SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - K
[X] Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2000
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ______ to ______.
Commission File Number: 0 - 13305
PARALLEL PETROLEUM CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 75-1971716
- ------------------------------ ----------------
State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
110 North Marienfeld Street
One Marienfeld Place, Suite 465
Midland, Texas 79701
- ---------------------------------------- ----------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (915) 684-3727
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Common Stock Purchase Warrants
Rights to Purchase Series A Preferred Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting and non-voting common equity held by
non-affiliates of the Registrant as of March 15, 2001 was approximately
$91,929,861, based on the last sale price of the common stock on the same date.
At March 15, 2001 there were 20,428,858 shares of common stock outstanding.
(i)
FORM 10-K
PARALLEL PETROLEUM CORPORATION
TABLE OF CONTENTS
Item No. Page
PART I
Item 1. Business 1
Item 2. Properties 22
Item 3. Legal Proceedings 24
Item 4. Submission of Matters to a Vote
of Security Holders 24
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 25
Item 6. Selected Financial Data 26
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 27
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk 38
Item 8. Financial Statements and Supplementary Data 39
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure 39
PART III
Item 10. Directors and Executive Officers of the Registrant 40
Item 11. Executive Compensation 42
Item 12. Security Ownership of Certain Beneficial Owners
and Management 48
Item 13. Certain Relationships and Related Transactions 50
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 51
(ii)
Cautionary Statements Regarding Forward-Looking Statements
Some statements contained in our Form 10-K report are "forward-looking
statements". All statements other than statements of historical facts included
in this report, including, without limitation, statements regarding planned
capital expenditures, the availability of capital resources to fund capital
expenditures, estimates of proved reserves, our financial position, business
strategy and other plans and objectives for future operations, are
forward-looking statements. You can identify forward-looking statements by the
use of forward-looking terminology such as "may," "will," "expect," "intend,"
"anticipate," "estimate," "continue," "present value," "future" or "reserves" or
other variations or comparable terminology. Although we believe the assumptions
and expectations reflected in these forward-looking statements are reasonable,
we can't give any assurance that our expectations will prove to be correct or
that we will be able to take any actions that are presently planned. All of
these statements involve assumptions of future events and risks and
uncertainties. Risks and uncertainties associated with forward-looking
statements include, but are not limited to:
risks associated with the drilling of wells;
competition;
future capital requirements and availability of financing;
fluctuations in prices of oil and gas;
governmental regulations;
geological concentration of our reserves; and
general economic conditions.
For these and other reasons, actual results may differ materially from
those projected or implied. We caution you against putting undue reliance on
forward-looking statements or projecting any future results based on such
statements.
Before you invest in our common stock, you should be aware that there are
various risks associated with an investment. We have described some of these
risks in other sections of this annual report and under the section Risk Factors
beginning on page 18 of this annual report.
1
PART I
ITEM 1. BUSINESS
General
Parallel Petroleum is an independent energy company engaged in oil and
natural gas exploration, development and production and the acquisition of
producing properties. These activities are concentrated in two areas:
the onshore gulf coast area of south Texas; and
the Permian Basin of west Texas.
Throughout this report, we refer to some terms that are commonly used and
understood in the oil and gas industry. These terms are: Mcf, Bcf, Bbls and EBO.
Mcf refers to the quantity of one thousand cubic feet of natural gas. Bcf means
one billion cubic feet of natural gas. Bbls means barrels of oil or crude oil
condensate. An EBO is an equivalent barrel of oil, or 6 Mcf of natural gas for
one barrel of oil.
As you read this report, it is important for you to understand our
relationship with First Permian, L.L.C., a Delaware limited liability company.
If you will turn to page 4 of this report, you will find information about First
Permian and its acquisition of properties under the heading First Permian,
L.L.C. Unless we state that the information about Parallel in this report
includes Parallel's 30.675% membership interest in First Permian, you should
keep in mind that references to Parallel, we, our or similar terminology exclude
First Permian.
Proved Reserves as of December 31, 2000
At December 31, 2000, our estimated proved reserves were approximately 1.0
million Bbls of oil and 15.7 Bcf of natural gas. The present value of our pretax
future net revenues, discounted at 10%, was approximately $90.9 million.
Approximately 73% of our proved reserves were natural gas and approximately 70%
were categorized as proved developed reserves.
As of December 31, 2000, an independent engineering firm estimated that
First Permian had total proved reserves of 48.1 million Bbls of oil and 5.9 Bcf
of natural gas with a present value of pretax future net revenues, discounted at
10%, of $300.1 million. Based on our 30.675% interest in First Permian's oil and
gas reserves, this represented 14.7 million Bbls of oil and 1.8 Bcf of natural
gas with a present value of $92.1 million, net to Parallel's interest.
The First Permian properties complement our existing Permian Basin
production and reserves. The properties are long-lived with low decline rates,
which helps offset the higher decline rates of our reserve base in the
Yegua/Frio/Wilcox gas trend in south Texas. At December 31, 2000, the reserve
life (total estimated proved reserves divided by the prior 12 months production)
of First Permian's properties was approximately 34.6 years. This compares with a
reserve life of our existing proved reserves at December 31, 2000 of
approximately 5.6 years. At December 31, 2000, the reserve life of our
properties, after including our 30.675% share of First Permian's reserves, is
approximately 17.4 years.
2
During 2000, we participated in drilling 32 gross (5.6 net) exploratory and
development wells. Twenty-three gross (4.0 net) wells were productive and 9
gross (1.7 net) wells were dry holes.
Parallel was incorporated in Texas on November 26, 1979, and reincorporated
in the State of Delaware on December 18, 1984.
Our executive offices are located at 110 Marienfeld Place, Suite 465,
Midland, Texas 79701. Our telephone number is (915) 684-3727.
Strategy
Our primary objectives are to build oil and gas reserves, production, cash
flow and earnings per share by exploring for new oil and gas reserves, acquiring
oil and gas properties and optimizing production from existing oil and gas
properties. Management seeks to achieve these objectives by:
using advanced technologies to conduct exploratory activities;
acquiring producing properties we believe add incremental value to our
asset base;
keeping debt levels low;
concentrating activities in core areas to achieve economies of scale; and
emphasizing cost controls.
Following this strategy, we have discovered oil and gas reserves using 3-D
seismic technology in the Horseshoe Atoll Reef Trend of west Texas and in the
Yegua/Frio/Wilcox gas trend onshore the gulf coast of Texas. Additionally, we
have acquired oil and gas producing properties in the Permian Basin of west
Texas. Capital utilized to acquire these properties has been provided primarily
by secured bank financing, sales of our equity securities and cash flow from
operations.
We continually screen, review and evaluate potential leases and prospects.
Our sources for possible acquisitions of leases and prospects include
independent landmen, independent oil and gas operators, geologists and
engineers. We also evaluate properties that become available for purchase from
major oil companies. If our review of an undeveloped lease or prospect or a
producing property indicates that it may have geological characteristics
favorable for 3-D seismic analysis, we may decide to acquire a working interest
in the property or an option to acquire a working interest. In the case of
producing properties, we also seek properties that are underperforming relative
to their potential. To reduce our financial exposure in any one prospect and
participate in more prospects, we enter into co-ownership arrangements with
third parties under standard industry form operating agreements. This is common
in the industry and enables us to share the drilling and related costs and
dry-hole risks with other participants. From time to time, we sell prospects to
third parties or farm-out prospects and retain an interest in revenues from
these prospects.
We strive to maintain low general and administrative expenses in our
operations. Our concentrated geographic focus allows us to manage a relatively
large asset base with few employees. We believe that our operational base allows
us to acquire exploratory prospects and producing properties at relatively low
incremental overhead costs and achieve economies of scale.
We also pursue cost savings by using outside geological and geophysical
consultants for our exploration and development efforts. We use independent
contractors for all of our field operations.
3
Intense competition among independent oil and gas producers requires us to
react quickly to available exploration and acquisition opportunities. We try to
position for these opportunities by maintaining:
adequate capital resources for projects in our primary areas of operations;
the technological capabilities to conduct a thorough evaluation of a
particular project; and
a small staff that is able to respond swiftly to exploration and
acquisition opportunities.
The steps we use to implement our business strategy include:
Focusing on Exploration Activities
We seek to increase our oil and gas reserves and production through
targeted exploration activities in our core operating areas. We focus on
prospects having the following characteristics:
known geological and reservoir characteristics;
locations near existing wells so data from existing wells can be correlated
with seismic data for prospects; and
a potential to have a meaningful impact on our reserves.
When economic conditions are favorable and when we have sufficient capital
resources, we believe we can maximize the value of our properties by
accelerating drilling activities. This provides us an opportunity to replace
reserves at a more rapid pace than existing reserves are produced.
Using Advanced Technologies
We believe use of 3-D seismic surveys and other advanced technologies
provides us with a risk management tool. Our use of these technologies in
exploring for and developing oil and gas properties can:
reduce drilling risks;
lower finding costs;
provide for more efficient production of oil and natural gas from our
properties; and
locate reserves not detectable by using traditional means.
Generally, 3-D seismic surveys provide more accurate and comprehensive
information to evaluate drilling prospects than conventional 2-D seismic
technology. We evaluate substantially all of our exploratory prospects using 3-D
seismic technology. On some exploratory prospects, we also use amplitude versus
offset, or AVO, analysis. AVO analysis shows the high contrast between sands and
shales and assists in determining the presence of natural gas in potential
reservoir sands.
We believe that using 3-D seismic, AVO and other technologies gives us a
competitive advantage because of the increased likelihood of successful
drilling. When we evaluate exploratory prospects in geographical areas where the
use of 3-D seismic and other advanced technologies are not likely to provide any
advantages, we use traditional evaluation methods, such as 2-D seismic
technology.
4
Serving as Geophysical Operator
We prefer to serve as the geophysical operator of exploratory projects
located in areas where we have experience using 3-D seismic technology. By doing
so, we control the design, acquisition, processing and interpretation of 3-D
surveys and, in most cases, determine drilling locations and well depths. The
integrity of 3-D seismic analysis in our projects is enhanced by emphasizing
quality controls throughout the data acquisition, processing and interpretation
phases.
We retain experienced outside consultants and participate with
knowledgeable joint working interest owners when we acquire, process and
interpret 3-D seismic surveys. When possible, we also attempt to correlate or
model the interpretations of 3-D seismic surveys with wells previously drilled
on or near the prospect being evaluated.
First Permian, L.L.C.
We own an equity interest in First Permian, L.L.C., a Delaware limited
liability company. On June 30, 1999, we joined with three other oil and gas
companies and formed First Permian to acquire oil and gas properties from Fina
Oil and Chemical Company. The acquired assets included oil and gas reserves and
associated assets in producing fields located in the Permian Basin of west
Texas.
On June 25, 1999, First Permian entered into a Merger Agreement with Fina
Oil and Chemical Company. Under terms of the Merger Agreement, Fina transferred
all of the oil and gas properties to a wholly owned subsidiary of Fina which was
then merged into First Permian. Upon consummating the merger, and after giving
effect to the purchase price adjustments required by the Merger Agreement, First
Permian paid to Fina cash in the aggregate amount of approximately $92 million.
The purchase was financed primarily with a bank credit facility for
$74,000,000, subordinated notes totaling $16,000,000 and the sale of minerals
for $5,000,000. The credit facility is collateralized by substantially all of
First Permian's oil and gas properties.
As of December 31, 2000, the subordinated notes had been paid in full.
On October 5, 2000, First Permian restated its credit agreement dated June
30, 1999, which, among other things, released Parallel from its guarantee of
$10,000,000 of First Permian's bank loans. First Permian's credit agreement was
further amended on December 27, 2000 and a revolving credit facility of up to
$110,000,000 was established with an initial borrowing base of $75,000,000 as of
December 27, 2000. The loan matures on September 1, 2003.
The founding members of First Permian were Parallel Petroleum, Baytech,
Inc., Tejon Exploration Company and Mansefeldt Investment Corporation. On June
30, 1999, Parallel, Baytech, Tejon and Mansefeldt each contributed cash for
initial membership interests of 22.5%, 22.5%, 27.5% and 27.5%, respectively.
Effective May 31, 2000, First Permian's original limited liability company
agreement was amended and restated to provide for, among other things, the
admission of additional members, the issuance of a new class of preferred
membership units and the issuance of additional common membership units in
return for additional capital contributions totaling $20,000,000 from new
members. As a result of the issuance of additional common membership units, our
interest at June 30, 2000 was 28.665%.
Concurrent with the cancellation on September 30, 2000 of a $3.1 million
note receivable from one of the other members of First Permian, our interest
increased to 30.675%. The note was collateralized by 80,000 common membership
units of First Permian and upon cancellation, the 80,000
5
common membership units were acquired by First Permian. This transaction had the
effect of reducing the total number of common membership units outstanding,
decreasing one member's pro rata interest and increasing the interest of the
remaining members of First Permian.
At December 31, 2000, Parallel owned a 30.675% interest in First Permian.
As a condition of obtaining bank financing to consummate the acquisition,
First Permian was required to hedge a significant portion of its crude oil
production. The remaining required hedge expires on June 30, 2001. A portion of
First Permian's production will remain subject to a collar through December
2002, as indicated in the following table.
First Permian, LLC (100%)
Hedge Contracts
Type Volume/Month Term Price Commodity
- ---- ------------ ---- ----- ---------
Swap 91,000 barrels 1/1/01-6/30/01 $17.70 WTI NYMEX
Collar 40,000 barrels 7/01-12/02 $19.00 floor
$24.80 ceiling WTI NYMEX
Collar 40,000 barrels 7/01-12/02 $18.00 floor
$28.75 ceiling WTI NYMEX
Drilling Activities in 2000
We are engaged in extensive drilling activities, primarily on properties in
which Parallel already owns interests and, to a lesser extent, newly acquired
properties. The scope of our exploration and development activities is affected
by the price of oil and gas.
In 2000, excluding transfers of assets held for sale, we spent
approximately $6.6 million on oil and gas related capital expenditures, an
increase of 47% over that expended in 1999. (See Note 11 to the Financial
Statements.) The majority of this was spent in the Yegua/Frio/Wilcox gas trend.
Because of the significantly higher oil and gas prices we received during 2000,
our cash flows increased and additional funds were available to accelerate
drilling activities from levels in 1999.
For the year ended December 31, 2000, we participated in drilling 32 gross
wells (5.62 net wells), of which 23 gross wells (3.96 net wells) are productive.
This compares with 18 gross wells (5.0 net wells) drilled in 1999, of which 13
gross wells (3.32 net wells) were productive.
Yegua/Frio/Wilcox Gas Trend
During 2000, our principal exploration and development activities were
concentrated in the Yegua/Frio/Wilcox gas trend, onshore the gulf coast of south
Texas, in Dewitt, Jackson, Lavaca, Victoria and Wharton Counties. This trend has
been our primary area of exploration activity since 1993.
We participated in drilling 32 gross wells in 2000, of which 30 were
drilled in the Yegua/Frio/ Wilcox gas trend. The following table shows the
results of drilling activity in this trend.
6
2000 Drilling Activity
Yegua/Frio/Wilcox Gas Trend
Target Depth Range No. of
Formation (feet) Wells Drilled Productive Dry
- --------- ---------- ------------- ---------- -----
Yegua 6,300 - 13,000 10 7 3
Frio 6,400 - 8,400 20 15 5
Wilcox 13,200 - 17,500 - - -
-------- ------- -------
Total 30 22 8
======== ======= =======
At March 1, 2001, we owned interests in 84 gross wells in south Texas.
Our exploration activities in the Yegua/Frio/Wilcox gas trend are conducted
under exploration agreements with third party participants. These agreements
allow us to participate in the acquisition and ownership of:
3-D seismic surveys;
options to acquire oil and gas leasehold interests; and
undivided working interests in oil and gas leases.
Our exploration agreements include area of mutual interest provisions.
Generally, an AMI is an agreed upon area of land which is subject to rights of
first refusal among the participants. For example, if we acquire any minerals,
royalty, overriding royalty, oil and gas leasehold or other interests in the
AMI, we would be obligated to offer the other participants the right to purchase
their pro rata share of the interest we acquired on the same terms that we
acquired the interest. If the other participants elect not to acquire their pro
rata share, we would then typically be free to retain or sell our interest for
our own account.
The 3-D seismic survey data we obtain is proprietary and shared only with
our working interest partners. Typically, seismic data is obtained from seismic
operations conducted over large blocks of acreage. Our actual working interest
ownership in acreage surveys is less than the total area surveyed.
Drilling and Acquisition Costs
The following table shows our oil and gas property acquisition, exploration
and development costs for the periods indicated.
7
Year Ended December 31,
--------------------------------------------------------
2000 (1) 1999 (1) 1998 1997 1996
--------- --------- ------ ------ ------
(in thousands)
Transfers from (to) undeveloped leases
held for sale $ 2,128 $ (2,128) $ - $ - $ 60
Proved property acquisition costs 23 42 89 918 3,839
Unproved property acquisition costs 3,372 1,979 6,034 7,710 369
Exploration costs 2,163 1,856 8,556 9,604 8,669
Development costs 1,087 639 3,873 4,877 3,963
------- -------- ------- ------- -------
$ 8,773 $ 2,388 $18,552 $23,109 $16,900
======= ======== ======= ======= =======
-------------------
(1) Reflects costs associated with assets being held for sale in 1999 and
transferred back to oil and gas property in 2000. The actual amounts spent
on capital expenditures during 2000 and 1999, excluding transfers, were
approximately $6.6 million and $4.5 million, respectively.
Drilling and Production Activities
We have assembled a balanced portfolio of:
lower risk natural gas projects in the Yegua/Frio/Wilcox gas trend;
low risk infill oil development projects in the Permian Basin (through our
interest in First Permian); and
high risk/high potential Wilcox natural gas projects.
Following are brief descriptions of the primary areas in which we conduct
our drilling and production activities.
Yegua/Frio/Wilcox Gas Trend
Since 1993, we have concentrated our exploration efforts in the
Yegua/Frio/Wilcox gas trend, drilling more than 140 wells with a 70% drilling
success ratio and acquiring more than 800 square miles of proprietary 3-D
seismic data on 22 projects. This seismic library is proprietary in the sense
that only Parallel and its working interest partners have access to the data,
and, most importantly, Parallel is the only partner with an interest in all of
the 22 projects. In our opinion, it would be cost prohibitive for another
company to duplicate this data base. With seismic data processing methods
continually improving, we believe this data library has an indefinite shelf life
and could yield new generations of prospects for many years.
Using this data base, we have generated a multi-year prospect inventory
ranging from lower risk/moderate impact to higher risk/higher impact prospects.
With the cost of seismic acquisition activities paid for, we can allocate most
of our future capital expenditure funds to data interpretation, drilling and
completion activities and leasehold acquisition.
8
The Yegua/Frio/Wilcox gas trend is a multi-pay trend with numerous
productive formations. The primary producing formations, listed in order of
depth, are the Miocene, Frio, Vicksburg, Yegua, and Wilcox formations. Our
strategy has been to drill lower risk prospects in the Frio and Yegua
formations, then to evaluate Miocene, Vicksburg and Wilcox leads.
This trend, in our opinion, ranks among the top domestic exploration areas
at this time.
First, the trend contains primarily natural gas reserves. With the current
strength of natural gas prices and with demand forecasted to remain strong,
this is an excellent area to concentrate capital dollars.
Second, the trend is located in what is often referred to as "pipeline
alley." Natural gas pipelines and distribution systems are in close
proximity, which means successful wells can usually be connected within a
30-day time period.
Third, we have extensive experience in the area and have been actively
exploring for new reserves since 1993.
Fourth, the return on investment is attractive, as is the potential to
discover significant natural gas reserves.
Using this same data base, we completed a regional Wilcox study last year
and identified 12 high potential/high risk Wilcox prospects. We believe our
Wilcox 3-D Gas Project presents a unique opportunity to drill untested
structures in the Wilcox formation and have leased approximately 30,000 acres in
connection with the project. If any one of the Wilcox prospects is successful,
it would have a major positive impact on Parallel's proved reserves.
To manage financial risks associated with the Wilcox Project, which has a
significantly higher risk profile than Yegua and Frio prospects, we intend to
bring in industry partners and reduce our average 50% working interest in the
project.
Contingent on rig availability, we plan to spud the first Wilcox well in
the second quarter of 2001. We have initially budgeted $3.0 million, net to our
interest, in 2001 to drill Wilcox prospects.
Permian Basin of West Texas
Before entering the gulf coast area of south Texas in 1993, our principal
activities were focused on acquiring producing properties in the Permian Basin
of west Texas. These properties produce primarily crude oil. At December 31,
2000, excluding our ownership interest in First Permian's properties, we
operated of all our Permian Basin properties.
We emphasize an ongoing program of enhancement, remedial and development
drilling activities on our Permian Basin properties when oil prices are at
levels to support these activities. In 2000, because we concentrated our capital
budget in the Yegua/Frio/Wilcox gas trend, we limited our capital expenditures
on our Permian Basin properties primarily to those activities necessary to
maintain optimum well performance.
When funds are available to support enhancement, remedial and development
drilling activities on our Permian Basin properties, we intend to allocate
available funds for these activities. Enhancement and remedial activities
include:
9
recompleting existing wellbores;
restimulating producing reservoirs;
identifying potential infill drilling locations;
making mechanical improvements to surface facilities and downhole
equipment; and
reviewing the practicality of applying new drilling and production
technologies that could either improve recovery potential or result in the
discovery of a new reservoir.
From time to time, we may also renegotiate gas purchase contracts or
reconfigure gathering lines. In connection with our enhancement operations, we
routinely review the performance and economics of our oil and gas properties.
When necessary, we take corrective action, such as:
shutting in temporarily uneconomic properties;
plugging wells we believe to be permanently impaired or depleted;
terminating oil and gas leases that are uneconomic under existing operating
conditions; and/or
selling properties to third parties.
During 2001, we expect our principal exploration and development activities
will continue to be concentrated in the Yegua/Frio/Wilcox gas trend and in the
Permian Basin, primarily through our 30.675% ownership in First Permian.
With the benefit of stable oil and gas prices, we expect to increase our
oil and gas related capital expenditure budget by 21% to approximately $8.0
million in 2001. Of this amount, $5.0 million will be used to drill
approximately 30 Frio and Yegua wells and $3.0 million to commence drilling
activities on our Wilcox 3-D Gas Project.
First Permian, L.L.C. Operations
Through our 30.675% interest, in 2001 we will participate in First
Permian's infill drilling and major workover program. First Permian's
exploitation and production activities are focused primarily on oil producing
properties in the Permian Basin of west Texas. The majority of its properties
produce from shallow producing intervals well depths range from 2,500 feet to
7,500 feet and include the San Andres, Glorietta and Clearfork formations.
These are mature, long-lived reserves with low decline rates, a predictable
production profile and successful secondary and tertiary recovery programs in
place and field-tested. Proved undeveloped potential is significant, with more
than 450 low risk infill locations identified that will require minimal capital
expenditures to exploit.
For the year 2001, First Permian has budgeted approximately $18.0 million
to continue drilling low-risk, infill wells and conduct major remedial and
workover activities. This is an increase of approximately 33% when compared with
its $13.5 million budget implemented in July 2000. The majority of the 2001
budget will be spent on properties operated by First Permian and will be used to
drill approximately 94 infill wells, primarily on the Southeast Westbrook and
North Robertson Units, for recompletions, workovers and facilities upgrades and
for secondary and tertiary activities.
10
First Permian operates each of its largest four core properties, as
detailed in the following table.
First Permian, LLC
Core Properties
Working Interest/
Property Acres Operator Net Revenue Interest Formation
- --------- ----- -------- -------------------- ----------
Westbrook SE 3,680 First Permian 87.6/72.5% Clearfork/3200'
N. Robertson 5,633 First Permian 42.5/35.0% Clearfork/5900-7200'
East Penwell 3,900 First Permian 53.1/46.3% San Andres/3800'
Whiteface 3,375 First Permian 100.0/85.0% San Andres/5000'
Oil and Natural Gas Prices are Volatile
Our revenues, profitability and cash flows are highly dependent on the
prices we receive for our oil and natural gas. Oil and natural gas prices have
continued to improve and stabilize since mid-1999.
If prices should decline substantially from current levels for a sustained
period of time, this could have a material adverse effect on our future
operations and financial condition.
Oil and natural gas prices can fluctuate widely on a month-to-month basis
in response to a variety of factors beyond our control. These factors include:
weather conditions;
the supply of foreign oil;
the level of product demand;
overall economic conditions;
the price and availability of alternative fuels; and
changes in the supply of and demand for oil and natural gas in domestic and
foreign markets.
The average prices we received for the oil and natural gas we produced in
2000, 1999 and 1998 are shown in the following table:
Average Price Received for the
Year Ended December 31,
--------------------------------------
2000 1999 1998
------ ------ ------
Oil (Bbl) $ 28.88 $ 17.32 $ 12.49
Natural gas (Mcf) $ 4.38 $ 2.27 $ 2.04
The average price we received for our oil sales at March 15, 2001 was
approximately $25.25 per Bbl. At the same date, the average price we received
for our natural gas was approximately $5.00 per Mcf. At December 31, 2000, on a
Mcfe basis, approximately 78% of our daily production was natural
11
gas and 22% was oil. There is substantial uncertainty regarding future oil and
gas prices and we can provide no assurance that prices will remain at current
levels.
Part of Our Business is Seasonal in Nature
Weather conditions affect the demand for and prices of natural gas and can
also delay drilling activities, disrupting our overall business plans.
Historically, demand for natural gas has been typically higher during winter
months.
Our Oil and Gas Operations Are Subject to Many Inherent Risks
Oil and gas drilling activities and production operations are highly
speculative and involve a high degree of risk. These operations are marked by
unprofitable efforts because of dry holes and wells that do not produce oil or
gas in sufficient quantities to return a profit. The success of our operations
depends, in part, upon the ability of our management and technical personnel.
The cost of drilling, completing and operating wells is often uncertain. There
is no assurance that our oil and gas drilling or acquisition activities will be
successful, that any production will be obtained, or that any such production,
if obtained, will be profitable.
Our operations are subject to all of the operating hazards and risks
normally incident to drilling for and producing oil and gas. These hazards and
risks include:
encountering unusual or unexpected formations and pressures;
explosions, blowouts and fires;
pipe and tubular failures and casing collapses;
environmental pollution; and
personal injuries.
Any one of these potential hazards could result in accidents, environmental
damage, personal injury, property damage and other harm that could result in
substantial liabilities to us.
As is customary in the industry, we maintain insurance against some, but
not all, of these risks. We maintain general liability insurance and obtain
insurance against blowouts on a well-by-well basis. We do not carry insurance
against pollution risks. If we sustain an uninsured loss or liability, our
ability to operate could be materially adversely affected.
Our oil and gas operations are not subject to renegotiation of profits or
termination of contracts at the election of the federal government.
Executive Officers of Parallel
At March 15, 2001, Parallel's executive officers were Thomas R. Cambridge
and Larry C. Oldham.
Mr. Cambridge, age 65, is the Chief Executive Officer and Chairman of the
Board of Directors of Parallel. He is an independent petroleum geologist engaged
in the exploration for, development and production of oil and natural gas. From
1970 until 1990, such activities were carried out primarily through Cambridge &
Nail Partnership, a Texas general partnership. Since 1990, such activities have
12
been carried out through Cambridge Production, Inc., a Texas corporation. Mr.
Cambridge has served as a Director of Parallel since February 1985; as President
during the period from October 1985 to October 1994; and as Chairman of the
Board of Directors and Chief Executive Officer since October 1985. He received a
Bachelors degree in geology from the University of Nebraska in 1958 and a
Masters of Science degree in 1960.
Mr. Oldham, age 47, is a founder of Parallel. He has served as an officer
and Director since Parallel's formation in 1979. He served as Executive Vice
President until October 1994 when he became President. He received a Bachelor of
Business Administration degree from West Texas State University in 1975. Mr.
Oldham is a member of the Permian Basin Landman's Association.
The term of both officers expires at Parallel's annual meeting of Directors
or when their respective successors are duly elected and qualified. There is no
family relationship between the executive officers.
Parallel is the beneficiary of a $1.0 million key-man life insurance policy
on the life of Mr. Cambridge and a $5.0 million key-man life insurance policy on
the life of Mr. Oldham.
Employees
At March 15, 2001, Parallel had seven full time employees. Mr. Cambridge
serves in the capacity of a consultant and not as a full-time employee. Parallel
also retains independent land, geological, geophysical and engineering
consultants and expects to continue to do so in the future. Additionally,
Parallel retains six contract pumpers on a month-to-month basis.
We consider our employee relations to be satisfactory. None of our
employees are represented by a union and we have not experienced work stoppages
or strikes.
Wells Drilled
The following table shows certain information concerning the number of
gross and net wells we drilled during the three-year period ended December 31,
2000.
Exploratory Wells (1) Development Wells (2)
-------------------------------- --------------------------------
Year Ended Productive Dry Productive Dry
December 31, -------------- -------------- -------------- --------------
Gross Net Gross Net Gross Net Gross Net
----- ----- ----- ----- ------ ----- ------ -----
2000 20.0 3.40 7.0 1.22 3.0 .56 2.0 .45
1999 11.0 2.50 5.0 1.70 2.0 .80 .0 .00
1998 9.0 2.16 8.0 1.71 4.0 1.16 2.0 .45
- -------------------
(1) An exploratory well is a well drilled to find and produce oil or gas in an
unproved area, to find a new reservoir in a field previously found to be
productive of oil or gas in another reservoir, or to extend a known
reservoir.
(2) A development well is a well drilled within the proved area of an oil or
gas reservoir to the depth of a stratigraphic horizon known to be
productive.
All of our drilling is performed on a contract basis by third-party
drilling contractors. We do not own any drilling equipment.
13
At March 15, 2001, we were participating in the drilling of 3 gross (.86
net) gas wells in Victoria, Dewitt and Jackson Counties, Texas.
Volumes, Prices and Lifting Costs
The following table shows certain information about our production,
including the volumes of oil and gas we produced, the average sales prices per
Mcf of gas and Bbl of oil produced, and the average production, or lifting, cost
per EBO for the three-year period ended December 31, 2000.
Year Ended December 31,
------------------------------------------
2000 1999 1998
------------ ----------- ----------
Net Production:
Oil (Bbls) 165,137 163,696 185,474
Gas (Mcf) 2,821,815 2,708,516 3,275,882
EBO(1) 635,440 615,115 731,454
Average Sales Price:
Oil (per Bbl) $ 28.88 $ 17.32 $ 12.49
Gas (per Mcf) $ 4.38 $ 2.27 $ 2.04
EBO $ 26.96 $ 14.59 $ 12.31
Average Production (Lifting) Cost per EBO $ 4.88 $ 3.83 $ 3.33
Operating Margin per EBO(2) $ 22.08 $ 10.76 $ 8.98
Depletion per EBO $ 8.18 $ 8.30 $ 8.07
- ---------------------------
(1) An EBO means one barrel of oil equivalent using the ratio of six Mcf of gas
to one barrel of oil.
(2) Operating margin is determined by deducting the average production cost per
EBO from the average sales price per EBO.
Our gas sales represented approximately 72% of our combined oil and gas
sales for the year ended December 31, 2000 versus 68% for December 31, 1999.
Markets and Customers
Our oil and gas production is sold at the well site on an as produced basis
at market-related prices in the areas where the producing properties are
located. We do not refine or process any of the oil or natural gas we produce
and all of our production is sold to unaffiliated purchasers on a month-to-month
basis.
In the following table, we show the purchasers that accounted for 10% or
more of our revenues during the specified years.
2000 1999 1998
---- ---- ----
EOTT Energy Operating Limited Partnership - - 11%
Cox & Perkins Exploration, Inc. - 14% 24%
Allegro Investments, Inc. 22% 27% 22%
Brayton Operating Corp. - 26% 18%
Pure Resources, Inc. 16% - -
14
We do not believe the loss of any one of our purchasers would materially
affect our ability to sell the oil and gas we produce. Other purchasers are
available in our areas of operations.
Our future ability to market our oil and gas production depends upon the
availability and capacity of gas gathering systems and pipelines and other
transportation facilities. We do not currently own or operate our own pipelines
or transportation facilities, and we are dependent on third parties to transport
our products.
We are not obligated to provide a fixed and determinable quantity of oil or
natural gas under any existing arrangements or contracts.
Our business does not require us to maintain a backlog of products,
customer orders or inventory.
Office Facilities
Our corporate offices consist of approximately 5,776 square feet of leased
space in Midland, Texas. Our current rental rate is $3,927 per month until May
31, 2004, when the lease expires.
Competition
The oil and gas industry is highly competitive, particularly in the areas
of acquiring exploration and development prospects and producing properties. The
principal means of competing for the acquisition of oil and gas properties are
the amount and terms of the consideration offered. Our competitors include major
oil companies, independent oil and gas concerns and individual producers and
operators. Many of these competitors have financial resources, staffs and
facilities much larger than ours.
We are also affected by competition for drilling rigs and the availability
of related equipment. With relatively high oil and gas prices, the oil and gas
industry typically experiences shortages of drilling rigs, equipment, pipe and
qualified field personnel. We are unable to predict when or to what extent our
exploration and development activities will be affected by rig, equipment or
personnel shortages.
The principal resources we need for acquiring, exploring, developing,
producing and selling oil and gas are:
leasehold prospects under which oil and gas reserves may be discovered;
drilling rigs and related equipment to explore for such reserves; and
knowledgeable and experienced personnel to conduct all phases of oil and
gas operations.
Oil and Gas Regulations
Our operations are regulated by certain federal and state agencies. Oil and
gas production and related operations are or have been subject to:
price controls;
taxes; and
15
environmental and other laws relating to the oil and gas industry.
We cannot predict how existing laws and regulations may be interpreted by
enforcement agencies or court rulings, whether additional laws and regulations
will be adopted, or the effect such interpretations or new laws and regulations
may have on our business, financial condition or results of operations.
Our oil and gas exploration, production and related operations are subject
to extensive rules and regulations that are enforced by federal, state and local
agencies. Failure to comply with these rules and regulations can result in
substantial penalties. The regulatory burden on the oil and gas industry
increases our cost of doing business and affects our profitability. Because
these rules and regulations are frequently amended or reinterpreted, we are not
able to predict the future cost or impact of complying with such laws.
Texas and many other states require drilling permits, bonds and operating
reports. Other requirements relating to the exploration and production of oil
and gas are also imposed. These states also have statutes or regulations
addressing conservation matters, including provisions for:
the unitization or pooling of oil and gas properties;
the establishment of maximum rates of production from oil and gas wells;
and
the regulation of spacing, plugging and abandonment of wells.
Sales of natural gas we produce are not regulated and are made at market
prices. However, the Federal Energy Regulatory Commission regulates interstate
and certain intrastate gas transportation rates and services conditions, which
affect the marketing of our gas, as well as the revenues we receive for sales of
our production. Since the mid-1980s, FERC has issued a series of orders,
culminating in Order Nos. 636, 636-A, 636-B and 636-C. These orders, commonly
known as Order 636, have significantly altered the marketing and transportation
service, including the unbundling by interstate pipelines of the sales,
transportation, storage and other components of the city-gate sales services
these pipelines previously performed.
One of FERC's purposes in issuing the orders was to increase competition in
all phases of the gas industry. Order 636 and subsequent FERC orders issued in
individual pipeline restructuring proceedings have been the subject of appeals,
the results of which have generally been supportive of the FERC's open-access
policy. In 1996, the United States Court of Appeals for the District of Columbia
Circuit largely upheld Order No. 636. Because further review of certain of these
orders is still possible, and other appeals remain pending, it is difficult to
predict the ultimate impact of the orders on Parallel and our gas marketing
efforts. Generally, Order 636 has eliminated or substantially reduced the
interstate pipelines' traditional role as wholesalers of gas, and has
substantially increased competition and volatility in gas markets. While
significant regulatory uncertainty remains, Order 636 may ultimately enhance our
ability to market and transport our gas, although it may also subject us to
greater competition.
Sales of oil we produce are not regulated and are made at market prices.
The price we receive from the sale of oil is affected by the cost of
transporting the product to market. Effective January 1, 1995, FERC implemented
regulations establishing an indexing system for transportation rates for
interstate common carrier oil pipelines, which, generally, would index such
rates to inflation, subject to certain conditions and limitations. These
regulations could increase the cost of transporting oil by
16
interstate pipelines, although the most recent adjustment generally decreased
rates. These regulations have generally been approved on judicial review. We are
unable to predict with certainty what effect, if any, these regulations will
have on us. The regulations may, over time, tend to increase transportation
costs or reduce wellhead prices for oil.
We are required to comply with various federal and state regulations
regarding plugging and abandonment of oil and gas wells.
Environmental Regulations
Various federal, state and local laws and regulations governing the
discharge of materials into the environment, or otherwise relating to the
protection of the environment, health and safety, affect our operations and
costs. These laws and regulations sometimes:
require prior governmental authorization for certain activities;
limit or prohibit activities because of protected areas or species;
impose substantial liabilities for pollution related to our operations or
properties; and
provide significant penalties for noncompliance.
In particular, our exploration and production operations, our activities in
connection with storing and transporting oil and other liquid hydrocarbons, and
our use of facilities for treating, processing or otherwise handling
hydrocarbons and related exploration and production wastes are subject to
stringent environmental regulations. As with the industry generally, compliance
with existing and anticipated regulations increases our overall cost of
business. While these regulations affect our capital expenditures and earnings,
we believe that they do not affect our competitive position in the industry
because our competitors are also affected by environmental regulatory programs.
Since environmental regulations have historically been subject to frequent
change, we cannot predict with certainty the future costs or other future
impacts of environmental regulations on our future operations. A discharge of
hydrocarbons or hazardous substances into the environment could subject us to
substantial expense, including the cost to comply with applicable regulations
that require a response to the discharge, such as claims by neighboring
landowners, regulatory agencies or other third parties for costs of:
containment or cleanup;
personal injury;
property damage; and
penalties assessed or other claims sought for natural resource damages.
The following are examples of some environmental laws that potentially
impact our operations.
Water. The Oil Pollution Act, or OPA, was enacted in 1990 and amends
provisions of the Federal Water Pollution Control Act of 1972 and other
statutes as they pertain to prevention of and response to major oil spills.
The OPA subjects owners of facilities to strict, joint and potentially
unlimited liability for removal costs and certain other consequences of an
oil spill, where such spill is into navigable waters, or along shorelines.
In the event of an oil spill into such waters, substantial liabilities
could be
17
imposed upon Parallel. States in which Parallel operates have also enacted
similar laws. Regulations are currently being developed under the OPA and
similar state laws that may also impose additional regulatory burdens on
Parallel.
The FWPCA imposes restrictions and strict controls regarding the discharge
of produced waters, other oil and gas wastes, any form of pollutant, and,
in some instances, storm water runoff, into waters of the United States.
The FWPCA provides for civil, criminal and administrative penalties for any
unauthorized discharges and, along with the OPA, imposes substantial
potential liability for the costs of removal, remediation or damages
resulting from an unauthorized discharge and, along with the OPA, imposes
substantial potential liability for the costs of removal, remediation or
damages resulting from an unauthorized discharge. State laws for the
control of water pollution also provide civil, criminal and administrative
penalties and liabilities in the case of an unauthorized discharge into
state waters. The cost of compliance with the OPA and the FWPCA have not
historically been material to our operations, but there can be no assurance
that changes in federal, state or local water pollution control programs
will not materially adversely affect us in the future. Although no
assurances can be given, we believe that compliance with existing permits
and compliance with foreseeable new permit requirements will not have a
material adverse effect on our financial condition or results of
operations.
Solid Waste. Parallel generates non-hazardous solid wastes that fall under
the requirements of the Federal Resource Conservation and Recovery Act and
comparable state statutes. The EPA and the states in which we operate are
considering the adoption of stricter disposal standards for the type of
non-hazardous waste we generate. The Resource Conservation and Recovery Act
also governs the generation, management, and disposal of hazardous wastes.
At present, we are not required to comply with substantial portion of the
Resource Conservation and Recovery Act requirements because our operations
generate minimal quantities of hazardous wastes. However, it is anticipated
that additional wastes, which could include wastes currently generated
during operations, could in the future be designated as hazardous wastes.
Hazardous wastes are subject to more rigorous and costly disposal and
management requirements than are non-hazardous wastes. Such change in the
regulations may result in Parallel incurring additional capital
expenditures or operating expenses.
Superfund. The Comprehensive Environmental Response, Compensation, and
Liability Act, sometimes called CERCLA or Superfund, imposes liability,
without regard to fault or the legality of the original act, on certain
classes of persons in connection with the release of a hazardous substance
into the environment. These persons include the current owner or operator
of any site where a release historically occurred and companies that
disposed or arranged for the disposal of the hazardous substances found at
the site. CERCLA also authorizes the EPA and, in some instances, third
parties to act in response to threats to the public health or the
environment and to seek to recover from the responsible classes of persons
the costs they incur. In the course of our ordinary operations, we may have
managed substances that may fall within CERCLA's definition of a hazardous
substance. We may be jointly and severally liable under CERCLA for all or
part of the costs required to clean up sites where we disposed of or
arranged for the disposal of these substances. This potential liability
extends to properties that we owned or operated, as well as to properties
owned and operated by others at which disposal of Parallel's hazardous
substances occurred.
18
Parallel may also fall into the category of a current owner or operator. We
currently own or lease numerous properties that for many years have been used
for exploring and producing oil and gas. Although we believe we use operating
and disposal practices standard in the industry, hydrocarbons or other wastes
may have been disposed of or released by us on or under properties that we have
owned or leased. In addition, many of these properties have been previously
owned or operated by third parties who may have disposed of or released
hydrocarbons or other wastes at these properties. Under CERCLA, and analogous
state laws, we could be required to remove or remediate previously disposed
wastes, including wastes disposed of or released by prior owners or operators,
to clean up contaminated property, including contaminated groundwater, or to
perform remedial plugging operations to prevent future contamination.
Risk Factors
Declining oil and gas prices may cause us to record ceiling test write-downs
We use the full cost method of accounting to account for our oil and gas
operations. This means that we capitalize the costs to acquire, explore for and
develop oil and gas properties. Under full cost accounting rules, the
capitalized costs of oil and gas properties may not exceed a "ceiling limit",
which is based on the present value of estimated future net revenues, net of
income tax effects, from proved reserves, discounted at 10%, plus the lower of
cost or fair market value of unproved properties. Theses rules generally require
pricing future oil and gas production at the unescalated oil and prices in
effect at the end of each fiscal quarter. If capitalized costs of oil and gas
properties exceed the ceiling limit, we must charge the amount of the excess
against earnings. This is called a ceiling test write-down. This noncash
impairment charge does not affect cash flow from operating activities but it
does reduce stockholders' equity.
The risk that we will be required to write down the carrying value of oil
and gas properties increases when oil and gas prices decline. In addition,
write-downs may occur if we experience substantial downward adjustments to our
estimated proved reserves.
During the fourth quarter of 1999, we recognized a noncash impairment
charge of $1,705,000 related to our oil and gas reserves and unproved
properties. This impairment of our oil and gas assets was primarily the result
of a decrease in our year-end proved reserves. We did not recognize an
impairment in 2000. We cannot assure you that we will not experience ceiling
test write-downs in the future.
We are subject to many restrictions under our loan agreement
Under our loan agreement with Bank United, Midland, Texas, substantially
all of our assets are encumbered and we are subject to various restrictions on
our ability to obtain additional financing, make investments, pay dividends,
lease equipment, sell assets and engage in business combinations. We are also
required under the loan agreement to comply with certain financial covenants and
maintain certain financial ratios. The loan agreement prohibits us from
declaring or paying dividends on our common stock but we are permitted to pay
dividends on our outstanding 6% convertible preferred stock as long as we are
not in default under the loan agreement. Although we are currently in compliance
with the foregoing restrictions and provisions, in the past we have had to
request waivers from our banks because of our non-compliance with certain
financial covenants and ratios. Our ability to comply in the future with these
restrictions and covenants is uncertain and will be affected by the levels of
cash flow from our operations and events or circumstances beyond our control.
Our failure to comply with any of the restrictions and covenants under the loan
agreement could result in a default under the loan agreement, which could cause
all of our existing indebtedness to be immediately due and payable. It is also
an event
19
of default under the loan agreement if a material adverse change occurs in our
financial or business condition.
The loan agreement limits the amounts we can borrow to a borrowing base
amount, determined by Bank United in its sole discretion, based upon projected
revenues from the oil and gas properties securing our loan. Bank United can
unilaterally adjust the borrowing base and the borrowings permitted to be
outstanding under the loan agreement. Outstanding borrowings in excess of the
borrowing base must be repaid immediately, or we must pledge other oil and gas
properties as additional collateral. We do not currently have any substantial
unpledged properties and no assurance can be given that if the borrowing base
was reduced significantly that we would be able to make any mandatory principal
prepayments required by Bank United.
Our producing properties are concentrated
Substantially all of our producing properties are located in the State of
Texas. At December 31, 2000, excluding our interest in First Permian,
approximately 47% of the PV-10 value of our proved reserves was concentrated in
the Gulf Coast region of south Texas and approximately 53% of the PV-10 value of
our proved reserves was concentrated in the Permian Basin of west Texas.
The occurrence of mechanical problems, adverse weather conditions, or other
events that cause curtailment or cessation of production from wells in which we
own an interest could have a material adverse effect on us. We will remain
vulnerable to a disproportionate impact of delays or interruptions of production
from these wells until we develop a more diversified production base.
Any material harm to the current producing reservoirs or any significant
governmental regulations with respect to these wells, including any curtailments
of production or interruptions of transportation of oil or gas produced from the
wells could have a material adverse effect on our liquidity and results of
operations.
We do not control all operations and development
Substantially all of our business activities are conducted through joint
operating agreements under which we own partial interests in oil and gas wells.
At December 31, 2000, excluding our interest in First Permian, we owned
interests in 76 gross (69.7 net) oil and gas wells where we are the operator and
100 gross (24.5 net) oil and gas wells where we are not the operator.
If we do not operate the wells in which we own an interest, we do not have
control over normal operating procedures, expenditures or future development of
underlying properties.
Since we do not have a majority interest in most wells we do not operate,
we may not be in a position to remove the operator in the event of poor
performance.
We are highly dependent upon key personnel and a small management team
Our success is highly dependent upon the services, efforts and abilities of
Thomas R. Cambridge, the Chairman of the Board of Directors and Chief Executive
Officer of our company, and Larry C. Oldham, the President and a Director of our
company. Our operations could be materially and adversely affected if Mr.
Cambridge or Mr. Oldham become unavailable for any reason.
20
We believe that our operations are dependent to some degree upon the
availability of outside advisors and consultants, including geophysicists who
provide 3-D seismic survey expertise.
We do not have employment agreements or long term contractual arrangements
with any of our officers, employees or consultants. In periods of improving
market conditions, our ability to obtain and retain qualified consultants on a
timely basis may be adversely affected.
Parallel is the owner and beneficiary of life insurance policies on the
lives of Mr. Cambridge and Mr. Oldham in the amounts of $1 million and $5
million, respectively.
At December 31, 2000, we had seven full-time employees. Our future growth
and profitability will also be dependent upon our ability to attract and retain
other qualified management personnel and to effectively manage our growth. There
can be no assurance that we will be successful in doing so.
The oil and gas industry is capital intensive
The oil and gas industry is capital intensive. We make substantial capital
expenditures for the acquisition, exploration for and development of oil and gas
reserves.
Historically, we have financed capital expenditures primarily with cash
generated by operations, proceeds from bank borrowings and sales of equity
securities. In addition, we may consider selling non-core assets to raise
additional operating capital. From time to time, we may also reduce our
ownership interests in 3-D seismic and other projects in order to reduce our
capital expenditure requirements, depending on our working capital needs.
Our cash flow from operations and access to capital are subject to a number
of variables, including:
our proved reserves;
the level of oil and gas we are able to produce from existing wells;
the prices at which oil and gas are sold; and
our ability to acquire, locate and produce new reserves.
Any one of these variables can materially affect the borrowing base
availability under our revolving credit facility with our bank lender.
If our revenues or the borrowing base under our loan agreement decrease as
a result of lower oil and gas prices, operating difficulties, declines in
reserves or for any other reason, we may have limited ability to obtain the
capital necessary to undertake or complete future drilling projects.
We may, from time to time, seek additional financing, either in the form of
increased bank borrowings, sales of debt or equity securities or other forms of
financing. We do not have any agreements at the present time for any additional
financing and there can be no assurance as to the availability or terms of any
additional financing.
If our capital resources and earnings are insufficient to fund our
exploration and development activities or repay our bank debt when due, we will
need to obtain additional funds through public or private financings or
additional borrowings. No assurance can be given as to our ability to obtain any
such capital resources. If we are not able to obtain the necessary capital, our
results of operations and
21
financial condition could be materially adversely affected. If, however,
additional funds are raised through the issuance of equity securities, the
percentage ownership of our stockholders at that time could be diluted and, in
addition, such equity securities may have rights, preferences or privileges
senior to those of the common stock.
We don't pay dividends on our common stock
We have never paid dividends on our common stock, and do not intend to pay
cash dividends on the common stock in the foreseeable future. Net income from
our operations, if any, will be used for the development of our business,
including capital expenditures, to retire debt and to pay dividends on our
outstanding shares of preferred stock. Any decision to pay dividends on our
common stock in the future will depend upon our profitability at that time, the
available cash and other factors. Our ability to pay dividends on our common
stock is further limited by the terms of our loan agreement and the terms of our
preferred stock.
Changes in control may be discouraged
Our certificate of incorporation, our bylaws and the Delaware General
Corporation Law contain provisions that may discourage other persons from
initiating a tender offer or takeover attempt that a stockholder might consider
to be in the best interests of all stockholders, including takeover attempts
that might result in a premium to be paid over the market price of our stock.
On October 5, 2000, our Board of Directors adopted a stockholder rights
plan designed to protect Parallel from unfair or coercive takeover attempts and
to prevent a potential acquiror from gaining control of Parallel without fairly
compensating all of the stockholders. The plan authorized 50,000 shares of $0.10
par Series A Preferred Stock Purchase Rights. A dividend of one Right for each
share of our outstanding common stock was distributed to stockholders of record
at the close of business on October 16, 2000. If a public announcement is made
that a person has acquired 15% or more of Parallel's common stock or a tender or
exchange offer is made for 15% or more of the common stock, each Right entitles
the holder to purchase from the company one one-thousandth of a share of Series
A Preferred Stock, at an exercise price of $26.00 per one one-thousandth of a
share, subject to adjustment. In addition, under certain circumstances, the
rights entitle the holders to buy Parallel's stock at a 50% discount. See Notes
4 and 9 to Financial Statements, on pages F-14 and F-19, respectively, for
additional information.
We are authorized to issue 10,000,000 shares of preferred stock, 974,500
shares of which are outstanding. Our Board of Directors has total discretion in
the issuance and the determination of the rights and privileges of any shares of
preferred stock which might be issued in the future, which rights and privileges
may be detrimental to the holders of the common stock. Also, the issuance of
preferred stock in the future could discourage, delay or prevent a tender offer,
proxy contest or other similar transaction involving a potential change in
control of Parallel that might by viewed favorably by stockholders.
22
ITEM 2. PROPERTIES
General
Our principal properties consist of developed and undeveloped oil and gas
leases and the reserves associated with these leases. Generally, developed oil
and gas leases remain in force so long as production is maintained. Undeveloped
oil and gas leaseholds are generally for a primary term of five or ten years. In
most cases, we can extend the term of our undeveloped leases by paying delay
rentals or by producing reserves that we discover under our leases.
Producing Wells and Acreage
We have presented the following table to provide you with a summary of the
producing oil and gas wells and the developed and undeveloped acreage in which
we owned an interest at December 31, 2000. We have not included in the table
acreage in which our interest is limited to options to acquire leasehold
interests, royalty or similar interests.
Producting Wells Acreage
------------------------------------- ----------------------------------------
Oil Gas Developed Undeveloped
----------------- ----------------- ------------------ ------------------
Gross Net (1) Gross Net (1) Gross Net (2) Gross Net (2)
------- --------- ------- -------- ------ -------- ------ --------
Texas 78 60.9 98 34.2 51,467 30,996 52,123 13,014
New Mexico - - - - - - 11,357 340
--- ---- --- ---- ------ ------ ------ ------
Total 78 60.9 98 34.2 51,467 30,996 63,480 13,354
=== ==== === ==== ====== ====== ====== ======
- --------------------
(1) Net wells are computed by multiplying the number of gross wells by our
working interest in the gross wells.
(2) Net acres are computed by multiplying the number of gross acres by our
working interest in the gross acres.
At December 31, 2000, we were operating 76 gross wells in which we also
owned interests. Approximately 48% of the discounted present value of our oil
and gas reserves as of December 31, 2000 is attributable to wells operated by
us. As operator, we supervise the drilling, completion and production of wells
and the further development of surrounding properties.
The operator of a well has significant control over its location and the
timing of its drilling. In addition, the operator of a well receives fees from
other working interest owners as reimbursement for general and administrative
expenses for operating the wells.
Except for our oil and gas leases, we do not own any patents, licenses,
franchises or concessions which are significant to our oil and gas operations.
Title to Properties
As is customary in the oil and gas industry, we make only a cursory review
of title to undeveloped oil and gas leases at the time they are acquired. These
cursory title reviews, while consistent with industry practices, are necessarily
incomplete. We believe that it is not economically feasible to review in depth
every individual property we acquire, especially in the case of producing
property acquisitions covering a large number of leases. Ordinarily, when we
acquire producing properties, we focus our review efforts on properties believed
to have higher values and will sample the remainder.
23
However, even an in-depth review of all properties and records may not
necessarily reveal existing or potential defects nor will it permit a buyer to
become sufficiently familiar with the properties to assess fully their
deficiencies and capabilities. In the case of producing property acquisitions,
inspections may not always be performed on every well, and environmental
problems, such as ground water contamination, are not necessarily observable
even when an inspection is undertaken. In the case of undeveloped leases or
prospects we acquire, before any drilling commences, we will usually cause a
more thorough title search to be conducted, and any material defects in title
that are found as a result of the title search are generally remedied before
drilling a well on the lease commences. We believe that we have good title to
our oil and gas properties, some of which are subject to immaterial
encumbrances, easements and restrictions. The oil and gas properties we own are
also typically subject to royalty and other similar non-cost bearing interests
customary in the industry. We do not believe that any of these encumbrances or
burdens will materially affect our ownership or the use of our properties.
Oil and Gas Reserves
Our oil and gas reserves were estimated as of December 31, 2000 by
Williamson Petroleum Consultants, Inc., Midland, Texas.
At December 31, 2000, excluding our 30.675% interest in First Permian's oil
and gas reserves, our estimated proved reserves were approximately 1.0 million
Bbls of oil and 15.7 Bcf of gas, or 3.6 million EBO.
The information in the following table provides you with certain
information regarding our proved reserves at December 31, 2000.
Proved Proved
Developed Undeveloped Total
--------- ----------- -----
Oil (Bbls) 570,851 402,156 973,007
Gas (Mcf) 11,576,608 4,109,360 15,685,968
Future Net Revenues (before income taxes) $ 107,229,435 $ 37,038,329 $ 144,267,764
Present Value of Future Net Revenues
(before income taxes) $ 72,486,636 $ 18,463,955 $ 90,950,591
For additional information concerning our estimated proved oil and gas
reserves, you should read Note 17 to the Financial statements. See Item 8 -
Financial Statements and Supplementary Data.
The information in the following table provides you with certain
information regarding our 30.675% interest in First Permian's proved reserves at
December 31, 2000.
Developed Undeveloped Total
--------- ----------- -----
Oil (Bbls) 7,505,547 7,236,780 14,742,327
Gas (Mcf) 1,251,195 567,432 1,818,627
Future Net Revenues (before income taxes) $113,962,997 $106,096,369 $220,059,366
Present Value of Future Net Revenues
(before income taxes) $ 54,513,476 $ 37,536,012 $ 92,049,488
24
For additional information concerning our 30.675% interest in First
Permian's estimated proved oil and gas reserves, you should read Note 15 to the
Financial statements. See Item 8 - Financial Statements and Supplementary Data.
The reserve data in these reports represent estimates only. Reservoir
engineering is a subjective process. There are numerous uncertainties inherent
in estimating our oil and natural gas reserves and their estimated values. Many
factors are beyond our control. Estimating underground accumulations of oil and
natural gas cannot be measured in an exact manner. The accuracy of any reserve
estimate is a function of the quality of available data and of engineering and
geological interpretation and judgment. As a result, estimates of different
engineers often vary. In addition, estimates of reserves are subject to revision
by the results of drilling, testing and production after the date of such
estimates. Consequently, reserve estimates are often different from the
quantities of oil and natural gas that are ultimately recovered. The
meaningfulness of such estimates is highly dependent upon the accuracy of the
assumptions upon which they were based.
Generally, the volume of production from oil and natural gas properties
declines as reserves are produced and depleted. Unless we acquire properties
containing proved reserves or conduct successful drilling activities, our proved
reserves will decline as we produce our existing reserves. Our future oil and
natural gas production is highly dependent upon our level of success in
acquiring or finding additional reserves.
We do not have any oil or gas reserves outside the United States.
Our oil and gas reserves and production are not subject to any long term
supply or similar agreements with foreign governments or authorities.
Other than estimated reserve volumes we file with the U.S. Department of
Energy, our estimated reserves have not been filed with or included in reports
to any federal agency other than the SEC.
ITEM 3. LEGAL PROCEEDINGS
At March 15, 2001 we were involved in two lawsuits incidental to our
business. In the opinion of management, the ultimate outcome of these lawsuits
will not have a material adverse effect on Parallel's financial position or
results of operations. We are not aware of any other threatened litigation. We
have not been a party to any bankruptcy, receivership, reorganization,
adjustment or similar proceeding. See Note 16 to the Financial Statements for
additional information.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matter to a vote of our stockholders during the
fourth quarter of 2000.
25
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock trades on the Nasdaq National Market under the symbol
PLLL. The following table shows, for the periods indicated, the high and
low closing sales prices for the common stock as reported by Nasdaq.
Price Per Share
------------------------
High Low
-------- --------
1998
First quarter $7.06 $5.37
Second quarter $6.25 $4.12
Third quarter $4.93 $2.62
Fourth quarter $2.93 $1.34
1999
First quarter $1.87 $1.00
Second quarter $2.34 $1.25
Third quarter $3.00 $1.75
Fourth quarter $2.53 $1.37
2000
First quarter $4.19 $1.59
Second quarter $3.00 $1.75
Third quarter $4.69 $2.56
Fourth quarter $4.69 $3.00
The last sale price of our common stock on March 15, 2001 was $4.50 per
share, as reported on the Nasdaq National Market.
As of March 15, 2001, there were approximately 3,064 stockholders of
record.
Dividends
We have not paid, and do not intend to pay in the foreseeable future, cash
dividends on our common stock. The revolving credit facility we have with our
bank lender prohibits the payment of dividends on the common stock. Our 6%
convertible preferred stock also contains provisions that restrict us from
paying dividends or making distributions on our common stock if all dividends on
the preferred stock have not been paid in full. Any dividends on our preferred
stock that are not declared and paid will accumulate and all accumulated
dividends must be paid in full before dividends may be paid to holders of common
stock. The credit facility allows us to pay dividends on our outstanding shares
of preferred stock as long as we are not in default under the terms of the
credit facility. The holders of the preferred
26
stock are entitled, as and when declared by the Board of Directors, to receive
an annual dividend of $.60 per share, payable semi-annually on June 15 and
December 15 of each year. See "Risk Factors" on page 18 and "Management's
Discussion and Analysis of Financial Condition and Results of Operations Capital
Resources and Liquidity" on page 34.
ITEM 6. SELECTED FINANCIAL DATA
In the following table, we provide you with selected historical financial
data. We have prepared this information using the audited financial statements
of Parallel for the five-year period ended December 31, 2000. It is important
that you read this data along with our financial statements and related notes,
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" under Item 7 below. The selected financial data provided are not
necessarily indicative of our future results of operations or financial
performance.
Year Ended December 31,
-------------------------------------------------------------------------
2000 1999(1) 1998(2) 1997 1996
------------- ------------ ------------ ------------ ------------
Operating revenues $ 17,134,502 $ 8,974,041 $ 9,001,582 $ 12,614,242 $ 14,167,470
Operating expenses $ 9,530,266 $ 10,173,995 $ 24,056,923 $ 7,968,146 $ 6,945,168
Net income (loss) $ 5,977,328 $ (2,450,457) $(12,995,910) $ 2,743,930 $ 4,330,654
Cumulative preferred stock dividend $ (609,063) $ (609,063) $ (276,712) - -
Net income (loss) available to
common stockholders $ 5,368,265 $ (3,059,520) $(13,272,622) $ 2,743,930 $ 4,330,654
Net income (loss) per common share
Basic $ 0.26 $ (0.16) $ (0.73) $ 0.15 $ 0.29
Diluted $ 0.25 $ (0.16) $ (0.73) $ 0.15 $ 0.28
Cash dividends - common stock - - - - -
Weighted average common shares
and common stock equivalents
outstanding:
Basic 20,331,858 18,549,214 18,300,998 17,862,792 14,957,404
Diluted 23,465,492 18,549,214 18,300,998 18,640,990 15,693,258
Present value of proved oil and gas
reserves discounted at 10% (before
estimated federal income taxes) $ 90,950,591 $ 25,498,996 $ 26,822,980 $ 46,419,580 $ 67,015,980
Working capital $ 2,760,837 $ (71,647) $ 128,813 $ (2,162,139) $ 351,517
Total assets $ 46,456,437 $ 43,264,070 $ 46,564,782 $ 49,855,532 $ 38,098,169
Total liabilities $ 15,288,069 $ 17,463,967 $ 20,839,642 $ 20,736,779 $ 13,380,034
Long term debt, less current maturities $ 11,624,000 $ 12,300,000 $ 18,035,889 $ 12,182,610 $ 8,521,391
Total stockholders' equity $ 31,168,368 $ 25,800,103 $ 25,725,140 $ 29,118,753 $ 24,718,135
- -------------------
(1) Results include a noncash charge of $1,705,000 related to the impairment of
oil and gas properties incurred in the fourth quarter of 1999, primarily a
result of a decrease in year-end reserves.
(2) Results include a noncash charge of $14,757,028 related to the impairment
of oil and gas properties incurred in the fourth quarter of 1998, primarily
a result of low oil and gas prices at year-end.
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis are intended to assist you in
understanding our financial position and results of operations for each year in
the three-year period ended December 31, 2000. You should read the following
discussion and analysis in conjunction with our financial statements and the
related notes.
The following discussion contains forward-looking statements. For a
description of limitations inherent in forward-looking statements, see
"Cautionary Statement Regarding Forward-Looking Statements" on page ii.
Basis of Presentation
We account for our 30.675% interest in First Permian using the equity
method of accounting. Under the equity method of accounting, we record our
investment in First Permian at cost on the balance sheet. This is increased or
reduced by our proportionate share of First Permian's income or loss, which is
presented as one amount in the statement of income. Our 30.675% share of First
Permian's oil and gas reserves is presented separately under our oil and gas
reserve information in Note 15 to the Financial Statements.
At December 31, 2000, we had recorded a loss of $500,576 in our investment
in First Permian. Our loss is recorded as a net liability in our investment to
the extent that we had guaranteed $10,000,000 of the debt of First Permian.
Effective October 25, 2000, we were released from this guarantee and , although
we continue to utilize the equity method of accounting, our financial statements
no longer include First Permian's losses because we are released from our
guarantee. To the extent First Permian generates income in excess of losses, we
will then recognize our share of the net income on our financial statements.
General
Our primary objectives are to build oil and gas reserves, production, cash
flow and earnings per share by exploring for new oil and gas reserves, acquiring
oil and gas properties and optimizing production from existing oil and gas
properties. Management seeks to achieve these objectives by:
using advanced technologies to conduct exploratory activities;
acquiring producing properties we believe add incremental value to our
asset base;
keeping debt levels low;
concentrating activities in core areas to achieve economies of scale; and
emphasizing cost controls.
Since 1992, our primary focus has been exploratory drilling using 3-D
seismic technology. Our long term business strategy is to increase our reserve
base by using this and other advanced technologies. Additionally, we intend to
exploit our existing properties and to acquire properties we believe can be
exploited by developing reserves not previously produced.
28
We undertake projects only when we believe the project has the potential
for initial cash flow adequate to return the project's capital expenditures
within a short period of time, generally less than 36 months. We also endeavor
to maximize the present value of our projects by accelerating production of our
reserves consistent with prudent reservoir management and prevailing energy
prices.
Following this strategy, we have discovered oil and gas reserves using 3-D
seismic technology in the Horseshoe Atoll Reef Trend of west Texas and the
Yegua/Frio/Wilcox gas trend onshore the gulf coast of Texas. Additionally, we
have acquired producing oil and gas properties in the Permian Basin of west
Texas. Capital used to acquire these properties has been provided primarily by
secured bank financing, sales of our equity securities and cash flows from
operations.
Operating Performance
Our operating performance is influenced by several factors, the most
significant of which are the prices we receive for our oil and gas and our
production volumes. The world price for oil has overall influence on the prices
that we receive for our oil production. The prices received for different grades
of oil are based upon the world price for oil, which is then adjusted based upon
the particular grade. Typically, light oil is sold at a premium, while heavy
grades of crude are discounted. Gas prices we receive are influenced by:
seasonal demand;
weather;
hurricane conditions in the Gulf of Mexico;
availability of pipeline transportation to end users;
proximity of our wells to major transportation pipeline infrastructures;
and
to a lesser extent, world oil prices.
Additional factors influencing our overall operating performance include:
production expenses;
overhead requirements; and
costs of capital.
Our oil and gas exploration, development and acquisition activities require
substantial and continuing capital expenditures. Historically, the sources of
financing to fund our capital expenditures have included:
cash flow from operations,
sales of our equity securities, and
bank borrowings.
Our oil and gas producing activities are accounted for using the full cost
method of accounting. Under this method, we capitalize all costs incurred in
connection with the acquisition of oil and gas properties and the exploration
for and development of oil and gas reserves. (See Note 11 to the Financial
29
Statements.) These costs include lease acquisition costs, geological and
geophysical expenditures, costs of drilling both productive and non-productive
wells, and overhead expenses directly related to land acquisition and
exploration and development activities. Proceeds from the disposition of oil and
gas properties are accounted for as a reduction in capitalized costs, with no
gain or loss recognized unless such disposition involves a material change in
reserves, in which case the gain or loss is recognized.
Depletion of the capitalized costs of oil and gas properties, including
estimated future development costs, is provided using the equivalent
unit-of-production method based upon estimates of proved oil and gas reserves
and production, which are converted to a common unit of measure based upon their
relative energy content. Unproved oil and gas properties are not amortized, but
are individually assessed for impairment. The cost of any impaired property is
transferred to the balance of oil and gas properties being depleted.
Depletion per equivalent unit of production EBO was $8.18 versus $8.30 in
1999 and $8.07 in 1998. The decrease per BOE in 2000 was a result of a decrease
of $2,890,373 in the net oil and gas properties depletable base coupled with a
disproportionate decrease in total beginning of the year reserves of 289,156
BOEs.
Results of Operations
Our business activities are characterized by frequent, and sometimes
significant, changes in our:
reserve base;
sources of production;
product mix (oil versus gas volumes); and
the prices we receive for our oil and gas production.
Year-to-year or other periodic comparisons of the results of our operations
can be difficult and may not fully and accurately describe our condition. The
following table shows selected operating data for each of the three years ended
December 31, 2000, 1999 and 1998.
30
Year Ended December 31,
-------------------------------------------
2000 1999(1) 1998(2)
---------- ----------- -----------
Production and prices:
Oil (Bbls) 165,137 163,696 185,474
Natural gas (Mcf) 2,821,815 2,708,516 3,275,882
EBO (Bbls) 635,440 615,115 731,454
Oil price (per Bbl) $ 28.88 $ 17.32 $ 12.49
Gas price (per Mcf) $ 4.38 $ 2.27 $ 2.04
Ratio of oil to gas price 6.59/1 7.63/1 6.12/1
Increase (decrease) in production
volumes over prior year 3% (16%) (1%)
Results of operations per EBO:
Oil and gas revenues $ 26.96 $ 14.59 $ 12.31
Costs and expenses:
Production costs 4.88 3.83 3.33 -
General and administrative 1.88 1.31 1.23
Provision for losses on trade receivables - .14 -
Depreciation, depletion and amortization 8.25 8.49 8.16
Impairment of oil and gas properties - 2.77 20.17
--------- ---------- ----------
Total costs and expenses 15.01 16.54 32.89
--------- ---------- ----------
Operating income (loss) 11.97 (1.95) (20.58)
Equity interest in earnings (loss) of
First Permian, L.L.C. (0.79) 0.32 -
Interest expense, net (1.76) (2.39) (1 .89)
Other income, net .19 .03 .46
--------- ---------- ----------
Pretax income (loss) per EBO $ 9.61 $ (3.99) $ (22.01)
========= ========== ==========
- -------------------
(1) Results include a noncash charge of $1,705,000 related to the impairment of
oil and gas properties incurred in the fourth quarter of 1999, primarily a
result of a decrease in year-end reserves.
(2) Results include a noncash charge of $14,757,028 related to the impairment
of oil and gas properties incurred in the fourth quarter of 1998, primarily
a result of low oil and gas prices at year-end.
The following table shows the percentage of total revenues represented by
each item reflected on our statements of operations for the periods indicated.
31
Year Ended December 31,
-------------------------------------
2000 1999(1) 1998(2)
------- -------- -------
Oil and gas revenues 100.0% 100.0% 100.0%
Costs and expenses:
Production costs 18.1 26.2 27.0
General and administrative 6.9 8.9 9.5
Provision for loss on trade receivables - 1.0 .5
Depreciation, depletion and
amortization 30.6 58.2 66.3
Impairment of oil and gas properties - 19.0 163.9
------- ------- -------
Total costs and expenses 55.6 113.3 267.2
------- ------- -------
Total costs and expenses
Operating income (loss) 44.4 (13.3) (167.2)
Equity interest in earnings (loss) of
First Permian, L.L.C. (2.9) 2.2 -
Interest expense, net (6.5) (16.4) (15.3)
Other income, net .7 .2 3.8
------- ------- -------
Pretax income (loss) 35.7 (27.3) (178.7)
Income tax (expense) benefit (0.8) - 34.4
------- ------- -------
Net income (loss) 34.9% (27.3%) (144.3%)
------- ------- -------
- -------------------
(1) Results include a noncash charge of $1,705,000 related to the impairment of
oil and gas properties incurred in the fourth quarter of 1999, primarily a
result of a decrease in year-end reserves.
(2) Results include a noncash charge of $14,757,028 related to the impairment
of oil and gas properties incurred in the fourth quarter of 1998, primarily
a result of low oil and gas prices at year-end.
Years Ended December 31, 2000 and December 31, 1999
Oil and Gas Revenues. Parallel's total oil and gas revenues for 2000 were
$17,134,502, an increase of $8,160,461, or approximately 91%, from $8,974,041
for 1999. The increase in revenues for 2000 when compared with 1999 is related
to a 3% increase in production volumes and an 85% increase in the average price
per EBO we received for our oil and gas sales.
Production. On an equivalent barrel basis, production volumes in 2000
totaled 635,440 EBOs compared with 615,115 EBOs in 1999. The 3% increase in
production was primarily due to increased drilling activity in 2000, which
resulted in more wells being placed in production.
Production Costs. The rise in production costs for 2000, when compared with
1999, was primarily the result of increased production taxes associated with
increased revenues and, to a lesser degree, a slight increase in production
volumes. Production costs increased $745,802 or 32%, to $3,099,534 for the
twelve months ended December 31, 2000, from $2,353,732 for the same period of
32
1999. Production costs as a percentage of revenues decreased primarily because
of higher oil and gas prices, which resulted in higher revenues. Average
production costs per EBO increased 27% to $4.88 for the twelve months ended
December 31, 2000 compared to $3.83 in the same period of 1999, primarily
because of increased production taxes.
General and Administrative Expenses. General and administrative expenses
increased $385,593, or 48%, to $1,191,527 for the year ended December 31, 2000,
from $805,934 in 1999. The increase was primarily related to increases in
automobile and salary expenses. General and administrative expenses as a
percentage of revenues decreased to 6.9% for the year ended December 31, 2000
versus 8.9% for the same period in 1999. This decrease is primarily a result of
higher oil and gas prices, which increased revenues.
Depreciation, Depletion and Amortization Expense. DD&A expenses for 2000
increased $15,705 to $5,239,205 versus $5,223,500 in 1999. This increase was
primarily the result of a 3% increase in production volumes. DD&A expense as a
percentage of revenues decreased primarily because of higher oil and gas
revenues.
Impairment of Oil and Gas Properties. During 2000, we did not recognize any
impairment charge. During the fourth quarter of 1999, we recognized a noncash
impairment charge of $1,705,000 related to our oil and gas reserves and unproved
properties. The impairment of oil and gas assets in 1999 was primarily the
result of a decrease in our year-end proved reserves.
Under full cost accounting rules, each quarter we are required to perform a
ceiling test calculation. The full cost pool carrying values cannot exceed a
company's future net revenues from its proved reserves, discounted at 10% per
annum using constant current product prices, and the lower of cost or market of
unproved properties.
The ceiling test was computed using the net present value of reserves at
December 31, 2000 based on prices of $25.00 per Bbl of oil and $10.18 per Mcf of
natural gas. The prices used to compute the ceiling test in 1999 were $24.75 per
Bbl and $2.20 per Mcf.
Net Interest Expense. Net interest expense decreased $349,127, or 24%, to
$1,120,080 for the year ended December 31, 2000 compared with $1,469,207 for the
same period of 1999. This decrease was principally a result of lower average
borrowings from our revolving line of credit facility and an increase in
interest income.
Income Tax Benefit (Expense). For the year ended December 31, 2000, we
recognized tax expense of $130,000. For the year ended December 31, 1999, we did
not recognize an income tax benefit or expense.
Our effective tax rate for 2000 was approximately 2.1% versus 0% in 1999.
You should read Note 5 to the Financial Statements on page F-14, included in
Item 8 - Financial Statements and Supplementary Data, for further discussion of
our income tax provisions and benefits.
Net Income (Loss) and Operating Cash Flow. Our net income, before preferred
stock dividends, was $5,977,328 for the year ended December 31, 2000 compared
with a net loss of $2,450,457 for the year ended December 31, 1999. We realized
net income in 2000 primarily because of substantially higher oil and gas prices,
which increased revenues, and a 3% increase in production volumes. The 1999 loss
was primarily caused by a fourth quarter 1999 noncash impairment charge to oil
33
and gas properties totaling $1,705,000 and decreased revenues resulting from a
decline in production volumes.
Operating cash flow for 2000 increased approximately $7,566,877, or 177%,
to $11,847,109 compared with $4,280,232 for the year ended December 31, 1999.
Years Ended December 31, 1999 and December 31, 1998
Oil and Gas Revenues. Our total oil and gas revenues for 1999 were
$8,974,041, a decrease of $27,541, or less than 1%, from $9,001,582 for 1998.
The decrease in revenues for 1999, compared with 1998, is related to a 16%
decline in production volumes, which was partially offset by higher oil and gas
prices.
Production. On an equivalent barrel basis, 1999 production totaled 615,115
EBOs compared with 731,454 EBOs in 1998. The decrease in production was
primarily due to normal production declines associated with producing wells and
decreased drilling activity in 1999, which affected our ability to replace oil
and gas produced during the year.
Production Costs. The decrease in production costs for 1999, when compared
with 1998, was primarily the result of a decrease in production volumes.
Production costs decreased $80,926, or 3%, to $2,353,732 for the twelve months
ended December 31, 1999, from $2,434,658 for the same period of 1998. Production
costs as a percentage of revenues decreased primarily because of higher oil and
gas prices. Average production costs per EBO increased 15% to $3.83 for the
twelve months ended December 31, 1999 compared with $3.33 in the same period of
1998, primarily because of lower production volumes and the fixed costs
associated with producing wells.
General and Administrative Expenses. General and administrative expenses
decreased $49,854, or 6%, to $805,934 for the year ended December 31, 1999, from
$855,788 for the same period of 1998. The decrease in general and administrative
expenses was primarily related to a decrease in property insurance costs and
legal expenses. General and administrative expenses as a percentage of revenues
decreased to 8.9% for the year ended December 31, 1999 versus 9.5% for the same
period in 1998. This decrease is primarily a result of higher oil and gas prices
and a 6% decline in general and administrative expenses.
Depreciation, Depletion and Amortization Expense. DD&A expenses for 1999
decreased $742,721, or 12%, to $5,223,500 versus $5,966,221 in 1998. This
decrease was a result of lower production volumes. DD&A expense as a percentage
of revenues decreased primarily because of lower production volumes.
Impairment of Oil and Gas Properties. During the fourth quarter of 1999, we
recognized a noncash impairment charge of $1,705,000 related to our oil and gas
reserves and unproved properties. The impairment of oil and gas assets was
primarily the result of a decrease in our year-end proved reserves. We
recognized an impairment charge in 1998 of $14,757,028, or $12,269,834 net of
tax, related to our oil and gas reserves and unproved properties. The impairment
of oil and gas assets in 1998 was primarily the result of the effect of
significantly lower oil and natural gas prices on both proved and unproved oil
and gas properties.
Under full cost accounting rules, each quarter we are required to perform a
ceiling test calculation. The full cost pool carrying values cannot exceed a
company's future net revenues from its
34
proved reserves, discounted at 10% per annum using constant current product
prices, and the lower of cost or market of unproved properties.
The ceiling test was computed using the net present value of reserves at
December 31, 1999 based on prices of $24.75 per Bbl of oil and $2.20 per Mcf of
natural gas. The prices used to compute the ceiling test in 1998 were $10.50 per
Bbl and $2.00 per Mcf.
Net Interest Expense. Net interest expense increased $90,875, or 6%, to
$1,469,207 for the year ended December 31, 1999, from $1,378,332 for the same
period of 1998. This increase was principally a result of an increase in average
borrowings from our revolving line of credit facility.
Income Tax Benefit (Expense). For the year ended December 31, 1999, we did
not recognize an income tax benefit or expense because we generated net tax
losses during the year. For the year ended December 31, 1998, we recognized a
tax benefit of $3,100,027. At December 31, 1999 and 1998, we reviewed our
deferred tax assets and, in light of the current economic conditions in the oil
and gas industry, the outlook for future commodity prices, and our expected
operational results in future periods, we believe that some of our net operating
losses may expire unused. Therefore, we established a valuation allowance
against them of $4,248,480 and $2,530,196 for 1999 and 1998, respectively.
Our effective tax rate for 1999 was approximately 0% versus a 19% benefit
in 1998. You should read Note 5 to the Financial Statements on page F-14,
included in Item 8 - Financial Statements and Supplementary Data, for further
discussion of our income tax provisions and benefits.
Net Income (Loss) and Operating Cash Flow. Our net loss, before preferred
stock dividends, was $2,450,457 for the year ended December 31, 1999 compared
with a net loss of $12,995,910 for the year ended December 31, 1998. The 1999
loss was primarily caused by a fourth quarter 1999 noncash impairment charge to
oil and gas properties totaling $1,705,000 as a result of a decrease in proved
reserves and a decline in production volumes. This compares with a fourth
quarter 1998 noncash impairment charge to oil and gas properties totaling
$14,757,028, the result of significantly lower oil and gas prices at year-end
1998.
Factors contributing to the net loss were partially offset by a 19%
increase in 1999 oil and gas prices, on an EBO basis, when compared with 1998
prices.
Operating cash flow for 1999 decreased approximately $347,000, or 8%, to
$4,280,232 compared with $4,627,312 for the year ended December 31, 1998. Other
sources of funds included net proceeds of $17,188 from the exercise of stock
options, net proceeds of $3,117,295, excluding offering costs, from the private
placement of common stock, net proceeds from property sales totaling $1,111,525
and bank borrowings under our credit facility.
Capital Resources and Liquidity
Our capital resources consist primarily of cash flows from our oil and gas
properties and bank borrowings supported by our oil and gas reserves. Our level
of earnings and cash flows depends on many factors, including the price of oil
and natural gas.
Our primary source of cash during 2000 was funds generated from operations.
Such funds were used primarily for exploration and development expenditures,
preferred stock dividend payments and the repayment of borrowings under our bank
credit facility.
35
During 2000, we spent $6,645,737 on exploration and development, seismic
data processing and leasehold acquisitions. Long term debt, excluding current
maturities, decreased by $676,000 to $11,624,000. At December 31, 2000, Parallel
had $2,000,826 in cash and total assets of $46,456,437. The unused borrowing
base available from our revolving credit facility was approximately $3,100,000
at December 31, 2000.
Bank Facility
On December 18, 2000, we entered into a new loan agreement with Bank
United, Midland, Texas, to refinance the outstanding indebtedness under the loan
agreement with our former bank lender, and to provide funds for working capital.
The loan agreement provides for a revolving credit facility under which we may
borrow up to the lesser of $30.0 million or the borrowing base amount in effect
from time to time. At December 31, 2000, the borrowing base in effect was $15.5
million, and $12.4 million, bearing interest at 9.5%, was outstanding under the
credit facility. The interest rate on amounts drawn under the revolving credit
facility is, at our election, either the bank's base rate or the eurodollar rate
plus a margin of 2.75% during the related eurodollar interest rate period. The
borrowing base is redetermined by the bank semi-annually on or about May 1 and
November 1 of each year, or at other times as the bank elects. The borrowing
base automatically reduces by $323,000 each month beginning January 1, 2001. If
the outstanding principal amount of our loan ever exceeds the borrowing base, we
are required to either provide additional collateral to the bank or prepay the
principal of the note in an amount at least equal to such excess. Unless there
is a borrowing base deficiency and we prepay the amount of the deficiency,
interest only is payable monthly. The revolving credit facility matures on
October 1, 2003.
Commitment fees of .25% per annum on the difference between the revolving
commitment and the average daily amount of the loan are due quarterly.
Our obligations to the bank are secured by substantially all of our oil and
gas properties. Our bank borrowings have been incurred to finance our property
acquisition, 3-D seismic surveys, enhancement and drilling activities.
In addition to customary affirmative covenants, the loan agreement contains
various restrictive covenants and compliance requirements, including:
maintaining certain financial ratios;
limitations on incurring additional indebtedness;
prohibiting the payment of dividends on our common stock;
limitations of the disposition of assets; and
permitting liens (other than in favor of the lender) to exist on any of our
properties.
If we have borrowing capacity under our loan agreement, we intend to
borrow, repay and reborrow under the revolving credit facility from time to time
as necessary, subject to borrowing base limitations, to fund:
3-D seismic surveys;
lease option exercises;
36
drilling activities on our properties in the Yegua/Frio/Wilcox gas trend;
developmental drilling on our Permian Basin properties, when economically
feasible;
other drilling expenditures and acquisition opportunities; and
general corporate purposes.
Preferred Stock
At December 31, 2000, we had 974,500 shares of 6% convertible preferred
stock outstanding. The preferred stock:
requires us to pay dividends of $.60 per annum, semi-annually on June 15
and December 15 of each year.
can be converted into common stock at any time, at the option of the
holder, into 2.8751 shares of common stock at an initial conversion price
of $3.50 per share, subject to adjustment in certain events.
is redeemable at our option, in whole or in part, for $10 per share, plus
accrued dividends.
has no voting rights, except as required by applicable law, and, except
that as long as any shares of preferred stock remain outstanding, the
holders of a majority of the outstanding shares of the preferred stock may
vote on any proposal to change any provision of the preferred stock which
materially and adversely affects the rights, preferences or privileges of
the preferred stock.
is senior to the common stock with respect to dividends and on liquidation,
dissolution or winding up of Parallel.
has a liquidation value of $10 per share, plus accrued and unpaid
dividends.
Future Capital Requirements
Our capital expenditure budget for 2001 is highly dependent on future oil
and gas prices and the availability of other sources of funding. These
expenditures will be governed by the following factors:
internally generated cash flows;
availability of borrowing under our current credit facility;
additional sources of financing; and
future drilling successes.
In 2001, we intend to drill lower risk prospects that could have a
meaningful effect on our reserve base and cash flows. In selected cases, we may
elect to reduce our interests in higher risk, higher impact projects. We may
also sell certain non-core producing properties to raise funds for capital
expenditures.
37
Outlook
The oil and gas industry is capital intensive. We make, and anticipate that
we will continue to make, substantial capital expenditures in the exploration
for, development and acquisition of oil and gas reserves. Historically, our
capital expenditures have been financed primarily with:
internally generated cash from operations;
funds provided from bank borrowings; and
proceeds from sales of equity securities.
The continued availability of these capital sources depends upon a number
of variables, including:
our proved reserves,
the volumes of oil and gas we produce from existing wells;
the prices at which we sell oil and gas; and
our ability to acquire, locate and produce new reserves.
Each of these variables materially affects our borrowing capacity. We may,
from time to time, seek additional financing in the form of:
increased bank borrowings;
sales of Parallel's securities;
sales of non-core properties; or
other forms of financing.
We do not currently have agreements for any future financing and there can
be no assurance as to the availability or terms of any such financing.
Trends and Prices
Changes in oil and gas prices significantly affect our revenues, cash flows
and borrowing capacity. Markets for oil and gas have historically been, and will
continue to be, volatile. Prices for oil and gas typically fluctuate in response
to relatively minor changes in supply and demand, market uncertainty, seasonal,
political and other factors beyond our control. We are unable to accurately
predict domestic or worldwide political events or the effects of other factors
on the prices we receive for our oil and gas. Historically, we have not entered
into transactions to hedge against changes in oil and gas prices, but we may
elect to enter into hedging transactions in the future to protect against
fluctuations in oil and gas prices.
During 2000, the average sales price we received for our oil production was
approximately $28.88 per Bbl, as compared with $17.32 in 1999, while the average
sales price for our gas was approximately $4.38 per Mcf in 2000, as compared
with $2.27 per Mcf in 1999. At March 15, 2001, we
38
were receiving an average of approximately $25.25 per Bbl for our oil production
and approximately $5.00 per Mcf for our gas production.
Inflation
Inflation has not had a significant impact on our financial condition or
results of operations. We do not believe that inflation poses a material risk to
our business.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. (FAS No. 133), which establishes standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. FAS No. 133 requires an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. It establishes
conditions under which a derivative may be designated as a hedge and establishes
standards for reporting changes in the fair value of a derivative. We adopted
FAS No. 133, as amended by FAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of FASB Statement No.
133, effective January 1, 2001. After assessing our contracts, we are not aware
of any freestanding or embedded derivative instruments that would need to be
recorded as either assets or liabilities in the Financial Statements as of
January 1, 2001, in accordance with FAS No. 133.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk and Interest Rate Sensitivity
We do not have or trade in derivative financial instruments and we do not
have firmly committed sales transactions. We have not entered into hedging
arrangements and do not have any delivery commitments. While hedging
arrangements reduce exposure to losses as a result of unfavorable price changes,
they also limit the ability to benefit from favorable market price changes.
Our major market risk exposure is in the pricing applicable to our oil and
natural gas production. Realized pricing is primarily driven by the prevailing
domestic price for crude oil and spot prices applicable to the region in which
we produce natural gas. Historically, prices received for oil and gas production
have been volatile and unpredictable. Pricing volatility is expected to
continue. Oil prices ranged from a monthly low of $23.57 per barrel to a monthly
high of $31.80 per barrel during 2000. Natural gas prices we received during
2000 ranged from a monthly low of $1.83 per Mcf to a monthly high of $6.36 per
Mcf. A significant decline in the prices of oil or natural gas could have a
material adverse effect on our financial condition and results of operations.
Our only financial instrument sensitive to changes in interest rates is our
bank debt. Our annual interest costs in 2001 will fluctuate based on short-term
interest rates. As the interest rate is variable and reflects current market
conditions, the carrying value approximates the fair value. The table below
shows principal cash flows and related weighted average interest rates by
expected maturity dates. Weighted average interest rates were determined using
weighted average interest paid and accrued in December
39
2000. You should read Note 3 to the Financial Statements and Supplementary Data
for further discussion of our debt that is sensitive to interest rates.
2001 2002 2003 Total Fair Value
------ ------ ------ ------- ------------
(in 000s, except interest rates)
Variable rate debt: $804 $3,876 $7,478 $12,428 $12,428
Revolving Facility (secured)
Average interest rate 9.5% 9.5% 9.5%
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Parallel's financial statements and supplementary financial data are
included elsewhere in this report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
40
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Directors and executive officers of Parallel at March 15, 2001 are as
follows:
Director
Name Age Since Position with Company
- ------------------------- ----- --------- ---------------------
Thomas R. Cambridge 65 1985 Chairman of the Board of Directors and
Chief Executive Officer
Larry C. Oldham 47 1979 President, Treasurer and Director
Ernest R. Duke (1)(2) 74 1980 Director
Dewayne E. Chitwood (1) 65 2000 Director
Charles R. Pannill (1)(2) 75 1982 Director
______________________
(1) Member of Audit Committee
(2) Member of Compensation Committee
Mr. Cambridge is an independent petroleum geologist engaged in the
exploration for, development and production of oil and natural gas. From 1970
until 1990, such activities were carried out primarily through Cambridge & Nail
Partnership, a Texas general partnership. Since 1990, such oil and gas
activities have been carried out through Cambridge Production, Inc., a Texas
corporation. He received a Bachelors degree in geology from the University of
Nebraska in 1958 and a Master of Science degree in
geology from the University of Nebraska in 1960.
Mr. Oldham, a founder of Parallel, has served as an officer and Director
since its formation in 1979. Before Parallel's formation, Mr. Oldham was
employed by Dorchester Gas Corporation during the period 1976 to 1979 and by
KPMG Peat Marwick LLP during 1975 and 1976. Mr. Oldham became President of
Parallel in October 1994, and served as Executive Vice President before that
time. He is a member of the Permian Basin Landman's Association. Mr. Oldham
received a Bachelor of Business Administration degree from West Texas State
University in 1975.
Mr. Duke is a consultant to MI Drilling Fluids, LLC and the president and
the majority shareholder of Mustang Mud, Inc., privately held oil field service
companies. He received a Bachelor of Science degree in Geology from Southern
Methodist University in 1950.
Mr. Chitwood is the chairman of the board of directors of Wes-Tex Drilling
Company, a corporation engaged in oil and gas exploration and production. Mr.
Chitwood has been an officer and director of Wes-Tex Drilling Company, Abilene,
Texas, since 1997. Mr. Chitwood currently serves
41
as Executor and Trustee of the Myrle Greathouse Estate, Executive Director of
the Greathouse Foundation and as an officer and director of Symbol, Inc. He
graduated from Southern Methodist University in 1958 with a degree in Business
Administration. Mr. Chitwood was appointed to Parallel's Board of Directors in
December 2000 to fill the vacancy created by the resignation of Myrle Greathouse
in the same month. Mr. Greathouse served as a director of Parallel for seven
years.
Mr. Pannill was employed by The Western Company of North America for over
thirty years until his retirement in February 1982. During his employment with
The Western Company of North America, Mr. Pannill served in various capacities,
including those of an executive officer and director. He received a Bachelor of
Science degree in Geology from Texas A&M University in 1950.
Directors hold office until the annual meeting of stockholders following
their election or appointment and until their respective successors have been
duly elected or appointed.
Officers are appointed annually by the Board of Directors to serve at the
Board's discretion and until their respective successors in office are duly
appointed.
There are no family relationships between any of Parallel's Directors or
officers.
Key Employees
In addition to the services provided by Mr. Cambridge and Mr. Oldham,
Parallel also relies extensively on the key employees identified below.
Eric A. Bayley, Manager of Engineering, has been a full-time employee of
Parallel since October 1993. From December 1990 to October 1993, Mr. Bayley was
an independent consulting engineer and devoted substantially all of his time to
Parallel. He graduated from Texas A&M University in 1978 with a Bachelor of
Science degree in Petroleum Engineering, and in 1984, Mr. Bayley graduated from
the University of Texas of the Permian Basin with a Masters of Business
Administration degree.
Rebecca A. Burrell, Manager of Accounting, has been a full-time employee of
Parallel since January 1985. Mrs. Burrell graduated from Jacksonville College in
1974 with a degree in accounting and has worked in oil and gas accounting since
1978.
Rhonda L. Keller, Manager of Investor Relations, has been a full-time
employee since August 1997. From October 1991 to July 1997, Ms. Keller served as
President of Corporate Perspective, Inc., an independent investor relations and
corporate communications firm, providing services primarily to publicly owned
companies. From January 1986 to September 1991, Ms. Keller was Director of
Investor Relations for Edisto Resources Corporation, Dallas, Texas.
John S. Rutherford, Manager of Land/Administration, has been employed by
Parallel since October 1993. From May 1991 to October 1993, Mr. Rutherford
served as a consultant to Parallel, devoting substantially all of his time to
Parallel's business. Mr. Rutherford graduated from Oral Roberts University in
1982 with a degree in Education and in 1986, he graduated from Baylor University
with a Master's degree in Business Administration. From April 1988 to April
1991, Mr. Rutherford was a vice president in the energy lending division of
Chase Bank of Texas, National Association, Midland, Texas.
