-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VuzSp3knuOqgmG3Fs8Pf9lGtK3fKQQGEbYYbCkG8uTuUxNGk1Xmc/CSTW8HlGYtn AeNnnYC55WlPdo6ANSQqzQ== 0000912057-99-005834.txt : 19991117 0000912057-99-005834.hdr.sgml : 19991117 ACCESSION NUMBER: 0000912057-99-005834 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MIDDLE BAY OIL CO INC CENTRAL INDEX KEY: 0000903267 STANDARD INDUSTRIAL CLASSIFICATION: OIL AND GAS FIELD EXPLORATION SERVICES [1382] IRS NUMBER: 631081013 STATE OF INCORPORATION: AL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 001-14745 FILM NUMBER: 99753251 BUSINESS ADDRESS: STREET 1: 1221 LAMAR ST STREET 2: SUITE 1020 CITY: HOUSTON STATE: TX ZIP: 77010 BUSINESS PHONE: 7137596808 MAIL ADDRESS: STREET 1: PO BOX 390 CITY: MOBILE STATE: AL ZIP: 36602 10QSB 1 FORM 10QSB - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-QSB /X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 OR / / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from ______________ to ______________ COMMISSION FILE NO. 0-21702 MIDDLE BAY OIL COMPANY, INC. (Exact name of small business issuer as specified in its charter) ALABAMA 63-1081013 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.)
------------------------ 1221 LAMAR STREET, SUITE 1020 HOUSTON, TX 77010 (Address of principal executive offices) ------------------------ (713) 759-6808 (Issuer's telephone number) N/A (Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of Exchange Act 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 / / Number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date: Common stock, $.02 par value 14,439,631 shares as of November 4, 1999 Transitional Small Business Disclosure Format (check one) Yes / / No /X/ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES INDEX
PAGE NO. ---- PART I. CONSOLIDATED FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets-- September 30, 1999 (Unaudited) and December 31, 1998................................................... 1 Consolidated Statements of Operations (Unaudited)-- Three and nine months ended September 30, 1999 and 1998................................................... 2 Consolidated Statements of Cash Flows (Unaudited)-- Nine months ended September 30, 1999 and 1998......... 3 Notes to Consolidated Financial Statements (Unaudited)............................................ 4 Item 2. Management's Discussion and Analysis Of Financial Condition and Results of Operations..................... 13 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders................................................... 26 Item 6. Exhibits and Reports on Form 8-K................... 26
PART I--FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
SEPTEMBER DECEMBER 31 1999 1998 ----------- ------------ (UNAUDITED) (AUDITED) ASSETS CURRENT ASSETS CASH AND CASH EQUIVALENTS................................. $25,076,465 $ 1,040,096 ACCOUNTS RECEIVABLE....................................... 2,716,165 3,309,043 ACCOUNTS RECEIVABLE-INSURANCE CLAIM....................... -- 448,083 OTHER CURRENT ASSETS...................................... 90,567 141,364 ----------- ----------- TOTAL CURRENT ASSETS.................................... 27,883,197 4,938,586 NON-CURRENT ASSETS NOTES RECEIVABLE--STOCKHOLDER............................. -- 173,115 PROPERTY (AT COST) OIL AND GAS (SUCCESSFUL EFFORTS METHOD)................... 80,659,521 90,849,439 OTHER..................................................... 988,579 795,323 ----------- ----------- 81,648,100 91,644,762 ACCUMULATED DEPLETION, DEPRECIATION AND AMORTIZATION........ (34,486,362) (39,073,584) ----------- ----------- 47,161,738 52,571,178 OTHER ASSETS................................................ 637,875 257,938 ----------- ----------- TOTAL ASSETS................................................ $75,682,810 $57,940,817 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES CURRENT MATURITY OF LONG-TERM DEBT........................ $4,314,318 $ -- ACCOUNTS PAYABLE-TRADE.................................... 2,822,415 3,643,241 ACCOUNTS PAYABLE-ENEX LP LIMITED PARTNERS................. -- 538,750 ACCOUNTS PAYABLE-REVENUE.................................. 362,065 342,931 OTHER CURRENT LIABILITIES................................. 200,806 275,010 ----------- ----------- TOTAL CURRENT LIABILITIES................................... 7,699,604 4,799,932 LONG-TERM DEBT.............................................. 24,176,249 27,454,567 CONVERTIBLE SUBORDINATED NOTES.............................. 10,850,000 -- DEFERRED INCOME TAXES....................................... 805,353 1,733,167 OTHER LIABILITIES........................................... 304,404 437,949 MINORITY INTEREST........................................... 1,014,155 957,369 STOCKHOLDERS' EQUITY PREFERRED STOCK, $0.02 PAR, 20,000,000 SHARES AUTHORIZED, 266,667 DESIGNATED SERIES B AND 2,177,481 SHARES DESIGNATED SERIES C, NONE OTHER DESIGNATED................ -- -- CONVERTIBLE PREFERRED STOCK SERIES B, $7.50 STATED VALUE, 266,667 SHARES ISSUED AND OUTSTANDING AT SEPTEMBER 30, 1999 AND DECEMBER 31, 1998. $2,000,000 AGGREGATE LIQUIDATION PREFERENCE.................................... 3,627,000 3,627,000 CONVERTIBLE PREFERRED STOCK SERIES C, $5.00 STATED VALUE, 1,142,996 AND 1,142,663 SHARES ISSUED AND OUTSTANDING AT SEPTEMBER 30, 1999 AND DECEMBER 31, 1998, RESPECTIVELY. $5,714,980 AGGREGATE LIQUIDATION PREFERENCE............... 5,235,083 5,281,937 COMMON STOCK, $.02 PAR VALUE, 40,000,000 SHARES AUTHORIZED, 13,383,005 AND 8,552,365 SHARES ISSUED AND OUTSTANDING AT SEPTEMBER 30, 1999 AND DECEMBER 31, 1998, RESPECTIVELY.... 267,692 171,055 PAID-IN-CAPITAL............................................. 48,137,005 36,947,588 ACCUMULATED DEFICIT......................................... (26,365,695) (23,401,707) LESS COST OF TREASURY STOCK; 21,773 SHARES.................. (68,040) (68,040) ----------- ----------- TOTAL STOCKHOLDERS' EQUITY.................................. 30,833,045 22,557,833 COMMITMENTS AND CONTINGENCIES ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $75,682,810 $57,940,817 =========== ===========
See accompanying notes to consolidated financial statements. 1 MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS UNAUDITED
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ------------------------ ------------------------- 1999 1998 1999 1998 ----------- ---------- ----------- ----------- REVENUE OIL AND GAS SALES AND PLANT INCOME........................ $ 4,656,156 $3,961,442 $11,328,502 $11,078,360 GAIN ON SALE OF PROPERTIES................................ 575,287 1,518,139 882,477 1,527,207 DELAY RENTAL AND LEASE BONUS INCOME....................... 61,911 20,333 64,911 217,404 OTHER..................................................... 469,508 194,846 691,442 436,783 ----------- ---------- ----------- ----------- TOTAL REVENUE............................................... 5,762,862 5,694,760 12,967,332 13,259,754 ----------- ---------- ----------- ----------- COSTS AND EXPENSES LEASE OPERATING, PRODUCTION TAXES AND PLANT COSTS......... 1,434,185 1,934,203 4,450,843 5,539,218 GEOLOGICAL AND GEOPHYSICAL................................ 46,768 139,303 188,484 927,418 DEPRECIATION, DEPLETION AND AMORTIZATION.................. 1,466,006 1,945,110 4,046,546 4,970,052 IMPAIRMENTS............................................... 749,443 492,000 749,443 492,000 DRYHOLE................................................... 391,477 24,141 455,108 331,405 INTEREST.................................................. 717,917 615,792 1,739,362 1,428,633 STOCK COMPENSATION........................................ 729,938 -- 729,938 67,500 SEVERANCE PAYMENT......................................... 284,060 -- 284,060 -- COMPENSATION PLAN PAYMENT................................. 292,527 -- 292,527 -- GENERAL AND ADMINISTRATIVE................................ 1,112,181 975,435 3,048,430 3,231,349 OTHER..................................................... 272,233 -- 481,622 4,639 ----------- ---------- ----------- ----------- TOTAL COSTS AND EXPENSES.................................... 7,496,735 6,125,984 16,466,363 16,992,214 LOSS BEFORE INCOME TAX BENEFIT AND MINORITY INTEREST........ (1,733,873) (431,224) (3,499,031) (3,732,460) MINORITY INTEREST........................................... 23,545 154,209 (40,228) 5,523 ----------- ---------- ----------- ----------- LOSS BEFORE INCOME TAX BENEFIT.............................. (1,757,418) (585,433) (3,458,803) (3,737,983) INCOME TAX BENEFIT.......................................... (367,314) (199,047) (923,324) (1,270,914) ----------- ---------- ----------- ----------- NET LOSS.................................................... (1,390,104) (386,386) (2,535,479) (2,467,069) DIVIDENDS TO PREFERRED STOCKHOLDERS......................... 142,843 -- 428,509 67,945 ----------- ---------- ----------- ----------- NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS................ ($1,532,947) ($ 386,386) ($2,963,988) ($2,535,014) =========== ========== =========== =========== NET LOSS PER SHARE Basic..................................................... ($ 0.15) ($ 0.05) ($ 0.32) ($ 0.32) =========== ========== =========== =========== Diluted................................................... ($ 0.15) ($ 0.05) ($ 0.32) ($ 0.32) =========== ========== =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Basic..................................................... 10,351,990 8,530,592 9,137,784 7,889,947 =========== ========== =========== =========== Diluted................................................... 10,351,990 8,530,592 9,137,784 7,889,947 =========== ========== =========== ===========
See accompanying notes to consolidated financial statements. 2 MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30 --------------------------- 1999 1998 ------------ ------------ OPERATING ACTIVITIES NET LOSS.................................................... ($ 2,535,479) ($ 2,467,069) ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED BY OPERATING ACTIVITIES DEPLETION, DEPRECIATION AND AMORTIZATION.................. 4,046,546 4,970,052 IMPAIRMENTS............................................... 749,443 492,000 DRYHOLE COSTS............................................. 455,108 331,405 STOCK COMPENSATION EXPENSE................................ 729,938 67,500 GAIN ON SALE OF PROPERTIES................................ (882,477) (1,527,207) DEFERRED INCOME TAX BENEFIT............................... (927,814) (1,270,914) MINORITY INTEREST......................................... (40,228) 5,523 OTHER CHARGES............................................. 350,023 (34,680) ------------ ------------ CASH FLOW FROM OPERATIONS BEFORE CHANGES IN CURRENT ASSETS AND LIABILITIES........................................... 1,945,060 566,610 CHANGES IN CURRENT ASSETS AND LIABILITIES, NET OF ACQUISITION EFFECTS: ACCOUNTS RECEIVABLE AND OTHER CURRENT ASSETS.............. 827,906 (588,159) ACCOUNTS PAYABLE, REVENUE PAYABLE, AND OTHER CURRENT LIABILITIES............................................. (1,330,626) 2,080,921 ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES................... 1,442,340 2,059,372 INVESTING ACTIVITIES PROCEEDS FROM SALES OF PROPERTIES........................... 3,614,453 4,707,497 ADDITIONS TO OIL AND GAS PROPERTIES......................... (1,827,614) (3,305,635) ACQUISITION OF ENEX RESOURCES CORPORATION, NET OF CASH ACQUIRED OF $4,698,211................................. -- (11,329,203) ACQUISITION OF ASSETS OF SERVICE DRILLING CO................ -- (6,337,689) OTHER ASSETS................................................ (251,680) (492,129) PAYMENTS FROM (ADVANCES TO) STOCKHOLDER..................... 173,115 (5,211) ------------ ------------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES......... 1,708,274 (16,762,370) FINANCING ACTIVITIES PROCEEDS FROM DEBT ISSUED................................. 1,036,000 32,469,604 PROCEEDS FROM SUBORDINATED NOTES ISSUED................... 10,850,000 -- PROCEEDS FROM COMMON STOCK ISSUED......................... 9,975,000 -- PRINCIPAL PAYMENTS ON DEBT................................ -- (15,976,432) PREFERRED STOCK DIVIDENDS PAID............................ (242,293) (67,945) REGISTRATION COSTS ON SERIES C PREFERRED STOCK............ (48,518) (778,501) OTHER..................................................... (684,434) (242,375) ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES................... 20,885,755 15,404,351 NET INCREASE IN CASH AND CASH EQUIVALENTS................... 24,036,369 701,353 CASH AND CASH EQUIVALENTS- BEGINNING........................ 1,040,096 1,587,184 ------------ ------------ CASH AND CASH EQUIVALENTS- ENDING........................... $ 25,076,465 $ 2,288,537 ============ ============ SUPPLEMENTAL CASH FLOW INFORMATION: INTEREST PAID IN CASH..................................... $ 1,446,736 $ 1,322,038 ============ ============ PREFERRED DIVIDENDS INCURRED BUT NOT PAID................. $ 186,216 -- ============ ============ ACQUISITION OF OIL AND GAS PROPERTIES FROM 3TEC........... $ 875,000 -- ============ ============ DRYHOLE COST ACCRUED BUT NOT PAID......................... $ 345,841 -- ============ ============ CONVERSION OF SERIES A PREFERRED STOCK.................... -- $ 10,000,000 ============ ============ COMMON STOCK ISSUED AS FINDERS' FEE IN ENEX RESOURCES CORP. TENDER OFFER.................... -- $ 245,231 ============ ============ COMMON STOCK ISSUED IN ACQUISITION OF ASSETS FROM SERVICE DRILLING CO., LLC....................................... -- $ 5,078,250 ============ ============
See accompanying notes to consolidated financial statements. 3 MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 (UNAUDITED) (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Middle Bay Oil Company, Inc., was incorporated under the laws of the State of Alabama on November 30, 1992. Effective March 27, 1998, the Company acquired 79.2% of Enex Resources Corporation ("Enex") and over a three-week period ending December 23, 1998, the Company acquired an additional 0.80% of Enex for a total of 80% of Enex. Effective April 16, 1998, the Company acquired the assets of Service Drilling Co., LLC ("Service Drilling"). Effective October 1, 1998, the Company acquired 100% of Enex Consolidated Partners, L.P. ("Enex Partnership"), a limited partnership of which Enex owned greater than a 50% interest. The Company and its subsidiaries are engaged in the acquisition, development and production of oil and gas in the contiguous United States. BASIS OF PRESENTATION In management's opinion, the accompanying consolidated financial statements contain all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly the consolidated financial position of the Company as of September 30, 1999 and December 31, 1998 and the consolidated results of operations and consolidated cash flows for the periods ended September 30, 1999 and 1998. The consolidated financial statements were prepared pursuant to the rules and regulations of the Securities and Exchange Commission. An independent accountant has not audited the accompanying consolidated financial statements. Certain information and disclosures normally included in annual audited financial statements prepared in accordance with generally accepted accounting principles have been omitted, although the Company believes that the disclosures made are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the Company's financial statements and notes thereto included in the Company's Annual Report on Form 10-KSB for the year ended December 31, 1998. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiary and Enex, an 80% owned subsidiary. The equity of the minority interest in Enex is shown in the consolidated statements as "minority interest". Significant intercompany accounts and transactions are eliminated in consolidation. EARNINGS PER SHARE Basic earnings per share is based on the weighted average shares outstanding without any dilutive effects considered. Diluted earnings per share reflects dilution from all potential common shares, including options, warrants and convertible preferred stock. A weighted average of 2,041,751 and 3,285,751 common stock equivalents in 1999 and 330,297 and 288,535 common stock equivalents in 1998, are not considered in the calculation of diluted earnings per share for the nine and three month periods ending September 30, respectively, due to the net loss recorded during these periods. 4 MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1999 (UNAUDITED) (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RECLASSIFICATIONS Certain reclassifications of prior period amounts have been made to conform to the current presentation. (2) ACQUISITIONS On March 27, 1998, the Company acquired 1,064,432 common shares, approximately 79.2%, of Enex for $15,966,480. The Company purchased the common shares of Enex through a cash tender offer that commenced February 19, 1998 (the "Enex Acquisition"). The Company also incurred approximately $60,934 in legal, accounting and printing expenses and issued 33,825 shares of Company common stock for finders fees to unrelated third parties. At the time, Enex was general partner of Enex Consolidated Partners, L.P., (the "Enex Partnership"), a New Jersey limited partnership whose principal business was oil and gas exploration and production. Enex's general partner interest was 4.1%. Enex also owned an approximate 56.2% limited partner interest in Enex Partnership. The cost of acquiring 79.2% of Enex was allocated using the purchase method of accounting to the consolidated assets and liabilities of Enex based on estimates of the fair values with the remaining purchase price allocated to proved oil and gas properties. The allocation of the purchase price is summarized as follows: (in thousands) Working capital............................................. $ 5,640 Oil and gas properties (proved and unproved)................ 19,090 Minority interest........................................... (7,669) ------- Total....................................................... $17,061 =======
