opinions referred to in this SECTION 6.1(a)
shall be delivered to Prudential no later than the Closing Date and shall,
except as expressly provided otherwise, be dated the Closing Date.
(b) LEGAL MATTERS. All legal matters with respect to the Company and
its Subsidiaries, the Transaction Documents and the Closing Transactions shall
be acceptable to Prudential.
(c) ABSENCE OF DEFAULT. No Default or Event of Default shall have
occurred which is continuing.
(d) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company contained in this Agreement and in the other
Transaction Documents shall be true and correct in all material respects on the
Closing Date as if they were made on such date (in determining the truth and
correctness of any representation or warranty no effect shall be given to any
limitation contained in such representation or warranty as to Knowledge).
(e) NO MATERIAL ADVERSE EFFECT. No event has occurred or condition
exists which has had or could be expected to have a Material Adverse Effect on
the Company.
(f) PAYMENT OF EXPENSES. Without limiting the provisions of Section
27
<PAGE>
11.3 of this Agreement, Baker & Botts, L.L.P. shall have received its fees and
expenses incurred as counsel to Prudential to the extent such fees and expenses
are reflected in a statement rendered to the Company prior to the Closing Date.
SECTION 2. CONDITIONS PRECEDENT TO THE COMPANY'S OBLIGATIONS AT CLOSING.
The obligations of the Company to sell the Securities pursuant to SECTION 2.1
are subject to the satisfaction of each of the conditions precedent set forth in
this SECTION 6.2 on or before 10:00 a.m. (Dallas, Texas time) on the Closing
Date. In the event all of the conditions precedent set forth in this SECTION
6.2 are not satisfied by such time, the Company may, at its option, terminate
this Agreement and the other Transaction Documents and all obligations of the
Company hereunder and thereunder.
(a) CLOSING DELIVERIES. Prudential shall have delivered to the
Company, in form and substance satisfactory to the Company each of the
following:
(i) the Purchase Price to be paid by Prudential pursuant to
SECTION 2.1;
(ii) the Amendment to Registration Rights Agreement;
The documents and certificates referred to in this SECTION 6.2(a) shall
be delivered to the Company no later than the Closing Date and shall, except as
expressly provided otherwise, be dated the Closing Date.
(b) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Prudential contained in this Agreement and in the other
Transaction Documents shall be true and correct in all material respects on the
Closing Date as if they were made on such date.
ARTICLE VII
REPRESENTATIONS AND WARRANTIES
In order to induce Prudential to purchase the Securities to be purchased
by it hereunder, the Company hereby represents and warrants to Prudential that
each of the following statements (a) is true and correct on the date hereof
(except to the extent such representations and warranties refer to a Schedule in
the Disclosure Schedule that explicitly refers to an earlier date).
SECTION 1. CORPORATE EXISTENCE AND POWER. Each of the Company and each
of its Subsidiaries (a) is a corporation, duly organized, validly existing and
in
28
<PAGE>
good standing under the Laws of the state of its incorporation, (b) has all
corporate power and authority necessary to carry on its business as now
conducted and as proposed to be conducted, and (c) is duly qualified as a
foreign corporation in each jurisdiction where a failure to be so qualified
could have a Material Adverse Effect on the Company or such Subsidiary.
SECTION 2. CORPORATE AND GOVERNMENTAL AUTHORIZATION; CONTRAVENTION. The
execution, delivery and performance of this Agreement and the other Transaction
Documents by each of the Company and each of its Subsidiaries (to the extent
each is a party to this Agreement or the other Transaction Documents) are within
its corporate powers, have been duly authorized by all necessary corporate
action, require no action by or in respect of, or filing with, any Governmental
Authority, and, except for matters which have been waived in writing by the
appropriate Person, do not contravene, or constitute a default under, any
provision of applicable Law or of the Charter Documents or of any material
judgment, injunction, order, decree or Material Agreement binding upon the
Company or any of its Subsidiaries or its respective assets, or result in the
creation or imposition of any Lien on any asset of the Company or any of its
Subsidiaries.
SECTION 3. BINDING EFFECT. This Agreement constitutes the valid and
binding agreement of the Company; each other Transaction Document when executed
and delivered in accordance with this Agreement, will constitute the valid and
binding obligation of the Company and each of its Subsidiaries which is a party
thereto, in each case enforceable in accordance with its terms except as (i) the
enforceability thereof may be limited by bankruptcy, insolvency or similar Laws
affecting creditors rights generally, and (ii) the availability of equitable
remedies may be limited by equitable principles of general applicability.
SECTION 4. CAPITALIZATION. SCHEDULE 7.4 of the Disclosure Schedule
accurately and completely sets forth for each of the Company and its
Subsidiaries its authorized, issued and outstanding capital stock of every
class. Except as set forth SCHEDULE 7.4 of the Disclosure Schedule and except
for the Warrants and registration rights provided in the Registration Rights
Agreement, (x) there are not outstanding any options, warrants or other rights
to acquire capital stock of any class of the Company or any of its Subsidiaries
or securities convertible into capital stock of the Company or any of its
Subsidiaries of any class, (y) no Person has any preemptive or similar rights
with respect to any subsequent issue of stock by the Company or any of its
Subsidiaries, and (z) no Person has any right to require the Company or any of
its Subsidiaries to register any securities of the Company or any of its
Subsidiaries under the Securities Act. Schedule I of the Amendment to the
Registration Rights Agreement accurately and completely sets forth all capital
stock of any class of the Company and its Subsidiaries, all options, warrants or
other rights to acquire capital stock of any class of the Company and its
Subsidiaries and
29
<PAGE>
all securities convertible into any class of capital stock of the Company and
its Subsidiaries respectively owned by the parties named therein (other than
Prudential).
SECTION 5. ISSUANCE OF SECURITIES. The Securities to be issued on the
Closing Date, when issued upon payment of the applicable Purchase Price in
accordance with SECTION 2.1, will be duly authorized, validly issued, fully paid
and non-assessable and will be free and clear of all Liens, claims and
encumbrances including pre-emptive rights. The Warrant Shares, when issued upon
an exercise of the Warrants, and the Conversion Shares, when issued upon a
conversion of the amount of principal and unpaid interest on the Notes, will be
duly authorized, validly issued, fully paid and nonassessable and free and clear
of all Liens, claims and encumbrances, including, without limitation, all
preemptive rights.
SECTION 6. FINANCIAL STATEMENTS. The Company Financial Statements were
prepared in accordance with the applicable published rules and regulations of
the Commission with respect thereto and in accordance with GAAP applied on a
consistent basis during the periods involved (except as may be indicated in the
notes thereto or, in the case of unaudited statements, as permitted by Rule
10-01 of Regulation S-X of the Commission) and fairly present in all material
respects, in accordance with applicable requirements of GAAP (in the case of
unaudited statements, subject to normal, recurring adjustments), the
consolidated financial position of the Company and its Subsidiaries as of their
respective dates and the consolidated results of operations and the consolidated
cash flows of the Company and its Subsidiaries for the periods presented
therein. The are no material liabilities of the Company or any Subsidiary
(contingent or otherwise), other than as disclosed in the Company's Financial
Statements. There are no material imbalances of production from the oil and gas
properties of the Company or its Subsidiaries whether required to be disclosed
pursuant to GAAP or otherwise. Since December 31, 1998, no event has occurred or
condition exists which has had or could be expected to have a Material Adverse
Effect.
SECTION 7. CONFLICTING AGREEMENTS AND OTHER MATTERS. Neither the
Company nor any of its Subsidiaries is a party to any contract or agreement or
subject to any charter or other corporate or company restriction which
materially and adversely affects its business, property or assets, or financial
condition of the Company and its Subsidiaries taken as a whole. Neither the
execution nor delivery of this Agreement, the Notes, the Warrant Certificates or
any of the other Transaction Documents, nor the offering, issuance and sale of
the Notes, the Warrants or the Common Stock Shares nor fulfillment of nor
compliance with the terms and provisions of this Agreement, the Notes, the
Warrant Certificates or any of the other Transaction Documents will conflict
with, or result in a breach of the terms, conditions or provisions of, or
constitute a default under, or result in any
30
<PAGE>
violation of, or result in the creation of any Lien upon any of the
properties or assets of the Company or any of its Subsidiaries pursuant to,
the charter, by-laws or other organizational documents of the Company or any
of its Subsidiaries, any award of any arbitrator or any agreement (including
any agreement with stockholders), instrument, order, judgment, decree,
statute, law, rule or regulation to which the Company or any of its
Subsidiaries is subject. Neither the Company nor any of its Subsidiaries is
a party to, or otherwise subject to any provision contained in, any
instrument evidencing Debt of the Company or such Subsidiary, any agreement
relating thereto or any other contract or agreement (including its charter or
other organizational document) which limits the amount of, or otherwise
imposes restrictions on the incurring of, Debt of the Company of the type to
be evidenced by the Notes except the Compass Senior Credit Agreement and the
Other Securities Purchase Agreements.
SECTION 8. COMPASS DEBT DOCUMENTS. The Company has provided to or made
available to Prudential with a true and correct copy of all of the Compass
Senior Debt Documents including all amendments and modifications thereto. No
rights or obligations of any party to any of such Compass Senior Debt Documents
have been waived, and no party to any of such Compass Senior Debt Documents is
in default of its obligations thereunder. Each of such Compass Senior Debt
Documents is a valid, binding and enforceable obligation of the parties thereto
in accordance with its terms and is in full force and affect.
SECTION 9. OUTSTANDING DEBT. SCHEDULE 7.9 of the Disclosure Schedule
contains a complete and accurate description of all Debt of the Company and each
of its Subsidiaries outstanding in a principal amount in excess of $100,000 on
the date hereof. Neither the Company nor any of its Subsidiaries is in default
in payment of any Debt with respect to which it is an obligor or in default of
any covenant, agreement, representation, warranty or other term of any document,
instrument or agreement evidencing, securing or otherwise pertaining to any such
Debt.
SECTION 10. TRANSACTIONS WITH AFFILIATES. Except for the Shareholders
Agreement and the Registration Rights Agreement, all contracts, agreements and
other arrangements (whether written, oral, express or implied) between the
Company or any of its Subsidiaries and any Affiliate of the Company and its
Subsidiaries in existence on the date hereof, including, without limitation, all
Investments of the Company or any of its Subsidiaries in any Affiliate of the
Company or any of its Subsidiaries are on terms and conditions substantially as
favorable to the Company or such Subsidiary as would be obtainable by it in a
comparable arms-length transaction with a Person other than an officer,
director, shareholder, Subsidiary or Affiliate.
31
<PAGE>
SECTION 11. LITIGATION. Except as set forth on SCHEDULE 7.11 of the
Disclosure Schedule, there is no action, suit, investigation or proceeding
pending or, to the knowledge of the Company, threatened against the Company or
any of its Subsidiaries, or any properties or rights of the Company or any of
its Subsidiaries, by or before any court, arbitrator or Governmental Authority.
There is no action, suit, investigation or proceeding pending or threatened
against the Company or any of its Subsidiaries which purports to affect the
validity or enforceability of this Agreement, any Note, the Warrant Certificates
or the Common Stock Shares.
SECTION 12. ERISA. Neither the Company nor any of its Subsidiaries nor
any ERISA Affiliate maintains or contributes to any Pension Plan other than the
Middle Bay Oil Company, Inc. 401(k) Plan (the "401(k) PLAN"). Each such Pension
Plan is in compliance in all material respects with its terms and the applicable
provisions of ERISA and the IRC. Except as required by law, none of the Company
or any of its Subsidiaries nor any ERISA Affiliate has any commitment to create
any additional Pension Plans. Except for the 401(k) Plan, neither the Company
nor any of its Subsidiaries nor any ERISA Affiliate has ever sponsored, adopted,
maintained or been obligated to contribute to, or had any liability under, any
Pension Plan. There is no material violation of ERISA with respect to the
filing of applicable reports, documents and notices regarding the Pension Plans
with the Secretary of the Treasury or the furnishing of such documents to the
participants and beneficiaries of the Pension Plans, and, to the best of the
Company's knowledge, with respect to each Pension Plan all other reports
required under ERISA or the IRC to be filed with any Governmental Authority have
been duly filed and all such reports are true and correct in all material
respects as of the dates given. Each Pension Plan that is intended to be
"qualified" within the meaning of section 401(a) of the IRC is, and has been
during the period from its adoption to date, so qualified, both as to form and,
to the best of the Company's knowledge, has been qualified, and all necessary
governmental approvals, including a favorable determination as to the
qualification under the IRC of each of such Pension Plans and each amendment
thereto, have been timely obtained or application for a favorable determination
will be filed prior to the applicable filing deadlines. Each trust created
under any such Pension Plan intended to be qualified within the meaning of
section 401(a) of the IRC and each trust described in section 501(c)(9) of the
IRC is exempt from federal income taxation under section 501(a) of the IRC and
has been so exempt during the period from creation to date. The Company has no
pending or, to the best of the Company's knowledge, threatened claims, lawsuits
or actions (other than routine claims for benefits in the ordinary course)
asserted or instituted against, and the Company has no knowledge of any
threatened litigation or claims against, the assets of any Pension Plan or its
related trust or against any fiduciary of a Pension Plan with respect to the
operation of such Pension Plan. Neither the Company nor any of its Subsidiaries
has received notice of any pending investigations, inquires or audits with
respect to any Pension Plan by any regulatory
32
<PAGE>
agency. Neither the Company nor any of its Subsidiaries has engaged in any
prohibited transactions, within the meaning of section 406 of ERISA or
section 4975 of the IRC, in connection with any Pension Plan. Neither the
Company nor any of its Subsidiaries maintains or has established any Pension
Plan which is a welfare benefit plan within the meaning of section 3(1) of
ERISA which provides for retiree medical liabilities or continuing benefits
or coverage for any participant or any beneficiary of any participant after
such participant's termination of employment except as may be required by the
Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA")
and the regulations thereunder, and at the expense of the participant or the
beneficiary of the participant. The Company and each of its Subsidiaries
that maintains a Pension Plan that is a welfare benefit plan within the
meaning of section 3(1) of ERISA has complied with any applicable notice and
continuation requirements of COBRA and the regulations thereunder. To the
best of the Company's knowledge, none of the Company or any of its
Subsidiaries maintains, has established, or has ever participated in, a
multiple employer welfare benefit arrangement within the meaning of section
3(40)(A) of ERISA. The execution and delivery of the Agreement and the
issuance and sale of the Securities will be exempt from, or will not involve
any transaction which is subject to, the prohibitions of section 406 of ERISA
and will not involve any transaction in connection with which a penalty could
be imposed under section 502(i) of ERISA or a tax could be imposed pursuant
to section 4975 of the IRC. The representation by the Company in the next
preceding sentence is made in reliance upon and subject to the accuracy of
the representation of Prudential in SECTION 8.2.
SECTION 13. TAXES AND FILING OF TAX RETURNS. The Company and each of
its Subsidiaries has filed all Tax returns required to have been filed by it or
has legally extended such returns and has paid all Taxes shown to be due and
payable on such returns, including interest and penalties, and all other Taxes
which are payable by the Company or any of its Subsidiaries. The Company does
not know of any proposed Tax assessment against the Company or any of its
Subsidiaries and all Tax liabilities of the Company and each of its Subsidiaries
are adequately provided for and no Tax liability of the Company or any of its
Subsidiaries has been asserted by the Internal Revenue Service or any other
Governmental Authority for Taxes in excess of those already paid.
SECTION 14. TITLE TO ASSETS. The Company has and each of its
Subsidiaries has Defensible Title to its respective real properties and to all
its other respective properties and assets (other than properties which it
leases), including the properties and assets (other than properties and
assets disposed of in the ordinary course of business), subject only to
Permitted Encumbrances. All leases necessary in any material respect for the
conduct of the respective businesses of the Company and its Subsidiaries are
valid and subsisting
33
<PAGE>
and are in full force and effect. For the purposes of this SECTION 7.14,
subparagraph (e) of the definition of Permitted Encumbrances shall read as
follows: (e) Liens, easements, rights-of-way, restrictions, servitudes,
permits, conditions, covenants, exceptions, reservations and other similar
encumbrances incurred in the ordinary course of business or existing on
property and not in the aggregate materially impairing the value of the
assets of the Company or its Subsidiaries or interfering with the ordinary
conduct of the business of the Company or its Subsidiaries or rights to any
of their assets."
SECTION 15. LICENSES, PERMITS, ETC. The Company and each of its
Subsidiaries possess all franchises, certificates, licenses, permits, consents,
authorizations, exemptions and orders of Governmental Authorities as are
necessary to carry on their respective businesses as now being conducted and as
proposed to be conducted, except to the extent a failure to have such
franchises, certificates, licenses, permits, consents, authorizations,
exemptions and orders could not have a Material Adverse Effect.
SECTION 16. PROPRIETARY RIGHTS. The Company and each of its
Subsidiaries has ownership of, or valid licenses to use, all trademarks,
copyrights, patents and other proprietary rights used in their respective
businesses. To the best of the Company's knowledge, the operation of the
businesses of the Company and its Subsidiaries does not infringe any patent,
copyright, trademark or other proprietary rights of others, and, neither the
Company nor any of its Subsidiaries has received any notice from any third party
of any such alleged infringement by the Company or any of its Subsidiaries. The
Company and each of its Subsidiaries has taken reasonable steps to establish and
preserve its respective ownership of all patents, copyrights, trademarks, trade
secrets and other proprietary rights. The Company is not aware of any
infringement by others of its or any its Subsidiaries' patents, copyrights,
trademarks or other proprietary rights.
