EXHIBIT 4.1
CERTIFICATE OF DESIGNATION
ESTABLISHING
SERIES A CONVERTIBLE PREFERRED STOCK
OF
TEXOIL, INC.
1. The name of the Corporation is Texoil, Inc., a Nevada corporation (the
"CORPORATION").
2. The Board of Directors of the Corporation duly adopted the following
resolutions by Unanimous Written Consent dated November 8, 1999:
WHEREAS, the Corporation's directors have reviewed and approved the
Designation of Preferences, Limitations and Rights of Series A Convertible
Preferred Stock of Texoil, Inc. ("CERTIFICATE"), attached hereto as EXHIBIT A
and incorporated herein by reference, delineating the number of shares, the
voting powers, designations, preferences and relative, participating, optional,
redemption, conversion, exchange, dividend or other special rights and
qualifications, limitations or restrictions of a series of Preferred Stock to be
issued by the Corporation and designated Series A Convertible Preferred Stock,
par value $0.01 per share (the "SERIES A PREFERRED STOCK");
RESOLVED, that 5,000,000 shares of authorized but unissued Preferred Stock
of the Corporation be designated Series A Preferred Stock and authorized for
issuance and that the Series A Preferred Stock have the rights, preferences,
limitations and restrictions set forth herein.
FURTHER RESOLVED, that the President or any Vice President of the
Corporation, individually or collectively, and the Secretary or Assistant
Secretary of the Corporation, individually or collectively, be, and such
officers hereby are, authorized and directed to execute, acknowledge, attest,
record and file with the Secretary of State of the State of Nevada a Certificate
of Designation in accordance with Section 78.1955 of the Nevada General
Corporation Law and to take all other actions that such officers deem necessary
to effectuate the Certificate of Designation and establish the Series A
Preferred Stock.
3. The authorized number of shares of Preferred Stock of the Corporation
is 10,000,000 and the number of shares of the Series A Preferred Stock, none of
which has been issued, is 5,000,000.
4. The resolutions set forth above have been duly adopted by all necessary
action on the part of the Corporation.
IN WITNESS WHEREOF, Texoil, Inc. has caused this Certificate to be
executed by Frank A. Lodzinski, its President, and Jerry M. Crews, its
Secretary, this 8th day of November, 1999.
TEXOIL, INC.
By: /s/ FRANK A. LODZINSKI
Frank A. Lodzinski, President
ATTEST:
By: /s/ JERRY M. CREWS
Jerry M. Crews, Secretary
State of Texas )
)
County of Harris )
The foregoing instrument was acknowledged before me, on the 8th day of
November, 1999, by Frank A. Lodzinski, President, and Jerry M. Crews, Secretary
of Texoil, Inc., a Nevada corporation, on behalf of the corporation.
Given under my hand and official seal this 8th day of November, 1999.
/s/ TRACY L. DREWS
Notary Public in and for the
State of Texas
My Commission Expires:
03-15-2003
Seal
2
EXHIBIT A
DESIGNATION OF PREFERENCES, LIMITATIONS AND RIGHTS
OF
SERIES A CONVERTIBLE PREFERRED STOCK
OF
TEXOIL, INC.
1. SERIES A CONVERTIBLE PREFERRED STOCK. The Series A Convertible
Preferred Stock, par value $0.01 per share (the "SERIES A PREFERRED"), will
consist of 5,000,000 shares and will have the designations, preferences, voting
powers, relative, participating, optional or other special rights and
privileges, and the qualifications, limitations and restrictions set forth in
this Designation of Preferences, Limitations and Rights of Series A Convertible
Preferred Stock of Texoil, Inc. (the "CERTIFICATE").
2. DIVIDENDS AND DISTRIBUTIONS.
(A) The holders of record of shares of Series A Preferred (the
"HOLDERS") shall be entitled to receive dividends at a rate of nine percent (9%)
of the Conversion Value (as defined in SECTION 4(A) below) per annum per share
of Series A Preferred, out of funds legally available therefor, which shall be
fully cumulative, prior and in preference to any declaration or payment of any
dividend or other distribution on any other class or series of Preferred Stock
or Common Stock (excluding any stock subdivisions, combinations or
consolidations for which an adjustment is made under SECTION 4(D)(I) below and
subject to SECTION 2(B) below). The dividend(s) payable hereunder shall be
payable quarterly on March 31, June 30, September 30 and December 31 of each
year (each a "QUARTERLY DIVIDEND DATE"), commencing with December 31, 1999,
except that if any such date is a Saturday, Sunday or legal holiday then such
dividend shall be payable on the next day that is not a Saturday, Sunday or
legal holiday on which banks in the State of Texas are permitted to be closed (a
"BUSINESS DAY"), to Holders on the stock books of the Corporation 10 days
preceding the payment date for such dividends (the "RECORD DATE"). The foregoing
dividend on the Series A Preferred shall accrue from the date of issuance of
each share until the earlier of (i) the conversion of the Series A Preferred to
common shares, par value $0.01 per share ("COMMON STOCK") or Class B Common
Stock, par value $0.01 per share ("CLASS B COMMON STOCK") (Common Stock and
Class B Common Stock are sometimes collectively referred to in this Certificate
as "CONVERSION SHARES"), or (ii) the liquidation, distribution or winding up of
the Corporation. The dividends shall be payable in the manner set forth in
SECTION 2(B) below. The amount of dividends payable for any period that is
shorter or longer than a full quarter shall be computed on the basis of a
360-day year of twelve 30-day months 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.