42
Consulting Arrangements
As part of our overall business strategy, we continually monitor and
control our general and administrative expenses. Decisions regarding our general
and administrative expenses are made within parameters we believe to be
compatible with our size, the level of our activities and projected future
activities. Our goal is to keep general and administrative expenses at
acceptable levels, without impairing the quality of services and organizational
structure necessary for conducting our business. In this regard, we retain
outside advisors and consultants to provide technical and administrative support
services in the operation of our business. From time to time, we grant
consultants overriding royalty interests, working interests, or options to
acquire working interests, in wells in which we own an interest. We believe
these types of compensation arrangements enable us to attract, retain and
provide additional incentives to qualified and experienced consultants.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires Parallel's
Directors and officers to file periodic reports with the SEC. These reports show
the Directors' and officers' ownership, and the changes in ownership, of
Parallel's common stock and other equity securities. To our knowledge, all
Section 16(a) filing requirements have been complied with during 2000, except
that Charles R. Pannill, a director, did not timely report the sale of 3,400
shares of common stock on December 28, 1999 and the sale of 3,000 shares of
common stock on January 11, 2000.
ITEM 11. EXECUTIVE COMPENSATION
Summary of Annual Compensation
The table below shows a summary of the types and amounts of compensation
paid to our executive officers during the last three years.
Summary Compensation Table
Long Term Compensation
----------------------------------
Annual Compensation Awards Payouts
---------------------------- -------------------------- -------
Other All
Annual Restricted Securities Other
Compen- Stock Underlying LTIP Compen-
Name and Salary Bonus sation Awards Options/ Payouts sation
Principal Position Year ($) ($) ($) ($) SARs(# ($) ($)
- ------------------- ---- -------- -------- ------- -------- ---------- ------- --------
T.R. Cambridge, 2000 $ 77,755 $ 2,000 $ 900 0 0 0 0
Chief Executive
Officer and 1999 $ 77,755 $ 1,000 $ 900 0 50,000 0 0
Chairman of the
Board of Directors 1998 $ 73,631 $ 500 $ 900 0 50,000 0 0
L.C. Oldham, 2000 $161,000 $ 2,000 $ 10,067(1) 0 0 0 $ 12,230(2)
President, Treasurer
and Director 1999 $125,000 $ 1,000 $ 20,221(1) 0 100,000 0 $ 5,771(2)
1998 $112,923 $ 500 $ 23,150(1) 0 100,000 0 $ 5,139(2)
43
- -------------------
(1) Such amount includes insurance premiums for nondiscriminatory group life,
medical, disability and dental insurance as follows: $7,058 for 2000;
$18,534 for 1999; and $17,445 for 1998.
(2) For 1998, such amount includes $3,388 contributed by Parallel to Mr.
Oldham's individual retirement account maintained under the 408(k)
simplified employee pension plan/individual retirement account and the
reimbursement to Mr. Oldham of $1,751 for income tax preparation and
planning. For 1999, such amount includes $3,750 contributed by Parallel to
Mr. Oldham's retirement account and the reimbursement to Mr. Oldham of
$2,021 for income tax preparation and planning. The amount shown for 2000
includes Parallel's contribution of $9,750 to Mr. Oldham's retirement
account and reimbursement of $2,480 for income tax preparation.
Stock Options
Parallel uses stock options as part of the overall compensation of
Directors, officers and employees. However, we did not grant any stock options
to our executive officers in fiscal year 2000. Summary descriptions of our stock
option plans are included in this report so you can review the types of options
we have granted and the significant features of our stock options.
The following table shows certain information with respect to stock option
exercises in 2000 and the value of unexercised stock options held by Parallel's
executive officers at December 31, 2000.
Aggregated Option/SAR Exercises in
Last Fiscal Year and Fiscal Year - End Option/SAR Values
Number of Securities Value of
Shares Value Underlying Unexercised Unexercised
Acquired Realized Options at Fiscal in-the-Mondy Options
Name on Exercise ($) (1) Year-End (2) at Fiscal Year-End ($)(2)
- ---------------- ----------- -------- ---------------------------- -----------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
T. R. Cambridge 0 0 275,000 25,000 $ 60,475 (2) $ 49,825 (2)
L. C. Oldham 0 0 557,000 90,000 $ 967,201 $ 200,000 (3)
- -------------------
(1) The value of in-the money options is equal to the fair market value of a
share of common stock at fiscal year-end ($3.813 per share), based on the
last sale price of Parallel's common stock, less the exercise price.
(2) At December 31, 2000, the exercise price of excercisable options to
purchase a total of 200,000 shares of common stock held by Mr. Cambridge
exceeded $3.813, the fair market value of our common stock on that date.
(3) At December 31, 2000, the exercise prices of exercisable options to
purchase 160,000 shares of common stock exceeded the fair market value of
our common stock on December 31, 2000, and the exercise price of
unexercisable options to purchase 40,000 shares exceeded the fair market
value of our common stock at that same date.
Change of Control Arrangements
Parallel's outstanding stock options and stock option plans contain certain
change of control provisions which are applicable to Parallel's outstanding
stock options, including the options held by Messrs. Cambridge and Oldham, and
other Directors of Parallel. For purposes of our options, a change of control
occurs if:
Parallel is not the surviving entity in a merger or consolidation;
Parallel sells, leases or exchanges all or substantially all of its assets;
44
Parallel is to be dissolved and liquidated;
any person or group acquires beneficial ownership of more than 50% of
Parallel's common stock; or
in connection with a contested election of directors, the persons who were
Directors of Parallel before the election cease to constitute a majority of
the Board of Directors.
If a change of control occurs, the Compensation Committee of the Board of
Directors can:
accelerate the time at which options may be exercised;
require optionees to surrender some or all of their options and pay to each
optionee the change of control value;
make adjustments to the options to reflect the change of control; or
permit the holder of the option to purchase, instead of the shares of
common stock as to which the option is then exercisable, the number and
class of shares of stock or other securities or property which the optionee
would acquire under the terms of the merger, consolidation or sale of
assets and dissolution if, immediately before the merger, consolidation or
sale of assets or dissolution, the optionee had been the holder of record
of the shares of common stock as to which the option is then exercisable.
The change of control value is an amount equal to, whichever is applicable:
the per share price offered to Parallel's stockholders in a merger,
consolidation, sale of assets or dissolution transaction;
the price per share offered to Parallel's stockholders in a tender offer or
exchange offer where a change of control takes place; or
if a change of control occurs, other than from a tender or exchange offer,
the fair market value per share of the shares into which the options being
surrendered are exercisable, as determined by the Committee.
Compensation of Directors
Parallel's non-employee Directors each receive $1,000 for attending
meetings of the Board of Directors and $500 for attending meetings of Board
committees that they serve on. Under these arrangements, during 2000, Dewayne E.
Chitwood received $0, Ernest R. Duke received $14,510, Myrle Greathouse received
$12,000 and Charles R. Pannill received $14,000. All Directors are reimbursed
for expenses incurred in connection with attending meetings.
Parallel's 1992 Stock Option Plan provides for the granting of a one-time
stock option to purchase 25,000 shares of common stock to each person who
becomes a non-employee director after March 1, 1992. No options were granted in
2000 under this plan.
Directors who are not employees of Parallel are also eligible to
participate in the Non-Employee Directors Stock Option Plan. On October 28,
1999, Messrs. Duke, Greathouse and Pannill were each granted an option to
purchase 25,000 shares of common stock. Mr. Cambridge was granted an option to
purchase 50,000 shares of common stock. All of the options were granted with an
exercise price of $1.82 per share, the fair market value of the common stock on
the date of grant. The options are exercisable
45
with respect to one-half of the shares on October 28, 2000, and one-half on
October 28, 2001. The options expire on October 28, 2009.
Stock Option Plans
1983 Incentive Stock Option Plan. In May 1984, our stockholders approved
and adopted the 1983 Incentive Stock Option Plan. Stock options granted under
the 1983 Plan are intended to be "incentive stock options" within the meaning of
the Internal Revenue Code which, generally, provides the optionee with certain
favorable tax benefits. Although the 1983 Plan expired by its own terms in 1993,
incentive stock options to purchase 157,000 shares of common stock remain
outstanding. The 1983 Plan is administered by the Compensation Committee of the
Board of Directors. Under the terms of the 1983 Plan, all employees of Parallel
were eligible to participate. The 1983 Plan authorized the granting of options
to purchase a total of 750,000 shares of common stock. All options granted under
the 1983 Plan were granted with exercise prices equal to the fair market value
of the common stock on the date of grant. All options expire, in any event, ten
years after the date of grant.
1992 Stock Option Plan. In May 1992, our stockholders approved and adopted
the 1992 Stock Option Plan. The 1992 Plan provides for granting to key
employees, including officers and Directors who are also key employees of
Parallel, and Directors who are not employees, options to purchase up to an
aggregate of 750,000 shares of common stock. Options granted under the 1992 Plan
to employees may be either incentive stock options or options which do not
constitute incentive stock options. Options granted to non-employee Directors
will not be incentive stock options.
The 1992 Plan is administered by the Board's Compensation Committee, none
of whom are eligible to participate in the 1992 Plan except to receive a
one-time option to purchase 25,000 shares at the time he becomes a Director. The
Compensation Committee selects the employees who are to be granted options and
establishes the number of shares issuable under each option and other such terms
and conditions as may be approved by the Compensation Committee. The purchase
price of common stock issued under each option must not be less than the fair
market value of the common stock at the time of grant.
The 1992 Plan provides for the granting of an option to purchase 25,000
shares of common stock to each individual who was a non-employee Director of
Parallel on March 1, 1992 and to each individual who becomes a non-employee
Director following March 1, 1992. Members of the Compensation Committee are not
eligible to participate in the 1992 Plan other than to receive a non-qualified
stock option to purchase 25,000 shares of common stock as described above.
An option may be granted in exchange for an individual's right and option
to purchase shares of common stock pursuant to the terms of a prior option
agreement. An agreement that grants an option in exchange for a prior option
must provide for the surrender and cancellation of the prior option. The
purchase price of common stock issued under an option granted in exchange for a
prior option is determined by the Compensation Committee and may be equal to the
price for which the optionee could have purchased common stock under the prior
option.
The 1992 Plan will expire by its own terms in May 2002.
Non-Employee Directors Stock Option Plan. The Parallel Petroleum
Non-Employee Directors Stock Option Plan was approved by our stockholders at the
annual meeting of stockholders held in May 1997. This plan provides for granting
to Directors who are not employees of Parallel options to purchase up to an
aggregate of 500,000 shares of common stock. Options granted under the plan will
not be incentive stock options within the meaning of the Internal Revenue Code.
46
The Directors Plan is administered by the Compensation Committee of the
Board of Directors. The Compensation Committee has sole authority to select the
Non-Employee Directors who are to be granted options; to establish the number of
shares which may be issued to Non-Employee Directors under each option; and to
prescribe such terms and conditions, as the Committee shall prescribe from time
to time in accordance with the Plan. Under provisions of the Directors Plan, the
option exercise price must be the fair market value of the stock subject to the
option on the date the option is granted. Options are not transferable other
than by will or the laws of descent and distribution and are not exercisable
after ten years from the date of grant.
The purchase price of shares as to which an option is exercised must be
paid in full at the time of exercise (1) in cash, (2) by delivering to Parallel
shares of stock having a fair market value equal to the purchase price, or (3) a
combination of cash or stock, as established by the Compensation Committee.
1998 Stock Option Plan. In June 1998, our stockholders adopted the 1998
Stock Option Plan. The 1998 Plan provides for the granting of options to
purchase up to 850,000 shares of common stock. Stock options granted under the
1998 Plan may be either incentive stock options or stock options which do not
constitute incentive stock options.
The 1998 Plan is administered by the Compensation Committee of the Board of
Directors. Members of the Compensation Committee are not eligible to participate
in the 1998 Plan. Only employees are eligible to receive options under the 1998
Plan. The Compensation Committee selects the employees who are granted options
and establishes the number of shares issuable under each option.
Options granted to employees contain terms and conditions that are approved
by the Compensation Committee. The Compensation Committee is empowered and
authorized, but is not required, to provide for the exercise of options by
payment in cash or by delivering to Parallel shares of common stock having a
fair market value equal to the purchase price, or any combination of cash or
common stock. The purchase price of common stock issued under each option must
not be less than the fair market value of the common stock at the time of grant.
Options granted under the 1998 Plan are not transferable other than by will
or the laws of descent and distribution. The 1998 Plan will expire in June 2008.
Other Option Grants. The Board of Directors granted a non-qualified stock
option to Mr. Cambridge in October 1993 under the general corporate powers of
Parallel. Upon recommendation of the Board's Compensation Committee, the Board
granted the option to Mr. Cambridge to purchase 100,000 shares of common stock
at an exercise price of $3.9375 per share, the fair market value of the common
stock on the date of grant. The option is not transferable, except by will or
the laws of descent and distribution. The option expires in October 2003.
Retirement Plan
Parallel maintains under Section 408(k) of the Code a combination
simplified employee pension ("SEP") and individual retirement account ("IRA")
plan (the "SEP/IRA") for eligible employees. Generally, eligible employees
include all employees who are at least twenty-one years of age.
Contributions to employee SEP accounts may be made at the discretion of
Parallel, as authorized by the Compensation Committee of the Board of Directors.
The percentage of contributions may vary from time to time. However, the same
percentage contribution must be made for all participating employees. Parallel
is not required to make annual contributions to the employees SEP accounts.
Parallel may make tax-deductible contributions for each employee participant of
up to 15% of a
47
participant's compensation, or $30,000, whichever is less. Under the prototype
simplified employee pension plan adopted by Parallel, all of the SEP
contributions must be made to SEP/IRAs maintained with the sponsor of the plan,
a national investment banking firm. All contributions to employees' accounts are
immediately 100% vested and become the property of each employee at the time of
contribution, including employer contributions, income-deferral contributions
and IRA contributions. Generally, earnings on contributions to an employee's
SEP/IRA account are not subject to federal income tax until withdrawn.
In addition to receiving SEP contributions made by Parallel, employees may
make individual annual IRA contributions of up to the lesser of $2,000 or 100%
of compensation. Each employee is responsible for the investment of funds in his
or her own SEP/IRA and can select investments offered through the sponsor of the
plan.
Distributions may be taken by employees at any time and must commence by
April 1st following the year in which the employee attains age 70 .
Parallel presently makes matching contributions to employee accounts in an
amount equal to the contribution made by each employee, not to exceed, however,
6% of each employee's salary during any calendar year. During 2000, Parallel
contributed an aggregate of $36,077 to the accounts of seven employee
participants. Of this amount, $9,750 was allocated to Mr. Oldham's account.
48
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This table shows information as of March 15, 2001 about the beneficial
ownership of common stock by: (1) each person known by us to own beneficially
more than five percent of our outstanding common stock; (2) each executive
officer of Parallel; (3) each Director of Parallel; and (4) all of Parallel's
executive officers and Directors as a group.
Name and Address Amount and Nature
of of Percent of
Beneficial Owner Beneficial Ownership (1) Class (2)
- ---------------- ------------------------ ----------
Thomas R. Cambridge
2201 Civic Circle, Suite 216
Amarillo, Texas 79109 1,042,045 (3) 5.03%
Dewayne E. Chitwood
P.O. Box 379
Abilene, TX 79604 1,659,557 (4) 7.84%
Ernest R. Duke
P.O. Box 1919
Midland, Texas 79702 327,473 (5) 1.60%
Larry C. Oldham
One Marienfeld Place, Suite 465
Midland, Texas 79701 867,090 (6) 4.15%
Charles R. Pannill
3416 Acorn Run
Fort Worth, Texas 76019 116,995 (7) *
Wes-Tex Drilling Company, L.P.
P.O. Box 379
Abilene, Texas 79604 1,246,773 (8) 6.04%
Dian Graves Owen
400 Pine, Suite 1000
Abilene, Texas 79601 1,281,428 (9) 6.10%
Julia Jones Matthews
400 Pine, Suite 900
Abilene, Texas 79601 1,942,428 (10) 9.00%
Dodge Jones Foundation
400 Pine, Suite 900
Abilene, Texas 79601 1,371,428 (11) 6.41%
All Executive Officers and Directors
as a Group (5 persons) 4,013,160 (12) 18.20 %
__________________
* Less than one percent.
(1) Unless otherwise indicated, all shares of common stock are held directly
with sole voting and investment powers.
49
(2) Securities not outstanding, but included in the beneficial ownership of
each such person are deemed to be outstanding for the purpose of computing
the percentage of outstanding securities of the class owned by such person,
but are not deemed to be outstanding for the purpose of computing the
percentage of the class owned by any other person.
(3) Includes 767,045 shares held indirectly through Cambridge Collateral
Services, Ltd., a limited partnership of which Mr. Cambridge and his wife
are the general partners. Includes 275,000 shares of common stock
underlying presently exercisable stock options held directly by Mr.
Cambridge.
(4) Includes 932,488 shares of common stock held directly by Wes-Tex Drilling
Company, L.P., a limited partnership ("Wes-Tex"), and 314,285 shares of
common stock that may be acquired by Wes-Tex upon conversion of 110,000
shares of preferred stock held by Wes-Tex. In his capacity as president,
chief executive officer and a manager of Wes- Tex Holdings, LLC, the
general partner of Wes-Tex, Mr. Chitwood may be deemed to have shared
voting and investment powers with respect to such shares. See note 8 below.
Also included are 97,500 shares of common stock underlying presently
exercisable stock options held by the Estate of Myrle Greathouse (the
"Estate"); 1,000 shares of common stock held indirectly by the Estate;
157,142 shares that may be acquired by the Greathouse Charitable Remainder
Trust (the "Trust") upon conversion of 55,000 shares of preferred stock;
and 157,142 shares of common stock that may be acquired by the Greathouse
Foundation (the "Foundation") upon conversion of 55,000 shares of preferred
stock. Mr. Chitwood is the executor of the Estate, the trustee (but not a
beneficiary) of the Trust and the executive director and a director of the
Foundation. In these capacities, Mr. Chitwood may also be deemed to have
shared voting and investment powers with respect to the shares of common
stock beneficially owned by the Estate, the Trust and the Foundation.
However, Mr. Chitwood disclaims beneficial ownership of all shares of
common stock shown in the table.
(5) Includes 72,500 shares of common stock underlying presently exercisable
stock options. Also included are 74,395 shares held by Duke and Cain
Partnership, a general partnership in which Mr. Duke is a partner, and
30,000 shares held in the name of Mr. Duke's wife. Mr. Duke has shared
voting and investment powers with respect to such shares.
(6) Includes 480,000 shares of common stock underlying presently exercisable
stock options.
(7) Includes 72,500 shares of common stock underlying presently exercisable
stock options. Also included are 1,300 shares held by Mr. Pannill as
custodian for the benefit of two minor grandchildren and as to which Mr.
Pannill disclaims beneficial ownership.
(8) Includes 314,285 shares of common stock that may be acquired upon
conversion of 110,000 shares of preferred stock. Wes-Tex has shared voting
and investment powers with respect to all such shares. See note 4 above.
(9) Includes 700,000 shares of common stock held directly by the Dian Graves
Owen Trust and 285,714 shares of common stock that may be acquired by Mrs.
Owen upon conversion of 100,000 shares of preferred stock held directly by
her. Also included are 285,714 shares that may be acquire upon conversion
of 100,000 shares of preferred stock held directly by the Dian Graves Owen
Foundation, a non-profit organization. Mrs. Owen disclaims beneficial
ownership of all shares of common stock beneficially owned by the Dian
Graves Owen Foundation.
(10) Includes 400,000 shares of common stock owned directly by the Julia Jones
Matthews Family Trust and 171,428 shares of common stock that may be
acquired by the Trust upon conversion of 60,000 shares of preferred stock
held directly by the Trust. By virtue of her position as the President and
a Director of the Dodge Jones Foundation, Matthews has shared voting and
investment powers with respect to, and may also be deemed to be the
beneficial owner of, 971,428 shares of common stock that may be acquired by
the Dodge Jones Foundation upon conversion of 340,000 shares of preferred
stock held by it, and 400,000 shares of common stock that are owned
directly by the Dodge Jones Foundation. Matthews disclaims beneficial
ownership of all shares of common stock beneficially owned by the Dodge
Jones Foundation. See note 11.
(11) Includes 971,428 shares that may be acquired upon conversion of 340,000
shares of preferred stock. The Dodge Jones Foundation has shared voting and
investment powers with respect to such shares of common stock. See note 10.
(12) Includes 997,500 shares of common stock underlying presently exercisable
stock options and 628,569 shares of common stock that may be acquired upon
conversion of 220,000 shares of preferred stock.
50
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
From time to time, Wes-Tex Drilling Company, a corporation, acquires
undivided interests in oil and gas leasehold acreage from our company and
participates with us and other interest owners in the drilling and development
of such acreage. Myrle Greathouse, a director and the sole shareholder of
Wes-Tex until his death in December 2000, was also a Director of Parallel.
Wes-Tex participates in these operations under standard form operating
agreements on the same or similar terms afforded by Parallel to nonaffiliated
third parties. We invoice all working interest owners, including Wes-Tex, on a
monthly basis, without interest, for their pro rata share of lease acquisition,
drilling and operating expenses. During 2000, we billed Wes-Tex $14,892 for its
proportionate share of lease operating expenses incurred. The largest amount
owed to us by Wes-Tex at any one time during 2000 for its share of lease
operating expenses was $2,219. At December 31, 2000, Wes-Tex owed us $429 for
these expenses. During 2000, we disbursed $71,297 to Wes-Tex in payment of
revenues attributable to Wes-Tex's pro rata share of the proceeds from sales of
oil and gas produced from properties in which Wes-Tex and Parallel owned
interests.
During 2000, Cambridge Production, Inc., a corporation owned by Mr.
Cambridge, served as operator of two wells on oil and gas leases in which we
also owned an interest. Generally, the operator of a well is responsible for the
day to day operations on the lease, overseeing production, employing field
personnel, maintaining production and other records, determining the location
and timing of drilling of wells, administering gas contracts, joint interest
billings, revenue distribution, making various regulatory filings, reporting to
working interest owners and other matters. During 2000, Cambridge Production
billed us $169,906 for our pro rata share of lease operating expenses and
drilling and workover expenses. We paid $153,690 to Cambridge Production during
2000, which included amounts remaining unpaid and owed to Cambridge Production
at the end of 1999. The largest outstanding amount we owed Cambridge Production
at any one time during 2000 was $20,255. At December 31, 2000, Cambridge
Production owed us $334. Cambridge Production's billings to Parallel are made
monthly on the same basis as all other working interest owners in the wells. Our
pro rata share of oil and gas sales during 2000 from the wells operated by
Cambridge Production was $274,065. At December 31, 2000, we owed Cambridge
Production $18,694.
During 2000, we paid $45,762 to First Permian for reimbursement of general
and administrative expense. First Permian paid $78,720 to us for reimbursement
of general and administrative expense. At December 31, 2000, we owed First
Permian $374. At that same date, First Permian owed us $2,875.
We believe the transactions described above were made on terms no less
favorable than if we had entered into the transactions with an unrelated party.
51
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
For a list of Financial Statements and Schedules, see "Index to the
Financial Statements and Schedules" on page F-1, and incorporated
herein by reference.
(b) We filed one report on Form 8-K during the last quarter of our fiscal
year ended December 31, 2000. In the Form 8-K, dated October 9, 2000 and
filed with the Securities and Exchange Commission on October 10, 2000, we
reported the adoption of a stockholder rights plan. As reported in Form
8-K, the plan is designed to protect Parallel from unfair or coercive
takeover attempts and to prevent a potential acquiror from gaining control
of Parallel without fairly compensating all of the stockholders.
(c) Exhibits:
Exhibit
No. Description of Exhibit
------- ----------------------
3.1 Certificate of Incorporation of Registrant
(Incorporated by reference to Exhibit 3.1 to
Form 10-K of the Registrant for the fiscal
year ended December 31, 1998.)
3.2 Bylaws of Registrant (Incorporated by
reference to Exhibit 3 to the Registrant's
Form 8-K, dated October 9, 2000, as filed
with the Securities and Exchange Commission
on October 10, 2000.)
4.1 Certificate of Designations, Preferences and
Rights of Serial Preferred Stock - 6%
Convertible Preferred Stock (Incorporated by
reference to Exhibit 4.1 to Form 10-Q of the
Registrant for the fiscal quarter ended
September 30, 1998.)
*4.2 Certificate of Designation, Preferences and
Rights of Series A Preferred Stock.
*4.3 Rights Agreement, dated as of October 5,
2000, between the Registrant and
Computershare Trust Company, Inc.,
as Rights Agent.
52
Exhibit
No. Description of Exhibit
------- ----------------------
Executive Compensation Plans and Arrangements
(Exhibit No.'s 10.1 through 10.7):
10.1 1983 Incentive Stock Option Plan
(Incorporated by reference to Exhibit 10.2 to
Form S-1 of the Registrant (File No. 2-92397)
as filed with the Securities and Exchange
Commission on July 26, 1984, as amended by
Amendments No. 1 and 2 on October 5, 1984,
and October 25, 1984, respectively).
10.2 1992 Stock Option Plan (Incorporated by
reference to Exhibit 28.1 to Form S-8 of the
Registrant (File No. 33-57348) as filed with
the Securities and Exchange Commission on
January 25, 1993.)
10.3 Stock Option Agreement between the Registrant
and Thomas R. Cambridge dated December 11,
1991 (Incorporated by reference to Exhibit
10.4 of Form 10-K of the Registrant for the
fiscal year ended December 31, 1992.)
10.4 Stock Option Agreement between the Registrant
and Thomas R. Cambridge dated October 18,
1993 (Incorporated by reference to Exhibit
10.4(e) of Form 10-K of the Registrant for
the fiscal year ended December 31, 1993.)
10.5 Merrill Lynch, Pierce, Fenner & Smith
Incorporated Prototype Simplified Employee
Pension Plan (Incorporated by reference to
Exhibit 10.6 of the Registrant's Form 10-K
for the fiscal year ended December 31, 1995.)
10.6 Non-Employee Directors Stock Option Plan
(Incorporated by reference to Exhibit 10.6
of the Registrant's Form 10-K Report for the
fiscal year ended December 31, 1997).
10.7 1998 Stock Option Plan (Incorporated by
reference to Exhibit 10.7 of Form 10-K of the
Registrant for the fiscal year ended
December 31, 1998.)
10.8 Restated Loan Agreement dated December 27,
1999, between the Registrant and Bank One,
Texas, N.A. (Incorporated by reference to
Exhibit 10.8 of Form 10-K of the Registrant
for the fiscal year ended December 31, 1999.)
*10.9 Loan Agreement dated December 18, 2000
between the Registrant and Bank United.
53
10.10 Letter agreement, dated March 24, 1999,
between the Registrant and Bank One, Texas,
N.A. (Incorporated by reference to Exhibit
10.9 of Form 10-K for the fiscal year ended
December 31, 1998.)
10.11 Certificate of Formation of First Permian,
L.L.C. (Incorporated by reference to Exhibit
10.1 of the Registrant's Form 8-K report
dated June 30, 1999.)
10.12 Limited Liability Company Agreement of First
Permian, L.L.C. (Incorporated by reference to
Exhibit 10.2 of the Registrant's Form 8-K
report dated June 30, 1999.)
10.13 Merger Agreement, dated June 25, 1999.
(Incorporated by reference to Exhibit 10.3 of
the Registrant's Form 8-K report dated
June 30, 1999.)
10.14 Agreement and Plan of Merger of First
Permian, L.L.C. and Nash Oil Company, L.L.C.
(Incorporated by reference to Exhibit 10.4 of
the Registrant's Form 8-K report dated June
30, 1999.)
10.15 Certificate of Merger of First Permian,
L.L.C. and Nash Oil Company, L.L.C
(Incorporated by reference to Exhibit 10.5 of
the Registrant's Form 8-K Report dated June
30, 1999.)
*10.16 Amended and Restated Limited Liability
Company Agreement of First Permian, L.L.C.
dated as of May 31, 2000.
10.17 Credit Agreement dated June 30, 1999, by and
among First Permian, L.L.C., Parallel
Petroleum Corporation, Baytech, Inc., and
Bank One, Texas, N.A. (Incorporated by
reference to Exhibit 10.6 of the Registrant's
Form 8-K report dated June 30, 1999.)
10.18 Limited Guaranty, dated June 30, 1999, by and
among First Permian, L.L.C., Parallel
Petroleum Corporation, and Bank One, Texas,
N.A. (Incorporated by reference to Exhibit
10.7 of the Registrant's Form 8-K report
dated June 30, 1999.)
10.19 Intercreditor Agreement, dated as of June 30,
1999, by and among First Permian, L.L.C.,Bank
One, Texas, N.A., Tejon Exploration Company,
and Mansefeldt Investment Corporation
(Incorporated by reference to Exhibit 10.8 of
the Registrant's Form 8-K report dated June
30, 1999.)
10.20 Subordinated Promissory Note, dated June 30,
1999, in the original principal amount of
$8.0 million made by First Permian, L.L.C.
payable to the order of Tejon Exploration
Company (Incorporated by reference to Exhibit
10.9 of the Registrant's Form 8-K report
dated June 30, 1999.)
10.21 Subordinated Promissory Note, dated June 30,
1999, in the original principal amount of
$8.0 million made by First Permian, L.L.C.
payable to the order of Mansefeldt Investment
Corporation (Incorporated by reference to
Exhibit 10.10 of the Registrant's Form 8-K
report dated June 30, 1999.)
54
Exhibit
No. Description of Exhibit
------- ----------------------
*10.22 Second Restated Credit Agreement,
dated October 25, 2000, among First
Permian, L.L.C., Bank One, Texas, N.A.,
and Bank One Capital Markets, Inc.
*23.1 Consent of Independent Auditors
*23.2 Consent of Independent Petroleum
Engineers
*23.3 Consent of Independent Petroleum
Engineers
- ------------------------
* Filed herewith.
F-1
PARALLEL PETROLEUM CORPORATION
Index to the Financial Statements
Page
Independent Auditors' Report F-2
Financial Statements:
Balance Sheets at December 31, 2000 and 1999 F-3
Statements of Income for the years ended
December 31, 2000, 1999, and 1998 F-4
Statements of Stockholders' Equity for the
years ended December 31, 2000, 1999 and 1998 F-5
Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998 F-6
Notes to Financial Statements F-7
All schedules are omitted, as the required information is inapplicable or
the information is presented in the financial statements or related notes.
F-2
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Parallel Petroleum Corporation:
We have audited the financial statements of Parallel Petroleum Corporation (the
"Company") as of December 31, 2000 and 1999, and the related statements of
income, stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Parallel Petroleum Corporation
as of December 31, 2000 and 1999, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States of America.
KPMG LLP
Midland, Texas
February 2, 2001
F-3
PARALLEL PETROLEUM CORPORATION
Balance Sheets
December 31, 2000 and 1999
Assets 2000 1999
Current assets:
Cash and cash equivalents $ 2,000,826 $ 1,276,417
Accounts receivable
Oil and gas 4,057,527 1,312,923
Others, net of allowance for doubtful accounts of $51,136 in
2000 and $157,187 in 1999 319,818 314,911
Affiliate 19,569 20,658
------------ ------------
4,396,914 1,648,492
Other assets 27,166 39,677
Assets held for sale _ 2,127,734
------------ ------------
Total current assets 6,424,906 5,092,320
------------ ------------
Property and equipment, at cost:
Oil and gas properties, full cost method (Note 11) 72,316,384 65,136,783
Other 372,765 289,720
------------ ------------
72,689,149 65,426,503
Less accumulated depreciation and depletion (32,742,060) (27,502,855)
------------ ------------
Net property and equipment 39,947,089 37,923,648
------------ ------------
Investment in First Permian, LLC (Note 15) _ 201,311
Other assets, net of accumulated amortization of $114,791 in 2000 and
$141,428 in 1999 84,442 46,791
------------ ------------
$ 46,456,437 $ 43,264,070
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt (Note 3) $ 803,531 $ 3,665,889
Investment liability in First Permian (Note 15) 366,765 _
Accounts payable and accrued liabilities:
Trade 2,443,773 1,495,376
Affiliate _ 2,702
Income taxes payable (Note 5) 50,000 _
------------ ------------
Total current liabilities 3,664,069 5,163,967
------------ ------------
Long-term debt, excluding current maturities (Note 3) 11,624,000 12,300,000
Stockholders' equity:
Series A preferred stock - par value of $.10 per share
(aggregate liquidation preference of $26) authorized 50,000 shares _ _
Preferred stock - $.60 cumulative convertible preferred stock - par
value of $.10 per share, (aggregate liquidation preference of $10)
authorized 10,000,000 shares, issued and outstanding 974,500 in
2000 and 1999 97,450 97,450
Common stock - par value of $.01 per share, authorized 60,000,000 shares,
issued and outstanding 20,331,858 in 2000 and 20,331,858 in 1999 203,319 203,319
Additional paid-in surplus 34,238,078 34,847,141
Retained earnings (deficit) (3,370,479) (9,347,807)
------------ ------------
Total stockholders' equity 31,168,368 25,800,103
------------ ------------
Commitments and contingencies (Note 16) ------------ ------------
$ 46,456,437 $ 43,264,070
============ ============
See accompanying notes to financial statements.
F-4
PARALLEL PETROLEUM CORPORATION
Statements of Income
Years ended December 31, 2000, 1999 and 1998
2000 1999 1998
Oil and gas revenues $ 17,134,502 $ 8,974,041 $ 9,001,582
------------ ------------- -------------
Costs and expenses:
Lease operating expense 3,099,534 2,353,732 2,434,658
General and administrative 1,191,527 805,934 855,788
Provision for losses on trade receivables _ 85,829 43,228
Depreciation and depletion 5,239,205 5,223,500 5,966,221
Impairment of oil and gas properties _ 1,705,000 14,757,028
------------ ------------- -------------
Total costs and expenses 9,530,266 10,173,995 24,056,923
------------ ------------- -------------
Operating income (loss) 7,604,236 (1,199,954) (15,055,341)
------------ ------------- -------------
Other income (expense), net:
Equity in income (loss) of First Permian, LLC
(Note 15) (500,576) 197,811 -
Interest income 220,280 65,333 2,771
Other income 130,368 26,847 395,683
Interest expense (1,340,360) (1,534,540) (1,381,103)
Other expense (6,620) (5,954) (57,947)
------------ ------------- -------------
Total other expense, net (1,496,908) (1,250,503) (1,040,596)
------------ ------------- -------------
Income (loss) before income taxes 6,107,328 (2,450,457) (16,095,937)
Income tax (expense) benefit (130,000) _ 3,100,027
------------ ------------- -------------
Net income (loss) $ 5,977,328 $ (2,450,457) $ (12,995,910)
============ ============= =============
Cumulative preferred stock dividend $ (609,063) $ (609,063) $ (276,712)
------------ ------------- -------------
Net income (loss) available to common
stockholders $ 5,368,265 $ (3,059,520) $ (13,272,622)
============ ============= =============
Net income (loss) per common share:
Basic $ .26 $ (.16) $ (.73)
======= ======= =======
Diluted $ .25 $ (.16) $ (.73)
======= ======= =======
See accompanying notes to financial statements.
F-5
PARALLEL PETROLEUM CORPORATION
Statements of Stockholders' Equity
Years ended December 31, 2000, 1999 and 1998
Common stock Preferred stock Additional Retained Total
----------------------- ------------------------ paid-in earnings stockholders'
Number of Number of
Shares Amount Shares Amount surplus (deficit) equity
--------- ------ --------- ------ ------- --------- -------
Balance,
January 1, 1998 18,114,358 181,144 - - 22,839,049 6,098,560 29,118,753
Issuance of stock, net - - 974,500 97,450 9,531,477 - 9,628,927
Options exercised 192,500 1,925 - - 164,700 - 166,625
Tax benefits related
to options - - - - 83,457 - 83,457
Net loss - - - - - (12,995,910) (12,995,910)
Dividends ($.60 per
share) - - - - (276,712) - (276,712)
---------- -------- ------- ------ ---------- ----------- -----------
Balance,
December 31, 1998 18,306,858 183,069 974,500 97,450 32,341,971 (6,897,350) 25,725,140
Issuance of stock, net 2,000,000 20,000 - - 3,097,295 - 3,117,295
Options exercised 25,000 250 - - 16,938 - 17,188
Net loss - - - - - (2,450,457) (2,450,457)
Dividends ($.60 per
share) - - - - (609,063) - (609,063)
---------- -------- ------- ------ ---------- ----------- -----------
Balance,
December 31, 1999 20,331,858 $ 203,319 974,500 $ 97,450 $34,847,141 $ (9,347,807) $25,800,103
Net income - - - - - 5,977,328 5,977,328
Dividends ($.60 per
share) - - - - (609,063) - (609,063)
---------- -------- ------- ------ ---------- ----------- -----------
Balance,
December 31, 2000 20,331,858 $ 203,319 974,500 $ 97,450 $34,238,078 $ (3,370,479) $31,168,368
========== ======== ======= ====== ========== =========== ===========
See accompanying notes to financial statements.
F-6
PARALLEL PETROLEUM CORPORATION
Statements of Cash Flows
Years ended December 31, 2000, 1999 and 1998
2000 1999 1998
Cash flows from operating activities:
Net income (loss) $ 5,977,328 $ (2,450,457) $ (12,995,910)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and depletion 5,239,205 5,223,500 5,966,221
Equity loss (income) from investment 500,576 (197,811) -
Deferred income taxes _ (3,100,027)
Loss on disposal of equipment 1,000 _ _
Impairment of oil and gas properties _ 1,705,000 14,757,028
Provision for losses on trade receivables _ 85,829 43,228
Other, net (37,651) 11,728 9,077
Changes in assets and liabilities:
Decrease (increase) in accounts receivable (2,748,422) (42,078) 838,743
Decrease (increase) in prepaid expenses 12,511 21,827 (24,321)
Increase (decrease) in accounts payable and accrued
liabilities 1,773,692 (927,304) 123,421
------------ ------------ --------------
Net cash provided by
operating activities 10,718,239 3,430,234 5,617,460
------------ ------------ --------------
Cash flows from investing activities:
Additions to oil and gas property (8,847,482) (4,896,081) (21,237,837)
Proceeds from disposition of oil and gas property 3,017,618 1,111,525 683,592
Additions to other property and equipment (84,045) _ (62,582)
Proceeds from disposition of other property and equipment _ _ 208,918
Distribution received from investment in First Permian, LLC 67,500 _ _
Investment in First Permian, LLC _ (3,500) _
------------ ------------ --------------
Net cash used in
investing activities (5,846,409) (3,788,056) (20,407,909)
------------ ------------ --------------
Cash flows from financing activities:
Borrowings from bank line of credit 12,427,531 780,000 18,182,279
Payments on bank line of credit (15,965,889) (2,850,000) (12,329,000)
Proceeds from exercise of options and warrants _ 17,188 166,625
Stock offering costs (82,705) (116,072)
Proceeds from common stock issuance _ 3,200,000 _
Proceeds from preferred stock issuance _ _ 9,744,999
Payments of preferred stock dividend (609,063) (609,063) (276,712)
------------ ------------ --------------
Net cash provided by (used in)
financing activities (4,147,421) 455,420 15,372,119
------------ ------------ --------------
Net increase in cash
and cash equivalents 724,409 97,598 581,670
Beginning cash and cash equivalents 1,276,417 1,178,819 597,149
------------ ------------ --------------
Ending cash and cash equivalents $ 2,000,826 $ 1,276,417 $ 1,178,819
============ ============ ==============
See accompanying notes to financial statements.
F-7
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
(1) Summary of Significant Accounting Policies
Nature of Operations
Parallel Petroleum Corporation (the "Company"), a Delaware corporation, is
primarily engaged in, and its only industry segment is, the
acquisition of, and the exploration for, development, production and
sale of, crude oil and natural gas. The Company's business activities
are carried out primarily in Texas. The Company's activities in Texas
are focused in the onshore Gulf Coast area of Jackson, Wharton,
Lavaca, Dewitt and Victoria Counties, Texas, and in the Permian Basin
of West Texas.
Concentration of Credit Risk
Financial instruments that potentially expose the Company to concentrations
of credit risk consist primarily of unsecured accounts receivable from
unaffiliated working interest owners and crude oil and natural gas
purchasers.
Property and Equipment
The Company's oil and gas producing activities are accounted for using the
full cost method of accounting. Accordingly, all costs associated with
acquisition, exploration, and development of oil and gas reserves,
including directly related overhead costs, are capitalized.
Management and service fees received for contractual arrangements, if any,
are treated as reimbursement of costs, offsetting the costs incurred
to provide those services, with any excess of fees over costs credited
to the full cost pool and recognized through lower cost amortization
only as production occurs.
Depletion is provided using the unit-of-production method based upon
estimates of proved oil and gas reserves with oil and gas production
being converted to a common unit of measure based upon their relative
energy content. Investments in unproved properties and major
development projects are not amortized until proved reserves
associated with the projects can be determined or until impairment
occurs. If the results of an assessment indicate that the properties
are impaired, the amount of the impairment is added to the capitalized
costs to be amortized.
In addition, the capitalized costs are subject to a "ceiling test", which
basically limits such costs to the aggregate of the "estimated present
value", discounted at a 10-percent interest rate, of future net
revenues, net of income tax effects, from proved reserves, based on
F-8
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
current economic and operating conditions, plus the lower of cost or
fair market value of unproved properties.
Salesof proved and unproved properties are accounted for as adjustments of
capitalized costs with no gain or loss recognized, unless such
adjustments would significantly alter the relationship between
capitalized costs and proved oil and gas reserves, in which case the
gain or loss is recognized in income. Abandonments of properties are
accounted for as adjustments of capitalized costs with no loss
recognized.
Maintenance and repairs are charged to operations; renewals and betterments
are capitalized to the appropriate property and equipment accounts.
Upon retirement or disposition of assets other than oil and gas properties,
the cost and related accumulated depreciation are removed from the
accounts with the resulting gains or losses, if any, recognized in
income. Depreciation of other property and equipment is computed using
the straight-line method based on their estimated useful lives.
Income Taxes
The Company accounts for federal income taxes using Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS
109"). Under the asset and liability method of FAS 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
Under FAS 109, the effect on previously recorded deferred tax assets
and liabilities resulting from a change in tax rates is recognized in
earnings in the period in which the change is enacted.
Investments
Investments in affiliated companies with a 20% to 50% ownership interest
are accounted for on an equity basis and, accordingly, net income
includes the Company's share of their income or loss.
Revenue Recognition
The Company uses the sales method of accounting for crude oil revenues. To
the extent that crude oil is produced but not sold, the oil in tanks
is not recorded as inventory on the financial statements. The oil in
tanks at December 31, 2000, 1999, and 1998 was not material.
F-9
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
The Company uses the entitlements method of accounting for natural gas
revenues. Under this method, revenues are recognized based on actual
percent of ownership interest from volumes of gas sold to purchasers.
Environmental
The Company is subject to extensive Federal, state and local environmental
laws and regulations. These laws, which are constantly changing,
regulate the discharge of materials into the environment and may
require the Company to remove or mitigate the environmental effects of
the disposal or release of petroleum or chemical substances at various
sites. Environmental expenditures are expensed or capitalized
depending on their future economic benefit. Expenditures that relate
to an existing condition caused by past operations and that have no
future economic benefits are expensed. Liabilities for expenditures of
a noncapital nature are recorded when environmental assessment and/or
remediation is probable, and the costs can be reasonably estimated.
Such liabilities are generally undiscounted unless the timing of cash
payments for the liability or component are fixed or reliably
determinable.
Gas Balancing
Deferred income associated with gas balancing is accounted for on the
entitlements method and represents amounts received for gas sold under
gas balancing arrangements in excess of the Company's interest in
properties covered by such agreements. The Company currently has no
significant amounts outstanding under gas balancing arrangements.
Net Income Per Share
Basicearnings per share excludes any dilutive effects of option, warrants
and convertible securities and is computed by dividing income
available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per share
is computed similar to basic earnings per share, however fully diluted
earnings per share reflects the assumed conversion of all potentially
dilutive securities.
Use of Estimates in the Preparation of Financial Statements
Preparation of the accompanying financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
F-10
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
Cash Management
The Company maintains a cash management system, whereby it maintains
minimum cash balances with any excess cash applied against its bank
line of credit.
Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
demand deposits, money market accounts and certificates of deposit
purchased with an original maturity of three months or less to be cash
equivalents.
Reclassifications
Certain reclassifications have been made to the 1999 and 1998 amounts to
conform to the 2000 presentation.
(2) Fair Value of Financial Instruments
The carrying amount of cash, accounts receivable, accounts payable, and
accrued liabilities approximates fair value because of the short
maturity of these instruments.
The carrying amount of long-term debt approximates fair value because the
Company's current borrowing rate is based on a variable market rate of
interest.
(3) Long-Term Debt
Long-term debt consists of the following at December 31:
2000 1999
Revolving Facility note payable to bank, at bank's base
lending rate plus .25% (8.75% at December 31, 1999) $ _ $ 15,965,889
Revolving Facility note payable to bank, at bank's base
lending rate (9.5% at December 31, 2000) 12,427,531 _
----------- ------------
Less: current maturities 803,531 3,665,889
----------- ------------
$ 11,624,000 $ 12,300,000
=========== ============
On December 27, 1999, the Company restated its note agreement with a bank
("Note"). Pursuant to the restated note agreement, the Company could
borrow $30,000,000 or the "borrowing base" then in effect. The
borrowing base was reduced by a monthly commitment reduction of
$300,000 beginning January 1, 2000. Indebtedness under the Note was to
mature July 1, 2001. The note was secured by substantially all of the
F-11
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
Company's oil and gas properties. Commitment fees of .25% per annum on
the difference between the commitment and the average daily amount
outstanding were due quarterly.
On December 18, 2000, the Company entered into a note agreement with a
bank ("Revolving Facility") to refinance the outstanding indebtedness
with its former lender. Pursuant to the note agreement, the Company
may borrow $30,000,000 or the "borrowing base" then in effect. The
borrowing base in effect at December 31, 2000 was $15,500,000. The
borrowing base is reduced by a monthly commitment reduction of
$323,000 beginning January 1, 2001. The borrowing base and monthly
commitment reduction are subject to redetermination semi-annually, on
or about May 1 and November 1 of each year, beginning May 1, 2001. The
lender may require a redetermination of the Borrowing Base and Monthly
Automatic Borrowing Base Reduction at any time in its sole discretion.
Indebtedness under the Revolving Facility matures October 1, 2003. The
note is secured by substantially all of the Company's oil and gas
properties. Commitment fees of .25% per annum on the difference
between the revolving commitment and the average daily amount are due
quarterly.
The unpaid principal balance for the Revolving Facility bears interest at
the election of the Company at a rate equal to (i) the bank's base
lending rate, or (ii) the applicable adjusted eurodollar rate plus a
margin of 2.75% during the related Eurodollar Interest Period.
Interest is due and payable on the day which the related Eurodollar
Interest Period ends.
The restated note agreement contains various restrictive covenants and
compliance requirements, which include (1) maintenance of certain
financial ratios, (2) limiting the incurrence of additional
indebtedness, and (3) no payment of dividends for common stock.
Scheduled maturities of long-term debt at December 31, 2000 are as follows:
2001 $ 803,531
2002 3,876,000
2003 7,748,000
-----------
$12,427,531
===========
(4) Stock Options, Warrants and Rights
At the election of the board of directors, the Company awards both
incentive stock options and nonqualified stock options to selected key
employees and officers. The options are awarded at an exercise price
based on the closing price of the Company's common stock on the date
of grant, a two-year and four-year vesting schedule and a ten-year
exercise period. As of December 31, 2000, options expire beginning in
the year-ended December 31, 2001 through 2009. There were no options
exercised in the year ended December 31, 2000. Exercise of the
nonqualified stock options resulted in a deferred tax effect of $6,375
and $83,457 for the years ended December 31, 1999 and 1998,
respectively.
F-12
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
The Company applies APB 25 and related interpretations in accounting for
its stock option awards. No compensation expense has been recognized
for its stock option awards. If compensation expense for the stock
option awards had been determined consistent with Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"), the Company's net income (loss) and net
income (loss) per share would have been adjusted to the pro forma
amounts indicated below for the years ended December 31:
2000 1999 1998
Net income (loss) $ 5,832,237 $ (3,107,170) $ (13,452,020)
Basic net income (loss) per share $ .29 $ (.17) $ (.74)
Diluted net income (loss) per share $ .25 $ (.17) $ (.74)
The pro forma net income (loss) and pro forma net income (loss) per share
amounts noted above are not likely to be representative of the pro
forma amounts to be reported in future years. Pro forma adjustments in
future years will include compensation expense associated with options
granted beginning in 1995 plus compensation expense associated with
any options awarded in subsequent years. As a result, such pro forma
compensation expense is likely to be higher than the levels
experienced in 2000, 1999 and 1998.
UnderFAS 123, the fair value of each stock option grant is estimated on
the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions used for grants in 1999 and
1998. No options were granted in 2000.
2000 1999 1998
Risk-free interest rate _ 5.98 5.61
Expected life _ 8 years 7 years
Expected volatility _ .74 .71
F-13
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
A summary of the Company's stock option plans as of December 31, 2000,
1999 and 1998, and changes during the years ended on those dates is
presented below:
For the year ended For the year ended For the year ended
December 31, 2000 December 31, 1999 December 31, 1998
--------------------- -------------------- --------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Shares Price of Shares Price of Shares Price
--------- -------- --------- -------- --------- --------
Stock options:
Outstanding at beginning of year 1,951,750 $ 3.13 1,541,750 $ 3.46 1,364,250 $ 3.06
Options granted _ _ 435,000 1.29 370,000 3.60
Options exercised _ _ (25,000) (.69) (192,500) (.87)
Options canceled _ _ _ _ _ _
--------- ------- --------- ------- --------- ------
Outstanding at end of year 1,951,750 $ 3.13 1,951,750 $ 3.13 1,541,750 $ 3.46
========= ======= ========= ======= ========= ======
Exercisable at end of year 1,689,250 $ 3.26 1,200,500 $ 3.35 816,750 $ 2.97
========= ======= ========= ======= ========= ======
Weighted average fair value
of options granted during
the year $ _ $ 1.40 $ 2.58
======= ======= =======
The following table summarizes information about the Company's stock
options outstanding at December 31, 2000:
Options Outstanding Options Exercisable
-------------------------------------------------------- ------------------------------------
Number Weighted Average Weighted Number Weighted
Range of Outstanding at Remaining Average Exercisable at Average
Exercise Prices December 31, 2000 Contractual Life Exercise Price December 31, 2000 Exercise Price
- --------------- ----------------- ---------------- -------------- ----------------- --------------
$.64 - $.69 150,000 2 years $ .64 150,000 $ .64
$1.03 - $1.82 558,000 3 years $ 1.68 340,500 $ 1.59
$3.19 - $5.50 1,243,750 8 years $ 3.46 1,198,750 $ 4.06
--------- ---------
1,951,750 1,689,250
========= =========
F-14
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
Stock Warrants
In connection with a common stock offering in 1996, an underwriter
received a five-year warrant to purchase 125,000 shares of common
stock at an exercise price of $5.10 per share. At December 31, 2000,
no shares have been purchased in connection with the five-year
warrant.
The Company has outstanding at December 31, 2000 and 1999, 300,000
warrants. Each warrant allows the holder to buy one share of common
stock for $6.00. The warrants were issued as part of the Company's
initial public offering in 1980 and are exercisable for a 30 day
period commencing on the date a registration statement covering
exercise is declared effective. The warrants contain antidilution
provisions and in the event of liquidation, dissolution, or winding up
of the Company, the holders are not entitled to participate in the
assets of the Company.
Stock Rights
On October 5, 2000, the Board of Directors declared a dividend of one
Right for each outstanding share of the Company's common stock, $0.01
par value, distributable to stockholders of record at the close of
business on October 16, 2000. If a public announcement that a person
has acquired 15% or more of the Company's common stock or a tender
offer or exchange offer is made for 15% or more of the common stock,
each Right will entitle the holder to purchase from the Company one
one-thousandth of a share of Series A Preferred Stock, par value $0.10
per share, at an exercise price of $26.00 per one one-thousandth of a
share, subject to adjustment.
Initially, the Rights attach to all common stock certificates representing
shares then outstanding, and no separate rights certificates will be
distributed. The Rights separate from the common stock upon the
earlier of (1) ten business days following a public announcement that
a person or group of affiliated or associated persons has acquired or
obtained the right to acquire, beneficial ownership of fifteen percent
(15%) or more of the outstanding shares of common stock or (2) ten
business days (or such later date as the Board of Directors shall
determine) following the commencement of a tender or exchange offer
that would result in a person or group beneficially owning fifteen
percent (15%) or more of such outstanding shares of common stock. The
date the Rights separate is referred to as the "distribution date".
Undercertain circumstances the rights entitle the holders to buy the
Company's stock at a 50% discount. In the event that (1) the Company
is the surviving corporation in a merger or other business combination
with an entity that owns 15% or more of the Company's outstanding
F-15
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
stock; (2) any person shall acquire beneficial ownership of 15% of the
Company's outstanding stock; or (3) there is any type of
recapitalization of the Company that results in an increase by more
than 1% the proportionate share of equity securities of the Company
owned by a person who owns 15% or more of the Company's outstanding
stock, each right holder will have the option to buy for the purchase
price common stock of the Company having a value equal to two times
the purchase price of the right.
Under certain circumstances the rights entitle the holders to buy shares of
the acquiror's common stock at a 50% discount. In the event that, at
any time after a person has acquired 15% or more of the Company's
common stock, (1) the Company enters into a merger or other business
combination transaction in which the Company is not the surviving
corporation; (2) the Company is the surviving corporation in a
transaction in which all or part of the common stock is exchanged for
cash, property or securities of any other person; or (3) more than 50%
of the assets, cash flow or earning power of the Company is sold, each
right holder will have the option to buy for the purchase price stock
of the acquiring company having a value equal to two times the
purchase price of the right.
The Rights are not exercisable until the distribution date and will expire
at the close of business on October 5, 2010, unless earlier redeemed
by the Company for $0.001 per right.
(5) Income Taxes
Federal income tax expense (benefit) differs from the amount computed at
the Federal statutory rate as follows:
Year ended
December 31,
--------------------------------------------
2000 1999 1998
---- ---- ----
Income tax expense (benefit) at statutory
rate $ 2,076,492 $ (833,156) $ (5,472,619)
Change in valuation allowance for deferred
tax assets (2,185,526) 1,718,284 2,530,196
Adjustment to deferred tax liability for
changes in estimates 669,533 (649,920) _
Statutory depletion (445,941) (237,047) (171,803)
Nondeductible expenses and other 15,442 1,839 14,199
----------- ----------- ------------
Income tax expense (benefit) $ 130,000 $ _ $ (3,100,027)
=========== =========== ============
Income tax expense is deferred, with the exception of $130,000 in 2000
related to alternative minimum tax ("AMT").
F-16
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31 are as follows:
2000 1999
---- ----
Noncurrent
----------
Deferred tax assets:
Net operating loss carryforwards $ 4,840,778 $ 7,217,369
Statutory depletion carryforwards 1,635,931 1,190,146
Alternative minimum tax credit carryforward 125,523 _
Equity loss in First Permian, LLC 124,700 _
Allowance for accounts receivable 17,386 _
----------- -----------
Total deferred tax assets 6,744,318 8,407,515
Less valuation allowance (2,062,954) (4,248,480)
----------- -----------
Net deferred tax assets 4,681,364 4,159,035
----------- -----------
Deferred tax liabilities:
Equity income in First Permian, LLC _ 187,568
Property and equipment, principally due to
differences in basis, expensing of intangible
drilling costs for tax purposes and depletion 4,681,364 3,971,467
----------- -----------
Total deferred tax liabilities 4,681,364 4,159,035
----------- -----------
Net noncurrent deferred income tax
liability $ _ $ _
=========== ===========
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax assets will not be realized. Due to
the historical volatility in crude oil and gas prices, the uncertainty
of future commodity prices, and the Company's history of generating
net losses, management has been unable to conclude that it is more
likely than not that the Company will be able to utilize all the
available carryforwards prior to their ultimate expiration. As such,
the Company has established a valuation allowance against deferred tax
assets which is $2,062,954 as of December 31, 2000.
F-17
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
As of December 31, 2000, the Company had investment tax credit and net
operating loss carryforwards for regular tax purposes available to
reduce future taxable income and tax liability, respectively. These
carryforwards expire as follows:
Alternative
minimum tax
Net operating Investment net operating
loss tax credit loss
------------- ---------- -------------
2001 $ _ $ 24,000 $ _
2009 329,000 _ _
2018 8,658,000 _ 6,748,000
2019 5,250,000 _ 4,883,000
------------ -------- ------------
$ 14,237,000 $ 24,000 $ 11,631,000
============ ======== ============
As of December 31, 2000, the Company had approximately $127,000 of
minimum tax credit available indefinitely.
(6) Major Customers
The following purchasers accounted for 10% or more of the Company's oil
and gas sales for the years ended December 31:
2000 1999 1998
---- ---- ----
Purchaser A _ 5% 11%
Purchaser B _ 14% 24%
Purchaser C 22% 27% 22%
Purchaser D _ 26% 18%
Purchaser E 16% _ _
(7) Employee Pension Plan
Effective September 1, 1988, the Company established a simplified employee
pension plan covering all salaried employees of the Company. The
employees voluntarily contribute a portion of their eligible
compensation, not to exceed $7,000, adjusted for inflation beginning
in 1988, to the plan. The Company's contribution, including the
employees contribution, cannot exceed the lesser of $30,000 or 15% of
compensation. During 2000, 1999 and 1998, the Company contributed an
aggregate of $36,077, $14,338 and $11,632, respectively, of which
$9,750, $3,750 and $3,388, respectively, was allocated to a Director
of the Company. The Company has no obligation to make contributions to
the plan.
F-18
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
(8) Statements of Cash Flows
During 2000, management of the Company made the decision to not sell its
assets held for sale and $2,127,734 was transferred from assets held
for sale to oil and gas properties and in 1999 and 1998, $2,127,734
and $0 were transferred from oil and gas properties to assets held for
sale, respectively. These transfers are considered non-cash
transactions.
No Federal taxes were paid in 2000, 1999 and 1998, as a result of net
operating losses or loss carryforwards.
The Company made interest payments of $1,340,002, $1,534,023 and
$1,349,786 in 2000, 1999 and 1998, respectively.
At December 31, 2000 and 1999, there were $711,873 and $1,489,870,
respectively, of property additions accrued in accounts payable.
(9) Equity Transactions
Common Stock
On November 19, 1999, the Company completed a private placement of
2,000,000 shares of its common stock for a price of $1.60 per share.
Proceeds received, net of related expenses, were approximately
$3,117,000 and were used to pay down debt, fund capital projects and
pay for operations.
Preferred Stock
On April 8, 1998, the Company completed a private placement of 600,000
shares of its $.60 Cumulative Convertible Preferred Stock, $.10 par
value per share ("Old Preferred Stock"). Cumulative dividends of $.60
per share were payable semi-annually on June 15 and December 15 of
each year. Each share of Old Preferred Stock was convertible at the
option of the holder, into 1.5625 shares of common stock at an initial
conversion price of $6.40 per share, subject to adjustment in certain
events. Proceeds received, net of related expenses, were approximately
$5,919,000. The net proceeds from the sale of Old Preferred Stock were
used to reduce the indebtedness outstanding under the Company's loan
agreement.
On October 16, 1998, the Company exchanged 600,000 shares of its $.60
Cumulative Convertible Preferred Stock ("Old Preferred Stock"), issued
in a private placement transaction dated April 8, 1998, for 600,000
shares of its 6% Convertible Preferred Stock, $0.10 par value per
share ("Preferred Stock"). Each share of Preferred Stock may be
converted, at the option of the holder, into 2.8571 shares of common
stock at an initial conversion price of $3.50 per share, subject to
adjustment in certain events. The Company may redeem the Preferred
Stock, in whole or part, after October 20, 1999, for $10 per share
plus accrued dividends.
F-19
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
On October 30, 1998, the Company completed a private placement of 374,500
shares of its 6% Convertible Preferred Stock, $0.10 par value per
share ("Preferred Stock"). Each share of Preferred Stock may be
converted, at the option of the holder, into 2.8571 shares of common
stock at an initial conversion price of $3.50 per share, subject to
adjustment in certain events. The Company may redeem the Preferred
Stock, in whole or part, after October 20, 1999, for $10 per share
plus accrued dividends. Proceeds received, net of expenses, were
approximately $3,709,000. The net proceeds from the sale of the
Preferred Stock were used to reduce the indebtedness under the
Company's loan agreement.
Cumulative dividends of $0.60 are payable semi-annually on June 15 and
December 15 of each year, commencing on December 15, 1998.
On October 5, 2000, the Company authorized 50,000 shares of $0.10 par
Series A Preferred Stock. These shares will be issued upon the
exercise of the Company's Preferred Stock Purchase Rights. Subject to
the rights of the holders of any series of preferred stock ranking
prior and superior to the Series A preferred stock with respect to
dividends, the holders of shares of the Series A Preferred Stock shall
be entitled to receive, when, and if declared by the Board of
Directors, quarterly dividends payable in cash on the first day of
July, October, January and April, in each year beginning in 2001,
commencing on the first quarterly dividend payment Date after the
first issuance of a fraction of a share of Series A Preferred Stock.
Each share of Series A Preferred Stock shall entitle the holder to one
one-thousandth of a vote on all matters submitted to a vote of the
stockholders of the Company.
(10) Related Party Transactions
Certain Directors and their companies own interests in certain wells
operated by the Company. During 2000 and 1999, the Company charged
$305,304 and $114,000, respectively, for lease operating expenses and
drilling costs and paid $160,704 and $68,000, respectively, in oil and
gas revenues to these related parties related to these wells.
An entity in which the Chief Executive Officer and Chairman of the Board
is the owner acted as the Company's agent in performing the routine
day to day operations of certain wells. In 2000 and 1999, the Company
was billed $169,906 and $34,000, respectively, for the Company's pro
rata share of lease operating and drilling expenses and received
$274,065 and $197,000 in 2000 and 1999, respectively, in oil and gas
revenues related to these wells.
During 2000 and 1999, the Company received from First Permian, LLC net
reimbursement of general and administrative expenses of $115,471 and
$78,720, respectively, with the reimbursement netted against the costs
incurred to provide those services.
During 2000, the Company received management fees of $75,000 from First
Permian, LLC. No such fees were received in 1999.
F-20
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
During 2000, the Company received $67,500 from First Permian, LLC for tax
withholdings associated with the Company's interest in First Permian.
No such distribution was received in 1999.
An entity in which a certain Director of the Company is the sole
shareholder purchased a total of 110,000 shares of preferred stock of
the Company during 1998. In addition, during 1998, a Foundation, where
this same Director is the chairman of the board of directors of the
Foundation, and a Trust, where this same Director is trustee,
purchased a total of 55,000 shares each of preferred stock of the
Company. All of the shares of preferred stock of the Company were
purchased at a price of $10 per share on the same terms as all other
unaffiliated purchasers. (See Note 9) Total proceeds received of
$2,200,000 were used to reduce the Company's bank debt.
(11) Oil and Gas Expenditures
The following table reflects capitalized costs related to the oil and gas
properties as of December 31:
2000 1999
---- ----
Proved properties $ 57,915,944 $ 52,795,570
Unproved properties 14,400,440 12,341,213
------------ ------------
72,316,384 65,136,783
Accumulated depletion (32,495,930) (27,296,752)
------------ ------------
$ 39,820,454 $ 37,840,031
============ ============
Certain directly identifiable internal costs of property acquisition,
exploration and development activities are capitalized. Such costs
capitalized in 2000, 1999 and 1998 totaled $624,007, $508,883 and
$527,500, respectively.
Depletion per equivalent unit of production (BOE) was $8.18, $8.30 and
$8.07 for 2000, 1999 and 1998, respectively.
The following table reflects costs incurred in oil and gas property
acquisition, exploration and development activities for each of the
years in the three year period ended December 31:
2000 1999 1998
---- ---- ----
Transfers (to)/from assets held for sale $ 2,127,734 $ (2,127,734) $ -
Proved property acquisition costs 23,291 41,768 88,747
Unproved property acquisition costs 3,371,898 1,978,964 6,034,025
Exploration 2,163,124 1,855,948 8,555,741
Development 1,087,424 638,845 3,873,168
----------- ------------ ------------
$ 8,773,471 $ 2,387,791 $ 18,551,681
=========== ============ ============
F-21
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
(12) Impairment of Oil and Gas Properties
As a result of a ceiling test calculation, which limits capitalized
costs, net of related deferred tax liability, to the aggregate of the
estimated present value, discounted at 10-percent of future net
revenues from proved reserves plus lower of cost or fair market value
of unproved properties, the Company recognized an impairment of
approximately $1,705,000 related to its oil and gas properties during
1999. There was no impairment recorded for 2000.
(13) Earnings per Share
In accordance with the provisions of FAS 128, the following table
provides a reconciliation between basic and diluted earnings per share
for the year ended December 31:
2000 1999 1998
---- ---- ----
Basic EPS Computation:
Numerator -
Net income (loss) $ 5,977,328 $ (2,450,457) $ (12,995,910)
Preferred stock dividend (609,063) (609,063) (276,712)
------------ ------------ -------------
Net income (loss) available to common
stockholders $ 5,368,265 $ (3,059,520) $ (13,272,622)
============ ============ =============
Denominator -
Weighted average common shares outstanding 20,331,858 18,549,214 18,300,998
=========== ============ =============
Basic net earnings (loss) per share $ .26 $ (.16) $ (.73)
======= ======= ========
Diluted EPS Computation:
Numerator -
Net income (loss) $ 5,977,328 $ (2,450,457) $ (12,995,910)
Preferred stock dividend _ (609,063 (276,712)
----------- ------------ -------------
Net income (loss) available to common
stockholders $ 5,977,328 $ (3,059,520) $ (13,272,622)
=========== ============ =============
Denominator -
Weighted average common shares for basic
earnings (loss) per share 20,331,858 18,549,214 18,300,998
Effect of dilutive securities:
Employee stock options 348,787 _ _
Warrants 603 _ _
Preferred stock 2,784,244 _ _
----------- ------------ -------------
Weighted average common shares for diluted
earnings (loss) per share assuming conversions 23,465,492 18,549,214 18,300,998
=========== ============ =============
Diluted net earnings (loss) per share $ .25 $ (.16) $ (.73)
======= ======= ========
F-22
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
Employee stock options to purchase shares of common stock and convertible
preferred stock were outstanding during 1999 and 1998 but were not
included in the computation of diluted net earnings (loss) per share
because either (i) the employee stock options' exercise price was
greater than the average market price of the common stock of the
Company, (ii) the effect of the assumed conversion of the Company's
preferred stock to common stock would be antidilutive, or (iii) the
Company had a net loss from continuing operations and, therefore, the
effect would be antidilutive.
(14) Recently Announced Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("FAS No. 133"), which establishes
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities.
FAS No. 133 requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position
and measure those instruments at fair value. It establishes conditions
under which a derivative may be designated as a hedge and establishes
standards for reporting changes in the fair value of a derivative. The
Company adopted FAS No. 133, as amended by FAS No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities, an
amendment of FASB Statement No. 133, effective January 1, 2001. After
assessing its contracts, the Company is not aware of any freestanding
or embedded derivative instruments that would need to be accounted for
in accordance with FAS No. 133.
(15) Equity Investment
On June 30, 1999, the Company acquired a 22.5% interest for $2,250 in
First Permian, LLC ("First Permian"), a Delaware limited liability
company. On December 31, 2000, the Company's interest in First Permian
was 30.675%.
On June 25, 1999, First Permian and Fina Oil and Chemical Company
("Fina") entered into a Merger Agreement in which First Permian
purchased oil and gas properties located in the Permian Basin of west
Texas for $96,125,000. Under the Merger Agreement, the oil and gas
properties were conveyed to Nash Oil Company, LLC ("Nash"), a newly
formed Delaware Limited Liability Company and a wholly-owned
subsidiary of Fina. Effective June 30, 1999, First Permian and Nash
were merged with the surviving limited liability company being First
Permian, LLC. The purchase was financed primarily with a bank credit
facility for $74,000,000, subordinated notes totaling $16,000,000 and
sale of minerals for $5,000,000. The credit facility is collateralized
by substantially all of First Permian's oil and gas properties.
F-23
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
At December 31, 2000, the Company has recorded a loss of $500,576 in its
investment of First Permian, LLC to the extent that the Company had
guaranteed $10,000,000 of the debt of First Permian. Effective October
25, 2000, the Company was released from its guarantee and has
discontinued the equity method of accounting for it's share of losses
in First Permian from that date. When First Permian begins to generate
net income, the Company will resume application of the equity method
of accounting only after the +Company's share in First Permian's net
income equals or exceeds the share of net losses not recognized during
the period the equity method was suspended. For 1999, the Company
recorded equity in income of $197,811 of First Permian.
Commodity Hedges
First Permian utilizes various swap contracts and other financial
instruments to hedge the effect of price changes on future oil
production.
The following table sets forth First Permian's outstanding oil hedge
contracts at December 31, 2000:
Type Volume/Month Term Price Commodity
---- ------------ ---- ----- ---------
Swap 91,000 barrels 1/1/01 - 6/30/01 $17.70 WTI NYMEX
Collar 40,000 barrels 7/01 - 12/02 $18.00 - $28.75 WTI NYMEX
Collar 40,000 barrels 7/01 - 12/02 $19.00 - $24.80 WTI NYMEX
During 2000 and at December 31, 1999, First Permian evaluated its oil hedge
contracts and determined that a portion of oil subject to the contract
did not qualify for hedge accounting. As a result, First Permian
marked-to-market the contract for $441,180 and $576,000, respectively,
recognizing a loss in other income. As of December 31, 2000, First
Permian's oil hedge contracts qualified for hedge accounting.
Interest Rate Swap Agreements
Theseinstruments are used to reduce the potential impact of increases in
interest rates on floating-rate long-term debt. At December 31, 2000
and 1999, First Permian was party to one interest rate swap agreement
to provide the Company with a fixed interest rate of 6.52% on
$40,000,000 of its revolving line of credit through July 1, 2002.
FAS 133
Pursuant to FAS 133, First Permian recorded a net transition adjustment
loss of $6,105,108 in accumulated other comprehensive income on
January 1, 2001.
F-24
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
The following summarizes selected audited financial information for First
Permian, LLC as of December 31:
Assets 2000 1999
------ ---- ----
Current assets:
Cash and cash equivalents $ 3,836,840 $ 4,476,669
Accounts receivable 6,337,595 4,653,020
Prepaids 61,218 25,311
Assets held for sale _ 2,300,000
----------- -----------
Total current assets 10,235,653 11,455,000
----------- -----------
Property and equipment, at cost:
Oil and gas properties, full cost method 87,527,750 71,967,245
Other property 1,086,427 252,453
----------- -----------
88,614,177 72,219,698
Less accumulated depletion and depreciation (8,251,530) (2,974,973)
----------- -----------
Net property and equipment 80,362,647 69,244,725
Other non-current assets, net of accumulated
amortization of $986,350 in 2000 and $223,800
in 1999 1,664,528 1,064,113
----------- -----------
$92,262,828 $81,763,838
=========== ===========
Liabilities and Members' Equity
--------------------------------
Current liabilities:
Current maturities of long-term debt $ _ $ 3,000,000
Accounts payable and accrued liabilities-trade 7,042,264 5,848,150
Liability for commodity swap 58,450 576,000
----------- -----------
Total current liabilities 7,100,714 9,424,150
----------- -----------
Long-term debt, net of current maturities 67,400,000 63,950,000
Notes payable to related parties _ 7,500,000
Redeemable preferred units 14,224,946 _
Members' equity 3,537,168 889,688
----------- -----------
$92,262,828 $81,763,838
=========== ===========
Revenues $24,713,111 $14,627,611
Cost and expenses 16,870,023 8,825,266
----------- -----------
Operating income 7,843,088 5,802,345
Other expense, net 7,220,136 (4,923,183)
----------- -----------
Net income before extraordinary item $ 622,952 $ 879,162
Extraordinary loss from debt restructure (960,825) _
----------- -----------
Net income (loss) $ (337,873) $ 879,162
=========== ===========
Redeemable preferred unit dividends (724,946) _
----------- -----------
Net income (loss) available to common members $(1,062,819) $ 879,162
=========== ===========
F-25
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
The following summarizes the Company's 30.675% interest in First Permian
LLC's unaudited oil and gas reserve data (in thousands):
Changes in Reserve Balances
Total Proved Proved Developed
---------------- ------------------
BBL MCF BBL MCF
--- --- --- ---
Reserves as of June 30, 1999 (date of
inception) _ _ _ _
Purchase of reserves in place 10,521 9,360 6,249 8,934
Sales of reserves in place (1,162) (533) (1,162) (533)
Revisions of previous estimates 1,115 (180) 1,110 (180)
Production (248) (457) (248) (457)
------ ------ ------ ------
Reserves as of December 31, 1999 10,226 8,190 5,949 7,764
Purchase of reserves in place 1,266 246 1,266 246
Sales of reserves in place (3) (2,014) (3) (2,014)
Revisions of previous estimates 3,639 (4,253) 680 (4,395)
Production (386) (350) (386) (350)
------ ------ ------ ------
Reserves as of December 31, 2000 14,742 1,819 7,506 1,251
====== ====== ====== ======
Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves
December 31,
---------------------------
2000 1999
---- ----
Future cash flows $ 374,869 $ 238,996
Future costs:
Production (126,082) (71,878)
Development (28,728) (13,001)
---------- ---------
Future net cash flows 220,059 154,117
10% annual discount for estimated timing of cash flows (128,010) (80,448)
---------- ---------
Standardized measure of discounted net cash flows $ 92,049 $ 73,669
========== =========
F-26
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
Changes in Standardized Measure of Discounted Future Net Cash Flows From
Proved Reserves
For the year ended December 31, 2000 and for the
period June 30, 1999 (date of inception) through December 31, 1999
2000 1999
---- ----
Increase (decrease):
Sales of minerals in place $ (1,380) $ (6,612)
Accretion of discount 7,367 _
Net change in sales prices net of production costs 24,997 _
Purchase of minerals in place 9,755 51,125
Changes in estimated future development costs (6,514) (337)
Revisions of prices and costs (11,603) 32,266
Sales, net of production costs (4,242) (2,773)
-------- --------
Net increase 18,380 73,669
Standardized measure of discounted net cash flows:
Beginning of year 73,669 _
-------- --------
End of year $ 92,049 $ 73,669
======== ========
(16) Commitments and Contingencies
At December 31, 2000, the Company is party to two legal actions arising
incidental to its business. It is managements opinion that the
ultimate outcome of these legal actions will not have a material
adverse effect on the Company's operations or financial position.
(17) Supplemental Oil and Gas Reserve Data (Unaudited)
The estimates of the Company's proved oil and gas reserves, which are all
located in the United States, are prepared by independent petroleum
engineers. Reserves were estimated in accordance with guidelines
established by the U.S. Securities and Exchange Commission and the
Financial Accounting Standards Board, which require that reserve
estimates be prepared under existing economic and operating conditions
with no provision for price and cost escalations except by contractual
arrangements. The Company has presented the reserve estimates
utilizing an oil price of $25.09, $24.75 and $10.50 per Bbl and a gas
price of $10.18, $2.20 and $2.00 per Mcf as of December 31, 2000, 1999
and 1998, respectively. Information for oil is presented in barrels
(BBL) and for gas in thousands of cubic feet (MCF).
F-27
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
A summary of changes in reserve balances is presented below (in thousands):
Total Proved Proved Developed
----------------- --------------------
BBL MCF BBL MCF
--- --- --- ---
Reserves as of January 1, 1998 1,894 30,548 837 20,328
Extensions and discoveries 281 7,554 210 5,634
Revisions of previous estimates (265) (8,806) (9) (3,614)
Production (186) (3,275) (185) (3,276)
----- ------ ---- ------
Reserves as of December 31, 1998 1,724 26,021 853 19,072
Sales of reserves in place _ (241) _ (241)
Extensions and discoveries 28 2,167 28 1,910
Revisions of previous estimates (580) (7,903) (128) (5,296)
Production (164) (2,760) (164) (2,760)
----- ------ ---- ------
Reserves as of December 31, 1999 1,008 17,284 589 12,685
Sales of reserves in place _ (383) _ (383)
Extensions and discoveries 37 1,143 37 1,143
Revisions of previous estimates 94 464 111 953
Production (165) (2,822) (165) (2,822)
----- ------ ---- ------
Reserves as of December 31, 2000 974 15,686 572 11,576
===== ====== ==== ======
The following is a standardized measure of the discounted net future cash
flows and changes applicable to proved oil and gas reserves required
by SFAS No. 69. The future cash flows are based on estimated oil and
gas reserves utilizing prices and costs in effect as of year end,
discounted at 10% per year and assuming continuation of existing
economic conditions.
During 2000, the average sales price received by the Company for its oil
was approximately $28.88 per Bbl, as compared to $17.32 in 1999, while
the average sales price for the Company's gas was approximately $4.38
per Mcf in 2000, as compared to $2.27 per Mcf in 1999. At March 15,
2001, the price received by the Company for its oil production was
approximately $25.25 per Bbl, while the price received by the Company,
at that same date, for its gas production was approximately $5.00 per
Mcf.
The standardized measure of discounted future net cash flows, in
management's opinion, should be examined with caution. The basis for
this table are the reserve studies prepared by independent petroleum
consultants, which contain imprecise estimates of quantities and rates
of production of reserves. Revisions of previous year estimates can
have a significant impact on these results. Also, exploration costs in
one year may lead to significant discoveries in later years and may
significantly change previous estimates of proved reserves and their
valuation. Therefore, the standardized measure of discounted future
net cash flow is not necessarily a "best estimate" of the fair value
of the Company's proved oil and gas properties.
F-28
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves
(In Thousands)
December 31,
--------------------------------------
2000 1999 1998
--------- -------- --------
Future cash flows $ 184,045 $ 62,967 $ 70,141
Future costs:
Production (35,550) (18,632) (20,706)
Development (4,228) (4,797) (5,740)
--------- -------- --------
Future net cash flows before income taxes 144,267 39,538 43,695
Future income taxes (24,321) _ _
--------- -------- --------
Future net cash flows 119,946 39,538 43,695
10% annual discount for estimated timing of
cash flows (38,658) (14,039) (16,872)
--------- -------- --------
Standardized measure of discounted net cash flows $ 81,288 $ 25,499 $ 26,823
========= ======== ========
Changes in Standardized Measure of
Discounted Future Net Cash Flows From Proved Reserves
(In Thousands)
December 31,
--------------------------------------
2000 1999 1998
--------- -------- --------
Increase (decrease):
Sales of minerals in place $ (136) $ (238) $ -
Extensions and discoveries and improved recovery,
net of future production and development costs 8,398 3,067 8,916
Accretion of discount 2,550 2,682 4,642
Net change in sales prices net of production costs 66,306 11,882 (16,036)
Changes in estimated future development costs 204 789 664
Revisions of quantity estimates 4,496 (13,371) (8,325)
Net change in income taxes (9,662) _ 365
Sales, net of production costs (14,035) (6,620) (6,588)
Changes of production rates (timing) and other (2,332) 485 (2,870)
-------- -------- --------
Net increase (decrease) 55,789 (1,324) (19,232)
Standardized measure of discounted future net cash
flows:
Beginning of year 25,499 26,823 46,055
-------- -------- --------
End of year $ 81,288 $ 25,499 $ 26,823
======== ======== ========
29
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
(18) Selected Quarterly Financial Results (Unaudited)
Quarter
-------------------------------------------------
First Second Third Fourth
----- ------ ----- ------
(in thousands, except per share data)
2000:
Oil and gas revenues $ 2,775 $ 3,197 $ 4,163 $ 7,000
Total costs and expense 1,875 2,098 2,220 3,337
Net income 194 695 1,699 3,389
Net income per common share $ .001 $ .027 $ .076 $ .16
Net income per common share
- assuming dilution $ .001 $ .027 $ .072 $ .14
1999:
Oil and gas revenues $ 1,963 $ 1,992 $ 2,291 $ 2,728
Total costs and expenses 1,621 1,729 2,239 4,585
Net income (loss) (10) (94) (150) (2,196)
Net income (loss) per common
share $ (.010) $ (.013) $ (.016) $ (.18)
Net income (loss) per common
share-assuming dilution $ (.010) $ (.013) $ (.016) $ (.16)
S-1
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
PARALLEL PETROLEUM CORPORATION
March 30, 2001 By: /s/ Thomas R. Cambridge
---------------------------------
Thomas R. Cambridge, Chief
Executive Officer and
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Thomas R. Cambridge Chief Executive Officer March 30, 2001
- ----------------------- and Chairman of the
Thomas R. Cambridge Board of Directors
(Principal Executive
Officer)
/s/ Larry C. Oldham
- ----------------------- President and Treasurer March 30, 2001
Larry C. Oldham (Principal Financial and
Accounting Officer)
/s/ Dewayne E. Chitwood
- ----------------------- Director March 30, 2001
Dewayne E. Chitwood
s/ Ernest R. Duke
- ----------------------- Director March 30, 2001
Ernest R. Duke
/s/ Charles R. Pannill
- ----------------------- Director March 30, 2001
Charles R. Pannill
E-1
Exhibit
No. Description of Exhibit
3.1 Certificate of Incorporation of Registrant (Incorporated by
reference to Exhibit 3.1 to Form 10-K of the Registrant for
the fiscal year ended December 31, 1998.)
3.2 Bylaws of Registrant (Incorporated by reference to Exhibit 3
to the Registrant's Form 8-K, dated October 9, 2000, as
filed with the Securities and Exchange Commission on October
10, 2000.)
4.1 Certificate of Designations, Preferences and Rights of
Serial Preferred Stock - 6% Convertible Preferred Stock
(Incorporated by reference to Exhibit 4.1 to Form 10-Q of
the Registrant for the fiscal quarter ended September 30,
1998.)
*4.2 Certificate of Designation, Preferences and Rights of Series
A Preferred Stock.
*4.3 Rights Agreement, dated as of October 5, 2000, between the
Registrant and Computershare Trust Company, Inc., as Rights
Agent.
Executive Compensation Plans and Arrangements (Exhibit No.'s
10.1 through 10.7):
10.1 1983 Incentive Stock Option Plan (Incorporated by reference
to Exhibit 10.2 to Form S-l of the Registrant (File No.
2-92397) as filed with the Securities and Exchange
Commission on July 26, 1984, as amended by Amendments No. 1
and 2 on October 5, 1984, and October 25, 1984,
respectively.)
10.2 1992 Stock Option Plan (Incorporated by reference to Exhibit
28.1 to Form S-8 of the Registrant (File No. 33-57348) as
filed with the Securities and Exchange Commission on January
25, 1993.)
10.3 Stock Option Agreement between the Registrant and Thomas R.
Cambridge dated December 11, 1991 (Incorporated by reference
to Exhibit 10.4 of Form 10-K of the Registrant for the
fiscal year ended December 31, 1992.)
10.4 Stock Option Agreement between the Registrant and Thomas R.
Cambridge dated October 18, 1993 (Incorporated by reference
to Exhibit 10.4(e) of Form 10-K of the Registrant for the
fiscal year ended December 31, 1993.)
E-2
Exhibit
No. Description of Exhibit
10.5 Merrill Lynch, Pierce, Fenner & Smith Incorporated Prototype
Simplified Employee Pension Plan (Incorporated by reference
to Exhibit 10.6 of the Registrant's Form 10-K for the fiscal
year ended December 31, 1995.)
10.6 Non-Employee Directors Stock Option Plan (Incorporated by
reference to Exhibit 10.6 of the Registrant's Form 10-K
Report for the fiscal year ended December 31, 1997).
10.7 1998 Stock Option Plan (Incorporated by reference to Exhibit
10.7 of Form 10-K of the Registrant for the fiscal year
ended December 31, 1998.)
10.8 Restated Loan Agreement dated December 27, 1999 between the
Registrant and Bank One, Texas, N.A. (Incorporated by
reference to Exhibit 10.8 of Form 10-K of the Registrant for
the fiscal year ended December 31, 1999.)
*10.9 Loan Agreement, dated December 18, 2000, between the
Registrant and Bank United.
10.10 Letter agreement, dated March 24, 1999, between the
Registrant and Bank One, Texas, N.A. (Incorporated by
reference to Exhibit 10.9 of Form 10-K of the Registrant for
the fiscal year ended December 31, 1998.)
10.11 Certificate of Formation of First Permian, L.L.C.
(Incorporated by reference to Exhibit 10.1 of the
Registrant's Form 8-K report dated June 30, 1999.)
10.12 Limited Liability Company Agreement of First Permian, L.L.C.
(Incorporated by reference to Exhibit 10.2 of the
Registrant's Form 8-K report dated June 30, 1999.)
10.13 Merger Agreement, dated June 25, 1999. (Incorporated by
reference to Exhibit 10.3 of the Registrant's Form 8-K
report dated June 30, 1999.)
10.14 Agreement and Plan of Merger of First Permian, L.L.C. and
Nash Oil Company, L.L.C. (Incorporated by reference to
Exhibit 10.4 of the Registrant's Form 8-K report dated June
30, 1999.)
10.15 Certificate of Merger of First Permian, L.L.C. and Nash Oil
Company, L.L.C. (Incorporated by reference to Exhibit 10.5
of the Registrant's Form 8-K report dated June 30, 1999.)
E-3
Exhibit
No. Description of Exhibit
*10.16 Amended and Restated Limited Liability Company Agreement of
First Permian, L.L.C. dated as of May 31, 2000.
10.17 Credit Agreement, dated June 30, 1999 by and among First
Permian, L.L.C., Parallel Petroleum Corporation, Baytech,
Inc., and Bank One, Texas, N.A. (Incorporated by reference
to Exhibit 10.6 of the Registrant's Form 8-K report dated
June 30, 1999.)
10.18 Limited Guaranty, dated June 30, 1999, by and among First
Permian, L.L.C., Parallel Petroleum Corporation, and Bank
One, Texas, N.A. (Incorporated by reference to Exhibit 10.7
of the Registrant's Form 8-K report dated June 30, 1999.)
10.19 Intercreditor Agreement, dated as of June 30, 1999, among
First Permian, L.L.C., Bank One, Texas, N.A., Tejon
Exploration Company, and Mansefeldt Investment Corporation.
(Incorporated by reference to Exhibit 10.8 of the
Registrant's Form 8-K report dated June 30, 1999).
10.20 Subordinated Promissory Note, dated June 30, 1999, in the
original principal amount of $8.0 million made by First
Permian, L.L.C. payable to the order of Tejon Exploration
Company (Incorporated by reference to Exhibit 10.9 of the
Registrant's Form 8-K report dated June 30, 1999.)
10.21 Subordinated Promissory Note, dated June 30, 1999, in the
original principal amount of $8.0 million made by First
Permian, L.L.C. payable to the order of Mansefeldt
Investment Corporation (Incorporated by reference to Exhibit
10.9 of the Registrant's Form 8-K report dated June 30,
1999.)
*10.22 Second Restated Credit Agreement, dated October 25, 2000,
among First Permian, L.L.C., Bank One, Texas, N.A., and Bank
One Capital Markets, Inc.
*23.1 Consent of Independent Auditors
*23.2 Consent of Independent Petroleum Engineers
*23.3 Consent of Independent Petroleum Engineers
- ----------------------
* Filed herewith.
1
Exhibit 4.2
CERTIFICATE OF
DESIGNATION, PREFERENCES AND RIGHTS OF
SERIES A PREFERRED STOCK
of
PARALLEL PETROLEUM CORPORATION
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
Pursuant to Section 151 of the General Corporation Law of the State of
Delaware, the undersigned authorized officer of Parallel Petroleum Corporation
(the "Corporation"), on behalf of the Corporation, DOES HEREBY CERTIFY
That pursuant to the authority conferred upon the Board of Directors (the
"Board") by the Certificate of Incorporation of the Corporation, as amended, and
the General Corporation Law of the State of Delaware, the Board of Directors on
October 5, 2000, adopted the following resolutions creating a series of fifty
thousand shares of Preferred Stock, par value $0. 1 0 per share, designated as
Series A Preferred Stock:
RESOLVED, that, pursuant to the authority vested in the Board in accordance
with the provisions of its Certificate of Incorporation, as amended, the Board
and the General Corporation Law of the State of Delaware, does hereby create,
authorize and provide for the issuance upon the exercise of the Corporation's
Preferred Stock Purchase Rights, of a series of Preferred Stock of the
Corporation, and does hereby fix and state that the designations, amounts,
powers, preferences and relative and other special rights and the
qualifications, limitations or restrictions thereof are as follows:
Series A Preferred Stock
Section 1. Designation and Amount. The shares of such series shall be
designated as Series A Preferred Stock and the number of shares constituting
such series shall be 50,000, which number may be increased or decreased (but not
below the number of shares thereof then outstanding) from time to time by action
of the Board of Directors.
2
Section 2. Dividends and Distributions.
(A) Subject to the prior and superior rights of the holders of any shares
of any series of Preferred Stock ranking prior and superior to the shares of
Series A Preferred Stock with respect to dividends, the holders of shares of
Series A Preferred Stock shall be entitled to receive, when, as and if declared
by the Board of Directors out of funds legally available for that purpose,
quarterly dividends payable in cash on the I st day of July, October, January
and April, in each year commencing January 1, 2001 (each such date being
referred to herein as a "Quarterly Dividend Payment Date"), commencing on the
first Quarterly Dividend Payment Date after the first issuance of a share or
fraction of a share of Series A Preferred Stock, in an amount per share (rounded
to the nearest cent) equal to the greater of (a) $0.01 or (b) subject to the
provision for adjustment hereinafter set forth, one thousand (1,000) times the
aggregate per share amount of all cash dividends, and one thousand (1,000) times
the aggregate per share amount (payable in kind) of all non-cash dividends or
other distributions other than a dividend payable in shares of the common stock
of the Corporation, par value $0.01 per share ("the Common Stock"), or a
subdivision of the outstanding shares of Common Stock (by reclassification or
otherwise), declared on the Common Stock, since the immediately preceding
Quarterly Dividend Payment Date, or, with respect to the first Quarterly
Dividend Payment Date, since the first issuance of any share or fraction of a
share of Series A Preferred Stock. In the event the Corporation shall at any
time after October 5, 2000 (the "Rights Declaration Date") (i) declare any
dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the
outstanding Common Stock, or (iii) combine the outstanding Common Stock into a
smaller number of shares, then in each such case the amount to which holders of
shares of Series A Preferred Stock were entitled immediately prior to such event
under clause (b) of the preceding sentence shall be adjusted by multiplying such
amount by a fraction the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately prior to
such event.
(B) The Corporation shall declare a dividend or distribution on the Series
A Preferred Stock as provided in paragraph (A) above immediately after it
declares a dividend or distribution on the Common
3
Stock (other than a dividend payable in shares of Common Stock); provided that,
in the event no dividend or distribution shall have been declared on the Common
Stock during the period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date, a dividend of $0.01 per share on the
Series A Preferred Stock shall nevertheless be payable on such subsequent
Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on outstanding shares
of Series A Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares of Series A Preferred Stock, unless
the date of issue of such shares is prior to the record date for the first
Quarterly Dividend Payment Date, in which case dividends on such shares shall
begin to accrue from the date of issue of such shares, or unless the date of
issue is a Quarterly Dividend Payment Date or is a date after the record date
for the determination of holders of shares of Series A Preferred Stock entitled
to receive a quarterly dividend and before such Quarterly Dividend Payment Date,
in either of which events such dividends shall begin to accrue and be cumulative
from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall
not bear interest. Dividends paid on the shares of Series A Preferred Stock in
an amount less than the total amount of such dividends at the time accrued and
payable on such shares shall be allocated pro rata on a share- by-share basis
among all such shares at the time outstanding. The Board of Directors may fix a
record date for the determination of holders of shares of Series A Preferred
Stock entitled to receive payment of a dividend or distribution declared
thereon, which record date shall be no more than sixty (60) days prior to the
date fixed for the payment thereof.
Section 3. Voting Rights. The holders of shares of Series A Preferred Stock
shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth, each
share of Series A Preferred Stock shall entitle the holder thereof to one
thousand (1,000) votes on all matters submitted to a vote of the stockholders of
the Corporation. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the number of votes per
4
share to which holders of shares of Series A Preferred Stock were entitled
immediately prior to such event shall be adjusted by multiplying such number by
a fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
(B) Except as otherwise provided herein or by law, the holders of shares of
Series A Preferred Stock and the holders of shares of Common Stock shall vote
together as one class on all matters submitted to a vote of stockholders of the
Corporation. Except as otherwise provided herein or by law, the holders of the
shares of Series A Preferred Stock shall not be entitled to vote as a separate
class on any matters submitted to a vote of the stockholders.
(C) (i) If at any time dividends on any Series A Preferred Stock shall be
in arrears in an amount equal to six (6) quarterly dividends thereon, the
occurrence of such contingency shall mark the beginning of a period (herein
called a "default period") which shall extend until such time when all accrued
and unpaid dividends for all previous quarterly dividend periods and for the
current quarterly dividend period on all shares of Series A Preferred Stock then
outstanding shall have been declared and paid or set apart for payment. During
each default period, all holders of Series A Preferred Stock, voting as a class,
shall have the right to elect two (2) Directors to the Board of Directors of the
Corporation.