SECTION 17. COMPLIANCE WITH LAW. To the Knowledge of the Company, the
business and operations of the Company and each of its Subsidiaries have been
and are being conducted in accordance with all applicable Laws.
SECTION 18. ENVIRONMENTAL MATTERS.
(a) Except as set forth on SCHEDULE 7.18 of the Disclosure Schedule,
(i) the reserves reflected in the Company's Financial Statements relating to
environmental matters were adequate under GAAP as of the date of such financial
statements, and neither the Company nor its Subsidiaries has incurred any
material liability in respect of any environmental matter since the that date,
and (ii) the SEC Documents include all information relating to environmental
matters required to be
<PAGE>
included therein under the rules and regulations of the Commission applicable
thereto.
(b) Except as set forth in SCHEDULE 7.18 of the Disclosure Schedule:
(i) Each of the Company and its Subsidiaries has conducted its
business and operated its assets, and is conducting its business and
operating its assets, in material compliance with all Environmental Laws.
(ii) Neither the Company nor any of its Subsidiaries has been
notified by any Governmental Authority that any of the operations or
assets of the Company or its Subsidiaries is the subject of any
investigation or inquiry by any Governmental Authority evaluating whether
any material remedial action is needed to respond to a release of
Hazardous Substance or to the improper storage or disposal (including
storage or disposal at offsite locations) of any Hazardous Substance.
(iii) Neither the Company nor any of its Subsidiaries and no
other Person has filed any notice under any federal, state or local law
indicating that (i) the Company or its Subsidiaries is responsible for
the improper release into the environment, or the improper storage or
disposal of any Hazardous Substance, or (ii) any Hazardous Substance is
improperly stored or disposed of upon any property of the Company or its
Subsidiaries.
(iv) Neither the Company nor any of its Subsidiaries has any
Substance contingent liability in connection with (i) release into the
environment at or on the property now or previously owned or leased by
the Company or its Subsidiaries, or (ii) the storage or disposal of any
Hazardous Substance.
(v) Neither the Company nor any of its Subsidiaries has
received any claim, complaint, notice, inquiry or request for information
which remains unresolved as of the date hereof with respect to any
alleged violation of any Environmental Laws or regarding potential
liability under any Environmental Laws relating to operations or
conditions of any facilities or property owned, leased or operated by the
Company or its Subsidiaries.
(vi) There are no sites, locations or operations at which the
Company or its Subsidiaries are currently undertaking, or have completed,
any remedial or response action relating to any such disposal or release,
as required by Environmental Laws.
(vii) There are no physical or environmental conditions existing
35
<PAGE>
on any property owned or leased by the Company or any Subsidiary
resulting from the Company's or any Subsidiary's operations or
activities, past or present, at any location, that would give rise to any
on-site or off-site remedial obligations under any applicable
Environmental Laws, other than normal and ordinary remedial work
associated with plugging and abandoning of oil and gas facilities.
SECTION 19. Intentionally Left Blank.
SECTION 20. FISCAL YEAR. The Company's fiscal year is from January 1 to
December 31.
SECTION 21. NO DEFAULT. Neither a Default nor an Event of Default has
occurred.
SECTION 22. INSURANCE. SCHEDULE 7.22 of the Disclosure Schedule
contains a complete and accurate list and description of all insurance policies
maintained by the Company as of the date hereof.
SECTION 23. GOVERNMENT REGULATION. Neither the Company nor any of its
Subsidiaries is subject to regulation under the Investment Company Act of 1940,
the Public Utility Holding the Company Act of 1935, the Interstate Commerce Act
(as any of the preceding acts have been amended), or any other Law which
regulates the incurring by the Company or any of its Subsidiaries of Debt,
including, but not limited to, Laws relating to common contract carriers of the
sale of electricity, gas, steam, water or other public utility services.
SECTION 24. SECURITIES LAWS. Assuming Prudential's representations made
herein are true and correct, the offer, issuance and sale of the Securities (a)
are and will be exempt from the registration and prospectus delivery
requirements of the Securities Act, (b) have been registered or qualified (or
are exempt from registration and qualification) under the registration, permit
or qualification requirements of all applicable state securities Laws, and (c)
are and will be accomplished in conformity with all other federal and applicable
state securities Laws.
SECTION 25. SEC DOCUMENTS. The Company is current in its obligations to
file all periodic reports and proxy statements with the Commission required to
be filed under the Exchange Act. Prudential has had available to it a true and
correct complete copy of each report, schedule, Registration Statement and
definitive proxy statement filed by the Company with the Commission since
October 4, 1993, and prior to the date of this Agreement (the "SEC Documents"),
which are all the documents (other than preliminary material) that the Company
was required to file
36
<PAGE>
with the Commission since such date. As of their respective dates, the SEC
Documents complied in all material respects with the requirements of the
Securities Act or the Exchange Act as the case may be, and the rules and
regulations of the Commission thereunder applicable to such SEC Documents,
and none of the SEC Documents contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
SECTION 26. OIL AND GAS OPERATIONS. Except as set forth on SCHEDULE
7.26 of the Disclosure Schedule:
(a) All wells included in the Oil and Gas Interests of the Company or
its Subsidiaries (the "Wells") have been drilled and (if completed) completed,
operated and produced in accordance with generally accepted oil and gas field
practices and in compliance in all material respects with applicable oil and gas
leases and applicable laws, rules, regulations. The Wells have been drilled and
completed within the limits permitted by contract, pooling or unit agreement,
and by law; and all drilling and completion of the Wells and all development and
operations have been conducted in compliance with all applicable laws,
ordinances, rules, regulations and permits, and judgments, orders and decrees of
any court or governmental body or agency. No Well is subject to penalties on
allowables because of any overproduction or any other violation of applicable
laws, rules, regulations or permits or judgments, orders or decrees of any court
or governmental body or agency that would prevent such Well from being entitled
to its full legal and regular allowable from and after the Closing Date as
prescribed by any court or governmental body or agency.
(b) There are no Wells 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 producing in commercial quantities;
(iii) are subject to exceptions to a requirement to plug and
abandon issued by a regulatory authority having jurisdiction over the
applicable lease; or
(iv) to the best knowledge of the Company, have been plugged and
abandoned but have not been plugged in accordance with all applicable
requirements of each regulatory authority having jurisdiction over the
Oil
37
<PAGE>
and Gas Interests.
(c) With respect to the oil, gas and other mineral leases, unit
agreements, pooling agreements, communitization agreements and other documents
creating interests comprising the Oil and Gas Interests: (a) the Company has
fulfilled all requirements in all material respects for filings, certificates,
disclosures of parties in interest, and other similar matters contained in (or
otherwise applicable thereto by law, rule or regulation) such leases or other
documents and are fully qualified to own and hold all such leases or other
interests; (b) there are no provisions applicable to such leases or other
documents which increase the royalty share of the lessor thereunder, and (c)
upon the establishment and maintenance of production in commercial quantities,
the leases and other interest are to be in full force and effect over the
economic life of the property involved and do not have terms fixed by a certain
number of years.
(d) Proceeds from the sale of Hydrocarbons produced from the Company's
and its Subsidiaries' Oil and Gas Interests are being received by the Company
and its Subsidiaries in a timely manner and are not being held in suspense for
any reason (except for amounts, individually or in the aggregate, not in excess
of $100,000 and held in suspense in the ordinary course of business).
(e) Seller is not obligated, by virtue of a prepayment arrangement, a
"take or pay" arrangement, a production payment or any other arrangement to
deliver Hydrocarbons produced from the Oil and Gas Interests at some future time
without then or thereafter receiving full payment therefor.
SECTION 27. FINANCIAL AND COMMODITY HEDGING. SCHEDULE 7.27 of the
Disclosure Schedule accurately summarizes the outstanding Hydrocarbon and
financial hedging positions of the Company and its Subsidiaries (including fixed
price controls, collars, swaps, caps, hedges and puts) as of the date reflected
on said Schedule.
SECTION 28. BOOKS AND RECORDS. All books, records and files of the
Company and its Subsidiaries (including those pertaining to the Company's or its
Subsidiaries' Oil and Gas Interests, wells and other assets, those pertaining to
the production, gathering, transportation and sale of Hydrocarbons, and
corporate, accounting, financial and employee records) (a) have been prepared,
assembled and maintained in accordance with usual and customary policies and
procedures and (b) fairly and accurately reflect the ownership, use, enjoyment
and operation by the Company and its Subsidiaries of their respective assets.
SECTION 29. RESERVE REPORT. To the knowledge of the Company, the
estimates of proved reserves of oil and natural gas prepared by Lee Keeling &
38
<PAGE>
Associates, Inc. and H. J. Gruy and Associates, Inc. (together, the "RESERVE
ENGINEER") as of December 31, 1998 (the "RESERVE REPORT"): (i) are reasonable;
and (ii) were prepared in accordance with generally accepted petroleum
engineering and evaluation principles as set forth in the Standards Pertaining
to the Estimating and Auditing of Oil and Gas Reserve Information promulgated by
the Society of Petroleum Engineers. The engineering information and production
data used in the preparation of the Reserve Report, which information and data
have been available to Prudential, are the information and data which are used
by the Company in good faith in the ordinary course of business. The factual
information underlying the estimates of the reserves of the Company and the
Subsidiaries, which was supplied by the Company to the Reserve Engineers for the
purpose of preparing the Reserve Report, including, without limitation,
production, volumes, sales prices for production, contractual pricing provisions
under oil or gas sales or marketing contracts under hedging arrangements, costs
of operations and development, and working interest and net revenue information
relating to the Company's and the Subsidiaries' ownership interests in
properties, was true and correct in all material respects on the date of such
Reserve Report; the estimates of future capital expenditures and other future
exploration and development costs supplied to the Reserve Engineers were
prepared in good faith and with a reasonable basis; the information provided to
the Reserve Engineers for purposes of preparing the Reserve Report was prepared
in accordance with customary industry practices; other than normal production of
the reserves and intervening oil and gas price fluctuations, the Company is not
as of the date hereof and as of the Closing Date will not be, aware of any facts
or circumstances that would result in a materially adverse change in the
reserves in the aggregate, or the aggregate present value of future net cash
flows therefrom, as described in the Reserve Report.
SECTION 30. NATURE OF COMPANY ASSETS. The assets of the Company and of
the Subsidiaries consist solely of (i) reserves of oil and gas, rights to
reserves of oil and gas and associated exploration and production assets with a
fair market value not exceeding $500 million and (ii) other assets with a fair
market value not exceeding $15 million. For purposes of this Section 7.33, the
term "associated exploration and production assets" shall have the meaning set
forth in Section 802.3 of the Rules promulgated pursuant to HSR Act.
SECTION 31. FULL DISCLOSURE. No information heretofore furnished by or
on behalf of the Company or any of its Subsidiaries to Prudential for the
purposes of this Agreement or any other Transaction Document or any transaction
contemplated hereby or thereby, contained, and no written information hereafter
furnished by or on behalf of the Company or any of its Subsidiaries to
Prudential for purposes of this Agreement or any other Transaction Document or
any transaction contemplated hereby or thereby will contain, any untrue
statement of a material fact or omit a material fact necessary to make the
statements therein not
39
<PAGE>
misleading. There is no fact or circumstance known to the Company which may
have a Material Adverse Effect on the Company or any of its Subsidiaries
which has not been disclosed to Prudential.
SECTION 32. YEAR 2000 COMPLIANCE. The Company's disclosure in its
Annual Report on Form 10-KSB for the year ended December 31, 1998 under the
heading "Year 2000 Compliance" accurately states the Company's statement of
readiness and contingency plans relative to the computer software which is
material to the conduct of the business and operations of the Company and its
Subsidiaries being capable of recording, storing, processing and presenting
calendar dates falling on or after January 1, 2000 in substantially the same
manner and with the same functionality as such software records, stores,
processes and presents such calendar dated falling on or before December 31,
1999.
SECTION 33. USE OF PROCEEDS. Neither the Company nor any Subsidiary
owns or has any present intention of acquiring any "margin stock" as defined in
Regulation U (12 CFR Part 221) of the Board of Governors of the Federal Reserve
System (herein called "margin stock"). The proceeds of sale of the Securities
will be used for the acquisition and development of oil and gas properties and
for general corporate purposes. None of such proceeds will be used, directly or
indirectly, for the purpose, whether immediate, incidental or ultimate, of
purchasing or carrying any margin stock or for the purpose of maintaining,
reducing or retiring any Debt which was originally incurred to purchase or carry
any stock that is currently a margin stock or for any other purpose which might
constitute this transaction a "purpose credit" within the meaning of such
Regulation U.
SECTION 34. NPI PLAN AND SEP/IRA PLAN. The Company's Employee Net
Profits Interest Incentive Compensation Plan ("NPI PLAN") has been canceled and
the Company's SEP/IRA Plan established in 1993 has been terminated.
SECTION 35. CERTAIN AGREEMENTS. The Company has delivered to Prudential
copies of each of the Employment Agreement, the Registration Rights Agreement,
the Shareholders Agreement and such copies are true, correct and complete copies
of such agreements and none of such agreements have been amended or modified
since the date of such agreement and all of such agreements remain in full force
and effect.
ARTICLE VIII
REPRESENTATIONS AND WARRANTIES OF PRUDENTIAL
In order to induce the Company to issue and sell the Securities to
Prudential hereunder, Prudential hereby represents and warrants to the Company
as follows:
40
<PAGE>
SECTION 1. NATURE OF PURCHASE. Prudential is not acquiring the
Securities to be purchased by it hereunder with a view to or for sale in
connection with any distribution thereof within the meaning of the Securities
Act, provided that the disposition of its property shall at all times be and
remain within its control.
SECTION 2. SOURCE OF FUNDS. The source of the funds being used by
Prudential to pay the purchase price of the Securities being purchased by
Prudential hereunder constitutes assets: (i) allocated to the "insurance
company general account" of Prudential (as such term is defined under Section V
of the United States Department of Labor's Prohibited Transaction Class
Exemption ("PTCE") 95-60), and as of the date of the purchase of the Securities
Prudential satisfies all of the applicable requirements for relief under
Sections I and IV of PTCE 95-60; (ii) allocated to a separate account maintained
by Prudential in which no employee benefit plan, other than employee benefit
plans identified on a list which has been furnished by Prudential to the
Company, participates to the extent of 10% or more; or (iii) of an investment
fund, the assets of which do not include assets of any employee benefit plan
within the meaning of ERISA. For the purpose of this Section 8.2, the terms
"separate account" and "employee benefit plan" shall have the respective
meanings specified in section 3 of ERISA.
ARTICLE IX
COVENANTS
SECTION 1. MAINTENANCE OF INSURANCE. The Company will, and will cause
each of its Subsidiaries to, at all times maintain or cause to be maintained
insurance issued by insurers of recognized responsibility covering such risks
and in such amounts as are customary in the case of companies of established
reputation engaged in the same or similar business and similarly situated.
SECTION 2. PAYMENT OF TAXES AND CLAIMS. The Company will, and will
cause each of its Subsidiaries to, pay when due (a) all Taxes imposed upon it or
its respective assets and, with respect to its respective franchises, business,
income or profits, pay such Taxes before any material penalty or interest
accrues thereon, and (b) all material claims (including, without limitation,
claims for labor, services, materials and supplies) for sums which have become
due and payable; provided, however, no payment of Taxes or claims shall be
required if (i) the amount, applicability or validity thereof is being contested
in good faith by appropriate action promptly initiated and diligently conducted
in accordance with good business practices and no material part of the property
or assets of each holder of Securities is the subject of any pending levy or
execution, and (ii) the Company has notified each holder of Securities of such
circumstances in reasonable detail.
41
<PAGE>
SECTION 3. COMPLIANCE WITH LAWS AND DOCUMENTS. The Company will, and
will cause each of its Subsidiaries to, comply with the provisions of (a) all
Laws, (b) its Charter Documents, and (c) every Material Agreement to which the
Company or any of its Subsidiaries is a party or by which the Company's or any
of its Subsidiaries' properties are bound.
SECTION 4. OPERATION OF PROPERTIES AND EQUIPMENT. The Company will, and
will cause each of its Subsidiaries to, at all times, maintain, preserve and
keep all operating equipment used or useful in the operation of their respective
businesses in proper repair, working order and condition, and make all necessary
or appropriate repairs, renewals, replacements, additions and improvements
thereto so that the efficiency of such equipment shall at all times be properly
preserved and maintained; PROVIDED, that, no item of operating equipment need be
so repaired, renewed, replaced, added to or improved, if the Company shall in
good faith determine that such action is not necessary or desirable for the
continued efficient and profitable operation of the Company's and its
Subsidiaries' businesses.
