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
January 31, 1997
Rio Grande, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation)
1-8287 74-1973357
(Commission File Number) (I.R.S. Employer Identification Number)
10101 Reunion Place, Suite 210
San Antonio, Texas 78216-4156
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(210) 308-8000
Item 2. Acquisition or Disposition of Assets
Acquisition. On January 16, 1997, Rio Grande Offshore, Ltd.
("Offshore") completed the acquisition of producing oil and gas properties in
the Righthand Creek Field ("Righthand Creek") located in Allen Parish,
Louisiana. The effective date of the Righthand Creek acquisition is November 1,
1996. The acquisition price for Righthand Creek is approximately $15.3 million
for total proved producing reserves of approximately 2 million barrels of oil
and 2 Bcf natural gas net to Offshore's interest and is subject to adjustment
under certain circumstances as described below. The acquired properties have
recently produced approximately 700 barrels of oil and 700 MCF of natural gas
per day net to Rio Grande's interest. Drilling will be the operator for the
seven existing wells, which are currently producing from the Wilcox formation.
The Righthand Creek acquisition was funded by approximately $9 million
borrowed from Comerica Bank - Texas, as described in Item 5, and approximately
$6 million of the proceeds of a $10 million private placement of preferred stock
to Koch Exploration Company ("Koch"), an affiliate of Koch Industries, Inc.,
further described in Item 5 below. The Purchase and Sale Agreement pertaining to
the Righthand Creek acquisition was filed as an exhibit and is incorporated by
reference in the Form 10-QSB filed for the quarter ended October 31, 1996.
The Purchase and Sale Agreement provides that Offshore will conduct
certain drilling operations on undeveloped leasehold acreage within twelve (12)
months of the closing date. Offshore must commence the spud-in of two (2) wells
within twelve months of closing to test the Wilcox "B" Sand; however, Offshore
does have the option to re-enter an existing well located on the undeveloped
acreage which would count as one well. In the event that Offshore fails to drill
either of the required wells to the Wilcox "B" formation, the seller has the
right to require Offshore to convey to the seller a working interest in the
unearned acreage.
In connection with Offshore's requirement to develop the undeveloped
leasehold acreage, the sellers have the option to obtain a working interest
ranging from 10 to 20 percent in all new wells completed, effective upon
Offshore obtaining project payout. Project payout for the wells completed by
Offshore will occur when Offshore has received proceeds from production of the
wells drilled in the amount equal to all actual costs of drilling, completing,
re-completing, equipping, maintaining, producing and operating the new wells. If
the sellers exercise their options in their entirety, the sellers' working
interest will remain in effect until the sellers have recovered the sum of $7
million out of their proportionate shares of proceeds from production sales net
of recoverable costs and expenses proportionate to their working interests in
the wells drilled. The working interests obtained by the sellers as described
above would then revert back to Offshore.
Item 5. Other Events
Bank Financing. Effective January 16, 1997, the Company and Drilling
executed the First Amendment to Loan Agreement ("First Amendment") with Comerica
Bank - Texas which provided for the increase of the senior credit facility to
$50 million and the increase of the borrowing base
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("Borrowing Base") to approximately $17 million. The First Amendment also
provided for extending the maturity date of the senior credit facility to
February 1, 2000. The Borrowing Base is subject to monthly reductions of $75,000
for February and March, 1997 and thereafter is subject to monthly reductions of
$333,000 until maturity or the next determination of the Borrowing Base. The
Borrowing Base of $17 million shall remain in effect until February 1, 1998;
however, the Company may request a redetermination prior to February 1, 1998 at
the Company's sole expense.
The interest rate options available to the Company are based either on
a prime rate determination or a Eurodollar rate determination. The outstanding
principal balance under the Borrowing Base will be subject to the Comerica Bank
- - Texas prime rate plus 1/2 percent calculated on actual days of a year
consisting of 365 days unless written notice is provided to the bank to elect an
amount to be converted to a Eurodollar rate determination. The Company can
select any amount of the outstanding principal under the Borrowing Base to be
converted into terms of 30, 60, 90 or 180 day periods. The interest rate is
based on the time period selected plus an incremental margin payable to Comerica
Bank - Texas equivalent to 2.25% per annum. Interest under the Eurodollar rate
is determined on actual days in a year based on 360 days. For any unused portion
of the Borrowing Base, a commitment fee of 3/8ths of one percent per annum will
be charged to the Company. Comerica Bank - Texas was paid a loan origination fee
of $75,000 to facilitate the First Amendment.
The current outstanding principal balance is $13,300,000.
Private Placement of Preferred Stock.
In August 1996, the Company engaged Reid Securities Corporation
("Reid") as its exclusive agent to assist the Company in effectuating the sales
of equity in the Company by means of private placement to institutional
investors. On January 15, 1997, the Company filed a Certificate of Designation,
Preferences and Rights of Series A Preferred Stock, Series B Preferred Stock,
and Series C Preferred Stock ("Certificate") with the Secretary of State,
Delaware. A copy of the Certificate is filed as an exhibit to this report. The
Certificate amended the Company's Certificate of Incorporation to establish
three new series of preferred stock consisting of 700,000 shares of Series A
Preferred Stock, 500,000 shares of Series B Preferred Stock, and 500,000 shares
of Series C Preferred Stock, each having a par value of $.01 per share. The
remaining 1,300,000 of the Company's 3,000,000 shares of authorized preferred
stock remains undesignated. The Certificate provides for the rights,
preferences, powers, restrictions and limitations of the respective series of
preferred stock, and the summary of the rights, preferences and other terms of
the respective series of preferred stock set forth herein is qualified in its
entirety by reference to the Certificate attached hereto as an exhibit.
Series A Preferred Stock. Pursuant to the Koch Agreement (as defined
herein), 500,000 shares of Series A Preferred Stock were initially issued by the
Company for consideration of $10 per share. Holders of the Series A Preferred
Stock, which has a face value of $10, shall be entitled to receive, out of funds
legally available, cumulative dividends at the rate of 15% of the face value
payable on the first day of February, May, August and November of each year. The
first dividend payment date will be May 1, 1997 and will include pro-rata
dividends from the date of issuance on January 16, 1997 to May 1, 1997.
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In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Company, holders of Series A Preferred Stock shall have
preference, second only to the senior credit facility, to the distribution of
the assets of the Company up to an amount equal to the aggregate face value of
the then outstanding Series A Preferred Stock plus accrued but unpaid dividends.
The Company's merger, consolidation or any other combination into another
corporation, partnership or other entity which results in the exchange of more
than 50% of the voting securities of the Company requires the consent of the
majority of the holders of the Series A Preferred Stock; however, the holders of
the Series A Preferred Stock are not entitled to any other voting rights.
If the Company completes a registered public offering before January
16, 2002, all of the outstanding shares of Series A Preferred Stock must be
redeemed at face value plus any accrued and unpaid dividends. If the Company
does not successfully complete a registered public offering by January 16, 2002,
the holders of a majority of the outstanding Series A Preferred Stock after that
date may at anytime during the first 10 days after each dividend payment date
require the Company to redeem shares of the Series A Preferred Stock equal to
10% of the aggregate number of shares of Series A Preferred Stock the Company
issued. The Company may redeem after January 16, 2003 all of the issued
outstanding shares of Series A Preferred Stock if all accrued dividends have
been declared and paid prior to the notice of redemption by the Company. The
Company must pay a premium of 10% of the face value of the Series A Preferred
Stock to effectuate such redemption.
Series B Preferred Stock. Pursuant to the Koch Agreement (as defined
herein), 500,000 shares of Series B Preferred Stock were issued by the Company
for consideration of $10 per share. Holders of the Series B Preferred Stock,
which has a face value of $10 per share, shall be entitled to receive, out of
funds legally available, cumulative dividends at the rate of .035 shares of
Series C Preferred Stock, which also has a face value of $10 per share. The
dividend payment date for the Series B Preferred Stock is the first day of
February, May, August and November of each year with the first dividend to be
paid May 1, 1997 and shall include dividends beginning February 1, 1997.
Dividends on the Series C Preferred Stock are payable in preference and priority
to payment of dividends on the Series B Preferred Stock.
In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Company, holders of Series B Preferred Stock shall have
preference in the distribution of the assets of the Company after and subject to
the payment of the senior credit facility and payment in full of all amounts,
including accrued but unpaid dividends, required to be distributed to the
holders of Series A Preferred Stock. The Series B Preferred Stock liquidation
preference shall be in an amount equal to the aggregate face value of the then
outstanding Series B Preferred Stock plus accrued but unpaid dividends.
If the Company successfully completes a registered public offering on
or before January 16, 2002 which results in gross proceeds greater than $15
million but less than $20 million each holder of Series B Preferred Stock may
elect to require the Company to redeem not more than one-half of the then issued
and outstanding shares of Series B Preferred Stock at an amount per share of
Series B Preferred Stock equal to the offering price per share of common stock
in the registered public offering. Any holders of Series B Preferred Stock
electing to redeem shares will have an equal
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percentage of Series B Preferred Stock converted into common stock of the
Company.
Upon the successful completion of a registered public offering
resulting in gross proceeds to the Company of more than $20 million and at a
price per share of common stock which is equal to or greater than the per share
value of the aggregate face value of the issued and outstanding Series B and
Series C Preferred Stock divided by the total number of shares of common stock
issuable upon conversion of the Series B Preferred Stock at the time of the
offering, all outstanding Series B Preferred Stock shall be automatically
converted into common stock of the Company. Thereafter, outstanding shares of
the Series B Preferred Stock shall be deemed cancelled.
If the Company does not successfully complete a registered public
offering on or before January 16, 2002, then at any time after that date, but
only during the first 10 days after each dividend payment date, the holders of a
majority of the issued and outstanding Series B Preferred Stock may elect to
require the Company to redeem up to 10% of the aggregate number of shares of
Series B Preferred Stock issued by the Company. The Company may redeem after
January 16, 2003, all of the issued and outstanding shares of Series B Preferred
Stock if all accrued dividends have been declared and paid prior to the notice
of redemption by the Company. The redemption price will be face value of all
outstanding shares of Series B Preferred Stock plus a premium of 10% of the face
value of Series B Preferred Stock.
Holders of Series B Preferred Stock have the option and right at any
time upon the surrender of certificates representing Series B Preferred Stock to
convert each share of Series B Preferred Stock into 5.26795 fully paid and
nonassessable shares of common stock of the Company, subject to adjustment as
set forth in the Certificate. The holders of Series B Preferred Stock have
certain anti-dilutive rights such that if any additional shares of common stock
are issued by the Company at any time after January 16, 1997 but before
conversion of any Series B Preferred Stock is converted and if the issue price
per share of common stock is less than the then applicable conversion price, as
defined in the Certificate, holders of the Series B Preferred Stock will be
granted an adjustment to the number of shares of common stock issuable upon
conversion. The initial conversion price per share is $1.898. The initial number
of fully diluted shares at January 16, 1997 is 10,974,895, which is the sum of
common shares currently issued and outstanding, shares of common stock reserved
for current and future option plans, plus shares reserved for the exercise of
warrants granted to certain subordinated debt holders on September 27, 1995 and
those shares which are reserved pursuant to conversion rights of the Series B
Preferred Stock. The aggregate number of shares of common stock into which the
Series B Preferred Stock can initially be converted is 2,633,975 shares, subject
to adjustment from time to time as set forth in the Certificate.
Voting Rights - Series B Preferred Stock. Holders of all the issued and
outstanding 500,000 shares of Series B Preferred Stock will collectively be
eligible to cast votes equivalent to 24% of the then issued and outstanding
shares of common stock on all matters submitted to the shareholders for vote at
any annual or special shareholders meeting. If at any time the Company is in
arrears in whole or in part with regard to quarterly dividends and such
nonpayment remains in effect for three consecutive dividend payment dates, the
holders of the Series B Preferred Stock may notify the Company of their election
to exercise rights to cast votes equivalent to 51% of the then
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issued and outstanding shares of common stock. At any time that the holders hold
less than 500,000 shares of Series B Preferred Stock, the voting percentage of
either 24% or 51% is reduced on a pro-rata basis.
Board of Directors. The holders of Series B Preferred Stock shall have
the right to nominate and elect to the Company's Board of Directors nominees
representing not less than one-third of the number of members constituting the
Board of Directors so long as there are more than 200,000 shares of Series B
Preferred Stock issued and outstanding. Koch has advised the Company that it
shall nominate Dale G. Schlinsog, Vice President of Koch Capital Services, and
Todd E. Banks, Chief Financial Officer of Koch Capital Services, to serve on the
Board of Directors during the interim period and until the next election of
directors at the annual meeting of shareholders. It is anticipated that the same
individuals will be placed on the ballot for election at the annual meeting of
shareholders to be held July 1, 1997.
If at any time the issued and outstanding shares of Series B Preferred
Stock are less than 200,000, the holders shall have the right to elect one
director to the Company's Board.
If at any time the Company is in arrears in whole or in part with
regard to quarterly dividends and such nonpayment remains in effect for three
consecutive quarters or, if a Significant Event (as defined in the Certificate)
occurs, the holders have the right at any annual or special meeting of the
shareholders to nominate and elect such number of individuals as shall after the
election shall represent a majority of the number of directors constituting the
Company's Board. A Significant Event shall mean and be deemed to exist if (i)
the Company files a voluntary petition, or there is filed against the Company an
involuntary petition, seeking relief under any applicable bankruptcy or
insolvency law, (ii) a receiver is appointed for any of the Company's properties
or assets, (iii) the Company makes or consents to the making of a general
assignment for the benefit of creditors or (iv) the Company becomes insolvent or
generally fails to pay, or admits in writing its inability or unwillingness to
pay, its debts as they become due. At such time that there is a cure or waiver
received in writing from the holders of a majority of the Series B Preferred
Stock, the additional board members elected by the holders shall be removed from
the Company's Board.
Series C Preferred Stock. The holders of Series C Preferred Stock,
which has a face value of $10 shall be entitled to receive cumulative dividends,
out of funds legally available, at the rate of 14% of the face value payable on
the first day of February, May, August and November of each year. The first
dividend payment date will be May 1, 1997 and will include pro-rata dividends
from January 16, 1997. Shares of Series C Preferred Stock will be issued as
dividends on the Series B Preferred Stock. No shares of Series C Preferred Stock
were initially issued in connection with consummation of the sale of the Series
A and Series B Preferred Stock pursuant to the Koch Agreement.
In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Company, the holders of the then outstanding Series C
Preferred Stock shall have preference in the distribution of the assets of the
Company, after and subject to the payment in full of all amounts required to be
distributed to the holders of Series A and Series B Preferred Stock. The Series
C
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Preferred Stock liquidation preference shall be in an amount equal to the
aggregate face value of the then outstanding Series C Preferred Stock plus
accrued but unpaid dividends. Series C Preferred Stock shall not be entitled to
any voting rights other than provided by law.
If the Company successfully completes a registered public offering on
or before January 16, 2002 resulting in gross proceeds to the Company of more
than $20 million and at a price per share of common stock which is equal to or
greater than the per share value of the aggregate face value of the issued and
outstanding Series B and Series C Preferred Stock divided by the total number of
shares of common stock issuable upon conversion of the Series B Preferred Stock
at the time of the offering, all issued and outstanding Series B Preferred Stock
shall be automatically converted into common stock of the Company and the
Company then has the right to redeem all of the Series C Preferred Stock for a
redemption price of $0.01 per share. The redemption shall occur on the same day
on which the registered public offering is completed. If there is a partial
conversion of Series B Preferred Stock, the Company has the right to redeem the
number of shares of Series C Preferred Stock which were issued as dividends to
such Series B Preferred Stock being redeemed. If the Company does not
successfully complete a registered public offering on or before January 16,
2002, then at any time after January 16, 2002, but only during the first ten
days after each dividend payment date, the majority of holders of Series C
Preferred Stock may require the Company to redeem up to 10% of the aggregate
number of shares of Series C Preferred Stock issued by the Company. The Company,
at any time after January 16, 2003, may redeem all of the then issued and
outstanding shares of Series C Preferred Stock at face value plus a premium of
10% of the face value if all accrued dividends have been paid before the notice
of redemption.
The holders of Series C Preferred Stock may not transfer shares
independently and apart from the underlying shares of Series B Preferred Stock
for which holders received such preferred stock. All shares of Series B and
Series C Preferred Stock shall bear a legend which shall advise of the
restrictions on transfer including that the shares have not been registered
under the Securities Act of 1933 and that the shares are subject to the terms
and conditions of the Certificate.
Preferred Stock Purchase Agreement ("Koch Agreement").
Contemporaneously with the Righthand Creek acquisition, the Company and Koch
concluded a $10 million private placement for the designated preferred stock as
described above. Koch acquired 500,000 shares of Series A Preferred Stock for $5
million and 500,000 shares of Series B Preferred Stock for $5 million. Reid, as
the investment banker, was paid $250,000 plus expenses from the proceeds for
representing the Company in the private placement. Approximately $6 million of
the proceeds of the private placement was used to acquire Righthand Creek.
Approximately $2 million has been used by the Company to retire the Company's
11.5% Subordinated Notes dated September 27, 1995. The Company incurred
approximately $300,000 in closing costs and other fees for the placement of the
equity and the purchase of Righthand Creek. The remaining proceeds will be used
to develop and workover various behind pipe or undeveloped reserves of Company
owned oil and gas properties.
The First Amendment to the senior credit facility provides for the
payment of dividends on the various preferred stock acquired by Koch unless an
event of default under the senior credit facility has occurred and is
continuing. The Koch Agreement provides for certain restrictions on the
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Company's total indebtedness. The Company can only increase indebtedness through
the senior credit facility; however, if the incurrence of additional debt
results in the Company's total indebtedness exceeding 65% of the present value
of the Company's proved reserves discounted at 12%, the Company cannot incur
such additional debt. The Koch Agreement does provide Koch the right and option
to purchase up to an additional 200,000 shares of Series A Preferred Stock at
the face value of $10 per share of Series A Preferred Stock at any time after
January 16, 1999 but on or before January 16, 2000. This option may be exercised
in whole or in part. The Koch Agreement also provides for a financing right of
first refusal. If the Company intends to issue new securities, it shall give
Koch written notice of such intention, describing the amount of funds the
Company wishes to raise, the type of new securities to be issued, the price and
general terms. Koch has 15 days from the date of receipt of notice to agree to
purchase all or part of such new securities.
Under the Koch Agreement and pursuant to a Master Commodity Swap
Agreement between the Company and Koch Oil Company, the Company has agreed to
put in place a price risk protection program in the form of one or more swap,
hedge, floor or collar agreements to be in place for the Company's net oil and
gas production, using a 6:1 gas/oil ratio, so long as Koch owns any preferred
stock in the Company. Subject to the conditions of the First Amendment with
Comerica Bank - Texas, the Company is restricted to placing the following volume
and pricing parameters for any commodity swap transactions of aggregate crude
oil barrels equivalent, net to the Company's interest as follows:
(a) For the period of November 1, 1996 through October 31,
1997, 700 Bbls oil equivalent at a base price of $20.09/Bbl
(b) For the period of November 1, 1997 through October 31,
1998, 600 Bbls oil equivalent at a base price of $20.06/Bbl
(c) For the period of November 1, 1998 through October 31,
1999, 500 Bbls oil equivalent at a base price of $20.23/Bbl
The Company has also agreed to enter into negotiations with Koch to
enter into one or more marketing agreements within 30 days of closing for the
purchase, sale and transportation of all oil and gas products produced by the
Company so long as Koch owns a majority of the Series B Preferred Stock. The
Company currently has a marketing agreement in place with another party,
therefore the marketing agreement to be negotiated with Koch will become
effective at such time when the existing contract expires. The marketing
agreement to be negotiated with Koch shall be at arms-length, for a term of not
less than five years and shall incorporate terms and conditions satisfactory to
the Company and Comerica Bank - Texas.
As a condition to consummating the Koch Agreement, Robert A. Buschman,
Guy Bob Buschman, Koch and the Company executed a Stockholders Agreement
("Stockholders Agreement"). Under the terms of the Stockholders Agreement, if
prior to January 18, 2002, either Buschman proposes to accept an offer to sell
their shares of the Company's common stock, then either Buschman shall notify
Koch regarding such offer and Koch may elect to participate in the sale
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of common stock on the same terms and conditions. Excluded from the limitations
in the Stockholders Agreement are certain Permitted Transfers more fully
described therein. Likewise, Koch may not sell any Series B Preferred Stock to
an outsider, as defined in the agreement, without first offering the Series B
Preferred Stock to the Buschmans. Pursuant to the Stockholders Agreement the
Buschmans also agreed to vote shares owned by them for any Koch nominees to the
Board of Directors from and after conversion of the Series B Preferred Stock to
Common Stock.
The Stockholders Agreement will terminate upon the earlier of:
(a) consummation of a public offering which results in
aggregate net proceeds of not less than $20 million;
(b) death of either party thereto;
(c) Koch ceases to own 50,000 shares of Series A
Preferred Stock, 50,000 shares of Series B Preferred
Stock, or more than 10% of common stock shares;
(d) either Buschman ceases to own more than 10% of
outstanding common stock; or
(e) five years.
An additional condition of closing required that Guy Bob Buschman,
President and Chief Executive Officer, and Gary Scheele, Vice President and
Chief Financial Officer, enter into employment agreements with the Company and
Drilling for initial terms of five years which may be renewed annually
thereafter at base salaries of $125,000 and $100,000 per annum, respectively.
Any subsequent increase in base salaries, payment of bonuses or grants of stock
options will be at the sole discretion of the Board of Directors. Under terms of
the employment agreement, Buschman and Scheele are provided company vehicles for
business and personal use at the sole expense of the Company. The Company may
terminate the employment agreements at any time for cause by providing 15 days
notice to the individuals, or at its sole discretion pay the individual for 15
days in lieu of notice. If the individual is terminated without cause, the
Company shall pay the individual three years of the annual base salary in
effect, and, also an amount sufficient, after taking into effect individual's
federal and state income taxes, to pay the exercise price of any options
granted, and pay the individual's COBRA cost for eighteen months following the
termination date.
The Registration Rights Agreement grants Koch up to three demand
registration rights upon notice to the Company from holders of at least 40% of
the Registrable Securities, which is defined in the Registration Rights
Agreement to mean the Common Stock issued and issuable upon conversion of the
Series B Preferred Stock, including any dividends or distributions thereon.
Whenever a demand registration is made, the Company shall be entitled to include
in any registration statement shares of Common Stock to be sold by other holders
of Common Stock with registration rights that allow such holders to participate
in the registration and shares of Common Stock to be sold by the Company for its
own account, subject to underwriter's cutbacks.
The Company may not cause any other registration of securities for sale
for its own account or for persons other than a holder of Registrable Securities
(other than a registration effected solely to implement an employee benefit plan
or a transaction to which Rule 145 of the Commission is
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applicable, or as may be required pursuant to the terms of those certain Warrant
Agreements, as amended through the date hereof, issued by the Company in
connection with the Company's 1995 11.50% Subordinated Notes) to become
effective less than 180 days after the effective date of any demand registration
required pursuant to the terms of the Registration Rights Agreement.
The Company has limited rights to postpone or avoid the demand
registration obligations contained in the Registration Rights Agreement under
certain circumstances, such as when the Company is already preparing a
registration statement when a demand is received, when the Board of Directors
shall determine in good faith that an offering would interfere materially with a
pending or contemplated financing, merger, sale of assets, recapitalization or
other similar corporate action of the Company, or when the Board of Directors
shall determine in good faith that the disclosures required in connection with
such a registration could reasonably be expected to materially adversely affect
the business or prospects of the Company.
The Registration Rights Agreements also provides for "piggyback"
registration rights for holders of Registrable Securities. If the Company at any
time proposes a Registered Public Offering, it must give written notice to all
holders of Registrable Securities of its intention to do so. Upon the written
request of any holders of Registrable Securities given within 20 days after
transmittal by the Company to the holders of such notice, the Company will,
subject to the limits contained in the Registration Rights Agreement, including
underwriter cutbacks, use its best efforts to cause those Registrable Securities
of said requesting holders to be included in such registration statement.
The following documents are attached as exhibits to this report: (1)
Certificate of Designation, Preferences and Rights of Series A Preferred Stock,
Series B Preferred Stock, and Series C Preferred Stock of Rio Grande, Inc. dated
January 15, 1997; (2) Preferred Stock Purchase Agreement between Koch
Exploration Company and Rio Grande, Inc. dated January 16, 1997; (3)
Registration Rights Agreement between Rio Grande, Inc. and Koch Exploration
Company dated January 16, 1997; (4) Stockholders Agreement between Robert A.
Buschman, Guy Bob Buschman, Rio Grande, Inc., and Koch Exploration Company dated
January 16, 1997; (5) First Amendment to Loan Agreement between Rio Grande,
Inc., Rio Grande Drilling Company and Comerica Bank - Texas dated January 15,
1997; (6) Employment Agreement between Rio Grande, Inc., Rio Grande Drilling
company and Guy Bob Buschman dated January 16, 1997; (7) Employment Agreement
between Rio Grande, Inc., Rio Grande Drilling Company and Gary Scheele dated
January 16, 1997; and (8) Master Commodity Swap Agreement between Rio Grande,
Inc. and Koch Oil Company dated January 16, 1997.
All summaries of any terms and provisions of any of these agreements
set forth above and any reference thereto is qualified in its entirety by
reference to the actual agreements and documents filed herewith as exhibits.
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Item 7. Financial Statements and Exhibits
(a) Financial Statements
Because the historical financial records for the
acquisition of Righthand Creek were not accessible
from the seller prior to the closing date, it is
impracticable to provide the required financial
statements for the acquisition at the time this Form
8-K is filed. The Company anticipates that the
required financial information relative to the
Righthand Creek acquisition will be filed in a Form
8-K/A prior to March 31, 1997.
(b) Exhibits
Number Document
4(i) Certificate of Designation, Preferences and
Rights of Series A Preferred Stock, Series B
Preferred Stock, and Series C Preferred
Stock of Rio Grande, Inc. dated January 15,
1997 (E-1).
4(j) Preferred Stock Purchase Agreement between
Koch Exploration Company and Rio Grande,
Inc. dated January 16, 1997 (E-35).
4(k) Registration Rights Agreement between Rio
Grande, Inc. and Koch Exploration Company
dated January 16, 1997 (E-79).
4(l) Stockholders Agreement between Robert A.
Buschman, Guy Bob Buschman, Rio Grande,
Inc., and Koch Exploration Company dated
January 16, 1997 (E-95).
10(k) First Amendment to Loan Agreement between
Rio Grande, Inc., Rio Grande Drilling
Company and Comerica Bank - Texas dated
January 15, 1997 (E-107).
10(l) Employment Agreement between Rio Grande,
Inc., Rio Grande Drilling Company and Guy
Bob Buschman dated January 16, 1997 (E-138).
10(m) Employment Agreement between Rio Grande,
Inc., Rio Grande Drilling Company and Gary
Scheele dated January 16, 1997 (E-148).
10(n) Master Commodity Swap Agreement between Rio
Grande, Inc. and Koch Oil Company dated
January 16, 1997 (E-158).
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SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RIO GRANDE, INC.
By: /s/
Guy Bob Buschman, President
Dated: January 31, 1997
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CERTIFICATE OF DESIGNATION,
PREFERENCES AND RIGHTS
OF
SERIES A PREFERRED STOCK
SERIES B PREFERRED STOCK
SERIES C PREFERRED STOCK
OF
RIO GRANDE, INC.
RIO GRANDE, INC., a Delaware corporation (the "Company"), acting
pursuant to Section 151 of the General Corporation Law of Delaware, does hereby
submit the following Certificate of Designation, Preferences and Rights of its
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock.
FIRST: The name of the Company is Rio Grande, Inc.
SECOND: At a duly called meeting of the Board of Directors of the
Company held January 15, 1997, the following resolutions were duly adopted:
WHEREAS the Certificate of Incorporation of the Company authorizes
preferred stock consisting of 3,000,000 shares, par value $.01 per share
("Preferred Stock"), issuable from time to time in one or more series, and
common stock consisting of 12,000,000 shares, par value $.01 per share ("Common
Stock"); and
WHEREAS the Board of Directors of the Company is authorized to
establish and fix the number of shares to be included in any series of Preferred
Stock and the designation, rights, preferences, powers, restrictions and
limitations of the shares of such series; and
WHEREAS it is the desire of the Board of Directors to establish and fix
the number of shares to be included in three new series of Preferred Stock, to
wit: 700,000 shares of Series A Preferred Stock, 500,000 shares of Series B
Preferred Stock and 500,000 shares of Series C Preferred Stock, having the
respective rights, preferences, powers, restrictions and limitations described
below;
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NOW, THEREFORE, BE IT RESOLVED that pursuant to Section 4 of the
Company's Certificate of Incorporation, as amended, there is hereby established
the following series of Preferred Stock, par value $.01, of the Company to have
the following designations, rights, preferences, powers, restrictions and
limitations, which shall be deemed to be set forth in a supplement to Section 4
of the Company's Certificate of Incorporation:
A. Series A Preferred Stock.
There is hereby established a Series A Preferred Stock, consisting of
700,000 shares, having a face value of $10.00 per share (the "Face Value") and
having the rights, preferences, powers, restrictions and limitations set forth
in this Article A. For all purposes in this Article A pertaining to the Series A
Preferred Stock, the term "Junior Stock" shall include Series B Preferred Stock,
Series C Preferred Stock, Common Stock and other capital stock of the Company
not expressly designated to be on parity with or senior to the Series A
Preferred Stock.
A.1. Dividends.
The holders of the Series A Preferred Stock shall be entitled to
receive, out of funds legally available therefor, cumulative dividends at the
rate of 15% of the Face Value of the Series A Preferred Stock (subject to
appropriate adjustments in the event of any stock dividend, stock split,
combination or other similar recapitalization affecting such shares) per share
per annum, payable in preference and priority to any payment of any cash
dividend on Junior Stock and payable on the first day of February, May, August
and November of each year ("Dividend Payment Date"), when and as declared by the
Board of Directors of the Company; provided that the first Dividend Payment Date
shall be May 1, 1997 and such dividend payment shall include pro-rata dividends
from the date of issuance of the Series A Preferred Stock to January 31, 1997.
Such dividends shall accrue with respect to each share of Series A
Preferred Stock from the date on which such share is issued and outstanding and
thereafter shall be deemed to accrue from day to day whether or not earned or
declared and whether or not there exists profits, surplus or other funds legally
available for the payment of dividends, and shall be cumulative so that if such
dividends on the Series A Preferred Stock shall not have been paid, or declared
and set apart for payment, the deficiency shall be fully paid or declared and
set apart for payment before any dividend shall be paid or declared or set apart
for any Junior Stock and before any purchase or acquisition of any Junior Stock
is made by the Company. At the earlier of: (i) prior to the redemption of the
Series A Preferred Stock; (ii) three (3) days prior to the consummation of an
underwritten Registered Public Offering of the type described in Section A.4(a);
or (iii) the liquidation of the Company, the sale of the Company or, directly or
indirectly, all or substantially all of its assets, or the merger, consolidation
or other combination of the Company with another entity in a transaction in
which the Company is not the surviving entity, any accrued but undeclared
dividends shall be paid to the holders of record of outstanding shares of Series
A Preferred Stock. No accumulation of dividends on the Series A Preferred Stock
shall bear interest.
A.2. Liquidation, Dissolution or Winding Up.
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(a) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Company, the holders of shares of Series A
Preferred Stock then outstanding shall be entitled to be paid out of the assets
of the Company available for distribution to its stockholders, before any
payment shall be made to the holders of Junior Stock by reason of their
ownership thereof, an amount equal to the Face Amount per share of Series A
Preferred Stock plus any accrued but unpaid dividends to the payment date
(whether or not declared) (the "Liquidation Value"). If upon any such
liquidation, dissolution or winding up of the Company the remaining assets of
the Company available for distribution to its stockholders shall be insufficient
to pay the holders of shares of Series A Preferred Stock the full amount to
which they shall be entitled, the holders of shares of Series A Preferred Stock
shall share ratably in any distribution of the remaining assets and funds of the
Company in proportion to the respective amounts which would otherwise be payable
in respect of the shares held by them upon such distribution if all amounts
payable on or with respect to such shares were paid in full.
(b) Unless the holders of a majority of the Series A Preferred Stock
then outstanding otherwise consent in writing or by vote, the merger,
consolidation or other combination of the Company into or with another
corporation, partnership, limited liability company or other entity which
results in the exchange of more than 50% of the voting securities of the Company
for securities or other consideration issued or paid or caused to be issued or
paid by such other corporation, partnership, limited liability company or other
entity or an affiliate thereof, or the sale, directly or indirectly, of all or
substantially all the assets of the Company, shall be deemed to be a
liquidation, dissolution or winding up of the Company for purposes of this
Section, and shall entitle the holders of Series A Preferred Stock to receive at
the closing, in cash, securities or other property, the amounts as specified in
Section A.2(a) above. The value of such property, rights or other securities
shall be determined in good faith by the Board of Directors of the Company.
A.3. Voting.
(a) Generally. Except as otherwise provided by applicable law or as
provided in this Section A, Series A Preferred Stock shall not entitle the
holders thereof to any voting rights.
(b) No Impairment. The Company shall not amend, alter or repeal
preferences, rights, powers or other terms of the Series A Preferred Stock,
whether in the Certificate of Incorporation or Bylaws of the Company or
otherwise, so as to affect adversely the Series A Preferred Stock, or amend,
alter or repeal this Section A.3, without the prior written consent or
affirmative vote of the holders of a majority of the then outstanding shares of
Series A Preferred Stock, given in writing or by vote at a meeting, consenting
or voting (as the case may be) separately as a class. For this purpose, without
limiting the generality of the foregoing, the authorization or issuance of any
series of Preferred Stock or other capital stock which is on a parity with or
has preference or priority over the Series A Preferred Stock as to the right to
receive either dividends or amounts distributable upon liquidation, dissolution
or winding up of the Company shall be deemed to affect adversely the Series A
Preferred Stock.
(c) Common Stock Dividends. Prior to January 16, 1999, or if at any
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time the Company is in arrears in the payment of dividends as set forth in
Section A.1, the Company shall not declare or pay cash dividends or other
distributions on or with respect to shares of Common Stock without the prior
written consent or affirmative vote of the holders of a majority of the then
outstanding shares of Series A Preferred Stock, given in writing or by vote at a
meeting, consenting or voting (as the case may be) separately as a class.
A.4. Redemption of the Series A Preferred Stock.
(a) Mandatory Redemption. If, on or before January 16, 2002, the
Company completes successfully a Registered Public Offering, the Company shall
redeem (unless otherwise prevented by law) all (but not less than all)
outstanding shares of Series A Preferred Stock (a "Mandatory Redemption") at an
amount per share equal to the Face Value plus accrued but unpaid dividends on
such shares, if any, accrued to the date of redemption (the "Mandatory
Redemption Price"). As used herein, "Registered Public Offering" shall refer to
a public offering pursuant to an effective registration statement under the
Securities Act of 1933, as amended, other than a registration effected in
connection with an employee benefit plan or a transaction of a type specified in
Rule 145 under such Act (or any successor thereto). The redemption shall occur
on the same day on which the Registered Public Offering is consummated (the
"Mandatory Redemption Date").
Not more than 60 days nor less than 10 days before the Mandatory
Redemption Date, the Company shall send notice of the Mandatory Redemption by
first-class certified mail, postage prepaid and return receipt requested, to the
holders of the shares of Series A Preferred Stock to be redeemed at their
respective addresses as the same shall appear on the books of the Company. The
notice shall refer to this Section A.4(a) and shall specify the Mandatory
Redemption Date and the time and place of the Mandatory Redemption. Before, on
or after the Mandatory Redemption Date, each holder of Series A Preferred Stock
to be redeemed shall surrender to the Company the certificate or certificates
representing such shares, in the manner and at the place designated in the
Mandatory Redemption Notice, and thereupon the Mandatory Redemption Price of
such shares shall be payable to the order of the person whose name appears on
such certificate or certificates as the owner thereof and each surrendered
certificate shall be cancelled. Notwithstanding delivery of a Mandatory
Redemption Notice in accordance with this Section A.4(a), any such notice shall
be deemed conditional and expressly subject to consummation of the Registered
Public Offering referred to hereinabove, and if said Registered Public Offering
shall not be consummated, any such Mandatory Redemption Notice shall be deemed
void ab initio and of no force and effect.
(b) Redemption at Option of Majority of Holders. If the Company does
not successfully complete a Registered Public Offering (as described in Section
A.4(a)) on or before January 16, 2002, then at any time after January 16, 2002
but only at any time during the first 10 days after each Dividend Payment Date
(the "Redemption Election Period") the holders of a majority of the then issued
and outstanding shares of Series A Preferred Stock (the "Majority Holders") may
elect to require the Company to redeem shares of Series A Preferred Stock at an
amount equal to the Face Value plus accrued but unpaid dividends to the
respective dates of redemption of the shares (the "Optional Redemption Price")
in accordance with this Section A.4(b). The Majority Holders may require the
Company to redeem with respect to each Redemption Election Period up to that
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number of shares of Series A Preferred Stock equal to 10% of the aggregate
number of shares of Series A Preferred Stock that the Company has issued
(whether or not then issued or outstanding, including shares of Series A
Preferred Stock that were issued and subsequently redeemed or otherwise
cancelled) as of the beginning of such Redemption Election Period.
If the Majority Holders elect to cause such a redemption, they shall so
notify the Company in writing (the "Redemption Exercise Notice"). Upon receipt
of the Redemption Exercise Notice the Company shall promptly (and in any event
within 10 days of receipt of the Redemption Exercise Notice) notify all holders
of Series A Preferred Stock of such election by sending a notice (the "Optional
Redemption Notice") by first class certified mail, postage prepaid and return
receipt requested to the holders of Series A Preferred Stock at their respective
addresses as the same shall appear on the books of the Company. The Optional
Redemption Notice shall refer to this Section A.4(b) and shall specify the last
day of the month following the month during which the Company received the
Redemption Exercise Notice as the date on which shares of Series A Preferred
Stock will be redeemed in accordance with this Section A.4(b) (the "Optional
Redemption Date"). The Company shall promptly notify (the "Section A.4(b)
Redemption Notice") each holder of Series A Preferred Stock of the number of
shares of Series A Preferred Stock held by such holder which are being redeemed
pursuant to this Section on any Optional Redemption Date. An election by the
Majority Holders in accordance with this Section A.4(b) shall be binding upon
all holders of the Series A Preferred Stock, and shares of Series A Preferred
Stock shall be redeemed pro rata among all holders of said shares to give effect
to the provisions of this Section A.4(b).
Upon receipt of the Section A.4(b) Redemption Notice, and before, on or
after the Optional Redemption Date, each holder of Series A Preferred Stock to
be redeemed shall surrender to the Company the certificate or certificates
representing such shares, in the manner and at the place designated in the
Section A.4(b) Redemption Notice, and thereupon the Optional Redemption Price of
such shares shall be payable to the order of the person whose name appears on
such certificate or certificates as the owner thereof and each surrendered
certificates shall be cancelled. The Company shall promptly reissue to such
holders (or their nominees) certificates evidencing any shares of Series A
Preferred Stock represented by the surrendered certificates which are not
redeemed.
(c) Redemption at the Option of the Company. The Company may at any
time after January 16, 2003 redeem all of the then issued and outstanding shares
of Series A Preferred Stock as set forth in this Section A.4(c) if all accrued
dividends have been declared and paid to the holders of record of the
outstanding shares of Series A Preferred Stock through the most recent Dividend
Payment Date. The date of such redemption (the "Company Redemption Date") shall
be designated in the notice described in the succeeding paragraph and must be a
date within ten (10) business days after a Dividend Payment Date. The redemption
price for any redemption pursuant to this Section A.4(c) (the "Company
Redemption Price") shall be the Face Value of all of the outstanding shares of
Series A Preferred Stock plus an additional amount equal to 10% of the Face
Value of such outstanding shares of Series A Preferred Stock.
Not more than sixty (60) days nor less than fifteen (15) days before
the Company Redemption Date, the Company shall send notice of the redemption by
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first-class, certified mail, postage prepaid and return receipt requested, to
all of the holders of the shares of Series A Preferred Stock at their respective
addresses as the same shall appear on the books of the Company. The notice shall
refer to this Section A.4(c) and shall specify the Company Redemption Date and
the time and place of the redemption. Before, on or after the Company Redemption
Date, each holder of Series A Preferred Stock shall surrender to the Company the
certificate or certificates representing such shares, in the manner and at the
place designated in the Company Redemption Notice, and thereupon the Company
Redemption Price of such shares shall be payable to the order of the person
whose name appears on such certificate or certificates as the owner thereof and
each surrendered certificate shall be cancelled.
(d) Provision for Payment. "Redemption Date" shall refer to the
Mandatory Redemption Date (in the case of redemptions governed by Section
A.4(a)), an Optional Redemption Date (in the case of redemptions governed by
Section A.4(b)), and a Company Redemption Date (in the case of redemptions
governed by Section A.4(c). "Redemption Price" shall mean the amount to be paid
by the Company on a particular Redemption Date pursuant to Section A.4(a) (as
the Mandatory Redemption Price), Section A.4(b) (as the Optional Redemption
Price), or Section A.4(c) (as the Company Redemption Price) as applicable. On or
prior to each Redemption Date, the Company shall deposit the Redemption Price of
all shares of Series A Preferred Stock designated for redemption on that
Redemption Date with a bank or trust corporation having aggregate capital and
surplus in excess of $100,000,000 as a trust fund for the benefit of the
respective holders of the shares designated for redemption and not yet redeemed,
with irrevocable instructions and authority to the bank or trust corporation to
pay the Redemption Price for such shares to their respective holders on or after
the related Redemption Date upon receipt of notification from the Company that
such holder has surrendered his share certificate to the Company pursuant to
Section A.4(a), Section A.4(b) or Section A.4(c) above. As of the Redemption
Date, the deposit shall constitute full payment of the shares being redeemed on
that Redemption Date, and from and after the Redemption Date the shares so
called for redemption on that Redemption Date shall be redeemed and shall be
deemed to be no longer outstanding, and the holders thereof shall cease to be
stockholders with respect to such shares and shall have no rights with respect
thereto except the rights to receive from the bank or trust corporation payment
of the Redemption Price of the shares, without interest, upon surrender of their
certificates therefor. The balance of any moneys deposited by the Company
pursuant to this Section A.4(d) remaining unclaimed at the expiration of three
(3) years following the Redemption Date shall thereafter be returned to the
Company upon its request expressed in a resolution of its Board of Directors.
(e) Rights Upon Redemption. From and after the Redemption Date, unless
there shall have been a default in payment of the Redemption Price, all rights
of the holders of shares of Series A Preferred Stock to be redeemed on that
Redemption Date as holders of Series A Preferred Stock (except the right to
receive the Redemption Price without interest upon surrender of their
certificate or certificates) shall cease with respect to such shares, and such
shares shall not thereafter be transferred on the books of the Company or be
deemed to be outstanding for any purpose whatsoever. If the funds of the Company
legally available for redemption of shares of Series A Preferred Stock on any
Redemption Date are insufficient to redeem the total number of shares of Series
A Preferred Stock to be redeemed on such date, those funds which are legally
available will be used to redeem the maximum possible number of such shares
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ratably among the holders of such shares to be redeemed based upon their
holdings of Series A Preferred Stock. At any time thereafter when additional
funds of the Company in excess of One Hundred Thousand Dollars ($100,000) are
legally available for the redemption of shares of Series A Preferred Stock, such
funds will immediately be used to redeem the balance of the shares which the
Company has become obligated to redeem on any Redemption Date, but which it has
not redeemed. The shares of Series A Preferred Stock not redeemed shall remain
outstanding and entitled to all the rights and preferences provided herein.
(f) Cancellation of Redeemed Stock. Any shares of Series A Preferred
Stock redeemed pursuant to this Section shall be cancelled and shall not under
any circumstances be reissued; and the Company may from time to time take such
appropriate corporate action as may be necessary to reduce accordingly the
number of authorized shares of the Company's capital stock.
(g) Acquisition by Company. The Company will not, and will not permit
any subsidiary of the Company to, purchase or acquire any shares of Series A
Preferred Stock otherwise than pursuant to (A) the terms of this Section A.4 or
(B) an offer made on the same terms to all holders of Series A Preferred Stock
at the time outstanding.
A.5. No Sinking Fund.
There shall be no sinking fund for the payment of dividends, or
liquidation preferences on the Series A Preferred Stock or the redemption of any
shares thereof.
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B. Series B Preferred Stock
There is hereby established a Series B Preferred Stock, consisting of
500,000 shares, having a face value of $10.00 per share (the "Face Value") and
having the rights, preferences, powers, restrictions and limitations set forth
in this Article B. Except as set forth herein, for all purposes in this Article
B pertaining to the Series B Preferred Stock, the term "Junior Stock" shall
include Series C Preferred Stock, Common Stock and other capital stock of the
Company not expressly designated to be on parity with or senior to the Series B
Preferred Stock; provided, however, that Series C Preferred Stock shall not be
junior to the Series B Preferred Stock with respect to the payment of dividends
as set forth in Section C.1 and Section B.1, respectively, and dividends on the
Series C Preferred Stock shall be payable in preference and priority to any
payment of dividends on the Series B Preferred Stock.
B.1. Dividends.
The holders of the Series B Preferred Stock shall be entitled to
receive, out of funds legally available therefor, cumulative dividends at the
rate of .035 shares of Series C Preferred Stock (subject to appropriate
adjustments in the event of any stock dividend, stock split, combination or
other similar recapitalization affecting such shares) per fiscal quarter of the
Company per share of Series B Preferred Stock. On the earlier to occur of (i)
the date on which the Company does not have a sufficient number of shares of
Series C Preferred Stock available for issue as dividends hereunder or (ii) the
date on which any shares of Series B Preferred Stock are redeemed pursuant to
Section B.4 below, then in lieu of the dividend described in the first sentence
of this Section B.1, the holders of the Series B Preferred Stock shall be
entitled to receive, out of funds legally available therefor, cumulative cash
dividends compounded annually at the rate of 14% of the Face Value of the Series
B Preferred Stock per share per annum (subject to appropriate adjustments in the
event of any stock dividend, stock split, combination or other similar
recapitalization affecting such shares). All dividends on Series B Preferred
Stock shall be payable in preference and priority to any payment of any dividend
on Junior Stock, but payable after any payment of any dividend on Series A
Preferred Stock and Series C Preferred Stock, and payable on the first day of
February, May, August and November of each year ("Dividend Payment Date"), when
and as declared by the Board of Directors of the Company; provided that the
first Dividend Payment Date shall be May 1, 1997 and shall include dividends
beginning February 1, 1997.