(ii) During any default period, such voting right of the holders of
Series A Preferred Stock may be exercised initially at a special meeting
called pursuant to subparagraph (iii) of this Section 3(C) or at any annual
meeting of stockholders of the Corporation, and thereafter at annual
meetings of stockholders of the Corporation, provided that such voting
right shall not be exercised unless the holders of one-third (1/3) in
number of shares of Series A Preferred Stock outstanding shall be present
in person or by proxy. The absence of a quorum of the holders of Common
Stock shall not affect the exercise by the holders of Series A Preferred
Stock of such voting right. At any meeting at which the holders of Series A
Preferred Stock shall exercise such voting right initially during an
existing default period, they shall have the right, voting as a class, to
elect Directors to fill such vacancies, if any, in the Board of Directors
as may then exist up to two (2) Directors or, if such right is exercised at
an annual
5
meeting, to elect two (2) Directors. If the number which may be so elected
at any special meeting does not amount to the required number, the holders
of the Series A Preferred Stock shall have the right to make such increase
in the number of Directors constituting the whole Board of Directors as
shall be necessary to permit the election by them of the required number.
After the holders of the Series A Preferred Stock shall have exercised
their right to elect Directors in any default period and during the
continuance of such period, the number of Directors constituting the whole
Board of Directors shall not be increased or decreased except by vote of
the holders of Series A Preferred Stock as herein provided or pursuant to
the rights of any equity securities ranking senior to or pari passu with
the Series A Preferred Stock.
(iii) Unless the holders of Series A Preferred Stock shall, during an
existing default period, have previously exercised their right to elect
Directors, the Board of Directors may order, or any stockholder or
stockholders owning in the aggregate not less than ten percent (I 0%) of
the total number of shares of Series A Preferred Stock outstanding may
request, the calling of a special meeting of the holders of Series A
Preferred Stock, which meeting shall thereupon be called by the President,
a Vice President or the Secretary of the Corporation. Notice of such
meeting and of any annual meeting at which holders of Series A Preferred
Stock are entitled to vote pursuant to this subparagraph (C)(iii) shall be
given to each holder of record of Series A Preferred Stock by mailing a
copy of such notice to him at his last address as the same appears on the
books of the Corporation. Such meeting shall be called for a time not
earlier than twenty (20) days and not later than sixty (60) days after such
order or request or in default of the calling of such meeting within sixty
(60) days after such order or request, such meeting may be called on
similar notice by any stockholder or stockholders owning in the aggregate
not less than ten percent (10%) of the total number of shares of Series A
Preferred Stock outstanding. Notwithstanding the provisions of this
subparagraph (C)(iii), no such special meeting shall be called during the
period within sixty (60) days immediately preceding the date fixed for the
next annual meeting of the stockholders of the Corporation.
(iv) In any default period, the holders of Common Stock, and other
classes of stock of the Corporation if applicable, shall continue to be
entitled to elect the whole number of Directors until the holders of the
Series A Preferred Stock shall have exercised their right to elect two (2)
6
Directors voting as a class, after the exercise of which right (x) the
Directors so elected by the holders of the Series A Preferred Stock shall
continue in office until their successors shall have been elected by such
holders or until the expiration of the default period, and (y) any vacancy
in the Board of Directors may (except as provided in subparagraph (C)(ii)
of this Section 3) be filled by vote of a majority of the remaining
Directors theretofore elected by the holders of the class of stock which
elected the Director whose office shall have become vacant. References in
this paragraph (C) to Directors elected by the holders of a particular
class of stock shall include Directors elected by such Directors to fill
vacancies as provided in clause (y) of the foregoing sentence.
(v) Immediately upon the expiration of a default period, (x) the right
of the holders of the Series A Preferred Stock as a class to elect
Directors shall cease, (y) the term of any Directors elected by the holders
of Series A Preferred Stock as a class shall terminate and (z) the number
of Directors constituting the whole Board of Directors shall be such number
as may be provided for in the Corporation's Certificate of Incorporation or
bylaws irrespective of any increase made pursuant to the provisions of
subparagraph (C)(ii) of this Section 3 (such number being subject, however,
to change thereafter in any manner provided by law or in the Corporation's
Certificate of Incorporation or bylaws). Any vacancies in the Board of
Directors effected by the provisions of clauses (y) and (z) in the
preceding sentence may be filled as provided in the Corporation's Amended
and Restated Certificate of Incorporation.
(D) Except as set forth herein, holders of Series A Preferred Stock shall
have no special voting rights and their consent shall not be required (except to
the extent they are entitled to vote with holders of Common Stock as set forth
herein) for taking any corporate action.
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Preferred Stock as provided in Section 2 are in arrears,
thereafter and until all accrued and unpaid dividends and distributions, whether
or not declared, on shares of Series A Preferred Stock outstanding shall have
been paid in full, the Corporation shall not:
7
(i) declare or pay dividends on, make any other distributions on, or
redeem or purchase or otherwise acquire for consideration any shares of
stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to, the Series A Preferred Stock;
(ii) declare or pay dividends on, or make any other distributions on,
any shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred Stock,
except dividends paid ratably on the Series A Preferred Stock and all such
junior stock on which dividends are payable or in arrears in proportion to
the total amounts to which the holders of all such shares are then
entitled;
(iii) redeem or purchase or otherwise acquire for consideration shares
of any stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Preferred Stock,
provided that the Corporation may at any time redeem, purchase or otherwise
acquire shares of any such parity stock in exchange for shares of any stock
of the Corporation ranking junior (either as to dividends or upon
dissolution, liquidation or winding up) to the Series A Preferred Stock; or
(iv) purchase or otherwise acquire for consideration any shares of
Series A Preferred Stock, or any shares of stock ranking on a parity with
the Series A Preferred Stock, except in accordance with a purchase offer
made in writing or by publication (as determined by the Board of Directors)
to all holders of such shares upon such terms as the Board of Directors,
after consideration of the respective annual dividend rates and other
relative rights and preferences of the respective series and classes, shall
determine in good faith will result in fair and equitable treatment among
the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the Corporation to
purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (A) of this Section 4,
purchase or otherwise acquire such shares at such time and in such manner.
8
Section 5. Reacquired Shares. Any shares of Series A Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and canceled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
to be created by resolution or resolutions of the Board of Directors, subject to
the conditions and restrictions on issuance set forth herein.
Section 6. Liquidation, Dissolution or Winding Up.
(A) Upon any liquidation (voluntary or otherwise), dissolution or winding
up of the Corporation, no distribution shall be made to the holders of shares of
stock ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Preferred Stock unless, prior thereto, the holders
of shares of Series A Preferred Stock shall have received $250 per share, plus
an amount equal to accrued and unpaid dividends and distributions thereon,
whether or not declared, to the date of such payment(the"Series A Liquidation
Preference"). Following the payment of the full amount of the Series A
Liquidation Preference, no additional distributions shall be made to the holders
of shares of Series A Preferred Stock unless, prior thereto, the holders of
shares of Common Stock shall have received an amount per share (the "Common
Adjustment") equal to the quotient obtained by dividing (i) the Series A
Liquidation Preference by (ii) one thousand (1,000) (as appropriately adjusted
as set forth in paragraph (C) of this Section to reflect such events as stock
splits, stock dividends and recapitalizations with respect to the Common Stock)
(such number in clause (ii) immediately above being referred to as the
"Adjustment Number"). Following the payment of the full amount of the Series A
Liquidation Preference and the Common Adjustment in respect of all outstanding
shares of Series A Preferred Stock and Common Stock, respectively, holders of
Series A Preferred Stock and holders of shares of Common Stock shall receive
their ratable and proportionate share of the remaining assets to be distributed
in the ratio of the Adjustment Number to one (1) with respect to such Preferred
Stock and Common Stock, on a per share basis, respectively.
(B) In the event, however, that there are not sufficient assets available
to permit payment in full of the Series A Liquidation Preference and the
liquidation preferences of all other series of preferred stock, if any,
9
which rank on a parity with the Series A Preferred Stock, then such remaining
assets shall be distributed ratably to the holders of such parity shares in
proportion to their respective liquidation preferences . In the event, however,
that there are not sufficient assets available to permit payment in full of the
Common Adjustment, then such remaining assets shall be distributed ratably to
the holders of Common Stock.
(C) In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the Adjustment Number in effect immediately prior to such event shall be
adjusted by multiplying such Adjustment Number by a fraction the numerator of
which is the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
Section 7. Consolidation, Merger, etc. In case the Corporation shall enter
into any consolidation, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock,
securities, cash or any other property, then in any such case the shares of
Series A Preferred Stock shall at the same time be similarly exchanged or
changed in an amount per share (subject to the provision for adjustment
hereinafter set forth) equal to one thousand (1,000) times the aggregate amount
of stock, securities, cash and/or any other property (payable in kind), as the
case may be, into which or for which each share of Common Stock is changed or
exchanged. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (ii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the amount set forth in the preceding sentence with respect to the exchange or
change of shares of Series A Preferred Stock shall be adjusted by multiplying
such amount by a fraction the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding immediately
prior to such event.
10
Section 8. Redemption. The outstanding shares of Series A Preferred Stock
may be redeemed at the option of the Board of Directors as a whole, but not in
part, at any time, or from to time to time, at a cash price per share equal to
one hundred five percent (105%) of (i) the product of the Adjustment Number
times the Average Market Value (as such term is hereinafter defined) of the
Common Stock, plus (ii) all dividends which on the redemption date have accrued
on the shares to be redeemed and have not been paid, or declared and a sum
sufficient for the payment thereof set apart, without interest. The "Average
Market Value" is the average of the closing sale prices of the Common Stock
during the thirty (30) day period immediately preceding the date before the
redemption date on the Composite Tape for New York Stock Exchange Listed Stocks,
or, if such stock is not quoted on the Composite Tape, on the New York Stock
Exchange, or, if such stock is not listed on such Exchange, on the principal
United States securities exchange registered under the Securities Exchange Act
of 1934, as amended, on which such stock is listed, or, if such stock is not
listed on any such exchange, the average of the closing sale prices with respect
to a share of Common Stock during such thirty (30) day period, as quoted on the
National Association of Securities Dealers, Inc. Automated Quotations System or
any system then in use, or if no such quotations are available, the fair market
value of the Common Stock as determined by the Board of Directors in good faith.
Section 9. Ranking. The Series A Preferred Stock shall rank junior to all
other series of the Corporation's Preferred Stock as to the payment of dividends
and the distribution of assets, unless the terms of any such series shall
provide otherwise.
Section 10. Amendment. Except as otherwise provided in the Certificate of
Incorporation, as amended, or by law, the Certificate of Incorporation of the
Corporation, as amended, shall not be further amended in any manner which would
materially alter or change the powers, preferences or special rights of the
Series A Preferred Stock so as to affect them adversely without the affirmative
vote of the holders of a majority or more of the outstanding shares of Series A
Preferred Stock, voting separately as a class.
Section 11. Fractional Shares. At the Corporation's sole discretion, Series
A Preferred Stock may be issued in fractions of a share which shall entitle the
holder, in proportion to such holder's fractional
11
shares, to exercise voting rights, receive dividends, participate in
distributions and to have the benefit of all other rights of holders of Series A
Preferred Stock.
IN WITNESS WHEREOF, I have executed this Certificate as of October 5, 2000.
PARALLEL PETROLEUM CORPORATION
By: /s/ Larry C. Oldham
--------------------------------
Larry C. Oldham, President
Exhibit 4.3
PARALLEL PETROLEUM CORPORATION
and
COMPUTERSHARE TRUST COMPANY, INC.,
as Rights Agent
Rights Agreement
Dated as of October 5,2000
i
TABLE OF CONTENTS
Section Page
Section 1. Certain Definitions 1
Section 2. Appointment of Rights Agent 5
Section 3. Issuance of Rights Certificates 6
(a) Distribution Date; Rights Certificates 6
(b) Common Stock Certificates; Summary of Rights 6
(c) Legend 6
Section 4. Form of Rights Certificates 7
(a) Form; Date 7
(b) Acquiring Person Legend 8
Section 5. Countersignature and Registration 8
(a) Signatures 8
(b) Registration and Transfer 8
Section 6. Transfer, Split Up, Combination and Exchange of Rights
Certificates; Mutilated, Destroyed, Lost or Stolen
Rights Certificates 9
(a) Procedure 9
(b) Issuance of New Rights Certificates 9
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights 9
(a) Exercise 9
(b) Purchase Price 10
(c) Rights Agent Actions 10
(d) Partial Exercise 11
(e) Termination of Acquiring Person's Rights 11
(f) Surrender of Rights Certificates; Identity of
Beneficial Owner 11
Section 8. Cancellation and Destruction of Rights Certificates 11
Section 9. Reservation and Availability of Capital Stock 12
(a) Reservation of Capital Stock 12
(b) Listing 12
(c) Registration under the Act 12
ii
(d) Covenant Regarding Capital Stock 12
(e) Transfer Taxes and Charges 13
Section 10. Preferred Stock Record Date 13
Section 11. Adjustment of Purchase Price; Number and Kind of
Shares or Number of Rights 13
(a) Certain Adjustments 13
(b) Purchase Price Adjustment - Capital Stock 16
(c) Purchase Price Adjustment - Cash, Assets, etc. 17
(d) Current Market Price 17
(e) Purchase Price Adjustment Threshold 18
(f) Equivalent Adjustments 19
(h) Preferred Stock Anti-Dilution 19
(i) Adjustment of Number of Rights 19
(j) Rights Certificates 20
(k) Adjustment Below Par Value 20
(1) Adjustment Effective as of Future Date; Exercise 20
(m) Tax Adjustments 20
(n) Restriction on Certain Transactions 21
(o) Restriction Against Diminishing Benefits of the Rights 21
(p) Common Stock Adjustments 21
Section 12. Certificate of Adjusted Purchase Price or
Number of Shares 21
Section 13. Consolidation, Merger or Sale or Transfer of
Assets or Earning Power 22
(a Flip-over Event 22
(b) Principal Party 23
(c) Supplemental Agreement 23
(d) Exceptions 24
Section 14. Fractional Rights and Fractional Shares 24
(a) Fractional Rights 24
(b) Fractional Shares of Preferred Stock 25
(c) Fractional Shares of Common Stock 25
(d) Waiver of Fractional Rights and Shares 25
iii
Section 15. Rights of Action 25
Section 16. Agreement of Rights Holders 26
Section 17. Rights Certificate Holder Not Deemed a Stockholder 26
Section 18. Concerning the Rights Agent 27
(a) Compensation 27
(b) Reliance 27
Section 19. Merger or Consolidation or Change of Name of
Rights Agent 27
(a) Successor 27
(b) Prior Countersignatures 27
Section 20. Duties of Rights Agent 28
(a) Legal Counsel 28
(b) Certification by the Company 28
(c) Liability for Gross Negligence, etc. 28
(d) Statements of Fact or Recitals 28
(e) Agreement; Adjustments 28
(f) Further Assurances 28
(g) Instructions 29
(h) Dealing in Rights 29
(i) Agents; Reasonable Care 29
(j) Expenses; Repayment Assurances 29
(k) Exercise of Rights; Consultation with Company 29
Section 21. Change of Rights Agent 29
Section 22. Issuance of New Rights Certificates 30
Section 23. Redemption and Termination 30
(a) Redemption 30
(b) Effect of Redemption; Procedure 31
Section 24. Exchange 31
(a) Right to Exchange 31
(b) Effect of Exchange; Procedure 31
iv
(c) Common Stock Equivalents 32
(d) Insufficient Common Stock 32
(e) Fractional Shares 32
Section 25. Notice of Certain Events 32
(a) Preferred Stock Transactions, etc. 32
(b) Other Transactions 33
Section 26. Notices 33
Section 27. Supplements and Amendments 34
Section 28. Successors 34
Section 29. Determinations and Actions by the Board of
Directors, etc. 34
Section 30. Benefits of this Agreement 34
Section 31. Severability 35
Section 32. Governing Law 35
Section 33. Counterparts 35
Section 34. Descriptive Headings 35
Exhibit A Certificate of Designation, Preferences and Rights
of Series A Preferred Stock
Exhibit B Form of Rights Certificate
Exhibit C Letter to Stockholders
Exhibit D Form of Press Release
1
RIGHTS AGREEMEENT
RIGHTS AGREEMENT, dated as of October 5, 2000, between PARALLEL PETROLEUM
CORPORATION, a Delaware corporation (the "Company"), and COMPUTERSHARE TRUST
COMPANY, INC., a Colorado corporation, as rights agent (the "Rights Agent").
RECITAL
On October 5, 2000 (the "Rights Dividend Declaration Date "), the Board of
Directors of the Company authorized and declared a dividend distribution of one
Right for each share of Common Stock (as hereinafter defined) of the Company
outstanding at the close of business on October 16, 2000 (the "Record Date"),
and has authorized the issuance of one Right (as such number may hereafter be
adjusted as provided herein) for each share of Common Stock of the Company
issued between the Record Date (whether originally issued or delivered from the
Company's treasury) and the Distribution Date, each Right initially representing
the right to purchase one one-thousandth of a share of Series A Preferred Stock
of the Company having the rights, powers and preferences set forth in the form
of Certificate of Designation, Preferences and Rights attached hereto as Exhibit
A, upon the terms and subject to the conditions hereinafter set forth (the
"Rights");
AGREEMENT
In consideration of the premises and the mutual agreements herein set
forth, the parties hereby agree as follows:
Section 1. Certain Definitions. For purposes of this Agreement, the
following terms have the meanings indicated:
(a) "Acquiring Person" shall mean any Person who or which, together
with all Affiliates and Associates of such Person, shall be the Beneficial Owner
(as such term is hereinafter defined) of 15% or more of the shares of Common
Stock then outstanding, but shall not include (i) the Company, (ii) any
Subsidiary of the Company, (iii) any employee benefit plan of the Company or of
any Subsidiary of the Company, or any Person or entity organized, appointed or
established by the Company for or pursuant to the terms of any such plan, or
(iv) any Person who becomes an Acquiring Person solely as a result of a
reduction in the number of shares of Common Stock outstanding due to the
repurchase of shares of Common
2
Stock by the Company, unless and until such Person shall purchase or otherwise
become (as a result of actions taken by such Person or its Affiliates or
Associates) the Beneficial Owner of additional shares of Common Stock
constituting 1% or more of the then outstanding shares of Common Stock.
Notwithstanding the foregoing, if (i) the Board of Directors of the Company
determines in good faith that a Person who would otherwise be an Acquiring
Person, as defined pursuant to the foregoing provisions of this paragraph, has
become such inadvertently (including, without limitation, because (A) such
Person was unaware that it beneficially owned a percentage of Common Stock that
would otherwise cause such Person to be an Acquiring Person, or (B) such Person
was aware of the extent of its Beneficial Ownership of Common Stock but had no
actual knowledge of the consequences of such Beneficial Ownership under this
Agreement) and without any intention of changing or influencing control of the
Company, and (ii) within ten Business Days of being requested by the Company to
advise it regarding the same, such Person certifies to the Company that such
Person acquired shares of Common Stock in excess of 14.99% inadvertently or
without knowledge of the terms of the Rights and who, together with all
Affiliates and Associates, thereafter does not acquire additional shares of
Common Stock and within ten Business Days of being requested by the Company to
do so disposes of the portion of such Common Stock in excess of 14.99%, then
such Person shall not be deemed to be or to have become an Acquiring Person for
any purposes of this Agreement; provided, however, that if the Person requested
to so certify fails to do so within ten Business Days of the Company's request
or such Person fails to dispose of such Common Stock in excess of 14.99% within
ten Business Days of the Company's request, then such Person shall become an
Acquiring Person immediately after such ten Business Day period.
(b) "Act" shall mean the Securities Act of 1933, as amended and in
effect from time to time.
(c) "Adjustment Shares" shall have the meaning set forth in Section
11(a)(ii) (Adjustment of Purchase Price, Number and Kind of Shares or Number of
Rights - Certain Adjustments)
(d) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Exchange Act.
(e) "Agreement", shall mean this Rights Agreement as originally
executed or as it may from time to time be supplemented or amended pursuant
3
to the applicable provisions hereof.
(f) A Person shall be deemed the "Beneficial Owner" of, and shall be
deemed to "beneficially own," any securities:
(i) which such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right to acquire (whether such right
is exercisable immediately or only after the passage of time) pursuant to any
agreement, arrangement or understanding (whether or not in writing) or upon the
exercise of conversion rights, exchange rights, rights, warrants or options, or
otherwise; provided, however that a Person shall not, for purposes of this
paragraph (i), be dee "Beneficial Owner" of or to "beneficially own," (A)
securities tendered pursuant to a tender or exchange offer made by such Person
or any of such Person's Affiliates or Associates until such tendered securities
are accepted for purchase or exchange, or (B) securities issuable upon exercise
of Rights at any time prior to the occurrence of a Triggering Event, or (C)
securities issuable upon exercise of Rights from and after the occurrence of a
Triggering Event, which Rights were acquired by such Person or any of such
Person's Affiliates or Associates prior to the Distribution Date or pursuant to
Section 3(a) (Issuance of Rights Certificates - Distribution Date, Rights
Certificates) or Section 22 (Issuance of New Rights Certificates) (the "Original
Rights") or pursuant to Section 11(i) (Adjustment of Purchase Price, Number and
Kind of Shares or Number of Rights - Adjustment of Number of Rights) in
connection with an adjustment made with respect to any Original Rights;
(ii) which such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right to vote or dispose of or has
"beneficial ownership" of (as determined pursuant to Rule 13d-3 of the General
Rules and Regulations under the Exchange Act), including pursuant to any
agreement, arrangement or understanding, whether or not in writing; provided,
however, that a Person shall not be deemed the "Beneficial Owner, of, or to
"beneficially own," any securi under this subparagraph (ii) as a result of an
agreement, arrangement or understanding to vote such security if such agreement,
arrangement or understanding: (A) arises solely from a revocable proxy given in
response to a public proxy or consent solicitation made pursuant to, and in
accordance with, the applicable provisions of the General Rules and Regulations
under the Exchange Act, and (B) is not also then reportable by such Person on a
Schedule 13D under the Exchange Act (or any comparable or successor report); or
4
(iii) which are "beneficially owned," directly or
indirectly, by any other Person (or any Affiliate or Associate thereof) with
which such Person (or any of such Person's Affiliates or Associates) has any
agreement, arrangement or understanding (whether or not in writing), for the
purpose of acquiring, holding, voting (except pursuant to a revocable proxy as
described in the proviso to subparagraph (ii) of this paragraph (f)) or
disposing of any voting securities of the Company;
provided, however, that nothing in this paragraph (f) shall cause a Person
engaged in business as an underwriter of securities to be the "Beneficial Owner,
of or to "beneficially own," any securities acquired through such Person's
participation in good faith in a firm commitment underwriting until the
expiration of forty (40) calendar days after the date of such acquisition.
(g) "Board" means the Board of Directors of the Company.
(h) "Business Day" shall mean any day other than a Saturday, Sunday or
a day on which banking institutions in the State of New York are authorized or
obligated by law or executive order to close.
(i) "Close of Business" on any given date shall mean 5:00 P.M., New
York, New York time, on such date; provided, however, that if such date is not a
Business Day it shall mean 5:00 P.M., New York, New York time, on the next
succeeding Business Day.
(j) "Common Stock" shall mean the common stock, par value $0.01 per
share, of the Company, except that "Common Stock" when used with reference to
any Person other than the Company shall mean the capital stock of such Person
with the greatest voting power, or the equity securities or other equity
interest having power to control or direct the management, of such Person.
(k) "Common Stock Equivalents" shall have the meaning set forth in
Section 11(a)(iii) (Adjustment of Purchase Price, Number and Kind of Shares or
Number of Rights - Certain Adjustments).
(l) "Company" shall mean the Person named as the "Company" in the
first paragraph of this Agreement until a successor corporation shall have
become such, or until a Principal Party shall assume, and thereafter be liable
for, all obligations and duties of the Company hereunder, pursuant to the
applicable provisions of this Agreement, and thereafter "Company" shall mean
such
5
successor corporation or Principal Party.
(m) "Current Market Price" shall have the meaning set forth in Section
11(d) (Adjustment of Purchase Price; Number and Kind of Shares or Number of
Rights - Current Market Price).
(n) "Current Value" shall have the meaning set forth in Section
11(a)(iii) (Adjustment of Purchase Price, Number and Kind of Shares or Number of
Rights - Certain Adjustments).
(o) "Distribution Date" shall have the meaning set forth in Section
3(a) (Issuance of Rights Certificates - Distribution Date, Rights Certificates).
(p) "Equivalent Preferred Stock" shall have the meaning set forth in
Section II (b) (Adjustment of Purchase Price; Number and Kind of Shares or
Number of - Purchase Price Adjustment - Capital Stock).
(q) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended and in effect on the date of this Agreement.
(r) "Exchange Number" shall mean one-half of the number of shares of
Common Stock, one-thousandths of a share of Preferred Stock, or shares or other
units of other property for which a Right is exercisable immediately prior to
the time of the action of the Board to exchange the Rights.
(s) "Expiration Date" shall have the meaning set forth in Section 7(a)
(Exercise of Rights; Purchase Price; Expiration Date of Rights - Exercise).
(t) "Final Expiration Date" shall mean the Close of Business on
October 5, 2010.
(u) "Flip-in Event" shall mean any event described in Section
11(a)(ii) (A) or (B) (Adjustment of Purchase Price, Number and Kind of Shares or
Number of Rights - Certain Adjustments).
(v) "Flip-in Trigger Date" shall have the meaning set forth in Section
11(a)(iii) (Adjustment of Purchase Price; Number and Kind of Shares or Number of
Rights - Certain Adjustments).
(w) "Flip-over Event" shall mean any event described in clauses (x),
6
(y) or (z) of Section 13(a) (Consolidation, Merger or Sale or Transfer of Assets
or Earning Power - Flip-over Event).
(x) "Original Rights" shall have the meaning set forth in Section
l(f)(i) (Certain Definitions).
(y) "Person" shall mean any individual, firm, corporation, partnership
or other entity.
(z) "Preferred Stock" shall mean shares of Series A Preferred Stock,
par value $0.10, of the Company, and, to the extent that there is not a
sufficient number of shares of Series A Preferred Stock authorized to permit the
full exercise of the Rights, any other series of preferred stock, par value
$0.10, of the Company designated for such purpose containing terms substantially
similar to the terms of the Series A Preferred Stock.
(aa) "Principal Party" shall have the meaning set forth in Section
13(b) (Consolidation, Merger or Sale or Transfer of Assets or Earning Power -
Principal Party).
(bb) "Purchase Price" shall have the meaning set forth in Section 4(a)
(Form of Rights Certificates - Form; Date).
(cc) "Record Date" shall have the meaning set forth in the Recital at
the beginning of the Agreement.
(dd) "Redemption Date" shall have the meaning set forth in Section
23(a) (Redemption and Termination - Redemption).
(ee) "Redemption Price" shall have the meaning set forth in Section
23(a) (Redemption and Termination - Redemption).
(ff) "Rights" shall have the meaning set forth in the Recital at the
beginning of the Agreement.
(gg) "Rights Agent" shall mean the Person named as the "Rights Agent"
in the first paragraph of this Agreement until a successor Rights Agent shall
have become such pursuant to the applicable provisions hereof and thereafter
"Rights Agent" shall mean such successor Rights Agent. If at any time there is
more than one Person appointed by the Company as Rights Agent
7
pursuant to the applicable provisions of this Agreement, "Rights Agent" shall
mean and include each such Person.
(hh) "Rights Certificates" shall have the meaning set forth in Section
3(a) (Issuance of Rights Certificates - Distribution Date; Rights Certificates).
(ii) "Rights Dividend Declaration Date" shall have the meaning set
forth in the Recital at the beginning of the Agreement.
(jj) "Spread" shall have the meaning set forth in Section 11(a)(iii)
(Adjustment of Purchase Price; Number and Kind of Shares or Number of Rights -
Certain Adjustments).
(kk) "Stock Acquisition Date" shall mean the first date of public
announcement (which, for purposes of this definition, shall include, without
limitation, a report filed or amended pursuant to Section 13(d) under the
Exchange Act) by the Company or an Acquiring Person that an Acquiring Person has
become such.
(ll) "Subsidiary" shall mean, with reference to any Person, any
corporation or other entity of which a majority of the voting power of equity
securities or majority of the equity interest is beneficially owned, directly or
indirectly, by such Person, or otherwise controlled by such Person.
(mm) "Substitution Period" shall have the meaning set forth in Section
11(a)(iii) (Adjustment of Purchase Price; Number and Kind of Shares or Number of
Rights - Certain Adjustments).
(nn) "Trading Day" shall have the meaning set forth in Section
11(d)(i) (Adjustment of Purchase Price, Number and Kind of Shares or Number of
Rights - Current Market Price).
(oo) "Triggering Event" shall mean any Flip-in Event or any Flip-over
Event.
Section 2. Appointment of Rights Agent. The Company hereby appoints the
Rights Agent to act as agent for the Company in accordance with the terms and
conditions hereof, and the Rights Agent hereby accepts such appointment. The
Company may from time to time appoint such Co-Rights Agents as it may deem
necessary or desirable.
8
Section 3. Issuance of Rights Certificates.
(a) Distribution Date; Rights Certificates. Until the earlier of (i)
the Close of Business on the tenth Business Day after the Stock Acquisition Date
(or, if the tenth Business Day after the Stock Acquisition Date occurs before
the Record Date, the Close of Business on the Record Date), or (ii) the Close of
Business on the tenth Business Day (or such later date as the Board shall
determine prior to such time as any Person becomes an Acquiring Person) after
the date that a tender or exc offer by any Person (other than the Company, any
Subsidiary of the Company, any employee benefit plan of the Company or of any
Subsidiary of the Company, or any Person or entity organized, appointed or
established by the Company for or pursuant to the terms of any such plan) is
first published or sent or given within the meaning of Rule 14d-2(a) of the
General Rules and Regulations under the Exchange Act, if upon consummation
thereof such Person would be the Beneficial Owner of 15% or more of the shares
of Common Stock then outstanding (the earlier of (i) and (ii) being herein
referred to as the "Distribution Date"), (x) the Rights will be evidenced
(subject to the provisions of paragraph (b) of this Section 3) by the
certificates for the Common Stock registered in the names of the holders of the
Common Stock (which certificates for Common Stock shall be deemed also to be
certificates for Rights) and not by separate certificates, and (y) the Rights
will be transferable only in connection with the transfer of the underlying
shares of Common Stock (including a transfer to the Company, except pursuant to
the provision of Section 23 (Redemption and Termination)). As soon as
practicable after the Distribution Date, the Rights Agent will send by
first-class, insured, postage prepaid mail, to each record holder of the Common
Stock as of the Close of Business on the Distribution Date, at the address of
such holder shown on the records of the Company, one or more rights
certificates, in substantially the form of Exhibit B hereto (the "Rights
Certificates"), evidencing one Right for each share of Common Stock so held,
subject to adjustment as provided herein. In the event that an adjustment in the
number of Rights per share of Common Stock has been made pursuant to Section
11(p) (Adjustment of Purchase Price, Number and Kind of Shares or number of
Rights -Common Stock Adjustments) at the time of distribution of the Rights
Certificates, the Company shall make the necessary and appropriate rounding
adjustments (in accordance with Section 14(a) (Fractional Rights and Fractional
Shares-Fractional Rights)) so that Rights Certificates representing only whole
numbers of Rights are distributed and cash is paid in lieu of any fractional
Rights. As of and after the Distribution Date, the Rights will be evidenced
solely by such Rights Certificates.
9
(b) Common Stock Certificates, Summary of Rights. With respect to
certificates for the Common Stock outstanding as of the Record Date, until the
Distribution Date, the Rights associated with the Common Stock represented by
such certificates will be evidenced by such certificates alone and the
registered holders of such Common Stock shall also be the registered holders of
the associated Rights. Until the earlier of the Distribution Date or the
Expiration Date, the transfer of any certificates representing shares of Common
Stock in respect of which Rights have been issued shall also constitute the
transfer of the Rights associated with such shares of Common Stock. On the
Record Date, or as soon as practicable thereafter, the Company will send a copy
of a Summary of Rights to Purchase Preferred Stock, in substantially the form of
Exhibit C hereto (the "Summary of Rights"), by first-class, postage-prepaid
mail, to each record holder of shares of Common Stock as of the close of
business of the Record Date, at the address of such holder shown on the records
of the Company.
(c) Legend. Rights shall be issued in respect of all certificates for
shares of Common Stock which are issued (whether originally issued or from the
Company's treasury) after the Record Date but prior to the earliest of the (i)
Distribution Date, (ii) the Expiration Date, or (iii) the Redemption Date, or,
in certain circumstances provided in Section 22 (Issuance of New Rights
Certificates) after the Distribution Date. Certificates representing such shares
of Common Stock shall also be deemed to be certificates for Rights, and shall
bear the following legend:
This certificate also evidences and entitles the holder
hereof to certain Rights as set forth in the Rights
Agreement dated as of October 5, 2000, by and between
Parallel Petroleum Corporation (the "Company") and
Computershare Trust Company, Inc., as Rights Agent (the
"Rights Agreement"), the terms of which are hereby
incorporated herein by reference and a copy of which is on
file at the principal offices of the Company. Under certain
circumstances, as set forth in the Rights Agreement, su
Rights will be evidenced by separate certificates and will
no longer be evidenced by this certificate. The Company will
mail to the holder of this certificate a copy of the Rights
Agreement, as in effect on the date of mailing, without
charge promptly after receipt of a written request therefor.
Under certain circumstances set forth in the Rights
Agreement, Rights
10
issued to, or held by, any Person who is, was or becomes an
Acquiring Person or any Affiliate or Associate thereof (as
such terms are defined in the Rights Agreement), whether
currently held by or on behalf of such Person or by any
subsequent holder, may become null and void.
With respect to such certificates containing the foregoing legend, until the
earliest of (i) the Distribution Date, (ii) the Expiration Date, and (iii) the
Redemption Date, (x) the Rights associated with the Common Stock represented by
such certificates shall be evidenced by such certificates alone, (y) the
registered holders of such Common Stock shall also be the registered holders of
the associated Rights, and (z) the transfer of any of such certificates shall
also constitute the transfer ofthe Rights associated with such shares of Common
Stock. In the event that the Company purchases, or acquires any shares of Common
Stock after the Record Date but prior to the Distribution Date, any rights
associated with such shares of Common Stock shall be deemed canceled and retired
so that the Company shall not be entitled to exercise any Rights associated with
shares of Common Stock which are no longer outstanding.
Section 4. Form of Rights Certificates.
(a) Form; Date. The Rights Certificates (and the forms of election to
purchase and of assignment to be printed on the reverse thereof) shall each be
substantially in the form set forth in Exhibit B hereto and may have such marks
of identification or designation and such legends, summaries or endorsements
printed thereon as the Company may deem appropriate and as are not inconsistent
with the provisions of this Agreement, or as may be required to comply with any
applicable law or with a rule or regulation made pursuant thereto or with any
rule or regulation of any stock exchange on which the Rights may from time to
time be listed or any securities association on whose interdealer quotation
system the Rights may be from time to time authorized for quotation, or to
conform to usage. Subject to the provisions of Section 11 (Adjustment of
Purchase Price, Number and Kind of Shares or Number of Rights) and Section 22
(Issuance of New Rights Certificates), the Rights Certificates, whenever
distributed, shall be dated as of the Record Date and on their face shall
entitle the holders thereof to purchase such number of one one-thousandths of a
share of Preferred Stock as shall be set forth therein at the price set forth
therein (such exercise price per one one-thousandth of a share is referred to
herein as the "Purchase Price"), but the amount and type of securities
purchasable upon the exercise of each Right and the Purchase Price thereof shall
be subject to
11
adjustment as provided herein.
(b) Acquiring Person Legend. Any Rights Certificate issued pursuant to
Section 3(a) (Issuance of Rights Certificates - Distribution Date: Rights
Certificates) or Section 22 (Issuance of New Rights Certificates) that
represents Rights beneficially owned by (i) an Acquiring Person or any Associate
or Affiliate of an Acquiring Person, (ii) a transferee of an Acquiring Person
(or of any such Associate or Affiliate) who becomes a transferee after the
Acquiring Person becomes such, or (iii) transferee of an Acquiring Person (or of
any such Associate or Affiliate) who becomes a transferee prior to or
concurrently with the Acquiring Person becoming such and receives such Rights
pursuant to either (A) a transfer (whether or not for consideration) from the
Acquiring Person to holders of equity interests in such Acquiring Person or to
any Person with whom such Acquiring Person has any continuing agreement,
arrangement or understanding regarding the transferred Rights or (B) a transfer
which is part of a plan, arrangement or understanding which has as a primary
purpose or effect avoidance of Section 7(e) (Exercise of Rights, Purchase Price,
Expiration Date of Rights - Termination of Acquiring Person's Rights) and any
Rights Certificate issued pursuant to Section 6 (Transfer, Split Up, Combination
and Exchange of Rights Certificates: Mutilated, Destroyed, Lost or Stolen Rights
Certificates), Section 11 (Adjustment of Purchase Price; Number and Kind of
Shares or Number of Rights) or Section 22 (Issuance of New Rights Certificates)
upon transfer, exchange, replacement or adjustment of any other Rights
Certificate referred to in this sentence, shall contain (to the extent feasible)
the following legend:
The Rights represented by this Rights Certificate are or were beneficially
owned by a Person who was or became an Acquiring Person or an Affiliate or
Associate of an Acquiring Person (as such terms are defined in the Rights
Agreement dated as of October 5, 2000, by and between Parallel Petroleum
Corporation and Computershare Trust Company, Inc., as Rights Agent).
Accordingly, this Rights Certificate and the Rights represented hereby may
become null and void in the circumstances specified in Section 7(e)
(Exercise of Rights: Purchase Price: Expiration Date of Rights -
Termination of Acquiring Person's Rights) of such Agreement.
Section 5. Countersignature and Registration.
12
(a) Signatures. The Rights Certificates shall be executed on behalf of
the Company by its Chairman of the Board, its President or any Vice President,
either manually or by facsimile signature, and shall have affixed thereto the
Company's seal or a facsimile thereof which shall be attested to by the
Secretary or an Assistant Secretary of the Company, either manually or by
facsimile signature. The Rights Certificates shall be countersiped by the Rights
Agent, either manually or by facsi signature, and shall not be valid for any
purpose unless so countersigned. In case any officer of the Company who shall
have signed any of the Rights Certificates shall cease to be such officer of the
Company before countersignature by the Rights Agent and issuance and delivery by
the Company, such Rights Certificates, nevertheless, may be countersigned by the
Rights Agent and issued and delivered by the Company with the same force and
effect as though the person who signed such Rights Certificates had not ceased
to be such officer of the Company; and any Rights Certificates may be signed on
behalf of the Company by any person who, at the actual date of the execution of
such Rights Certificate, shall be a proper officer of the Company to sign such
Rights Certificate, although at the date of the execution of this Rights
Agreement any such person was not such an officer.
(b) Registration and Transfer. Following the Distribution Date, the
Rights Agent will keep or cause to be kept, at its principal office or offices
designated as the appropriate place for surrender of Rights Certificates upon
exercise or transfer, books for registration and transfer of the Rights
Certificates issued hereunder. Such books shall show the names and addresses of
the respective holders of the Rights Certificates, the number of Rights
evidenced on its face by each of the Rig Certificates and the date of each of
the Rights Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of Rights
Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates.
(a) Procedure. Subject to the provisions of Section 4(b) (Form of
Rights Certificates - Acquiring Persons Legend), Section 7(e) (Exercise of
Rights, Purchase Price, Expiration Date of Rights Termination of Acquiring
Person's Rights) and Section 14 (Fractional Rights and Fractional Shares), at
any time after the Close of Business on the Distribution Date, and at or prior
to the Close of Business on the Expiration Date, any Rights Certificate or
Certificates may be transferred, split up, combined or exchanged for another
Rights Certificate or Certificates, entitling the registered holder to purchase
a like number of one one-thousandths of a share of Preferred Stock (or,
following a Triggering Event,
13
Common Stock, other securities, cash or other assets, as the case may be) as the
Rights Certificate or Certificates surrendered then entitled such holder (or
former holder in the case of a transfer) to purchase. Any registered holder
desiring to transfer, split up, combine or exchange any Rights Certificate or
Certificates shall make such request in writing delivered to the Rights Agent,
and shall surrender the Rights Certificate or Certificates to be transferred,
split up, combined or exchanged at the principal office or offices of the Rights
Agent designated for such purpose. Neither the Rights Agent nor the Company
shall be obligated to take any action whatsoever with respect to the transfer of
any such surrendered Rights Certificate until the registered holder shall have
completed and signed the certificate contained in the form of assignment on the
reverse side of such Rights Certificate and shall have provided such additional
evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or
Affiliates or Associates thereof as the Company shall reasonably request.
Thereupon, the Rights Agent shall, subject to Section 4(b), Section 7(e) and
Section 14, countersign and deliver to the Person entitled thereto a Rights
Certificate or Rights Certificates, as the case may be, as so requested. The
Company may require payment of a sum sufficient to cover any tax or governmental
charge that may be imposed in connection with any transfer, split up,
combination or exchange of Rights Certificates.
(b) Issuance of New Rights Certificates. Upon receipt by the Company
and the Rights Agent of evidence reasonably satisfactory to them of the loss,
theft, destruction or mutilation of a Rights Certificate, and, in case of loss,
theft or destruction, of indemnity or security reasonably satisfactory to them,
and reimbursement to the Company and the Rights Agent of all reasonable expenses
incidental thereto, and upon surrender to the Rights Agent and cancellation of
the Rights Certificate mutilated, the Company will execute and deliver a new
Rights Certificate of like tenor to the Rights Agent for countersignature and
delivery to the registered owner in lieu of the Rights Certificate so lost,
stolen, destroyed or mutilated.
Section 7. Exercise of Rights, Purchase Price, Expiration Date of Rights.
(a) Exercise. Subject to Section 7(e) (Exercise of Rights: Purchase
Price: Expiration Date of Rights - Termination of Acquiring Person's Rights),
the registered holder of any Rights Certificate may exercise the Rights
evidenced thereby (except as otherwise provided herein, including, without
limitation, the restrictions on exercisability set forth in Section 9(c)
(Reservation and Availability of Capital Stock - Registration under the Act),
Section 11(a)(iii) (Adjustment of Purchase Price; Number and Kind of Shares or
Number of Rights - Certain
14
Adjustments), Section 23(a) (Redemption and Termination Redemption), and Section
24(b) (Exchange - Effect of Exchange: Procedure)) in whole or in part at any
time after the Distribution Date upon surrender of the Rights Certificate, with
the form of election to purchase and the certificate on the reverse side thereof
duly executed, to the Rights Agent at the principal office or offices of the
Rights Agent designated for such purpose, together with payment of the aggregate
Purchase Price with respect to the total number of one one-thousandths of a
share of Preferred Stock (or other securities, cash or other assets, as the case
may be) as to which such surrendered Rights are then exercisable and an amount
equal to any applicable transfer tax, at or prior to the earliest of (i) the
Final Expiration Date, (ii) the Redemption Date, or (iii) the expiration of the
Rights pursuant to Section 13(d) (Consolidation, Merger or Sale or Transfer of
Assets or Earning Power - Exceptions) (the earliest of (i), (ii) and (iii) being
herein referred to as the "Expiration Date"). The payment of the Purchase Price
and the applicable transfer tax, if any (as such amount may be reduced pursuant
to Section 11(a)(iii) (Adjustment of Purchase Price; Number and Kind of Shares
or Number of Rights - Certain Adjustments)), may be made (x) in cash, (y) by
certified check, cashier's check or money order payable to the order of the
Company, or (z) by delivery of a certificate or certificates (with appropriate
stock powers executed in blank attached thereto) evidencing a number of shares
of Common Stock equal to the then Purchase Price divided by the closing price
(as determined pursuant to Section 11(d) (Adjustment of Purchase Price, Number
and Kind of Shares or Number of Rights - Current Market Price)) per share of
Common Stock on the Trading Day immediately preceding the date of such exercise.
In the event that the Company is obligated to issue other securities (including
Common Stock) of the Company, pay cash and/or distribute other property pursuant
to Section 11(a) the Company will make all arrangements necessary so that such
other securities, cash and/or other property are available for distribution by
the Rights Agent, if and when appropriate. The Company reserves the right to
require prior to the occurrence of a Triggering Event that upon any exercise of
Rights, a number of Rights be exercised so that only whole shares of Preferred
Stock would be issued.
(b) Purchase Price. The Purchase Price for each one one-thousandth of
a share of Preferred Stock pursuant to the exercise of a Right shall initially
be $26.00, and shall be subject to adjustment from time to time as provided in
Section 11 (Adjustment of Purchase Price; Number and Kind of Shares or Number of
Rights) and Section 13(a) (Consolidation, Merger or Sale or Transfer of Assets
or Earning Power - Flip-over Event) and shall be payable in accordance with
paragraph (a) of this Sect 7.
15
(c) Rights Agent Actions. Upon receipt of a Rights Certificate
representing exercisable Rights and the compliance by the holder of such Rights
Certificate with paragraph (a) of this Section 7, the Rights Agent shall,
subject to Section 20(k) (Duties of Rights Agent - Exercise of Rights,
Consultation with Company), thereupon promptly (i) (A) requisition from any
transfer agent of the shares of Preferred Stock (or make available, if the
Rights Agent is the transfer agent for such shares) certificates for the total
number of one one-thousandths of a share of Preferred Stock to be purchased and
the Company hereby irrevocably authorizes its transfer agent to comply with all
such requests, or (B) if the Company shall have elected to deposit the total
number of shares of Preferred Stock issuable upon exercise of the Rights
hereunder with a depositary agent, requisition from the depositary agent
depositary receipts representing such number of one one-thousandths of a share
of Preferred Stock as are to be purchased (in which case certificates for the
shares of Preferred Stock represented by such receipts shall be deposited by the
transfer agent with the depositary agent) and the Company will direct the
depositary agent to comply with such request, (ii) requisition from the Company
the amount of cash, if any, to be paid in lieu of fractional shares in
accordance with Section 14 (Fractional Rights and Fractional Shares), (iii)
after receipt thereof, deliver such certificates or depositary receipts to or
upon the order of the registered holder of such Rights Certificate, registered
in such name or names as may be designated by such holder, and (iv) after
receipt thereof, deliver such cash, if any, to or upon the order of the
registered holder of such Rights Certificate.
(d) Partial Exercise. In case the registered holder of any Rights
Certificate shall exercise less than all the Rights evidenced thereby, a new
Rights Certificate evidencing Rights equivalent to the Rights remaining
unexercised shall be issued by the Rights Agent and delivered to, or upon the
order of the registered holder of such Rights Certificate, registered in such
name or names as may be designated by such holder, subject to the provisions of
Section 14 (Fractional Rights and Fract Shares).
(e) Termination of Acquiring Person's Rights. Notwithstanding anything
in this Agreement to the contrary, from and after the first occurrence of a
Flip-in Event, any Rights beneficially owned by (i) an Acquiring Person, or an
Associate or Affiliate of an Acquiring Person, (ii) a transferee of an Acquiring
Person (or of any such Associate or Affiliate) who becomes a transferee after
such Acquiring Person becomes such, or (iii) a transferee of an Acquiring Person
(or of any such Associat Affiliate) who becomes a transferee prior to or
concurrently with the Acquiring Person becoming such and receives such Rights
pursuant to
16
either (A) a transfer (whether or not for consideration) from the Acquiring
Person to holders of equity interests in such Acquiring Person or to any Person
with whom the Acquiring Person has any continuing agreement, arrangement or
understanding regarding the transferred Rights or (B) a transfer which is part
of a plan, arrangement or understanding which has as a primary purpose or effect
the avoidance of this Section 7(e), shall become null and void without any
further action and no holder of such Rights shall have any rights whatsoever
with respect to such Rights, whether under any provision of this Agreement or
otherwise. The Company shall use all reasonable efforts to ensure that the
provisions of this Section 7(e) and Section 4(b) (Form of Rights Certificates -
Acquiring Person Legend) are complied with, but shall have no liability to any
holder of Rights Certificates or other Person as a result of its failure to make
any determinations with respect to an Acquiring Person or any of its respective
Affiliates, Associates or transferees hereunder.
(f) Surrender of Rights Certificates; Identity of Beneficial Owner.
Notwithstanding anything in this Agreement to the contrary, neither the Rights
Agent nor the Company shall be obligated to undertake any action with respect to
a registered holder upon the occurrence of any purported exercise as set forth
in this Section 7 unless such registered holder shall have (i) completed and
signed the certificate contained in the form of election to purchase set forth
on the reverse side of the Rights Certificate surrendered for such exercise, and
(ii) provided such additional evidence of the identity of the Beneficial Owner
(or former Beneficial Owner) or Affiliates or Associates thereof as the Company
shall reasonably request.
Section 8. Cancellation and Destruction of Rights Certificates. All Rights
Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or any of its
agents, be delivered to the Rights Agent for cancellation or in canceled form,
or, if surrendered to the Rights Agent, shall be canceled by it, and no Rights
Certificates shall be issued in lieu thereof except as expressly permitted by
any of the provisions of this Agreement. The Company shall deliver to the Rights
Agent for cancellation and retirement, and the Rights Agent shall so cancel and
retire, any other Rights Certificate purchased or acquired by the Company
otherwise than upon the exercise thereof. The Rights Agent shall deliver all
canceled Rights Certificates to the Company, or shall, at the written request of
the Company, destroy such canceled Rights Certificates, and in such case shall
deliver a certificate of destruction thereof to the Company.
17
Section 9. Reservation and Availability of Capital Stock.
(a) Reservation of Capital Stock. The Company will use its best
efforts to reserve and keep available out of its authorized and unissued shares
of Preferred Stock (and, following the occurrence of a Triggering Event, out of
its authorized and unissued shares of Common Stock and/or other securities or
out of its authorized and issued shares of Common Stock held in its treasury),
the number of shares of Preferred Stock (and, following the occurrence of a
Triggering Event, Common Stock an other securities) that, as provided in this
Agreement, including the rights of the Company under Section 11(a)(iii)
(Adjustment of Purchase Price; Number and Kind of Shares or Number of Rights -
Certain Adjustments) to otherwise fulfill its obligations, will be sufficient to
permit the exercise in full of all outstanding Rights.
(b) Listing. So long as the shares of Preferred Stock (and, following
the occurrence of a Triggering Event, Common Stock and/or other securities)
issuable and deliverable upon the exercise of the Rights may be listed on any
national securities exchange or authorized for quotation on any interdealer
quotation system of any securities association, the Company shall use its best
efforts to cause, from and after such time as the Rights become exercisable, all
shares reserved for such issua to be listed on such exchange or quoted on such
system upon official notice of issuance upon such exercise.
(c) Registration under the Act. The Company will use its best efforts
to (i) file, as soon as practicable following the earliest date after the first
occurrence of a Flip-in Event on which the consideration to be delivered by the
Company upon exercise of the Rights has been determined in accordance with
Section 11(a)(iii) (Adjustment of Purchase Price, Number and Kind of Shares or
Number of Rights Certain Adjustments), or as soon as is required by law
following the Distribution Date, a case may be, a registration statement on an
appropriate form under the Act with respect to the securities purchasable upon
exercise of the Rights, (ii) cause such registration statement to become
effective as soon as practicable after such filing, and (iii) cause such
registration statement to remain effective (with a prospectus at all times
meeting the requirements of the Act) until the earlier of (A) the date as of
which the Rights are no longer exercisable for such securities, and (B) the
Expiration Date. The Company will also take such action as may be appropriate
under, or to ensure compliance with, the securities or "blue sky" laws of the
various states in connection with the exercisability of the Rights. The Company
may temporarily suspend, for a period of time not to exceed ninety (90) calendar
days after the date set forth in clause
18
(i) of the first sentence of this Section 9(c), the exercisability of the Rights
in order to prepare and file such registration statement and permit it to become
effective. Upon any such suspension, the Company shall issue a public
announcement stating that the exercisability of the Rights has been temporarily
suspended, as well as a public announcement at such time as the suspension is no
longer in effect. In addition, if the Company shall determine that a
registration statement is required following the Distribution Date, the Company
may temporarily suspend the exercisability of the Rights until such time as a
registration statement has been declared effective. Notwithstanding any
provision of this Agreement to the contrary, the Rights shall not be exercisable
in any jurisdiction if the requisite qualification in such jurisdiction shall
not have been obtained, the exercise thereof shall not be permitted under
applicable law or a registration statement shall not have been declared
effective.
(d) Covenant Regarding Capital Stock. The Company will take all such
action as may be necessary to ensure that all one one-thousandths of a share of
Preferred Stock (and, following the occurrence of a Triggering Event, Common
Stock and/or other securities) delivered upon exercise of Rights shall, at the
time of delivery of the certificates for such shares (subject to payment of the
Purchase Price), be duly and validly authorized and issued and fully paid and
nonassessable.
(e) Transfer Taxes and Charges. The Company will pay when due and
payable any and all federal and state transfer taxes and charges which may be
payable in respect of the issuance or delivery of the Rights Certificates and of
any certificates for a number of one one-thousandths of a share of Preferred
Stock (or Common Stock and/or other securities, as the case may be) upon the
exercise of Rights. The Company shall not, however, be required to pay any
transfer tax which may be payable i respect of any transfer or delivery of
Rights Certificates to a Person other than, or the issuance or delivery of a
number of one one-thousandths of a share of Preferred Stock (or Common Stock
and/or other securities, as the case may be) in respect of a name other than,
that of the registered holder of the Rights Certificates evidencing Rights
surrendered for exercise or to issue or deliver any certificates for a number of
one one-thousandths of a share of Preferred Stock (or Common Stock and/or other
securities, as the case may be) in a name other than that of the registered
holder upon the exercise of any Rights until such tax shall have been paid (any
such tax being payable by the holder of such Rights Certificate at the time of
surrender) or until it has been established to the Company's satisfaction that
no such tax is due.
19
Section 10. Preferred Stock Record Date. Each Person in whose name any
certificate for a number of one one-thousandths of a share of Preferred Stock
(or Common Stock and/or other securities, as the case may be) is issued upon the
exercise of Rights shall for all purposes be deemed to have become the holder of
record of such fractional shares of Preferred Stock (or Common Stock and/or
other securities, as the case may be) represented thereby on, and such
certificate shall be dated as of, the date upon which the Rights Certificate
evidencing such Rights was duly surrendered and payment of the Purchase Price
(and all applicable transfer taxes) was made; provided, however, that if the
date of such surrender and payment is a date upon which the Preferred Stock (or
Common Stock and/or other securities, as the case may be) transfer books of the
Company are closed, such Person shall be deemed to have become the record holder
of such shares (fractional or otherwise) on, and such certificate shall be
dated, the next succeeding Business Day on which the Preferred Stock (or Common
Stock and/or other securities, as the case may be) transfer books of the Company
are open. Prior to the exercise of the Rights evidenced thereby, the holder of a
Rights Certificate shall not be entitled to any rights of a stockholder of the
Company with respect to shares for which the Rights shall be exercisable,
including, without limitation, the right to vote, to receive dividends or other
distributions or to exercise any preemptive rights, and shall not be entitled to
receive any notice of any proceedings of the Company, except as provided herein.
Section 11. Adjustment of Purchase Price, Number and Kind of Shares or
Number of Rights. The Purchase Price, the number and kind of shares covered by
each Right and the number of Rights outstanding are subject to adjustment from
time to time as provided in this Section 11.
(a) Certain Adjustments.
(i) In the event the Company shall at any time after the date of
this Agreement (A) declare a dividend on the Preferred Stock payable in shares
of Preferred Stock, (B) subdivide or split the outstanding Preferred Stock, (C)
combine the outstanding Preferred Stock into a smaller number of shares, or (D)
issue any shares of its capital stock in a reclassification of the Preferred
Stock (including any such reclassification in connection with a consolidation or
merger in whi Company is the continuing or surviving corporation), except as
otherwise provided in this Section 11(a) and Section 7(e) (Exercise of Rights;
Purchase Price: Expiration Date of Rights - Termination of Acquiring Person's
Rights), the Purchase Price in effect at the time of the record date for such
dividend or
20
of the effective date of such subdivision, split, combination or
reclassification, and the number and kind of shares of Preferred Stock or
capital stock, as the case may be, issuable on such date, shall be
proportionately adjusted so that the holder of any Right exercised after such
time shall be entitled to receive, upon payment of the aggregate adjusted
Purchase Price then in effect necessary to exercise a Right in full, the
aggregate number and kind of shares of Preferred Stock or capital stock, as the
case may be, which, if such Right had been exercised immediately prior to such
date and at a time when the Preferred Stock (or other capital stock, as the case
may be) transfer books of the Company were open, such holder would have owned
upon such exercise and been entitled to receive by virtue of such dividend,
subdivision, split, combination or reclassification. If an event occurs which
would require an adjustment under both this Section 11(a)(i) and Section
11(a)(ii) the adjustment provided for in this Section 11(a)(i) shall be in
addition to, and shall be made prior to, any adjustment required pursuant to
Section 11(a)(ii).
(ii) In the event:
(A) (1) any Acquiring Person or any Associate or Affiliate
of any Acquiring Person, at any time after the date of this
Agreement, directly or indirectly, shall merge into the Company or
otherwise combine with the Company and the Company shall be the
continuing or surviving corporation of such merger or combination
and the Common Stock of the Company shall remain outstanding and
unchanged, or (2) subject to Section 23 (Redemption and
Termination), any Person (othe than the Company, any Subsidiary of
the Company, any employee benefit plan of the Company or of any
Subsidiary of the Company, or any Person or entity organized,
appointed or established by the Company for or pursuant to the
terms of any such plan), alone or together with its Affiliates and
Associates, shall, at any time after the Rights Dividend
Declaration Date, become an Acquiring Person, unless the event
causing such Person to become an Acquiring Person is a Flip-over
Event, or is an acquisition of shares of Common Stock pursuant to
a tender offer or an exchange offer for all outstanding shares of
Common Stock at a price and on terms determined by the Board of
Directors, prior to the public announcement of such tender offer
or exchange offer, after receiving advice from one or more
investment banking firms selected by the Board of Directors, to be
(a) at a price which is fair to the
21
stockholders of the Company (taking into account all factors which
the Board of Directors deem relevant including, without
limitation, prices which could reasonably be achieved if the
Company or its assets were sold on an orderly basis designed to
realize maximum value) and (b) otherwise in the best interests of
the Company and its stockholders, other than such Acquiring
Person, its Affiliates and its Associates; or
(B) during such time as there is an Acquiring Person, there
shall be any reclassification of securities (including any reverse
stock split), or recapitalization of the Company, or any merger or
consolidation of the Company with any of its Subsidiaries or any
other transaction or series of transactions involving the Company
or any of its Subsidiaries, other than a transaction or
transactions to which the provisions of Section 13(a)
(Consolidation, Merger or Sale o Transfer of Assets or Earning
Power Flip-over Event) apply (whether or not with or into or
otherwise involving an Acquiring Person) which has the effect,
directly or indirectly, of increasing by more than 1% the
proportionate share of the outstanding shares of any class of
equity securities of the Company or any of its subsidiaries which
is directly or indirectly beneficially owned by any Acquiring
Person or any Associate or Affiliate of any Acquiring Person,
then, promptly following the occurrence of any such Flip-in Event (whether
described in Section 11(a)(ii)(A) or (B)), proper provision shall be made so
that each holder of a Right (except as provided below and in Section 7(e)
(Exercise of Rights, Purchase Price: Expiration Date of Rights - Termination of
Acquiring Person's Rights)) shall thereafter have the right to receive, upon
exercise thereof at the then current Purchase Price in accordance with the terms
of this Agreement, in lieu of the number of one one-thousandths of a share of
Preferred Stock, such number of shares of Common Stock of the Company as shall
equal the result obtained by (x) multiplying the then current Purchase Price by
the then number of one one-thousandths of a share of Preferred Stock for which a
Right was exercisable immediately prior to the first occurrence of a Flip-in
Event, and (y) dividing that product (which, following such first occurrence,
shall thereafter be referred to as the "Purchase Price" for each Right and for
all purposes of this Agreement) by 50% of the Current Market Price per share of
Common Stock on the date of such first occurrence (such number of shares being
referred to as the "Adjustment Shares").
22
(iii) In the event that the number of shares of Common Stock that
are authorized by the Company's Certificate of Incorporation but not outstanding
or reserved for issuance for purposes other than upon exercise of the Rights is
not sufficient to permit the exercise in full of the Rights in accordance with
the foregoing subparagraph (ii) of this Section 11 (a), the Company shall: (A)
determine the excess of (1) the value of the Adjustment Shares issuable upon the
exercise of Right (the "Current Value") over (2) the Purchase Price (such
excess, the "Spread"), and (B) with respect to each Right, subject to Section
7(e) (Exercise of Rights; Purchase Price; Expiration Date of Rights -
Termination of Acquiring Person's Rights), make adequate provision to substitute
for the Adjustment Shares, upon payment of the applicable Purchase Price, (1)
cash, (2) a reduction in the Purchase Price, (3) Common Stock or other equity
securities of the Company (including, without limitation, shares, or units of
shares, of preferred stock which the Board has deemed to have essentially the
same value or economic rights as shares of Common Stock (such shares of
preferred stock being referred to as "Common Stock Equivalents")), (4) debt
securities of the Company, (5) other assets, or (6) any combination of the
foregoing, having an aggregate value equal to the Current Value (less the amount
of any reduction in the Purchase Price), where such aggregate value has been
determined by the Board based upon the advice of a nationally recognized
investment banking firm selected by the Board; provided, however, that if the
Company shall not have made adequate provision to deliver value pursuant to
clause (B) above within thirty (30) calendar days following the first occurrence
of a Flip-in Event (the date of such Flip-in Event being referred to herein as
the "Flip-in Trigger Date"), then the Company shall be obligated to deliver,
upon the surrender for exercise of a Right and without requiring payment of the
Purchase Price, shares of Common Stock (to the extent available) and then, if
necessary, cash, which shares and/or cash have an aggregate value equal to the
Spread. If the Board shall determine in good faith that it is likely that
sufficient additional shares of Common Stock or other equity securities could be
authorized for issuance upon exercise in full of the Rights, the thirty (30)
calendar day period set forth above may be extended to the extent necessary, but
not more than ninety (90) calendar days after the Flip-in Trigger Date, in order
that the Company may seek stockholder approval for the authorization of such
additional shares (such period, the "Substitution Period"). To the extent that
the Company determines that some action need be taken pursuant to the first
and/or second sentences of this Section 11(a)(iii), the Company (x) shall
provide, subject to Section 7(e), that such action shall apply uniformly to all
outstanding Rights, and (y) may suspend the exercisability of the Rights until
the expiration of the Substitution Period in order to seek any authorization of
additional shares and/or to decide the appropriate form of
23
distribution to be made pursuant to such first sentence and to determine the
value thereof. In the event of any such suspension, the Company shall issue a
public announcement stating that the exercisability of the Rights has been
temporarily suspended, as well as a public announcement at such time as the
suspension is no longer in effect. For purposes of this Section 11(a)(iii), the
value of the Common Stock shall be the Current Market Price per share of the
Common Stock on the Flip-in Trigger Date and the value of any Common Stock
Equivalent shall be deemed to have the same value as the Common Stock on such
date.
(iv) If the rules of the national securities exchange, registered
as such pursuant to Section 6 of the Exchange Act, or of the national securities
association, registered as such pursuant to Section 15A of the Exchange Act, on
which the Common Stock is principally traded or quoted would prohibit such
exchange or association from listing or continuing to list, or from authorizing
for or continuing quotation and/or transaction reporting through an interdealer
quotation syst the Common Stock or other equity securities of the Company if the
Rights were to be exercised for shares of Common Stock in accordance with
subparagraph (ii) of this Section 11(a) because such issuance would nullify,
restrict or disparately reduce the per share voting rights of holders of Common
Stock, the Company shall: (A) determine the Spread, and (B) with respect to each
Right, make adequate provision to substitute for the Adjustment Shares, upon
payment of the applicable Purchase Price, (1) cash, (2) a reduction in the
Purchase Price, (3) equity securities of the Company, including, without
limitation, Common Stock Equivalents, other than securities which would have the
effect of nullifying, restricting or disparately reducing the per share voting
rights of holders of Common Stock, (4) debt securities of the Company, (5) other
assets, or (6) any combination of the foregoing, having an aggregate value equal
to the Current Value, where such aggregate value has been determined by the
Board based upon the advice of a recognized investment banking firm selected by
the Board; provided, however, if the Company shall not have made adequate
provision to deliver value pursuant to clause (B) above within thirty (30)
calendar days following the Flip-in Trigger Date, then the Company shall be
obligated to deliver, upon the surrender for exercise of a Right and without
requiring payment of the Purchase Price, cash having an aggregate value equal to
the Spread. To the extent that the Company determines that some action need be
taken pursuant to the first sentence of this Section 11(a)(iv), the Company (x)
shall provide, subject to Section 7(e) (Exercise of Rights, Purchase Price;
Expiration Date of Rights - Termination of Acquiring Person's Rights), that such
action shall apply uniformly to all outstanding Rights and (y) may suspend the
exercisability of the Rights, but not longer than ninety (90) calendar days
after the Flip-in Trigger Date, in order
24
to decide the appropriate form of distribution to be made pursuant to such first
sentence and to determine the value thereof. In the event of any such
suspension, the Company shall issue a public announcement stating that the
exercisability of the Rights has been temporarily suspended, as well as a public
announcement at such time as the suspension is no longer in effect. For purposes
of this Section 11(a)(iv), the value of the Common Stock shall be the Current
Market Price per share of the Common Stock on the Flip-in Trigger Date and the
value of any Common Stock Equivalent shall be deemed to have the same value as
the Common Stock on such date.
(b) Purchase Price Adjustment - Capital Stock. In case the
Company shall fix a record date for the issuance of rights, options or warrants
to all holders of Preferred Stock entitling them to subscribe for or purchase
(for a period expiring within forty-five (45) calendar days after such record
date) Preferred Stock (or shares having the same rights, privileges and
preferences as the shares of Preferred Stock ("Equivalent PreferredStock")) or
securities convertible into Preferred Stock Equivalent Preferred Stock at a
price per share of Preferred Stock or per share of Equivalent Preferred Stock
(or having a conversion price per share, if a security convertible into
Preferred Stock or Equivalent Preferred Stock) less than the Current Market
Price per share of Preferred Stock on such record date, the Purchase Price to be
in effect after such record date shall be determined by multiplying the Purchase
Price in effect immediately prior to such record date by a fraction, the
numerator of which shall be the number of shares of Preferred Stock outstanding
on such record date, plus the number of shares of Preferred Stock which the
aggregate offering price of the total number of shares of Preferred Stock and/or
Equivalent Preferred Stock so to be offered (and/or the aggregate initial
conversion price of the convertible securities so to be offered) would purchase
at such Current Market Price, and the denominator of which shall be the number
of shares of Preferred Stock outstanding on such record date, plus the number of
additional shares of Preferred Stock and/or Equivalent Preferred Stock to be
offered for subscription or purchase (or into which the convertible securities
so to be offered are initially convertible). In case such subscription price may
be paid by delivery of consideration part or all of which may be in a form other
than cash, the value of such consideration shall be as determined in good faith
by the Board, whose determination shall be described in a statement filed with
the Rights Agent and shall be binding on the Rights Agent and the holders of the
Rights. Shares of Preferred Stock owned by or held for the account of the
Company shall not be deemed outstanding for the purpose of any such computation.
Such adjustment shall be made successively whenever such a record date is fixed,
and in the event that such rights or warrants are not so issued, the Purchase
Price
25
shall be adjusted to be the Purchase Price which would then be in effect if such
record date had not been fixed.
(c) Purchase Price Adjustment - Cash, Assets, etc. In case the Company
shall fix a record date for a distribution to all holders of Preferred
Stock (including any such distribution made in connection with a
consolidation or merger in which the Company is the continuing corporation)
of evidences of indebtedness, cash (other than a regular quarterly cash
dividend out of the earnings or retained earnings of the Company), assets
(other than a dividend payable in Preferred Stock, but including any
dividend payable in stock other than Preferred Stock) or subscription
rights or warrants (excluding those referred to in Section 11(b)
(Adjustment of Purchase Price, Number and Kind of Shares or Number of
Rights Purchase Price Adjustment - Capital Stock)), the Purchase Price to
be in effect after such record date shall be determined by multiplying the
Purchase Price in effect immediately prior to such record date by a
fraction, the numerator of which shall be the Current Market Price per
share of Preferred Stock on such record date, less the fair market value
(as determined in good faith by the Board, whose determination shall be
described in a statement filed with the Rights Agent) of the portion of the
cash, assets or evidences of indebtedness so to be distributed or of such
subscription rights or warrants applicable to a share of Preferred Stock
and the denominator of which shall be such Current Market Price per share
of Preferred Stock. Such adjustments shall be made successively whenever
such a record date is fixed, and in the event that such distribution is not
so made, the Purchase Price shall be adjusted to be the Purchase Price
which would have been in effect if such record date had not been fixed.
(d) Current Market Price.
(i) For the purpose of any computation hereunder, other than
computations made pursuant to Section 11(a)(iii) (Adjustment of Purchase Price,
Number and Kind of Shares or Number of Rights - Certain Adiustments) the Current
Market Price per share of Common Stock on any date shall be deemed to be the
average of the daily closing prices per share of such Common Stock for the
thirty (30) consecutive Trading Days immediately prior to such date, and for
purposes of computations pursuant to Section 11(a)(iii) the Current Market Price
per share of Common Stock on any date shall be deemed to be the average of the
daily closing prices per share of such Common Stock for the ten (10) consecutive
Trading Days immediately following such date; provided, however, that in the
event that the Current Market Price per share of the Common Stock is determined
during a period following the announcement by the issuer of
26
such Common Stock of (A) a dividend or distribution on such Common Stock payable
in shares of such Common Stock or securities convertible into shares of such
Common Stock (other than the Rights), or (B) any subdivision, combination or
reclassification of such Common Stock and the ex-dividend date for such dividend
or distribution, or the record date for such subdivision, combination or
reclassification shall not have occurred prior to the commencement of the
requisite thirty (30) Trading Day or ten (10) Trading Day period, as set forth
above, then, and in each such case, the Current Market Price shall be properly
adjusted to take into account ex-dividend trading. The closing price for each
Trading Day shall be the last sale price, regular way, or, in case no such sale
takes place on such Trading Day, the average of the closing bid and asked
prices, regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the New York Stock Exchange or, if the shares of Common Stock are not
listed or admitted to trading on the New York Stock Exchange, as reported in the
principal consolidated transaction reporting system with respect to securities
listed on the principal national securities exchange on which the shares of
Common Stock are listed or admitted to trading or, if the shares of Common Stock
are not listed or admitted to trading on any national securities exchange, the
last quoted price or, if not so quoted, the average of the high bid and low
asked prices in the over-the-counter market, as reported by the National
Association of Securities Dealers, Inc. Automated Quotation System or such other
system then in use, or, if on any such date the shares of Common Stock are not
quoted by any such organization, the average of the closing bid and asked prices
as furnished by a professional market maker making a market in the Common Stock
selected by the Board. If on any such date no market maker is making a market in
the Common Stock, the fair value of such shares on such date as determined in
good faith by the Board shall be used. The term "Trading Day'shall mean a day on
which the principal national securities exchange on which the shares of Common
Stock are listed or admitted to trading is open for the transaction of business
or, if the shares of Common Stock are not listed or admitted to trading on any
national securities exchange, a Business Day. If the Common Stock is not
publicly held or not so listed or traded, Current Market Price per share shall
mean the fair value per share as determined in good faith by the Board, whose
determination shall be described in a statement filed with the Rights Agent and
shall be conclusive for all purposes.
(ii) For the purpose of any computation hereunder, the
Current Market Price per share of Preferred Stock shall be determined in the
same manner as set forth above for the Common Stock in clause (i) of this
Section 11(d) (other than the last sentence thereof). If the Current Market
Price per share of
27
Preferred Stock cannot be determined in the manner provided above or if the
Preferred Stock is not publicly held or listed or traded in a manner described
in clause (i) of th Section 11(d), the Current Market Price per share of
Preferred Stock shall be conclusively deemed to be an amount equal to 1,000 (as
such number may be appropriately adjusted for such events as stock splits, stock
dividends and recapitalizations with respect to the Common Stock occurring after
the date of this Agreement) multiplied by the Current Market Price per share of
the Common Stock. If neither the Common Stock nor the Preferred Stock is
publicly held or so listed or traded, Current Market Price per share of the
Preferred Stock shall mean the fair value per share as determined in good faith
by the Board, whose determination shall be described in a statement filed with
the Rights Agent and shall be conclusive for all purposes. For all purposes of
this Agreement, the Current Market Price of one one-thousandth of a share of
Preferred Stock shall be equal to the Current Market Price of one share of
Preferred Stock divided by 1,000.
(e) Purchase Price Adjustment Threshold. Anything herein to the
contrary notwithstanding, no adjustment in the Purchase Price shall be required
unless such adjustment would require an increase or decrease of at least one
percent (1%) in the Purchase Price; provided, however, that any adjustments
which by reason of this Section 11(e) are not required to be made shall be
carried forward and taken into account in any subsequent adjustment. All
calculations under this Section 11 (Adjustme Purchase Price, Number and Kind of
Shares or Number of Rights) shall be made to the nearest cent or to the nearest
thousandth of a share of Common Stock or other share or one-millionth of a share
of Preferred Stock, as the case may be. Notwithstanding the first sentence of
this Section 11(e), any adjustment required by this Section 11 shall be made no
later than the earlier of (i) three (3) years from the date of the transaction
which mandates such adjustment, or (ii) the Expiration Date.
(f) Equivalent Adjustments. If as a result of an adjustment made
pursuant to Section 11 (a)(ii) (Adjustment of Purchase Price, Number and Kind of
Shares or Number of Rights - Certain Adjustments) or Section l3(a)
(Consolidation Merger or Sale or Transfer of Assets or Earning Power Flip-over
Event) the holder of any Right thereafter exercised shall become entitled to
receive any shares of capital stock other than Preferred Stock, thereafter the
number of such other shares so receivab upon exercise of any Right and the
Purchase Price thereof shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the provisions with
respect to the Preferred Stock contained in Sections 11(a), (b), (c), (e), (g),
(h), (i), (j), (k) and (m), and the
28
provisions of Sections 7, 9, 10, 13 and 14 with respect to the Preferred Stock
shall apply on like terms to any such other shares.
(g) Post-Adjustment Rights Issuances. All Rights originally
issued by the Company subsequent to any adjustment made to the Purchase Price
hereunder shall evidence the right to purchase, at the adjusted Purchase Price,
the number of one one-thousandths of a share of Preferred Stock purchasable from
time to time hereunder upon exercise of the Rights, all subject to further
adjustment as provided herein.
(h) Preferred Stock Anti-Dilution. Unless the Company shall have
exercised its election as provided in Section 11(i) (Adjustment of Purchase
Price; Number and Kind of Shares or Number of Rights - Adjustment of Number of
Rights), upon each adjustment of the Purchase Price as a result of the
calculations made in Section 11(b) (Adjustment of Purchase Price, Number and
Kind of Shares or Number of Rights - Purchase Price Adjustment - Capital Stock)
and Section 11(c) (Adjustment of Purchase Price, Number and Kind of Shares or
Number of Rights - Purchase Price Adjustment - Cash, Assets, etc.), each Right
outstanding immediately prior to the making of such adjustment shall thereafter
evidence the right to purchase, at the adjusted Purchase Price, that number of
one one-thousandths of a share of Preferred Stock (calculated to the nearest
one-millionth) obtained by (i) multiplying (x) the number of one one-thousandths
of a share covered by a Right immediately prior to this adjustment, by (y) the
Purchase Price in effect immediately prior to such adjustment of the Purchase
Price, and (ii) dividing the product so obtained by the Purchase Price in effect
immediately after such adjustment of the Purchase Price.
(i) Adjustment of Number of Rights. The Company may elect on or
after the date of any adjustment of the Purchase Price to adjust the number of
Rights, in lieu of any adjustment in the number of one one-thousandths of a
share of Preferred Stock purchasable upon the exercise of a Right. Each of the
Rights outstanding after the adjustment in the number of Rights shall be
exercisable for the number of one one-thousandths of a share of Preferred Stock
for which a Right was exercisable immediately prior to such adjustment. Each
Right held of record prior to such adjustment of the number of Rights shall
become that number of Rights (calculated to the nearest one-ten-thousandth)
obtained by dividing the Purchase Price in effect immediately prior to
adjustment of the Purchase Price by the Purchase Price in effect immediately
after adjustment of the Purchase Price. The Company shall make a public
announcement of its election to adjust the number of Rights, indicating the
record date for the adjustment, and,
29
if known at the time, the amount of the adjustment to be made. This record date
may be the date on which the Purchase Price is adjusted or any day thereafter,
but, if the Rights Certificates have been issued, shall be at least ten (10)
calendar days later than the date of the public announcement. If Rights
Certificates have been issued, upon each adjustment of the number of Rights
pursuant to this Section 11(i), the Company shall, as promptly as practicable,
cause to be distributed to holders of record of Rights Certificates on such
record date Rights Certificates evidencing, subject to Section 14 (Fractional
Rights and Fractional Shares) the additional Rights to which such holders shall
be entitled as a result of such adjustment, or, at the option of the Company,
shall cause to be distributed to such holders of record in substitution and
replacement for the Rights Certificates held by such holders prior to the date
of adjustment, and upon surrender thereof, if required by the Company, new
Rights Certificates evidencing all the Rights to which such holders shall be
entitled after such adjustment. Rights Certificates so to be distributed shall
be issued, executed and countersigned in the manner provided for herein (and may
bear, at the option of the Company, the adjusted Purchase Price) and shall be
registered in the names of the holders of record of Rights Certificates on the
record date specified in the public announcement.
(j) Rights Certificates. Irrespective of any adjustment or change
in the Purchase Price or the number of one one-thousandths of a share of
Preferred Stock issuable upon the exercise of the Rights, the Rights
Certificates theretofore and thereafter issued may continue to express the
Purchase Price per one one-thousandth of a share and the number of one
one-thousandths of a share which were expressed in the initial Rights
Certificates issued hereunder.
(k) Adjustment Below Par Value. Before taking any action that
would cause an adjustment reducing the Purchase Price below the then par or
stated value, if any, of the number of one one-thousandths of a share of
Preferred Stock issuable upon exercise of the Rights, the Company shall take any
corporate action which is or may, in the opinion of its counsel, be necessary in
order that the Company may validly and legally issue fully paid and
nonassessable such number of one one-thousandths share of Preferred Stock at
such adjusted Purchase Price.
(1) Adjustment Effective as of Future Date, Exercise. In any case
in which this Section 11 (Adjustment of Purchase Price, Number and Kind of
Shares or Number of Rights) shall require that an adjustment in the Purchase
Price be made effective as of a record date for a specified event, the Company
may
30
elect to defer until the occurrence of such event the issuance to the holder
of any Right exercised after such record date the number of one one-thousandths
of a share of Preferred Stock an other capital stock or securities of the
Company, if any, issuable upon such exercise over and above the number of one
one-thousandths of a share of Preferred Stock and other capital stock or
securities of the Company, if any, issuable upon such exercise on the basis of
the Purchase Price in effect prior to such adjustment; provided, however, that
the Company shall deliver to such holder a due bill or other appropriate
instrument evidencing such holder's right to receive such additional shares
(fractional or otherwise) or securities upon the occurrence of the event
requiring such adjustment.
(m) Tax Adjustments. Anything in this Section 11 (Adjustment of
PurchaseNumber and Kind of Shares or Number of Rights) to the contrary
notwithstanding, the Company shall be entitled to make such reductions in the
Purchase Price, in addition to those adjustments expressly required by this
Section 11, as and to the extent that in its good faith judgment the Board shall
determine to be advisable in order that any (i) consolidation or subdivision of
the Preferred Stock, (ii) issuance wholl cash of any shares of Preferred Stock
at less than the Current Market Price, (iii) issuance wholly for cash of shares
of Preferred Stock or securities which by their terms are convertible into or
exchangeable for shares of Preferred Stock, (iv) stock dividends or (v) issuance
of rights, options or warrants referred to in this Section 11, hereafter made by
the Company to holders of its Preferred Stock shall not be taxable to such
stockholders.
(n) Restriction on Certain Transactions. The Company shall not,
at any time after the earlier of the Stock Acquisition Date or the Distribution
Date, (i) consolidate with any other Person (other than a Subsidiary of the
Company in a transaction which complies with Section 11(o) (Adjustment of
Purchase Price, Number and Kind of Shares or Number of Rights - Restriction
Against Diminishing Benefits of the Rights)), (ii) merge with or into any other
Person (other than a Subsidiary of the Company in a transaction which complies
with Section 11 (o)), (iii) enter into a statutory share exchange or similar
transaction with any other Person (other than a Subsidiary of the Company in a
transaction which complies with Section 11(o)), or (iv) sell or transfer (or
permit any Subsidiary to sell or transfer), in one transaction, or a series of
related transactions, assets, cash flow or earning power aggregating more than
50% of the assets, cash flow or earning power of the Company and its
Subsidiaries (taken as a whole) to any other Person or Persons (other than the
Company and/or any of its Subsidiaries in one or more transactions each of which
complies with Section 11(o)), if (x) at the time of or
31
immediately after such consolidation, merger, statutory share exchange or
similar transaction, or sale there are any rights, warrants or other instruments
or securities outstanding or agreements in effect which would substantially
diminish or otherwise eliminate the benefits intended to be afforded by the
Rights or (y) prior to, simultaneously with or immediately after such
consolidation, merger, statutory share exchange or similar transaction, or sale,
the stockholders of the Person who constitutes, or would constitute, the
"Principal Party" for purposes of Section 13(a) (Consolidation, Merger or Sale
or Transfer of Assets or Earning Power - Flip-over Event) shall have received a
distribution of Rights previously owned by such Person or any of its Affiliates
and Associates.
(o) Restriction Against Diminishing Benefits of the Rights. The
Company covenants and agrees that, after the earlier of the Stock Acquisition
Date or the Distribution Date, it will not, except as permitted by Section 23
(Redemption and Termination) or Section 27 (Supplements and Amendments) take (or
permit any Subsidiary to take) any action if at the time such action is taken it
is reasonably foreseeable that such action will diminish substantially or
otherwise eliminate the benefits intended to be afforded by the Rights.
(p) Common Stock Adiustments. Anything in this Agreement to the
contrary notwithstanding, in the event that the Company shall at any time after
the Rights Dividend Declaration Date and prior to the Distribution Date (i)
declare a dividend on the outstanding shares of Common Stock payable in shares
of Common Stock, (ii) subdivide or split the outstanding shares of Common Stock,
or (iii) combine the outstanding shares of Common Stock into a smaller number of
shares, the number of Rights associated with each share of Common Stock then
outstanding, or issued or delivered thereafter but prior to the Distribution
Date, shall be proportionately adjusted so that the number of Rights thereafter
associated with each share of Common Stock following any such event shall equal
the result obtained by multiplying the number of Rights associated with each
share of Common Stock immediately prior to such event by a fraction, the
numerator of which shall be the total number of shares of Common Stock
outstanding immediately prior to the occurrence of the event and the denominator
of which shall be the total number of shares of Common Stock outstanding
immediately following the occurrence of such event. The adjustments provided for
in this Section 11(p) shall be made successively whenever such a dividend is
declared or paid or such subdivision, combination or consolidation is effected.
Section 12. Certificate of Adiusted Purchase Price or Number of Shares.
Whenever an adjustment is made as provided in Section 11 (Adjustment of
32
Purchase Price: Number and Kind of Shares or Number of Rights) and Section 13
(Consolidation. Merger or Sale or Transfer of Assets or Earning Power) the
Company shall (a) promptly prepare a certificate setting forth such adjustment
and a brief statement of the facts accounting for such adjustment, (b) promptly
file with the Rights Agent, and with each transfer agent for the Preferred Stock
and the Common Stock, a copy of such certificate, and (c) mail or cause the
Rights Agent to mail a brief summary thereof to each holder of a Rights
Certificate (or, if prior to the Distribution Date, to each holder of a
certificate representing shares of Common Stock) in accordance with Section 26
(Notices). The Rights Agent shall be fully protected in relying on any such
certificate and on any adjustment therein contained.
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning
Power.
(a) Flip-over Event. In the event that, following the Stock
Acquisition Date, directly or indirectly, (x) the Company shall consolidate
with, or merge with and into, or enter into a statutory stock exchange or
similar transaction with, any other Person (other than a Subsidiary of the
Company in a transaction which complies with Section 11(o)(Adjustment of
Purchase Price: Number and Kind of Shares or Number of Rights - Restriction
Against Diminishing Benefits of the Rights)), and the Co shall not be the
continuing or surviving corporation of such consolidation, merger or statutory
share exchange or similar transaction, (y) any Person (other than a Subsidiary
of the Company in a transaction which complies with Section 11 (o)) shall
consolidate with, or merge with or into, or enter into a statutory stock
exchange or similar transaction with, the Company, and the Company shall be the
continuing or surviving corporation of such consolidation, merger or statutory
share exchange or similar transaction and, in connection with such
consolidation, merger or statutory share exchange or similar transaction, all or
part of the outstanding shares of Common Stock shall be changed into or
exchanged for stock or other securities of any other Person or cash or any other
property, or (z) the Company shall sell or otherwise transfer (or one or more of
its Subsidiaries shall sell or otherwise transfer), in one transaction or a
series of related transactions, assets, cash flow or earning power aggregating
more than 50% of the assets, cash flow or earning power of the Company and its
Subsidiaries (taken as a whole) to any Person or Persons (other than the Company
or any Subsidiary of the Company in one or more transactions each of which
complies with Section 11(o)), then, and in each such case (except as may be
contemplated by Section 13(d) (Consolidation, Merger or Sale or Transfer of
Assets or Earning Power - Exceptions)), (i) proper provision shall be
33
made so that: each holder of a Right, except as provided in Section 7(e)
(Exercise of Rights: Purchase Price, Expiration Date of Rights Termination of
Acquiring Person's Rights) shall thereafter have the right to receive, upon the
exercise thereof at the then current Purchase Price in accordance with the terms
of this Agreement, such number of validly authorized and issued, fully paid,
nonassessable and freely tradeable shares of Common Stock of the Principal
Party, not subject to any liens, encumbrances, rights of first refusal or other
adverse claims, as shall be equal to the result obtained by (A) multiplying the
then current Purchase Price by the number of one one-thousandths of a share of
Preferred Stock for which a Right is exercisable immediately prior to the first
occurrence of a Flip-over Event (or, if a Flip-in Event has occurred prior to
the first occurrence of a Flip-over Event, multiplying the number of such one
one-thousandths of a share for which a Right was exercisable immediately prior
to the first occurrence of a Flip-in Event by the Purchase Price in effect
immediately prior to such first occurrence), and (B) dividing that product
(which, following the first occurrence of a Flip-over Event, shall be referred
to as the "Purchase Price" for each Right and for all purposes of this
Agreement) by 50% of the Current Market Price per share of the Common Stock of
such Principal Party on the date of consummation of such Flip-over Event; (ii)
such Principal Party shall thereafter be liable for, and shall assume, by virtue
of such Flip-over Event, all the obligations and duties of the Company pursuant
to this Agreement; (iii) the term "Company" shall thereafter be deemed to refer
to such Principal Party, it being specifically intended that the provisions of
Section 11 (Adjustment of Purchase Price: Number and Kind of Shares or Number of
Rights) shall apply only to such Principal Party following the first occurrence
of a Flipover Event; (iv) such Principal Party shall take such steps (including,
but not limited to, the reservation of a sufficient number of shares of its
Common Stock) in connection with the consummation of any such transaction as may
be necessary to assure that the provisions hereof shall thereafter be
applicable, as nearly as reasonably may be, in relation to its shares of Common
Stock thereafter deliverable upon the exercise of the Fights; and (v) the
provisions of Section 11(a)(ii) (Adjustment of Purchase Price, Number and Kind
of Shares or Number of Rights Certain Adjustments) hereof shall be of no effect
following the first occurrence of any Flip-over Event.
(b) Principal Party. "Principal Party" shall mean
(i) in the case of any transaction described in clause (x)
or (y) of the first sentence of Section 13(a) (Consolidation, Merger
or Sale or Transfer of Assets or Earning Power Flip-over Event), the
Person that is the issuer of any securities into which shares of
Common Stock of the
34
Company are converted in such consolidation, merger or statutory share
exchange or similar transaction, and if no securities are so issued,
the Person that is the other party to such consolidation, merger or
statutory share exchange or similar transaction, and
(ii) in the case of any transaction described in clause (z)
of the first sentence of Section 13(a) (Consolidation, Merger or Sale
or Transfer of Assets or Earning Power - Flip-over Event), the Person
that is the party receiving the greatest portion of the assets, cash
flow or earning power transferred pursuant to such transaction or
transactions;
provided, however, that in any such case, (1) if the Common Stock of such Person
is not at such time and has not been continuously over the preceding twelve (12)
month period registered under Section 12 of the Exchange Act, and such Person is
a direct or indirect Subsidiary of another Person the Common Stock of which is
and has been so registered, "Principal Party" shall refer to such other Person;
and (2) in case such Person is a Subsidiary, directly or indirectly, of more
than one Person, the Common Stocks of two or more of which are and have been so
registered, "Principal Party" shall refer to whichever of such Persons is the
issuer of the total outstanding Common Stock having the greatest aggregate
market value.
(c) Supplemental Agreement. The Company shall not consummate a
Flip-over Event unless the Principal Party shall have a sufficient number of
authorized shares of its Common Stock which have not been issued or reserved for
issuance to permit the exercise in full of the Rights in accordance with this
Section 13 (Consolidation, Merger or Sale or Transfer of Assets or Earning
Power) and unless prior thereto the Company and such Principal Party shall have
executed and delivered to the Rights Agent a supplemental agreement providing
for the terms set forth in paragraphs (a) and (b) of this Section 13 and further
providing that, as soon as practicable after the date of such Flip-over Event,
the Principal Party will
(i) prepare and file a registration statement under the Act,
with respect to the Rights and the securities purchasable upon
exercise of the Rights on an appropriate form, and will use its best
efforts to cause such registration statement to (A) become effective
as soon as practicable after such filing and (B) remain effective
(with a prospectus at all times meeting the requirements of the Act)
until the Expiration Date and take all such other action as may be
necessary to enable Principal Party to issue
35
the securities purchasable upon exercise of the Rights, including but
not limited to the registration or qualification of such securities
under all requisite securities laws or jurisdictions of the various
states and the listing of such securities on such exchange and trading
markets as may be necessary or appropriate; and
(ii) will deliver to holders of the Rights historical
financial statements for the Principal Party and each of its
Affiliates which comply in all respects with the requirements for
registration on Form 10 under the Exchange Act.
The provisions of this Section 13 (Consolidation, Merger or Sale or Transfer of
Assets or Earning Power) shall similarly apply to successive consolidations,
mergers or statutory share exchanges or similar transactions or sales or other
transfers. In the event that a Flip-over Event shall occur at any time after the
occurrence of a Flip-in Event, the Rights which have not theretofore been
exercised shall thereafter become exercisable in the manner described in Section
13(a) (Consolidation, Merger or Sale or Transfer of Assets or Earning Power -
Flip-over Event).
(d) Exceptions. Notwithstanding anything in this Agreement to the
contrary, Section 13 (Consolidation, Merger or Sale or Transfer of Assets or
Earning Power) shall not be applicable to a transaction described in
subparagraphs (x) and (y) of Section 13(a) (Consolidation, Merger or Sale or
Transfer of Assets or Earning Power - Flip-over Event) if (i) such transaction
is consummated with a Person or Persons who acquired shares of Common Stock
pursuant to a tender offer or exchange offer f all outstanding shares of Common
Stock which complies with the provisions of Section 11(a)(ii)(A) (Adjustment of
Purchase Price-, Number and Kind of Shares or Number of Rights - Certain
Adjustments) (or a wholly-owned subsidiary of any such Person or Persons), (ii)
the price per share of Common Stock offered in such transaction is not less than
the price per share of Common Stock paid to all holders of shares of Common
Stock whose shares were purchased pursuant to such tender or exchange offer and
(iii) the form of consideration being offered in such transaction is the same as
the form of consideration paid to all holders of shares of Common Stock whose
shares were purchased pursuant to such tender offer or exchange offer. Upon
consummation of any such transaction contemplated by this Section 13(d), all
Rights hereunder shall expire.
Section 14. Fractional Rights and Fractional Shares.
36
(a) Fractional Rights. The Company shall not be required to issue
fractions of Rights, except prior to the Distribution Date as provided in
Section 11(p) (Adjustment of Purchase Price, Number and Kind of Shares or Number
of Rights Common Stock Adjustments), or to distribute Rights Certificates which
evidence fractional Rights. In lieu of such fractional Rights, there shall be
paid to the registered holders of the Rights Certificates with regard to which
such fractional Rights would otherwise be issuable, an amount in cash equal to
the same fraction of the current market value of a whole Right. For purposes of
this Section 14(a), the current market value of a whole Right shall be the
closing price of the Rights for the Trading Day immediately prior to the date on
which such fractional Rights would have been otherwise issuable. The closing
price of the Rights for any Trading Day shall be the last sale price, regular
way, or, in case no such sale takes place on such Trading Day, the average of
the closing bid and asked prices, regular way, in either case as reported in the
principal consolidated transaction reporting system with respect to securities
listed or admitted to trading on the New York Stock Exchange or, if the Rights
are not listed or admitted to trading on the New York Stock Exchange, as
reported in the principal consolidated transaction reporting system with respect
to securities listed on the principal national securities exchange on which the
Rights are listed or admitted to trading, or if the Rights are not listed or
admitted to trading on any national securities exchange, the last quoted price
or, if not so quoted, the average of the high bid and low asked prices in the
over-the-counter market as reported by the National Association of Securities
Dealers, Inc. Automated Quotation System or such other system then in use or, if
on any such date the Rights are not quoted by any such organization, the average
of the closing bid and asked prices as furnished by a professional market maker
making a market in the Rights selected by the Board. If on any such date no such
market maker is making a market in the Rights, the fair value of the Rights on
such date as determined in good faith by the Board shall be used.