(B) All dividends payable on or before December 31, 2001 shall be
payable in shares of Series A Preferred (the "PAYMENTS-IN-KIND"), unless any
Holder elects to receive dividends payable in cash, which election must be made
in writing no later than ten (10) days after the original issuance of the shares
of Series A Preferred. Once a Holder elects to receive cash, it may not receive
Payments-in-Kind during such period. Dividends payable after December 31, 2001
shall be paid in the same form as previously paid to each Holder; provided that,
for each quarter, the Board of Directors may elect to pay the dividends in cash
by notifying the Holders of the Corporation's election to pay cash in lieu of
Payments-in-Kind for such Quarterly Dividend Date. Any such dividend election by
the Corporation for any particular
Quarterly Dividend Date shall operate only for such Quarterly Dividend Date.
Each Payment-in-Kind shall be equal in amount to that number of shares of Series
A Preferred that is equal in number to the aggregate cash dividend that would be
payable on any such dividend date, assuming such dividend were being paid in
cash, divided by the Conversion Value (as defined in SECTION 4(A) below), and
shall be allocated on a pro rata basis to each Holder entitled to receive such
dividend. Certificates representing the shares of Series A Preferred issuable on
payment of any Payment-in-Kind shall be delivered to each Holder entitled to
receive such Payment-in-Kind (in appropriate denominations) promptly following
the Quarterly Dividend Date for which such Payment-in-Kind is to be made
hereunder.
(C) All cash dividends on shares of Series A Preferred shall be due
on the Quarterly Dividend Date. If cash dividends are not paid within ten (10)
days of the Quarterly Dividend Date, the unpaid dividend amount shall accrue
interest from and after each Quarterly Dividend Date at a rate of nine percent
(9%) per annum (compounded on a quarterly basis). All shares of Series A
Preferred to be issued as Payments-in-Kind that are not issued when due shall be
deemed for all purposes to have been issued on and to be outstanding from and
after the applicable Quarterly Dividend Date.
(D) If the Corporation pays any dividend on its Common Stock (other
than in shares of its Common Stock), the Corporation shall at the same time pay
a dividend on the Series A Preferred in an amount per share of Series A
Preferred equal to the amount of such dividend per share of Common Stock
multiplied by the number of shares of Common Stock into which each share of
Series A Preferred is then convertible.
3. LIQUIDATION RIGHTS. In the event of any liquidation, dissolution or
winding-up of the Corporation, whether voluntary or involuntary (a
"Liquidation"), distributions shall be made to the Holders in respect of such
Series A Preferred before any amount shall be paid to the holders of any other
class or series of capital stock of the Corporation in the following manner:
(A) SERIES A PREFERRED. The Holders shall be entitled to be paid
first out of the assets of the Corporation available for distribution to holders
of its capital stock an amount per share equal to the greater of:
(I) the sum of (A) the Conversion Value, plus (B) all accrued
but unpaid dividends then owed (calculated through the date of
liquidation), plus any accrued and unpaid interest thereon, prior to any
distribution to the holders of any other Preferred Stock or Common Stock;
or
(II) the fair market value of the Corporation as determined by
an independent appraiser or investment banker experienced in the oil and
gas industry (an "INDEPENDENT EVALUATOR") selected by the Holders of at
least a majority of the then outstanding Series A Preferred (the
"REQUISITE INTEREST") and approved by the Board of Directors of the
Corporation, which approval shall not be unreasonably withheld, divided by
the total number of outstanding shares of Common Stock of the Corporation
(on a fully-diluted basis) and multiplied by the number of shares of
Common Stock into which each share of Series A Preferred is then
convertible.
If the proceeds from a Liquidation are not sufficient to pay to the
Holders at least the preference amount set forth in Section 3(a)(i), then such
Holders shall instead be entitled to receive the entire assets and funds of the
Corporation legally available for distribution to the
2
holders of capital stock, which assets and funds shall be distributed ratably
among the Holders in proportion to the shares of Series A Preferred then held by
each of them.
(B) REMAINING ASSETS. After payment to the Holders of the amounts
set forth in SECTION 3(A) above, the entire remaining assets and funds of the
Corporation legally available for distribution, if any, shall be distributed
among the holders of Common Stock in proportion to the shares of Common Stock
then held by them.
(C) EVENTS DEEMED A LIQUIDATION. For purposes of this SECTION 3, the
Holders of a Requisite Interest may elect to have treated as a Liquidation (i)
the sale or other transfer in a single transaction or a series of related
transactions of all or substantially all of the assets of the Corporation, or
(ii) the sale of a majority of the Corporation's outstanding Common Stock in a
single transaction or a series of related transactions, or (iii) the merger,
consolidation or other reorganization of the Corporation with or into any other
entity unless the holders of the voting securities of the Corporation
outstanding immediately prior to such transaction continue to hold more than 50%
of the total voting securities of the surviving entity outstanding immediately
after such transaction. Upon the occurrence of any of the foregoing enumerated
events, the Corporation shall provide prompt written notice to the Holders, who
shall have ten (10) days to provide written notice to the Corporation of their
election under this SECTION 3(C).
(D) VALUATION OF SECURITIES AND PROPERTY. In the event the
Corporation proposes to distribute assets other than cash in connection with any
Liquidation, the value of the assets to be distributed to the Holders shall be
determined in good faith by the Board of Directors. The method of valuation of
securities subject to an investment letter or other restrictions on free
marketability shall be adjusted to make an appropriate discount to reflect the
fair market value thereof as determined in good faith by the Board of Directors.
The Holders of at least ten percent (10%) of the outstanding Series A Preferred
shall have the right to challenge any determination by the Board of Directors of
fair market value pursuant to this SECTION 3(D), in which case the determination
of fair market value shall be made by an Independent Evaluator selected jointly
by the Board of Directors and the challenging parties (or if they are unable to
agree, an Independent Evaluator selected by the American Arbitration
Association), the reasonable cost of such appraisal to be borne by the
Corporation.