SECTION 5. ADDITIONAL DOCUMENTS. The Company will, and will cause each
of its Subsidiaries to, cure promptly any defects in the creation and issuance
of the Securities, and the execution and delivery of this Agreement and the
other Transaction Documents, and, at the Company's sole expense, promptly and
duly execute and deliver, and cause each of its Subsidiaries to promptly execute
and deliver, to the holders of the Securities, upon reasonable request, all such
other and further documents, agreements and instruments in compliance with or
accomplishment of the covenants and agreements of the Company and each of its
Subsidiaries in this Agreement and the other Transaction Documents, all as may
be reasonably necessary or appropriate in connection therewith.
SECTION 6. MAINTENANCE OF BOOKS AND RECORDS. The Company will, and will
cause each of its Subsidiaries to, maintain proper books of record and account
in which true and correct entries in conformity with GAAP shall be made on a
timely basis of all dealings and transactions in relation to the Company's and
its Subsidiaries' businesses and activities.
SECTION 7. ENVIRONMENTAL MATTERS.
(a) The Company will, and will cause each of its Subsidiaries to,
comply with all Environmental Law and Laws applicable to their respective
properties and operations, including, without limitation, all Hazardous
Substances transportation, storage, disposal, remediation and similar
requirements of applicable Environmental Law and Laws.
(b) Notwithstanding any other provision contained within this
42
<PAGE>
Agreement or the other Transaction Documents, the Company shall immediately
orally notify each holder of Securities of any Hazardous Discharge or the
receipt of any Environmental Complaint relating to any property or assets owned
by the Company or any of its Subsidiaries or affecting any properties or assets
owned or leased by other Persons and shall furnish each holder of Securities
with written notice of such Hazardous Discharge or Environmental Complaint
within five (5) days of the oral notification.
SECTION 8. INSPECTION OF PROPERTY. The Company will permit, and will
cause its Subsidiaries to permit, any Person designated by the holder of any
Note in writing:
(a) NO DEFAULT -- if no Default or Event of Default then exists, at
the expense of such holder, and upon reasonable prior notice to the Company, to
visit the principal executive office of the Company or any Subsidiary, to
discuss the affairs, finances and accounts of the Company or any Subsidiary with
the Company's or such Subsidiary's officers, and (with the consent of the
Company, which consent will not be unreasonably withheld) its independent public
accountants, and (with the consent of the Company, which consent will not be
unreasonably withheld) to visit the other offices and properties of the Company
or any Subsidiary, all at such reasonable times and as often as may be
reasonably requested in writing; and
(b) DEFAULT -- if a Default or Event of Default then exists, at the
expense of the Company to visit and inspect any of the offices or properties of
the Company or any Subsidiary, to examine all their respective books of account,
records, reports and other papers, to make copies and extracts therefrom, and to
discuss their respective affairs, finances and accounts with their respective
officers and independent public accountants (and by this provision the Company
authorizes said accountants to discuss the affairs, finances and accounts of the
Company and its Subsidiaries), all at such times and as often as may be
requested in writing.
SECTION 9. NEGATIVE COVENANTS. Until the Redemption Date:
(a) The Company and its Subsidiaries will not engage in any business
other than the exploration, acquisition, development and production of oil and
gas.
(b) Except as set forth in the draft proxy attached as Attachment D to
the Officers Certificate, executed by Floyd C. Wilson and delivered to
Prudential on October 19, 1999, the Company will not, nor will it permit any of
its Subsidiaries to, enter into any amendment or modification of its Charter
Documents or the Compass Senior Debt Documents or waive or fail to enforce any
material right of the Company or any of its Subsidiaries thereunder.
43
<PAGE>
(c) Except as set forth in the draft proxy attached as Attachment D to
the Officers Certificate, executed by Floyd C. Wilson and delivered to
Prudential on October 19, 1999, the Company will not, and will not permit any of
its Subsidiaries to, (i) terminate, or fail to maintain its existence in its
jurisdiction of incorporation, or (ii) terminate, or fail to maintain its good
standing and qualification to transact business in all jurisdictions where the
failure to maintain its good standing or qualification to transact business
could have a Material Adverse Effect.
(d) The Company will not, and will not permit any of its Subsidiaries
to, enter into any transaction with an Affiliate or make any payments to an
Affiliate (whether in cash or in property) of any type other than (i)
compensation paid to the executive officers of the Company or any of its
Subsidiaries which is approved by the Board of Directors, and (b) advances for,
and reimbursement of, reasonable travel, entertainment and similar expenses.
(e) The proceeds of the issuance and sale of the Securities hereunder
will be used by the Company solely for the acquisition and development of oil
and gas properties and for general corporate purposes. None of such proceeds
will be used, directly or indirectly, for the purpose, whether immediate,
incidental or ultimate, of purchasing or carrying securities in violation of
applicable Laws, rules or regulations of any Governmental Authority.
(f) The Company will not, and will not permit any of its Subsidiaries
or any ERISA Affiliate to, directly or indirectly, terminate any Pension Plan
so as to result in any material liability to the Company or any of its
Subsidiaries or any ERISA Affiliate, establish, or become obligated to
contribute to or provide benefits under, any Pension Plan, incur any obligation
to provide post-employment health care benefits to any of their current or
former employees, except as required by COBRA, enter into any new Plan or modify
any existing Plan so as to increase its obligations thereunder except in the
ordinary course of business consistent with past practice which could result in
any material liability to the Company or any of its Subsidiaries or any ERISA
Affiliate, or permit to exist any circumstances with respect to any Pension Plan
that would have a Material Adverse Effect.
(g) The Company will not, and will not permit any of its Subsidiaries
to, make payments on Debt which is subordinate, in right of payment to the Note,
to the extent such payments would be in violation of the subordination
provisions applicable to such Debt.
SECTION 10. FILING OF NASDAQ NOTIFICATION FORMS. On or before Closing,
the Company shall have filed a Nasdaq Notification Form for Listing of
Additional Shares for the Common Stock Shares. Upon written notice from
Prudential of its
44
<PAGE>
exercise of the Warrants, the Company shall promptly file a Nasdaq
Notification Form for Listing of Additional Shares for the Warrant Shares.
Upon written notice from Prudential of its conversion of the Notes, the
Company shall promptly file a Nasdaq Notification Form for Listing of
Additional Shares for the shares of Common Stock issuable upon conversion of
the Notes.
SECTION 11. INTEREST ON THE NOTES AND THE OTHER NOTES. The Company
hereby agrees that if the Company elects to accrue and add to the principal of
any Other Note pursuant to the terms of such Other Note any portion of the
interest due and payable on such Other Note on any interest payment date with
respect to such Other Note, the Company shall elect to accrue and add to the
principal of the Notes pursuant to the terms of the Notes the same percentage of
the interest due and payable on the Notes on such interest payment date as the
Company elected to accrue and add to the principal of such Other Note. The
Company further agrees that if the Company elects to accrue and add to the
principal of any Note pursuant to the terms of such Note any portion of the
interest due and payable on such Note on any interest payment date with respect
to such Note, the Company shall elect to accrue and add to the principal of all
other Notes and the Other Notes pursuant to the terms of such other Notes and
the Other Notes the same percentage of the interest due and payable on such
other Notes and the Other Notes on such interest payment date as the Company
elected to accrue and add to the principal of such Note. Any accrual and
addition to the principal of the Notes of interest on the Notes required by
pursuant to this Section 9.11 shall occur automatically notwithstanding any
provision for notice of such election in the Notes. The Company also covenants
that it will not (i) prepay any portion of the Notes without prepaying a pro
rata portion of the Other Notes or (ii) prepay any portion of the Other Notes
without prepaying a pro rata portion of the Notes.
ARTICLE X
DEFAULTS; TERMINATION
SECTION 1. EVENTS OF DEFAULT. If one or more of the following events
(collectively, "EVENTS OF DEFAULT" and individually, an "EVENT OF DEFAULT")
shall have occurred and be continuing:
(a) the Company shall fail to pay when due any principal or interest
on the Note;
(b) the Company shall fail to pay when due any fees, expenses,
reimbursements, indemnification payments or other monetary obligations when due
under any of the Transaction Documents and such failure shall continue for ten
(10) days following the due date of such payment;
45
<PAGE>
(c) the Company shall fail to observe or perform any covenant or
agreement contained in ARTICLE IX hereof;
(d) the Company shall fail to observe or perform any covenant or
agreement contained in this Agreement or any other Transaction Document (other
than as referred to in subsection (c)) which failure has resulted in, or could
reasonably be expected to result in a Material Adverse Effect;
(e) any representation, warranty, certification or statement made or
deemed to have been made by the Company in this Agreement or any of the other
Transaction Documents or by the Company or any other Person on behalf of the
Company in any certificate, financial statement or other document delivered
pursuant to this Agreement or any of the other Transaction Documents, shall
prove to have been incorrect in any material respect when made;
(f) a default or event which, with the giving of notice, lapse of time
or both could (unless cured or waived) become a default, shall occur under the
terms of any Debt of the Company or any of its Subsidiaries having a principal
balance of $250,000 or more (including, without limitation, the Permitted Senior
Debt);
(g) the Company or any of its Subsidiaries shall commence a voluntary
case or other proceeding seeking liquidation, reorganization or other relief
with respect to itself or its Debts under any bankruptcy, insolvency or other
similar Law now or hereafter in effect or seeking the appointment of a trustee,
receiver, liquidator, custodian or other similar official of it or any
substantial part of its property, or shall consent to any such relief or to the
appointment of or taking possession by any such official in an involuntary case
or other proceeding commenced against it, or shall make a general assignment for
the benefit of creditors, or shall fail generally to pay its Debts as they
become due, or shall take any corporate action to authorize any of the
foregoing;
(h) an involuntary case or other proceeding shall be commenced against
the Company or any of its Subsidiaries seeking liquidation, reorganization or
other relief with respect to it or its Debts under any bankruptcy, insolvency or
other similar Law now or hereafter in effect or seeking the appointment of a
trustee, receiver, liquidator, custodian or other similar official of it or any
substantial part of its property, and such involuntary case or other proceeding
shall remain undismissed and unstayed for a period of sixty (60) days; or an
order for relief shall be entered against the Company under the federal
bankruptcy Laws as now or hereafter in effect;
(i) one (1) or more judgments or orders for the payment of money
aggregating in excess of $250,000 shall be rendered against the Company or any
of
46
<PAGE>
its Subsidiaries and such judgment or order (i) shall continue unsatisfied
and unstayed for a period of thirty (30) days, or (ii) is not fully paid and
satisfied at least ten (10) days prior to the date on which any of its assets
may be lawfully sold to satisfy such judgment or order;
(j) any Change of Control; or
(k) an "Event of Default" under any Other Securities Purchase
Agreement;
then, so long as any such event is continuing, any Noteholder shall without
notice or demand of any kind (including, without limitation, notice of intention
to accelerate and acceleration) (unless any such notice is expressly provided
for herein or in the other Transaction Documents), all of which are hereby
waived, take any and all actions as may be permitted by the Transaction
Documents including, declaring the obligations in respect of the Note owned by
such Noteholder (including all accrued interest thereon) to be, and such
obligations shall thereupon become, immediately due and payable.
ARTICLE XI
MISCELLANEOUS
SECTION 1. NOTICES. All notices, requests and other communications to
any party hereunder shall be in writing (including bank wire, telex, telecopy or
similar writing) and shall be given to such party at its address, telex or
telecopy number set forth on the signature pages hereof or such other address,
telex or telecopy number as such party may hereafter specify for the purpose by
notice to the other party. Each such notice, request or other communication
shall be effective (i) if given by telex or telecopy, when such telex or
telecopy is transmitted to the telex or telecopy number specified in this
SECTION 11.1 and the appropriate answer back is received or receipt is otherwise
confirmed, (ii) if given by mail, three (3) Business Days after deposit in the
mails with first class postage prepaid, addressed as aforesaid, or (iii) if
given by any other means, when delivered at the address specified in this
SECTION 11.1.
SECTION 2. NO WAIVERS. No failure or delay by any holder of Securities
in exercising any right, power or privilege hereunder or under any other
Transaction Document shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or remedies
provided by Law or in any of the other Transaction Documents.
47
<PAGE>
SECTION 3. EXPENSES; INDEMNIFICATION. (a) Except as provided in SECTION
6.1(f), all expenses incurred in connection with this Agreement shall be paid by
the party incurring such expenses.
(b) The Company agrees to indemnify and hold harmless, Prudential, its
shareholders and each subsequent holder of Securities and their respective
directors, officers, employees, agents, successors and assigns (collectively,
the "INDEMNIFIED PARTIES") from and against any and all liabilities, losses,
damages, costs and expenses of any kind (including, without limitation, the
reasonable fees and disbursements of counsel for the Indemnified Parties in
connection with any investigative, administrative or judicial proceeding,
whether or not any such Indemnified Party shall be designated a party thereto)
which may be incurred by any Indemnified Party relating to or arising out of (a)
this Agreement, the other Transaction Documents, the Closing Transactions and
all other transactions contemplated hereby or thereby.
(c) The Company further agrees to defend, indemnify and hold harmless
each Indemnified Party from and against any and all losses, liabilities
(including strict liability), damages (including for bodily injury and property
damage), costs, expenses (including attorneys' fees and environmental
consultants' expenses), relating to any of the properties or assets securing the
Obligations, that any Indemnified Party may incur in connection with any
Environmental Complaint or Hazardous Discharge or any violation of any
Environmental Law and Laws regardless of whether or not caused by, or within the
control of, the Company, or any of its Subsidiaries as tenant, sub-tenant or
prior owner or occupant of any of the properties or assets securing the
Obligations or any properties owned or leased by other parties, and regardless
of whether such claim is brought by Governmental Authorities or private parties.
This indemnity shall survive the repayment of the Obligations and the discharge
or release of any Lien granted hereunder or in any other Transaction Document.
(d) (i) Promptly after receipt by an Indemnified Party of notice of
the commencement of any action, suit or other proceeding against an Indemnified
Party with respect to which an Indemnified Party demands indemnification
hereunder, such Indemnified Party shall promptly notify the Company in writing
of the commencement thereof, provided that the failure to so notify the Company
shall not relieve it from any liability that it may have to an Indemnified
Party, except to the extent that such failure has materially prejudiced the
Company's ability to provide a defense in the proceeding. The Company shall
have the right to assume the defense of any such proceeding, but the Indemnified
Parties collectively shall have the right, at the expense of the Company, to
retain not more than one counsel of their choice to represent the Indemnified
Parties in such proceeding. The counsel for the Indemnified Parties may
participate in, but not control, the defense of such
48
<PAGE>
proceeding.
(ii) The indemnity provided for herein shall cover the amount of
any settlements entered into by an Indemnified Party in connection with any
claim for which an Indemnified Party may be indemnified hereunder; provided
that, no settlement binding on an Indemnified Party may be made without the
consent of an Indemnified Party and the Company (which consent shall not be
reasonably withheld).
(iii) Any indemnification hereunder shall be made no later than
45 days after receipt by the Company of the written request of the Indemnified
Party.
THE PARTIES RECOGNIZE THAT AN INDEMNITEE MAY BE ENTITLED TO INDEMNIFICATION
HEREUNDER FROM ACTS OR OMISSIONS THAT ARISE OUT OF OR RESULT FROM THE ORDINARY,
STRICT, SOLE OR CONTRIBUTORY NEGLIGENCE OF SUCH INDEMNITEE.
SECTION 4. AMENDMENTS AND WAIVERS; SALE OF INTEREST. Any provision of
this Agreement and the other Transaction Documents may be amended or waived if,
but only if, such amendment or waiver is in writing and is signed by the Company
and (a) the Majority Noteholder and (b) the Majority Warrant Holder. The
Company hereby consents to any participation, sale, assignment, transfer or
other disposition which complies with Article V, at any time or times hereafter,
of any Securities, this Agreement and any of the other Transaction Documents, or
of any portion hereof or thereof, including, without limitation, Prudential's
rights, title, interests, remedies, powers, and duties hereunder or thereunder,
subject to compliance with applicable Laws. The Company hereby covenants to
notify Prudential in writing of any amendment proposed to be made to the Other
Securities Purchase Agreements, Other Notes or other documents relating thereto,
and shall allow Prudential the opportunity (and hereby agrees) to amend this
Agreement and the other Transaction Documents to conform to any such amendments.
SECTION 5. SURVIVAL. All representations, warranties and covenants made
by the Company herein or in any certificate or other instrument delivered by it
or in its behalf under the Transaction Documents shall be considered to have
been relied upon by Prudential and shall survive the delivery to Prudential of
such Transaction Documents and the purchase of the Securities, regardless of any
investigation made by or on behalf of Prudential and shall survive only for so
long as any Note remains outstanding. All representations, warranties and
covenants made by Prudential herein or in any certificate or other instrument
delivered by it or in its behalf under the Transaction Documents shall be
considered to have been relied upon by the
49
<PAGE>
Company and shall survive the delivery to the Company of such Transaction
Documents and the purchase of the Securities, regardless of any investigation
made by or on behalf of the Company and shall survive only for so long as any
Note remains outstanding.