Over a three-week period ending December 23, 1998, the Company acquired an additional 0.80% (9,747 common shares) of Enex common stock for approximately $68,000. On April 16, 1998, the Company acquired substantially all of the oil and gas assets of Service Drilling Co., LLC and certain affiliates ("Service Drilling"), in exchange for 666,000 shares of Company common stock and $6,500,000 in cash for a total acquisition cost of $10,054,774, before post-closing adjustments (the "Service Acquisition"). The fair value of the securities issued in connection with the Service Acquisition was calculated using the price of the Company's common stock at the time the Service Acquisition was announced to the public and further adjusted for tradability restrictions. An independent valuation firm determined the tradability discount for the Company's common stock. The effective date of the acquisition was March 1, 1998 and the cost was allocated using the purchase method of accounting. On December 30, 1998, the Company completed the acquisition of the Enex Partnership (the "Enex Partnership Acquisition"). The transaction consisted of an exchange offer whereby the Company offered to exchange 2.086 shares of Series C Preferred stock ("Series C") for each Enex Partnership unit (the "Exchange Offer"). In connection with the Exchange Offer, the Company submitted a proposal to investors in the Enex Partnership to amend the partnership agreement to provide for the transfer of all of the assets and liabilities of the Enex Partnership to the Company as of October 1, 1998 and dissolve the 5 MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1999 (UNAUDITED) (2) ACQUISITIONS (CONTINUED) Enex Partnership. The Exchange Offer was approved on December 30, 1998 and the Company issued 2,177,481 Series C shares for 100% of the outstanding limited partner units. At the close of the Exchange Offer, the Enex Partnership had 1,102,631 units outstanding. Enex was issued 1,293,521 Series C shares for its 56.2% ownership of the Enex Partnership. The remaining 883,959 Series C shares were issued to the limited partners that elected to take Series C shares in lieu of cash. In January 1999, certain dissenting limited partners were paid $516,000 and other unitholders were paid $23,000 in lieu of fractional shares. Because of the dissenting limited partners, Enex owns 59.4% of the Series C shares, of which 20% (258,704 shares) are considered outstanding and held by third parties. The Series C accrues dividends at an annual rate of $0.50 per share which are paid on March 31 and September 30 and has a $5.00 per share liquidation value. The cost of acquiring 100% of the outstanding limited partner units was approximately $11.9 million, consisting of the following (in thousands): Estimated fair value of 2,177,481 shares of Company Series C preferred stock........................................... $10,887 Cash consideration.......................................... 539 Legal, accounting and other expenses........................ 431 ------- Total....................................................... $11,857 =======
As Enex is consolidated into the Company's financial statements, the number of shares outstanding and the value of the shares outstanding attributable to the 43.8% of the Enex Partnership not owned by Enex and the minority interest owners of Enex (20%) is 1,142,663 and $5,713,317, respectively. The cost of acquiring the outstanding limited partner units that were not owned by Enex was approximately $6.7 million, consisting of the following (in thousands): Estimated fair value of 1,142,663 shares of Company Series C preferred stock........................................... $5,713 Cash consideration.......................................... 539 Legal, accounting and other expenses........................ 431 ------ Total....................................................... $6,683 ======
The Company's purchase price was allocated to the assets and liabilities of the Enex Partnership based on estimates of the fair values with the remaining purchase price allocated to proved oil and gas properties. The registration costs of approximately $431,000 reduced the value of the Series C shares issued. Because the Enex Partnership was consolidated in the financial statements of the Company as of the effective date 6 MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1999 (UNAUDITED) (2) ACQUISITIONS (CONTINUED) of October 1, 1998, the purchase price allocation below shows the effect of the acquisition on the consolidated financial statements (in thousands): Working capital............................................. $ (539) Oil and gas properties...................................... (23) Minority interest........................................... 5,844 ------ Series C Preferred Stock.................................... $5,282 ======
The following pro forma data presents the results of the Company for the nine months ended September 30, 1998, as if the acquisitions of Service, Enex and the Enex Partnership had occurred on January 1, 1998. The pro forma results are presented for comparative purposes only and are not necessarily indicative of the results which would have been obtained had the acquisitions been consummated as presented. The following data reflect pro forma adjustments for oil and gas revenues, production costs, depreciation and depletion related to the properties and businesses acquired, preferred stock dividends on preferred stock issued, and the related income tax effects (in thousands, except per share amounts):
PROFORMA NINE MONTHS ENDED SEPTEMBER 30, 1998 ------------------ (UNAUDITED) Total revenues.............................................. $20,765 Net loss available to stockholders.......................... (3,346) Net loss per share available to stockholders................ (0.41)
(3) COMMON STOCK, WARRANT AND SENIOR SUBORDINATED NOTE SALE TO 3TEC ENERGY COMPANY, L.L.C. ("3TEC") On August 27, 1999, the Company closed a Securities Purchase Agreement(the "Agreement') for a total of $21,400,000 with 3TEC Energy Corporation, a privately-held company ("Old 3TEC"). Contemporaneously with the closing of the transactions contemplated by the Securities Purchase Agreement, Old 3TEC was merged with and into 3TEC with 3TEC as the surviving entity. As a result of the merger, all of the properties, rights, privileges, powers and franchises of Old 3TEC, including without limitation, the rights, obligations and duties of Old 3TEC under the Securities Purchase Agreement became vested in 3TEC as the surviving entity. The Securities Purchase Agreement and contemplated transactions were approved by the stockholders at the Company's annual meeting on August 10, 1999. The controlling person of 3TEC is EnCap Investments L.L.C., a Delaware limited liability company ("EnCap Investments"). The sole member of EnCap Investments is El Paso Field Services Company, a Delaware corporation ("El Paso Field Services"). The controlling person of El Paso Field Services is El Paso Energy Corporation, a Delaware corporation. The Company received $9,825,000 in cash and oil and gas properties valued at $875,000 for 4,755,556 shares of common stock and 3,600,000 warrants (the 7 MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1999 (UNAUDITED) (3) COMMON STOCK, WARRANT AND SENIOR SUBORDINATED NOTE SALE TO 3TEC ENERGY COMPANY, L.L.C. ("3TEC") (CONTINUED) "Warrants")(See Note 7) and $10,700,000 for a 5-year senior subordinated convertible note with a face value of $10,700,000 (the "Note"). At closing, 3TEC became the Company's largest shareholder with ownership of approximately 36% of the outstanding common stock. If 3TEC chooses to fully exercise the Warrants and fully convert the Note to common shares, 3TEC would control approximately 58% of the then issued and outstanding shares of common stock of the Company. As part of the Agreement, at closing, five of the seven directors resigned and all of the executive officers, except Stephen W. Herod and Robert W. Hammons, resigned from their executive positions. A new five-member board was formed. John J. Bassett, former president, chief executive officer and chairman of the Company and Gary C. Christopher, continued as directors and 3TEC appointed three new board members, Floyd C. Wilson, David B. Miller and D. Martin Phillips. Floyd C. Wilson is Managing Director and a member of 3TEC. David B. Miller and D. Martin Phillips are Managing Directors of EnCap Investments. The Company appointed Mr. Wilson Chairman of the Board, President, Chief Executive Officer, Secretary and Treasurer, Mr. Bassett Executive Vice-President and Frank C. Turner II acting Chief Financial Officer. Subsequently, Mr. Bassett resigned and Mr. Herod was named to the Board effective September 30, 1999. (4) ACCOUNTS RECEIVABLE-INSURANCE CLAIM The Company owns a 100% working interest in the Louis Mayard #1 well (the "Well") located in the Esther Field in Vermillion Parish, Louisiana. Due to a failed recompletion attempt and the inability of the Company to shut in the Well using normal operating methods, the Company incurred approximately $1,856,000 during 1998 to gain control of the Well using special crews. On November 4, 1998, the insurance company made a partial payment to the Company under its well control insurance policy of approximately $1,408,000. In April, 1999 the Company was paid $383,000 in final settlement of all claims related to the Well. The Company had recorded the estimated remaining amount due from the insurance company in current assets as Accounts Receivable-Insurance Claim. (5) LONG-TERM DEBT
SEPTEMBER 30 DECEMBER 31 1999 1998 ------------ ----------- Reducing revolving line of credit of up to $100,000,000 due April 1, 2001, secured by oil and gas properties, monthly borrowing base reductions of $250,000 effective May 1, 1999 and monthly payments of interest at Libor plus 2.00% and prime. At September 30, 1999 the Libor and prime rates were 5.30% and 8.25%, respectively........................ 28,490,567 27,454,567 Less current maturities..................................... (4,314,318) -- ----------- ----------- Long-term debt excluding current maturities................. $24,176,249 $27,454,567 =========== ===========
8 MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1999 (UNAUDITED) (5) LONG-TERM DEBT (CONTINUED) In connection with the Enex Acquisition the Company entered into a new reducing revolving line of credit agreement (the "$100 million Revolver"). The $100 million Revolver is subject to semi-annual borrowing base redeterminations which are affected by acquisitions and dispositions of assets. The borrowing base at September 30, 1999 was $27,600,000 and monthly borrowing base reduction requirements are $250,000. The principal is due at maturity, April 1, 2001. Monthly principal payments are made as required in order that the outstanding principal balance plus outstanding letters of credit does not exceed the borrowing base. Interest is payable monthly and is calculated at the prime rate. The Company may also elect to calculate interest under the Libor rate, as defined in the agreement. The Libor rate increases by (a) 2.00% if the outstanding loan balance and letters of credit are equal to or greater than 75% of the borrowing base, (b) 1.75% if the outstanding loan balance and letters of credit are less than 75% or greater than 50% of the borrowing base or (c) 1.50% if the outstanding loan balance and letters of credit are equal to or less than 50% of the borrowing base. Libor interest is payable at maturity of the Libor loan which cannot be less than thirty days. At September 30, 1999, the Company had borrowed $28,490,567 and had $373,750 of outstanding letters of credit. As of September 30, 1999, the Company is paying Libor plus 2.00% on a ninety day Libor loan for $26,505,605 and prime on $1,984,962. Effective May 1, 1999, the borrowing base was redetermined to be $31,000,000 with monthly borrowing base reductions of $250,000. Effective September 1, 1999, the Company sold mortgaged properties for $2,741,000 with a borrowing base of $2,200,000. Considering the monthly reductions and the September property sale, the outstanding principal balance and letters of credit exceed the borrowing base by $1,314,000 as of September 30. The property sale closed on September 30 and the Company made a $1,900,000 principal payment on October 1. The terms of the October 1, 1999 redetermination for the Company's $100 million Revolver have been deferred pending execution of a definitive agreement with Bank One (See Note 10). Pursuant to the terms of the $100 million Revolver, if the borrowing base is less than the outstanding principal balance plus outstanding letters of credit the Company has sixty days, after receipt of notice from the Banks, to cure the excess by prepayment, providing additional collateral or a combination of both. Amounts spent on debt retirement due to reductions in the borrowing base reduce the cash available to spend on acquisition, development and exploration activities, and accordingly, oil and natural gas revenues and operating results may be adversely affected. The Company paid a facility fee equal to 3/8% of the initial borrowing base and is required to pay 3/8% on any future increase in the borrowing base within five days of written notice. The Company is required to pay a quarterly commitment fee on the unused portion of the borrowing base of 1/2% if the outstanding loan balance plus letters of credit are greater than 50% of the borrowing base or 3/8% if the outstanding loan balance plus letters of credit are less than or equal to 50% of the borrowing base. The Company is required to pay a letter of credit fee on the date of issuance or renewal of each letter of credit equal to the greater of $500 or 1 1/2% of the face amount of the letter of credit. 9 MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1999 (UNAUDITED) (5) LONG-TERM DEBT (CONTINUED) The Company has granted to the Banks liens on substantially all of the Company's oil and natural gas properties, whether currently owned or hereafter acquired, and a negative pledge on all other oil and gas properties. The $100 million Revolver requires, among other things, a cash flow coverage ratio of 1.25 to 1.00 and a current ratio, excluding current maturities of the $100 million Revolver, of 0.9 to 1.00, determined on a quarterly basis. (6) SENIOR SUBORDINATED NOTES On August 27, 1999, senior subordinated promissory notes (the "Senior Notes") were sold to 3TEC and affiliates of Alvin V. Shoemaker ("Shoemaker"), a former director and significant shareholder, for $10,700,000 and $150,000, respectively. The Senior Notes bear interest at an annual rate of 9%. Interest is payable on December 31, 1999 and on every March 31, June 30, September 30 and December 31, thereafter until maturity. The Company may defer payment of fifty percent (50%) of the first eight quarterly interest payments. The Senior Notes may be prepaid, without premium or penalty, in whole or in part, at any time after August 27, 2001. 3TEC and Shoemaker may convert all or any portion of outstanding principal and accrued interest at any time into shares of Company common stock at a conversion price of $3.00 per common share, a total of 3,616,667 common shares. The conversion price may be adjusted from time to time based on the occurrence of certain events. In the event of a change in control (as defined in the Agreement), the entire outstanding principal balance and all accrued but unpaid interest shall be immediately due and payable. The Senior Notes rank senior in right of payment to all Company notes and indebtedness other than the $100 Million Revolver. (7) COMMON STOCK, OPTIONS AND WARRANTS On August 27, 1999, the Company sold 3TEC 4,755,556 shares of common stock and five-year warrants to purchase 3,600,000 shares of common stock for $9,825,000 in cash and oil and gas properties valued at $875,000. On the same date, the Company sold 66,666 shares of common stock and five-year warrants to purchase 50,466 shares of common stock to Shoemaker for $150,000. The warrants issued to 3TEC and Shoemaker are exercisable for $1.00 per share and expire five years from the issue date. Sixty percent of the warrants are immediately exercisable, in whole or in part at any time until the expiration date. An additional 10% of the warrants may be exercised at each anniversary of the grant date until expiration. On the occurrence of either a change of control, payment in full of the Senior Notes or conversion of the entire principal balance of the Senior Notes, all of the warrants become immediately exercisable. If less than the entire principal balance of the Senior Notes are converted, a pro-rata portion of the warrants will be convertible based on the portion of the Senior Notes that are converted. On August 24, 1999, the Company amended the 1995 Stock Option and Stock Appreciation Rights Plan due to the change in control that resulted from the sale of securities to 3TEC. The Plan was amended to extend the exercise date for all options issued prior to July 1, 1999 to one year from the following dates: (1) the termination date of employees if the termination date is without cause and occurred during the 10 MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1999 (UNAUDITED) (7) COMMON STOCK, OPTIONS AND WARRANTS (CONTINUED) six-month period commencing with the closing of the Purchase Agreement; (2) the date of termination for employees terminated for "Good Reason" as defined in such employee's employment agreement; and (3) the date of resignation of a holder who is also a director who resigns at closing of the Purchase Agreement. According to APB Opinion 25, the extension of the exercise period results in a new measurement date and compensation expense, equal to the intrinsic value of all of the Plan's outstanding options, is recognized. A one-time charge of $730,000 due to the Plan amendment was recorded as Compensation Expense during the three-month period ending September 30, 1999. On February 9, 1999 and January 13, 1998, the Board of Directors granted to certain employees and directors, options with exercise prices of $1.50 and $5.75 per share, respectively, to acquire 200,000 and 232,000 shares of Company common stock, respectively. All of the options were granted under the 1995 Stock Option and Stock Appreciation Rights Plan at fair market value on date of grant and will expire five years from date of grant if not exercised. On September 15, 1998, warrants to acquire 75,000 shares of Company common stock at an exercise price of $5.00 were granted to a consultant as compensation. The warrants vested over the period September 15, 1998 to January 1, 1999. The estimated fair value of the warrants of $198,946 was determined at the date of grant and charged to stock compensation expense over the vesting period. The agreement was amended on August 9, 1999 to include issuing the consultant 10,000 shares of Series C Preferred Stock as additional compensation for services performed to date. General and administrative expense was charged $50,000 during the three-month period ending September 30, 1999 for the issuance of the 10,000 Series C shares. (8) COMMITMENTS AND CONTINGENCIES Effective September 30, 1999, John J. Bassett, resigned as executive vice-president and board member and ceased employment with the Company. Under the terms of Mr. Bassett's employment agreement, the Company is obligated to make a lump-sum payment of $280,000 to Mr. Bassett within ten days of his resignation. The severance payment, and associated taxes of $4,060, was recognized as severance payment expense during the quarter ending September 30. Mr. Bassett was paid on October 10. Stephen W. Herod, Vice-President Corporate Development, was appointed to the Board to replace Mr. Bassett. In March 1995, the Board of Directors adopted an employee incentive compensation plan (the "Plan") for the benefit of Company employees. The Plan benefits are equal to one percent (1%) of the annual net profit from oil and gas properties acquired or discovered on or after January 1, 1994 and one percent (1%) of the annual sales proceeds from any oil and gas properties sold on or after January 1, 1994. The Compensation Committee of the Board of Directors has sole authority regarding the amount and timing of payment of any Plan benefits to eligible employees. On August 27, 1999, the Compensation Committee authorized the payment of $274,625 to the eligible participants in the Plan. The