Such dividends shall accrue with respect to each share of Series B
Preferred Stock beginning on February 1, 1997 and thereafter shall be deemed to
accrue from day to day whether or not earned or declared and whether or not
there exists profits, surplus or other funds legally available for the payment
of dividends, and shall be cumulative so that if such dividends on the Series B
Preferred Stock shall not have been paid, or declared and set apart for payment,
the deficiency shall be fully paid or declared and set apart for payment before
any dividend shall be paid or declared or set apart for any Junior Stock and
before any purchase or acquisition of any Junior Stock is made by the Company.
At the earlier of: (i) prior to the redemption of the Series B Preferred Stock;
(ii) three (3) days prior to the consummation of an underwritten Registered
Public Offering of the type described in Section B.4(a); or (iii) the
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liquidation of the Company, the sale of the Company or, directly or indirectly,
all or substantially all of its assets, or the merger, consolidation or other
combination of the Company with another entity in a transaction in which the
Company is not the surviving entity, any accrued but undeclared dividends shall
be paid to the holders of record of outstanding shares of Series B Preferred
Stock. No accumulation of dividends on the Series B Preferred Stock shall bear
interest.
Within ten (10) days after each Dividend Payment Date, holders of
Series B Preferred Stock will receive written notification from the Company or
the transfer agent specifying the number of shares of Series C Preferred Stock
paid as a dividend and the recipient's aggregate holdings of Series C Preferred
Stock as of that Dividend Payment Date and after giving effect to the dividend.
Certificates evidencing the shares of Series C Preferred Stock issued as
dividends on the Series B Preferred Stock shall be mailed promptly by the
Company to the holders of record of the Series B Preferred Stock as their names
and addresses appear on the share register of the Company or at the office of
the transfer agent on the corresponding Dividend Payment Date.
B.2. Liquidation, Dissolution or Winding Up.
(a) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Company, the holders of shares of Series B
Preferred Stock then outstanding shall be entitled to be paid out of the assets
of the Company available for distribution to its stockholders, after and subject
to the payment in full of all amounts required to be distributed to the holders
of Series A Preferred Stock of the Company, but before any payment shall be made
to the holders of Junior Stock by reason of their ownership thereof, an amount
equal to $10 per share of Series B Preferred Stock plus accrued but unpaid
dividends to the payment date (whether or not declared) (the "Liquidation
Value"). If upon any such liquidation, dissolution or winding up of the Company
the remaining assets of the Company available for distribution to its
stockholders shall be insufficient to pay the holders of shares of Series B
Preferred Stock the full amount to which they shall be entitled, the holders of
shares of Series B Preferred Stock shall share ratably in any distribution of
the remaining assets and funds of the Company in proportion to the respective
amounts which would otherwise be payable in respect of the shares held by them
upon such distribution if all amounts payable on or with respect to such shares
were paid in full.
(b) Unless the holders of a majority of the Series B Preferred Stock
then outstanding otherwise consent in writing or by vote, the merger,
consolidation or other combination of the Company into or with another
corporation, partnership, limited liability company or other entity which
results in the exchange of more than 50% of the voting securities of the Company
for securities or other consideration issued or paid or caused to be issued or
paid by such other corporation, partnership, limited liability company or other
entity or an affiliate thereof, or the sale, directly or indirectly, of all or
substantially all the assets of the Company, shall be deemed to be a
liquidation, dissolution or winding up of the Company for purposes of this
Section, and shall entitle the holders of Series B Preferred Stock to receive at
the closing in cash, securities or other property the amounts as specified in
Section B.2(a) above. The value of such property, rights or other securities
shall be determined in good faith by the Board of Directors of the Company.
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B.3. Voting.
(a) General Right. In addition to the other voting rights provided by
this Section B or provided by applicable law, each holder of outstanding shares
of Series B Preferred Stock shall be entitled to vote the Weighted Number of
Votes (as defined below) related to the number of shares of Series B Preferred
Stock held by such holder at each meeting of stockholders of the Company (and
written actions of stockholders in lieu of meetings) with respect to any and all
matters presented to the stockholders of the Company for their action or
consideration. "Weighted Number of Votes" as to one share of Series B Preferred
Stock means as of any particular date the quotient of the Targeted Voting Power
as of such date divided by the number of shares of Series B Preferred Stock
issued and outstanding as of such date. For so long as 500,000 shares of Series
B Preferred Stock are issued and outstanding, the "Targeted Voting Power" shall
mean, as of a particular date on which the vote of stockholders is taken, that
number of votes necessary to result in all of the holders of the then issued and
outstanding shares of Series B Preferred Stock holding collectively 24% of the
votes eligible for casting on that date and the holders of the then issued and
outstanding shares of Common Stock holding, collectively, 76% of the votes
eligible for casting on that date. Notwithstanding the foregoing, if at any time
the Company shall be in arrears in whole or in part with regard to quarterly
dividends as specified in Section B.1 for three (3) consecutive Dividend Payment
Dates, the holders of a majority of the then issued and outstanding shares of
Series B Preferred Stock may notify the Company of their election to exercise
their rights under this sentence and, upon the Company's receipt of such notice
and unless and until the Company distributes in full to the holders of Series B
Preferred Stock all dividends which are in arrears, the "24%" percentage
contained in the definition of "Targeted Voting Power" shall be deemed to be
"51%", subject to adjustment as set forth below. If at any time less than
500,000 shares of Series B Preferred Stock are issued and outstanding, then the
percentages specified above in the definition of "Targeted Voting Power" (i.e.,
24% or 51%, as the case may be) shall be reduced by multiplying said Targeted
Voting Power by a fraction, the numerator of which shall be the number of shares
of Series B Preferred Stock which are then issued and outstanding and the
denominator of which shall be 500,000.
Except as provided by law, by the provisions of Subsection B.3(b),
B.3(c) or B.3(d) or by the provisions establishing any other series of Preferred
Stock, holders of Series B Preferred Stock shall vote together with the holders
of Common Stock as a single class.
(b) No Impairment. The Company shall not amend, alter or repeal
preferences, rights, powers or other terms of the Series B Preferred Stock,
whether in the Certificate of Incorporation or Bylaws of the Company or
otherwise, so as to affect adversely the Series B Preferred Stock, or amend,
alter or repeal this Section B.3, without the prior written consent or
affirmative vote of the holders of a majority of the then outstanding shares of
Series B Preferred Stock, given in writing or by vote at a meeting, consenting
or voting (as the case may be) separately as a class. For this purpose, without
limiting the generality of the foregoing, the authorization or issuance of any
series of Preferred Stock or other capital stock which is on a parity with or
has preference or priority over the Series B Preferred Stock as to the right to
receive either dividends or amounts distributable upon liquidation, dissolution
or winding up of the Company shall be deemed to affect adversely the Series B
Preferred Stock.
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(c) Voting on other Certain Events. Without the prior written consent
or affirmative vote of the holder(s) of a majority of the then outstanding
shares of Series B Preferred Stock, voting as a single class, in person or by
proxy, either in writing without a meeting or at a special or annual meeting of
shareholders called for the purpose, the Company shall not, and it will cause
its subsidiaries not to:
(i) authorize or issue shares of any class of stock
(other than the Series A and Series C Preferred Stock authorized
hereby) having any preference or priority as to dividends or assets
superior to or on a parity with any such preference or priority of the
Series B Preferred Stock;
(ii) permit the number of directors constituting the
Board of Directors of the Company to be less than six or more than
nine;
(iii) reclassify any shares of any class of stock
into shares having any preference or priority as to dividends or assets
superior to or on a parity with any such preference or priority of the
Series B Preferred Stock;
(iv) engage in any business other than acquiring,
producing, selling and developing oil and gas properties and exploring
for, producing, transporting, marketing and selling oil, natural gas
and related hydrocarbons;
(v) repurchase or agree to repurchase more than
12,500 shares of its Common Stock or any options, warrants or other
rights to acquire shares of its Common Stock; provided, however, this
provision shall not be interpreted as limiting the redemption rights of
the Company or the holders of the Series A Preferred Stock, Series B
Preferred Stock, or Series C Preferred Stock as set forth in this
Certificate of Designation, or as limiting the ability of the Company
with Board approval to repurchase up to 75,000 shares of Common Stock
(or rights to acquire Common Stock) from employees other than Robert A.
Buschman, Guy Bob Buschman, or Gary Scheele);
(vi) without limiting any other right of the holders
of Series B Preferred Stock, pay cash dividends or make any other
distribution on any shares of Common Stock at any time prior to January
16, 1999;
(vii) enter into, or permit a Subsidiary to enter
into, any new agreement or make any amendment to any existing
agreement, which by its terms would restrict the Company's performance
of its obligations to holders of Series B Preferred Stock; or
(viii) reduce the percentage of shares of Series B
Preferred Stock required to consent to any of the above matters, or
alter or negate the need for such consent.
(d) Board of Directors.
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(i) For so long as there are more than 200,000 shares of
Series B Preferred Stock issued and outstanding, the holders of the Series B
Preferred Stock shall have the right at each stockholder meeting for the
election of directors and from time to time, voting as a class separate and
apart from the Common Stock, to nominate and elect to the Company's board of
directors ("Board"), that number of individuals (the "Series B Nominees") who,
immediately after giving effect to their election and at all times thereafter,
represent not less than one-third of the number of members constituting the
Board; provided, however, that if there are less than 200,000 shares of Series B
Preferred Stock issued and outstanding, the holders of the Series B Preferred
Stock shall have the right to elect one member of the Board of Directors; and
provided further that a majority of the holders of Series B Preferred Stock may
waive the foregoing rights in whole or in part and designate a lesser number of
Series B Nominees for election as directors at any stockholder meeting for the
election of directors, which waiver shall be effective until the next annual
meeting of stockholders.
(ii) In the event (A) the Company shall be in arrears in whole
or in part with regard to quarterly dividends as specified in Section B.1 for
three (3) consecutive Dividend Payment Dates or (B) does not redeem the Series B
Preferred Stock on the Redemption Date as required in Section B.4 or (C) a
Significant Event occurs (the occurrence of any of the events described in (A),
(B) or (C) being an "Additional Board Election Event"), and so long thereafter
as such failure to pay dividends or redeem shares or Significant Event remains
uncured (the "Additional Board Election Period"), the holders of the Series B
Preferred Stock shall have the right at any annual or special meeting of
stockholders, voting as a class separate and apart from the Common Stock, to
nominate and elect to the Company's Board such number of individuals (the
"Additional Nominees") who, immediately after giving effect to their election
together with the persons serving on the Board pursuant to Section B.4(d)(i), if
any, represent a majority of the number of members constituting the Company's
Board. A "Significant Event" shall mean and be deemed to exist with respect to
the Company if (i) the Company files a voluntary petition, or there is filed
against the Company an involuntary petition, seeking relief under any applicable
bankruptcy or insolvency law, (ii) a receiver is appointed for any of the
Company's properties or assets, (iii) the Company makes or consents to the
making of a general assignment for the benefit of creditors or (iv) the Company
becomes insolvent or generally fails to pay, or admits in writing its inability
or unwillingness to pay, its debts as they become due. If an Additional Board
Election Event occurs, the following shall apply:
(x) Upon the request of the holders of a majority of
the Series B Preferred Stock, the Company shall call a
special meeting ("Special Meeting") of the Company's
stockholders as a result of the occurrence of an Additional
Board Election Event, such Special Meeting to be held as soon
as reasonably practicable but not later than sixty (60) days
thereafter. The failure of the holders of the Series B
Preferred Stock to exercise their rights under this clause
(x) shall not constitute a waiver of their right to exercise
such right in the future.
(y) At the Special Meeting and if a quorum consisting
of the holders of a majority of the Series B Preferred Stock
are present in person or by proxy, the Additional Nominees
shall be nominated and elected by the vote as a class of the
Series B Preferred Stock with each share of Series B
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Preferred Stock entitled to one vote. Once elected, the
Additional Nominees shall serve until the Additional Board
Election Period terminates, subject to their reelection each
year by the Series B Preferred Stock, as provided for herein,
at the annual meeting of the Company.
(z) The Additional Board Election Period shall
terminate by reason of the cure or waiver in writing (signed
by the holders of a majority of the Series B Preferred Stock)
of the Additional Board Election Event and at such time,
subject to revesting of such rights in the event of a
subsequent occurrence of an Additional Board Election Event
thereafter, the term of office of the Additional Nominees
shall terminate with respect to such Additional Board
Election Period, the right of the Series B Stock to nominate
the Additional Nominees shall expire with respect to such
Additional Board Election Period and the Additional Nominees
shall thereupon be deemed to have been removed as members of
the Board.
(iii) Except as set forth in Section B.3(d)(ii)(z), no Board
member elected by the holders of Series B Preferred Stock pursuant to this
Section B.3(d) (a "Nominee") may be removed from the Board without the consent
of the holders of a majority of the Series B Preferred Stock voting together as
a class, with each share of Series B Preferred Stock having one vote. Any
vacancy on the Board caused by the death, resignation or removal of any Nominee
shall be filled promptly by another person nominated by the holders of a
majority of the Series B Preferred Stock at a special meeting of the Company's
stockholders held for that purpose. Upon the request of the holders of a
majority of the Series B Preferred Stock, the Company shall call a special
meeting of the Company's stockholders as a result of any vacancy on the Board
caused by the death, resignation or removal of any Nominee; such special meeting
shall be held as soon as reasonably practicable but not later than sixty (60)
days thereafter (or such shorter period as may be permitted by law). The failure
of the holders of the Series B Preferred Stock to exercise their rights under
this subsection (iii) shall not constitute a waiver of their right to exercise
such right in the future. At the special meeting and if a quorum consisting of
the holders of a majority of the Series B Preferred Stock are present in person
or by proxy, the person designated by the holders of Series B Preferred Stock to
fill such vacancy shall be nominated and elected by the vote as a class of the
Series B Preferred Stock with each share of Series B Preferred Stock entitled to
one vote.
(e) Common Stock Dividends. Prior to January 16, 1999, or if at any
time the Company is in arrears in the payment of dividends as set forth in
Section B.1, the Company shall not declare or pay cash dividends or other
distributions on or with respect to shares of Common Stock without the prior
written consent or affirmative vote of the holders of a majority of the then
outstanding shares of Series B Preferred Stock, given in writing or by vote at a
meeting, consenting or voting (as the case may be) separately as a class.
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B.4. Redemption of the Series B Preferred Stock.
(a) Optional Redemption On or Before January 16, 2002 at Option of
Majority Holders. If, on or before January 16, 2002, the Company completes
successfully a Registered Public Offering resulting in gross proceeds to the
Company of more than $15,000,000 but less than or equal to $20,000,000, each
holder of Series B Preferred Stock may elect to require the Company to redeem
not more than one-half (1/2) of the then issued and outstanding shares of Series
B Preferred Stock owned by such holder as provided below (a "Section B.4(a)
Redemption") at an amount per share of Series B Preferred Stock equal to the
offering price per share of the Common Stock in such Registered Public Offering
(the "Section B.4(a) Redemption Price"). Upon such an election, an equal
percentage of Series B Preferred Stock held by any such holder shall be
converted in accordance with the provisions of Section B.6(b), below. As used
herein, "Registered Public Offering" shall refer to a public offering pursuant
to an effective registration statement under the Securities Act of 1933, as
amended, other than a registration effected in connection with an employee
benefit plan or a transaction of a type specified in Rule 145 under such Act (or
any successor thereto).
Not more than three days after the filing with the Securities and
Exchange Commission of the Registration Statement related to the Registered
Public Offering, the Company shall send notice of the Registered Public Offering
by first-class certified mail, postage prepaid and return receipt requested, to
the holders of the shares of Series B Preferred Stock at their respective
addresses as the same shall appear on the books of the Company. The notice shall
refer to this Section B.4(a), shall specify the projected closing date and the
estimated range of the offering price per share of the Common Stock in such
Registered Public Offering and shall include a copy of the preliminary
prospectus filed by the Company with the SEC relating to the Registered Public
Offering. Each holder of Series B Preferred Stock shall have the right, at any
time on or before the 15th day after the date on which the Company mailed such
notice, to deliver written notice (the "Election Notice") to the Company
electing to have a specified portion (but not more than 1/2) of such holder's
Series B Preferred Stock redeemed by the Company pursuant to this Section
B.4(a); provided such election may be conditioned upon the Section B.4(a)
Redemption Price being not less than the minimum amount specified in such
holder's Election Notice. The Company shall promptly notify (the "Section B.4(a)
Redemption Notice") each holder of Series B Preferred Stock of the number of
shares of Series B Preferred Stock held by such holder which are being redeemed
pursuant to this Section. The redemption (and conversion pursuant to Section
B.6(b)) shall occur and be effective in all respects on the same day on which
the Registered Public Offering is consummated (the "Section B.4(a) Redemption
Date"), and thereafter the holder of shares being redeemed pursuant to this
Section B.4(a) shall have only the rights set forth in Sections B.4(d) and
Section B.4(e) hereof.
Before, on or after the Section B.4(a) Redemption Date, each holder of
Series B Preferred Stock to be redeemed shall surrender to the Company the
certificate or certificates representing such shares, in the manner and at the
place designated in the Section B.4(a) Redemption Notice, and thereupon the
Section B.4(a) Redemption Price of such shares shall be payable to the order of
the person whose name appears on such certificate or certificates as the owner
thereof and each surrendered certificates shall be cancelled. The Company shall
promptly reissue to such holders (or their nominees) certificates evidencing the
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shares of Series B Preferred Stock represented by the surrendered certificates
which are not redeemed.
(b) Redemption at Option of Majority of Holders. If the Company does
not successfully complete a Registered Public Offering (as described in Section
B.4(a)) on or before January 16, 2002, then at any time after January 16, 2002
but only at any time during the first 10 days after each Dividend Payment Date
(the "Redemption Election Period") the holders of a majority of the then issued
and outstanding shares of Series B Preferred Stock (the "Majority Holders") may
elect to require the Company to redeem shares of Series B Preferred Stock at an
amount equal to the Face Value plus accrued but unpaid dividends to the
respective dates of redemption of the shares (the "Optional Redemption Price")
in accordance with this Section B.4(b). The Majority Holders may require the
Company to redeem with respect to each Redemption Election Period up to that
number of shares of Series B Preferred Stock equal to 10% of the aggregate
number of shares of Series B Preferred Stock that the Company has issued
(whether or not then issued or outstanding, including shares of Series B
Preferred Stock that were issued and subsequently redeemed or otherwise
cancelled) as of the beginning of such Redemption Election Period.
If the Majority Holders elect to cause such a redemption, they shall so
notify the Company in writing (the "Redemption Exercise Notice"). Upon receipt
of the Redemption Exercise Notice the Company shall promptly (and in any event
within 10 days of receipt of the Redemption Exercise Notice) notify all holders
of Series B Preferred stock of such election by sending a notice (the "Optional
Redemption Notice") by first class certified mail, postage prepaid and return
receipt requested to the holders of Series B Preferred Stock at their respective
addresses as the same shall appear on the books of the Company. The Optional
Redemption Notice shall refer to this Section B.4(b) and shall specify the last
day of the month following the month during which the Company received the
Redemption Exercise Notice as the date on which shares of Series B Preferred
Stock will be redeemed in accordance with this Section B.4(b) (the "Optional
Redemption Date"). The Company shall promptly notify (the "Section B.4(b)
Redemption Notice") each holder of Series B Preferred Stock of the number of
shares of Series B Preferred Stock held by such holder which are being redeemed
pursuant to this Section on an Optional Redemption Date. An election by the
Majority Holders in accordance with this Section B.4(b) shall be binding upon
all holders of the Series B Preferred Stock, and Series B Preferred Stock shall
be redeemed pro rata among all holders of said shares to give effect to the
provisions of this Section B.4(b).
Upon receipt of the Section B.4(b) Redemption Notice, and before, on or
after the Optional Redemption Date, each holder of Series B Preferred Stock to
be redeemed shall surrender to the Company the certificate or certificates
representing such shares, in the manner and at the place designated in the
Section B.4(b) Redemption Notice, and thereupon the Optional Redemption Price of
such shares shall be payable to the order of the person whose name appears on
such certificate or certificates as the owner thereof and each surrendered
certificates shall be cancelled. The Company shall promptly reissue to such
holders (or their nominees) certificates evidencing any shares of Series B
Preferred Stock represented by the surrendered certificates which are not
redeemed.
(c) Redemption at the Option of the Company. The Company may at any
time after January 16, 2003 redeem all of the then issued and outstanding shares
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of Series B Preferred Stock as set forth in this Section B.4(c) if all accrued
dividends have been declared and paid to the holders of record of the
outstanding shares of Series B Preferred Stock through the most recent Dividend
Payment Date. The redemption shall occur on a date specified by the Company (the
"Company Redemption Date"), which must be a date within ten (10) business days
after a Dividend Payment Date. The redemption price for any redemption pursuant
to this Section B.4(c) (the "Company Redemption Price") shall be the Face Value
of all of the outstanding shares of Series B Preferred Stock plus an additional
amount equal to 10% of the Face Value of such outstanding shares of Series B
Preferred Stock.
Not more than sixty (60) days nor less than fifteen (15) days before
the Company Redemption Date, the Company shall send notice of redemption
pursuant to this Section B.4(c) by first-class, certified mail, postage prepaid
and return receipt requested, to all of the holders of the shares of Series B
Preferred Stock at their respective addresses as the same shall appear on the
books of the Company. The notice shall refer to this Section B.4(c) and shall
specify the Company Redemption Date and the time and place of the redemption.
Before, on or after the Company Redemption Date, each holder of Series B
Preferred Stock shall surrender to the Company the certificate or certificates
representing such shares, in the manner and at the place designated in the
Company Redemption Notice, and thereupon the Company Redemption Price of such
shares shall be payable to the order of the person whose name appears on such
certificate or certificates as the owner thereof and each surrendered
certificate shall be cancelled. Notwithstanding the foregoing, delivery by the
Company to the holders of the Series B Preferred Stock of a Company Redemption
Notice pursuant to this Section B.4(c) shall not prejudice or foreclose the
rights of said holders to convert shares of Series B Preferred Stock to Common
Stock pursuant to Section B.5(a) hereof so long as the Conversion Date (as
defined in Section B.5(c)(i)) precedes the Company Redemption Date as defined
herein.
(d) Provision for Payment. "Redemption Date" shall refer to the Section
B.4(a) Redemption Date (in the case of redemptions governed by Section B.4(a)),
an Optional Redemption Date (in the case of redemptions governed by Section
B.4(b)), and a Company Redemption Date (in the case of redemptions governed by
Section B.4(c)). "Redemption Price" shall mean the amount to be paid by the
Company on a particular Redemption Date pursuant to Section B.4(a), Section
B.4(b), or Section B.4(c), as applicable. On or prior to each Redemption Date,
the Company shall deposit the Redemption Price of all shares of Series B
Preferred Stock designated for redemption on that Redemption Date with a bank or
trust corporation having aggregate capital and surplus in excess of $100,000,000
as a trust fund for the benefit of the respective holders of the shares
designated for redemption and not yet redeemed, with irrevocable instructions
and authority to the bank or trust corporation to pay the Redemption Price for
such shares to their respective holders on or after the related Redemption Date
upon receipt of notification from the Company that such holder has surrendered
his share certificate to the Company pursuant to Section B.4(a), Section B.4(b),
or Section B.4(c) above. As of the Redemption Date, the deposit shall constitute
full payment of the shares being redeemed on that Redemption Date, and from and
after the Redemption Date the shares so called for redemption on that Redemption
Date shall be redeemed and shall be deemed to be no longer outstanding, and the
holders thereof shall cease to be stockholders with respect to such shares and
shall have no rights with respect thereto except the rights to receive from the
bank or trust corporation payment of the Redemption Price of the shares, without
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interest, upon surrender of their certificates therefor. The balance of any
moneys deposited by the Company pursuant to this Section B.4(d) remaining
unclaimed at the expiration of three (3) years following the Redemption Date
shall thereafter be returned to the Company upon its request expressed in a
resolution of its Board of Directors.
(e) Rights Upon Redemption. From and after the Redemption Date, unless
there shall have been a default in payment of the Redemption Price, all rights
of the holders of shares of Series B Preferred Stock to be redeemed on that
Redemption Date as holders of Series B Preferred Stock (except the right to
receive the Redemption Price without interest upon surrender of their
certificate or certificates) shall cease with respect to such shares, and such
shares shall not thereafter be transferred on the books of the Company or be
deemed to be outstanding for any purpose whatsoever. If the funds of the Company
legally available for redemption of shares of Series B Preferred Stock on any
Redemption Date are insufficient to redeem the total number of shares of Series
B Preferred Stock to be redeemed on such date, those funds which are legally
available will be used to redeem the maximum possible number of such shares
ratably among the holders of such shares to be redeemed based upon their
holdings of Series B Preferred Stock or upon the respective Holder Elections. At
any time thereafter when additional funds of the Company in excess of One
Hundred Thousand Dollars ($100,000) are legally available for the redemption of
shares of Series B Preferred Stock, such funds will immediately be used to
redeem the balance of the shares which the Company has become obliged to redeem
on any Redemption Date, but which it has not redeemed. The shares of Series B
Preferred Stock not redeemed shall remain outstanding and entitled to all the
rights and preferences provided herein.
(f) Cancellation of Redeemed Stock. Any shares of Series B Preferred
Stock redeemed pursuant to this Section shall be cancelled and shall not under
any circumstances be reissued; and the Company may from time to time take such
appropriate corporate action as may be necessary to reduce accordingly the
number of authorized shares of the Company's capital stock.
(g) Acquisition by Company. The Company will not, and will not permit
any subsidiary of the Company to, purchase or acquire any shares of Series B
Preferred Stock otherwise than pursuant to (A) the terms of this Section B.4 or
(B) an offer made on the same terms to all holders of Series B Preferred Stock
at the time outstanding.
B.5. Optional Conversion.
The holders of the Series B Preferred Stock shall have conversion
rights as described in this Section B.5 (the "Conversion Rights"). In the event
of a liquidation of the Company, the Conversion Rights shall terminate at the
close of business on the first full day preceding the date fixed for the payment
of any amounts distributable on liquidation to the holders of Series B Preferred
Stock.
(a) Right to Convert. Each share of Series B Preferred Stock shall be
convertible, at the option of the holder thereof, at any time and from time to
time, upon surrender of certificates representing shares of Series B Preferred
Stock and without payment of any further consideration, into the number of fully
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paid and nonassessable shares of Common Stock (or rights to acquire Common
Stock) described in Section B.5(a)(i) hereof at an effective conversion price
per share (the "Conversion Price") described in Section B.5(a)(ii) hereof,
subject to adjustment as provided below. The date on which any such right to
convert is exercised as provided in Section B.5(c) hereof is hereinafter
referred to as the "Conversion Date."
(i) Number of Shares. Any additional shares of Common Stock
issued by the Company at any time or from time to time after January 16, 1997
(the "Base Date") and before any applicable Conversion Date at a price per share
that is less than the then applicable Conversion Price (but not including any
shares issued as dividends or distributions as provided in Section B.5(f) or
upon a stock split or combination as provided in Section B.5(e); any shares
issuable upon conversion of the Series B Preferred Stock; any shares issuable
upon exercise of any options granted pursuant to the terms of the Company's
stock option plans existing and as in effect on the Base Date, or up to 300,000
additional shares of Common Stock issuable upon exercise of options granted
after the Base Date pursuant to the terms of any option plan or arrangement of
the Company adopted after the Base Date, including any shares of Common Stock
issuable as a result of antidilution provisions of any such options; and any
shares of Common Stock issuable upon exercise of warrants granted in connection
with the Company's 1995 11.50% Subordinated Notes, such warrants have been
amended through the Base Date, including any shares issuable as a result of
antidilution provisions of such warrants) shall be referred to herein as
"Adjustment Shares." The number of shares of Common Stock issuable upon
conversion of each share of the Series B Preferred Stock tendered for conversion
pursuant to the terms of this Section B.5 on any date from and after the Base
Date shall initially be equal to 5.26795.
For purposes of this Section B.5, the term "Initial Number of
Fully Diluted Shares" shall mean 10,974,895 shares of Common Stock, which number
is equal to the sum of (i) the total number of shares Common Stock issued and
outstanding at the Base Date; plus (ii) the sum of the total number of shares
reserved for issuance upon exercise of options granted pursuant to the terms of
the Company's stock option plans existing and as in effect on the Base Date plus
300,000 additional shares of Common Stock that may be issued upon exercise of
options granted after the Base Date pursuant to the terms of any option plan or
arrangement of the Company adopted after the Base Date plus the number of shares
of Common Stock issuable upon exercise of Warrants granted in connection with
the Company's 1995 11.50% Subordinated Notes, as such Warrants have been amended
through the Base Date; plus (iii) the number of shares of Common Stock that
would represent 24% of the Initial Number of Fully Diluted Shares. The number of
shares of Common Stock issuable upon conversion of each share of the Series B
Preferred Stock shall be adjusted upon the issuance of any Adjustment Shares, on
any date from and after the Base Date, to equal the total number of shares
determined by the following formula, rounded to the nearest 1/100,000 of a
share: (a).24 multiplied by (b) the sum of (aa) the Initial Number of Fully
Diluted Shares plus (bb) the quotient of (aaa) the number of shares of
Adjustment Shares issued and outstanding at the Conversion Date, divided by
(bbb) 1 minus .24, divided by (c) the total number of shares of Series B
Preferred Stock issued and outstanding on the Base Date.
(ii)Conversion Price. The Conversion Price per share shall
initially be equal to $1.898.
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(b) Fractional Shares. No fractional shares of Common Stock shall be
issued upon conversion of the Series B Preferred Stock. In lieu of fractional
shares, the Company shall pay cash equal to such fraction multiplied by the then
effective Conversion Price.
(c) Mechanics of Conversion.
(i) In order to convert shares of Series B Preferred Stock
into shares of Common Stock, the holder shall surrender the certificate or
certificates for such shares of Series B Preferred Stock, duly endorsed, at the
office of the transfer agent (or at the principal office of the Company if the
Company serves as its own transfer agent), together with written notice that
such holder elects to convert all or any number of the shares represented by
such certificate or certificates. Such notice shall state such holder's name or
the names of the nominees in which such holder wishes the certificate or
certificates for shares of Common Stock to be issued. The date of receipt of
such certificates and notice by the transfer agent or the Company shall be the
conversion date ("Conversion Date"). The Company shall, as soon as practicable
after the Conversion Date, issue and deliver at such office to such holder, or
to his nominees, a certificate or certificates for the number of shares of
Common Stock to which such holder shall be entitled, together with cash in lieu
of any fraction of a share.
(ii) The Company shall at all times during which the Series B
Preferred Stock shall be outstanding, reserve and keep available out of its
authorized but unissued stock, for the purpose of effecting the conversion of
the Series B Preferred Stock (whether pursuant to this Section B.5 or pursuant
to Section B.6), such number of its duly authorized shares of Common Stock as
shall from time to time be sufficient to effect the conversion of all
outstanding Series B Preferred Stock. Before taking any action which would cause
an adjustment reducing the Conversion Price below the then par value of the
shares of Common Stock issuable upon conversion of the Series B Preferred Stock,
the Company will take any corporate action which may, in the opinion of its
counsel, be necessary in order that the Company may validly and legally issue
fully paid and nonassessable shares of Common Stock at such adjusted Conversion
Price.
(iii) All shares of Series B Preferred Stock, which shall have
been surrendered for conversion as herein provided shall no longer be deemed to
be outstanding and all rights with respect to such shares, including the rights,
if any, to receive dividends, notices and to vote, shall immediately cease and
terminate on the Conversion Date, except only the right of the holders thereof
to receive shares of Common Stock in exchange therefor. Any shares of Series B
Preferred Stock so converted shall be retired and cancelled and shall not be
reissued, and the Company may from time to time take such appropriate action as
may be necessary to reduce the number of shares of authorized Series B Preferred
Stock accordingly.
(iv) If the conversion is in connection with an underwritten
offering of securities registered pursuant to the Securities Act of 1933, as
amended, the conversion may at the option of any holder tendering Series B
Preferred Stock for conversion, be conditioned upon the consummation of the sale
of securities pursuant to such offering, in which event the person(s) entitled
to receive the Common Stock issuable upon such conversion of the Series B
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Preferred Stock shall not be deemed to have converted such Series B Preferred
Stock until immediately prior to the closing of the sale of securities.
(d) Adjustment of Conversion Price Upon Issuance of Adjustment Shares.
In the event the Company shall at any time after the Base Date issue Adjustment
Shares (excluding shares issued as a dividend or distribution as provided in
Section B.5(f) or upon a stock split or combination as provided in Section
B.5(e)), without consideration or for a consideration per share less than the
applicable Conversion Price in effect on the date of and immediately prior to
such issue, then and in such event, the Conversion Price shall be reduced,
concurrently with such issue, to a price (calculated to the nearest 1/1000 of
one cent) determined by multiplying such Conversion Price by a fraction, (A) the
numerator of which shall be equal to the Initial Number of Fully Diluted Shares,
plus the quotient of (a) the aggregate consideration received by the Company for
Adjustment Shares issued and outstanding at the Conversion Date, divided by (b)
the Conversion Price immediately preceding the event requiring such adjustment,
(B) and the denominator of which shall be equal to the sum of the Initial Number
of Fully Diluted Shares plus the number of shares of Adjustment Shares issued
and outstanding at the Conversion Date.
For purposes of this Section B.5(d), the consideration received by the
Company for the issue of any Adjustment Shares of Common Stock shall be computed
as follows:
(A) insofar as it consists of cash, be computed at
the aggregate of cash received by the Company, excluding
amounts paid or payable for accrued interest or accrued
dividends;
(B) insofar as it consists of property other than
cash, be computed at the fair market value thereof at the
time of such issue, as determined in good faith by the Board
of Directors; and
(C) in the event Adjustment Shares of Common Stock
are issued together with other shares or securities or other
assets of the Company for consideration which covers both, be
the proportion of such consideration so received, computed as
provided in clauses (A) and (B) above, as determined in good
faith by the Board of Directors.
(e) Adjustment to Conversion Price for Stock Splits and Combinations.
If the Company shall at any time or from time to time after the Base Date effect
a subdivision of the outstanding Common Stock, the Conversion Price then in
effect immediately before that subdivision shall be proportionately decreased.
If the Company shall at any time or from time to time after the Base Date
combine the outstanding shares of Common Stock, the Conversion Price then in
effect immediately before the combination shall be proportionately increased.
Any adjustment under this paragraph shall become effective at the close of
business on the date the subdivision or combination becomes effective.
(f) Adjustment to Conversion Price for Certain Dividends and
Distributions. In the event the Company at any time, or from time to time after
the Base Date shall make or issue a dividend or other distribution payable in
additional shares of Common Stock, then and in each such event the Conversion
Price shall be decreased as of the time of such issuance, by multiplying the
Conversion Price by a fraction:
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(1) the numerator of which shall be the total number
of shares of Common Stock issued and outstanding immediately
prior to the time of such issuance, and
(2) the denominator of which shall be the total
number of shares of Common Stock issued and outstanding
immediately prior to the time of such issuance plus the
number of shares of Common Stock issuable in payment of such
dividend or distribution.
(g) Adjustments for Other Dividends and Distributions. In the event the
Company at any time or from time to time after the Base Date shall make or issue
a dividend or other distribution payable in securities of the Company other than
shares of Common Stock, then and in each such event provision shall be made so
that the holders of shares of the Series B Preferred Stock shall receive upon
conversion thereof in addition to the number of shares of Common Stock
receivable thereupon, the amount of securities of the Company that they would
have received had their Series B Preferred Stock been converted into Common
Stock on the date of such event and had thereafter, during the period from the
date of such event to and including the Conversion Date, retained such
securities receivable by them as aforesaid during such period given application
to all adjustments called for during such period, under this paragraph with
respect to the rights of the holders of the Series B Preferred Stock.
(h) Adjustment for Stock Splits, Reclassification, Exchange, or
Substitution. If at any time from and after the Base Date the Common Stock
issuable upon the conversion of the Series B Preferred Stock shall be subdivided
or combined, if any additional shares of Common Stock are issued as a dividend
or distribution of Company securities, or if the Common Stock is otherwise
changed into the same or a different number of shares of any class or classes of
stock, whether by capital reorganization, reclassification, or otherwise (other
than a dividend or distribution as described in Section B.5(g) above, or a
reorganization, merger, consolidation, or sale of assets provided for below),
then and in each such event the holder of each share of Series B Preferred Stock
shall have the right thereafter to convert such share into the kind and amount
of shares of stock and other securities and property receivable upon such
subdivision, combination, dividend, reorganization, reclassification, or other
change, by holders of the number of shares of Common Stock into which such
shares of Series B Preferred Stock would have been converted immediately prior
to such subdivision, combination, dividend, reorganization, reclassification, or
change, all subject to further adjustment as provided herein.
(i) Adjustment for Merger or Reorganization, etc. In case of any
consolidation or merger of the Company with or into another corporation,
partnership, limited liability company or other entity or the sale of all or
substantially all of the assets of the Company to another corporation,
partnership, limited liability company or other entity (other than a
consolidation, merger or sale which is treated as a liquidation pursuant to
Section B.2(b)), (i) if the surviving entity shall consent in writing to the
following provisions, then each share of Series B Preferred Stock shall
thereafter be convertible into the kind and amount of shares of stock or other
securities or property to which a holder of the number of shares of Common Stock
of the Company deliverable upon conversion of such Series B Preferred Stock
would have been entitled upon such consolidation, merger or sale; and, in such
case, appropriate adjustment (as determined in good faith by the Board of
Directors) shall be made in the application of the provisions in this Section
B.5 set forth with respect to the rights and interest thereafter of the holders
of the Series B Preferred Stock, to the end that the provisions set forth in
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this Section B.5 (including provisions with respect to changes in and other
adjustments of the Conversion Price) shall thereafter be applicable, as nearly
as reasonably may be, in relation to any shares of stock or other property
thereafter deliverable upon the conversion of the Series B Preferred Stock; or
(ii) if the surviving entity shall not so consent, then each holder of Series B
Preferred Stock may, after receipt of notice specified in subsection (l) below
("Notice of Record Date"), elect to convert such stock into Common Shares as
provided in this Section B.5 or to accept the distributions to which he shall be
entitled under Section B.2(a) and Section B.2(b), assuming holders of a majority
of the Series B Preferred Stock have not voted, as per Section B.2(b), that the
merger or consolidation shall not be deemed to be a liquidation.
(j) No Impairment. The Company will not, by amendment of its
Certificate of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Company, but will at all
times in good faith assist in the carrying out of all the provisions of this
Section B.5 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of the
Series B Preferred Stock against impairment.
(k) Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Conversion Price pursuant to this Section B.5
or to the number of shares of Common Stock issuable upon conversion of Series B
Preferred Stock pursuant to Section B, the Company at its expense shall promptly
compute such adjustment or readjustment in accordance with the terms hereof and
furnish to each holder, if any, of Series B Preferred Stock a certificate
setting forth such adjustment or readjustment and showing in detail the facts
upon which such adjustment or readjustment is based and shall file a copy of
such certificate with its corporate records. The Company shall, upon the written
request at any time of any holder of Series B Preferred Stock, furnish or cause
to be furnished to such holder a similar certificate setting forth (i) such
adjustments and readjustments, (ii) the Conversion Price then in effect, and
(iii) the number of shares of Common Stock and the amount, if any, of other
property which then would be received upon the conversion of Series B Preferred
Stock. Despite such adjustment or readjustment, the form of each or all Series B
Preferred Stock Certificates, if the same shall reflect the initial or any
subsequent conversion price, need not be changed in order for the adjustments or
readjustments to be valued in accordance with the provisions of this Certificate
of Designation, which shall control.
(l) Notice of Record Date. In the event:
(i) that, without limiting the rights of the holders
of Series B Preferred Stock pursuant to Section B.3, the
Company declares a dividend (or any other distribution) on
its Common Stock payable in Common Stock or other securities
of the Company;
(ii) that the Company subdivides or combines its
outstanding shares of Common Stock;
(iii) of any reclassification of the Common Stock of
the Company (other than a subdivision or combination of its
outstanding shares of Common Stock or a stock dividend or
stock distribution thereon), or of any consolidation or
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merger of the Company into or with another corporation, or of
the sale of all or substantially all of the assets of the
Company; or
(iv) of the involuntary or voluntary dissolution,
liquidation or winding up of the Company;
then the Company shall cause to be filed at its principal office or at the
office of the transfer agent of the Series B Preferred Stock, and shall cause to
be mailed to the holders of the Series B Preferred Stock at their last addresses
as shown on the records of the Company or such transfer agent, at least ten days
prior to the record date specified in (A) below or twenty days before the date
specified in (B) below, a notice stating
(A) the record date of such dividend, distribution,
subdivision or combination, or, if a record is not to be taken, the
date as of which the holders of Common Stock of record to be entitled
to such dividend, distribution, subdivision or combination are to be
determined, or
(B) the date on which such reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up is
expected to become effective, and the date as of which it is expected
that holders of Common Stock of record shall be entitled to exchange
their shares of Common Stock for securities or other property
deliverable upon such reclassification, consolidation, merger, sale,
dissolution or winding up.
B.6. Mandatory Conversion.
(a) Registered Public Offering in Excess of $20,000,000. Upon
the successful consummation of the sale of shares of Common Stock in a
Registered Public Offering resulting in gross proceeds to the Company of more
than $20,000,000 and at a price per share of Common Stock which is equal to or
greater than (i) the aggregate Face Value of the issued and outstanding Series B
and Series C Preferred Stock on such date, divided by (ii) the total number of
shares of Common Stock that would have been issuable on the date of consummation
of such offering upon conversion of the Series B Preferred Stock in accordance
with the terms of Section B.5 hereof, (which minimum price shall hereinafter be
referred to as the "Minimum Price"), then, effective upon the consummation of
such Registered Public Offering (the "Conversion Date"), all issued and
outstanding shares of Series B Preferred Stock not otherwise converted by the
holders thereof on or before the consummation of such Registered Public Offering
shall automatically and without further action on the part of the respective
holder or the Company be converted into Common Stock at the then effective
Conversion Price pursuant to Section B.5 and all shares of Series B Preferred
Stock then outstanding shall be cancelled.
(b) Upon the successful consummation of the sale of shares of Common
Stock in a Registered Public Offering resulting in gross proceeds to the Company
of more than $15,000,000 but less than or equal to $20,000,000, if any holders
of Series B Preferred Stock have elected to redeem shares of said Series B
Preferred Stock in a Section B.4(a) Redemption and such shares are redeemed as
set forth therein, then on the Section B.4(a) Redemption Date, a number of
shares of Series B Preferred Stock equal to that number redeemed by each such
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holder pursuant to Section B.4(a) shall automatically and without further action
on the part of the respective holder or the Company be converted into Common
Stock at the then effective Conversion Price and the shares of Series B
Preferred Stock thus converted shall be cancelled. The Conversion Date for any
conversion pursuant to this provision shall be the Section B.4(a) Redemption
Date.
(c) The Company shall give all holders of record of shares of Series B
Preferred Stock then outstanding written notice of the conversion of the shares
of Series B Preferred Stock being converted pursuant to this Section B.6. Such
notice will be sent by first class or registered mail, postage prepaid, to each
record holder of Series B Preferred Stock at such holder's address last shown on
the records of the transfer agent for the Series B Preferred Stock (or the
records of the Company, if it serves as its own transfer agent). In such case,
the holder may surrender the certificate or certificates for such shares of
Series B Preferred Stock, duly endorsed, at the office of the transfer agent (or
at the principal office of the Company if the Company serves as its own transfer
agent), together with a notice stating such holder's name or the names of the
nominees in which such holder wishes the certificate or certificates for shares
of Common Stock to be issued. The Company shall, as soon as practicable after
the receipt of the Series B Certificates and notice by the transfer agent, issue
and deliver at such office to such holder, or to his nominees, a certificate or
certificates for the number of shares of Common Stock to which such holder shall
be entitled, together with cash in lieu of any fraction of a share.
Notwithstanding any provision hereof, all shares of Series B Preferred Stock
converted pursuant to the provisions of this Section B.6 shall no longer be
deemed to be outstanding and all rights with respect to such shares of Series B
Preferred Stock, including the rights, if any, to receive dividends, notices,
and to vote, shall immediately cease and terminate on the Conversion Date,
except only the right of the holders thereof to receive shares of Common Stock
in exchange therefor. Any shares of Series B Preferred Stock so converted shall
be retired and cancelled and shall not be reissued, and the Company may from
time to time take such appropriate action as may be necessary to reduce the
number of authorized Series B Preferred Stock accordingly.
B.7. Sinking Fund.
There shall be no sinking fund for the payment of dividends, or
liquidation preferences on the Series B Preferred Stock or the redemption of any
shares thereof.
C. Series C Preferred Stock
There is hereby established a Series C Preferred Stock, consisting of
500,000 shares, having a face value of $10.00 per share (the "Face Value") and
having the rights, preferences, powers, restrictions and limitations set forth
in this Article C. For all purposes in this Article C pertaining the Series C
Preferred Stock, the term "Junior Stock" shall include Common Stock and other
capital stock of the Company not expressly designated to be on parity with or
senior to the Series C Preferred Stock and shall include Series B Preferred
Stock, but only with respect to the payment of dividends as set forth in Section
C.1 and Section B.1, respectively (to wit, dividends on the Series C Preferred
Stock shall be payable in preference and priority to any payment of dividends on
the Series B Preferred Stock).
C.1. Dividends.