4. CONVERSION. The Holders have conversion rights as follows (the
"CONVERSION RIGHTS"):
(A) RIGHT TO CONVERT. Each share of Series A Preferred shall
initially be convertible, at the option of the Holder thereof, at any time on or
after the date of issuance thereof, into the number of fully paid and
nonassessable shares of Common Stock which results from dividing the Conversion
Price (as hereinafter specified) per share in effect at the time of conversion
into the per share Conversion Value. The initial Conversion Price of the Series
A Preferred shall be $4.00 per share, and the Conversion Value of the Series A
Preferred shall be $8.00 per share. The initial Conversion Price of the Series A
Preferred shall be subject to adjustment from time to time as provided in
SECTION 4(D) hereof. The Conversion Value shall not be subject to adjustment.
Upon conversion, all accrued but unpaid dividends on a Holder's Series A
Preferred so converted, plus any accrued and unpaid interest thereon, shall, at
the option of such Holder, be paid in cash (to the extent permitted under
applicable corporate law) or converted into the number of fully paid and
nonassessable shares of Common Stock which results from dividing the Conversion
Price in effect at such time into the aggregate of all such accrued but unpaid
dividends and accrued and unpaid interest.
3
(B) AUTOMATIC CONVERSION. At any time after December 31, 2002 that
(i) the Corporation's Net Equity Value equals or exceeds $121,500,000 and (ii)
the Corporation's Net Equity Value per share (Net Equity Value divided by the
number of shares of Common Stock outstanding on a fully-diluted basis) equals or
exceeds $10.00, each share of Series A Preferred shall automatically be
converted into the number of fully paid and nonassessable shares of Class B
Common Stock which results from dividing the Conversion Price per share in
effect at the time of conversion into the per share Conversion Value. For
purposes of this SECTION 4, "NET EQUITY VALUE" shall be determined as of each
March 31, June 30, September 30 and December 31 and shall equal the sum of (A)
95% of the present value, using a 10% discount rate, of the estimated future net
revenues from the Corporation's proved developed producing reserves, (B) 50% of
the present value, using a 10% discount rate, of the estimated future net
revenues from the Corporation's proved developed nonproducing reserves ("PDNP
VALUE"), (C) 25% of the present value, using a 10% discount rate, of the
estimated future net revenues from the Corporation's proved undeveloped reserves
("PUD VALUE"), and (D) the Corporation's current assets; LESS the sum of (Y) the
Corporation's current liabilities and (Z) the Corporation's long-term
liabilities (exclusive of deferred taxes); provided, however, that, for purposes
of determining Net Equity Value, the sum of the PDNP Value and the PUD Value
shall not exceed three-sevenths (3/7) of the value determined under clause (A)
of this sentence. In determining the value of the Corporation's oil and gas
reserves, (1) the definitions of reserve categories in the rules and regulations
of the Securities and Exchange Commission shall apply, (2) oil and gas prices
shall equal the futures prices quoted on the New York Mercantile Exchange for
the next succeeding 36 months from the date as of which the determination is
being made and then shall be held flat for periods thereafter and (3) operating
costs shall be escalated 2% per year for the next succeeding 3 years from the
date as of which the determination is being made and then shall be held flat for
periods thereafter. For purposes of determining Net Equity Value, the value of
the Corporation's proved oil and gas reserves shall be determined on the basis
set forth above as of each March 31, June 30 and September 30 by the Corporation
and as of each December 31 by an independent engineering firm approved by the
Board of Directors of the Corporation. If the Holders of a Requisite Interest
disagree with the Corporation's determination of Net Equity Value, then, within
30 days after receiving notice of the Corporation's determination, such Holders
shall give notice of such disagreement to the Corporation and shall determine
the Net Equity Value of the Corporation on the basis set forth above. The
Corporation will promptly furnish, or direct its independent engineering firm to
furnish, all information reasonably requested by such Holders. If the Net Equity
Value determined by such Holders is greater than or equal to 90% of the Net
Equity Value determined by the Corporation, then the Net Equity Value shall be
the average of the two valuations. If the Net Equity Value determined by such
Holders is less than 90% of the Net Equity Value determined by the Corporation,
then the Net Equity Value shall be determined by an Independent Evaluator
selected by such Holders and the Corporation (or if they are unable to agree, an
Independent Evaluator selected by the American Arbitration Association). The Net
Equity Value determined by the Independent Evaluator shall be final and binding
on the parties with respect to the valuation date in question. The reasonable
fees and expenses of the Independent Evaluator shall be borne by the
Corporation; otherwise, the Holders and the Corporation shall each bear their
own fees, costs and expenses (including fees and expenses of attorneys,
accountants and other professional advisors) incurred in connection with such
determination of Net Equity Value. Upon conversion, all accrued but unpaid
dividends (whether declared or undeclared) on a Holder's Series A Preferred,
plus any accrued and unpaid interest thereon shall, at the option of such
Holder, be paid in cash (to the extent permitted under applicable corporate law)
or converted into the number of fully paid and nonassessable shares of Class B
Common Stock which results from dividing the Conversion Price in effect at such
time into the aggregate of all such accrued but unpaid dividends and accrued and
unpaid interest.