authorized amount, equal to 100% of the Plan benefits through August 27, 1999, was paid to the Plan participants and the Plan was terminated pursuant to the terms of the 3TEC Agreement. The entire amount of the payment, including associated taxes of $17,902, was recognized as compensation expense during the quarter ending September 30, 1999. Prior to the Compensation Committee's authorization, the Plan benefits were not accrued as an expense in the financial statements because 11 MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1999 (UNAUDITED) (8) COMMITMENTS AND CONTINGENCIES (CONTINUED) the likelihood that the Compensation Committee would determine that the benefits would be payable to eligible employees was less than probable. The Company is a defendant in various legal proceedings which are considered routine litigation incidental to the Company's business, the disposition of which management believes will not have a material effect on the financial position or results of operations of the Company. (9) HEDGING ACTIVITIES In April, the Company entered into costless collar hedges for approximately 3,650 Mcf per day with a weighted average floor and ceiling of $2.06 and $2.20, for the months of May through October of 1999. During the three month and nine month periods ending September 30, 1999, the Company incurred hedging losses of approximately $118,000 and $131,000, respectively. (10) SUBSEQUENT EVENTS On October 1, 1999 the Company executed, and subsequently amended on October 22, a commitment letter with Bank One Texas, N.A. and Banc One Capital Markets, Inc. ("Bank One") for a $250 million credit facility (the "Facility") to finance the potential Floyd Oil Acquisition, subject to an initial borrowing base of $95 million. Unless a definitive agreement is executed on or before November 30, 1999 the $95 million commitment with Bank One will terminate. The terms of the October 1, 1999 redetermination for the Company's $100 million Revolver have been deferred pending execution of a definitive agreement with Bank One. On October 7, 1999, the Company announced that it had entered into an agreement for the acquisition of properties and interests owned by a group of private sellers and managed by Floyd Oil Company. There is no relationship between Floyd C. Wilson, President of the Company, and Floyd Oil Company. The transaction has an adjusted purchase price of approximately $96 million with an effective date of January 1, 1999. The majority of the properties are located in Texas and Louisiana. The properties being acquired have estimated proved reserves at August 1, 1999 of 186,000 Mmcfe with 73% of the reserves classified as proved developed producing. The reserves being acquired are 76% natural gas. The Company will operate the majority of the properties. Closing is expected to be on or before November 30, 1999 and is subject to execution of definitive agreements and completion of due diligence. The transaction is expected to be financed through the Bank One Facility and from working capital. On October 19, 1999, the Company closed a private placement of securities to The Prudential Insurance Company of America ("Prudential"). The economic terms and conditions of the private placement are similar to those of the Agreement with 3TEC entered into on July 1, 1999. The private placement consisted of the sale of 1,055,042 shares of common stock and five-year warrants to purchase 798,677 shares at $1.00 per share of common stock for $2,373,844 and a five-year senior subordinated convertible note for $2,373,844. The subordinated note will bear interest at a rate of 9% per annum and is convertible into 791,281 shares of common stock. On November 2, 1999, the operator authorized the plugging and abandonment of the Cornelius #1 well on the Hawkins Ranch Prospect which was spudded on September 3, 1999. The Company incurred approximately $363,000 in costs, which were charged to dryhole expense in the current period. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table reflects certain summary operating data for the periods presented:
THREE MONTHS NINE MONTHS SEPTEMBER 30 SEPTEMBER 30 ------------------- ------------------- 1999 1998 1999 1998 -------- -------- -------- -------- Net Production Data: Oil and Liquids (MBbls)................................. 116 163 367 427 Natural Gas (MMcf)...................................... 982 1,031 2,778 2,713 Equivalent Production (Mcfe)............................ 1,680 2,009 4,980 5,277 Average Sales Price (1) Oil and Liquids (per Bbl)............................... $19.10 11.35 14.66 11.91 Natural Gas (per Mcf)................................... 2.35 1.90 2.01 2.04 Average equivalent price (per Mcfe)......................... 2.69 1.90 2.20 2.02 Expenses ($ per Mcfe) Oil and gas operating (2)............................... 0.78 0.92 0.82 0.99 General and administrative.............................. 0.66 0.49 0.61 0.61 Depreciation and depletion (3).......................... 0.85 0.95 0.79 0.93 Cash Margin ($ per Mcfe) (4)................................ 1.25 0.49 0.77 0.42
- ------------------------ (1) Excludes revenue from Spivey Field gas plant. (2) Includes lease operating costs, production and ad valorem taxes and excludes Spivey Field plant costs. (3) Represents depreciation and depletion, excluding impairments, of oil and gas properties only. (4) Represents average equivalent price per Mcfe less oil and gas operating expenses per Mcfe and general and administrative expenses per Mcfe. THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 For the three months ended September 30, 1998, the revenues and expenses include the Enex Acquisition and the Service Acquisition but do not include the Enex Partnership Acquisition. REVENUES-- Total revenues for the current period of $5,763,000 were $68,000 higher than the comparable period. The increase in total revenues was due principally to increases in oil and gas revenues of $695,000 and other income of $275,000, offset partially by a $943,000 decrease in gains on sales of properties. Oil and gas revenues increased $695,000. The increase in oil and gas revenues consisted of a $371,000 increase in oil revenues, a $348,000 increase in gas revenues and a $24,000 decrease in other revenues. The increase in gas revenues included a loss on hedging of $118,000. The increase in oil and gas revenues was the result of higher oil and gas prices. Production of oil and gas decreased 29% and 5%, respectively while oil and gas prices increased 68% and 24%, respectively. Normal production decline and property sales contributed to the declines in oil and gas production. In April, the Company entered into costless collar hedges for approximately 3,650 Mcf per day with a weighted average floor and ceiling of $2.06 and $2.20, for the months of May through October. During the current period, the Company incurred a hedging loss of $118,000. In the current period, the realized gas price would have been $2.47, if the hedging loss was excluded versus a realized price of $2.35. The Company recorded gains on the sale of properties in the current and comparable periods of $575,000 and $1,518,000, respectively. The sale of approximately 157 wells in 19 fields for approximately $2,741,000 to a private company accounted for the primary portion of the gain in the current period. The 13 effective date of the private sale was September 1. In the prior period, the Company also sold several hundred properties at auction and in private sales for approximately $4,140,000. In the current and comparable periods a significant portion of the proceeds was credited against the original acquisition cost. Other income in the current period of $469,000 includes $256,000 from a lawsuit settlement. Other income in the comparable period includes a lawsuit settlement of $123,000. COSTS AND EXPENSES-- Total expenses increased $1,371,000 over the comparable period. The primary reasons for the total expense increase were non-recurring charges of $1,307,000 associated with the sale of securities to 3TEC and the resulting change in management control and increased dryhole costs of $367,000. The non-recurring charges were stock compensation expense of $730,000, severance payment of $284,000 and employee incentive compensation plan payment of $293,000. The stock compensation charge resulted from an amendment to the Company's stock option plan, prior to the sale of securities to 3TEC, which increased the length of time employees and directors could exercise their options if they were terminated or resigned, in the case of directors, for a certain period of time after the sale of securities to 3TEC. The severance payment was the amount payable to John J. Bassett upon his resignation on September 30, 1999, according to the terms of his employment agreement. The employee incentive compensation plan payment was the result of an agreement between 3TEC and the Company to pay the benefits due under the plan as a condition precedent to the closing of the securities sale to 3TEC. Lease operating expense decreased $500,000. Property sales that have closed throughout the twelve month period ending September 30, 1999 contributed to the lower lease operating expenses. Geological and geophysical expenses ("G&G expenses") decreased $92,000. In the current and comparable periods, the Company incurred approximately $47,000 and $139,000, respectively, of G&G expenses. The principal G&G expenses in the current and comparable periods were attributable to the Cedartown Prospect and the Sherburne Prospect, respectively. Depletion, depreciation and amortization expenses decreased $479,000. Reserve write-downs, property sales and lower production contributed to the lower depletion, depreciation and amortization expenses. Impairment expense in the current period of $749,000 consists of a $472,000 impairment on the fee mineral acreage situated in Louisiana, a $27,000 impairment of various non-producing leases and a $250,000 impairment on various oil and gas properties. The fee mineral impairment was the result of 6,227 unleased acres in Terrebonne Parish that are expected to revert to the surface owners by December 1, 1999. Impairment expense in the comparable period was due to the writedown of reserves resulting from an unsuccessful recompletion attempt. During the current period, dryhole expense increased by $367,000. In the current and comparable periods, the Company incurred approximately $391,000 and $24,000, respectively, of dryhole expenses. Dryhole expense attributable to the Cornelius #1 of $363,000 was the primary dryhole expense in the current period. The Cornelius #1 was declared a dryhole subsequent to September 30 and the estimated costs to complete the drilling and plug and abandon the well were accrued at September 30. Interest expense increased $102,000. Accrued interest on the subordinated notes since August 27, 1999 resulted in slightly higher interest expense. Interest rates and the loan balance did not vary significantly between the current and comparable periods. General and administrative expenses ("G&A") increased $137,000. Increases in salary, legal and consulting expenses in the current period offset decreases in salary, office and rent expenses in the comparable period. The increase in salary expense was due to employees hired subsequent to the sale of securities to 3TEC. Legal and consulting expenses increased for various reasons. The decrease in salary, 14 office and rent expenses in the comparable period was due to the staff reductions at Enex and the closing of the Enex offices in Kingwood, Texas. Other expenses increased $272,000. Bad debt expense of $70,000 and various other charges accounted for the increase. OPERATING LOSS AND NET LOSS-- The Company reported an operating loss before minority interest of $1,734,000 for current period versus an operating loss of $431,000 for the comparable period. Due to the Enex Acquisition, the Company records a minority interest on its income statement to remove the net income or loss attributable to the minority interest holders of Enex (20%). In the current and comparable periods, the minority interest increased the operating loss by $23,000 and $154,000, respectively. The minority interest in the current period accounted only for the Enex operations while the minority interest in the comparable period accounted for the operations of Enex and the Enex Partnership. The Enex Partnership was acquired by the Company effective October 1, 1998. The Company reported an income tax benefit of $367,000 in the current period versus a $199,000 benefit in the comparable period. The Company reported a net loss of $1,390,000 for the current period versus a net loss of $386,000 for the comparable period. After considering the preferred stock dividend requirement of $143,000 in the current period versus none in the comparable period, the Company reported a net loss attributable to common stockholders in the current and comparable periods of $1,533,000 and $386,000, respectively. The preferred dividends in the current period represent three months of accrued dividends on the Series C preferred stock. If the non-recurring charges of $1,307,000 associated with the sale of securities to 3TEC and the resulting change in management control in the current period were excluded, the Company would have reported net loss attributable to common stockholders of $440,000 versus the actual net loss attributable to common stockholders of $1,533,000. NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 For the nine months ended September 30, 1998, the revenues and expenses include the Enex Acquisition for the period April through September and do not include the Enex Partnership Acquisition. The Service Acquisition is included in the revenues and expenses for the months of May through September. REVENUES-- Total revenues for the current period of $12,967,000 were $292,000 lower than the comparable period. The decrease in total revenues was due principally to a decrease in gain on sale of properties of $645,000 offset partially by increases in other income and oil and gas revenues. Oil and gas revenues increased $250,000. The increase in oil and gas revenues consisted of a $292,000 increase in oil revenues, a $35,000 increase in gas revenues and a $77,000 decrease in other revenues. The increase in gas revenues included a loss on hedging of $131,000. The increase in oil and gas revenues was primarily the result of higher oil prices. Oil production decreased 14% while oil prices increased 23%. The 2% increase in gas production was almost entirely offset by the 2% lower gas prices caused by the hedging loss. Normal production decline and property sales contributed to the reduced oil production over the comparable period. The Enex, Service and Enex Partnership Acquisitions, which closed subsequent to March 26, 1998, increased oil and gas production over the comparable period. 15 In April, the Company entered into costless collar hedges for approximately 3,650 Mcf per day with a weighted average floor and ceiling of $2.06 and $2.20, for the months of May through October. During the current period, the Company incurred a hedging loss of $131,000. In the current period, the realized gas price would have been $2.06, if the hedging loss was excluded versus a realized price of $2.01. The Company recorded gains on the sale of properties in the current and comparable periods of $882,000 and $1,527,000, respectively. The sale of approximately 157 wells in 19 fields for approximately $2,741,000 to a private company accounted for the primary portion of the gain in the current period. The effective date of the private sale was September 1. In the comparable period, the Company also sold several hundred properties at auction and in private sales for approximately $4,495,000. In the current and comparable periods a significant portion of the proceeds was credited against the original acquisition cost. Other income in the current period of $691,000 includes $256,000 from a lawsuit settlement and $135,000 in interest income. Other income in the comparable period includes a lawsuit settlement of $123,000. COSTS AND EXPENSES-- Total expenses decreased $526,000 over the comparable period. The primary reasons for the total expense decrease were lower lease operating expenses, production taxes and plant costs ("lease operating expenses"), geological and geophysical expenses and depletion. Certain non-recurring charges associated with the sale of securities to 3TEC and the resulting change in management control increased total expenses by $1,307,000. The non-recurring charges were stock compensation expense of $730,000, severance payment of $284,000 and employee incentive compensation plan payment of $293,000. The stock compensation charge resulted from an amendment to the Company's stock option plan, prior to the sale of securities to 3TEC, which increased the length of time employees and directors could exercise their options if they were terminated or resigned, in the case of directors, for a certain period of time after the sale of securities to 3TEC. The severance payment was the amount payable to John J. Bassett upon his resignation on September 30, 1999, according to the terms of his employment agreement. The employee incentive compensation plan payment was the result of an agreement between 3TEC and the Company to pay the benefits under the plan as a condition precedent to the closing of the securities sale to 3TEC. Lease operating expense decreased $1,088,000. Property sales that have closed throughout the twelve month period ending September 30, 1999 contributed to the lower lease operating expenses. Geological and geophysical expenses ("G&G expenses") decreased $739,000. In the current and comparable periods, the Company incurred approximately $188,000 and $927,000, respectively, of G&G expenses. The principal G&G expenses in the current and comparable periods were attributable to the Cedartown Prospect and Hawkins Ranch Prospect, respectively. Depletion, depreciation and amortization expenses decreased $923,000. Reserve write-downs, property sales and lower production contributed to the lower depletion, depreciation and amortization expenses. Impairment expense in the current period of $749,000 consists of a $472,000 impairment on the fee mineral acreage situated in Louisiana, a $27,000 impairment of various non-producing leases and a $250,000 impairment on various oil and gas properties. The fee mineral impairment was the result of 6,227 unleased acres in Terrebonne Parish that are expected to revert to the surface owners by December 1, 1999. Impairment expense in the comparable period was due to the writedown of reserves resulting from an unsuccessful recompletion attempt. During the current period, dryhole expense increased by $124,000. The dryhole expense in the current period of $455,000 was due primarily to expenses on the Hawkins 60 #1 of $39,000 and Cornelius #1 of $363,000. Both wells are part of the Hawkins Ranch Prospect. The dryhole expense in the prior period of 16 $331,000 consisted principally of a $199,000 dryhole on the S. Highbaugh Prospect and additional dryhole expense of $102,000 on two dryholes in the Reflection Ridge Prospect. Interest expense increased $311,000 due to a lower average loan balance in the first quarter