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The holders of the Series C Preferred Stock shall be entitled
to receive, out of funds legally available therefor, cumulative dividends at the
rate of 14% of the Face Value of the Series C Preferred Stock (subject to
appropriate adjustments in the event of any stock dividend, stock split,
combination or other similar recapitalization affecting such shares) per share
per annum, payable in preference and priority to any payment of any cash
dividend on Junior Stock and payable on the first day of February, May, August
and November of each year ("Dividend Payment Date", when and as declared by the
Board of Directors of the Company; provided that the first Dividend Payment Date
shall be May 1, 1997 and such dividend payment shall include pro-rata dividends
from the date of issuance of the Series C Preferred Stock to January 31, 1997.
Such dividends shall accrue with respect to each share of
Series C Preferred Stock from the date on which such share is issued and
outstanding and thereafter shall be deemed to accrue from day to day whether or
not earned or declared and whether or not there exists profits, surplus or other
funds legally available for the payment of dividends, and shall be cumulative so
that if such dividends on the Series C Preferred Stock shall not have been paid,
or declared and set apart for payment, the deficiency shall be fully paid or
declared and set apart for payment before any dividend shall be paid or declared
or set apart for any Junior Stock and before any purchase or acquisition of any
Junior Stock is made by the Company. At the earlier of: (i) prior to the
redemption of the Series C Preferred Stock; (ii) three (3) days prior to the
consummation of an underwritten Registered Public Offering of the type described
in Section C.4(a); or (iii) the liquidation of the Company, the sale of the
Company or, directly or indirectly, all or substantially all of its assets, or
the merger, consolidation or other combination of the Company with another
entity in a transaction in which the Company is not the surviving entity, any
accrued but undeclared dividends shall be paid to the holders of record of
outstanding shares of Series C Preferred Stock. No accumulation of dividends on
the Series C Preferred Stock shall bear interest.
C.2. Liquidation, Dissolution or Winding Up.
(a) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Company, the holders of shares of Series C
Preferred Stock then outstanding shall be entitled to be paid out of the assets
of the Company available for distribution to its stockholders, after and subject
to the payment in full of all amounts required to be distributed to the holders
of Series A Preferred Stock and Series B Preferred Stock of the Company, but
before any payment shall be made to the holders of Junior Stock by reason of
their ownership thereof, an amount equal to $10 per share of Series C Preferred
Stock plus accrued but unpaid dividends to the payment date (whether or not
declared) (the "Liquidation Value"). If upon any such liquidation, dissolution
or winding up of the Company the remaining assets of the Company available for
distribution to its stockholders shall be insufficient to pay the holders of
shares of Series C Preferred Stock the full amount to which they shall be
entitled, the holders of shares of Series C Preferred Stock shall share ratably
in any distribution of the remaining assets and funds of the Company in
proportion to the respective amounts which would otherwise be payable in respect
of the shares held by them upon such distribution if all amounts payable on or
with respect to such shares were paid in full.
(b) Unless the holders of a majority of the Series C Preferred Stock
then outstanding otherwise consent in writing or by vote, the merger,
consolidation or other combination of the Company into or with another
corporation, partnership, limited liability company or other entity which
E-25
results in the exchange of more than 50% of the voting securities of the Company
for securities or other consideration issued or paid or caused to be issued or
paid by such other corporation, partnership, limited liability company or other
entity or an affiliate thereof, or, the sale, directly or indirectly, of all or
substantially all the assets of the Company shall be deemed to be a liquidation,
dissolution or winding up of the Company for purposes of this Section, and shall
entitle the holders of Series C Preferred Stock to receive at the closing, in
cash, securities or other property, the amounts as specified in Section C.2(a)
above. The value of such property, rights or other securities shall be
determined in good faith by the Board of Directors of the Company.
C.3. Voting.
(a) Generally. Except as otherwise provided by applicable law or as
other provided in this Section C, Series C Preferred Stock shall not entitle the
holders thereof to any voting rights.
(b) No Impairment. The Company shall not amend, alter or repeal
preferences, rights, powers or other terms of the Series C Preferred Stock so as
to affect adversely the Series C Preferred Stock, or amend, alter or repeal this
Section C.3, without the prior written consent or affirmative vote of the
holders of a majority of the then outstanding shares of Series C Preferred
Stock, given in writing or by vote at a meeting, consenting or voting (as the
case may be) separately as a class. For this purpose, without limiting the
generality of the foregoing, the authorization or issuance of any shares of a
series of Preferred Stock other than Series A Preferred Stock and Series B
Preferred Stock described in Articles A and B above, respectively, or other
capital stock which is on a parity with or has preference or priority over the
Series C Preferred Stock as to the right to receive either dividends or amounts
distributable upon liquidation, dissolution or winding up of the Company shall
be deemed to affect adversely the Series C Preferred Stock.
(c) Common Stock Dividends. Prior to January 16, 1999 or if the Company
is in arrears in the payment of dividends as set forth in Section C.1, the
Company shall not declare or pay cash dividends or other distributions on or
with respect to shares of Common Stock without the prior written consent or
affirmative vote of the holders of a majority of the then outstanding shares of
Series C Preferred Stock, given in writing or by vote at a meeting, consenting
or voting (as the case may be) separately as a class.
C.4. Redemption of the Series C Preferred Stock.
(a) Redemption in Connection with Registered Public Offering. If the
Company successfully consummates a Registered Public Offering as described in
Section B.6(a), then the Company shall have the right to redeem all (but not
less than all) of the issued and outstanding shares of Series C Preferred Stock
pursuant to this Section C.4(a) (the "Section C.4(a) Redemption") for a
redemption price of $.01 per share of Series C Preferred Stock (the "Section
C.4(a) Redemption Price"). The redemption shall occur on the same day on which
the Registered Public Offering is consummated (the "Section C.4(a) Redemption
Date").
Not more than 60 days nor less than 10 days before the Section C.4(a)
Redemption Date, the Company shall send notice of the Section C.4(a) Redemption
(the "Section C.4(a) Redemption Notice") by first-class certified mail, postage
E-26
prepaid and return receipt requested, to the holders of the shares of Series C
Preferred Stock to be redeemed at their respective addresses as the same shall
appear on the books of the Company. The notice shall refer to this Section
C.4(a) and shall specify the anticipated Section C.4(a) Redemption Date. Before,
on or after the Section C.4(a) Redemption Date, each holder of Series C
Preferred Stock to be redeemed shall surrender to the Company the certificate or
certificates representing such shares, in the manner and at the place designated
in the Section C.4(a) Redemption Notice, and thereupon the Section C.4(a)
Redemption Price of such shares shall be payable to the order of the person
whose name appears on such certificate or certificates as the owner thereof and
each surrendered certificates shall be cancelled. Notwithstanding delivery of a
Section C.4(a) Redemption Notice in accordance with this Section C.4(a), any
such notice shall be deemed conditional and expressly subject to consummation of
the Registered Public Offering referred to hereinabove, and if said Registered
Public Offering shall not be consummated, any such Section C.4(a) Redemption
Notice shall be deemed void ab initio and of no force and effect.
(b) Redemption Upon Partial Conversion of Series B Preferred Stock. If
the Company successfully consummates a Registered Public Offering as described
in Section B.6(b), then the Company shall have the right to redeem all (but not
less than all) of the issued and outstanding shares of Series C Preferred Stock
that were originally issued as dividends on the Series B Preferred Stock being
redeemed in accordance with the provisions of Section B.4(a) pursuant to this
Section C.4(b) (the "Section C.4(b) Redemption") for a redemption price of $.01
per share of Series C Preferred Stock (the "Section C.4(b) Redemption Price").
The redemption shall occur on the same day on which the Registered Public
Offering is consummated (the "Section C.4(b) Redemption Date").
Not more than 60 days nor less than 10 days or such lesser amount as
may be practicable before the Section C.4(b) Redemption Date, the Company shall
send notice of the Section C.4(b) Redemption (the "Section C.4(b) Redemption
Notice") by first-class certified mail, postage prepaid and return receipt
requested, to the holders of the shares of Series C Preferred Stock to be
redeemed at their respective addresses as the same shall appear on the books of
the Company. The notice shall refer to this Section C.4(b) and shall specify the
anticipated Section C.4(b) Redemption Date. Before, on or after the Section
C.4(b) Redemption Date, each holder of Series C Preferred Stock to be redeemed
shall surrender to the Company the certificate or certificates representing such
shares, in the manner and at the place designated in the Section C.4(b)
Redemption Notice, and thereupon the Section C.4(b) Redemption Price of such
shares shall be payable to the order of the person whose name appears on such
certificate or certificates as the owner thereof and each surrendered
certificates shall be cancelled. Notwithstanding delivery of a Section C.4(b)
Redemption Notice in accordance with this Section C.4(b), any such notice shall
be deemed conditional and expressly subject to consummation of the Registered
Public Offering referred to hereinabove, and if said Registered Public Offering
shall not be consummated, any such Section C.4(b) Redemption Notice shall be
deemed void ab initio and of no force and effect.
(c) Redemption at Option of Majority of Holders. If the Company does
not successfully complete a Registered Public Offering as described in Section
B.4(a) on or before January 16, 2002, then at any time after January 16, 2002
but only at any time during the first 10 days after each Dividend Payment Date
(the "Redemption Election Period") the holders of a majority of the then issued
and outstanding shares of Series C Preferred Stock (the "Majority Holders") may
elect to require the Company to redeem shares of Series C Preferred Stock at an
E-27
amount equal to the Face Value plus an amount equal to accrued but unpaid
dividends to the respective dates of redemption of the shares (the "Optional
Redemption Price") in accordance with this Section C.4(c). The Majority Holders
may require the Company to redeem with respect to each Redemption Election
Period up to that number of shares of Series C Preferred Stock equal to 10% of
the aggregate number of shares of Series C Preferred Stock that the Company has
issued (whether or not then issued or outstanding, including shares of Series B
Preferred Stock that were issued and subsequently redeemed or otherwise
cancelled.)
If the Majority Holders elect to cause such a redemption, they shall so
notify the Company in writing (the "Redemption Exercise Notice"). Upon receipt
of the Redemption Exercise Notice the Company shall promptly (and in any event
within 10 days of receipt of the Redemption Exercise Notice) notify all holders
of Series C Preferred stock of such election by sending a notice (the "Optional
Redemption Notice") by first class certified mail, postage prepaid and return
receipt requested to the holders of Series C Preferred Stock at their respective
addresses as the same shall appear on the books of the Company. The Optional
Redemption Notice shall refer to this Section C.4(c) and shall specify the last
day of the month following the month during which the Company received the
Redemption Exercise Notice as the date on which shares of Series C Preferred
Stock will be redeemed in accordance with this Section C.4(c) (the "Optional
Redemption Date"). The Company shall promptly notify (the "Section C.4(c)
Redemption Notice") each holder of Series C Preferred Stock of the number of
shares of Series C Preferred Stock held by such holder which are being redeemed
pursuant to this Section. An election by the Majority Holders in accordance with
this Section C.4(c) shall be binding upon all holders of the Series C Preferred
Stock, and shares of Series C Preferred Stock shall be redeemed pro rata among
all holders of said shares to give effect to the provisions of this Section
C.4(c).
Upon receipt of the Section C.4(c) Redemption Notice, and before, on or
after the Optional Redemption Date, each holder of Series C Preferred Stock to
be redeemed shall surrender to the Company the certificate or certificates
representing such shares, in the manner and at the place designated in the
Section C.4(b) Redemption Notice, and thereupon the Optional Redemption Price of
such shares shall be payable to the order of the person whose name appears on
such certificate or certificates as the owner thereof and each surrendered
certificates shall be cancelled. The Company shall promptly reissue to such
holders (or their nominees) certificates evidencing the shares of Series C
Preferred Stock represented by the surrendered certificates which are not
redeemed.
(d) Redemption at Option of the Company. The Company may at any time
after January 16, 2003 redeem all of the then issued and outstanding shares of
Series C Preferred Stock as set forth in this Section C.4(d) if all accrued
dividends have been declared and paid to the holders of record of the
outstanding shares of Series C Preferred Stock through the most recent Dividend
Payment Date. The date of such redemption (the "Company Redemption Date") shall
be designated in the notice described in the succeeding paragraph and must be a
date within ten (10) business days after a Dividend Payment Date. The redemption
price for any redemption pursuant to this Section C.4(d) (the "Company
Redemption Price") shall be the Face Value of all of the outstanding shares of
Series C Preferred Stock plus an additional amount equal to 10% of the Face
Value of such outstanding shares of Series C Preferred Stock.
Not more than sixty (60) days nor less than fifteen (15) days before
the Company Redemption Date, the Company shall send notice of redemption
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pursuant to this Section C.4(d) by first-class, certified mail, postage prepaid
and return receipt requested, to all the holders of the shares of Series C
Preferred Stock at their respective addresses and the same shall appear on the
books of the Company. The notice shall refer to this Section C.4(d) and shall
specify the Company Redemption Date and the time and place of the redemption.
Before, on or after the Company Redemption Date, each holder of Series C
Preferred Stock shall surrender to the Company the certificate or certificates
representing such shares, in the manner and at the place designated in the
Company Redemption Notice, and thereupon the Company Redemption Price of such
shares shall be payable to the order of the person whose name appears on such
certificate or certificates as the owner thereof and each surrendered
certificate shall be cancelled.
(e) Provision for Payment. "Redemption Date" shall refer to the Section
C.4(a) Redemption Date (in the case of redemptions governed by Section C.4(a)),
a Section C.4(b) Redemption Date (in the case of redemptions governed by Section
C.4(b)), an Optional Redemption Date (in the case of redemptions governed by
Section C.4(c)), or a Company Redemption Date (in the case of redemptions
governed by Section C.4(d)). "Redemption Price" shall mean the amount to be paid
by the Company on a particular Redemption Date pursuant to Section C.4(a),
Section C.4(b), Section C.4(c), or Section C.4(d), as applicable. On or prior to
each Redemption Date, the Company shall deposit the Redemption Price of all
shares of Series C Preferred Stock designated for redemption on that Redemption
Date with a bank or trust corporation having aggregate capital and surplus in
excess of $100,000,000 as a trust fund for the benefit of the respective holders
of the shares designated for redemption and not yet redeemed, with irrevocable
instructions and authority to the bank or trust corporation to pay the
Redemption Price for such shares to their respective holders on or after the
related Redemption Date upon receipt of notification from the Company that such
holder has surrendered his share certificate to the Company pursuant to Section
C.4(a), Section C.4(b), Section C.4(c) or Section C.4(d) above. As of the
Redemption Date, the deposit shall constitute full payment of the shares being
redeemed on that Redemption Date, and from and after the Redemption Date the
shares so called for redemption on that Redemption Date shall be redeemed and
shall be deemed to be no longer outstanding, and the holders thereof shall cease
to be stockholders with respect to such shares and shall have no rights with
respect thereto except the rights to receive from the bank or trust corporation
payment of the Redemption Price of the shares, without interest, upon surrender
of their certificates therefor. The balance of any moneys deposited by the
Company pursuant to this Section C.4(e) remaining unclaimed at the expiration of
three (3) years following the Redemption Date shall thereafter be returned to
the Company upon its request expressed in a resolution of its Board of
Directors.
(f) Rights Upon Redemption. From and after the Redemption Date, unless
there shall have been a default in payment of the Redemption Price, all rights
of the holders of shares of Series C Preferred Stock to be redeemed on that
Redemption Date as holders of Series C Preferred Stock (except the right to
receive the Redemption Price without interest upon surrender of their
certificate or certificates) shall cease with respect to such shares, and such
shares shall not thereafter be transferred on the books of the Company or be
deemed to be outstanding for any purpose whatsoever. If the funds of the Company
legally available for redemption of shares of Series C Preferred Stock on any
Redemption Date are insufficient to redeem the total number of shares of Series
C Preferred Stock to be redeemed on such date, those funds which are legally
available will be used to redeem the maximum possible number of such shares
ratably among the holders of such shares to be redeemed based upon their
holdings of Series C Preferred Stock. At any time thereafter when additional
funds of the Company are legally available for the
E-29
redemption of shares of Series C Preferred Stock such funds will immediately be
used to redeem the balance of the shares which the Company has become obliged to
redeem on any Redemption Date, but which it has not redeemed. The shares of
Series C Preferred Stock not redeemed shall remain outstanding and entitled to
all the rights and preferences provided herein.
(g) Cancellation of Redeemed Stock. Any shares of Series C Preferred
Stock redeemed pursuant to this Section shall be canceled and shall not under
any circumstances be reissued; and the Company may from time to time take such
appropriate corporate action as may be necessary to reduce accordingly the
number of authorized shares of the Company's capital stock.
(h) Acquisition by Company. The Company will not, and will not permit
any subsidiary of the Company to, purchase or acquire any shares of Series C
Preferred Stock otherwise than pursuant to (A) the terms of this Section C.4 or
(B) an offer made on the same terms to all holders of Series C Preferred Stock
at the time outstanding.
C.5. Sinking Fund.
There shall be no sinking fund for the payment of dividends, or
liquidation preferences on the Series C Preferred Stock or the redemption of any
shares thereof.
D. Provisions Applicable to Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock, as described in Articles A, B and
C, supra.
D.1. Registration of Transfer of Preferred Stock. The Company will keep
at its principal office a register for the registration of the Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock. Subject
to and in accordance with the terms of the Certificate, upon the surrender of
any certificate representing shares of any series of Preferred Stock at the
Company's principal office, the Company will, at the request of the registered
holder of such certificate, execute and deliver, at the Company's expense, a new
certificate or certificates in exchange representing the number of shares and
series of Preferred Stock represented by the surrendered certificate. Each such
new certificate shall be registered in such name and shall represent such number
of shares of Preferred Stock as shall be requested by the holder of the
surrendered certificate, should be substantially identical in form to the
surrendered certificate, and the Preferred Stock represented by such new
certificate shall earn dividends from the date to which dividends shall have
been paid on the shares represented by the surrendered certificate.
D.2 Replacement.
Upon receipt by the Company of evidence reasonably satisfactory to it
of ownership of and the loss, theft, destruction or mutilation of any
certificate evidencing one or more shares of Preferred Stock the Company at its
expense will execute and deliver in lieu of such certificate, a new certificate
of like kind, representing the number of shares of Preferred Stock which shall
have been represented by such lost, stolen, destroyed or mutilated certificate,
dividends thereon shall accrue from the date to which dividends shall have been
paid on such lost, stolen, destroyed or mutilated certificate.
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D.3 Certain Events.
If any event occurs as to which, in the opinion of a majority of the
holders of Series B Preferred Stock, the provisions of this Certificate of
Designation, Preferences and Rights are not strictly applicable, or, if strictly
applicable, would not fairly protect the respective rights of the holders of the
Preferred Stock and the Company in accordance with the essential intent and
principles of such provisions, then the Board of Directors shall make an
adjustment in the application of such provision, in accordance with such
essential intent and principles, so as to protect such rights as aforesaid, but
in no event shall any adjustment have the effect of increasing the conversion
price as otherwise determined pursuant to the any of the provisions of this
Certificate (except as expressly set forth herein) or diminishing the rights of
the holders with regard to dividend payments and payments upon liquidation.
D.4 Restrictions on Transferability. Shares of Series B Preferred Stock
may be transferred only if transferred together with shares of Series C
Preferred Stock previously issued as dividends thereon to Section B.1, and not
otherwise. Shares of Series C Preferred Stock may not be transferred
independently and apart from the underlying shares of Series B Preferred Stock.
Certificates of shares of Series B Preferred Stock and Series C Preferred Stock
shall bear a legend in substantially the form set forth below evidencing such
restrictions.
"THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR THE LAWS OF ANY STATE AND
MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED
UNLESS AND UNTIL REGISTERED UNDER SUCH ACT OR LAWS, OR UNLESS THE
COMPANY HAS RECEIVED AN OPINION OF COUNSEL OR OTHER EVIDENCE,
SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH
REGISTRATION IS NOT REQUIRED."
"THE SALE OR TRANSFER OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE IS SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN
CERTIFICATE OF DESIGNATION, RIGHTS AND PREFERENCES OF THE
CORPORATION, WHICH PROHIBITS THE TRANSFER OF THIS CERTIFICATE
INDEPENDENTLY AND APART FROM A CERTIFICATE REPRESENTING SHARES OF
SERIES C PREFERRED STOCK, SUCH CERTIFICATE MAY BE OBTAINED UPON
WRITTEN REQUEST TO THE SECRETARY OF THE CORPORATION."
"THE SALE OR TRANSFER OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE IS SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN
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CERTIFICATE OF DESIGNATION, RIGHTS AND PREFERENCES OF THE
CORPORATION, WHICH PROHIBITS THE TRANSFER OF THIS CERTIFICATE
INDEPENDENTLY AND APART FROM A CERTIFICATE REPRESENTING SHARES OF
SERIES B PREFERRED STOCK, SUCH CERTIFICATE MAY BE OBTAINED UPON
WRITTEN REQUEST TO THE SECRETARY OF THE CORPORATION."
* * * * * *
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IN WITNESS WHEREOF, the Company has caused this Certificate of
Designation, Preferences and Rights to be executed by its President and attested
to by its Secretary this _____day of January, 1997.
Rio Grande, Inc.
By:
Its: President
ATTEST:
Its: Secretary
[Seal]
E-33
PREFERRED STOCK PURCHASE AGREEMENT
By and Between
Rio Grande, Inc.
and
Koch Exploration Company
January 16, 1997
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PREFERRED STOCK PURCHASE AGREEMENT
THIS PREFERRED STOCK PURCHASE AGREEMENT (as amended from time to time,
the "Agreement"), dated as of January 16, 1997, is by and between Koch
Exploration Company, a Kansas corporation ("Purchaser") and Rio Grande, Inc., a
Delaware corporation ("Rio Grande").
RECITALS
A. Rio Grande and its Subsidiaries are in the business of acquiring,
producing, selling and developing oil and gas properties and businesses relating
to the foregoing, including, without limitation, exploring for, producing,
transporting, marketing and selling oil, natural gas and related hydrocarbons.
B. Purchaser desires to purchase from Rio Grande, and Rio Grande
desires to issue and sell to Purchaser, 500,000 shares of Rio Grande's Series A
Preferred Stock, par value $.01 per share, and 500,000 shares of Rio Grande's
Series B Preferred Stock, par value $.01 per share, for an aggregate purchase
price of $10,000,000, and on the other terms and subject to the conditions
hereinafter set forth.
AGREEMENTS
In consideration of the recitals and the mutual promises, covenants and
agreements herein contained and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
intending to be legally bound hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION I.1. Definitions. Certain terms used herein shall
have the indicated meanings as set forth on Schedule 1.1.
SECTION I.2. Accounting Terms. All accounting terms, determinations and
computations not specifically defined herein shall be construed and made in
accordance with GAAP as applied in the preparation of the Rio Grande Audited
Financial Statements, including all notes thereto (but only to the extent such
application is consistent with GAAP).
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ARTICLE II
PURCHASE AND SALE
SECTION II.1. Authorization of Preferred Stock. Prior to
Closing, Rio Grande shall file the Certificate of Designation with
the Secretary of State for the State of Delaware.
SECTION II.2. Sale of Preferred Stock. Subject to the satisfaction of
the terms and conditions herein set forth and in reliance upon the respective
representations and warranties of the parties set forth herein, at the Closing
Rio Grande agrees to sell to Purchaser, free and clear of any liens, claims,
charges or encumbrances whatsoever, and Purchaser agrees to purchase from Rio
Grande, 500,000 shares of Series A Preferred Stock, par value $.01, and 500,000
shares of Series B Preferred Stock, par value $.01, (collectively, the
"Purchased Shares"), for an aggregate purchase price of $10,000,000 (the
"Purchase Price"). Rio Grande and Purchaser agree that such purchase price is
equal to $10.00 per share of Series A Preferred Stock and $10.00 per share of
Series B Preferred Stock. At the Closing, Rio Grande agrees to grant to
Purchaser an option to purchase an additional 200,000 shares of Series A
Preferred Stock (the "Option Shares") in accordance with and subject to the
terms and conditions set forth in Section 6.1.
SECTION II.3. Closing Date. The Closing shall take place at 10:00 a.m.,
San Antonio, Texas time, on January 16, 1997 or such other time and date
mutually agreed by Rio Grande and Purchaser (the "Closing Date") at the offices
of Rio Grande in San Antonio, or at such other place as may be mutually agreed
upon by Rio Grande and Purchaser.
SECTION II.4. Activity at Closing. At Closing, the following shall
occur:
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(a) Actions to be taken by Rio Grande. At Closing, Rio
Grande shall:
(i) Stock Certificates. Deliver to Purchaser (a) ten
certificates for Series A Preferred Stock, each representing
50,000 shares of such Series A Preferred Stock and in the
aggregate all such certificates representing 500,000 shares of
Series A Preferred Stock and (b) ten certificates for Series B
Preferred Stock, each representing 50,000 shares of such
Series B Preferred Stock and in the aggregate all such
certificates representing 500,000 shares of Series B Preferred
Stock, all of such certificates duly executed and registered
in the name of Purchaser (or in the name of such nominee as
Purchaser shall designate).
(ii) Registration Rights Agreement. Execute and
deliver to Purchaser the Registration Rights Agreement in form
and substance satisfactory to Purchaser and Rio Grande.
(iii) Swap Agreement. Deliver to Purchaser a true and
correct copy of a fully executed Master Commodity Swap
Agreement (the "Swap Agreement") between Rio Grande and Koch
Oil Company, a division of Koch Industries, Inc., pertaining
to crude oil in form and substance satisfactory to Purchaser,
Rio Grande and the Senior Lenders.
(iv) Officer's Certificate. Deliver to Purchaser a
certificate, executed by the President and Chief Financial
Officer of Rio Grande, to the effect that as of the Closing
Date (1) no default exists under the Senior Loan Agreements,
(2) the representations and warranties set forth in Section
3.1 are accurate in all material respects as of the Closing
Date as if made on the Closing Date, and (3) since the date
hereof there has been no Material Adverse Change.
(v) Legal Opinion. Deliver to Purchaser the opinion
of Cox & Smith Incorporated, counsel to Rio Grande, dated the
Closing Date, substantially in the form of Exhibit B.
(vi) Secretary's Certificate. Deliver to Purchaser
copies of each of the following, in each case certified by the
Secretary of Rio Grande to be in full force and effect on the
Closing Date:
(1) the Charter as of the Closing certified by
the Secretary of State for the State of Delaware as of a
date not more than seven days prior to the Closing;
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(2) the By-laws; and
(3) resolutions of the Board of Directors of Rio
Grande, the form and substance of which are satisfactory
to Purchaser, adopting and authorizing the execution and
filing of the Certificate of Designation, and authorizing
the execution, delivery and performance of this Agreement
and the Registration Rights Agreement and the
transactions contemplated hereby and thereby, including
the issuance and sale of the Purchased Shares.
(vii) Good Standing Certificates. Deliver to
Purchaser copies of a certificate of existence and, where a
jurisdiction issues good standing certificates, a good
standing certificate with respect to Rio Grande and for each
of the Subsidiaries of Rio Grande in their respective
jurisdictions of incorporation or formation from the
respective public authorities of their states of incorporation
or formation as of a date not more than fifteen days prior to
the Closing.
(viii) Expenses. Pay to Purchaser, by wire transfer
of immediately available funds to an account designated in
written instructions theretofore received by Rio Grande from
Purchaser, an amount equal to the lesser of $50,000 or the
amount of all direct out-of-pocket expenses reasonably
incurred by Purchaser in connection with the negotiation,
review and consummation of this Agreement and the transactions
contemplated hereby. In lieu of such wire transfer, such
amount may be credited against the Purchase Price at Closing,
thereby reducing the amount to be wire transferred by
Purchaser pursuant to Section 2.4(b)(i).
(b) Actions to be taken by Purchaser. At Closing, Purchaser
shall:
(i) Payment. Pay the Purchase Price (minus any
adjustments thereto pursuant to Section 2.4(b)(ix) above) by wire
transfer of immediately available funds to an account designated by Rio
Grande in written instructions theretofore received by Purchaser.
(ii) Registration Rights Agreement. Execute and
deliver to Rio Grande the Registration Rights Agreement.
(iii) Stockholders Agreement. Execute and deliver to
each of Robert A. Buschman and Guy Bob Buschman a Stockholders'
Agreement in form and substance satisfactory to Purchaser.
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(iv) Officer's Certificate. Deliver to Rio Grande a
certificate, executed by the Vice President of Purchaser to the effect
that as of the Closing Date the representations and warranties set
forth in Section III.2 hereof are true and accurate in all material
respects as of the Closing Date.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION III.1. Representations and Warranties of Rio Grande. Rio Grande
represents and warrants to Purchaser that as of the date hereof and as of the
Closing Date:
SECTION III.1.1. Corporate Organization and Standing; Power and
Authority. Rio Grande and each of its Subsidiaries is a corporation or limited
partnership (as the case may be) duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or formation,
and is duly qualified to do business and in good standing as a foreign
corporation or limited partnership in all jurisdictions in which it is required
to be qualified in order to do business, except where the failure to be so
qualified would not have a Material Adverse Effect on Rio Grande and its
Subsidiaries on a consolidated basis. Accurate and complete copies of the
Charter and By-laws and of the organizational documents of each of Rio Grande's
Subsidiaries have heretofore been delivered to Purchaser. Rio Grande and each of
its Subsidiaries has full power and authority to own or lease its properties and
to carry on its business as it is presently being conducted. Rio Grande has full
corporate power and authority to enter into this Agreement and the Registration
Rights Agreement and to perform its obligations hereunder and thereunder.
SECTION III.1.2. Authorized Capital Stock of Rio Grande.
(a) The authorized capital stock of Rio Grande will, as of the Closing
Date, consist of 12,000,000 shares of common stock, $.01 par value, (the "Common
Stock") and 3,000,000 shares of preferred stock, par value $.01 per share,
consisting of the following:
(i) 700,000 shares of Series A Preferred Stock, none
of which shall be issued or outstanding except for the 500,000 shares
issued to Purchaser at Closing;
(ii)500,000 shares of Series B Preferred Stock, none
E-39
of which shall be issued or outstanding except for the 500,000 shares
issued to Purchaser at Closing;
(iii) 500,000 shares of Series C Preferred Stock,
none of which shall be issued or outstanding; and
(iv) 1,300,000 shares of other preferred stock, the
rights and preferences of which having not been established by Rio
Grande's Board of Directors and none of which shares shall be issued or
outstanding.
Schedule 3.1.2(a) sets forth as of December 31, 1996 the following information:
(i) the number of issued and outstanding shares of Common Stock, (ii) the number
of shares of Common Stock issuable upon the exercise of options, warrants or
other rights of purchase which were exercisable as of December 31, 1996,
including the exercise price for each such share; (iii) the number of shares of
Common Stock issuable upon the exercise of options, warrants or other rights of
purchase which were not exercisable as of December 31, 1996, including the
exercise price for each such share and (iv) the number of shares of Common Stock
issuable pursuant to any other contract, option, warrant or commitment of any
character granted or issued by Rio Grande. The shares of Common Stock issuable
upon the exercise of all options, warrants or other rights of purchase have been
duly reserved for issuance upon such exercise. Since December 31, 1996, Rio
Grande has not issued or agreed to issue any shares of Common Stock or any
options, warrants or other rights to purchase Common Stock.
(b) On the Closing Date, after giving effect to the consummation of the
transactions contemplated by this Agreement, to the knowledge of Rio Grande no
person or group that would be required to report its ownership of Rio Grande's
equity securities on a Schedule 13D or an amendment thereto will be the legal or
beneficial owner (within the meaning of Rule 13d-3 promulgated by the Commission
pursuant to the Exchange Act) of 5% or more of the issued and outstanding Common
Stock other than as set forth on Schedule 3.1.2(b).
(c) No Person has any preemptive right to purchase or subscribe for any
shares of Common Stock, preferred stock or any other securities of Rio Grande.
Except for the Series B Preferred Stock (which is convertible into shares of
Common Stock) and except as disclosed on Schedule 3.1.2(a), there are no
outstanding securities of Rio Grande or any of its Subsidiaries which are
convertible into or exchangeable for any shares of Rio Grande capital stock;
there are no existing contracts, options, warrants, calls or similar commitments
of any character granted or issued by Rio Grande or any of its Subsidiaries
E-40
calling for or relating to the issuance or transfer of shares of capital stock
or any other securities of Rio Grande or any of its Subsidiaries; and there are
no stock appreciation rights, contingent interest certificates or coupons,
phantom stock rights or similar interests granted or issued by Rio Grande.
(d) Except as set forth on Schedule 3.1.2(d), the Company has
no obligation to register any of its Common Stock or other
securities under the Securities Act.
(e) Cumulative voting in the election of directors of Rio Grande is not
permitted. Except as set forth on Schedule 3.1.2(e), to Rio Grande's knowledge
there exist (and upon consummation of the transactions contemplated by this
Agreement, there will exist) (a) no voting trusts, voting agreements or other
arrangements by or among any of its stockholders regarding the voting of Rio
Grande Common Stock and (b) no agreements between any of the stockholders or one
or more groups of stockholders of Rio Grande who hold individually or
beneficially 5% or more of Rio Grande's equity securities and Rio Grande related
to Rio Grande or its capital stock.
SECTION III.1.3. Authorization and Enforceability. All corporate action
on the part of Rio Grande and its directors and stockholders necessary for the
authorization, execution, delivery and performance by Rio Grande of this
Agreement, the Registration Rights Agreement and the Acquisition Agreement (and
related agreements) to which Rio Grande is a party, as the case may be; the
consummation of the transactions contemplated hereby and thereby (including the
Acquisition); and the authorization of the Preferred Stock and issuance and
delivery of the Purchased Shares have been taken. Each of this Agreement and the
Acquisition Agreement is a legal, valid and binding obligation of Rio Grande,
enforceable against Rio Grande in accordance with its terms, except as limited
by bankruptcy, insolvency or other laws affecting creditors' rights generally or
by general equitable principles. Upon execution, the Registration Rights
Agreement will be a legal, valid and binding obligation of Rio Grande,
enforceable against Rio Grande in accordance with its terms, except as limited
by bankruptcy, insolvency or other laws affecting creditors' rights generally or
by general equitable principles. The Purchased Shares, when issued, sold and
delivered in accordance with the terms of this Agreement, and the Series C
Preferred Stock when issued and delivered pursuant to the Certificate of
Designation, and the Option Shares when issued, sold and delivered in accordance
with the terms of this Agreement, will be duly and validly issued, fully paid,
non-assessable and free and clear of all liens, charges, claims and
encumbrances. The shares of Common Stock issuable upon the conversion of Series
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B Preferred Stock have been duly reserved for issuance upon the conversion of
Series B Preferred Stock and, when issued upon the conversion of Series B
Preferred Stock in accordance with the Charter Certificate of Designation, will
be duly and validly issued, fully paid and non-assessable and free and clear of
all liens, charges, claims and encumbrances.
SECTION III.1.4. Title to and Condition of Assets. Except as set forth
on Schedule 3.1.4, Rio Grande and each of its Subsidiaries has good and valid
title to all properties, assets and rights of every name and nature now
reflected as being owned by it in the books and records from which it prepares
financial statements, free from all defects, liens, charges and encumbrances
whatsoever (other than insubstantial defects in title customary in the oil and
gas industry and other liens which singly and in the aggregate do not materially
detract from the value or impair the use of the affected properties). The
material tangible assets of Rio Grande and its Subsidiaries, which are
reasonably necessary for the operation of the business of Rio Grande and its
Subsidiaries taken as a whole, are in good working condition, ordinary wear and
tear excepted, are able to serve the function for which they are currently being
used, and to Rio Grande's knowledge there are no conditions or events which
would prevent continued normal operation of said material tangible assets.
SECTION III.1.5. Subsidiaries and Other Investments. Except as
indicated on Schedule 3.1.5, Rio Grande does not own, directly or indirectly,
any shares of capital stock of any corporation or hold any equity or ownership
interest in any other Person.
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SECTION III.1.6. Financial Statements. Copies of (a) the Rio Grande
Audited Balance Sheet, and related audited statements of income, earnings and
cash flows for the fiscal year then ended, including the notes thereto
(collectively, the "Rio Grande Audited Financial Statements") and (b) the
unaudited balance sheet of Rio Grande and its Subsidiaries as of October 31,
1996 as filed with the Commission on Form 10-QSB (the "Rio Grande Unaudited
Balance Sheet"), and related unaudited statements of income, earnings and cash
flow for the nine months then ended (collectively, the "Rio Grande Unaudited
Financial Statements"), are included in the Publicly Filed Documents that have
heretofore been delivered to Purchaser. The Rio Grande Audited Financial
Statements have been prepared from the books and records of Rio Grande and its
Subsidiaries in conformity with GAAP applied on a basis consistent with the
applicable prior date or period and present fairly in all material respects the
financial condition of Rio Grande and its Subsidiaries as at the Audit Date and
the results of operations and cash flow of Rio Grande and its Subsidiaries for
the periods indicated. The Rio Grande Unaudited Financial Statements have been
prepared from the books and records of Rio Grande and its Subsidiaries in
conformity with GAAP (subject to normal year-end audit adjustments and the
absence of footnotes) and present fairly in all material respects the financial
condition of Rio Grande and its Subsidiaries as at the Interim Balance Sheet
Date and the results of operations and cash flow of Rio Grande and its
Subsidiaries for the nine months then ended. The books of account of Rio Grande
and its Subsidiaries fairly reflect all material transactions of Rio Grande and
its Subsidiaries and are correct and complete in all material respects.
SECTION III.1.7. Absence of Undisclosed Liabilities. As of the Interim
Balance Sheet Date, Rio Grande had (and as of the date hereof Rio Grande has and
as of the Closing Date Rio Grande will have) no material liabilities (matured or
unmatured, fixed or contingent) known to it which are not fully reflected or
provided for on the Rio Grande Unaudited Balance Sheet as at the Interim Balance
Sheet Date), or any material loss contingency (as defined in State of Financial
Accounting Standards No. 5) known to it whether or not required by GAAP to be
shown on the Rio Grande Unaudited Balance Sheet, except obligations to perform
under commitments incurred in the ordinary course of business after the Interim
Balance Sheet Date. A portion of the monthly revenues received by Rio Grande's
Subsidiaries from offshore properties located in the Gulf of Mexico is deducted
by the operator to fund future estimated abandonment costs. The amount of the
abandonment escrow and the accrued platform abandonment expense recognized by
Rio Grande is based on the ratio of produced reserves to the remaining proved
producing reserves of the properties based upon information provided by the
operator of the respective properties.
E-43
SECTION III.1.8. Pro Forma Financial Information and Projections. A
true and correct copy of the Acquisition Agreement has heretofore been filed
with the Commission on December 16, 1996 as an Exhibit to a Periodic Report on
Form 10QSB and has been delivered to Purchaser. Purchaser has been furnished
copies of (i) a pro forma balance sheet of Rio Grande and its Subsidiaries as of
July 31, 1996 giving effect to the Acquisition as of such date (the "Pro Forma
Balance Sheet") and (ii) a projected statement of earnings and cash flows of Rio
Grande for the fiscal year ended January 31, 1997, projected statements of
earnings and cash flow for Rio Grande and its Subsidiaries for fiscal years
ended January 31, 1998 through January 31, 2007, the projected year end balance
sheet for Rio Grande and its Subsidiaries as of January 31, 1997, and the
projected year-end balance sheets for Rio Grande and its Subsidiaries for the
fiscal years ending January 31, 1998 through January 31, 2001 (collectively the
"Projections"). The Projections were prepared in good faith and were and are
based upon the assumptions reflected therein, which Purchaser acknowledges
having reviewed and having had an opportunity to discuss with representatives of
Rio Grande.
SECTION III.1.9. Minute Books. The copies of the minute books of Rio
Grande and its Subsidiaries which were delivered to Purchaser are complete in
all material respects and reflect all transactions referred to in such minutes
in all material respects.
SECTION III.1.10. Leases. Schedule 3.1.10 sets forth leases pursuant to
which Rio Grande and any of its Subsidiaries lease real or personal property.
Except as specifically noted on Schedule 3.1.10, all leases and other agreements
pursuant to which Rio Grande or its Subsidiaries lease from others real or
personal property that serve as collateral pursuant to the Senior Loan
Agreements are in good standing, valid and effective in accordance with their
respective terms without any material defaults thereunder, and to Rio Grande's
knowledge, all other leases and agreements pursuant to which Rio Grande or its
Subsidiaries lease from others real or personal property are in good standing,
valid and effective in accordance with their respective terms without any
material defaults thereunder.
SECTION III.1.11. Proprietary Rights. As of the date hereof and from
and after the Closing Date, each of Rio Grande and its Subsidiaries will own or
have the unrestricted right to use all Proprietary Rights that are necessary to
permit the business of Rio Grande and its Subsidiaries, as they propose to
conduct them, to be carried on after the Closing Date in the manner in which
they are currently conducted. To Rio Grande's knowledge, the use of such
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Proprietary Rights by Rio Grande and/or its Subsidiaries does not and will not
violate or infringe on the proprietary rights of any third party, there is no
claim, action, proceeding or investigation pending or threatened against Rio
Grande or any of its Subsidiaries with respect to any of such Proprietary Rights
and none of Rio Grande and its Subsidiaries have any knowledge that any third
party is infringing any of such Proprietary Rights. Neither Rio Grande nor any
of its Subsidiaries is in material default under any license or other agreement
relating to any of such Proprietary Rights and all such licenses and agreements
are valid, enforceable and in full force and effect and there is no event or
condition which, with notice or lapse of time, or both, would constitute an
event of default under such licenses or agreements.
SECTION III.1.12. Insurance. Rio Grande and its Subsidiaries maintain
insurance with reputable insurers with respect to their respective properties
and business against such casualties and contingencies and in such types and
amounts as are set forth on Schedule 3.1.12. All such insurance policies are in
full force and effect and Rio Grande and its Subsidiaries are not in default
under any such policy. True and complete summaries of such policies as in effect
on the date hereof have been provided to Purchaser. Such policies provide
insurance coverage adequate to comply with worker's compensation, transportation
and other laws applicable to Rio Grande and/or its Subsidiaries and any permits,
licenses, approvals and/or contracts to which Rio Grande and/or its Subsidiaries
are parties.
SECTION III.1.13. Taxes. Rio Grande and each of its Subsidiaries has
duly filed all tax reports and returns (including all federal, state and local
income tax, franchise tax, gross receipts, sales tax, wage tax and real and
personal property tax returns) required to be filed by it, has duly paid all
taxes and other charges (including customs duties) reflected on such tax reports
and returns as being due and has withheld all taxes required to be withheld by
it by any federal, state, local or foreign taxing authority, excepting in each
case such taxes as are being contested in good faith or where the failure to pay
such taxes would not have a Material Adverse Effect on the Company and its
Subsidiaries on a consolidated basis. The federal and state income tax returns
of Rio Grande and its Subsidiaries have never been audited. There are no
outstanding waivers by Rio Grande or any of its Subsidiaries to extend the
statute of limitations on any tax assessment or powers of attorney relating
thereto. Neither Rio Grande nor any of its Subsidiaries has filed with the
Internal Revenue Service any election or consent under Section 341(f) of the
Code. As of January 31, 1996, the net operating loss carryforward of Rio Grande
as reflected in its federal income tax return, Form 1120 was $16,964,968. To Rio
Grande's knowledge, there have been no transfers by or among holders of five
E-45
percent or more of the Common Stock that have resulted in a limitation on the
net operating loss carryforward.
SECTION III.1.14. Disclosure of Contracts and Arrangements. To Rio
Grande's knowledge, the exhibits listed in the Publicly Filed Documents
constitute all of the contracts that would be required to be filed pursuant to
Item 601(b)(4), (9), (10), (22), and (23) of Regulation S-B (as promulgated by
the Commission) if an Annual Report on Form 10-KSB were being filed on the
Closing Date. Accurate and complete copies of all such contracts have heretofore
been furnished to Purchaser, all contracts referenced in the first sentence
hereof are valid and in full force and effect, and neither Rio Grande nor any of
its Subsidiaries is in material default, and has not been notified by any other
party that it is in material default, under any contract described above. To Rio
Grande's knowledge, no party with whom Rio Grande or any of its Subsidiaries has
an agreement which is of material importance to Rio Grande or any of its
Subsidiaries is in default thereunder. Neither Rio Grande nor any of its
Subsidiaries is subject to any contract, the performance of which it reasonably
anticipates could have a Materially Adverse Effect or would be considered
unreasonably burdensome in its industry. The Annual Report on Form 10-KSB for
the fiscal year ended on the Audit Date, and all other Publicly Filed Documents
complied in form with all rules and regulations of the Commission and accurately
described the affairs and condition of Rio Grande and its Subsidiaries for the
periods indicated therein in all material respects.
SECTION III.1.15. No Adverse Changes. Except as set forth in Schedule
3.1.15, since the Interim Balance Sheet Date there has not been:
(a) any material adverse change in the condition
(financial or otherwise including environmental matters), assets,
liabilities, business or business prospects of Rio Grande or its
Subsidiaries from that shown by the Rio Grande Unaudited Balance Sheet
as at the Interim Balance Sheet Date;
(b) any dividend, declaration, setting aside or
payment or other distribution in respect of any of Rio Grande's capital
stock or any direct or indirect redemption, purchase or other
acquisition of any of such stock by Rio Grande;
(c) any labor dispute, or any other event,
development, or condition, of any character, or threat of the same,
materially adversely affecting the business or business prospects of
Rio Grande of its Subsidiaries;
(d) any asset or property of Rio Grande or its
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Subsidiaries made subject to a lien of any kind (other than
insubstantial defects in title customary in the oil and gas industry
and other liens which singly and in the aggregate do not materially
detract from the value or impair the use of the affected properties);
(e) any material liability or obligation incurred by
Rio Grande or its Subsidiaries, other than liabilities or obligations
incurred in the ordinary course of business;
(f) any waiver of any valuable right of Rio Grande or
its Subsidiaries or any cancellation of any debt or claim held by Rio
Grande or its Subsidiaries, in either case in an amount that would be
material to Rio Grande and its Subsidiaries on a consolidated basis;
(g) any issuance of any stock, bonds or other
securities (including options, warrants, or rights) of Rio Grande or
its Subsidiaries or any agreements or commitments respecting the same
(except as contemplated hereby);
(h) any sale, assignment or transfer of any material
tangible or intangible assets of Rio Grande or its Subsidiaries except
with respect to tangible assets in the ordinary course of business;
(i) any extraordinary increase, direct or indirect,
in the compensation paid or payable to any officer, director, employee
or agent of Rio Grande or its Subsidiaries;
(j) any wage or salary increase applicable to any
group or classification of employees generally (other than in
connection with the general salary plan of Rio Grande or its
Subsidiaries), any employment contract with or loan to any officer or
employee, or any material transaction of any other nature with any
director, officer, shareholder or employee of Rio Grande or its
Subsidiaries except on terms no less favorable to Rio Grande than would
be obtained in an arms length transaction with an unaffiliated third
party;
(k) any material transaction, contract or commitment
outside the ordinary course of business, except as contemplated by this
Agreement, the Acquisition Agreement, the Senior Loan Agreements (as
amended), the Reid Engagement and the transactions contemplated hereby
and thereby;
(l) any material change in its accounting methods or
practices; or
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(m) any event requiring the Company to file a Current
Report on Form 8-K.