(b) Fractional Shares of Preferred Stock. The Company shall not be
required to issue fractions of shares of Preferred Stock (other than fractions
which are integral multiples of one one-thousandth of a share of Preferred Stock
which may at the option of the Company, be evidenced by depositary receipts)
upon exercise of the Rights or to distribute certificates which evidence
fractional shares of Preferred Stock (other than fractions which are integral
multiples of one one-thousandth of share of Preferred Stock). Interests in
fractions of Preferred Stock in integral multiples of one one-thousandth of a
share of Preferred Stock may, at the election of the Company, be evidenced by
depositary receipts, pursuant to an appropriate agreement between the Company
and a depositary
37
selected by it; provided, however, that such agreement shall provide that the
holders of such depositary receipts shall have all the rights, privileges and
preferences to which they are entitled as beneficial owners of the Preferred
Stock represented by such depositary receipts. In lieu of fractional shares of
Preferred Stock that are not integral multiples of one one-thousandth of a share
of Preferred Stock, the Company may pay to the registered holders of Rights
Certificates at the time such Rights are exercised as herein provided an amount
in cash equal to the same fraction of the current market value of one
one-thousandth of a share of Preferred Stock. For purposes of this Section
14(b), the current market value of one one-thousandth of a share of Preferred
Stock shall be one one-thousandth of the closing price of a share of Preferred
Stock (as determined pursuant to Section 11(d)(ii) (Adjustment of Purchase
Price, Number and Kind of Shares or Number of Rights - Current Market Price) for
the Trading Day immediately prior to the date of such exercise.
(c) Fractional Shares of Common Stock. Following the occurrence of a
Triggering Event, the Company shall not be required to issue fractions of shares
of Common Stock upon exercise of the Rights or to distribute certificates which
evidence fractional shares of Common Stock. In lieu of fractional shares of
Common Stock, the Company may pay to the registered holders of Rights
Certificates at the time such Rights are exercised as herein provided an amount
in cash equal to the same fractio the current market value of one (1) share of
Common Stock. For purposes of this Section 14(c), the current market value of
one share of Common Stock shall be the closing price of one share of Common
Stock (as determined pursuant to Section 11(d)(i) (Adjustment of Purchase Price,
Number and Kind of Shares or Number of Rights - Current Market Price) for the
Trading Day immediately prior to the date of such exercise.
(d) Waiver of Fractional Rights and Shares. The holder of a Right by
the acceptance of the Right expressly waives his or her right to receive any
fractional Rights or any fractional shares upon exercise of a Right, except as
permitted by this Section 14 (Fractional Rights and Fractional Shares).
Section 15. Rights of Action. All rights of action in respect of this
Agreement are vested in the respective registered holders of the Rights
Certificates (and, prior to the Distribution Date, the registered holders of the
Common Stock); and any registered holder of any Rights Certificate (or, prior to
the Distribution Date, of the Common Stock), without the consent of the Rights
Agent or of the holder of any other Rights Certificate (or, prior to the
Distribution Date, of the Common Stock), may, in his or her own behalf and for
his or her own benefit, enforce, and may
38
institute and maintain any suit, action or proceeding against the Company to
enforce, or otherwise act in respect of, his or her right to exercise the Rights
evidenced by such Rights Certificate in the manner provided in such Rights
Certificate and in this Agreement. Without limiting the foregoing or any
remedies available to the holders of Rights, it is specifically acknowledged
that the holders of Rights would not have an adequate remedy at law for any
breach of this Agreement and shall be entitled to specific performance of the
obligations hereunder and injunctive relief against actual or threatened
violations of the obligations hereunder of any Person subject to this Agreement.
Section 16. Agreement of Rights Holders. Every holder of a Right by
accepting the same consents and agrees with the Company and the Rights Agent and
with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be transferable
only in connection with the transfer of Common Stock;
(b) after the Distribution Date, the Rights Certificates are
transferable only on the registry books of the Rights Agent if surrendered at
the principal office or offices of the Rights Agent designated for such
purposes, duly endorsed or accompanied by a proper instrument of transfer and
with the appropriate forms and certificates fully executed;
(c) subject to Section 6(a) (Transfer, Split Up, Combination and
Exchange of Rights Certificates, Mutilated, Destroyed, Lost or Stolen Rights
Certificates - Procedure) and Section 7(f) (Exercise of Rights; Purchase Price,
Expiration Date of Rights - Surrender of Rights Certificates; Identity of
Beneficial Owner), the Company and the Rights Agent may deem and treat the
person in whose name a Rights Certificate (or, prior to the Distribution Date,
the associated Common Stock certificate) registered as the absolute owner
thereof and of the Rights evidenced thereby (notwithstanding any notations of
ownership or writing on the Rights Certificates or the associated Common Stock
certificate made by anyone other than the Company or the Rights Agent) for all
purposes whatsoever, and neither the Company nor the Rights Agent, subject to
the last sentence of Section 7(e) (Exercise of Rights; Purchase Price,
Expiration Date of Rights - Termination of Acquiring Person's Rights), shall be
required to be affected by any notice to the contrary; and
(d) notwithstanding anything in this Agreement to the contrary,
neither the Company nor the Rights Agent shall have any liability to any holder
39
of a Right or other Person as a result of its inability to perform any of its
obligations under this Agreement by reason of any preliminary or permanent
injunction or other order, decree or ruling issued by a court of competent
jurisdiction or by a governmental, regulatory or administrative agency or
commission, or any statute, rule, regulation executive order promulgated or
enacted by any governmental authority, prohibiting or otherwise restraining
performance of such obligation; provided, however, the Company must use its best
efforts to have any such order, decree or ruling lifted or otherwise overturned
as soon as possible.
Section 17. Rights Certificate Holder Not Deemed a Stockholder. No holder,
as such, of any Rights Certificate shall be entitled to vote, receive dividends
or be deemed for any purpose the holder of the number of one one-thousandths of
a share of Preferred Stock or any other securities of the Company which may at
any time be issuable on the exercise of the Rights represented thereby, nor
shall anything contained herein or in any Rights Certificate be construed to
confer upon the holder of any Rights Certificate, as such, any of the rights of
a stockholder of the Company or any right to vote for the election of directors
or upon any matter submitted to stockholders at any meeting thereof, or to give
or withhold consent to any corporate action, or to receive notice of meetings or
other actions affecting stockholders (except as provided in Section 25 (Notice
of Certain Events)), or to receive dividends or subscription rights, or
otherwise, until the Right or Rights evidenced by such Rights Certificate shall
have been exercised in accordance with the provisions hereof.
Section 18. Concerning the Rights Agent.
(a) Compensation. The Company shall pay to the Rights Agent reasonable
compensation for all services rendered by it hereunder and, from time to time,
on demand of the Rights Agent, its reasonable expenses and counsel fees and
other disbursements incurred in the administration and execution of this
Agreement and the exercise and performance of its duties hereunder. The Company
agrees to indemnify the Rights Agent for, and to hold it harmless against, any
loss, liability or expense, inc without gross negligence, bad faith or willful
misconduct on the part of the Rights Agent, for anything done or omitted to be
done by the Rights Agent in connection with the acceptance and administration of
this Agreement, including the costs and expenses of defending against or
investigating any claim of liability in the premises.
(b) Reliance. The Rights Agent shall be protected and shall incur
40
no liability for or in respect of any action taken, suffered or omitted to be
taken by it in connection with its administration of this Agreement in reliance
upon any Rights Certificate or certificate for Common Stock or for other
securities of the Company, instrument of assignment or transfer, power of
attorney, endorsement, affidavit, letter, notice, direction, consent,
certificate, statement or other paper or document believed by it to be genuine
and to be signed, executed and, where necessary, verified or acknowledged, by
the proper Person or Persons, or otherwise upon the advice of counsel as set
forth in Section 20 (Duties of Rights Agent).
Section 19. Merger or Consolidation or Change of Name of Rights Agent.
(a) Successor. Any corporation into which the Rights Agent or any
successor Rights Agent may be merged or with which it may be consolidated, or
any corporation resulting from any merger or consolidation to which the Rights
Agent or any successor Rights Agent shall be a party, or any corporation
succeeding to the corporate trust or stock transfer business of the Rights Agent
or any successor Rights Agent, shall be the successor to the Rights Agent under
this Agreement without the execut or filing of any paper or any further act on
the part of any of the parties hereto; provided, however, that such corporation
would be eligible for appointment as a successor Rights Agent under the
provisions of Section 21 (Change of Rights Agent). In case at the time such
successor Rights Agent shall succeed to the agency created by this Agreement,
any of the Rights Certificates shall have been countersigned but not delivered,
any such successor Rights Agent may adopt the countersignature of a predecessor
Rights Agent and deliver such Rights Certificates so countersigned; and in case
at that time any of the Rights Certificates shall not have been countersigned,
any successor Rights Agent may countersign such Rights Certificates either in
the name of the predecessor or in the name of the successor Rights Agent; and in
all such cases such Rights Certificates shall have the full force provided in
the Rights Certificates and in this Agreement.
(b) Prior Countersignatures. In case at any time the name of the
Rights Agent shall be changed and at such time any of the Rights Certificates
shall have been countersigned but not delivered, the Rights Agent may adopt the
countersignature under its prior name and deliver Rights Certificates so
countersigned; and in case at that time any of the Rights Certificates shall not
have been countersigned, the Rights Agent may countersign such Rights
Certificates either in its prior name or in changed name; and in all such cases
such Rights Certificates shall have the full force provided in the Rights
Certificates and in this Agreement.
41
Section 20. Duties of Rights Agent. The Rights Agent undertakes the duties
and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Rights Certificates,
by their acceptance thereof, shall be bound:
(a) Legal Counsel. The Rights Agent may consult with legal counsel
(who may be legal counsel for the Company), and the opinion of such counsel
shall be full and complete authorization and protection to the Rights Agent as
to any action taken or omitted to be taken by it in good faith and in accordance
with such opinion.
(b) Certification by the Company. Whenever in the performance of its
duties under this Agreement the Rights Agent shall deem it necessary or
desirable that any fact or matter (including, without limitation, the identity
of any Acquiring Person and the determination of Current Market Price) be proved
or established by the Company prior to taking or suffering any action hereunder,
such fact or matter (unless other evidence in respect thereof be herein
specifically prescribed) may be deem be conclusively proved and established by a
certificate signed by the President, any Vice President, the Secretary, any
Assistant Secretary, the Treasurer or any Assistant Treasurer of the Company and
delivered to the Rights Agent; and such certificate shall be full authorization
to the Rights Agent for any action taken or suffered in good faith by it under
the provisions of this Agreement in reliance upon such certificate.
(c) Liability for Gross Negligence, etc. The Rights Agent shall be
liable hereunder only for its own gross negligence, bad faith or willful
misconduct.
(d) Statements of Fact or Recitals. The Rights Agent shall not be
liable for or by reason of any of the statements of fact or recitals contained
in this Agreement or in the Rights Certificates or be required to verify the
same (except as to its countersignature on such Rights Certificates), but all
such statements and recitals are and shall be deemed to have been made by the
Company only.
(e) Agreement; Adjustments. The Rights Agent shall not be under any
responsibility in respect of the validity of this Agreement or the execution and
delivery hereof (except the due execution hereof by the Rights Agent) or in
respect of the validity or execution of any Rights Certificate (except its
countersignature); nor shall it be responsible for any breach by the Company of
any covenant or condition contained in this Agreement or in any Rights
Certificate; nor shall it be responsibl any adjustment required under the
provisions of Section 11
42
(Adjustment of Purchase Price; Number and Kind of Shares or Number of Rights) or
Section 13 (Consolidation, Merger or Sale or Transfer of Assets or Earning
Power) or responsible for the manner, method or amount of any such adjustment or
the ascertaining of the existence of facts that would require any such
adjustment (except with respect to the exercise of Rights evidenced by Rights
Certificates after actual notice of any such adjustment); nor shall it by any
act hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any shares of Common Stock or Preferred Stock to
be issued pursuant to this Agreement or any Rights Certificate or as to whether
any shares of Common Stock or Preferred Stock will, when so issued, be validly
authorized and issued, fully paid and nonassessable.
(f) Further Assurances. The Company will perform, execute, acknowledge
and deliver or cause to be performed, executed, acknowledged and delivered all
such further and other acts, instruments and assurances as may reasonably be
required by the Rights Agent for the carrying out or performing by the Rights
Agent of the provisions of this Agreement.
(g) Instructions. The Rights Agent is hereby authorized and directed
to accept instructions with respect to the performance of its duties hereunder
from the President, any Vice President, the Secretary, any Assistant Secretary,
the Treasurer or any Assistant Treasurer of the Company and to apply to such
persons for advice or instructions in connection with its duties, and it shall
not be liable for any action taken or suffered to be taken by it in good faith
in accordance with the instructions of any such person.
(h) Dealing in Rights. The Rights Agent and any stockholder, director,
officer or employee of the Rights Agent may buy, sell or deal in any of the
Rights or other securities of the Company or become pecuniarily interested in
any transaction in which the Company may be interested, or contract with or lend
money to the Company or otherwise act as fully and freely as though it were not
Rights Agent under this Agreement. Nothing herein shall preclude the Rights
Agent from acting in any ot capacity for the Company or for any other legal
entity.
(i) Agents, Reasonable Care. The Rights Agent may execute and exercise
any of the rights or powers hereby vested in it or perform any duty hereunder
either itself or by or through its attorneys or agents, and the Rights Agent
shall not be answerable or accountable for any act, default, neglect or
misconduct of any such attorneys or agents or for any loss to the Company
43
resulting from any such act, default, neglect or misconduct; provided, however,
reasonable care was exercised in the selection and continued employment thereof.
(j) Expenses: Repayment Assurances. No provision of this Agreement
shall require the Rights Agent to expend or risk its own funds or otherwise
incur any financial liability in the performance of any of its duties hereunder
or in the exercise of its rights if there shall be reasonable grounds for
believing that repayment of such funds or adequate indemnification against such
risk or liability is not reasonably assured to it.
(k) Exercise of Rights; Consultation with Company. If, with respect to
any Rights Certificate surrendered to the Rights Agent for exercise or transfer,
the certificate attached to the form of assignment or form of election to
purchase, as the case may be, has either not been completed or indicates an
affirmative response to clause 1 and/or 2 thereof, the Rights Agent shall not
take any further action with respect to such requested exercise of transfer
without first consulting with the Company.
Section 21. Change of Rights Agent. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon thirty (30) calendar days' notice in writing mailed to the Company, and to
each transfer agent of the Common Stock and Preferred Stock, by registered or
certified mail, and to the holders of the Rights Certificates by first-class
mail. The Company may remove the Rights Agent or any successor Rights Agent upon
thirty (30) calendar days' notice in writing, mailed to the Rights Agent or
successor Rights Agent, as the case may be, and to each transfer agent of the
Common Stock and Preferred Stock, by registered or certified mail, and to the
holders of the Rights Certificates by first-class mail. If the Rights Agent
shall resign or be removed or shall otherwise become incapable of acting, the
Company shall appoint a successor to the Rights Agent. If the Company shall fail
to make such appointment within a period of thirty (30) calendar days after
giving notice of such removal or after it has been notified in writing of such
resignation or incapacity by the resigning or incapacitated Rights Agent or by
the holder of a Rights Certificate (who shall, with such notice, submit his
Rights Certificate for inspection by the Company), then the registered holder of
any Rights Certificate may apply to any court of competent jurisdiction for the
appointment of a new Rights Agent. Any successor Rights Agent, whether appointed
by the Company or by such a court, shall be (a) a corporation organized and
doing business under the laws of the United States or of any State of the United
States, in good standing, which is authorized under such laws to exercise stock
transfer or
44
corporate trust powers, is subject to supervision or examination by federal or
state authority and has at the time of its appointment as Rights Agent a
combined capital and surplus of at least $50,000,000 or (b) an Affiliate of a
corporation described in clause (a) of this sentence. After appointment, the
successor Rights Agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named as Rights Agent without
further act or deed; but the predecessor Rights Agent shall deliver and transfer
to the successor Rights Agent any property at the time held by it hereunder, and
execute and deliver any further assurance, conveyance, act or deed necessary for
the purpose. Not later than the effective date of any such appointment, the
Company shall file notice thereof in writing with the predecessor Rights Agent
and each transfer agent of the Common Stock and the Preferred Stock, and mail a
notice thereof in writing to the registered holders of the Rights Certificates.
Failure to give any notice provided for in this Section 21 (Change of Rights
Agent), or any defect therein, shall not affect the legality or validity of the
resignation or removal of the Rights Agent or the appointment of the successor
Rights Agent, as the case may be.
Section 22. Issuance of New Rights Certificates. Notwithstanding any of the
provisions of this Agreement or of the Rights to the contrary, the Company may,
at its option, issue new Rights Certificates evidencing Rights in such form as
may be approved by the Board to reflect any adjustment or change in the Purchase
Price and the number or kind or class of shares or other securities or property
purchasable under the Rights Certificates made in accordance with the provisions
of this Agreement. In addition, in connection with the issuance or sale of
shares of Common Stock following the Distribution Date and prior to the
redemption or expiration of the Rights, the Company (a) shall, with respect to
shares of Common Stock so issued or sold pursuant to the exercise of stock
options or under any employee plan or arrangement, or upon the exercise,
conversion or exchange of securities hereafter issued by the Company, in either
case outstanding as of the Distribution Date, and (b) may, in any other case, if
deemed necessary or appropriate by the Board, issue Rights Certificates
representing the appropriate number of rights in connection with such issuance
or sale; provided, however, that (i) no such Rights Certificate shall be issued
if, and to the extent that, the Company shall be advised by counsel that such
issuance would create a significant risk of material, adverse tax consequences
to the Company or the Person to whom such Rights Certificate would be issued,
and (ii) no such Rights Certificate shall be issued if, and to the extent that,
appropriate adjustment shall otherwise have been made in lieu of the issuance
thereof.
Section 23. Redemption and Termination.
45
(a) Redemption. The Company may, at its option, at any time prior to
the earlier of the Stock Acquisition Date, or (ii) the Final Expiration Date,
redeem (the date of such redemption being referred to herein as the "Redemption
Date") all but not less than all of the then outstanding Rights at a redemption
price of $0.001 per Right, as such amount may be appropriately adjusted to
reflect any stock split, stock dividend or similar transaction occurring after
the date hereof (such redempt price being hereinafter referred to as the
"Redemption Price"). The redemption of the Rights by the Company may be made
effective at such time, on such basis and with such conditions as the Board in
its sole discretion, may establish. The Company may, at its option, pay the
Redemption Price in cash, shares of Common Stock (based on the Current Market
Price of the Common Stock at the time of redemption) or any other form of
consideration deemed appropriate by Board.
(b) Effect of Redemption; Procedure. Immediately upon the action of
the Company ordering the redemption of the Rights and without any further action
and without any notice, the right to exercise the Rights will terminate and the
only right thereafter of the holders of Rights shall be to receive the
Redemption Price for each Right so held. Promptly after the Redemption Date, the
Company shall (i) give notice of such redemption to the Rights Agent, (ii) give
public notice of such redemp provided, however, that the failure to give, or any
defect in, such notice shall not affect the validity of such redemption, and
(iii) mail notice of such redemption to the holders of the then outstanding
Rights at their last addresses as they appear upon the registry books of the
Rights Agent or, prior to the Distribution Date, on the registry books of the
Transfer Agent for the Common Stock. Any notice which is mailed in the manner
herein provided shall be deemed given, whether or not the holder receives the
notice. Each such notice of redemption will state the method by which the
payment of the Redemption Price will be made. Amounts payable shall be rounded
down to the nearest $0.01.
Section 24. Exchange.
(a) Right to Exchange. The Company may, at its option, at any time and
from time to time after the first occurrence of a Flip-in Event, exchange all or
part of the then outstanding and exercisable Rights (other than Rights which
have become void as provided in Section 7(e) (Exercise of Rights, Purchase
Price, Expiration Date of Rights - Termination of Acquiring Person's Rights))
for the Exchange Number of shares of Common Stock, shares or units of Preferred
Stock which the Board has determined to be a Common Stock Equivalent, units of
other
46
property or any combination thereof as determined by the Board.
Notwithstanding the foregoing, the Company shall not be empowered to effect such
exchange at any time after any Person (other than the Company, any Subsidiary of
the Company, any employee benefit plan of the Company or any such Subsidiary or
any entity holding shares of Common Stock for or pursuant to any such plan),
together with all Affiliates and Associates of such Person, becomes the
Beneficial Owner of 50% or more of the shares of Common Stock then outstanding.
The exchange of the Rights by the Company may be made effective at such time, on
such basis and with such conditions as the Board in its sole discretion may
establish.
(b) Effect of Exchange; Procedure. Immediately upon the action of the
Company ordering the exchange of any Rights pursuant to paragraph (a) of this
Section 24, evidence of which shall have been filed with the Rights Agent and
without any further action and without any notice, the right to exercise such
Rights will terminate and the only right thereafter of a holder of such Rights
shall be to receive that number of shares of Common Stock, Common Stock
Equivalents or units of other prope equal to the number of such Rights held by
such holder multiplied by the Exchange Number. Promptly after the action of the
Company ordering the exchange of the Rights, the Company shall (i) file evidence
of such action with the Rights Agent, (ii) give public notice of such exchange;
provided, however, that the failure to give, or any defect in, such notice shall
not affect the validity of such exchange, and (iii) mail notice of such exchange
to the holders of such Rights at their last addresses as they appear upon the
registry books of the Rights Agent. Any notice which is mailed in the manner
herein provided shall be deemed given, whether or not the holder receives the
notice. Each such notice of exchange will state the method by which the exchange
will be effected and, in the event of any partial exchange, the number of Rights
which will be exchanged. Any partial exchange shall be effected pro rata based
on the number of Rights (other than Rights which have become void as provided in
Section 7(e) (Exercise of Rights; Purchase Price, Expiration Date of Rights
Termination of Acquiring Person's Rights)) held by each holder of Rights.
(c) Common Stock Equivalents. In any exchange pursuant to this Section
24, the Company, at its option, may substitute Common Stock Equivalents for
Common Stock exchangeable for Rights, at the initial rate of one share of Common
Stock Equivalent for each share of Common Stock, as appropriately adjusted to
reflect adjustments in the voting rights of the Common Stock pursuant to the
Company's Certificate of Incorporation, so that the share of Common Stock
Equivalent delivered in lieu of e share of Common Stock
47
shall have the same voting rights as one share of Common Stock.
(d) Insufficient Common Stock. In the event that the number of shares
of Common Stock which are authorized by the Company's Certificate of
Incorporation but not outstanding or reserved for issuance for purposes other
than upon exercise of the Rights is not sufficient to permit any exchange of
Rights in accordance with this Section 24, the Company may, at its option, take
all such action as may be necessary to authorize additional shares of Common
Stock for issuance upon such exchange.
(e) Fractional Shares. Upon the action of the Company ordering the
exchange of any Rights pursuant to paragraph (a) of this Section 24, the Company
shall not be required to issue fractions of shares or to distribute certificates
which evidence fractional shares. In lieu of such fractional shares, the Company
may pay to the registered holders of the Rights Certificates with regard to
which such fractional shares would otherwise be issuable an amount in cash equal
to the same fraction o current market value of one share of Common Stock. For
purposes of this Section 24, the current market value of one share of Common
Stock shall be the closing price of one share of Common Stock (as determined
pursuant to Section 11(d)(i) (Adjustment of Purchase Price, Number and Kind of
Shares or Number of Rights - Current Market Price ) for the Trading Day
immediately prior to the date of exchange pursuant to this Section 24, and the
value of any Common Stock Equivalent shall be deemed to have the same current
market value as the Common Stock on such date.
Section 25. Notice of Certain Events.
(a) Preferred Stock Transactions, etc. In case the Company shall
propose, at any time after the Distribution Date, (i) to pay any dividend
payable in stock of any class to the holders of Preferred Stock or to make any
other distribution to the holders of Preferred Stock (other than a regular
quarterly cash dividend out of earnings or retained earnings of the Company);
(ii) to offer to the holders of Preferred Stock rights or warrants to subscribe
for or to purchase any additional share Preferred Stock or shares of stock of
any class or any other securities, rights or options; (iii) to effect any
reclassification of its Preferred Stock (other than a reclassification involving
only the subdivision of outstanding shares of Preferred Stock); (iv) to effect
any consolidation with, merger into or with, or statutory share exchange or
similar transaction with, any other Person (other than a Subsidiary of the
Company in a transaction which complies with Section 11(o) (Adjustment of
Purchase Price, Number and Kind of Shares or Number of Rights -
48
Restriction a Diminishing Benefits of the Rights)), or to effect any sale or
other transfer (or to permit one or more of its Subsidiaries to effect any sale
or other transfer), in one transaction or a series of related transactions, of
more than 50% of the assets, cash flow or earning power of the Company and its
Subsidiaries (taken as a whole) to any other Person or Persons (other than the
Company and/or any of its Subsidiaries in one or more transactions each of which
complies with Section 11(o)); (v) to effect the liquidation, dissolution or
winding up of the Company, or (vi) to declare or pay any dividend on the shares
of Common Stock payable in Common Stock or to effect a subdivision, combination
or consolidation of the shares of Common Stock (by reclassification or otherwise
than by payment of dividends in Common Stock), then, in each such case, the
Company shall give to each holder of a Rights Certificate, to the extent
feasible and in accordance with Section 26 (Notices), a notice of such proposed
action, which shall specify the record date for the purposes of such stock
dividend, distribution of rights or warrants, or the date on which such
reclassification, consolidation, merger, statutory share exchange or similar
transaction, sale, transfer, liquidation, dissolution, or winding up is to take
place and the date of participation therein by the holders of the shares of
Preferred Stock, if any such date is to be fixed, and such notice shall be so
given in the case of any action covered by clause (i) or (ii) above at least
twenty (20) calendar days prior to the record date for determining holders of
the shares of Preferred Stock for purposes of such action, and in the case of
any such other action, at least twenty (20) calendar days prior to the date of
the taking of such proposed action or the date of participation therein by the
holders of the shares of Preferred Stock, whichever shall be the earlier.
(b) Other Transactions. In case any of the events set forth in Section
11(a)(ii) (Adjustment of Purchase Price: Number and Kind of Shares or Number of
Rights - Certain Adjustments) shall occur, then, in any such case, (i) the
Company shall as soon as practicable thereafter give to each holder of a Rights
Certificate, to the extent feasible and in accordance with Section 26 (Notices),
a notice of the occurrence of such event, which shall specify the event and the
consequences of the eve holders of Rights under Section 11(a)(ii), and (ii) all
references in the preceding paragraph to Preferred Stock shall be deemed
thereafter to refer to Common Stock and/or, if appropriate, other securities.
Section 26. Notices. Notices or demands authorized by this Agreement to be
given or made by the Rights Agent or by the holder of any Rights Certificate to
or on the Company shall be sufficiently given or made if sent by telecopier
(with receipt confirmed) or by first-class mail, postage prepaid, addressed
(until another address is filed in writing with the Rights Agent) as follows:
49
Parallel Petroleum Corporation
110 N. Marienfeld
Suite 465
Midland, Texas 79701
Attention: Chief Executive Officer
Telecopier: (915) 684-3905
Subject to the provisions of Section 21 (Change of Rights Agent), any notice or
demand authorized by this Agreement to be given or made by the Company or by the
holder of any Rights Certificate to or on the Rights Agent shall be sufficiently
given or made if sent by telecopier (with receipt confirmed) or by first-class
mail, postage prepaid, addressed (until another address is filed in writing with
the Company as follows:
Computershare Trust Company, Inc.
12039 West Alameda Parkway
Suite Z-2
Lakewood, Colorado 80228
Attention: Michelle Vigil
Telecopier: (303) 986-2444
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Rights Certificate (or, if
prior to the Distribution Date, to the holder of certificates representing
shares of Common Stock) shall be sufficiently given or made if sent by
first-class mail, postage prepaid, addressed to such holder at the address of
such holder as shown on the registry books of the Company.
Section 27. Supplements and Amendments. For so long as the Rights are
redeemable, and subject to the penultimate sentence of this Section 27, the
Company may, and the Rights Agent shall, if the Company so directs, supplement
or amend any provision of this Agreement without the approval of any holders of
certificates representing shares of Common Stock or, on and after the
Distribution Date, any holders of Rights Certificates. At any time when the
Rights are no longer redeemable and subject to the penultimate sentence of this
Section 27, the Company and the Rights Agent shall, if the Company so directs,
supplement or amend this Agreement without the approval of any holders of Rights
Certificates; provided, however, that no such supplement or amendment may (i)
adversely affect the interests of the holders of Rights Certificates, or, prior
to the
50
Distribution Date, the holders of the Common Stock (other than an Acquiring
Person or an Affiliate or Associate of any such Person); (ii) cause this
Agreement again to become amendable other than in accordance with this sentence;
or (iii) cause the Rights again to become redeemable. Upon the delivery of a
certificate from an appropriate officer of the Company which states that the
proposed supplement or amendment is in compliance with the terms of this Section
27, the Rights Agent shall execute such supplement or amendment. Notwithstanding
anything contained in this Agreement to the contrary, no supplement or amendment
shall be made which changes the Redemption Price, the Final Expiration Date, the
Purchase Price, or the number of one one-thousandths of a share of Preferred
Stock for which a right is exercisable; provided, however, that at any time
prior to (i) a Stock Acquisition Date or (ii) the date that a tender or exchange
offer by any Person (other than the Company, any Subsidiary of the Company, any
employee benefit plan of the Company or any Subsidiary of the Company, or any
Person or entity organized, appointed or established by the Company for or
pursuant to the terms of any such plan) is first published or sent or given
within the meaning of Rule 14d-2(a) of the General Rules and Regulations under
the Exchange Act, if upon consummation thereof, such Person would be the
Beneficial Owner of 15% or more of the shares Of Common Stock then outstanding,
the Board may amend this Agreement to increase the Purchase Price or extend the
Final Expiration Date. Prior to the Distribution Date, the interests of the
holders of Rights shall be deemed coincident with the interests of the holders
of Common Stock.
Section 28. Successors. All the covenants and provisions of this Agreement
by or for the benefit of the Company or the Rights Agent shall bind and inure to
the benefit of their respective successors and assigns hereunder.
Section 29. Determinations and Actions by the Board of Directors, etc. For
all purposes of this Agreement, any calculation of the number of shares of
Common Stock outstanding at any particular time, including for purposes of
determining the particular percentage of such outstanding shares of common Stock
of which any Person is the Beneficial Owner, shall be made in accordance with
the last sentence of Rule 13d 3(d)(1)(i) of the General Rules and Regulations
under the Exchange Act. The Board shall have the exclusive power and authority
to administer this Agreement and to exercise all rights and powers specifically
granted to the Board or to the Company, or as may be necessary or advisable in
the administration of this Agreement, including, without limitation, the right
and power to (i) interpret the provisions of this Agreement, and (ii) make all
determinations deemed necessary or advisable for the administration of this
51
Agreement (including a determination to redeem or not redeem the Rights or to
amend the Agreement). All such actions, calculations, interpretations and
determinations (including, for purposes of clause (y) below, all omissions with
respect to the foregoing) which are done or made by the Board, in good faith,
shall (x) be final, conclusive and binding on the Company, the Rights Agent, the
holders of the Rights and all other parties, and (y) not subject the Board to
any liability to the holders of the Rights.
Section 30. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any Person other than the Company, the Rights Agent and the
registered holders of the Rights Certificates (and, prior to the Distribution
Date, registered holders of the Common Stock) any legal or equitable right,
remedy or claim under this Agreement; but this Agreement shall be for the sole
and exclusive benefit of the Company, the Rights Agent and the registered
holders of the Rights Certificates (and, prior to the Distribution Date,
registered holders of the Common Stock).
Section 31. Severability. If any term, provision, covenant or restriction
of this Agreement is held by a court of competent jurisdiction or other
authority to be invalid, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions of this Agreement shall remain in full
force and effect and shall in no way be affected, impaired or invalidated;
provided, however, that notwithstanding anything in this Agreement to the
contrary, if any such term, provision, covenant or restriction is held by such
court or authority to be invalid, void or unenforceable and the Board determines
in its good faith judgment that severing the invalid language from this
Agreement would adversely affect the purpose or effect of this Agreement, the
right of redemption set forth in Section 23 (Redemption and Termination) shall
be reinstated and shall not expire until the Close of Business on the tenth
Business Day following the date of such determination by the Board.
Section 32. Governing Law. This Agreement, each Right and each Rights
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of Delaware and for all purposes shall be governed by and
construed in accordance with the laws of such State applicable to contracts made
and to be performed entirely within such State.
Section 33. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
52
the same instrument.
Section 34. Descriptive Headings. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the day and year first above written.
Attest: PARALLEL PETROLEUM CORPORATION
By: /s/ Thomas W. Ortloff By: /s/ Larry C. Oldham
----------------------------- --------------------------
Thomas W. Ortloff, Secretary Larry C. Oldham, President
COMPUTERSHARE TRUST COMPANY, INC.,
as Rights Agent
By:/s/ Kellie Gwinn By: /s/ Laura Sisneros
------------------------------ --------------------------
Name: Kellie Gwinn Name: Laura Sisneros
Title: Vice President Title: Vice President
B-2
Exhibit B
[Form of Rights Certificate]
Certificate No. R______ ______ Rights
NOT EXERCISABLE AFTER THE EARLIER OF OCTOBER 5, 2010, OR SUCH DATE AS THE RIGHTS
REPRESENTED HEREBY ARE REDEEMED BY PARALLEL PETROLEUM CORPORATION (THE
"CORPORATION"). THE RIGHTS REPRESENTED BY THIS RIGHTS CERTIFICATE ARE SUBJECT TO
REDEMPTION, AT THE OPTION OF THE CORPORATION, AT $0.001 PER RIGHT ON THE TERMS
SET FORTH IN THE RIGHTS AGREEMENT DATED AS OF OCTOBER 5, 2000, BY AND BETWEEN
THE CORPORATION AND COMPUTERSHARE TRUST COMPANY, INC., AS RIGHTS AGENT (THE
"RIGHTS AGREEMENT"). UNDER CERTAIN CIRCUMSTANCES, RIGHTS BENEFICIALLY OWNED BY
AN ACQUIRING PERSON (AS SUCH TERM IS DEFINED IN THE RIGHTS AGREEMENT) AND ANY
SUBSEQUENT HOLDER OF SUCH RIGHTS MAY BECOME NULL AND VOID. [THE RIGHTS
REPRESENTED BY THIS RIGHTS CERTIFICATE ARE OR WERE BENEFICIALLY OWNED BY A
PERSON WHO WAS OR BECAME AN ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF AN
ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT).
ACCORDINGLY, THIS RIGHTS CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY MAY
BECOME NULL AND VOID IN THE CIRCUMSTANCES SPECIFIED IN SECTION 7(e) (EXERCISE OF
RIGHTS, PURCHASE PRICE: EXPIRATION DATE OF RIGHTS TERMINATION OF ACQUIRING
PERSON'S RIGHTS) OF SUCH AGREEMENT.]1
Rights Certificate
PARALLEL PETROLEUM CORPORATION
This certifies that ___________________________________or its, his or her
registered assigns, is the registered owner of the number of rights set forth
above, each of which entitles the owner thereof, subject to the terms,
provisions and conditions of the Rights Agreement, dated as of October 5, 2000
(the "Rights
_______________________
1 The portion of the legend in brackets shall be inserted only if
applicable and shall replace the prededing sentence.
B-3
Agreement"), between Parallel Petroleum Corporation, a Delaware corporation (the
"Corporation"), and Computershare Trust Company, Inc., a Colorado corporation,
as Rights Agent (the "Rights Agent"), to purchase from the Corporation at any
time prior to 5:00 P.M. (New York, New York time) on October 5, 2010 at the
office or offices of the Rights Agent designated for such purpose, or its
successors as Rights Agent, one one-thousandth (1/1,000) of a fully paid,
nonassessable share of Series A Preferred Stock (the "Preferred Stock") of the
Corporation, at a purchase price of $_________ per one one-thousandth (1/1,000)
of a share (the "Purchase Price"), upon presentation and surrender of this
Rights Certificate with the Form of Election to Purchase and related Certificate
duly executed. The number of Rights evidenced by this Rights Certificate (and
the number of shares which may be purchased upon exercise thereof) set forth
above, and the Purchase Price set forth above, are the number and Purchase Price
as of _________________, _______, based on the Preferred Stock as constituted at
such date. The Corporation reserves the right to require prior to the occurrence
of a Triggering Event (as such term is defined in the Rights Agreement) that
upon any exercise of Rights, a number of Rights be exercised so that only whole
shares of Preferred Stock would be issued.
Upon the occurrence of a Flip-in Event (as such term is defined in the
Rights Agreement), if the Rights evidenced by this Rights Certificate are
beneficially owned by (i) an Acquiring Person or an Associate or Affiliate or
any such Person (as such terms are defined in the Rights Agreement), (ii) a
transferee of an Acquiring Person or its Associate or Affiliate who becomes a
transferee after such Acquiring Person or its Associate or Affiliate becomes
such, or (iii) under certain circumstances specified in the Rights Agreement, a
transferee of an Acquiring Person or its Associate or Affiliate who becomes a
transferee prior to or concurrently with the Acquiring Person becoming such,
such Rights shall become null and void and no holder hereof shall have any right
with respect to such Rights from and after the occurrence of such Flip-in Event.
As provided in the Rights Agreement, the Purchase Price and the number and
kind of shares of Preferred Stock or other securities, which may be purchased
upon the exercise of the Rights evidenced by this Rights Certificate are subject
to modification and adjustment upon the happening of certain events, including
Triggering Events (as such term is defined in the Rights Agreement).
This Rights Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
B-4
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Corporation and the holders of the Rights Certificates, which
limitations of rights include the temporary suspension of the exercisability of
such Rights under the specific circumstances set forth in the Rights Agreement.
Copies of the Rights Agreement are on file at the above-mentioned office of the
Rights Agent and are also available upon written request to the Rights Agent.
This Rights Certificate, with or without other Rights Certificates, upon
surrender at the principal office or offices of the Rights Agent designated for
such purpose, may be exchanged for another Rights Certificate or Rights
Certificates of like tenor and date evidencing Rights entitling the holder to
purchase a like aggregate number of one one-thousandths of a share of Preferred
Stock as the Rights evidenced by the Rights Certificate or Rights Certificates
surrendered shall have entitled such holder to purchase. If this Rights
Certificate shall be exercised in part, the holder shall be entitled to receive
upon surrender hereof another Rights Certificate or Rights Certificates for the
number of whole Rights for which this Rights Certificate is not exercised.
Subject to the provisions of the Rights Agreement, the Rights evidenced by
this Certificate (i) may be redeemed by the Corporation at its option at a
redemption price of $0.001 per Right at any time prior to the earlier of (a) the
Stock Acquisition Date (as such term is defined in the Rights Agreement) or (b)
the Final Expiration Date (as such term is defined in the Rights Agreement) and
(ii) may be exchanged in whole or in part for Preferred Stock, shares of the
Corporation's Common Stock, par value $0.01 per share, other property or any
combination thereof.
In addition, the Rights may be exchanged, in whole or in part, for shares
of Common Stock, or shares of common stock equivalents of the Corporation having
essentially the same value or economic rights as such shares. Immediately upon
the action of the Board of Directors of the Corporation authorizing any such
exchange, and without any further action or any notice, the Rights (other than
Rights which are not subject to such exchange) will terminate and the Rights
will only enable holders to receive the shares issuable upon such exchange.
No fractional shares of Preferred Stock will be issued upon the exercise of
any Right or Rights evidenced hereby (other than fractions which are integral
multiples of one one-thousandth (1/1,000) of a share of Preferred Stock, which
may, at the election of the Corporation, be evidenced by depositary receipts),
but
B-5
a cash payment will be made in lieu thereof, as provided in the Rights
Agreement.
No holder of this Rights Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of shares of Preferred Stock
or of any other securities of the Corporation which may at any time be issuable
on the exercise hereof, nor shall anything contained in the Rights Agreement or
herein be construed to confer upon the holder hereof, as such, any of the rights
of a stockholder of the Corporation or any right to vote for the election of
directors or upon any matter submitted to stockholders of the Corporation at any
meeting thereof, or to give or withhold consent to any corporate action or to
receive notice of meetings or other actions affecting stockholders of the
Corporation (except as provided in the Rights Agreement), or to receive
dividends or subscription rights, or otherwise, until the Right or Rights
evidenced by this Rights Certificate shall have been exercised as provided in
the Rights Agreement.
This Rights Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signature of the proper officers of the Corporation
and its corporate seal.
Dated as of ______________________
ATTEST: PARALLEL PETROLEUM CORPORATION
_________________________________ By:___________________________
Secretary Title: _______________________
Countersigned:
RIGHTS AGENT
By:______________________________
Authorized Signature
Form of Reverse Side of Rights Certificate]
FORM OF ASSIGNMENT
(To be executed by the registered holder if such
holder desires to transfer the Rights Certificate.)
FOR VALUE RECEIVED,_______________________________________ hereby sells, assigns
and transfers unto_____________________________________
________________________________________________________________________________
(Please print name and address of transferee) this Rights Certificate, together
with all right, title and interest therein, and does hereby irrevocably
constitute and appoint Attorney, to transfer the within Rights Certificate on
the books of the within-named Corporation, with full power of substitution.
Dated:___________________________ _____________________________________
Signature
Signature Guaranteed:
CERTIFICATE
The undersigned hereby certifies by checking the appropriate boxes that:
(1) this Rights Certificate [ ] is [ ] is not being sold, assigned and
transferred by or on behalf of a Person who is or was an Acquiring Person or an
Affiliate or Associate of an Acquiring Person (as such terms are defined in the
Rights Agreement); and
(2) after due inquiry and to the best knowledge of the undersigned, it did
not acquire the Rights evidenced by this Rights Certificate from any Person who
is, was or subsequently became an Acquiring Person or an Affiliate or Associate
of an Acquiring Person.
Dated:___________________________ ____________________________________
Signature
Signature Guaranteed:
NOTICE
The signature to the foregoing Assignment and Certificate must correspond
to the name as written upon the face of this Rights Certificate in every
particular, without alteration or enlargement or any change whatsoever.
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to
exercise Rights represented by the
Rights Certificate.)
To: PARALLEL PETROLEUM CORPORATION
The undersigned hereby irrevocably elects to exercise ____________ Rights
represented by this Rights Certificate to purchase the shares of Preferred Stock
issuable upon the exercise of the Rights (or such other securities of the
Corporation or of any other person which may be issuable upon the exercise of
the Rights) and requests that certificates for such shares be issued in the name
of and delivered to:
Please insert social security or
other identifying number
______________________________________________________________________________
(Please print name and address)
______________________________________________________________________________
If such number of Rights shall not be all the Rights evidenced by this
Rights Certificate, a new Rights Certificate for the balance of such Rights
shall be registered in the name of and delivered to:
Please insert social security or
other identifying number
______________________________________________________________________________
(Please print name and address)
______________________________________________________________________________
Dated:_________________________ _____________________________________
Signature Guaranteed:
CERTIFICATE
The undersigned hereby certifies by checking the appropriate boxes that:
(1) the Rights evidenced by this Rights Certificate [ ] are [ ] are not
being acquired or exercised by or on behalf of a Person who is or was an
Acquiring Person or an Affiliate or Associate of an Acquiring Person (as such
terms are defined in the Rights Agreement); and
(2) after due inquiry and to the best knowledge of the undersigned, it [ ]
did [ ] did not acquire the Rights evidenced by this Rights Certificate from any
Person who is, was or became an Acquiring Person or an Affiliate or Associate of
an Acquiring Person.
Dated:_________________________ ____________________________________
Signature
Signature Guaranteed:
NOTICE
The signature to the foregoing Election to Purchase and Certificate must
correspond to the name as written upon the face of this Rights Certificate in
every particular, without alteration or enlargement or any change whatsoever.
ANNEX I
Social Security
or Taxpayer Number of Total
Name and Address Identification Shares Purchase
of Buyer Number Purchased Price
- ---------------- --------------- ---------- --------
[This Annex I is attached to and made a part of that certain Stock
Purchase Agreement between Parallel Petroleum Corporation and the
Buyer named above.]
C-1
[Letter to Stockholders] Exhibit C
October 16, 2000
Dear Parallel Petroleum Corporation Stockholder:
On October 5, 2000, your Board of Directors adopted a Stockholder Rights
Plan designed to prevent a potential acquiror from gaining control of the
Company without fairly compensating all of the Company's stockholders.
The Rights will initially trade with shares of the Company's Common Stock
and will have no impact on the way in which the Company's shares are traded.
There are no separate certificates or market for the Rights.
The Rights will not become exercisable and trade separately from the Common
Stock until the earlier of (1) ten business days after a public announcement
that a person has acquired 15% or more of the Common Stock of the Company or (2)
ten business days (or any later date determined by the Company's Board of
Directors) after a person makes a tender or exchange offer for 15% or more of
the Company's Common Stock.
Many other public companies have adopted similar plans, indicating
widespread agreement that such plans can help Directors deflect coercive and
inadequate offers.
A summary of the terms of the Rights is included with this letter.
Sincerely,
Larry C. Oldham,
President
C-2
SUMMARY OF RIGHTS TO PURCHASE
PREFERRED STOCK
On October 5, 2000, the Board of Directors of Parallel Petroleum
Corporation (the "Company"), declared a dividend distribution of one Right for
each outstanding share of the Company's common stock, $0.01 par value (the
"Common Stock"), to stockholders of record at the close of business on October
16, 2000. Each Right entitles the registered holder to purchase from the Company
one one-thousandth(1/1,000) of a share of Series A Preferred Stock, par value
$0.10 per share (the "Preferred Stock"), at a Purchase Price of $26.00 per one
one-thousandth (1/1,000) of a share, subject to adjustment. The description and
terms of the Rights are set forth in a Rights Agreement (the "Rights Agreement")
between the Company and Computershare Trust Company, Inc., as Rights Agent (the
"Rights Agent").
Initially, the Rights will be attached to all Common Stock certificates
representing shares then outstanding, and no separate Rights Certificates will
be distributed. The Rights will separate from the Common Stock upon the earlier
of (i) ten (10) business days following a public announcement that a person or
group of affiliated or associated persons (an "Acquiring Person") has acquired,
or obtained the right to acquire, beneficial ownership of fifteen percent (15%)
or more of the outstanding shares of Common Stock (the "Stock Acquisition
Date"), or (ii) ten (10) business days (or such later date as the Board of
Directors shall determine) following the commencement of a tender or exchange
offer that would result in a person or group beneficially owning fifteen percent
(15%) or more of such outstanding shares of Common Stock. The date the Rights
separate is referred to as the "Distribution Date."
Until the Distribution Date, (i) the Rights will be evidenced by the Common
Stock certificates and will be transferred with and only with such Common Stock
certificates, (ii) new Common Stock certificates issued after October 16, 2000
will contain a notation incorporating the Rights Agreement by reference, and
(iii) the surrender for transfer of any certificates for Common Stock
outstanding will also constitute the transfer of the Rights associated with the
Common Stock represented by such certificates. Pursuant to the Rights Agreement,
the Company reserves the right to require prior to the occurrence of a
Triggering Event (as defined below) that, upon any exercise of Rights, a number
of Rights be exercised so that only whole shares of Preferred Stock will be
issued.
The Rights are not exercisable until the Distribution Date and will expire
at the close of business on October 5, 2010, unless earlier redeemed by the
Company as described below.
As soon as practicable after the Distribution Date, Rights Certificates
will
C-3
be mailed to holders of record of the Common Stock as of the close of
business on the Distribution Date and, thereafter, the separate Rights
Certificates will represent the Rights. Except in connection with shares of
Common Stock issued or sold pursuant to the exercise of stock options under any
employee plan or arrangements, or upon the exercise, conversion or exchange of
securities hereafter issued by the Company, or as otherwise determined by the
Board of Directors, only shares of Common Stock issued prior to the Distribution
Date will be issued with Rights.
In the event that (i) the Company is the surviving corporation in a merger
or other business combination with an Acquiring Person (or any associate or
affiliate thereof) and its Common Stock remains outstanding and unchanged, (ii)
any person shall acquire beneficial ownership of more than fifteen percent (15%)
of the outstanding shares of Common Stock (except pursuant to (A) certain
consolidations or mergers involving the Company or sales or transfers of the
combined assets, cash flow or earning power of the Company and its subsidiaries
or (B) an offer for all outstanding shares of Common Stock at a price and upon
terms and conditions which the Board of Directors determines to be in the best
interests of the Company and its stockholders), or (iii) there occurs a
reclassification of securities, a recapitalization of the Company or any of
certain business combinations or other transactions (other than certain
consolidations and mergers involving the Company and sales or transfers of the
combined assets, cash flow or earning power of the Company and its subsidiaries)
involving the Company or any of its subsidiaries which has the effect of
increasing by more than one percent (1%) the proportionate share of any class of
the outstanding equity securities of the Company or any of its subsidiaries
beneficially owned by an Acquiring Person (or any associate or affiliate
thereof), each holder of a Right (other than the Acquiring Person and certain
related parties) will thereafter have the right to receive, upon exercise,
Common Stock (or, in certain circumstances, cash, property or other securities
of the Company) having a value equal to two times the Purchase Price of the
Right. Notwithstanding any of the foregoing, following the occurrence of any of
the events described in this paragraph, all Rights that are, or (under certain
circumstances specified in the Rights Agreement) were, beneficially owned by any
Acquiring Person will be null and void. The events described in this paragraph
are referred to as "Flip-in Events."
For example, at a Purchase Price of $26.00 per Right, each Right not owned
by an Acquiring Person (or by certain related parties or transferees) following
an event set forth in the preceding paragraph would entitle its holder to
purchase $52.00 worth of Common Stock (or other consideration, as noted above)
for $26.00. Assuming that the Common Stock had a per share market price of $5.20
at such time, the holder of each valid Right would be entitled to purchase 10
shares of Common Stock for $26.00.
C-4
In the event that, at any time following the Stock Acquisition Date, (i)
the Company shall enter into a merger or other business combination transaction
in which the Company is not the surviving corporation, (ii) the Company is the
surviving corporation in a consolidation, merger or similar transaction pursuant
to which all or part of the outstanding shares of Common Stock are changed into
or exchanged for stock or other securities of any other person or cash or any
other property or (iii) more than 50% of the combined assets, cash flow or
earning power of the Company and its subsidiaries is sold or transferred (in
each case other than certain consolidations with, mergers with and into, or
sales of assets, cash flow or earning power by or to subsidiaries of the Company
as specified in the Rights Agreement), each holder of a Right (except Rights
which previously have been voided as set forth above) shall thereafter have the
right to receive, upon exercise, common stock of the acquiring company having a
value equal to two times the Purchase Price of the Right. The events described
in this paragraph are referred to as "Flip-over Events." Flip-in Events and
Flip-over Events are referred to collectively as "Triggering Events."
The Purchase Price payable, the number and kind of shares covered by each
Right and the number of Rights outstanding are subject to adjustment from time
to time to prevent dilution (i) in the event of a stock dividend on, or a
subdivision, combination or reclassification of, the Preferred Stock, (ii) if
holders of the Preferred Stock are granted certain rights, options or warrants
to subscribe for Preferred Stock or securities convertible into Preferred Stock
at less than the current market price of the Preferred Stock, or (iii) upon the
distribution to holders of the Preferred Stock of evidences of indebtedness,
cash (excluding regular quarterly cash dividends), assets (other than dividends
payable in Preferred Stock) or subscription rights or warrants (other than those
referred to in (ii) immediately above).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments amount to at least one percent (1%) of the
Purchase Price. No fractional shares of Preferred Stock are required to be
issued (other than fractions which are integral multiples of one one-thousandth
(1/1,000) of a share of Preferred Stock) and, in lieu thereof, the Company may
make an adjustment in cash based on the market price of the Preferred Stock on
the trading date immediately prior to the date of exercise.
At any time after any person or group becomes an Acquiring Person and prior
to the acquisition by such person or group of fifty percent (50%) or more of the
outstanding shares of Common Stock, the Board of Directors of the Company may,
without payment of the Purchase Price by the holder, exchange the Rights (other
than Rights owned by such person or group, which will become void), in whole or
in part, for shares of Common Stock at an exchange ratio of one-half (1/2) the
number of shares of Common Stock (or in certain circumstances Preferred
C-5
Stock) for which a Right is exercisable immediately prior to the time of the
Company's decision to exchange the Rights (subject to adjustment).
At any time until the Stock Acquisition Date, the Company may redeem the
Rights in whole, but not in part, at a price of $0.001 per Right (payable in
cash, shares of Common Stock or other consideration deemed appropriate by the
Board of Directors). Immediately upon the action of the Board of Directors
ordering redemption of the Rights, the Rights will terminate and the only right
of the holders of Rights will be to receive the $0.001 redemption price.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the right
to vote or to receive dividends. While the distribution of the Rights will not
be taxable to stockholders or to the Company, stockholders may, depending upon
the circumstances, recognize taxable income in the event that the Rights become
exercisable for Common Stock (or other consideration) of the Company or for
common stock of an acquiring company as set forth above or in the event that the
Rights are redeemed.
Other than those provisions relating to the principal economic terms of the
Rights, any of the provisions of the Rights Agreement may be amended by the
Board of Directors of the Company at any time during the period in which the
Rights are redeemable. At any time when the Rights are no longer redeemable, the
provisions of the Rights Agreement may be amended by the Board only if such
amendment does not adversely affect the interest of holders of Rights (excluding
the interest of any Acquiring Person); provided, however, that no amendment may
cause the Rights again to become redeemable.
A copy of the Rights Agreement has been filed with the Securities and
Exchange Commission as an Exhibit to a Registration Statement on Form 8-A filed
on October 9, 2000. A copy of the Rights Agreement is available free of charge
from the Rights Agent. This summary description of the Rights does not purport
to be complete and is qualified in its entirety by reference to the Rights
Agreement, which is incorporated herein by reference.
Exhibit D
Parallel Petroleum Corporation (ticker: PLLL, exchange: NASDAQ) News Release -
5-Oct-2000
================================================================================
Parallel Petroleum Announces Successful Natural Gas Discovery;
Adopts Stockholder Rights Plan and Amends Bylaws
Parallel Petroleum Corporation (Nasdaq NMS: PLLL) today announced the current
production rate of a natural gas discovery in the Yegua/Frio Gas Trend in
Jackson County, Texas. The Weaver-Dugger A No. 1, Jackson County, Texas, was
drilled to a total depth of 9,440 feet. The well was perforated in two intervals
from 9,310 to 9,321 feet and 9,323 to 9,326 feet in the Frio formation and is
currently flowing at a rate of 1,871 mcf of gas and 57 barrels of oil per day on
a 9.75/64-inch choke with flowing tubing pressure of 4,750 psi. Based on the
operator's current assessment, the production rate is expected to be increased
to 5,000 mcf per day plus condensate during the next 30 days. Four new prospects
have been identified on this project and are waiting on rigs. The Company owns a
27.63% working interest (20.72% net revenue interest) in the well. The operator,
privately held Allegro Investments, and industry partners own the remaining
interests.
In addition, the Company today announced that its Board of Directors has adopted
a Stockholder Rights Plan. The Plan is designed to protect the Company from
unfair or coercive takeover attempts and to prevent a potential acquiror from
gaining control of the Company without fairly compensating all of the Company's
stockholders.
The Plan creates a dividend of one right for each outstanding share of the
Company's Common Stock. The rights are represented by and traded with the
Company's Common Stock. There are no separate certificates or market for the
rights.
The rights do not become exercisable or trade separately from the Common Stock
unless one or both of the following conditions are met: a public announcement
that a person has acquired 15% or more of the Common Stock of the Company, or a
tender or exchange offer is made for 15% or more of the Common Stock of the
Company.
Should either of the aforementioned conditions be met and the rights become
exercisable, each right will entitle the holder thereof to buy 1/1,000th of a
share of the Company's Series A Preferred Stock at an exercise price of $26.00.
Each 1/1,000th of a share of the Series A Preferred Stock will essentially be
the economic equivalent of one share of Common Stock.
Under certain circumstances the rights entitle the holders to buy the Company's
stock at a 50% discount. In the event that (1) the Company is the surviving
corporation in a merger or other business combination with an entity that owns
15% or more of the Company's outstanding stock; (2) any person shall acquire
beneficial ownership of 15% of the Company's outstanding stock; or (3) there is
any type of recapitalization of the Company that results in an increase by more
than 1% the proportionate share of equity securities of the Company owned by a
person who owns 15% or more of the Company's outstanding stock, each right
holder will have the option to buy for the purchase price Common Stock of the
Company having a value equal to two times the purchase price of the right.
Under certain circumstances the rights entitle the holders to buy shares of the
acquiror's Common Stock at a 50% discount. In the event that at any time after a
person has acquired 15% or more of the Company's Common Stock,
(1) the Company enters into a merger or other business combination transaction
in which the Company is not the surviving corporation; (2) the Company is the
surviving corporation in a transaction in which all or part of the Common Stock
is exchanged for cash, property or securities of any other person; or (3) more
than 50% of the assets, cash flow or earning power of the Company is sold, each
right holder will have the option to buy for the purchase price stock of the
acquiring company having a value equal to two times the purchase price of the
right.
The rights may be redeemed by the Company for $0.001 per right at any time until
the first public announcement of the acquisition of beneficial ownership of 15%
of the Company's Common Stock.
The distribution of the rights will be made to stockholders of record as of
October 16, 2000. Stockholders of record will receive a separate mailing
describing the Plan and a copy of the Plan containing all the provisions of the
new rights will be filed with the Securities and Exchange Commission. The
Company's Plan is similar to those adopted by many other companies.
Also on October 5, 2000, the Board of Directors adopted certain amendments to
the Company's Bylaws. These amendments modify, clarify and add certain
provisions regarding the advance notice requirements for stockholder proposals
before an annual meeting of stockholders, the calling of special meetings of
stockholders, stockholder written consents, and the procedures for nominating
directors.
Parallel Petroleum Corporation is an independent energy company engaged in the
exploration for and the acquisition, development and production of oil and gas
using 3-D seismic technology.
In addition to historical information contained herein, this news release
contains forward-looking statements subject to various risks and uncertainties
that could cause the Company's actual results to differ materially from those in
the forward-looking statements. Forward-looking statements can be identified by
the use of forward looking terminology such as "may," "will," "expect","intend,"
"anticipated," "estimate," "continue," "present value," "future" "reserves" or
other variations thereof or comparable terminology. Factors that could cause or
contribute to such differences could include, but are not limited to, those
relating to the Company's growth strategy, outstanding indebtedness, dependence
on weather conditions, seasonality, expansion and other activities of
competitors, prices of oil and gas, and the general condition of the economy and
its effect on the securities market. While the Company believes its
forward-looking statements are based upon reasonable assumptions, there are
factors that are difficult to predict and that are influenced by economic and
other, conditions beyond the Company's control. Investors are directed to
consider such risks and other uncertainties discussed in documents filed by the
Company with the Securities and Exchange Commission.
Parallel Petroleum Corporation
I IO N. Marienfeld, Suite 465
Midland, TX 79701
915.684.3727
www.parallel-petro.com
Contact: Rhonda L. Keller
Manager Investor Relations
e-mail:rho@parallel-petro.com
MIDLAND, Texas, September 22, 2000
================================================================================
Parallel Petroleum Corporation - 110 North Marienfeld Suite 465 - Midland, Texas
79701 - phone 915.684.3727 fax 915.684.3905
EXHIBIT 10.9
LOAN AGREEMENT
DATED DECEMBER 18, 2000
by and between
PARALLEL PETROLEUM CORPORATION,
as Borrower,
AND
BANK UNITED,
as Lender
i
TABLE OF CONTENTS
Page No.
ARTICLE I.............................................................. 1
Definitions............................................................ 1
1.1 Certain Defined Terms.......................... 1
1.2 Other Definitional Provisions.................. 8
ARTICLE II............................................................. 8
Revolving Loan......................................................... 8
2.1 Revolving Commitment........................... 8
2.2 Manner of Borrowing............................ 9
2.3 Commitment Fee................................. 9
2.4 Note........................................... 10
2.5 Principal Payments............................. 10
2.6 Interest Rate; Interest Payments............... 10
2.7 Capital Adequacy............................... 11
2.8 Prepayments.................................... 11
2.9 Manner and Application of Payments............. 12
2.10 Rate Elections................................. 12
2.11 Increased Cost of Eurodollar Portion........... 13
2.12 Availability................................... 13
2.13 Funding Losses................................. 14
2.14 Taxes.......................................... 14
ARTICLE III............................................................ 15
Borrowing Base and Required Prepayments Under Note..................... 15
3.1 Borrowing Base................................. 15
3.2 Redeterminations of Borrowing Base and Monthly
Automatic Borrowing Base Reduction............. 15
3.3 Standards for Redetermination.................. 16
3.4 Borrowing Base Redetermination Fee............. 16
3.5 Mandatory Increase in Collateral or Prepayment
of Principal of the Note....................... 16
3.6 Monthly Automatic Borrowing Base Reduction
and Prepayment of Principal of the Note........ 16
ARTICLE IV............................................................. 17
Security and Assignment................................................ 17
ARTICLE V.............................................................. 17
Conditions Precedent................................................... 17
5.1 Renewal and Extension.......................... 17
5.2 All Advances................................... 18
ARTICLE VI............................................................. 19
Representations and Warranties......................................... 19
6.1 Existence and Authority........................ 19
6.2 Powers......................................... 19
6.3 Financial Statements........................... 19
6.4 Liabilities.................................... 19
6.5 Litigation..................................... 19
ii
6.6 Taxes......................................... 20
6.7 Purpose of Loan............................... 20
6.8 Properties; Liens............................. 20
6.9 Material Agreements........................... 20
6.10 ERISA......................................... 21
6.11 Location of Records........................... 21
6.12 Permits and Franchises, Etc................... 21
6.13 Subsidiaries.................................. 21
6.14 Hazardous Wastes and Substances............... 21
6.15 Public Utility Holding Company Act............ 22
6.16 General....................................... 22
ARTICLE VII........................................................... 22
Affirmative Covenants................................................. 22
7.1 Financial Statements and Other Information.... 22
7.2 Taxes......................................... 24
7.3 Discharge of Contractual Obligations.......... 24
7.4 Legal Status.................................. 24
7.5 Maintenance and Evidence of Priority of Bank
Liens......................................... 24
7.6 Insurance..................................... 25
7.7 Reimbursement of Fees and Expenses............ 25
7.8 Indemnification............................... 25
7.9 Curing of Defects............................. 26
7.10 Inspection and Visitation..................... 26
7.11 Notices....................................... 26
7.12 Bank Lien on Other Assets..................... 26
7.13 Compliance.................................... 26
7.14 Compliance with Environmental Laws............ 27
7.15 Use of Proceeds............................... 27
7.16 Deposit Accounts.............................. 27
7.17 Title Curative................................ 27
ARTICLE VIII.......................................................... 27
Negative Covenants.................................................... 27
8.1 Liens......................................... 28
8.2 Indebtedness.................................. 29
8.3 ERISA Compliance.............................. 29
8.4 Investments................................... 29
8.5 Mergers, Consolidations....................... 30
8.6 Dividends and Distributions................... 30
8.7 Transactions with Affiliates.................. 30
8.8 Accounting Method and Fiscal Year............. 30
8.9 Nature of Business............................ 30
8.10 Disposition of Assets......................... 30
8.11 Current Ratio................................. 30
8.12 Leases........................................ 31
8.13 Net Worth..................................... 31
8.14 Debt Service Ratio............................ 31
8.15 Derivatives................................... 31
iii
ARTICLE IX............................................................ 31
Default and Remedies.................................................. 31
9.1 Events of Default............................. 31
9.2 Remedies...................................... 33
ARTICLE X............................................................. 33
Miscellaneous......................................................... 33
10.1 Survival of Representations and Warranties.... 33
10.2 Communications................................ 33
10.3 Non-Waiver.................................... 34
10.4 Strict Compliance............................. 34
10.5 Cumulative Rights............................. 34
10.6 GOVERNING LAW................................. 35
10.7 CHOICE OF FORUM; CONSENT TO SERVICE OF PROCESS;
JURISDICTION; AND WAIVER OF JURY TRIAL........ 35
10.8 ARBITRATION................................... 35
10.9 Usury Savings Clause.......................... 37
10.10 Enforceability................................ 37
10.11 Binding Effect................................ 37
10.12 No Third Party Beneficiary.................... 38
10.13 Delegation by Lender.......................... 38
10.14 Setoff........................................ 38
10.15 Additional Documents.......................... 38
10.16 Counterparts.................................. 39
10.17 Amendments.................................... 39
10.18 Headings...................................... 39
10.19 Conflicts..................................... 39
10.20 Entirety...................................... 39
10.21 Participations................................ 39
10.22 Notice of Final Agreement..................... 39
Exhibit 2.2 - Request for Advance
Exhibit 2.4 - Promissory Note
Exhibit 2.10 - Form of Rate Election
Schedule 5.1 - Closing Documents
Schedule 6.5 - Litigation
Schedule 6.9 - Material Agreements
Exhibit 7.1 - Compliance Certificate
Schedule 7.17 - Title Curative Matters
1
LOAN AGREEMENT
THIS LOAN AGREEMENT (this "Agreement") is entered into this 18th day of
December, 2000 by and between PARALLEL PETROLEUM CORPORATION, a Delaware
corporation ("Borrower"); and BANK UNITED, a federal savings bank ("Lender").
RECITALS
A. Borrower and Bank One, Texas, N.A. ("Prior Lender") entered into that
certain Restated Loan Agreement dated December 27, 1999 (the "Prior Loan
Agreement").
B. Contemporaneously with the execution hereof, the Prior Lender has
assigned to Lender all of the Prior Lender's interests in and under the Prior
Loan Agreement, the Prior Note (defined below) and all liens and security
interests securing Borrower's obligations to Prior Lender under the Prior Loan
Agreement and the Prior Note.
C. Borrower has requested that Lender provide Borrower with a reducing
revolving line of credit facility in an amount up to $30,000,000, and Lender is
willing to make such facility available to Borrower, subject to the terms and
conditions contained herein. The parties hereto agree that this Agreement
replaces the Prior Loan Agreement and that this Agreement and the other Loan
Papers executed in connection herewith shall govern the terms of the loans made
hereunder in their entirety and shall control over the Prior Loan Agreement.
AGREEMENT
NOW THEREFORE, in consideration of the premises and the mutual covenants
herein contained and other good and valuable consideration, it is hereby agreed
between the parties as follows:
ARTICLE I
Definitions
1.1 Certain Defined Terms. For the purposes of this Agreement, the
following terms shall have the respective meanings assigned to them in this
section or in the section or recital referred to below:
"Adjusted Eurodollar Rate" means, with respect to each particular
Eurodollar Portion and the associated Eurodollar Rate and Reserve Percentage,
the rate per annum calculated by Lender
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(rounded upwards, if necessary, to the next higher 1/100th of 1%) determined on
a daily basis pursuant to the following formula:
AER = ER + EM
---------
1.00 - RP
AER = Adjusted Eurodollar Rate
ER = Eurodollar Rate
RP = Reserve Percentage
EM = Eurodollar Margin
The Adjusted Eurodollar Rate shall change as the associated Reserve Percentage
changes.
"Advance" means any disbursement to or on behalf of Borrower under any of
the Loan Papers, including, without limitation, all amounts advanced under the
Prior Note or the Note.
"Agreement": the preamble.
"Bank Liens" means Liens in favor of Lender, securing all or any portion of
the Obligation, including, without limitation, Rights in any of the Collateral
created in favor of Lender, whether by mortgage, pledge, hypothecation,
assignment, transfer or other granting or creation of Liens.
"Base Rate" means, as of any date, the fluctuating rate of interest per
annum published in the Money Rates section of The Wall Street Journal as the
U.S. "prime rate." If the Money Rates section of The Wall Street Journal
contains more than one U.S. "prime rate," then the "prime rate" for purposes of
this definition shall be the higher of said rates. If the Money Rates section of
The Wall Street Journal does not have a rate designated by it as its "prime
rate," then the "prime rate" shall be deemed to be the fluctuating rate of
interest per annum which is the general reference rate designated by Lender as
its "reference rate," "base rate" or other similar rate and which is comparable
to the "prime rate" as described above. The Base Rate is used by Lender as a
general reference rate of interest, taking into account such factors as Lender
may deem appropriate, it being understood that it is not necessarily the lowest
or best rate actually charged to any customer and that Lender may make various
commercial or other loans at rates of interest having no relationship to such
rate. Each change in the Base Rate shall become effective without prior notice
to Borrower automatically as of the opening of business on the date of such
change in the Base Rate.
"Base Rate Portion" means that portion of the unpaid principal balance of
the Revolving Loan which is not made up of Eurodollar Portions.
"Borrower": the preamble.
"Borrowing Base": Section 3.1.
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"Borrowing Base Redetermination Fee": Section 3.4.
"Business Day" means a day on which commercial banks are open for business
with the public in the State of Texas. Any Business Day in any way relating to
Eurodollar Portions (such as the day on which a Eurodollar Interest Period
begins or ends) must also be a day on which, in the judgment of Lender,
significant transactions in Dollars are carried out in the London interbank
market.
"Cash Flow" means Borrower's Net Income for each fiscal quarter of
Borrower, less preferred dividends paid by Borrower during each such fiscal
quarter, plus depreciation, depletion and other non-cash charges of Borrower
during each such fiscal quarter determined on an unconsolidated basis.
"Claims": Section 7.8.
"Collateral": Article IV.
"Commitment Fee": Section 2.3.
"Current Assets" of any person shall mean, as of any date, the current
assets that would be reflected on an unconsolidated balance sheet of such person
prepared as of such date in conformity with GAAP.
"Current Liabilities" of any person shall mean, as of any date, the current
liabilities that would be reflected on an unconsolidated balance sheet of such
person prepared as of such date in conformity with GAAP.
"Current Ratio" means, as of any date, the ratio of Borrower's Current
Assets (including, for purposes of this calculation, unused availability under
the Revolving Commitment) to its Current Liabilities (excluding, for purposes of
this calculation, current maturities of the Note).
"Debt Service Ratio" means, as of the end of each fiscal quarter of
Borrower, the ratio of Borrower's Cash Flow during such fiscal quarter to the
Total Monthly Automatic Borrowing Base Reductions during such fiscal quarter.
"Deed of Trust" means one or more mortgages, deeds of trust, assignments of
production and security agreements and financing statements in favor of Lender
encumbering every interest of Borrower in every oil and gas property owned by
Borrower and selected by Lender to be encumbered as security for the Obligation,
including, without limitation, any such property consisting of royalty
interests, overriding royalty interests and/or reversionary rights relating to
either developed or undeveloped leasehold acreage, it being specifically
recognized that if any such interest selected is in a state where a mortgage,
deed of trust, assignment of production and security agreement or financing
statement is, or may be, ineffective, a document appropriate for use in that
state shall be required.
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"Derivatives" means, foreign exchange transactions and commodity, currency
and interest rate swaps, floors, caps, collars, forward sales, options, other
similar transactions and combinations of the foregoing, including without
limitation, Rate Management Transactions.
"Dollars" and "$" mean lawful money of the United States of America.
"ERISA": Section 6.10.
"Eurodollar Interest Period" means, with respect to each particular
Eurodollar Portion, a period of thirty (30), sixty (60) or ninety (90) days, as
specified in the Rate Election applicable thereto, beginning on and including
the date specified in such Rate Election (which must be a Business Day), and
ending thirty (30), sixty (60) or ninety (90) days thereafter, provided that
each Eurodollar Interest Period which would otherwise end on a day which is not
a Business Day shall end on the next succeeding Business Day (unless such next
succeeding Business Day is in the next calendar month, in which case such
Eurodollar Interest Period shall end on the immediately preceding Business Day).
No Eurodollar Interest Period may be elected for any Eurodollar Portion which
would extend past the Revolving Maturity Date.
"Eurodollar Margin" means, with respect to each Eurodollar Portion of the
Revolving Loan, two and three-fourths percent (2.75%).
"Eurodollar Portion" means any portion of the unpaid principal balance of
the Revolving Loan which Borrower designates as such in a Rate Election.
"Eurodollar Rate" means, with respect to each particular Eurodollar Portion
for any Interest Period therefor, the rate of interest per annum at which
deposits in immediately available and freely transferrable funds in Dollars are
offered to Lender (at approximately 10:00 a.m. Dallas, Texas time three Business
Days prior to the first day of each Interest Period) in the London interbank
market for delivery on the first day of such Interest Period in an amount equal
to or comparable to the principal amount of the Eurodollar Portion to which such
Interest Period relates. Each determination of the Eurodollar Rate by Lender
shall, in the absence of error, be conclusive and binding.
"Event of Default": Section 9.1.
"GAAP" shall mean those generally accepted accounting principles and
practices that are recognized as such by the American Institute of Certified
Public Accountants acting through its Accounting Principles Board or by the
Financial Accounting Standards Board (or any other appropriate board or
committee thereof), applied on a basis consistent with that of prior periods so
as to properly reflect the financial condition, results of operations and cash
flows of a person, except that any accounting principle or practice required to
be changed by the said Accounting Principles Board or Financial Accounting
Standards Board (or any other board or committee thereof) in order to continue
as a generally accepted accounting principle or practice may so be changed and
when so
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changed shall constitute generally accepted accounting principles in accordance
with the terms hereof.
"Highest Lawful Rate" means the maximum nonusurious rate of interest (or,
if the context so requires, an amount calculated at such rate) that Lender is
allowed to contract for, charge, take, reserve or receive under applicable law
after taking into account, to the extent required by applicable law, any and all
relevant payments or charges under the Loan Papers.
"Interest Period" means, with respect to any Eurodollar Portion, the
related Eurodollar Interest Period.
"Investments": Section 8.4.
"Lender": the preamble.
"Lien" means any lien, mortgage, security interest, charge, or encumbrance
of any kind, including, without limitation, the Rights of a vendor, lessor, or
similar party under any conditional sales agreement or other title retention
agreement or lease substantially equivalent thereto, any production payment, and
any other Right of, or arrangement with, any creditor to have his claim
satisfied out of any property or assets, or the proceeds therefrom, prior to the
general creditors of the owner thereof.
"Loan Papers" means (i) this Agreement, (ii) any and all notes, mortgages,
deeds of trust, security agreements, financing statements, guaranties, and other
agreements, documents, certificates, letters and instruments ever delivered or
executed pursuant to, or in connection with, this Agreement, as any of the same
may hereafter be amended, supplemented or restated (including, without
limitation, the Note and the Deed of Trust), (iii) any and all agreements,
documents and instruments ever delivered or executed pursuant to, or in
connection with, Rate Management Transactions, and (iv) any and all future
renewals and extensions or restatements of, or amendments or supplements to, all
or any part of the foregoing.
"Margin Regulations" means, as applicable, Regulations G, U and X of the
Board of Governors of the Federal Reserve System, as from time to time in
effect.
"Material Adverse Change" means any set of circumstances or events that (i)
will or could reasonably be expected to have any adverse effect upon the
validity, performance, or enforceability of any Loan Paper, (ii) is or could
reasonably be expected to be material and adverse to the financial condition or
business operations of Borrower, (iii) will or could reasonably be expected to
impair the ability of Borrower to fulfill its obligations under the terms and
conditions of the Loan Papers, or (iv) will or could reasonably be expected to
cause an Event of Default.
"Material Agreement" of any person means any material written or oral
agreement, contract, commitment, or understanding to which such person is a
party, by which such person is directly or
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indirectly bound, or to which any asset of such person may be subject, which is
not cancelable by such person upon 30 days or less notice without liability for
further payment other than nominal penalty.
"Mineral Interests" means Rights, estates, titles, and interests in and to
oil, gas, sulphur, or other mineral (or any combination thereof) leases (and all
extensions, amendments, ratifications, and subleases thereof or thereunder) and
any mineral interests, royalty and overriding royalty interests, production
payment and net profits interests, mineral fee interests, and rights therein,
including, without limitation, any reversionary or carried interests relating to
the foregoing, together with Rights, titles, and interests created by or arising
under the terms of any unitization, communitization, and pooling agreements or
arrangements, and all properties, rights, and interests covered thereby, whether
arising by contract, by order, or by operation of law, which now or hereafter
include all or any part of the foregoing.
"Monthly Automatic Borrowing Base Reduction": Section 3.6.
"Net Income" means Borrower's unconsolidated net income, determined in
accordance with GAAP.
"Net Worth" means, as of any date, an amount equal to Borrower's
unconsolidated stockholders' equity, as determined in accordance with GAAP.
"Note": Section 2.4(a).
"Obligation" means all present and future indebtedness, obligations and
liabilities, and all renewals and extensions thereof, or any part thereof, now
or hereafter owed to Lender by Borrower, arising from, by virtue of, or pursuant
to any Loan Paper (including, without limitation, amounts owed to Lender by
Borrower on account of any letters of credit issued by Lender for the account of
Borrower and any and all obligations, contingent or otherwise, whether now
existing or hereafter arising, of Borrower to Lender arising under or in
connection with Rate Management Transactions), or otherwise, together with all
interest accruing thereon and reasonable costs, expenses, and attorneys' fees
incurred in the enforcement or collection thereof, whether such indebtedness,
obligations, and liabilities are direct, indirect, fixed, contingent,
liquidated, unliquidated, joint, several, or joint and several or were, prior to
acquisition thereof by Lender, owed to some other person.
"Plan" means any plan subject to Title IV of ERISA and maintained by
Borrower, or any such plan to which Borrower is required to contribute on behalf
of its employees.
"Prior Lender": Recital A.
"Prior Loan Agreement": Recital A.
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"Prior Note" means that certain promissory note dated December 27, 1999, in
the original principal amount of $30,000,000 executed by Borrower and payable to
the order of Prior Lender.
"Rate Election" has the meaning given it in Section 2.10.
"Rate Management Transaction" means any transaction (including an agreement
with respect thereto) now existing or hereafter entered into between Borrower
and Lender which is a rate swap, basis swap, forward rate transaction, commodity
swap, commodity option, equity or equity index swap, equity or equity index
option, bond option, interest rate option, foreign exchange transaction, cap
transaction, floor transaction, collar transaction, forward transaction,
currency swap transaction, cross-currency rate swap transaction, currency option
or any other similar transaction (including any option with respect to any of
these transaction) or any combination thereof, whether linked to one or more
interest rates, foreign currencies, commodity prices, equity prices or other
financial measures.
"Regulation D" means Regulation D of the Board of Governors of the Federal
Reserve System, as from time to time in effect.
"Reserve Percentage" means, on any day with respect to each particular
Eurodollar Portion in a Tranche, the maximum reserve requirement, as determined
by Lender (including without limitation any basic, supplemental, marginal,
emergency or similar reserves), expressed as a decimal and rounded to the next
higher .01 of 1%, which would then apply to Lender under Regulation D or
successor regulations issued from time to time by the Board of Governors of the
Federal Reserve System with respect to "Eurocurrency liabilities" (as such term
is defined in Regulation D) equal in amount to Lender's Eurodollar Portion in
such Tranche, were Lender to have any such "Eurocurrency liabilities". If such
reserve requirement shall change after the date hereof, the Reserve Percentage
shall be automatically increased or decreased, as the case may be, from time to
time as of the effective time of each such change in such reserve requirement.
"Revolving Commitment": Section 2.1(a).
"Revolving Loan" means a loan or loans made under the Revolving Commitment
pursuant to Section 2.1(a).
"Revolving Maturity Date" means October 1, 2003.
"Rights" means rights, remedies, powers, privileges and benefits.
"Subsidiary" means any corporation fifty percent (50%) or more of the
Voting Shares of which is owned, directly or indirectly, by Borrower.
"Taxes" has the meaning given it in Section 2.14.
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"Total Monthly Automatic Borrowing Base Reductions" means the sum of the
Monthly Automatic Borrowing Base Reductions during each fiscal quarter of
Borrower.
"Tranche" has the meaning given it in Section 2.10.
"Voting Shares" of any corporation or other entity shall mean outstanding
shares of capital stock or other ownership interests of any class or classes
(however designated) having ordinary voting power for the election of at least a
majority of the members of the Board of Directors (or other governing body) of
such corporation or other entity, other than shares having such power only by
reason of the happening of a contingency.
1.2 Other Definitional Provisions.
(a) All terms defined in this Agreement shall have the above described
meanings when used in any other Loan Paper or in any certificate, report or
other document made or delivered pursuant to this Agreement, unless same
shall otherwise expressly require.
(b) Terms used herein in the singular shall import the plural and vice
versa.
(c) Terms not specifically defined herein shall have the meanings
accorded them under GAAP, customary oil and gas industry practices or the
Texas Uniform Commercial Code, as appropriate.
(d) The words "hereof," "herein," "hereto," "hereunder" and similar
terms when used in this Agreement shall refer to this Agreement as a whole
and not to any particular provision of this Agreement.
ARTICLE II
2.1 Revolving Commitment.
(a) Subject to the terms and conditions hereof, during the period
beginning on the date hereof and ending on the Revolving Maturity Date,
Lender agrees to extend to Borrower a revolving line of credit which shall
not exceed at any time outstanding the lesser of (i) $30,000,000, or (ii)
the Borrowing Base from time to time in effect (such lesser amount being
referred to herein as the "Revolving Commitment"). Subject to the foregoing
limitations and the requirements set forth herein and the Note, Borrower
may borrow, repay, and reborrow hereunder during the period beginning on
the date hereof and ending on the Revolving Maturity Date. Notwithstanding
any other provisions of this Agreement, no Advance shall be required to be
made hereunder if any Event of Default has occurred and is continuing.
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(b) Borrower may at any time prior to the Revolving Maturity Date upon
at least one (1) Business Day's notice in writing to Lender reduce (in
$100,000 integer multiples) or terminate the Revolving Commitment. If the
Revolving Commitment is reduced, Lender shall thereafter have no obligation
to make any Advance that would result in the Revolving Loan exceeding the
Revolving Commitment as so reduced; if the Revolving Commitment is
terminated, no further Advance shall be made pursuant to Agreement.
Notwithstanding anything to the contrary contained herein, (i) once reduced
or terminated, the Revolving Commitment may not be increased or reinstated
except upon the mutual written agreement of Borrower and Lender; and (ii)
Borrower shall not reduce the Revolving Commitment to an amount that is
less than the outstanding balance of the Revolving Loan on the effective
date of such reduction.
2.2 Manner of Borrowing.
(a) Each request by Borrower to Lender for an Advance shall be in the
form of Exhibit 2.2 hereto and shall specify the aggregate amount of such
requested Advance and the requested date of such Advance. Borrower shall
furnish to Lender each request for Advance not later than 10:00 a.m.
Midland, Texas time, (i) one (1) Business Day prior to the requested
borrowing date (which must be a Business Day) in the case of Advances to be
made as Base Rate Portions, and (ii) three (3) days prior to the requested
borrowing date (which must be a Business Day) in the case of Advances to be
made as Eurodollar Portions; provided that, any Advance to be made as a
Eurodollar Portion shall require, in addition, a Rate Election as set forth
in Section 2.10. Subject to Section 2.10, each Advance shall be in the
minimum amount of $50,000 or the unadvanced portion of the Revolving
Commitment, whichever is less.
(b) Upon fulfillment of all applicable conditions set forth in Section
5.2 hereof (and assuming the prior satisfaction of all conditions pursuant
to Section 5.1 hereof), Lender shall before 2:00 o'clock p.m. (Midland,
Texas time) on the requested borrowing date, pay or deliver each Advance to
or upon the order of Borrower at the principal banking office of Lender in
Midland, Texas in immediately available funds.
2.3 Commitment Fee. In addition to the payments provided for in the Note,
Borrower shall pay to Lender a revolving credit loan commitment fee at the rate
of one-quarter percent (1/4%) per annum on the difference between the Revolving
Commitment and the average daily amount of the Revolving Loan for each calendar
quarter (or portion thereof) during which the Revolving Commitment is in effect.
Such fee shall be payable on the first (1st) day of the second month following
each such calendar quarter, beginning February 1, 2001. The parties acknowledge
and agree that the commitment fees payable hereunder are bona fide commitment
fees and are intended as reasonable compensation to Lender for committing to
make funds available to Borrower as described herein and for no other purpose.
Upon the effective date of a change in the Revolving Commitment (whether
due to a reduction of the Revolving Commitment pursuant to Section 2.1(b), or a
change in the Borrowing Base pursuant to Section 3.2 or Section 3.6), the
commitment fee payable pursuant to this Section
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2.3 shall be calculated on the basis of the amount of the Revolving Commitment,
as so changed. Upon the effective date of a termination or reduction of the
Revolving Commitment (pursuant to Section 2.1(b)), Borrower shall have no
further liability for such commitment fee (except for that portion of the
quarter prior to termination of the Revolving Commitment).
2.4 Note.
(a) The Advances made by Lender under the Revolving Loan shall be
evidenced by a promissory note (the "Note"), which shall be (i) dated as of
the date hereof, (ii) in the principal amount of $30,000,000, and (iii) in
the form of Exhibit 2.4 hereto with blanks appropriately completed in
conformity herewith. Notwithstanding the principal amount of the Note as
stated on the face thereof, the amount of principal actually owing on the
Note at any given time shall be the aggregate of all Advances theretofore
made to Borrower under the Revolving Loan, less all payments of principal
theretofore actually received by Lender and applied to the Note.
(b) It is expressly agreed that the Note is given, to the extent of
$12,365,889.22, in renewal, extension and rearrangement, but not in
extinguishment or novation, of the unpaid principal balance of the Prior
Note.
2.5 Principal Payments. The principal of the Note shall be due and payable
on the Revolving Maturity Date, unless earlier due in whole or in part pursuant
to the mandatory prepayment requirements of Section 3.5, Section 3.6 or the
other terms hereof.
2.6 Interest Rate; Interest Payments. The unpaid principal balance of the
Note shall bear interest from time to time and interest on the Note shall be
payable, as follows:
(a) Borrower agrees to pay interest on the Note calculated on the
basis of the actual days elapsed in a year consisting of 365 or, if
appropriate, 366 days with respect to the unpaid principal amount of each
Base Rate Portion during the term of the Note until maturity (whether by
acceleration or otherwise), at a varying rate per annum equal to the lesser
of (i) the Highest Lawful Rate, or (ii) the Base Rate. Subject to the
provisions of this Agreement and to prepayment, the principal of the Note
representing Base Rate Portions shall be due and payable as specified in
Section 2.5 hereof and the interest in respect of each Base Rate Portion
shall be due and payable monthly on the 1st day of each month, commencing
January 1, 2001. Past due principal and, to the extent permitted by law,
past due interest in respect to each Base Rate Portion, shall bear
interest, payable on demand, at a rate per annum equal to the Highest
Lawful Rate.
(b) Borrower agrees to pay interest calculated on the basis of a year
consisting of 360 days with respect to the unpaid principal amount of each
Eurodollar Portion during the term of the Note until maturity (whether by
acceleration or otherwise), at a varying rate per annum equal to the lesser of
(i) the Highest Lawful Rate, or (ii) the applicable Adjusted Eurodollar Rate
during the related Eurodollar Interest Period. Subject to the provisions of this
Agreement with respect to prepayment, the principal of the Note representing
Eurodollar Portions shall be payable as specified
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in Section 2.5 hereof and the interest with respect to each Eurodollar Portion
shall be due and payable on the day which the related Eurodollar Interest Period
ends. Past due principal and, to the extent permitted by law, past due interest
in respect to each Eurodollar Portion, shall bear interest, payable on demand,
at a rate per annum equal to the Highest Lawful Rate.
2.7 Capital Adequacy. If at any time after the date hereof, and from time
to time, any law, rule, regulation or treaty now existing or hereafter
promulgated regarding capital adequacy, or any adoption thereof, ruling thereon,
change therein, or interpretation thereof now existing or hereafter made by any
governmental authority, central bank or comparable agency regarding capital
adequacy, or compliance by Lender with any request, directive, or requirement
now existing or hereafter imposed by any governmental authority, central bank or
comparable agency regarding capital adequacy (whether or not having the force of
law), shall result in Lender incurring a reduction in the rate of return on
Lender's capital as a consequence of Lender's obligations hereunder to a level
below that which Lender otherwise could have achieved in an amount deemed by
Lender to be material (and Lender may, in determining such amount, utilize such
assumptions and allocations of costs and expenses as Lender shall deem
reasonable and may use any reasonable averaging or attribution method), then,
Lender may, from time to time, notify Borrower and deliver to Borrower a
certificate setting forth in reasonable detail the calculation of the amount
necessary to compensate Lender for the reductions incurred. In such event,
Borrower agrees that it shall, within thirty (30) days, either (i) pay such
amount to Lender, or (ii) renegotiate the interest rate on the Note to a rate
mutually acceptable to Borrower and Lender. Failing Borrower's payment of such
amount pursuant to clause (i) above or the renegotiation of the interest rate
pursuant to clause (ii) above, Borrower agrees that it shall, within ninety (90)
days thereafter, pay the Obligation in full and terminate this Agreement.
2.8 Prepayments. Borrower may prepay any Base Rate Portion, in whole or in
part, without penalty or premium, provided, however, that the Revolving
Commitment shall be terminated if the unpaid principal balance of the Note is at
any time reduced to less than $1,000. No prepayment of any Eurodollar Portion or
any part thereof shall be permitted prior to the last day of the current
Interest Period therefor without the prior consent of Lender; provided, that if
Lender determines that it may not lawfully maintain a Eurodollar Portion to the
last day of the current Interest Period therefor, Borrower shall prepay such
Eurodollar Portion on the date required by Lender. If there is a permitted
prepayment of any Eurodollar Portion prior to the last day of the current
Interest Period therefor, whether by consent or requirement of Lender (including
without limitation pursuant to Section 3.5 or Section 3.6 hereof) or because of
acceleration or otherwise, Borrower shall, within fifteen (15) days of any
request by Lender, pay to Lender any loss or expense which Lender may incur or
sustain as a result of any such prepayment. A statement as to the amount of such
loss or expense, prepared in good faith and in reasonable detail by Lender and
submitted by Lender to Borrower, shall be conclusive and binding absent manifest
error in computation. Calculation of all amounts payable to Lender under this
Section 2.8 shall be made as though Lender shall have actually funded or
committed to fund the relevant Eurodollar Portion through the purchase of an
underlying deposit in an amount equal to the amount of such portion and having a
maturity comparable to the current Interest Period for such Eurodollar Portion;
provided, however, that Lender may fund any
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Eurodollar Portion in any manner it sees fit and the foregoing assumption shall
be utilized only for the purpose of calculation of amounts payable under this
Section 2.8.
2.9 Manner and Application of Payments. All payments of principal and
interest on the Note shall be made by Borrower to Lender before 1:30 o'clock
p.m. (Midland, Texas time), in lawful money of the United States of America and
in immediately available funds at Lender's principal banking office in Midland,
Texas. In any case where a payment of principal or interest on the Note, or any
commitment or other fee, is due on a day other than a Business Day, the maturity
thereof shall be extended to the next succeeding Business Day, but interest
shall continue to accrue until the payment is in fact made. All payments and
prepayments on the Obligation, including proceeds from the exercise of any
Rights under the Loan Papers or proceeds of any of the Collateral, shall be
applied to the Obligation in the order deemed appropriate by Lender, but Lender
shall always retain the right to apply same in the following order: (i) to
expenses for which Lender shall not have been reimbursed under the Loan Papers
and then to all indemnified amounts due Lender under the terms of the Loan
Papers; (ii) to accrued and unpaid interest on the Note; (iii) to Base Rate
Portions of the Loan; (iv) to Eurodollar Portions of the Loan; and (v) to the
remaining Obligation. Subject to the foregoing, payments of principal of the
Note shall be applied to the Eurodollar Portions as Borrower shall select;
provided, however, that Borrower shall select Eurodollar Portions to be repaid
subject to the terms of Section 2.8 hereof, and in a manner designed to minimize
the consequential loss to Lender, if any, resulting from such payments; and
provided further that, if Borrower shall fail to select the Eurodollar Portions
to which such payments are to be applied, or if an Event of Default has occurred
and is continuing at the time of such payment, then Lender shall be entitled to
apply the payment to such Eurodollar Portions in the manner it shall deem
appropriate.
2.10 Rate Elections. Borrower may from time to time designate all or any
portions of the Revolving Loan (including any yet to be made Advances which are
to be made prior to or at the beginning of the designated Interest Period but
excluding any portions of the Revolving Loan which are required to be repaid
prior to the end of the designated Interest Period) as a "Tranche", which term
refers to a set of Eurodollar Portions with identical Interest Periods. Lender
shall not be required to give effect to such election during the continuance of
an Event of Default, and Borrower may make such an election with respect to
already existing Eurodollar Portions only if such election will take effect at
or after the termination of the Interest Period applicable thereto. Each
election by Borrower of a Tranche shall:
(a) Be made in writing in the form and substance of Exhibit 2.10
attached hereto, duly completed, herein called a "Rate Election";
(b) Specify the aggregate amount of the Revolving Loan which Borrower
desires to designate as such Tranche, the first day of the Interest Period
which is to apply thereto, and the length of such Interest Period; and
(c) Be received by Lender not later than 10:00 a.m. Midland, Texas
time, on the third Business Day preceding the first day of the specified
Interest Period.