4
(C) MECHANICS OF CONVERSION. Before any Holder shall be entitled to
convert shares of Series A Preferred into shares of Common Stock and to receive
certificates therefor, such Holder shall surrender the certificate or
certificates therefor, duly endorsed, at the principal office of the Corporation
or of any transfer agent for the Series A Preferred, and shall give written
notice to the Corporation at such office that such Holder elects to convert the
same; PROVIDED, HOWEVER, that in the event of an automatic conversion pursuant
to SECTION 4(B) hereof, the outstanding shares of Series A Preferred shall be
converted automatically without any further action by the Holders and whether or
not the certificates representing such shares are surrendered to the Corporation
or its transfer agent; and provided further that the Corporation shall not be
obligated to issue certificates evidencing the shares of Class B Common Stock
issuable upon such automatic conversion unless and until the certificates
evidencing such shares of Series A Preferred are either delivered to the
Corporation or its transfer agent as provided above, or the Holder notifies the
Corporation or its transfer agent that such certificates have been lost, stolen
or destroyed and executes an agreement reasonably satisfactory to the
Corporation to indemnify the Corporation from any loss incurred by it in
connection with such certificates. The Corporation shall as soon as practicable
after such delivery, or after such agreement and indemnification, issue and
deliver at such office to such Holder a certificate or certificates for the
number of shares of Common Stock or Class B Common Stock, as the case may be, to
which it, he or she shall be entitled and, at the option of such Holder, either
a check payable to the Holder in the amount of any accrued but unpaid dividends
payable pursuant to SECTION 2 hereof, and any accrued and unpaid interest
thereon, or the number of fully paid and nonassessable shares of Common Stock or
Class B Common Stock, as the case may be, which results from dividing the
Conversion Price in effect at such time into the aggregate of all such accrued
but unpaid dividends and accrued and unpaid interest. Such conversion shall be
deemed to have been made immediately prior to the close of business on the date
of such surrender of the shares of Series A Preferred to be converted, or, in
the case of automatic conversion, simultaneously upon the occurrence of the
event leading to such automatic conversion, and the person or persons entitled
to receive the shares of Common Stock or Class B Common Stock, as the case may
be, issuable upon such conversion shall be treated for all purposes as the
holder or holders of such shares of Common Stock or Class B Common Stock, as the
case may be, on such date.
(D) ADJUSTMENTS TO CONVERSION PRICE.
(I) SPECIAL DEFINITIONS. For purposes of this SECTION 4(D),
the following definitions shall apply:
(1) "OPTIONS" shall mean rights, options or warrants to
subscribe for, purchase or otherwise acquire either Common Stock or
Convertible Securities.
(2) "CONVERTIBLE SECURITIES" shall mean any evidences of
indebtedness, shares or other securities convertible into or exchangeable
for Common Stock.
(3) "ADDITIONAL SHARES OF COMMON STOCK" shall mean all
shares of Common Stock issued (or, pursuant to SECTION 4(D)(III), deemed
to be issued) by the Corporation after the Original Issue Date, other than
shares of Common Stock issued or issuable:
5
(A) upon conversion of shares of Series A
Preferred or Class B Common Stock;
(B) pursuant to a stock option or warrant
outstanding as of the Original Issue Date;
(C) as a dividend or distribution on shares of
Series A Preferred;
(D) in a transaction described in SECTION
4(D)(VI); or
(E) by way of dividend or other distribution on
shares of Common Stock excluded from the definition of
Additional Shares of Common Stock by the foregoing CLAUSES
(A), (B), (C), (D) or this CLAUSE (E).
(4) "ORIGINAL ISSUE DATE" shall mean the date on which
the first share of Series A Preferred was issued.
(II) DEEMED ISSUE OF ADDITIONAL SHARES OF COMMON STOCK. In the
event the Corporation at any time or from time to time after the Original
Issue Date shall issue any Options or Convertible Securities or shall fix
a record date for the determination of holders of any class of securities
entitled to receive any such Options or Convertible Securities, then the
maximum number of shares (as set forth in the instrument relating thereto
without regard to any provisions contained therein for a subsequent
adjustment of such number) of Common Stock issuable upon the exercise of
such Options or, in the case of Convertible Securities and Options
therefor, the exercise of such Options and conversion or exchange of such
Convertible Securities, shall be deemed to be Additional Shares of Common
Stock issued as of the time of such issue or, in case such a record date
shall have been fixed, as of the close of business on such record date,
provided that Additional Shares of Common Stock shall not be deemed to
have been issued unless the consideration per share (determined pursuant
to SECTION 4(D)(IV) hereof) of such Additional Shares of Common Stock
would be less than the Conversion Price in effect immediately prior to
such issue or such record date, as the case may be, and provided further
that in any such case in which Additional Shares of Common Stock are
deemed to be issued:
(1) except as provided in SECTION 4(D)(II)(2), no
further adjustment in the Conversion Price of the Series A Preferred shall
be made upon the subsequent issue of Convertible Securities or shares of
Common Stock upon the exercise of such Options or conversion or exchange
of such Convertible Securities;
(2) if such Options or Convertible Securities by their
terms provide, with the passage of time or otherwise, for any change in
the consideration payable to the Corporation, or change in the number of
shares of Common Stock issuable, upon the exercise, conversion or exchange
thereof (other than under or by reason of provisions designed to protect
against dilution), the Conversion Price of the Series A Preferred computed
upon the original issue thereof (or upon the occurrence of a record date
with respect thereto) and any subsequent adjustments based thereon, shall,
upon any such increase or decrease becoming effective, be recomputed to
reflect
6
such increase or decrease insofar as it affects such Options or
the rights of conversion or exchange under such Convertible Securities;
and
(3) no readjustment pursuant to CLAUSE (2) above shall
have the effect of increasing the Conversion Price of the Series A
Preferred to an amount which exceeds the lower of (A) the Conversion Price
of the Series A Preferred on the original adjustment date related to such
Options or Convertible Securities or (B) the Conversion Price of the
Series A Preferred that would have resulted from any other issuance of
Additional Shares of Common Stock between the original adjustment date
related to such Options or Convertible Securities and such readjustment
date.