of the comparable period and higher interest expense in the current period due to the interest on the subordinated notes issued on August 27, 1999. The loan balance was lower in the first quarter of the comparable period compared to the second quarter of the comparable period because the Enex Acquisition closed on March 27, 1998 and the Service Acquisition closed on April 16, 1998. In addition, advances on the $100 Million Revolver occurred in February and April of the current period. General and administrative expenses ("G&A") decreased $183,000. Decreases in several expense categories contributed to the decrease. The primary expense decrease was due to decreases in salary, contract labor, office and rent expenses. The staff reductions at Enex and the closing of the Enex offices in Kingwood, Texas contributed largely to these expense reductions. Increases in salary, legal, accounting and consulting expenses in the current period partially offset the expense reductions. An increase in salary expense was due to employees hired subsequent to the sale of securities to 3TEC. Legal, accounting and consulting expenses increased for various reasons. Other expenses increased $477,000. Bad debt expense of $170,000 and other miscellaneous adjustments resulted in the expense increase. OPERATING LOSS AND NET LOSS-- The Company reported an operating loss before minority interest of $3,499,000 for current period versus an operating loss of $3,732,000 for the comparable period. Due to the Enex Acquisition, the Company records a minority interest on its income statement to remove the net income or loss attributable to the minority interest holders of Enex (20%). In the current and comparable periods, the minority interest decreased the operating loss by $40,000 and increased the operating loss by $6,000, respectively. The minority interest in the current period accounted only for the Enex operations while the minority interest in the comparable period accounted for the operations of Enex and the Enex Partnership. The Enex Partnership was acquired by the Company effective October 1, 1998. The Company reported an income tax benefit of $923,000 in the current period versus a $1,271,000 benefit in the comparable period. The Company reported a net loss of $2,535,000 for the current period versus a net loss of $2,467,000 for the comparable period. After considering the preferred stock dividend requirement of $428,000 in the current period versus $68,000 in the comparable period, the Company reported a net loss attributable to common stockholders in the current and comparable periods of $2,964,000 and $2,535,000, respectively. The preferred dividends in the current period represent nine months of accrued dividends on the Series C preferred stock. The preferred dividend in the comparable period represents accrued dividends on the Series A preferred stock. If the non-recurring charges of $1,307,000 associated with the sale of securities to 3TEC and the resulting change in management control in the current period were excluded, the Company would have reported net loss attributable to common stockholders of $1,849,000 versus the actual net loss attributable to common stockholders of $2,964,000. LIQUIDITY AND CAPITAL RESOURCES NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1998 Cash flow from operating activities for the current period of $1,442,000 decreased $617,000 from the comparable period. The decrease in cash flow was due primarily to working capital changes offset partially by lower lease operating and geological and geophysical expenses. Cash flow from oil and gas properties 17 (oil and gas revenues and plant income less lease operating expenses, production taxes and plant costs) increased $1,338,000 over the comparable period. Lower lease operating expense was the primary reason for the increased cash flow from oil and gas properties. Increases in oil prices and gas production resulted in higher oil and gas revenues. Oil prices increased 23%, while oil production decreased 14%. Gas prices decreased 1%, while gas production increased 2%. The change in working capital was caused principally by timing differences in the payment of expenses and receipt of revenues. Cash additions to oil and gas properties were lower than the comparable period due primarily to less exploratory and developmental drilling in the current period. The amount spent on acquisitions was lower due to no acquisitions in the current period versus the Enex and Service Acquisitions that closed in the comparable period. The Company acquired approximately 79% of Enex common stock for cash in a tender offer that closed March 27, 1998 and acquired the oil and gas assets of Service Drilling Co., LLC and certain affiliates for cash and stock in a transaction that closed April 16, 1998. During the current period, the Company was advanced $516,000 on the $100 million Revolver to pay the dissenting limited partners in the Enex Partnership Acquisition and $520,000 to pay for developmental drilling projects on several of its major properties. In the comparable period, the Company refinanced its existing debt and financed the Enex and Service Acquisitions with proceeds from the $100 million Revolver. The Company made no principal payments on the $100 million Revolver during the current period. In the comparable period, the Company made principal payments, excluding refinancings, of $5,015,000. During the current period, the Company sold $10,850,000 of common stock, receiving $9,975,000 in cash and $875,000 in oil and gas properties, and $10,850,000 of subordinated notes to 3TEC and Shoemaker. No common stock or note sales were made in the comparable period. Cash costs of $684,000 were incurred in the sale of the securities to 3TEC and classified as Other Financing Activities. In the current period, the Company paid approximately $242,000 in dividends on the Series C preferred stock issued in the Enex Partnership Acquisition. The amount paid represents a portion of the $428,000 of dividends accrued for the nine months ended September 30, 1999. Of the $428,000, $97,000 is attributable to the 20% minority interest ownership in Enex. The remaining dividends were not immediately paid in cash because of unknown addresses and non-receipt of preferred stock issuance forms. Net cash from operations, property sales, $100 million Revolver advances and cash on hand were used during the period ending September 30, 1999 principally for proved property and leasehold acquisitions, exploratory and developmental drilling and geological and geophysical expenses. Approximately $134,000 and $198,000 was spent on leasehold and legal costs on the Cedartown and Hawkins Ranch Prospects, respectively. Approximately $1,329,000 was spent on exploratory and developmental drilling and recompletions. Approximately $167,000 was spent on abandonment costs on a field in Florida. The principal exploratory well drilled in the current period was the Hawkins 60 #1 on the Hawkins Ranch Prospect which was unsuccessful. The principal developmental expenditure in the current period was a recompletion in the Murphy Lake Field for approximately $351,000. The remaining exploratory and developmental work was throughout several fields. The Company had current assets of $27,883,000 and current liabilities of $7,700,000, which resulted in working capital of $20,183,000 as of September 30, 1999. Current period working capital increased $20,044,000 from working capital of $139,000 as of December 31, 1998. Cash received from the sale of securities to 3TEC and Shoemaker of $20,825,000 caused the increase in working capital. The current maturity of long-term debt increased from December 31, 1998 because the amount of debt outstanding increased and the borrowing base decreased since December 31, 1998. The Company's current ratio of 8.24, calculated under the terms of the $100 million Revolver agreement, which excludes current maturities of debt due under the $100 million Revolver, was in excess of the 0.90 to 1.00 required. 18 COMMON STOCK, WARRANT AND SENIOR SUBORDINATED NOTE SALE TO 3TEC ENERGY COMPANY, L.L.C. ("3TEC") On August 27, 1999, the Company closed a Securities Purchase Agreement(the "Agreement') for a total of $21,400,000 with 3TEC Energy Corporation, a privately-held company ("Old 3TEC"). Contemporaneously with the closing of the transactions contemplated by the Securities Purchase Agreement, Old 3TEC was merged with and into 3TEC with 3TEC as the surviving entity. As a result of the merger, all of the properties, rights, privileges, powers and franchises of Old 3TEC, including without limitation, the rights, obligations and duties of Old 3TEC under the Securities Purchase Agreement became vested in 3TEC as the surviving entity. The Securities Purchase Agreement and contemplated transactions were approved by the stockholders at the Company's annual meeting on August 10, 1999. The controlling person of 3TEC is EnCap Investments L.L.C., a Delaware limited liability company ("EnCap Investments"). The sole member of EnCap Investments is El Paso Field Services Company, a Delaware corporation ("El Paso Field Services"). The controlling person of El Paso Field Services is El Paso Energy Corporation, a Delaware corporation. The Company received $9,825,000 in cash and oil and gas properties valued at $875,000 for 4,755,556 shares of common stock and 3,600,000 warrants (the "Warrants") and $10,700,000 for a 5-year senior subordinated convertible note with a face value of $10,700,000 (the "Note"). The Warrants may be exercised for up to 3,600,000 shares of common stock at an exercise price of $1 per share. Sixty percent of the Warrants may be exercised immediately. The remaining 40% will be exercisable over a 4-year period commencing 12 months from the closing date of the Agreement. The Note will bear interest at a rate of 9% per annum and is convertible into 3,566,667 shares of common stock. Simultaneous with the close of the Agreement with 3TEC, the Company sold 66,666 shares of Company common stock for $150,000 and $150,000 of 5-year senior subordinated convertible notes to affiliates of Alvin V. Shoemaker, a former director and significant shareholder of the Company ("Shoemaker"). At closing, 3TEC became the Company's largest shareholder with ownership of approximately 36% of the outstanding common stock. If 3TEC chooses to fully exercise the Warrants and fully convert the Note to common shares, 3TEC would control approximately 58% of the then issued and outstanding shares of common stock of the Company. As part of the Agreement, at closing, five of the seven directors resigned and a new five-member board was formed. John J. Bassett, former president, chief executive officer and chairman of the Company and Gary C. Christopher, continued as directors and 3TEC appointed three new board members, Floyd C. Wilson, David B. Miller and D. Martin Phillips. Floyd C. Wilson is Managing Director and a member of 3TEC. David B. Miller and D. Martin Phillips are Directors of EnCap Investments. Subsequently, Mr. Bassett resigned and Mr. Herod was named to the Board effective September 30, 1999. As part of the Agreement, at closing, all of the officers of the Company, except Stephen W. Herod and Robert W. Hammons, resigned from their executive positions. The Company appointed Mr. Wilson Chairman of the Board, President, Chief Executive Officer, Secretary and Treasurer, Mr. Bassett Executive Vice-President and Frank C. Turner II acting Chief Financial Officer. COMMITMENT FOR A $250 MILLION CREDIT FACILITY On October 1, 1999 the Company executed, and subsequently amended on October 22, a commitment letter with Bank One Texas, N.A. and Banc One Capital Markets, Inc. ("Bank One") for a $250 million credit facility (the "Facility") to finance the potential Floyd Oil Acquisition, subject to an initial borrowing base of $95 million. Unless a definitive agreement is executed on or before November 30, 1999 the $95 million commitment with Bank One will terminate. The terms of the October 1, 1999 redetermination for the Company's $100 million Revolver have been deferred pending execution of a definitive agreement with Bank One. 19 $100 MILLION LINE OF CREDIT In conjunction with the Enex Acquisition on March 27, 1998 the Company entered into a $100 million reducing, revolving line of credit (the "$100 million Revolver") with current borrowings under a term note maturing April 1, 2001. The entire principal balance of the Company's $50 million Convertible Loan was replaced with the $100 million Revolver. The amount the Company can borrow is based upon the borrowing base. The borrowing base and the monthly borrowing base reduction amounts are redetermined semi-annually by unanimous consent of the lenders. The principal is due at maturity, April 1, 2001. Monthly principal payments are made as required in order that the outstanding principal balance plus outstanding letters of credit does not exceed the borrowing base. Interest is payable monthly and is calculated at the prime rate. The Company may elect to calculate interest under the Libor rate, as defined in the agreement. The Libor rate increases by (a) 2.00% if the outstanding loan balance and letters of credit are equal to or greater than 75% of the borrowing base, (b) 1.75% if the outstanding loan balance and letters of credit are less than 75% or greater than 50% of the borrowing base or (c) 1.50% if the outstanding loan balance and letters of credit are equal to or less than 50% of the borrowing base. The borrowing base at September 30, 1999 was $27,600,000. Effective May 1, the borrowing base was redetermined to be $31,000,000 with monthly borrowing base reductions of $250,000. The borrowing base was reduced by $2,200,000 due to the sale of mortgaged properties for $2,741,000 effective September 1, 1999. At September 30, 1999 the Company had borrowed $28,491,000 and had $374,000 of outstanding letters of credit. During the current period, the Company did not make any principal payments and was advanced $1,036,000 under the $100 million Revolver. The Company is currently paying Libor plus 2.00% on a ninety day Libor loan for $26,506,000 and prime on $1,985,000. At September 30, 1999, the outstanding principal balance and letters of credit exceed the borrowing base by $1,314,000. The property sale closed on September 30 and the Company made a $1,900,000 principal payment on October 1. Pursuant to the terms of the $100 million Revolver, if the borrowing base is less than the outstanding principal balance plus outstanding letters of credit the Company has sixty days, after receipt of notice from the Banks, to cure the excess by prepayment, providing additional collateral or a combination of both. The terms of the October 1, 1999 redetermination have been deferred pending execution of a definitive agreement on the $250 million credit facility with Bank One. The Company paid a facility fee equal to 3/8% of the initial borrowing base and is required to pay 3/8% on any future increase in the borrowing base within five days of written notice. The Company is required to pay a quarterly commitment fee on the unused portion of the borrowing base of 1/2% if the outstanding loan balance plus letters of credit are greater than 50% of the borrowing base or 3/8% if the outstanding loan balance plus letters of credit are less than or equal to 50% of the borrowing base. The Company is required to pay a letter of credit fee on the date of issuance or renewal of each letter of credit equal to the greater of $500 or 1 1/2% of the face amount of the letter of credit. The Company has granted to the Banks liens on substantially all of the Company's oil and natural gas properties, whether currently owned or hereafter acquired, and a negative pledge on all other oil and gas properties. The $100 million Revolver requires, among other things, a cash flow coverage ratio of 1.25 to 1.00 and a current ratio, excluding the current maturity of the $100 million Revolver, of 0.9 to 1.00, determined on a quarterly basis. As of September 30, 1999 the Company was in compliance with the cash flow and current ratio covenants. Because the borrowing base was higher than the debt and outstanding letters of credit during the current period, excluding the effects of the property sale that closed on September 30, no debt payments were required. 20 Under the terms of the $100 million Revolver, when mortgaged properties are sold the borrowing base shall be reduced, and if necessary, proceeds from the sales of properties shall be applied to the debt outstanding in an amount equal to the loan value attributable to such properties sold. The $100 million Revolver includes other covenants prohibiting cash dividends, distributions, loans, advances to third parties in excess of $100,000, or sales of assets greater than 10% of the aggregate net present value of the oil and gas properties in the borrowing base. The bank has granted the Company a waiver allowing the Company to pay the dividends to holders of Series C as long as no default or event of default exists or would exist as a result of any Series C dividend payment. SENIOR SUBORDINATED NOTES On August 27, 1999, as part of the Agreement with 3TEC, senior subordinated promissory notes (the "Senior Notes") were sold to 3TEC and Shoemaker for $10,700,000 and $150,000, respectively. The Senior Notes bear interest at an annual rate of 9%. Interest is payable on December 31, 1999 and on every March 31, June 30, September 30 and December 31, thereafter until maturity. The Company may defer payment of fifty percent (50%) of the first eight quarterly interest payments. The Senior Notes may be redeemed, in whole or in part, at any time after August 27, 2001. 3TEC and Shoemaker may convert all or any portion of outstanding principal and accrued interest at any time into shares of Company common stock at a conversion price of $3.00 per common share, for a total of 3,616,667 common shares. The conversion price may be adjusted from time to time based on the occurrence of certain events. In the event of a change in control, the entire outstanding principal balance and all accrued but unpaid interest shall be immediately due and payable. The Senior Notes rank senior in right of payment to all Company notes and indebtedness other than the $100 Million Revolver. PRIVATE PLACEMENT OF SECURITIES TO THE PRUDENTIAL INSURANCE COMPANY OF AMERICA On October 19, 1999, the Company closed a private placement of securities to The Prudential Insurance Company of America ("Prudential"). The economic terms and conditions of the private placement are similar to those of the Agreement with 3TEC entered into on July 1, 1999. The private placement consisted of the sale of 1,055,042 shares of common stock and five-year warrants to purchase 798,677 shares of common stock at $1.00 per share for $2,373,844 and a five-year senior subordinated convertible note for $2,373,844. The subordinated note will bear interest at a rate of 9% per annum and is convertible into 791,281 shares of common stock. Prudential owns approximately 7% of the Company's currently outstanding common stock. PROPERTY SALES During the nine-month period ending September 30, 1999, the Company received approximately $3,600,000 in cash from the sales of non-strategic oil and gas properties. The Company recorded a gain of $869,000 on the sales of the oil and gas properties. Subsequent to the May 1 borrowing base redetermination, the borrowing base on the $100 Million Revolver was reduced by $2,200,000 for the loan value of the sold properties. FUTURE CAPITAL REQUIREMENTS AND AVAILABLE FINANCING The Company has made and will continue to make, substantial capital expenditures for acquisition, development and exploration of oil and natural gas reserves. The timing of most of the Company's capital expenditures is discretionary with no material long-term commitments. Consequently, the Company has a significant degree of flexibility to adjust the level of such expenditures as conditions warrant. 