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Each Rate Election shall be irrevocable. Borrower may make no Rate Election
which does not specify an Interest Period complying with the definition of
"Eurodollar Interest Period" in Section 1.1, and the aggregate amount of the
Tranche elected in any Rate Election must be $1,000,000 or a higher integral
multiple of $100,000. Upon the termination of each Interest Period the portion
of the Revolving Loan within the related Tranche shall, unless the subject of a
new Rate Election then taking effect, automatically become a part of the Base
Rate Portion of the Revolving Loan and become subject to all provisions of the
Loan Papers governing such Base Rate Portion. Borrower shall have no more than
four (4) Tranches in effect at any time.
2.11 Increased Cost of Eurodollar Portion. If any applicable domestic or
foreign law, treaty, rule, directive or regulation (whether now in effect or
hereinafter enacted or promulgated, including Regulation D) or any
interpretation or administration thereof by any governmental authority charged
with the interpretation or administration thereof (whether or not having the
force of law):
(a) shall change the basis of taxation of payments to Lender of any
principal, interest, or other amounts attributable to any Eurodollar
Portion of the Revolving Loan, or otherwise due under this Agreement in
respect of any Eurodollar Portion of the Revolving Loan (other than taxes
imposed on the overall net income of Lender or any lending office of Lender
by any jurisdiction in which Lender or any such lending office is located);
(b) shall change, impose, modify, apply or deem applicable any
reserve, special deposit or similar requirements in respect of any
Eurodollar Portion (excluding those for which Lender is fully compensated
pursuant to adjustments made in the definition of Adjusted Eurodollar Rate)
or against assets of, deposits with or for the account of, or credit
extended by, Lender; or
(c) shall impose on Lender or the London interbank market any other
condition affecting any Eurodollar Portion;
and the result of any of the foregoing (a) through (c) is to (1) increase
the cost to Lender of funding or maintaining any Eurodollar Portion, or (2)
to reduce the amount of any sum receivable by Lender in respect of any
Eurodollar Portion by an amount reasonably deemed by Lender to be material;
then (i) Lender shall promptly notify Borrower in writing of the happening
of such event, (ii) Borrower shall thereafter upon demand pay to Lender
such additional amount or amounts as will compensate Lender for such
additional cost or reduction, subject to the provisions of Section 2.13,
and (iii) Borrower may elect, by giving to Lender not less than three (3)
Business Days' notice, to convert all (but not less than all) of any such
Eurodollar Portion into a part of the Base Rate Portion, subject to the
provisions of Section 2.13.
2.12 Availability. If (a) any change in applicable laws, treaties, rules or
regulations or in the interpretation or administration thereof in any
jurisdiction whatsoever, domestic or foreign, shall make it unlawful or
impracticable for Lender to fund or maintain Eurodollar Portions, or shall
materially restrict the authority of Lender to purchase or take offshore
deposits of dollars (i.e.,
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"eurodollars"), or (b) Lender determines that matching deposits appropriate to
fund or maintain any Eurodollar Portion are not available to it, or (c) Lender
determines that the formula for calculating the Adjusted Eurodollar Rate does
not fairly reflect the cost to Lender of making or maintaining loans based on
such rate, then, upon notice by Lender to Borrower, Borrower's right to elect
Eurodollar Portions shall be suspended to the extent and for the duration of
such illegality, impracticability, restriction or condition, and all Eurodollar
Portions (or portions thereof) which are then outstanding or are then the
subject of any Rate Election and which cannot lawfully or practicably be
maintained or funded shall immediately become or remain part of the Base Rate
Portions of the Loan, subject to the provisions of Section 2.13. Borrower agrees
to indemnify Lender and hold it harmless against all costs, expenses, claims,
penalties, liabilities and damages which may result from any such change in law,
treaty, rule, regulation, interpretation or administration.
2.13 Funding Losses. In addition to its other obligations hereunder,
Borrower will indemnify Lender against, and reimburse Lender on demand for, any
loss or expense incurred or sustained by Lender, as a result of (a) any payment
or prepayment (whether authorized or required hereunder or otherwise) of all or
a portion of a Eurodollar Portion on a day other than the day on which the
applicable Interest Period ends, (b) any payment or prepayment (whether required
hereunder or otherwise) of the Revolving Loan made after the delivery, but
before the effective date, of a Rate Election, if such payment or prepayment
prevents such Rate Election from becoming fully effective, (c) the failure of
any Advance to be made or of any Rate Election to become effective due to any
condition precedent to an Advance not being satisfied, due to the inability of
Lender (acting reasonably and in accordance with Section 2.12) to determine the
Adjusted Eurodollar Rate for a Eurodollar Portion, or due to any other action or
inaction of Borrower, or (d) any conversion (whether authorized or required
hereunder or otherwise) of all or any portion of any Eurodollar Portion into a
Base Rate Portion on a day other than the day on which the applicable Interest
Period ends.
2.14 Taxes. All payments by Borrower of principal of, and interest on, the
Revolving Loan, and all other amounts payable hereunder shall be made free and
clear of and without deduction for any present or future income, excise, stamp
or franchise taxes and other taxes, fees, duties, withholdings or other charges
of any nature whatsoever imposed by any taxing authority, but excluding
franchise taxes and taxes imposed on or measured by Lender's net income or
receipts (such non-excluded items being called "Taxes"). In the event that any
withholding or deduction from any payment to be made by Borrower hereunder is
required in respect of any Taxes pursuant to any applicable law, rule or
regulation, then, Borrower will:
(a) pay directly to the relevant authority the full amount required to
be so withheld or deducted;
(b) promptly forward to Lender an official receipt or other
documentation satisfactory to Lender evidencing such payment to such
authority; and
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(c) pay to Lender such additional amount(s) as is necessary to ensure
that the net amount actually received by Lender will equal the full amount
such Lender would have received had no such withholding or deduction been
required.
If any Taxes are directly asserted against Lender with respect to any payment
received by Lender hereunder, Lender may pay such Taxes and Borrower will
promptly pay such additional amounts to Lender (including any penalties,
interest or expenses) as is necessary in order that the net amount received by
such person after the payment of such Taxes (including any taxes on such
additional amount) shall equal the amount such person would have received had no
such Taxes been asserted. If Borrower fails to pay any Taxes when due to the
appropriate taxing authority or fail to remit to Lender the required receipts or
other required documentary evidence, Borrower shall indemnify Lender for any
Taxes, interest or penalties that may become payable by Lender as a result of
any such failure.
ARTICLE III
Borrowing Base and Required Prepayments Under Note
3.1 Borrowing Base. The "Borrowing Base" is initially set at the sum of
$15,500,000.00 but shall be subject to redetermination as further provided in
this Article.
3.2 Redeterminations of Borrowing Base and Monthly Automatic Borrowing Base
Reduction. Lender shall redetermine the Borrowing Base and Monthly Automatic
Borrowing Base Reduction semi-annually, on or about May 1 and November 1 of each
year, beginning May 1, 2001. Lender may require a redetermination of the
Borrowing Base and Monthly Automatic Borrowing Base Reduction at any time in its
sole discretion. In addition, Borrower may request that Lender redetermine the
Borrowing Base and Monthly Automatic Borrowing Base Reduction at any time, and
Lender agrees to respond to each such request within thirty (30) days after
Lender has received from Borrower the requisite information for such
redetermination; provided, however, that Borrower may request no more than one
Borrowing Base and Monthly Automatic Borrowing Base Reduction redetermination
during the six-month period between each scheduled Borrowing Base
redetermination. Promptly following each redetermination of the Borrowing Base
or the Monthly Automatic Borrowing Base Reduction, Lender shall notify Borrower
of any change in the amount of the Borrowing Base or the Monthly Automatic
Borrowing Base Reduction. Until such time as Lender has notified Borrower in
writing of a change in the amount of the Borrowing Base or the Monthly Automatic
Borrowing Base Reduction, the Borrowing Base and Monthly Automatic Borrowing
Base Reduction will remain unchanged.
Borrower shall furnish to Lender, no later than thirty (30) days prior to
each redetermination date hereunder (or within thirty (30) days after receipt of
notice from Lender that it has elected to make a non-scheduled Borrowing Base
and Monthly Automatic Borrowing Base Reduction redetermination), as directed by
Lender, such information as Lender may request, in form and
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substance acceptable to Lender, requisite to Lender's redetermination of the
Borrowing Base and Monthly Automatic Borrowing Base Reduction.
3.3 Standards for Redetermination. All Borrowing Base and Monthly Automatic
Borrowing Base Reduction redeterminations shall be made by Lender in the
exercise of its sole discretion in accordance with its customary practices and
standards for loans in similar amounts to borrowers similarly situated, at the
time and under the circumstances then prevailing.
3.4 Borrowing Base Redetermination Fee. In addition to the payments
provided for in the Note, Borrower shall pay to Lender as a Borrowing Base
redetermination fee the sum of $750 at the time Lender provides the notice
required by Section 3.2 and at any time that Borrower requests a non-scheduled
Borrowing Base redetermination pursuant to Section 3.2; provided, however, that
Borrowing Base redetermination fees payable by Borrower hereunder shall not
exceed $3000 during any calendar year. The parties acknowledge and agree that
the Borrowing Base redetermination fees payable hereunder are intended as
reasonable compensation to Lender for its efforts in redetermining the Borrowing
Base during the term of the Revolving Loan and for no other purpose.
3.5 Mandatory Increase in Collateral or Prepayment of Principal of the
Note. In the event that the Obligation shall, at the time of notification of the
Borrowing Base by Lender to Borrower pursuant to Section 3.2, be in excess of
the Revolving Commitment, Borrower shall, at Borrower's option, either (i)
within thirty (30) days thereafter, by instruments satisfactory in form and
substance to Lender, provide Lender with additional collateral with value in
amounts satisfactory to Lender, in its sole discretion, in order to increase the
Borrowing Base by an amount at least equal to such excess, or (ii) within thirty
(30) days thereafter, prepay the principal of the Note (together with accrued
interest on the principal amount so prepaid) in an amount at least equal to such
excess.
3.6 Monthly Automatic Borrowing Base Reduction and Prepayment of Principal
of the Note. The Borrowing Base shall automatically reduce by $323,000 on
January 1, 2001, and on the first day of each month thereafter during the term
of the Revolving Commitment (each a "Monthly Automatic Borrowing Base
Reduction"), subject to Lender's right, in its sole discretion, to redetermine
the Monthly Automatic Borrowing Base Reduction in conjunction with a Borrowing
Base redetermination pursuant to Section 3.2 above. In the event that the
Obligation shall be in excess of the Borrowing Base on the date of any Monthly
Automatic Borrowing Base Reduction, then on said date Borrower shall prepay the
principal of the Note in an amount equal to such excess, in addition to the
payment of accrued interest on the Note that may be due on such date. The
provisions of Section 3.5 above shall be applicable to scheduled and
non-scheduled redeterminations of the Borrowing Base but shall not apply to a
Monthly Automatic Borrowing Base Reduction.
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ARTICLE IV
Security and Assignment
To secure full and complete payment and performance of the Obligation,
Borrower hereby grants and conveys to and creates in favor of Lender Bank Liens
in, to and on all of the following items and types of property (referred to
collectively herein as the "Collateral"), all as more particularly described in
the Loan Papers:
(a) all present and future interest now owned or hereafter acquired by
Borrower in the Mineral Interests identified in the Deed of Trust, together
with all proceeds of production therefrom;
(b) all present and future increases, profits, combinations,
reclassifications, improvements and products of, accessions, attachments,
and other additions to, tools, parts and equipment used in connection with,
and substitutes and replacements for, any of the Collateral;
(c) all cash and noncash proceeds and other Rights arising from or by
virtue of, or from the voluntary or involuntary sale, lease or other
disposition of, or collections with respect to, or insurance proceeds
payable with respect to, or proceeds payable by virtue of warranty or other
claims against manufacturers of, or claims against any other person with
respect to, any of the Collateral;
(d) all present and future security for the payment to Borrower for
any of the Collateral;
(e) all goods which gave or will give rise to any of the Collateral or
are evidenced, identified or represented therein or thereby; and
(f) all certificates of title, manufacturer's statements of origin, or
other documents, accounts and chattel paper arising from or related to any
of the Collateral.
All Bank Liens created in favor of Prior Lender pursuant to the Prior Loan
Agreement are hereby ratified, renewed and extended in favor of Lender, without
lapse or interruption of perfection or priority.
ARTICLE V
Conditions Precedent
5.1 Renewal and Extension. The obligation of Lender to accept the Note in
renewal, extension and rearrangement of the Prior Note shall be subject to
satisfaction of each of the following conditions precedent:
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(a) There shall have been executed, where appropriate, and delivered
by Borrower (and/or any other requisite party thereto) (i) the documents
listed on Schedule 5.1 hereto, all of which shall be in form and substance
satisfactory to Lender and its counsel, and (ii) such other documents or
instruments as Lender may reasonably require.
(b) All requirements of notice necessary to perfect each Bank Lien
shall have been accomplished or arrangements made therefor to the
satisfaction of Lender and its counsel.
(c) Lender shall have received from Borrower's legal counsel a
favorable legal opinion in form and substance satisfactory to Lender and
its counsel respecting the matters set forth in Section 6.1, 6.2, 6.5 and
6.15 hereof.
(d) No Material Adverse Change shall have occurred in the financial
condition, assets or business prospects of Borrower since September 30,
2000.
(e) All fees due and payable to Prior Lender and all accrued and
unpaid interest on the Prior Note shall have been paid up to the date
hereof.
(f) Lender shall have received an assignment of notes, liens and
security interests and the original of the Prior Note, with appropriate
endorsement, from the Prior Lender, all in form and substance satisfactory
to Lender.
(g) Lender shall have received from Borrower acceptable title
information covering not less than ninety percent (90%) of the engineered
value of Borrower's Mineral Interests.
(h) Borrower shall have paid to Lender a facility fee in the amount of
$38,750.
5.2 All Advances. The obligation of Lender to make any Advance hereunder
shall be subject to satisfaction of each of the following conditions precedent:
(a) An authorized individual shall have requested such Advance in
accordance with the requirements of Section 2.2(a) hereof.
(b) No Event of Default shall have occurred that has not been waived
in writing by Lender, and there shall exist no condition or event that,
with the giving of notice or lapse of time or both, would constitute an
Event of Default.
(c) Borrower shall have observed, performed and complied with all
covenants, agreements, duties and obligations contained in the Loan Papers.
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ARTICLE VI
Representations and Warranties
In order to induce Lender to enter into this Agreement, Borrower represents
and warrants to Lender as of the date hereof, which representations and
warranties shall survive the delivery of the Note, as follows:
6.1 Existence and Authority. Borrower is (i) a corporation duly organized,
legally existing and in good standing under the laws of the State of Delaware,
and (ii) duly qualified as a foreign corporation and in good standing in the
State of Texas. Except to the extent that the failure to qualify would not cause
or result in a Material Adverse Change, there are no other states or
jurisdictions wherein Borrower's operations, transaction of business or
ownership of property makes such qualification necessary.
6.2 Powers. Borrower is duly authorized and empowered to create and issue
the Note and to execute and deliver this Agreement, the other Loan Papers and
all other instruments referred to or mentioned herein, and all action (corporate
or otherwise) on Borrower's part requisite for the due creation, issuance and
delivery of the Note and the due execution and delivery of this Agreement and
the other Loan Papers has been duly and effectively taken. This Agreement is,
and the other Loan Papers when duly executed and delivered will be, legal, valid
and binding obligations of Borrower enforceable in accordance with their terms
(subject to any applicable bankruptcy, insolvency or other laws generally
affecting the enforcement of creditors' rights). The Loan Papers do not violate
any provisions of Borrower's articles of incorporation or bylaws or of any
contract, partnership or other agreement, law or regulation to which Borrower is
subject, and the same do not require the consent or approval of any other person
or entity, including without limitation, any regulatory authority or
governmental body of the United States, of any state or of any political
subdivision of the United States or of any State.
6.3 Financial Statements. The unconsolidated financial statements of
Borrower for the three (3) months ended September 30, 2000, which have been
delivered to Lender, are complete and correct, have been prepared in conformity
with GAAP, and fairly present the financial condition and results of operations
of Borrower as of the dates and for the periods stated. No Material Adverse
Change in the financial condition of Borrower has occurred since September 30,
2000.
6.4 Liabilities. As of the date hereof, Borrower has no material
liabilities, direct or contingent, other than those set forth in the financial
statements of Borrower referred to in Section 6.3 hereof. Borrower knows of no
fact, circumstance, act, condition or development that will or could cause a
Material Adverse Change.
6.5 Litigation. Except as provided in Schedule 6.5 attached hereto,
Borrower is not involved in, nor is aware of the threat of, any material
litigation, nor are there any outstanding or unpaid judgments against Borrower.
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6.6 Taxes. All tax returns required to be filed by Borrower in all
jurisdictions have been filed, and all taxes, assessments, fees and other
governmental charges upon Borrower or upon any of its property, income or
franchises, which are due and payable, have been paid, or adequate reserves
determined in conformity with GAAP have been provided for payment thereof.
6.7 Purpose of Loan. The proceeds of any Advances (a) are not and will not
be used directly or indirectly for the purpose of purchasing or carrying, or for
the purpose of extending credit to others for the purpose of purchasing or
carrying, any "margin stock" as that term is defined in Regulation U of the
Board of Governors of the Federal Reserve System, as amended; and (b) will be
otherwise used for lawful purposes.
6.8 Properties; Liens.
(a) With regard to the Mineral Interests included in the Deed of
Trust, (i) Borrower has good and marketable title to all such Mineral
Interests, free and clear of all Liens except Liens permitted under Section
8.1 hereof, and has full authority to create Bank Liens thereon; and (ii)
all such Mineral Interests are valid, subsisting and in full force and
effect, and all rentals, royalties and other amounts due and payable in
respect thereof have been duly paid.
(b) Borrower has good and marketable title to all of its other
respective properties reflected on the financial statements referred to in
Section 6.3 hereof, and, except for the Liens permitted under Section 8.1,
there is no Lien on any asset of Borrower.
(c) Subject to the Liens permitted under Section 8.1 and Liens that
neither materially detract from the marketability of the property nor
impair the use of the property, and except as may be limited or otherwise
affected by bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally, upon execution, delivery and
recording, or filing, as appropriate, the Loan Papers will be effective to
create in favor of Lender a legal, valid and continuing first Lien on
property (real and personal, tangible and intangible) described therein,
prior and superior to all other existing or future Liens, and, upon the
filing of the appropriate notice documents, will be enforceable as such
against creditors and purchasers from Borrower, and no other filings,
recordings or other actions are necessary or desirable in order to
establish, preserve, protect and perfect such Lien in favor of Lender as a
valid a perfected first Lien on such property, except a continuation
statement may be required under the Uniform Commercial Code.
(d) None of the Collateral is or will be subject to a gas balancing
arrangement under which a material imbalance exists with respect to which
imbalance Borrower is in an overproduced status and is required to (i)
permit one or more third parties to take a portion of the production
attributable to such Collateral without payment (or without full payment)
therefor, and/or (ii) make payment in cash in order to correct such
imbalance.
6.9 Material Agreements. Except for the Loan Papers, the Material
Agreements described on Schedule 6.9, agreements, documents and instruments
giving rise to Mineral Interests, farmout
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agreements, gas contracts and operating and joint operating agreements related
to any Mineral Interests, there are no Material Agreements of Borrower. The
performance by Borrower under any Material Agreement will not cause a Material
Adverse Change. Borrower is not, nor will the execution, delivery and
performance of and compliance with the terms of the Loan Papers cause Borrower
to be, in default (nor has any potential default occurred) under any Material
Agreement, any agreement, document or instrument giving rise to Mineral
Interests, farmout agreements, gas contracts or any operating or joint
operating, or unitization agreements related to Mineral Interests, other than in
each case such defaults or potential defaults which could not, individually or
collectively, cause a Material Adverse Change. A default by Borrower under any
operating or joint operating agreement related to any Mineral Interests it owns
will not result in any loss or diminution of any other Mineral Interests it
owns.
6.10 ERISA. All Plans maintained by Borrower are in compliance with all
funding and other requirements of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), and none have been terminated or have accrued any
funding deficiency for which Borrower would be liable under said statute.
6.11 Location of Records. The records of Borrower concerning the Collateral
are kept at the following location: 110 North Marienfeld, Suite 465, Midland,
Texas 79701.
6.12 Permits and Franchises, Etc. Borrower has all rights, licenses,
permits, franchises, patents, patent rights, trademarks, trademark rights and
copyrights that are required in order for it to conduct its business as now
conducted without known conflict with the rights of others. Borrower is not
aware of any fact or condition that might cause any of such rights not to be
renewed in due course.
6.13 Subsidiaries. Borrower presently has no Subsidiary and owns no stock
or other ownership interest in any other corporation, limited liability company
or association other than First Permian, LLC. Borrower is not a member of any
general or limited partnership, joint venture or association of any type
whatsoever except associations, joint ventures or other relationships (a) that
are established pursuant to a standard form operating agreement or similar
agreement or that are partnerships for purposes of federal income taxation only,
(b) that are not corporations or partnerships (or subject to the Uniform
Partnership Act) under applicable state law, and (c) whose businesses are
limited to the exploration, development and operation of oil, gas or mineral
properties and interests owned directly by the parties in such associations,
joint ventures or relationships.
6.14 Hazardous Wastes and Substances. Borrower and its properties are in
compliance with applicable state and federal environmental laws and regulations
and Borrower is not aware of and has not received any notice of any violation of
any applicable state or federal environmental law or regulation and, except as
previously disclosed in writing to Lender, there has not heretofore been filed
any complaint, nor commenced any administrative procedure, against Borrower or
any of its predecessors, alleging a violation of any environmental law or
regulation. Except in substantial compliance with relevant environmental laws,
Borrower has not installed, used, generated, stored
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or disposed of any hazardous waste, toxic substance, asbestos or related
material ("Hazardous Materials") on its properties. For the purposes of this
Agreement, Hazardous Materials shall include, but shall not be limited to,
substances defined as "hazardous substances" or "toxic substances" in the
Comprehensive Environmental Response Compensation and Liability Act of 1980, as
amended, 42 U.S.C. 9061, et seq., Hazardous Materials Transportation Act, 49
U.S.C. 1802, et seq., and the Resource Conservation and Recovery Act, 42 U.S.C.
6901, et seq., or as "hazardous substances," "hazardous waste" or "pollutant or
contaminant" in any other applicable federal, state or local environmental law
or regulation. There do not exist upon any property owned by Borrower any
underground storage tanks or facilities, and to the knowledge of Borrower, none
of such property has ever been used for the treatment, storage, recycling, or
disposal of any Hazardous Materials.
6.15 Public Utility Holding Company Act. Borrower is not a "holding
company," or "subsidiary company" of a "holding company," or an "affiliate" of a
"holding company" or of a "subsidiary company" of a "holding company" or a
"public utility" within the meaning of the Public Utility Holding Company Act of
1935, as amended.
6.16 General. There are no significant material facts or conditions
relating to the Loan Papers, any of the Collateral, or the financial condition
or business of Borrower that could, collectively or individually, cause a
Material Adverse Change and that have not been related, in writing, to Lender as
an attachment to this Agreement; and all writings heretofore or hereafter
exhibited or delivered to Lender by or on behalf of Borrower are and will be
genuine and in all respects what they purport and appear to be.
ARTICLE VII
Affirmative Covenants
As an inducement to Lender to enter into this Agreement, Borrower covenants
and agrees that, from the date hereof and until termination of this Agreement
and payment in full of the Obligation (except as otherwise provided in this
Article), unless otherwise agreed to by Lender in writing:
7.1 Financial Statements and Other Information. Borrower will promptly
furnish to Lender copies of (i) such information regarding its business and
affairs and financial condition as Lender may reasonably request, and (ii)
without request, the following:
(a) as soon as available and in any event within ninety (90) days
after the end of each fiscal year of Borrower, a consolidated and an
unconsolidated balance sheet of Borrower as of the close of such fiscal
year and the related consolidated and unconsolidated statements of income,
cash flows and stockholders' equity of Borrower for such year, which shall
be audited and accompanied by the unqualified opinion and report thereon
issued by Borrower's independent public accountants;
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(b) as soon as available and in any event within forty-five (45) days
after the end of each fiscal quarter of Borrower, an unaudited consolidated
and unconsolidated balance sheet of Borrower as of the close of such fiscal
quarter and the related unaudited consolidated and unconsolidated
statements of income, cash flows and stockholders' equity of Borrower for
such fiscal quarter;
(c) as soon as available and in any event within forty-five (45) days
after the end of each fiscal quarter of Borrower, a report summarizing
production, gross revenues, expenses, and net revenues from all of
Borrower's Mineral Interests for such quarter on a field by field basis
and, if requested by Lender, on a lease by lease basis;
(d) on or before March 31 and September 30 of each year, an oil and
gas reserve evaluation effective as of the immediately preceding December
31 and June 30, respectively, covering all of Borrower's Mineral Interests
under the defined categories of proved developed producing, proved
developed nonproducing, and proved undeveloped, prepared by independent
petroleum engineers selected by Borrower and satisfactory to Lender;
(e) within forty-five (45) days after the end of each fiscal quarter
of Borrower, the Compliance Certificate in the form of Exhibit 7.1 hereto
signed by the President or Chief Financial Officer of Borrower;
(f) as soon as available, copies of all filings by Borrower with the
Securities and Exchange Commission;
(g) immediately upon becoming aware of the existence of, or any
material change in the status of, any litigation which could create a
Material Adverse Change if determined adversely against Borrower, a written
communication to Lender of such matter;
(h) immediately upon becoming aware of an Event of Default or the
existence of any condition or event that constitutes, or with notice or
lapse of time, or both, would constitute an Event of Default, a verbal
notification to Lender specifying the nature and period of existence
thereof and what action Borrower is taking or proposes to take with respect
thereto and, immediately thereafter, a written confirmation to Lender of
such matters;
(i) immediately upon becoming aware that any person has given notice
or taken any other action with respect to a claimed default under any
material indenture, mortgage, deed of trust, promissory note, loan
agreement, note agreement, drilling contract, operating or joint venture
agreement or any other Material Agreement or undertaking to which Borrower
is a party, a verbal notification to Lender specifying the notice given or
action taken by such person and the nature of the claimed default and what
action Borrower is taking or proposes to take with respect thereto and,
immediately thereafter, a written communication to Lender of such matters;
and
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(j) immediately upon becoming aware of the commencement of any
material action or material proceeding against Borrower or any of its
properties by any governmental agency, including, without limitation, the
Internal Revenue Service, the Environmental Protection Agency, the U.S.
Department of Energy or the Federal Energy Regulatory Commission, a written
communication to Lender of such matter.
All financial statements, schedules and other financial information delivered
hereunder shall be prepared in conformity with GAAP and shall be certified as
true and correct by the President or Chief Financial Officer of Borrower by
signature and date thereon.
7.2 Taxes. Borrower will pay and discharge or cause to be paid and
discharged all taxes, assessments and governmental charges or levies imposed
upon it or upon its income and profits or upon any of its property, real,
personal or mixed, or upon any part thereof, before the same shall become in
default, as well as all lawful claims for labor, materials and supplies or
otherwise, which, if not paid, might become a Lien upon such properties or any
part thereof; provided that Borrower shall not be required to pay and discharge
or cause to be paid or discharged any such tax, assessment, charge, levy or
claim contested by it in good faith by appropriate proceedings if Borrower shall
have set up adequate reserves therefor, if required, under GAAP; and provided,
further, that the immediately preceding provision shall not apply to any Lien
imposed by the U.S. Government for failure to pay income, payroll, FICA or
similar taxes, and payment with respect to any such tax, assessment, charge,
levy or claim shall be made before any property of Borrower shall be seized and
sold in satisfaction thereof.
7.3 Discharge of Contractual Obligations. Borrower will do and perform
every act and discharge all of the obligations provided to be performed and
discharged under the Loan Papers, and any and all of the instruments or
documents referred to or mentioned herein at the time or times and in the manner
required.
7.4 Legal Status. Borrower will do or cause to be done all things necessary
to preserve, renew and keep in full force and effect its existence, rights,
licenses, permits and franchises and comply with all laws and regulations
applicable to it, and, further, comply with all applicable laws and regulations,
whether now in effect or hereafter enacted or promulgated by any governmental
authority having jurisdiction over any of its assets or properties,
noncompliance with which would cause a Material Adverse Change.
7.5 Maintenance and Evidence of Priority of Bank Liens. Borrower shall
perform such acts and duly authorize, execute, acknowledge, deliver, file, and
record (or cause to be filed and recorded) such additional assignments, security
agreements, deeds of trust, mortgages and other agreements, documents,
instruments and certificates as Lender may reasonably deem necessary or
appropriate in order to perfect and maintain the Bank Liens and preserve and
protect the Rights of Lender in respect of all present and future Collateral,
and cause to be furnished to Lender such opinions of counsel as Lender may
request regarding the priority of Borrower's title to, and the Bank
25
Liens upon, the assets of Borrower, all of which opinions shall be prepared by
such law firm or firms as may be acceptable to Lender.
7.6 Insurance. Borrower presently maintains and will continue to maintain
such policies of liability, hazard, damage, business interruption and workmen's
compensation insurance as are customarily carried by companies similarly
situated. If requested by Lender, any such policies of insurance shall show
Lender therein as loss payee. Upon request by Lender, Borrower will furnish
Lender with certificates and policies necessary to give Lender reasonable
assurance of the existence of such coverage. Borrower agrees to notify promptly
Lender of any termination or other material change in Borrower's insurance
coverage, and to provide Lender, upon request, with all information about the
renewal of each policy at least 15 days prior to the expiration thereof.
7.7 Reimbursement of Fees and Expenses. Borrower agrees to pay, on demand,
all reasonable out-of-pocket fees and expenses incurred by Lender or its
designated representatives in connection with the negotiation, preparation and
execution of this Agreement, all renewals hereof, the other Loan Papers or other
transactions pursuant hereto or to the Loan Papers, as well as all costs of
filing and recordation, all legal and accounting fees, costs associated with
Borrowing Base redeterminations as provided in Section 3.4, all inspection,
environmental audit and similar costs related to the evaluation of the
Collateral, all costs associated with enforcing any of Lender's Rights under the
Loan Papers (including, without limitation, costs of repossessing, storing,
transporting, preserving and insuring any of the Collateral), all court costs
associated with enforcing or defending any Rights against Borrower or any third
party challenging said Rights and any other cost or expense incurred by Lender
or its designated representatives in connection herewith or with the other Loan
Papers, together with interest at the Highest Lawful Rate per annum on each such
amount commencing 10 days after the date notice of such expenditure is given to
Borrower by Lender until the date it is repaid to Lender.
7.8 Indemnification. Borrower agrees to indemnify Lender, its officers,
directors, shareholders, employees, and affiliates (collectively "Indemnitee"),
from and against any and all liabilities, obligations, claims, losses, damages,
penalties, actions, judgments, suits, remedial actions, costs, expenses or
disbursements (collectively, "Claims") of any kind or nature whatsoever that may
be imposed on, incurred by, or asserted against Indemnitee growing out of or
resulting from (i) the Loan Papers and the transactions and events at any time
associated therewith (including, without limitation, the enforcement of the Loan
Papers and the defense of Indemnitee's actions and inactions in connection with
the Loan), except to the limited extent such Claims are proximately caused by
Indemnitee's gross negligence or willful misconduct; (ii) the presence of any
Hazardous Materials on or under the properties covered by the Deed of Trust; or
(iii) any activity carried on or undertaken on or off the properties covered by
the Deed of Trust, whether prior to or during the term hereof and whether by
Borrower or by any third person, in connection with the treatment, storage,
recycling, removal, handling or disposal of Hazardous Materials at any time
located on or under the properties covered by the Deed of Trust. Indemnitee
shall have the right to defend any such Claims, employing its attorneys
therefor. While Borrower shall also be entitled to employ its own attorneys and
to participate in the defense of any such Claims, Indemnitee shall, if not
furnished with reasonable
26
indemnity, have the right to compromise and adjust all such Claims. The
covenants and conditions of this section shall at all times be construed to be
personal covenants in favor of Indemnitee and shall not run with the lands;
provided, however, that such covenants and indemnity shall remain in full force
and effect notwithstanding the payment in full of the Obligation and the
release, either partially or wholly, of the Bank Liens or any foreclosure
thereunder. All such Claims as may be paid by Indemnitee shall bear interest at
the Highest Lawful Rate per annum until paid by Borrower and shall be part of
the Obligation secured by the Bank Liens. THE PARTIES HERETO INTEND FOR THE
PROVISIONS OF THIS PARAGRAPH TO APPLY TO AND PROTECT EACH INDEMNIFIED PARTY FROM
THE CONSEQUENCES OF STRICT LIABILITY IMPOSED OR THREATENED TO BE IMPOSED ON ANY
INDEMNIFIED PARTY AS WELL AS FROM THE CONSEQUENCES OF ITS OWN NEGLIGENCE (EXCEPT
GROSS NEGLIGENCE), WHETHER OR NOT THAT NEGLIGENCE IS THE SOLE, CONTRIBUTING OR
CONCURRING CAUSE OF ANY CLAIMS INDEMNIFIED AGAINST IN THIS PARAGRAPH.
7.9 Curing of Defects. Borrower will promptly cure any material defects in
the execution and delivery of any of the Loan Papers, and in any other
instrument or document referred to or mentioned herein. Borrower will
immediately execute and deliver to Lender, upon request, all such other and
further instruments as may be reasonably required or desired by Lender from time
to time in compliance with or accomplishment of the covenants and agreements of
Borrower made in the Loan Papers.
7.10 Inspection and Visitation. Borrower will grant Lender access to all of
its books and records, as well as to all of the Collateral, and allow inspection
and copying of same by Lender or its designated representatives at any time
during normal business hours or such other time as Lender may reasonably
request.
7.11 Notices. Borrower will give prompt written notice to Lender of any
proceedings instituted against it by or in any federal or state court or before
any commission or other regulatory body, federal, state or local, which, if
adversely determined, would cause a Material Adverse Change.
7.12 Bank Lien on Other Assets. If requested by Lender, Borrower shall
execute and deliver to Lender one or more mortgages, deeds of trust, assignments
of production, security agreements, financing statements, pledge agreements, or
other security documents in favor of Lender covering every interest in every
asset or property (including, without limitation, Mineral Interests) owned by
Borrower, whether now owned or hereafter acquired, which shall become part of
the Collateral.
7.13 Compliance. Borrower will observe and comply with:
(a) all laws, statutes, codes, acts, ordinances, rules, regulations,
directions and requirements of all federal, state, county, municipal and
other governments, departments,
27
commissions, boards, courts, authorities, officials and officers, domestic
and foreign, where the failure to observe or comply would cause a Material
Adverse Change; and
(b) all orders, judgments, decrees, injunctions, certificates,
franchises, permits, licenses and authorizations of all federal, state,
county, municipal and other governments, departments, commissions, boards,
courts, authorities, officials and officers, domestic and foreign, where
the failure to observe or comply would cause a Material Adverse Change and
against which it shall maintain such reserves as are appropriate under
GAAP.
7.14 Compliance with Environmental Laws. The Borrower is and will remain in
substantial compliance with all state and federal environmental laws and
regulations and Borrower will not place nor permit to be placed any Hazardous
Materials on any of its properties in violation of applicable state and federal
environmental laws. In the event Borrower should discover any Hazardous
Materials on any of its properties which could result in a breach of the
foregoing covenant, Borrower shall notify Lender within three (3) days after
such discovery. Borrower shall dispose of all material amounts of Hazardous
Materials generated by the Borrower only at facilities and/or with carriers that
maintain valid governmental permits under the Resource Conservation and Recovery
Act, 42 U.S.C. 6901. In the event of any notice or filing of any complaint or
commencement of any administrative hearing or procedure against the Borrower
alleging a violation of any environmental law or regulation, Borrower shall give
notice to Lender within five (5) days after Borrower has received notice of such
notice or filing.
7.15 Use of Proceeds. Borrower will use the proceeds of the Revolving Loan
for refinancing the Prior Note, financing oil and gas acquisitions or capital
expenditures, or working capital in Borrower's oil and gas business.
7.16 Deposit Accounts. Borrower agrees to maintain all of its significant
operating demand deposit accounts with Lender.
7.17 Title Curative. Not later than ninety (90) days after the date of this
Agreement Borrower shall provide to Lender the title curative information set
forth on Schedule 7.17 attached hereto. As soon as practicable but in any event
within ninety (90) days after receipt by Borrower from Lender or its counsel of
written notice of additional material title defects Lender reasonably requires
to be cured, Borrower shall use its best efforts to provide such curative
information, in form and substance satisfactory to Lender.
ARTICLE VIII
Negative Covenants
As an inducement to Lender to enter into this Agreement, Borrower hereby
covenants and agrees that, from the date hereof and until termination of this
Agreement and payment in full of the
28
Obligation (except as otherwise provided in this Article), unless otherwise
agreed to by Lender in writing:
8.1 Liens. Borrower will not create, assume or suffer to exist any Lien
upon any of its properties or assets now owned or hereafter acquired securing
any indebtedness other than the Obligation or acquire or agree to acquire any
property under any conditional sale agreement or other title retention
agreement, excluding, however, from the operation of this section:
(a) deposits or pledges to secure payments of workmen's compensation,
unemployment insurance, old age pensions or other social security;
(b) deposits or pledges to secure performance of bids, tenders,
contracts (other than contracts for the payment of money), leases, public
or statutory obligations, surety or appeal bonds, or other deposits or
pledges for purposes of like general nature in the ordinary course of
business;
(c) Liens for taxes, assessments or other governmental charges or
levies that are not delinquent or that are in good faith being contested or
litigated, if such reserve as shall be required by GAAP shall have been
made therefor, provided, that this exception shall not allow any Lien
imposed by the U.S. Government for failure to pay income, payroll, FICA or
similar taxes;
(d) mechanics', carriers', workmen's, repairman's or other like Liens
arising in the ordinary course of business securing obligations less than
ninety (90) days from the date of invoice, and on which no suit to
foreclose has been filed, or which are in good faith being contested or
litigated, if such reserve as shall be required by GAAP shall have been
made therefor;
(e) Liens created by or resulting from any litigation or legal
proceeding that is currently being contested in good faith by appropriate
proceedings, if such reserve as shall be required by GAAP shall have been
made therefor;
(f) Liens, charges and encumbrances incidental to the conduct of its
business or the ownership of its properties or assets, which were not
incurred in connection with the borrowing of money or the obtaining of
advances or credit and that do not materially detract from the value of
such property or assets or materially impair the use thereof in the
operation of its business;
(g) landlords' Liens for rental not yet due and payable and which, to
the extent the same encumbers any of the Collateral, are subordinate to the
Bank Liens;
(h) Liens arising in the normal course of business under operating
agreements covering oil and gas properties and interests therein, including
such Liens as may arise thereunder because of the default of other parties
to the operating agreement; or
(i) the Bank Liens.
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8.2 Indebtedness. Borrower will not create, assume, incur or have
outstanding, or in any manner become or be liable directly or indirectly
(whether by way of guaranty or otherwise) in respect of, any indebtedness for
borrowed money or the purchase price of any property (including direct, indirect
and capitalized leases), excluding, however, from the operation of this section:
(a) the Note;
(b) accounts payable for services furnished and for the purchase price
of materials and supplies acquired in the ordinary course of its business,
not more than ninety (90) days from the date of invoice;
(c) indebtedness of Borrower in respect of any Derivatives permitted
by Section 8.15; and
(d) other indebtedness not to exceed an aggregate amount of $100,000
at any time outstanding.
8.3 ERISA Compliance. Borrower will not at any time permit any Plan subject
to ERISA maintained by it to (i) engage in any "prohibited transaction" as such
term is defined in Section 4975 of the Internal Revenue Code of 1986, as
amended; (ii) incur any "accumulated funding deficiency" as such term is defined
in Section 302 of ERISA; or (iii) terminate in a manner which could result in
the imposition of a lien on its property pursuant to Section 4068 of ERISA.
8.4 Investments. Borrower will not make or commit to make, any advance,
loan, extension of credit or capital contribution to, or purchase of any stock,
bonds, notes, debentures or other securities of, or make any other investment in
any person, or accept any item in satisfaction of indebtedness (all of the
aforesaid transactions being herein called "Investments"), except:
(a) Investments in accounts, contract rights and chattel paper (as
defined in the Uniform Commercial Code), and notes receivable, arising or
acquired in the ordinary course of business;
(b) Investments with maturities of not more than 180 days in direct
obligations of the United States of America, or obligations, the principal
and interest of which are unconditionally guaranteed by the United States
of America;
(c) certificates of deposit maintained with Lender;
(d) Borrower's existing Investment in First Permian, L.L.C.; and
(e) other Investments not to exceed $50,000 in the aggregate at any
time outstanding.
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8.5 Mergers, Consolidations. Borrower will not (i) amend or otherwise
modify its corporate charter or otherwise change its structure in any manner
that would cause a Material Adverse Change; (ii) form any new subsidiary
company; or (iii) consolidate with or merge into, or acquire any party or permit
any party to consolidate with or merge into, or acquire it.
8.6 Dividends and Distributions. Neither Borrower nor any Subsidiary will
declare, pay or make any loans, advances, dividends or distributions, of any
kind, to its stockholders or other equity owners, or make any other distribution
on account of, or purchase, acquire or redeem or retire any stock or other
security issued by it, except that Borrower may pay cash dividends on its
outstanding shares of 6% Convertible Preferred Stock in accordance with the
provisions of Borrower's Certificate of Designations, Preferences and Rights of
Serial Preferred Stock 6% Convertible Preferred Stock dated October 19, 1998,
provided that no Event of Default exists at the time of declaration or payment
of such dividends and the payment of such dividends would not cause an Event of
Default.
8.7 Transactions with Affiliates. Borrower will not, directly or
indirectly, enter into any transaction (including, but not limited to, the sale
or exchange of property or the rendering of services) with any of its
affiliates, other than in the ordinary course of business and upon fair and
reasonable terms no less favorable than Borrower could obtain or could become
entitled to in an arm's length transaction with a person that was not an
affiliate.
8.8 Accounting Method and Fiscal Year. Borrower will not make any change in
its present accounting method unless such changes are required for conformity
with GAAP.
8.9 Nature of Business. Borrower will not make any substantial change in
the nature of its businesses as now conducted.
8.10 Disposition of Assets. Borrower will not sell, transfer, lease,
exchange, alienate or otherwise dispose of any of its property or assets except,
to the extent not otherwise forbidden under the Deed of Trust:
(a) equipment that is worthless or obsolete or which is replaced by
equipment of equal suitability and value;
(b) inventory that is sold in the ordinary course of business; and
(c) interests in oil and gas leases, or portions thereof, so long as
no well situated on any such lease or located on any unit containing all or
any part thereof, is capable (or is subject to being made capable through
commercially feasible operations) of producing oil, gas or other
hydrocarbons or minerals in commercial quantities.
8.11 Current Ratio. At all times during the term hereof, Borrower's Current
Ratio shall not be less than 1.00 to 1.
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8.12 Leases. Borrower shall not pay or become liable to pay rentals or
lease payments on any lease (excluding oil and gas leases), sublease or similar
arrangement in an amount exceeding $250,000 in the aggregate in any fiscal year.
8.13 Net Worth. At all times during the term hereof, Borrower's Net Worth
shall not be less than (a) $25,000,000, plus (b) seventy-five percent (75%) of
the net proceeds of any equity offering by the Borrower on or after the date of
this Agreement, plus (c) fifty percent (50%) of Borrower's Adjusted Net Income
for each fiscal quarter, if positive, and zero percent (0%) if negative,
determined on a cumulative basis, for the period beginning October 1, 2000, and
ending on the last day of the most recent fiscal quarter as of the time in
question. As used in this Section 8.13, Borrower's Adjusted Net Income means for
any period, Borrower's Net Income for such period, provided there shall be
excluded from such Net Income (to the extent otherwise included therein) the
cumulative effect of a change in accounting principles and the after-tax net
effect of any non-recurring non-cash charges, including, without limitation, any
charges under Financial Accounting Standard Board Statement No. 121, as amended,
supplemented or modified from time to time.
8.14 Debt Service Ratio. At all times during the term hereof, Borrower's
Debt Service Ratio shall not be less than 1.1 to 1.
8.15 Derivatives. Borrower shall not enter into any Derivatives, other than
oil and/or gas price Derivatives which are related to bona fide hedging
activities and as to which (i) the aggregate notional amounts of such
Derivatives during any calculation period do not exceed seventy-five percent
(75%) of Borrower's estimated production from proved producing reserves existing
as of the date of the execution thereof based upon the then most current reserve
evaluation required pursuant to Section 7.1(d) above, (ii) such Derivatives do
not contain terms or provisions which could require margin calls, (iii) the
counterparty to any such Derivatives have a minimum rating of "A-" by Standard &
Poors' Corporation or "A3" by Moody's Investors Service, Inc., (iv) such
Derivatives are for a term of eighteen (18) months or less, and (v) such
Derivatives have the economic effect of assuring the receipt by Borrower of a
price equal to or greater than that under Lender's then current pricing policy.
ARTICLE IX
Default and Remedies
9.1 Events of Default. If any one or more of the following shall occur and
shall not have been remedied in the period, if any, provided, an "Event of
Default" shall be deemed to have occurred hereunder and with respect to all of
the Obligation, unless waived in writing by Lender:
(a) default shall occur in the payment when due of the Obligation
including, without limitation, any principal or interest due on the Note or
any commitment or other fee due hereunder;
32
(b) any representation, warranty or statement made by Borrower herein,
in any of the other Loan Papers or in any certificate furnished to Lender
hereunder shall be breached or shall prove to be untrue or misleading in
any material respect at the time when made;
(c) default shall occur in the performance or observance of any
covenant, agreement, duty or obligation of Borrower contained herein or in
any of the other Loan Papers; provided, that breach of the covenant
contained in Sections 8.11, 8.13 or 8.14 hereof shall not constitute an
Event of Default unless the same shall continue for a period of thirty (30)
days;
(d) Borrower shall (i) apply for or consent to the appointment of a
receiver, trustee or liquidator of it or of all or a substantial part of
its assets; (ii) be unable, or admit in writing its inability, to pay its
debts as they become due; (iii) make a general assignment for the benefit
of creditors; (iv) be adjudicated a bankrupt or insolvent or file a
voluntary petition in bankruptcy; (v) file a petition or an answer seeking
reorganization or an arrangement with creditors or to take advantage of any
bankruptcy or insolvency law; (vi) file an answer admitting the material
allegations of, or consent to, or default in answering, a petition filed
against it in any bankruptcy, reorganization or insolvency proceedings; or
(vii) take any action (corporate or otherwise) for the purpose of effecting
any of the foregoing;
(e) an order, judgment or decree shall be entered by any court of
competent jurisdiction approving a petition seeking reorganization of
Borrower or appointing a receiver, trustee or liquidator of Borrower or of
all or a substantial part of its assets, and such order, judgment or decree
shall continue unstayed in effect for any period of thirty (30) consecutive
days;
(f) any Lien for failure to pay income, payroll, FICA or similar taxes
shall be filed by the U.S. Government or any agent or instrumentality
thereof against Borrower or any of its assets;
(g) there shall occur any acceleration, notice of default, filing of
suit or notice of breach by any other party to any Material Agreement to
which Borrower is a party wherein the amount involved or claimed exceeds
$100,000, following the passage of any grace period provided for
thereunder;
(h) default shall occur in the payment of any indebtedness of Borrower
aggregating $100,000 or more under any note, loan agreement or credit
agreement and such default shall continue for more than the period of
grace, if any, specified therein, or any such indebtedness shall become due
before its stated maturity by acceleration of the maturity thereof or shall
become due by its terms and shall not be promptly paid or extended;
(i) any final judgment or judgments for the payment of money in the
amount of $100,000 or more, in the aggregate, shall be rendered against
Borrower and shall not be satisfied or discharged at least thirty (30) days
prior to the date on which any of its assets could be lawfully sold to
satisfy such judgment or judgments;
33
(j) the good faith belief by Lender that the prospect of payment or
performance of the Obligation is materially impaired, or that the value of
the Collateral has, or will be, materially decreased;
(k) a Material Adverse Change has occurred with respect to Borrower;
(l) a majority of the individuals comprising the current Board of
Directors of Borrower shall resign, be declared incompetent or otherwise be
removed (voluntarily or involuntarily) or cease to serve as members of the
Board of Directors of Borrower; or
(m) the occurrence or existence of any default, event of default or
other similar condition or event (however described) with respect to any
Rate Management Transaction.
9.2 Remedies. Upon the occurrence of any Event of Default, Lender shall
have no further obligation to advance funds hereunder or under the Note, and
Lender may declare all of the Obligation to be forthwith due and payable,
whereupon the same shall forthwith become due and payable without further
presentment, demand, protest, notice of acceleration or the intent to
accelerate, or other notice of any kind, all of which Borrower hereby expressly
waives, anything contained herein, in the Note or in any of the other Loan
Papers to the contrary notwithstanding; provided that any default under
subsections (d) or (e) of Section 9.1 shall result in all of the Obligation
becoming immediately due and payable in full without the necessity of any act by
Lender. Further, Lender may, in its discretion, but shall not be required to,
exercise such Rights as are provided it in any of the Loan Papers or at law or
in equity. Nothing contained in this Article shall be construed to limit or
amend in any way the Events of Default enumerated in the Loan Papers or any
other document executed in connection with the transactions contemplated herein.
Further, in such event, Lender shall have all other Rights afforded to it with
respect to Borrower or any of the Collateral under any of the Loan Papers or
under any applicable law or in equity.
ARTICLE X
Miscellaneous
10.1 Survival of Representations and Warranties. All representations and
warranties of Borrower herein, and all covenants, agreements, duties and
obligations of Borrower herein not fully performed on or before the date of this
Agreement, shall survive such date.
10.2 Communications. Unless specifically provided otherwise, whenever any
Loan Paper requires or permits any consent, approval, notice, request, or demand
from one party to another, such communication must be in writing to be effective
and shall be deemed to have been given on the day actually delivered or, if
mailed, on the third day (or if such third day is not a Business Day, then on
the next succeeding Business Day) after it is enclosed in an envelope, addressed
to the party to be notified at the address stated below, properly stamped,
sealed, and deposited in the appropriate
34
official postal service. Until changed by notice pursuant hereto, the address
for each party for purposes hereof is as follows:
BORROWER: PARALLEL PETROLEUM CORPORATION
110 North Marienfeld, Suite 465
Midland, Texas 79701
LENDER: BANK UNITED
401 West Texas
Midland County
Midland, Texas 79701
Attention: Michael J. Davis
10.3 Non-Waiver.
(a) The acceptance by Lender at any time and from time to time of part
payment on the Obligation shall not operate as a waiver of any Event of
Default then existing.
(b) No waiver by Lender of any Event of Default shall operate as a
waiver of any other then existing or subsequent Event of Default.
(c) No delay or omission by Lender in exercising any Right shall
impair such Right or operate as a waiver thereof, nor shall any single or
partial exercise of any such Right preclude other or further exercise
thereof, or the exercise of any other Right under the Loan Papers or
otherwise.
(d) No notice or demand given by Lender in any case shall operate as a
waiver of Lender's right to take other action in the same, similar or other
instances without such notice or demand.
(e) No Advance hereunder shall operate as a waiver by Lender of (i)
the representations, warranties and covenants of Borrower under the Loan
Papers; (ii) any Event of Default; or (iii) any of the conditions to
Lender's obligation, if any, to make further Advances.
10.4 Strict Compliance. If any action or failure to act by Borrower
violates any covenant of Borrower contained herein or in any other Loan Paper,
then such violation shall not be excused by the fact that such action or failure
to act would otherwise be permitted by any covenant (or exception to any
covenant) other than the covenant violated.
10.5 Cumulative Rights. The Rights of Lender under the Loan Papers are in
addition to all other Rights provided by law, whether or not the Obligation is
due and payable and whether or not Lender has instituted any suit for collection
or other action in connection with the Loan Papers.
35
10.6 GOVERNING LAW. THIS AGREEMENT HAS BEEN PREPARED, IS BEING EXECUTED AND
DELIVERED, AND IS INTENDED TO BE PERFORMED, IN THE STATE OF TEXAS. THE
SUBSTANTIVE LAWS OF SUCH STATE AND THE APPLICABLE FEDERAL LAWS OF THE UNITED
STATES OF AMERICA SHALL GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND
INTERPRETATION OF THIS AGREEMENT AND THE OTHER LOAN PAPERS, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAW, PROVIDED, HOWEVER, THAT THE RIGHTS PROVIDED IN
THE LOAN PAPERS WITH REFERENCE TO PROPERTIES SITUATED IN OTHER STATES MAY BE
GOVERNED BY THE LAWS OF SUCH OTHER STATES.
10.7 CHOICE OF FORUM; CONSENT TO SERVICE OF PROCESS; JURISDICTION; AND
WAIVER OF JURY TRIAL. ANY SUIT, ACTION OR PROCEEDING AGAINST BORROWER ARISING
OUT OF OR RELATING TO ANY OF THE LOAN PAPERS OR ANY JUDGMENT ENTERED BY ANY
COURT IN RESPECT THEREOF, MAY BE BROUGHT OR ENFORCED IN THE COURTS OF THE STATE
OF TEXAS, COUNTY OF MIDLAND, OR IN THE UNITED STATES COURTS LOCATED IN THE STATE
OF TEXAS, COUNTY OF MIDLAND, OR IN THE UNITED STATES COURTS LOCATED IN THE STATE
OF TEXAS, AS LENDER IN ITS SOLE DISCRETION MAY ELECT, AND BORROWER HEREBY
SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURTS FOR THE PURPOSE OF ANY
SUCH SUIT, ACTION OR PROCEEDING. BORROWER HEREBY IRREVOCABLY CONSENTS TO SERVICE
OF PROCESS IN ANY SUIT, ACTION OR PROCEEDING IN ANY OF SAID COURTS BY THE
MAILING THEREOF BY LENDER BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO
BORROWER, AT ITS ADDRESS SET FORTH HEREIN. BORROWER HEREBY IRREVOCABLY WAIVES
ANY OBJECTIONS THAT IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY
SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY OF THE OTHER LOAN
PAPERS BROUGHT IN ANY OF SAID COURTS AND HEREBY FURTHER IRREVOCABLY WAIVES ANY
CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS
BEEN BROUGHT IN AN INCONVENIENT FORUM. THE BORROWER HEREBY WAIVES, TO THE
FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY
IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY.
10.8 ARBITRATION. TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY
CONTROVERSY, DISPUTE OR CLAIM ARISING OUT OF, IN CONNECTION WITH, OR RELATING TO
THIS AGREEMENT OR ANY OF THE OTHER LOAN PAPERS OR ANY TRANSACTION PROVIDED FOR
THEREIN, INCLUDING BUT NOT LIMITED TO ANY CLAIM BASED ON OR ARISING FROM AN
ALLEGED TORT OR AN ALLEGED BREACH OF ANY AGREEMENT CONTAINED IN ANY OF THE LOAN
PAPERS, SHALL, AT THE REQUEST OF ANY PARTY TO THE LOAN PAPERS (EITHER BEFORE OR
AFTER THE COMMENCEMENT OF JUDICIAL PROCEEDINGS), BE SETTLED BY ARBITRATION
PURSUANT TO TITLE 9 OF THE UNITED STATES CODE, WHICH THE PARTIES HERETO
36
ACKNOWLEDGE AND AGREE APPLIES TO THE TRANSACTION INVOLVED HEREIN, AND IN
ACCORDANCE WITH THE COMMERCIAL ARBITRATION RULES OF THE AMERICAN ARBITRATION
ASSOCIATION (THE "AAA"). IN ANY SUCH ARBITRATION PROCEEDING: (i) ALL STATUTES OF
LIMITATION WHICH WOULD OTHERWISE BE APPLICABLE SHALL APPLY; AND (ii) THE
PROCEEDING SHALL BE CONDUCTED IN HOUSTON, TEXAS, BY A SINGLE ARBITRATOR, IF THE
AMOUNT IN CONTROVERSY IS $1 MILLION OR LESS, OR BY A PANEL OF THREE ARBITRATORS
IF THE AMOUNT IN CONTROVERSY IS OVER $1 MILLION. ALL ARBITRATORS SHALL BE
SELECTED BY THE PROCESS OF APPOINTMENT FROM A PANEL PURSUANT TO SECTION 13 OF
THE AAA COMMERCIAL ARBITRATION RULES AND EACH ARBITRATOR WILL HAVE
AAA-ACKNOWLEDGED EXPERTISE IN THE APPROPRIATE SUBJECT MATTER. ANY AWARD RENDERED
IN ANY SUCH ARBITRATION PROCEEDING SHALL BE FINAL AND BINDING, AND JUDGMENT UPON
ANY SUCH AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION.
IF ANY PARTY TO THIS AGREEMENT OR THE OTHER LOAN PAPERS FILES A PROCEEDING
IN ANY COURT TO RESOLVE ANY SUCH CONTROVERSY, DISPUTE OR CLAIM, SUCH ACTION
SHALL NOT CONSTITUTE A WAIVER OF THE RIGHT OF SUCH PARTY OR A BAR TO THE RIGHT
OF ANY OTHER PARTY TO SEEK ARBITRATION UNDER THE PROVISIONS OF THIS SECTION OF
THAT OR ANY OTHER CLAIM, DISPUTE OR CONTROVERSY, AND THE COURT SHALL, UPON
MOTION OF ANY PARTY TO THE PROCEEDING, DIRECT THAT SUCH CONTROVERSY, DISPUTE OR
CLAIM BE ARBITRATED IN ACCORDANCE WITH THIS SECTION.
NOTWITHSTANDING ANY OF THE FOREGOING, THE PARTIES HERETO AGREE THAT NO
ARBITRATOR OR PANEL OF ARBITRATORS SHALL POSSESS OR HAVE THE POWER TO (i) ASSESS
PUNITIVE DAMAGES, (ii) DISSOLVE, RESCIND OR REFORM (EXCEPT THAT THE ARBITRATOR
MAY CONSTRUE AMBIGUOUS TERMS) THIS AGREEMENT OR ANY OTHER LOAN PAPERS, (iii)
ENTER JUDGMENT ON THE DEBT, (iv) EXERCISE EQUITABLE POWERS OR ISSUE OR ENTER ANY
EQUITABLE REMEDIES OR (v) ALLOW DISCOVERY OF ATTORNEY/CLIENT PRIVILEGED
INFORMATION, AND THE PARTIES HEREBY WAIVE THE AFOREMENTIONED REMEDIES. THE
COMMERCIAL ARBITRATION RULES OF THE AAA ARE HEREBY MODIFIED TO THIS EXTENT FOR
THE PURPOSE OF ARBITRATION OF ANY DISPUTE, CONTROVERSY OR CLAIM ARISING OUT OF,
IN CONNECTION WITH, OR RELATING TO ANY LOAN PAPER. THE PARTIES HERETO FURTHER
AGREE TO WAIVE, EACH TO EACH OTHER, ANY CLAIMS FOR PUNITIVE DAMAGES, AND AGREE
THAT NEITHER AN ARBITRATOR NOR ANY COURT SHALL HAVE THE POWER TO ASSESS PUNITIVE
DAMAGES.
NO PROVISION OF, OR THE EXERCISE OF ANY RIGHTS UNDER, THIS SECTION SHALL
LIMIT OR IMPAIR THE RIGHT OF ANY PARTY TO THE LOAN PAPERS BEFORE, DURING OR
AFTER ANY ARBITRATION PROCEEDING TO: (i) EXERCISE SELF-HELP REMEDIES SUCH AS SET
OFF OR REPOSSESSION; (ii) FORECLOSE (JUDICIALLY OR
37
OTHERWISE) ANY LIEN ON OR SECURITY INTEREST IN ANY REAL OR PERSONAL PROPERTY
COLLATERAL; OR (iii) OBTAIN EMERGENCY RELIEF FROM A COURT OF COMPETENT
JURISDICTION TO PREVENT THE DISSIPATION, DAMAGE, DESTRUCTION, TRANSFER,
HYPOTHECATION, PLEDGING OR CONCEALMENT OF ASSETS OR OF COLLATERAL SECURING ANY
INDEBTEDNESS, OBLIGATION OR GUARANTY REFERENCED IN THE LOAN PAPERS. SUCH
EMERGENCY RELIEF MAY BE IN THE NATURE OF, BUT IS NOT LIMITED TO: PRE-JUDGMENT
ATTACHMENTS, GARNISHMENTS, SEQUESTRATIONS, APPOINTMENTS OF RECEIVERS, OR OTHER
EMERGENCY INJUNCTIVE RELIEF TO PRESERVE THE STATUS QUO, INCLUDING, WITHOUT
LIMITATION, THE RIGHT TO OBTAIN A PRELIMINARY INJUNCTION TO PREVENT A
FORECLOSURE OF THE LIENS EVIDENCED BY THE DEED OF TRUST.
10.9 Usury Savings Clause. Nothing contained in this Agreement, the Note,
any other Loan Paper or in any other Agreement or undertaking relating hereto or
to the Obligation shall be construed to obligate Borrower, under any
circumstances whatsoever, to pay interest at a rate in excess of the Highest
Lawful Rate. All sums paid hereunder or under the Note that are deemed to be
interest shall be spread and prorated over the entire period for which the Note
is outstanding. In the event that any sums received hereunder from Borrower are
at any time under applicable law deemed or held to provide a rate of interest in
excess of the Highest Lawful Rate, the effective rate of interest on the
Obligation shall be deemed reduced to and shall be the Highest Lawful Rate, and
Borrower and any other parties hereby agree to accept as their sole remedy under
such circumstances either the return of any sums of interest that may have been
collected in excess of the Highest Lawful Rate or the application of these sums
as a credit against the unpaid principal amount of the Note, whichever remedy
may be elected by Lender. In addition, in the event that the maturity of the
Note is accelerated by reason of the election by Lender hereunder, then earned
interest may never include more than the amount calculated pursuant to the
Highest Lawful Rate, and if unearned interest is provided for in the Note or the
other Loan Papers, Borrower and any other parties liable on said documents
hereby agree to accept as their sole remedy under such circumstances either (a)
the cancellation of said unearned interest, or (b) if theretofore paid, either
the return to Borrower or the crediting of said unearned interest on the
principal amount due under the Note or other documents, whichever action may be
elected by Lender. To the extent the Highest Lawful Rate is determined by
reference to the laws of the State of Texas, same shall be the weekly ceiling
provided for in Chapter 303 of the Texas Finance Code and in Article 5069-1D.002
of the Revised Civil Statutes of Texas, in each case as amended, provided that
Lender may, by notice to Borrower, elect such other reference as is allowed by
said statutes.
10.10 Enforceability. If one or more of the provisions contained in the
Loan Papers shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such in validity, illegality, or unenforceability
shall not affect any other provision of the Loan Papers or any other instrument
referred to herein.
10.11 Binding Effect. The Loan Papers shall be binding upon and inure to
the benefit of Borrower and Lender and their respective successors and assigns;
provided, however, that Borrower
38
shall not assign any Rights, duties or obligations under the Loan Papers without
the prior written consent of Lender.
10.12 No Third Party Beneficiary.
(a) The parties do not intend the benefits of the Loan Papers to inure
to any third party, nor shall the Loan Papers be construed to make or
render Lender liable to any third party, including, without limitation, any
materialman, supplier, contractor, subcontractor, purchaser, lessor or
lessee having a claim against Borrower. Notwithstanding anything contained
in the Loan Papers, or any conduct or course of conduct by any or all of
the parties hereto, whether before or after signing the Agreement or any
other Loan Paper, no Loan Paper shall be construed as creating any right,
claim or cause of action against Lender in favor of any third party,
including, without limitation, any materialman, supplier, contractor,
subcontractor, purchaser, lessor or lessee having a claim against Borrower.
(b) All conditions to the obligation of Lender to make Advances
hereunder are imposed solely and exclusively for the benefit of Lender, and
no other person shall have standing to require satisfaction of such
conditions in accordance with their terms or be entitled to assume that
Lender will make or refuse to make Advances in the absence of strict
compliance therewith, and any or all of such conditions may be freely
waived in whole or in part by Lender at any time if Lender, in its sole
absolute discretion, deems it advisable to do so.
10.13 Delegation by Lender. Lender may perform any of its duties or
exercise any of its Rights by or through its officers, directors, employees,
attorneys, agents or other representatives.
10.14 Setoff. Borrower hereby grants to Lender (and to each participant to
whom Lender has conveyed or may hereafter convey a participation in the Note)
the right of setoff to secure payment of the Obligation upon any and all moneys,
securities or other property of Borrower and the proceeds therefrom, now or
hereafter held or received by or in transit to, Lender or any such participant
or any agent of Lender or such participant, from or for the account of Borrower,
whether for safekeeping, custody, pledge, transmission, collection or otherwise,
and also upon any and all deposits (general or specific) and credits of Borrower
and any and all claims of Borrower against Lender or any such participant at any
time existing. Notwithstanding the foregoing, nothing contained herein shall
grant to Lender the right of setoff against an account if Lender has actual
knowledge that any person other than Borrower or any Subsidiary of Borrower has
an ownership interest in such account.
10.15 Additional Documents. It is contemplated that there may be certain
supplementary and/or corrective mortgages, deeds of trust, security agreements
and similar items prepared by Lender to be executed by Borrower subsequent
hereto, as well as certain other corrective and additional documentation not
executed concurrently with this Agreement because of the unavailability of
information such as property and collateral descriptions at the time of the
execution hereof. Borrower hereby agrees to cooperate with Lender and provide
such information in
39
connection therewith as Lender may reasonably request, and to execute and
deliver such other and further documentation as Lender shall reasonably request
so as to provide Lender with a Bank Lien on the Collateral.
10.16 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all of which
taken together shall constitute one and the same instrument.
10.17 Amendments. Neither this Agreement nor any provision hereof may be
changed, waived, discharged or terminated orally but only by an instrument in
writing signed by Borrower and Lender.
10.18 Headings. All headings used herein are for convenience and reference
purposes only and shall not affect the substance of this Agreement.
10.19 Conflicts. In the event that there exists any conflict or
inconsistency between the terms hereof and the terms of any other Loan Paper,
the terms hereof shall govern and control, provided that the fact that any
representation, warranty or covenant contained in any other Loan Paper is not
contained herein shall not be, or be deemed to be, a conflict or inconsistency.
10.20 Entirety. This Agreement and the other Loan Papers embody the entire
agreement among the parties and supersede and supplant all prior agreements and
understandings with respect to the matters contained herein.
10.21 Participations. Lender may at any time, or from time to time, sell or
agree to sell to one or more other persons a participation in all or any part of
the Obligation, in which event each such other participant shall be entitled to
the rights and benefits under this Agreement and the other Loan Papers. It is
understood and agreed that Lender may provide to participants and prospective
participants financial information and reports and data concerning Borrower and
Borrower's properties and operations as have been provided to Lender pursuant to
this Agreement.
10.22 Notice of Final Agreement. THIS WRITTEN AGREEMENT AND THE OTHER LOAN
PAPERS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
40
EXECUTED as of the date first above written.
PARALLEL PETROLEUM CORPORATION,
a Delaware corporation
By:___________________________
Larry C. Oldham
President
BANK UNITED
By:___________________________
Michael J. Davis
President
1
Exhibit 2.4
PROMISSORY NOTE
$30,000,000.00 Midland, Texas December 18, 2000
FOR VALUE RECEIVED, the undersigned PARALLEL PETROLEUM CORPORATION, a
Delaware corporation (referred to herein as "Borrower"), hereby unconditionally
promises to pay to the order of BANK UNITED, a federal savings bank ("Lender"),
at 401 West Texas, Midland County, Midland, Texas 79701, or such other address
as Lender shall designate in writing to Borrower, the principal sum of THIRTY
MILLION AND NO/100 DOLLARS ($30,000,000.00), or if less, so much thereof as may
be advanced pursuant to the Loan Agreement (as hereinafter defined), in lawful
money of the United States of America, together with interest from the date
hereof until paid at the rates specified in the Loan Agreement.
The principal and all accrued interest on this Note shall be due and
payable in accordance with the terms and provisions of the Loan Agreement.
This Note is executed pursuant to that certain Loan Agreement dated of even
date herewith between Borrower and Lender (herein, as from time to time amended,
modified or restated, called the "Loan Agreement"), and is the Note referred to
therein. All capitalized terms used but not specifically defined herein shall
have the meanings ascribed thereto in the Loan Agreement. Reference is made to
the Loan Agreement and the other Loan Papers for a statement of the prepayment
rights and obligations of Borrower, a description of the properties mortgaged
and assigned as security, the nature and extent of such security and the rights
of the parties under the Loan Papers in respect to such security, for a
statement of the terms and conditions under which the due date of this Note may
be accelerated and for statements regarding other matters affecting this Note
(including without limitation the obligations of the holder hereof to advance
funds hereunder, principal and interest payment due dates, voluntary and
mandatory prepayments, exercise of rights and remedies, payment of attorneys'
fees, court costs and other costs of collection and certain waivers by Borrower
and others now or hereafter obligated for payment of any sums due hereunder).
Upon the occurrence of an Event of Default, as that term is defined in the Loan
Agreement or the other Loan Papers, the holder hereof shall have all rights and
remedies of the Lender under the Loan Agreement and the other Loan Papers.
Nothing contained in this Note, the Loan Agreement, any other Loan Paper or
in any other agreement or undertaking relating hereto or to the Obligation shall
be construed to obligate Borrower, under any circumstances whatsoever, to pay
interest at a rate in excess of the Highest Lawful Rate. All sums paid under the
Loan Agreement or under this Note that are deemed to be interest shall be spread
and prorated over the entire period for which this Note is outstanding. In the
event that any sums received hereunder or under the Loan Agreement from Borrower
are at any time under applicable law deemed or held to provide a rate of
interest in excess of the Highest Lawful Rate, the effective rate of interest on
the Obligation shall be deemed reduced to and shall be the Highest Lawful Rate,
and
2
Borrower and any other parties hereby agree to accept as their sole remedy under
such circumstances either the return of any sums of interest that may have been
collected in excess of the Highest Lawful Rate or the application of these sums
as a credit against the unpaid principal amount of this Note, whichever remedy
may be elected by Lender. In addition, in the event that the maturity of this
Note is accelerated by reason of the election by Lender hereunder or under the
Loan Agreement, then earned interest may never include more than the amount
calculated pursuant to the Highest Lawful Rate, and if unearned interest is
provided for in this Note or the other Loan Papers, Borrower and any other
parties liable on said documents hereby agree to accept as their sole remedy
under such circumstances either (a) the cancellation of said unearned interest,
or (b) if theretofore paid, either the return to Borrower or the crediting of
said unearned interest on the principal amount due under this Note or other
documents, whichever action may be elected by Lender. To the extent the Highest
Lawful Rate is determined by reference to the laws of the State of Texas, same
shall be the weekly ceiling provided for in Chapter 303 of the Texas Finance
Code and in Article 5069-1D.001 of the Revised Civil Statutes of Texas, in each
case as amended, provided that Lender may, by notice to Borrower, elect such
other reference as is allowed by said statutes.
If any payment of principal or interest on this Note shall become due on a
day other than a Business Day, such payment shall be made on the next succeeding
Business Day and such extension of time shall in such case be included in
computing interest in connection with such payment.
If this Note is placed in the hands of an attorney for collection, or if it
is collected through any legal proceeding at law or in equity or in bankruptcy,
receivership or other court proceedings, Borrower agrees to pay all costs of
collection, including, but not limited to, court costs and reasonable attorneys'
fees.
Borrower and each surety, endorser, guarantor and other party ever liable
for payment of any sums of money payable on this Note, jointly and severally
waive presentment and demand for payment, notice of acceleration or the
intention to accelerate the maturity, protest, notice of protest and nonpayment,
as to this Note and as to each and all installments hereof, and agree that their
liability under this Note shall not be affected by any renewal or extension in
the time of payment hereof, or in any indulgences, or by any release or change
in any security for the payment of this Note, and hereby consent to any and all
renewals, extensions, indulgences, releases or changes.
This Note shall be governed by and construed in accordance with the
applicable laws of the United States of America and the laws of the State of
Texas, except that Chapter 346 of the Texas Finance Code (which regulates
certain revolving credit loan accounts and revolving tri-party accounts) shall
not apply to this Note.
This Note is given, to the extent of $12,365,889.22, in renewal, extension
and rearrangement, but not in extinguishment or novation, of the unpaid
principal balance of the certain promissory note dated December 27, 1999, in the
original principal amount of $30,000,000, executed by Borrower and payable to
the order of Bank One, Texas, N.A.
3
TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY CONTROVERSY, DISPUTE OR
CLAIM ARISING OUT OF, IN CONNECTION WITH, OR RELATING TO THIS NOTE OR ANY OF THE
OTHER LOAN PAPERS OR ANY TRANSACTION PROVIDED FOR THEREIN, INCLUDING BUT NOT
LIMITED TO ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT OR AN ALLEGED
BREACH OF ANY AGREEMENT CONTAINED IN ANY OF THE LOAN PAPERS, SHALL, AT THE
REQUEST OF ANY PARTY TO THE LOAN PAPERS (EITHER BEFORE OR AFTER THE COMMENCEMENT
OF JUDICIAL PROCEEDINGS), BE SETTLED BY ARBITRATION PURSUANT TO TITLE 9 OF THE
UNITED STATES CODE, WHICH THE PARTIES HERETO ACKNOWLEDGE AND AGREE APPLIES TO
THE TRANSACTION INVOLVED HEREIN, AND IN ACCORDANCE WITH THE COMMERCIAL
ARBITRATION RULES OF THE AMERICAN ARBITRATION ASSOCIATION (THE "AAA"). IN ANY
SUCH ARBITRATION PROCEEDING: (i) ALL STATUTES OF LIMITATION WHICH WOULD
OTHERWISE BE APPLICABLE SHALL APPLY; AND (ii) THE PROCEEDING SHALL BE CONDUCTED
IN HOUSTON, TEXAS, BY A SINGLE ARBITRATOR, IF THE AMOUNT IN CONTROVERSY IS $1
MILLION OR LESS, OR BY A PANEL OF THREE ARBITRATORS IF THE AMOUNT IN CONTROVERSY
IS OVER $1 MILLION. ALL ARBITRATORS SHALL BE SELECTED BY THE PROCESS OF
APPOINTMENT FROM A PANEL PURSUANT TO SECTION 13 OF THE AAA COMMERCIAL
ARBITRATION RULES AND EACH ARBITRATOR WILL HAVE AAA-ACKNOWLEDGED EXPERTISE IN
THE APPROPRIATE SUBJECT MATTER. ANY AWARD RENDERED IN ANY SUCH ARBITRATION
PROCEEDING SHALL BE FINAL AND BINDING, AND JUDGMENT UPON ANY SUCH AWARD MAY BE
ENTERED IN ANY COURT HAVING JURISDICTION. IF ANY PARTY TO THIS NOTE OR THE OTHER
LOAN PAPERS FILES A PROCEEDING IN ANY COURT TO RESOLVE ANY SUCH CONTROVERSY,
DISPUTE OR CLAIM, SUCH ACTION SHALL NOT CONSTITUTE A WAIVER OF THE RIGHT OF SUCH
PARTY OR A BAR TO THE RIGHT OF ANY OTHER PARTY TO SEEK ARBITRATION UNDER THE
PROVISIONS OF THIS SECTION OF THAT OR ANY OTHER CLAIM, DISPUTE OR CONTROVERSY,
AND THE COURT SHALL, UPON MOTION OF ANY PARTY TO THE PROCEEDING, DIRECT THAT
SUCH CONTROVERSY, DISPUTE OR CLAIM BE ARBITRATED IN ACCORDANCE WITH THIS
SECTION. NOTWITHSTANDING ANY OF THE FOREGOING, THE PARTIES HERETO AGREE THAT NO
ARBITRATOR OR PANEL OF ARBITRATORS SHALL POSSESS OR HAVE THE POWER TO (i) ASSESS
PUNITIVE DAMAGES, (ii) DISSOLVE, RESCIND OR REFORM (EXCEPT THAT THE ARBITRATOR
MAY CONSTRUE AMBIGUOUS TERMS) THIS NOTE OR ANY OTHER LOAN PAPERS, (iii) ENTER
JUDGMENT ON THE DEBT, (iv) EXERCISE EQUITABLE POWERS OR ISSUE OR ENTER ANY
EQUITABLE REMEDIES OR (v) ALLOW DISCOVERY OF ATTORNEY/CLIENT PRIVILEGED
INFORMATION, AND THE PARTIES HEREBY WAIVE THE AFOREMENTIONED REMEDIES. THE
COMMERCIAL ARBITRATION RULES OF THE AAA ARE HEREBY MODIFIED TO THIS EXTENT FOR
THE PURPOSE OF ARBITRATION OF ANY DISPUTE, CONTROVERSY OR CLAIM ARISING OUT OF,
IN CONNECTION WITH, OR RELATING TO ANY LOAN PAPER. THE PARTIES HERETO FURTHER
AGREE TO WAIVE, EACH TO EACH OTHER, ANY CLAIMS FOR PUNITIVE DAMAGES, AND AGREE
THAT NEITHER AN ARBITRATOR NOR ANY COURT SHALL HAVE THE POWER TO ASSESS PUNITIVE
DAMAGES. NO PROVISION OF, OR THE EXERCISE OF ANY RIGHTS UNDER, THIS SECTION
SHALL LIMIT OR IMPAIR THE RIGHT OF
4
ANY PARTY TO THE LOAN PAPERS BEFORE, DURING OR AFTER ANY ARBITRATION PROCEEDING
TO: (i) EXERCISE SELF-HELP REMEDIES SUCH AS SET OFF OR REPOSSESSION; (ii)
FORECLOSE (JUDICIALLY OR OTHERWISE) ANY LIEN ON OR SECURITY INTEREST IN ANY REAL
OR PERSONAL PROPERTY COLLATERAL; OR (iii) OBTAIN EMERGENCY RELIEF FROM A COURT
OF COMPETENT JURISDICTION TO PREVENT THE DISSIPATION, DAMAGE, DESTRUCTION,
TRANSFER, HYPOTHECATION, PLEDGING OR CONCEALMENT OF ASSETS OR OF COLLATERAL
SECURING ANY INDEBTEDNESS, OBLIGATION OR GUARANTY REFERENCED IN THE LOAN PAPERS.
SUCH EMERGENCY RELIEF MAY BE IN THE NATURE OF, BUT IS NOT LIMITED TO: PRE-
JUDGMENT ATTACHMENTS, GARNISHMENTS, SEQUESTRATIONS, APPOINTMENTS OF RECEIVERS,
OR OTHER EMERGENCY INJUNCTIVE RELIEF TO PRESERVE THE STATUS QUO, INCLUDING,
WITHOUT LIMITATION, THE RIGHT TO OBTAIN A PRELIMINARY INJUNCTION TO PREVENT A
FORECLOSURE OF THE LIENS EVIDENCED BY THE DEED OF TRUST.
THIS WRITTEN NOTE, THE LOAN AGREEMENT AND THE OTHER LOAN PAPERS REPRESENT
THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE
OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE
ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
EXECUTED this 18th day of December, 2000.
BORROWER:
PARALLEL PETROLEUM CORPORATION,
a Delaware corporation
By:
Larry C. Oldham
President
Exhibit 10.16
AMENDED AND RESTATED
LIMITED LIABILITY COMPANY AGREEMENT
OF
FIRST PERMIAN, L.L.C.
a Delaware Limited Liability Company
Dated as of May 31, 2000
(i)
TABLE OF CONTENTS
ARTICLE I Page
Formation . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.1. Formation. . . . . . . . . . . . . . . . . 2
Section 1.2. Name . . . . . . . . . . . . . . . . . . . 2
Section 1.3. Purpose . . . . . . . . . . . . . . . . . . 2
Section 1.4. Registered Office and Registered Agent; Principal
Place of Business . . . . . . . . . . . . . . . 2
Section 1.5. Foreign Qualification. . . . . . . . . . . 3
Section 1.6. Term . . . . . . . . . . . . . . . . . . . 3
Section 1.7. EnCap Transaction Costs. . . . . . . . . . 3
ARTICLE II
Definitions and References. . . . . . . . . . . . . . . . . 3
Section 2.1. Definitions. . . . . . . . . . . . . . . . 3
Section 2.2. References and Construction. . . . . . . . 8
ARTICLE III
Members and Units . . . . . . . . . . . . . . . . . . . . . . 9
Section 3.1. Members. . . . . . . . . . . . . . . . . . 9
Section 3.2. Units. . . . . . . . . . . . . . . . . . . 9
Section 3.3. Additional Members . . . . . . . . . . . 11
Section 3.4. Liability to Third Parties . . . . . . . 11
Section 3.5. Withdrawal . . . . . . . . . . . . . . . 11
ARTICLE IV
Capitalization. . . . . . . . . . . . . . . . . . . . . . . 12
Section 4.1. Agreed Capital Contributions of Founding Members 12
Section 4.2. Agreed Capital Contributions of Persons Admitted as
Members as of the Date Hereof. . . . . . . . . 12
Section 4.3. Further Capital Contributions. . . . . . 12
Section 4.4. Non-Payment of Capital Contributions . . 12
Section 4.5. Interest on and Return of Capital Contributions 12
ARTICLE V
Allocations and Distributions . . . . . . . . . . . . . . . 12
Section 5.1 Allocations. . . . . . . . . . . . . . . 12
Section 5.2. Distributions in Respect of the Preferred Units 15
Section 5.3. Distributions in Respect of the Common Units 16
Section 5.4. Tax Distributions. . . . . . . . . . . . 16
Section 5.5. Payment of Cash Distributions. . . . . . 17
(ii)
Section 5.6. Investment Coverage Ratio. . . . . . . . 17
ARTICLE VI
Management/Governance Provisions. . . . . . . . . . . . . . 18
Section 6.1. Board of Directors . . . . . . . . . . . 18
Section 6.2. Certain Agreement. . . . . . . . . . . . 18
Section 6.3. Removal of Directors . . . . . . . . . . 19
Section 6.4. Vacancies. . . . . . . . . . . . . . . . 19
Section 6.5. Meetings of Board of Directors . . . . . 19
Section 6.6. Certain Specified Actions Requiring Board Approval 20
Section 6.7. Officers . . . . . . . . . . . . . . . . 23
Section 6.8. Certain Agreed Upon Actions. . . . . . . 23
Section 6.9. Use of EnCap Related Parties' Capital Contributions 25
Section 6.10. Management Fees. . . . . . . . . . . . . 25
Section 6.11. Placement Fee. . . . . . . . . . . . . . 25
ARTICLE VII
Accounting and Banking Matters; Capital Accounts; Tax Matters 25
Section 7.1. Books and Records. . . . . . . . . . . . 25
Section 7.2. Fiscal Year. . . . . . . . . . . . . . . 25
Section 7.3. Bank Accounts. . . . . . . . . . . . . . 26
Section 7.4. Capital Accounts . . . . . . . . . . . . 26
Section 7.5. Tax Partnership. . . . . . . . . . . . . 27
Section 7.6. Tax Elections. . . . . . . . . . . . . . 27
Section 7.7. Tax Matters Partner. . . . . . . . . . . 27
Section 7.8. Confidentiality. . . . . . . . . . . . . 27
ARTICLE VIII
Indemnification . . . . . . . . . . . . . . . . . . . . . . 28
Section 8.1. Power to Indemnify in Actions, Suits or Proceeding
Other Than Those by or in the Right of the Company 28
Section 8.2. Power to Indemnify in Actions, Suits or Proceedings
by or in the Right of the Company . . . . . . . 28
Section 8.3. Authorization of Indemnification . . . . 29
Section 8.4. Good Faith Defamed . . . . . . . . . . . 29
Section 8.5. Indemnification by a Court . . . . . . . 29
Section 8.6. Expenses Payable in Advance. . . . . . . 30
Section 8.7. Nonexclusivity of Indemnification and Advancement of
Expenses . . . . . . . . . . . . . . . . . . . 30
Section 8.8. Insurance. . . . . . . . . . . . . . . . 30
Section 8.9. Certain Definitions. . . . . . . . . . . 30
Section 8.10. Survival of Indemnification and Advancement of
Expenses 31
Section 8.11 Limitation on Indemnification. . . . . . 31
Section 8.12. Indemnification of Employees and Agents. 31
Section 8.13. Severability . . . . . . . . . . . . . . 31
(iii)
ARTICLE IX
Dispositions of Units and Substitutions; Redemption of Preferred Units 32
Section 9.1. Dispositions . . . . . . . . . . . . . . 32
Section 9.2. Substitution . . . . . . . . . . . . . . 32
Section 9.3. Redemption of Preferred Units. . . . . . 32
ARTICLE X
Dissolution, Liquidation, and Termination . . . . . . . . . 33
Section 10.1. Dissolution. . . . . . . . . . . . . . . 33
Section 10.2. Liquidation and Termination. . . . . . . 33
Section 10.3 Deficit Capital Accounts . . . . . . . . 35
Section 10.4 Certificate of Cancellation. . . . . . . 35
ARTICLE XI
Representations and Warranties . . . . . . . . . . . . . . 35
Section 11.1. Representations and Warranties of Members to
Each Other. . . . . . . . . . . . . . . . . . . 35
Section 11.2. Representations and Warranties of EnCap Related
Entities. . . . . . . . . . . . . . . . . . . . 36
Section 11.3. Representations and Warranties of Jones
Foundation, Owen, Owen Foundation, Stai, Bridwell
and Tejon to the Other Members . . . . . . . . 36
Section 11.4. Representations and Warranties of Current
Members to the EnCap Related Entities. . . . . 37
Section 11.5. Survival of Representations and Warranties 37
ARTICLE XII
General Provisions. . . . . . . . . . . . . . . . . . . . . 37
Section 12.1. Notices. . . . . . . . . . . . . . . . . 37
Section 12.2. Amendment or Modification. . . . . . . . 38
Section 12.3. Entire Agreement . . . . . . . . . . . . 38
Section 12.4. Effect of Waiver or Consent. . . . . . . 38
Section 12.5. Successors and Assigns . . . . . . . . . 38
Section 12.6. Governing Law. . . . . . . . . . . . . . 38
Section 12.7. Severability . . . . . . . . . . . . . . 38
Section 12.8. Further Assurances . . . . . . . . . . . 39
Section 12.9. Title to Company Property. . . . . . . . 39
Section 12.10. Public Announcements. . . . . . . . . 39
Section 12.11. No Third Party Beneficiaries. . . . . 39
Section 12.12. Area of Mutual Interest . . . . . . . 39
Section 12.13. Resignation of Baytech and Parallel as Managers 40
Section 12.14. Counterparts. . . . . . . . . . . . . 40
1
FIRST AMENDED AND RESTATED
LIMITED LIABILITY COMPANY AGREEMENT
OF
FIRST PERMIAN, L.L.C.
THIS FIRST AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT (this
"Agreement"), dated as of May 31, 2000 is made and entered into by and among
Baytech, Inc., a Texas corporation ("Baytech"), Parallel Petroleum Corporation,
a Delaware corporation ("Parallel"), Tejon Exploration Company, a Texas
corporation ("Tejon"), Tejon Investment Partners, a Texas general partnership
("Tejon Partners"), Dodge Jones Foundation ("Jones Foundation"), Mansefeldt
Investment Corporation, a Texas corporation ("Mansefeldt"), Topaz Exploration
Company, a Texas corporation ("Topaz"), Tucker S. Bridwell, a resident of the
State of Texas ("Bridwell"), Dian Graves Owen, a resident of the State of Texas
("Owen"), Dian Graves Owen Foundation ("Owen Foundation"), Harlan Stai, a
resident of the State of Texas ("Stai"), EnCap Energy Capital Fund III, L.P., a
Texas -limited partnership ("III LP"), EnCap Energy Acquisition III-B, Inc., a
Texas corporation ("III-B Inc."), Energy Capital Investment Company PLC, an
English investment company ("ECIC"), and BOCP Energy Partners, L.P., a Texas
limited partnership ("BOCP"). Baytech, Parallel, Tejon and Mansefeldt are herein
sometimes called the "Founding Members". Baytech, Parallel, Tejon Partners,
Mansefeldt, Topaz, Bridwell and Owen are herein sometimes called the "Current
Members". III-LP, III-B Inc., ECIC and BOCP are herein sometimes called the
"EnCap Related Parties".
RECITALS:
A. The Founding Members have heretofore formed First Permian L. L. C., a
Delaware limited liability company (the "Company"), pursuant to the terms and
conditions of that certain Limited Liability Company Agreement dated as of June
25, 1999 (the "Original Company Agreement"). Under the Original Company
Agreement, the Founding Members acquired units of membership interest in the
Company in exchange for certain capital contributions. Since the date of the
Original Company Agreement, certain of the Founding Members have assigned all or
a portion of its units of membership interest in the Company to certain other
persons, which persons are referenced in the definition of Current Members.
B. The Current Members, Tejon, Jones Foundation, Owen Foundation, Stai, and
the EnCap Related Parties desire to amend and restate the Original Company
Agreement (i) to provide for the admission of Tejon, Jones Foundation, Owen
Foundation, Stai and the EnCap Related Parties as members of the Company, (ii)
to provide for the issuance to Tejon, Jones Foundation, Bridwell, Owen, Owen
Foundation, Stai and the EnCap Related Parties of (A) a new class of preferred
membership interests in the Company and (B) common membership interests in the
Company, (iii) to provide for the repayment of certain subordinated indebtedness
owed by the Company to Tejon and Mansefeldt, (iv) to provide for the purchase by
the Company from Tejon and Mansefeldt, respectively, of certain indebtedness
owed by Baytech to the each of them, (v) to provide for the payment by the
Company of the Arrangement Fee (as defined herein) under the terms of the Bank
One Payment Agreement (as defined herein), and (vi) to set forth the agreement
2
of the parties hereto with respect to the management and operation of the
business and affairs of the Company as hereafter conducted.
AGREEMENT:
NOW, THEREFORE, in consideration of the foregoing Recitals and the mutual
covenants and Agreement contained herein, the parties hereto do hereby agree to
amend and restate the Original Company Agreement as follows:
ARTICLE I
Formation
Section 1.1. Formation. The Company has heretofore been organized as a
Delaware limited liability company under and pursuant to the Act.
Section 1.2. Name. The name of the Company is "First Permian, L. L. C.".
The business of the Company shall be conducted in the name of the Company unless
under the law of some jurisdiction in which the Company does business such
business is required to be conducted under another name. In such a case, the
business of the Company in such jurisdiction may be conducted under such other
name or names as the Board of Directors may select.
Section 1.3. Purpose. Subject to the terms of this Agreement, the purpose
of the Company shall be (a) to enter into that certain Merger Agreement dated
June 25, 1999, by and among the Company, Fina Oil and Chemical Company and FWT
Oil and Gas Inc. (in this Section, the "Fina Agreement"), (b) to consummate the
transactions contemplated by, and perform the obligations of the Company under,
the Fina Agreement, (c) to acquire additional Leases (as defined herein) in the
continental United States and state and federal waters offshore thereto, (d) to
own, hold, maintain, renew, drill, and develop the properties acquired by the
Company under the Fina Agreement and any additional Leases acquired by the
Company in accordance with the terms hereof, (e) to produce, collect, store,
treat, deliver, market, sell or other dispose of oil, gas and related
hydrocarbons and other minerals from such properties and Leases, (f) to
farm-out, sell, abandon, or otherwise dispose of such properties and Leases and
(g) to engage in or perform any and all activities that are related to or
incident to the foregoing and that may be lawfully conducted by a limited
liability company under the Act.
Section 1.4. Registered Office and Registered Agent; Principal Place of
Business.
(a) The registered office of the Company required by the Act to be
maintained in the State of Delaware shall be the initial registered office named
in the Certificate or such other office (which need not be a place of business
of the Company) as the Board of Directors may designate from time to time in the
manner provided by law. The registered agent of the Company in the State of
Delaware shall be the initial registered agent named in the Certificate or such
other
3
Person or Persons as the Board of Directors may designate from time to
time.
(b) The principal place of business of the Company shall be 110 West
Louisiana, Suite 500, Midland, Texas 79702-7158, or at such other location as
designated by the Board of Directors.
Section 1.5. Foreign Qualification. Prior to the Company's conducting
business in any jurisdiction other than Delaware, the Company shall comply, to
the extent procedures are reasonably available, with all requirements necessary
to qualify the Company as a foreign limited liability company in such
jurisdiction. At the request of the Board of Directors or an officer of the
Company, each Member agrees to execute, acknowledge, swear to, and deliver all
certificates and other instruments conforming with this Agreement that are
necessary or appropriate to qualify, continue, and terminate the Company as a
foreign limited liability company in all such jurisdictions in which the Company
may conduct business.
Section 1.6. Term. The Company commenced on the date the Certificate was
filed with the Secretary of State of Delaware and shall continue in existence
until it is dissolved and terminated in accordance with the terms hereof.
Section 1.7. EnCap Transaction Costs. The Company shall promptly pay or
reimburse the EnCap Related Entities for all reasonable, third-party out of
pocket costs and expenses incurred by them in connection with their
consideration of an investment in the Company, due diligence and the
negotiation, preparation and execution of this Agreement, including the
reasonable fees and expenses of legal counsel, petroleum engineers and
environmental and other third party consultants; provided, that the maximum
amount of such costs and expenses to be borne by the Company shall be $30,000.