(III) ADJUSTMENT OF CONVERSION PRICE UPON ISSUANCE OF
ADDITIONAL SHARES OF COMMON STOCK. In the event the Corporation shall
issue Additional Shares of Common Stock (including Additional Shares of
Common Stock deemed to be issued pursuant to SECTION 4(D)(II)), then, and
in each such event, the Conversion Price in effect immediately prior to
such issue shall be adjusted to a price (calculated to the nearest cent)
determined by multiplying such Conversion Price by a fraction, the
numerator of which shall be (1) the number of shares of Common Stock
outstanding immediately prior to such issue (determined on a fully diluted
basis) plus (2) (A) the aggregate consideration received by the
Corporation for the total number of Additional Shares of Common Stock
issued or deemed to be issued since the Original Issue Date divided by (B)
the Conversion Price in effect immediately prior to such issue, and the
denominator of which shall be the number of shares of Common Stock
outstanding immediately prior to such issue (determined on a fully diluted
basis) plus the number of Additional Shares of Common Stock issued or
deemed to be issued since the Original Issue Date; provided that the
Conversion Price may never be adjusted to an amount greater than the
Conversion Price at the Original Issue Date as subsequently adjusted
pursuant to Sections 4(D)(V), (VI) and (VII) (without regard to any prior
or current adjustments pursuant to this Section 4(D)(III)).
(IV) DETERMINATION OF CONSIDERATION. For purposes of this
SECTION 4(D), the consideration received by the Corporation for the issue
of any Additional Shares of Common Stock shall be computed as follows:
(1) CASH AND PROPERTY: Such consideration shall be
computed as follows:
(A) insofar as it consists of cash, such
consideration shall be computed at the aggregate amount of
cash received by the Corporation;
(B) insofar as it consists of property other than
cash, such consideration shall be computed at the fair market
value thereof at the time of such issue, as determined by the
Board of Directors in the good faith exercise of its
reasonable business judgment; and
(C) in the event Additional Shares of Common Stock
are issued together with other shares or securities or other
assets of the Corporation for consideration which covers both,
such consideration shall be the proportion of such
consideration so received, computed as
7
provided in CLAUSES (A) and (B) above, as determined by the
Board of Directors in the good faith exercise of its
reasonable business judgment.
(2) OPTIONS AND CONVERTIBLE SECURITIES. The
consideration per share received by the Corporation for Additional Shares
of Common Stock deemed to have been issued pursuant to SECTION 4(D)(II),
relating to Options and Convertible Securities, shall be determined by
dividing
(A) the total amount, if any, received or
receivable by the Corporation as consideration for the issue
of such Options or Convertible Securities, plus the minimum
aggregate amount of additional consideration (as set forth in
the instruments relating thereto, without regard to any
provision contained therein for a subsequent adjustment of
such consideration) payable to the Corporation upon the
exercise of such Options or the conversion or exchange of such
Convertible Securities, or in the case of Options for
Convertible Securities, the exercise of such Options for
Convertible Securities and the conversion or exchange of such
Convertible Securities, by
(B) the maximum number of shares of Common Stock
(as set forth in the instruments relating thereto, without
regard to any provision contained therein for a subsequent
adjustment of such number) issuable upon the exercise of such
Options or the conversion or exchange of such Convertible
Securities.
(3) FAIR MARKET VALUE. The Holders of a Requisite
Interest of the issued and outstanding Series A Preferred shall have the
right to challenge any determination by the Board of Directors of fair
market value pursuant to this SECTION 4(D), in which case such
determination of fair market value shall be made by an Independent
Evaluator selected jointly by the Board of Directors and the challenging
parties (or if they are unable to agree, an Independent Evaluator selected
by the American Arbitration Association), the reasonable cost of such
appraisal to be borne by the Corporation.
(V) SUBDIVISIONS, COMBINATIONS, OR CONSOLIDATION OF COMMON
STOCK. In the event the outstanding shares of Common Stock shall be
subdivided, combined or consolidated, by stock split, stock dividend,
combination or like event, into a greater or lesser number of shares of
Common Stock, the Conversion Price of the Series A Preferred in effect
immediately prior to such subdivision, combination or consolidation shall,
concurrently with the effectiveness of such subdivision, combination or
consolidation, be proportionately adjusted.
(VI) RECLASSIFICATIONS. In the case, at any time after the
date hereof, of any capital reorganization or any reclassification of the
stock of the Corporation (other than as a result of a stock dividend or
subdivision, split-up or combination of shares), or the consolidation or
merger of the Corporation with or into another person (other than a
consolidation or merger (A) in which the Corporation is the continuing
entity and which does not result in any change in the Common Stock or (B)
which is treated as a liquidation pursuant to SECTION 3(C) above), the
shares of Series A Preferred shall, after such reorganization,
reclassification, consolidation or merger, be convertible into the kind
and number of shares of stock or other securities or property of the
surviving
8
corporation or otherwise to which such Holder would have been
entitled if immediately prior to such reorganization, reclassification,
consolidation or merger such Holder had converted his shares of Series A
Preferred into Common Stock. In any such case, appropriate adjustment
shall be made in the application of the provisions of this SECTION 4 after
such reorganization, reclassification, consolidation or merger so that the
provisions of this SECTION 4 (including adjustments to the Conversion
Price) shall be applicable after such event and shall be as nearly
equivalent as practicable. The provisions of this SECTION 4(D)(VI) shall
similarly apply to successive reorganizations, reclassifications,
consolidations or mergers.