SECTION 6. LIMITATION ON INTEREST. Regardless of any provision
contained in the Transaction Documents, no Noteholder shall ever be entitled to
receive, collect, or apply, as interest on the Note, any amount in excess of the
Maximum Lawful Rate, and in the event any Noteholder ever receives, collects or
applies as interest any such excess, such amount which would be deemed excessive
interest shall be deemed a partial prepayment of principal and treated hereunder
as such; and if the Note is paid in full, any remaining excess shall promptly be
paid to the Company. In determining whether or not the interest paid or payable
under any specific contingency exceeds the Maximum Lawful Rate, the Company and
the Noteholder shall, to the extent permitted under applicable Law, (a)
characterize any nonprincipal payment as an expense, fee or premium rather than
as interest, (b) exclude voluntary prepayments and the effects thereof, and (c)
amortize, prorate, allocate and spread, in equal parts, the total amount of the
interest throughout the entire contemplated term of the Note, so that the
interest rate is the Maximum Lawful Rate throughout the entire term of the Note;
PROVIDED, HOWEVER, that, if the unpaid principal balance thereof is paid and
performed in full prior to the end of the full contemplated term thereof, and if
the interest received for the actual period of existence thereof exceeds the
Maximum Lawful Rate, the Noteholder shall refund to the Company the amount of
such excess and, in such event, the Noteholder shall not be subject to any
penalties provided by any Laws for contracting for, charging, taking, reserving
or receiving interest in excess of the Maximum Lawful Rate.
SECTION 7. INVALID PROVISIONS. If any provision of the Transaction
Documents is held to be illegal, invalid, or unenforceable under present or
future Laws effective during the term thereof, such provision shall be fully
severable, the Transaction Documents shall be construed and enforced as if such
illegal, invalid, or unenforceable provision had never comprised a part thereof,
and the remaining provisions thereof shall remain in full force and effect and
shall not be affected by the illegal, invalid, or unenforceable provision or by
its severance therefrom. Furthermore, in lieu of such illegal, invalid, or
unenforceable provision there shall be added automatically as a part of the
Transaction Documents a provision as similar in terms to such illegal, invalid,
or unenforceable provision as may be possible and be legal, valid and
enforceable.
SECTION 8. SUCCESSORS AND ASSIGNS. The provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns, except that the Company may not assign or
otherwise transfer any of its rights or obligations under this Agreement.
50
<PAGE>
Notwithstanding any other provision herein, Prudential may assign its rights to
its Affiliates, subject to compliance with applicable Laws.
SECTION 9. GOVERNING LAW. THIS AGREEMENT AND THE TRANSACTION DOCUMENTS
SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF
TEXAS.
SECTION 10. COUNTERPARTS. This Agreement may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
SECTION 11. NO THIRD PARTY BENEFICIARIES. Except as provided in SECTION
11.3 and ARTICLE XII, it is expressly intended that there shall be no third
party beneficiaries of the covenants, agreements, representations or warranties
herein contained other than transferees or assignees of all or any part of
Prudential's interest hereunder.
SECTION 12. FINAL AGREEMENT. THIS AGREEMENT AND THE OTHER TRANSACTION
DOCUMENTS COLLECTIVELY REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY
NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS BETWEEN THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN
THE PARTIES.
SECTION 13. SUBMISSION TO JURISDICTION; WAIVER OF SERVICE AND VENUE.
ANY SUIT, ACTION OR PROCEEDING BROUGHT BY PRUDENTIAL WITH RESPECT TO THIS
AGREEMENT OR ANY OF THE OTHER TRANSACTION DOCUMENTS MAY BE BROUGHT IN THE COURTS
OF THE STATE OF TEXAS, COUNTY OF DALLAS, OR IN THE FEDERAL COURTS LOCATED IN THE
NORTHERN DISTRICT OF TEXAS, AS PRUDENTIAL MAY SELECT IN ITS SOLE DISCRETION.
THE COMPANY HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURTS FOR
THE PURPOSE OF ANY SUCH SUIT, ACTION OR PROCEEDING. THE COMPANY HEREBY
IRREVOCABLY WAIVES ANY OBJECTIONS WHICH IT MAY NOW OR HEREAFTER HAVE TO THE
LAYING OF VENUE OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO
THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT BROUGHT IN THE COURTS LOCATED
IN THE STATE OF TEXAS, COUNTY OF DALLAS, AND HEREBY WAIVES ANY CLAIM THAT ANY
SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN
ANY INCONVENIENT FORUM.
51
<PAGE>
SECTION 14. WAIVER OF RIGHT TO TRIAL BY JURY. PRUDENTIAL AND THE
COMPANY EACH HEREBY WAIVE ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND,
ACTION OR CAUSE OF ACTION (A) ARISING UNDER THIS AGREEMENT, ANY TRANSACTION
DOCUMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN
CONNECTION HEREWITH OR THEREWITH, OR (B) IN ANY WAY CONNECTED WITH OR RELATED OR
INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR ANY OF THEM IN RESPECT TO
THIS AGREEMENT. PRUDENTIAL AND THE COMPANY EACH AGREE THAT THE OTHER MAY FILE A
COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE
PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
SECTION 15. DISCLOSURE TO OTHER PERSONS. The Company acknowledges that
the holder of any Security may deliver copies of any financial statements and
other documents delivered to such holder, and disclose any other information
disclosed to such holder, by or on behalf of the Company or any Subsidiary in
connection with or pursuant to the Transaction Documents to (i) such holder's
directors, officers, employees, agents and professional consultants, (ii) any
other holder of any Security, (iii) any Person to which such holder offers to
sell such Security or any part thereof, (iv) any Person to which such holder
sells or offers to sell a participation in all or any part of such Security, (v)
any Person from which such holder offers to purchase any security of the
Company, (vi) any federal or state regulatory authority having jurisdiction over
such holder, (vii) the National Association of Insurance Commissioners or any
similar organization or (viii) any other Person to which such delivery or
disclosure may be necessary or appropriate (a) in compliance with any law, rule,
regulation or order applicable to such holder, (b) in response to any subpoena
or other legal process or informal investigative demand or (c) in connection
with any litigation to which such holder is a party.
ARTICLE XII
SUBORDINATION
SECTION 1. SUBORDINATION OF PAYMENT. The payment of the Debt
represented by the Notes is hereby expressly subordinated in right of payment to
the prior payment in full of the Compass Senior Debt; PROVIDED, HOWEVER, so long
as no Event of Default has occurred and is continuing for which (other than an
event specified in Subsection 7.1(d) of the Compass Senior Credit Agreement) the
Agent under the Compass Senior Credit Agreement has given written notice of such
Event of Default to the Noteholders (a "DEFAULT NOTICE"), the Company may pay
only interest due on the Notes according to their terms. At any time following
the
52
<PAGE>
occurrence and during the continuance of any Event of Default and provided
that the Agent under the Compass Senior Credit Agreement has given a Default
Notice to the Noteholders, the Noteholders will not accept or receive, any
payments in cash, on or with respect to the Notes unless and until (a) such
Event of Default shall have been cured or waived or shall have ceased to
exist or (b) such time as all Compass Senior Debt shall have been fully paid
and performed and the obligation of the Senior Lenders to make loans under
the Compass Senior Credit Agreement shall have terminated. Notwithstanding
the above, if within 90 days after the giving of such Default Notice by the
Agent under the Compass Senior Credit Agreement such Event of Default has not
become the subject of an acceleration notice by the Senior Lenders, then the
Company may, at its option (unless in such interval the provision of this
SECTION 12.1 have again come into effect on account of any other Event of
Default that did not exist on the date of any prior Default Notice), resume
making any and all required payments in respect of the Notes in any manner
authorized under the terms governing the Notes until such time (if any) that
such judicial proceedings are instituted, such an acceleration notice is
given or a Default Notice is given and a period of 90 days shall not have
elapsed since the giving of such Default Notice as contemplated above. In
the event any direct or indirect payment or distribution in cash, shall be
received by the Noteholders in contravention of the provisions hereof, such
payment or distribution shall be held in trust for, and shall be immediately
paid over or delivered to, the Agent under the Compass Senior Credit
Agreement.
SECTION 2. NOTES SUBORDINATED TO PRIOR PAYMENT OF COMPASS SENIOR
DEBT ON DISSOLUTION, LIQUIDATION OR REORGANIZATION OF THE COMPANY. Upon any
distribution of assets of the Company upon any voluntary or involuntary
dissolution, winding up, liquidation or reorganization of the Company (whether
in bankruptcy, insolvency or receivership proceedings or upon an assignment for
the benefit of creditors or otherwise):
(a) the Senior Lenders shall first be entitled to
receive payment in full (or to have such payment duly provided for
to their satisfaction) of the principal thereof and interest due
on the Compass Senior Debt and other amounts due in connection
therewith before the Noteholders are entitled to receive any
payment on account of the Notes;
(b) any payment or distribution of assets of the Company
of any kind or character, whether in cash, property or securities,
to which the Noteholders would be entitled except for the
provisions of this ARTICLE XII, shall be paid by the liquidating
trustee or agent or other person making such payment or
distribution directly to the Senior Lenders or their
representative, to the extent necessary to
53
<PAGE>
make payment in full of all Compass Senior Debt remaining unpaid,
after giving effect to any concurrent payment or distribution or
provision therefor to the Senior Lenders; and
(c) in the event that, notwithstanding the foregoing,
any payment or distribution of assets of the Company of any kind
or character, whether in cash, property or securities, shall be
received by the Noteholders on account of principal of or interest
on the Notes before the Compass Senior Debt is paid in full or
provision made for its payment, such payment or distribution
(subject to the further provisions of this ARTICLE XII) shall be
paid over to the Senior Lenders or their representative for
application to the payment of all Compass Senior Debt remaining
unpaid or unprovided for until all Compass Senior Debt shall have
been paid in full, after giving effect to any concurrent payment
or distribution or provision therefor to the Senior Lenders.
SECTION 3. SUBORDINATION OF LIENS. So long as the Compass Senior
Debt remains outstanding or any obligation of the Senior Lenders exists to make
loans under the Compass Senior Credit Agreement, the Noteholders hereby
subordinate all Liens, now existing or hereafter created or arising, securing
all or any portion of the Notes to all Liens, now existing or hereafter created
or arising, securing all or any portion of the Compass Senior Debt,
notwithstanding any defect, deficiency, error or omission which may be contained
in any document creating or perfecting any such Lien securing all or any portion
of the Compass Senior Debt. All Liens, now existing or hereafter created or
arising, securing all or any portion of the Notes shall at all times remain
subordinate, secondary and inferior to all Liens, now existing or hereafter
created or arising, securing all or any portion of the Compass Senior Debt.
SECTION 4. SUBORDINATION OF REMEDIES. So long as the Compass
Senior Debt remains outstanding or any obligation of the Senior Lenders exists
to make loans under the Compass Senior Credit Agreement, the Noteholders shall
not, without the prior written consent of the Senior Lenders, declare the Notes
due or in default (other than to accelerate the Notes after the maturity of the
Compass Senior Debt, whether by acceleration or otherwise, and take such other
actions as reasonably required to protect the Noteholders's claims upon any
bankruptcy, insolvency, or receivership proceeding with respect to the Company)
or foreclose upon or exercise any power of sale with respect to any security for
all or any portion of the Notes or exercise any other right, power or remedy of
the Noteholders provided for in any document or instrument executed in
connection with the Notes or by law or initiate or join with any other creditor
of the Company in initiating any plan or proceeding pursuant to any bankruptcy,
insolvency or receivership
54
<PAGE>
proceedings or seeking an assignment for the benefit of creditors or the
marshalling of the assets and liabilities of the Company. Upon any
distribution of assets of the Company or the dissolution, winding up,
liquidation or reorganization (whether in bankruptcy, insolvency or
receivership proceedings or upon an assignment for the benefit of creditors
or the marshalling of the assets and liabilities of the Company or
otherwise), any payment to which the Noteholders would otherwise be entitled
with respect to the Notes shall be held in trust for, and shall be
immediately paid over or delivered to, the Senior Lenders for application to
the Compass Senior Debt until all Compass Senior Debt shall have been paid in
full. Notwithstanding any provision of this ARTICLE XII, (i) the Noteholders
may receive payments of interest on the Notes in kind through the Company's
election to accrue and add such interest payment to the principal of the
Notes pursuant to the provisions of the Notes; (ii) the Noteholders may
convert the Notes to shares of common stock of the Company at any time in
accordance with the terms of the Notes; (iii) the Noteholders may exercise
any warrants for shares of common stock of the Company in accordance with the
terms of any such warrants and (iv) the Senior Lenders shall have no rights
to the shares of Common Stock obtained by the Noteholders through conversion
of the Notes and exercise of the Warrants.
SECTION 5. CONTINUING AGREEMENT. This Agreement shall continue
in full force and effect and the liabilities and obligations of the Company and
the Noteholders hereunder shall not be affected or impaired by any amendment,
modification or alteration of any Loan Document, except as may be expressly
provided in any such amendment, modification or alteration. This Agreement
shall continue to be effective or shall be reinstated, as the case may be, if at
any time any payment of any of the Compass Senior Debt is rescinded or must
otherwise be returned by the Senior Lenders upon the insolvency, bankruptcy or
reorganization of the Company or otherwise, all as though such payment had not
been made.
SECTION 6. LIABILITY NOT IMPAIRED. The provisions of this
ARTICLE XII shall be deemed a continuing offer to all holders of Compass Senior
Debt to act in reliance on such provisions (but no such reliance shall be
required to be proven to receive the benefits hereof) and may be enforced by
such holders and no right of any present or future holder of any Compass Senior
Debt to enforce subordination as provided in this ARTICLE XII shall be affected
or impaired by (a) the failure of the Agent under the Compass Senior Credit
Agreement or the Senior Lenders or any other Person to exercise diligence or
reasonable care in the preservation, protection or other handling or treatment
of all or any part of any Collateral for all or any portion of the Compass
Senior Debt, (b) the failure of any Lien intended to be granted or created to
secure all or any part of the Compass Senior Debt to be properly perfected or
created or the unenforceability of any such Lien for any other reason, or
(c) the subordination of any such Lien to any other Lien. The Senior
55
<PAGE>
Lenders may at any time and from time to time, without the consent of or
notice to the Noteholders, and without incurring any responsibility to the
Noteholders, and without impairing or releasing or otherwise affecting any of
the obligations or agreements of the Noteholders hereunder, (a) change the
manner, place or terms of payment, or change or extend the time of payment
of, renew, or alter all or any portion of the Compass Senior Debt, (b)
exchange, release, surrender, realize upon or otherwise deal with, in any
manner and any order, any Property at any time subject to any Lien in favor
of the Senior Lenders, (c) exercise or refrain from exercising any rights
against the Company or others, and (d) sell, transfer, assign or grant
participations in the Compass Senior Debt or any portion thereof.
SECTION 7. WAIVERS. The Noteholders waive any right to require
the Senior Lenders to (a) proceed against the Company or make any effort at the
collection of the Compass Senior Debt from the Company or any other Person
liable for all or any portion of the Compass Senior Debt, (b) proceed against or
exhaust any Collateral securing all or any portion of the Compass Senior Debt,
or (c) pursue any other remedy in the power of the Senior Lenders.
SECTION 8. KNOWLEDGE OF THE NOTEHOLDERS. The Noteholders shall
not at any time be charged with knowledge of the existence of any facts which
would prohibit the making of any payment to the Noteholders under the Notes or
the taking of any action under the Notes by the Noteholders unless and until the
Noteholders shall have received written notice thereof from the Agent under the
Compass Senior Credit Agreement and, prior to the receipt of any such written
notice, shall be entitled in all respects conclusively to assume that no such
fact exist.
SECTION 9. OBLIGATION OF THE COMPANY. Nothing contained in this
ARTICLE XII shall affect the obligation of the Company to make, or prevent the
Company from making, payment of the principal of or interest on the Notes,
except as otherwise provided in this ARTICLE XII and the Notes.
SECTION 10. SUBROGATION. Upon payment in full of the Compass
Senior Debt, the Noteholders shall be subrogated to the rights of the holders of
Compass Senior Debt to receive payments or distributions of assets of the
Company made on the Compass Senior Debt until the principal of and interest on
the Notes shall be paid in full, and, for the purposes of such subrogation, no
payments to the holders of Compass Senior Debt of any c 10.sh, property, stock
or obligations to which the Noteholders would be entitled (except for the
provisions of this ARTICLE XII) shall, as between the Company, its creditors
(other than the holders of Compass Senior Debt) and the Noteholders, be deemed
to be a payment by the Company to or on account of the Compass Senior Debt.
56
<PAGE>
[SIGNATURE PAGE TO FOLLOW]
57
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective Authorized Officers on the day and year first
above written.
COMPANY:
MIDDLE BAY OIL COMPANY, INC.
By: /s/ Floyd C. Wilson
--------------------
Name: Floyd C. Wilson
Title: President and Chief Executive Officer
Address for Notice:
Middle Bay Oil Company, Inc.
1221 Lamar Street, Suite 1020
Houston, TX 77010
Fax: (713) 650-0352
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
By: /s/ Ric E. Abel
---------------
Vice President
(1) All payments by wire transfer of immediately available funds to:
The Bank of New York
New York, New York
ABA No. 021-000-018
Account Name: Prudential Managed
Account No. 890-0304-391
58
<PAGE>
Each such wire transfer shall set forth the name of the Company, a
reference to "9.00% Senior Subordinate Convertible Promissory Note due
October 19, 2004, PPN#595673 A*5,"and the due date and application (as
between principal and interest) of the payment being made.