ARTICLE II
Definitions and References
Section 2.1. Definitions. When used in this Agreement, the following terms
shall have the respective meanings assigned to them in this Section 2.1 or in
the sections or other subdivisions referred to below:
"Acquisition" shall mean an acquisition of Leases, whether effected
directly or indirectly (including the acquisition of common stock, limited
liability company interests or partnership interests in or from a Person who
owns Leases).
"Acquisition Costs" shall mean all third-party, out of pocket costs and
expenses incurred by the Company in connection with effecting an Acquisition,
including the price paid or contractually agreed to be paid to acquire the
Leases, title examination costs, brokers' commissions, petroleum engineers' fees
and expenses, attorneys' fees and expenses,
4
environmental and other consultants' fees and expenses, due diligence fees and
expenses, and recording costs.
"Act" shall mean the Delaware Limited Liability Company Act or any
successor statute, as amended from time to time.
"Adjusted Capital Account" shall mean the capital account maintained for
each Member as provided in Section 7.4, (a) increased by (i) the amount of any
unpaid Capital Contributions agreed to be contributed by such Member under
Article IV, if any, and (ii) an amount equal to such Member's allocable share of
Minimum Gain as computed on the last day of such fiscal year in accordance with
the applicable Treasury Regulations, and (b) decreased by the adjustments
provided for in Treas. Reg. 1.704-1(b)(2)(ii)(d)(4)-(6).
"Affiliate" shall mean, when used with respect to a Person, any Person
directly or indirectly controlling, controlled by or under common control with
such Person. For purposes of this definition, the terms "controlling, controlled
by or under common control" shall mean the possession, directly or indirectly,
of the power to direct or cause the direction of management or policies (whether
through ownership of securities or any partnership or other ownership interest,
by contract or otherwise) of a Person.
"Agreement" shall mean this Agreement, as hereafter amended, modified or
changed in accordance with the terms hereof.
"Annual Budget" shall mean the budget of the Company with respect to a
calendar year.
"Arrangement Fee" shall mean the arrangement fee referenced in Section 8(b)
of the Bank One Agreement.
"Bank One Agreement" shall mean that certain Restated Credit Agreement
dated August 16, 1999, by and among the Company, as borrower, Parallel and
Baytech, as guarantors, Bank One, Texas, N.A., and the institutions named
therein, as banks, and Bank One, Texas, N.A., as Agent.
"Bank One Payment Agreement" shall mean that certain Payment Agreement
dated as of even date herewith by and among Bank One, Texas, N.A., Banc One
Capital Markets, Inc. and the Company.
"Baytech" shall have the meaning assigned to it in the preamble to this
Agreement.
"Baytech/Mansefeldt Loan Documents" shall mean that certain Loan Agreement
dated April 17, 2000, by and between Mansefeldt and Baytech and all other
documents or instruments executed and delivered in connection therewith, as
amended.
"Baytech/Mansefeldt Term Loan Note" shall mean that certain Term Note dated
April 17, 2000, executed by Baytech and payable to the order of Mansefeldt in
the original principal amount of $1,550,000.
5
"Baytech/Tejon Loan Documents" shall mean that certain Loan Agreement dated
April 17, 2000, by and between Tejon and Baytech and all other documents or
instruments executed and delivered in connection therewith, as amended.
"Baytech/Tejon Term Loan Note" shall mean that certain Term Note dated
April 17, 2000, executed by Baytech and payable to the order of Tejon in the
original principal amount of $1,550,000.
"Board of Directors" or "Directors" shall have the respective meaning
assigned to them in Section 6.1.
"BOCP" shall have the meaning assigned to it in the preamble to this
Agreement.
"Bridwell" shall have the meaning assigned to it in the preamble to this
Agreement.
"Capital Contribution" shall mean, for any Member at the particular time in
question, the aggregate of the dollar amounts of any cash contributed to the
capital of the Company and the fair market value of any property contributed to
the capital of the Company, or, if the context in which such term is used so
indicates, the dollar amounts of cash and the fair market value of any property
agreed to be contributed, or requested to be contributed, by such Member to the
capital of the Company.
"Certificate" shall mean the Certificate of Formation filed by the Company
with the Delaware Secretary of State.
"Common Unitholders" shall have the meaning assigned to such term in
Section 3.2(a).
"Common Units" shall have the meaning assigned to such term in Section
3.2(a).
"Common Unit Sharing Percentage" shall mean as to any Common Unitholder,
the percentage obtained by dividing the number of Common Units owned by such
Common Unitholder by the total number of Common Units issued and outstanding at
the time in question.
"Company " shall mean First Permian, L. L. C., a Delaware limited liability
company.
"Company Nonrecourse Liabilities" shall have the meaning assigned to the
term "nonrecourse liabilities" in Treasury Regulation section 1.752-1(a)(2).
"Current Members" shall have the meaning assigned to it in the preamble to
this Agreement.
6
"Dispose" (including the correlative terms "Disposed" or "Disposition")
shall mean any sale, assignment, transfer, conveyance, gift, pledge,
hypothecation or other encumbrance or any other disposition, whether voluntary,
involuntary or by operation of law.
"ECIC" shall have the meaning assigned to it in the preamble to this
Agreement.
"EnCap Related Entities" shall mean III LP, III-B Inc., ECIC and BOCP.
"Existing Leasehold and HBP Acreage" shall mean (a) wells and the leasehold
and the acreage associated therewith in which a Member or an Affiliate thereof
owned a working or revenue interest therein on or prior to the date of the
Original Company Agreement (and which wells were not contributed to or acquired
by the Company at the time of the Original Company Agreement and therefore the
Company has no interest in) and renewals thereof (existing leasehold") and (c)
new leasehold or other property interests covering the same acreage as existing
leasehold or acreage adjacent or within a one mile radius thereof, even if
acquired after the date of the Original Company Agreement.
"Exploitation Plan" shall mean, with respect to a Lease or group of related
Leases, a plan to conduct drilling, development, enhancement, or production
operations thereon.
"Founding Members" shall have the meaning assigned to it in the preamble to
this Agreement.
"GAAP" shall mean generally accepted accounting principles and practices,
consistently applied, which are recognized as such by the Financial Accounting
Standards Board (or any generally recognized successor).
"Hedging Transaction" shall mean any commodity hedging transaction
pertaining to oil, gas and related hydrocarbons and minerals, whether in the
form of a swap agreement, option to acquire or dispose of a futures contract,
whether on an organized commodities exchange or otherwise, or similar type of
financial transaction classified as "notional principal contracts" pursuant to
Treasury Regulation 1.512(b)-l(a)(1). Any Hedging Transaction shall be
identified in the books and records of the Company as a "hedging transaction" in
the manner and at the times prescribed by Treasury Regulation 1.1221-2(e).
"III LP" shall have the meaning assigned to it in the preamble to this
Agreement.
"III-B Inc." shall have the meaning assigned to it in the preamble to this
Agreement.
"Internal Revenue Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time, and any successor statute or statutes.
"Investment Coverage Ratio" shall have the meaning assigned to such term in
Section 5.6.
7
"Jones Foundation" shall have the meaning assigned to it in the preamble to
this Agreement.
"Lease" shall mean a lease, mineral interest, royalty or overriding
royalty, fee right, mineral servitude, license, concession or other right
covering oil, gas and related hydrocarbons (or a contractual right to acquire
such an interest) or an undivided interest therein or portion thereof, together
with all appurtenances, easements, permits, licenses, servitudes and
rights-of-way situated upon or used or held for future use in connection with
such an interest or the exploration, development or operation thereof.
"Liquidation Amount" shall have the meaning assigned to such term in
Section 5.2.
"Mansefeldt" shall have the meaning assigned to such term in the preamble
to this Agreement.
"Mansefeldt Related Parties" shall mean Mansefeldt, Topaz, Bridwell, Owen,
Owen Foundation and Stai.
"Mansefeldt Subordinated Note" shall mean that certain Subordinated
Promissory Note dated June 30, 1999, executed by the Company in favor of
Mansefeldt in the original principal amount of $8,000,000.
"Member" shall mean any Person executing this Agreement as of the date of
this Agreement as a member or hereafter admitted to the Company as a member as
provided in this Agreement, but such term does not include any Person who has
ceased to be a Member.
"Member Nonrecourse Debt" shall have the meaning assigned to the term
"partner nonrecourse debt" in Treasury Regulation section 1.704.2(b)(4).
"Member Nonrecourse Deductions" shall have the meaning assigned to the term
"partner nonrecourse deductions" in Treasury Regulation section 1.704-2(i).
"Minimum Gain" shall have the meaning assigned to that term in Treasury
Regulation section 1.704-2(d) and section 1.704-2(i)(3), as applicable.
"Option Securities" shall mean all rights, options and warrants evidencing
the right to subscribe for, purchase or otherwise acquire Common Units or
Preferred Units, whether or not the right to subscribe for, purchase or
otherwise acquire is immediately exercisable or is conditioned upon the passage
of time, the occurrence or non-occurrence of the existence or non-existence of
some other event.
"Original Company Agreement" shall have the meaning assigned to it in
Paragraph A of the Recitals to this Agreement.
"Owen" shall have the meaning assigned to such term in the preamble to this
Agreement.
8
"Owen Foundation" shall have the meaning assigned to such term in the
preamble to this Agreement.
"Parallel" shall have the meaning assigned to such term in the preamble to
this Agreement.
"Person" shall have the meaning assigned to it in Section 18-101(12) of the
Act.
"Preferred Unitholders" shall have the meaning assigned to such term in
Section 3.2(a).
"Preferred Units" shall have the meaning assigned to such term in Section
3.2(a).
"Preferred Unit Sharing Percentage" shall mean as to any Preferred
Unitholder, the percentage obtained by dividing the number of Preferred Units
owned by such Preferred Unitholder by the total number of Preferred Units issued
and outstanding at the time in question.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Tejon"shall have the meaning assigned to it in the preamble to this
Agreement.
"Tejon Partners" shall have the meaning assigned to it in the preamble to
this Agreement.
"Tejon Related Parties" shall mean Tejon, Tejon Partners and the Jones
Foundation.
"Tejon Subordinated Note" shall mean that certain Subordinated Promissory
Note dated June 30, 1999, executed by the Company in favor of Tejon in the
original principal amount of $8,000,000.
"Topaz" shall have the meaning assigned to such term in the preamble to
this Agreement.
"Treasury Regulations" (or any abbreviation thereof used herein) shall mean
temporary or final regulations promulgated under the Internal Revenue Code.
"Units" shall have the meaning assigned to such term in Section 3.2.
"Warrant Option" shall have the meaning assigned to such term in the Bank
One Payment Agreement.
Section 2.2. References and Construction.
(a) All references in this Agreement to articles, sections, subsections and
other subdivisions refer to corresponding articles, sections, subsections and
other subdivisions of this Agreement unless expressly provided otherwise.
9
(b) Titles appearing at the beginning of any of such subdivisions are for
convenience only and shall not constitute part of such subdivisions and shall be
disregarded in construing the language contained in such subdivisions.
(c) The words "this Agreement", "this instrument", "herein", "hereof",
"hereby", "hereunder" and words of similar import refer to this Agreement as a
whole and not to any particular subdivision unless expressly so limited.
(d) Words in the singular form shall be construed to include the plural and
vice versa, unless the context otherwise requires.
(e) Examples shall not be construed to limit, expressly or by implication,
the -matter they illustrate.
(f) The word "or" is not exclusive and the word "includes" and its
derivatives shall mean "includes, but is not limited to" and corresponding
derivative expressions.
(g) No consideration shall be given to the fact or presumption that one
party had a greater or lesser hand in drafting this Agreement.
(h) All references herein to "$" or "dollars" shall refer to U.S. Dollars.
(i) Unless the context otherwise requires or unless otherwise provided
herein, the terms defined in this Agreement which refer to a particular
agreement, instrument or document shall also refer to and include all renewals,
extensions, modifications, amendments or restatements of such agreement,
instrument or document, provided that nothing contained in this subsection shall
be construed to authorize such renewal, extension, modification, amendment or
restatement.
Exhibits 3.1. 3.2(f)-l. 3.2(f)-2, 4.2. 6.2(a), 6.8(b)-l. 6.8(b)-2 and
6.8(c) and to this Agreement are attached hereto. Each such Exhibit is
incorporated herein by reference and made a part hereof for all purposes and
references to this Agreement shall also include such Exhibit unless the context
in which used shall otherwise require.
ARTICLE III
Members and Units
Section 3.1. Members. The Members of the Company are set forth in Schedule
3.1.
Section 3.2. Units.
(a) The Company shall have two classes of membership interests as follows:
10
(i) a class consisting of 2,000,000 authorized common membership
interests, which shall be referred to herein as "Common Units"; and
(ii) a class consisting of 2,000,000 authorized preferred membership
interests, which shall be referred to herein as "Preferred Units".
Each class of membership interests of the Company shall have the rights and
privileges accorded such class as are set forth in this Agreement. Members that
own Common Units are herein sometimes called "Common Unitholders" and Members
that own Preferred Units are herein sometimes called "Preferred Unitholders".
Common Units and Preferred Units are herein sometimes called the "Units".
(b) Subject to the other terms of this Agreement, the Company may issue
Option Securities at such times, in such circumstances and for such
consideration as may be determined by the Board.
(c) Contemporaneously with the execution and delivery of this Agreement by
the parties hereto:
(i) the units of membership interest in the Company currently owned by
the Current Members shall be deemed converted into a like number of Common
Units; and
(ii) in consideration of the respective Capital Contributions of
Tejon, Jones Foundation, Owen, Owen Foundation, Stai, Bridwell and the
EnCap Related Entities, as provided for in Section 4.2, the Company shall
issue to such Persons the number of Preferred Units and Common Units set
forth opposite their respective name in Exhibit 3.1 (excluding, in the
instance of Dian Graves Owen and Tucker S. Bridwell, the 100,000 Common
Units and 12,500 Common Units, respectively, previously issued by the
Company to such persons).
(d) In connection with the issuance of the Preferred Units and Common Units
to the EnCap Related Entities, $9,500,000 of the Capital Contributions
referenced in Section 4.2 shall be allocated to the Preferred Units and
$6,500,000 of the Capital Contributions referenced in Section 4.2 shall be
allocated to the Common Units. In connection with the issuance of the Preferred
Units to the Persons (other than the EnCap Related Entities) listed in
subsection (c) above, $4,000,000 of the Capital Contributions referenced in
Section 4.2 shall be allocated to the Preferred Units.
(e) Exhibit 3.1 sets forth the number of Common Units and Preferred Units
owned by each Member after giving effect to the transactions contemplated by
subsection (c) above.
(f) Ownership of Units shall be evidenced by certificates (in this Section,
"Unit Certificates"). Unit Certificates representing Common Units shall be in
the form of Exhibit 3.2(f)-l (with the blanks duly completed to indicate the
series of Common Units represented thereby), and Unit Certificates representing
Preferred Units shall be in the form of Exhibit
11
3.2(f)-2 (with the blanks duly completed to indicate the series of Preferred
Units represented thereby). The Company shall issue one or more Unit
Certificates to each Member, which Unit Certificates need not bear a seal of the
Company but shall be signed by an officer or other Person authorized to sign
such Unit Certificates by the Board certifying the number, class and series of
Units represented by such certificate. The Unit Certificates shall be
consecutively numbered (on a class by class or series by series basis) and shall
be entered in the books of the Company as they are issued and shall exhibit the
holder's name and number of Units. The Board may determine the conditions upon
which a new Unit Certificate may be issued in place of a Unit Certificate that
is alleged to have been lost, stolen or destroyed and may, in its discretion,
require the owner of such Unit Certificate or its legal representative to give
bond, with sufficient surety, to indemnify the Company and each transfer agent
and registrar against any and all losses or claims that may arise by reason of
the issuance of a new Unit Certificate in the place of the one so lost, stolen
or destroyed. Each Unit Certificate shall bear a legend on the reverse side
thereof substantially in the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE OFFERED OR
SOLD, UNLESS IT HAS BEEN REGISTERED UNDER THE SECURITIES ACT OR UNLESS
AN EXEMPTION FROM REGISTRATION IS AVAILABLE (AND, IN SUCH CASE, AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY SHALL HAVE
BEEN DELIVERED TO THE COMPANY TO THE EFFECT THAT SUCH OFFER OR SALE IS
NOT REQUIRED TO BE REGISTERED UNDER THE SECURITIES ACT). THIS SECURITY
IS SUBJECT TO CERTAIN VOTING AGREEMENTS, RESTRICTIONS ON TRANSFER AND
OTHER TERMS AND CONDITIONS SET FORTH IN THE LIMITED LIABILITY COMPANY
AGREEMENT OF THE COMPANY, DATED AS OF MAY 31, 2000 (AS SUCH AGREEMENT
MAY BE AMENDED FROM TIME TO TIME), A COPY OF WHICH MAY BE OBTAINED
FROM THE COMPANY AT ITS PRINCIPAL EXECUTIVE OFFICES. Section 3.3.
Additional Members. Additional Persons may be admitted to the Company
as Members as provided more specifically herein.
Section 3.4. Liabilities: to Third Parties. No Member shall be liable for
the debts, obligations or liabilities of the Company, including under a judgment
decree or order of a court.
Section 3.5. Withdrawal. No Member shall have the right to withdraw, resign
or retire from the Company as a Member.
12
ARTICLE IV
Capitalization
Section 4.1. Agreed Capital Contributions of Founding Members. The Founding
Members have heretofore made Capital Contributions to the Company as provided in
Section 2.2 of the Original Company Agreement.
Section 4.2. Agreed Capital Contributions of Persons Admitted as Members as
of the Date Hereof. Contemporaneously with executing and delivering this
Agreement, each Person listed in Exhibit 4.2 shall make the cash Capital
Contribution to the Company in the amount set forth opposite its respective name
in Exhibit 4.2.
Section 4.3. Further Capital Contributions. Unless otherwise agreed in
writing, no Member shall be required to make any Capital Contributions to the
Company other than those made by such Member as provided in Sections 4.1 and
4.2. as applicable.
Section 4.4. Non-Payment of Capital Contributions. If any Member (in this
Section, a "non-contributing Member") fails to make timely a Capital
Contribution to the Company that it has agreed to make to the Company under the
terms hereof, the Company shall have the right to pursue any remedy available to
the Company at law or in equity against the non- contributing Member for the
collection of the unpaid amount, including the prosecution of a suit against a
noncontributing Member. The non-contributing Member shall be responsible for all
costs and expenses (including attorneys' fees and expenses) incurred by the
Company or any other Member arising under this Section 4.4.
Section 4.5. Interest on and Return of Capital Contributions.
(a) No interest shall be paid by the Company in respect of any Member's
Capital Contributions or capital account. However, all interest which accrues on
Company funds shall be allocated and credited to the Members in accordance with
Article V.
(b) Except as otherwise provided herein or in the Act, no Member shall have
the right to withdraw or to receive a return of its Capital Contribution.
ARTICLE V
Allocations and Distributions
Section 5.1. Allocations.
(a) Except as otherwise provided in this Section 5.1 or as may be required
by section 704(c) of the Internal Revenue Code and Treasury Regulation Section
1.704-1(b)(2)(iv)(f)(4), all items of income, gain, loss, deduction (including
depletion), and credit of the Company, and
13
the Company's depletable basis in all oil and gas properties, shall be allocated
among the Common Unitholders in proportion to their Common Unit Sharing
Percentages.
(b) [Section 5. l(b) intentionally not used]
(c) The Members intend that the cash distributions made to the Preferred
Unitholders under Section 5.2(a) shall be treated as guaranteed payments for the
use of capital under Section 707 of the Internal Revenue Code, or as interest
expense of the Company, and not as a distributable share of Company income.
However, if it is determined that such cash distributions may not be so treated,
then gross income for any fiscal year shall be allocated first to the Preferred
Unitholders in proportion to their Preferred Unit Sharing Percentages until the
aggregate amount of gross income allocated under this subsection (c) for all
fiscal years of the Company equals the aggregate amount of cash distributions
that are not so treated which are made to the Preferred Unitholders for all
fiscal years of the Company under Section 5.2(a).
(d) Notwithstanding any of the foregoing provisions of this Section 5.1 to
the contrary:
(i) If during any fiscal year of the Company there is a net increase
in Minimum Gain attributable to a Member Nonrecourse Debt that gives rise
to Member Nonrecourse Deductions, each Member bearing the economic risk of
loss for such Member Nonrecourse Debt shall be allocated items of Company
deductions and losses for such year (consisting first of cost recovery or
depreciation deductions with respect to property that is subject to such
Member Nonrecourse Debt and then, if necessary, a pro rata portion of the
Company's other items of deductions and losses, with any remainder being
treated as an increase in Minimum Gain attributable to Member Nonrecourse
Debt in the subsequent year) equal to such Member's share of Member
Nonrecourse Deductions, as determined in accordance with applicable
Treasury Regulations.
(ii) If for any fiscal year of the Company there is a net decrease in
Minimum Gain attributable to Company Nonrecourse Liabilities, each Member
shall be allocated items of Company income and gain for such year
(consisting first of gain recognized from the disposition of Company
property subject to one or more Company Nonrecourse Liabilities and then,
if necessary, a pro rata portion of the Company's other items of income and
gain, and then, if necessary, for subsequent years) equal to such Member's
share of such net decrease (except to the extent such Member's share of
such net decrease is caused by a change in debt structure with such Member
commencing to bear the economic risk of loss as to all or part of any
Company Nonrecourse Liability or by such Member contributing capital to the
Company that the Company uses to repay a Company Nonrecourse Liability), as
determined in accordance with applicable Treasury Regulations.
(iii) If for any fiscal year of the Company there is a net decrease in
Minimum Gain attributable to a Member Nonrecourse Debt, each Member bearing
the economic risk of loss for such Member Nonrecourse Debt shall be
allocated items of Company
income and gain for such year (consisting first of gain recognized from the
disposition of Company property subject to Member Nonrecourse Debt, and
then, if necessary, a pro rata portion of the Company's other items of
income and gain, and if necessary, for subsequent years) equal to such
Member's share of such net decrease (except to the extent such Member's
share of such net decrease is caused by a change in debt structure or by
the Company's use of capital contributed by such Member to repay the Member
Nonrecourse Debt) as determined in accordance with applicable Treasury
Regulations.
(e) The losses and deductions allocated pursuant to this Article V shall
not exceed the maximum amount of losses and deductions that can be allocated to
a Member without causing or increasing a deficit balance in the Member's
Adjusted Capital Account. If, at the end of any fiscal year, as a result of the
allocations otherwise provided for in this Section 5.1, the Adjusted Capital
Account balance of any Member shall become negative, items of deduction and loss
otherwise allocable to such Member for such year, to the extent such items would
have caused such negative balance, shall instead be allocated to Members having
positive Adjusted Capital Account balances remaining at such time in proportion
to such balances.
(f) In the event that a Member unexpectedly receives any adjustment,
allocation or distribution described in Treasury Regulations section
1.704-1(b)(2)(ii)(d)(4)-(6) that causes or increases a deficit balance in such
Member's Adjusted Capital Account, items of Company income and gain shall be
allocated to that Member in an amount and manner sufficient to eliminate the
deficit balance as quickly as possible.
(g) The allocations set forth in subsections (d), (e) (last sentence), and
(f) (collectively, the "Regulatory Allocations") are intended to comply with
certain requirements of the Treasury Regulations. It is the intent of the
Members that, to the extent possible, all Regulatory Allocations that are made
be offset either with other Regulatory Allocations or with special allocations
pursuant to this Section 5. l(g). Therefore, notwithstanding any other
provisions of this Article V (other than the Regulatory Allocations), the
Directors shall make such offsetting special allocations in whatever manner it
determines appropriate so that, after such offsetting allocations are made, each
Member's Adjusted Capital Account balance is, to the extent possible, equal to
the Adjusted Capital Account balance such Member would have had if the
Regulatory Allocations were not part of this Agreement and all Company items
were allocated pursuant to the remaining section of this Article V.
(h) In accordance with Section 704(c) of the Internal Revenue Code and the
Treasury Regulations thereunder, income and deductions with respect to any
property carried on the books of the Company at an amount that differs from such
property's adjusted tax basis shall, solely for federal income tax purposes, be
allocated among the Members in a manner to take into account any variation
between the adjusted tax basis of such property to the Company and such book
value. In making such allocations, the Directors shall use the "traditional
method with curative allocations" pursuant to Treasury Regulations Section
1-704-3(c).
(i) All items of income, gain, loss, deduction, and credit allocable to any
Units that may have been transferred shall be allocated between the transferor
and the transferee based on
14
the portion of the calendar year during which each was recognized as owning
those Units, without regard to whether cash distributions were made to the
transferor or the transferee during that calendar year; provided, however, that
this allocation must be made in accordance with a method permissible under
section 706 of the Internal Revenue Code and the applicable Treasury
Regulations.
Section 5.2. Distributions in Respect of the Preferred Units.
(a) The Preferred Unitholders will be entitled to receive distributions
from the Company at the Designated Rate (as defined below) of the Designated
Amount. Such distributions will be prior and in preference to any declaration or
payment of any distributions on the Common Units except for the tax
distributions required by Section 5.4. Distributions on the Preferred Units will
be cumulative and will accrue whether or not declared and whether or not there
will be funds legally available for the payment thereof. Except as provided
below, the distributions will be payable in cash. The distributions shall be
payable quarterly on October 1, January 1, April I and July I of each year
commencing on October 1, 2000 (in this Section, the "Quarterly Distribution
Date"), except that if any such date is not a Business Day (as defined below),
then such distribution shall be payable on the first Business Day immediately
thereafter to the Preferred Unitholders. As used above and elsewhere herein,
"Business Day" shall mean a day, other than a Saturday or a Sunday, on which
commercial banks are open for business with the public in Houston, Texas.
Distributions payable on the Preferred Units for any period that is shorter or
longer than a full quarterly distribution period shall be computed on the basis
of a 365-day year and the actual number of days elapsed (including the first day
but excluding the last day) occurring in the period for which such amount is
payable. As used above in this subsection, (i) the term "Designated Rate" shall
mean 9.00% per annum, except that if either (A) the Investment Coverage Ratio
(as determined in accordance with Section 5.6) is less than 1.5 to 1 or (B) the
Company fails to pay timely a distribution due and owing under this Section 5.2
or the amount owed under Section 9.3(b) and the Company does not cure the
default within 10 days after the date such distribution or amount was due, the
Designated Rate shall be increased to 12. 00 % per annum until such time as the
Investment Coverage Ratio is equal to or greater than 1. 5 to 1 or the payment
default is cured (whichever is applicable); and (ii) the term "Designated
Amount" shall mean $13,500,000 (which amount shall be subject to increase as
provided in the last sentence of this subsection (a) and subject to decrease as
provided in the last sentence of Section 9.3(a)). Any adjustment to the
Designated Rate under clause (i)(A) of the immediately preceding sentence shall
be made as of the effective date of the Subject Reserve Report (as defined in
Section 5.6) upon which the computation of the Investment Coverage Ratio is
made. With respect to the first twelve quarterly distributions payable under
this subsection (a) commencing with the first Quarterly Distribution Date, the
Company may, at least 30 days prior to the subject Quarterly Distribution Date,
elect to pay the cash distribution to the Preferred Unitholders in Preferred
Units (in this Section, a "Payment in Kind"). If such an election is made, the
Company shall promptly notify the Preferred Unitholders of the election to make
a Payment in Kind in lieu of a payment in cash for the subject Quarterly
Distribution Date. An election for any particular Quarterly Distribution Date
shall operate only for such Quarterly Distribution Date. Each Payment in Kind
shall be payable as of the Quarterly Distribution Date for which the election to
make such Payment in Kind was made, except that if such Quarterly Distribution
Date is not a Business Day, then such
15
Payment in Kind shall be on the first Business Day immediately thereafter to the
holders of the Preferred Units. Each Payment in Kind shall be equal to that
number of Preferred Units that is equal in number to the aggregate cash
distribution payable on the subject Quarterly Distribution Date divided by
$10.00. The Company shall immediately reflect on its books and records the
issuance of such additional Preferred Units. Contemporaneously with a Payment in
Kind, the Designated Amount shall be increased by an amount equal to the
aggregate cash distribution that would have otherwise been payable on the
subject Quarterly Distribution Date had the Payment in Kind election not been
made.
(b) Notwithstanding anything herein to the contrary, in the event of any
liquidation, dissolution or winding up of the Company, voluntary or involuntary,
the Preferred Unitholders will be entitled to receive, in preference to the
holders of the Common Units or other securities of the Company junior to or on
parity with the Preferred Units, a cash amount equal to the Designated Amount
plus any distributions cumulated but not paid on the Preferred Units outstanding
(the "Liquidation Amount"). A consolidation or merger of the Company with or
into any other entity or a sale or transfer in a single transaction or series of
related transactions of all or substantially all of the assets of the Company
shall be deemed to be a liquidation for purposes hereof.
(c) Each Preferred Unitholder shall be entitled to receive a share of each
distribution made to the Preferred Unitholders under this Section 5.2 in
accordance with such Preferred Unitholder's Preferred Unit Sharing Percentage.
Section 5.3. Distributions in Respect of the Common Units.
(a) The Company may make distributions of cash or other properties to the
Common Unitholders in respect of the Common Units from time to time as
determined by the Directors in accordance with the terms hereof; provided, any
distribution made by the Company to a Common Unitholder under this Section 5.3
may be made if, and only if, all accrued but unpaid distributions in respect of
the Preferred Units have been paid in full.
(b) Each Common Unitholder shall be entitled to receive a share of each
distribution made to the Common Unitholders under this Section 5.3 determined as
follows:
(i) first, to the Common Unitholders in proportion and to the extent
necessary to cause the cumulative distributions to them pursuant to Section
5.4 and this Section 5.3(b)(i) to be in accordance with their respective
Common Unit Sharing Percentages; and
(ii) thereafter, to the Common Unitholders in accordance with their
respective Common Unit Sharing Percentages.
Section 5.4. Tax Distributions. Notwithstanding Section 5.2 and 5.3, as
soon as conveniently possible after the end of each taxable year of the Company
(but in no event sooner than the time the Company's accountants have determined
the Company's income, gains, deductions, losses and credits for such taxable
year with reasonable accuracy) cash distributions
16
shall be made to the Common Unitholders in proportion to and to the extent of
their respective Presumed Company Tax Liabilities. For purposes of this Section
5.4, "Presumed Company Tax Liability" shall, as to each Common Unitholder for
any given taxable year of the Company, be deemed to be equal to (i) the product
of ((a)) the excess, if any, of the cumulative amount of the income and gain
items reported or reportable on such Common Unitholder's Schedules K- I (IRS
Form 1065) with respect to the Common Units of the Company for such taxable year
and all prior taxable years over ((i)) the sum of the deduction and loss items
reported or reportable on such Schedules K- I for such taxable year and all
prior taxable years and ((ii)) the sum of the depletion deductions which such
Common Unitholder is entitled by virtue of its interest in the Company during
such taxable year and all prior taxable years, and ((b)) the higher of the
maximum effective federal individual income tax rate or the federal corporate
income tax rate in effect for such taxable year (as determined by the Company's
accountants), minus (ii) the cumulative amount of prior distributions to such
Common Unitholder pursuant to this Section 5.4.
Section 5.5. Payment of Cash Distributions. Unless waived in writing by a
Member, payment of all cash distributions to the Members under this Agreement
shall be made by wire transfer of immediately available funds in accordance with
such written instructions to the Directors as may be provided by such Members
from time to time.
Section 5.6. Investment Coverage Ratio.
(a) As used in this Agreement, the term "Investment Coverage Ratio" shall
mean the ratio of X to Y, where "X" is equal to the pre-income tax present value
of projected net cash flows attributable to the Company's Proved Reserves as set
forth in a Subject Reserve Report, and where "Y" is equal to the sum of the
Company's Total Indebtedness plus the Liquidation Amount.
(b) The EnCap Related Entities shall have the right to request that a
Subject Reserve Report be furnished by the Company from time to time at the
expense of the Company; provided, however, that if the EnCap Related Entities
request a Subject Reserve Report more than twice in any given calendar year, the
cost and expense of the third or any additional Subject Reserve Report during
such year shall be borne by the EnCap Related Entities. Upon receipt by the
Company of a request from the EnCap Related Entities to furnish a Subject
Reserve Report, the Company shall use its reasonable best efforts to obtain and
furnish such Subject Reserve Report as promptly as practicable and in any event
within 60 days after receipt of such request.
(c) As used in this Section 5.6:
(i) "Proved Reserves" shall have the meaning assigned to such term in
the Definitions for Oil and Gas Reserves promulgated by the Society of
Petroleum Engineers (or any generally recognized successors) as in effect
from time to time.
(ii) "Subject Reserve Report" shall mean an engineering report or
reports concerning the oil and gas reserves of the Company: (A) prepared by
an independent petroleum engineer(s) acceptable to the EnCap Related
Entities; (B) with an effective date specified by the EnCap Related
Entities; (C) which utilizes a 10% per annum discount
17
rate; (D) which utilizes prices determined by the EnCap Related Parties in
good faith (however, it is contemplated that such determination will likely
be based upon projected futures market prices reduced by (x) the historical
average basis differential between such NYMEX prices and posted and/or spot
prices actually received by the Company and (y) any gathering,
transportation and processing fees, and in any event the prices so utilized
will be consistent with those being used by EnCap Investments L.L.C. in
connection with other similar investments of the type contemplated by this
Agreement and the pricing assumptions being utilized by major U.S. banks
actively involved in energy lending in their evaluation of oil and gas
properties), escalated at a rate reasonably designated by the EnCap Related
Entities; (E) lease operating expenses and production taxes derived from
and consistent with those actually incurred by the Company, escalated at
the same rate, if any, being applied to prices, and (F) such other
assumptions as shall be designated by the EnCap Related Entities and
approved by the Board of Directors.
(iii) "Total Indebtedness " shall mean (without duplication) all
liabilities of the Company and any of its consolidated subsidiaries in any
of the following categories: (A) liabilities for borrowed money; (B)
liabilities for the deferred purchase price of property or services; (C)
liabilities evidenced by bonds, notes, debentures or other similar
instruments; (D) liabilities which (1) would under GAAP be shown as a
liability and (2) are payable more than one year from the date of creation
thereof (other than reserves for taxes and reserves for contingent
obligations); and (E) liabilities under futures contracts, forward
contracts, swap, cap or collar contracts, option contracts, hedging
contracts, other derivative contracts or other similar arrangements to the
extent that such liabilities are not correctly reflected in the Subject
Reserve Report; provided, that (x) amounts accrued to redeem the Preferred
Units or representing dividends or other amounts payable on or with respect
to the Preferred Units shall not be deemed or otherwise included in Total
Indebtedness and (y) liabilities incurred by the Company and its
consolidated subsidiaries on ordinary trade terms to vendors, suppliers or
other persons providing goods and services for use by the Company or any
such subsidiary in the ordinary course of its business shall not be
included in Total Indebtedness unless and until such liabilities are
outstanding more than 90 days past the original invoice or billing date
therefor.
ARTICLE VI
Management/Governance Provisions
Section 6.1. Board of Directors. Except for situations in which the
approval of the Members is required by this Agreement or by nonwaivable
provisions of applicable law, the powers of the Company shall be exercised by or
under the authority of, and the business and affairs of the Company shall be
managed under the direction of managers who shall be referred to herein as the
"Board of Directors" or the "Directors".
Section 6.2. Certain Agreement.
19
(a) From and after the date hereof, the Board of Directors of the Company
shall be composed of five individuals. Each of Baytech, Parallel, the Tejon
Related Parties (jointly), the Mansefeldt Related Parties (jointly) and the
EnCap Related Parties (jointly) shall have the right to designate one individual
to serve on the Board. The initial designees to the Board, as prescribed by the
foregoing provisions of this subsection (a), are set forth in Exhibit 6.2(a);
immediately after the execution and delivery of this Agreement by the parties
hereto, the Board of Directors of the Company shall be composed of such
designees, each of whom shall serve until his successor is duly selected and
qualified or until such individual's death, resignation or removal.
(b) Members of the Board of Directors will not be paid any fee for serving
on the Board of Directors but will be entitled to reimbursement for reasonable
out-of-pocket expenses in attending meetings of the Board of Directors.
(c) Regular meetings of the Board of Directors shall be held quarterly at
such times and places as the Board of Directors may from time to time determine.
Section 6.3. Removal of Directors. Any Director may be removed from the
Board of Directors, with or without cause, by the Member(s) who designated such
Director to serve on the Board. Except as provided in the immediately preceding
sentence, a Director may not be removed from the Board of Directors.
Section 6.4. Vacancies. In the event that a vacancy is created on the Board
of Directors at any time by the death, disability, retirement, resignation or
removal of a Director, the Member(s) that had designated such Director to serve
on the Board shall have the sole and exclusive right to designate a replacement
therefor.
Section 6.5. Meetings of Board of Directors.
(a) Meetings of the Board of Directors, annual, regular or special, may be
held either within or without the State of Texas.
(b) An annual meeting of the Board of Directors for the transaction of such
business as may properly come before the meeting, without notice, shall be held
immediately after the annual meeting of Members and at the same place unless
changed by consent of all the Persons then serving on the Board of Directors.
(c) Regular meetings of the Board of Directors, of which no notice shall be
necessary, shall be held at such times and places as may be fixed from time to
time by resolution adopted by the Board and communicated to all Directors.
Except as otherwise provided by statute, the Certificate, or this Agreement, any
and all business may be transacted at any regular meeting.
(d) Special meetings of the Board of Directors may be called on forty-eight
(48) hours' notice to each Director, either personally or by facsimile,
overnight courier, or telegram by any Member. Except as may be otherwise
expressly provided by statute, the Certificate or this
20
Agreement, neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the Board of Directors need be specified in the
notice or waiver of notice of such meeting.
(e) At all meetings of the Board of Directors the presence of a majority of
the number of Directors fixed by or in the manner provided in this Agreement
shall be necessary and sufficient to constitute a quorum for the transaction of
business, except as otherwise provided by statute, the Certificate or this
Agreement. The act of a majority in number of the Persons then serving on the
Board of Directors shall be the act of the Board of Directors, unless the act of
a greater number or certain specified Directors is required by statute, the
Certificate or this Agreement, in which case the act of such greater number or
specified Directors shall be requisite to constitute the act of the Board of
Directors. If a quorum shall not be present at any meeting of the Board of
Directors, the Directors present thereat may adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present. At any such adjourned meeting any business may be transacted
that might have been transacted at the meeting as originally convened.
(f) All meetings of the Board of Directors shall be presided over by the
chairman of the meeting, who shall be a Person designated by a majority of the
Directors present at the meeting. The chairman of any meeting of the Board of
Directors shall determine the order of business and the procedure at the
meeting, including such regulation of the manner of voting and the conduct of
discussion as determined by him to be in order.
(g) Any action required or permitted to be taken at any meeting of the
Board of Directors may be taken without a meeting, without prior notice and
without a vote if a consent or consents in writing, setting forth the action so
taken, is signed by the requisite number of Directors, or the specified
Directors, that would be necessary to authorize or take such action at a meeting
of the Board of Directors. A telegram, telex, cablegram, or similar transmission
by a Director, or a photographic, photostatic, facsimile or similar reproduction
of a writing signed by a Director, shall be regarded as signed by the Director
for purposes of this Section 6.5.
(h) Subject to the provisions of applicable law and this Agreement
regarding notice of meetings, Persons serving on the Board of Directors may,
unless otherwise restricted by the Certificate or this Agreement, participate in
and hold a meeting of the Board of Directors by using conference telephone or
similar communications equipment by means of which all Persons participating in
the meeting can hear each other, and participation in a meeting pursuant to this
Section 6.5 shall constitute presence in Person at such meeting, except when a
Person participates in the meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting was not lawfully
called or convened.
Section 6.6. Certain Specified Actions Requiring Board Approval.
(a) Notwithstanding anything in this Agreement or in the Certificate to the
contrary, the Company (and the officers and agents acting on its behalf) shall
not take any of the following actions without having first received the approval
of the Board of Directors in accordance with
21
this Agreement, unless such actions were previously approved by the Board of
Directors as a part of the Annual Budget:
(i) to commit to or effect any Acquisition (or series of related
Acquisitions) (A) where the amount of the estimated Acquisition Costs
attributable thereto is in excess of $50,000 or (B) where, with respect to
a given calendar year and at the time of such Acquisition(s), cumulative
Acquisition Costs incurred by the Company during such calendar year equal
or exceed $150,000;
(ii) to commit or otherwise agree to any Exploitation Plan (A) where
the amount of the estimated capital expenditures attributable thereto is in
excess of $50,000 or (B) where, with respect to any given calendar year and
at the time of such Exploitation Plan, cumulative capital expenditures
incurred by the Company during such calendar year equal or exceed $150,000;
(iii) to commit to or incur any other expenditure or series of related
expenditures not otherwise a part of an approved Acquisition or an
Exploitation Plan (A) if the amount of such expenditure(s) exceeds $50,000
or (B) where, with respect to any given calendar year and at the time of
such proposed expenditure(s), cumulative expenditures of this type incurred
by the Company during such calendar year equal or exceed $150,000;
(iv) to create, incur, or assume any indebtedness (exclusive, however,
of any indebtedness under the Bank One Agreement);
(v) to guarantee in the name or on behalf of the Company the payment
of money or the performance of any contract or other obligation of any
Person other than the Company;
(vi) to mortgage, pledge, assign in trust or otherwise encumber any
Company property, or assign any monies owed or to be owed to the Company,
except as required under the Bank One Agreement;
(vii) to establish and maintain an Annual Budget;
(viii) to amend an Annual Budget in any material respect; to sell,
lease, farmout, dispose, or abandon any of the Company's properties and
assets in a single transaction or a series of related transactions;
(x) to appoint the Company's independent certified public accountants
and attorneys;
(xi) to appoint the Company's independent petroleum engineers;
22
(xii) to amend, modify or change in any material respect any loan or
credit document, any purchase and sale document or any other material
agreement to which the Company is a party;
(xiii) to make any loans or any advance payments of compensation or
other consideration to any officer or other employee of the Company;
(xiv) to compromise or settle any lawsuit, administrative matter or
other dispute to which the Company is a party or to repair or replace
Company property damaged or destroyed as a result of an accident or other
occurrence when the Company's share of the costs of repair or replacement
(either individually or in the aggregate) is in excess of $50,000;
(xv) to enter into any Hedging Transaction;
(xvi) to pay any management or similar fees to a Member other than as
provided in Section 6.10;
(xvii) to admit a new Member or authorize a new class or series of
securities of the Company;
(xviii) while the Preferred Units are outstanding, to make a
distribution to the
Common Unitholders under Section 5.3,
(xix) except as provided in Section 5.2 or Section 9.3, to issue or
repurchase any debt or equity securities (including any Option Securities)
of the Company;
(xx) to merge or consolidate the Company with any other entity,
convert the Company into another form of entity or exchange interests with
any other Person or entity;
(xxi) to dissolve the Company;
(xxii) to commence a voluntary bankruptcy by the Company;
(xxiii) to bind or obligate the Company with respect to any matter
outside the scope of the Company's business;
(xxiv) to loan Company funds to any Member or an Affiliate thereof;
(xxv) with respect to the Bank One Agreement: (A) to alter,
supplement, modify or amend the Bank One Agreement in any respect; (B) to
cause the Partnership to make any voluntary prepayment of the loans due and
owing under the Bank One
23
Agreement; (C) to request a redetermination of the applicable borrowing
base under the Bank One Agreement; (D) to submit a request for borrowing
under the Bank One Agreement; or (E) to take any other material action or
make any material election under the Bank One Agreement;
(xxvi) to approve the assumptions designed by the EnCap Related
Entities pursuant to clause (F) of the definition of Subject Reserve
Report, as referenced in Section 5.6 (c); or
(xxvii) to consent to any of the matters referenced in the last
sentence of Section 7.7.
(b) Notwithstanding the Act or anything herein or in the Certificate to the
contrary, no separate Member vote, consent or approval shall be required with
respect to any of the matters specified in this Section 6.6 requiring Board of
Director approval.
Section 6.7. Officers.
(a) The Board of Directors may, from time to time, designate one or more
Persons to be officers of the Company. No officer need be a resident of the
State of Texas, a Member or a Director. Any officers so designated shall have
such authority and perform such duties as the Board of Directors may, from time
to time, delegate to them. The Board of Directors may assign titles to
particular officers. Unless the Board of Directors decide otherwise, if the
title is one commonly used for officers of a business corporation formed under
the Delaware General Corporation Law (or any successor statute), the assignment
of such title shall constitute the delegation to such officer of the authority
and duties that are normally associated with that office, subject to any
specific delegation of authority and duties made to such officer by the Board of
Directors pursuant to this subsection (a) and the other terms and provisions
hereof (including Section 6.6). Each officer shall hold office until his
successor shall be duly designated and shall qualify or until his death or until
he shall resign or shall have been removed in the manner hereinafter provided.
Any number of offices may be held by the same Person. The salaries or other
compensation, if any, of the officers and agents of the Company shall be fixed
from time to time by the Board of Directors.
(b) Any officer may resign as such at any time. Such resignation shall be
made in writing and shall take effect at the time specified therein, or if no
time be specified, at the time of its receipt by the Board of Directors. The
acceptance of a resignation shall not be necessary to make it effective, unless
expressly so provided in the resignation. Any officer may be removed as such,
either with or without cause, by the Board of Directors; provided, however, that
such removal shall be without prejudice to the contract rights, if any, of the
Person so removed. Designation of an officer shall not of itself create contract
rights. Any vacancy occurring in any office of the Company may be filled by the
Board of Directors.
Section 6.8. Certain Agreed Upon Actions.
(a) Contemporaneously with the execution and delivery of this Agreement by
the parties hereto, (i) the Company is authorized to, and shall, pay to Tejon
the sum of $2,166,876.03
24
in respect of the Tejon Subordinated Note and (ii) the Company shall pay to
Mansefeldt the sum of $2,166,876.03 in respect of the Mansefeldt Subordinated
Note. The Company and Tejon acknowledge and agree that payment to Tejon of the
sum referenced in clause (i) of the first sentence of this subsection (a) shall
constitute full and complete payment of all amounts due and owing by the Company
under the Tejon Subordinated Note; and Tejon further agrees that upon receipt of
such sum, it will immediately deliver the original executed Tejon Subordinated
Note to the Company for cancellation and authorizes the Company to affix or
write a notation to such note to the effect that it has been paid in full. The
Company and Mansefeldt acknowledge and agree that payment to Mansefeldt of the
sum referenced in clause (ii) of the first sentence of this subsection (a) shall
constitute full and complete payment of all amounts due and owing by the Company
under the Mansefeldt Subordinated Note; and Mansefeldt further agrees that upon
receipt of such sum, it will immediately deliver the original executed
Mansefeldt Subordinated Note to the Company for cancellation and authorizes the
Company to affix or write a notation to such note to the effect that it has been
paid in full.
(b) Contemporaneously with the execution and delivery of this Agreement, by
the parties hereto, (i) the Company is authorized to, and shall, pay to Tejon
the sum of $1,556,350.70 for assignment of all of Tejon's right, title and
interest in and to the Baytech/Tejon Tenn Loan Note and the Baytech/Tejon Loan
Documents and (ii) the Company is authorized to, and shall, pay to Mansefeldt
the sum of $1,556,350.70 for assignment of all of Mansefeldt's right, title and
interest in and to the Baytech/Mansefeldt Term Loan Note and the
Baytech/Mansefeldt Loan Documents. Upon receipt of such sum, (A) Tejon will
deliver to the Company the Baytech/Tejon Loan Documents, including the
Baytech/Tejon Term Loan Note bearing its executed endorsement in the form
attached hereto as Exhibit 6.8(b)-l and (B) Mansefeldt will deliver to the
Company the Baytech/Mansefeldt Loan Documents, including the Baytech/Mansefeldt
Term Loan Note bearing its executed endorsement in the form attached hereto as
Exhibit 6.8(b)-2. The Company is authorized to, and shall, convert each of the
Baytech/Tejon Term Loan Note and the Baytech/Mansefeldt Term Loan Note into
Common Units on and effective as of July 1, 2000, and the officers of the
Company are hereby directed to take all such actions as are reasonably necessary
to effectuate the foregoing on such date.
(c) Contemporaneously with the execution and delivery of this Agreement by
the parties hereto, the Company is authorized to, and shall, execute and deliver
that certain Bank One Payment Agreement, substantially in the form of the
instrument attached hereto as Exhibit 6.8(c) in all material respects, whereby
the Company will pay Bank One, Texas, N.A. and Banc One Capital Markets, Inc.
the Arrangement Fee (in lieu of any exercise of the Warrant Option) for the sum
of $1,250,000, and as otherwise provided in the Bank One Payment Agreement. In
connection with the foregoing, Tucker S. Bridwell is hereby expressly authorized
to execute the document described in the immediately preceding sentence in the
name and on behalf of the Company as its duly authorized representative (and the
other parties to such agreement are expressly authorized to rely on this
sentence and the other provisions of this subsection as proof of Tucker S.
Bridwell's authority to so execute such agreement in the name and on behalf of
the Company).
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Section 6.9. Use of EnCap Related Parties' Capital Contributions. The
Company shall use the Capital Contributions made by the EnCap Related Parties
pursuant to Section 4.2 as follows: (i) $300,000 shall be used by the Company
for the exclusive purpose of effecting the transactions contemplated by Section
6.8(a); (ii) $3,100,000 shall be used by the Company for the exclusive purpose
of effecting the transactions contemplated by Section 6.8(b); (iii) $1,250,000
shall be used by the Company for the exclusive purpose of effecting the
transactions contemplated by Section 6.8(c); and (iv) $11,350,000 shall be used
to fund development costs on the Company's properties.
Section 6.10. Management Fees. In consideration of providing various
managerial and other services and assistance to the Company from time to time,
the Company is hereby authorized to pay to the Members listed below an annual
cash management fee for calendar years 2000 and 2001 and thereafter as approved
by the Board in accordance with the terms hereof:
Member(s) Fee
Baytech $150,000 per year
Parallel $75,000 per year
Mansefeldt/Tejon $75,000 per year
The fees referenced above shall be paid to the Members entitled to them in
installments as determined by the Board.
Section 6.11. Placement Fee. Immediately after the execution and delivery
of this Agreement by the parties hereto, the Company shall pay to the EnCap
Related Entities a placement fee equal to $320,000. The placement fee shall be
shared by and allocated among the EnCap Related Entities in the same proportions
as they acquired Common Unit and Preferred Units hereunder. The placement fee
shall be tendered to the EnCap Related Entities by the Company via wire transfer
of immediately available funds to an account or accounts designated in writing
to the Company by EnCap Investments L.L.C.
ARTICLE VII
Accounting and Banking Matters; Capital Accounts; Tax Matters
Section 7.1. Books and Records. The Company shall keep and maintain full
and accurate books of account for the Company in accordance with generally
accepted accounting principles consistently applied in accordance with the terms
of this Agreement. Such books shall be maintained at the principal United States
office of the Company.
Section 7.2. Fiscal Year. The calendar year shall be selected as the
accounting year of the Company and the books of account shall be maintained on
an accrual basis.
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Section 7.3. Bank Accounts. The Company shall maintain one or more bank
accounts in the name of the Company in such bank or banks as may be determined
by the Board of Directors, which accounts shall be used for the payment of
expenditures incurred by the Company in connection with the business of the
Company and in which shall be deposited any and all receipts of the Company. All
such receipts shall be and remain the property of the Company and shall not be
commingled in any way with funds of any other Person.
Section 7.4. Capital Accounts.
(a) A capital account shall be established and maintained for each Member.
Each Member's capital account (a) shall be increased by (i) the amount of money
contributed by that Member to the Company, (ii) the fair market value of
property contributed by that Member to the Company (net of liabilities secured
by the contributed property that the Company is considered to assume or take
subject to under section 752 of the Internal Revenue Code), and (iii) the amount
of any item of taxable income or gain and the amount of any item of income and
gain exempt from tax allocated to such Member for federal income tax purposes,
and (b) shall be decreased by (i) the amount of money distributed to that Member
of the Company, (ii) the fair market value of property distributed to that
Member by the Company (net of liabilities secured by the distributed property
that the Member is considered to assume or take subject to under section 752 of
the Internal Revenue Code), (iii) allocations to that Member of expenditures of
the Company described in section 705(a)(2)(B) of the Code, and (iv) allocations
to that Member of Company loss and deduction (or items thereof). The Members'
capital accounts also shall be maintained and adjusted as permitted by the
provisions of Treasury Regulation sections 1.704- 1(b)(2)(iv)(f) and as required
by the other provisions of Treasury Regulation sections 1.704- 1(b)(2)(iv) and
1.704-1(b)(4), including adjustments to reflect the allocations to the Members
of depreciation, depletion, amortization, and gain or loss as computed for book
purposes rather than the allocation of the corresponding items as computed for
tax purposes, as required by Treasury Regulation section 1.704-1(b)(2)(iv)(g).
(b) Notwithstanding the foregoing provisions of this Section 7.4, the
Members' capital accounts shall be adjusted on the date of this Agreement in the
manner required under Treasury Regulation 1.704-1(b)(2)(iv)(f) to reflect the
fair market value of the Company's assets immediately prior to the date of this
Agreement, which value shall be determined by reference to the Capital
Contributions made to the Company for additional Common Units under Sections 4.2
and 4.3. Thereafter, the Members' capital accounts shall be maintained and
adjusted as permitted by the provisions of Treasury Regulation 1.704-1(b)(2)(iv)
and 1.704-1(b)(4), including adjustments to reflect the allocations to the
Members of depreciation, depletion, amortization and gain or loss as computed
for book purposes rather than the allocation of the corresponding items as
computed for tax purposes, as required by Treasury Regulation 1.704-
1(b)(2)(iv)(g).
(c) On the transfer of all or part of a Member's Units, the capital account
of the transferor that is attributable to the transferred Units shall carry over
to the transferee Member in accordance with the provisions of Treasury
Regulation 1.704-1(b)(2)(iv)(1).
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Section 7.5. Tax Partnership. The Members agree to classify the Company as
a partnership for federal tax purposes. Neither the Company, any Member nor any
officer or other representative of any of the foregoing shall file an election
to classify the Company as an association taxable as a corporation for federal
tax purposes.
Section 7.6. Tax Elections. The Company shall make the following elections:
(a) To elect the calendar year as the Company's fiscal year if permitted by
applicable law;
(b) To elect the accrual method of accounting;
(c) If requested by a Member, to elect, in accordance with Sections 734,
743 and 754 of the Internal Revenue Code and applicable regulations and
comparable state law provisions, to adjust basis in the event any Unit is
transferred in accordance with this Agreement or any Company property is
distributed to any Member;
(d) To elect to treat all organizational and start-up costs of the Company
as deferred expenses amortizable over 60 months under Sections 195 and 709 of
the Internal Revenue Code; and
(e) To elect with respect to such other federal, state and local tax
matters as the Board of Directors shall approve.
Section 7.7. Tax Matters Partner. The Board shall from time to time
designate a Member to act as the "tax matters partner" under Section 6231 of the
Internal Revenue Code, subject to replacement by the Board (such Member, in this
Section, being called the "tax matters partner"). The tax matters partner shall
promptly notify the Members if any tax return or report of the Company is
audited or if any adjustments are proposed by any governmental body. In
addition, the tax matters partner shall promptly furnish to the Members all
notices concerning administrative or judicial proceedings relating to federal
income tax matters as required under the Internal Revenue Code. During the
pendency of any such administrative or judicial proceeding, the tax matters
partner shall furnish to the Members periodic reports, not less often than
monthly, concerning the status of any such proceeding. Without the consent of
the Board, the tax matters partner shall not extend the statute of limitations,
file a request for administrative adjustment, file suit concerning any tax
refund or deficiency relating to any Company administrative adjustment or enter
into any settlement agreement relating to any Company item of income, gain,
loss, deduction or credit for any fiscal year of the Company.
Section 7.8. Confidentiality. Except as may be required by applicable law
or valid subpoena or other lawful process or by the rules of any applicable
stock exchange or other self-regulatory body or other regulatory requirements,
each Member agrees that it will (consistent with its reasonable practices and
procedures adopted in good faith for handling confidential information) keep
confidential all Company geological, geophysical and seismic information and any
and all other information or data relating to the Company's properties and other
assets, the
28
acquisition or exploration prospects of the Company, the production from such
properties or prospects and the Company's financial information, and will not
disclose any such information to any person whatsoever (other than such Member's
officers, directors, employees, beneficial owners, attorneys, accountants,
advisors or potential transferees (provided each of such persons is informed of
the confidential nature of such information) or to another Member and its
representatives); provided, however, that the foregoing covenant of each Member
shall not apply to any information that (a) was or becomes generally available
to the public other than as a result of disclosure by such Member, (b) becomes
available to such Member from a source other than the Company, provided that
such source is not (to the knowledge of such Member) bound by a confidentiality
agreement with the Company or (c) such Member can establish was within its
possession prior to it being furnished to such Member by or on behalf of the
Company, provided that the source of such information was not (to the knowledge
of such Member) bound by a confidentiality agreement with the Company in respect
thereof.
ARTICLE VIII
Indemnification
Section 8.1. Power to Indemnify in Actions. Suits or Proceeding Other Than
Those by or in the Right of the Company. Subject to Section 8.3, the Company
shall indemnify any Person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the Company) by reason of the fact that he is or was a
Member, Director or officer of the Company, or is or was serving at the request
of the Company as a member, manager, director, officer, employee or agent of
another limited liability company, corporation, partnership, joint venture,
trust or other enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the Company, and with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful. The termination of
any action, suit or proceeding by judgment, order, settlement, conviction, or
upon a plea of nolo contenders or its equivalent, shall not, of itself, create a
presumption that the Person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, had reasonable
cause to believe that his conduct was unlawful.
Section 8.2. Power to Indemnify in Actions, Suits or Proceedings by or in
the Right of the Company. Subject to Section 8.3, the Company shall indemnify
any Person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
Company to procure a judgment in its favor by reason of the fact that he is or
was a Member, Director or officer of the Company, or is or was serving at the
request of the Company as a member, manager, director, officer, employee or
agent of another limited liability company, corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with
29
the defense or settlement of such action or suit if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best interests
of the Company and except that no indemnification shall be made in respect of
any claim, issue or matter as to which such Person shall have been adjudged to
be liable for negligence or willful misconduct in the performance of his duty to
the Company or for a material breach of this Agreement unless and only to the
extent that the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such Person is fairly and reasonably entitled to
indemnity for such expenses which such court shall deem proper.
Section 8.3. Authorization of Indemnification. Any indemnification under
this Article VIII (unless ordered by a court) shall be made by the Company only
as authorized in the specific case upon a determination that indemnification of
the Member, Director or officer is proper in the circumstances because he has
met the applicable standard of conduct set forth in Section 8.1 or Section 8.2.
Such determination shall be made (i) by the Board of Directors by a majority
vote of a quorum consisting of Directors who were not parties to such action,,
suit or proceeding, or (ii) if such a quorum is not obtainable, or, even if
obtainable a quorum of disinterested Directors so directs, by independent legal
counsel in a written opinion, or (iii) by the Members. To the extent that a
Member, Director or officer has been successful on the merits or otherwise in
defense of any action, suit or proceeding referred to in Section 8.1 or Section
8.2, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith, without the necessity of authorization
in the specific case.
Section 8.4. Good Faith Defined. For purposes of any determination under
Section 8.3, a Person shall be deemed to have acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the Company, or, with respect to any criminal action or proceeding, to have had
no reasonable cause to believe his conduct was unlawful, if his action is based
on the records or books of account of the Company or another enterprise, or on
information supplied to him by the Directors or officers of the Company or
another enterprise in the course of their duties, or on the advice of legal
counsel for the Company or another enterprise or on information or records given
or reports made to the Company or another enterprise by an independent certified
public accountant or by an appraiser or other expert selected with reasonable
care by the Company or another enterprise. The term "another enterprise" as used
in this Section 8.4 shall mean any other limited liability company, corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise of
which such Person is or was serving at the request of the Company as a member,
manager, director, officer, employee or agent. The provisions of this Section
8.4 shall not be deemed to be exclusive or to limit in any way the circumstances
in which a Person may be deemed to have met the applicable standard of conduct
set forth in Section 8.1 or Section 8.2, as the case may be.
Section 8.5. Indemnification by a Court. Notwithstanding any contrary
determination in the specific case under Section 8.3, and notwithstanding the
absence of any determination thereunder, any Member, Director or officer of the
Company may apply to any court of competent jurisdiction in the State of Texas
(which court shall apply Delaware law) for indemnification to
30
the extent otherwise permissible under Sections 8.1 and 8.2. The basis of such
indemnification by a court shall be a determination by such court that
indemnification of the Member, Director or officer of the Company is proper in
the circumstances because he has met the applicable standards of conduct set
forth in Section 8.1 or 8.2, as the case may be. Neither a contrary
determination in the specific case under Section 8.3 nor the absence of any
determination thereunder shall be a defense to such application or create a
presumption that the Member, Director or officer of the Company seeking
indemnification has not met any applicable standard of conduct. Notice of any
application for indemnification pursuant to this Section 8.5 shall be given to
the Company promptly upon the filing of such application. If successful, in
whole or in part, the Member, Director or officer of the Company seeking
indemnification shall also be entitled to be paid the expense of prosecuting
such application.
Section 8.6. Expenses Payable in Advance. Expenses incurred by a Member,
Director or officer of the Company in defending or investigating a threatened or
pending action, suit or proceeding shall be paid by the Company in advance of
the final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such Member, Director or officer to repay such
amount if it shall ultimately be determined that he is not entitled to be
indemnified by the Company as authorized by this Article VIII.
Section 8.7. Nonexclusivity of Indemnification and Advancement of Expenses.
The indemnification and advancement of expenses provided by or granted pursuant
to this Article VIII shall not be deemed exclusive of any other rights to which
those seeking indemnification or advancement of expenses may be entitled under
any agreement, contract, vote of Members or disinterested Directors or pursuant
to the direction (howsoever embodied) of any court of competent jurisdiction or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, it being the policy of the Company
that indemnification of the Persons specified in Sections 8.1 and 8.2 shall be
made to the fullest extent permitted by law. The provisions of this Article VIII
shall not be deemed to preclude the indemnification of any Person who is not
specified in Section 8.1 or Section 8.2 but whom the Company has the power or
obligation to indemnify under the provisions of the Act or otherwise.
Section 8.8. Insurance. The Company may purchase and maintain insurance on
behalf of any Person who is or was a Member, Director or officer of the Company,
or is or was a serving at the request of the Company as a member, manager,
director, officer, employee or agent of another limited liability company,
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise against any liability asserted against him and incurred by him in any
such capacity, or arising out of his status as such, whether or not the Company
would have the power or the obligation to indemnify him against such liability
under the provisions of this Article VIII.
Section 8.9. Certain Definitions. For purposes of this Article VIII,
references to "the Company" shall include, in addition to the resulting entity,
any constituent entity (including any constituent of a constituent) absorbed in
a consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its members, managers, directors,
officers, and employees or agents, so that any Person who is or was a member,
31
manager, director, officer, employee or agent of such constituent entity, or is
or was serving at the request of such constituent entity as a member, manager,
director, officer, employee or agent of another limited liability company,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under the provisions of this Article VIII with respect to the resulting
or surviving entity as he would have with respect to such constituent entity if
its separate existence had continued. For purposes of this Article VIII,
references to "fines" shall include any excise taxes assessed on a Person with
respect to an employee benefit plan; and references to "serving at the request
of the Company" shall include any service as a member, manager, director,
officer, employee or agent of the Company which imposes duties on, or involves
services by, such member, manager, director or officer with respect to an
employee benefit plan, its participants or beneficiaries; and a Person who acted
in good faith and in a manner he reasonably believed to be in the interest of
the participants and beneficiaries of an employee benefit plan shall be deemed
to have acted in a manner "not opposed to the best interests of the Company" as
referred to in this Article VIII.
Section 8.10. Survival of Indemnification and Advancement of Expenses. The
indemnification and advancement of expenses provided by, or granted pursuant to,
this Article VIII shall, unless otherwise provided when authorized or ratified,
continue as to a Person who has ceased to be a Member, Director or officer and
shall inure to the benefit of the heirs, executors and administrators of such a
Person.
Section 8.11. Limitation on Indemnification. Notwithstanding anything
contained in this Article VIII to the contrary, except for proceedings to
enforce rights to indemnification (which shall be governed by Section 8.5), the
Company shall not be obligated to indemnify any Member, Director or officer in
connection with a proceeding (or part thereof) initiated by such Person unless
such proceeding (or part thereof) was authorized or consented to by the Board of
Directors.
Section 8.12. Indemnification of Employees and Agents. The Company may, to
the extent authorized from time to time by the Board of Directors, provide
rights to indemnification and the advancement of expenses to employees and
agents of the Company similar to those conferred in this Article VIII to
Members, Directors and officers of the Company.
Section 8.13. Severability. The provisions of this Article VIII are
intended to comply with the Act. To the extent that any provision of this
Article VIII authorizes or requires indemnification or the advancement of
expenses contrary to the Act or the Certificate, the Company's power to
indemnify or advance expenses under such provision shall be limited to that
permitted by the Act and the Certificate and any limitation required by the Act
or the Certificate shall not affect the validity of any other provision of this
Article VIII.
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ARTICLE IX
Dispositions of Units and Substitutions; Redemption of Preferred Units
Section 9.l. Dispositions. A Member may Dispose of Units, in whole or in
part, subject to the following: (a) no such Disposition shall be made if such
Disposition would result in the violation of any applicable federal or state
securities laws; and (b) the Company shall not be required to recognize any such
Disposition until the instrument pursuant to which the Units are to be Disposed
has been delivered to the Board of Directors for recordation on the books of the
Company. Any costs incurred by the Company in connection with any Disposition by
a Member of all or a part of its Units shall be borne by such Member.
Notwithstanding anything herein to the contrary, the terms and provisions of
this Section 9.1 shall not be deemed to be applicable to a redemption of the
Preferred Units as provided in Section 9.3.
Section 9.2. Substitution.
(a) Unless an assignee of Units becomes a Member in accordance with the
provisions set forth below, such assignee shall not be entitled to any of the
rights granted to a Member hereunder in respect of such Units, other than the
right to receive allocations of income, gain, loss, deduction, credit and
similar items and distributions to which the assignor would otherwise be
entitled, to the extent such items are assigned.
(b) An assignee of the Units of a Member, or any portion thereof, shall
become a Member entitled to all of the rights of a Member in respect of such
Units if, and only if (i) the assignor gives the assignee such right, (ii) the
other Members consent to such substitution (which consent shall not be
unreasonably withheld, conditioned or delayed) and (iii) the assignee executes
and delivers such instruments, in form and substance reasonably satisfactory to
the other Members, as the other Members may deem reasonably necessary to effect
such substitution and to confirm the agreement of the assignee to be bound by
all of the terms and provisions of this Agreement.
Section 9.3. Redemption of Preferred Units.
(a) The Company shall have the option to redeem the Preferred Units (in
multiples of an aggregate of 100,000 Preferred Units, with the Preferred Units
of each Preferred Unitholder thereof being redeemed on a pro rata basis) at any
time at a cash redemption price per Preferred Unit equal to the Liquidation
Amount divided by the number of Preferred Units then outstanding; provided, that
if the Company elects to effect a redemption on or prior to December 31, 2002,
the Liquidation Amount shall be increased by an amount equal to X multiplied by
Y, where "X" equals the cumulative cash dividends that would have been earned
hereunder on the Preferred Units so redeemed in the absence of such redemption
from the date of the redemption through December 31, 2002, and where "Y" equals
.50. If the Company so elects to effect a redemption under this subsection (a),
it shall give notice of same to the Preferred Unitholders not less than 30
Business Days prior to the date on which such redemption is to be made.
Contemporaneously with a redemption of less than all of the Preferred Units
outstanding, the
33
Designated Amount shall be reduced by the aggregate amount paid with respect to
such redemption exclusive of (i) that portion of such payment that represents
the payment of distributions cumulated but not paid and (ii) if applicable, any
additional amount added to the Liquidation Amount as described in the proviso to
the first sentence of this subsection (a).
(b) On the fifth anniversary date of the date hereof and provided the
Preferred Units have not been previously redeemed in full pursuant to subsection
(a), the Company shall be required to redeem all of the Preferred Units at a
cash redemption price per share equal to the Liquidation Amount divided by the
number of Preferred Units then outstanding.
ARTICLE X
Dissolution, Liquidation, and Termination
Section 10.1. Dissolution. The Company shall dissolve and its affairs shall
be- wound up on the first to occur of the following:
(a) December 31, 2015;
(b) the election by the Board to dissolve the Company as provided in
Section 6.6(a)(xxi);
(c) the sale or other disposition of all or substantially all of the assets
of the Company; or
(d) entry of a decree of judicial dissolution of the Company under Section
18-802 of the Act.
Section 10.2. Liquidation and Termination. On dissolution of the Company,
the liquidator shall be a Person selected by the Board of Directors. The
liquidator shall proceed diligently to wind up the affairs of the Company and
make final distributions as provided herein and in the Act. The costs of
liquidation shall be borne as a Company expense. Until final distribution, the
liquidator shall continue to operate the Company properties with all of the
power and authority of the Director. The steps to be accomplished by the
liquidator are as follows:
(a) as promptly as possible after dissolution and again after final
liquidation, the liquidator shall cause a proper accounting to be made of the
Company's assets, liabilities, and operations through the last day of the
calendar month in which the dissolution occurs or the final liquidation is
completed, as applicable.
(b) The liquidator shall pay, satisfy or discharge from Company funds all
of the debts, liabilities and obligations of the Company (including, without
limitation, all expenses incurred in liquidation) or otherwise make adequate
provision for payment and discharge thereof
34
(including, without limitation, the establishment of a cash escrow fund for
contingent liabilities in such amount and for such term as the liquidator may
reasonably determine).
(c) All remaining assets of the Company shall be distributed to the Members
as follows:
(i) the liquidator may sell any or all Company property and any
resulting gain or loss from each sale shall be computed and allocated to
the capital accounts of the Members as provided in Section 5.1;
(ii) with respect to all Company property that has not been sold, the
fair market value of that property shall be determined and the capital
accounts of the Members shall be adjusted to reflect the manner in which
the unrealized income, gain, loss, and deduction inherent in property that
has not been reflected in the capital accounts previously would be
allocated among the Members under Section 5.1 if there were a taxable
disposition of that property for the fair market value of that property on
the date of distribution; and
(iii) Company property shall be distributed among the Members in the
amounts specified in Sections 5.2 and 5.3.
All distributions in kind to the Members shall be valued for purposes of
determining each Member's interest therein at its fair market value at the time
of such distribution, and such distributions shall be made subject to the
liability of each distributes for costs, expenses, and liabilities theretofore
incurred or for which the Company has committed prior to the date of
termination, and those costs, expenses, and liabilities shall be allocated to
the distributes pursuant to this Section 10.2. It is intended that the foregoing
distributions to each Member will be equal to each Member's respective positive
capital account balance as determined after giving effect to the foregoing
adjustments and to all adjustments attributable to allocations of items of
income, gain, loss and deduction realized by the Company during the taxable year
in question and all adjustments attributable to contributions and distributions
of money and property effected prior to such distribution. To the extent that
any such Member's positive capital account balance does not correspond to such
distribution, the allocations provided for in Section 5.1 shall be adjusted, to
the least extent necessary, to produce a capital account balance for the Partner
which corresponds to the amount of such distribution. Any distribution to the
Members in liquidation of the Company shall be made by the later of the end of
the taxable year in which the liquidation occurs or 90 days after the date of
such liquidation. For purposes of the preceding sentence, the term "liquidation"
shall have the same meaning as set forth in Treasury Regulation
1.704-l(b)(2)(ii). The distribution of cash and/or property to a Member in
accordance with the provisions of this Section 10.2 constitutes a complete
return to the Member of its Capital Contribution and a complete distribution to
the Member of its Units and all the Company's property and constitutes a
compromise to which all Members have consented within the meaning of Section
18-502(b) of the Act. To the extent that a Member returns funds to the Company,
it has no claim against any other Member for those funds.
35
Section 10.3 Deficit Capital Accounts. Notwithstanding anything to the
contrary contained in this Agreement, and notwithstanding any custom or rule of
law to the contrary, no Member shall be obligated to restore a deficit balance
in its capital account at any time.
Section 10.4 Certificate of Cancellation. On completion of the distribution
of Company assets as provided herein, the Company shall be terminated and the
Members shall file a certificate of cancellation with the Secretary of State of
Delaware, cancel any other filings made pursuant to Section 1.5, and take such
other actions as may be necessary to terminate the Company.
ARTICLE XI
Representations and Warranties
Section 11.1. Representations and Warranties of Members to Each Other. Each
Member hereby severally (and not jointly or jointly and severally) as to itself
only represents, warrants and covenants to the other Members as follows:
(a) Such Member (if not an individual) is duly organized, validly existing
and in good standing under the laws of the jurisdiction of its formation.
(b) Such Member has the requisite power and authority to execute and
deliver this Agreement and to perform its obligations hereunder. Such Member, if
an individual, is not a minor and has the requisite legal capacity to execute
and deliver this Agreement and to perform its obligations hereunder.
(c) The execution, delivery and performance by such Member (if not an
individual) of this Agreement has been duly and validly authorized by all
requisite limited liability company, partnership or corporate (as applicable)
action.
(d) The execution, delivery and performance by such Member of this
Agreement (i) (if not an individual) is within its limited liability,
partnership or corporate (as applicable) powers and (ii) will not (A) be in
contravention of or violate any provisions of its charter or other governing
documents, as amended to the date hereof (in the instance of a Member not an
individual), or (ii) be in contravention of or result in any breach or
constitute a default under any applicable law, rule, regulation, judgment,
license, permit or order or any loan, note or other agreement or instrument to
which such Member is a party or by which it or any of its properties are bound.
(e) When delivered to the other Members, this Agreement will have been duly
and validly executed and will be binding upon such Member and enforceable in
accordance with the terms hereof.
36
(f) No consent, approval, authorization or order of any court or
governmental agency or authority or of any third party which has not been
obtained is required in connection with the execution, delivery and performance
by such Member of this Agreement.
(g) Such Member nor any of its Affiliates has employed or retained any
broker, agent or finder in connection with this Agreement or the transactions
contemplated herein, or paid or agreed to pay any brokerage fee, finder's fee,
commission or similar payment to any Person on account of this Agreement or the
transactions provided for herein (exclusive of the placement fee paid by the
Company under Section 6.11); and such Member shall indemnify and hold harmless
the Company and the other Members from any costs, including attorneys' fees, and
liability arising from the claim of any broker, agent or finder employed or
retained by such Member in connection with the Company or this Agreement.
(h) There is no pending or, to such Member's knowledge (after due inquiry),
threatened judicial, administrative or arbitral action, suit or proceeding
against or investigation of such Member or its ability to perform its
obligations under this Agreement.
Section 11.2. Representations and Warranties of EnCap Related Entities.
Each of the EnCap Related Entities hereby severally (and not jointly or jointly
and severally) and as to itself only represents, warrants and covenants to the
other Members as follows:
(a) It is an "accredited investor" as such term is defined in Regulation D
promulgated under the Securities Act. It is acquiring its Units as contemplated
hereby for its own account for investment and not with a view to, or for sale or
other disposition in connection with, any distribution of all or any part
thereof, except in compliance with applicable federal and state securities laws.
(b) It understands that the Units issued to it hereunder will not have been
registered pursuant to the Securities Act or any applicable state securities
laws, that the Units will be characterized as "restricted securities" under
federal securities laws, and that under such laws and applicable regulations the
Units cannot be sold or otherwise disposed of without registration under the
Securities Act or an exemption therefrom.
(c) It has, prior to its execution of this Agreement, been furnished with
sufficient written and other information about the Company to make an informed
investment decision.
Section 11.3. Representations and Warranties of Jones Foundation, Owen,
Owen Foundation, Stai, Bridwell and Tejon to the Other Members. Each of Jones
Foundation, Owen, Owen Foundation, Stai, Bridwell and Tejon hereby severally
(and not jointly or jointly and severally) and as to itself only represents,
warrants and covenants to the other Members as follows:
(a) It is an "accredited investor" as such term is defined in Regulation D
promulgated under the Securities Act. It is acquiring its Units as contemplated
hereby for its own account for investment and not with a view to, or for sale or
other disposition in connection with, any
37
distribution of all or any part thereof, except in compliance with applicable
federal and state securities laws.
(b) It understands that the Units issued to it hereunder will not have been
registered pursuant to the Securities Act or any applicable state securities
laws, that the Units will be characterized as "restricted securities" under
federal securities laws, and that under such laws and applicable regulations the
Units cannot be sold or otherwise disposed of without registration under the
Securities Act or an exemption therefrom.
(c) It has, prior to its execution of this Agreement, been furnished with
sufficient written and other information about the Company to make an informed
investment decision.
Section 11.4. Representations and Warranties of Current Members to the
EnCap Related Entities. Each Current Member hereby represents and warrants to
the EnCap Related Entities that (a) as of the date hereof, none of the financial
statements or other written documents or information delivered herewith or
heretofore by or on behalf of the Company or such Member to the EnCap Related
Entities in connection with this Agreement, the Company or its assets contains
any untrue statement of a material fact or omits to state any material fact
(other than facts which the EnCap Related Entities recognize to be industry
risks normally associated with the oil and gas business) necessary to keep the
statements contained herein or therein from being misleading; and (b) there is
no fact peculiar to the Company or its assets (other than facts which the EnCap
Related Entities recognize to be industry risks normally associated with the oil
and gas business) which materially adversely affects or in the future may (so
far as Member can now reasonably foresee) materially adversely affect the
Company, its financial condition or its assets and which has not been set forth
in this Agreement or in the other documents, certificates and statements
furnished to the EnCap Related Entities by or on behalf of the Company or such
Member prior to the date hereof in connection with the transactions contemplated
hereby.
Section 11.5. Survival of Representations and Warranties. All
representations, warranties and covenants made by each of the Members in this
Agreement or any other document contemplated thereby or hereby shall be
considered to have been relied upon by the other party hereto and shall survive
the execution and delivery of this Agreement or such other document, regardless
of any investigation made by or on behalf of any such party.
ARTICLE XII
General Provisions
Section 12.l. Notices. Except as expressly set forth to the contrary in
this Agreement, all notices, requests, or consents provided for or permitted to
be given under this Agreement must be in writing and must be given either by
depositing that writing in the United States mail, addressed to the recipient,
postage paid, and registered or certified with return receipt requested or by
delivering that writing to the recipient in person, by courier, or by facsimile
transmission; and a notice, request, or consent given under this Agreement is
effective on receipt by the Person
38
to receive it. All notices, requests, and consents to be sent to a Member must
be sent to or made at the addresses given for that Member on Exhibit 3.1 or such
other address as that Member may specify by notice to the other Members. All
notices, requests, and consents to be sent to the Company must be sent to or
made at the address of the Company's principal place of business (with the fax
number being (915) 686-7034) or such other address (or fax number) as the
Company may specify by notice to the Members.
Section 12.2. Amendment or Modification. This Agreement may be amended or
modified from time to time only by a written instrument executed and agreed to
by those Common Unitholders whose aggregate Common Unit Sharing Percentages
equal or exceed 90 %; provided, however, that if at the time of such proposed
amendment or modification, all or a portion of the Preferred Units are
outstanding, then any such amendment or modification must also receive the prior
written approval of those Preferred Unitholders whose aggregate Preferred Unit
Sharing Percentages equal or exceed 90 % if such amendment or modification
adversely affects the rights, preferences, or privileges of the Preferred Units;
provided, further, that any amendment or modification to this Agreement that
increases a Member's required Capital Contributions to the Company or its
liability for Company debt and obligations shall only be effective with the
written approval of such Member; and provided, further, this Section 12.2 shall
not be amended or modified without the prior written approval of all of the
Members.
Section 12.3. Entire Agreement. This Agreement constitute the full and
complete agreement of the parties hereto with respect to the subject matter
thereof. Without limitation of the foregoing, this Agreement supersedes in its
entirety the Original Company Agreement and any amendments, modifications or
changes thereto.
Section 12.4. Effect of Waiver or Consent. The failure of any Person to
insist upon strict performance of a covenant hereunder or of any obligation
hereunder, irrespective of the length of time for which such failure continues,
shall not be a waiver of such Person's right to demand strict compliance in the
future. No consent or waiver, express or implied, to or of any breach or default
in the performance of any obligation hereunder shall constitute a consent or
waiver to or of any other breach or default in the performance of the same or
any other obligation hereunder.
Section 12.5. Successors and Assigns. Subject to Article IX, this Agreement
shall be binding upon and inure to the benefit of the Members and their
respective heirs, legal representatives, successors, and assigns.
Section 12.6 Governing Law. THIS AGREEMENT IS GOVERNED BY AND SHALL BE
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, EXCLUDING ANY
CONFLICT-OF-LAWS RULE OR PRINCIPLE THAT MIGHT REFER THE GOVERNANCE OR THE
CONSTRUCTION OF THIS AGREEMENT TO THE LAW OF ANOTHER JURISDICTION.
Section 12.7. Severability. If any provision of this Agreement is held to
be unenforceable, this Agreement shall be considered divisible and such
provision shall be deemed
39
inoperative to the extent it is deemed unenforceable, and in all other respect
this Agreement shall remain in full force and effect; provided, however, that if
any provision may be made enforceable by limitation thereof, then such provision
shall be deemed to be so limited and shall be enforceable to the maximum extent
permitted by applicable law.
Section 12.8. Further Assurances. In connection with this Agreement and the
transactions contemplated hereby, each Member shall execute and deliver any
additional documents and instruments and perform any additional acts that may be
necessary or appropriate to effectuate and perform the provisions of this
Agreement and those transactions.
Section 12.9. Title to Company Property. All property owned by the Company,
whether real or personal, tangible or intangible, shall be deemed to be owned by
the, Company, and no Member, individually, shall have any ownership of such
property. The Company shall hold all of its property in its own name.
Section 12.10. Public Announcements. The Company or any Member shall issue
a press release or other public statement with respect to this Agreement or the
transactions contemplated hereby only after having providing reasonable advance
notice of same to the other Members.
Section 12.11. No Third Party Beneficiaries. Except as otherwise provided
in Section 6.8(c) and in Article VIII, it is the intent of the parties hereto
that no third-party beneficiary rights be created or deemed to exist in favor of
any Person not a party to this Agreement, unless otherwise expressly agreed to
in writing by the parties.
Section 12.12. Area of Mutual Interest. An area of mutual interest (in this
Section, "AMI") is hereby established as being any lands located within one mile
of any Company property. If any Member of any of its Affiliates (in this
Section, an "Acquiring Party"), acquires from an unaffiliated third party any
interest (in this Section, a "Subsequently Acquired Interest") in lands lying
within the AMI, the Company shall have the first and prior right to acquire the
Subsequently Acquired Interest upon the terms set forth below:
(a) Within 15 days after acquiring the Subsequently Acquired Interest, the
Acquiring Party shall notify the Company in writing of the acquisition of a
Subsequently Acquired Interest. Such notice shall set forth (i) a description of
the Subsequently Acquired Interest, (ii) the total cost of the Subsequently
Acquired Interest, including all land and legal costs associated with the
acquisition thereof and (iii) any other pertinent terms of such acquisition,
including copies of applicable leases, assignments, bank draft or other evidence
of payment for such Subsequently Acquired Interest.
(b) The Company shall have 15 days from the receipt of the notice described
in subsection (a) above to elect, by written notice to the Acquiring Party to
acquire the Subsequently Acquired Interest. If the Acquiring Party has not
received an election in writing from the Company within such 15-day period, the
Company shall be deemed to have elected not to acquire such Subsequently
Acquired Interest.
40
(c) An election by the Company to acquire a Subsequently Acquired Interest
shall constitute a binding obligation of the Company to pay the total cost of
the Subsequently Acquired Interest within 15 days from the date the Company
gives notice to the Acquiring Party of its election to purchase the Subsequently
Acquired Interest. The notice set forth in subsection (a) above shall be deemed
an invoice for the Acquiring Party's total costs for acquisition of the
Subsequently Acquired Interest. Against receipt of such amount from the Company,
the Acquiring Party shall execute and deliver to the Company an assignment of
the Subsequently Acquired Interest (which assignment shall contain a special
warranty of title).
(d) Notwithstanding the foregoing or anything else herein to the contrary,
nothing herein shall preclude any Member or its Affiliates from managing,
operating or developing- its (or theirs) Existing Leasehold and HBP Acreage.
Each Member who either directly or indirectly (through an Affiliate) owns
Existing Leasehold and HBP Acreage covenants and agrees with the EnCap Related
Entities to furnish to them, within 20 days after the date hereof, a list or
schedule in form and content reasonably satisfactory to the EnCap Related
Parties detailing such Member's Existing Leasehold and HBP Acreage.
(e) Notwithstanding the foregoing or anything else herein to the contrary,
for purposes of this Section, an "Affiliate" of any of the EnCap Related
Entities shall include only (i) EnCap Investments L. L. C., (ii) any subsidiary
of EnCap Investments L. L. C., or (iii) any investment fund managed by EnCap
Investments L.L.C. or any subsidiary thereof.
Section 12.13. Resignation of Baytech and Parallel as Managers. By virtue
of their execution and delivery of this Agreement, each of Baytech and Parallel
shall be deemed to have resigned as the "Managers" of the Company and agree to
execute such other documents and instruments, if any, as shall be reasonably
requested by the Company to evidence the foregoing.
Section 12.14. Counterparts. This Agreement may be executed in any number
of counterparts, with each such counterpart constituting an original and all of
such counterparts constituting but one and the same instrument.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, the Members have executed this Agreement in
counterparts, as of the date first above written.
BAYTECH, INC.
By: /s/ Ben A. Strickling
----------------------------
Name: Ben A. Strickling
Title: President
IN WITNESS WHEREOF, the Members have executed this Agreement in
counterparts, as of the date first above written.
PARALLEL PETROLEUM CORPORATION
By: /s/ Larry C. Oldham
----------------------------
Name: Larry C. Oldham
Title: President
IN WITNESS WHEREOF, the Members have executed this Agreement in
counterparts, as of the date first above written.
TEJON EXPLORATION COMPANY
By: /s/ Joseph Edwin Canon
----------------------------
Name: Joseph Edwin Canon
Title: Vice President
TEJON INVESTMENT PARTNERS
By: TEJON EXPLORATION COMPANY
By: /s/ Joseph Edwin Canon
----------------------------
Name: Joseph Edwin Canon
Title: Vice President
DODGE JONES FOUNDATION
By: /s/ Joseph Edwin Canon
----------------------------
Name: Joseph Edwin Canon
Title: Executive Director
IN WITNESS WHEREOF, the Members have executed this Agreement in
counterparts, as of the date first above written.
MANSEFELDT INVESTMENT CORPORATION
By: /s/ Tucker Bridwell
----------------------------
Name: Tucker Bridwell
Title: President
TOPAZ EXPLORATION COMPANY
By: /s/ Tucker Bridwell
----------------------------
Name: Tucker Bridwell
Title: President
----------------------------
Dian Graves Owen
DIAN GRAVES OWEN FOUNDATION
By:
Name:
Title:
----------------------------
Harlan Stai
/s/ Tucker S. Bridwell
----------------------------
Tucker S. Bridwell
IN WITNESS WHEREOF, the Members have executed this Agreement in
counterparts, as of the date first above written.
MANSEFELDT INVESTMENT CORPORATION
By:
Name:
Title: President
TOPAZ EXPLORATION COMPANY
By:
Name:
Title: President
/s/ Dian Graves Owen
----------------------------
Dian Graves Owen
DIAN GRAVES OWEN FOUNDATION
By: /s/ Dian Graves Owen
----------------------------
Name: Dian Graves Owen
Title: Chair
/s/ Harlan Stai
----------------------------
Harlan Stai
----------------------------
Tucker S. Bridwell
IN WITNESS WHEREOF, the Members have executed this Agreement in
counterparts, as of the date first above written.
ENCAP ENERGY CAPITAL FUND III, L.P.
By: ENCAP INVESTMENTS L.L.C., General Partner
By: /s/ David B. Miller
----------------------------
Name: David B. Miller
Title: Managing Director
ENCAP ENERGY ACQUISITION III-B, INC.
By: /s/ David B. Miller
----------------------------
Name: David B. Miller
Title: Vice President
ENERGY CAPITAL INVESTMENT COMPANY PLC
By:
Name: Gary R. Petersen
Title: Director
BOCP ENERGY PARTNERS, L.P.
By: ENCAP INVESTMENTS, L.L.C., Manager
By: /s/ David B. Miller
----------------------------
Name: David B. Miller
Title: Managing Director
IN WITNESS WHEREOF, the Members have executed this Agreement in
counterparts, as of the date first above written.
ENCAP ENERGY CAPITAL FUND III, L.P.
By: ENCAP INVESTMENTS L.L.C., General Partner
By: /s/ David B. Miller
----------------------------
Name: David B. Miller
Title: Managing Director
ENCAP ENERGY ACQUISITION III-B, INC.
By: /s/ David B. Miller
----------------------------
Name: David B. Miller
Title: Vice President
ENERGY CAPITAL INVESTMENT COMPANY PLC
By: /s/ Gary R. Petersen
----------------------------
Name: Gary R. Petersen
Title: Director
BOCP ENERGY PARTNERS, L.P.
By: ENCAP INVESTMENTS, L.L.C., Manager
By: /s/ David B. Miller
----------------------------
Name: David B. Miller
Title: Managing Director
EXHIBIT 3.1
MEMBERS ADDRESS FOR PREFERRED COMMON
NOTICE PURPOSES UNITS UNITS
- -------------------- ----------------- --------- --------
Baytech, Inc. Baytech, Inc. -0- 350,000
110 W. Louisiana Ave., Suite 200
Midland, Texas 79702
Attention: Ben A. Strickling III
Fax No.: 915-686-9921
Parallel Petroleum Corporation Parallel Petroleum Corporation -0- 350,000
One Marienfeld Place, Suite 465
110 N. Marienfeld
Midland, Texas 79701
Attention: Larry C. Oldham
Fax No.: 915-684-3905
Tejon Exploration Company c/o Tejon Exploration Company 100,000 9,608.25
400 Pine Street, Suite 900
Abilene, Texas 79601
Attention: Joseph E. Canon
Fax No.: 915-673-2028
Tejon Investment Partners c/o Tejon Exploration Company -0- 150,000
400 Pine Street, Suite 900
Abilene, Texas 79601
Attention: Joseph E. Canon
Fax No.: 915-673-2028
Dodge Jones Foundation c/o Tejon Exploration Company 100,000 9,608.25
400 Pine Street, Suite 900
Abilene, Texas 79601
Attention: Joseph E. Canon
Fax No.: 915-673-2028
Mansefeldt Investment c/o Mansefeldt Investment -0- 35,000
Corporation Corporation
400 Pine Street, Suite 900
Abilene, Texas 79601
Attention: Tucker S. Bridwell
Fax No.: 915-675-5017
Topaz Exploration Company c/o Mansefeldt Investment -0- 2,500
Corporation
400 Pine Street, Suite 900
Abilene, Texas 79601
Attention: Tucker S. Bridwell
Fax No.: 915-675-5017
Tucker S. Bridwell c/o Mansefeldt Investment 20,000 14,421.65
Corporation
400 Pine Street, Suite 900
Abilene, Texas 79601
Attention: Tucker S. Bridwell
Fax No.: 915-675-5017
Dian Graves Owen c/o Mansefeldt Investment 70,000 106,725.775
Corporation
400 Pine Street, Suite 900
Abilene, Texas 79601
Attention: Tucker S. Bridwell
Fax No.: 915-675-5017
Dian Graves Owen Foundation c/o Mansefeldt Investment 100,000 9,608.25
Corporation
400 Pine Street, Suite 900
Abilene, Texas 79601
Attention: Tucker S. Bridwell
Fax No.: 915-675-5017
Harlan Stai c/o Mansefeldt Investment 10,000 960.825
Corporation
400 Pine Street, Suite 900
Abilene, Texas 79601
Attention: Tucker S. Bridwell
Fax No.: 915-675-5017
EnCap Energy Capital Fund c/o EnCap Investments L.L.C. 451,028 86,673
III, L.P. 3811 Turtle Creek Blvd., Suite 1080
Dallas, Texas 75219
Attention: David B. Dunton
Fax No.: 214-599-0200
EnCap Energy Acquisition c/o EnCap Investments L.L.C. 341,110 65,550
III-B, Inc. 3811 Turtle Creek Blvd., Suite 1080
Dallas, Texas 75219
Attention: David B. Dunton
Fax No.: 214-599-0200
Energy Capital Investment c/o EnCap Investments L.L.C. 47,500 9,128
Company PLC 3811 Turtle Creek Blvd., Suite 1080
Dallas, Texas 75219
Attention: David B. Dunton
Fax No.: 214-599-0200
BOCP Energy Partners, L.P. c/o EnCap Investments L.L.C. 110,362 21,208
3811 Turtle Creek Blvd., Suite 1080
Dallas, Texas 75219
Attention: David B. Dunton
Fax No.: 214-599-0200
EXHIBIT 3.2(f)-l
THE UNITS REPRESENTED BY THIS CERTIFICATE ARE SUBJECT
TO CERTAIN VOTING AGREEMENTS, RESTRICTIONS ON
TRANSFER AND OTHER TERMS AND CONDITIONS SET FORTH IN
THAT CERTAIN AMENDED AND RESTATED LIMITED LIABILITY
COMPANY AGREEMENT OF THE COMPANY, DATED AS OF MAY
31, 2000 (AS SUCH AGREEMENT MAY BE AMENDED FROM TIME
TO TIME), A COPY OF WHICH MAY BE OBTAINED FROM THE
COMPANY AT ITS PRINCIPAL EXECUTIVE OFFICES.