SECTION III.1.16. Litigation. There is no action, suit, proceeding or
investigation pending or, to the knowledge of Rio Grande, threatened against or
affecting Rio Grande or any of its Subsidiaries or any property or right of Rio
Grande or any of its Subsidiaries, and neither Rio Grande nor any of its
Subsidiaries is aware of any facts which would provide a valid basis for any
investigation, action, suit, proceeding or claim.
SECTION III.1.17. Compliance with Laws. Rio Grande and each of its
Subsidiaries has complied with and is not in default in any respect under, any
law, ordinance, requirement, regulation, rule or order applicable to its
business, including equal employment opportunity laws, employee safety laws,
Environmental Laws, transportation, equipment safety laws and other governmental
regulations affecting the conduct of its business, except where the failure to
so comply would not have a Material Adverse Effect on Rio Grande and its
Subsidiaries or on a consolidated basis. Neither Rio Grande nor any of its
Subsidiaries is subject to any continuing court or administrative order, writ,
injunction or decree, applicable specifically to it, its business, property or
employees, or, is in default with respect to any order, writ, injunction or
decree of any court or federal, state, municipal or other governmental
department, commission, board, agency or instrumentality, domestic or foreign.
SECTION III.1.18. Absence of Conflicts. The execution and delivery of
this Agreement, the Registration Rights Agreement, the Swap Agreement, the
Stockholders Agreement and the Acquisition Agreement, the consummation of the
transactions provided for herein or therein (including the Acquisition) and the
fulfillment by Rio Grande and/or any of its Subsidiaries of the terms hereof or
thereof, do not and/or will not (a) conflict with or result in a breach of any
provision of the Charter or By-laws or the charter or by-laws or partnership
agreement or other organizational documents of any of its Subsidiaries, (b)
result in a conflict or default or give rise to any right of termination,
cancellation or acceleration under any of the terms, conditions or provisions of
any note, bond, mortgage, loan agreement, indenture, license, lease, agreement
or other instrument or obligation to which Rio Grande or any of its Subsidiaries
is a party or by which Rio Grande or any of its Subsidiaries is bound (including
the Senior Loan Agreements but excluding the 11.5% Notes), (c) violate any
order, writ, injunction, decree, or any statute, rule or regulation applicable
to Rio Grande or any of its Subsidiaries or any of the material properties or
assets of Rio Grande or any of its Subsidiaries or (d) conflict with or give
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rise to any right of termination under, or materially and adversely affect, any
material permit, license or authorization of any governmental authorizations
used or required by Rio Grande or any of its Subsidiaries.
SECTION III.1.19. Consents. No consent, approval or other action by any
local, state, federal or foreign governmental authority or any third person is
required in connection with the execution and delivery by Rio Grande of this
Agreement, the Registration Rights Agreement and the Acquisition Agreement and
the consummation of the transactions contemplated hereby and thereby except for
consents and approvals that have been obtained as of the Closing Date.
SECTION III.1.20. Employee Benefit Plans.
(a) No Plan is subject to Title IV of ERISA and no Plan is a
"multiemployer plan" (as that term is defined in sections 3(37) and 4001(a)(3)of
ERISA).
(b) To the extent required by applicable law or regulations, all Plans
have been accurately described in the Publicly Filed Documents and there have
been no material changes in the provisions thereof.
(c) All Plans comply and have been administered in form and operation
in all material respects with all requirements of applicable law.
(d) There are no actions, suits, or claims (except for the one
outstanding employment claim summarized on Schedule 3.1.20) pending or
threatened involving any Plan or the assets thereof and no facts exist which
could give rise to any such actions, suits or claims (other than routine claims
for benefits).
(e) No Plan provides pension, post-retirement medical or
post-retirement life insurance benefits (except as may be required by section
601 of ERISA or section 4980B of the Code).
(f) There have been no "prohibited transactions" (as described in
section 406 of ERISA) with respect to any Plan and neither the Company nor any
Subsidiary has otherwise engaged in any prohibited transaction.
(g) To the extent required, actuarially adequate accruals for all
obligations under each of the Plans are reflected in the Rio Grande Audited
Financial Statements and such obligations include a pro rata amount of the
contributions that would otherwise have been made in accordance with past
practices and applicable law for plan years which include the Closing Date.
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SECTION III.1.21. Labor Relations. Neither Rio Grande nor any of its
Subsidiaries is a party to any collective bargaining agreement. No strike, work
stoppage or other labor dispute relating to Rio Grande or any of its
Subsidiaries is pending or, to the knowledge of Rio Grande or any of its
Subsidiaries, is threatened and no application for certification of a collective
bargaining agent is pending or, to the knowledge of Rio Grande or any of its
Subsidiaries, is threatened. There are no unfair labor practice charges or
grievances pending or in process or, to Rio Grande's knowledge, threatened by or
on behalf of any employee of Rio Grande or any of its Subsidiaries nor have any
complaints been received by Rio Grande or any of its Subsidiaries or, to the
knowledge of Rio Grande or any of its Subsidiaries, threatened or filed, with
any federal, state or local governmental agencies alleging employment
discrimination or other violations of laws pertaining to such employees.
SECTION III.1.22. Compensation, Ownership and Conflicts of Interest.
The Publicly Filed Documents set forth in all material respects the information
required by Regulation S-B, Items 401-404 to be disclosed in such Publicly-Filed
Documents for the periods covered thereby. Since the dates and periods covered
by the Publicly-Filed Documents no material change has occurred in the type,
nature or amount of the arrangements and transactions covered by such items in
Regulation S-B.
SECTION III.1.23. Licenses and Permits. Rio Grande and each of its
Subsidiaries has all material licenses, permits and other authorizations of
governmental authorities, domestic and foreign, used or required by it in the
conduct of its business, is in full compliance with the material terms of and
requirements that are conditions to the existence of such material licenses,
permit and other authorization, and has not received any notice (nor does Rio
Grande or any of its Subsidiaries have any reason to believe) that revocation is
being considered with respect to any of such material licenses, permits or
authorizations.
SECTION III.1.24. Absence of Certain Payments. Neither Rio Grande nor
any of its Subsidiaries, or any Person acting with knowledge or authorization of
Rio Grande on behalf of Rio Grande or its Subsidiaries, has made any payment to
or conferred any benefit, directly or indirectly, on suppliers, customers,
employees or agents of suppliers or customers, or officials or employees of any
government or agency or instrumentality of any government (domestic or foreign)
or any political parties or candidates for office, which is or was unlawful.
SECTION III.1.25. Environmental Matters. Except as set forth in
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Schedule 3.1.25, (a) all facilities and property (including underlying
groundwater) owned, leased or operated by Rio Grande or any of its Subsidiaries
have been, and continue to be, owned, leased or operated by Rio Grande and its
Subsidiaries in material compliance with all Environmental Laws; (b) there have
been no past, and there are no pending or, to the knowledge of Rio Grande,
threatened (i) claims, complaints, notices or inquiries to, or requests for
information received by, Rio Grande or any of its Subsidiaries with respect to
any alleged violation of any Environmental Law, or (ii) claims, complaints,
notices or inquiries to, or requests for information received by, Rio Grande or
any of its Subsidiaries regarding potential liability under any Environmental
Law or under any common law theories relating to operations or the condition of
any facilities or property (including underlying groundwater) owned, leased or
operated by Rio Grande or any of its Subsidiaries; (c) there have been no
Releases of Hazardous Materials at, on or under any property now or previously
owned or leased or operated by Rio Grande or any of its Subsidiaries that,
singly or in the aggregate, have, or may reasonably be expected to have, a
Material Adverse Effect; (d) Rio Grande and its Subsidiaries have been issued
and are in material compliance with all material permits, certificates,
approvals, licenses and other authorizations required under Environmental Laws;
(e) no property now or previously owned, leased or operated by Rio Grande or any
of its Subsidiaries is listed or, to Rio Grande's knowledge proposed for
listing, on the National Priorities List pursuant to CERCLA, on the CERCLIS or
on any other federal or state list of sites requiring investigation or clean-up;
(f) there are no underground storage tanks, active or abandoned, including
petroleum storage tanks, on or under any property now or previously owned,
leased or operated by Rio Grande or any of its Subsidiaries that, singly or in
the aggregate, have, or may reasonably be expected to have, a Material Adverse
Effect; (g) neither Rio Grande nor any Subsidiary of Rio Grande has directly
transported or directly arranged for the transportation of any Hazardous
Material to any location which is listed or, to Rio Grande's knowledge proposed
for listing, on the National Priorities List pursuant to CERCLA, on the CERCLIS
or on any similar federal or state list or which is the subject of federal,
state or local enforcement actions or other investigations which may reasonably
be expected to lead to claims against Rio Grande or such Subsidiary thereof for
any remedial work, damage to natural resources or personal injury, including
claims under CERCLA; (h) there are no polychlorinated biphenyls, radioactive
materials or friable asbestos present at any property now or previously owned or
leased or operated by Rio Grande or any Subsidiary of Rio Grande that, singly or
in the aggregate, have, or may reasonably be expected to have, a Material
Adverse Effect; and (i) to the knowledge of Rio Grande, no conditions exist at,
on or under any property now or previously owned or leased or operated by Rio
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Grande or any of its Subsidiaries which, with the passage of time, or the giving
of notice or both, would give rise to liability under any Environmental Law
which may reasonably be expected to have a Material Adverse Effect.
SECTION III.1.26. Fees and Commissions. Except as set forth on Schedule
3.1.26, neither Rio Grande nor any Person acting on behalf of Rio Grande has
retained any finder, broker, agent, financial advisor or other intermediary
(collectively, "Rio Grande Intermediary") in connection with the transactions
contemplated hereby. Rio Grande shall indemnify and hold harmless Purchaser from
liability for any compensation to any Rio Grande Intermediary (including,
without limitation, any Persons listed in Schedule 3.1.26) and the fees and
expenses of defending against such liability or alleged liability.
SECTION III.1.27. Regulation G, Etc. None of the proceeds from the sale
of the Purchased Shares or Option Shares will be used, directly or indirectly,
for the purpose of purchasing or carrying any "margin stock" as defined in
Regulation G (12 CFR Part 207) of the Board of Governors of the Federal Reserve
System (herein called "margin stock") or for the purpose of reducing or retiring
any indebtedness which was originally incurred to purchase or carry margin stock
or for any other purpose which might constitute this transaction or transactions
relating to the Acquisition a "purpose credit" within the meaning of Regulation
G. Neither Rio Grande, any of its Subsidiaries nor any agent acting on its
behalf has taken or will take any action which might cause this Agreement to
violate Regulation G, T, U or X or any other regulation of the Board of
Governors of the Federal Reserve System or to violate the Exchange Act.
SECTION III.1.28. Senior Loan Agreements; No Restrictive Covenants. All
agreements between Rio Grande and/or its Subsidiaries and Comerica Bank-Texas
are listed on Schedule 3.1.28. Rio Grande has delivered to Purchaser true,
correct and complete copies of the Senior Loan Agreements, as in effect on the
date hereof and as at the Closing. Except as set forth in the Senior Loan
Agreements, there are no contractual arrangements to which Rio Grande or any of
its Subsidiaries is a party or is bound that would prohibit or restrict the
dividend payments on any series of Preferred Stock or the redemption, conversion
or issuance of any Preferred Stock or Common Stock in accordance with the terms
of this Agreement and/or the Certificate of Designation or that would limit or
prevent any Subsidiaries of Rio Grande from paying dividends or making advances
to its immediate corporate parent. The Senior Loan Agreements are in full force
and effect and there does not exist any default thereunder and Rio Grande is not
aware of any presently existing facts or circumstances which with the passage of
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of time would result in a default under the Senior Loan Agreements.
SECTION III.1.29. Holding Company and Investment Company Status.
Neither Rio Grande nor any of its Subsidiaries is a "holding company", or a
"subsidiary company" of a "holding company", or an "affiliate" of a "holding
company", or a "public utility", within the meaning of the Public Utility
Holding Company Act of 1935 or a "public utility" within the meaning of the
Federal Power Act. Neither Rio Grande nor any of its Subsidiaries is an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940 or an "investment adviser"
within the meaning of the Investment Advisers Act of 1940.
SECTION III.1.30. Absence of Untrue Statements. Neither this Agreement
nor any Schedule or Exhibit, nor any other document, certificate or statement
prepared by Rio Grande and furnished or to be furnished to Purchaser by Rio
Grande in connection with the transactions contemplated hereby, taken as a
whole, contains or will contain any untrue statement of a material fact or omits
or will omit to state a material fact necessary in order to make the statements
contained herein and therein not misleading. There is no fact relating to the
condition (financial or otherwise), properties, assets, operations, results of
operations, business or prospects of Rio Grande which could reasonably be
expected to have a Material Adverse Effect which has not been disclosed to
Purchaser.
SECTION III.2. Representations and Warranties of Purchaser. Purchaser
hereby represents and warrants to Rio Grande as of the date hereof and as of the
Closing Date as follows:
SECTION III.2.1. Purchase for Investment. Purchaser is acquiring the
Purchased Shares for investment and not with a present view to distributing all
or any part thereof in any transaction or series of transactions which would
constitute a "distribution" within the meaning of the Securities Act, subject at
all times to the right of such Purchaser to dispose of its property in its own
discretion subject to the provisions of Section 6.2. Purchaser acknowledges that
the Purchased Shares have not been registered under the Securities Act.
Purchaser agrees that Purchased Shares will bear a legend or legends
substantially to the effect of the legend or legends set forth in Section 6.2
hereto.
SECTION III.2.2. Investor Qualifications. Purchaser is an "accredited
investor" as defined in Rule 501 promulgated by the Commission pursuant to the
Securities Act.
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SECTION III.2.3. Due Authorization. Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Kansas and has full corporate power and authority to enter into this Agreement
and to perform the transactions contemplated herein. This Agreement, the
Registration Rights Agreement, the Stockholders' Agreement, and the Swap
Agreement have been duly and validly executed and delivered by Purchaser (or the
respective affiliate of Purchaser made a party thereto) and each constitutes the
legal, valid and binding obligation of Purchaser (or such affiliate),
enforceable in accordance with its terms, except as such enforceability may be
limited by applicable bankruptcy, insolvency, moratorium, reorganization or
other laws affecting creditors' rights generally or by the availability of
equitable remedies.
SECTION III.2.4. Consents. All consents, approvals, qualifications,
licenses, orders or authorizations of, or filings with, any governmental
authority required in connection with Purchaser's valid execution, delivery and
performance of this Agreement have been obtained or made, or will as of the
Closing Date have been obtained or made.
SECTION III.2.5. No Violation. The execution and delivery by Purchaser
of this Agreement and the execution and delivery by Purchaser and/or an
affiliate of Purchaser of all other agreements and instruments to be executed
and delivered by Purchaser or such affiliate in connection herewith, the
consummation by Purchaser and any such affiliate of the transactions provided
for herein and therein and contemplated hereby or thereby, and the fulfillment
by Purchaser or such Affiliate of the terms hereof and thereof, will not (a)
conflict with or result in a breach of any provision of Purchaser's or such
affiliate's certificate of incorporation or by-laws or (b) result in a default,
give rise to any right of termination, cancellation or acceleration, or require
any consent or approval, under any of the terms, conditions or provisions of any
note, bond, mortgage, loan agreement, indenture, license, agreement, lease or
any other instrument or obligation to which Purchaser or Purchaser's respective
affiliate is a party or by which it is bound.
SECTION III.2.6. Brokers and Finders. Neither Purchaser nor any Person
acting on behalf of such Purchaser has retained any finder, broker, agent,
financial advisor or other intermediary in connection with the transactions
contemplated by this Agreement.
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ARTICLE IV
CONDITIONS TO THE CLOSING
SECTION IV.1. Conditions to Obligations of Purchaser. The obligation of
Purchaser to purchase the Purchased Shares at the Closing is subject to the
fulfillment on or before the Closing of the following conditions:
SECTION IV.1.1. Representations and Warranties; Performance. (a) (i)
The representations and warranties set forth in Section 3.1 shall be accurate as
of the Closing Date and (ii) since the Interim Balance Sheet Date, there shall
have been no Material Adverse Change; and (b) Rio Grande shall have performed
all obligations and complied with all covenants and agreements required to be
performed or to be complied with by it under this Agreement on or prior to the
Closing Date.
SECTION IV.1.2. Stockholders' Agreement; Employment Agreements. Robert
A. Buschman, Guy Bob Buschman and Purchaser shall have executed a Stockholders'
Agreement and Purchaser shall have been provided copies of fully executed
Employment Agreements between Rio Grande and each of Guy Bob Buschman and Gary
Scheele, in each case such agreements being in form and substance satisfactory
to Purchaser.
SECTION IV.1.3. Consents. Any foreign, federal, state or local
governmental authority or regulatory agency having jurisdiction, to the extent
that its consent, approval or other action is required for the consummation of
the transactions contemplated by this Agreement or the agreements entered into
in connection herewith, shall have granted such required consents or approvals
and taken any other such required actions.
SECTION IV.1.4. Proceedings and Documents. As of the Closing, all
corporate and other proceedings in connection with the transactions contemplated
hereby, and all documents and instruments incident to such transactions, and all
documents to be delivered to Purchaser pursuant to Section 2.4, shall be
satisfactory in form and substance to, and shall have been delivered to,
Purchaser and, as to legal matters, its counsel, and Purchaser shall have
received at or prior to the Closing any other documents as it shall have
reasonably requested.
SECTION IV.1.5. Indebtedness; Acquisition. No default shall exist under
any of the Senior Loan Agreements and all conditions to the consummation of the
Acquisition (other than the payment of the purchase price) shall have been
satisfied on the day of Closing.
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SECTION IV.1.6. Qualifications. As of the Closing, all authorizations,
approvals or permits of, or filings with, any governmental authority, including
state securities or "Blue Sky" authorities, that are required by law in
connection with the lawful sale and issuance of the Purchased Shares shall have
been duly obtained by Rio Grande, and shall be effective as of the Closing.
SECTION IV.1.7. Authorization. Purchaser shall have received approval
from its upper management or board of directors, as the case may be, to close
the transactions contemplated hereunder.
SECTION IV.2. Conditions Precedent to Obligations of Rio Grande. The
obligation of Rio Grande to issue and sell the Purchased Shares at the Closing
is subject to the fulfillment on or before the Closing of the following
condition:
SECTION IV.2.1. Representations and Warranties. The representations and
warranties set forth in this Agreement made by Purchaser shall be accurate as of
the Closing Date as if made on the Closing Date.
SECTION IV.2.2. Senior Loan Agreements; Acquisition. The Senior Loan
Agreements shall have been modified and amended in such respects as shall in
form and substance be satisfactory to Rio Grande, and all conditions to the
consummation of the Acquisition (other than payment of the purchase price) shall
have been satisfied on the date of Closing.
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ARTICLE V
COVENANTS
Rio Grande hereby covenants and agrees with Purchaser as follows:
SECTION V.1. Regular Reporting Information. Rio Grande will furnish to
Purchaser by overnight courier not later than five days following the filing by
Rio Grande or any of its Subsidiaries with the Commission, a copy of each report
on Form 8-K, 10-QSB or 10-KSB under the Exchange Act, each registration
statement filed pursuant to the Securities Act and each communication delivered
to its stockholders as a class.
SECTION V.2. Other Information.
(a) Promptly after the occurrence thereof, Rio Grande will (unless
Purchaser specifically otherwise directs in writing) notify Purchaser of the
existence and nature of a default under the Senior Loan Agreements and the steps
that it intends to take to cure such default. During the pendency of any such
default, Rio Grande shall provide to Purchaser, upon Purchaser's reasonable
request, with reports as to such default and/or its efforts to cure same.
(b) Upon the reasonable request of Purchaser, Rio Grande will deliver
to Purchaser other information and data, not proprietary in nature (in the good
faith judgment of Rio Grande), pertaining to its business, financial and
corporate affairs to the extent that such delivery will not violate any then
applicable laws or any contracts of Rio Grande with third persons. Rio Grande
will permit any Person designated by Purchaser in writing, at the expense of
Purchaser, to visit and inspect any of the properties of Rio Grande, including
its books of account, and to discuss its affairs, finances and accounts with Rio
Grande's officers or directors, all at such reasonable times and as often as
Purchaser may reasonably request, all in a manner consistent with the reasonable
security and confidentiality needs of Rio Grande, provided, that Rio Grande
shall be under no such obligation (i) with respect to information deemed in good
faith by Rio Grande to be proprietary or (ii) if Rio Grande's board of directors
reasonably believes such visit, inspection or discussion would violate
applicable laws or any contract with third persons. Notwithstanding the
foregoing, Purchaser acknowledges that in connection with its review of
information and data pertaining to Rio Grande it will be provided information
that has not been publicly disclosed and may constitute material inside
information within the meaning of applicable securities laws. Purchaser agrees
E-57
to retain in confidence all such information, data, reports, compilations or
reviews, to refrain from disclosing any of such information to any third party
until and unless such information is otherwise publicly disclosed, to use such
information solely and exclusively as permitted by law, and to permit no use of
such information that would or might be detrimental to Rio Grande from a
competitive standpoint or otherwise.
(c) Business Plan. Not less than 30 days prior to the commencement of
each fiscal year, Rio Grande shall provide to Purchaser a business plan for such
fiscal year; provided, however, the business plan for the fiscal year ending
January 31, 1998 shall be provided to Purchaser within thirty days of Closing.
The business plan shall be in form and substance reasonably satisfactory to
Purchaser and shall in any event cover those items described in Exhibit D.
Within 30 days after the end of each fiscal quarter, Rio Grande shall provide to
Purchaser a summary comparing the business plan to Rio Grande's actual
performance during such fiscal quarter.
SECTION V.3. Rule 144 and Rule 144A Information. Rio Grande shall (i)
make and keep "current public information" "available" (as both such terms are
defined in Rule 144 under the Securities Act), (ii) timely file with the
Commission, in accordance with all rules and regulations applicable thereto, all
reports and other documents (x) required of Rio Grande for Rule 144, as it may
be amended from time to time (or any rule, regulation or statute replacing Rule
144), to be available to stockholders of Rio Grande and (y) required to be filed
under section 15(d) of the Exchange Act, notwithstanding that Rio Grande's duty
to file such reports or documents may be suspended or otherwise terminated under
the express terms of such provision and (iii) upon request by Purchaser, furnish
to Purchaser a written statement by Rio Grande that it has complied with the
reporting requirements of the Exchange Act and Rule 144, together with a copy of
the most recent annual or quarterly report of Rio Grande and such reports and
documents filed by Rio Grande with the Commission as may reasonably be requested
by Purchaser. Rio Grande shall, upon Purchaser's request or upon the request of
a prospective buyer (a "Prospective Buyer") of shares of Common Stock or
Preferred Stock, deliver to Purchaser and such Prospective Buyer, all
information described in Section (d)4(i) of Rule 144A under the Securities Act
(all of such information being "reasonably current" as described in such Section
(d)4(i)) if Rio Grande (x) is not subject to Section 13 or 15(d) of the Exchange
Act, and (y) is not exempt from reporting pursuant to Rule 12g3-2(b) under the
Exchange Act.
SECTION V.4. Liability Insurance. Rio Grande will maintain in full
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force and effect a policy or policies of standard comprehensive general
liability insurance underwritten by a financially sound and reputable U.S.
insurance company (as of the date the policy is secured) insuring Rio Grande's
and its Subsidiaries' properties and business against such losses and risks, and
in such amounts, as are adequate for its business and as are customarily carried
by entities of similar size engaged in the same or similar business. Such
policies shall include property loss insurance policies, with extended coverage,
sufficient in amount to allow the substantial replacement of any of its tangible
properties which might be damaged or destroyed by the risks or perils normally
covered by such policies. Rio Grande shall, upon the written request of
Purchaser, purchase liability insurance covering the directors of Rio Grande.
SECTION V.5. Dividend and Redemption Restrictions. Except as otherwise
permitted pursuant to the Certificate of Designation, so long as Purchaser is
the holder of any Preferred Stock, neither Rio Grande nor any of its
Subsidiaries shall enter into any contract or agreement except the Senior Loan
Agreements as in effect on the Closing Date which by its terms restricts
payments of dividends on, or redemptions or conversions of, shares of Rio
Grande's capital stock and/or, in the case of the Subsidiaries of Rio Grande,
restricts the making of advances to any Subsidiary of Rio Grande.
SECTION V.6. Payment of Notes. Upon Closing, Rio Grande shall segregate
into a separate bank account funds sufficient to pay and discharge the 11.5%
Notes. Rio Grande shall, as soon as reasonably practical after the Closing,
prepay the 11.5% Notes in accordance with the terms thereof.
SECTION V.7. Treatment of Preferred Stock. Rio Grande shall treat all
distributions (other than payments in redemption of the Preferred Stock that are
not with respect to accrued but unpaid dividends) paid by it on the Preferred
Stock as non-deductible dividends on all of its tax returns.
SECTION V.8. Price Risk Protection. Except as otherwise agreed by
Purchaser, so long as Purchaser owns any Preferred Stock in Rio Grande, Rio
Grande shall have price risk protection in place on Rio Grande's net oil and gas
production using a 6:1 gas/oil ratio. This risk protection shall be in the form
of one or more swap, hedge, floor, collar or similar agreements with a reputable
institution that has a S&P long term unsecured debt rating of at least AA or a
Moody's long term unsecured debt rating of Aa. Rio Grande shall have price risk
management in place at closing that will extend for at least 12 months. Rio
Grande shall inform Purchaser (or its affiliate) when Rio Grande desires to
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enter into a commodity price risk management agreement and shall grant Purchaser
(or its affiliate) the right to match the terms of any proposal for commodity
price risk management services. For the purposes of this Section, unless the
Senior Lenders consent otherwise, Rio Grande shall not put in place such price
risk protection in excess of the following amounts of barrels of oil (or its
equivalent) per day or at a price less than the following: (a) through October
31, 1997, 700 barrels of oil and $20.09; (b) for the period November 1, 1997
through October 31, 1998, 600 barrels of oil and $20.66, and (c) November 1,
1998 through October 31, 1999, 500 barrels of oil and $20.23.
SECTION V.9. Negotiations Regarding Marketing Agreement.
(a) Rio Grande will facilitate negotiations and discussions between
Purchaser (or affiliate of Purchaser) and Highland Energy Company with regard to
the prospective purchase by Purchaser (or such affiliate) of oil, natural gas
and related hydrocarbons (collectively, "Products") produced from mineral
properties owned or leased by Rio Grande; provided, however, any prospective
agreements between Purchaser (or an affiliate of Purchaser), Rio Grande and/or
Highland relating to the sale of Products to any entity affiliated with
Purchaser must be in form and substance satisfactory to Rio Grande and its
Senior Lenders and must provide to Rio Grande prices for its Product at least
equivalent to the prices that could be obtained in an arms length transaction
with an unaffiliated third party.
(b) Within thirty (30) days of Closing, Rio Grande shall enter into one
or more marketing agreements with Purchaser (or its affiliate) for the purchase,
sale and transportation of all oil and gas products (i) produced by Rio Grande,
(ii) that is currently under contract with another party to become effective at
such time when the existing contract expires, and (iii) subsequently acquired by
Rio Grande; provided, that such agreement shall be at arms-length, for a term of
not less than five years, and shall incorporate terms and conditions
satisfactory to Purchaser, Rio Grande and the Senior Lenders. Such marketing
agreement would automatically be renewed on a year to year basis for so long as
Purchaser (or its affiliate) owns a majority of the Series B Preferred Stock (or
the equivalent of a majority of Series B Preferred Stock in the event of the
conversion of such stock into Common Stock as provided herein). In respect to
such marketing agreements:
(i) Rio Grande would grant to Koch the right to purchase all
crude oil/condensate and/or natural gas owned or controlled by Rio Grande
(whether Rio Grande's owned/controlled interest is by lease, ownership or any
other device), wherever located in the United States;
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(ii) Koch would have the right, but not the obligation, to
purchase said crude oil/condensate and natural gas from Rio Grande on an
outright basis;
(iii) If Koch exercises this right in association with the
purchase of crude oil/condensate it would pay a price equal to the highest price
which Koch pays in the region where the crude/oil condensate is produced, for
comparable term, location, and quantities of crude oil. Any deviations in these
categories will trigger adjustments to the price paid. Prices payable for
natural gas and associated products shall be based on the prices Rio Grande
could receive under competitive marketing arrangements; and
(iv) the specific details regarding the associated crude oil
and natural gas purchase and sale transaction will be the subject of separate
crude oil and natural gas purchase and sales contracts between Koch and Rio
Grande.
SECTION V.10. Financing Right.
(a) Financing Right of First Refusal. Before offering or selling any
New Securities to any third party in a transaction principally designed to
provide additional debt or equity financing for Rio Grande and/or its
subsidiaries, Rio Grande shall first offer to sell such New Securities to
Purchaser. If Rio Grande intends to so issue New Securities, it shall give each
Holder written notice of such intention, describing the amount of funds Rio
Grande wishes to raise, the type of New Securities to be issued, the price
thereof and the general terms upon which Rio Grande proposes to effect such
issuance. Purchaser shall have fifteen (15) days from the date when any such
notice is received to agree to purchase all or part of such New Securities for
the price and upon the general terms and conditions specified in Rio Grande's
notice (or on such other terms as Rio Grande and Purchaser may agree upon during
such 15-day period) by giving written notice to Rio Grande stating the quantity
of New Securities to be so purchased.
If at the end of such 15-day period (or the end of the additional
ten-day period provided for overallotments) the Purchaser fails to exercise the
foregoing right of first refusal with respect to all of the New Securities being
offered by Rio Grande, Rio Grande may within 120 days after the end of such
15-day period sell such New Securities to a third party or parties at a price
and upon general terms no more favorable to the purchasers thereof than
specified in the foregoing notice given to Purchaser, provided that Rio Grande
must first reoffer the New Securities to Purchaser pursuant to the preemptive
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right described in subparagraph (b) below. In the event Rio Grande has not sold
such New Securities within such 120-day period, Rio Grande shall not thereafter
issue or sell any New Securities without first offering such New Securities to
Purchaser in the manner provided above in this subparagraph (a).
(b) Preemptive Right. This subparagraph (b) shall apply to any offers
by Rio Grande to issue or sell New Securities after Rio Grande first complies
with subparagraph (a) above. Rio Grande hereby grants to Purchaser a right of
first refusal to purchase, on a pro rata basis, all or any part of New
Securities (as defined below) which Rio Grande may, from time to time, propose
to sell and issue to third parties, subject to the terms and conditions set
forth below. The Purchaser's pro rata share, for purposes of this subparagraph
(b) shall equal a fraction, the numerator of which is the number of shares of
Common Stock then held by Purchaser and/or issuable upon conversion or exercise
of any Preferred Stock, convertible securities, options, rights or warrants then
held by Purchaser, and the denominator of which is the total number of shares of
Common Stock then outstanding or issuable upon conversion or exercise of any
Preferred Stock, convertible securities, options, rights or warrants.
If this subparagraph (b) applies, Rio Grande shall give Purchaser
written notice of its intention to issue or sell New Securities, describing the
type of New Securities to be issued, the price thereof and the general terms
upon which Rio Grande proposes to effect such issuance. Purchaser shall have
seven (7) business days from the date of when any such notice is received to
agree to purchase all or part of its pro rata share of such New Securities for
the price and upon the general terms and conditions specified in Rio Grande's
notice by giving written notice to Rio Grande stating the quantity of New
Securities to be so purchased.
If Purchaser fails to exercise the foregoing right of first refusal
with respect to any New Securities within such 7-day period (or the additional
seven-day period provided for overallotments), Rio Grande may within the balance
of the 120 days set forth in subparagraph (a) sell any or all of such New
Securities not agreed to be purchased by Purchaser, at a price and upon general
terms no more favorable to the purchasers thereof than specified in the notice
given to Purchaser pursuant to above. In the event Rio Grande has not sold such
New Securities within such 120-day period, Rio Grande shall not thereafter issue
or sell any New Securities without first offering such New Securities to
Purchaser in the manner provided in subparagraph (a) above.
(c) Assignment; Termination. This rights set forth in this Section 5.8
may not be assigned or transferred, except that such rights are assignable by
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Purchaser in whole or in part to any Permitted Assign. This Section 5.8
shall not apply to any New Securities first offered by Rio Grande after January
15, 2002.
SECTION V.11. Negative Covenants. For so long as Purchaser owns more
than $2,500,000 in aggregate face amount of the issued and outstanding Series A
Preferred Stock and/or Series B Preferred Stock (except with regard to V.II(m),
which shall apply regardless of ownership), without the prior written consent of
Purchaser (which consent may not be unreasonably withheld), Rio Grande hereby
agrees that it will not, and it will cause its Subsidiaries not to:
(a) authorize or issue shares of any class of stock
having any preference or priority as to dividends or assets superior to
or on a parity with any such preference or priority of the Preferred
Stock;
(b) permit the number of directors constituting the
Board of Directors of Rio Grande to be less than six or more than nine;
(c) reclassify any shares of any class of stock into
shares having any preference or priority as to dividends or assets
superior to or on a parity with any such preference or priority of the
Preferred Stock;
(d) engage in any business other than acquiring,
producing, selling and developing oil and gas properties; and exploring
for, producing, transporting, marketing and selling oil, natural gas
and related hydrocarbons;
(e) merge or consolidate with any Person (other than
mergers of wholly-owned Subsidiaries with and into each other or Rio
Grande), or directly or indirectly sell, lease or otherwise dispose of
assets involving an aggregate consideration of more than ten percent
(10%) of the book value of its assets on a consolidated basis at the
time of such sale, lease or disposition in any 12-month period, other
than in the ordinary course of business;
(f) repurchase or agree to repurchase any shares of
its Common Stock or any options, warrants or other rights to acquire
shares of its Common Stock except for the redemption of Preferred Stock
in accordance with the Charter and as permitted by the Certificate of
Designation, Section B.3(c)(v);
(g) unless all dividends accrued on shares of the
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Preferred Stock shall have been declared and paid, pay cash dividends
or make any other distribution on, or redeem, any shares of Common
Stock;
(h) without limiting (g), pay dividends or make any
other distribution on any shares of Common Stock at any time prior to
January 15, 1999;
(i) enter into, or permit a Subsidiary to enter into,
any new agreement or make any amendment to any existing agreement,
which by its terms would restrict Rio Grande's performance of its
obligations to holders of Preferred Stock;
(j) after the Closing, enter into any agreement with
any holder or prospective holder of any securities of Rio Grande
providing for the granting to such holder of registration rights,
preemptive rights, special voting rights or protection against
dilution;
(k) except as otherwise provided in Schedule 5.9(k),
incur any indebtedness for borrowed money or become a guarantor or
otherwise contingently liable for any such indebtedness except for
trade payables, purchase money obligations or other unsecured
indebtedness incurred in the ordinary course of business;
(l) incur any additional indebtedness if Rio Grande's
total indebtedness exceeds or if the additional debt will result in the
total indebtedness by Rio Grande exceeding 65% of the present value,
using a 12% discount factor ("PV12"), of the Proved Reserves (as
defined below) net to Rio Grande's interest. The PV12 shall be
determined by using reserve projections provided by an independent
engineering firm or firms as mutually agreed upon by Rio Grande and
Purchaser. Proved Reserves will be determined by utilizing 100% of the
proved developed producing reserve profile, 75% of the proved developed
not producing reserve profile and 50% of the proved undeveloped reserve
profile. The operating costs used in the appraisal shall be based on
the prior twelve (12) months average lease operating costs disregarding
the lowest and highest cost months in such twelve (12) month period.
The oil and gas prices shall be based on the then current futures price
strip less any pertinent adjustments for basis differential and any
other associated burdens. Capital expenditures that are necessary for
development of such reserves shall be included. Purchaser may request a
redetermination of the value of Rio Grande's reserves if the Senior
Lenders have not required a redetermination within 120 days of request
and if in Purchaser's reasonable assessment, the total debt of Rio
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Grande has exceeded 65% of the PV12 value for more than 90 consecutive
days;
(m) directly or indirectly use or permit to be used
the "Koch" name (or the name of Purchaser or any of Purchaser's
affiliates) in any public announcements, press releases, filings with
any governmental authority (including, without limitation, filings made
pursuant to the Securities Act or the Exchange Act or other information
provided to the Commission whether or not deemed "filed" pursuant to
the Securities Act or the Exchange Act), marketing or advertising
materials or otherwise, except as required by law in the good faith
judgment of Rio Grande;
(n) reduce the percentage of shares of Preferred
Stock required to consent to any of the above matters, or alter or
negate the need for such consent; or
(o) grant or issue at an exercise price less than the
Conversion Price (as defined in the Certificate of Designation) any
rights, options, or warrants to directly or indirectly subscribe for,
purchase, or otherwise acquire shares of Common Stock, or any evidences
of indebtedness, shares, or other securities directly or indirectly
convertible into or exchangeable for shares of Common Stock, that would
constitute upon issuance Adjustment Shares pursuant to Section
B.5(a)(i) of the Certificate of Designation.
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ARTICLE VI
OPTION SHARES; TRANSFER
SECTION VI.1. Option to Purchase. For purposes of this Agreement, the
shares of Series A Preferred Stock to be issued pursuant to Section 2.2 of this
Agreement as Purchased Shares are referred to as the "Initially Issued Series A
Preferred Stock." Rio Grande hereby grants to Purchaser the right and option to
purchase an additional four-tenths (0.40) of one (1) share of Series A Preferred
Stock for each one (1) share of Initially Issued Series A Preferred Stock then
held by Purchaser or such subsequent holder; provided, however, this option
shall expire and be of no further force and effect upon redemption in full of
the Initially Issued Series A Preferred Stock. The exercise price shall be $4.00
for each four-tenths (0.40) of one (1) share of Series A Preferred Stock so
purchased (or $10.00 for each whole share of Series A Preferred Stock so
purchased), meaning that if such option is exercised in full with respect to all
500,000 shares of Initially Issued Series A Preferred Stock, would be entitled
to purchase 200,000 shares of Series A Preferred Stock for an aggregate exercise
price of $2,000,000. The foregoing option may be exercised by Purchaser at any
time on or after January 16, 1999 but on or before January 16, 2000 (the "Option
Period"). The option may be exercised in whole or in part and may be exercised
at any time and from time to time during the Option Period.
To exercise this option, Purchaser shall deliver to Rio Grande (i) the
certificate or certificates for the shares of the Initially Issued Series A
Preferred Stock as to which the option to purchase is being exercised, (ii)
written notice stating that the Purchaser is electing to exercise its option to
purchase with respect to all or any number of the shares of Initially Issued
Series A Preferred Stock represented by such certificate or certificates,
specifying the number of shares of Series A Preferred Stock to be purchased as a
result of such exercise and specifying Purchaser's or such holder's name or the
names of the nominees in which Purchaser wishes the certificate or certificates
of Series A Preferred Stock to be issued and (iii) a certified or cashier's
check payable to the order of Rio Grande in the amount of the purchase price of
the shares being purchased pursuant to the exercise of such option. Upon receipt
of such notice, certificate and purchase price, Rio Grande shall promptly issue
the additional purchased shares and reissue the Initially Issued Series A
Preferred Stock evidenced by the certificate so delivered, in each case in the
names specified in the notice. Once the option has been exercised with respect
to a share of Initially Issued Series A Preferred Stock, the foregoing option
shall terminate as to that share of Initially Issued Series A Preferred Stock
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but not as to any other share of Initially Issued Series A Preferred Stock as to
which the option to purchase had never been exercised.
SECTION VI.2. Restrictive Legends. (a) Except as otherwise permitted by
this Section 6.2, each certificate representing Preferred Stock constituting
"restricted securities" as defined in Rule 144 under the Securities Act
("Restricted Securities") shall bear a legend substantially in the form shown
below:
"THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR THE LAWS OF ANY STATE AND MAY
NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED UNLESS AND
UNTIL REGISTERED UNDER SUCH ACT OR LAWS, OR UNLESS THE COMPANY HAS
RECEIVED AN OPINION OF COUNSEL OR OTHER EVIDENCE, SATISFACTORY TO THE
COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED."
(b) In addition to the legend set forth in Section 6.2(a), each
certificate representing Series B Preferred Stock shall bear a legend
substantially in the form shown below:
"THE SALE OR TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
IS SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN CERTIFICATE OF
DESIGNATION, RIGHTS AND PREFERENCES OF THE CORPORATION, WHICH PROHIBITS
THE TRANSFER OF THIS CERTIFICATE INDEPENDENTLY AND APART FROM A
CERTIFICATE REPRESENTING SHARES OF SERIES C PREFERRED STOCK, SUCH
CERTIFICATE MAY BE OBTAINED UPON WRITTEN REQUEST TO THE SECRETARY OF
THE CORPORATION."
(c) In addition to the legend set forth in Section 6.2(a), each
certificate representing Series C Preferred Stock shall bear a legend
substantially in the form shown below:
"THE SALE OR TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
IS SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN CERTIFICATE OF
DESIGNATION, RIGHTS AND PREFERENCES OF THE CORPORATION, WHICH PROHIBITS
THE TRANSFER OF THIS CERTIFICATE INDEPENDENTLY AND APART FROM A
CERTIFICATE REPRESENTING SHARES OF SERIES B PREFERRED STOCK, SUCH
CERTIFICATE MAY BE OBTAINED UPON WRITTEN REQUEST TO THE SECRETARY OF
THE CORPORATION."
SECTION VI.2.1. Notice of Proposed Transfer; Opinions of Counsel.
Prior to any transfer of any Restricted Securities which are not
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registered under an effective registration statement under the Securities Act,
the holder thereof will give written notice to Rio Grande of such holder's
intention to effect such transfer, describing in reasonable detail the manner of
the proposed transfer. If any such holder delivers to Rio Grande (i) an opinion
of counsel reasonably acceptable to Rio Grande and its counsel to the effect
that the proposed transfer may be effected without registration of such
Restricted Securities under the Securities Act and applicable blue sky laws and
(ii) such other documents, certificates or information pertaining to such
transfer as Rio Grande may reasonably request, Rio Grande agrees to transfer
such Restricted Securities to the proposed transferee; provided, however, the
newly issued certificate will contain a legend substantially in the form shown
in Section VI.2, above.
SECTION VI.2.2. Issuance of Certificates Without Legend. Upon receipt
of evidence satisfactory to Rio Grande confirming that some or all of the shares
of Preferred Stock or common stock issued upon conversion of the Series B
Preferred Stock are no longer Restricted Securities, Rio Grande shall reissue or
shall authorize its transfer agent to reissue certificates representing such
shares without the restrictive legend provided for in Section VI.2 hereof. In
connection with any such request for reissuance, Rio Grande may require an
opinion of counsel, satisfactory to Rio Grande in form and substance, that the
shares in question are no longer Restricted Securities.
ARTICLE VII
MISCELLANEOUS
SECTION VII.1. Written Waivers. Any waiver, permit, consent or approval
of any kind or character on the part of any party of any provisions or
conditions of this Agreement must be made in writing and shall be effective only
to the extent specifically set forth in such writing.
SECTION VII.2. Indemnification.
SECTION VII.2.1 By Rio Grande. Rio Grande hereby indemnifies and agrees
to defend and hold Purchaser harmless from, against and in respect of any and
all claims, demands, losses, costs, expenses, obligations, liabilities, damages,
recoveries and deficiencies, including interest, penalties and attorneys' fees,
that such Purchaser shall incur or suffer, which arise, result from, or relate
to the breach or failure of performance by Rio Grande, or the falsity of any of
the representations or warranties, covenants or agreements in this Agreement or
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the Registration Rights Agreement, or in any certificate or other instrument
furnished or to be furnished by Rio Grande or any Subsidiary hereunder or
thereunder.
SECTION VII.2.2 By Purchaser. Purchaser hereby indemnifies and agrees
to defend and hold Rio Grande harmless from, against and in respect of any and
all claims, demands, losses, costs, expenses, obligations, liabilities, damages,
recoveries and deficiencies, including interest, penalties and attorneys' fees,
that Rio Grande shall incur or suffer, which arise, result from, or relate to
the breach or failure of performance by Purchaser, or the falsity of any of the
representations or warranties, covenants or agreements in this Agreement or the
Registration Rights Agreement, or in any certificate or other instrument
furnished or to be furnished by Purchaser or any Subsidiary hereunder or
thereunder.
SECTION VII.3. Successors and Assigns. This Agreement is binding upon
Rio Grande and Purchaser and inures to the benefit of Rio Grande, Purchaser and
their respective successors and Permitted Assigns.
SECTION VII.4. Severability. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision will be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
SECTION VII.5. Descriptive Headings. The descriptive headings of this
Agreement are inserted for convenience of reference only and do not constitute a
part of this Agreement.