(2) All notices of payment and written confirmation of such transfers:
The Prudential Insurance Company of America
c/o Prudential Capital Group
Four Gateway Center
100 Mulberry Street
Newark, New Jersey 07102-4069
Attn.: Trade Managements Group
(Attn.: Manager)
(3) All other communications:
The Prudential Insurance Company of America
c/o Prudential Capital Group
2200 Ross Avenue, Suite 4200E
Dallas, Texas 75201
Fax: (214) 720-6299
Attn.: Managing Director
(4) All telephonic or facsimile prepayment notices:
Manager, Trade Managements Group
Telephone: (973) 802-7398
Telecopier: (973) 624-6432
(5) Tax I.D. No. 22-1211670
59
<PAGE>
EXHIBIT A
SENIOR SUBORDINATE CONVERTIBLE PROMISSORY NOTE
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THIS NOTE
MAY NOT BE TRANSFERRED EXCEPT PURSUANT TO A VALID EXEMPTION COVERING SUCH
TRANSFER.
$2,373,844 Dallas, Texas October 19, 1999
PPN #___________
FOR VALUE RECEIVED, the undersigned, MIDDLE BAY OIL COMPANY, INC, an Alabama
corporation ("MAKER" or the "COMPANY") hereby promises to pay to the order of
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, a New Jersey corporation ("PAYEE"),
not later than 2:00 P.M. (New York City time), on the date when due, in Federal
or other funds immediately available in New York, New York, at The Bank of New
York's offices or at such other address given to Maker by Payee, the principal
sum of TWO MILLION THREE HUNDRED SEVENTY-THREE THOUSAND EIGHT HUNDRED FORTY-FOUR
AND NO/100 DOLLARS ($2,373,844), together with interest, as hereinafter
described. Whenever any payment of principal of, or interest on, this Note
shall be due on a day which is not a Business Day, the date for payment thereof
shall be extended to the next succeeding Business Day. If the date for payment
of principal is extended by operation of law or otherwise, interest thereon
shall be payable for such extended time.
This Note has been executed and delivered pursuant to, and is subject to and
governed by, the terms of that certain Securities Purchase Agreement dated as of
October 19, 1999, by and between Maker and Payee (the "AGREEMENT"). This Note
is the "Note" referred to in the Agreement. Unless otherwise defined herein or
unless the context hereof otherwise requires, each term used herein with its
initial letter capitalized has the meaning given to such term in the Agreement.
This Note shall rank senior in right of payment to all Company notes and
indebtedness other than the Compass Senior Debt. This Note shall rank pari
passu with the Other Notes without any preference or priority one over another.
Maker reserves the right to prepay without premium or penalty, after thirty (30)
days prior written notice to the Noteholder, the principal amount of the Note,
in whole or in part, at any time after October 19, 2001.
Maker promises to pay interest on the outstanding principal balance hereof,
prior to the occurrence of an Event of Default, at a rate per annum equal to the
lesser of (a) the Fixed Rate or (b) the Maximum Lawful Rate, in Federal or other
funds
<PAGE>
immediately available in New York, New York, at the offices of The Bank of
New York above referenced. Interest shall accrue on the principal balance of
the Note outstanding from time to time at the Fixed Rate; provided, that,
interest shall accrue on any amounts past due and owing on the Note from the
date due until paid at the Default Rate; PROVIDED FURTHER, that in no event
shall the rate of interest charged hereunder exceed the Maximum Lawful Rate.
Interest shall be payable on the Note as it accrues on December 31, 1999 and
continuing on each March 31, June 30, September 30 and December 31 thereafter
until paid in full. Whenever any payment of principal of, or interest on,
the Note shall be due on a day which is not a Business Day, the date for
payment thereof shall be extended to the next succeeding Business Day.
With respect to the first eight (8) quarterly interest payments payable
hereunder commencing with the first such quarterly interest payment, the Company
may, at least thirty (30) days prior to the subject payment date, elect to
accrue and add to the principal of the Note up to fifty percent (50%) of the
interest payment due and payable on such interest payment date. If such an
election is made, the Company shall notify the Noteholder of the portion (up to
50%) of such quarterly interest payment which the Company elects to accrue and
add to the principal of the Note.
Interest shall be computed on the Note on the basis of the number of actual days
elapsed, assuming that each calendar year consisted of 360 days. The entire
outstanding principal balance of this Note and all accrued but unpaid interest
thereon shall be due and payable in full in a single installment on October 19,
2004.
The entire outstanding principal balance of the Note and all accrued but unpaid
interest thereon shall be immediately due and payable in full upon the
occurrence of a Change of Control.
A Noteholder may elect to convert all or any portion of the amount of principal
and accrued but unpaid interest on the Note as hereinafter provided. Each $3.00
(the "CONVERSION PRICE") of principal and accrued but unpaid interest on the
Note shall be convertible into one share of Common Stock. The Conversion Price
is subject to adjustment from time to time upon the occurrence of any of the
events enumerated below:
1. In the event that the Company shall (a) declare a dividend on the Common
Stock in shares of its capital stock (whether shares of such Common Stock
or of capital stock of any other class of the Company), (b) split or
subdivide the outstanding Common Stock, or (c) combine the outstanding
Common Stock into a smaller number of shares, then (as a result of an
event described in (a), (b) or (c)) the Conversion Price shall be
adjusted to equal the product of the Conversion Price in effect
immediately prior to such event multiplied by a fraction the numerator of
which is equal to the number of shares of Common Stock outstanding on a
Fully Diluted Basis (as defined below)
<PAGE>
immediately after the event and the denominator of which is equal to
the number of shares of Common Stock outstanding on a Fully Diluted
Basis immediately prior to such event.
2. In the event that the Company shall (a) issue any shares of Common Stock
without consideration or at a price per share less than the Conversion
Price immediately prior to such issuance, or (b) issue options, rights or
warrants to subscribe for or purchase such Common Stock (or securities
convertible into such Common Stock) without consideration or at a price
per share (or having a conversion price per share, if a security
convertible into such Common Stock) less than the Conversion Price, then,
effective upon such issuance, the Conversion Price shall be adjusted to
equal the product obtained by multiplying the Conversion Price in effect
immediately prior to the date of such issuance by a fraction, the
numerator of which shall be the number of shares of Common Stock
outstanding on a Fully Diluted Basis immediately prior to such issuance
plus the number of shares of Common Stock which the aggregate offering
price of the total number of shares of such Common Stock so to be issued
or to be offered for subscription or purchase (or the aggregate initial
conversion price of the convertible securities so to be offered) would
purchase at the Conversion Price immediately prior to such issuance, and
the denominator of which shall be the number of shares of Common Stock
outstanding on a Fully Diluted Basis immediately after such issuance. In
case such consideration may be paid in a consideration part or all of
which shall be in a form other than cash, the value of such consideration
shall be as determined by an investment banking firm reasonably
acceptable to the Noteholder (the cost of the engagement of said
investment banking firm to be borne by the Company). Shares of such
Common Stock owned by or held for the account of the Company or any
Subsidiary thereof shall not be deemed outstanding for the purpose of any
such computation. Such adjustment shall be made successively whenever
the date of such issuance is fixed (which date of issuance shall be the
record date for such issuance if a record date therefor is fixed); and,
in the event that such shares or options, rights or warrants are not so
issued, the Conversion Price shall again be adjusted to be the Conversion
Price if the date of such issuance had not been fixed.
3. In case the Company shall make a distribution to all holders of Common
Stock (including any such distribution made in connection with a
consolidation or merger in which the Company is the surviving
corporation) of shares of it stock, evidences of its indebtedness,
assets, or rights, options or warrants (other than those referred to in
paragraph 2 above) to subscribe for or purchase such shares, evidences of
indebtedness, or assets, then, effective upon such distribution, the
Conversion Price shall be adjusted to equal the product obtained by
multiplying the Conversion Price in effect immediately prior to the date
of such distribution by a fraction, the
<PAGE>
numerator of which shall be the Per Share Stock Price for the trading
day immediately preceding the day of distribution ("PRE-DISTRIBUTION
PRICE") less the fair market value of the distribution (as determined
in good faith by the Board of Directors of the Company) applicable to
one share of Common Stock, and the denominator of which shall be the
Pre-Distribution Price. Such adjustment shall be made successively
whenever a date for such distribution is fixed (which date of
distribution shall be the record date for such issuance if a record
date therefor is fixed); and, if such distribution is not so made, the
Conversion Price shall again be adjusted to be to be the Conversion
Price if the date of such issuance had not been fixed.
4. No adjustment in the Conversion Price shall be required unless such
adjustment would require an increase or decrease of at least one-tenth of
one percent (.1%) in the total number of shares of Common Stock that
would be issued as a result of the conversion of all the Note; provided
that any adjustments which by reason of this section are not required to
be made shall be carried forward and taken into account in any subsequent
adjustment. All calculations under this section shall be made to the
nearest hundredth of one percent.
5. In the event of any capital reorganization of the Company, or of any
reclassification of any Common Stock for which the Note is convertible
(other than a subdivision or combination of outstanding shares of such
Common Stock), or in case of the consolidation of the Company with or the
merger of the Company with or into any other corporation or of the sale
of the properties and assets of the Company as, or substantially as, an
entirety to any other entity, each $3.00 of principal and unpaid interest
outstanding of the Note shall after such capital reorganization,
reclassification of such Common Stock, consolidation, merger or sale be
convertible, upon the terms and conditions specified in this Agreement,
into the number of shares of stock or other securities or assets to which
a holder of the number of shares of Common Stock into which amount of
principal and interest payable under the Note is convertible (at the time
of such capital reorganization, reclassification of such Common Stock,
consolidation, merger or sale) would have been entitled upon such capital
reorganization, reclassification of such Common Stock, consolidation,
merger or sale; and in any such case, if necessary, the provisions set
forth in this section with respect to the rights thereafter of such Note
shall be appropriately adjusted so as to be applicable, as nearly as may
reasonably be, to any shares of stock or other securities or assets
thereafter deliverable upon the conversion of the Note. The Company
shall not effect any such consolidation, merger or sale, unless prior to
or simultaneously with the consummation thereof, the successor
corporation (if other than the Company) resulting from such consolidation
or merger or the corporation purchasing such assets or the appropriate
corporation or entity shall assume, by written instrument, the obligation
to deliver to the
<PAGE>
Noteholder the shares of stock, securities or assets to which, in
accordance with the foregoing provisions, such Noteholder may be
entitled pursuant to this section.
6. If any question shall at any time arise with respect to the Conversion
Price or the number of shares issuable upon conversion of the Note, such
question shall be determined by the independent firm of certified public
accountants of recognized national standing selected by the Noteholder
and acceptable to the Company.
7. Notwithstanding anything in this section to the contrary, the Company
shall not be permitted to take any action described in this section, if
such action is prohibited under any other provision of this Note or the
Agreement.
If a Noteholder elects to convert all or a portion of the outstanding principal
and accrued and unpaid interest under the Note, then the Noteholder shall
deliver the Note to the Company in exchange for an amended and restated note
setting forth the new amount of principal and accrued and unpaid interest. Upon
such exchange, the Company shall promptly issue and deliver, or cause to be
issued and delivered, to the Noteholder a certificate or certificates for the
number of whole shares of Common Stock to which the Noteholder is entitled under
the terms hereof. To the extent permitted by law, such conversion shall be
deemed to have been made immediately prior to the close of business on the date
of such exchange of the Notes for the amended and restated note and Conversion
Shares, and the Noteholder shall be treated for all purposes as the record
holder of such shares of Common Stock on such date.
No fractional shares or script of Common Stock shall be issued upon conversion
of all or a portion of the outstanding principal and accrued unpaid interest of
the outstanding principal and accrued unpaid interest under the Note. In lieu
of a fractional share of Common Stock to which the holder would otherwise be
entitled, the Company shall pay cash equal to the product of such fraction
multiplied by the market value of one share of Common Stock on the date of
conversion.
Upon the occurrence and during the continuance of an Event of Default, and upon
the conditions stated in the Agreement, the holder hereof may, at its option,
declare the entire unpaid principal of and accrued interest on this Note
immediately due and payable (provided that, upon the occurrence of certain
Events of Default, and upon the conditions stated in the Agreement, such
acceleration shall be automatic), without notice, demand, or presentment, all of
which are hereby waived, and the holder hereof shall have the right to offset
against this Note any sum or sums owed by the holder hereof to Maker. After the
occurrence of an Event of Default, interest shall accrue on the outstanding
principal balance of this Note and, to the extent permitted by applicable Law,
on accrued but unpaid interest, at the lesser of (a) the Default Rate or (b) the
Maximum Lawful Rate.
<PAGE>
After the occurrence of an Event of Default, all amounts collected or received
by any Noteholder in respect of the Obligations shall be applied first, to the
payment of all proper costs incurred by the Noteholder in connection with the
collection thereof (including reasonable fees, expenses and disbursements of
counsel for the Noteholder), second, to the reimbursement of any advances made
by Noteholder to effect performance of any unperformed covenants of the Company
under any of the Transaction Documents, third, to the payment of all accrued
interest on the Note, fourth, to unpaid principal on the Note, and fifth to the
Company or any other Person entitled to such proceeds under applicable Law.
If this Note is placed in the hands of an attorney for collection, or if it is
collected through any legal proceedings, Maker agrees to pay the court costs,
reasonable attorneys' fees, and other costs of collection of the holder hereof.
Maker, and each surety, endorser, guarantor, and other party ever liable for
payment of any sums of money payable on this Note, jointly and severally waive
presentment and demand for payment, protest, notice of protest and nonpayment,
and notice of acceleration and the intention to accelerate, and agree that their
liability on this Note shall not be affected by any renewal or extension in the
time of payment hereof, by any indulgences, or by any release or change in any
security for the payment of this Note, and hereby consent to any and all
renewals, extensions, indulgences, releases, or changes, regardless of the
number of such renewals, extensions, indulgences, releases or changes.
THIS NOTE, THE AGREEMENT AND THE OTHER TRANSACTION DOCUMENTS (OTHER THAN THE
REGISTRATION RIGHTS AGREEMENT AND THE COMPANY'S CHARTER DOCUMENTS) SHALL BE
CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS.
THIS NOTE AND THE OTHER TRANSACTION DOCUMENTS COLLECTIVELY REPRESENT THE FINAL
AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS BETWEEN THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
MIDDLE BAY OIL COMPANY, INC.
By:
Name: Floyd C. Wilson
Title: President and Chief Executive
Officer
<PAGE>
EXHIBIT B
AMENDMENT TO REGISTRATION RIGHTS AGREEMENT
This Amendment to Registration Rights Agreement (the "Amendment") dated
as of October 19, 1999, is entered into by and among MIDDLE BAY OIL COMPANY,
INC., an Alabama corporation ("Corporation"), 3TEC Energy Company L.L.C., a
Delaware limited liability company f/k/a 3TEC Energy Corporation, Shoemaker
Family Partners, L.P., Shoeinvest II, LP, and The Prudential Insurance Company
of America, a New Jersey corporation ("Prudential").
RECITALS
WHEREAS, on August 27, 1999, the Corporation, 3TEC Energy Company L.L.C.
f/k/a 3TEC Energy Corporation; Kaiser-Francis Oil Company; C.J. Lett, III;
Weskids, L.P.; Alvin V. Shoemaker; Shoemaker Family Partners, L.P.; and
Shoeinvest II, LP entered into a certain Registration Rights Agreement (the
"Agreement"); and.
WHEREAS, the parties hereto wish to amend the Agreement to add Prudential
as a party to the Agreement and as a Shareholder as defined in the Agreement.
NOW, THEREFORE, in consideration of the mutual promises contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
1. ADDITION OF PRUDENTIAL AS A SHAREHOLDER. Prudential is hereby
added as a party to the Agreement and shall be considered a
Shareholder as defined in the Agreement.
2. SCHEDULE 1. Schedule 1 of the Agreement is hereby deleted in its
entirety and replaced with Schedule 1 attached hereto.
3. TERMS DEFINED IN AGREEMENT. As used herein, each term defined in
the Agreement shall have the meaning assigned thereto in the
Agreement, unless expressly provided herein to the contrary.
4. FULL FORCE AND EFFECT. Except with respect to the changes made in
this Amendment, the terms and provisions of the Agreement are in
full force and effect.
<PAGE>
5. NOTICES. Any notice to be given by any party hereunder to any
other shall be in writing, mailed by certified or registered mail,
return receipt requested, and shall be addressed to the other
parties at the addresses listed on the signature pages hereof.
All such notices shall be deemed to be given three (3) days after
the date of mailing thereof.
6. BINDING EFFECT. This Amendment shall be binding upon the parties
hereto and their respective successors, personal representatives
and permitted assigns.
7. COUNTERPARTS. This Amendment may be executed in one or more
counterparts, each of which shall constitute an original and all
of which together shall constitute but one and the same
instrument.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
67
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
"CORPORATION"
MIDDLE BAY OIL COMPANY, INC.
By:
Name: Floyd C. Wilson
Title: President and Chief Executive Officer
Address for Notice:
Middle Bay Oil Company, Inc.
1221 Lamar Street, Suite 1020
Houston, TX 77010
Fax: (713) 650-0352
"SHAREHOLDERS"
3TEC ENERGY COMPANY L.L.C
By:
Name: Floyd C. Wilson
Title: Managing Director
Address for Notice:
3TEC Energy Company L.L.C.