(VII) PREFERRED STOCK PURCHASE AGREEMENT. The Conversion Price
shall be adjusted as provided in the Preferred Stock Purchase Agreement
dated as of October 12, 1999 by and among the Corporation, Quantum Energy
Partners, LP, EnCap Equity 1996 Limited Partnership, Energy Capital
Investment Company PLC, V&C Energy Limited Partnership and the other
parties who are signatories thereto (the "PURCHASE AGREEMENT"), in the
event of any inaccuracy in or breach of the representations or warranties
made by the Corporation therein. A copy of the Purchase Agreement is
attached hereto as Annex 1 and incorporated herein by reference.
(E) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the Conversion Price of the Series A Preferred
pursuant to this SECTION 4, the Corporation at its expense shall promptly
thereafter compute such adjustment or readjustment in accordance with the terms
hereof and furnish to each Holder of Series A Preferred a certificate setting
forth such adjustment or readjustment and showing in detail the facts upon which
such adjustment or readjustment is based. The Corporation shall, upon the
written request at any time of any Holder, furnish or cause to be furnished to
such Holder a like certificate setting forth (i) such adjustments and
readjustments, if any, (ii) the Conversion Price of the Series A Preferred at
the time in effect, and (iii) the number of shares of Common Stock and the
amount, if any, of other property which at the time would be received upon the
conversion of the Series A Preferred.
(F) STATUS OF CONVERTED STOCK. In case any shares of Series A
Preferred shall be converted pursuant to SECTION 4 hereof, the shares so
converted shall be canceled, shall not be reissuable as Series A Preferred and
shall become a part of the authorized, but unissued preferred stock of the
Corporation.
(G) FRACTIONAL SHARES. In lieu of any fractional shares in the
aggregate to which any Holder would otherwise be entitled upon conversion, the
Corporation shall pay cash equal to such fraction multiplied by the fair market
value of one share of Common Stock determined by the Board of Directors in the
good faith exercise of its reasonable business judgment.
(H) MISCELLANEOUS.
(I) All calculations under this SECTION 4 shall be made to the
nearest cent or to the nearest one hundredth (1/100) of a share, as the
case may be.
(II) No adjustment in the Conversion Price of the Series A
Preferred will be made if such adjustment would result in a change in such
Conversion Price of less than $0.01. Any adjustment of less than $0.01
which is not made shall be carried forward and shall be made at the time
of and together with any subsequent adjustment
9
which, on a cumulative basis, amounts to an adjustment of $0.01 or more in
such Conversion Price.
(I) NO IMPAIRMENT. The Corporation will not through any
reorganization, recapitalization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms to be observed
or performed hereunder by the Corporation, but will at all times in good faith
assist in the carrying out of all the provisions of this SECTION 4 and in the
taking of all action as may be necessary or appropriate in order to protect the
conversion rights of the Holders against impairment.
(J) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock and Class B Common Stock, solely for the purpose of
effecting the conversion of the shares of Series A Preferred, such number of its
shares of Common Stock and Class B Common Stock as shall from time to time be
sufficient to effect the conversion of all outstanding shares of Series A
Preferred. If at any time the number of authorized but unissued shares of Common
Stock or Class B Common Stock shall not be sufficient to effect the conversion
of all then outstanding shares of Series A Preferred, the Corporation will take
such corporate action as may be necessary to increase its authorized but
unissued shares of Common Stock or Class B Common Stock, as the case may be, to
such number of shares as shall be sufficient for such purpose.
5. VOTING RIGHTS.
(A) GENERAL. To the extent required by law or by SECTION 5(B) or
SECTION 9 hereof, the Holders will be entitled to vote on all matters as a
separate class or series. On all matters other than matters set forth in SECTION
5(B), the Holders of Series A Preferred will also vote together with the holders
of Common Stock as a single class and each share of Series A Preferred will
entitle the Holder to the number of votes per share equal to the full number of
shares of Common Stock into which each share of Series A Preferred is
convertible on the record date for such vote. The Holders of Series A Preferred
shall receive notice of and shall be entitled to attend in person or by proxy
any meeting of the holders of Common Stock.
(B) VOTING FOR DIRECTORS. For so long as at least the "Threshold
Amount" (as defined below) of Series A Preferred is outstanding, the Holders of
a Requisite Interest, voting as a separate class, shall be entitled to elect the
Class B directors to the Board of Directors of the Corporation in accordance
with the Corporation's Amended and Restated Articles of Incorporation (the
"ARTICLES OF INCORPORATION"). Any vacancies on the Board of Directors resulting
from the death, resignation, disqualification or removal of any Class B
director, and any vacancies resulting from an increase in the number of Class B
directors, may be filled by a majority of the remaining Class B directors,
though less than a quorum, or by the Holders of a Requisite Interest. Class B
directors may be removed from the Board of Directors at any time, with or
without cause, by the vote or consent of the Holders of not less than two-thirds
(2/3) of the voting power of the issued and outstanding Series A Preferred.
"THRESHOLD AMOUNT" shall mean at least ten percent (10%) of the sum of (a) the
shares of Series A Preferred issued on the Original Issue Date, and (b) the
number of additional shares of Series A Preferred issued to the Holders as
dividends or pursuant to other adjustments in accordance with the provisions of
this Certificate or the Purchase Agreement.
10
(C) AMENDMENT. Any amendment to this Certificate may be made solely
by a vote of the Board of Directors of the Corporation and the Holders of at
least ninety percent (90%) of the then outstanding Series A Preferred (a
"SUPERMAJORITY INTEREST"), by duly called meeting or by written consent.