SECTION VII.6. Notices. Any notices required or permitted to be given
hereunder shall be delivered personally, sent by overnight courier or mailed,
registered or certified mail, return receipt requested, to the following
addresses, and shall be deemed to have been received on the day of personal
delivery, one Business Day after deposit with an overnight courier or three
business days after deposit in the mail:
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If to Purchaser, to: Koch Exploration Company
4111 E. 37th Street North
Wichita, Kansas 67220
Attention: Vice President
If to Rio Grande, to: Rio Grande, Inc.
10101 Reunion Place Union Square
Suite 210
San Antonio, Texas 78216
Attention: President and Chief
Executive Officer
or to such other address as any party may specify in a written notice given to
the other parties hereto.
SECTION VII.7. Governing Law. The corporate law of Delaware will govern
all issues concerning the relative rights of holders of the Preferred Stock as
such. All other questions concerning the construction, validity and
interpretation of this Agreement and the Exhibits and Schedules shall be
governed by the internal law, and not the law of conflicts of, the State of
Texas, and the performance of the obligations imposed by this Agreement, shall
be governed by the laws of the State of Texas applicable to contracts made and
wholly to be performed in that state.
SECTION VII.8. Exhibits and Schedules. All Exhibits and Schedules are
an integral part of this Agreement.
SECTION VII.9. Final Agreement. This Agreement, together with those
documents expressly referred to herein including the Registration Rights
Agreement, constitute the final agreement of the parties concerning the matters
referred to herein, and supersedes all prior agreements and understandings with
respect to such matters.
SECTION VII.10. Execution in Counterparts. This Agreement may be
executed in any number of counterparts, each of which when so executed and
delivered shall be deemed an original, and such counterparts together shall
constitute one instrument. A photographic, photostatic, facsimile or other
similar reproduction of a writing signed by a party shall be regarded as an
executed original. Delivery of counterparts by facsimile shall be deemed
delivery of the original by a party.
SECTION VII.11. Further Assurances. Upon reasonable request of either
party, the other party hereto will on and after the Closing Date take such
reasonable actions as may be required to carry out the purposes of this
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Agreement, the terms of the Certificate of Designation and the Registration
Rights Agreement.
SECTION VII.12. Remedies Cumulative. The remedies provided in this
Agreement shall be cumulative and shall not preclude the assertion or exercise
of any other rights or remedies available by law, in equity or otherwise.
SECTION VII.13. Effect of Investigation. Any due diligence review,
audit or other investigation or inquiry undertaken or performed by or on behalf
of Purchaser shall not limit, qualify, modify or amend the representations,
warranties or covenants of, or indemnities by Rio Grande made or undertaken
pursuant to this Agreement, irrespective of the knowledge and information
received (or which should have been received therefrom) by Purchaser; provided,
however, if Purchaser or any representative thereof becomes aware of facts or
circumstances constituting an actual or an alleged breach or falsity of a
representation, warranty or covenant of Rio Grande prior to Closing, and
notwithstanding its knowledge of such facts or circumstances, Purchaser acquires
the Purchased Shares as set forth herein, Purchaser may not thereafter assert
such alleged breach or falsity as a grounds for relief pursuant to Section
VII.2.1 of this Agreement or otherwise.
SECTION VII.14. Survival and Renewal of Representations and Warranties.
The representations, warranties, indemnities and covenants of Rio Grande
contained herein shall survive the Closing. The representations and warranties
of Rio Grande contained herein shall be made on the date hereof and deemed
remade on and as of the Closing Date.
SECTION VII.15. Fees and Expenses. Rio Grande will bear all of its own
expenses in connection with the preparation, execution and negotiation of this
Agreement and the Registration Rights Agreement, and the transactions
contemplated hereby and thereby. If Purchaser does not close the purchase of the
Purchased Shares as a result of a breach of representation, warranty or covenant
by Rio Grande, Rio Grande shall pay to Purchaser the sum of $100,000 in same day
or immediately available funds.
SECTION VII.16. Interpretation. In this Agreement, unless a clear
contrary intention appears:
(a) the singular number includes the plural number and vice versa;
(b) reference to any Person includes such Person's successors and
assigns but, if applicable, only if such successors and assigns are permitted by
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this Agreement, and reference to a Person in a particular capacity excludes such
Person in any other capacity or individually;
(c) reference to any gender includes each other gender;
(d) reference to any agreement (including this Agreement and the
Schedules and Exhibits), document or instrument means such agreement, document
or instrument as amended or modified and in effect from time to time in
accordance with the terms thereof and, if applicable, the terms hereof and
reference to any promissory note includes any promissory note which is an
extension or renewal thereof or a substitute or replacement therefor;
(e) reference to any applicable law means such applicable law as
amended, modified, codified, replaced or reenacted, in whole or in part, and in
effect from time to time, including rules and regulations promulgated thereunder
and reference to any section or other provision of any applicable law means that
provision of such applicable law from time to time in effect and constituting
the substantive amendment, modification, codification, replacement or
reenactment of such section or other provision;
(f) reference to any Article, Section, Schedule or Exhibit means such
Article or Section hereof or Schedule or Exhibit hereto;
(g) "hereunder", "hereof", "hereto" and words of similar import shall
be deemed references to this Agreement as a whole and not to any particular
Article, Section or other provision hereof; and
(h) "including" (and with correlative meaning "include") means
including without limiting the generality of any description preceding such
term.
ARTICLE VIII
TERMINATION
SECTION VIII.1. Termination. This Agreement may be terminated at any
time prior to the Closing:
(a) by mutual consent of Purchaser and Rio Grande;
(b) by either Rio Grande or Purchaser if the Closing
shall not have occurred by January 17, 1997, provided that the failure
to consummate the transactions contemplated hereby is not a result of
the failure by the party so electing to terminate this Agreement to
perform any of its obligations hereunder.
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SECTION VIII.2. Effect of Termination. Except for the obligations of
Section 7.15 hereof, if this Agreement shall be terminated pursuant to Section
8.1, all obligations, representations and warranties of the parties hereto under
the Agreement shall terminate and there shall be no liability of any party to
another party.
The parties hereto have executed this Agreement as of the date first
set forth above.
Rio Grande, Inc.
By:
Its:
Koch Exploration Company
By:
Its:
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SCHEDULES
1.1 Definitions
1-A Publicly Filed Documents
3.1.2(a) Capital Stock
3.1.2(b) 5% Owners of Securities
3.1.2(d) Registration Rights
3.1.2(e) Voting Agreements
3.1.5 Subsidiaries and Investments
3.1.10 - Leases and Agreements
3.1.12 Insurance
3.1.15 - No Adverse Change Exceptions
3.1.20 - Employee Matters
3.1.25 - Environmental Matters
3.1.26 - Fees and Commissions
3.1.28 - Senior Loan Agreements
5.9(k) Permitted Indebtedness
EXHIBITS
A - Certificate of Designation
B - Opinion of Counsel - Cox & Smith
C - Form of Registration Rights Agreement
D - Business Plan
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Schedule 1.1
Defined Terms
"Acquisition" - means the acquisition and related transactions
contemplated by the Acquisition Agreement.
"Acquisition Agreement" - means the Purchase and Sale Agreement
dated November 20,, 1996 by and between Rio Grande Offshore, Ltd. and Brechtel
Energy Corporation.
"Agreement" - has the meaning assigned to it in the Preamble.
"Audit Date" - means January 31, 1996.
"Business Day" - means any day other than Saturday, Sunday or a
day on which national banks located in the State of Kansas are authorized to be
closed for business.
"By-laws" - means the by-laws of Rio Grande as in effect on the
Closing Date and certified pursuant to Section 2.4.
"CERCLA" - means the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended.
"CERCLIS" - means the Comprehensive Environmental Response
Compensation Liability Information System List.
"Certificate of Designation" - means the Certificate of
Designation, Preferences and Rights in the form of Exhibit A to be filed by Rio
Grande with the Secretary of State for the State of Delaware on or before the
Closing Date.
"Charter" - means the certificate of incorporation and amendments
thereto (including the Certificate of Designation) of Rio Grande as in effect on
the Closing Date and filed with the Secretary of State for the State of
Delaware.
"Closing" - means the closing of the transactions contemplated by
this Agreement.
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"Closing Date" - means the date specified in Section 2.3 upon
which the Closing shall occur.
"Code" - means the Internal Revenue Code of 1986, as amended.
"Commission" - means the Securities and Exchange Commission.
"Common Stock" - means the common capital stock of Rio Grande
described in Section 3.1.2.
"11.5% Notes" - means the indebtedness of Rio Grande to the
holders of the 11.5% Notes issued pursuant to the Note Purchase Agreement, dated
September 27, 1995, by and among Rio Grande, Rio Grande Drilling Company and
various purchasers, as amended, said Note Purchase Agreement, as amended, being
filed as exhibits to the Publicly Filed Documents.
"Environmental Laws" means all applicable federal, state or local
statutes, laws, ordinances, codes, rules, and regulations in effect at the time
in question (including consent decrees involving Rio Grande or any of its
Subsidiaries and administrative orders) relating to public health and safety and
protection of the environment.
"ERISA" - means the Employee Retirement Income Security Act of
1974, as amended.
"Exchange Act" - means the Securities Exchange Act of 1934, as
amended.
"GAAP" - means generally accepted accounting principles,
consistently applied, as in effect from time to time.
"Hazardous Material" means
(a) any "hazardous substance", as defined by CERCLA;
(b) any "hazardous waste", as defined by the Resource Conservation
and Recovery Act, as amended;
(c) any petroleum product; or
(d) any pollutant or contaminant or hazardous, dangerous or toxic
chemical, material or substance not mentioned above which is regulated under any
Environmental Law.
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"Holder" - means Purchaser or any Permitted Assign which hereafter owns
shares of Preferred Stock or Common Stock issued upon conversion of Preferred
Stock.
"Interim Balance Sheet Date" - means October 31, 1996.
"Material or "material" - means, when used in a definition or used to
qualify information to be covered by a representation or warranty by Rio Grande,
a matter that would be "material" within the meaning of Rule 405 of Regulation C
as promulgated by the Commission.
"Material Adverse Change" means a change(s) as of a specified date, in
the business, assets, liabilities, results of operation, condition (financial or
otherwise) or prospects of Rio Grande or its Subsidiaries that would reasonably
be considered, singly or in the aggregate, material and adverse with respect to
Rio Grande and its Subsidiaries on a consolidated basis.
"Material Adverse Effect" or "Materially Adverse Effect" means an
event, condition, circumstance or arrangement that could, singly or in the
aggregate, have a material adverse effect on the business, assets, liabilities,
results of operation, condition (financial or otherwise) or prospects of Rio
Grande and its Subsidiaries on a consolidated basis.
"New Securities" - means any capital stock of Rio Grande whether now or
hereafter authorized and rights, options or warrants to purchase capital stock,
and securities of any type whatsoever which are, or may become, convertible into
capital stock; provided, however, that the term "New Securities" does not
include (i) the Preferred Stock issuable under this Agreement or pursuant to the
Certificate of Designation or the shares of Common Stock issuable upon
conversion of Preferred Stock; (ii) securities offered to the public pursuant to
a registered public offering; (iii) securities issued as all or a portion of the
consideration for or in connection with the acquisition of (a) mineral
properties; (b) another corporation or business entity by merger, combination or
otherwise, or the purchase of substantially all the assets of such corporation
or other reorganization resulting in the ownership by Rio Grande of not less
than 51% of the voting power of such corporation or business entity; (iv) not
more than 300,000 shares of Common Stock or rights to acquire Common Stock
issued to employees or consultants of Rio Grande pursuant to a stock option
plan, employee stock purchase plan, restricted stock plan or other employee
E-77
stock plan or agreement; (v) Common Stock issued upon exercise of the warrants
initially issued by Rio Grande to the holders of the 11.5% Notes; or (vi)
securities issued as a result of any stock split, stock dividend or
reclassification of Common Stock, distributable on a pro rata basis to all
holders of Common Stock.
"Option Shares" - means the 200,000 shares of Series A Preferred Stock
to which holders of Series A Preferred Stock are entitled to purchase in
accordance with and subject to the terms and conditions set forth in Section
6.1.
"Permitted Assign" - means any wholly owned Subsidiary or parent of, or
any Person that is, within the meaning of the Securities Act, controlling,
controlled by or under common control with, Purchaser.
"Person" - means a natural person, partnership, corporation,
association, joint stock company, trust, joint venture, unincor porated
organization or other entity, or a governmental entity or any department, agency
or political subdivision thereof.
"Plans" means all arrangements pursuant to which Rio Grande or any of
its Subsidiaries is a party, in which it participates in or as to which it has
any liability or contingent liability that are (a) "employee benefit plans" (as
that term is defined in section 3(3) of ERISA) or (b) retirement or deferred
compensation plans, incentive compensation plans, stock plans, unemployment
compensation plans, vacation pay, severance pay, bonus or benefit arrangement,
insurance or hospitalization program or any other fringe benefit arrangements
for any current or former employee, director, consultant or agent, whether
pursuant to contract, arrangement, custom or informal understanding, which are
not employee benefit plans.
"Preferred Stock" means the Series A Preferred Stock, the Series B
Preferred Stock and the Series C Preferred Stock.
"Preferred Stock Memorandum" means the Preferred Stock Memorandum,
dated October 1996 (Reid Securities Corporation) provided to Purchaser
pertaining to Rio Grande and its Subsidiaries.
"Pro Forma Balance Sheet" - means the pro forma balance sheet referred
to in Section 3.1.8.
"Pro Forma Financial Statements" - means the financial statements
referred to in Section 3.1.8.
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"Projections" - means the projected balance sheets and financial
statements referred to in Section 3.1.8.
"Proprietary Rights" - means all patents, patent registrations and
applications therefor, know-how, formulae, inventions, invention disclosures,
improvements, trademarks, trademark registrations and applications therefor,
trade names, service marks, service mark registrations and applications
therefor, copyrights, copyright registrations and applications therefor and
technical information owned by Rio Grande and its Subsidiaries or used in or
necessary to the business of Rio Grande and its Subsidiaries.
"Publicly Filed Documents" - means the documents listed on Schedule
1-A.
"Purchase Price" - means $10,000,000.
"Purchased Shares" - is defined in Section 2.2.
"Registration Rights Agreement" - means the Registration Rights
Agreement to be entered into by Purchaser and Rio Grande at Closing
substantially in the form attached hereto as Exhibit C.
"Reid Engagement" - means the engagement by Rio Grande of Reid
Securities Corporation to assist with the private placement of debt or equity
securities pursuant to which certain fees and expenses are payable, as more
fully described in the Engagement Letter dated August 28, 1996 between Rio
Grande and Reid Securities
Corporation.
"Release" means a "release", as such term is defined in CERCLA.
"Resource Conservation and Recovery Act" means the Resource
Conservation and Recovery Act, 42 U.S.C. Section 690, et seq., as in effect from
time to time.
"Rio Grande Audited Balance Sheet" - means the audited balance sheet of
Rio Grande and its Subsidiaries as of the Audit Date as filed with the
Commission on Form 10-KSB.
"Rio Grande Audited Financial Statements" - means the audited financial
statements for Rio Grande and its Subsidiaries referred to in Section 3.1.6(a).
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"Rio Grande Unaudited Balance Sheet" - means the unaudited balance
sheet of Rio Grande and its Subsidiaries referred to in Section 3.1.6(b).
"Rio Grande Unaudited Financial Statements" - means the unaudited
financial statements of Rio Grande and its Subsidiaries referred to in Section
3.1.6.
"Securities Act" - means the Securities Act of 1933, as amended.
"Senior Lenders" - means the lenders (whether one or more) under the
Senior Loan Agreements.
"Senior Loan Agreements" - means the agreements listed on Schedule
3.1.28 as in effect on the Closing Date.
"Series A Preferred Stock" - means the Series A Preferred Stock to be
established by the Certificate of Designation.
"Series B Preferred Stock" - means the Series B Preferred Stock to be
established by the Certificate of Designation.
"Series C Preferred Stock" - means the Series C Preferred Stock to be
established by the Certificate of Designation.
"Subsidiary" - means, with respect to a Person, any other Person of
which securities or other ownership interest representing more than fifty
percent (50%) of the ordinary voting power (including limited partnership
interests) are, at the time as of which any determination is being made, owned
or controlled by such Person or one or more Subsidiaries of such Person or such
Person and one or more Subsidiaries of such Person.
E-80
Schedule 1-A
Publicly Filed Documents
Form 10-KSB for the fiscal year ended January 31, 1996, together with the Proxy
Statement attached thereto
Form 10-QSB for the quarter ended July 31, 1996
Form 10-QSB for the quarter ended October 31, 1996]
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Exhibit A
Form of Certificate of Designation, Preferences and Rights
[to come]
E-82
Exhibit B
Items to be Covered by Legal Opinion
Capitalized terms not otherwise defined herein shall have the meanings
ascribed to such terms in the Stock Purchase Agreement.
1. Rio Grande and each of its Subsidiaries is a corporation or limited
partnership (as the case may be) duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or formation,
and is duly qualified to do business and in good standing as a foreign
corporation or formation in the following jurisdictions [list]. Rio Grande and
each of its Subsidiaries has full power and authority to own its properties, to
carry on its business and to hold under lease the properties it holds under
lease. Rio Grande has full corporate power and authority to enter into the
Agreement and the Registration Rights Agreement and to perform the transactions
contemplated hereby and thereby.
2. The authorized capital stock of Rio Grande consists of 12,000,000
shares of common stock $.01 par value, (the "Common Stock") and 3,000,000 shares
of preferred stock, par value $.01 per share, consisting of the following:
(i) 700,000 shares of Series A Preferred Stock, none
of are issued or outstanding except for the 500,000 shares issued to
Purchaser at Closing;
(ii) 500,000 shares of Series B Preferred Stock, none
of which are issued or outstanding except for the 500,000 shares issued
to Purchaser at Closing;
(iii) 500,000 shares of Series C Preferred Stock,
none of which shall be issued or outstanding; and
(iv) 1,300,000 shares of other preferred stock, the
rights and preferences of which having not been established to Rio
Grande's Board of directors and none of which shares shall be issued or
outstanding.
30142402.2
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3. All corporate action on the part of Rio Grande and its
directors and stockholders necessary for the authorization, execution,
delivery and performance by Rio Grande of the Agreement, the
Registration Rights Agreement and the Acquisition Agreement (and
related agreements) to which Rio Grande is a party, as the case may be,
and the consummation of the transactions contemplated thereby
(including the Acquisition), and for the authorization, issuance and
delivery of the Preferred Stock and Purchased Shares have been taken.
Each of the Agreement, the Registration Rights Agreement and the
Acquisition Agreement (and each of its related agreements) is a legal,
valid and binding obligation of Rio Grande, enforceable against Rio
Grande in accordance with its terms, except as limited by bankruptcy,
insolvency or other laws affecting creditors' rights generally or by
the general equitable principles.
4. The Purchased Shares, when issued, sold and delivered in
accordance with the terms of the Agreement, and the Series C Preferred
Stock when issued and delivered pursuant to the Certificate of
Designation, and the Option Shares when issued, sold and delivered in
accordance with the terms of the Agreement, will be duly and validly
issued, fully paid, non-assessable and free and clear of all liens,
charges, claims and encumbrances. The shares of Common Stock issuable
upon the conversion of Series B Preferred Stock and Series C Preferred
Stock have been duly reserved for issuance upon the conversion of
Series B Preferred Stock and Series C Preferred Stock and, when issued
upon the conversion of Series B Preferred Stock or Series C Preferred
Stock (as the case may be) in accordance with the Charter, will be duly
and validly issued, fully paid and non-assessable and free and clear of
all liens, charges, claims and encumbrances.
5. The issuance, sale and delivery of the Purchased Shares and
the Option Shares, the issuance and delivery of Series C Preferred
Stock as dividends, and the issuance and delivery of Common Stock upon
conversion of shares of Preferred Stock is not subject to any
preemptive rights of stockholders of Rio Grande or, to the knowledge of
such counsel, to any right of first refusal or other similar right in
favor of any Person.
30142402.2
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6. The execution and delivery of the Agreement and the
Registration Rights Agreement), the execution and delivery of the
Acquisition Agreement (and agreements relating thereto) and the
consummation of the transactions provided for therein (including the
Acquisition) and the fulfillment by Rio Grande and/or any of its
Subsidiaries of the terms thereof, do not and/or will not (a) conflict
with or result in a breach of any provision of the Charter or By-laws
or the charter or by-laws or partnership agreement or other
organizational documents of any of its Subsidiaries, (b) result in a
conflict or default or give rise to any right of termination,
cancellation or acceleration under any of the terms, conditions or
provisions of any note, bond, mortgage, loan agreement, indenture,
license, lease, agreement or other instrument or obligation to which
Rio Grande or any of its Subsidiaries is a party or by which Rio Grande
or any of its Subsidiaries is bound (including the Senior Loan
Agreements), (c) violate any order, writ, injunction, decree, or any
statute, rule or regulation applicable to Rio Grande or any of its
Subsidiaries or any of the material properties or assets of Rio Grande
or any of its Subsidiaries or (d) terminate or adversely affect any
material permit, license or authorization of any governmental
authorizations used or required by Rio Grande or any of its
Subsidiaries.
30142402.2
E-85
Exhibit C
Form of Registration Rights Agreement
30142402.2
E-86
Exhibit D
Items to be included, among other things, in Rio Grande, Inc. Business
Plan as may be changed as agreed by Rio Grande and Purchaser.
Reserve Reports and Economic Summaries by Well:
- Subdivided by PDP, PDNP, PUD and other reserve
categories
- Showing PV 10 and PV 12 values as determined by
utilizing parameters defined in the Debt Covenant
contained in the Preferred Stock Purchase Agreement
Activity Report to include the following transactions types
with estimated expenditures:
- Acquisitions/Divestitures
- Exploration/Exploitation
- Land/Seismic
- Cost Cutting Measures
Financial Information to include the following:
- Income Statement Projections by well or project
- Statemert of Anticipated Change in Financial
Position
- Anticipated investing/financing activity and effect
on debt
- Anticipated costs, to include cash expenses, G&A,
DD&A and other related items
Stock Market Activity
- Proposed issuance of stock
- Proposed issuance of options or warrants
30142402.2
E-87
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT dated as of the 16th day of
January, 1997, is entered into by and between RIO GRANDE, INC., a
Delaware corporation ("Rio Grande"), and KOCH EXPLORATION COMPANY, a
Kansas corporation ("Purchaser").
RECITALS
WHEREAS, Rio Grande and Purchaser have entered into a
Preferred Stock Purchase Agreement dated as of January 15, 1997,
concerning, among other things, the issuance and sale of shares of Rio
Grande's preferred stock (the "Stock Purchase Agreement"); and
WHEREAS, Rio Grande and the Purchaser desire to enter into
this Agreement in connection with, and as an integral part of, their
execution of the Stock Purchase Agreement;
NOW, THEREFORE, for and in consideration of the mutual
promises of the parties hereto, and for other good and valuable
consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
1. DEFINITIONS
1.1 "Agreement" shall mean, and the words "herein," "hereof,"
"hereunder" and words of similar import shall refer to, this instrument
and any amendment hereto.
1.2 "Commission" shall refer to the Securities and Exchange
Commission.
1.3 "Common Stock" shall refer to any and all of Rio Grande's
common stock, $.01 par value, including, but not limited to, the
Conversion Stock.
1.4 "Conversion Stock" shall refer to any and all (i) Common Stock
issued and issuable upon conversion of the Series B Preferred Stock,
and (ii) Common Stock issued as dividends on or in any combination or
subdivision of the foregoing. When the phrase "Conversion Stock" is
used herein, it shall refer to the sum of shares of Common Stock issued
as a result of the conversion of, plus shares of Common Stock issuable
on conversion of, the Series B Preferred Stock, unless otherwise
specified. Conversion Stock shall exclude any shares otherwise included
30142402.2
E-88
in the foregoing from and after the date that such shares are sold
pursuant to a Registered Public Offering.
1.5 "Demand Stock" is defined in Section 2.1A.
1.6 1.6 "Exchange Act" shall refer to the Securities Exchange Act
of 1934, as amended.
1.7 "Holders of Registrable Securities" (including references to
holders of certain percentages of Registrable Securities) collectively
refers to the holders of Series B Preferred Stock (to the extent that
such shares of stock have not then been converted into Common Stock)
and the holders of shares of Common Stock that theretofore have been
issued upon the conversion of Series B Preferred Stock (based upon
conversion of the Series B Preferred Stock).
1.8 "Initiating Holders" means holder(s) of Registrable Securities
who in the aggregate hold not less than forty percent (40%) of the
Registrable Securities (assuming for this purpose that all issued and
outstanding Series B Preferred Stock is converted into Conversion
Stock).
1.9 "Person" shall refer to any natural person, partnership,
corporation, association, joint stock company, trust, joint venture,
unincorporated organization or other entity, or a governmental entity
or any department, agency or political subdivision thereof.
1.10 "Preferred Stock" shall refer to the Series B Preferred
Stock.
1.11 "Registered Public Offering" shall refer to a public sale of
Rio Grande's Common Stock pursuant to an effective registration
statement, other than a registration effected solely to implement an
employee benefit plan, a transaction in which Rule 145 of the
Commission is applicable or any other form or type of registration in
which Registrable Securities cannot be included pursuant to Commission
rule or practice.
1.12 "Registrable Securities" shall refer to the Conversion Stock.
1.13 "Reporting Company" shall mean a Person subject to the filing
requirements of Section 13 or 15 of the Exchange Act or a Person who
has completed a Registered Public Offering.
1.14 "Securities Act" shall refer to the Securities Act of 1933,
as amended.
30142402.2
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1.15 "Series B Preferred Stock" shall refer to any and all of Rio
Grande's Series B Preferred Stock, par value $.01 per share.
30142402.2
E-90
2. REGISTRATION RIGHTS.
2.1 Demand Registration Rights.
A. Upon the written request by the Initiating Holders to
register Registrable Securities, Rio Grande shall promptly deliver
notice of such request to all holders of Registrable Securities (such
holders of Registrable Securities being referred to as the "Notified
Persons"), who then shall have 30 days to indicate in writing if they
desire to be included in such registration. If the Initiating Holders
intend to distribute the Demand Stock by means of an underwriting, they
shall so advise Rio Grande as part of their written request. "Demand
Stock" shall mean all of the shares of Registrable Stock being
requested to be registered by the Initiating Holders and the Notified
Persons. Rio Grande will use its best efforts to expeditiously (but in
any event within 90 days of the written request described in the first
sentence of this section) effect the registration of the Demand Stock
under the Securities Act and qualify the Demand Stock for sale under
any state blue sky law, but only to the extent provided for in the
following provisions of this Article II; provided, however, that the
shares of Demand Stock for which registration has been requested shall
constitute at least 40% of the total shares of Registrable Securities
then outstanding (assuming for this purpose that all issued and
outstanding Series B Preferred Stock is converted into Conversion
Stock).
Rio Grande shall not be required to effect registration
pursuant to requests under this Section 2.1 more than three (3) times
for the holders of the Registrable Securities as a group. A demand
registration instituted pursuant to this Section 2.1 shall not be
counted as such unless and until (1) Rio Grande shall have in good
faith filed a registration statement with the Commission pursuant to
this Section 2.1 and (2) the holders holding at least a majority of the
Registrable Securities included in such offering elect to proceed with
the registration process after receiving the Commission's complete
initial comments, if any, to the first filing of such registration
statement. Rio Grande shall not be required to include in such
registration any shares of Common Stock that are issuable upon the
conversion of Preferred Stock unless the holder commits in writing to
Rio Grande that such holder will convert the Preferred Stock into
shares of Common Stock before or not later than simultaneously with the
effectiveness of the registration statement registering those shares of
Common Stock.
B. Whenever a demand registration pursuant to Section 2.1A
is made, Rio Grande shall be entitled to include in any registration
30142402.2
E-91
statement (i) shares of Common Stock to be sold by other holders of
Common Stock with registration rights that allow such holders to
participate in the registration (the "Other Registration Rights
Holders"), and (ii) shares of Common Stock to be sold by Rio Grande for
its own account; provided, however that if the managing underwriter
determines in good faith that the number of shares of Common Stock to
be sold in such registration should be limited due to market
conditions, then the number of shares of Common Stock included by Rio
Grande in such registration shall be reduced to the extent necessary to
cause the total number of shares of Common Stock being so registered to
be reduced to the number determined by the underwriter, and if such
reduction is not sufficient, then after the number of shares of Common
Stock included by Rio Grande has been decreased to zero, then the
number of shares of Common Stock included by the Other Registration
Rights Holders shall be reduced pro rata among the Other Registration
Rights Holders to the extent necessary to cause the total number of
shares of Common Stock being so registered to be further reduced to the
number determined by the underwriter, and if such further reduction is
not sufficient, then after the number of shares of Common Stock
included by the Other Registration Rights Holders is reduced to zero,
then the Demand Stock shall be reduced pro rata to the extent necessary
to cause the number of shares of Demand Stock so registered to equal
the number determined by the underwriter.
Except as permitted herein, Rio Grande may not cause any other
registration of securities for sale for its own account or for Persons
other than a holder of Registrable Securities (other than a
registration effected solely to implement an employee benefit plan or a
transaction to which Rule 145 of the Commission is applicable, or as
may be required pursuant to the terms of those certain Warrant
Agreements, as amended through the date hereof, issued by the Company
in connection with the Company's 1995 11.50% Subordinated Notes) to
become effective less than 180 days after the effective date of any
registration required pursuant to this Section 2.1.
C. If at the time of any request to register Demand Stock
pursuant to this Section 2.1, Rio Grande is preparing a registration
statement for a Registered Public Offering which in fact is filed and
becomes effective within 90 days after the request, then Rio Grande may
at its option direct that such request to register Demand Stock be
delayed for a period not in excess of six months from the effective
date of such offering. Such right to delay a request shall be exercised
by Rio Grande not more than once in any two year period. Nothing in
this Section 2.1C shall preclude a holder of Registrable Securities
30142402.2
E-92
from enjoying registration rights pursuant to the terms of Section 2.2
hereof. No demand shall be made by holders of Registrable Securities at
any time, within six (6) months of the effective date of any other
registration of Common Stock in which holders of Registrable Securities
were entitled to participate pursuant to the terms of this Agreement.
Rio Grande may postpone for a reasonable period of time (not
to exceed 90 days) the filing of any registration statement otherwise
required to be prepared and filed by it pursuant to this Section 2.1
if, at the time it receives a request for registration:
(x) the Board of Directors of Rio Grande shall determine in good
faith that such offering will interfere materially with a pending or
contemplated financing, merger, sale of assets, recapitalization or
other similar corporate action of Rio Grande and Rio Grande shall have
furnished to the persons seeking such registration a certificate signed
by the President of Rio Grande to that effect, accompanied by a
certified copy of the relevant board resolutions; or
(y) the Board of Directors of Rio Grande shall determine in good
faith that the disclosures required in connection with such
registration could reasonably be expected to materially adversely
affect the business or prospects of Rio Grande and Rio Grande shall
have furnished to the persons seeking such registration a certificate
signed by the President of Rio Grande to that effect, accompanied by a
certified copy of the relevant board resolutions.
2.2 Piggyback Registration. If Rio Grande at any time proposes a Registered
Public Offering, it will, as soon as practicable but no less than 30 days prior
to filing the registration statement, give written notice to all holders of
Registrable Securities of its intention to do so (stating the intended method of
disposition of such securities). Upon the written request of any holders of
Registrable Securities given within 20 days after transmittal by Rio Grande to
the holders of such notice, Rio Grande will, subject to the limits contained in
this Section 2.2, use its best efforts to cause those Registrable Securities of
said requesting holders to be included in such registration statement; provided,
however that if the underwriter managing such registration determines in good
faith that market or economic conditions limit the amount of securities which
may reasonably be expected to be sold, Rio Grande may limit the number of shares
of Common Stock included by persons other than Rio Grande, including, without
limitation, the Registrable Securities (the "Piggyback Stock") to be included in
such registration and the holders of the Piggyback Stock will be allowed to
register their Piggyback Stock pro rata based on the number of shares of
Piggyback Stock held by such holders, respectively. If any holder of Piggyback
Stock disapproves of the terms of any such underwriting, he may elect to
withdraw therefrom by written notice to Rio Grande and the managing underwriter.
If, by the withdrawal of such Piggyback Stock, a greater number of Piggyback
30142402.2
E-93
Stock held by other holders of Piggyback Stock may be included in such
registration (up to the limit imposed by the underwriters), Rio Grande shall
offer to all holders of Piggyback Stock who have included Piggyback Stock in the
registration the right to include additional Piggyback Stock, pro rata. Any
Piggyback Stock excluded or withdrawn from such underwriting shall be withdrawn
from such registration. Rio Grande shall be under no obligation to complete any
offering of its securities it proposes to make and shall incur no liability to
any holder of Registrable Securities for its failure to do so.
2.3 Registration Procedures. If and whenever Rio Grande is required by the
provisions of this Article II to use its best efforts to effect the registration
of Registrable Securities under the Securities Act, Rio Grande will, as
expeditiously as possible:
(i) prepare and file with the Commission a
registration statement with respect to such securities and use
its best efforts to cause such registration statement to
become and remain effective for the period provided in this
Article II;
30142402.2
E-94
(ii) prepare and file with the Commission
such amendments and supplements to such registration statement
and the prospectus used in connection therewith as may be
necessary to keep such registration statement effective and to
comply with the provisions of the Securities Act with respect
to the sale or other disposition of all securities covered by
such registration statement whenever the seller or sellers of
such securities shall desire to sell or otherwise dispose of
the same, but only to the extent provided in this Article II;
(iii) furnish to each seller such number of
copies of a prospectus, including a preliminary prospectus, in
conformity with the requirements of the Securities Act, and
such other documents, as such seller may reasonably request in
order to facilitate the public sale or other disposition of
the securities owned by such seller;
(iv) use its best efforts to register or
qualify the securities covered by such registration statement
under such other securities or state blue sky laws of such
jurisdictions as each seller, or in the case of an
underwritten public offering, the managing underwriter shall
reasonably request, and do any and all other acts and things
which may be necessary under such securities or blue sky laws
to enable the public sale or other disposition of the
securities in such jurisdictions, except that Rio Grande shall
not for any such purpose be required to qualify to do business
as a foreign corporation in any jurisdiction wherein it is not
so qualified;
(v) before filing the registration statement
or prospectus or amendments or supplements thereto, furnish to
one special counsel selected by the holders of a majority of
the Registrable Securities included in such offering copies of
such documents proposed to be filed which shall be subject to
the reasonable approval of such special counsel;
(vi) if the offering is underwritten, at the
request of any seller, use its best efforts to furnish on the
date securities are delivered to the underwriter for sale
pursuant to such registration (A) an opinion of counsel for
Rio Grande, dated the effective date of the registration
statement, addressed to the seller and to Rio Grande, and (B)
a "comfort" letter signed by the independent public
accountants who have certified Rio Grande's financial
statements included in the registration statement, addressed
to the seller and the underwriter, covering substantially the
30142402.2
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same matters with respect to the registration statement (and
the prospectus included therein) and (in the case of the
accountants' letter) with respect to events subsequent to the
date of the financial statements, as are customarily covered
(at the time of such registration) in opinions of issuer's
counsel and in accountants' letters delivered to the
underwriters in underwritten public offerings of securities;
(vii) cause all Registrable Securities
covered by such registration to be listed on each securities
exchange, including the Nasdaq Stock Market, on which similar
securities issued by Rio Grande are then listed; and
(viii) take such other actions as shall be
reasonably requested by a holder of Registrable Securities
included in such registration.
provided, however, that notwithstanding any other provision of this Article II,
Rio Grande shall not in any event be required to use its best efforts to
maintain the effectiveness of any such registration statement for a period in
excess of 90 days or 120 days in the case of registrations pursuant to Section
2.1 (or at the request of the selling holders, an additional 90 days or 120 days
as the case may be). The term "seller" as used in this Article II refers to a
holder of the Registrable Securities selling such shares.
In connection with each registration hereunder, each seller shall
furnish to Rio Grande in writing such information with respect to such seller as
reasonably shall be necessary in order to assure compliance with federal and
applicable state securities laws.
2.4 Expenses. All expenses incurred in effecting the registration provided
for in Sections 2.1, 2.2 and Section 2.9, including without limitation, all
registration and filing fees, printing expenses, fees and disbursements of
counsel for Rio Grande and fees of one special counsel for all of the selling
holders of the Registrable Securities being so registered selected by the
holders of a majority of the Registrable Securities included in the
registration, underwriting expenses (other than fees, commissions or discounts
relating to the sale of shares of Common Stock, other than for the account of
Rio Grande, that are included in the registration), expenses of any audits
incident to or required by any such registration, expenses of complying with the
securities or blue sky laws of any jurisdictions pursuant to Section 2.3(iv)
hereof, and any other expenses incurred in taking the actions described in
Section 2.3 (all of such expenses referred to as "Registration Expenses"), shall
be paid by Rio Grande; provided, however that in the case of a registration
pursuant to Section 2.1, participating sellers of Registrable Securities shall
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bear their respective pro rata portion of expenses incurred by Rio Grande for
its accountants to audit other than year-end financial statements, unless in the
case of a registration pursuant to Section 2.1 in which more than 40% of the
Common Stock included in such registration is Common Stock for the account of
Rio Grande, in which case Rio Grande shall pay its proportionate share of such
additional audit expense.
2.5 Indemnification.
A. In the event of any registration of any of its securities under
the Securities Act pursuant to this Article II, Rio Grande shall indemnify and
hold harmless the seller of such securities, each underwriter (as defined in the
Securities Act), and each other Person who participates in the offering of such
securities and each other Person, if any, who controls (within the meaning of
the Securities Act) such seller, underwriter or participating Person
(individually and collectively the "Indemnified Person") against any and all
losses, claims, damages or liabilities (collectively the "liability"),to which
such Indemnified Person may become subject insofar as such liability (or action
in respect thereof) arises out of or is based upon (i) any untrue statement or
alleged untrue statement of any material fact contained in any registration
statement under which such securities were registered under the Securities Act,
any preliminary prospectus or final prospectus contained therein, or any
amendment or supplement thereto, (ii) any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading or (iii) any violation by Rio Grande of any
rule or regulation promulgated under the Securities Act or any state securities
law applicable to and relating to action or inaction required of Rio Grande in
connection with any such registration. Rio Grande shall reimburse each such
Indemnified Person for all fees and expenses (including reasonable legal fees)
reasonably incurred by such Indemnified Person in connection with investigating
or, subject to paragraph D of this Section 2.5, defending or settling any such
liability; provided, however, that Rio Grande shall not be liable to any
Indemnified Person in any such case to the extent that any such liability arises
out of or is based upon any alleged untrue statements or alleged omissions made
in such registration statement, preliminary or final prospectus, or amendment or
supplement thereto, in reliance upon and in conformity with written information
furnished to Rio Grande by such Indemnified Person specifically for use therein.
B. Each holder of any securities sold pursuant to any registration
under this Article II shall, by acceptance of the proceeds thereof, indemnify
and hold harmless, for the sale of its securities in such registration, each
other holder of any such securities, Rio Grande, its directors and officers, its
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legal counsel and independent public accountants, each underwriter and each
other Person, if any, who controls Rio Grande or such underwriter (individually
and collectively the "Rio Grande Indemnified Person"), against any and all
losses, claims, damages or liabilities, to which any such Rio Grande Indemnified
Person may become subject insofar as such liability (or actions in respect
thereof) arises out of or is based upon (i) any untrue statement or alleged
untrue statement of any material fact contained in any registration statement
under which securities were registered under the Securities Act at the written
request of such holder, any preliminary prospectus or final prospectus contained
therein, or any amendment or supplement thereto, or (ii) any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in the case of (i) and
(ii) to the extent, but only to the extent, that such alleged untrue statement
or alleged omission was made in such registration statement, preliminary or
final prospectus, amendment or supplement thereto in reliance upon and in
conformity with written information furnished to Rio Grande by such holder
specifically for use therein, and then only to the extent that such untrue
statement or alleged untrue statements or omission or alleged omissions by the
holder were not based on the authority of an expert as to which the holder had
no reasonable ground to believe, and did not believe, that the statements made
on the authority of such expert were untrue or that there was an omission to
state a material fact. Such holder shall reimburse any Rio Grande Indemnified
Person for any reasonable legal fees reasonably incurred in investigating or,
subject to Paragraph D of this Section 2.5, defending any such liability.
C. Indemnification similar to that specified in Section 2.5A and
Section 2.5B shall be given by Rio Grande and each holder of any securities sold
pursuant to a registration under this Article II (with such modifications as may
be appropriate) with respect to any required registration or other qualification
of such securities under any federal or state law or regulation of a
governmental authority other than the Securities Act.
D. In the event Rio Grande, any holder of Registrable Securities
or of securities sold pursuant to this Agreement or any other Person receives a
complaint, claim or other notice of any liability or action, giving rise to a
claim for indemnification under paragraphs A, B or C of this Section 2.5, the
Person claiming indemnification under such paragraphs shall promptly notify the
Person against whom indemnification is sought of such complaint, notice, claim
or action, and such indemnifying Person shall have the right to investigate and
defend any such loss, claim, damage, liability or action; provided however, that
failure to so notify shall not affect the indemnification rights under
paragraphs A, B or C of this Section 2.5 except to the extent (but only to the
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extent) the indemnifying person was materially adversely prejudiced by such
failure. The Person claiming indemnification shall have the right to employ
separate counsel in any such action and to participate in the defense thereof,
but the fees and expenses of such counsel shall not be at the expense of the
Person against whom indemnification is sought (unless the indemnifying party
fails to defend the Persons rightfully claiming indemnification under this
Section 2.5, in which case the fees and expenses of such separate counsel shall
be borne by the Person against whom indemnification is sought). In no event
shall a Person against whom indemnification is sought be obligated to indemnify
any Person for any settlement of any claim or action effected without the
indemnifying Person's prior written consent.
E. If the indemnification provided for in this Section 2.5 is held
by a court of competent jurisdiction to be unavailable to an indemnified party
with respect to any loss, liability, claim, damage or expense referred to
therein, then the indemnifying party, in lieu of indemnifying such indemnified
party thereunder, shall contribute to the amount paid or payable by such
indemnified party as a result of such loss, liability, claim, damage or expense
in such proportion as is appropriate to reflect the relative fault of the
indemnifying party on the one hand and of the indemnified party on the other
hand in connection with the statements or omissions which resulted in such loss,
liability, claim, damage or expense as well as any other relevant equitable
considerations. The relevant fault of the indemnifying party and the indemnified
party shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. Notwithstanding the foregoing, the amount any holder of
Registrable Securities shall be obligated to contribute pursuant to this Section
2.5E shall be limited to an amount equal to the proceeds received by such holder
pursuant to the registration statement which gives rise to such obligation to
contribute (less the aggregate amount of any damages which the holder has
otherwise been required to pay in respect of such loss, claim, damage, liability
or action or any substantially similar loss, claim, damage, liability or action
arising from the sale of such securities).
F. The indemnification provided by this Section 2.5 shall be a
continuing right to indemnification and shall survive the registration and sale
of any securities by any Person entitled to indemnification hereunder and the
expiration or termination of this Agreement.
2.6 Termination of Registration Rights. Notwithstanding the foregoing
egistration and the
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provisions of this Article II, the rights to rdesignation of Conversion Stock as
Registrable Securities shall terminate as to any particular securities when such
securities shall have been transferred or assigned in any manner except as set
forth in Section 2.10 hereto.
2.7 Compliance with Rule 144 and Rule 144A. Rio Grande shall make available
to each holder of Registrable Stock the benefit of certain rules and regulations
of the Commission which may permit such holder to sell Conversion Stock to the
public without registration under the Securities Act by (a) making and keeping
"current public information" "available" (as both such terms are defined in Rule
144 under the Securities Act) at all times, (b) use its best efforts to timely
file with the Commission, in accordance with all rules and regulations
applicable thereto, all reports and other documents (i) required of Rio Grande
for Rule 144, as it may be amended from time to time (or any rule, regulation or
statute replacing Rule 144), to be available to stockholders of Rio Grande and
(ii) required to be filed under Section 15(d) of the Exchange Act,
notwithstanding that Rio Grande's duty to file such reports or documents may be
suspended or otherwise terminated under the express terms of such provision and
(c) upon request by such holder, furnishing such holder a written statement by
Rio Grande that it has complied with the reporting requirements of the Exchange
Act and Rule 144, together with a copy of the most recent annual or quarterly
report of Rio Grande and such reports and documents filed by Rio Grande with the
Commission as may reasonably be requested by such holder in order that such
holder may avail itself of any rule or regulation of the Commission allowing
sales of Conversion Stock without registration under the Securities Act. Rio
Grande shall, upon such holder's request or upon the request of a prospective
buyer (a "Prospective Buyer") of Conversion Stock, deliver to such holder and
such Prospective Buyer, all information described in Section (d)(i) of Rule 144A
under the Securities Act (all of such information being "reasonably current" as
described in such Section (d)4(i) if Rio Grande (x) is not subject to Section 13
or 15(d) of the Exchange Act, and (y) is not exempt from reporting pursuant to
Rule 12g3- 2(b) under the Exchange Act.
2.8 Amendments. The provisions of this Agreement may be amended, and Rio
Grande may take any action herein prohibited or omit to perform any act herein
required to be performed by it, only if Rio Grande has obtained the written
consent of holders of at least 662/3% of the Registrable Securities.
2.9 Short Form Registration. Rio Grande shall use its best efforts to
qualify for registration on Form S-2, Form S-3 or similar short form
registration statement (the "Short Form"). If and when Rio Grande so qualifies
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to use a Short Form, the holders of the Registrable Securities shall have the
right to request registration on the Short Form as the demand registration right
created by Section 2.1 hereof. In such case, the provisions of Section 2.1 shall
apply to such demand registration except that the registration shall be on the
Short Form so specified by the holders of the Registrable Securities.