5910 N. Central Expressway
Suite 1150
Dallas, TX 75206
Fax: (214) 373-9731
68
<PAGE>
SHOEMAKER FAMILY PARTNERS, LP
By: Alvin V. Shoemaker
Its General Partner
By:
Name: Alvin V. Shoemaker
Title: General Partner
Address for Notice:
Shoemaker Family Partners, LP
60 Brushhill Road
Kinnelon, NJ 07405
Fax: (310) 444-3833
SHOEINVEST II, LP
By: Alvin Shoemaker Investments, Inc.
Its General Partner
By:
Name: Alvin V. Shoemaker
Title: General Partner
Address for Notice:
Shoeinvest II, LP
60 Brushhill Road
Kinnelon, NJ 07405
Fax: (310) 444-3833
69
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
By:
Name: Ric E. Abel
Title: Vice President
Address for Notice:
The Prudential Insurance Company of America
c/o Prudential Capital Group
2200 Ross Avenue, Suite 4200E
Dallas, Texas 75201
Fax: (214) 720-6299
Attn.: Managing Director
70
<PAGE>
SCHEDULE 1
3TEC Energy Company L.L.C.,
f/k/a 3TEC Energy Corporation Securities Purchase Agreement by and
between 3TEC Energy Corporation and
Middle Bay OilCompany, Inc., dated
July 1, 1999
4,755,556 shares of Common Stock
Warrants exercisable for 3,600,000
shares of Common Stock
$10,700,000 Note (which is convertible
to Conversion Shares)
Shoemaker Family Partners,
LP Securities Purchase Agreement by and
between Shoemaker Family Partners, LP
and Middle Bay Oil Company, Inc.,
dated August 27, 1999
22,222 shares of Common Stock
Warrants exercisable for 16,822 shares
of Common Stock
$50,000 Note (which is convertible to
Conversion Shares)
Shoeinvest II, LP Securities Purchase Agreement by and
between Shoeinvest II, LP and Middle
Bay Oil Company, Inc., dated August
27, 1999
44,444 shares of Common Stock
Warrants exercisable for 33,644 shares
of Common Stock
$100,000 Note (which is convertible to
Conversion Shares)
The Prudential Insurance
Company of America Securities Purchase Agreement by and
between The Prudential Insurance
Company of America and Middle Bay Oil
Company, Inc., dated October 19, 1999
1,055,042 shares of Common Stock
Warrants exercisable for 798,677
shares of Common Stock
71
<PAGE>
$2,373,844 Note (which is convertible
to Conversion Shares)
72
<PAGE>
EXHIBIT C
EXECUTION COPY
PARTICIPATION RIGHTS AGREEMENT
PARTICIPATION RIGHTS AGREEMENT, dated as of October 19, 1999, by
and among MIDDLE BAY OIL COMPANY, INC., an Alabama corporation (the "COMPANY"),
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA (the "PURCHASER") and 3TEC ENERGY
COMPANY, L.L.C., a Delaware limited liability company (the "STOCKHOLDER"),
which as of the date hereof is the holder of approximately 35.5% of the issued
and outstanding shares of the Company's common stock, par value $0.02 per share
("COMMON STOCK"), Common Stock purchase warrants ("WARRANTS") entitling the
Stockholder to purchase 3,600,000 additional shares of Common Stock (subject to
adjustment as provided therein) and one or more Senior Subordinate Promissory
Notes ("NOTES") in the aggregate principal amount of $10,700,000 convertible at
the election of the Stockholder into 3,566,666 additional shares of Common Stock
(subject to adjustment as provided therein).
1. BACKGROUND. The Company and the Purchaser have entered into a
Securities Purchase Agreement (the "PURCHASE AGREEMENT"), dated as of the date
hereof, pursuant to which the Company has agreed, among other things, to issue
and sell (a) 1,055,042 shares of Common Stock, (b) Common Stock purchase
warrants ("PRUDENTIAL WARRANTS") entitling Purchaser to purchase 798,677
additional shares of Common Stock (subject to adjustment as provided therein),
and (c) $2,373,844 aggregate principal amount of Notes convertible at the
election of the Purchaser into 791,281 additional shares of Common Stock
(subject to adjustment as provided therein). This Agreement shall become
effective upon the issuance of the Securities.
2. TRANSFERS OF COMMON STOCK.
2.1 RIGHTS OF PARTICIPATION.
(a) TAGALONG OFFER. If the Stockholder or an Affiliate
thereof proposes to sell for value Notes or shares of the Common Stock or
Common Stock Equivalents (each of the Stockholder and any Affiliate
thereof being referred to herein as a "TRANSFEROR"), BUT EXCLUDING (i) a
sale which is pursuant to a public offering registered under the
Securities Act or is a transfer pursuant to Rule 144 of the Securities
Act, (ii) a sale to one or more of its Affiliates by a Transferor, or
(iii) a sale or sales which are effected by such Transferor in a single
transaction or a series of transactions and which do not involve more
than 5% of the Fully Diluted Common Stock, then such Transferor shall
offer (the "PARTICIPATION OFFER") to include in the proposed sale a
number of shares of Common Stock or Common Stock Equivalents, or an
aggregate principal amount of Notes, as the case may be, designated by
any
<PAGE>
Tagalong Holder, not to exceed, in respect of any such Tagalong
Holder, the number of shares of Common Stock or Common Stock
Equivalents, or the aggregate principal amount of Notes, as the case
may be, equal to the product of (a) the aggregate principal amount of
Notes, or the aggregate number of shares of Common Stock or Common
Stock Equivalents, as the case may be, to be sold by the Transferor
to the proposed transferee and (b) a fraction, the numerator of which
shall be the number of shares of Fully Diluted Common Stock held by
such Tagalong Holder and the denominator of which shall be the number
of shares of Fully Diluted Common Stock held by the Transferor and
the Tagalong Holders. The Transferor shall give written notice to
each Tagalong Holder of the Participation Offer (the "PARTICIPATION
OFFER NOTICE") at least 30 days prior to the proposed sale. The
Participation Offer Notice shall specify the proposed transferee, the
aggregate principal amount of Notes, or the number of shares of
Common Stock or Common Stock Equivalents, as the case may be, to be
sold to such transferee, the amount and type of consideration to be
received therefor, and the place and date on which the sale is to be
consummated.
(b) EXERCISE. Each Tagalong Holder who wishes to
include Notes or shares of Common Stock or Common Stock Equivalents in
the proposed sale in accordance with this Section 2.1 shall so notify the
Transferor not more than 15 days after the date of receipt of the
Participation Offer Notice. The Participation Offer shall be conditioned
upon the Transferor's sale of Notes or shares of Common Stock or Common
Stock Equivalents pursuant to the transactions contemplated in the
Participation Offer Notice with the transferee named therein. If any
Tagalong Holders have accepted the Participation Offer, the Transferor
shall reduce to the extent necessary the aggregate principal amount of
Notes, or the number of shares of Common Stock or Common Stock
Equivalents, as the case may be, it otherwise would have sold in the
proposed sale so as to permit such Tagalong Holders to sell the aggregate
principal amount of Notes, or the number of shares of Common Stock or
Common Stock Equivalents, as the case may be, that they are entitled to
sell under this Section 2.1, and the Transferor and such Tagalong Holders
shall sell the aggregate principal amount of Notes, or the number of
shares of Common Stock or Common Stock Equivalents, as the case may be,
specified in the Participation Offer to the proposed transferee in
accordance with the terms of such sale set forth in the Participation
Offer Notice. If no Tagalong Holder accepts the Participation Offer in
accordance with this Section 2.1(b), the Transferor shall be free to
consummate the proposed sale that is the subject of such Participation
Offer with the proposed transferee. Any Notes or shares of the Common
Stock or Common Stock Equivalents sold or otherwise transferred in
compliance with the terms of this Agreement shall not thereafter be
subject to the terms of this Agreement.
2.2 RESTRICTIVE LEGEND. Contemporaneously with the execution
and delivery of this Agreement, (i) each certificate representing shares of
presently
<PAGE>
outstanding, or contemporaneously issued, Common Stock, (ii) each
certificate representing Warrants presently outstanding or contemporaneously
issued and (iii) each Note presently outstanding or contemporaneously issued,
held by the Stockholder shall be stamped or otherwise imprinted with a
conspicuous legend (or shall be exchanged for stock certificates, Warrant
certificates or Notes bearing a legend) in substantially the following
respective forms:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS SET FORTH IN A PARTICIPATION RIGHTS AGREEMENT DATED
AS OF OCTOBER 19, 1999 AMONG THE CORPORATION, THE PRUDENTIAL
INSURANCE COMPANY OF AMERICA AND 3TEC ENERGY COMPANY, L.L.C., AND
SUCH SHARES MAY NOT BE TRANSFERRED EXCEPT IN COMPLIANCE WITH SUCH
RESTRICTIONS. SUCH PARTICIPATION RIGHTS AGREEMENT IS ON FILE AT
THE OFFICE OF THE CORPORATION AND A COPY THEREOF WILL BE FURNISHED
WITHOUT CHARGE TO THE HOLDER OF THE SHARES REPRESENTED BY THIS
CERTIFICATE UPON WRITTEN REQUEST." [FOR COMMON STOCK]
"THE COMMON STOCK PURCHASE WARRANTS REPRESENTED BY THIS
CERTIFICATE, AND THE SHARES OF COMMON STOCK ISSUABLE UPON THE
EXERCISE OF SUCH WARRANTS, ARE SUBJECT TO CERTAIN RESTRICTIONS SET
FORTH IN A PARTICIPATION RIGHTS AGREEMENT DATED AS OF OCTOBER 19,
1999 AMONG THE CORPORATION, THE PRUDENTIAL INSURANCE COMPANY OF
AMERICAN AND 3TEC ENERGY COMPANY, L.L.C., AND SUCH COMMON STOCK
PURCHASE WARRANTS AND SHARES OF COMMON STOCK MAY NOT BE
TRANSFERRED EXCEPT IN COMPLIANCE WITH SUCH RESTRICTIONS. SUCH
PARTICIPATION RIGHTS AGREEMENT IS ON FILE AT THE OFFICE OF THE
CORPORATION AND A COPY THEREOF WILL BE FURNISHED WITHOUT CHARGE TO
THE HOLDER OF THE COMMON STOCK PURCHASE WARRANTS REPRESENTED
HEREBY, OR TO THE HOLDER OF ANY SHARES OF COMMON STOCK ISSUABLE
UPON THE EXERCISE OF SUCH WARRANTS, UPON WRITTEN REQUEST." [FOR
WARRANTS]
"THIS NOTE, AND THE SHARES OF COMMON STOCK OF THE CORPORATION
ISSUABLE UPON THE CONVERSION HEREOF, ARE SUBJECT TO CERTAIN
RESTRICTIONS SET FORTH IN A PARTICIPATION RIGHTS AGREEMENT DATED
AS OF OCTOBER 19, 1999 AMONG THE CORPORATION, THE PRUDENTIAL
INSURANCE COMPANY OF AMERICA AND 3TEC ENERGY COMPANY, L.L.C., AND
THIS NOTE AND SUCH SHARES OF COMMON STOCK MAY NOT BE TRANSFERRED
EXCEPT IN COMPLIANCE WITH SUCH RESTRICTIONS. SUCH PARTICIPATION
RIGHTS AGREEMENT IS ON FILE AT THE OFFICE OF THE CORPORATION AND A
COPY THEREOF WILL BE FURNISHED WITHOUT CHARGE TO THE HOLDER THIS
NOTE, OR TO THE HOLDER OF SUCH SHARES OF COMMON STOCK, UPON
WRITTEN REQUEST." [FOR NOTES]
Each certificate issued upon the direct or indirect transfer (other than
transfers made
<PAGE>
in compliance with the terms of this Agreement) of any such outstanding
Common Stock or Warrants, and each Note issued upon the direct or indirect
transfer (other than transfers made in compliance with the terms of this
Agreement) of any other Note, held by the Stockholder, and each certificate
representing shares of Common Stock issuable upon exercise of any such
Warrant or upon conversion of any such Note, as the case may be, (other than
upon exercise of any Warrant or conversion of any Note transferred in
compliance with the terms of this Agreement) shall also be stamped or
otherwise imprinted with the applicable, foregoing legend.
2.3 EFFECT OF VIOLATION. Any purported transfer of Notes,
Common Stock or Common Stock Equivalents which is not permitted by this
Agreement or which is in violation of this Agreement shall be void and of no
force and effect whatsoever.
3. DEFINITIONS. As used herein, unless the context otherwise
requires, the following terms have the following respective meanings:
AFFILIATE: With respect to any Person, any other Person who,
directly or indirectly, is in control of, is controlled by, or is under
common control with, such Person. As used herein, the term "CONTROL"
means possession, directly or indirectly, of the power to direct or cause
the direction of the management or policies of a Person, whether through
the ownership of voting securities, by contract or otherwise.
AGREEMENT: This Participation Rights Agreement, as the same may
be amended from time to time.
COMMON STOCK: As defined in the introductory paragraph of this
Agreement.
COMMON STOCK EQUIVALENTS: All options, rights or warrants
(including, without limitation, the Warrants) to purchase shares of
Common Stock, all securities convertible into or exchangeable for shares
of Common Stock (including, without limitation, the Notes), all shares
of Common Stock into which shares of common stock of another class have
been converted, and all shares of stock or other securities of the
Company into which Common Stock (or Common Stock Equivalents) have been
converted.
COMPANY: As defined in the introductory paragraph of this
Agreement.
FULLY DILUTED COMMON STOCK: At any time, the then outstanding
Common Stock plus (without duplication) all shares of Common Stock
issuable, whether at such time or upon the passage of time or the
occurrence of future events, upon the exercise, conversion or exchange of
all then outstanding options, rights or warrants (including, without
limitation, the Warrants) or securities convertible into or exchangeable
for Common Stock (including, without limitation, the Notes).
<PAGE>
PARTICIPATION OFFER: As defined in Section 2.1(a).
PARTICIPATION OFFER NOTICE: As defined in Section 2.1(a).
PERSON: A corporation, an association, a partnership, a limited
liability company, a business, an individual, a governmental or political
subdivision thereof or a governmental agency.
PURCHASE AGREEMENT: As defined in Section 1.
PURCHASER: As defined in the introductory paragraph of this
Agreement.
REQUIRED HOLDERS: At any time, any holder or holders of 662/3% of
the aggregate number of (i) shares of Common Stock held by all Tagalong
Holders, (ii) shares of Common Stock issuable upon the exercise of all
Warrants held by all Tagalong Holders and (iii) shares of Common Stock
issuable upon the conversion of all Notes held by all Tagalong Holders.
SECURITIES ACT: The Securities Act of 1933, as amended, or any
successor statute thereto.
STOCKHOLDER: As defined in the introductory paragraph of this
Agreement.
TAGALONG HOLDER. Any holder of (i) Common Stock, Warrants or
Notes issued pursuant to the Purchase Agreement, or (ii) Common Stock
issued upon the exercise of such Warrants or the conversion of such
Notes.
TRANSFEROR: As defined in Section 2.1(a).
WARRANTS: As defined in Section 1.
4. AGREEMENT. A copy of this Agreement shall be filed with the
permanent records of the Company and shall be kept at all times at the principal
place of business of the Company.
5. FURTHER ASSURANCES. Each party agrees to do, or cause to be
done, such further acts and to execute and deliver, or to cause to be executed
and delivered, such further agreements, instruments, certificates and other
documents as may be necessary or appropriate to effectuate and carry out the
purposes of this Agreement.
6. AMENDMENTS AND WAIVERS. This Agreement may be amended, modified
or supplemented only by an instrument approved in writing by the Company, the
Stockholders and the Required Holders. Any agreement of a party hereto to waive
compliance with the performance of any agreement or condition herein shall be
valid only if set forth in an instrument in writing signed by such party.
<PAGE>
7. NOTICES. All communications provided for hereunder shall be sent
by first-class mail and (a) if addressed to a Tagalong Holder, addressed to such
Tagalong Holder in the manner set forth in the Purchase Agreement, or at such
other address as such Tagalong Holder shall have furnished to the other parties
hereto in writing, (b) if addressed to the Company, at 1221 Lamar Street, Suite
1020, Houston, Texas 77010, Attention: Floyd C. Wilson, or at such other
address, or to the attention of such other officer, as the Company shall have
furnished to the other parties hereto in writing; PROVIDED, HOWEVER, that any
such communication to the Company may also, at the option of any of the other
parties hereto, be either delivered to the Company at its address set forth
above or to any officer of the Company, or (c) if to the Stockholder or any
other Transferor, at 3TEC Energy Company, L.L.C., 5910 N. Central Expressway,
Suite 1150, Dallas, TX 75206, Attention: Floyd C. Wilson, or at such other
address as such party shall have furnished to the other parties hereto in
writing.