21 The Company expects to spend approximately $3,400,000 on development and exploration projects over the next twelve months, which excludes any exploration and development projects associated with any future significant acquisitions. The Company intends to use available cash, cash flows from operations and cash proceeds from asset sales of certain non-core properties to fund capital expenditures other than significant acquisitions and expects such funds to be adequate for such purposes. On October 7, 1999, the Company announced that it had entered into an agreement for the acquisition of properties and interests owned by a group of private sellers and managed by Floyd Oil Company. There is no relationship between Floyd C. Wilson, President of the Company, and Floyd Oil Company. The transaction has an adjusted purchase price of approximately $96 million with an effective date of January 1, 1999. The majority of the properties are located in Texas and Louisiana. The properties being acquired have estimated proved reserves at August 1, 1999 of 186,000 Mmcfe with 73% of the reserves classified as proved developed producing. The reserves being acquired are 76% natural gas. The Company will operate the majority of the properties. Closing is expected to be on or before November 30, 1999 and is subject to execution of definitive agreements and completion of due diligence. The transaction is expected to be financed through the Bank One Facility and from working capital. Other than the Floyd Oil Acquisition, the Company does not have a specific acquisition budget as a result of the unpredictability of the timing and size of potential acquisition activities. The Company intends to use borrowings under its bank credit facility, or other debt or equity financings, to the extent available, to finance significant acquisitions. The availability and attractiveness of these sources of financing will depend upon a number of factors, some of which will relate to the financial condition and performance of the Company, and some of which will be beyond the Company's control, such as prevailing interest rates, oil and gas prices and other market conditions. On October 17, 1999 the Company spudded a well in the Cedartown Prospect. The Company's share of the dryhole cost is $187,000. On November 2, 1999, the operator agreed to plug and abandon the second exploratory well drilled on the Hawkins Ranch Prospect, the Cornelius #1, which was spudded on September 3. The first well drilled on the Hawkins Ranch Prospect in the first quarter of 1999 was also unsuccessful. The operator is currently evaluating the future drilling plans on the Hawkins Ranch Prospect in light of the results of the Cornelius #1. Prior to the results of the Cornelius #1, the operator had scheduled the drilling of three additional exploratory wells through February 1, 2000 with total estimated dryhole costs, net to the Company, of approximately $885,000. The Company expects to pay approximately $300,000 in the fourth quarter of 1999 to fund the remaining Cornelius #1 dryhole costs. As of November 12, 1999 the Company had not committed to drill any additional wells on the Hawkins Ranch Prospect. At September 30, 1999, the outstanding principal balance and letters of credit on the $100 million revolver exceeded the borrowing base by $1,314,000. The Company paid $1,900,000 on the outstanding principal balance on October 1, 1999. The terms of the October 1, 1999 redetermination have been deferred pending execution of a definitive agreement on the $250 million credit facility with Bank One. If a definitive agreement on the Bank One credit facility is executed, the outstanding principal balance on the $100 million Revolver will be paid in full. Amounts spent on debt retirement due to reductions in the borrowing base reduce the cash available to spend on acquisition, development and exploration activities and, accordingly, oil and natural gas revenues and operating results may be adversely affected. The Company believes that cash flow from operations, cash on hand and available borrowings will be sufficient to fund its operations and future growth as contemplated under its current business plan. However, if the Company's plans or assumptions change or if its assumptions prove to be inaccurate, the Company may be required to seek additional capital. Management cannot be assured that the Company will be able to obtain such capital or, if such capital is available, that the Company will be able to obtain it on acceptable terms. 22 CURRENT ACTIVITIES As of November 12, 1999, there was one exploratory well drilling on the Cedartown Prospect in Lincoln Parish, Louisiana. YEAR 2000 COMPLIANCE Readers are cautioned that the forward-looking statements contained in the following Year 2000 discussion should be read in conjunction with the Company's disclosures under the heading "Forward-Looking Statements." The disclosures also constitute a "Year 2000 Readiness Disclosure" and "Year 2000 Statement" within the meaning of the Year 2000 Information and Readiness Disclosure Act of 1998. STATEMENT OF READINESS The Company has undertaken various initiatives to ensure that its hardware, software and equipment will function properly with respect to dates before and after January 1, 2000. For this purpose, the phrase "hardware, software and equipment" includes systems that are commonly thought of as Information Technology systems ("IT"), as well as those Non-Information Technology systems ("Non-IT") and equipment which include embedded technology. IT systems include computer hardware and software and other related systems. Non-IT systems include certain oil and gas production and field equipment, gathering systems, office equipment, telephone systems, security systems and other miscellaneous systems. The Non-IT systems present the greatest readiness challenge since identification of embedded technology is difficult and because the Company is, to a great extent, reliant on third parties for Non-IT compliance. The Company has formed a Year 2000 ("Y2K") Project team, which is chaired by its Chief Financial Officer, Frank C. Turner, II. The team includes corporate staff and representatives from the Company's business units. In response to the possible risks posed to the Company, the team has developed a Y2K Plan (the "Plan") which includes guidelines for inventory, assessment, remediation, testing and contingency planning. The following categories represent the mission-critical operational systems of the Company. A "mission-critical system" is a system that is vital to the successful continuation of a core business activity. An application may be mission critical if it interfaces with a designated mission-critical system. Each system has been evaluated by the Company as to (a) the risks to the Company in the event of the most reasonably likely worst case scenario (the "Worst Case Scenario"); (b) the status of the Company's remediation plan, if any ("Status"); and (c) the Company's contingency plans, if any ("Contingency Plans"). ACCOUNTING SOFTWARE SYSTEMS. The Company relies solely on certain software accounting packages ("Accounting Packages") to provide management with various reports that allow managers to determine the cash flow and profitability of individual properties and of the Company as a whole. Management also relies on the Accounting Packages to provide financial information necessary to prepare quarterly and annual financial reports that are sent to the Securities and Exchange Commission, NASDAQ Stock Market, banks and stockholders. In addition, the Company relies on the Accounting Packages to process and print checks to be sent to working and royalty interest owners for their share of the monthly oil and gas sales, to process and print checks for payment to vendors and to process and print monthly joint-interest statements to be sent to working interest owners in Company-operated oil and gas properties. Under a Worst Case Scenario, all accounting functions would have to be completed manually, significantly hindering the Company's ability to complete the above-described mission-critical tasks. Status: The Company has updated its accounting systems. Testing was completed on June 30, 1999 and all primary functions utilizing dates functioned properly. Contingency Plans: Based on the results of the independent testing of the Accounting Software System, the Y2K Team believes the risk of the Accounting Software System being adversely affected by Y2K is remote. If the Accounting Software System is adversely affected by Y2K, the Company 23 has developed various contingency plans which include the utilization of support personnel and the performance of manual tasks. CONTROL SYSTEMS AND IMBEDDED TECHNOLOGY. These systems include the equipment used to produce, monitor, control, sell and record hydrocarbon production, including all artificial lift equipment, storage, measurement and control facilities and third-party systems and technology interrelated to the Company's business. Under a Worst Case Scenario, multiple fields of oil and gas would lose the ability to account for or produce the amount of hydrocarbon production, temporarily shutting down the field(s) until the malfunctioning part(s) could be repaired or replaced. This is not expected to materially adversely affect the Company. Status: The only mission-critical field operated by the Company is the Spivey Field, whose production operations are not affected by Y2K issues. The Spivey Field is affected by a third-party operated gas plant that processes the field's natural gas and may be subject to Y2K issues. Refer to "Third Party Systems-Gas Plant" for a discussion of the gas plant at the Spivey Field. The operations of the remaining fields were not materially affected by Y2K issues. Contingency Plans: The Company will continue to monitor the operations at its field locations and develop contingency planning if an exposure becomes apparent. THIRD-PARTY SYSTEMS--OIL AND GAS PURCHASERS. The Company utilizes third-party purchasers to sell the oil and gas produced from the wells in which it has a working or royalty interest. The Company also depends on third-party purchasers to remit to the Company its share of the proceeds from the sales of oil and gas. The Company does not directly sell any oil and gas produced from the wells in which it has a working or royalty interest and does not take any oil or gas in kind as an alternative to cash payment. Under a Worst Case Scenario, multiple major purchasers would be temporarily shut down due to Y2K issues, materially adversely affecting the Company's revenues. Status: Based upon the diversity of purchasers, the Company believes that no single purchaser is a mission-critical purchaser. The Y2K team does not anticipate that a problem with any single purchaser for a reasonable period of time beyond 2000 will force the Company to curtail or shut down its operations. Although no single purchaser is a mission-critical purchaser, the loss of a major purchaser or multiple minor purchasers due to Y2K problems would affect the Company. The Company has obtained information about the top ten purchasers and their Y2K readiness. All but two of the top ten purchasers have formal Y2K Plans and are working to upgrade any mission-critical systems that are affected by Y2K. The other two purchasers acknowledge that certain systems will be affected by Y2K and have been undertaking plans to upgrade these systems. Contingency Plans: The Company continues to monitor the Y2K status of its major purchasers. Should a purchaser not become Y2K compliant, the Company will identify alternative purchasers for its production and, if necessary, temporarily shut-in production. THIRD-PARTY SYSTEMS--GAS PLANT. Over 95% of the gas produced in the Spivey Field, a mission-critical system, is sold to a gas plant under a life of the lease casinghead tailgate gas contract. The Company owns approximately 11.5% of the gas plant and related gathering system. Colt Resources Corporation operates the plant. Under a Worst Case Scenario, the gas plant would be shut down less than one month which would not materially adversely affect the Company. Status: The Company has received a letter from the operator of the Spivey plant stating that the Spivey plant's control systems and embedded technology are not Y2K affected and that its accounting and processing systems are Y2K compliant. Contingency Plans: A short-term interruption of gas sales would not materially affect the Company's operations. If the Spivey plant experiences problems with an expected duration in excess of one month, the Company has identified alternative gas markets it could utilize. 24 THIRD-PARTY SYSTEMS--BANKING. The Company relies on its banks to deposit checks payable to the Company and credit the checks to the appropriate accounts. The Company also relies on its banks to credit third-party accounts for payment. A Worst Case Scenario would occur if the Company's principal bank is unable to provide certain services for an extended period of time due to Y2K, causing the Company to be materially adversely affected. Status: The Company's principal bank has represented that it has a formal Y2K Plan in effect and has substantially remediated and tested all of its non-compliant, in-house and vendor-supported mission-critical systems as of June 30, 1999. Contingency Plans: The Company intends to have cash on hand sufficient to cover short-term emergency payments and payroll. The Company also plans to open accounts with other institutions in the event its principal bank is unable to rectify its problems in a timely manner. The Company has no long-term contingency plans in the event of a system-wide failure of banking institutions. THIRD-PARTY SYSTEMS--SUPPORT FUNCTIONS. The primary material support functions provided by third parties are electrical service, communication service and office space. Under a Worst Case Scenario, all primary support functions would be hindered in the short term. Status: All vendors of these services have reported that formal Y2K remediation plans are in effect and are substantially complete as of September 30, 1999. Contingency Plans: Short-term (less than two weeks) interruptions of services will not materially adversely affect the Company. The Company will be able to conduct business on a reduced scale using alternative business methods. Longer-term interruptions may materially adversely affect the Company. The Company has no plans sufficient to fully offset the effect of long-term interruptions. COMPUTER OPERATING SYSTEMS AND APPLICATION SOFTWARE SYSTEMS. The Company relies solely on its personal computer systems to access the accounting software package through the Company's computer network. In addition, certain schedules and databases that are used for critical functions rely on spreadsheet and word-processing applications that are run on the Company's personal computer systems. Status: All systems appear to be Y2K ready. Contingency Plans: Operations could be performed manually until non-functioning equipment or software is repaired or replaced COSTS OF Y2K COMPLIANCE The costs incurred by the Company to implement the Plan were not material to the Company's financial condition or results of operations. The Company does not expect any future costs related to the Plan to be material to the Company's financial condition or results of operations. THE RISKS OF Y2K ISSUES The Company presently believes that Y2K issues will not pose significant operational problems. However, if all significant Y2K issues are not properly identified or assessed, remediation and testing are not effected timely, the Y2K issues, either individually or in combination, may materially and adversely impact the Company's results of operations, liquidity and financial condition or materially and adversely affect its relationships with its business partners. Additionally, the misrepresentation of compliance by other entities or the persistent, universal failure of financial, transportation or other economic systems will likely have a material and adverse impact on the Company's operations or financial condition for which it cannot adequately prepare. 25 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On July 19, 1999 a proxy was mailed to shareholders of record on July 12, 1999 soliciting their vote at the Annual Meeting of Shareholders of the Company on August 10, 1999. The following matters were submitted to a vote of shareholders (Shares Eligible to Vote on All Matters: 8,534,057): 1. Election of Directors Messrs. Edward P. Turner, Jr., John J. Bassett, Frank E. Bolling, Jr., C.J. Lett, III, Stephen W. Herod, Alvin V. Shoemaker and Gary R. Christopher were elected to serve on the Board of Directors until the next Annual Meeting of Shareholders.
WITHHELD FOR AUTHORITY --------- --------- John J. Bassett......................................... 7,289,621 5,031 C. J. Lett, III......................................... 7,289,521 5,131 Stephen W. Herod........................................ 7,289,621 5,031 Edward P. Turner, Jr.................................... 7,289,521 5,131 Frank E. Bolling, Jr.................................... 7,289,521 5,131 Alvin V. Shoemaker...................................... 7,289,521 5,131 Gary R. Christopher..................................... 7,289,621 5,031
2. Amendment to increase the authorized capital stock of the Company from 20,000,000 to 40,000,000 shares of common stock and from 10,000,000 to 20,000,000 shares preferred stock. The increase in the authorized capital stock of the Company to 40,000,000 common shares and 20,000,000 preferred shares was approved. For Against Abstain 7,094,278 11,123 1,954
3. Ratification of issuance of Series C Preferred Stock in connection with the acquisition by the Company of the oil and gas properties of Enex Consolidated Partners, L.P. The ratification of the issuance of the Series C Preferred Stock was approved. For Against Abstain 7,098,597 5,785 2,973
4. Consideration of and voting upon the approval of a Securities Purchase Agreement with 3TEC Energy Corporation and the issuance of 4,755,556 shares of common stock, 5-year warrants to purchase 3,600,000 shares of common stock and a 5-year $10,700,000 subordinated convertible promissory note. The issuance of the common stock, warrants and convertible note was approved. For Against Abstain 7,101,576 2,826 2,973
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following documents are filed as exhibits to this report: 3.1 Articles of Incorporation (Incorporated by reference to Exhibits to Registration Statement on Form S-4 filed October 4, 1993.)