Certificate of Common Units in First Permian, L.L.C.
Certificate No._______ _______Units
First Permian, L. L. C., a Delaware limited liability company (the
"Company"), hereby certifies that (the "Holder") is the registered owner of
Common Units in the Company (the "Common Units"). The rights, preferences and
limitations of the Common Units are set forth in that certain Amended and
Restated Limited Liability Company Agreement of the Company dated as of May 31,
2000, as amended, supplemented or restated from time to time (the "LLC
Agreement"), a copy of which is on file at the principal office of the Company.
This Certificate and Common Units evidenced hereby are not negotiable or
transferable except as provided in the LLC Agreement.
Dated:__________________ First Permian, L.L.C.
By:____________________________
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND MAY NOT BE OFFERED OR SOLD, UNLESS IT HAS
BEEN REGISTERED UNDER THE SECURITIES ACT OR UNLESS AN
EXEMPTION FROM REGISTRATION IS AVAILABLE (AND, IN SUCH
CASE, AN OPINION OF COUNSEL REASONABLY SATISFACTORY
TO THE COMPANY SHALL HAVE BEEN DELIVERED TO THE
COMPANY TO THE EFFECT THAT SUCH OFFER OR SALE IS NOT
REQUIRED TO BE REGISTERED UNDER THE SECURITIES ACT).
THIS SECURITY IS SUBJECT TO CERTAIN VOTING AGREEMENTS,
RESTRICTIONS ON TRANSFER AND OTHER TERMS AND
CONDITIONS SET FORTH IN THAT CERTAIN AMENDED AND
RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF THE
COMPANY, DATED AS OF MAY 31, 2000 (AS SUCH AGREEMENT
MAY BE AMENDED FROM TIME TO TIME), A COPY OF WHICH
MAY BE OBTAINED FROM THE COMPANY AT ITS PRINCIPAL
EXECUTIVE OFFICES.
EXHIBIT 3.2(f)-2
THE UNITS REPRESENTED BY THIS CERTIFICATE ARE SUBJECT
TO CERTAIN VOTING AGREEMENTS, RESTRICTIONS ON
TRANSFER AND OTHER TERMS AND CONDITIONS SET FORTH IN
THAT CERTAIN AMENDED AND RESTATED LIMITED LIABILITY
COMPANY AGREEMENT OF THE COMPANY, DATED AS OF MAY
31, 2000 (AS SUCH AGREEMENT MAY BE AMENDED FROM TIME
TO TIME), A COPY OF WHICH MAY BE OBTAINED FROM THE
COMPANY AT ITS PRINCIPAL EXECUTIVE OFFICES.
Certificate of Preferred Units in First Permian, L.L.C.
Certificate No._____ ______Preferred Units
First Permian, L. L. C., a Delaware limited liability company (the
"Company"), hereby certifies that (the "Holder") is the registered owner of
Preferred Units in the Company (the "Preferred Units"). The rights, preferences
and limitations of the Preferred Units are set forth in that certain Limited
Liability Company Agreement of the Company dated as of May 31, 2000, as amended,
supplemented or restated from time to time (the "LLC Agreement"), a copy of
which is on file at the principal office of the Company.
This Certificate and Preferred Units evidenced hereby are not negotiable or
transferable except as provided in the LLC Agreement.
Dated:__________________ First Permian, L.L.C.
By:_______________________
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND MAY NOT BE OFFERED OR SOLD, UNLESS IT HAS
BEEN REGISTERED UNDER THE SECURITIES ACT OR UNLESS AN
EXEMPTION FROM REGISTRATION IS AVAILABLE (AND, IN SUCH
CASE, AN OPINION OF COUNSEL REASONABLY SATISFACTORY
TO THE COMPANY SHALL HAVE BEEN DELIVERED TO THE
COMPANY TO THE EFFECT THAT SUCH OFFER OR SALE IS NOT
REQUIRED TO BE REGISTERED UNDER THE SECURITIES ACT).
THIS SECURITY IS SUBJECT TO CERTAIN VOTING AGREEMENTS,
RESTRICTIONS ON TRANSFER AND OTHER TERMS AND
CONDITIONS SET FORTH IN THAT CERTAIN LIMITED LIABILITY
COMPANY AGREEMENT OF THE COMPANY, DATED AS OF MAY
31,2000 (AS SUCH AGREEMENT MAY BE AMENDED FROM TIME
TO TIME), A COPY OF WHICH MAY BE OBTAINED FROM THE
COMPANY AT ITS PRINCIPAL EXECUTIVE OFFICES.
EXHIBIT 4.2
Member Capital Contribution
Tejon Exploration Company $1,000,000.00
Dodge Jones Foundation $1,000,000.00
Dian Graves Owen $ 700,000.00
Dian Graves Owen Foundation $1,000,000.00
Harlan Stai $ 100,000.00
Tucker S. Bridwell $ 200,000.00
EnCap Energy Capital Fund III, L.P. $7,596,263.00
EnCap Energy Acquisition III-B, Inc. $5,745,010.00
Energy Capital Investment Company PLC $ 800,000.00
BOCP Energy Partners, L.P. $1,858,728.00
EXHIBIT 6.2(a)
Nominating Member(s) Designee
Baytech Ben A. Strickling III
Parallel Larry C. Oldham
Tejon Related Parties Joseph E. Canon
Mansefeldt Related Parties Tucker S. Bridwell
EnCap Related Parties David B. Miller
EXHIBIT 6.8(B)-1
ASSIGNMENT OF NOTE
The undersigned in consideration of the cash payment of One Million Five
Hundred Fifty Thousand and No/100 Dollars ($1,550,000.00) (principal) along with
Six Thousand Three Hundred Fifty and 70/100 Dollars ($6,350.70) (accrued
interest), does hereby assign all of its right, title and interest in and to
this Note, including the security and rights described hereunder, to First
Permian, L.L.C., without recourse.
TEJON EXPLORATION COMPANY
By: ____________________
Joseph Edwin Canon,
Vice President
EXHIBIT 6.8(B)-2
ASSIGNMENT OF NOTE
The undersigned in consideration of the cash payment of One Million Five
Hundred Fifty Thousand and No/100 Dollars ($1,550,000.00) (principal) along with
Six Thousand Three Hundred Fifty and 70/100 Dollars ($6,350.70) (accrued
interest), does hereby assign all of its right, title and interest in and to
this Note, including the security and rights described hereunder, to First
Permian, L.L.C., without recourse.
MANSEFELDT INVESTMENT
CORPORATION
By: ____________________
Tucker S. Bridwell,
President
1
EXHIBIT 6.8(c)
PAYMENT AGREEMENT
This Payment Agreement (this "Agreement"), dated May 31, 2000 is among BANK
ONE, TEXAS, N.A. ("Bank One"), BANC ONE CAPITAL MARKETS, INC. (Arranger"),
together with Bank One, collectively, "Payees," and individually, each a "Payee"
and FIRST PERMIAN, L.L.C. ("Borrower,).
RECITALS
Payees are entitled to payment of an "Arrangement Fee" (hereinafter so
called) in accordance with the terms of that certain Restated Credit Agreement
dated August 16, 1999 (the "Credit Agreement"), and those certain letters dated
June 25, 1999, June 30, 1999 and July 26, 1999 (the "Letters") among Bank One,
Borrower and Arranger, copies of which Letters are attached hereto as Exhibit A,
reference to which is made for all purposes. The parties hereto have agreed that
the Arrangement Fee payable under the terms of the Credit Agreement and the
Letters shall be $1,250,000.00, which amount shall be due and payable on or
before June 1, 2000.
NOW, THEREFORE, in consideration of the foregoing, the 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 covenant and agree as follows:
Section 1. Payment of Arrangement Fee. Subject to the provisions of Section
2 of this Agreement, Borrower shall pay in full settlement of the Arrangement
Fee on or before June 1, 2000 (the "Closing Date"), the cash sum of
$1,250,000.00. Payees shall furnish wiring instructions to Borrower, and the
payment of the Arrangement Fee by Borrower in the manner directed by the Payees
shall be deemed the "Closing".
Section 2. Look Back. Borrower shall be obligated to pay additional
consideration to Payees if prior to December 31, 2000, Borrower consummates a
Look-Back Transaction, and the fair market value of the Units indicated by such
Look-Back Transaction exceeds $25.00 per unit (as such units exist on the date
hereof, and after giving effect to any splits or reclassification of Units after
the date hereof) then in each such case, Borrower shall promptly pay to Payees
an amount in cash equal to the difference between $1,250,000.00 (as adjusted to
reflect additional amounts paid as a result of any previous Look-Back
Transactions) and the value of 5% of the Units (on a fully diluted basis after
giving effect to the Look-Back Transactions and after giving effect to any other
splits or reclassification of Units) as indicated by such Look-Back Transaction.
The value of the Units as indicated in the Look-Back Transaction shall be
adjusted by assuming all Units were outstanding and that Borrower had additional
cash equal to the consideration paid in the transaction.
As used herein, the following terms have the following meanings.
2
"Look-Back Transaction" shall mean (it) consummation of a public offering
or disposition of Units, (b) a private sale, or series of private sales, of
Units constituting more than fifty percent (50%) of the Units then outstanding,
(c) the sales or disposition (or a series of related sales or dispositions) or
liquidation of all or substantially all of the assets of Borrower on a
consolidated basis, including any sale or disposition of the membership
interests or assets of the subsidiaries of Borrower, or (d) any merger,
consolidation, combination or similar transaction involving Borrower in which
the Units are changed or converted.
"Units" means, collectively, (a) Units of Borrower, and (b) any other class
of equity security issued by Borrower that is not limited to a fixed sum in
respect to the rights of the holders of such security to participate in the
distribution of assets upon any liquidation, dissolution or winding up of
Borrower.
Section 3. Not a Look-Back Transaction. The transactions contemplated in
that certain Consent Letter of even date, a true and correct copy of which is
attached hereto as Exhibit B, reference to which is made for all purposes, shall
not be considered a Look-Back Transaction.
Section 4. Further Assurances. At the Closing, and at all times thereafter,
Payees shall, as reasonably requested by Borrower, execute and deliver to
Borrower such other documents as shall be reasonably requested by Borrower to
comply with the purposes and intent of this Agreement.
Section 5. Representations and Warranties of Borrower. Borrower represents
and warrants to Payees that the following are true and correct as of this date
and will be true and correct through the Closing Date as if made on that date:
(a) Authorization and Validity. The execution, delivery and performance of
this Agreement and the other agreements contemplated hereby by Borrower, and the
consummation of the transactions contemplated hereby and thereby, have been
unanimously approved and duly authorized by Borrower. This Agreement and each
other agreement contemplated hereby have been or will be duly executed and
delivered by Borrower and constitute or win constitute as of the Closing legal,
valid and binding obligations of Borrower, enforceable against it in accordance
with their respective terms, except as may be limited by applicable bankruptcy,
insolvency or similar laws affecting creditors' rights generally or the
availability of equitable remedies.
(b) Survival of Representations. The above representations and warranties
shall survive the expiration or termination of this Agreement, the discharge of
all other obligations owed by the parties to each other and shall not be
affected by any investigation by or on behalf of Payees, or by any information
which Payees may have or obtain with respect thereto.
Section 6. Representations and Warranties of Payees. Payees represent and
warrant to Borrower that the following are true and correct as of this date and
will be true and correct through the Closing Date as if made on that date:
3
(a)Authorization and Validity. The execution, delivery and performance of
this Agreement and the other agreements contemplated hereby by Payees, and the
consummation of the transactions contemplated hereby and thereby, have been
unanimously approved and duly authorized by Payees. This Agreement and each
other agreement contemplated hereby have been or will be duly executed and
delivered by Payees and constitute or will constitute as of the Closing legal,
valid and binding obligations of Payees, enforceable against them in accordance
with their respective terms, except as may be limited by applicable bankruptcy,
insolvency or similar laws affecting creditors' rights generally or the
availability of equitable remedies.
(b) No Transfer. Payees have not elected to receive, nor transferred, sold,
assigned or redeemed the right to receive a grant of costless warrants under the
terms of the Letters, and have in fact elected to receive payment of the
Arrangement Fee in cash rather than the grant of costless warrants (the "Warrant
Option") as described in the Letters.[Specifically, reference is made to Section
1(b) of that certain Letter dated July 26, 1999, as descriptive of both the
Warrant Option and the Arrangement Fee].
(c) Survival of Representations. The above representations and warranties
shall survive the expiration or termination of this Agreement, the discharge of
all other obligations owed by the parties to each other and shall not be
affected by any investigation by or on behalf of Borrower, or by any information
which Borrower may have or obtain with respect thereto.
Section 7. Release of Claims. Payees release any claim they have to the
Warrant Option. Nothing contained herein shall release any other rights the
Payees have under the Loan Documents to which the Arrangement Fee relates.
Section 8. Notices. Any notice or communication pursuant hereto must be in
writing and delivered personally or sent by certified mail, postage prepaid and
with return receipt requested, to the address specified on the signature pages
of this Agreement. Notices delivered personally shall be deemed communicated as
of actual receipt; mailed notices shall be deemed communicated as of 10:00 a.m.
on the third business day after mailing. Any party may change its address for
notice by written notice given to the other parties.
Section 9. Costs, Expenses, and Legal Fees. Each party hereto agrees to pay
the costs and expenses, including reasonable attorneys' fees, incurred by the
other party in successfully (i) enforcing any of the terms of this Agreement or
(H) providing that the other party breached any of the terms of this Agreement.
Section 10. Waiver. The waiver by any party of any breach or provision of
this Agreement must be in writing and shall not constitute a continuing waiver
or a waiver of any subsequent breach of the same or a different provision
hereof.
Section 11. Severability. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under present or future laws effective during
the term hereof, such provision shall be fully severable and this Agreement
shall be construed and enforced as if such illegal, invalid, or unenforceable
provision never comprised a part of this Agreement; and the remaining provisions
of this Agreement shall remain in full force and effect and shall not be
affected by the
4
illegal, invalid, or enforceable provision or by its severance here from.
Furthermore, in lieu of such illegal, invalid, or unenforceable provision, there
shall be added automatically as part of this Agreement a provision as similar in
its terms to such illegal, invalid, or unenforceable provision as may be
possible and be legal, valid, and enforceable.
Section 12. Confidentiality. Nothing herein shall restrict Bank One and the
Arranger (or require the consent of Borrower) from dividing the Arrangement Fee
between each other in any manner. Borrower agrees not to disclose any or all of
the terms of this Agreement to any person other than employees, attorneys or
accounts of Borrower to whom it is necessary to disclose the information (and
whom shall be made aware of this promise not to disclose) or as may be required
by law or any court or regulatory agency having jurisdiction over Borrower.
Section 13. Miscellaneous. This Agreement may be amended only by an
instrument in writing executed by the person against whom enforcement of the
amendment is sought. There are no oral agreements among the parties to this
Agreement. This Agreement and the rights and obligations of the parties hereto
shall be governed by, construed, and enforced in accordance with internal laws
(and not the conflicts laws) of Texas. This Agreement is performable in Harris
County, Texas. The captions in this Agreement are for convenience of reference
only. This Agreement shall be binding on the parties hereto and their heirs,
estates, personal representatives, successors, and assigns. This Agreement shall
not be construed against the party responsible for, or primarily responsible
for, preparing this Agreement. Time is of the essence with respect to the
obligations in this Agreement. This Agreement may be signed by facsimile and in
counterparts.
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound, have
executed this Agreement as of the date first above written.
Address: BANK ONE, TEXAS, N.A.
910 Travis Street, Sixth Floor
Houston, Texas 77002 By:_________________________
Attn: Richard G. Sylvan Richard G. Sylvan, First Vice
President
Address: BANC ONE CAPITAL MARKETS, INC.
1717 Main Street, 4th Floor
Dallas, Texas 75201
Attn: Jorge Gutierrez By:_________________________
Jorge Gutierrez, Director
Address: FIRST PERMIAN, L.L.C.
P.0. Box 2455
Midland, Texas 79702 By:__________________________
Tucker S. Bridwell, Its Duly
Authorized Representative and
Agent
Exhibit 10.22
SECOND
RESTATED CREDIT AGREEMENT
AMONG
FIRST PERMIAN, L.L.C., AS BORROWER,
AND
BANK ONE, TEXAS, N.A.
AND THE INSTITUTIONS NAMED HEREIN
AS BANKS
AND
BANK ONE, TEXAS, N.A.,
AS ADMINISTRATIVE AGENT
AND
BANC ONE CAPITAL MARKETS, INC.,
AS SOLE LEAD ARRANGER AND BOOK MANAGER
OCTOBER 25, 2000
i
TABLE OF CONTENTS
Page No.
1. Definitions . . . . . . . . . . . . . . . . . . . . . . . 1
2. Commitments of the Bank . . . . . . . . . . . . . . . . . 13
(a) Terms of Revolving Commitment. . . . . . . . . . . . 13
(b) Procedure for Borrowing . . . . . . . . . . . . . . 13
(c) Letters of Credit. . . . . . . . . . . . . . . . . . 14
(d) Procedure for Obtaining Letters of Credit. . . . . . 15
(e) Type and Number of Advances. . . . . . . . . . . . . 16
(f) Voluntary Reduction of Revolving Commitment. . . . . 16
(g) Monthly Commitment Reductions. . . . . . . . . . . . 16
(h) Several Obligations. . . . . . . . . . . . . . . . . 16
3. Notes Evidencing Loans. . . . . . . . . . . . . . . . . . 16
(a) Form of Revolving Notes. . . . . . . . . . . . . . . 16
(b) Issuance of Additional Notes . . . . . . . . . . . . 17
(c) Interest Rate. . . . . . . . . . . . . . . . . . . . 17
(d) Payment of Interest. . . . . . . . . . . . . . . . . 17
(e) Payment of Principal . . . . . . . . . . . . . . . . 17
(f) Payment to Banks . . . . . . . . . . . . . . . . . . 17
(g) Sharing of Payments, Etc.. . . . . . . . . . . . . . 18
(h) Non-Receipt of Funds by the Agent. . . . . . . . . . 18
4. Interest Rates. . . . . . . . . . . . . . . . . . . . . . 18
(a) Options. . . . . . . . . . . . . . . . . . . . . . . 18
(b) Interest Rate Determination. . . . . . . . . . . . . 19
(c) Conversion Option. . . . . . . . . . . . . . . . . . 19
(d) Recoupment . . . . . . . . . . . . . . . . . . . . . 20
(e) Interest Rates Applicable After Default. . . . . . . 20
5. Special Provisions Relating to Loans. . . . . . . . . . . 20
(a) Unavailability of Funds or Inadequacy of Pricing . . 20
(b) Change in Laws . . . . . . . . . . . . . . . . . . . 21
(c) Increased Cost or Reduced Return . . . . . . . . . . 21
(d) Discretion of Bank as to Manner of Funding . . . . . 23
(e) Breakage Fees. . . . . . . . . . . . . . . . . . . . 23
6. Collateral Security . . . . . . . . . . . . . . . . . . . 24
ii
7. Borrowing Base. . . . . . . . . . . . . . . . . . . . . . . 24
(a) Initial Borrowing Base . . . . . . . . . . . . . . . 24
(b) Subsequent Determinations of Borrowing Base. . . . . 25
8. Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . 26
(a) Unused Commitment Fee. . . . . . . . . . . . . . . . 26
(b) Agency Fees . . . . . . . . . . . . . . . . . . 26
(c) The Letter of Credit Fee . . . . . . . . . . . . 27
9. Prepayments . . . . . . . . . . . . . . . . . . . . . . 27
(a) Voluntary Prepayments . . . . . . . . . . . . . 27
(b) Mandatory Prepayment For Borrowing Base Deficiency. 27
10. Representations and Warranties. . . . . . . . . . . . . 27
(a) Creation and Existence. . . . . . . . . . . . . . . . . 27
(b) Power and Authority . . . . . . . . . . . . . . . . . . 27
(c) Binding Obligations . . . . . . . . . . . . . . . . . . 28
(d) No Legal Bar or Resultant Lien. . . . . . . . . . . . . 28
(e) No Consent. . . . . . . . . . . . . . . . . . . . . . . 28
(f) Financial Condition . . . . . . . . . . . . . . . . . . 28
(g) Liabilities . . . . . . . . . . . . . . . . . . . . 28
(h) Litigation. . . . . . . . . . . . . . . . . . . . . . . 28
(i) Taxes; Governmental Charges . . . . . . . . . . . . . . 29
(j) Titles, Etc . . . . . . . . . . . . . . . . . . . . . . 29
(k) Defaults. . . . . . . . . . . . . . . . . . . . . . . . 29
(1) Casualties; Taking of Properties. . . . . . . . . . . . 29
(m) Use of Proceeds; Margin Stock . . . . . . . . . . . . . 29
(n) Location of Business and Offices. . . . . . . . . . . . 30
(o) Compliance with the Law . . . . . . . . . . . . . . . . 30
(p) No Material Misstatements . . . . . . . . . . . . . . . 30
(q) Not A Utility . . . . . . . . . . . . . . . . . . . . . 30
(r) ERISA . . . . . . . . . . . . . . . . . . . . . . . . . 30
(s) Public Utility Holding Company Act. . . . . . . . . . . 30
(t) Subsidiaries. . . . . . . . . . . . . . . . . . . . . . 31
(u) Environmental Matters . . . . . . . . . . . . . . . . . 31
(v) Liens . . . . . . . . . . . . . . . . . . . . . . . . . 31
11. Conditions of Lending . . . . . . . . . . . . . . . . . . 31
12. Affirmative Covenants . . . . . . . . . . . . . . . . . . 33
iii
(a) Financial Statements and Reports . . . . . . . . . . . 33
(b) Certificates of Compliance . . . . . . . . . . . . . . 34
(c) Accountants' Certificate . . . . . . . . . . . . . . . 34
(d) Taxes and Other Liens . . . . . . . . . . . . . . . . . 35
(e) Compliance with Laws . . . . . . . . . . . . . . . . . 35
(f) Further Assurances . . . . . . . . . . . . . . . . . . 35
(g) Performance of Obligations . . . . . . . . . . . . . . 35
(h) Insurance . . . . . . . . . . . . . . . . . . . . . . . 35
(i) Accounts and Records . . . . . . . . . . . . . . . . . 36
(j) Right of Inspection . . . . . . . . . . . . . . . . . . 36
(k) Notice of Certain Events . . . . . . . . . . . . . . . 37
(1) ERISA Information and Complianc . . . . . . . . . . . . 37
(m) Environmental Reports and Notices . . . . . . . . . . . 37
(n) Compliance and Maintenance. . . . . . . . . . . . . . . 38
(o) Operation of Properties . . . . . . . . . . . . . . . . 38
(p) Compliance with Leases and Other Instruments. . . . . . 38
(q) Certain Additional Assurances Regarding
Maintenance and Operations of Properties . . . . . . . 39
(r) Sale of Certain Assets/Prepayment of Proceeds . . . . . 39
(s) Title Matters . . . . . . . . . . . . . . . . . . . . . 39
(t) Curative Matters . . . . . . . . . . . . . . . . . . . 40
(u) Change of Principal Place of Business . . . . . . . . . 40
13. Negative Covenants . . . . . . . . . . . . . . . . . . 40
(a) Negative Pledge . . . . . . . . . . . . . . . . . . . 40
(b) Current Ratio . . . . . . . . . . . . . . . . . . . . 40
(e) Minimum Interest Coverage Ratio . . . . . . . . . . . 41
(d) General and Administrative Expenses . . . . . . . . . 41
(e) Consolidations and Mergers . . . . . . . . . . . . . 41
(f) Debts, Guaranties and Other Obligations . . . . . . . 41
(g) Distributions . . . . . . . . . . . . . . . . . . . . 42
(h) Loans and Advances . . . . . . . . . . . . . . . . . 42
(i) Sale or Discount of Receivables . . . . . . . . . . . 42
(j) Nature of Business . . . . . . . . . . . . . . . . . 42
(k) Transactions with Affiliates . . . . . . . . . . . . 42
(1) Hedging Transactions . . . . . . . . . . . . . . . . 42
(m) Investments . . . . . . . . . . . . . . . . . . . . . 43
(n) Amendment to Certificate of Formation or Limited
Liability Company Agreement . . . . . . . . . . . . . 43
(o) Pre-Payment of Other Indebtedness . . . . . . . . . . 43
iv
14. Events of Default . . . . . . . . . . . . . . . . . . . 43
15. The Agent and the Banks . . . . . . . . . . . . . . . . 45
(a) Appointment and Authorization. . . . . . . . . . . . 45
(b) Note Holders . . . . . . . . . . . . . . . . . . . . 46
(c) Consultation with Counsel. . . . . . . . . . . . . . 46
(d) Documents. . . . . . . . . . . . . . . . . . . . . . 47
(e) Resignation or Removal of Agent. . . . . . . . . . . 47
(f) Responsibility of Agent. . . . . . . . . . . . . . . 47
(g) Independent Investigation. . . . . . . . . . . . . . 49
(h) Indemnification. . . . . . . . . . . . . . . . . . . 49
(i) Benefit of Section 15. . . . . . . . . . . . . . . . 49
(j) Pro Rata Treatment . . . . . . . . . . . . . . . . . 49
(k) Assumption as to Payments. . . . . . . . . . . . . . 50
(1) Other Financings . . . . . . . . . . . . . . . . . . 50
(m) Interests of Banks . . . . . . . . . . . . . . . . . 50
(n) Investments. . . . . . . . . . . . . . . . . . . . . 51
16. Exercise of Rights . . . . . . . . . . . . . . . . . . 51
17. Notices . . . . . . . . . . . . . . . . . . . . . . . 51
18. Expenses . . . . . . . . . . . . . . . . . . . . . . . 52
19. Indemnity . . . . . . . . . . . . . . . . . . . . . . 52
20. Governing Law . . . . . . . . . . . . . . . . . . . . 53
21. Invalid Provisions . . . . . . . . . . . . . . . . . . 53
22. Maximum Interest Rate . . . . . . . . . . . . . . . . 53
23. Amendments . . . . . . . . . . . . . . . . . . . . . . 54
24. Multiple Counterparts . . . . . . . . . . . . . . . . 54
25. Conflict . . . . . . . . . . . . . . . . . . . . . . . 54
26. Survival . . . . . . . . . . . . . . . . . . . . . . . 54
27. Parties Bound . . . . . . . . . . . . . . . . . . . . 54
v
28. Assignments and Participation . . . . . . . . . . . . 55
29. Choice of Forum: Consent to Service of Process
and Jurisdiction . . . . . . . . . . . . . . . . . . . 56
30. Waiver of Jury Trial . . . . . . . . . . . . . . . . . 57
31. Other Agreements . . . . . . . . . . . . . . . . . . . 57
32. Financial Terms . . . . . . . . . . . . . . . . . . . 57
vi
Exhibits
Exhibit "A" - Notice of Borrowing
Exhibit "B" - Revolving Note
Exhibit "C" - Certificate of Compliance
Exhibit "D" - Form of Assignment and Acceptance Agreement
Schedules
Schedule 1 - Liens
Schedule 2 - Financial Condition
Schedule 3 - Liabilities
Schedule 4 - Litigation
Schedule 5 - Borrower's Membership Interests
Schedule6 - Environmental Matters
Schedule 7 - Title Matters
Schedule 8 - Curative Matters
1
SECOND RESTATED CREDIT AGREEMENT
THIS SECOND RESTATED CREDIT AGREEMENT (hereinafter referred to as the
"Agreement") executed as of the 25th day of October, 2000, by and between FIRST
PERMIAN, L.L.C., a Delaware limited liability company (hereinafter referred to
as "Borrower") and BANK ONE, TEXAS, N.A., a national banking association ("Bank
One"), and each of the financial institutions which is a party. hereto (as
evidenced by the signature pages to this Agreement) or which may from time to
time become a party hereto pursuant to the provisions of Section 28 hereof or
any successor or assignee thereof (hereinafter collectively referred to as
"Banks", and individually, "Bank") and Bank One, as Administrative Agent (the
"Agent").
WITNESSETH:
WHEREAS, Borrower, Agent, the Banks, Parallel Petroleum Corporation and
Baytech, Inc. entered into a Credit Agreement dated as of June 30, 1999 pursuant
to which the Banks agreed to make available loan facilities in aggregate amounts
of up to $110,000,000 (the "Original Credit Agreement"); and
WHEREAS, Borrower, Agent, the Banks, Parallel Petroleum Corporation, and
Baytech, Inc. entered into a Restated Credit Agreement dated as of August 16,
1999 pursuant to which the Banks agreed to make available loan facilities in
aggregate amounts of up to $110,000,000 (the "Restated Credit Agreement"); and
WHEREAS, as of May 17, 2000, the Borrower, the Agent, the Banks, Parallel
Petroleum Corporation and Baytech, Inc. entered into a First Amendment to
Restated Credit Agreement to make certain amendments to the Restated Credit
Agreement; and
WHEREAS, the Borrower, the Agent and the Banks have agreed to restate the
Restated Credit Agreement to make certain additional changes thereto, including,
but not limited to, releasing the guaranties of Parallel Petroleum Corporation
and Baytech, Inc.;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereby agree as follows:
1. Definitions. When used herein the terms "Agent", "Agreement", "Bank ",
"Banks", "Bank One", "Borrower", "Original Credit Agreement" and "Restated
Credit Agreement" shall have the meanings indicated above. When used herein the
following terms shall have the following meanings:
Advance or Advances means a loan or loans hereunder.
Affiliate means any Person which, directly or indirectly, controls, is
controlled by or is under common control with the relevant Person. For the
purposes of this definition, "control" (including, with correlative
meanings, the terms "controlled by" and "under common control with"), as
used with respect to any Person, shall mean a member of the
2
board of directors, a partner or an officer of such Person, or any other
Person with possession, directly or indirectly, of the power to direct or
cause the direction of the management and policies of such Person, through
the ownership (of record, as trustee, or by proxy) of voting shares,
partnership interests or voting rights, through a management contract or
otherwise. Any Person owning or controlling directly or indirectly ten
percent or more of the voting shares, partnership interests or voting
rights, or other equity interest of another Person shall be deemed to be an
Affiliate of such Person.
Alternate Base Rate means, as of any date, a rate of interest per
annum equal to the higher of (i) the Base Rate for such day and (ii) the
sum of the Federal Funds Effective Rate for such date plus one- half of one
percent (.50%) per annum.
Assignment and Acceptance means a document substantially in the form
of Exhibit "E" hereto.
Base Rate means, as of any date, the fluctuating rate of interest per
annum established from time to time by Agent as its Base Rate (which rate
of interest may not be the lowest, best or most favorable rate of interest
which Agent may charge on loans to its customers). Each change in the Base
Rate shall become effective without prior notice to Borrower automatically
as of the opening of business on the date of such change in the Base Rate.
Base Rate Interest Period means, with respect to any Base Rate Loan,
the period ending on the last day of each month, provided, however, that
(i) if any Base Rate Interest Period would end on a day which is not a
Business Day, such Interest Period shall be extended to the next succeeding
Business Day, and (ii) if any Base Rate Interest Period would otherwise end
after the Revolving Maturity Date such Interest Period shall end on the
Revolving Maturity Date.
Base Rate Loans mean any loan during any period which bears interest
based upon the Alternate Base Rate or which would bear interest based upon
the Alternate Base Rate if the Maximum Rate ceiling was not in effect at
that particular time.
Base Rate Margin means:
(i) five-eighths of one percent (.625%) per annum whenever the
Borrowing Base Usage is equal to or greater than ninety percent (90%);
or
(ii) one-half of one percent (.50%) per annum whenever the
Borrowing Base Usage is equal to or greater than sixty percent (60%),
but less than ninety percent (90%); or
3
(iii) one quarter of one percent (.25%) per annum whenever the
Borrowing Base Usage is equal to or greater than thirty-five percent
(35%), but less than sixty percent (60%); or
(iii) zero percent (O%) per annum whenever the Borrowing Base
Usage is less than thirty-five percent (35%).
Borrowing Base shall mean the value assigned by the Banks from time to
time to the Oil and Gas Properties pursuant to Section 7 hereof. Until the
next determination of the Borrowing Base pursuant to Section 7(b) hereof,
the Borrowing Base shall be $68,000,000.
Borrowing Base Usage means, as of any date, all amounts outstanding on
the Revolving Loan plus all outstanding Letters of Credit, divided by the
Borrowing Base.
Borrowing Date means the date elected by Borrower pursuant to Section
2(b) hereof for an Advance on the Revolving Loan.
Business Day means the normal banking hours during any day (other than
Saturdays or Sundays) that banks are legally open for business in Midland,
Texas.
Cash Equivalents shall mean (i) securities issued or directly and
fully guaranteed or insured by the United States of America or any agency
or instrumentality thereof (provided that the full faith and credit of the
United States of America is pledged in support thereof) having maturities
of not more than six months from the date of acquisition, (ii) U.S. dollar
denominated time deposits, certificates of deposit and bankers' acceptances
of (x) any Bank, (y) any domestic commercial bank of recognized standing
having capital and surplus in excess of $100,000,000 or (z) any Bank (or
the parent company of such bank) whose short-term commercial paper rating
from Standard & Poor's Corporation ("S&P") is at least A-1 or the
equivalent thereof or from Moody's Investors Service, Inc. ("Moody's") is
at least P-1 or the equivalent thereof (any such bank, an "Approved Bank"),
in each case with maturities of not more than six months from the date of
acquisition, (iii) repurchase obligations with a term of not more than
seven days for underlying securities of the types described in clause (i)
above entered into with any bank meeting the qualifications specified in
clause (ii) above, (iv) commercial paper issued by any Bank or Approved
Bank or by the parent company of any Bank or Approved Bank and commercial
paper issued by, or guaranteed by, any industrial or financial company with
a short-term commercial paper rating of at least A-1 or the equivalent
thereof by S&P or at least P-1 or the equivalent thereof by Moody's (any
such company, an "Approved Company"), or guaranteed by any industrial
company with a long term unsecured debt rating of at least A or A2 or the
equivalent of each thereof, from S&P or Moody's, as the case may be, and in
each case maturing within six months after the date of acquisition and (v)
investments in money market funds substantially
4
all of whose assets are comprised of securities of the type described in
clauses (i) through (iv) above.
Change of Control shall occur if any Person (or syndicate or group of
Persons which is deemed a Person for the purposes of Sections 13(d) or
14(d)(ii) of the Securities Act of 1934, as amended) shall acquire,
directly or indirectly an amount of issued and outstanding voting stock of
Borrower (including the acquisition of newly-issued stock) sufficient to
change the control of Borrower by causing the election or change of a
majority of the directors of Borrower.
Change of Management means a Change of Management shall occur if (i)
Tucker Bridwell ever ceases to act as Chairman or (ii) Don Tiffin ever
ceases to act as General Manager of Borrower, and a replacement for such
officer, acceptable to Agent, is not appointed within thirty (30) days
thereafter.
Commitment means the Revolving Commitment.
Current Assets means the total of current assets determined in
accordance with GAAP minus receivables due from Affiliates, plus, as of any
date, the current unused availability on the Revolving Commitment.
Current Liabilities means the total of current obligations as
determined in accordance with GAAP minus (i) current maturities of
long-term debt and (ii) payables due to Affiliates.
Default means all the events specified in Section 14 hereof,
regardless of whether there shall have occurred any passage of time or
giving of notice, or both, that would be necessary in order to constitute
such event as an Event of Default.
Defaulting Bank is used herein as defined in Section 3(f) hereof.
EBITDA means earnings for any period before provision for interest
expense, income taxes, depreciation, depletion, amortization, gains and
losses on asset sales and other non-cash charges for such period, as
determined in accordance with GAAP.
Effective Date means the date of this Agreement.
Eligible Assignee means any of (i) a Bank or other lender or any
Affiliate of a Bank or other lender; (ii) a commercial bank organized under
the laws of the United States, or any state thereof, and having a combined
capital and surplus of at least $100,000,000; (iii) a commercial bank
organized under the laws of any other country which is a member of the
Organization for Economic Cooperation and Development, or a political
subdivision of any
5
such country, and having a combined capital and surplus of at least
$100,000,000.00, provided that such bank is acting through a branch or
agency located in the United States; (iv) a Person that is primarily
engaged in the business of commercial lending and that (A) is a subsidiary
of a Bank, (B) a subsidiary of a Person of which a Bank is a subsidiary, or
(C) a Person of which a Bank is a subsidiary; (v) any other entity (other
than a natural person) which is an "accredited investor" (as defined in
Regulation D under the Securities Act) which extends credit or buys loans
as one of its businesses, including, but not limited to, insurance
companies, mutual funds, investments funds and lease financing companies;
and (vi) with respect to any Bank that is a fund that invests in loans, any
other fund that invests in loans and is managed by the same investment
advisor of such Bank or by an Affiliate of such investment advisor (and
treating all such funds so managed as a single Eligible Assignee);
provided, however, that no Affiliate of Borrower shall be an Eligible
Assignee.
Environmental Laws means the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended by the Superfund
Amendments and Reauthorization Act of 1986, 42 U.S.C.A. 9601, et seq., the
Resource Conservation and Recovery Act, as amended by the Hazardous Solid
Waste Amendment of 1984, 42 U.S.C.A. 6901, et seq., the Clean Water Act, 33
U.S.C.A. 1251, et seq., the Clean Air Act, 42 U.S.C.A. 1251, et seq., the
Toxic Substances Control Act, 15 U.S.C.A. 2601, et seq., The Oil Pollution
Act of 1990, 33 U.S.C. 2701, et seq., and all other laws, statutes, codes,
acts, ordinances, orders, judgments, decrees, injunctions, rules,
regulations, orders, permits and restrictions of any federal, state,
county, municipal and other governments, departments, commissions, boards,
agencies, courts, authorities, officials and officers, domestic or foreign,
relating to oil pollution, air pollution, water pollution, noise control
and/or the handling, discharge, disposal or recovery of on-site or off-site
asbestos, radioactive materials, spilled or leaked petroleum products,
distillates or fractions and industrial solid waste or "hazardous
substances" as defined by 42 U.S.C. 9601, et seq., as amended, as each of
the foregoing may be amended from time to time.
Environmental Liability means any claim, demand, obligation, cause of
action, order, violation, damage, injury, judgment, penalty or fine, cost
of enforcement, cost of remedial action or any other costs or expense
whatsoever, including reasonable attorneys' fees and disbursements,
resulting from the violation or alleged violation of any Environmental Law
or the release of any substance into the environment which is required to
be remediated by a regulatory agency or governmental authority or the
imposition of any Environmental Lien (as hereinafter defined) which could
reasonably be expected to individually or in the aggregate have a Material
Adverse Effect.
Environmental Lien means a Lien in favor of any court, governmental
agency or instrumentality or any other Person (i) for any Environmental
Liability or (ii) for damages arising from or cost incurred by such court
or governmental agency or instrumentality or
6
other person in response to a release or threatened release of asbestos or
"hazardous substance" into the environment, the imposition of which Lien
could reasonably be expected to have a Material Adverse Effect.
ERISA means the Employee Retirement Income Security Act of 1974, as
amended.
Eurodollar Base Rate shall mean the offered rate for the period equal
to or greater than the Interest Period for U.S. dollar deposits of not less
than $1,000,000 as of 11:00 a.m. City of London, England time two (2)
Business Days prior to the first day of the Interest Period as shown on the
display designated as "British Bankers Association Interest Settlement
Rates" on Reuter's for the purpose of displaying such rate. In the event
such rate is not available on Reuter's, then such offered rate shall be
otherwise independently determined by the Agent from an alternate,
substantially independent source available to Agent or shall be calculated
by Agent by substantially similar methodology as that theretofore used to
determine such offered rate.
Eurodollar Business Day means a Business Day on which dealings in U.S.
Dollar deposits are carried on in the London interbank 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 one (1), two (2) or three (3) months thereafter as selected
by the Borrower pursuant to Section 4(a)(ii), 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 one (1), two
(2) or three (3) months thereafter, as selected by the Borrower pursuant to
Section 4(a)(ii); provided, however, that (i) if any Eurodollar Interest
Period would otherwise expire on a day which is not a Eurodollar Business
Day, such Interest Period shall expire on the next succeeding Eurodollar
Business Day unless the result of such extension would be to extend such
Interest Period into the next calendar month, in which case such Interest
Period shall end on the immediately preceding Eurodollar Business Day, (ii)
if any Eurodollar Interest Period begins on the last Eurodollar Business
Day of a calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such Interest Period)
such Interest Period shall end on the last Eurodollar Business Day of a
calendar month, and (iii) any Eurodollar Interest Period which would
otherwise expire after the Maturity Date shall end on such Maturity Date.
Eurodollar Loan means any loan during any period which, except as
otherwise provided in Section 4(e) hereof, bears interest at the Eurodollar
Rate, or which would bear interest at such rate if the Maximum Rate ceiling
was not in effect at a particular time.
Eurodollar Margin means:
7
(i) two and one-eighth percent (2.125%) per annum whenever the
Borrowing Base Usage is equal to or greater than ninety percent (90%);
or
(ii) two percent (2%) per annum whenever the Borrowing Base Usage
is equal to or greater than sixty percent (60%), but less than ninety
percent (90%); or
(iii) one and three-quarters percent (1.75%) per annum whenever
the Borrowing Base Usage is equal to or greater than thirty-five
percent (35%), but less than sixty percent (60%); or
(iii) one and one-half percent (1.50%) per annum whenever the
Borrowing Base Usage is less than thirty-five percent (35%).
Eurodollar Rate means, with respect to a Eurodollar Loan for the
relevant Interest Period, the sum of (i) the quotient of (A) the Eurodollar
Base Rate applicable to such Interest Period, divided by (B) one minus the
Reserve Requirement (expressed as a decimal) applicable to such Interest
Period, plus the (ii) Eurodollar Margin. The Eurodollar Rate shall be
rounded to the next higher multiple of 1/100th of one percent if the rate
is not such a multiple.
Federal Funds Effective Rate shall mean, for any day, an interest rate
per annum equal to the weighted average of the rates on overnight Federal
funds transactions with members of the Federal Reserve System arranged by
Federal funds brokers on such day, as published for such day (or, if such
day is not a Business Day, for the immediately preceding Business Day) by
the Federal Reserve Bank of New York, or, if such rate is not so published
for any day which is a Business Day, the average of the quotations at
approximately 10:00 a.m. (Dallas time) on such day on such transactions
received by the Agent from three (3) Federal funds brokers of recognized
standing selected by the Agent in its sole discretion.
Financial Statements mean balance sheets, income statements,
statements of cash flow and appropriate footnotes and schedules, prepared
in accordance with GAAP.
GAAP means generally accepted accounting principles, consistently
applied.
General and Administrative Expenses means expenses of providing
corporate, management, supervisory and engineering services and other
corporate services with respect to management and assets of the Borrower,
determined in accordance with GAAP.
Interest Payment Date means the last day of each calendar month, and
in addition, in the case of Eurodollar Loans, the last day of the
applicable Interest Period.
8
Interest Period means any Base Rate Interest Period, or Eurodollar
Interest Period.
Letters of Credit is used herein as defined in Section 2(c) hereof.
Lien means any mortgage, deed of trust, pledge, security interest,
assignment, encumbrance or lien (statutory or otherwise) of every kind and
character.
Loans mean the Revolving Loan.
Loan Documents means this Agreement, the Notes, the Guaranties, the
Security Interests and all other documents executed in connection with the
transaction described in this Agreement.
Majority Banks mean Banks holding 66-2/3% or more of the Commitment or
if the Commitment has been terminated, Banks holding 66-2/3% of the
outstanding Loans.
Material Adverse Effect means any circumstance or event which could
have a material adverse effect on (i) the assets or properties,
liabilities, financial condition, business, operations, affairs or
circumstances of the Borrower, or (ii) the ability of the Borrower to carry
out its businesses as of the date of this Agreement or as proposed at the
date of this Agreement to be conducted or to meet its obligations under the
Notes, this Agreement or the other Loan Documents on a timely basis.
Maximum Rate means at any particular time in question, the maximum
non-usurious rate of interest which under applicable law may then be
charged on the Note. If such Maximum Rate changes after the date hereof,
the Maximum Rate shall be automatically increased or decreased, as the case
may be, without notice to Borrower from time to time as the effective date
of each change in such Maximum Rate.
Minimum Interest Coverage Ratio means the ratio of EBITDA for the
period being measured to the sum of (i) Total Interest Expense for the
period being measured plus (ii) Preferred Dividends paid in cash during the
period being measured.
Monthly Commitment Reduction is used herein, as defined in Section
2(e) hereof.
Net Income means Borrower's net income after income taxes calculated
in accordance with GAAP.
Notes mean the Revolving Notes, substantially in the form of Exhibits
"B" hereto issued or to be issued hereunder to each Bank, respectively, to
evidence the indebtedness to
9
such Bank arising by reason of the Advances on the Revolving Loan, together
with all modifications, renewals and extensions thereof or any part thereof
Oil and Gas Properties means all oil, gas and mineral properties and
interests, related personal properties, in which Borrower grants to the
Banks either a first and prior lien and security interest pursuant to
Section 6 hereof or a negative pledge pursuant to Section 13 hereof.
Other Financing is used herein as defined in Section 15(l) hereof.
Payor is used herein as defined in Section 3(h) hereof.
Permitted Liens shall mean (i) royalties, overriding royalties,
reversionary interests, production payments and similar burdens; (ii) sales
contracts or other arrangements for the sale of production of oil, gas or
associated liquid or gaseous hydrocarbons which would not (when considered
cumulatively with the matters discussed in clause (i) above) deprive
Borrower of any material right in respect of any such Borrower's assets or
properties (except for rights customarily granted with respect to such
contracts and arrangements); (iii) statutory Liens for taxes or other
assessments that are not yet delinquent (or that, if delinquent, are being
contested in good faith by appropriate proceedings, levy and execution
thereon having been stayed and continue to be stayed and for which such
Borrower has set aside on its books adequate reserves in accordance with
GAAP); (iv) easements, rights of way, servitudes, permits, surface leases
and other rights in respect to surface operations, pipelines, grazing,
logging, canals, ditches, reservoirs or the like, conditions, covenants and
other restrictions, and easements of streets, alleys, highways, pipelines,
telephone lines, power lines, railways and other easements and rights of
way on, over or in respect of Borrower's assets or properties and that do
not individually or in the aggregate, cause a Material Adverse Effect; (v)
materialmen's, mechanic's, repairman's, employee's, warehousemen's,
landlord's, carrier's, pipeline's, contractor's, sub-contractor's,
operator's, non- operator's (arising under operating or joint operating
agreements), and other Liens (including any financing statements filed in
respect thereof) incidental to obligations incurred by Borrower in
connection with the construction, maintenance, development, transportation,
storage or operation of Borrower's assets or properties to the extent not
delinquent (or which, if delinquent, are being contested in good faith by
appropriate proceedings and for which Borrower has set aside on its books
adequate reserves in accordance with GAAP); (vi) all contracts, agreements
and instruments, and all defects and irregularities and other matters
affecting Borrower's assets and properties which were in existence at the
time Borrower's assets and properties were originally acquired by Borrower
and all routine operational agreements entered into in the ordinary course
of business, which contracts, agreements, instruments, defects,
irregularities and other matters and routine operational agreements are not
such as to, individually or in the aggregate, interfere materially with the
operation, value or use of Borrower's assets and properties,
10
considered in the aggregate; (vii) liens in connection with workmen's
compensation, unemployment insurance or other social security, old age
pension or public liability obligations; (viii) legal or equitable
encumbrances deemed to exist by reason of the existence of any litigation
or other legal proceeding or arising out of a judgment or award with
respect to which an appeal is being prosecuted in good faith and levy and
execution thereon have been stayed and continue to be stayed; (ix) rights
reserved to or vested in any municipality, governmental, statutory or other
public authority to control or regulate Borrower's assets and properties in
any manner, and all applicable laws, rules and orders from any governmental
authority; (x) landlord's liens; (xi) Liens incurred pursuant to the
Security Instruments; and (xii) Liens existing at the date of this
Agreement which have been disclosed to Banks in writing by Borrower or
identified in Schedule "1" hereto.
Person means an individual, a corporation, a partnership, an
association, a trust or any other entity or organization, including a
government or political subdivision or an agency or instrumentality
thereof.
Plan means any plan subject to Title IV of ERISA and maintained by
Borrower, or any such plan to which Borrower is required to contribute on
behalf of its employees.
Pre-Approved Contracts as used herein shall mean any contracts or
agreements entered into in connection with any Rate Management Transaction
designed to hedge, provide a price floor for or swap crude oil or natural
gas or otherwise sell up to (i) eighty percent (80%) of Borrower's
anticipated production from proved, developed producing reserves of crude
oil through December 31, 2002, and thereafter tip to seventy-five percent
(75%) of such anticipated production, and/or (ii) eighty percent (80%) of
Borrower's anticipated, proved, developed producing reserves of natural gas
through December 31, 2002, and thereafter, seventy-five percent (75%) of
such anticipated production, during the period from immediately preceding
settlement date (or the commencement of the term of such hedge transactions
if there is no prior settlement date) to such settlement date, (iii) with a
maturity of twenty-four (24) months or less, (iv) with "strike prices" per
barrel or Mmbtu greater than Agent's forecasted price in the most recent
engineering evaluation of Borrower's Oil and Gas Properties, adjusted for
the difference between the forecasted price and the Borrower's actual
product price as reasonably determined by the Agent, and (v) with
counterparties to the hedging agreement reasonably approved by Agent.
Pro Rata or Pro Rata Part means for each Bank, (i) for all purposes
where no Loans are outstanding, such Bank's Revolving Commitment Percentage
and (ii) otherwise, the proportion which the portion of the outstanding
Loans owed to such Bank bears to the aggregate outstanding Loans owed to
all Banks at the time in question.
11
Rate Management Transactions means any transaction (including an
agreement with respect thereto) now existing or hereafter entered into by
Borrower which is a rate swap, basis swap, forward rate transaction,
commodity swap, commodity option, equity or equity index swap, equity or
equity index option, bond option, interest rate option, forward exchange
transaction, cap transaction, floor transaction, collar transaction,
forward transaction, currency swap transaction, cross-currency rate swap
transaction, currency option or any other similar transaction (including
any option with respect to any of these transactions) or any combination
thereof, whether linked to one or more interest rates, foreign currencies,
commodity prices, equity prices or other financial measures.
Regulation D shall mean Regulation D of the Board of Governors of the
Federal Reserve System as from time to time in effect and any successor
thereto and other regulation or official interpretation of said Board of
Governors relating to reserve requirements applicable to member banks of
the Federal Reserve System.
Reimbursement Obligations shall mean at any time, the obligations of
the Borrower in respect of all Letters of Credit then outstanding to
reimburse amounts paid by any Bank in respect of any drawing or drawings
under a Letter of Credit.
Release Price is used herein as defined in Section 12(r) hereof.
Reserve Requirement means, with respect to any Interest Period, the
maximum aggregate reserve requirement (including all basic, supplemental,
marginal and other reserves) which is imposed under Regulation D on
Eurocurrency liabilities.
Required Payment is used herein as defined in Section 3(h) hereof.
Revolving Commitment means (A) for all Banks, the lesser of (i)
$110,000,000 or (ii) the Borrowing Base, in each case as reduced from time
to time pursuant to Sections 2 and 7 hereof, and (B) as to any Bank, its
obligation to make Advances hereunder on the Revolving Loan and purchase
participations in Letters of Credit issued hereunder by Agent in amounts
not exceeding, in the aggregate, an amount equal to such Bank's Revolving
Loan Commitment Percentage times the total Revolving Commitment as of any
date. The Revolving Commitment of each Bank hereunder shall be adjusted
from time to time to reflect assignments made by such Bank pursuant to
Section 28 hereof. Each reduction in the Revolving Commitment shall result
in a Pro Rata reduction in each Bank's Revolving Commitment.
12
Revolving Commitment Percentage means for each Bank the percentage
derived by dividing its Revolving Commitment at the time of the
determination by the Revolving Commitment of all Banks at the time of
determination. The Revolving Commitment Percentage of each Bank hereunder
shall be adjusted from time to time to reflect assignments made by such
Bank pursuant to Section 28 hereof.
Revolving Loan means a loan or loans made under the Revolving
Commitment pursuant to Section 2 hereof.
Revolving Maturity Date means September 1, 2003.
Revolving Notes means the Revolving Notes described in Section 3
hereof.
Security Instruments is used collectively herein to mean this
Agreement, all Deeds of Trust, Mortgages, Security Agreements, Assignments
of Production and Financing Statements and other collateral documents
covering the Oil and Gas Properties and related personal property,
equipment, oil and gas inventory and proceeds of the foregoing, all such
documents to be in form and substance satisfactory to Agent.
Subsidiary means any corporation or other entity of which securities
or other ownership interests having ordinary voting power to elect a
majority of the board of directors or other persons performing similar
functions are at the time directly or indirectly owned by Borrower or
another subsidiary.
Total Interest Expense means Borrower's total interest expense for any
period, as determined in accordance with GAAP, excluding non-cash interest
items such as amortization of loan costs.
Total Outstandings means, as of any date, the sum of (i) the total
principal balance outstanding on the Revolving Notes, plus (ii) the total
face amount of all outstanding Letters of Credit, plus (iii) the amount of
all unpaid Reimbursement Obligations.
Tranche means a set of Eurodollar Loans made by the Banks at the same
time and for the same Interest Period.
Unscheduled Redeterminations means a redetermination of the Borrowing
Base made at any time other than on the dates set for the regular
semi-annual redetermination of the Borrowing Base which are made (A) at the
reasonable request of Borrower, (B) at the reasonable request of Majority
Banks, or (C) at any time it appears to Agent or Majority Banks, in the
exercise of their reasonable discretion, that either (i) there has been a
decrease
13
in the value of the Oil and Gas Properfies, or (ii) an event has occurred
which is reasonably expected to have a Material Adverse Effect.
Unused Commitment Fee Rate shall be:
(i) one-half of one percent (.50%) per annum whenever the
Borrowing Base Usage is equal to or greater than ninety percent (90%),
or
(ii) three-eighths of one percent (.375%) per annum whenever the
Borrowing Base Usage is equal to or greater than thirty-five percent
(35%) but less than ninety percent (90%); or
(iii) one-fourth of one percent (.25%) per annum whenever the
Borrowing Base Usage is less than thirty-five percent (35%).
2. Commitments of the Banks.
(a) Terms of Revolving Commitment. On the terms and conditions hereinafter
set forth, each Bank agrees severally to make Advances to the Borrower from time
to time during the period beginning on the Effective Date and ending on the
Revolving Maturity Date in such amounts as the Borrower may request up to an
amount not to exceed, in the aggregate principal amount outstanding at any time,
the Revolving Commitment less Total Outstandings. The obligation of the Borrower
hereunder shall be evidenced by this Agreement and the Revolving Notes issued in
connection herewith, said Revolving Notes to be as described in Section 3
hereof. Notwithstanding any other provision of this Agreement, no Advance shall
be required to be made hereunder if any Event of Default (as hereinafter
defined) has occurred and is continuing or if any event or condition has
occurred or failed to occur which with the passage of time or service of notice,
or both, would constitute an Event of Default. Each Advance under the Revolving
Commitment shall be an aggregate amount of at least $1,000,000 or in multiples
of $500,000 in excess thereof. Irrespective of the face amount of the Revolving
Note or Notes, the Banks shall never have the obligation to Advance any amount
or amounts in excess of the Revolving Commitment or to increase the Revolving
Commitment.
(b) Procedure for Borrowing. Whenever the Borrower desires an Advance
hereunder on the Revolving Loan, it shall give Agent telegraphic, telex,
facsimile or telephonic notice ("Notice of Borrowing") of such requested
Advance, which in the case of telephonic notice, shall be promptly confirmed in
writing. Each Notice of Borrowing shall be in the form of Exhibit "A" attached
hereto and shall be received by Agent not later than 11:00 a.m. Midland, Texas
time, (i) one Business Day prior to the Borrowing Date in the case of the Base
Rate Loan, or (ii) three Eurodollar Business Days prior to any proposed
14
Borrowing Date in the case of Eurodollar Loans. Each Notice of Borrowing shall
specify (i) the Borrowing Date (which, if at Base Rate Loan, shall be a Business
Day and if a Eurodollar Loan, a Eurodollar Business Day), (ii) the principal
amount to be borrowed, (iii) the portion of the Advance constituting Base Rate
Loans and/or Eurodollar Loans, (iv) if any portion of the proposed Advance is to
constitute Eurodollar Loans, the initial Interest Period selected by Borrower
pursuant to Section 4, hereof to be applicable thereto, and (v) the date upon
which such Advance is required. Upon receipt of such Notice, Agent shall advise
each Bank thereof; provided, that if the Banks have received at least one (1)
day's notice of such Advance prior to funding of a Base Rate Loan, or at least
three (3) days notice of each Advance prior to funding in the case of a
Eurodollar Loan, each Bank shall provide Agent at its office at 2301 West Wall
Street, Midland, Texas 79702, not later than 1:00 p.m., Midland, Texas time, on
the Borrowing Date, in immediately available funds, its pro rata share of the
requested Advance, but the aggregate of all such fundings by each Bank shall
never exceed such Banks Revolving Commitment. Not later than 2:00 p.m., Midland,
Texas time, on the Borrowing Date, Agent shall make available to the Borrower at
the same office, in like funds, the aggregate amount of such requested Advance.
Neither Agent nor any Bank shall incur any liability to the Borrower in acting
upon any Notice referred to above which Agent or such Bank believes in good
faith to have been given by a duly authorized officer or other person authorized
to borrow on behalf of Borrower or for otherwise acting in good faith under this
Section 2(b). Upon funding of Advances by Banks in accordance with this
Agreement, pursuant to any such Notice, the Borrower shall have effected
Advances hereunder.
(c) Letters of Credit. On the terms and conditions hereinafter set forth,
the Agent shall from time to time during the period beginning on the Effective
Date and ending on the Revolving Maturity Date upon request of Borrower issue
standby Letters of Credit for the account of Borrower (the "Letters of Credit")
in such face amounts as Borrower may request, but not to exceed in the aggregate
face amount at any time outstanding the sum of Five Million Dollars
($5,000,000). The face amount of all Letters of Credit issued and outstanding
hereunder shall be considered as Advances on the Revolving Commitment for
Borrowing Base purposes and all payments made by the Agent on such Letters of
Credit shall be considered as Advances under the Revolving Notes. Each Letter of
Credit issued for the account of Borrower hereunder shall (i) be in favor of
such beneficiaries as specifically requested by Borrower, (ii) have an
expiration date not exceeding the earlier of (a) one year or (b) the Revolving
Maturity Date, and (iii) contain such other terms and provisions as may be
required by Agent. Each Bank (other than Agent) agrees that, upon issuance of
any Letter of Credit hereunder, it shall automatically acquire a participation
in the Agent's liability under such Letter of Credit in an amount equal to such
Bank's Revolving Commitment Percentage of such liability, and each Bank (other
than Agent) thereby shall absolutely, unconditionally and irrevocably assume, as
primary obligor and not as surety, and shall be unconditionally obligated to
Agent to pay and discharge when due, its Revolving
15
Commitment Percentage of Agent's liability under such Letter of Credit. The
Borrower hereby unconditionally agrees to pay and reimburse the Agent for the
amount of each demand for payment under any Letter of Credit that is in
compliance with the provisions of any such Letter of Credit at or prior to the
date on which payment is to be made by the Agent to the beneficiary thereunder,
without presentment, demand, protest or other formalities of any kind. Upon
receipt from any beneficiary of any Letter of Credit of any demand for payment
under such Letter of Credit, the Agent shall promptly notify the Borrower of the
demand and the date upon which such payment is to be made by the Agent to such
beneficiary in respect of such demand. Forthwith upon receipt of such notice
from the Agent, Borrower shall advise the Agent whether or not it intends to
borrow hereunder to finance its obligations to reimburse the Agent, and if so,
submit a Notice of Borrowing as provided in Section 2(b) hereof. If Borrower
fails to so advise Agent and thereafter fails to reimburse Agent, the Agent
shall notify each Bank of the demand and the failure of the Borrower to
reimburse the Agent, and each Bank shall reimburse the Agent for its Revolving
Commitment Percentage of each such draw paid by the Agent and unreimbursed by
the Borrower. All such amounts paid by Agent and/or reimbursed by the Banks
shall be treated as an Advance or Advances under the Revolving Commitment, which
Advances shall be immediately due and payable and shall bear interest it the
Maximum Rate.
(d) Procedure for Obtaining Letters of Credit. The amount and date of
issuance, renewal, extension or reissuance of a Letter of Credit pursuant to the
Banks' commitments above in Section 2(c) shall be designated by Borrower's
written request delivered to Agent at least three (3) Business Days prior to the
date of such issuance, renewal, extension or reissuance. Concurrently with or
promptly following the delivery of the request for a Letter of Credit, Borrower
shall execute and deliver to the Agent an application and agreement with respect
to the Letters of Credit, said application and agreement to be in the form used
by the Agent. The Agent shall not be obligated to issue, renew, extend or
reissue such Letters of Credit if (A) the amount thereon when added to the face
amount of the outstanding Letters of Credit plus any Reimbursement Obligations
exceeds Five Million Dollars ($5,000,000) or (B) the amount thereof when added
to the Total Outstandings would exceed the Revolving Commitment. Borrower agrees
to pay the Agent for the benefit of the Banks commissions for issuing the
Letters of Credit (calculated separately for each Letter of Credit) in an amount
equal to the greater of (i) the Eurodollar Margin then in effect per annum times
the maximum face amount of the Letter of Credit or (ii) $500.00. In addition,
Borrower agrees to pay to the Agent for its own account an additional commission
of one-quarter of one percent (.25%) times the maximum face amount of such
Letter of Credit for issuing each such Letter of Credit. Such commissions shall
be payable prior to the issuance of each Letter of Credit and thereafter on each
anniversary date of such issuance while such Letter of Credit is outstanding.
16
(e) Type and Number of Advances. Any Advance made under the Revolving
Commitment may be a Base Rate Loan or a Eurodollar Loan, or combination thereof,
selected by Borrower pursuant to Section 4(a) hereof the total number of
Tranches under the Revolving Commitment which may be outstanding at any time
shall never exceed three (3).
(f) Voluntary Reduction of Revolving Commitment. The Borrower may at any
time, or from time to time, upon not less than three (3) Business Days; prior
written notice to Agent, reduce or terminate the Revolving Commitment; provided,
however, that (i) each reduction in the Revolving Commitment must be in the
amount of $1,000,000 or more, in increments of $500,000 and (ii) each reduction
must be accompanied by a prepayment of the Revolving Notes in the amount by
which the outstanding principal balance of the Revolving Notes exceeds the
Revolving Commitment as reduced pursuant to this Section 2.
(g) Monthly Commitment Reductions. The Revolving Commitment shall be
reduced as of the first day of each month by an amount determined by the Banks
pursuant to Section 7(b) hereof (the "Monthly Commitment Reduction"). The
Monthly Commitment Reduction shall be $0 beginning on October 1, 2000, with like
reductions continuing on the first day of each month thereafter until
redetermined pursuant to Section 7(b) hereof. If as a result of any such Monthly
Commitment Reduction, the Total Outstandings ever exceed the Revolving
Commitment then in effect, the Borrower shall make the mandatory prepayment of
principal required pursuant to Section 9(b) hereof.
(h) Several Obligations. The obligations of the Banks under the Commitment
are several and not joint. The failure of any Bank to make an Advance required
to be made by it shall not relieve any other Bank of its obligation to make its
Advance, and no Bank shall be responsible for the failure of any other Bank to
make the Advance to be made by such other Bank. No Bank shall be required to
lend hereunder any amount in excess of its legal lending limit.
3. Notes Evidencing Loans. The loans described above in Section 2 shall be
evidenced by promissory notes of Borrower as follows:
(a) Form of Revolving Notes. The Revolving Loan shall be evidenced by a
Note or Notes in the aggregate face amount of $110,000,000, and shall be in the
form of Exhibit "B" hereto with appropriate insertions (each a "Revolving
Note"). Notwithstanding the face amount of the Revolving Notes, the actual
principal amount due from the Borrower to Banks on account of the Revolving
Notes, as of any date of computation, shall be the sum of Advances then and
theretofore made on account thereof, less all principal payments actually
received by Banks in collected funds with respect thereto. Although the
Revolving Notes may be dated as of the Effective Date, interest in respect
17
thereof shall be payable only for the period during which the loans evidenced
thereby are outstanding and, although the stated amount of the Revolving Notes
may be higher, the Revolving Notes shall be enforceable, with respect to
Borrower's obligation to pay the principal amount thereof, only to the extent of
the unpaid principal amount of the Loans. Irrespective of the face amount of the
Revolving Notes, no Bank shall ever be obligated to advance on the Revolving
Conunitinent any amount in excess of its Revolving Commitment then in effect.
(b) Issuance of Additional Notes. At the Effective Date there shall be
outstanding one Revolving Note in the aggregate face amount of $110,000,000
payable to the order of Bank One. From time to time new Notes may be issued to
other Banks as such Banks become parties to this Agreement. Upon request from
Agent, the Borrower shall execute and deliver to Agent any such new or
additional Notes. From time to time as new Notes are issued the Agent shall
require that each Bank exchange its Note(s) for newly issued Note(s) to better
reflect the extent of each Bank's Commitment hereunder.
(c) Interest Rates. The unpaid principal balance of the Notes shall bear
interest from time to time as set forth in Section 4 hereof.
(d) Payment of Interest. Interest on the Notes shall be payable on each
Interest Payment Date.
(e) Payment of Principal. The unpaid principal balance of the Notes shall
be due and payable to the Agent for the ratable benefit of the Banks on the
Revolving Maturity Date unless earlier due in whole or in part as a result of an
acceleration of the amount due or pursuant to the mandatory prepayment
provisions of Section 9 hereof.
(f) Payment to Banks. Each Bank's Pro Rata Part of payment or prepayment of
the Loans shall be directed by wire transfer to such Bank by the Agent at the
address provided to the Agent for such Bank for payments no later than 2:00
p.m., Midland, Texas, time on the Business Day such payments or prepayments are
deemed hereunder to have been received by Agent; provided, however, in the event
that any Bank shall have failed to make an Advance as contemplated under Section
2 hereof (a "Defaulting Bank") and the Agent or another Bank or Banks shall have
made such Advance, payment received by Agent for the account of such Defaulting
Bank or Banks shall not be distributed to such Defaulting Bank or Banks until
such Advance or Advances shall have been repaid in full to the Bank or Banks who
funded such Advance or Advances. Any payment or prepayment received by Agent at
any time after 12:00 noon, Midland, Texas, time on a Business Day shall be
deemed to have been received on the next Business Day. Interest shall cease to
accrue on any principal as of the end of the day preceding the Business Day on
which any such payment or prepayment is deemed hereunder to have been received
by Agent. If Agent fails to transfer any principal
18
amount to any Bank as provided above, then Agent shall promptly direct such
principal amount by wire transfer to such Bank.
(g) Sharing of Payments. Etc. If any Bank shall obtain any payment (whether
voluntary, involuntary, or otherwise) on account of the Loans, (including,
without limitation, any set-off) which is in excess of its Pro Rata Part of
payments on the Loans, as the case may be, obtained by all Banks, such Bank
shall purchase from the other Banks such participation as shall be necessary to
cause such purchasing Bank to share the excess payment pro rata with each of
them; provided that, if all or any portion of such excess payment is thereafter
recovered from such purchasing Bank, the purchase shall be rescinded and the
purchase price restored to the extent of the recovery. The Borrower agrees that
any Bank so purchasing a participation from another Bank pursuant to this
Section may, to the fullest extent permitted by law, exercise all of its rights
of payment (including the right of offset) with respect to such participation as
fully as if such Bank were the direct creditor of the Borrower in the amount of
such participation.
(h) Non-Receipt of Funds by the Agent. Unless the Agent shall have been
notified by a Bank or the Borrower (the "Payor") prior to the date on which such
Bank is to make payment to the Agent of the proceeds of a Loan to be made by it
hereunder or the Borrower is to make a payment to the Agent for the account of
one or more of the Banks, as the case may be (such payment being herein called
the "Required Payment"), which notice shall be effective upon, receipt, that the
Payor does not intend to make the Required Payment to the Agent, the Agent may
assume that the Required Payment has been made and may, in reliance upon such
assumption (but shall not be required to), make the amount thereof available to
the intended recipient on such date and, if the Payor has not in fact made the
Required Payment to the Agent, the recipient of such payment shall, on demand,
pay to the Agent the amount made available to it together with interest thereon
in respect of the period commencing on the date such amount was made available
by the Agent until the date the Agent recovers such amount at the rate
applicable to such portion of the applicable Loan.
4. Interest Rates.
(a) Options.
(i) Base Rate Loans. On all Base Rate Loans the Borrower agrees to pay
interest on the Notes calculated on the basis of the actual days elapsed in
a year consisting of 360 days with respect to the unpaid principal amount
of each Base Rate Loan from the date the proceeds thereof are made
available to Borrower until maturity (whether by acceleration or
otherwise), at a varying rate per annum equal to the lesser of (i) the
Maximum Rate (defined herein), or (ii) the sum of the Alternate Base Rate
plus the Base Rate Margin.
19
Subject to the provisions of this Agreement as to prepayment, the principal
of the Notes representing Base Rate Loans shall be payable as specified in
Section 3(e) hereof and the interest in respect of each Base Rate Loan
shall be payable on each Interest Payment Date. Past due principal and, to
the extent permitted by law, past due interest in respect to each Base Rate
Loan, shall bear interest, payable on demand, at the rate set forth in
Section 4(e) hereof.
(ii) Eurodollar Loans. On all Eurodollar Loans the Borrower agrees to
pay interest calculated on the basis of 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 Borrower 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 Eurodollar Rate plus the
Eurodollar Margin. Subject to the provisions of this Agreement with respect
to prepayment, the principal of the Notes shall be payable as specified in
Section 3(e) hereof and the interest with respect to each Eurodollar Loan
shall be payable on each Interest Payment Date. Past due principal and, to
the extent permitted by law, past due interest shall bear interest, payable
on demand, at the rate set forth in Section 4(e) hereof. Upon three (3)
Eurodollar Business Days' written notice prior to the making by the Banks
of any Eurodollar Loan (in the case of the initial Interest Period
therefor) or the expiration date of each succeeding Interest Period (in the
case of subsequent Interest Periods therefor), Borrower shall have the
option, subject to compliance by Borrower with all of the provisions of
this Agreement, as long as no Default or Event of Default exists, to
specify whether the Interest Period commencing on any such date shall be a
one (1), two (2) or three (3) month period. If Agent shall not have
received timely notice of a designation of such Interest Period as herein
provided, Borrower shall be deemed to have elected to convert all maturing
Eurodollar Loans to Base Rate Loans.
(b) Interest Rate Determination. The Agent shall determine each interest
rate applicable to the Loans hereunder. The Agent shall give prompt notice to
the Borrower and the Banks of each rate of interest so determined and its
determination thereof shall be conclusive absent error.
(c) Conversion Option. Borrower may elect from time to time (i) to convert
all or any part of its Eurodollar Loans to Base Rate Loans by giving Agent
irrevocable notice of such election in writing prior to 10:00 a.m. (Midland,
Texas time) on the conversion date and such conversion shall be made on the
requested conversion date, provided that any such conversion of a Eurodollar
Loan shall only be made on the last day of the Eurodollar Interest
20
Period with respect thereof, (ii) to convert all or any part of its Base Rate
Loans to Eurodollar Loans by giving the Agent irrevocable written notice of such
election three (3) Eurodollar Business Days prior to the proposed conversion and
such conversion shall be made on the requested conversion date or, if such
requested conversion date is not a Eurodollar Business Day or a Business Day, as
the case may be, on the next succeeding Eurodollar Business Day or Business Day,
as the case may be. Any such conversion shall not be deemed to be a prepayment
of any of the loans for purposes of this Agreement or the Notes.
(d) Recoupment. If at any time the applicable rate of interest selected
pursuant to Sections 4(a)(i) or 4(a)(ii) above shall exceed the Maximum Rate,
thereby causing the interest on the Notes to be limited to the Maximum Rate,
then any subsequent reduction in the interest rate so selected or subsequently
selected shall not reduce the rate of interest on the Notes below the Maximum
Rate until the total amount of interest accrued on the Notes equals the amount
of interest which would have accrued on the Notes if the rate or rates selected
pursuant to Sections 4(a)(i) or (ii), as the case may be, had at all times been
in effect.
(e) Interest Rates Applicable After Default. Notwithstanding anything to
the contrary contained in this Section 4, during the continuance of a Default or
an Event of Default the Majority Banks may, at their option, by notice from
Agent to the Borrower (which notice may be revoked at the option of the Majority
Banks notwithstanding the provisions of Section 15 hereof, which requires all
Banks to consent to changes in interest rates) declare that no Advance may be
made as, converted into, or continued as a Eurodollar Loan. During the
continuance of an Event of Default, the Majority Banks, may, at their option, by
notice from Agent to the Borrower (which notice may be revoked at the option of
Majority Banks notwithstanding the provisions of Section 15 hereof, which
requires all Banks to consent to changes in interest rates) declare that (i)
each Eurodollar Loan shall bear interest for the remainder of the applicable
Interest Period at the rate otherwise applicable to such Interest Period plus
two percent (2%) per annum and (ii) each Base Rate Loan shall bear interest at
the rate otherwise applicable to such Interest Period plus two percent (2%),
provided that, during the continuance of an Event of Default under Section 14(f)
or 14(g), the interest rate set forth in clauses (i) and (ii) above shall be
applicable to all outstanding Loans without any election or action on the part
of the Agent or any Bank.
5. Special Provisions Relating to Loans.
(a) Unavailability of Funds or Inadequacy of Pricing. In the event that, in
connection with any proposed Eurodollar Loan, the Agent determines, which
determination shall, absent manifest error, be final, conclusive and binding
upon all parties, due to changes in circumstances since the date hereof,
adequate and fair means do not exist for determining the Eurodollar Rate or such
rate will not accurately reflect the costs to the Banks of funding a Eurodollar
Loan for such Eurodollar Interest Period, the Agent shall give notice of such
21
determination to the Borrower and the Banks, whereupon, until the Agent notifies
the Borrower and the Banks that the circumstances giving rise to such suspension
no longer exist, the obligations of the Banks to make, continue or convert Loans
into Eurodollar Loans shall be suspended, and all loans to Borrower shall be
Base Rate Loans during the period of suspension.
(b) If at any time any new law or any change in existing laws or in the
interpretation of any new or existing laws shall make it unlawful for any Bank
to make or continue to maintain or fund Eurodollar Loans hereunder, then such
Bank shall promptly notify Borrower in writing and such Bank's obligation to
make, continue or convert Loans into Eurodollar Loans under this Agreement shall
be suspended until it is no longer unlawful for such Bank to make or maintain
Eurodollar Loans. Upon receipt of such notice, Borrower shall either repay the
outstanding Eurodollar Loan owed to the Banks, without penalty, on the last day
of the current, Interest Periods (or, if any Bank may not lawfully continue to
maintain and fund such Eurodollar Loan, immediately), or Borrower may convert
such Eurodollar Loan at such appropriate time to a Base Rate Loan.
(c) Increased Cost or Reduced Return.
(i) If, after the date hereof, the adoption of any applicable law,
rule, or regulation, or any change in any applicable law, rule, or
regulation, or any change in the interpretation or administration thereof
by any governmental authority, central bank, or comparable agency charged
with the interpretation or administration thereof, or compliance by any
Bank with any request or directive (whether or not having the force of law)
of any such governmental authority, central bank, or comparable agency:
(A) shall subject such Bank to any tax, duty, or other charge
with respect to any Eurodollar Loan, its Notes, or its obligation to
make Eurodollar Loans, or change the basis of taxation of any amounts
payable to such Bank under this Agreement or its Notes in respect of
any Eurodollar Loan (other than franchise taxes and taxes imposed on
the overall net income of such Bank);
(B) shall impose, modify, or deem applicable any reserve, special
deposit, assessment, or similar requirement (other than reserve
requirements, if any, taken into account in the determination of the
Eurodollar Rate) relating to any extensions of credit or other assets
of, or any deposits with or other liabilities or Commitment of, such
Bank, including the Commitment of such Bank hereunder; or
22
(C) shall impose on such Bank or on the London interbank market
any other condition affecting this Agreement or its Notes or any of
such extensions of credit or liabilities or Commitment;
and the result of any of the foregoing is to increase the cost to such
Bank of making, converting into, continuing, or maintaining any
Eurodollar Loan or to reduce any sum received or receivable by such
Bank under this Agreement or its Notes with respect to any Eurodollar
Loan, then Borrower shall pay to such Bank on demand such amount or
amounts as will compensate such Bank for such increased cost or,
reduction. If any Bank requests compensation by Borrower under this
Section 5(c), Borrower may, by notice to such Bank (with a copy to
Agent), suspend the obligation of such Bank to make or continue
Eurodollar Loans, or to convert all or part of the Base Rate Loan
owing to such Bank to a Eurodollar Loan, until the event or condition
giving rise to such request ceases to be in effect (in which case the
provisions of this Section 5(c) shall be applicable); provided that
such suspension shall not affect the right of such Bank to receive the
compensation so requested.
(ii) If, after the date hereof, any Bank shall have determined that
the adoption of any applicable law, rule, or regulation regarding capital
adequacy or any change therein or in the interpretation or administration
thereof by any governmental authority, central bank, or comparable agency
charged with the interpretation or administration thereof, or any request
or directive regarding capital adequacy (whether or not having the force of
law) of any such govenunental authority, central bank, or comparable
agency, has or would have the effect of reducing the rate of return on the
capital of such Bank or any corporation controlling such Bank as a
consequence of such Bank's obligations hereunder to a level below that
which such Bank or such corporation could have achieved but for such
adoption, change, request, or directive (taking into consideration its
policies with respect to capital adequacy), then from time to time upon
demand Borrower shall pay to such Bank such additional amount or amounts as
will compensate such Bank for such reduction.
(iii) Each Bank shall promptly notify Borrower and Agent of any event
of which it has knowledge, occurring after the date hereof, which will
entitle such Bank to compensation pursuant to this Section 5(c) and will
designate a separate lending office, if applicable, if such designation
will avoid the need for, or reduce the amount of, such compensation and
will not, in the judgment of such Bank, be otherwise disadvantageous to it.
Any Bank claiming compensation under this Section 5(c) shall furnish to
Borrower and Agent a statement setting forth the additional amount or
amounts to be paid to it hereunder which shall be conclusive in the absence
of manifest error. In determining such amount, such Bank may use any
reasonable averaging and attribution methods.
23
(iv) Any Bank giving notice to the Borrower through the Agent,
pursuant to this Section 5(c) shall give to the Borrower a statement signed
by an officer of such Bank setting forth in reasonable detail the basis
for, and the calculation of such additional cost, reduced payments or
capital requirements, as the case may be, and the additional amounts
required to compensate such Bank therefor.
(v) Within five (5) Business Days after receipt by the Borrower of any
notice referred to in this Section 5(c), the Borrower shall pay to the
Agent for the account of the Bank issuing such notice such additional
amounts as are required to compensate such Bank for the increased cost,
reduced payments or increased capital requirements identified therein, as
the case may be.
(d) Discretion of Bank as to Manner of Funding. Notwithstanding any
provisions of this Agreement to the contrary, each Bank shall be entitled to
fund and maintain its funding of all or any part of its Loan in any manner it
sees fit, it being understood, however, that for the purposes of this Agreement
all determinations hereunder shall be made as if each Bank had actually funded
and maintained each Eurodollar Loan through the purchase of deposits having a
maturity corresponding to the last day of the Eurodollar Interest Period
applicable to such Eurodollar Loan and bearing an interest rate to the
applicable interest rate for such Eurodollar Period.
(e) Breakage Fees. Without duplication under any other provision hereof, if
any Bank incurs any loss, cost or expense including, without limitation, any
loss of profit and loss, cost, expense or premium reasonably incurred by reason
of the liquidation or reemployment of deposits or other funds acquired by such
Bank to fund or maintain any Eurodollar Loan or the relending or reinvesting of
such deposits or amounts paid or prepaid to the Banks as a result of any of the
following events (other than any such occurrence as a result in the change of
circumstances described in Sections 5(a) and (b)):
(i) any payment, prepayment or conversion of a Eurodollar Loan on a
date other than the last day of its Eurodollar Interest Period (whether by
acceleration, prepayment or otherwise);
(ii) any failure to make a principal payment of a Eurodollar Loan on
the due date thereof, or
(iii) any failure by the Borrower to borrow, continue, prepay or
convert to a Eurodollar Loan on the dates specified in a notice given
pursuant to Section 2(c) or 4(c) hereof,
24
then the Borrower shall pay to such Bank such amount as will reimburse such
Bank for such loss, cost or expense. If any Bank makes such a claim for
compensation, it shall furnish to Borrower and Agent a statement setting
forth the amount of such loss, cost or expense in reasonable detail
(including an explanation of the basis for and the computation of such
loss, cost or expense) and the amounts shown on such statement shall be
conclusive and binding absent manifest error.
6. Collateral Security. To secure the performance by Borrower of its
obligations hereunder, and under the Notes and Security Instruments, whether now
or hereafter incurred, matured or unmatured, direct or contingent, joint or
several, or joint and several, including extensions, modifications, renewals and
increases thereof, and substitutions therefore, Borrower has heretofore granted
and assigned to Agent for the ratable benefit of the Banks a first and prior
Lien on certain of its Oil and Gas Properties, proceeds of production, certain
related equipment, oil and gas inventory, and proceeds of the foregoing. The Oil
and Gas Properties herewith mortgaged to the Agent shall represent not less than
85% of the Engineered Value (as hereinafter defined) of Borrower's Oil and Gas
Properties as of the Effective Date. Obligations arising from Rate Management
Transactions shall be secured by the Collateral (as hereinafter defined) and
repaid on a pari passu basis with the indebtedness and obligations of the
Borrower under the Loan Documents. All Oil and Gas Properties and other
collateral in which Borrower herewith granted or hereafter grants to Agent for
the ratable benefit of the Banks a first and prior Lien (to the satisfaction of
the Agent) in accordance with this Section 6, as such properties and interests
are from time to time constituted, are hereinafter collectively called the
"Collateral".
The granting and assigning of such security interests and Liens by Borrower
shall be pursuant to Security Instruments in form and substance reasonably
satisfactory to the Agent. Concurrently with the delivery of each of the
Security Instruments or within a reasonable time thereafter as specified in
Section 12(s) hereof, Borrower shall furnish to the Agent mortgage and title
opinions and other title information satisfactory to Agent with respect to the
title and Lien status of Borrower's interests in not less than 90% of the
Engineered Value of the Oil and Gas Properties covered by the Security
Instruments as Agent shall have designated. "Engineered Value" for this purpose
shall mean future net revenues discounted at the discount rate being used by the
Agent as of the date of any such determination utilizing the pricing parameters
used in the engineering report furnished to the Agent for the ratable benefit of
the Banks, pursuant to Sections 7 and 12 hereof. Borrower will cause to be
executed and delivered to the Agent, in the future, additional Security
Instruments if the Agent reasonably deems such are necessary to insure
perfection or maintenance of Banks' security interests and Liens in the Oil and
Gas Properties or any part of thereof.
7. Borrowing Base.
(a) Initial Borrowing Base. At the Effective Date, the Borrowing Base
shall be $68,000,000.
25
(b) Subsequent Determinations of Borrowing Base. Subsequent
determinations of the Borrowing Base shall be made by the Banks at least
semi-annually on April 1 and October 1 of each year beginning April 1, 2001
or as Unscheduled Redeterininations. in connection with, and as of, each
determination of the Borrowing Base, the Banks shall also redetermine the
Monthly Commitment Reduction. The Borrower shall fumish to the Banks as
soon as possible but in any event no later than March 1 of each year
thereafter beginning March 1, 2001, with an engineering report in form and
substance satisfactory to the Agent prepared by an independent petroleum
engineering acceptable to Agent covering the Oil and Gas Properties
utilizing economic and pricing parameters used by Agent as established from
time to time, together with such other information concerning the value of
the Oil and Gas Properties as the Agent shall deem necessary to determine
the value of the Oil and Gas Properties. By September 1 of each year, or
within thirty (30) days after either (i) receipt of notice from Agent that
the Banks require an Unscheduled Redetermination, or (ii) the Borrower give
notice to Agent of its desire to have an Unscheduled Redetermination
performed, the Borrower shall furnish to the Banks an engineering report in
form and substance satisfactory to Agent prepared by Borrower's in-house
engineering staff valuing the Oil and Gas Properties utilizing economic and
pricing parameters used by the Agent as established from time to time,
together with such other information, reports and data concerning the value
of the Oil and Gas Properties as Agent shall deem reasonably necessary to
determine the value of such Oil and Gas Properties. Agent shall by notice
to the Borrower no later than April 1 and October 1 of each year, or within
a reasonable time thereafter (herein called the "Determination Date"),
notify the Borrower of the designation by the Banks of the new borrowing
Base and Monthly Commitment Reduction for the period beginning on such
Determination Date and continuing until, but not including, the next
Determination Date. If an Unscheduled Redetermination is made by the Banks,
the Agent shall notify the Borrower within a reasonable time after receipt
of all requested information of the new Borrowing Base and Monthly
Commitment Reduction, and such new Borrowing Base and Monthly Commitment
Reduction shall continue until the next Determination Date. If the Borrower
does not furnish all such information, reports and data by any date
specified in this Section 7(b), unless such failure is of no fault of the
Borrower, the Banks may nonetheless designate the Borrowing Base and
Monthly Commitment Reduction at any amounts which the Banks in their
discretion determine and may redesignate the Borrowing Base and Monthly
Commitment Reduction from time to time thereafter until the Banks receive
all such information, reports and data, whereupon the Banks shall designate
a new Borrowing Base and Monthly Commitment Reduction as described above.
Each Bank shall determine the amount of the Borrowing Base and Monthly
Commitment Reduction based upon the loan collateral value which such Bank
in its discretion (using such methodology, assumptions and discounts rates
as such Bank customarily uses in assigning collateral value to oil and gas
properties, oil and gas gathering systems, gas processing and plant
operations) assigns to such Oil and Gas Properties of the Borrower at the
time in question and based upon such other credit factors consistently
applied (including, without limitation, the assets,
26
liabilities, cash flow, business, properties, prospects, management and
ownership of the Borrower and its affiliates) as such Bank customarily
considers in evaluating similar oil and gas credits, but such Bank in its
discretion shall not be required to give any additional positive value to
any Oil and Gas Property over the current economic and pricing parameters
used by such Bank for such Determination Date which additional value is
derived directly from a hedging, forward sale or swap agreement covering
such Oil and Gas Property as of the date of such determination. All
determinations or Unscheduled Redeterminations of the Borrowing Base and
the Monthly Commitment Reduction require the approval of Majority Banks;
provided, however, that notwithstanding anything to the contrary herein,
the amount of the Borrowing Base may not be increased, nor may the Monthly
Commitment Reduction be reduced, without the approval of all Banks. If the
required percentage of Banks cannot otherwise agree on the Borrowing Base
or the Monthly Commitment Reduction, each Bank shall submit in writing to
the Agent its proposed Borrowing Base and Monthly Commitment Reduction and
the Borrowing Base and Monthly Commitment Reduction shall be set on the
basis of the lowest Borrowing Base and the highest Monthly Commitment
Reduction proposed by any Bank. If at any time any of the Oil and Gas
Properties are sold, the Borrowing Base then in effect shall automatically
be reduced by a sum equal to the amount of prepayment required to be made
pursuant to Section 12(r) hereof. The Borrowing Base shall be additionally
reduced from time to time pursuant to the provisions of Sections 2(d), (e)
and 12(t) hereof. It is expressly understood that the Banks have no
obligation to designate the Borrowing Base or the Monthly Commitment
Reduction at any particular amounts, except in the exercise of their
discretion, whether in relation to the Revolving Commitment or otherwise.
8. Fees.
(a) Unused Commitment Fee. The Borrower shall pay to Agent for the
ratable benefit of the Banks an unused commitment fee (the "Unused
Commitment Fee") equivalent to the Unused Commitment Fee Rate times the
daily average of the unadvanced amount of the Revolving Commitment. The
Unused Commitment Fee shall be payable in arrears on the last Business Day
of each calendar quarter beginning September 30, 2000 with the final fee
payment due on the Maturity Date for any period then ending for which the
Unused Commitment Fee shall not have been theretofore paid. In the event
the Revolving Commitment terminates on any date prior to the end of any
such monthly period, the Borrower shall pay to the Agent for the ratable
benefit of the Banks, on the date of such termination, the total Unused
Commitment Fee due for the period in which such termination occurs.
(b) Agency Fees. The Borrower shall pay to the Agent certain fees for
acting as Agent hereunder in amounts set forth in the Fee Letter dated June
25, 1999 among Borrower, Agent and Bank One Capital Markets, Inc.
27
(c) The Letter of Credit Fee. Borrower shall pay to the Agent the
Letter of Credit fees required above in Section 2(d).
9. Prepayments.
(a) Voluntary Prepayments. Subject to the provisions of Section 5(e)
hereof, the Borrower may at any time and from time to time, without penalty
or premium, prepay the Notes, in whole or in part. Each such prepayment
shall be made on at least three (3) Eurodollar Business Days' notice to
Agent in the case of Eurodollar Loan Tranches and without notice in the
case of Base Rate Loans and shall be in a minimum amount of $1,000,000 or
an integral multiple of $500,000 in excess thereof or the unpaid balance on
the Notes, whichever is less, plus accrued interest thereon to the date of
prepayment.
(b) Mandatory Prepayment For Borrowing Base Deficiency. In the event
the Total Outstandings ever exceed the Borrowing Base as determined by
Banks pursuant to Section 7(b) hereof, the Borrower shall, within thirty
(30) days after notification from the Agent, either (A) by instruments
reasonably satisfactory in form and substance to the Bank, provide the
Agent with collateral with value and qualify in amounts satisfactory to all
of the Banks in their discretion in order to increase the Borrowing Base by
an amount at least equal to such excess, or (B) prepay, without premium or
penalty, the principal amount of the Revolving Notes in an amount at least
equal to such excess plus accrued interest thereon to the date of
prepayment. If the Total Outstandings ever exceed the Revolving Commitment
solely as a result of a Monthly Commitment Reduction or any other required
reduction in the Revolving Commitment, then in such event, Borrower shall
immediately prepay the principal amount of the Revolving Notes in an amount
at least equal to such excess plus accrued interest to the date of
prepayment.
10. Representations and Warranties. In order to induce the Banks to
enter into this Agreement, the Borrower hereby represents and warrants to
the Banks (which representations and warranties will survive the delivery
of the Notes) that:
(a) Creation and Existence. Borrower is a limited liability company
duly organized, validly existing and in good standing under the laws of the
jurisdiction in which it was formed and is duly qualified in all
jurisdictions wherein failure to qualify may result in a Material Adverse
Effect. Borrower has all power and authority to own its properties and
assets and to transact the business in which it is engaged.
(b) Power and Authority. Borrower is duly authorized and empowered to
execute, deliver and perform its Loan Documents, including this Agreement;
and all corporation action on Borrower's part for the due execution,
delivery and performance of the Loan Documents, including this Agreement,
have been duly and effectively taken.
28
(c) Binding Obligations. This Agreement and the other Loan Documents
will, constitute valid and binding obligations of Borrower, enforceable in
accordance with its respective terms (except that enforcement may be
subject to any applicable bankruptcy, insolvency, or similar debtor relief
laws now or hereafter in effect and relating to or affecting the
enforcement of creditors' rights generally).
(d) No Legal Bar or Resultant Lien. The Loan Documents, including this
Agreement, do not and will not, to the best of the Borrower's knowledge
violate any provisions of any contract, agreement, law, regulation, order,
injunction, judgment, decree or writ to which Borrower is subject, or
result in the creation or imposition of any lien or other encumbrance upon
any assets or properties of Borrower, other than those contemplated by this
Agreement.
(e) No Consent. The execution, delivery and performance by Borrower of
its Loan Documents, including this Agreement, does not require the consent
or approval of any other person or entity, including without limitation any
regulatory authority or governmental body of the United States or any state
thereof or any political subdivision of the United States or any state
thereof.
(f) Financial Condition. The audited Financial Statements of Borrower
for the year ended December 31, 1999, which have been delivered to Banks
are complete and correct in all material respects, and fully and accurately
reflect in all material respects the financial condition and results of the
operations of Borrower as of the date or dates and for the period or
periods stated. No change has since occurred in the condition, financial or
otherwise, of Borrower which is reasonably expected to have a Material
Adverse Effect, except as disclosed to the Banks in Schedule "2" attached
hereto.
(g) Liabilities. Borrower has no material liability, direct or
contingent, except as disclosed to the Banks in the Financial Statements or
on Schedule "3" attached hereto. No unusual or unduly burdensome
restrictions, restraint, or hazard exists by contract, law or governmental
regulation or otherwise relative to the business, assets or properties of
Borrower which is reasonably expected to have a Material Adverse Effect.
(h) Litigation. Except as described in the Financial Statements, or as
otherwise disclosed to the Banks in Schedule "4" attached hereto, there is
no litigation, legal or administrative proceeding, investigation or other
action of any nature pending or, to the knowledge of the officers of
Borrower threatened against or affecting Borrower which involves the
possibility of any judgment or liability not fully covered by insurance,
and which is reasonably expected to have a Material Adverse Effect.