8. ASSIGNMENT. This Agreement shall be binding upon and inure to the
benefit of and be enforceable by the parties hereto and their respective
successors and assigns (including, in the case of the Stockholder, the other
Transferors) other than (a) the Persons to which a sale or other transfer is
made pursuant to clauses (i) and (iii) of Section 2.1(a) or their respective
successors and assigns (except the Stockholder) and (b) any transferee to which
a sale or other transfer is made by the Transferor in compliance with Section
2.1. In the event that the Stockholder transfers any Notes, Warrants, Common
Stock or Common Stock Equivalents to any of its Affiliates other than the
Company, it shall cause such Affiliates to comply with the provisions of this
Agreement. In addition, and whether or not any express assignment shall have
been made, the provisions of this Agreement which are for the benefit of the
Purchaser shall also be for the benefit of and enforceable by any subsequent
Tagalong Holder.
9. DESCRIPTIVE HEADINGS. The descriptive headings of the several
sections and paragraphs of this Agreement are inserted for reference only and
shall not limit or otherwise affect the meaning hereof.
10. SPECIFIC PERFORMANCE. The parties hereto recognize and agree that
money damages may be insufficient to compensate the Tagalong Holders for
breaches by the Company or the Stockholder of the terms hereof and,
consequently, that the equitable remedy of specific performance of the terms
hereof will be available in the event of any such breach.
11. GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with, and the rights of the parties shall be governed by, the laws of
the State of Texas.
<PAGE>
12. COUNTERPARTS. This Agreement may be executed simultaneously in
any number of counterparts, each of which shall be deemed an original, but all
such counterparts shall together constitute one and the same instrument.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGES FOLLOW]
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement, or
caused this Agreement to be executed and delivered by their respective officers
thereunto duly authorized, as of the date first above written.
MIDDLE BAY OIL COMPANY, INC.
By:
Name: Floyd C. Wilson
Title: President and Chief Executive
Officer
THE PRUDENTIAL INSURANCE COMPANY OF
AMERICA
By:
Name: Ric E. Abel
Title: Vice President
3TEC ENERGY COMPANY, L.L.C.
By:
Name: Floyd C. Wilson
Title: Managing Director
<PAGE>
EXHIBIT D
FORM OF WARRANT CERTIFICATE
THE OFFER AND SALE OF THE WARRANTS EVIDENCED BY THIS CERTIFICATE AND THE
SECURITIES ISSUABLE UPON AN EXERCISE OF SUCH WARRANT HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 AND SUCH SECURITIES MAY NOT BE SOLD OR
TRANSFERRED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT
COVERING SUCH SALE OR TRANSFER OR THE COMPANY RECEIVES AN OPINION OF COUNSEL
(WHICH MAY BE COUNSEL FOR THE COMPANY) STATING THAT SUCH SALE OR TRANSFER IS
EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.
No. W-1 798,677 Warrants
PPN #__________
WARRANT CERTIFICATE
This Warrant Certificate ("WARRANT CERTIFICATE") certifies that THE
PRUDENTIAL INSURANCE COMPANY OF AMERICA, a New Jersey corporation ("HOLDER"), or
registered assigns, is the registered holder of SEVEN HUNDRED NINETY-EIGHT
THOUSAND SIX HUNDRED SEVENTY-SEVEN (798,677) Warrants ("WARRANTS") to purchase
Common Stock of MIDDLE BAY OIL COMPANY, INC. an Alabama corporation (the
"COMPANY"). Each Warrant entitles the holder, subject to the conditions set
forth herein and in the Securities Purchase Agreement referred to below, to
purchase from the Company before 5:00 P.M., Dallas, Texas time, five (5) years
following the Closing Date (as defined in the Securities Purchase Agreement)
(the "EXPIRATION DATE"), one fully paid and nonassessable share of the Common
Stock of the Company (the "WARRANT SHARES") at a price (the "WARRANT EXERCISE
PRICE") of $1.00 per Warrant Share, subject to adjustment as provided in SECTION
4.2 of the Securities Purchase Agreement, payable in lawful money of the United
States of America (or, subject to the terms of SECTION 4.1 of the Securities
Purchase Agreement, by offsetting the principal balance of the Note, upon
surrender of this Warrant Certificate, execution of the form of Election to
Purchase on the reverse hereof, and payment of the Warrant Exercise Price (in
lawful money of the United States of America or by offsetting the principal
balance of the Note) to the Company, at its offices located at 1221 Lamar
Street, Suite 1020, Houston, Texas 77010, or at such other address as the
Company may specify in writing to the registered holder of the Warrants
evidenced hereby (the "WARRANT OFFICE"). The Warrant Exercise Price and number
of Warrant Shares purchasable upon exercise of the Warrants are subject to
adjustment prior to the Expiration Date upon the occurrence of certain events as
set forth in Section 4.2 of the Securities Purchase Agreement.
<PAGE>
The Company may deem and treat the registered holder(s) of the Warrants
evidenced hereby as the absolute owner(s) thereof (notwithstanding any notation
of ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
Warrant Certificates, when surrendered at the office of the Company at
the above-mentioned address by the registered holder hereof in person or by a
legal representative duly authorized in writing, may be exchanged, in the manner
and subject to the limitations provided in the Securities Purchase Agreement,
but without payment of any service charge, for another Warrant Certificate or
Warrant Certificates of like tenor evidencing in the aggregate a like number of
Warrants.
Upon due presentment for registration of transfer of this Warrant
Certificate at the office of the Company at the above-mentioned address and
subject to the conditions set forth on this Certificate and in SECTION 4.2 of
the Securities Purchase Agreement, a new Warrant Certificate or Warrant
Certificates of like tenor and evidencing in the aggregate a like number of
Warrants shall be issued in exchange for this Warrant Certificate to the
transferee(s) and, if less than all the Warrants evidenced hereby are to be
transferred, to the registered holder hereof, subject to the limitations
provided in the Securities Purchase Agreement, without charge except for any tax
or other governmental charge imposed in connection therewith.
This Warrant Certificate is one of the Warrant Certificates referred to
in the Securities Purchase Agreement, dated as of October 19, 1999, between the
Company and Holder. Said Securities Purchase Agreement is hereby incorporated
by referenced in and made a part of this instrument and is hereby referred to
for a description of the rights, limitation of rights, obligations, duties and
immunities thereunder of the Company and the holders.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
signed by its duly authorized officers and has caused its corporate seal to be
affixed hereunto.
MIDDLE BAY OIL COMPANY, INC.
By:
-----------------------------------
Name: Floyd C. Wilson
Title: President and Chief Executive
Officer
<PAGE>
FORM OF ELECTION TO PURCHASE
(To be executed upon exercise of Warrant)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase ______ Warrant Shares and
herewith tenders payment for such Warrant Shares to the order of the Company in
the amount of $_______ in accordance with the terms hereof, or represents and
warrants to the Company that the undersigned is the legal and beneficial owner
of the Warrant Shares and hereby advises the Company that the undersigned has
offset the principal balance of the Note in the amount of $__________ in payment
for the Warrant Shares. The undersigned requests that a certificate for such
Warrant Shares be registered in the name of ___________ whose address is
_____________________ and that such certificate be delivered to __________ whose
address is ____________________. If said number of Warrant Shares is less than
all of the Warrant Shares purchased hereunder, the undersigned requests that a
new Warrant Certificate be registered in the name of ______________ whose
address is ______________ and that such Warrant Certificate is to be delivered
to _______________ whose address is __________________.
Signature:
--------------------------
(Signature must conform in all
respects to name as specified on the
face of the Warrant Certificate.)
Date:
-----------------------
<PAGE>
EXHIBIT E
IDENTIFICATION OF OTHER SECURITIES PURCHASE AGREEMENTS
Securities Purchase Agreement dated July 1, 1999 by and between 3TEC Energy
Corporation and Middle Bay Oil Company, Inc.
Securities Purchase Agreement dated August 27, 1999, by and between Shoemaker
Family Partners, L.P., and Middle Bay Oil Company, Inc.
Securities Purchase Agreement dated August 27, 1999, by and between Shoeinvest
II, L.P., and Middle Bay Oil Company, Inc.
<PAGE>
EXHIBIT F
WIRING INSTRUCTIONS
[Company's Letterhead]
The Prudential Insurance Company of America
c/o Prudential Capital Group
2200 Ross Avenue, Suite 4200E
Dallas, Texas 75201
Re: FUNDS DELIVERY INSTRUCTIONS
Ladies and Gentlemen:
As contemplated by Section 2.4 of the Securities Purchase
Agreement, dated October 19, 1999, between us, the undersigned hereby instructs
you to deliver, on the date of Closing, the Purchase Price of the Common Stock
Shares, Warrants and the Note in the manner required by Section 2.4 to the
undersigned's account identified below:
Account Name: Middle Bay Oil Company, Inc.
Account No.: 1576583304
Bank: Bank One, Texas, N.A.
Bank ABA No.: 111000614
This instruction has been executed and delivered by an authorized
representative of the undersigned.
Very truly yours,
MIDDLE BAY OIL COMPANY, INC.
By:
----------------------------
Name:
Title:
<PAGE>
DISCLOSURE SCHEDULE
Schedule 1.1A Ownership Interests
Schedule 1.1B Series B Convertible Preferred Shares
Schedule 1.1C Series C Convertible Preferred Shares
Schedule 7.4 Capitalization
Schedule 7.9 Outstanding Debt
Schedule 7.11 Litigation
Schedule 7.18 Environmental Matters
Schedule 7.22 Insurance
Schedule 7.26 Oil and Gas Operations Exceptions
Schedule 7.27 Financial and Commodity Hedging
<PAGE>
Exhibit 10.2
AMENDMENT TO REGISTRATION RIGHTS AGREEMENT
This Amendment to Registration Rights Agreement (the "Amendment") dated
as of October 19, 1999, is entered into by and among MIDDLE BAY OIL COMPANY,
INC., an Alabama corporation ("Corporation"), 3TEC Energy Company L.L.C., a
Delaware limited liability company f/k/a 3TEC Energy Corporation, Shoemaker
Family Partners, L.P., Shoeinvest II, LP, and The Prudential Insurance Company
of America, a New Jersey corporation ("Prudential").
RECITALS
WHEREAS, on August 27, 1999, the Corporation, 3TEC Energy Company L.L.C.
f/k/a 3TEC Energy Corporation; Kaiser-Francis Oil Company; C.J. Lett, III;
Weskids, L.P.; Alvin V. Shoemaker; Shoemaker Family Partners, L.P.; and
Shoeinvest II, LP entered into a certain Registration Rights Agreement (the
"Agreement"); and.
WHEREAS, the parties hereto wish to amend the Agreement to add Prudential
as a party to the Agreement and as a Shareholder as defined in the Agreement.
NOW, THEREFORE, in consideration of the mutual promises contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
1. ADDITION OF PRUDENTIAL AS A SHAREHOLDER. Prudential is hereby
added as a party to the Agreement and shall be considered a
Shareholder as defined in the Agreement.
2. SCHEDULE 1. Schedule 1 of the Agreement is hereby deleted in its
entirety and replaced with Schedule 1 attached hereto.
3. TERMS DEFINED IN AGREEMENT. As used herein, each term defined in
the Agreement shall have the meaning assigned thereto in the
Agreement, unless expressly provided herein to the contrary.
4. FULL FORCE AND EFFECT. Except with respect to the changes made in
this Amendment, the terms and provisions of the Agreement are in
full force and effect.
5. NOTICES. Any notice to be given by any party hereunder to any
other shall be in writing, mailed by certified or registered mail,
return receipt requested, and shall be addressed to the other
parties at the addresses listed on the signature pages hereof.
All such notices shall be deemed to be given three (3) days after
the date of mailing thereof.
<PAGE>
6. BINDING EFFECT. This Amendment shall be binding upon the parties
hereto and their respective successors, personal representatives
and permitted assigns.
7. COUNTERPARTS. This Amendment may be executed in one or more
counterparts, each of which shall constitute an original and all
of which together shall constitute but one and the same
instrument.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
"CORPORATION"
MIDDLE BAY OIL COMPANY, INC.
By: /s/ Floyd C. Wilson
Name: Floyd C. Wilson
Title: President and Chief Executive Officer
Address for Notice:
Middle Bay Oil Company, Inc.
1221 Lamar Street, Suite 1020
Houston, TX 77010
Fax: (713) 650-0352
"SHAREHOLDERS"
3TEC ENERGY COMPANY L.L.C
By: /s/ Floyd C. Wilson
Name: Floyd C. Wilson
--------------------------------
Title: Managing Director
--------------------------------
Address for Notice:
3TEC Energy Company L.L.C.
5910 N. Central Expressway
Suite 1150
Dallas, TX 75206
Fax: (214) 373-9731
<PAGE>
SHOEMAKER FAMILY PARTNERS, LP
By: Alvin V. Shoemaker
Its General Partner
By: /s/ Alvin V. Shoemaker
Name: Alvin V. Shoemaker
Title: General Partner
Address for Notice:
Shoemaker Family Partners, LP
60 Brushhill Road
Kinnelon, NJ 07405
Fax: (310) 444-3833
SHOEINVEST II, LP
By: Alvin Shoemaker Investments, Inc.
Its General Partner
By: /s/ Alvin V. Shoemaker
Name: Alvin V. Shoemaker
Title: General Partner
Address for Notice:
Shoeinvest II, LP
60 Brushhill Road
Kinnelon, NJ 07405
Fax: (310) 444-3833
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
By: /s/ Ric E. Abel
Name: Ric E. Abel
Title: Vice President
Address for Notice:
The Prudential Insurance Company of America
c/o Prudential Capital Group
2200 Ross Avenue, Suite 4200E
Dallas, Texas 75201
Fax: (214) 720-6299
Attn.: Managing Director
<PAGE>
SCHEDULE 1
3TEC Energy Company L.L.C.,
f/k/a 3TEC Energy Corporation Securities Purchase Agreement by and
between 3TEC Energy Corporation and
Middle Bay OilCompany, Inc., dated
July 1, 1999
4,755,556 shares of Common Stock
Warrants exercisable for 3,600,000
shares of Common Stock
$10,700,000 Note (which is convertible
to Conversion Shares)
Shoemaker Family Partners,
LP Securities Purchase Agreement by and
between Shoemaker Family Partners, LP
and Middle Bay Oil Company, Inc.,
dated August 27, 1999
22,222 shares of Common Stock
Warrants exercisable for 16,822 shares
of Common Stock
$50,000 Note (which is convertible to
Conversion Shares)
Shoeinvest II, LP Securities Purchase Agreement by and
between Shoeinvest II, LP and Middle
Bay Oil Company, Inc., dated August
27, 1999
44,444 shares of Common Stock
Warrants exercisable for 33,644 shares
of Common Stock
$100,000 Note (which is convertible to
Conversion Shares)
The Prudential Insurance
Company of America Securities Purchase Agreement by and
between The Prudential Insurance
Company of America and Middle Bay Oil
Company, Inc., dated October 19, 1999
1,055,042 shares of Common Stock
Warrants exercisable for 798,677
shares of Common Stock
<PAGE>
$2,373,844 Note (which is convertible
to Conversion Shares)
<PAGE>
Exhibit 10.3
EXECUTION COPY
PARTICIPATION RIGHTS AGREEMENT
PARTICIPATION RIGHTS AGREEMENT, dated as of October 19, 1999, by
and among MIDDLE BAY OIL COMPANY, INC., an Alabama corporation (the "COMPANY"),
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA (the "PURCHASER") and 3TEC ENERGY
COMPANY, L.L.C. , a Delaware limited liability company (the "STOCKHOLDER"),
which as of the date hereof is the holder of approximately 35.5% of the issued
and outstanding shares of the Company's common stock, par value $0.02 per share
("COMMON STOCK"), Common Stock purchase warrants ("WARRANTS") entitling the
Stockholder to purchase 3,600,000 additional shares of Common Stock (subject to
adjustment as provided therein) and one or more Senior Subordinate Promissory
Notes ("NOTES") in the aggregate principal amount of $10,700,000 convertible at
the election of the Stockholder into 3,566,666 additional shares of Common Stock
(subject to adjustment as provided therein).
1. BACKGROUND. The Company and the Purchaser have entered into a
Securities Purchase Agreement (the "PURCHASE AGREEMENT"), dated as of the date
hereof, pursuant to which the Company has agreed, among other things, to issue
and sell (a) 1,055,042 shares of Common Stock, (b) Common Stock purchase
warrants ("PRUDENTIAL WARRANTS") entitling Purchaser to purchase 798,677
additional shares of Common Stock (subject to adjustment as provided therein),
and (c) $2,373,844 aggregate principal amount of Notes convertible at the
election of the Purchaser into 791,281 additional shares of Common Stock
(subject to adjustment as provided therein). This Agreement shall become
effective upon the issuance of the Securities.