2.10 Transferability of Registration Rights. The right to cause Rio Grande
to register Registrable Securities of a holder and keep information available
granted to a holder of Registrable Securities by Rio Grande under this Agreement
may be assigned by a holder of Registrable Securities to any partner,
shareholder or affiliate of such holder, to any other holder of Registrable
Securities, or to a transferee or assignee who receives at least 500,000 shares
of Registrable Securities (as adjusted for stock splits and the like); provided,
that Rio Grande is given written notice by the holder of Registrable Securities
at the time of or within a reasonable time after said transfer, stating the name
and address of said transferee or assignee and identifying the securities with
respect to which such registration rights are being assigned. As used herein, an
"affiliate" of a holder of Registrable Securities shall mean any Person who
controls, is under common control with, or is controlled by such holder.
2.11 Designation of Underwriter. In the case of any registration effected
pursuant to this Article II, Rio Grande shall have the right to designate the
managing underwriter, subject to the approval of the holders of a majority of
the Registrable Securities included in such offering. With respect to offerings
under Section 2.1, the holders of the Demand Stock shall negotiate with the
underwriter selected by Rio Grande with regard to the underwriting of the Demand
Stock; provided, however, that if the holders of a majority of the Demand Stock
have not agreed with such underwriter as to the terms and conditions of such
underwriting within twenty (20) days following commencement of such
negotiations, the holders of a majority of the Demand Stock may select an
underwriter of their choice, provided such underwriter is reasonably acceptable
to Rio Grande. Rio Grande and each holder of Registrable Securities included in
the registration shall enter into an underwriting agreement in customary form
with the managing underwriter.
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3. MISCELLANEOUS.
3.1 Remedies. Any Person having any rights under any provision of this
Agreement will be entitled to enforce such rights specifically, to recover any
damages by reason of any breach of any provision of this Agreement, and to
exercise all other rights granted by law or equity, which rights may be
exercised cumulatively and not alternatively. The prevailing party in any such
dispute shall receive its reasonable attorneys' fees and costs.
3.2 Successors and Assigns. Except as otherwise expressly provided herein,
all covenants and agreements contained in this Agreement by or on behalf of any
of the parties hereto will bind and inure to the benefit of the respective
successors and assigns of the parties hereto whether so expressed or not.
3.3 Severability. Whenever possible, each provision of this Agreement will
be interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be prohibited by or invalid
under applicable law, such provision will be ineffective only to the extent of
such prohibition or invalidity, without invalidating the remainder of this
Agreement.
3.4 Counterparts. This Agreement may be executed in two or more
counterparts, any one of which need not contain the signatures of more than one
party, but all such counterparts when taken together will constitute one and the
same Agreement.
3.5 Descriptive Headings. The descriptive headings of this Agreement
are inserted for convenience only and do not constitute a part of this
Agreement.
3.6 Notices. Any notices required or permitted to be sent shall be
delivered personally, telecopied or mailed, certified mail, postage prepaid,
return receipt requested, to the following addresses until such addresses have
been changed by written notice delivered pursuant to this Section 3.6 and shall
be deemed to have been delivered and received three (3) business days after such
mailing, when delivered personally or when receipt is confirmed by an individual
if sent by telecopy:
If to Rio Grande: Rio Grande, Inc.
10101 Reunion Place
Union Square, Ste. 210
San Antonio, Texas 78216
Attn: President
Telecopy No.:(210) 308-8111
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If to Purchaser: Koch Exploration Company
4111 E. 37th St. North
Wichita, Kansas 67220
Attn: Vice President
Telecopy No.: (316) 828-5390
3.7 Governing Law. The validity, meaning and effect of this Agreement shall
be determined in accordance with the laws of Texas applicable to contracts made
and to be performed in that state.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first written above.
Rio Grande:
RIO GRANDE, INC.
By:___________________________
Its:
Purchaser:
KOCH EXPLORATION COMPANY
By:___________________________
Its:
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STOCKHOLDERS AGREEMENT
THIS STOCKHOLDERS AGREEMENT (this "Agreement") is made this 16th day of
January, 1997, by and among Robert A. Buschman and Guy Bob Buschman, in their
capacities as stockholders, (the "Founders"), Rio Grande, Inc., a Delaware
corporation (the "Company"), and the persons and organizations whose signatures
appear below (whether one or more, the "Stockholders").
WHEREAS, pursuant to that certain Preferred Stock Purchase Agreement dated
as of January 15, 1997, the Stockholders acquired from the Company shares of its
Series A Preferred Stock, par value $.01 per share (the "Series A Preferred
Stock") and shares of its Series B Preferred Stock, par value $.01 per share
("Series B Preferred Stock") which are convertible into shares of common stock
of the Company, par value $.01 per share, as more fully set forth in the
Certificate of Designation filed with the Secretary of State of Delaware on
January 15, 1997 (such Common Stock, adjusted, hereinafter referred to as, the
"Common Stock"); and
WHEREAS, the Founders are presently the legal or beneficial owner of
2,360,940 shares, collectively, of the outstanding Common Stock of the Company;
and
WHEREAS, the Founders have agreed pursuant to this Agreement, among other
things, to grant the Stockholders the opportunity to participate, upon the terms
and conditions set forth in this Agreement, in certain subsequent sales of the
Common Stock of the Company made by the Founders to induce the Stockholders to
make the proposed investment;
NOW, THEREFORE, THE PARTIES HERETO, INTENDING TO BE LEGALLY BOUND, HEREBY
AGREE AS FOLLOWS:
ARTICLE 1
Sales by a Founder
1.1 Notice of Certain Purchase Offers. Prior to January 18, 2002 (unless
otherwise terminated pursuant to Section 5.1 hereof), except as set forth in
Section 1.5, should either Founder propose to accept one or more bona fide
offers (collectively the "Purchase Offer") from any Persons to purchase shares
of the Company's Common Stock from the Founder (a "Transferring Founder"), then
such Transferring Founder shall promptly notify each Stockholder of the terms
and conditions of such Purchase Offer. For purposes hereof, a "Person" means a
natural person, partnership, corporation, association, joint stock company,
trust, joint venture, unincorporated organization or other entity, or a
governmental entity or any department, agency or political subdivision thereof.
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1.2 Right to Participate. Each Stockholder shall have the right,
exercisable upon written notice to the Transferring Founder within 15 Business
Days after the date of receipt of the notice of the Purchase Offer, to
participate in the Transferring Founder's sale of Common Stock on the same terms
and conditions. A "Business Day" means any day other than Saturday, Sunday or a
day on which national banks located in the State of Kansas are authorized to be
closed for business. If no Stockholder elects to participate in the Purchase
Offer as provided herein, then the Transferring Founder may offer such Common
Stock to any Outsider pursuant to the terms of the Purchase Offer. To the extent
a Stockholder exercises such right of participation, the number of shares of
Common Stock which the Transferring Founder may sell pursuant to such Purchase
Offer shall be correspondingly reduced in accordance with the provisions below.
The right of participation of each Stockholder shall be subject to the following
terms and conditions:
(a) Each Stockholder may sell all or any part of that number of
shares of Common Stock of the Company which it then owns equal to the product
obtained by multiplying (i) the aggregate number of shares of Common Stock
covered by the Purchase Offer by (ii) a fraction the numerator of which is the
number of shares of Common Stock of the Company at the time owned by such
Stockholder and the denominator of which is the combined number of shares of
Common Stock of the Company at the time owned by the Transferring Founder
(including shares transferred to Permitted Transferees as hereinafter defined in
accordance herewith) and the Stockholders. For purposes of making such
computation, each Stockholder shall be deemed to own the number of shares of
Common Stock into which all its Series B Preferred Stock is convertible on the
date such Stockholder receives the notice of the Purchase Offer.
(b) Each Stockholder may participate in the sale by delivering to
the Transferring Founder for transfer to the purchase offeror one or more
certificates, properly endorsed for transfer, which represent
(i) the number of shares of Common Stock which such
Stockholder elects to sell pursuant to this Section 1.2 not to exceed the number
of shares of Common Stock which it may sell as determined in accordance with
Section 1.2(a) above; or
(i) that number of shares of Series B Preferred Stock
which is at such time convertible into the number of shares of Common Stock
which such Stockholder elects to sell pursuant to this Section 1.2 not to exceed
the number of shares of Common Stock which it may sell as determined in
accordance with Section 1.2(a) above; provided, however, that if the purchase
offeror objects to the delivery of Series B Preferred Stock in lieu of Common
Stock, such Stockholder may convert and deliver Common Stock as provided in
subparagraph (b)(i) above.
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(c) If a Stockholder elects not to participate in such a sale and
the terms and conditions of such sale thereafter materially change (except with
regard to the purchase price, as to which any change shall be deemed material),
the Founders must once again give the notice required in Section 1.1 and allow
each such Stockholder the opportunity to participate in such sale.
1.3 Consummation of Sale. The stock certificate or certificates which the
Stockholder delivers to the Transferring Founder pursuant to Section 1.2 shall
be transferred by the Transferring Founder to the purchase offeror in
consummation of the sale of the Common Stock pursuant to the terms and
conditions specified in the Section 1.1 notice to the Stockholders, and the
Transferring Founder shall promptly thereafter remit to such Stockholder that
portion of the sale proceeds to which such Stockholder is entitled by reason of
its participation in such sale.
1.4 Ongoing Rights. The exercise or non-exercise of the rights of the
Stockholders hereunder to participate in one or more sales of Common Stock made
by the Founders shall not adversely affect their rights to participate in
subsequent sales of Common Stock by either Founder pursuant to Section 1.1
hereof.
1.5 Permitted Transfers. The participation rights of the Stockholders and
restriction on transfers by the Founders shall not apply (a) to offers or sales
by the Founders or their Permitted Transferees in an underwritten public
offering or otherwise pursuant to an effective registration statement, on the
facilities of a national securities exchange or in any other recognized public
securities market, (b) to any pledge of Common Stock made by a Founder pursuant
to a bona fide loan transaction which creates a mere security interest, (c) upon
the death of a Founder, to any transfer of Common Stock owned by such Founder on
the date of such Founder's death to such Founder's ancestors or descendants or
spouse or to a trustee for their benefit or to any charity, (d) to any inter
vivos gift of shares to such Founder's ancestors or descendants or spouse or to
a trust for the benefit of any of the foregoing, or (e) to any other bona fide
gift (collectively, "Permitted Transfers" and the respective transferees
"Permitted Transferee"); provided, however, that (i) such Founder shall inform
the Stockholders of any Permitted Transfer involving more than one percent (1%)
of the outstanding stock on a fully diluted basis and (ii) to the extent any
Person (other than an underwriter in connection with a registered offering)
acquires beneficial ownership of Common Stock representing more than 5% of the
then outstanding shares of Common Stock on a fully diluted basis as a result of
a Permitted Transfer, the transferring Founder will request such Person to
furnish the Stockholders with a written agreement to be bound by and comply with
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all provisions of this Agreement applicable to such Founder; provided, to the
extent a Founder makes a Permitted Transfer and subsequently re-acquires shares
from such Permitted Transferee, those shares shall again become subject to the
terms hereof.
1.6 Restrictions on Transfer On or Before January 18, 2000. Without the
prior written consent of the Stockholders, except as otherwise expressly
permitted by Sections 1.5(a)-(d) neither Founder will sell, assign or otherwise
transfer any shares of Common Stock owned by such Founder on or before January
18, 2000; provided, that if the Stockholders consent to a proposed sale,
assignment or transfer on or before January 18, 2000 pursuant to this provision,
the other provisions of this Agreement will apply to such sale, assignment or
transfer.
ARTICLE 2
Sales by Stockholders
2.1 During the term hereof and except as set forth in this Article 2, no
Stockholder may sell any Series B Preferred Stock which such Stockholder now
owns, or which such Stockholder may hereafter acquire, to a person not a party
to this Agreement (an "Outsider"), unless such person is an affiliate of such
Stockholder, without first offering the Series B Preferred Stock which the
Stockholder wishes to transfer to the Company and the Founders pursuant to the
procedures set forth in this Article on substantially the same terms as will be
offered to the Outsider. If, at the end of the Second Option Period as provided
in Section 2.4, the Company or the Founders have not agreed to acquire all of
the offered Series B Preferred Stock, then all of such Series B Preferred Stock
may be transferred to an Outsider in compliance with Section 2.3.
2.2 All offers to transfer made pursuant to this Article shall state the
proposed purchase price and all other terms applicable to the proposed transfer
to the Outsider.
2.3 Any transfer to an Outsider must be effected in accordance with
the provisions hereof:
(a) the transferring Stockholder shall transfer all the
Preferred Stock which was offered pursuant to Section 2.1;
(b) such transfer must be made on substantially the same terms
set forth in the offer to the Company and the Founders; and
(c) such transfer must be made within one hundred (120) days
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after expiration of the Second Option Period.
Any proposed transfer of Series B Preferred Stock which does not comply
with the provisions of Section 2.3 must be reoffered to the Company and the
Founders.
2.4 Before any Stockholder may transfer or dispose of all or any of
such Stockholder's Series B Preferred Stock in a transaction subject to the
provisions of this Article, such Stockholder must first offer such Series B
Preferred Stock to the Company and, if the Company refuses such offer, then to
the Founders pro rata, according to their then existing Common Stock ownership
interests. The offering price shall be equal to or less than the price, and
otherwise on substantially the same terms, proposed to be offered by such
Stockholder to the Outsider. Such offer to the Company shall be held open by
such Stockholder for a period of ten (10) days from the date of such offer,
which period shall be known as the "First Option Period" and such offer to the
Founders shall be held open by such Stockholder for a period of ten (10) days
from the end of the First Option Period, which period shall be known as the
"Second Option Period".
2.5 The Company may, within the First Option Period, accept such offer
as to all the Series B Preferred Stock so offered. In the event such offer is
not accepted by the Company, then the Founders may, pro rata or otherwise as
agreed among said Founders, within the Second Option Period, accept such offer
as to all the Series B Preferred Stock so offered. In the event such offer is
not accepted by the Company and/or the Founders as to all the Series B Preferred
Stock so offered, then the transferring Stockholder may offer such Series B
Preferred Stock to any Outsider pursuant to the terms of Section 2.3; provided,
if either the Company or the Founders elects not to participate in such a sale
and the terms and conditions of such sale thereafter materially change, the
transferring Stockholder must once again give the notice required in Section 2.1
and allow the Company and the Founders to exercise their right under this
Article 2.
ARTICLE 3
Prohibited Transfers
3.1 Treatment of Prohibited Transfers. In the event a Founder should
sell any Common Stock of the Company in contravention of the participation
rights of the Stockholders under this Agreement (a "Prohibited Transfer"), the
Stockholders, in addition to such other remedies as may be available at law, in
equity or hereunder, shall have the put option provided in Section 3.2 below,
and such Founder (the "Breaching Founder") shall be bound by the applicable
provisions of such put option.
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3.2 Put Option. In the event of a Prohibited Transfer, each Stockholder
shall have the right to sell to the Breaching Founder a number of shares of
Common Stock of the Company (either directly or through delivery of convertible
Series B Preferred Stock) equal to the number of shares each Stockholder would
have been entitled to transfer to the purchaser in the Prohibited Transfer
pursuant to the terms hereof. Such sale shall be made on the following terms and
conditions:
(a) The price per share at which the shares are to be sold to
the Breaching Founder shall be equal to the price per share paid by the
purchaser to the Breaching Founder in the Prohibited Transfer. Such Breaching
Founder shall also reimburse each Stockholder for any and all fees and expenses,
including legal fees and expenses, incurred pursuant to the exercise or the
attempted exercise of the Stockholder's rights under this Article 3.
(b) Within 90 days after the later of the date on which the
Stockholders (i) received notice from the Breaching Founder of the Prohibited
Transfer or (ii) otherwise become aware of the Prohibited Transfer, each
Stockholder shall, if exercising the put option created hereby, deliver to such
Breaching Founder the certificate or certificates representing shares to be
sold, each certificate to be properly endorsed for transfer.
(c) Such Breaching Founder shall, upon receipt of the
certificate or certificates for the shares to be sold by a Stockholder, pursuant
to Section 3.2(b), pay the aggregate purchase price therefor and the amount of
reimbursable fees and expenses, as specified in Section 3.2(a), by certified
check or bank draft made payable to the order of such Stockholder.
ARTICLE 4
Legended Certificates
4.1 Legend. Each certificate representing shares of Series B Preferred
Stock of the Company issued to the Stockholders or of the Common Stock of the
Company now or hereafter owned by the Founders or issued to any Permitted
Transferee of the Stockholders who agrees to be bound by the restrictions set
forth herein shall be endorsed with the following legend:
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"THE SALE OR TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
IS SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN STOCKHOLDERS
AGREEMENT BY AND BETWEEN THE STOCKHOLDER, THE CORPORATION AND CERTAIN
HOLDERS OF PREFERRED STOCK OF THE CORPORATION. COPIES OF SUCH AGREEMENT
MAY BE OBTAINED UPON WRITTEN REQUEST TO THE SECRETARY OF THE
CORPORATION."
4.2 Legend Removal. The Section 4.1 legend shall be removed (i) upon
termination of this Agreement in accordance with its terms; or (ii) in
connection with a Permitted Transfer or other sale permitted by terms hereof;
provided the Company may request an opinion of counsel reasonably acceptable in
form and substance to the Company to the effect that the proposed transfer is
permitted pursuant to the terms of this Article and that the shares issued to
the transferee are not required to be legended in accordance with the terms
hereof.
ARTICLE 5
Miscellaneous Provisions
5.1 Termination. This Agreement shall terminate upon the earliest of
(i) the consummation of an underwritten public offering of the Company's Common
Stock registered under the Securities Act of 1933, as amended, which results in
aggregate net proceeds to the Company of not less than $20,000,000 at a public
offering price of more than the Minimum Price (as defined in the Certificate of
Designation, Preferences and Rights dated January 15, 1997), appropriately
adjusted to reflect any stock split, stock dividend or recapitalization of the
Company from the date of this Agreement; (ii) as to any party, upon the death of
such party; (iii) as to the Stockholders, at such time as the Stockholders cease
to own 50,000 shares of Series A Preferred Stock, 50,000 shares of Series B
Preferred Stock; or Common Stock representing in the aggregate more than ten
percent (10%) of the outstanding Common Stock of the Company on a fully diluted
basis; (iv) as to either Founder, at such time as said Founder ceases to own
Common Stock representing in the aggregate more than ten percent (10%) of the
outstanding Common Stock on a fully diluted basis; or (v) upon the expiration of
five years from the date hereof (except in regard to Section 5.9).
5.2 Notices. Any notice required or permitted to be given to a party
pursuant to the provisions of this Agreement shall be in writing and shall be
effective upon personal delivery or upon deposit in the U.S. mail, postage
prepaid and properly addressed to the party to be notified as set forth below
such party's signature or at such other address as such party may designate by
ten (10) days' advance written notice to the other parties hereto.
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5.3 Successors and Assigns. Except as otherwise set forth herein, this
Agreement and the rights and obligations of the parties hereunder shall inure to
the benefit of, and be binding upon, their respective successors, assigns and
legal representatives. The participation rights of the Stockholders hereunder
are only assignable (i) by each of such Stockholders to any partner, shareholder
or affiliate thereof, or (ii) to an assignee or transferee who acquires at least
50,000 shares of Series B Preferred Stock (or shares of Common Stock issuable
upon conversion of such Series B Preferred Stock or a combination of such Series
B Preferred Stock and Common Stock). As used herein, an "affiliate" of a
Stockholder shall mean any Person who controls, is under common control with, or
is controlled by such Stockholder.
5.4 Severability. In the event one or more of the provisions of this
Agreement should, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions of this Agreement, and this Agreement
shall be construed as if such invalid, illegal or unenforceable provision had
never been contained herein.
5.5 Amendments. Any amendment or modification of this Agreement shall
be effective only if evidenced by a written instrument executed by duly
authorized representatives of the parties hereto. Any waiver by a party of its
rights hereunder shall be effective only if evidenced by a written instrument
executed by a duly authorized representative of such party, provided, however,
that holders of a majority of the Common Stock issued or issuable upon
conversion of the Series B Preferred Stock may, with the prior written consent
of the Founders and the Company, waive, modify or amend on behalf of all
Stockholders any provisions hereof. In no event shall such waiver of any rights
hereunder constitute the waiver of such rights in any future instance unless the
waiver so specifies in writing.
5.6 Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of Delaware
without regard to conflict of laws.
5.7 Other Obligations of Company. The Company agrees to inform the
Founders and Stockholders of any breach hereof and to assist the Founders and
Stockholders in the exercise of their rights and performance of their
obligations under Article 3 hereof.
5.8 Ownership of Shares. Each Founder represents and warrants, with
respect to the shares of Common Stock owned by such Founder, that such Founder
is the sole legal and beneficial owner of the shares of Common Stock subject to
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this Agreement and that no Person has any interest (other than a community
property interest) in such shares.
5.9 Voting Agreement. (a) From and after the date on which shares of
Series B Preferred Stock have been converted into shares of Common Stock (the
"Trigger Date") and for so long as the Stockholders own in excess of ten percent
(10%) of the outstanding shares of Common Stock on a fully diluted basis, the
Founders agree to vote all shares of Common Stock owned, controlled or voted by
each of them in favor of Stockholders' nominees, if any, for the Board of
Directors.
(b) The Founders shall not vote any shares of Common Stock
owned or controlled by either of them to remove any of the Stockholders'
nominees from the Board without the consent of Stockholders holding a majority
of the shares of Series B Preferred Stock and Common Stock issued upon
conversion of the Series B Preferred Stock owned by all such Stockholders
("Majority in Interest"). Any vacancy on the Board caused by the death,
resignation or removal of any of the Stockholders' nominees shall be filled
promptly by another person nominated by the Majority in Interest at a special
meeting of the Company's stockholders held for that purpose. The failure of the
Stockholders to exercise their rights under this Section 5.9 shall not
constitute a waiver of their right to exercise such right in the future.
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IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year indicated above.
FOUNDERS:
Robert A. Buschman
Address: 10101 Reunion Place,
Suite 210
San Antonio, Texas 78216
Guy Bob Buschman
Address: 10101 Reunion Place,
Suite 210
San Antonio, Texas 78216
COMPANY:
RIO GRANDE, INC.
By:
Title:
Address: 10101 Reunion Place
Union Square, Suite 210
San Antonio, TX 78216
Attention: President
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STOCKHOLDER:
KOCH EXPLORATION COMPANY
By:
Title:
Address: 4111 E. 37th Street North
Wichita, KS 67220
Attention: Vice President
Consent of Spouse:
I acknowledge that I have read the foregoing Agreement and that I know
its contents, and I agree to be deemed to be a "Founder" for purposes of the
foregoing Agreement. I am aware that by its provisions if I and/or my spouse
agree to sell all or part of the shares of Common Stock of the Company held of
record by either or both of us, including my community property interest in such
shares, if any, co-sale rights (as described in the Agreement) must be granted
to the Stockholders by the seller. I hereby agree that those shares and my
interest in them, if any, are subject to the provisions of the Agreement and
that I will take no action at any time to hinder operation of, or violate, the
Agreement.
SPOUSE OF ROBERT A. BUSCHMAN:
Name:
SPOUSE OF GUY BOB BUSCHMAN:
Cindy Buschman
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1/15/97
FIRST AMENDMENT TO LOAN AGREEMENT
FIRST AMENDMENT TO LOAN AGREEMENT dated as of January 15, 1997, among
RIO GRANDE, INC. and RIO GRANDE DRILLING COMPANY, each having its address at
Union Square, Suite 210, 10101 Reunion Place, San Antonio, Texas 78216- 4156,
referred to herein as the "Borrowers", and COMERICA BANK - TEXAS, Second Floor,
Thanksgiving Tower, 1601 Elm Street, Dallas, Texas 75201, referred to herein as
the "Bank".
R E C I T A L S
A. The Borrowers and the Bank are parties to a Loan Agreement dated as
of March 8, 1996 (the "Original Loan Agreement").
B. The indebtedness of the Borrowers to the Bank under the Original
Loan Agreement is presently evidenced by a promissory note made by the Borrowers
payable to the order of the Bank in the original principal sum of $10,000,000
dated as of March 8, 1996 (the "Original Note"). The outstanding balance of the
Original Note as of this date is $5,050,000.
C. The obligations of the Borrowers to the Bank under the Original Loan
Agreement and the Original Note are secured by interests in oil and gas
properties owned by Rio Grande Drilling Company and by Rio Grande Offshore,
Ltd., an affiliate of the Borrowers. These properties are located in the states
of Louisiana, Mississippi, Oklahoma, Texas and Wyoming, and these are the
"Mortgaged Properties" under the Original Loan Agreement.
D. The Borrowers have raised $10,000,000 through the sale of preferred
stock of Rio Grande, Inc. The Borrowers have requested the Bank increase the
loan availability under the credit facility created by the Original Loan
Agreement to enable them to borrow up to an additional $12,000,000. The
Borrowers propose to use portions of the net proceeds from the sale of preferred
stock and the loan increase to acquire from a consortium of sellers acting
through their agent, Brechtel Energy Corporation, certain mineral interests in
oil and gas properties located in Allen Parish, Louisiana known as the Righthand
Creek Field.
E. The Borrowers have requested that the Bank modify the amount
and terms of payment of the Original Note and extend the maturity date of
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the Original Note and make various amendments to the Original Loan Agreement and
the related Loan Documents (as defined in the Original Loan Agreement) in order
to consummate this property acquisition. The Bank is agreeable to such requests,
subject to the terms and conditions hereof, including without limitation, the
amendment of the liens against the presently existing Mortgaged Properties to
secure expressly the modified and increased indebtedness, and the mortgage to
the Bank of the interests to be acquired in the Righthand Creek Field as
additional collateral, all as hereinafter set forth.
NOW THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt, sufficiency and adequacy of which are
hereby acknowledged, the parties hereto agree as follows:
1.0 Definitions. The defined terms used herein shall have the same
meanings as provided therefor in the Original Loan Agreement, unless the context
hereof otherwise requires or provides. The term "Loan Agreement" means the
Original Loan Agreement as amended by this First Amendment to Loan Agreement and
as the same may hereafter be amended from time to time. In addition, the
following terms have the meaning set forth below:
"Affidavit of Payment of Trade Bills - New Properties": See
Section 5.8.
"Effective Date" means January 16, 1997.
"First Renewal Note" means that certain renewal and extension
promissory note made by the Borrowers payable to the order of the Bank
in the original principal sum of $50,000,000 dated January 15, 1997,
and having a final maturity date of February 1, 2000, which is a
renewal and extension of the Original Note.
"Maturity Date" means February 1, 2000.
"Maximum Rate" means the higher of the maximum interest rate
allowed by applicable United States or Texas law as amended from time
to time and in effect on the date for which a determination of interest
accrued under the Note is made. The determination of the maximum rate
permitted by applicable Texas law shall be made pursuant to the
indicated rate ceiling as defined in Tex.Rev.Civ.Stat.Ann. art.
5069-1.04, but Bank reserves the right to implement from time to time
any other rate ceiling permitted by such law.
"Modification Papers" mean this First Amendment to Loan
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Agreement, the First Renewal Note, the New Oil and Gas Mortgage, the
New Louisiana Commercial Security Agreement, the Property Certificate
New Properties, the Affidavit of Payment of Trade Bills - New
Properties, the Transfer Order Letters - New Properties, the UCC-1
financing statements, the Section 26.02 Notice, the Mortgage
Amendments, the officer's certificates for both Borrowers and of the
general partner of Offshore, and all other documents executed by the
Borrowers, Rio Grande Offshore, Ltd. and their officers and affiliates
in connection with the transactions described in this First Amendment
to Loan Agreement.
"Mortgage Amendments": See Section 2.0.
"New Louisiana Commercial Security Agreement" means the
security agreement granting the Bank liens against the New Properties.
"New Oil and Gas Mortgage" means the Oil and Gas Mortgage
granting the Bank liens against the New Properties.
"New Properties" mean those Oil and Gas Properties listed on
Schedule V attached hereto which are the properties known as the
Righthand Creek Field located in Allen Parish, Louisiana, which are
being acquired from a consortium of sellers acting through their agent,
Brechtel Energy Corporation.
"Offshore" means Rio Grande Offshore, Ltd., a Texas limited
partnership which is 100% owned or controlled, directly or indirectly,
by the Borrowers.
"Original Loan Agreement": see Recital A.
"Original Note": see Recital B.
"Preferred Stock Designation Certificate" means that certain
document captioned "Certificate of Designation of Preferences and
Rights of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock of Rio Grande, Inc." dated as of January 15, 1997.
"Preferred Stock Purchase Agreement" means that certain
Preferred Stock Purchase Agreement between Rio Grande, Inc. and Koch
Exploration Company dated as of January 16, 1997, as amended.
"Permitted Commodity Swap Transaction": See Section 5.0.
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2.0 Renewal and Extension of Original Note and Addition of Collateral.
The Borrowers shall pay the Bank all accrued interest on the Original Note to
the Effective Date. Then, the outstanding principal balance of the Original Note
on the Effective Date, which is $5,050,000, shall be renewed and extended and
shall be evidenced by the First Renewal Note. The First Renewal Note will
continue to be secured by all of the collateral presently securing the Original
Note, including without limitation, the Mortgaged Properties described in the
Original Loan Agreement and the Oil and Gas Mortgages (other than those
Mortgaged Properties which have subsequently been released with the consent of
the Bank), and pursuant thereto, each of such presently existing Oil and Gas
Mortgages shall be amended to secure expressly the First Renewal Note pursuant
to the terms of mortgage amendments (the "Mortgage Amendments") which shall be
satisfactory in form and substance to the Bank. In addition, as further security
for the indebtedness evidenced by the First Renewal Note, the Borrowers shall
mortgage, and shall cause Offshore to mortgage, to the Bank their respective
Mineral Interests in the New Properties pursuant to the terms of the New Oil and
Gas Mortgage. The provisions of the New Oil and Gas Mortgage to the contrary
notwithstanding, Offshore need not comply with the covenants contained in
Sections 1.3, 1.4, 1.5 and 1.6(a) of the New Oil and Gas Mortgage with respect
to that portion of the New Properties known as the Ballard Unit U WX RB SUA (the
"Ballard Unit"), until such time as the Ballard Unit has been included within
the Borrowing Base.
3.0 Borrowing Base Matters. The parties agree that on the Effective
Date the Borrowing Base shall be $17,050,000. The parties further agree that the
next scheduled Determination Date shall be February 1, 1998. The parties further
agree to modify and increase the "Monthly Reduction Amount" as set forth in
Section 7.0 hereof.
4.0 Uses of Proceeds. As the result of the increase of the Borrowing
Base to $17,050,000, an additional $12,000,000 of new funds is now available for
Loans under the Loan Agreement. In addition to the uses of proceeds specified in
Section 2.2 of the Original Loan Agreement, proceeds of Loans (a) shall be used
to refinance the existing indebtedness of the Borrowers to the Bank evidenced by
the Original Note and to complete the acquisition of the New Properties, and (b)
may be used to repay the obligations of the Borrowers under the Note Purchase
Agreement and for capital expenditures in connection with the development of oil
and gas properties.
5.0 Permitted Commodity Swap Transactions. The term "Permitted
Commodity Swap Transaction" means a commodity swap protection pricing
30142402.2
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arrangement entered into by either Borrower in the ordinary course of business
which meets both volume and pricing parameters determined by the Bank in its
sole discretion in accordance with then-current practices, customary procedures
and standards used by the Bank for its petroleum industry customers,
consistently applied with respect to petroleum industry customers similarly
situated. Simultaneously with the determination of the Borrowing Base under the
Original Loan Agreement, the Bank will establish volume and pricing parameters
for all Permitted Commodity Swap Transactions in the aggregate, each of which
(a) shall be established for a thirty-six (36) month period commencing on the
"as of" date utilized in the Bank's engineering with each Borrowing Base
redetermination, and (b) shall remain in effect until the next time the
Borrowing Base is redetermined. Redetermined volume and pricing parameters shall
be effective for all Permitted Commodity Swap Transactions entered into after
the date of redetermination, but the Borrowers shall not be required to redeem,
cover or cancel any then-existing Permitted Commodity Swap Transaction which met
the applicable standards in effect at the time it was initially executed.
Initially, the Bank establishes the aggregate volume and pricing parameters for
crude oil hedging for the thirty-six (36) month period transactions commencing
November 1, 1996, as are set forth on Exhibit E attached hereto.
6.0 Conditions Precedent. The transactions contemplated by the First
Amendment to Loan Agreement shall be deemed to be effective as of the Effective
Date, when the following conditions have been complied with to the satisfaction
of the Bank, unless waived in writing by the Bank:
6.1 Loan Origination Fee. The Borrowers shall have paid the
Bank a loan origination fee of $75,000.
6.2 Effectiveness of Modification Papers. Each of the
Modification Papers shall be in full force and effect.
6.3 Payment of Accrued Interest on Original Note. The
Borrowers shall have paid the Bank the accrued interest on the Original
Note to the Effective Date.
6.4 Closing of Transactions Under Preferred Stock Purchase
Agreement. The Borrowers shall have delivered evidence satisfactory to
the Bank of the closing of the transactions described in the Preferred
Stock Purchase Agreement and the payment to Rio Grande, Inc. of the
Purchase Price, as defined therein.
6.5 Payment of Subordinated Debt. The Borrowers shall have
made arrangements for the prompt payment in a manner satisfactory to
the Bank of all obligations owed under the Note Purchase Agreement.
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6.6 Property Certificates. The Borrowers shall have delivered
to the Bank one or more Property Certificates for the New Properties
(each a "Property Certificate - New Properties"), which shall be in the
form of Exhibit "C" attached to the Original Loan Agreement containing
the information as provided therein.
6.7 Transfer Order Letters. The Borrowers shall have
delivered, and shall have caused Offshore to deliver, to the Bank one
or more Transfer Order Letters for each of the New Properties (each a
"Transfer Order Letter - New Properties"), which shall be in the form
of Exhibit "D" attached to the Original Loan Agreement containing the
information as provided therein.
6.8 Affidavit of Payment of Trade Bills. The Borrowers shall
have delivered, and shall have caused Offshore to deliver, to the Bank
an affidavit (each an "Affidavit of Payment of Trade Bills - New
Properties") which shall be substantially in the form of the Affidavit
of Payment of Trade Bills delivered pursuant to the Original Loan
Agreement containing the certifications as provided therein for the New
Properties.
6.9 Title Opinions. The Borrowers shall have caused to be
delivered to the Bank one or more current favorable title opinions,
addressed to the Bank upon which the Bank may rely with respect to the
New Properties to be acquired with the proceeds of the Loan to be
funded upon the occurrence of the Effective Date. Each title opinion
shall opine as to such matters incident to such New Properties as the
Bank may reasonably request including the following:
(a) Offshore has good and defensible title to all
such New Properties to the extent of its Mineral Interests as
specified therein, free and clear of all liens and
encumbrances.
(b) Offshore is entitled to receive, after giving
effect to all royalties, overriding royalties and other
burdens payable out of production, a decimal share of all
hydrocarbons produced and sold from such New Properties before
and after payout, as set forth in the opinion.
(c) Offshore's operating interest in such New
Properties is not obligated to bear a decimal share of all
costs and expenses from the operation thereof in excess of
that set forth in the opinion, before and after payout.
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6.10 Cleanup of Certain Matters Relating to Acquisition Title
Opinion. The legal issues raised in Requirement No. 1, Requirement No.
10(6) and Requirement No. 11 of that certain Acquisition Title Opinion
for the properties known as the Reservoirwide Unit U WX RD SU of the
Righthand Creek Field prepared by Michael C. McKeough dated December
23, 1996, have been complied with or otherwise addressed in a manner
acceptable to the Bank.
6.11 Credit Opinion. There shall have been delivered to the
Bank a favorable opinion of Borrowers' counsel covering such matters
incident to the Loan to be funded upon the occurrence of the Effective
Date as the Bank may reasonably request.
6.12 Borrowing Request. The Borrowers shall have given the
Bank a Borrowing Request appropriately completed in compliance with the
requirements of the Loan Agreement.
6.13 Release of Prior Lien. There shall have been delivered to
the Bank a release acceptable to the Bank executed by First National
Bank of Commerce of New Orleans, Louisiana, releasing such bank's lien
against New Properties.
6.14 Finder's Fees. The Borrowers shall have made arrangements
satisfactory to the Bank for the payment in full all finder's fees and
brokerage commissions, if any, relating to the issuance of the
preferred stock of Rio Grande, Inc., and the acquisition of the New
Properties.
6.15 Section 26.02 Notice. The Borrowers and Offshore shall
have executed a Section 26.02 Notice.
6.16 Documentation and Proceedings. The Borrowers shall have
delivered resolutions of their board of directors, and the Borrowers
shall have caused Offshore to deliver appropriate evidence of authority
of its general partner acting on behalf of Offshore, authorizing their
execution, delivery and performance of the Modification Documents to
which they are parties.
6.17 Additional Documents. Each Borrower and Offshore shall
have executed and delivered to the Bank such additional documents and
certificates with respect to the transactions contemplated by this
First Amendment to Loan Agreement as the Bank shall have reasonably
requested.
6.18 Required Acts and Conditions. All acts, conditions and
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things required to be done and performed and to have happened precedent
to the consummation of the transactions contemplated by this First
Amendment to Loan Agreement and to the continued performance and
effectiveness of each of the Modification Papers shall have been done
and performed and shall have happened in due compliance with all
applicable laws.
6.19 No Default. There shall exist no event of default under
the Original Loan Agreement, and there shall exist no condition, event
or act which, with the giving of notice or lapse of time, or both,
would constitute an event of default under the Original Loan Agreement.
6.20 Expenses. The Borrowers shall have paid all reasonable
expenses of the Bank in connection with the transactions contemplated
by the Modification Papers including but not limited to engineering
fees incurred by the Bank and fees and expenses of counsel for the
Bank.
7.0 Amendments to Original Loan Agreement. When the obligations of the
parties become effective as provided in Section 6.0 hereof, the Original Loan
Agreement shall be deemed to be amended as follows:
(a) The lead in to the definitions contained in Section 1.0
shall be amended to read in its entirety as follows:
"1.0 Definitions. Certain definitions concerning the
interest rate provisions are set forth on Schedule VI. In
addition, the following terms shall have the meanings set
forth with respect thereto:"
(b) The definition of "Monthly Reduction Amount" shall be
amended to read in its entirety as follows:
"'Monthly Reduction Amount' means $333,000 per month
commencing April 1, 1997 and continuing through and including
December 1, 1998 (subject to adjustment as provided in Section
3.5 hereof), and thereafter in the amount of $333,000 per
month unless or until adjusted as provided in Section 3.5
hereof.
(c) The figure "$10,000,000" on the fourth line of the first
sentence of Section 2.1 shall be amended to be "$50,000,000".
(d) Section 2.2 shall be amended by adding the following
clauses at the end thereof:
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". . ., and (d) to refinance existing indebtedness
owed to Bank, and (e) to repay obligations owed under the Note
Purchase Agreement, and (f) for capital expenditures in
connection with the development of oil and gas properties."
(e) Section 2.3 shall be amended to read in its entirety as
follows:
"2.3 Promissory Note. The obligation of Borrowers to
repay the aggregate principal balance of all Loans hereunder
outstanding at any one time (the 'Principal Debt' shall be
evidenced by a Promissory Note (the 'Note') which shall (a) be
dated January 15, 1997, (b) be payable on or before the
Maturity Date for the amount of $50,000,000, or the Principal
Debt then outstanding, whichever is less, (c) bear interest
from the date thereof until paid at the interest rate and be
payable in the manner as is hereinafter set forth, (d) be
entitled to the benefits of the Loan Agreement and the
security provided for in the Loan Agreement, and (e) be in
such form as is acceptable to the Bank. The Note shall be
given in substitution for and in renewal and extension of the
Original Note with the effect that $5,050,000, which is the
unpaid balance of the Original Note as of this date, shall
become part of the principal balance of the Note. The Note
shall be given in substitution and in renewal and extension of
that certain promissory note made by Borrowers payable to the
order of Bank in the Original Principal Sum of $10,000,000
dated March 8, 1996 (the 'Original Note'), with the effect
that $5,050,000 which is the unpaid balance of the Original
Note as of this date, shall become part of the principal
balance of the Note."
(f) "2.4 INTENTIONALLY OMITTED"
(g) The figure "$10,000,000 in the second sentence of Section
2.6 shall be amended to be "$50,000,000".
(h) New Sections 2.7, 2.8, 2.9, 2.10, 2.11, 2.12, 2.13, 2.14
and 2.15 shall be added which read in their entirety as follows:
"2.7 Procedure for Borrowing. Whenever Borrowers
desire a Loan hereunder, Borrowers shall give Bank notice in
the form of Exhibit A attached hereto specifying (a) the date
(which shall be a Business Day in the case of a Prime Rate
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Loan or a Eurodollar Business Day in the case of a Eurodollar
Loan) of the proposed borrowing, (b) the amount to be
borrowed, (c) the portion of the borrowing constituting a
Prime Rate Loan and/or a Eurodollar Loan (which may only be in
Incremental Portions), and (d) if any portion of the proposed
borrowing constitutes a Eurodollar Loan, the initial
Eurodollar Interest Period selected by Borrowers (thirty days,
sixty days, ninety days, or one hundred eighty days). Such
notice shall be given by 10 a.m. (Dallas, Texas time) on the
date of the proposed borrowing in the case of a Prime Rate
Loan, and by 10 a.m. (Dallas, Texas time) two (2) Business
Days prior to the date of the proposed borrowing in the case
of a Eurodollar Loan. The notice required may be given
telephonically by Borrowers to Bank, but upon giving such
telephonic notice Borrowers shall immediately thereafter
provide Bank with the written notice attached hereto as
Exhibit A. All notices given under this Section 2.7 shall be
irrevocable. Not later than 2:00 p.m. (Dallas, Texas time) on
the date of the proposed borrowing and upon fulfillment of all
other conditions required by this Agreement, Bank will make
such Loan available to Borrowers by crediting the amount
thereof to Borrowers' account with Bank or otherwise
disbursing it as Borrowers shall request in writing. No Loans
may be obtained after the Maturity Date.
2.8 Interest Rate Options For Loans. The interest
rate options available hereunder for Loans shall be for Prime
Rate Loans and for Eurodollar Loans. No more than two (2)
different Eurodollar Loans may be outstanding at any one time.
2.9 Prime Rate Loans. Borrowers agree to pay interest
(calculated on the basis of the actual days elapsed in a year
consisting of 365 days) with respect to the unpaid principal
amount of each Prime Rate Loan from the date the proceeds
thereof are made available to Borrowers until maturity
(whether by acceleration or otherwise) at a varying rate per
annum equal to the lesser of (i) the Maximum Rate or (ii) the
Prime Rate plus 1/2 percent (.50%) per annum. The interest in
respect of each Prime Rate Loan shall be payable on the last
day of each Prime Rate Interest Period. Each Prime Rate Loan
may be prepaid in whole or in part at any time and from time
to time without premium or penalty.
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2.10 Eurodollar Loans. Borrowers agree to pay
interest (calculated on the basis of actual days elapsed in a
year consisting of 360 days) with respect to the unpaid
principal amount of each Eurodollar Loan from the date the
proceeds thereof are made available to Borrowers until
maturity (whether by acceleration or otherwise) at a rate per
annum equal to the lesser of (i) the Maximum Rate or (ii) the
Eurodollar Rate applicable to such Eurodollar Loan. Subject to
the provisions of this Agreement as to prepayment, interest
with respect to each Eurodollar Loan shall be payable on the
last day of each Eurodollar Interest Period. Subject to the
provisions of this Agreement as to prepayment, the principal
of each Eurodollar Loan shall be due and payable on the last
day of each applicable Eurodollar Interest Period and may be
paid or renewed or shall automatically be converted to a Prime
Rate Loan on the last day of such Eurodollar Interest Period
as hereinafter provided. If Borrowers are not in default
hereunder and desire to renew such Eurodollar Loan and the
amount thereof is at least an Incremental Portion, Borrowers
shall deliver the notice required in Section 2.7 hereof and
designate whether the Eurodollar Interest Period to commence
on the expiration date of the prior Eurodollar Interest Period
shall be a thirty day, sixty day, ninety day or one hundred
eighty day period. If Bank has not received timely permissible
notice of designation of such Eurodollar Interest Period as
herein provided, Borrowers shall be deemed to have elected to
convert such maturing Eurodollar Loan to a Prime Rate Loan.
2.11 Interest Rate Determination. Bank shall
determine each interest rate applicable hereunder and shall
give prompt notice to Borrowers of each rate of interest so
determined.
2.12 Conversion Option: Prime Rate Loans to
Eurodollar Loans. Borrowers may convert its Prime Rate Loans
to Eurodollar Loans by giving Bank irrevocable written notice
of such election at least two (2) Eurodollar Business Days
prior to the proposed conversion date. The notice of
conversion to a Eurodollar Loan shall include (1) the amount
of the Prime Rate Loan to be converted (which must be
converted in Incremental Portions), and (2) the duration of
the Eurodollar Interest Period selected (thirty days, sixty
days, ninety days or one hundred eighty days). If Borrowers
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are not in default hereunder, such conversion shall be made on
the requested conversion date or, if such requested conversion
date is not a Eurodollar Business Day, on the next succeeding
Eurodollar Business Day, but if Borrowers are in default
hereunder, no conversion may occur.
2.13 Conversion Option: Eurodollar Loans to Prime
Rate Loans. Borrowers may convert all or any part of its
Eurodollar Loans to Prime Rate Loans by giving Bank
irrevocable written notice of such election prior to 10 a.m.
(Dallas, Texas time) on the conversion date, if such
conversion date is the last day of a Eurodollar Interest
Period with respect thereto, or at least two (2) Eurodollar
Business Days prior written notice if the conversion date is a
day other than the last day of the Eurodollar Interest Period
with respect thereto. Such conversion shall be made on the
requested conversion date or, if such requested conversion
date is not a Business Day, on the next succeeding Business
Day. A conversion of a Eurodollar Loan to a Prime Rate Loan on
a day other than the last day of the Eurodollar Interest
Period for the Eurodollar Loan in question shall constitute a
prepayment which may require the payment of the breakage fee
described in Section 6 of Schedule VII attached hereto. All
conversion notices given hereunder shall be irrevocable.