6. LIQUIDATION RIGHTS.
(A) RIGHT TO LIQUIDATION. At anytime after April 1, 2004, the
Holders of a Requisite Interest may elect to require the Corporation to use its
best efforts to liquidate (the "LIQUIDATION RIGHT") all or any portion of the
shares of Series A Preferred at a price per share equal to the Liquidation Price
(as defined herein). As used in this SECTION 6, the term "liquidation" refers to
the liquidation of the Series A Preferred held by the Holders either by
redemption by the Corporation or by sale by the Holders pursuant to a registered
public offering, in either case on the terms set forth herein, and not to a
liquidation of the Corporation. The Holders of a Requisite Interest may require
the Corporation to effect the Liquidation Right by giving written notice to the
Corporation of such election (a "LIQUIDATION NOTICE"). Upon receipt of a
Liquidation Notice, the Corporation will use its best efforts to liquidate the
shares of Series A Preferred specified in such Liquidation Notice as soon as
practicable and in all events within nine (9) months of the Corporation's
receipt of the Liquidation Notice. The Corporation shall give the Holders not
less than forty-five (45) days' notice of the date estimated for liquidation of
the Series A Preferred (the "LIQUIDATION DATE"). Upon the occurrence of a
"Trigger Event" (as defined in SECTION 6(G)), the Holders' sole remedy shall be
the right of increased voting power of the Class B directors elected by the
Holders, as set forth in the Articles of Incorporation; provided that the
limitation contained in this sentence shall not limit any other rights or
privileges the Holders may have under this Certificate, the Purchase Agreement
or any other agreement between the Corporation and a Holder.
(B) LIQUIDATION PRICE. The Holders shall be entitled to receive from
the Corporation an amount in cash for each share of Series A Preferred to be
liquidated (the "LIQUIDATION PRICE") equal to the greater of (i) the Fair Market
Value of the Corporation as of the Valuation Date (as hereinafter defined), as
determined in accordance with SECTION 6(C) hereof, divided by the total number
of outstanding shares of Common Stock of the Corporation (on a fully-diluted
basis) and multiplied by the number of shares of Common Stock into which each
share of Series A Preferred is convertible at the time the Liquidation Price is
paid or (ii) an amount per share of Series A Preferred equal to (A) the
Conversion Value plus (B) all accrued and unpaid dividends through the date of
liquidation plus any accrued and unpaid interest thereon ((A) and (B) in the
aggregate, the "REQUIRED RETURN"). The "VALUATION DATE " shall be the date 30
days prior to the Liquidation Date.
(C) FAIR MARKET VALUE. The "FAIR MARKET VALUE" of the Corporation
shall be determined as follows:
(I) Within 30 days after the date of the Corporation's notice
of the Liquidation Date, the Corporation, on the one hand, and the Holders
on the other hand, will independently determine the Fair Market Value of
the Corporation as of the Valuation Date and each shall provide a written
analysis of such value to the other party. The Corporation will promptly
furnish, or direct its independent engineering firm to furnish, all
information reasonably requested by the Holders. If the difference between
the two valuations is less than 10% of the lower valuation, the Fair
Market Value of the Corporation shall be the average of the two
valuations. If either party fails to deliver a written notice of valuation
to the other party within the 30-day period, such party shall be
11
deemed to consent and agree to the valuation submitted by the other party,
which shall be the Fair Market Value of the Corporation for purposes of
this SECTION 6.
(II) If the difference between the two valuations is greater
than 10% of the lower valuation, the parties agree to engage an
Independent Evaluator mutually acceptable to each of them (or if they are
unable to agree, an Independent Evaluator selected by the American
Arbitration Association) to value the Corporation. The Independent
Evaluator shall review the valuations submitted by the Corporation and the
Holders in accordance with SECTION 6(C)(I) and shall consider such
valuations as well as any other information it deems relevant in order to
determine the Fair Market Value of the Corporation. The Fair Market Value
of the Corporation as established by the Independent Evaluator shall be
final and binding on the parties; provided that, if the Independent
Evaluator fails to determine the Fair Market Value of the Corporation
prior to the Liquidation Date, then, at the option of either the
Corporation or the Holders of a Requisite Interest, the Fair Market Value
of the Corporation shall be redetermined, in which case the Corporation
shall establish a new Liquidation Date by notice as provided in SECTION
6(A), the Valuation Date shall be changed correspondingly and the process
for determining the Fair Market Value of the Corporation pursuant to
SECTION 6(C) shall be repeated. The reasonable fees and expenses of the
Independent Evaluator shall be borne by the Corporation; otherwise, such
Holders and the Corporation shall each bear their own fees, costs and
expenses (including fees and expenses of attorneys, accountants and other
professional advisors) incurred in connection with the appraisal and the
liquidation of the Holders' Series A Preferred.
(III) In all cases, the determination of the Fair Market Value
of the Corporation shall be made on a basis that (y) assumes that all of
the debts and obligations of the Corporation have been or will be
satisfied in full, and (z) in the event that the Corporation is a public
company, meaning that it is a company required to file periodic reports
with the Securities and Exchange Commission, at such time, takes into
account not only the market price of the Corporation's equity securities,
but also the underlying net asset value of the Corporation's properties.
(D) DIVIDENDS; RIGHTS OF HOLDERS. No shares of Series A Preferred
are entitled to any dividends accruing after the date on which the Liquidation
Price of such shares of Series A Preferred is paid. On such date, all rights of
the Holders will cease, and such shares of Series A Preferred will be deemed not
to be outstanding.