2. TRANSFERS OF COMMON STOCK.
2.1 RIGHTS OF PARTICIPATION.
(a) TAGALONG OFFER. If the Stockholder or an Affiliate
thereof proposes to sell for value Notes or shares of the Common Stock or
Common Stock Equivalents (each of the Stockholder and any Affiliate
thereof being referred to herein as a "TRANSFEROR"), BUT EXCLUDING (i) a
sale which is pursuant to a public offering registered under the
Securities Act or is a transfer pursuant to Rule 144 of the Securities
Act, (ii) a sale to one or more of its Affiliates by a Transferor, or
(iii) a sale or sales which are effected by such Transferor in a single
transaction or a series of transactions and which do not involve more
than 5% of the Fully Diluted Common Stock, then such Transferor shall
offer (the "PARTICIPATION OFFER") to include in the proposed sale a
number of shares of Common Stock or Common Stock Equivalents, or an
aggregate principal amount of Notes, as the case may be, designated by
any
<PAGE>
Tagalong Holder, not to exceed, in respect of any such Tagalong
Holder, the number of shares of Common Stock or Common Stock
Equivalents, or the aggregate principal amount of Notes, as the case
may be, equal to the product of (a) the aggregate principal amount of
Notes, or the aggregate number of shares of Common Stock or Common
Stock Equivalents, as the case may be, to be sold by the Transferor
to the proposed transferee and (b) a fraction, the numerator of which
shall be the number of shares of Fully Diluted Common Stock held by
such Tagalong Holder and the denominator of which shall be the number
of shares of Fully Diluted Common Stock held by the Transferor and
the Tagalong Holders. The Transferor shall give written notice to
each Tagalong Holder of the Participation Offer (the "PARTICIPATION
OFFER NOTICE") at least 30 days prior to the proposed sale. The
Participation Offer Notice shall specify the proposed transferee, the
aggregate principal amount of Notes, or the number of shares of
Common Stock or Common Stock Equivalents, as the case may be, to be
sold to such transferee, the amount and type of consideration to be
received therefor, and the place and date on which the sale is to be
consummated.
(b) EXERCISE. Each Tagalong Holder who wishes to
include Notes or shares of Common Stock or Common Stock Equivalents in
the proposed sale in accordance with this Section 2.1 shall so notify the
Transferor not more than 15 days after the date of receipt of the
Participation Offer Notice. The Participation Offer shall be conditioned
upon the Transferor's sale of Notes or shares of Common Stock or Common
Stock Equivalents pursuant to the transactions contemplated in the
Participation Offer Notice with the transferee named therein. If any
Tagalong Holders have accepted the Participation Offer, the Transferor
shall reduce to the extent necessary the aggregate principal amount of
Notes, or the number of shares of Common Stock or Common Stock
Equivalents, as the case may be, it otherwise would have sold in the
proposed sale so as to permit such Tagalong Holders to sell the aggregate
principal amount of Notes, or the number of shares of Common Stock or
Common Stock Equivalents, as the case may be, that they are entitled to
sell under this Section 2.1, and the Transferor and such Tagalong Holders
shall sell the aggregate principal amount of Notes, or the number of
shares of Common Stock or Common Stock Equivalents, as the case may be,
specified in the Participation Offer to the proposed transferee in
accordance with the terms of such sale set forth in the Participation
Offer Notice. If no Tagalong Holder accepts the Participation Offer in
accordance with this Section 2.1(b), the Transferor shall be free to
consummate the proposed sale that is the subject of such Participation
Offer with the proposed transferee. Any Notes or shares of the Common
Stock or Common Stock Equivalents sold or otherwise transferred in
compliance with the terms of this Agreement shall not thereafter be
subject to the terms of this Agreement.
<PAGE>
2.2 RESTRICTIVE LEGEND. Contemporaneously with the execution
and delivery of this Agreement, (i) each certificate representing shares of
presently outstanding, or contemporaneously issued, Common Stock, (ii) each
certificate representing Warrants presently outstanding or contemporaneously
issued and (iii) each Note presently outstanding or contemporaneously issued,
held by the Stockholder shall be stamped or otherwise imprinted with a
conspicuous legend (or shall be exchanged for stock certificates, Warrant
certificates or Notes bearing a legend) in substantially the following
respective forms:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS SET FORTH IN A PARTICIPATION RIGHTS AGREEMENT DATED
AS OF OCTOBER 19, 1999 AMONG THE CORPORATION, THE PRUDENTIAL
INSURANCE COMPANY OF AMERICA AND 3TEC ENERGY COMPANY, L.L.C., AND
SUCH SHARES MAY NOT BE TRANSFERRED EXCEPT IN COMPLIANCE WITH SUCH
RESTRICTIONS. SUCH PARTICIPATION RIGHTS AGREEMENT IS ON FILE AT
THE OFFICE OF THE CORPORATION AND A COPY THEREOF WILL BE FURNISHED
WITHOUT CHARGE TO THE HOLDER OF THE SHARES REPRESENTED BY THIS
CERTIFICATE UPON WRITTEN REQUEST." [FOR COMMON STOCK]
"THE COMMON STOCK PURCHASE WARRANTS REPRESENTED BY THIS
CERTIFICATE, AND THE SHARES OF COMMON STOCK ISSUABLE UPON THE
EXERCISE OF SUCH WARRANTS, ARE SUBJECT TO CERTAIN RESTRICTIONS SET
FORTH IN A PARTICIPATION RIGHTS AGREEMENT DATED AS OF OCTOBER 19,
1999 AMONG THE CORPORATION, THE PRUDENTIAL INSURANCE COMPANY OF
AMERICAN AND 3TEC ENERGY COMPANY, L.L.C., AND SUCH COMMON STOCK
PURCHASE WARRANTS AND SHARES OF COMMON STOCK MAY NOT BE
TRANSFERRED EXCEPT IN COMPLIANCE WITH SUCH RESTRICTIONS. SUCH
PARTICIPATION RIGHTS AGREEMENT IS ON FILE AT THE OFFICE OF THE
CORPORATION AND A COPY THEREOF WILL BE FURNISHED WITHOUT CHARGE TO
THE HOLDER OF THE COMMON STOCK PURCHASE WARRANTS REPRESENTED
HEREBY, OR TO THE HOLDER OF ANY SHARES OF COMMON STOCK ISSUABLE
UPON THE EXERCISE OF SUCH WARRANTS, UPON WRITTEN REQUEST." [FOR
WARRANTS]
"THIS NOTE, AND THE SHARES OF COMMON STOCK OF THE CORPORATION
ISSUABLE UPON THE CONVERSION HEREOF, ARE SUBJECT TO CERTAIN
RESTRICTIONS SET FORTH IN A PARTICIPATION RIGHTS AGREEMENT DATED
AS OF OCTOBER 19, 1999 AMONG THE CORPORATION, THE PRUDENTIAL
INSURANCE COMPANY OF AMERICA AND 3TEC ENERGY COMPANY, L.L.C., AND
THIS NOTE AND SUCH SHARES OF COMMON STOCK MAY NOT BE TRANSFERRED
EXCEPT IN COMPLIANCE WITH SUCH RESTRICTIONS. SUCH PARTICIPATION
RIGHTS AGREEMENT IS ON FILE AT THE OFFICE OF THE CORPORATION AND A
COPY THEREOF WILL BE FURNISHED WITHOUT CHARGE
<PAGE>
TO THE HOLDER THIS NOTE, OR TO THE HOLDER OF SUCH SHARES OF COMMON
STOCK, UPON WRITTEN REQUEST." [FOR NOTES]
Each certificate issued upon the direct or indirect transfer (other than
transfers made in compliance with the terms of this Agreement) of any such
outstanding Common Stock or Warrants, and each Note issued upon the direct or
indirect transfer (other than transfers made in compliance with the terms of
this Agreement) of any other Note, held by the Stockholder, and each certificate
representing shares of Common Stock issuable upon exercise of any such Warrant
or upon conversion of any such Note, as the case may be, (other than upon
exercise of any Warrant or conversion of any Note transferred in compliance
with the terms of this Agreement) shall also be stamped or otherwise imprinted
with the applicable, foregoing legend.
2.3 EFFECT OF VIOLATION. Any purported transfer of Notes,
Common Stock or Common Stock Equivalents which is not permitted by this
Agreement or which is in violation of this Agreement shall be void and of no
force and effect whatsoever.
3. DEFINITIONS. As used herein, unless the context otherwise
requires, the following terms have the following respective meanings:
AFFILIATE: With respect to any Person, any other Person who,
directly or indirectly, is in control of, is controlled by, or is under
common control with, such Person. As used herein, the term "CONTROL"
means possession, directly or indirectly, of the power to direct or cause
the direction of the management or policies of a Person, whether through
the ownership of voting securities, by contract or otherwise.
AGREEMENT: This Participation Rights Agreement, as the same may
be amended from time to time.
COMMON STOCK: As defined in the introductory paragraph of this
Agreement.
COMMON STOCK EQUIVALENTS: All options, rights or warrants
(including, without limitation, the Warrants) to purchase shares of
Common Stock, all securities convertible into or exchangeable for shares
of Common Stock (including, without limitation, the Notes), all shares
of Common Stock into which shares of common stock of another class have
been converted, and all shares of stock or other securities of the
Company into which Common Stock (or Common Stock Equivalents) have been
converted.
COMPANY: As defined in the introductory paragraph of this
Agreement.
FULLY DILUTED COMMON STOCK: At any time, the then outstanding
<PAGE>
Common Stock plus (without duplication) all shares of Common Stock
issuable, whether at such time or upon the passage of time or the
occurrence of future events, upon the exercise, conversion or exchange of
all then outstanding options, rights or warrants (including, without
limitation, the Warrants) or securities convertible into or exchangeable
for Common Stock (including, without limitation, the Notes).
PARTICIPATION OFFER: As defined in Section 2.1(a).
PARTICIPATION OFFER NOTICE: As defined in Section 2.1(a).
PERSON: A corporation, an association, a partnership, a limited
liability company, a business, an individual, a governmental or political
subdivision thereof or a governmental agency.
PURCHASE AGREEMENT: As defined in Section 1.
PURCHASER: As defined in the introductory paragraph of this
Agreement.
REQUIRED HOLDERS: At any time, any holder or holders of 662/3% of
the aggregate number of (i) shares of Common Stock held by all Tagalong
Holders, (ii) shares of Common Stock issuable upon the exercise of all
Warrants held by all Tagalong Holders and (iii) shares of Common Stock
issuable upon the conversion of all Notes held by all Tagalong Holders.
SECURITIES ACT: The Securities Act of 1933, as amended, or any
successor statute thereto.
STOCKHOLDER: As defined in the introductory paragraph of this
Agreement.
TAGALONG HOLDER. Any holder of (i) Common Stock, Warrants or
Notes issued pursuant to the Purchase Agreement, or (ii) Common Stock
issued upon the exercise of such Warrants or the conversion of such
Notes.
TRANSFEROR: As defined in Section 2.1(a).
WARRANTS: As defined in Section 1.
4. AGREEMENT. A copy of this Agreement shall be filed with the
permanent records of the Company and shall be kept at all times at the principal
place of business of the Company.
5. FURTHER ASSURANCES. Each party agrees to do, or cause to be
done, such further acts and to execute and deliver, or to cause to be executed
and delivered, such further agreements, instruments, certificates and other
documents as may be necessary or appropriate to effectuate and carry out the
purposes of this Agreement.
<PAGE>
6. AMENDMENTS AND WAIVERS. This Agreement may be amended, modified
or supplemented only by an instrument approved in writing by the Company, the
Stockholders and the Required Holders. Any agreement of a party hereto to waive
compliance with the performance of any agreement or condition herein shall be
valid only if set forth in an instrument in writing signed by such party.
7. NOTICES. All communications provided for hereunder shall be sent
by first-class mail and (a) if addressed to a Tagalong Holder, addressed to such
Tagalong Holder in the manner set forth in the Purchase Agreement, or at such
other address as such Tagalong Holder shall have furnished to the other parties
hereto in writing, (b) if addressed to the Company, at 1221 Lamar Street, Suite
1020, Houston, Texas 77010, Attention: Floyd C. Wilson, or at such other
address, or to the attention of such other officer, as the Company shall have
furnished to the other parties hereto in writing; PROVIDED, HOWEVER, that any
such communication to the Company may also, at the option of any of the other
parties hereto, be either delivered to the Company at its address set forth
above or to any officer of the Company, or (c) if to the Stockholder or any
other Transferor, at 3TEC Energy Company, L.L.C., 5910 N. Central Expressway,
Suite 1150, Dallas, TX 75206, Attention: Floyd C. Wilson, or at such other
address as such party shall have furnished to the other parties hereto in
writing.
8. ASSIGNMENT. This Agreement shall be binding upon and inure to the
benefit of and be enforceable by the parties hereto and their respective
successors and assigns (including, in the case of the Stockholder, the other
Transferors) other than (a) the Persons to which a sale or other transfer is
made pursuant to clauses (i) and (iii) of Section 2.1(a) or their respective
successors and assigns (except the Stockholder) and (b) any transferee to which
a sale or other transfer is made by the Transferor in compliance with Section
2.1. In the event that the Stockholder transfers any Notes, Warrants, Common
Stock or Common Stock Equivalents to any of its Affiliates other than the
Company, it shall cause such Affiliates to comply with the provisions of this
Agreement. In addition, and whether or not any express assignment shall have
been made, the provisions of this Agreement which are for the benefit of the
Purchaser shall also be for the benefit of and enforceable by any subsequent
Tagalong Holder.
9. DESCRIPTIVE HEADINGS. The descriptive headings of the several
sections and paragraphs of this Agreement are inserted for reference only and
shall not limit or otherwise affect the meaning hereof.
10. SPECIFIC PERFORMANCE. The parties hereto recognize and agree that
money damages may be insufficient to compensate the Tagalong Holders for
breaches by the Company or the Stockholder of the terms hereof and,
consequently, that the equitable remedy of specific performance of the terms
hereof will be available in the event of any such breach.
11. GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with, and the rights of the parties shall be governed by, the laws of
the State of Texas.
<PAGE>
12. COUNTERPARTS. This Agreement may be executed simultaneously in
any number of counterparts, each of which shall be deemed an original, but all
such counterparts shall together constitute one and the same instrument.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGES FOLLOW]
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement, or
caused this Agreement to be executed and delivered by their respective officers
thereunto duly authorized, as of the date first above written.
MIDDLE BAY OIL COMPANY, INC.
By: /s/ Floyd C. Wilson
-------------------
Name: Floyd C. Wilson
Title: President and Chief Executive
Officer
THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA
By: /s/ Ric E. Abel
Name: Ric E. Abel
Title: Vice President
3TEC ENERGY COMPANY, L.L.C.
By: /s/ Floyd C. Wilson
-------------------
Name: Floyd C. Wilson
Title: Managing Director
<PAGE>
Exhibit 99.1
FOR IMMEDIATE RELEASE FOR FURTHER INFORMATION CONTACT:
STEVE W. HEROD
713/759-6808, EXT. 104
MIDDLE BAY OIL COMPANY, INC. ANNOUNCES PRIVATE PLACEMENT
HOUSTON, TEXAS, OCTOBER 20, 1999... Middle Bay Oil Company, Inc. ("Middle Bay")
(NASDAQ: MBOC) announced today the closing of a private placement of securities
for $4,747,688 to Prudential Capital Group, a division of The Prudential
Insurance Company of America ("Prudential"). The economic terms and conditions
of the private placement are similar to those of Middle Bay's transaction with
3TEC Energy Company, L.L.C. ("3TEC"), which closed on August 27, 1999. 3TEC is a
privately held independent exploration and production company whose members
include an affiliate of EnCap Investments L.C. ("EnCap") and Floyd C. Wilson.
With over $1 billion in funds under management, EnCap is an institutional funds
management firm specializing in financing the upstream and midstream sectors of
the energy industry. EnCap is a wholly owned subsidiary of El Paso Energy
Corporation. Floyd C. Wilson, former President and Chief Executive Officer of
Hugoton Energy Corporation, is a major shareholder and President of 3TEC.
Concurrent with the closing of the 3TEC/Middle Bay transaction, Mr. Wilson
became Chairman, President and Chief Executive Officer of Middle Bay. 3TEC is
Middle Bay's largest shareholder with ownership of approximately 33% of the
currently outstanding common stock.
Pursuant to a Securities Purchase Agreement executed October 19, 1999,
Prudential purchased 1,055,042 shares of newly issued Middle Bay common stock
and five-year warrants to purchase 798,677 shares of Middle Bay common stock for
$2,373,844. The warrants are exercisable for $1.00 per share and are subject to
certain restrictions regarding the timing of their exercise. Middle Bay issued
Prudential a senior subordinated convertible note for $2,373,844, which has a
five-year maturity, bears interest at 9% per annum and is convertible into
Middle Bay common stock at $3.00 per share.
The funds from the Prudential transaction are intended to be used as part of the
consideration for Middle Bay's acquisition of properties and interests owned by
a group of private sellers and managed by Floyd Oil Company, which was announced
October 7, 1999. The Floyd Oil acquisition, which is subject to the execution of
definitive agreements and completion of due diligence, has an approximate
purchase price of $94 million and will increase the Company's proved reserves by
an estimated 186 BCFE. The reserves being acquired are 76% natural gas with 73%
classified as proved developed producing. Middle Bay will operate the majority
of the properties. Closing is expected to be in late October or early November
1999.
<PAGE>
Middle Bay Oil Company, Inc. is an independent oil and gas exploration and
production company with operations in Texas, Louisiana and Oklahoma.
The information contained in this press release may contain projections,
estimates and other forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Although the Company believes that its expectations are based on
reasonable assumptions, it can give no assurance that its goals will be
achieved. Important factors that could cause actual results to differ materially
from those included in the forward-looking statements include the timing and
extent of changes in commodity prices for oil and gas, environmental risks,
drilling, producing and operating risks, risks related to exploration and
development, uncertainties about the estimates of reserves, government
regulation, competition and the ability of the Company to meet its stated
business goals.