2.14 Prepayment of Loans. (a) Borrowers may at any
time and from time to time prepay any Prime Rate Loan, in
whole or in part, and (b) Borrowers may at any time and from
time to time prepay any Eurodollar Loan in whole or in part,
provided that Borrowers first comply with the conditions
hereinafter set forth. Borrowers shall give Bank at least two
(2) Eurodollar Business Days prior written notice of (i) its
intent to prepay, (ii) the amount of principal which will be
prepaid, and (iii) the date on which the prepayment will be
made. Each prepayment of principal of a Eurodollar Loan shall
be in a minimum amount of $100,000 (or the aggregate principal
amount outstanding, if less) and in increments of $100,000 in
excess thereof (unless the prepayment retires the outstanding
principal balance of the Note in full) plus accrued interest
thereon to the date of prepayment. Borrowers may also be
required to pay Bank the breakage fee described in Section 6
of Schedule VII attached hereto because such payment of a
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Eurodollar Loan is made on a date other than the last day of
the applicable Eurodollar Interest Period.
2.15 Schedule VI. Reference is made to Schedule VII
attached hereto for special provisions relating to Eurodollar
Loans."
(i) The phrase "1/2 of one percent (.50%) per annum" on the
third line of Section 2.6 shall be changed to the phrase "3/8ths of one
percent (.375%) per annum".
(j) Sections 3.1 and 3.2 shall be amended to read in their
entirety as follows:
"3.1 Periodic Determinations of Borrowing Base. The
Borrowing Base shall be redetermined by Bank as of February 1
and August 1 of each year (each a 'Determination Date'), until
maturity. The Borrowing Base, as redetermined, shall remain in
effect until the next Determination Date, provided that the
Borrowing Base may be redetermined between Determination Dates
in accordance with Section 3.3 hereof.
3.2 Engineering Data to be Provided Prior to
Scheduled Determination Dates. (a) On or before January 1 of
each year for the Determination Date of February 1, Borrowers
shall deliver to Bank such information, reports and data
pertaining to the Mineral Interests of Grantor in all of their
oil and gas properties, which may include all or a portion of
the information and engineering data contained in the Reserve
Report, as Bank may reasonably request. Such information shall
be updated and supplemented from that contained in the most
recent Reserve Report furnished to Bank. Bank shall then
determine the Borrowing Base for the six month period
beginning February 1.
(b) On or before July 1 of each year for the
Determination Date of August 1, Borrowers shall deliver to
Bank a Reserve Report and the other data specified in Section
6.4 hereof together with updated and supplemented information
and engineering data as is reasonably necessary to bring such
Reserve Report current. Bank shall then determine the
Borrowing Base for the six month period commencing August 1."
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(k) The figure "$10,000,000" on the second line of Section
7.10 shall be amended to be "$50,000,000".
(l) Section 7.7 shall be amended to read in its entirety as
follows:
"7.7 Dividends and Distributions. (a) Make any
distribution (other than dividends payable in capital stock of
Borrowers) on any shares of any class of their capital stock
or apply any of their property or assets to the purchase,
redemption or other retirement of any shares of any class of
capital stock of Borrowers; provided however, unless an event
of default has occurred and is continuing, Borrowers may make
dividend payments to the holders of preferred stock of Rio
Grande, Inc. pursuant to the terms of the Preferred Stock
Designation Certificate; and (b) permit Rio Grande GulfMex,
Ltd. to make any distribution (other than a distribution to
its partners in the ordinary course of business and in
accordance with the respective partnership interests of such
partners) on any partnership interest or apply any of its
property or assets to the purchase, redemption or other
retirement of any partnership interest."
(m) Section 7.9 shall be amended to read in its entirety as
follows:
"7.9 INTENTIONALLY OMITTED"
(n) The first sentence of Section 7.12 shall be amended to
read in its entirety as follows:
"Permit the change of control of Rio Grande, Inc.,
except as the result of actions taken pursuant to the terms of
the Preferred Stock Designation Certificate."
(o) Section 7.13 shall be amended to read in its entirety as
follows:
"7.13 Change in Management. Permit Guy R. Buschman to
cease being the President and Chief Executive Officer of
Borrowers, except as the result of actions taken pursuant to
the Preferred Stock Designation Certificate; provided that if
Guy R. Buschman is disabled and thus unable to perform his
30142402.2
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duties as President of Borrowers, then Borrowers shall have
sixty (60) days within with to appoint a president acceptable
to Bank. 'Disabled' as used in the preceding sentence means
if, for physical or mental reasons, Guy R. Buschman is unable
to perform his duties as President of Borrowers for sixty (60)
consecutive days or one hundred twenty (120) days during any
12-month period."
(p) A new Section 7.19 shall be added which reads in its
entirety as follows:
"7.19 No Amendment of Preferred Stock Designation
Certificate or Preferred Stock Purchase Agreement. Modify or
amend the terms and provisions of the Preferred Stock
Designation Certificate or the Preferred Stock Purchase
Agreement."
(q) A new Section 7.20 shall be added which reads in its
entirety as follows:
"7.20 No Commodity Swap Protection or Hedging
Arrangements. Enter into any commodity swap protection hedging
arrangement except for Permitted Commodity Swap Transactions."
(r) Section 9.5 shall be amended to read in its entirety as
follows:
"9.5 Default in Other Debt. An event of default shall
occur under the provisions of any instrument (other than the
Loan Documents and the Note Purchase Agreement) evidencing
indebtedness of Borrowers or the other Grantors for the
payment of borrowed money or of any agreement relating thereto
(the effect of which is to permit the holder or holders of
such instrument to cause the indebtedness evidenced by such
instrument to become due prior to its stated maturity),
provided Borrowers may default in indebtedness secured by
purchase-money security interests so long as the total amount
of such indebtedness in default does not exceed $50,000 in the
aggregate.
(s) The Borrowing Request attached as Exhibit A to the
Original Loan Agreement shall be replaced with the Borrowing Request
attached as Exhibit A to this First Amendment to Loan Agreement.
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8.0 Certain References. All references in the Original Loan Agreement
and in the Loan Documents to the Note shall mean the First Renewal Note. All
references in the original Loan Agreement and in the Loan Documents to the "Loan
Agreement" shall mean the Original Loan Agreement, as amended by this First
Amendment to Loan Agreement, and as the same may hereafter be modified and
amended from time to time.
9.0 Representations and Warranties. To induce the Bank to enter into
this First Amendment to Loan Agreement, each Borrower represents and warrants as
follows (which representations and warranties shall survive the execution and
delivery hereof):
9.1 Authority and Compliance. The Borrowers have full power
and authority to execute, deliver and perform the Modification Papers
to which they are parties and to incur and perform the obligations
provided for therein. The other Grantors have full power and authority
to execute, deliver and perform the Modification Papers to which they
are parties and to incur and perform the obligations provided for
therein. No consent or approval of any public authority or other third
party is required as a condition to the validity or performance of any
Modification Papers, and the Grantors are in compliance with all laws
and regulatory requirements to which the Grantors are subject except
for those laws and regulations the non-compliance with which does not
create a possibility of adversely affecting either the financial
condition of the Grantors or any of their Mineral Interests in the
Mortgaged Properties.
9.2 Binding Agreement. This First Amendment to Loan Agreement
and the other Modification Papers executed by the Borrowers and the
other Grantors constitute valid and legally binding obligations of the
Borrowers and the other Grantors, respectively, enforceable in
accordance with their terms except to the extent that such enforcement
may be limited by applicable bankruptcy, insolvency, or other similar
laws affecting creditors' rights generally.
9.3 No Conflicting Agreements. There is no charter, bylaw,
stock provision, partnership agreement or other document pertaining to
the power of authority of any of the Grantors and no provision of any
existing agreement, mortgage, indenture or contract binding upon any of
the Grantors or affecting any property of the Grantors, which would
conflict with or in any way prevent the execution, delivery and
carrying out of the terms and provisions of this First Amendment to
Loan Agreement and the other Modification Papers.
9.4 No Liens. Offshore has good and defensible title to, and
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is the beneficial owner of, all Mineral Interests in and to the oil and
gas leases which comprise the Mortgaged Properties described in the New
Oil and Gas Mortgage. None of the Mineral Interests of Offshore in and
to the oil and gas leases which comprise the Mortgaged Properties
described in the New Oil and Gas Mortgage are subject to any security
interest, mortgage, deed of trust, pledge, lien or title retention
document of any character except liens permitted by Section 7.4 of the
Original Loan Agreement.
9.5 New Properties Same As Properties Engineered. All of the
New Properties described in and covered by the engineering reports
which have been previously delivered to and relied upon by the Bank in
connection with this First Amendment to Loan Agreement are part of the
properties mortgaged to the Bank pursuant to the New Oil and Gas
Mortgage.
9.6 Certain Representations Under Original Loan Agreement. All
representations and warranties contained in Sections 8.3, 8.6, 8.8 and
8.9 are true and correct in all material respects (the representations
made in Sections 8.6 and 8.8 are made with respect to facts as they
exist as of the Effective Date).
10.0 Supplemental Title Opinion Post Closing. Within ninety (90) days
after the Effective date, the Borrowers shall cause to be delivered to the Bank
one or more current favorable title Opinions addressed to the Bank upon which
the Bank may rely with respect to the New Properties which are acceptable to the
Bank confirming (a) the title and information described in Section 6.9 hereof,
and (b) there are no liens or encumbrances against the Mineral Interests of
Offshore in such New Properties other than those in favor of the Bank.
11.0 Confirmation of Relationship of Liabilities Under Swap Agreements
to Certain Negative Covenants. The parties agree that obligations owed by the
Borrowers in respect of Permitted Commodity Swap Transactions will not be deemed
to be transactions in compassed within the scope of (a) the negative covenants
set forth in Sections 7.5, 7.6 and 7.11 of the Original Loan Agreement, and (b)
Section 7.4 of the Original Loan Agreement, if (i) no security is required
unless the amount of credit exposure to the Borrowers exceeds $500,000, and (ii)
the security given by the Borrowers is limited to cash and cash equivalents.
12.0 Compliance with Terms of Issuance of Preferred Stock. The parties
hereby confirm that the execution of and performance by Rio Grande, Inc. of its
duties and obligations under the Preferred Stock Designation Certificate and the
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Preferred Stock Purchase Agreement shall not be deemed to be prohibited by any
of the terms and provisions of the Original Loan Agreement, as amended by this
First Amendment to Loan Agreement.
13.0 Approval of Right of First Refusal of Sale of Production to Koch.
The Borrowers have requested that the Bank consent to their granting of a right
of first refusal to Koch Exploration Company or any of its affiliates (any of
them being referred to herein as "Koch") with respect to the purchase of
production from all or a portion of the Mortgaged Properties. Bank consents to
such right of first refusal provided that (a) the purchase price to be paid by
Koch is not less than the maximum purchase price which Koch pays others for
comparable production purchased by Koch in the same area or the best price
otherwise available under competitive marketing arrangements, and (b) Koch
grants Borrowers and Bank the right to audit Koch's books and records to confirm
that the price being paid by Koch is not less than the maximum purchase price
which Koch pays others for comparable production in the same area or the best
price otherwise available under competitive marketing arrangements.
14.0 No Further Amendments. Except as previously amended in writing or
as amended hereby, the Original Loan Agreement shall remain unchanged and all
provisions shall remain fully effective between the parties during the term of
this First Amendment to Loan Agreement.
15.0 Limitation on Agreements. The agreements and amendments set forth
herein are limited precisely as written and shall not be deemed (a) to be a
waiver or waivers of or a consent or a consents to or an amendment of any other
term or condition in the Original Loan Agreement, or (b) to prejudice any right
or rights which the Bank now has or may have in the future under or in
connection with the Original Loan Agreement or any of the Loan Documents or any
of the other documents referred to therein. This First Amendment to Loan
Agreement together with all of the other Modification Papers shall constitute
Loan Documents for all purposes.
16.0 Joint and Several Liability. The liability of the Borrowers
hereunder shall be joint and several in all respects.
17.0 Section 26.02 Notice. THIS WRITTEN AGREEMENT, TOGETHER WITH ALL OF
THE OTHER MODIFICATION PAPERS AND LOAN DOCUMENTS, REPRESENTS THE FINAL AGREEMENT
AMONG THE PARTIES AND MAY NOT CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS
OR SUBSEQUENT ORAL AGREEMENTS AMONG THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS AMONG THE PARTIES. This First Amendment to Loan Agreement, together
with the other Modification Papers and Loan Documents, embodies the entire
agreement between the parties, and supersedes all prior agreements and
understandings relating to the subject matter hereof.
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IN WITNESS WHEREOF, the parties hereto have executed this First
Amendment to Loan Agreement to be effective for all purposes as of January 16,
1997, upon compliance with the provisions of Section 6.0 hereof.
RIO GRANDE, INC.
By
Guy R. Buschman
President
RIO GRANDE DRILLING COMPANY
By
Guy R. Buschman
President
COMERICA BANK - TEXAS
By
Terry O. McCarter
Vice President
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SCHEDULES TO FIRST AMENDMENT TO LOAN AGREEMENT
V.........................List of New Properties...................ss.1.0
VI...................Interest Rate Pricing Definitions.............ss.7.0(a)
VII............Special Provisions Relating to Eurodollar Loans.....ss.7.0(h)
EXHIBITS TO FIRST AMENDMENT TO LOAN AGREEMENT
A...........................Borrowing Request......................ss.7.0(s)
F.............Parameters for Permitted Commodity Swap Transactions
for 36 Month Period Commencing 11/1/96......ss.5.0
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SCHEDULE V
DESCRIPTION OF NEW PROPERTIES
30142402.2
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SCHEDULE VI
INTEREST RATE PRICING DEFINITIONS
The definitions set forth on this Schedule VI are those which relate
solely to the interest rate pricing options under the Agreement.
"Business Day" means the normal banking hours during any day (other
than Saturdays or Sundays) that banks are legally open for business in Dallas,
Texas.
"Eurocurrency Reserve Requirement" means, for any Eurodollar Loan for a
Eurodollar Interest Period thereunder, the daily average of the stated maximum
rate (expressed as a decimal) at which reserves (including any marginal,
supplemental or emergency reserves) are required to be maintained during such
Eurodollar Interest Period under Regulation D by Bank against "eurocurrency
liabilities" (as such term is used in Regulation D), but without benefit or
credit of proration, exemptions or offsets that might otherwise be available to
Bank from time to time under Regulation D. Without limiting the effect of the
foregoing, the Eurocurrency Reserve Requirement shall reflect any other reserves
required to be maintained by Bank against (a) any category of liabilities that
includes deposits by reference to which the Eurodollar Interest Rate for
Eurodollar Loans is to be determined, or (b) any category of extension of credit
or other assets that includes Eurodollar Loans.
"Eurodollar Business Day" means a Business Day on which dealings in
U.S. Dollar deposits are carried on in the Eurodollar market.
"Eurodollar Interest Period" means, with respect to any Eurodollar
Loan:
(i) initially, the period commencing on the date such
Eurodollar Loan is made and ending thirty days, sixty days, ninety days
or one hundred eighty days thereafter, as selected by Borrowers, and
(ii) thereafter, each period commencing on the day following
the last day of the next preceding Interest Period applicable to such
Eurodollar Loan and ending thirty days, sixty days, ninety days or one
hundred eighty days thereafter, as selected by Borrowers;
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provided, however, that (A) if any Eurodollar Interest Period would otherwise
expire on a day that is not a Eurodollar Business Day, such Interest Period
shall expire on the next succeeding Eurodollar Business Day, and (B) any
Eurodollar Interest Period that would otherwise expire after the Maturity Date,
shall end on such Maturity Date.
"Eurodollar Loan" means any Loan that bears interest at the Eurodollar
Rate or that would bear interest at such rate if the Maximum Rate ceiling was
not in effect at a particular time.
"Eurodollar Margin" means two point two five percent (2.25%) per annum;
provided that "Eurodollar Margin" shall be two percent (2.0%) per annum
effective on any Determination Date that Bank determines, in the exercise of its
discretion and simultaneously with its determination of the Borrowing Base as of
such Determination Date, that no single well bore of a Mortgaged Property
comprises more than 15% of the present worth future net income of the base case
proved producing properties included within the then-current Borrowing Base
(such computation to be made in Bank's discretion in accordance with
then-current practices, customary procedures and standards used by Bank for its
petroleum industry customers, consistently applied with respect to petroleum
industry customers similarly situated).
"Eurodollar Rate" means, with respect to each Eurodollar Loan, a rate
per annum (rounded upward, if necessary, to the nearest 1/10 of 1%) determined
by Bank as follows:
Interbank Market Rate + Eurodollar
------------------------------------- Margin
1 - Eurocurrency Reserve Requirement
"Interbank Market Rate" means the rate of interest per annum (rounded
upward, if necessary, to the nearest 1/100th of 1%) at which deposits in
immediately available and freely transferable funds in U.S. Dollars are offered
to Bank in the interbank eurocurrency market for delivery on the first day of
each such Eurodollar Interest Period, such deposits being for a period of time
equal or comparable to such Eurodollar Interest Period in an amount equal to or
comparable to the principal amount of the Eurodollar Loan to which such
Eurodollar Loan to which such Eurodollar Interest Period relates. The Interbank
Market Rate shall be determined at approximately 10:00 a.m. (Dallas, Texas time)
two (2) Eurodollar Business Days prior to the first day of each Eurodollar
Interest Period.
"Incremental Portion" means any amount which is $100,000 or amounts in
excess thereof in integral multiples of $100,000.
"Interest Period" means any Prime Rate Interest Period or Eurodollar
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Interest Period, as is applicable.
"Maximum Rate" means the lesser of the maximum rate of interest allowed
by applicable United States or Texas law as amended or the Prime Rate plus 5%
from time to time and in effect on the date for which a determination of
interest accrued hereunder is made.
"Prime Rate" means the variable rate of interest per annum established
from time to time by Bank as its Prime Rate (which rate of interest may or may
not be the lowest rate or best charged by Bank on similar loans, and Bank may
make various commercial or other loans at rates of interest having no
relationship to such rate). Each change in the Prime Rate shall become effective
without prior notice to Borrowers automatically as of the opening of business on
the date of such change in the Prime Rate.
"Prime Rate Interest Period" means, with respect to any Prime Rate
Loan, the period ending on the last day of each calendar quarter; provided,
however, that (i) if any Prime Rate Interest Period would end on a day that is
not a Business Day, such Interest Period shall end on the next preceding
Business Day, and (ii) if any Prime Rate Interest Period would otherwise end
after the Maturity Date, such Interest Period shall end on such Maturity Date.
"Prime Rate Loan" means any Loan that bears interest at the Prime Rate
or that would bear interest at the Prime Rate if the Maximum Rate ceiling was
not in effect at that particular time.
"Regulation D" means Regulation D of the Board of Governors of the
Federal Reserve System as amended or supplemented from time to time.
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SCHEDULE VII
SPECIAL PROVISIONS RELATING TO EURODOLLAR LOANS
The following provisions shall apply to all Eurodollar Loans under this
Agreement.
1. Unavailability of Funds, Disaster, Etc. If, in connection with any
proposed Eurodollar Loan, Bank determines (which determination shall be
conclusive, absent manifest error) that
(a) U.S. Dollar deposits of the relevant amount and for the
relevant Eurodollar Interest Period for Eurodollar Loans are not
available to Bank in the interbank eurocurrency market, or
(b) the Eurodollar Interest Rate will not adequately reflect
the cost to Bank of maintaining or funding the Eurodollar Loans for
such Interest Period, or
(c) adequate means do not exist in the market to determine the
Eurodollar Interest Rate,
then the obligations of Bank to make the applicable Eurodollar Loan shall be
suspended until such time as Bank determines that the event resulting in such
suspension has ceased to exist, and Borrowers shall either repay in full the
then outstanding principal amount of each applicable Eurodollar Loan owed to
Bank, without penalty, on the last day of the applicable Interest Period or
convert the same to the Prime Rate.
2. Reserve Requirements. In the event of any change in any applicable
law, treaty, or regulation or in the interpretation or administration thereof or
in the event any central bank or other fiscal monetary or other authority having
jurisdiction over Bank or the Loans contemplated by this Agreement imposes,
modifies, or deems applicable to any Eurodollar Loan or Loans any reserve
requirement of the Board of Governors of the Federal Reserve System or any other
reserve, special deposit, or similar requirements against assets of, deposits
with or for the account of, or credit extended by, Bank, or imposes on Bank or
the interbank eurocurrency market, as the case may be, any other condition
affecting this Agreement or the Eurodollar Loans which is not otherwise
expressly included in the determination of the applicable rate or rates of
interest hereunder, and the result of any of the foregoing is to increase the
cost to Bank in making or maintaining its Eurodollar Loans or to reduce any
30142402.2
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amount (or the effective return on any amount) received by Bank hereunder, then
Borrowers shall pay to Bank within five (5) days of demand of Bank as additional
interest on the Note evidencing the Eurodollar Loans such additional amount or
amounts as Bank may determine as will reimburse Bank for such additional cost or
such reduction. Upon becoming aware of any such change or imposition that may
result in any such increase or reduction, Bank shall give written notice to
Borrowers thereof together with certificate of Bank setting forth the amount
necessary to compensate Bank as aforesaid and the basis for the determination of
such amount. Determinations made by Bank for purposes of this Section 2 of the
effect of any such change in its costs of making or maintaining its Eurodollar
Loans or on amounts receivable by it in respect of such Eurodollar Loans and of
the additional amounts required to compensate Bank in respect thereof shall be
conclusive, if made on a reasonable basis and are absent manifest error.
3. Taxes. Both principal and interest on the Note evidencing the
Eurodollar Loans are payable without withholding or deduction for or on account
of any taxes. If any taxes, duties or other charges of any kind whatsoever are
levied or imposed on or with respect to the Note evidencing the Eurodollar Loans
or on any payment on the Note evidencing the Eurodollar Loans made to Bank
(except for the imposition of, or change in the rate of, any tax on the overall
net income of Bank), or if there is any change in the basis of taxation of
payment to Bank of principal, interest and other amounts due and payable
hereunder with respect to any Loan (except for the imposition of, or change in
the rate of, any tax on the overall net income of Bank), then, and in any such
event, Borrowers shall pay to Bank within five (5) days of demand of Bank such
additional amounts as Bank may determine to be necessary so that every net
payment of principal and interest on the Note evidencing the Eurodollar Loans,
after withholding or deduction for or on account of any such taxes, will not be
less than any amount provided herein. In addition, if at any time when the
Eurodollar Loans are outstanding any laws are enacted or promulgated, or any
court of law or governmental agency interprets or administers any law, which, in
any such case, changes the basis of taxation of payments to Bank of principal of
or interest on the Note evidencing the Eurodollar Loans by subjecting such
payments to double taxation or otherwise (except through an increase in the rate
of tax on the overall net income of Bank) then Borrowers will pay Bank such
amounts as Bank may determine to be necessary to compensate Bank for any such
increased costs and/or losses resulting therefrom. Bank shall give notice to
Borrowers upon becoming aware of the amount of any loss incurred by it through
enactment or promulgation of any such law that changes the basis of taxation of
payments to Bank or of any such enactment or promulgation that may result in
such payments becoming subject to double taxation or otherwise. Bank shall also
deliver to Borrowers a certificate of Bank setting forth the basis for the
determination of such loss and the computation of such amounts.
30142402.2
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Determinations made by Bank for purposes of this Section 3 of the effect of such
taxes on its costs of making or maintaining Eurodollar Loans or on amounts
receivable by it in respect of such Eurodollar Loans and of the additional
amounts required to compensate Bank in respect thereof shall be conclusive, if
made on a reasonable basis and are absent manifest error.
4. Illegality, Change in Laws, Etc. If at any time the adoption of any
new law, change in existing laws, or interpretation of any new or existing laws
make it unlawful or impossible for Bank to (a) maintain its commitment to make
Eurodollar Loans, then upon such notice to Borrowers of such fact Bank's
commitment to make Eurodollar Loans shall terminate; or (b) maintain or fund its
Eurodollar Loans hereunder, then Bank shall promptly notify Borrowers in writing
and Borrowers shall either (i) repay the outstanding Eurodollar Loans owed to
Bank, without penalty, on the last day of the current Interest Periods (or
immediately with the breakage fee specified in Section 6 below if Bank may not
lawfully continue to maintain and fund such Eurodollar Loans) or (ii) convert
such Eurodollar Loans at such appropriate time to Prime Rate Loans.
5. Risk-Based Capital Requirements. If Bank determines that (a)
compliance with any judicial, administrative, or other governmental
interpretation of any law or regulation or (b) compliance by Bank or any
corporation controlling Bank with any guideline or request from any central bank
or other governmental authority (whether or not having the force of law) has the
effect of requiring an increase in the amount of capital required or expected to
be maintained by Bank or any corporation controlling Bank, and Bank determines
that such increase is based upon its obligations hereunder, and other similar
obligations, Borrowers shall pay Bank within five (5) days of demand of Bank
such additional amount as shall be certified by Bank to be the amount allocable
to Bank's obligation to Borrowers hereunder. Bank will notify Borrowers of any
event occurring that will entitle Bank to compensation pursuant to this Section
after Bank obtains knowledge thereof and determines to request such
compensation. Bank's notice to Borrowers shall include a certificate of Bank
setting forth the amount necessary to compensate Bank as aforesaid and the basis
for the determination of such amount. Determinations by Bank for purposes of
this Section of the effect of any increase in the amount of capital required to
be maintained by Bank and of the amounts allocable to Bank's obligations to
Borrowers hereunder shall be conclusive, if made on a reasonable basis and are
absent manifest error.
30142402.2
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6. Failure to Borrow. Borrowers hereby indemnify Bank against any loss,
cost or expense incurred by Bank as a result of (a) any payment of a Eurodollar
Loan on a date other than the last day of the Interest Period for such
Eurodollar Loan, including but not limited to acceleration by Bank pursuant to
this Agreement, or (b) any failure by Borrowers to borrow or convert, as the
case may be, a Eurodollar Loan on the date of borrowing or conversion, as the
case may be, after Borrowers have given Bank the relevant notices of Borrowers'
election to borrow or convert, as the case may be, specified in this Agreement.
30142402.2
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EXHIBIT A
BORROWING REQUEST
Reference is made to that certain Loan Agreement among RIO GRANDE,
INC., RIO GRANDE DRILLING COMPANY and COMERICA BANK - TEXAS dated as of March 8,
1996, as amended by that certain First Amendment to Loan Agreement dated as of
January 15, 1997 (as the same may hereafter be amended, the "Loan Agreement").
The terms used herein shall have the same meanings as provided therefor in the
Loan Agreement unless the context hereof otherwise requires or provides.
A. GENERAL.
1. Date of proposed Loan.
2. Designate whether new Loan or renewal of existing Eurodollar
Loan:
_______New Loan ________ Renewal of
Eurodollar Loan
3. Interest rate options and amounts:
Amount of requested Loan which
will be Prime Rate Loan $
Amount of requested Loan which
will be Eurodollar Loan $
4. Requested Eurodollar Interest Period
5. Description of use of proceeds of Loan:
6. The Borrowers hereby certify that all conditions precedent specified by
the Loan Agreement for this Loan have been complied with in all
respects.
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B. BORROWING BASE.
1. Enter: lesser of $50,000,000
or Borrowing Base currently in
effect.
2. Enter: Principal Debt outstanding
as of this date. -
3. Excess (deficit) available for
Loans (subtract line B2 from
line B1).
The Borrowers hereby certify that on the date hereof the
representations and warranties contained the Loan Agreement are true in all
material respects as if made on the date hereof, and no event of default or no
event which, with the lapse of time or the giving of notice, or both, would
constitute an event of default under the Loan Agreement, exists.
Dated ____________, 199__.
RIO GRANDE, INC. RIO GRANDE DRILLING COMPANY
By By
Title Title
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EXHIBIT E TO FIRST AMENDMENT TO LOAN AGREEMENT
VOLUME AND PRICING PARAMETERS FOR PERMITTED COMMODITY SWAP TRANSACTIONS
IN THE AGGREGATE FOR CRUDE OIL HEDGING FOR THE THIRTY-SIX (36) MONTH PERIOD
COMMENCING NOVEMBER 1, 1996.
A. Volume. The maximum barrels of production per day that can
be the subject of all such arrangements in the aggregate cannot exceed
the amounts during the time periods set forth below:
Time Period Maximum Barrels Per Day
11/1/96 to and including 10/31/97 700
11/1/97 to and including 10/31/98 600
11/1/98 to and including 10/31/99 500
B. Price. The minimum price which must be attained with
respect to all such arrangements in the aggregate must be at least the
price per barrel during the periods set forth below:
Time Period Minimum Price Per Barrel
11/1/96 to and including 10/31/97 $20.09
11/1/97 to and including 10/31/98 $20.66
11/1/98 to and including 10/31/99 $20.23
E-145
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") is entered into by RIO
GRANDE, INC., a Delaware corporation, RIO GRANDE DRILLING COMPANY (collectively
hereafter the "Company") and Guy Bob Buschman (the "Employee") as of January 16,
1997 (the "Effective Date").
WHEREAS, the Company wishes to employ Employee, and Employee desires to
accept such employment, on the terms and conditions set forth herein:
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and promises contained herein, the parties agree as follows:
1. Employment: The Company hereby agrees to employ Employee in San
Antonio, Bexar County, Texas, as an executive officer of the Company with the
present title of President and Chief Executive Officer. Employee hereby accepts
such employment and agrees to perform such duties and undertake such
responsibilities as are assigned to him from time to time by the Board of
Directors of the Company or by such officers as the Board of Directors may
designate.
2. Full-Time Best Efforts: Employee shall devote his full time, effort
and attention during customary business hours to the business of the Company and
its subsidiaries and the performance of his obligations under this Agreement.
Employee shall at all times faithfully, industriously and to the best of his
ability, experience and talent perform all of his obligations hereunder. The
Company shall provide adequate, qualified support staff, both clerical and
professional and the necessary computer hardware and system software, to permit
Employee to perform the duties and obligations of his office during customary
business hours.
3. Term of Employment: Employee's primary term of employment("Primary
Term") shall begin on January 15, 1997 and continue until January 15, 2002,
unless sooner terminated pursuant to Section 6 below. Unless this Agreement is
terminated before its expiration by the parties pursuant to Section 6 or the
Company provides the Employee with notice of non-renewal of the Agreement at
least 60 days prior to the expiration of the Primary Term (or the Option Term,
as defined herein), the term of this Agreement Primary Term shall automatically
renew for a period of one year ("Option Term").
E-146
4. Compensation: During the term of this Agreement, the Company agrees
to consider the guidelines contained in a compensation survey similar to the
National Association of Corporate Directors Blue Ribbon Commission Report on
Executive Compensation for companies of similar size and type in making
recommendations for compensation paid to Employee. The Company shall provide the
following minimum compensation to the Employee during the term of this
Agreement:
A. Base Salary: From the Effective Date until changed as
provided in this section, the Company agrees to pay Employee an annual salary of
$125,000 during the first year of employment with the Company under this
Agreement, payable bi-weekly in accordance with the Company's payroll policies,
less applicable withholdings required by law. The Employee shall be eligible for
discretionary increases in base salary as determined upon the recommendations of
the Compensation and Stock Option Committee (the "Compensation Committee") and
as approved by the Board of Directors. In making recommendations concerning
discretionary increases the Compensation Committee shall consider performance of
the Company, performance of the Employee, cost of living increases, and other
similar factors.
B. Bonus: Employee may be awarded bonuses and other incentive
based compensation during the term of his employment under this Agreement. The
amount of such bonuses and additional compensation, and the conditions for
payment shall be based upon the recommendations of the Compensation Committee,
but at all times shall ultimately be in the sole discretion of the Board of
Directors.
C. Stock Options: Notwithstanding the execution of this
Agreement, Employee retains those stock options granted to him pursuant to the
1986 Incentive Stock Option Plan and the 1995 Incentive Stock Option Plan. In
addition to those stock options, Employee shall be entitled to participate in
any additional stock options as recommended by the Compensation Committee and
approved by the Board.
5. Additional Non-Cash Compensation and Benefits:
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A. Benefits: Employee benefits (such as, but not limited to,
medical and disability insurance, paid vacation, and sick leave) shall be
provided and made available to Employee in accordance with the Company's
Personnel Manual, as may be amended from time to time in the discretion of the
Board of Directors. The Company acknowledges that the Employee's ability to
fully utilize and enjoy his vacation benefits may be restricted by his duties
and obligations under the terms of this Agreement, and therefore, the provisions
of the Company's Personnel Manual notwithstanding, Employee shall be entitled to
receive compensation equal to 1/52 of his annual cash compensation from salary
for each week (or 1/5 of such weekly amount for each day) of vacation leave that
is unused as a result of conflicts between the Employee's personal schedule and
his duties and obligations under this Agreement up to one-half of the Employee's
annual vacation benefits. Upon presentation of appropriate documentation,
Employee shall be reimbursed by the Company for reasonable and necessary
out-of-pocket expenses incurred in the performance of his duties.
B. Company Vehicle: Company shall provide Employee with a
Company owned or leased vehicle or light truck similar to previous vehicles
provided to the Employee for use in performing his duties and obligations and
for personal use. The Company shall pay all expenses, including, without
limiting the generality thereof, all insurance, fuel, license fees, repairs and
maintenance, incurred on account of or related to such vehicle. The Company
shall purchase a new replacement vehicle (a vehicle similar in cost to the
replacement cost of the old vehicle) in accordance with prior past practices of
the Company. Employee shall provide an annual summary of total mileage and
business mileage, in accordance with Company policies and procedures, for the
limited purpose of complying with federal income and employment tax laws.
C. Expense Reimbursement: Company shall pay all reasonable
expenses and shall reimburse Employee for all reasonable expenses incurred on
its behalf by Employee in the performance of his duties and obligations.
D. Retirement Benefits: The Company shall undertake a review
of available retirement benefit options and submit to the Compensation Committee
E-148
a retirement benefit plan taking into account the size and financial condition
of the Company and the needs of the Employee.
6. Termination: The Company may terminate this Agreement at any time for
"cause" (as hereinafter defined) by delivering to Employee written notice
describing the cause of termination fifteen (15) days before the date of such
termination. Alternatively, the Company in its sole discretion, may pay the
Employee for the fifteen (15) days in lieu of providing the notice. In the event
that this Agreement is terminated for "cause" Employee shall be entitled only to
his benefits and base salary earned pro rata to the date of such termination.
The determination of whether Employee shall be terminated for "cause" shall be
made by the Board of Directors, in the reasonable exercise of its business
judgment, and shall be limited to the occurrence of the following events:
A. Conviction of or a plea of nolo contendere to the charge of
a felony;
B. Failure (without proper legal cause) to perform in a
reasonably satisfactory manner or negligence in performing
Employee's material duties and responsibilities hereunder as
determined by the Board in the exercise of its reasonable business
judgment, provided that a written warning is given to Employee by
the Company and such non-performance or negligence continues sixty
(60) days thereafter;
C. Gross negligence in performing Employee's material duties
and responsibilities under the Agreement which are within Employee's
job responsibilities hereunder;
D. Breach of fiduciary duty to the Company.
If the Employee is terminated without cause the Company shall pay to the
Employee the equivalent of three years of his annual base salary in effect at
the time of the termination, less applicable withholdings required by law. In
addition, the Company shall pay the Employee an amount sufficient, after taking
into the Employee's personal federal and state income taxes with respect to such
payment, to pay the exercise price of all incentive and non-qualified options
E-149
held by the Employee, plus all related federal and state income taxes. Finally,
the Company shall pay the Employee's COBRA costs for eighteen months following
his termination. Any material diminution in the Employee's duties and
responsibilities, other than termination for cause, shall be deemed a
termination without cause under the Agreement and the Employee may elect to
receive the payments provided for herein, and upon such receipt Employee's
employment with the Company shall be terminated.
7. Inventions and Patents: Employee agrees that all reasonably
patentable inventions, innovations or improvements in the Company's products or
methods of conducting its business (including new contributions, improvements,
ideas and discoveries) shall belong to the Company. Employee agrees that the
Company shall be granted a non-exclusive, unrestricted license to use, modify
and license to others for use all computer programs and computer software,
relating to the business of the Company, written or conceived by the Employee
during the term of this Agreement. Employee shall promptly disclose all
patentable inventions, innovations or improvements to the Company.
8. Property of the Company: All books, documents, lists and records
pertaining to the Company's business (collectively, the "Records"), whether the
Records are written, typed, printed, contained on microfilm, contained on
computer disc, contained in tape or are set forth in some other medium, are the
sole and exclusive property of the Company. Upon the termination of Employee's
employment with the Company, Employee shall return to the Company all keys,
credit cards, equipment, phone cards, records and copies thereof that are in
Employee's possession or control or that Employee has removed from the Company's
premises and Records that are in Employee's possession or control or that
Employee has removed from the Company's premises. Employee shall be entitled to
retain copies of the Companies records that are pertinent to his individual
state or federal income liability.
9. Covenant Not to Compete:
A. After consulting with legal counsel regarding the legal
consequences of the Agreement including, without limitation, this Section 10,
Employee agrees that, in his role as President and Chief Executive Officer,
E-150
Employee will work in an unsupervised capacity, supervise other employees, make
recommendations to the President regarding expenditures of Company capital and
assets, be primarily responsible for preparing financial statements and
analyzing the Company's profitability and otherwise advising the President and
the Board of Directors on the financial aspects of the Company's operations.
B. Employee hereby covenants and agrees that during his
employment with the Company and for six months immediately following the end of
his employment with the Company, he will not without the prior written consent
of the Company, either individually or in conjunction with any person, firm,
corporation or any other entity as principal, agent, employee or shareholder or
in any other manner whatsoever:
i. invest in, become associated with, accept
employment with, serve as a consultant to, or accept compensation from, any
person, firm, corporation or any other entity (including any new business
started by Employee alone or with others) that is engaged in the business of
exploring for and producing oil and gas in areas or where the Company, within
the 6 months of the date of the Employee's termination of employment, has
operations or has been actively involved in oil and gas development (each and
all of which entities shall be included within the meaning of the term "Company"
for the purposes of Sections 9, 10 and 11), including, except for those
transactions which Employee invested in with the consent of the Board of
Directors of the Company;
E-151
ii. contact or solicit, directly or indirectly, any
employee of, or vendor to, the Company for the purpose of causing, inviting or
encouraging any such employee or vendor to alter or terminate his, her or its
employment or business relationship with the Company; or
C. Notwithstanding the foregoing, the ownership by Employee of
not more than five percent of the shares of stock of any corporation having a
class of equity securities actively traded on a national securities exchange or
on NASDAQ shall not be deemed, in and of itself, to violate this Section 9.
D. Nothing herein shall prohibit Employee from engaging in any
work in the oil and gas industry after the end of his employment with the
Company if Employee furnishes the Company with proof and assurances (in a form
and type reasonably requested by Company) that Employee will not be competing
with Company in any way or manner which is prohibited, and if the Company then
provides Employee with its written consent. Employee acknowledges that nothing
herein will, in any way, significantly restrain his ability to work or earn a
living.
10. Confidentiality: Employee acknowledges that, by virtue of his
employment with the Company, he possesses and will come to possess confidential
and proprietary information relating to the business and operations of the
Company. Employee agrees that he will not, at any time, except in furtherance of
the Company's business (A) disclose any trade secret, know-how or confidential
information of the Company (including but not limited to cost or pricing
information, customer lists, commission plans, supply information, internal
business procedures, market studies, terms of the agreements with the Company's
equity holders, information concerning pending or contemplated acquisitions or
expansion plans of the Company or the existence of negotiations concerning the
same, and similar non-public information relating to the Company's internal
operations, business, plans, policies or practices), to any person other than an
employee or agent of the Company or (B) use or permit the use of any of the
Company's trade secrets, know-how or confidential information in any way to
compete, directly or indirectly, with the Company or in any other manner adverse
to the Company. Employee further covenants and agrees that at all times during
the term hereof and at all times thereafter Employee will hold all of the
foregoing information, trade secrets and know-how in secrecy as trustee or
E-152
custodian for the Company for the exclusive benefit of the Company, and will
faithfully do everything in his power to assist the Company in holding in
secrecy the foregoing and shall not use the foregoing except in furtherance of
the Company's business. The trade secrets, know-how and the confidential
information of the Company relate to the conduct of the Company's business, are
of independent economic value to the Company because they are not generally
known and are the subject of efforts by the Company to maintain their secrecy.
Employee acknowledges that the right to maintain the secrecy of the trade
secrets, know-how and confidential information of the Company constitutes a
proprietary right that the Company is entitled to protect and that the
disclosure, or improper use, of the trade secrets, know-how or the confidential
information of the Company by Employee will cause irreparable harm to the
Company. Both Employee and the Company acknowledge and agree, however, that this
Section shall not be interpreted, applied or construed to limit Employee's legal
right to use the general knowledge, skills and experience he acquired during his
employment with the Company in any employment that he may hold following
termination of this Agreement.
11. Miscellaneous:
A. For purposes of this Agreement, all notices and other
communications hereunder shall be in writing and shall be deemed to have been
duly given either: (i) when received if personally delivered to the other party;
(ii) two days after deposit in the mail postage prepaid, certified mail, return
receipt requested; (iii) when received if delivered via a nationally recognized
overnight courier service; or (iv) when received if delivered via an
electronically confirmed facsimile transmission. Notices to the Company shall be
given to it addressed to the Company's corporate headquarters. Notices to
Employee shall be addressed to Employee's most recent address as set forth in
the personnel records of the Company. Either party shall be entitled to change
the address at which notice is to be given by providing notice to the other
party of such change in the manner provided herein.
B. This Agreement sets forth the entire agreement of the
parties with respect to the subject matter hereof, and supersedes all prior
agreements, whether written or oral. This Agreement may be amended only by a
writing signed by both parties hereto. Each party represents and warrants that
this Agreement has been duly and validly authorized, executed and delivered by
E-153
such party and constitutes a valid and binding obligation of such party,
enforceable against such party in accordance with its terms.
C. This Agreement shall be binding upon, and inure to the
benefit of the parties, their respective heirs, successors, personal
representatives and assigns; provided, however, that Employee may not transfer
or assign any of his duties or obligations under this Agreement.
D. No modification, amendment or waiver of any provisions of
this Agreement shall be effective unless approved in writing by both parties,
the failure at any time to enforce any of the provisions of this Agreement shall
in no way be construed as a waiver of such provisions and shall not affect the
right of either party thereafter to enforce each and every provision hereof in
accordance with its terms.
E. The parties hereto have endeavored to limit Employee's
right to compete to the extent necessary to protect the Company from unfair
competition in connection with certain investments in the Company. However, if a
court of proper jurisdiction determines that any temporal, territorial or
activity- related restriction on competition contained in this Agreement is too
broad to permit enforcement thereof to its fullest extent, then such restriction
shall be enforced as permitted under Texas law.
F. The parties agree that should any word, provision or other
part of this Agreement be determined by a court of competent jurisdiction to be
invalid, unenforceable or prohibited by law, all other provisions hereof shall
be unaffected thereby.
G. Should any dispute arise between the Parties relating to
this Agreement, including without limitation, any dispute relating to Employee's
employment or termination of employment from the Company, the parties
specifically stipulate and agree to submit any such dispute to final and binding
arbitration conducted under the auspices of the American Arbitration
Association, with the costs of such arbitration to be split equally between the
Parties; provided, however, that upon conclusion of the arbitration, the
prevailing party in the arbitration shall be entitled to reimbursement of its
costs of arbitration from the non-prevailing party, including attorneys fees and
expenses, experts fees and expenses and other similar costs associated with the
arbitration. The award of the arbitrators, or of a majority of them, shall be
E-154
final, and judgment upon the award rendered may be entered in any court, state
or federal, having jurisdiction. Employee, with an adequate opportunity to
consult with legal counsel, knowingly and voluntarily waives any right to trial
by jury of any dispute pertaining to or relating in any way to Employee's
employment with or termination from the Company, including any matters relating
to this Agreement, the provisions of any federal, state or local law, regulation
or ordinance notwithstanding. Notwithstanding the foregoing provisions, if the
Employee breaches any of the non- disclosure or non-competition provisions of
this Agreement, the Company shall have the right to seek immediate injunctive
relief in the form of a temporary, preliminary or permanent mandatory or
restraining injunction, enjoining the Employee from such further breach of those
provisions of this Agreement.
No delay or omission by the Company or the Employee in
exercising any right or remedy under any of the terms of this Agreement shall
operate as a waiver of any rights or remedies which the Company or Employee may
have under this Agreement, either at law or in equity, and no single or partial
exercise of any such right shall preclude any other or further exercise thereof
or of the exercise of any other right or remedy.
H. For the purposes of obtaining a temporary, preliminary, or
permanent injunction or restraining injunction, order or decree to enforce the
non-disclosure or non-compete provisions of this Agreement, such action shall be
filed and prosecuted solely and exclusively in a state or federal court sitting
in San Antonio, Bexar County, Texas, and Employee irrevocably accepts the
jurisdiction of the courts of the State of Texas, and the federal courts located
in such State. Employee expressly submits and consents in advance to such
jurisdiction in any action or suit commenced in any such court, and Employee
hereby irrevocably waives any objection which Employee may have based upon
personal jurisdiction, improper venue or forum non-conveniens and hereby
irrevocably consents to the granting of such legal or equitable relief as is
deemed appropriate by such court. The Employee and the Company, each with an
adequate opportunity to consult with counsel, hereby irrevocably waives any
right to a trial by jury in any injunction or arbitration proceeding. Any
injunctive relief obtained by the Company under this Agreement shall be in
addition to any other relief to which the Company may be entitled to assert in
the arbitration proceeding, at law or in equity. This Agreement was entered into
and is performable in San Antonio, Bexar County, Texas. Employee covenants to
Company and Company covenants to Employee that no litigation arising out of or
E-155
relating to this Agreement will ever be commenced in any court other than a
court sitting in San Antonio, Bexar County, Texas. The Parties further agree and
covenant that the sole and exclusive venue for any court or arbitration
proceeding shall be in San Antonio, Bexar County, Texas.