26 3.2 Articles of Amendment to Articles of Incorporation reflecting reverse split (Incorporated by reference to Exhibits to definitive Proxy Statement filed February 15, 1995.) 3.3 Articles of Amendment to Articles of Incorporation designating preferences and rights of Series A Preferred Stock (Incorporated by reference to Exhibits to Form 8-K filed July 3, 1997.) 3.4 Articles of Amendment to Articles of Incorporation designating preferences and rights of Series B Preferred Stock (Incorporated by reference to Form 8-K filed July 3, 1997.) 3.5 Articles of Amendment to Amended Articles of Incorporation increasing the number of authorized shares (Incorporated by reference to Exhibits to definitive Proxy Statement filed July 19, 1999.) 3.6 Bylaws of the Company (Incorporated by reference to Exhibits to Registration Statement on Form S-4 filed October 4, 1993.) 3.7 Articles of Amendment to Articles of Incorporation designating preferences and rights of Series C Preferred Stock (Incorporated by reference to Exhibits to Amendment No. 1 to Form S-4 filed October 19, 1998.) 10.1 Securities Purchase Agreement, dated July 1, 1999 by and between the Company and 3TEC Energy Corporation (Incorporated by reference to Exhibits to definitive Proxy Statement filed July 19, 1999.) 10.2* Securities Purchase Agreement, dated August 27, 1999 by and between the Company and Shoemaker Family Partners, LP 10.3* Securities Purchase Agreement, dated August 27, 1999 by and between the Company and Shoeinvest II, LP 10.4 Securities Purchase Agreement, dated October 19, 1999 between The Prudential Insurance Company of America and the Company (Incorporated by reference to Exhibits to Form 8-K filed November 2, 1999.) 10.5* Shareholders Agreement, dated August 27, 1999 by and among the Company, 3TEC Energy Corporation and the Major Shareholders 10.6* Registration Rights Agreement, dated August 27, 1999 by and among the Company, 3TEC Energy Corporation, the Major Shareholders, Shoemaker Family Partners, LP and Shoeinvest II, LP 10.7 Amendment to Registration Rights Agreement, dated October 19, 1999 by and among the Company, 3TEC Energy Company L.L.C., f/k/a 3TEC Energy Corporation, Shoemaker Family Partners, LP, Shoeinvest II, LP, and The Prudential Insurance Company of America (Incorporated by reference to Exhibits to Form 8-K filed November 2, 1999.) 10.8 Participation Rights Agreement, dated October 19, 1999 by and among the Company, The Prudential Insurance Company of America and 3TEC Energy Company L.L.C. (Incorporated by reference to Exhibits to Form 8-K filed November 2, 1999.) 10.9* Employment Agreement, dated August 27, 1999 by and between Floyd C. Wilson and the Company 10.10* Employment Agreement, dated August 27, 1999 by and between John J. Bassett and the Company 10.11* Credit Agreement, dated March 27, 1998 by and among the Company, Compass Bank, and Bank of Oklahoma, National Association
27 10.12* First Amendment to Credit Agreement, dated August 27, 1999 by and among the Company, Compass Bank, and Bank of Oklahoma, National Association 10.13* Second Amendment to Credit Agreement, dated October 19, 1999 by and among the Company, Compass Bank, and Bank of Oklahoma, National Association 10.14* Subordination Agreement, dated August 27, 1999 by and between 3TEC Energy Corporation, Compass Bank, and Bank of Oklahoma, National Association 10.15* Subordination Agreement, dated August 27, 1999 by and among Shoemaker Family Partners, LP, Compass Bank, and Bank of Oklahoma, National Association 10.16* Subordination Agreement, dated August 27, 1999 by and among Shoeinvest II, LP, Compass Bank, and Bank of Oklahoma, National Association 27.1 Financial Data Schedule
- ------------------------ * Filed herewith (b) On July 16, 1999, the Company filed a Form 8-K under Item 1 describing the securities purchase agreement between the Company and 3TEC Energy Corporation that was executed on July 1, 1999. On September 8, 1999, the Company filed a Form 8-K under Item 1 describing the final securities purchase agreement and the closing of the transaction on August 27, 1999. 28 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MIDDLE BAY OIL COMPANY, INC. (Registrant) By: /s/ FRANK C. TURNER II ----------------------------------------- Frank C. Turner II Date: November 12, 1999 CHIEF FINANCIAL OFFICER
29 EX-10.2 2 EXHIBIT 10.2 Exhibit 10.2 SECURITIES PURCHASE AGREEMENT BETWEEN SHOEMAKER FAMILY PARTNERS, LP AND MIDDLE BAY OIL COMPANY, INC. AUGUST 27, 1999 TABLE OF CONTENTS ARTICLE I TERMS DEFINED Section 1.1 Definitions.....................................................................................1 Section 1.2 Accounting Terms and Determinations............................................................11 Section 1.3 Gender and Number............................................................................. 11 Section 1.4 References to Agreement........................................................................11 ARTICLE II PURCHASE AND SALE OF SECURITIES Section 2.1 Purchase and Sale..............................................................................11 Section 2.2 Closing ......................................................................................11 Section 2.3 Delivery.......................................................................................11 Section 2.4 Payment........................................................................................12 ARTICLE III RESERVATION AND ISSUANCE OF CONVERSION SHARES .................................................12 ARTICLE IV CERTAIN TERMS APPLICABLE TO WARRANTS Section 4.1 Exercise of Warrants...........................................................................12 Section 4.2 Adjustment of Number of Warrant Shares Purchasable.............................................14 Section 4.3 Notices to Warrant Holders.....................................................................16 Section 4.4 Reservation and Issuance of Warrant Shares.....................................................17 ARTICLE V TRANSFER OF SECURITIES Section 5.1 Restrictions on Transfer.......................................................................17 Section 5.2 Registration, Transfer and Exchange of Warrants................................................18 Section 5.3 Mutilated or Missing Warrant Certificates......................................................18 Section 5.4 Registration, Transfer and Exchange of Notes...................................................19 Section 5.5 Mutilated or Missing Notes.....................................................................19 ARTICLE VI CONDITIONS Section 6.1 Conditions Precedent to Closing................................................................19 Section 6.2 Conditions Precedent to Closing ...............................................................22 ARTICLE VII REPRESENTATIONS AND WARRANTIES Section 7.1 Corporate Existence and Power..................................................................23 Section 7.2 Corporate and Governmental Authorization; Contravention........................................23 Section 7.3 Binding Effect ................................................................................24 Section 7.4 Capitalization.................................................................................24 Section 7.5 Issuance of Securities.........................................................................24 Section 7.6 Financial Statements...........................................................................24 Section 7.7 Material Agreements............................................................................25 Section 7.8 Compass Debt Documents.........................................................................25 Section 7.9 Investments ...................................................................................25 Section 7.10 Outstanding Debt...............................................................................25 Section 7.11 Transactions with Affiliates...................................................................25 Section 7.12 Employment Matters.............................................................................25 Section 7.13 Litigation.....................................................................................25 Section 7.14 ERISA .........................................................................................26 Section 7.15 Taxes and Filing of Tax Returns................................................................27 Section 7.16 Title to Assets................................................................................27 Section 7.17 Licenses, Permits, Etc.........................................................................27 Section 7.18 Proprietary Rights.............................................................................27 Section 7.19 Compliance with Law............................................................................27 Section 7.20 Environmental Matters..........................................................................27 Section 7.21 Intentionally Left Blank.......................................................................29 Section 7.22 Fiscal Year....................................................................................29 Section 7.23 No Default.....................................................................................29 Section 7.24 Insurance......................................................................................29 Section 7.25 Government Regulation..........................................................................29 Section 7.26 Securities Law .............................................................................29 Section 7.27 Brokers and Finders............................................................................29 Section 7.28 SEC Documents..................................................................................29 Section 7.29 Oil and Gas Operations.........................................................................30 Section 7.30 Financial and Commodity Hedging................................................................31 Section 7.31 Books and Records..............................................................................31 Section 7.32 Reserve Report.................................................................................31 Section 7.33 Nature of Company Assets.......................................................................31 Section 7.34 Full Disclosure................................................................................32 Section 7.35 Year 2000 Compliance...........................................................................32 ARTICLE VIII REPRESENTATIONS AND WARRANTIES OF SFP Section 8.1 Corporate Existence and Power..................................................................32 Section 8.2 Corporate and Governmental Authorization; Contravention........................................32 Section 8.3 Binding Effect.................................................................................32 Section 8.4 Brokers and Finders............................................................................33 Section 8.5 Taxes and Filing of Returns....................................................................33 Section 8.6 Intentionally Omitted..........................................................................33 ARTICLE IX COVENANTS Section 9.1 Maintenance of Insurance.......................................................................33 Section 9.2 Payment of Taxes and Claims....................................................................33 Section 9.3 Compliance with Laws and Documents.............................................................34 Section 9.4 Operation of Properties and Equipment..........................................................34 Section 9.5 Additional Documents...........................................................................34 Section 9.6 Maintenance of Books and Records...............................................................34 Section 9.7 Environmental Matters..........................................................................34 Section 9.8 Access to Information..........................................................................34 Section 9.9 Conduct of Business of the Company.............................................................35 Section 9.10 Intentionally Omitted..........................................................................36 Section 9.11 Intentionally Omitted..........................................................................36 ARTICLE X DEFAULTS; TERMINATION Section 10.1 Events of Default..............................................................................36 Section 10.2 Termination....................................................................................37 Section 10.3 Effect of Termination..........................................................................37 ARTICLE XI MISCELLANEOUS Section 11.1 Notices........................................................................................38 Section 11.2 No Waivers.....................................................................................38 Section 11.3 Expenses; Indemnification......................................................................38 Section 11.4 Amendments and Waivers; Sale of Interest.......................................................39 Section 11.5 Survival.......................................................................................39 Section 11.6 Limitation on Interest.........................................................................40 Section 11.7 Invalid Provisions.............................................................................40 Section 11.8 Successors and Assigns.........................................................................40 Section 11.9 Governing Law..................................................................................40 Section 11.10 Counterparts...................................................................................40 Section 11.11 No Third Party Beneficiaries...................................................................40 Section 11.12 Final Agreement................................................................................41 Section 11.13 Submission to Jurisdiction; Waiver of Service of Venue.........................................41 Section 11.14 Waiver of Right to Trial by Jury...............................................................41 Section 11.15 Public Announcements...........................................................................41
EXHIBITS Exhibit A Senior Subordinate Promissory Note Exhibit B Registration Rights Agreement Exhibit C Intentionally Omitted Exhibit D Form of Warrant Certificate Exhibit E Employment Agreement Exhibit F Intentionally Omitted Exhibit G Purchase Price to be Transferred at Closing Exhibit H Identification of Other Securities Purchase Agreements SECURITIES PURCHASE AGREEMENT THIS SECURITIES PURCHASE AGREEMENT is entered into effective this ___ day of August, 1999, by and between SHOEMAKER FAMILY PARTNERS, LP, a New Jersey limited partnership ("SFP") and Middle Bay Oil Company, Inc., an Alabama corporation (the "COMPANY"). W I T N E S S E T H: WHEREAS, the Company has authorized and desires to issue and sell to SFP (a) certain shares of the Company's Common Stock, par value $0.02 per share, (b) a Note, and (c) certain Warrants; WHEREAS, SFP desires to purchase such securities from the Company on the terms and conditions set forth herein; and NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: ARTICLE I TERMS DEFINED SECTION 1.1. DEFINITIONS. The following terms, as used herein, have the following meanings: "Affiliate" means, as to any Person, any Subsidiary of such Person, or any other Person which, directly or indirectly, controls, is controlled by, or is under common control with, such Person and, with respect to the Company, any executive officer of any Subsidiary or any Person who holds five percent (5%) or more of the voting stock of the Company. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or partnership interests, or by contract or otherwise. SFP shall not be considered an Affiliate of the Company for purposes of this Agreement or the other Transaction Documents. "Agreement" means this Securities Purchase Agreement. "Authorized Officer" means, as to any Person, its Chairman, its Chief Executive Officer, its President, its Chief Operating Officer, its Financial Officer and any Vice President. "Business Day" means any day except a Saturday, Sunday or other day on which national banks in Dallas, Texas are authorized by law to close. "Capital Lease" means, for any Person, as of any date, any lease of property, real or personal, which 1 would be capitalized on a balance sheet of the lessee of such lease prepared as of such date in accordance with GAAP. "Change of Control" means the occurrence of any of the following: (a) the sale, lease, transfer or other disposition, in one transaction or a series of related transactions, of more than fifty percent (50%) of the value of the Oil and Gas Interests as set forth in the most current reserve report of the Company and its Subsidiaries (on the date hereof, the Reserve Report is the most recent reserve report), or (b) any sale, transfer, merger, consolidation, disposition or other transaction which results in any Person or Persons individually or together with their Affiliates owning more than fifty percent (50%) of the Common Stock on a Fully Diluted Basis. "Charter Documents" means, with respect to any Person, its certificate of incorporation, articles of incorporation, bylaws, partnership agreement, regulations, operating agreement and all other comparable charter documents. "Closing" has the meaning given such term in SECTION 2.2 hereof. "Closing Date" means the tenth Business Day after the date of the Company's Shareholders' meeting whereby the transactions contemplated hereby are approved. "Closing Transactions" means the transactions which will occur on the Closing Date pursuant to the Transaction Documents. "COBRA" has the meaning given such term in SECTION 7.14 hereof. "Commission" means the Securities and Exchange Commission or any entity succeeding to any or all of its functions under the Securities Act or the Exchange Act. "Common Stock" means the Company's common stock, par value $0.02 per share. "Common Stock Shares" means the 22,222 shares of Common Stock to be purchased by SFP pursuant to this Agreement. "Company" has the meaning given such term in the preamble hereto. "Company Financial Statements" means the audited and unaudited consolidated financial statements of the Company and its Subsidiaries (including the related notes) included (or incorporated by reference) in the Company's Annual Report on Form 10-KSB for the year ended December 31, 1998, and the Company's Quarterly Report on Form 10-QSB for the quarterly period ended March 31, 1999, filed with the Commission. "Compass Senior Credit Agreement" means that certain Credit Agreement dated March 27, 1998, as amended, by and among Middle Bay Oil Company, Inc. and Enex Resources Corporation, as Borrower, and Compass Bank, as Agent and a Lender, Bank of Oklahoma, National Association, as a Lender and the other lenders signatory thereto. 2 "Compass Senior Debt" means all Debt of the Company outstanding under the Compass Senior Credit Agreement, including all renewals and extensions thereof. "Compass Senior Debt Documents" means the Compass Senior Debt Agreement and all promissory notes, security agreements, mortgages, deeds of trust, assignments, guarantees and other documents, instruments and agreements executed and delivered pursuant to the Compass Senior Credit Agreement evidencing, securing, guaranteeing or otherwise pertaining to the Compass Senior Debt and other obligations arising under the Compass Senior Credit Agreement, as the foregoing may be amended, renewed, extended, supplemented, increased or otherwise modified from time to time to the extent permitted hereunder. "Conversion Shares" means shares of Common Stock issued upon conversion of the Note. "Debt" means, for any Person, without duplication, (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (c) all indebtedness of such Person on which interest charges are customarily paid or accrued, (d) all Guarantees by such Person, (e) the unfunded or unreimbursed portion of all letters of credit issued for the account of such Person, (f) the present value of all obligations in respect of Capital Leases of such Person, (g) any obligation of such Person representing the deferred purchase price of property or services purchased by such Person other than trade payables incurred in the ordinary course of business and which are not more than ninety (90) days past invoice date, (h) any indebtedness, liability or obligation secured by a Lien on the assets of such Person whether or not such indebtedness, liability or obligation is otherwise non-recourse to such Person, (i) liabilities arising under future contracts, forward contracts, swap, cap or collar contracts, option contracts, hedging contracts, other derivative contracts and similar agreements, (j) liabilities with respect to payments received in consideration of oil, gas or other minerals yet to be acquired or produced at the time of payment (including obligations under "take-or-pay" contracts to deliver gas in return for payments already received and the undischarged balance of any production payment created by such Person or for the creation of which such Person directly or indirectly received payment, and (k) all liability of such Person as a general partner or joint venturer for obligations of the nature described in (a) through (k) preceding. "Default" means any condition or event which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Default Rate" means the Fixed Rate plus 3% per annum. "Defensible Title" means such right, title and interest that is (a) evidenced by an instrument or instruments filed of record in accordance with the conveyance and recording laws of the applicable jurisdiction to the extent necessary to prevail against competing claims of bona fide purchasers for value without notice and (b) subject to Permitted Encumbrances, free and clear of all Liens, claims, infringements, burdens or other defects. "Disclosure Schedule" means the disclosure schedule entitled Middle Bay Disclosure Schedule separately provided by the Company to SFP on or before the date hereof, and any documents listed on such disclosure schedule and expressly incorporated therein by reference. 