(E) REISSUANCE; NEW CERTIFICATES. Any shares of Series A Preferred
which are redeemed in accordance with the Liquidation Rights herein granted or
otherwise acquired by the Corporation will be canceled and will not be reissued,
sold or transferred, but will become part of the authorized but unissued
preferred stock of the Corporation. If fewer than the total number of shares of
Series A Preferred represented by any certificate are redeemed, a new
certificate representing the number of unredeemed shares of Series A Preferred
will be issued to the Holder thereof without cost to such Holder within three
(3) business days after surrender of the certificate representing the redeemed
shares.
(F) RATABLE OFFERS. Neither the Corporation nor any subsidiary will
redeem, repurchase or otherwise acquire any shares of Series A Preferred
pursuant to this SECTION 6, except as expressly authorized herein or pursuant to
a purchase offer made pro rata to all Holders of shares of Series A Preferred on
the basis of the number of shares of Series A Preferred owned by each such
Holder.
12
(G) TRIGGER EVENT. A "TRIGGER EVENT" shall be deemed to have
occurred if, within nine months after the Corporation's receipt of a Liquidation
Notice, the Corporation shall have failed to accomplish either of the following:
(i) the completion of a registered public offering of the Conversion Shares on
terms acceptable to the Holders of a Requisite Interest pursuant to which the
Holders have received net proceeds in an amount sufficient to achieve the
Required Return per share of Series A Preferred held immediately prior to the
public offering, or (ii) the redemption of all of the Series A Preferred at or
above the Liquidation Price.
7. NOTICES OF RECORD DATE. In the event of any taking by the Corporation
of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend or
other distribution, any right to subscribe for, purchase or otherwise acquire
any shares of stock of any class or any other securities or property, or to
receive any other right, the Corporation shall mail to each Holder, at least
twenty (20) days prior to the date specified therein, a notice specifying the
date on which any such record is to be taken for the purpose of such dividend,
distribution or right, and the anticipated amount and character of such
dividend, distribution or right.
8. NOTICES. Any notice required or permitted by the provisions of this
Certificate to be given to the Holders shall be deemed given when deposited in
the United States mail, postage prepaid, and addressed to each Holder of record
at such Holder's address appearing on the books of the Corporation. Any notice
required or permitted by the provisions of this Certificate to be given to the
Corporation shall be deemed given when deposited in the United States mail,
postage prepaid, and addressed to the Corporation at its registered office or
its principal place of business.
9. APPROVAL OF CERTAIN TRANSACTIONS WHILE SERIES A PREFERRED IS
OUTSTANDING.
(A) REQUISITE INTEREST. So long as at least the Threshold Amount of
Series A Preferred is outstanding, the Corporation shall not, without first
obtaining the written approval of the Holders of a Requisite Interest, voting as
a separate class, take any action to:
(I) create any new class or series of shares that has a
preference over or is on a parity with the Series A Preferred with respect to
voting, dividends, liquidation preferences or otherwise;
(II) issue any shares of capital stock of the Corporation,
including Common Stock and any series of Preferred Stock, whether now authorized
or not, or any rights, options or warrants to purchase shares of Common Stock or
Preferred Stock, or any securities of any type whatsoever that are, or may
become, convertible into or exchangeable for shares of Common stock or Preferred
Stock; PROVIDED, HOWEVER, that the Corporation may issue (i) shares of capital
stock to the Holders in connection with the conversion of the Series A Preferred
or as a dividend or distribution on the Series A Preferred; (ii) securities in
connection with stock options or warrants outstanding as of the date hereof;
(iii) stock issued in connection with any stock split, stock dividend or
recapitalization by the Corporation; and (iv) shares of Common Stock (not
including any rights, options, warrants or other securities convertible into or
exchangeable for Common Stock) at a purchase price per share of such Common
Stock for cash or other consideration the fair market value of which is greater
than or equal to 150% of the Conversion Price then in effect;
13
(III) repurchase, redeem or retire any shares of capital stock
of the Corporation other than the repurchase of shares of Series A Preferred
pursuant to the terms thereof;
(IV) authorize or pay any dividend or other distribution
(other than a stock dividend) with respect to the Preferred Stock or the Common
Stock (other than the dividends payable to the Holders as provided in this
Certificate);
(V) undertake, enter into or consummate (A) a consolidation or
merger of the Corporation with or into any other corporation or business entity
in which the holders of the voting securities of the Corporation outstanding
immediately after the Original Issue Date do not continue to hold more than
fifty percent (50%) of the total voting securities of the surviving entity
outstanding immediately after such transaction, (B) the sale or other transfer
in a single transaction or a series of related transactions of all or
substantially all of the assets of the Corporation, or (C) the liquidation,
dissolution, winding-up or reorganization of the Corporation; or
(VI) enter into or modify any commodity hedge transaction at a
price below $17.50 per barrel for crude oil or $2.10 per MMBtu for natural gas.
For purposes of SECTION 9(A)(II), the fair market value of non-cash
consideration to be paid for Common Stock shall be determined by the Board of
Directors of the Corporation, provided that the Holders of a Requisite Interest
of the issued and outstanding Series A Preferred shall have the right to
challenge any determination by the Board of Directors of fair market value
pursuant to SECTION 9(A)(II), in which case such determination of fair market
value shall be made by an Independent Evaluator selected jointly by the Board of
Directors and the challenging parties (or if they are unable to agree, an
Independent Evaluator selected by the American Arbitration Association), the
reasonable cost of such appraisal to be borne by the Corporation.
(B) SUPERMAJORITY INTEREST. So long as at least the Threshold Amount
of Series A Preferred is outstanding, the Corporation shall not, without first
obtaining the written approval of the Holders of a Supermajority Interest,
voting as a separate class, take any action to:
(I) alter the rights, preferences or privileges of the
Series A Preferred; or
(II) alter or amend the Articles of Incorporation, this
Certificate or the bylaws of the Corporation.
14
ANNEX 1