I. This Agreement shall be subject to and governed by the laws
of the State of Texas
J. Employee acknowledges and agrees that the provisions of
Sections 9, 10 and 11 of this Agreement are a reasonable and necessary
protection of the immediate and substantial interests of the Company, that any
violation of these restrictions would cause substantial injury to the Company,
and that the Company would not have entered into certain transactions without
the additional consideration offered by Employee in binding himself to such
provisions of this Agreement. In the event of a breach or threatened breach by
Employee of the provisions of Sections 9, 10 and 11 of this Agreement, the
Company shall be entitled to apply to any court of competent jurisdiction for a
temporary and/or permanent injunction restraining Employee from such breach or
threatened breach; provided, however, that nothing herein contained shall be
construed to preclude the Company from pursuing any other available remedy for
such breach or threatened breach in addition to, or in lieu of, such injunctive
relief.
K. The Employee shall be afforded indemnification rights to
the maximum extent provided under Delaware law.
L. This Agreement may be executed in one or more counterparts,
any one of which need not contain the signatures of more than one party, but all
such counterparts taken together will constitute one and the same instrument.
Signatures may be exchanged by telecopy, with original signatures to follow.
Each party to this agreement agrees that it will be bound by its own telecopied
signature and that it accepts the telecopied signature of the other party to
this Agreement.
E-156
EXECUTED as of the date first set forth above.
RIO GRANDE, INC.
By:
Name:
Title:
EMPLOYEE
Guy Bob Buschman
E-157
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") is entered into by RIO
GRANDE, INC., a Delaware corporation, RIO GRANDE DRILLING COMPANY, a Texas
corporation (collectively hereafter the "Company") and Gary Scheele (the
"Employee") as of January 16, 1997 (the "Effective Date").
WHEREAS, the Company wishes to employ Employee, and Employee desires to
accept such employment, on the terms and conditions set forth herein:
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and promises contained herein, the parties agree as follows:
1. Employment: The Company hereby agrees to employ Employee in San
Antonio, Bexar County, Texas, as an executive officer of the Company with the
present title of vice-president, vice chief financial officer and
secretary/treasurer. At all times under the term of this Agreement the Employee
shall report directly to the President and Chief Executive Officer. Employee
hereby accepts such employment and agrees to perform such duties and undertake
such responsibilities as are assigned to him from time to time by the Board of
Directors of the Company or by the President and Chief Executive Officer.
2. Full-Time Best Efforts: Employee shall devote his full time, effort
and attention during customary business hours to the business of the Company and
its subsidiaries and the performance of his obligations under this Agreement.
Employee shall at all times faithfully, industriously and to the best of his
ability, experience and talent perform all of his obligations hereunder. The
Company shall provide adequate, qualified support staff, both clerical and
professional and the necessary computer hardware and systems software, to permit
Employee to perform the duties and obligations of his office during customary
business hours.
3. Term of Employment: Employee's primary term of employment("Primary
Term") shall begin on January 15, 1997 and continue until January 15, 2002,
unless sooner terminated pursuant to Section 6 below. Unless this Agreement is
terminated before its expiration by the parties pursuant to Section 6 or the
Company provides the Employee with notice of non-renewal of the Agreement at
E-158
least 60 days prior to the expiration of the Primary Term (or the Option Term,
as defined herein), the term of this AgreementAgreementPrimary Term shall
automatically renew for a period of oneyearyear year("Option Term").
4. Compensation: During the term of this Agreement, the Company agrees
to consider the guidelines contained in a compensation survey similar to the
National Association of Corporate Directors Blue Ribbon Commission Report on
Executive Compensation for companies of similar size and type in making
recommendations for compensation paid to Employee. The Company shall provide the
following minimum compensation to the Employee during the term of this
Agreement:
A. Base Salary: From the Effective Date until changed as
provided in this section, the Company agrees to pay Employee an annual salary of
$100,000 during the first year of employment with the Company under this
Agreement, payable bi-weekly in accordance with the Company's payroll policies,
less applicable withholdings required by law. The Employee shall be eligible for
discretionary increases in base salary as determined upon the recommendations of
the Compensation and Stock Option Committee (the "Compensation Committee") and
as approved by the Board of Directors. In making recommendations concerning
discretionary increases the Compensation Committee shall consider performance of
the Company, performance of the Employee, cost of living increases, and other
similar factors.
B. Bonus: Employee may be awarded bonuses and other incentive
based compensation during the term of his employment under this Agreement. The
amount of such bonuses and additional compensation, and the conditions for
payment shall be based upon the recommendations of the Compensation Committee,
but at all times shall ultimately be in the sole discretion of the Board of
Directors.
C. Stock Options: Notwithstanding the execution of this
Agreement, Employee retains those stock options granted to him pursuant to the
1986 Incentive Stock Option Plan and the 1995 Incentive Stock Option Plan. In
addition to those stock options, Employee shall be entitled to participate in
any additional stock options as recommended by the Compensation Committee and
approved by the Board.
E-159
5. Additional Non-Cash Compensation and Benefits:
A. Benefits: Employee benefits (such as, but not limited to,
medical and disability insurance, paid vacation, and sick leave) shall be
provided and made available to Employee in accordance with the Company's
Personnel Manual, as may be amended from time to time in the discretion of the
Board of Directors. The Company acknowledges that the Employee's ability to
fully utilize and enjoy his vacation benefits may be restricted by his duties
and obligations under the terms of this Agreement, and therefore, the provisions
of the Company's Personnel Manual notwithstanding, Employee shall be entitled to
receive compensation equal to 1/52 of his annual cash compensation from salary
for each week (or 1/5 of such weekly amount for each day) of vacation leave that
is unused as a result of conflicts between the Employee's personal schedule and
his duties and obligations under this Agreement up to one-half of the Employee's
annual vacation benefits. Upon presentation of appropriate documentation,
Employee shall be reimbursed by the Company for reasonable and necessary
out-of-pocket expenses incurred in the performance of his duties.
B. Company Vehicle: Company shall provide Employee with a
Company owned or leased vehicle or light truck similar to previous vehicles
provided to the Employee for use in performing his duties and obligations and
for personal use. The Company shall pay all expenses, including, without
limiting the generality thereof, all insurance, fuel, license fees, repairs and
maintenance, incurred on account of or related to such vehicle. The Company
shall purchase a new replacement vehicle (a vehicle similar in cost to the
replacement cost of the old vehicle) in accordance with prior past practices of
the Company. Employee shall provide an annual summary of total mileage and
business mileage, in accordance with Company policies and procedures, for the
limited purpose of complying with federal income and employment tax laws.
C. Expense Reimbursement: Company shall pay all reasonable
expenses and shall reimburse Employee for all reasonable expenses incurred on
its behalf by Employee in the performance of his duties and obligations
hereunder.
D. Retirement Benefits: The Company shall undertake a review
of available retirement benefit options and submit to the Compensation Committee
E-160
a retirement benefit plan taking into account the size and financial condition
of the Company and the needs of the Employee.
6. Termination: The Company may terminate this Agreement at any time for
"cause" (as hereinafter defined) by delivering to Employee written notice
describing the cause of termination fifteen (15) days before the date of such
termination. Alternatively, the Company in its sole discretion, may pay the
Employee for the fifteen (15) days in lieu of providing the notice. In the event
that this Agreement is terminated for "cause" Employee shall be entitled only to
his benefits and base salary earned pro rata to the date of such termination.
The determination of whether Employee shall be terminated for "cause" shall be
made by the Board of Directors, in the reasonable exercise of its business
judgment, and shall be limited to the occurrence of the following events:
A. Conviction of or a plea of nolo contendere to the charge of a
felony;
B. Failure (without proper legal cause) to perform in a reasonably
satisfactory manner or negligence in performing Employee's material
duties and responsibilities hereunder as determined by the Board in
the exercise of its reasonable business judgment, provided that a
written warning is given to Employee by the Company and such
non-performance or negligence continues sixty (60) days thereafter;
C. Gross negligence in performing Employee's material duties and
responsibilities under the Agreement which are within Employee's job
responsibilities hereunder;
D. Breach of fiduciary duty to the Company.
If the Employee is terminated without cause the Company shall pay to the
Employee the equivalent of three years of his annual base salary in effect at
the time of the termination, less applicable withholdings required by law. In
addition, the Company shall pay the Employee an amount sufficient, after taking
into the Employee's personal federal and state income taxes with respect to such
payment, to pay the exercise price of all incentive and non-qualified options
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held by the Employee, plus all related federal and state income taxes. Finally,
the Company shall pay the Employee's COBRA costs for eighteen months following
his termination. Any material diminution in the Employee's duties and
responsibilities, other than termination for cause, shall be deemed a
termination without cause under the Agreement and the Employee may elect to
receive the payments provided for herein, and upon such receipt Employee's
employment with the Company shall be terminated.
7. Inventions and Patents: Employee agrees that all reasonably
patentable inventions, innovations or improvements in the Company's products or
methods of conducting its business (including new contributions, improvements,
ideas and discoveries) shall belong to the Company. Employee agrees that the
Company shall be granted a non-exclusive, unrestricted license to use, modify
and license to others for use all computer programs and computer software,
relating to the business of the Company, written or conceived by the Employee
during the term of this Agreement. Employee shall promptly disclose all
patentable inventions, innovations or improvements to the Company.
8. Property of the Company: All books, documents, lists and records
pertaining to the Company's business (collectively, the "Records"), whether the
Records are written, typed, printed, contained on microfilm, contained on
computer disc, contained in tape or are set forth in some other medium, are the
sole and exclusive property of the Company. Upon the termination of Employee's
employment with the Company, Employee shall return to the Company all keys,
credit cards, equipment, phone cards, records and copies thereof that are in
Employee's possession or control or that Employee has removed from the Company's
premises and Records that are in Employee's possession or control or that
Employee has removed from the Company's premises. Employee shall be entitled to
retain copies of the Companies records that are pertinent to his individual
state or federal income liability.
9. Covenant Not to Compete:
A. After consulting with legal counsel regarding the legal
consequences of the Agreement including, without limitation, this Section 10,
Employee agrees that, in his role as Vice President and Chief Financial Officer
and Secretary/Treasurer. Employee will work in an unsupervised capacity,
supervise other employees, make recommendations to the President regarding
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expenditures of Company capital and assets, be primarily responsible for
preparing financial statements and analyzing the Company's profitability and
otherwise advising the President and the Board of Directors on the financial
aspects of the Company's operations.
B. Employee hereby covenants and agrees that during his
employment with the Company and for six months immediately following the end of
his employment with the Company, he will not without the prior written consent
of the Company, either individually or in conjunction with any person, firm,
corporation or any other entity as principal, agent, employee or shareholder or
in any other manner whatsoever:
i. invest in, become associated with, accept
employment with, serve as a consultant to, or accept compensation from, any
person, firm, corporation or any other entity (including any new business
started by Employee alone or with others) that is engaged in the business of
exploring for and producing oil and gas in areas or where the Company, within
the 6 months of the date of the Employee's termination of employment, has
operations or has been actively involved in oil and gas development (each and
all of which entities shall be included within the meaning of the term "Company"
for the purposes of Sections 9, 10 and 11), including, except for those
transactions which Employee invested in with the consent of the Board of
Directors of the Company;
ii. contact or solicit, directly or indirectly, any
employee of, or vendor to, the Company for the purpose of causing, inviting or
encouraging any such employee or vendor to alter or terminate his, her or its
employment or business relationship with the Company; or
C. Notwithstanding the foregoing, the ownership by Employee of
not more than five percent of the shares of stock of any corporation having a
class of equity securities actively traded on a national securities exchange or
on NASDAQ shall not be deemed, in and of itself, to violate this Section 9.
D. Nothing herein shall prohibit Employee from engaging in any
work in the oil and gas industry after the end of his employment with the
Company if Employee furnishes the Company with proof and assurances (in a form
and type reasonably requested by Company) that Employee will not be competing
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with Company in any way or manner which is prohibited, and if the Company then
provides Employee with its written consent. Employee acknowledges that nothing
herein will, in any way, significantly restrain his ability to work or earn a
living.
10. Confidentiality: Employee acknowledges that, by virtue of his
employment with the Company, he possesses and will come to possess confidential
and proprietary information relating to the business and operations of the
Company. Employee agrees that he will not, at any time, except in furtherance of
the Company's business (A) disclose any trade secret, know-how or confidential
information of the Company (including but not limited to cost or pricing
information, customer lists, commission plans, supply information, internal
business procedures, market studies, terms of the agreements with the Company's
equity holders, information concerning pending or contemplated acquisitions or
expansion plans of the Company or the existence of negotiations concerning the
same, and similar non-public information relating to the Company's internal
operations, business, plans, policies or practices), to any person other than an
employee or agent of the Company or (B) use or permit the use of any of the
Company's trade secrets, know-how or confidential information in any way to
compete, directly or indirectly, with the Company or in any other manner adverse
to the Company. Employee further covenants and agrees that at all times during
the term hereof and at all times thereafter Employee will hold all of the
foregoing information, trade secrets and know-how in secrecy as trustee or
custodian for the Company for the exclusive benefit of the Company, and will
faithfully do everything in his power to assist the Company in holding in
secrecy the foregoing and shall not use the foregoing except in furtherance of
the Company's business. The trade secrets, know-how and the confidential
information of the Company relate to the conduct of the Company's business, are
of independent economic value to the Company because they are not generally
known and are the subject of efforts by the Company to maintain their secrecy.
Employee acknowledges that the right to maintain the secrecy of the trade
secrets, know-how and confidential information of the Company constitutes a
proprietary right that the Company is entitled to protect and that the
disclosure, or improper use, of the trade secrets, know-how or the confidential
information of the Company by Employee will cause irreparable harm to the
Company. Both Employee and the Company acknowledge and agree, however, that this
Section shall not be interpreted, applied or construed to limit Employee's legal
E-164
right to use the general knowledge, skills and experience he acquired during his
employment with the Company in any employment that he may hold following
termination of this Agreement. Notwithstanding the foregoing, the Company
acknowledges that the Employee's duties and obligations hereunder require him to
prepare numerous computer based analyses, and agrees that it is impracticable
for the Employee to maintain or provide the Company an accounting or inventory
of the computer spread sheets or other computer software used in the performance
of his duties and obligations.
11. Miscellaneous:
A. For purposes of this Agreement, all notices and other
communications hereunder shall be in writing and shall be deemed to have been
duly given either: (i) when received if personally delivered to the other party;
(ii) two days after deposit in the mail postage prepaid, certified mail, return
receipt requested; (iii) when received if delivered via a nationally recognized
overnight courier service; or (iv) when received if delivered via an
electronically confirmed facsimile transmission. Notices to the Company shall be
given to it addressed to the Company's corporate headquarters. Notices to
Employee shall be addressed to Employee's most recent address as set forth in
the personnel records of the Company. Either party shall be entitled to change
the address at which notice is to be given by providing notice to the other
party of such change in the manner provided herein.
B. This Agreement sets forth the entire agreement of the
parties with respect to the subject matter hereof, and supersedes all prior
agreements, whether written or oral. This Agreement may be amended only by a
writing signed by both parties hereto. Each party represents and warrants that
this Agreement has been duly and validly authorized, executed and delivered by
such party and constitutes a valid and binding obligation of such party,
enforceable against such party in accordance with its terms.
C. This Agreement shall be binding upon, and inure to the
benefit of the parties, their respective heirs, successors, personal
representatives and assigns; provided, however, that Employee may not transfer
or assign any of his duties or obligations under this Agreement.
D. No modification, amendment or waiver of any provisions of
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this Agreement shall be effective unless approved in writing by both parties,
the failure at any time to enforce any of the provisions of this Agreement shall
in no way be construed as a waiver of such provisions and shall not affect the
right of either party thereafter to enforce each and every provision hereof in
accordance with its terms.
E. The parties hereto have endeavored to limit Employee's
right to compete to the extent necessary to protect the Company from unfair
competition in connection with certain investments in the Company. However, if a
court of proper jurisdiction determines that any temporal, territorial or
activity- related restriction on competition contained in this Agreement is too
broad to permit enforcement thereof to its fullest extent, then such restriction
shall be enforced as permitted under Texas law.
F. The parties agree that should any word, provision or other
part of this Agreement be determined by a court of competent jurisdiction to be
invalid, unenforceable or prohibited by law, all other provisions hereof shall
be unaffected thereby.
G. Should any dispute arise between the Parties relating to
this Agreement, including without limitation, any dispute relating to Employee's
employment or termination of employment from the Company, the parties
specifically stipulate and agree to submit any such dispute to final and binding
arbitration conducted under the auspices of the American Arbitration
Association, with the costs of such arbitration to be split equally between the
Parties; provided, however, that upon conclusion of the arbitration, the
prevailing party in the arbitration shall be entitled to reimbursement of its
costs of arbitration from the non-prevailing party, including attorneys fees and
expenses, experts fees and expenses and other similar costs associated with the
arbitration. The award of the arbitrators, or of a majority of them, shall be
final, and judgment upon the award rendered may be entered in any court, state
or federal, having jurisdiction. Employee, with an adequate opportunity to
consult with legal counsel, knowingly and voluntarily waives any right to trial
by jury of any dispute pertaining to or relating in any way to Employee's
employment with or termination from the Company, including any matters relating
to this Agreement, the provisions of any federal, state or local law, regulation
or ordinance notwithstanding. Notwithstanding the foregoing provisions, if the
Employee breaches any of the non- disclosure or non-competition provisions of
this Agreement, the Company shall have the right to seek immediate injunctive r
E-166
elief in the form of a temporary, preliminary or permanent mandatory or
restraining injunction, enjoining the Employee from such further breach of those
provisions of this Agreement.
No delay or omission by the Company or the Employee in exercising any right or
remedy under any of the terms of this Agreement shall operate as a waiver of any
rights or remedies which the Company or Employee may have under this Agreement,
either at law or in equity, and no single or partial exercise of any such right
shall preclude any other or further exercise thereof or of the exercise of any
other right or remedy.
H. For the purposes of obtaining a temporary, preliminary, or permanent
injunction or restraining injunction, order or decree to enforce the
non-disclosure or non-compete provisions of this Agreement, such action shall be
filed and prosecuted solely and exclusively in a state or federal court sitting
in San Antonio, Bexar County, Texas, and Employee irrevocably accepts the
jurisdiction of the courts of the State of Texas, and the federal courts located
in such State. Employee expressly submits and consents in advance to such
jurisdiction in any action or suit commenced in any such court, and Employee
hereby irrevocably waives any objection which Employee may have based upon
personal jurisdiction, improper venue or forum non-conveniens and hereby
irrevocably consents to the granting of such legal or equitable relief as is
deemed appropriate by such court. The Employee and the Company, each with an
adequate opportunity to consult with counsel, hereby irrevocably waives any
right to a trial by jury in any injunction or arbitration proceeding. Any
injunctive relief obtained by the Company under this Agreement shall be in
addition to any other relief to which the Company may be entitled to assert in
the arbitration proceeding, at law or in equity. This Agreement was entered into
and is performable in San Antonio, Bexar County, Texas. Employee covenants to
Company and Company covenants to Employee that no litigation arising out of or
relating to this Agreement will ever be commenced in any court other than a
court sitting in San Antonio, Bexar County, Texas. The Parties further agree and
covenant that the sole and exclusive venue for any court or arbitration
proceeding shall be in San Antonio, Bexar County, Texas.
I. This Agreement shall be subject to and governed by the
laws of the State of Texas
J. Employee acknowledges and agrees that the provisions of
Sections 9, 10 and 11 of this Agreement are a reasonable and necessary
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protection of the immediate and substantial interests of the Company, that any
violation of these restrictions would cause substantial injury to the Company,
and that the Company would not have entered into certain transactions without
the additional consideration offered by Employee in binding himself to such
provisions of this Agreement. In the event of a breach or threatened breach by
Employee of the provisions of Sections 9, 10 and 11 of this Agreement, the
Company shall be entitled to apply to any court of competent jurisdiction for a
temporary and/or permanent injunction restraining Employee from such breach or
threatened breach; provided, however, that nothing herein contained shall be
construed to preclude the Company from pursuing any other available remedy for
such breach or threatened breach in addition to, or in lieu of, such injunctive
relief.
K. The Employee shall be afforded indemnification rights to
the maximum extent provided under Deleware law.
L. This Agreement may be executed in one or more counterparts,
any one of which need not contain the signatures of more than one party, but all
such counterparts taken together will constitute one and the same instrument.
Signatures may be exchanged by telecopy, with original signatures to follow.
Each party to this agreement agrees that it will be bound by its own telecopied
signature and that it accepts the telecopied signature of the other party to
this Agreement.
EXECUTED as of the date first set forth above.
RIO GRANDE, INC.
By:
Name:
Title:
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EMPLOYEE
Gary Scheele
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MASTER COMMODITY SWAP AGREEMENT
THIS MASTER COMMODITY SWAP AGREEMENT ("Master Agreement") is made as of
this _____ day of January, 1997, by and between , ("Party A"), and RIO GRANDE,
INC. (Party "B").
The parties hereto anticipate entering into one or more commodity
transactions (each a "Swap Transaction"). The terms of each Swap Transaction
entered into hereunder shall be set forth in a written Confirmation in the form
of Exhibit 1 herein provided by Party A to Party B, which shall be deemed to
incorporate by reference the terms and conditions of this Master Agreement. A
Confirmation shall be deemed conclusive and binding if no objections are made
within one (1) Business Day of receipt of the Confirmation. This Master
Agreement and all the Confirmations constitute a single agreement between the
parties (collectively referred to as this "Agreement"). In the case of a
conflict between this Master Agreement and any applicable Confirmation, the
terms specified in such Confirmation shall govern.
The terms "Effective Date", "Trade Date", "Payment Date", "Commodity",
"Fixed Payor", "Fixed Price", "Market Payor", "Market Price Index", "Notional
Amount", "Calculation Periods", "Modified Payment Calculation", and "Termination
Date" , if applicable, shall have the meanings specified in the relevant
Confirmation.
1. Payments.
(a) Party A shall: (i) perform all calculations required hereunder; (ii)
determine the Market Price of the specified Commodity of any applicable Swap
Transaction in accordance with the Market Price Index of each Swap Transaction;
(iii) determine the amounts required to be paid under each Swap Transaction; and
(iv) notify Party B, as early as is practicable and at least two (2) Business
Days prior to the Payment Date for each Calculation Period, of the party to make
a payment and the amount of such payment. Neither party shall be liable for any
errors in calculations or determinations, irrespective that any such errors may
be subsequently discovered and corrected.
(b) For Transactions identified as a Swap in the Confirmation, any Fixed
Payor shall pay to the other party, on each applicable Payment Date relating to
each applicable Calculation Period, an amount equal to the excess, if any, of
the Fixed Amount (Notional Amount times Fixed Price) over the Market Amount
(Notional Amount times Market Price Index). Any Market Payor in a Swap
Transaction shall pay to the other party, on each applicable Payment Date
relating to each applicable Calculation Period, an amount equal to the excess,
if any, of the Market Amount over the Fixed Amount.
(c) For Transactions identified as Caps, Floors, or Collars in the
Confirmation, payment shall be calculated as follows: (i) Where a Cap Strike
Price has been specified, the Market Payor shall pay to the other party, on each
applicable Payment Date relating to each applicable Calculation Period, an
amount equal to the excess, if any, of the Market Amount (Notional Amount times
Market Price Index) over the product of the Cap Strike Price and the Notional
Amount; (ii) Where a Floor Strike Price has been specified, the Market Payor
shall pay to the other party, on each applicable Payment Date relating to each
applicable Calculation Period, an amount equal to the excess, if any, of the
product of the Floor Strike Price and the Notional Amount over the Market Amount
(Notional Amount times Market Price Index).
(d) Modifications to these payment calculations and consideration of
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premium amounts, if necessary, will be described in the written Confirmation.
All Payments or deposits of cash Collateral under this Agreement shall be made
on the Payment Date by wire transfer in immediately available funds to the
account designated by the payee. Payment obligations of the parties due on the
same Payment Date under this Master Agreement and any Confirmation shall be
netted, so that only one amount is due from one party to the other.
2. Collateral Requirements.
Collateral will be paid by each party on the terms and conditions set
forth in any Collateral Annex attached hereto, which Collateral Annex is
incorporated herein by this reference.
3. Representations and Warranties.
Party A and Party B each represents and warrants, as of the date hereof
and as of the date of delivery of each Swap Transaction, as follows:
(a) Its execution, delivery, and performance of this Master Agreement,
all Confirmations, and any Swap Transaction have been duly authorized by all
necessary corporate action and do not contravene any legal or contractual
restriction binding on or affecting it, and the person signing this Master
Agreement and each Confirmation is authorized and duly empowered to do so;
E-171
(b) This Master Agreement, all Confirmations, and any Swap Transaction
entered into are legal, valid, and binding obligations enforceable against it in
accordance with its terms, except as may be limited by bankruptcy,
reorganization, moratorium, or other similar laws affecting creditor's rights
generally;
(c) It will enter into Swap Transactions hereunder as principal only and
not as the agent for any other person;
(d) It is an "eligible swap participant" that qualifies for the safe
harbor exemption for swap agreements under the rules of the Commodity Futures
Trading Commission;
(e) It has entered into this Master Agreement (including each Swap
Transaction evidenced hereby) in conjunction with its line of business or the
financing of its business;
(f) Party B agrees that it will provide Party A with any information
regarding its financial condition as Party A may reasonably request, and such
information shall accurately reflect the financial condition of Party B. Party B
will, in any event, promptly notify Party A of any material adverse change in
such condition, and either party will promptly notify the other party of the
occurrence of any event of default hereunder; and
(g) In connection with the negotiation of, the entering into, and the
confirmation of the execution of this Master Agreement and each Swap
Transaction:
(1) it is acting as principal (and not as agent or in any other
capacity, fiduciary or otherwise);
(2) the other party is not acting as a fiduciary or financial or
investment advisor for it;
(3) it is not relying upon any representation (whether written or
oral) of the other party other than the representations expressly set forth in
this Master Agreement;
(4) the other party has not given to it (directly or indirectly
through any other person) any advice, counsel, assurance, guarantee, or
representation whatsoever as to the expected or projected success,
profitability, return, performance, result, effect, consequence, or benefit
(either legal, regulatory, tax, financial, accounting, or otherwise) of this
Master Agreement or such Swap Transaction;
(5) it has consulted with its own legal, regulatory, tax, business,
investment, financial, and accounting advisors to the extent it has deemed
necessary, and it has made its own investment, hedging, and other decisions
regarding the Swap Transactions based upon its own judgment and upon any advice
from such advisors as it has deemed necessary, and not upon any view expressed
by the other party;
(6) all decisions regarding the Swap Transactions have been the
result of arm's length negotiations between the parties; and
(7) it is entering into this Master Agreement and such Swap
Transaction with a full understanding of all of the risks hereof and thereof
(economic and otherwise), and it is capable of assuming and willing to assume
(financially and otherwise) those risks.
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4. Events of Default.
The parties agree they are forward contract merchants within the meaning
of Section 556 of the Bankruptcy Code and that the Swap Transactions
contemplated by this Agreement are subject to Section 556 and 560 of the
Bankruptcy Code.
(a) "Event of Default" shall mean: (i) any failure by Party A or Party B
to pay any amount as and when due and payable under this Agreement; (ii) any
representation or warranty made by Party A or Party B hereunder proving to have
been false or misleading in any material respect as of the time it was made or
reaffirmed; (iii) any failure by Party A or Party B to perform, observe, or
comply with any other term, covenant, condition, or provision contained in this
Agreement and such failure continues for thirty (30) days after receipt of
notice of such failure from the other party; (iv) any failure of any party to
provide any Collateral required pursuant to Section 2 hereto and any applicable
Confirmation; (v) the initiation of a proceeding by or against Party A or Party
B under the bankruptcy laws of the United States or the bankruptcy or insolvency
laws of any other jurisdiction, or the making of any assignment for the benefit
of creditors, an application for appointment of a receiver, custodian, or
trustee, or the passing of a resolution for winding up or liquidation by or on
behalf of Party A or Party B; (vi) the consolidation or amalgamation with, or
merger into, or transfer of all of substantially all of the assets of Party A or
Party B to another entity if either (a) the resulting, surviving, or transferee
entity fails to assume all the obligations of such party under this Agreement,
or (b) the creditworthiness of the resulting, surviving, or transferee entity
is, in the reasonable judgment of the other party, materially weaker than that
of Party A or Party B, as the case may be, immediately prior to such action; and
(vii) any default, event of default or other similar condition or event (however
described) in respect of either party under one or more agreements or
instruments relating to any obligation or payment (whether present or future,
contingent or otherwise, as principal or surety or otherwise) in respect of
borrowed money (individually or collectively) in an aggregate amount of not less
than $25,000,000 for Party A or $200,000 for Party B (respectively, the
"Cross-Default Threshold") which has resulted in such indebtedness becoming due
and payable under such agreements or instruments before it would otherwise have
been due and payable.
(b) Upon the occurrence of any Event of Default, the non-defaulting party
may, but shall not be required to, designate an Early Termination Date upon two
(2) Business Days' notice to the defaulting party. On the Early Termination
Date, the parties' obligations under all Swap Transactions (the "Terminated
Transactions") shall terminate, except for the obligation contained in Section
4(c) below.
(c) After notice is delivered designating an Early Termination Date, the
non-defaulting party will determine the Market Value as of the Early Termination
Date for all Swap Transactions. "Market Value" is defined as (a) if the
non-defaulting party is the Market Payor, the Notional Amount times the Market
Price for the commodity as reasonably determined by the non-defaulting party
("Termination Price") less the Fixed Price (NA x (TP-FP)), or (b) if the
non-defaulting party is the Fixed Price Payor, the Notional Amount times the
Fixed Price less the Termination Price (NA x (FP- TP)). The non-defaulting party
will then calculate:
(i) the amount owed by the defaulting party to the non-defaulting
party by taking the sum of:
(a) the absolute value of all negative Market Values with
respect to the Terminated Transactions, and
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(b) any unpaid amounts owed to the non-defaulting party by
the defaulting party pursuant to Section 1 immediately prior to the Early
Termination Date, and
(c) the amount of any other damages, losses, or expenses
incurred by the non- defaulting party (determined by the non-defaulting party in
a commercially reasonable manner) in obtaining, liquidating, or employing hedges
against or in replacing the terminated Swap Transaction with equivalent
positions.
(ii) the amount owed by the non-defaulting party to the defaulting
party by taking the sum of:
(a) all positive Market Values with respect to the Terminated
Transactions, and
(b) any unpaid amounts owed to the defaulting party by the
non-defaulting party pursuant to Section 1 immediately prior to the Early
Termination Date.
The party owing the larger amount under (i) and (ii) above will pay
to the other party an amount equal to the excess of the larger amount over the
smaller amount no later than two (2) Business Days following notice from the
non-defaulting party of the amount due, plus, in the case of any amount owing
under this Section (c) by the defaulting party, interest from (and including)
the Early Termination Date until the date such amount is paid.
(d) The non-defaulting party shall deliver to the defaulting party a
statement containing in reasonable detail a computation of the amount owing
pursuant to the preceding paragraph together with such corroborating
documentation as the defaulting party may reasonably request.
(e) The non-defaulting party's rights are in addition to and not in
limitation or exclusion of any other rights which the non-defaulting party may
have (whether by agreement, operation of law, or otherwise).
5. Miscellaneous.
(a) No amendment or waiver of any provision of this Master Agreement, nor
consent to any departure by either party therefrom, nor assignment of any of the
rights or obligations hereunder, shall be effective unless the same is in
writing and signed by Party A and Party B, and such waiver or consent shall be
effective only in the specific instance and for the specified purpose for which
given.
(b) A party that defaults in the payment of any amount due hereunder
will, to the extent permitted by law, be required to pay interest on all amounts
owed to the other party at the then-prevailing prime interest rate established
by the Chase Manhattan Bank at its offices in New York, New York, plus one
percent (1%), on demand, for the period from, and including the original due
date for payment to, but excluding the date of actual payment.
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(c) "Business Day" shall mean any day other than a Saturday or Sunday on
which the New York Mercantile Exchange ("NYMEX") is open for business.
(d) Each party hereby waives, with full knowledge and understanding of
the consequences of such waiver, any claim, cause of action, or right which it
might otherwise be entitled to assert against the other party regarding the
validity or enforceability of this Master Agreement under any applicable laws or
regulations.
(e) This Master Agreement may be terminated by either party, upon at
least five (5) Business Days' written notice to the other party, except that no
such termination shall affect the obligations of the parties hereunder as to
Swap Transactions in effect on or prior to the date of termination without the
prior written consent of the other party.
(f) Any notices required or desired to be given hereunder shall be in
writing and shall be mailed or telefaxed as follows:
If to Party A:
Attn:
Telephone:
Telefax:
If to Party B: Rio Grande, Inc.
10101 Reunion Place (Union Square Suite 210)
San Antonio, Texas 78216
Attn: Gary Scheele
Telephone: 210-308-8000
Telefax: 210-308-8111
Notices provided hereunder shall be deemed to have been received
when sent, if provided by telefax, telex, or hand, or when deposited in the U.
S. mail, if provided by first class mail. In the event that any such notice is
received after 5:00 P.M. Central Time on a Business Day or is received on a
non-Business Day, delivery shall be deemed to have been received on the next
Business Day.
(g) This Master Agreement shall be governed by, and construed in
accordance with, the laws of the State of Kansas, without reference to the
conflict of laws provisions thereof and without recourse to arbitration, and the
parties hereto consent to the jurisdiction and venue of the courts of the State
of Kansas or the courts of the United States sitting in the State of Kansas in
connection with any controversy or dispute arising out of or related to this
Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Master Agreement
to be executed by their respective officers thereunto duly authorized as of the
date first above written.
PARTY A:
By:
----------------------
R. C. Aldridge, President
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PARTY B:
RIO GRANDE, INC.
By
-------------------------
Print Name:
-----------------
Title:
----------------------
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Exhibit 1
SWAP TRANSACTION
This is executed when a Swap Transaction is completed. The terms listed in
this exhibit are shown as an example only. The Master Commodity Swap
Agreement is binding when a Swap Transaction has been executed.
TO:
FROM:
ATTN:
Dear Sirs:
The purpose of this Agreement is to set forth the terms and conditions of
the Swap Transaction entered into between and ________________________________
on the Trade Date referred to below. This letter constitutes a "Confirmation" as
referred to in the Master Swap Agreement specified below.
1. This Confirmation supplements, forms a part of, and is subject to the
Master Commodity Swap Agreement dated as of __________________ (the "Master
Agreement") between and __________________________. All provisions contained or
incorporated by reference in the Master Agreement shall govern this
Confirmation, except as expressly modified below.
2. The terms of the particular Swap Transaction to which this Confirmation
relates are as follows:
a. Transaction Type: Swap
b. Trade Date: (date)
c. Effective Date: (date)
d. Applicable Commodity: U. S. Gulf Coast Pipeline Kerosene-based
Aviation Jet Fuel as defined by Platts or other applicable description
e. Notional Amount:: xx,xxx barrels per month
f. Fixed Price: $x.xxxx per gallon
g. Market Payor:
h. Market Price Index: The Unweighted Arithmetic Average (rounded to
the fifth decimal point) of the low prices listed for "Jet Kerosene"
(c/gal) in the "Pipeline" column of the "U. S. Gulf Coast" section of
the "Spot Price Assessments" of the Platt's Oilgram Price Report for
each day during the Calculation Period for which such price is
ordinarily reported. The prices used will be those for the Effective
Date rather than the dates of Platt's issues in which those prices are
reported. If any such price is not reported in Platt's and is not
otherwise obtainable from the publisher of Platt's, then such other
internationally recognized price reporting service shall be used
asmutually determined.
i. Calculation Period: Monthly, from mo/day/year and including
mo/day/year
j. Payment Dates: No later than the 2nd Business Day of the month
following the last day of the Calculation Period noted herein
k. Payment Calculation: If the Market Price Index for the Calculation
Period(s) is greater than the Fixed Price, then Koch will owe
_____________________ the difference multiplied by the Notional Amount.
If the Market Price Index for the Calculation Period(s) is less than
the Fixed Price, then ______________________ will owe Koch the
difference multiplied by the Notional Amount.
l. Termination Date: Mo/day/year, which date shall be the last day of
the term of the Swap Transaction
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Please confirm that the foregoing correctly sets forth the terms of our
agreement by executing the copy of this Confirmation enclosed for that purpose
and returning to us.
We are pleased to have completed this transaction with you.
Best regards,
By:
-------------------------------
Title:
----------------------------
Accepted and confirmed as of the date first written above:
(Name of Party B)
By:
-----------------------------
Title:
---------------------------
End of Exhibit 1
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COLLATERAL ANNEX
The purpose of this Annex is to set forth the conditions under which
Party A or Party B will be required to pay or deliver cash, securities, and
other property, together with proceeds thereof ("Collateral") to the other, as
well as the conditions under which the recipient thereof will return and release
such Collateral.
1. Definitions.
For purposes of this Annex, the following terms have respective
definitions set forth below (capitalized terms used but not defined in this
Annex shall have the meaning specified in the Master Agreement to which this
Annex is attached):
"Aggregate Exposure" of a party as of any Calculation Date means the sum
of the Exposures of such party for all Swap Transactions outstanding on such
Calculation Date.
"Calculation Date" means the first Business Day of each month, and shall
also mean any other Business Day on which Party A chooses or is requested by
Party B to make the determinations referred to in Section 3(b) hereof.
"Collateral" has the meaning set forth in the introduction hereto.
"Collateral Value" on any date means: (i) with respect to any Collateral
consisting of Government Obligations, the sum of (A)(1) the mean of the high bid
and low asked prices quoted on such date by any principal market maker for such
Government Obligations chosen by Party A, or (2) if no quotations are available
from a principle market maker for such date, the mean of such high bid and low
asked prices as of the day next preceding such date on which such quotations
were available, plus (B) the accrued but unpaid interest on such Government
Obligations (except to the extent included in the applicable price referred to
in (A) of this clause (i)) as of such date; (ii) with respect to any cash
Collateral, the amount of such cash; (iii) with respect to any Collateral
consisting of letters of credit, the amount thereof; and (iv) with respect to
any other Eligible Collateral, the fair market value of such Collateral on such
date as determined in any reasonable manner chosen by Party A.
"Credit Threshold" with respect to Party A means $15,000,000 and with
respect to Party B means $500,000; provided, however, that Party A reserves the
right, in its sole discretion, pursuant to Party A's normal and continuing
credit evaluation procedures, to increase or decrease said threshold.
"Default" means an Event of Default or an event or condition that, with
the giving of notice or lapse of time (or both), would constitute an Event of
Default.
"Eligible Collateral" as of any date means: (i) cash; (ii) Government
Obligations; (iii) irrevocable letters of credit issued to the relevant
recipient specified pursuant to Section 3(b) hereof by such banks on such terms
and in such amounts as such recipient has, in its sole discretion, agreed to in
writing; and (iv) such other property as such recipient may, in its sole
discretion, agree in writing to accept as Collateral.
"Exposure" with respect to any Swap Transaction outstanding on any
Calculation Date means: (i) in the case of any Exposure of Party A, the U.S.
dollar amount, determined by Party A in good faith and in accordance with market
practice, that a proposed assignee would require to be paid by Party B to assume
the rights and obligations of Party A under such Swap Transaction; and (ii) in
the case of any Exposure of Party B, the U.S. dollar amount, determined by Party
A in good faith and in accordance with market practice, that a proposed assignee
would require to be paid by Party A to assume the rights and obligations of
Party B under such Swap Transaction; provided, however, that if the Exposure of
either party for a Swap Transaction is negative, the Exposure of such party for
such Swap Transaction shall be zero.
"Government Obligations" means direct obligations of the United States of
America, or obligations fully guaranteed as to both principal and interest by
the United States of America, the federal interest by the United States of
America, the Federal National Mortgage Association (FNMA), and the Federal Home
Loan Mortgage Corporation (FHLMC), but shall exclude Interest Only and Principle
Only securities guaranteed by either GNMA, FHMA or FHLMC and Collateralized
Mortgage Obligations, Real Estate Mortgage Investment Conduits, and similar
derivative securities.
"Material Adverse Change" means a material adverse change, as determined
by Party A in its sole and absolute discretion, in (i) the business financial
condition or results of operations of Party B, or (ii) Party B's ability to
repay its Net Exposure.
"Minimum Transfer Amount" with respect to Party A means $1,000,000 and
with respect to Party B means $100,000.
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"Net Exposure" shall mean the excess, if any, of one party's Aggregate
Exposure over the other party's Aggregate Exposure. The party with the smaller
Aggregate Exposure amount shall be deemed to have a Net Exposure equal to such
excess.
2. Collateral: Grant of Security Interest.
(a) Each party represents and warrants to the other party that it is the
sole legal and beneficial owner of any Collateral (other than any Collateral
consisting of letters of credit) delivered to the other party, free and clear of
any lien, security interest, claim or encumbrance, other than the collateral
interest created pursuant hereto.
(b) Each party hereby grants to the other party a security interest in
all Collateral from time to time paid or delivered hereunder by or on behalf of
the delivering party to the receiving party to secure the payment of all
obligations (now or hereafter existing) of the delivering party under the Master
Agreement.
3. Delivery of Collateral.
(a) On each Calculation Date, Party A shall determine the Aggregate
Exposure for each party and the Net Exposure of each party and shall notify
Party B in writing of such calculations to the extent the Net Exposure of either
party exceeds its Credit Threshold. All calculations made by Party A shall be
conclusive between the parties in the absence of manifest error.
(b) If, as of any Calculation Date, either party has a Net Exposure in
excess of its Credit Threshold, then upon request of the exposed party, Eligible
Collateral shall be provided by and/or returned so that as a result such party
holds Eligible Collateral with a Collateral Value at least equal to such excess,
provided that all such payments and returns of eligible Collateral shall be
rounded to the nearest integral multiple of $50,000 (and rounded up if exactly
between two such integral multiples) and such payment equals or exceeds the
pledgor's Minimum Transfer Amount. If neither party has a Net Exposure, or if
the Net Exposure of each party is less than its Credit Threshold, all Eligible
Collateral shall be returned. Notwithstanding the foregoing, neither party shall
have any obligation to convert any Eligible Collateral held by it into property
of any other type or to return any Eligible Collateral held by it pursuant to
this Section 3(b) if (i) as a result of such return such party's Net Exposure
would exceed the Collateral Value of Eligible Collateral held by it by more than
the other party's Credit Threshold, or (ii) there is continuing any Default with
respect to the other party.
(c) If Party A determines that Party B has suffered a Material Adverse
Change, then Party A may require Eligible Collateral be delivered in an amount
equal to the Net Exposure without regard to the Credit Threshold.
(d) Cash Collateral shall be paid by wire transfer of immediately
available funds to the Designated Account of the party receiving the payment.
Non-cash Collateral shall be delivered to the recipient party in accordance with
its instructions. All Eligible Collateral shall be provided (or returned) within
one (1) Business Day after the Calculation Date as of which the relevant
computation under Section 3(a) occurred.
(e) Return of Collateral in accordance with this Section 3 shall be
deemed a release of the security interest granted pursuant to Section 2(b)
hereof with respect to such returned Collateral. In connection with each return
of Collateral pursuant to this Section 3, each party will, upon request of the
other party, execute a receipt showing the Collateral returned to it.
4. Administration of Collateral.
(a) Each party shall have free and unrestricted use of all cash
Collateral provided to it hereunder. The party providing such cash Collateral
shall earn interest thereon, payable by the recipient party thereof, from and
including the date of its receipt by such recipient party to, but excluding the
date such Collateral is returned, replaced, or utilized pursuant to Section 3 or
5 hereof, at a rate per annum equal to the daily fed funds effective rate
calculated and reported by the Federal Reserve Bank of New York. Such interest
shall be calculated on the basis of the actual number of days elapsed over a
year of 365 days. Unless a Default shall be continuing with respect to a party,
the net amount of interest due to such party shall be remitted to its Designated
Account on the second Business Day following the end of each calendar month.
(b) Subject to the next sentence of this Section 4(b), each party shall
promptly remit to the other party all principal and interest received by the
receiving party in respect of the non-cash Collateral held by it.
Notwithstanding the foregoing, neither party shall be required to so remit such
principal or interest (i) if a Default shall be continuing with respect to the
other party, or (ii) to the extent that immediately following such remittance
the Collateral Value of all Eligible Collateral held by such party should be
less than its Net Exposure in excess of the other party's Credit Threshold.
(c) Beyond the exercise of reasonable care in the custody thereof,
neither party shall have any duty as to any Collateral in its possession or
control or in the possession or control of any agent or bailee for it or as to
any income thereon or as to the preservation of rights against prior parties or
any other rights pertaining thereto. Reasonable care in the custody and
preservation of such Collateral shall be deemed to have been exercised if the
Collateral is accorded treatment substantially equal to that which the receiving
party accords its own property.
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5. Exercise of Rights Against Collateral.
If any Event of Default has occurred and is continuing with respect to a
party, the other party may exercise the rights and remedies of a secured party
under the Master Agreement or applicable law, and may apply Collateral held by
it to satisfy the obligations of the defaulting party under the Master Agreement
after the designation of any Early Termination Date pursuant to Section 4(b) of
the Master Agreement.
6. Miscellaneous.
(a) Each party will defend Collateral provided by it against the claims
and demands of all other persons, will keep such Collateral free from all
security interests or other encumbrances (except the security interest
hereunder), and will not sell, transfer, assign, deliver, or otherwise dispose
of any such Collateral or any interest therein without the prior written consent
of the other party.
(b) Each party will execute and deliver to the other party (and to the
extent permitted by applicable law, such other party is hereby authorized to
execute and deliver, in its own name or the name of the other party) such
financing statements, assignments, and other documents, and do such other things
relating to the Collateral held by it and the security interest granted
hereunder, including anything it may reasonably deem necessary or appropriate to
perfect or maintain perfection of its security interest in such Collateral, and
the party which paid or delivered such Collateral shall pay all costs relating
thereto.
(c) Each party agrees that it will forthwith upon demand pay to the other
party the amount of any out-of-pocket expenses which such other party may incur
in connection with the collection, administration, sale or, other disposition of
any Collateral pursuant hereto.
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