29
(i) Taxes: Governmental Charges. Borrower has filed all tax returns
and reports required to be filed and has paid all taxes, assessments, fees
and other governmental charges levied upon it or its assets, properties or
income which are due and payable, including interest and penalties, the
failure of which to pay could reasonably be expected to have a Material
Adverse Effect, except such as are being contested in good faith by
appropriate proceedings and for which adequate reserves for the payment
thereof as required by GAAP has been provided and levy and execution
thereon have been stayed and continue to be stayed.
(j) Titles, Etc. Borrower has good and defensible title to all of its
assets, including without limitation, the Oil and Gas Properties, free and
clear of all liens or other encumbrances except Permitted Liens.
(k) Defaults. Borrower is not in default and no event or circumstance
has occurred which, but for the passage of time or the giving of notice, or
both, would constitute a default under any loan or credit agreement,
indenture, mortgage, deed of trust, security agreement or other agreement
or instrument to which Borrower is a party in any respect that would be
reasonably expected to have a Material Adverse Effect. No Event of Default
hereunder has occurred and is continuing.
(1) Casualties; Taking of Properties. Since the dates of the latest
Financial Statements of the Borrower delivered to Banks, neither the
business nor the assets or properties of Borrower has been affected (to the
extent it is reasonably likely to cause a Material Adverse Effect), as a
result of any fire, explosion, earthquake, flood, drought, windstorm,
accident, strike or other labor disturbance, embargo, requisition or taking
of property or cancellation of contracts, permits or concessions by any
domestic or foreign government or any agency thereof, riot, activities of
armed forces or acts of God or of any public enemy.
(m) Use of Proceeds; Margin Stock. The proceeds of the Revolving
Commitment may be used by the Borrower for the purposes of Letters of
Credit and general corporate purposes. Borrower is not engaged principally
or as one of its important activities in the business of extending credit
for the purpose of purchasing or carrying any "margin stock" as defined in
Regulation U of the Board of Governors of the Federal Reserve System (12
C.F.R. Part 221), or for the purpose of reducing or retiring any
indebtedness which was originally incurred to purchase or carry a margin
stock or for any other purpose which might constitute this transaction a
"purpose credit" within the meaning of Regulation G or U of the Board of
Governors of the Federal Reserve System.
Neither Borrower nor any person or entity acting on behalf of Borrower
has taken or will take any action which might cause the loans hereunder or
any of the Loan Documents,
30
including this Agreement, to violate Regulation G or U or any other
regulation of the Board of Governors of the Federal Reserve System or to
violate the Securities Exchange Act of 1934 or any rule or regulation
thereunder, in each case as now in effect or as the same may hereafter be
in effect.
(n) Location of Business and Offices. The principal place of business
and chief executive offices of the Borrower is located at the address
stated in Section 17 hereof.
(o) Compliance with the Law. To the best of Borrower's knowledge,
neither Borrower:
(i) is not in violation of any law, judgment, decree, order,
ordinance, or govenunental rule or regulation to which Borrower, or
any of its assets or properties are subject; or
(ii) has not failed to obtain any license, permit, franchise or
other govenunental authorization necessary to the ownership of any of
its assets or properties or the conduct of its business;
which violation or failure is reasonably expected to have a Material
Adverse Effect.
(p) No Material Misstatements. No information, exhibit or report furnished
by Borrower to the Banks in connection with the negotiation of this Agreement
contained any material misstatement of fact or omitted to state a material fact
or any fact necessary to make the statement contained therein not materially
misleading.
(q) Not A Utility. Borrower is not an entity engaged in the State of Texas
in the Generation, transmission, or distribution and sale of electric power;
(ii) transportation, distribution and sale through a local distribution system
of natural or other gas for domestic, commercial, industrial, or other use;
(iii) provision of telephone or telegraph service to others; (iv) production,
transmission, or distribution and sale of steam or water; (v) operation of a
railroad; or (vii) provision of sewer service to others.
(r) ERISA. Borrower is in compliance in all material respects with the
applicable provisions of ERISA, and no "reportable event", as such term is
defined in Section 403 of ERISA, has occurred with respect to any Plan of
Borrower.
(s) Public Utility Holding Company Act. Borrower is not a "holding
company", or "subsidiary company" of a "holding company", or an "affiliate" of a
"holding company" or of a "subsidiary company" of a "holding company", or a
"public utility" within the meaning of the Public Utility Holding Company Act of
1935, as amended.
31
(t) Subsidiaries. The Borrower has no Subsidiaries.
(u) Environmental Matters. Except as disclosed on Schedule "5", Borrower
has not received notice or otherwise learned of any Environmental Liability
which would be reasonably likely to individually or in the aggregate have a
Material Adverse Effect arising in connection with (A) any non- compliance with
or violation of the requirements of any Environmental Law or (B) the release or
threatened release of any toxic or hazardous waste into the environment, (ii)
has not received notice of any threatened or actual liability in connection with
the release or notice of any threatened release of any toxic or hazardous waste
into the environment which would be reasonably likely to individually or in the
aggregate have a Material Adverse Effect or (iii) has not received notice or
otherwise learned of any federal or state investigation evaluating whether any
remedial action is needed to respond to a release or threatened release of any
toxic or hazardous waste into the environment for which Borrower is or may be
liable which may reasonably be expected to result in a Material Adverse Effect.
(v) Liens. Except (i) as disclosed on Schedule "1" hereto and (ii) for
Permitted Liens, the assets and properties of the Borrower are free and clear of
all liens and encumbrances.
11. Conditions of Lending.
(a) The effectiveness of this Agreement, and the obligation to make the
initial Advance or issue any initial Letter of Credit under the Revolving
Commitment shall be subject to satisfaction of the following conditions
precedent:
(i) Execution and Delivery. The Borrower shall have executed and
delivered the Agreement, Notes and other required Loan Documents and the
other Security Instruments, all in form and substance satisfactory to the
Agent;
(ii) Legal Opinion. The Agent shall have received from Borrower's
legal counsel a favorable legal opinion or opinions in form and substance
satisfactory to it (i) as to the matters set forth in Subsections 10(a),
(b), (c), (d), (e) and (h) hereof and (ii) as to such other matters as
Agent or its counsel may reasonably request;
(iii) Resolutions. The Agent shall have received appropriate certified
resolutions of Borrower;
(iv) Good Standing. The Agent shall have received evidence of
existence and good standing for Borrower;
32
(v) Incumbency. The Agent shall have received a signed certificate of
Borrower, certifying the names of the officers of Borrower authorized to
sign loan documents on behalf of Borrower, together with the true
signatures of each such officer. The Agent may conclusively rely on such
certificate until the Agent receives a further certificate of Borrower
canceling or amending the prior certificate and submitting signatures of
the officers named in such further certificate;
(vi) Certificate of Formation of Limited Liability Company. The Agent
shall have received copies of all amendments to the Borrower's Certificate
of Formation, certified by the Secretary of State of the State of Delaware,
and a copy of all amendments to the Borrower's Limited Liability Company
Agreement, certified by one or more officers of Borrower as being true,
correct and complete;
(vii) Representation and Warranties. The representations and
warranties of Borrower under this Agreement are true and correct in all
material respects as of such date, as if then made (except to the extent
that such representations and warranties related solely to an earlier
date);
(viii) No Event of Default. No Event of Default shall have occurred
and be continuing nor shall any event have occurred or failed to occur
which, with the passage of time or service of notice, or both, would
constitute an Event of Default;
(ix) Other Documents. Agent shall have received such other instruments
and documents incidental and appropriate to the transaction provided for
herein as Agent or its counsel may reasonably request, and all such
documents shall be in form and substance reasonably satisfactory to the
Agent; and
(x) Legal Matters Satisfactory. All legal matters incident to the
consummation of the transactions contemplated hereby shall be reasonably
satisfactory to special counsel for Agent retained at the expense of the
Borrower.
(b) The obligation of the Banks to make any Advance or issue any Letter of
Credit under the Revolving Commitment (including the initial Advance) shall be
subject to the following additional conditions precedent that, at the date of
making each such Advance and after giving effect thereto:
(i) Representation and Warranties. The representations and warranties
of Borrower under this Agreement are true and correct in all material
respects as of such date, as if then made (except to the extent that such
representations and warranties related solely to an earlier date);
33
(ii) No Event of Default. No Event of Default shall have occurred and
be continuing nor shall any event have occurred or failed to occur which,
with the passage of time or service of notice, or both, would constitute an
Event of Default;
(iii) Other Doctunents. Agent shall have received such other
instruments and documents incidental and appropriate to the transaction
provided for herein as Agent or its counsel may reasonably request, and all
such documents shall be in form and substance reasonably satisfactory to
the Agent; and
(iv) Legal Matters Satisfactory. All legal matters incident to the
consummation of the transactions contemplated hereby shall be reasonably
satisfactory to special counsel for Agent retained at the expense of
Borrower.
12. Affirmative Covenants. A deviation from the provisions of this Section
12 shall not constitute an Event of Default under this Agreement if such
deviation is consented to in writing by the Majority Banks prior to the date of
deviation. The Borrower will at all times comply with the covenants contained in
this Section 12 from the date hereof and for so long as the Commitment is in
existence or any amount is owed to the Agent or the Banks under this Agreement
or the other Loan Documents.
(a) Financial Statements and Reports. Borrower shall promptly fumish to the
Agent from time to time upon request such information regarding the business and
affairs and financial condition of Borrower, as the Agent may reasonably
request, and will furnish to the Agent.
(i) Annual Financial Statements. As soon as available, and in any
event within ninety (90) days after the close of each fiscal year beginning
with the fiscal year ended December 31, 1999, the annual audited
consolidated and consolidating Financial Statements of Borrower, prepared
in accordance with GAAP accompanied by an unqualified opinion rendered by
an independent accounting firm reasonably acceptable to the Agent;
(ii) Quarterly Financial Statements. As soon as available, and in any
event within forty-five (45) days after the end of each calendar quarter of
each year (except the last calendar quarter of any fiscal year), beginning
with the fiscal quarter ended September 30, 2000, the quarterly unaudited
consolidated and consolidating Financial Statements of Borrower prepared in
accordance with GAAP;
(iii) Report on Properties. As soon as available and in any event on
or before March 1 and September 1 of each calendar year, and at such other
times as any Bank, in accordance with Section 7 hereof, may request, the
engineering reports
34
required to be furnished to the Agent under such Section 7 on the Oil and
Gas Properties;
(iv) Monthly Production Reports. Within 30 days after request of
Agent, a report, in form and substance satisfactory to the Agent,
indicating the next preceding month's sales volume, sales revenues,
production taxes, operating expense and net operating income from the Oil
and Gas Properties, with detailed calculations and worksheets, all in form
and substance satisfactory to Agent;
(v) SEC Reports. As soon as available, and in any event within five
(5) days of filing, copies of all filings by Borrower, if any, with the
Securities and Exchange Commission;
(vi) Additional Information. Promptly upon request of the Agent from
time to time any additional financial information or other information that
the Agent may reasonably request.
All such reports, information, balance sheets and Financial Statements referred
to in Subsection 12(a) above shall be in such detail as the Agent may reasonably
request and shall be prepared in a manner consistent with the Financial
Statements.
(b) Certificates of Compliance. Concurrently with the furnishing of the
annual audited Financial Statements pursuant to Subsection 12(a)(i) hereof and
the quarterly unaudited Financial Statements pursuant to Subsection 12(a)(ii)
hereof for the months coinciding with the end of each fiscal quarter, Borrower
shall furnish to the Agent a certificate in the form of Exhibit "C" attached
hereto, signed by the Chairman, President or Chief Financial Officer of
Borrower, (i) stating that Borrower has fulfilled in all material respects its
obligations under the Notes and the Loan Documents, including this Agreement,
and that all representations and warranties made herein and therein continue
(except to the extent they relate solely to an earlier date) to be true and
correct in all material respects (or specifying the nature of any change), or if
a Default has occurred, specifying the Default and the nature and status
thereof; (ii) to the extent requested from time to time by the Agent,
specifically affirming compliance of Borrower in all material respects with any
of its representations (except to the extent they relate solely to an earlier
date) or obligations under said instruments; (iii) setting forth the
computation, in reasonable detail as of the end of each period, as applicable,
covered by such certificate, of compliance with Sections 13(b), (c), (d), (e)
and (f); and (iv) containing or accompanied by such financial or other details,
information and material as the Agent may reasonably request to evidence such
compliance.
(c) Accountants' Certificate. Concurrently with the furnishing of the
annual Financial Statements pursuant to Section 12(a)(i) hereof, Borrower will
furnish a statement
35
from the firm of independent public accountants which prepared such Financial
Statement to the effect that nothing has come to its attention to cause them to
believe that there existed on the date of such statements any Event of Default
and specifically calculating Borrower's compliance with Sections 13(b), (c),
(d), (e) and (f) of this Agreement.
(d) Taxes and Other Liens. The Borrower will pay and discharge promptly all
taxes, assessments and governmental charges or levies imposed upon the Borrower,
or upon the income or any assets or property of Borrower, as well as all claims
of any kind (including claims for labor, materials, supplies and rent) which, if
unpaid, might become a Lien or other encumbrance upon any or all of the assets
or property of Borrower and which could reasonably be expected to result in a
Material Adverse Effect; provided, however, that the Borrower shall not be
required to pay any such tax, assessment, charge, levy or claim if the amount,
applicability or validity thereof shall currently be contested in good faith by
appropriate proceedings diligently conducted, levy and execution thereon have
been stayed and continue to be stayed and if Borrower shall have set up adequate
reserves therefor, if required, under GAAP.
(e) Compliance with Laws. Borrower will observe and comply, in all material
respects, with all applicable laws, statutes, codes, acts, ordinances, orders,
judgments, decrees, injunctions, rules, regulations, orders and restrictions
relating to environmental standards or controls or to energy regulations of all
federal, state, county, municipal and other governments, departments,
commissions, boards, agencies, courts, authorities, officials and officers,
domestic or foreign.
(f) Further Assurances. The Borrower will cure promptly any defects in the
creation and issuance of the Notes and the execution and delivery of the Notes
and the Loan Documents, including this Agreement. The Borrower at its sole
expense will promptly execute and deliver to Agent upon its reasonable request
all such other and further documents, agreements and instruments in compliance
with or accomplishment of the covenants and agreements in this Agreement, or to
correct any omissions in the Notes or more fully to state the obligations set
out herein.
(g) Performance of Obligations. The Borrower will pay the Notes and other
obligations incurred by it hereunder according to the reading, tenor and effect
thereof and hereof, and Borrower will do and perform every act and discharge all
of the obligations provided to be performed and discharged by the Borrower under
the Loan Documents, including this Agreement, at the time or times and in the
manner specified.
(h) Insurance. The Borrower now maintains and will continue to maintain
insurance with financially sound and reputable insurers with respect to its
assets against such liabilities, fires, casualties, risks and contingencies and
in such types and amounts as is
36
customary in the case of persons engaged in the same or similar businesses and
similarly situated. Upon request of the Agent, the Borrower will furnish or
cause to be furnished to the Agent from time to time a summary of the insurance
coverage of Borrower in form and substance satisfactory to the Agent, and, if
requested, will furnish the Agent copies of the applicable policies. Upon demand
by Agent any insurance policies covering any such property shall be endorsed (i)
to provide that such policies may not be canceled, reduced or affected in any
manner for any reason without fifteen (15) days prior notice to Agent, (ii) to
provide for insurance against fire, casualty and other hazards normally insured
against, in the amount of the full value (less a reasonable deductible not to
exceed amounts customary in the industry for similarly situated business and
properties) of the property insured, and (iii) to provide for such other matters
as the Agent may reasonably require. The Borrower shall at all times maintain
adequate insurance with respect to all of its assets, including but not limited
to, the Oil and Gas Properties or any collateral against its liability for
injury to persons or property, which insurance shall be by financially sound and
reputable insurers and shall without limitation provide the following coverages:
comprehensive general liability (including coverage for damage to underground
resources and equipment, damage caused by blowouts or cratering, damage caused
by explosion, damage to underground minerals or resources caused by saline
substances, broad form property damage coverage, broad form coverage for
contractually assumed liabilities and broad form coverage for acts of
independent contractors), worker's compensation and automobile liability. The
Borrower shall at all times maintain cost of control of well insurance with
respect to the Oil and Gas Properties which shall include the Borrower against
seepage and pollution expense; redrilling expense; and cost of control of well;
fires, blowouts, etc., if deemed economical in the reasonable discretion of the
Borrower. Additionally, the Borrower shall at all times maintain adequate
insurance with respect to all of its other assets and wells in accordance with
prudent business practices.
(i) Accounts and Records. Borrower will keep books, records and accounts in
which full, true and correct entries will be made of all dealings or
transactions in relation to its business and activities, prepared in a manner
consistent with prior years, subject to changes suggested by Borrower's
auditors.
(j) Right of Inspection. Borrower will permit any officer, employee or
agent of the Banks to examine Borrower's books, records and accounts, and take
copies and extracts therefrom, all at such reasonable times during normal
business hours and as often as the Banks may reasonably request. The Banks will
use best efforts to keep all Confidential Information (as herein defmed)
confidential and will not disclose or reveal the Confidential Information or any
part thereof other than (i) as required by law, and (ii) to the Banks', and the
Banks' subsidiaries, Affiliates, officers, employees, legal counsel and
regulatory authorities or advisors to whom it is necessary to reveal such
information for the purpose of effectuating the agreements and undertakings
specified herein or as otherwise required in
37
connection with the enforcement of the Banks' and the Agent's rights and
remedies under the Notes, this Agreement and the other Loan Documents. As used
herein, "Confidential Information" means information about the Borrower
furnished by the Borrower to the Banks, but does not include information (i)
which was publicly known, or otherwise known to the Banks, at the time of the
disclosure, (ii) which subsequently becomes publicly known through no act or
omission by the Banks, or (iii) which otherwise becomes known to the Banks,
other than through disclosure by the Borrower.
(k) Notice of Certain Events. The Borrower shall promptly notify the Agent
if Borrower learns of the occurrence of (i) any event which constitutes an Event
of Default together with a detailed statement by Borrower of the steps being
taken to cure such Event of Default; (ii) any legal, judicial or regulatory
proceedings affecting Borrower, or any of the assets or properties of Borrower
which, if adversely determined, could reasonably be expected to have a Material
Adverse Effect; (iii) any dispute between Borrower and any governmental or
regulatory body or any other Person or entity which, if adversely determined,
might reasonably be expected to cause a Material Adverse Effect; (iv) any other
matter which in Borrower's reasonable opinion could have a Material Adverse
Effect.
(l) ERISA Information and Compliance. The Borrower will promptly furnish to
the Agent immediately upon becoming aware of the occurrence of any "reportable
event", as such term is defined in Section 4043 of ERISA, or of any "prohibited
transaction", as such term is defined in Section 4975 of the Internal Revenue
Code of 1954, as amended, in connection with any Plan or any trust created
thereunder, a written notice signed by the chief financial officer of Borrower
specifying the nature thereof, what action Borrower is taking or proposes to
take with respect thereto, and, when known, any action taken by the Internal
Revenue Service with respect thereto.
(m) Environmental Reports and Notices. The Borrower will deliver to the
Agent (i) promptly upon its becoming available, one copy of each report sent by
Borrower to any court, governmental agency or instrumentality pursuant to any
Environmental Law, (ii) notice, in writing, promptly upon Borrower's receipt of
notice or otherwise learning of any claim, demand, action, event, condition,
report or investigation indicating any potential or actual liability arising in
connection with (x) the non- compliance with or violation of the requirements of
any Environmental Law which reasonably could be expected to have a Material
Adverse Effect; (y) the release or threatened release of any toxic or hazardous
waste into the environment which reasonably could be expected to have a Material
Adverse Effect or which release Borrower would have a duty to report to any
court or government agency or instrumentality, or (iii) the existence of any
Envirorunental Lien on any properties or assets of Borrower, and Borrower shall
immediately deliver a copy of any such notice to Agent.
38
(n) Compliance and Maintenance. The Borrower will (i) observe and comply in
all material respects with all Environmental Laws; (ii) except as provided in
Subsections 12(p) and 12(q) below, maintain the Oil and Gas Properties and other
assets and properties in good and workable condition at all times and make all
repairs, replacements, additions, betterments and improvements to the Oil and
Gas Properties and other assets and properties as are needed and proper so that
the business carried on in connection therewith may be exercised in good faith;
(iii) take or cause to be taken whatever actions are necessary or desirable to
prevent an event or condition of default by Borrower under the provisions of any
gas purchase or sales contract or any other contract, agreement or lease
comprising a part of the Oil and Gas Properties or other collateral security
hereunder which default could reasonably be expected to result in a Material
Adverse Effect; and (iv) furnish Agent upon request evidence satisfactory to
Agent that there are no Liens, claims or encumbrances on the Oil and Gas
Properties, except laborers', vendors', repairmen's, mechanics', worker's, or
materialmen's liens arising by operation of law or incident to the construction
or improvement of property if the obligations secured thereby are not yet due or
are being contested in good faith by appropriate legal proceedings or Permitted
Liens.
(o) Operation of Properties. Except as provided in Subsection 12(p) and (q)
below, the Borrower will operate, or use reasonable efforts to cause to be
operated, all Oil and Gas Properties in a careful and efficient manner in
accordance with the practice of the industry and in compliance in all material
respects with all applicable laws, rules, and regulations, and in compliance in
all material respects with all applicable proration and conservation laws of the
jurisdiction in which the properties are situated, and all applicable laws,
rules, and regulations, of every other agency and authority from time to time
constituted to regulate the development and operation of the properties and the
production and sale of hydrocarbons and other minerals therefrom; provided,
however, that the Borrower shall have the right to contest in good faith by
appropriate proceedings, the applicability or lawfulness of any such law, rule
or regulation and pending such contest may defer compliance therewith, as long
as such deferment shall not subject the properties or any part thereof to
foreclosure or loss.
(p) Compliance with Leases and Other Instruments. The Borrower will pay or
cause to be paid and discharge all rentals, delay rentals, royalties, production
payment, and indebtedness required to be paid by Borrower (or required to keep
unimpaired in all material respects the rights of Borrower in Oil and Gas
Properties) accruing under, and perform or cause to be performed in all material
respects each and every act, matter, or thing required of Borrower by each and
all of the assignments, deeds, leases, subleases, contracts, and agreements in
any way relating to Borrower or any of the Oil and Gas Properties and do all
other things necessary of Borrower to keep unimpaired in all material respects
the rights of Borrower thereunder and to prevent the forfeiture thereof or
default thereunder; provided, however, that nothing in this Agreement shall be
deemed to require Borrower to perpetuate
39
or renew any oil and gas lease or other lease by payment of rental or delay
rental or by commencement or continuation of operations nor to prevent Borrower
from abandoning or releasing any oil and gas lease or other lease or well
thereon when, in any of such events, in the opinion of Borrower exercised in
good faith, it is not in the best interest of the Borrower to perpetuate the
same.
(q) Certain Additional Assurances Regarding Maintenance and Operations of
Properties. With respect to those Oil and Gas Properties which are being
operated by operators other than the Borrower, the Borrower shall not be
obligated to perform any undertakings contemplated by the covenants and
agreement contained in Subsections 12(o) or 12(p) hereof which are performable
only by such operators and are beyond the control of the Borrower; however, the
Borrower agrees to promptly take all reasonable actions available under any
operating agreements or otherwise to bring about the performance of any such
material undertakings required to be performed thereunder.
(r) Sale of Certain Assets/Prepayment of Proceeds. The Borrower will
immediately pay over to the Agent for the ratable benefit of the Banks as a
prepayment of principal on the Notes, an amount equal to 100% of the Release
Price received by Borrower from the sale of the Oil and Gas Properties, which
sale has been approved in advance by the Majority Banks. Provided, however, that
the foregoing sentence shall not apply to asset sales with proceeds valued at up
to $500,000 between each Borrowing Base Determination Date. The term "Release
Price" as used herein shall mean a price determined by Majority Banks, in their
discretion based upon the loan collateral value of the Oil and Gas Properties
being sold by Borrower which such Banks in their discretion (using such
methodology, assumptions and discounts rates as such Banks customarily use in
assigning collateral value to oil and gas properties, oil and gas gathering
systems, gas processing and plant operations) assign to such Oil and Gas
Properties at the time in question as approved pursuant to each Bank's internal
credit procedures. Any such prepayment of principal on the Revolving Notes
required by this Section 12(r), shall not be in lieu of, but shall be in
addition to, any Monthly Commitment Reduction or any mandatory prepayment of
principal required to be paid pursuant to Section 9(b) hereof
(s) Title Matters. Within thirty (30) days after the Effective Date with
respect to the Oil and Gas Properties listed on Schedule "6" hereto, furnish
Agent with title opinions and/or title information reasonably satisfactory to
Agent showing good and defensible title of Borrower to such Oil and Gas
Properties subject only to the Permitted Liens. As to any Oil and Gas Properties
hereafter mortgaged to Agent, Borrower will promptly (but in no event more than
thirty (30) days following such mortgaging), furnish Agent with title opinions
and/or title information reasonably satisfactory to Agent showing good and
defensible title of Borrower to such Oil and Gas Properties subject only to
Permitted Liens.
40
(t) Curative Matters. Within thirty (30) days after the Effective Date with
respect to matters listed on Schedule "7" and, thereafter, within thirty (30)
days after receipt by Borrower from Agent or its counsel of written notice of
title defects the Agent reasonably requires to be cured, Borrower shall either
(i) provide such curative information, in form and substance satisfactory to
Agent, or (ii) substitute Oil and Gas Properties of value and quality
satisfactory to the Agent for all of Oil and Gas Properties for which such title
curative was requested but upon which Borrower elected not to provide such title
curative information, and, within sixty (60) days of such substitution, provide
title opinions or title information satisfactory to the Agent covering the Oil
and Gas Properties so substituted. If the Borrower fails to satisfy (i) or (ii)
above within the time specified, the loan collateral value assigned by the Banks
to the Oil and Gas Properties for which such curative information was requested
shall be deducted from the Borrowing Base resulting in a reduction thereof.
(u) Change of Principal Place of Business. Borrower shall give Agent at
least thirty (30) days prior written notice of its intention to move its
principal place of business from the address as set forth in Section 17 hereof.
13. Negative Covenants. A deviation from the provisions of this Section 13
shall not constitute an Event of Default under this Agreement if such deviation
is consented to in writing by the Majority Banks prior to the date of deviation.
The Borrower will at all times comply with the covenants contained in this
Section 13 from the date hereof and for so long as the Commitment is in
existence or any amount is owed to the Agent or the Banks under this Agreement
or the other Loan Documents.
(a) Negative Pledge. The Borrower shall not without the prior written
consent of the Banks:
(i) create, incur, assume or permit to exist any Lien, security
interest or other encumbrance on any of its assets or properties except
Permitted Liens; or
(ii) sell, lease, transfer or otherwise dispose of, in any fiscal
year, any of its assets except for (A) sales, leases, transfers or other
dispositions made in the ordinary course of Borrower's oil and gas
businesses, and (B) sales made with the consent of Majority Banks which are
made pursuant to, and in full compliance with, Section 12(r) hereof;
(b) Current Ratio. Borrower shall not allow its ratio of Current Assets to
Current Liabilities to be less than 1.1 to 1.0 as of the end of any fiscal
quarter.
41
(c) Minimum Interest Coverage Rating. The Borrower will not allow its
Minimum Interest Coverage Ratio to be less than (i) 1.5 to 1.0 for the period
from September 30, 2000 to and including June 30, 2001, (ii) 2.0 to 1.0 for the
fiscal quarters ended September 30, 2001 and December 31, 2001, and (iii) 2.75
to 1.0 as of the end of each fiscal quarter thereafter. The aforesaid ratio
shall be calculated as of the end of each fiscal quarter for the four preceding
fiscal quarters ending with the fiscal quarter for which such measurement is
being made.
(d) General and Administrative Expenses. The Borrower will never allow its
General and Administrative Expenses (including management fees) for any fiscal
year to exceed $2,500,000 in any year, said amount to be tested as of the end of
each fiscal year.
(e) Consolidations and Mergers. Borrower will not consolidate or merge with
or into any other Person, except that Borrower may merge with another Person if
Borrower is the surviving entity in such merger and if, after giving effect
thereto, no Default or Event of Default shall have occurred and be continuing.
(f) Debts, Guaranties and Other Obligations. Without the consent of
Majority Banks, Borrower will not incur, create, assume or in any manner become
or be liable in respect of any indebtedness, nor will Borrower guarantee or
otherwise in any manner become or be liable in respect of any indebtedness,
liabilities or other obligations of any other person or entity, whether by
agreement to purchase the indebtedness of any other person or entity or
agreement for the furnishing of funds to any other person or entity through the
purchase or lease of goods, supplies or services (or by way of stock purchase,
capital contribution, advance or loan) for the purpose of paying or discharging
the indebtedness of any other person or entity, or otherwise, except that the
foregoing restrictions shall not apply to:
(i) the Notes and any renewal or increase thereof, or other
indebtedness of the Borrower heretofore disclosed to Banks in the
Borrower's Financial Statements or on Schedule "3" hereto; or
(ii) taxes, assessments or other government charges which are not yet
due or are being contested in good faith by appropriate action promptly
initiated and diligently conducted, if such reserve as shall be required by
GAAP shall have been made therefor and levy and execution thereon have been
stayed and continue to be stayed; or
(iii) indebtedness (other than in connection with a loan or lending
transaction) incurred in the ordinary course of business, including, but
not limited to indebtedness for drilling, completing, leasing and reworking
oil and gas wells; or
42
(iv) other indebtedness not exceeding $1,000,000 in the aggregate
outstanding at any time; or
(v) any renewals or extensions of (but, other than in the case of the
Notes, not increases in) any of the foregoing.
(g) Distributions. Borrower will not declare or pay any cash distribution,
purchase, redeem or otherwise acquire for value any of its membership interests
now or hereafter outstanding, return any capital to its members, or make any
distribution of its assets to its stockholders as such, except the foregoing
shall not apply to (i) distributions made to its members for the payment of
federal income taxes directly attributable to Borrower's income and (ii)
dividends on its preferred stock; provided, however, that immediately before and
after giving effect to any such distribution no (i) Default or Event of Default
or (ii) Borrowing Base deficiency or requirement to make any mandatory
prepayment of principal pursuant to Section 9(b) hereof, shall exist.
(h) Loans and Advances. Borrower shall not make or permit to remain
outstanding any loans or advances to or in any person or entity, except that the
foregoing restriction shall not apply to:
(i) loans or advances to any person, the material details of which
have been set forth in the Financial Statements of the Borrower heretofore
furnished to Banks; or
(ii) advances made in the ordinary course of Borrower's oil and gas
business.
(i) Sale or Discount of Receivables. Borrower will not discount or sell
with recourse, or sell for less than the greater of the face or market value
thereof, any of its notes receivable or accounts receivable.
(j) Nature of Business. Borrower will not permit any material change to be
made in the character of its business as carried on at the date hereof.
(k) Transactions with Affiliates. Borrower will not enter into any
transaction with any Affiliate, except transactions upon terms that are no less
favorable to it than would be obtained in a transaction negotiated at arm's
length with an unrelated third party.
(l) Hedging Transactions. Borrower will not enter into any Rate Management
Transactions, except the foregoing prohibitions shall not apply to (x)
transactions consented
43
to in writing by the Majority Banks which are on terms acceptable to the
Majority Banks, or (y) Pre-Approved Contracts with Agent or a Bank.
(m) Investments. Borrower shall not make any investments in any person or
entity, except such restriction shall not apply to investments in Cash
Equivalents.
(n) Amendment to Certificate of Formation or Limited Liability Agreement.
Borrower will not permit any amendment to, or any alteration of, its Certificate
of Formation or its Limited Liability Company Agreement.
(o) Prepayment of Other Indebtedness. Except as otherwise provided for
herein or otherwise in this Agreement, Borrower shall not make any payment,
prepayment or other unscheduled principal payment on, or redeem any of its
indebtedness (other than indebtedness owed to the Banks hereunder).
14. Events of Default. Any one or more of the following events shall be
considered an "Event of Default" as that term is used herein:
(a) The Borrower shall fail to pay when due or declared due the principal
of, and the interest on, the Notes, or any fee or any other indebtedness of the
Borrower incurred pursuant to this Agreement or any other Loan Document; or
(b) Any representation or warranty made by Borrower under this Agreement or
any other Loan Document, or in any certificate or statement furnished or made to
the Banks pursuant hereto, or in connection herewith, or in connection with any
document furnished hereunder, shall prove to be untrue in any material respect
as of the date on which such representation or warranty is made (or deemed
made), or any representation, statement (including financial statements),
certificate, report or other data furnished or to be furnished or made by
Borrower under any Loan Document, including this Agreement, proves to have been
untrue in any material respect, as of the date as of which the facts therein set
forth were stated or certified; or
(c) Default shall be made in the due observance or performance of any of
the covenants or agreements of the Borrower contained in the Loan Documents,
including this Agreement (excluding covenants contained in Section 12(s),
Section 12(w), Section 12(x) and Section 13 of the Agreement for which there is
no cure period), and such default shall continue for more than thirty (30) days;
or
(d) Default shall be made in the due observance or performance of the
covenants of Borrower contained in Section 12(s), Section 12(w), Section 12(x)
or Section 13 of this Agreement; or
44
(e) Default shall be made in respect of any obligation for borrowed money,
other than the Notes, for which Borrower is liable (directly, by assumption, as
guarantor or otherwise), or any obligations secured by any mortgage, pledge or
other security interest, lien, charge or encumbrance with respect thereto, on
any asset or property of Borrower or in respect of any agreement relating to any
such obligations unless such Borrower is not liable for same (i.e., unless
remedies or recourse for failure to pay such obligations is limited to
foreclosure of the collateral security therefor), and if such default shall
continue beyond the applicable grace period, if any; or
(f) Borrower shall commence a voluntary case or other proceedings seeking
liquidation, reorganization or other relief with respect to itself or its debts
under any bankruptcy, insolvency or other similar law now or hereafter in effect
or seeking an appointment of a trustee, receiver, liquidator, custodian or other
similar official of it or any substantial part of its property, or shall consent
to any such relief or to the appointment of or taking possession by any such
official in an involuntary case or other proceeding commenced against it, or
shall make a general assignment for the benefit of creditors, or shall fail
generally to pay its debts as they become due, or shall take any corporate
action authorizing the foregoing; or
(g) An involuntary case or other proceeding, shall be commenced against
Borrower seeking liquidation, reorganization or other relief with respect to it
or its debts under any bankruptcy insolvency or similar law now or hereafter in
effect or seeking the appointment of a trustee, receiver, liquidator, custodian
or other similar official of it or any substantial part of its property, and
such involuntary case or other proceeding shall remain undismissed and unstayed
for a period of sixty (60) days; or an order for relief shall be entered against
Borrower under the federal bankruptcy laws as now or hereinafter in effect; or
(h) A final judgment or order for the payment of money in excess of
$500,000 (or judgments or orders aggregating in excess of $500,000) shall be
rendered against Borrower and such judgments or orders shall continue
unsatisfied and unstayed for a period of thirty (30) days; or
(i) In the event the Total Outstandings shall at any time exceed the
Borrowing Base established for the Revolving Notes, and the Borrower shall fail
to comply with the provisions of Section 9(b) hereof, or
(j) A Change of Control shall occur; or
(k) A Change of Management shall occur; or
45
Upon occurrence of any Event of Default specified in Subsections 14(f) and
(g) hereof, the entire principal amount due under the Notes and all interest
then accrued thereon, and any other liabilities of the Borrower hereunder, shall
become immediately due and payable all without notice and without presentment,
demand, protest, notice of protest or dishonor or any other notice of default of
any kind, all of which are hereby expressly waived by the Borrower. In any other
Event of Default, the Agent, upon request of Majority Banks, shall by notice to
the Borrower declare the principal of, and all interest then accrued on, the
Notes and any other liabilities hereunder to be forthwith due and payable,
whereupon the same shall forthwith become due and payable without presentment,
demand, protest, notice of intent to accelerate, notice of acceleration or other
notice of any kind, all of which the Borrower hereby expressly waives, anything
contained herein or in the Note to the contrary notwithstanding. Nothing
contained in this Section 14 shall be construed to limit or amend in any way the
Events of Default enumerated in the Note, or any other document executed in
connection with the transaction contemplated herein.
Upon the occurrence and during the continuance of any Event of Default, the
Banks are hereby authorized at any time and from time to time, without notice to
the Borrower (any such notice being expressly waived by the Borrower), to set-
off and apply any and all deposits (general or special, time or demand,
provisional or final) at any time held and other indebtedness at any time owing
by any of the Banks to or for the credit or the account of the Borrower against
any and all of the indebtedness of the Borrower under the Notes and the Loan
Documents, including this Agreement, irrespective of whether or not the Banks
shall have made any demand under the Loan Documents, including this Agreement or
the Notes and although such indebtedness may be umnatured. Any amount set-off by
any of the Banks shall be applied against the indebtedness owed the Banks by the
Borrower pursuant to this Agreement and the Notes. The Banks agree promptly to
notify the Borrower after any such setoff and application, provided that the
failure to give such notice shall not affect the validity of such set-off and
application. The rights of the Bank under this Section are in addition to other
rights and remedies (including, without limitation, other rights of setoff)
which the Banks may have.
15. The Agent and the Banks.
(a) Appointment and Authorization. Each Bank hereby appoints Agent as its
nominee and agent, in its name and on its behalf: (i) to act as nominee for and
on behalf of such Bank in and under all Loan Documents; (ii) to arrange the
means whereby the funds of Banks are to be made available to the Borrower under
the Loan Documents; (iii) to take such action as may be requested by any Bank
under the Loan Documents (when such Bank is entitled to make such request under
the Loan Documents); (iv) to receive all documents and items to be furnished to
Banks under the Loan Documents; (v) to be the secured party, mortgagee,
beneficiary, and similar party in respect of, and to receive, as the case may
be, any collateral for the benefit of Banks; (vi) to promptly distribute to each
Bank all material information, requests, documents and items received from the
Borrower under the Loan
46
Documents; (vii) to promptly distribute to each Bank such Bank's Pro Rata Part
of each payment or prepayment (whether voluntary, as proceeds of insurance
thereon, or otherwise) in accordance with the terms of the Loan Documents and
(viii) to deliver to the appropriate Persons requests, demands, approvals and
consents received from Banks. Each Bank hereby authorizes Agent to take all
actions and to exercise such powers under the Loan Documents as are specifically
delegated to Agent by the terms hereof or thereof, together with all other
powers reasonably incidental thereto. With respect to its Commitment hereunder
and the Notes issued to it, Agent and any successor Agent shall have the same
rights under the Loan Documents as any other Bank and may exercise the same as
though it were not the Agent; and the term "Bank" or "Banks" shall, unless
otherwise expressly indicated, include Agent and any successor Agent in its
capacity as a Bank. Agent and any successor Agent and its Affiliates may accept
deposits from, lend money to, act as trustee under indentures of and generally
engage in any kind of business with the Borrower, and any person which may do
business with the Borrower, all as if Agent and any successor Agent was not
Agent hereunder and without any duty to account therefor to the Banks; provided
that, if any payments in respect of any property (or the proceeds thereof) now
or hereafter in the possession or control of Agent which may be or become
security for the obligations of the Borrower arising under the Loan Documents by
reason of the general description of indebtedness secured or of property
contained in any other agreements, documents or instruments related to any such
other business shall be applied to reduction of the obligations of the Borrower
arising under the Loan Documents, then each Bank shall be entitled to share in
such application according to its pro rata part thereof. Each Bank, upon request
of any other Bank, shall disclose to all other Banks all indebtedness and
liabilities, direct and contingent, of the Borrower to such Bank as of the time
of such request.
(b) Note Holders. From time to time as other Banks become a party to this
Agreement, Agent shall obtain execution by the Borrower of additional Notes in
amounts representing the Commitment of each such new Bank, up to an aggregate
face amount of all Revolving Notes not exceeding $110,000,000. The obligation of
such Bank shall be governed by the provisions of this Agreement, including but
not limited to, the obligations specified in Section 2 hereof. From time to
time, Agent may require that the Banks exchange their Notes for newly issued
Notes to better reflect the Commitment of the Banks. Agent may treat the payee
of any Note as the holder thereof until written notice of transfer has been
filed with it, signed by such payee and in form satisfactory to Agent.
(c) Consultation with Counsel. Banks agree that Agent may consult with
legal counsel selected by Agent and shall not be liable for any action taken or
suffered in good faith by it in accordance with the advice of such counsel.
Banks acknowledge that Gardere & Wynne, L.L.P. is counsel for Bank One, both as
Agent and as a Bank, and that such firm does not represent any of the other
Banks in connection with this transaction.
47
(d) Documents. Agent shall not be under a duty to examine or pass upon the
validity, effectiveness, enforceability, genuineness or value of any of the Loan
Documents or any other instrument or document furnished pursuant thereto or in
connection therewith, and Agent shall be entitled to assume that the same are
valid, effective, enforceable and genuine and what they purport to be.
(e) Resignation or Removal of Agent. Subject to the appointment and
acceptance of a successor Agent as provided below, Agent may resign at any time
by giving written notice thereof to Banks and the Borrower, and Agent may be
removed at any time with or without cause by all Banks. If no successor Agent
has been so appointed by all Banks (and approved by the Borrower) and has
accepted such appointment within 30 days after the retiring Agent's giving of
notice of resignation or removal of the retiring Agent, then the retiring Agent
may, on behalf of Banks, appoint a successor Agent. Any successor Agent must be
approved by Borrower, which approval will not be unreasonably withheld. Upon the
acceptance of any appointment as Agent hereunder by a successor Agent, such
successor Agent shall thereupon succeed to and become vested with all the rights
and duties of the retiring Agent, and the retiring Agent, as the case may be,
shall be discharged from its duties and obligations hereunder. After any
retiring Agent resignation or removal hereunder as Agent, the provisions of this
Section 15 shall continue in effect for its benefit in respect to any actions
taken or omitted to be taken by it while it was acting as Agent. To be eligible
to be an Agent hereunder the party serving, or to serve, in such capacity must
own a Pro Rata Part of the Commitment equal to the level of Commitment required
to be held by any Bank pursuant to Section 28 hereof.
(f) Responsibility of Agent. It is expressly understood and agreed that the
obligations of Agent under the Loan Documents are only those expressly set forth
in the Loan Documents as to each, and that Agent shall be entitled to assume
that no Default or Event of Default has occurred and is continuing, unless Agent
has actual knowledge of such fact or has received notice from a Bank or the
Borrower that such Bank or the Borrower considers that a Default or an Event of
Default has occurred and is continuing and specifying the nature thereof.
Neither Agent nor any of its directors, officers, attorneys or employees shall
be liable for any action taken or omitted to be taken by them under or in
connection with the Loan Documents, except for its or their own gross negligence
or willful misconduct. Agent shall not incur liability under or in respect of
any of the Loan Documents by acting upon any notice, consent, certificate,
warranty or other paper or instrument believed by it to be genuine or authentic
or to be signed by the proper party or parties, or with respect to anything
which it may do or refrain from doing in the reasonable exercise of its
judgment, or which may seem to it to be necessary or desirable.
Agent shall not be responsible to Banks for any of the Borrower's recitals,
statements, representations or warranties contained in any of the Loan
Documents, or in any certificate
48
or other document referred to or provided for in, or received by any Bank under,
the Loan Documents, or for the value, validity, effectiveness, genuineness,
enforceability or sufficiency of any of the Loan Documents or for any failure by
the Borrower to perform any of its obligations hereunder or thereunder. Agent
may employ agents and attorneys-in-fact and shall not be answerable, except as
to money or securities received by it or its authorized agents, for the
negligence or misconduct of any such agents or attorneys-in-fact selected by it
with reasonable care.
The relationship between Agent and each Bank is only that of agent and
principal and has no fiduciary aspects. Nothing in the Loan Documents or
elsewhere shall be construed to impose on Agent any duties or responsibilities
other than those for which express provision is therein made. In performing its
duties and functions hereunder, Agent does not assume and shall not be deemed to
have assumed, and hereby expressly disclaims, any obligation or responsibility
toward or any relationship of agency or trust with or for the Borrower or any of
its beneficiaries or other creditors. As to any matters not expressly provided
for by the Loan Documents, Agent shall not be required to exercise any
discretion or take any action, but shall be required to act or to refrain from
acting (and shall be fully protected in so acting or refraining from acting)
upon the instructions of all Banks and such instructions shall be binding upon
all Banks and all holders of the Notes; provided, however, that Agent shall not
be required to take any action which is contrary to the Loan Documents or
applicable law.
Agent shall have the right to exercise or refrain from exercising, without
notice or liability to the Banks, any and all rights afforded to Agent by the
Loan Documents or which Agent may have as a matter of law; provided, however,
Agent shall not, without the consent of Majority Banks, take any other action
with regard to amending the Loan Documents, waiving any default under the Loan
Documents or taking any other action with respect to the Loan Documents which
requires consent of Majority Banks. Provided further, however, that no
amendment, waiver, or other action shall be effected pursuant to the preceding
sentence without the consent of all Banks which: (i) would increase the
Borrowing Base or decrease the Monthly Commitment Reduction, (ii) would reduce
any fees hereunder, or the principal of, or the interest on, any Bank's Note or
Notes, (iii) would postpone any date fixed for any payment of any fees
hereunder, or any principal or interest of any Bank's Note or Notes, (iv) would
materially increase any Bank's obligations hereunder or would materially alter
Agent's obligations to any Bank hereunder, (v) would release Borrower from its
obligation to pay any Bank's Note or Notes, (vi) release any of the Collateral
(except as otherwise provided in Section 12(r) hereof), (vii) would change the
definition of Majority Banks, (viii) would amend, modify or change any provision
of this Agreement requiring the consent of all the Banks, (ix) would extend the
Revolving Maturity Date, or (x) would amend this sentence or the previous
sentence. Agent shall not have liability to Banks for failure or delay in
exercising any right or power possessed by Agent pursuant to the Loan Documents
49
or otherwise unless such failure or delay is caused by the gross negligence of
the Agent, in which case only the Agent responsible for such gross negligence
shall have liability therefor to the Banks.
(g) Independent Investigation. Each Bank severally represents and warrants
to Agent that it has made its own independent investigation and assessment of
the financial condition and affairs of the Borrower in connection with the
making and continuation of its participation hereunder and has not relied
exclusively on any information provided to such Bank by Agent in connection
herewith, and each Bank represents, warrants and undertakes to Agent that it
shall continue to make its own independent appraisal of the credit worthiness of
the Borrower while the Notes are outstanding or its Commitment hereunder are in
force. Agent shall not be required to keep itself informed as to the performance
or observance by the Borrower of this Agreement or any other document referred
to or provided for herein or to inspect the properties or books of the Borrower.
Other than as provided in this Agreement, Agent shall not have any duty,
responsibility or liability to provide any Bank with any credit or other
information concerning the affairs, financial condition or business of the
Borrower which may come into the possession of Agent.
(h) Indemnification. Banks agree to indemnify Agent, ratably according to
their respective Commitment on a Pro Rata basis, from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements of any proper and reasonable kind or nature
whatsoever which may be imposed on, incurred by or asserted against Agent in any
way relating to or arising out of the Loan Documents or any action taken or
omitted by Agent under the Loan Documents, provided that no Bank shall be liable
for any portion of such liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements resulting from
Agent's gross negligence or willful misconduct. Each Bank shall be entitled to
be reimbursed by the Agent for any amount such Bank paid to Agent under this
Section 15(h) to the extent the Agent has been reimbursed for such payments by
the Borrower or any other Person. The parties intend for the provisions of this
Section to apply to and protect the Agent from the consequences of any liability
including strict liability imposed or threatened to be imposed on Agent as well
as from the consequences of its own negligence, whether or not that negligence
is the sole, contributing or concurring cause of any such liability.
(i) Benefit of Section 15. The agreements contained in this Section 15 are
solely for the benefit of Agent and the Banks and are not for the benefit of, or
to be relied upon by, the Borrower, any Affiliate of the Borrower or any other
person.
(j) Pro Rata Treatment. Subject to the provisions of this Agreement, each
payment (including each prepayment) by the Borrower and collection by Banks
(including
50
offsets) on account of the principal of and interest on the Notes and fees
provided for in this Agreement, payable by the Borrower shall be made Pro Rata;
provided, however, in the event that any Defaulting Bank shall have failed to
make an Advance as contemplated under Section 3 hereof and Agent or another Bank
or Banks shall have made such Advance, payment received by Agent for the account
of such Defaulting Bank or Banks shall not be distributed to such Defaulting
Bank or Banks until such Advance or Advances shall have been repaid in full to
the Bank or Banks who funded such Advance or Advances.
(k) Assumption as to Payments. Except as specifically provided herein,
unless Agent shall have received notice from the Borrower prior to the date on
which any payment is due to Banks hereunder that the Borrower will not make such
payment in full, Agent may, but shall not be required to, assume that the
Borrower has made such payment in full to Agent on such date and Agent may, in
reliance upon such assumption, cause to be distributed to each Bank on such due
date an amount equal to the amount then due such Bank. If and to the extent the
Borrower shall not have so made such payment in full to Agent, each Bank shall
repay to Agent forthwith on demand such amount distributed to such Bank together
with interest thereon, for each day from the date such amount is distributed to
such Bank until the date such Bank repays such amount to Agent, at the interest
rate applicable to such portion of the Revolving Loan.
(l) Other Financings. Without limiting the rights to which any Bank
otherwise is or may become entitled, such Bank shall have no interest, by virtue
of this Agreement or the Loan Documents, in (a) any present or future loans
from, letters of credit issued by, or leasing or other financial transactions
by, any other Bank to, on behalf of, or with the Borrower (collectively referred
to herein as "Other Financings") other than the obligations hereunder; (b) any
present or future guarantees by or for the account of the Borrower which are not
contemplated by the Loan Documents; (c) any present or future property taken as
security for any such Other Financings; or (d) any property now or hereafter in
the possession or control of any other Bank which may be or become security for
the obligations of the Borrower arising under any loan document by reason of the
general description of indebtedness secured or property contained in any other
agreements, documents or instruments relating to any such Other Financings.
(m) Interests of Banks. Nothing in this Agreement shall be construed to
create a partnership or joint venture between Banks for any purpose. Agent,
Banks and the Borrower recognize that the respective obligations of Banks under
the Commitment shall be several and not jointly and that neither Agent nor any
of Banks shall be responsible or liable to perform any of the obligations of the
other under this Agreement. Each Bank is deemed to be the owner of an undivided
interest in and to all rights, titles, benefits and interests belonging and
accruing to Agent under the Security Instruments, including, without limitation,
liens and security interests in any collateral, fees and payments of principal
and
51
interest by the Borrower under the Commitment on a Pro Rata basis. Each Bank
shall perform all duties and obligations of Banks under this Agreement in the
same proportion as its ownership interest in the Loans outstanding at the date
of determination thereof.
(n) Investments. Whenever Agent in good faith determines that it is
uncertain about how to distribute to Banks any funds which it has received, or
whenever Agent in good faith determines that there is any dispute among the
Banks about how such funds should be distributed, Agent may choose to defer
distribution of the funds which are the subject of such uncertainty or dispute.
If Agent in good faith believes that the uncertainty or dispute will not be
promptly resolved, or if Agent is otherwise required to invest funds pending
distribution to the Banks, Agent may invest such funds pending distribution (at
the risk of the Borrower). All interest on any such investment shall be
distributed upon the distribution of such investment and in the same proportions
and to the same Persons as such investment. All monies received by Agent for
distribution to the Banks (other than to the Person who is Agent in its separate
capacity as a Bank) shall be held by the Agent pending such distribution solely
as Agent for such Banks, and Agent shall have no equitable title to any portion
thereof.
16. Exercise of Rights. No failure to exercise, and no delay in exercising,
on the part of the Agent or the Banks, any right hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise thereof preclude any
other or further exercise thereof or the exercise of any other right. The rights
of the Agent and the Banks hereunder shall be in addition to all other rights
provided by law. No modification or waiver of any provision of the Loan
Documents, including this Agreement, or the Note nor consent to departure
therefrom, shall be effective unless in writing, and no such consent or waiver
shall extend beyond the particular case and purpose involved. No notice or
demand given in any case shall constitute a waiver of the right to take other
action in the same, similar or other circumstances without such notice or
demand.
17. Notices. Any notices or other communications required or permitted to
be given by this Agreement or any other documents and instruments referred to
herein must be given in writing (which may be by facsimile transmission) and
must be personally delivered or mailed by prepaid certified or registered mail
or e-mailed to the party to whom such notice or communication is directed at the
address of such party as follows: (a) BORROWER: FIRST PERMIAN, L.L.C., 110 West
Louisiana Avenue, Midland, Texas 79702-7158, Facsimile No. 915-686- 7034,
Attention: Don Tiffin, General Manager, e-mall: dtiffin@firstpermian.com; with a
copy to: (i) Tucker Bridwell, Chairman, c/o Mansefeldt Investment Corporation,
400 Pine, Suite 1000, Abilene, Texas 79601, Facsimile No. 915-675- 5017, e-mail:
mansefel@abilene.com; (ii) David Dunton, Vice President, EnCap Investments, LLC,
3811 Turtle Creek Boulevard, Suite 1080, Dallas, Texas 75219, Facsimile No.
214-599-0200, e-mail: duntond@epenergy.com; (b) AGENT: BANK ONE, TEXAS, N.A.,
910 Travis Street, Houston, Texas 77002, Facsimile No. 713- 751-7894, Attention:
Richard G. Sylvan, First Vice President, e-mail: dick_sylvan@mail.bankone.com.
Any such notice or other communication shall be deemed to have been given
(whether actually received or not) on the day
52
it is personally delivered, delivered by facsimile or e-mail as aforesaid or, if
mailed, on the third day after it is mailed as aforesaid. Any party may change
its address for purposes of this Agreement by giving notice of such change to
the other party pursuant to this Section 17. Any notice required to be given to
the Banks shall be given to the Agent and distributed to all Banks by the Agent.
18. Expenses. The Borrower shall pay (i) all reasonable and necessary
out-of-pocket expenses of the Banks, including reasonable fees and disbursements
of special counsel for the Agent, in connection with the preparation of this
Agreement, any waiver or consent hereunder or any amendment hereof or any
Default or Event of Default or alleged Default or Event, of Default hereunder,
(ii) all reasonable and necessary out-of-pocket expenses of the Agent, including
reasonable fees and disbursements of special counsel for the Agent in connection
with the preparation of any participation agreement for a participant or
participants requested by the Borrower or any amendment thereof and (iii) if a
Default or an Event of Default occurs, all reasonable and necessary
out-of-pocket expenses incurred by the Banks, including fees and disbursements
of counsel, in connection with such Default and Event of Default and collection
and other enforcement proceedings resulting therefrom. The Borrower hereby
acknowledges that Gardere & Wynne, L.L.P. is special counsel to Bank One, as
Agent and as a Bank, under this Agreement and that it is not counsel to, nor
does it represent the Borrower in connection with the transactions described in
this Agreement. The Borrower is relying on separate counsel in the transaction
described herein. The Borrower shall indemnify the Banks against any transfer
taxes, document taxes, assessments or charges made by any governmental authority
by reason of the execution, delivery and filing of the Loan Documents. The
obligations of this Section 18 shall survive any termination of this Agreement,
the expiration of the Loans and the payment of all indebtedness of the Borrower
to the Banks hereunder and under the Notes.
19. Indemnity. The Borrower agrees to indemnify and hold harmless the Banks
and their respective officers, employees, agents, attorneys and representatives
(singularly, an "Indemnified Party", and collectively, the "Indemnified
Parties") from and against any loss, cost, liability, damage or expense
(including the reasonable fees and out-of-pocket expenses of counsel to the
Banks, including all local counsel hired by such counsel) ("Claim") incurred by
the Banks in investigating or preparing for, defending against, or providing
evidence, producing documents or taking any other action in respect of any
commenced or threatened litigation, administrative proceeding or investigation
under any federal securities law, federal or state environmental law, or any
other statute of any jurisdiction, or any regulation, or at common law or
otherwise, which is alleged to arise out of or is based upon any acts, practices
or omissions or alleged acts, practices or omissions of the Borrower or its
agents or arises in connection with the duties, obligations or performance of
the Indemnified Parties in negotiating, preparing, executing, accepting,
keeping, completing, countersigning, issuing, selling, delivering, releasing,
assigning, handling, certifying, processing or receiving or taking any other
action with respect to the Loan Documents and all documents, items and materials
contemplated thereby even if any of the foregoing arises out of an Indemnified
Party's ordinary negligence. The indemnity set forth herein shall be in addition
to any other obligations or
53
liabilities of the Borrower to the Banks hereunder or at common law or
otherwise, and shall survive any termination of this Agreement, the expiration
of the Loans and the payment of all indebtedness of the Borrower to the Banks
hereunder and under the Notes, provided that the Borrower shall have no
obligation under this Section to the Banks with respect to any of the foregoing
arising out of the gross negligence or willful misconduct of any Bank. If any
Claim is asserted against any Indemnified Party, the Indemnified Party shall
endeavor to notify the Borrower of such Claim (but failure to do so shall not
affect the indemnification herein made except to the extent of the actual harm
caused by such failure). The Indemnified Party shall have the right to employ,
at the Borrower's expense, counsel of the Indemnified Parties' choosing and to
control the defense of the Claim. The Borrower may at its own expense also
participate in the defense of any Claim. Each Indemnified Party may employ
separate counsel in connection with any Claim to the extent such Indemnified
Party believes it reasonably prudent to protect such Indemnified Party. [The
parties intend for the provisions of this Section to apply to and protect each
Indemnified Party from the consequences of any liability including strict
liability imposed or threatened to be imposed on Agent as well as from the
consequences of its own negligence, whether or not that negligence is the sole,
contributing, or concurring cause of any Claim.]
20. Governing Law. THIS AGREEMENT IS BEING EXECUTED AND DELIVERED, AND IS
INTENDED TO BE PERFORMED, IN MIDLAND, MIDLAND COUNTY, TEXAS, AND THE SUBSTANTIVE
LAWS OF TEXAS SHALL GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND
INTERPRETATION OF THIS AGREEMENT AND ALL OTHER DOCUMENTS AND INSTRUMENTS
REFERRED TO HEREIN, UNLESS OTHERWISE SPECIFIED THEREIN.
21. Invalid Provisions. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under present or future laws effective during
the term of this Agreement, such provisions shall be fully severable and this
Agreement shall be construed and enforced as if such illegal, invalid or
unenforceable provision had never comprised a part of this Agreement, and the
remaining provisions of the Agreement shall remain in full force and effect and
shall not be affected by the illegal, invalid or unenforceable provision or by
its severance from this Agreement.
22. Maximum Interest Rate. Regardless of any provisions contained in this
Agreement or in any other documents and instruments referred to herein, the
Banks shall never be deemed to have contracted for or be entitled to receive,
collect or apply as interest on the Notes any amount in excess of the Maximum
Rate, and in the event any Bank ever receives, collects or applies as interest
any such excess, or if an acceleration of the maturities of any Notes or if any
prepayment by the Borrower results in the Borrower having paid any interest in
excess of the Maximum Rate, such amount which would be excessive interest shall
be applied to the reduction of the unpaid principal balance of the Notes for
which such excess was received, collected or applied, and, if the principal
balance of such Note is paid in full, any remaining excess shall forthwith be
paid to the Borrower. All sums paid or agreed to be paid to the Banks for the
use, forbearance or detention of the
54
indebtedness evidenced by the Notes and/or this Agreement shall, to the extent
permitted by applicable law, be amortized, prorated, allocated and spread
throughout the full term of such indebtedness until payment in full so that the
rate or amount of interest on account of such indebtedness does not exceed the
Maximum Rate. In determining whether or not the interest paid or payable under
any specific contingency exceeds the Maximum Rate of interest permitted by law,
the Borrower and the Banks shall, to the maximum extent permitted under
applicable law, (i) characterize any non-principal payment as an expense, fee or
premium, rather than as interest; and (ii) exclude voluntary prepayments and the
effect thereof; and (iii) compare the total amount of interest contracted for,
charged or received with the total amount of interest which could be contracted
for, charged or received throughout the entire contemplated term of the Note at
the Maximum Rate.
For purposes of Section 303 of the Texas Finance Code, to the extent
applicable to any Bank or Agent, Borrower agrees that the Maximum Rate (as
defined herein) shall be the "weekly ceiling" as defined in said Chapter,
provided that such Bank or Agent as applicable, may also rely, to the extent
permitted by applicable laws of the State of Texas and the United States of
America, on alternative maximum rates of interest under the Texas Finance Code
or other laws applicable to such Banks or Agent from time to time if greater.
23. Amendments. This Agreement may be amended only by an instrument in
writing executed by an authorized officer of the party against whom such
amendment is sought to be enforced.
24. Multiple Counterparts. This Agreement may be executed in a number of
identical separate counterparts, each of which for all purposes is to be deemed
an original, but all of which shall constitute, collectively, one agreement. No
party to this Agreement shall be bound hereby until a counterpart of this
Agreement has been executed by all parties hereto.
25. Conflict. In the event any term or provision hereof is inconsistent
with or conflicts with any provision of the Loan Documents, the terms or
provisions contained in this Agreement shall be controlling.
26. Survival. All covenants, agreements, undertakings, representations and
warranties made in the Loan Documents, including this Agreement, the Notes or
other documents and instruments referred to herein shall survive all closings
hereunder and shall not be affected by any investigation made by any party.
27. Parties Bound. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors, assigns, heirs,
legal representatives and estates, provided, however, that the Borrower may not,
without the prior written consent of all of the Banks, assign any rights,
powers, duties or obligations hereunder.
55
28. Assignments and Participations.
(a) Each Bank shall have the right to sell, assign or transfer all or any
part of its Note or Notes, its Commitment and its rights and obligations
hereunder to one or more Affiliates, Banks, financial institutions, pension
plans, insurance companies, investment funds, or similar Persons who are
Eligible Assignees or to a Federal Reserve Bank; provided, that each sale,
assignment or transfer (other than to an Affiliate, a Bank or a Federal Reserve
Bank), shall require the consent of Agent and the Borrower, which consents will
not be unreasonably withheld; provided, further, however, that if an Event of
Default has occurred and is continuing, the consent of the Borrower shall not be
required. Any such assignee, transferee or recipient shall have, to the extent
of such sale, assignment, or transfer, the same rights, benefits and obligations
as it would if it were such Bank and a holder of such Note, Commitment and
rights and obligations, including, without limitation, the right to vote on
decisions requiring consent or approval of all Banks or Majority Banks and the
obligation to fund its Commitment; provided, that (1) each such sale,
assignment, or transfer (other than to an Affiliate, a Bank or a Federal Reserve
Bank) shall be in an aggregate principal amount not less than $5,000,000, (2)
each remaining Bank shall at all times maintain its Commitment then outstanding
in an aggregate principal amount at least equal to $5,000,000; (3) each such
sale assignment or transfer shall be of a Pro Rata portion of such Bank's
Revolving Commitment, (4) no Bank may offer to sell its Note or Notes,
Commitment, rights and obligations or interests therein in violation of any
securities laws; and (5) no such assignments (other than to a Federal Reserve
Bank) shall become effective until the assigning Bank and its assignee delivers
to Agent and Borrower an Assignment and Acceptance and the Note or Notes subject
to such assignment and other documents evidencing any such assignment. An
assignment fee in the amount of $3,500 for each such assignment (other than to
an Affiliate, a Bank or the Federal Reserve Bank) will be payable to Agent by
assignor or assignee. Within five (5) Business Days after its receipt of copies
of the Assignment and Acceptance and the other documents relating thereto and
the Note or Notes, the Borrower shall execute and deliver to Agent (for delivery
to the relevant assignee) a new Note or Notes evidencing such assignee's
assigned Commitment and if the assignor Bank has retained a portion of its
Commitment, a replacement Note in the principal amount of the Commitment
retained by the assignor (except as provided in the last sentence of this
paragraph (a) such Note or Notes to be in exchange for, but not in payment of,
the Note or Notes held by such Bank). On and after the effective date of an
assignment hereunder, the assignee shall for all purposes be a Bank, party to
this Agreement and any other Loan Document executed by the Banks and shall have
all the rights and obligations of a Bank under the Loan Documents, to the same
extent as if it were an original party thereto, and no further consent or action
by Borrower, Banks or the Agent shall be required to release the transferor Bank
with respect to its Commitment assigned to such assignee and the transferor Bank
shall henceforth be so released.
56
(b) Each Bank shall have the right to grant participations in all or any
part of such Bank's Notes and Commitment hereunder to one or more pension plans,
investment funds, insurance companies, financial institutions or other Persons,
provided, that:
(i) each Bank granting a participation shall retain the right to vote
hereunder, and no participant shall be entitled to vote hereunder on
decisions requiring consent or approval of all Banks or Majority Banks
(except as set forth in (iii) below);
(ii) in the event any Bank grants a participation hereunder, such
Bank's obligations under the Loan Documents shall remain unchanged, such
Bank shall remain solely responsible to the other parties hereto for the
performance of such obligations, such Bank shall remain the holder of any
such Note or Notes for all purposes under the Loan Documents, and Agent,
each Bank and Borrower shall be entitled to deal with the Bank granting a
participation in the same manner as if no participation had been granted;
and
(iii) no participant shall ever have any right by reason of its
participation to exercise any of the rights of Banks hereunder, except that
any Bank may agree with any participant that such Bank will not, without
the consent of such participant (which consent may not be unreasonably
withheld) consent to any amendment or waiver requiring approval of all
Banks.
(c) It is understood and agreed that any Bank may provide to assignees and
participants and prospective assignees and participants financial information
and reports and data concerning Borrower's properties and operations which was
provided to such Bank pursuant to this Agreement.
(d) Upon the reasonable request of either Agent or Borrower, each Bank will
identify those to whom it has assigned or participated any part of its Notes and
Commitment, and provide the amounts so assigned or participated.
29. Choice of Forum: Consent to Service of Process and Jurisdiction. THE
OBLIGATIONS OF BORROWER UNDER THE LOAN DOCUMENTS ARE PERFORMABLE IN MIDLAND
COUNTY, TEXAS. ANY SUIT, ACTION OR PROCEEDING AGAINST THE BORROWER WITH RESPECT
TO THE LOAN DOCUMENTS OR ANY JUDGMENT ENTERED BY ANY COURT IN RESPECT THEREOF,
MAY BE BROUGHT IN THE COURTS OF THE STATE OF TEXAS, COUNTY OF HARRIS, OR IN THE
UNITED STATES COURTS LOCATED IN MIDLAND COUNTY, TEXAS AND THE BORROWER HEREBY
SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURTS FOR THE PURPOSE OF ANY
57
SUCH SUIT, ACTION OR PROCEEDING. THE BORROWER HEREBY IRREVOCABLY CONSENTS TO
SERVICE OF PROCESS IN ANY SUIT, ACTION OR PROCEEDING IN SAID COURT BY THE
MAILING THEREOF BY BANK BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE
BORROWER, AS APPLICABLE, AT THE ADDRESS FOR NOTICES AS PROVIDED IN SECTION 17.
THE BORROWER HEREBY IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY NOW OR
HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUIT, ACTION OR PROCEEDING ARISING
OUT OF OR RELATING TO ANY LOAN DOCUMENT BROUGHT IN THE COURTS LOCATED IN THE
STATE OF TEXAS, COUNTY OF HARRIS, AND HEREBY FURTHER IRREVOCABLY WAIVES ANY
CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS
BEEN BROUGHT IN AN INCONVENIENT FORUM.
30. Waiver of Jury Trial. THE BORROWER HEREBY WAIVES, TO THE FULLEST EXTENT
PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL
PROCEEDING ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY.
31. Other Agreements. THIS WRITTEN CREDIT AGREEMENT REPRESENTS THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
32. Financial Terms. All accounting terms used in this Agreement which are
not specifically defined herein shall be construed in accordance with GAAP.
58
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
BORROWER:
FIRST PERMIAN, L.L.C.
a Delaware limited liability company
By: /s/ Tucker S. Bridwell
----------------------------
Tucker S. Bridwell, Chairman
BANKS:
BANK ONE, TEXAS, N.A.,
a national banking association
By: /s/ Richard G. Sylvan
----------------------------
Richard G. Sylvan, First Vice
President
ADMINISTRATIVE AGENT:
BANK ONE, TEXAS, N.A.,
a national banking association
By: /s/ Richard G. Sylvan
----------------------------
Richard G. Sylvan, First Vice
President
1
EXHIBIT "A"
NOTICE OF BORROWING
The undersigned hereby certifies that he is the _______________ of
____________, Manager of FIRST PERMIAN, L.L.C., a Delaware limited liability
company, and that as such he is authorized to execute this Notice of Borrowing
on behalf of the Borrower (as such term is defined in the Agreement). With
reference to that certain Second Restated Credit Agreement dated as of October
25, 2000 (as same may be amended, modified, increased, supplemented and/or
restated from time to time, the "Agreement") entered into by and among Borrower
and BANK ONE, TEXAS, N.A. ("Bank One"), and the financial institutions party
thereto (the "Banks"), the undersigned further certifies, represents and
warrants on behalf of the Borrower that all of the following statements are true
and correct (each capitalized term used herein having the same meaning given to
it in the Agreement unless otherwise specified):
(a) Borrower requests that the Banks advance Borrower on
the Revolving Loan _____________ the aggregate sum of $___________
by no later than ________________. Immediately following such
Advance, the aggregate outstanding balance of Advances shall equal
$____________ on the Revolving Loan.
(b) This Advance shall be a: Base Rate Loan ___________, or
Eurodollar Loan _________, (if Eurodollar please state requested
Interest Period ______ months).
(c) As of the date hereof, and as a result of the making of the
requested Advance, there does not and will not exist any Default or
Event of Default.
(d) Borrower has performed and complied with all agreements
and conditions contained in the Agreement which are required to be
performed or complied with by Borrower before or on the date hereof.
(e) The representations and warranties contained in the
Agreement are true and correct in all material respects as of the date
hereof and shall be true and correct upon the making of the Advance,
with the same force and effect as though made on and as of the date
hereof and thereof.
(f) No change that would cause a Material Adverse Effect to
the condition, financial or otherwise, of Borrower has occurred since
the most recent Financial Statement provided to the Banks.
2
EXECUTED AND DELIVERED this _____ day of _________, ______.
FIRST PERMIAN, L.L.C.
a Delaware limited liability company
By:
Name:
Title:
1
EXHIBIT "B"
REVOLVING NOTE
$_____________ __________, 2000
FOR VALUE RECEIVED, the undersigned, FIRST PERMIAN, L.L.C., a Delaware
limited liability company (hereinafter referred to as the "Borrower"), hereby
unconditionally promises to pay to the order of ___________________ (the "Bank")
at the offices of BANK ONE, TEXAS, N.A. (the "Agent") in ______________ County,
Texas, the principal sum of ________________ AND ___/100 DOLLARS
($_____________), in lawful money of the United States of America together with
interest from the date hereof until paid at the rates specified in the Loan
Agreement (as hereinafter defined). All payments of principal and interest due
hereunder are payable at the offices of Agent at
_______________________________, attention: Energy Department, or at such other
address as Bank shall designate in writing to Borrower.
The principal and all accrued interest on this Note shall be due and
payable in accordance with the terms and provisions of the Loan Agreement.
This Note is executed pursuant to that certain Second Restated Credit
Agreement dated October 25, 2000 between Borrower, the Agent and Banks (as the
same may be amended from time to time, the "Loan Agreement" and is one of the
Notes referred to therein. Reference is made to the Loan Agreement and the Loan
Documents (as that term is defined in the Loan Agreement) for a statement of
prepayment, rights and obligations of Borrower, for a statement of the terms and
conditions under which the due date of this Note may be accelerated and for
statements regarding other matters affecting this Note (including without
limitation the obligations of the holder hereof to advance funds hereunder,
principal and interest payment due dates, voluntary and mandatory prepayments,
exercise of rights and remedies, payment of attorneys' fees, court costs and
other costs of collection and certain waivers by Borrower and others now or
hereafter obligated for payment of any sums due hereunder). Upon the occurrence
of an Event of Default, as that term is defined in the Loan Agreement and Loan
Doctunents, the holder hereof (i) may declare forthwith to be entirely and
immediately due and payable the principal balance hereof and the interest
accrued hereon, and (ii) shall have all rights and remedies of the Bank tinder
the Loan Agreement and Loan Documents. This Note may be prepaid in accordance
with the terms and provisions of the Loan Agreement.
Regardless of any provision contained in this Note, the holder hereof shall
never be entitled to receive, collect or apply, as interest on this Note, any
amount in excess of the Maximum Rate (as such term is defined in the Loan
Agreement), and, if the holder hereof ever receives, collects, or applies as
interest, any such amount which would be excessive interest, it shall be deemed
a partial prepayment of principal and treated hereunder as such; and, if the
indebtedness evidenced hereby is paid in full, any remaining excess shall
forthwith be paid to Borrower. In determining whether or not the interest paid
or payable, under any specific contingency, exceeds the Maximum Rate, Borrower
and the holder hereof shall, to the maximum extent permitted under applicable
law (i) characterize any non-principal payment as an expense, fee or premium
rather than as interest, (ii) exclude voluntary prepayments and the effects
thereof, and (iii) spread the total amount of interest throughout the entire
contemplated term of the obligations evidenced by this Note and/or referred to
in the Loan Agreement so that the interest rate is uniform throughout the entire
term of
2
this Note; provided that, if this Note is paid and performed in full
prior to the end of the full contemplated term thereof; and if the interest
received for the actual period of existence thereof exceeds the Maximum Rate,
the holder hereof shall refund to Borrower the amount of such excess or credit
the amount of such excess against the indebtedness evidenced hereby, and, in
such event, the holder hereof shall not be subject to any penalties provided by
any laws for contracting for, charging, taking, reserving or receiving interest
in excess of the Maximum Rate.
If any payment of principal or interest on this Note shall become due on a
day other than a Business Day (as such term is defined in the Loan Agreement),
such payment shall be made on the next succeeding Business Day and such
extension of time shall in such case be included in computing interest in
connection with such payment.
If this Note is placed in the hands of an attorney for collection, or if it
is collected through any legal proceeding at law or in equity or in bankruptcy,
receivership or other court proceedings, Borrower agree to pay all costs of
collection, including, but not limited to, court costs and reasonable attorneys'
fees.
Borrower and each surety, endorser, guarantor and other party ever liable
for payment of any sums of money payable on this Note, jointly and severally
waive presentment and demand for payment, notice of intention to accelerate the
maturity, protest, notice of protest and nonpayment, as to this Note and as to
each and all installments hereof, and agree that their liability under this Note
shall not be affected by any renewal or extension in the time of payment hereof,
or in any indulgences, or by any release or change in any security for the
payment of this Note, and hereby consent to any and all renewals, extensions,
indulgences, releases or changes.
This Note shall be governed by and construed in accordance with the
applicable laws of the United States of America and the laws of the State of
Texas.
THIS WRITTEN NOTE, THE LOAN AGREEMENT AND THE OTHER LOAN DOCUMENTS
REPRESENT THE FINAL AGREEMENTS BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED
BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE
PARTIES. THERE ARE NO UNWRITTEN ORAL AGREENIENTS BETWEEN THE PARTIES.
3
EXECUTED as of the date and year first above written.
BORROWER:
FIRST PERMIAN, L.L.C.
a Delaware limited liability company
By:
Name:
Title:
1
EXHIBIT "C"
CERTIFICATE OF COMPLIANCE
The undersigned hereby certifies that he is the ________________ of
____________ Manager of FIRST PERMIAN, L.L.C., a Delaware limited liability
company (the "Borrower") and that as such he is authorized to execute this
Certificate of Compliance on behalf of the Borrower. With reference to that
certain Second Restated Credit Agreement, dated as of October 25, 2000, (as same
may be amended, modified, increased, supplemented and/or restated from time to
time, the "Agreement") entered into among the Borrower and BANK ONE, TEXAS, N.A.
as "Agent," for itself and the Banks signatory thereto (the "Banks"), the
undersigned further certifies, represents and warrants on behalf of the Borrower
that all of the following statements are true and correct (each capitalized term
used herein having the same meaning given to it in the Agreement unless
otherwise specified):
(a) The Borrower has fulfilled in all material respects its
obligations under the Notes and Security Instruments, including the
Agreement, and all representations and warranties made herein and therein
continue (except to the extent they relate solely to an earlier date) to be
true and correct in all material respects [if the representations and
warranties are not true and correct, the party signing this certificate
shall except from the foregoing statement the matters for which such
representations and warranties are no longer true specifying the nature of
any such change.]
(b) No Event of Default has occurred under the Security Instruments,
including the Agreement [if an Event of Default has occurred, the party
certifying hereto shall specify the facts constituting the Event of Default
and the nature and status thereof].
(c) To the extent requested from time to time by the Agent, the
certifying party shall specifically affirm compliance of the Borrower in
all material respects with any of its representations and warranties
(except to the extent they relate solely to an earlier date) or obligations
under said instruments.
(d) Financial Computations for the period ending ______________
(provide calculations on a consolidated basis):
(i) Current Ratio;
(ii) Minimum Interest Coverage Ratio; and
(iii) General and Administrative Expenses.
2
EXECUTED, DELIVERED AND CERTIFIED TO this ______day of ______________,
20___.
BORROWER:
FIRST PERMIAN, L.L.C.
a Delaware limited liability company
By:
Name:
Title:
1
EXHIBIT "D"
ASSIGNMENT AND ACCEPTANCE AGREEMENT
This ASSIGNMENT AND ACCEPTANCE AGREEMENT (this "Assignment and Acceptance")
dated as of ______________. _____ is made between ____________________ (the
"Assignor") and ______________ (the "Assignee").
RECITALS
WHEREAS, the Assignor is party to that certain Second Restated Credit
Agreement dated as of October 25, 2000 (the "Loan Agreement") by and among First
Permian, L.L.C., a Delaware limited liability company (hereinafter referred to
as the "Company"), the Banks signatory thereto (the "Banks"), Bank One, Texas,
N.A., as Administrative Agent (in such capacity, the "Agent"), and the financial
institutions party thereto (unless otherwise defined herein, capitalized terms
used herein have the respective meanings assigned to them in the Loan
Agreement);
WHEREAS as provided under the Loan Agreement, the Assignor has committed to
make Loans (the "Committed Loans") to the Company in aggregate amounts not to
exceed $110,000,000 on the Revolving Loan (the "Revolving Commitment"), such
Revolving Commitment being evidenced by a Revolving Note in the face amount of
$110,000,000 (the "Note"); the Revolving Commitment is hereinafter referred to
as (the "Commitment");
WHEREAS, [the Assignor has made Committed Loans to the Company in the
aggregate principal amount of $______________ on the Revolving Commitment [no
Committed Loans are outstanding under the Loan Agreement]; and
WHEREAS, the Assignor wishes to assign to the Assignee [part] [all] of the
rights and obligations of the Assignor under the Loan Agreement in respect of
its Commitment, in an amount equal to $_____________ on the Revolving Commitment
for a total of $_______________ for the total Commitment (the "Assigned Amount")
on the terms and subject to the conditions set forth herein and the Assignee
wishes to accept assignment of such rights and assume such obligations from the
Assignor on such terms and subject to such conditions;
NOW, THEREFORE, in consideration of the foregoing and the mutual agreements
contained herein, the parties hereto agree as follows:
1. Assignment and Acceptance.
(a) Subject to the terms and conditions of this Assignment and Acceptance,
(i) the Assignor hereby sells, transfers and assigns to the Assignee, and (ii)
the Assignee hereby purchases, assumes and undertakes from the Assignor, without
recourse and without representation or warranty (except as provided in this
Assignment and Acceptance) ___% (the "Assignee's Percentage Share") of (A) the
Commitment [and the Committed Loans] of the Assignor, (B) the Notes, and (C) all
related rights, benefits, obligations, liabilities and indemnities of the
Assignor under and in connection with the Loan Agreement and the Loan Documents.
2
[If appropriate, add paragraph specifying payment to Assignor by Assignee
of outstanding principal of, accrued interest on, and fees with respect to,
Committed Loans assigned.]
(b) With effect on and after the Effective Date (as defined in Section 5
hereof), the Assignee shall be a party to the Loan Agreement and succeed to all
of the rights and be obligated to perform all of the obligations of a Bank under
the Loan Agreement, including the requirements concerning confidentiality and
the payment of indemnification, with a Commitment in an amount equal to the
Assigned Amount. The Assignee agrees that it will perform in accordance with
their terms all of the obligations which by the terms of the Loan Agreement are
required to be performed by it as a Bank. It is the intent of the parties hereto
that the Commitment of the Assignor shall, as of the Effective Date, be reduced
by an amount equal to the Assigned Amount and the Assignor shall relinquish its
rights and be released from its obligations under the Loan Agreement to the
extent such obligations have been assumed by the Assignee.
(c) After giving effect to the assignment and assumption set forth herein,
on the Effective Date the Assignee's Commitment will be $__________.
(d) After giving effect to the assignment and assumption set forth herein,
on the Effective Date the Assignor's Commitment will be $____________.
2. Payments.
(a) As consideration for the sale, assignment and transfer contemplated in
Section 1 hereof, the Assignee shall pay to the Assignor on the Effective Date
in immediately available funds an amount equal to $________________,
representing the Assignee's Pro Rate Share of the principal amount of all
Committed Loans.
(b) The [Assignor] [Assignee] further agrees to pay to the Agent a
processing fee in the amount specified in Section 28 of the Loan Agreement.
3. Reallocation of Payments. Any interest, fees and other payments accrued
to the Effective Date with respect to the Commitment, the Committed Loans and
the Notes shall be for the account of the Assignor. Any interest, fees and other
payments accrued on and after the Effective Date with respect to the Assigned
Amount shall be for the account of the Assignee. Each of the Assignor and the
Assignee agrees that it will hold in trust for the other party any interest,
fees and other amounts which it may receive to which the other party is entitled
pursuant to the preceding sentence and pay to the other party any such amounts
which it may receive promptly upon receipt.
4. Independent Credit Decision. The Assignee (a) acknowledges that it has
received a copy of the Loan Agreement and the Schedules and Exhibits thereto,
together with copies of the most recent financial statements referred to in
Section 12 of the Loan Agreement, and such other documents and information as it
has deemed appropriate to make its own credit and legal analysis and decision to
enter into this Assignment and Acceptance; and (b) agrees that it will,
independently
3
and without reliance upon the Assignor, the Agent or any other Bank and based on
such documents and information as it shall deem appropriate at the time,
continue to make its own credit and legal decisions in taking or not taking
action under the Loan Agreement.
5. Effective Date; Notices.
(a) As between the Assignor and the Assignee, the effective date for this
Assignment and Acceptance shall be ______________, _______ (the "Effective
Date"); provided that the following conditions precedent have been satisfied on
or before the Effective Date:
(i) this Assignment and Acceptance shall be executed and delivered by
the Assignor and the Assignee, together with the Notes;
(ii) the consent of the Agent required for an effective assignment of
the Assigned Amount by the Assignor to the Assignee under Section 28 of the
Loan Agreement shall have been duly obtained and shall be in full force and
effective as of the Effective Date;
(iii) the Assignee shall pay to the Assignor all amounts due to the
Assignor under this Assignment and Acceptance;
(iv) the processing fee referred to in Section 2(b) hereof and in
Section 28 of the Loan Agreement shall have been paid to the Agent; and
(v) the Assignor shall have assigned and the Assignee shall have
assumed a percentage equal to the Assignee's Percentage Share of the rights
and obligations of the Assignor under the Loan Agreement (if such agreement
exists).
(b) Promptly following the execution of this Assignment and Acceptance, the
Assignor shall deliver to the Agent for acknowledgment by the Agent, a copy of
this Assignment and Acceptance.
6. Agent. [INCLUDE ONLY IF ASSIGNOR IS AGENT]
(a) The Assignee hereby appoints and authorizes the Assignor to take such
action as agent on its behalf and to exercise such powers under the Loan
Agreement as are delegated to the Agent by the Banks pursuant to the terms of
the Loan Agreement.
(b) The Assignee shall assume no duties or obligations held by the Assignor
in its capacity as Agent under the Loan Agreement.]
7. Withholding Tax. The Assignee (a) represents and warrants to the Bank,
the Agent and the Company that under applicable law and treaties no tax will be
required to be withheld by the Bank with respect to any payments to be made to
the Assignee hereunder, (b) agrees to furnish (if
4
it is organized under the laws of any jurisdiction other than the United States
or any State thereof) to the Agent and the Company prior to the time that the
Agent or Company is required to make any payment of principal, interest or fees
hereunder, duplicate executed originals of either U.S. Internal Revenue Service
Form 4224 or U.S. Internal Revenue Service Form 101 (wherein the Assignee claims
entitlement to the benefits of a tax treaty that provides for a complete
exemption from U.S. federal income withholding tax on all payments hereunder)
and agrees to provide new Forms 4224 or 1001 upon the expiration of any
previously delivered form or comparable statements in accordance with applicable
U.S. law and regulations and amendments thereto, duly executed and completed by
the Assignee, and (c) agrees to comply with all applicable U.S. laws and
regulations with regard to such withholding tax exemption.
8. Representations and Warranties.
(a) The Assignor represents and warrants that (i) it is the legal and
beneficial owner of the interest being assigned by it hereunder and that such
interest is free and clear of any Lien or other adverse claim; (ii) it is duly
organized and existing and it has the full power and authority to take, and has
taken, all action necessary to execute and deliver this Assignment and
Acceptance and any other documents required or permitted to be executed or
delivered by it in connection with this Assignment and Acceptance and to fulfill
its obligations hereunder; (iii) on notices to, or consents, authorizations or
approvals of, any Person are required (other than any already given or obtained)
for its due execution, delivery and performance of this Assignment and
Acceptance, and apart from any agreements or undertakings or filings required by
the Loan Agreement, no further action by, or notice to, or filing with, any
Person is required of it for such execution, delivery or performance; and (iv)
this Assignment and Acceptance has been duly executed and delivered by it and
constitutes the legal, valid and binding obligation of the Assignor, enforceable
against the Assignor in accordance with the terms hereof, subject, as to
enforcement, to bankruptcy, insolvency, moratorium, reorganization and other
laws of general application relating to or affecting creditors' rights and to
general equitable principles.
(b) The Assignor makes no representation or warranty and assumes no
responsibility with respect to any statements, warranties or representations
made in or in connection with the Loan Agreement or the execution, legality,
validity, enforceability, genuineness, sufficiency or value of the Loan
Agreement or any other instrument or document fumished pursuant thereto. The
Assignor makes no representation or warranty in connection with, and assumes no
responsibility with respect to, tho solvency, financial condition or statements
of the Company, or the performance or observance by the Company, of any of its
respective obligations under the Loan Agreement or any other instrument or
document furnished in connection therewith.
(c) The Assignee represents and warrants that (i) it is duly organized and
existing and it has full power and authority to take, and has taken, all action
necessary to execute and deliver this Assignment and Acceptance any other
documents required or permitted to be executed or delivered by it in connection
with this Assignment and Acceptance, and to fulfill its obligations hereunder;
(ii) no notices to, or consents, authorizations or approvals of, any Person are
required (other than any
5
already given or obtained) for its due execution, delivery and performance of
this Assignment and Acceptance; and apart from any agreements or undertakings or
filings required by the Loan Agreement, no further action by, or notice to, or
filings with, any Person is required of it for such execution, delivery or
performance; (iii) this Assignment and Acceptance has been duly executed and
delivered by it and constitutes the legal, valid and binding obligation of the
Assignee, enforceable against the Assignee in accordance with the terms hereof,
subject, as to enforcement, to bankruptcy, insolvency, moratorium,
reorganization and other laws of general application relating to or affecting
creditors' rights and to general equitable principles; and (iv) it is an
Eligible Assignee.
9. Further Assurances. The Assignor and the Assignee each hereby agree to
execute and deliver such other instruments, and take such other action, as
either party may reasonably request in connection with the transactions
contemplated by this Assignment and Acceptance, including the delivery of any
notices or other documents or instruments to the Company or the Agent, which may
be required in connection with the assignment and assumption contemplated
hereby.
10. Miscellaneous.
(a) Any amendment or waiver of any provision of this Assignment and
Acceptance shall be in writing and signed by the parties hereto. No failure or
delay by either party hereto in exercising any right, power or privilege
hereunder shall operate as a waiver thereof and any waiver of any breach of the
provisions of this Assignment and Acceptance shall be without prejudice to any
rights with respect to any other further breach thereof.
(b) All payments made hereunder shall be made without any set-off or
counterclaim.
(c) The Assignor and the Assignee shall each pay its own costs and expenses
incurred in connection with the negotiation, preparation, execution and
performance of this Assignment and Acceptance.
(d) This Assignment and Acceptance may be executed in any number of
counterparts and all of such counterparts taken together shall be deemed to
constitute one and the same instrument.
(e) THIS ASSIGNMENT AND ACCEPTANCE SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAW OF THE STATE OF TEXAS. The Assignor and the Assignee
each irrevocably submits to the non-exclusive jurisdiction of any State or
Federal court sitting in Texas over any suit, action or proceeding arising out
of or relating to this Assignment and Acceptance and irrevocably agrees that all
claims in respect of such action or proceeding may be heard and determined in
such Texas State or Federal court. Each party to this Assignment and Acceptance
hereby irrevocably waives, to the fullest extent it may effectively do so, the
defense of an inconvenient forum to the maintenance of such action or
proceeding.
(f) THE ASSIGNOR AND THE ASSIGNEE EACH HEREBY KNOWINGLY, VOLUNTARILY AND
INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A
6
TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF,
UNDER, OR IN CONNECTION WITH THIS ASSIGNMENT AND ACCEPTANCE, THE LOAN AGREEMENT,
ANY RELATED DOCUMENTS AND AGREEMEINTS OR ANY COURSE OF CONDUCT, COURSE OF
DEALING OR STATEMENTS (WHETHER ORAL OR WRITTEN).
(g) Assignee hereby provides the administrative detail on Addendum 1
hereto.
[Other provisions to be added as may be negotiated between the Assignor and
the Assignee, provided that such provisions are not inconsistent with the Loan
Agreement.]
IN WITNESS WHEREOF, the Assignor and the Assignee have caused this
Assignment and Acceptance to be executed and delivered by their duly authorized
officers as of the date first above written.
[ASSIGNOR]
By:
Title:
By:
Title:
Address:
[ASSIGNEE]
By:
Title:
By:
Title:
Address:
7
(If required by Section 28 of the Loan Agreement)
ACKNOWLEDGED AND CONSENTED TO:
BANK ONE, TEXAS, N.A., as Agent
By:
Name:
Title:
FIRST PERMIAN, L.L.C.
a Delaware limited liability company
By:
Name:
Title:
ADDENDUM 1 TO
ASSIGNMENT AND ACCEPTANCE AGREEMENT
The following administrative details apply to the Assignee:
(A) Notice Address: _____________________________
Assignee name: _____________________________
Address: _____________________________
_____________________________
_____________________________
Attention: _____________________________
Telephone: ( )__________________________
Telecopier: ( )__________________________
Telex (Answerback): _____________________________
(B) Payment Instructions:
Account No.: _____________________________
At: _____________________________
_____________________________
_____________________________
Reference: _____________________________
Attention: _____________________________
SCHEDULE 1
LIENS
NONE
SCHEDULE 2
FINANCIAL CONDITION
NONE
SCHEDULE 3
LIABILITIES
NONE
SCHEDULE 4
LITIGATION
NONE
SCHEDULE 5
ENVIRONMENTAL MATTERS
NONE
SCHEDULE 6
TITLE MATTERS
NONE
SCHEDULE 7
CURATIVE MATTERS
NONE
Exhibit 23.1
Consent of Independent Auditors'
The Board of Directors and Stockholders
Parallel Petroleum Corporation
We consent to the incorporation by reference in the registration statements (No.
33-46959, No. 33-57348 and No. 333-34617) on Forms S-8, and the registration
statement (No. 33-90296) on Form S-3 of Parallel Petroleum Corporation of our
report dated February 2, 2001, relating to the balance sheets of Parallel
Petroleum Corporation as of December 31, 2000 and 1999, and the related
statements of income, stockholders' equity, and cash flows for each of the years
in the three-year period ended December 31, 2000, which appears in the December
31, 2000 annual report on Form 10-K of Parallel Petroleum Corporation.
/s/ KPMG LLP
Midland, Texas
March 26, 2001
Exhibit 23.2
Consent of Independent Petroleum Engineers
As independent petroleum engineers, we hereby consent to the incorporation by
reference in the registration statements (No. 33-46959, No. 33-57348 and No.
333-34617) on Forms S-8, and the registration statement (No. 33-90296) on Form
S-3 of Parallel Petroleum Corporation of our estimates of reserves, included in
the annual report on Form 10-K of Parallel Petroleum Corporation for the fiscal
year ended December 31, 2000.
/s/ JOE C. NEAL & ASSOCIATES
Midland, Texas
March 23, 2001
Exhibit 23.3
Consent of Independent Petroleum Engineers
As independent petroleum engineers, we hereby consent to the incorporation by
reference in the registration statements (No. 33-46959, No. 33-57348 and No.
333-34617) on Forms S-8, and the registration statement (No. 33-90296) on Form
S-3 of Parallel Petroleum Corporation of our estimates of reserves, included in
the annual report on Form 10-K of Parallel Petroleum Corporation for the fiscal
year ended December 31, 2000.
/s/ WILLIAMSON PETROLEUM CONSULTANTS, INC.
Midland, Texas
April 2, 2001