3 "Employment Agreement" means that certain employment agreement to be executed at Closing by the Company and Floyd C. Wilson in substantially the form of Exhibit E. "Environmental Complaint" means any complaint, summons, citation, notice, directive, order, claim, litigation, investigation, proceeding, judgment, letter or other communication from any federal, state, municipal or other Governmental Authority or any other party involving a Hazardous Discharge, Environmental Contamination or any violation of any order, permit or Environmental Law and Laws. "Environmental Contamination" means the presence of any Hazardous Substances, which presence results from a Hazardous Discharge. "Environmental Law and Laws" means any law, common law, ordinance, regulation or policy of any Governmental Authority, as well as any order, decree, permit, judgment or injunction issued, promulgated, approved, or entered thereunder, relating to the environment, health and safety, Hazardous Substances (including, without limitation, the use, handling, transportation, production, disposal, discharge or storage thereof), industrial hygiene, the environmental conditions on, under, or about any real property owned, leased or operated at any time by the Company or any of its Subsidiaries or any real property owned, leased or operated by any other party, including, without limitation, soil, groundwater, and indoor and ambient air conditions or the reporting or remediation of Environmental Contamination. Environmental Law and Laws include, without limitation, the Clean Air Act, as amended, the Federal Water Pollution Control Act, as amended, the Rivers and Harbors Act of 1899, as amended, the Safe Drinking Water Act, as amended, the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), as amended, the Superfund Amendments and Reauthorization Act of 1986 ("SARA"), as amended, the Resource Conservation and Recovery Act of 1976 ("RCRA"), as amended, the Hazardous and Solid Waste Amendments Act of 1984, as amended, the Toxic Substances Control Act, as amended, the Occupational Safety and Health Act ("OSHA"), as amended, the Hazardous Materials Transportation Act, as amended, and any other federal, state and local law whose purpose is to conserve or protect health, the environment, wildlife or natural resource. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any regulation promulgated thereunder. "ERISA Affiliate" means the Company or any of its Subsidiaries and any other corporation or trade or business under common control with the Company or any of its Subsidiaries or treated as a single employer with the Company or any of its Subsidiaries as determined under sections 414(b), (c), (m) or (o) of the IRC. "Event of Default" has the meaning set forth in SECTION 10.1. "Exchange Act" means the Securities Exchange Act of 1934, as amended, or any successor federal statute. "Exhibit" refers to an exhibit attached to this Agreement and incorporated herein by reference, unless specifically provided otherwise. "Financial Officer" means, as to any Person, its Chief Financial Officer, or if no Person serves in such 4 capacity, the highest ranking executive officer of such Person with responsibility for accounting, financial reporting, financial compliance and similar functions. "Fixed Rate" means nine percent (9.0%) per annum. "Fully Diluted Basis" means, with reference to outstanding Common Stock, the shares of Common Stock that would be outstanding assuming that all outstanding options, warrants and other rights to acquire Common Stock had been exercised (regardless of whether such rights are then exercisable) and all securities convertible into Common Stock had then been converted (regardless of whether such securities are then convertible) and had been issued, all in accordance with GAAP. Any reference in this Agreement or any of the other Transaction Documents to "holder(s) of outstanding Common Stock on a Fully Diluted Basis" or words of similar import shall be deemed to include holder(s) of outstanding options, warrants or similar rights to acquire Common Stock or securities convertible into Common Stock. "GAAP" means generally accepted accounting principles, applied on a consistent basis, set forth in Opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants and/or in statements of the Financial Accounting Standards Board and/or their successors which are applicable in the circumstances as of the date in question; and the requirement that such principles be applied on a consistent basis means that the accounting principles observed in a current period are comparable in all material respects to those applied in a preceding period. "Governmental Authority" means any national, state or county, municipal government, domestic or foreign, any agency, board, bureau, commission, court, department or other instrumentality of any such government, or any arbitrator in any case that has jurisdiction over the Company or its Subsidiaries or any of their respective properties or assets. "Guaranty" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or other obligation (whether arising by virtue of partnership arrangements, by agreements to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions, by "comfort letter" or other similar undertaking of support of otherwise), or (b) entered into for the purpose of assuring in any other manner the obligee of such Debt or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); PROVIDED, that, the term "Guaranty" shall not include endorsements for collection or deposit in the ordinary course of business. For purposes of this Agreement, the amount of any Guaranty shall be the maximum amount that the guarantor could be legally required to pay under such Guaranty. "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "Hazardous Discharge" means any releasing, spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, disposing or dumping of a Hazardous Substance at, from, onto, 5 under or within any real property owned, leased or operated at any time by the Company or any of its Subsidiaries or any real property owned, leased or operated by any other Person. "Hazardous Substance" means any pollutant, toxic substance, hazardous waste, compound, element or chemical that is defined as hazardous, toxic, noxious, dangerous or infectious pursuant to any Environmental Law and Laws or which is otherwise regulated by any Environmental Law and Laws. "Holder" with respect to any Security, shall mean the record or beneficial owner of such Security. "Hydrocarbons" means oil, condensate, gas, casinghead gas and other liquid or gaseous hydrocarbons. "Investment" in any Person means any investment, whether by means of securities purchase (whether by direct purchase from such Person or from an existing holder of securities of such Person), loan, advance, extension of credit, capital contribution or otherwise, in or to such Person, the Guaranty of any Debt or other obligation of such Person, or the subordination of any claim against such Person to other Debt or other obligation of such Person; PROVIDED, that, "Investments" shall not include advances made to employees of such Person for reasonable travel, entertainment and similar expenses incurred in the ordinary course of business. "IRC" means the Internal Revenue Code of 1986, as amended from time to time, and any regulation promulgated thereunder. "Knowledge" means actual knowledge after reasonable investigation consistent with the generally accepted business practices in the oil and gas industry. "Laws" means all applicable statutes, laws, ordinances, regulations, orders, writs, injunctions, or decrees of any state, commonwealth, nation, territory, possession, county, township, parish, municipality, or Governmental Authority. "Lien" means with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset. For the purposes of this Agreement, a Person shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement or other title retention agreement relating to such asset. "Majority Noteholder" means a Noteholder or Noteholders holding more than fifty percent (50%) of the aggregate principal balance of the Note. "Majority Warrantholder" means a Warrant Holder or Warrant Holders who hold more than fifty percent (50%) of the outstanding Warrant Shares. "Major Shareholders" means Kaiser-Francis Oil Company, C.J. Lett, III, Weskids, L.P., and Alvin V. Shoemaker. 6 "Material Adverse Effect" means, with respect to a Person, a material adverse effect on the business, financial condition, operations, assets or prospects of such Person or any of its Subsidiaries, and shall also mean, with respect to the Company or any of its Subsidiaries, a material adverse effect on such Person's ability to pay and perform its obligations under the Transaction Documents. "Material Agreement" means any written or oral agreement, contract, commitment, or understanding to which a Person is a party, by which such Person is directly or indirectly bound, or to which any assets of such Person may be subject (a) which is not cancelable by such Person upon notice of sixty (60) days or less without liability for further payment other than nominal penalty, (b) pursuant to which such Person acquires any material portion of the raw materials, supplies or services used or consumed by such Person in the operation of its business (unless such raw materials, supplies or services are readily available to such Person from other sources on comparable terms), or (c) pursuant to which such Person derives any material part of its revenues. "Maximum Lawful Rate" means the maximum rate (or, if the context so permits or requires, an amount calculated at such rate) of interest which, at the time in question would not cause the interest charged on the Note at such time to exceed the maximum amount which Noteholders would be allowed to contract for, charge, take, reserve, or receive under applicable Law after taking into account, to the extent required by applicable Law, any and all relevant payments or charges under the Transaction Documents. "Noteholder" means any Person in whose name a Note is registered on the Note Register. "Note Redemption Date" means the date on which the entire balance of the Note, including, without limitation, all accrued but unpaid interest thereon and all fees payable by the Company or its Subsidiaries in connection therewith, have been paid in full. "Note Register" means a register maintained by the Company setting forth the name and address of each Noteholder and the principal amount of the Note held by such Noteholder. "Notes" means the Company's Senior Subordinate Promissory Notes in the aggregate principal amount of $50,000 to be issued and sold by the Company to SFP pursuant to SECTION 2.1 hereof and any renewals, extensions or replacements thereof, and "Note" means any of such Notes. The Notes shall be substantially in the form of EXHIBIT A attached hereto. "Obligations" means all present and future indebtedness, obligations and liabilities, and all renewals and extensions thereof, or any part thereof, of the Company, its Subsidiaries and any other Person arising pursuant to the Transaction Documents, and all interest accrued thereon and costs, expenses, and attorneys' fees incurred in the enforcement or collection thereof, regardless of whether such indebtedness, obligations and liabilities are direct, indirect, fixed, contingent, liquidated, unliquidated, joint, several or joint and several. "Oil and Gas Interest(s)" means (a) direct and indirect interests in and rights with respect to oil, gas, mineral and related properties and assets of any kind and nature, direct or indirect, including working, royalty and overriding royalty interests, production payments, operating rights, net profits interests, other non-working 7 interests and non-operating interests; (b) interests in and rights with respect to Hydrocarbons and other minerals or revenues therefrom and contracts in connection therewith and claims and rights thereto (including oil and gas leases, operating agreements, unitization and pooling agreements and orders, division orders, transfer orders, mineral deeds, royalty deeds, oil and gas sales, exchange and processing contracts and agreements and, in each case, interests thereunder), surface interests, fee interests, mineral servitudes, reversionary interests, reservations and concessions; (c) easements, rights of way, licenses, permits, leases, and other interests associated with, appurtenant to, or necessary for the operation of any of the foregoing; and (d) interests in equipment and machinery (including well equipment and machinery), oil and gas production, gathering, transmission, compression, treating, processing and storage facilities (including tanks, tank batteries, pipelines and gathering systems), pumps, water plants, electric plants, gasoline and gas processing plants, refineries and other tangible personal property and fixtures associated with, appurtenant to, or necessary for the operation of any of the foregoing. "Ownership Interests" means the ownership interests of the Company and its Subsidiaries in its assets, as set forth on SCHEDULE 1.1A of the Disclosure Schedule. "Other Notes" means the Company notes to be issued and sold by the Company pursuant to provisions of the Other Securities Purchase Agreements. "Other Securities Purchase Agreements" shall mean those securities purchase agreements of even date herewith as listed on EXHIBIT H attached hereto. "Pension Plan" means any employee benefit plan or welfare benefit plan within the meaning of section 3(3) of ERISA maintained by the Company, any Subsidiary of the Company or any ERISA Affiliate that is or was previously covered by Title IV of ERISA or subject to the minimum funding standards under section 412 of the IRC, including a "multiemployer plan" as such term is defined in section 3(37) of ERISA, under which the Company or any Subsidiary of the Company has any current or future obligation or liability and under which any present or former employee of the Company or any Subsidiary of the Company, or such present or former employee's dependents or beneficiaries, has any current or future right to benefits. "Per Share Stock Price" means for the Common Stock on any day shall be the last sale price, or, in case no such sale takes place on such day, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotations System, or such other system then in use. "Permitted Encumbrances" means (a) Liens for Taxes, assessments or other governmental charges or levies if the same shall not at the particular time in question be due and delinquent or (if foreclosure, distraint, sale or other similar proceedings shall not have been commenced or if commenced, shall have been stayed) are being contested in good faith by appropriate proceedings and if the Company or its Subsidiaries shall have set aside on their books such reserves (segregated to the extent required by sound accounting principles) as may be required by GAAP or otherwise determined by its board of directors to be adequate with respect thereto; (b) Liens of carriers, warehousemen, mechanics, laborers, materialmen, landlords, vendors, workmen and operators arising by operation of law in the ordinary course of business or by a written agreement existing 8 as of the date hereof and necessary or incident to the exploration, development, operation and maintenance of Hydrocarbon properties and related facilities and assets for sums not yet due or being contested in good faith by appropriate proceedings, if any the Company or its Subsidiaries shall have set aside on its books such reserves(segregated to the extent required by sound accounting practices) as may be required by GAAP or otherwise determined by its board of directors to be adequate with respect thereto; (c) Liens incurred in the ordinary course of business in connection with worker's compensation, unemployment insurance and social security legislation (other than ERISA); (d) Liens incurred in the ordinary course of business to secure the performance of bids, tenders, trade contracts, leases, statutory obligations, surety and appeal bonds, performance and repayment bonds and other obligations of a like nature; (e) Liens, easements, rights-of-way, restrictions, servitudes, permits, conditions, covenants, exceptions, reservations and other similar encumbrances incurred in the ordinary course of business or existing on property and not (i) reducing the Company's net revenue interest in any Oil and Gas Interests below that set forth on Schedule 1.1A , (ii) increasing the Company's Working Interest in any Oil and Gas Interest above that set forth on Schedule 1.1A or (iii) in the aggregate materially impairing the value of the assets of the Company or its Subsidiaries or interfering with the ordinary conduct of the business of the Company or its Subsidiaries or rights to any of their assets; (f) Liens created or arising by operation of law to secure a party's obligations as a purchaser of oil and gas; (g) all rights to consent by, required notices to, filings with, or other actions by Governmental Authorities to the extent customarily obtained subsequent to Closing; (h) farmout, carried working interest, joint operating, unitization, royalty, overriding royalty, sales and similar arrangements relating to the exploration, development of, or production from, Hydrocarbon properties entered into in the ordinary course of business; (i) preferential rights to purchase and Third Party Consents (to the extent not triggered by the consummation of the transactions contemplated herein); and (j) Liens arising under or created pursuant to the Compass Senior Debt Documents. "Permitted Senior Debt" means the Compass Senior Debt or other debt or credit facility of the Company which is intended to replace the Compass Senior Debt. "Person" means an individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof and shall also mean the Company. "Pre-Distribution Price" has the meaning given such term in SECTION 4.2(c). "Purchase Price" has the meaning given such term in SECTION 2.1 "Redemption Date" means the date on which the entire balance of the Note, including, without limitation, all accrued but unpaid interest thereon and all fees payable by the Company or its Subsidiaries in connection therewith, have been paid in full. "Registration Rights Agreement" means a Registration Rights Agreement to be executed by the Company, 3TEC and SFP at Closing, in the form attached hereto as Exhibit B. "Registration Statement" has the meaning giving such term in SECTION 5.1. 9 "Reserve Engineer" shall have the meaning set forth in SECTION 7.32. "Reserve Report" shall have the meaning set forth in SECTION 7.32. "SEC Documents" shall have the meaning set forth in SECTION 7.28. "Schedule" means a "schedule" attached to this Agreement and incorporated herein by reference, unless specifically indicated otherwise. "Section" refers to a "section" or "subsection" of this Agreement unless specifically indicated otherwise. "Securities" means the Notes, the Common Stock Shares and the Warrants to be issued and sold to SFP and any Warrant Shares. "Securities Act" means the Securities Act of 1933, as amended, or any successor federal statute. "Senior Lender" means Compass Bank, Bank of Oklahoma, National Association and the other lenders who executed the Compass Senior Credit Agreement. "Series B Convertible Preferred Shares" shall mean those shares of Series B Convertible Preferred Stock of the Company as set forth on SCHEDULE 1.1B of the Disclosure Schedule. "Series C Convertible Preferred Shares" shall mean those shares of Series C Convertible Preferred Stock of the Company as set forth on SCHEDULE 1.1C of the Disclosure Schedule. "Shareholders Agreement" means a Shareholders Agreement to be entered into by and among the Company and the Major Shareholders of the Company at Closing. "Subsidiary" means, for any Person, any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other Persons performing similar functions (including that of a general partner) are at the time directly or indirectly owned, collectively, by such Person and any Subsidiaries of such Person. The term Subsidiary shall include Subsidiaries of Subsidiaries (and so on). "Taxes" means all taxes, assessments, filing or other fees, levies, imposts, duties, deductions, withholdings, stamp taxes, interest equalization taxes, capital transaction taxes, foreign exchange taxes or other charges of any nature whatsoever, from time to time or at any time imposed by law or any federal, state or local governmental agency. "Tax" means any one of the foregoing. "Third Party Consents" means the consent or approval of any Person other than the Company, SFP or any Governmental Authority. 10 "3TEC" shall mean 3TEC Energy Corporation, a Delaware corporation. "3TEC Note" shall mean that certain Senior Subordinate Promissory Note in the aggregate principal amount of $10,700,000 to be issued and sold by the Company to 3TEC. "Transaction Documents" means this Agreement, the Notes, the Warrant Certificates, the Registration Rights Agreement, the Shareholders Agreement, the Company's Charter Documents and all other agreements, certificates, documents or instruments now or at any time hereafter delivered in connection with this Agreement, as the foregoing may be renewed, extended, modified, amended or restated from time to time. "Warrant Certificate" means the Warrant Certificates to be issued by the Company evidencing Warrants issued hereunder which shall be in the form of EXHIBIT D attached hereto. "Warrant Exercise Price" means $1.00 per share (subject to adjustment as provided in SECTION 4.2). "Warrant Expiration Date" means 5:00 p.m., Dallas, Texas time, five (5) years following the Closing Date. "Warrant Holder" means any Person (i) in whose name any Warrant is registered on the Warrant Register, or (ii) in whose name any Warrant Shares are registered on the books and records of the Company. "Warrant Register" means a register maintained by the Company setting forth the name and address of each Warrant Holder, the number of Warrants held by such Warrant Holder and the certificate number of each Warrant Certificate held by such Warrant Holder. "Warrant Shares" means the shares of Common Stock issuable upon exercise of the Warrants. "Warrants" means the Common Stock Purchase Warrants to be issued by the Company to SFP pursuant to SECTION 2.1 of this Agreement, each of which shall entitle the holder thereof to purchase one (1) share of Common Stock at the Warrant Exercise Price (subject to adjustment as provided in SECTION 4.2). "Working Interests" means the Company's or its Subsidiaries' share of all of the costs, expenses, burdens, and obligations of any type or nature attributable to the Company's or its Subsidiaries' interests in its oil and gas properties or any well thereon. SECTION 1.2. ACCOUNTING TERMS AND DETERMINATIONS. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with GAAP as in effect from time to time, applied on a basis consistent with the most recent annual audited, consolidated financial statements of the Company delivered to SFP prior to the date hereof. SECTION 1.3. GENDER AND NUMBER. Words of any gender used in this Agreement shall be held and construed to include any other gender and words in the singular number shall be held to include the plural, 11 and vice versa, unless the context requires otherwise. SECTION 1.4. REFERENCES TO AGREEMENT. Use of the words "herein", "hereof", "hereinabove", and the like are and shall be construed as references to this Agreement. ARTICLE II PURCHASE AND SALE OF SECURITIES SECTION 2.1. PURCHASE AND SALE. Subject to the satisfaction of the terms and conditions set forth herein and in reliance upon the representations and warranties of the parties set forth herein and in the other Transaction Documents (a) SFP agrees to purchase from the Company and the Company agrees to issue and sell to SFP, 22,222 shares of Common Stock and 16,822 Warrants for an aggregate purchase price of $50,000 (the "COMMON STOCK SHARES PURCHASE PRICE"), and (b) SFP agrees to purchase from the Company and the Company agrees to issue and sell to SFP the Note for the purchase price of $50,000 (the "NOTE PURCHASE PRICE," and together with the Common Stock Shares Purchase Price, the "PURCHASE PRICE"). SECTION 2.2. CLOSING. Closing of the purchase and sale of the Securities (the "Closing") shall take place at the offices of Thompson & Knight, P.C., Houston, Texas at 10:00 a.m. on the Closing Date, or at such other time, date and place as may be agreed upon in writing by the Company and SFP. SECTION 2.3. DELIVERY. At the Closing, the Company shall deliver to SFP, against payment therefor, certificates evidencing the Common Stock Shares, the Note and the Warrant Certificate purchased by SFP hereunder, in each case duly issued and in form sufficient to vest title thereto fully in SFP, free and clear of all Liens, claims and encumbrances. SECTION 2.4. PAYMENT. At the Closing, SFP shall pay the Purchase Price to the Company by wire transfer of immediately available funds. ARTICLE III RESERVATION AND ISSUANCE OF CONVERSION SHARES The Company will at all times have authorized, and reserve and keep available, free from preemptive rights, for the purpose of enabling it to satisfy any obligation to issue Conversion Shares upon the Noteholder's exercise of its conversion rights under the Note, the number of shares of Common Stock deliverable upon such conversion rights. The Company covenants that all Conversion Shares issued by it will, upon issuance in accordance with the terms of this Agreement, be fully paid and nonassessable and free from all Taxes with respect to the issuance thereof and free from all Liens other than Liens arising by, through or under the Noteholder to whom such Conversion Shares were issued. ARTICLE IV 12 CERTAIN TERMS APPLICABLE TO WARRANTS SECTION 4.1. EXERCISE OF WARRANTS. (a) One-half of the Warrants may be exercised in whole or in part at any time until the Warrant Expiration Date at which time the Warrants shall expire and shall thereafter no longer be exercisable. (b) The other half of the Warrants (the "Restricted Warrants") may be exercised, in whole or in part, until the Warrant Expiration Date, as follows: (i) up to 20% of the Restricted Warrants may be exercised during the one (1) year period commencing on the Closing Date; (ii) up to 40% of the Restricted Warrants (inclusive of any prior exercise under this subsection (b)) may be exercised during the one (1) year period commencing twelve (12) months after the Closing Date; (iii) up to 60% of the Restricted Warrants (inclusive of any prior exercise under this subsection (b)) may be exercised during the one (1) year period commencing twenty-four (24) months after the Closing Date; (iv) up to 80% of the Restricted Warrants (inclusive of any prior exercise under this subsection (b)) may be exercised during the one (1) year period commencing thirty-six (36) months after the Closing Date; and (v) up to 100% of the Restricted Warrants (inclusive of any prior exercise under this subsection (b)) may be exercised during the one (1) year period commencing forty-eight (48) months after the Closing Date; Notwithstanding the foregoing, in any event, the Restricted Warrants may be exercised at the earlier of: (i) the conversion of all or part of the Note into shares of Common Stock, subject to the restrictions set forth below in SECTION 4.1(C); (ii) a Change of Control; or (iii) the payment in full of the Note. (c) If the entire amount of principal and interest due and payable under the Note is converted to Common Stock, all of the Restricted Warrants shall be immediately exercisable in whole or in part at any time until the Warrant Expiration Date. If less than the entire amount of principal and interest due and payable 13 under the Note is converted, a pro-rata portion of the Restricted Warrants based upon the amount of the Note which is converted compared to the total amount of the Note prior to conversion, shall be immediately exercisable in whole or in part at any time until the Warrant Expiration Date. For example, if fifty percent (50%) of the Note is converted, one half of the Restricted Warrants would be exercisable. (d) The Warrants shall be exercised by presentation of the Warrant Certificate evidencing the Warrants to be exercised, with the form of election to purchase on the reverse thereof duly completed and signed, to the Company at the offices of the Company as set forth on the signature page of this Agreement, together with payment of the aggregate Warrant Exercise Price for the number of Warrant Shares in respect of which such Warrants are being exercised in lawful money of the United States of America; PROVIDED, that, to the extent the Warrant Holder exercising such Warrants is also the holder of a Note, such Warrant Holder or Noteholder may elect, by written notice to the Company delivered with such presentation, to elect to pay the applicable Warrant Exercise Price by offsetting the next scheduled payment of such Note by an amount equal to the aggregate Warrant Exercise Price payable in connection with such exercise of Warrants. Upon such presentation, the Company shall issue and cause to be delivered to or upon the written order of the registered Holder of such Warrants and in such name or names as such registered Holder may designate, a certificate or certificates for the aggregate number of Warrant Shares issued upon such exercise of such Warrants. Any Person so designated to be named therein shall be deemed to have become holder of record of such Warrant Shares as of the date of exercise of such Warrants; PROVIDED, that, no Warrant Holder will be permitted to designate that such Warrant Shares be issued to any Person other than such Warrant Holder unless each condition to transfer contained in ARTICLE V hereof which would be applicable to a transfer of Warrants or Warrant Shares has been satisfied. (b) If less than all of the Warrants evidenced by a Warrant Certificate are exercised at any time, a new Warrant Certificate or Certificates shall be issued for the remaining number of Warrants evidenced by such Warrant Certificate. All Warrant Certificates surrendered upon exercise of Warrants shall be canceled. (c) The Company shall not be required to issue fractional shares of Common Stock upon exercise of any Warrants issued by it, but shall pay for any such fraction of a share an amount in cash equal to the value of such fractional share determined by the Company's board of directors in good faith. (d) The Company will pay all Taxes attributable to the initial issuance of Warrant Shares upon the exercise of the Warrants issued by it; PROVIDED, that, each Warrant Holder shall use its reasonable efforts to avoid any such Tax on the issuance of Warrant Shares; and PROVIDED, further that, the Company shall not be required to pay any income Tax or any other Tax which may be payable in respect of any transfer involved in the issue of any Warrant Certificate or any certificate for Warrant Shares in a name other than that of the registered holder of a Warrant Certificate surrendered upon the exercise of such a Warrant, and the Company shall not be required to issue or deliver such certificates unless or until the Person or Persons requesting the issuance thereof shall have paid to the Company the amount of such Tax or shall have established to the satisfaction of the Company that such Tax has been paid. SECTION 4.2. ADJUSTMENT OF NUMBER OF WARRANT SHARES PURCHASABLE. The number of Warrant 14 Shares purchasable upon the exercise of each Warrant is subject to adjustment from time to time upon the occurrence of any of the events enumerated in this SECTION 4.2. (a) In the event that the Company shall at any time after the date of this Agreement declare a dividend on the Common Stock in shares of its capital stock (whether shares of such Common Stock or of capital stock of any other class of the Company), split or subdivide the outstanding Common Stock, or combine the outstanding Common Stock into a smaller number of shares, the number of Warrant Shares purchasable upon an exercise of each Warrant after the time of the record date for such dividend or of the effective date of such split, subdivision or combination shall be adjusted to equal the number of shares of Common Stock which a Holder having the same number of shares of Common Stock as the number of Warrant Shares into which each Warrant is exercisable immediately prior to such record date or effective date, as the case may be, would own or be entitled to receive after such record date or effective date. (b) In the event that the Company shall at any time after the date of this Agreement issue any shares of Common Stock without consideration or at a price per share less than $1.00, or issue options, rights or warrants to subscribe for or purchase such Common Stock (or securities convertible into such Common Stock) without consideration or at a price per share (or having a conversion price per share, if a security convertible into such Common Stock) less than $1.00, the number of Warrant Shares purchasable upon an exercise of each Warrant after the date of such issuance shall be adjusted to equal the product obtained by multiplying the number of Warrant Shares into which each Warrant is exercisable immediately prior to the date of such issuance by a fraction, the numerator shall be the number of shares of Common Stock outstanding on a Fully Diluted Basis immediately after such issuance, and the denominator of which shall be the number of shares of Common Stock outstanding on a Fully Diluted Basis immediately prior to such issuance PLUS the number of shares of such Common Stock which the aggregate offering price of the total number of shares of such Common Stock so to be issued or to be offered for subscription or purchase (or the aggregate initial conversion price of the convertible securities so to be offered) would purchase at $1.00 per share. In case such subscription price may be paid in a consideration part or all of which shall be in a form other than cash, the value of such consideration shall be as determined by an investment banker reasonably acceptable to the Warrant Holder (the cost of the engagement of said investment banking firm to be borne by the Company). Shares of such Common Stock owned by or held for the account of the Company or any Subsidiary thereof shall not be deemed outstanding for the purpose of any such computation. Such adjustment shall be made successively whenever the date of such issuance is fixed (which date of issuance shall be the record date for such issuance if a record date therefor is fixed); and, in the event that such shares or options, rights or warrants are not so issued, the number of Warrant Shares into which each Warrant is exercisable shall again be adjusted to be such number of Warrant Shares into which each Warrant is exercisable if the date of such issuance had not been fixed. (c) In case the Company shall make a distribution to all holders of Common Stock (including any such distribution made in connection with a consolidation or merger in which the Company is the surviving corporation) of shares of it stock, evidences of its indebtedness, assets, or rights, options or warrants (other than those referred to in subsection (b) of this Section 4.2) to subscribe for or purchase such shares, evidences of indebtedness, or assets, the number of Warrant Shares into which each Warrant is exercisable after such date of distribution shall be adjusted to equal the product obtained by multiplying the number of Warrant 15 Shares purchasable upon an exercise of each Warrant immediately prior to such date by a fraction, the numerator of which shall be the Per Share Stock Price for the trading day immediately preceding the day of distribution ("Pre-Distribution Price"), and the denominator of which shall be the Pre-Distribution Price less the fair market value of the distribution (as determined in good faith by the Board of Directors of the Company) applicable to one share of Common Stock. Such adjustment shall be made successively whenever a date for such distribution is fixed (which date of distribution shall be the record date for such issuance if a record date therefor is fixed); and, if such distribution is not so made, the number of Warrant Shares into which each Warrant is exercisable shall again be adjusted to be such number of Warrant Shares which would then be in effect if the date of such distribution had not been fixed. (d) No adjustment in the number of Warrant Shares purchasable upon an exercise of each Warrant shall be required unless such adjustment would require an increase or decrease of at least one-tenth of one percent (.1%) in such number of Warrant Shares; PROVIDED that any adjustments which by reason of this SECTION 4.2(d) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this SECTION 4.2 shall be made to the nearest hundredth of one percent. (e) The Warrant Exercise Price in effect immediately prior to any adjustment of the number of Warrant Shares into which each Warrant is exercisable shall be simultaneously adjusted (but not below the par value of the Common Stock) by multiplying the Warrant Exercise Price immediately prior to such adjustment by a fraction, the numerator of which shall be the number of Warrant Shares into which each Warrant is exercisable immediately prior to such adjustment, and the denominator of which shall be the number of Warrant Shares into which each Warrant is exercisable immediately after such adjustment. (f) In the event of any capital reorganization of the Company, or of any reclassification of any Common Stock for which any Warrant is exercisable (other than a subdivision or combination of outstanding shares of such Common Stock), or in case of the consolidation of the Company with or the merger of the Company with or into any other corporation or of the sale of the properties and assets of the Company as, or substantially as, an entirety to any other Person, each Warrant shall after such capital reorganization, reclassification of such Common Stock, consolidation, merger or sale be exercisable, upon the terms and conditions specified in this Agreement, for the number of shares of stock or other securities or assets to which a holder of the number of Warrant Shares purchasable (at the time of such capital reorganization, reclassification of such Common Stock, consolidation, merger or sale) upon exercise of such Warrant would have been entitled upon such capital reorganization, reclassification of such Common Stock, consolidation, merger or sale; and in any such case, if necessary, the provisions set forth in this SECTION 4 with respect to the rights thereafter of such Warrant shall be appropriately adjusted so as to be applicable, as nearly as may reasonably be, to any shares of stock or other securities or assets thereafter deliverable on the exercise of such Warrants. The Company shall not effect any such consolidation, merger or sale, unless prior to or simultaneously with the consummation thereof, the successor corporation (if other than the Company) resulting from such consolidation or merger or the corporation purchasing such assets or the appropriate corporation or entity shall assume, by written instrument, the obligation to deliver to each Warrant Holder the shares of stock, securities or assets to which, in accordance with the foregoing provisions, such Warrant Holder may be entitled pursuant to this SECTION 4.2(f). 16 (g) If any question shall at any time arise with respect to the adjusted number of Warrant Shares, such question shall be determined by the independent firm of certified public accountants of recognized national standing selected by the Warrant Holder. (h) Notwithstanding anything in this SECTION 4.2 to the contrary, the Company shall not be permitted to take any action described in this SECTION 4.2 (such as, but not by way of limitation, any dividend, consolidation merger or reorganization) if such action is prohibited under any other provision of this Agreement. (i) Notwithstanding that the number of Warrant Shares purchasable upon the exercise of each Warrant may have been adjusted pursuant to the terms hereof, the Company shall nonetheless not be required to issue fractions of Warrant Shares upon exercise of each Warrant or to distribute certificates that evidence fractional shares, but instead shall pay to the holder of each Warrant the cash value of any such fractional Warrant Shares. SECTION 4.3 NOTICES TO WARRANT HOLDERS. Upon any adjustment of the number of Warrant Shares issuable upon an exercise of the Warrants or any adjustment of the Warrant Exercise Price pursuant to SECTION 4.3, the Company shall promptly, but in any event within thirty (30) days thereafter, cause to be given to each Warrant Holder, at its address appearing on the Warrant Register, by first class mail, postage prepaid, a certificate signed by the Company's Financial Officer setting forth the number of Warrant Shares issuable upon the exercise of each Warrant as so adjusted and the Warrant Exercise Price as so adjusted, and describing in reasonable detail the facts accounting for such adjustment and the method of calculation used. Where appropriate, such certificate may be given in advance and included as part of the notice required to be mailed under the other provisions of this SECTION 4.3. In the event: (a) that the Company shall authorize the issuance to all holders of its Common Stock of rights or warrants to subscribe for or purchase capital stock of the Company or of any other subscription rights or warrants; or (b) that the Company shall issue any shares of Common Stock without consideration or at a price per share less than $1.00, or issue options, rights, or warrants to subscribe for or purchase such Common Stock (or securities convertible into such Common Stock) without consideration or at a price per share (or having a conversion price per share, if a security convertible into such Common Stock) less than $1.00; or (c) that the Company shall authorize the distribution to all holders of its Common Stock of shares of its stock, evidences of its indebtedness, assets, or rights, options, or warrants to subscribe for or purchase such shares, evidences of indebtedness or assets; or (d) of any consolidation or merger to which the Company is a party and for which approval of any shareholders of the Company is required, or of the conveyance or transfer of the properties and assets of 17 the Company substantially as an entirety, or of any capital reorganization or reclassification or change of the Common Stock (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination); or (d) of the voluntary dissolution, liquidation or winding up of the Company; or (e) that the Company proposes to take any other action which would require an adjustment of the Warrant Exercise Price of the Warrants issued by it pursuant to SECTION 4.2; then the Company shall cause to be given to each Warrant Holder at such Warrant Holder's address appearing on the Warrant Register, at least twenty (20) days prior to the applicable date hereinafter specified, by first class mail, postage prepaid, a written notice stating the date as of which the holders of record of Common Stock to be entitled to receive any such rights, warrants or distribution are to be determined, or the date on which any such consolidation, merger, conveyance, transfer, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that the holders of record of Common Stock shall be entitled to exchange their shares for securities or other property, if any, deliverable upon such reclassification, consolidation, merger, conveyance, transfer, dissolution, liquidation or winding up. SECTION 4.4. RESERVATION AND ISSUANCE OF WARRANT SHARES. The Company will at all times have authorized, and reserve and keep available, free from preemptive rights, for the purpose of enabling it to satisfy any obligation to issue Warrant Shares upon the exercise of the Warrants, the number of shares of Common Stock deliverable upon exercise of all outstanding Warrants. The Company covenants that all Warrant Shares issued by it will, upon issuance in accordance with the terms of this Agreement, be fully paid and nonassessable and free from all Taxes with respect to the issuance thereof and free from all Liens other than Liens arising by, through or under the Warrant Holder to whom such Warrant Shares were issued. ARTICLE V TRANSFER OF SECURITIES Section 5.1. RESTRICTIONS ON TRANSFER. SFP understands and agrees that the Securities have not been registered under the Securities Act or any state securities Laws, and that accordingly, they will not be fully transferable except as permitted under various exemptions contained in the Securities Act and applicable state securities Laws, or upon satisfaction of the registration and prospectus delivery requirements of the Securities Act and applicable state securities Laws. SFP acknowledges that it must bear the economic risk of its investment in the Securities for an indefinite period of time (subject, however, to the payment terms of the Note, and the Company's obligations pursuant to the Registration Rights Agreement) since they have not been registered under the Securities Act and applicable state securities Laws and therefore cannot be sold unless they are subsequently registered or an exemption from registration is available. Absent an effective registration statement under the Securities Act and applicable state securities Laws covering the disposition of the Securities, SFP will not sell, transfer, assign, pledge, hypothecate or otherwise dispose of any or all of the Securities absent a valid exemption from the registration and prospectus delivery requirements of the 18 Securities Act and the registration or qualification requirements of any applicable state securities Laws. The Company agrees that it will effect the transfer of the Securities on its books and records upon receipt of an opinion of counsel stating that SFP's proposed sale or transfer of the Securities is exempt from the registration and qualification requirements of the Securities Act. SECTION 5.2. REGISTRATION, TRANSFER AND EXCHANGE OF WARRANTS. (a) The Company shall maintain at the offices of the Company as set forth on the signature pages of this Agreement, the Warrant Register for registration of the Warrants and Warrant Certificates and transfers thereof. On the Closing Date, the Company shall register the outstanding Warrants and Warrant Certificates issued to SFP. The Company may deem and treat the registered Warrant Holders as the absolute owners of the Warrants registered to such Holders and (notwithstanding any notation of ownership or other writing on the Warrant Certificates made by any Person) for the purpose of any exercise thereof or any distribution to the Warrant Holders, and for all other purposes. (b) Upon satisfaction of each condition set forth in SECTION 5.1 hereof, the Company shall register the transfer of any outstanding Warrants in the Warrant Register upon surrender of the Warrant Certificate(s) evidencing such Warrants to the Company at the offices of the Company as set forth on the signature pages of this Agreement, accompanied (if so required by it) by a written instrument or instruments of transfer in form satisfactory to it, duly executed by the registered Warrant Holder or by the duly appointed legal representative thereof. Upon any such registration of transfer, new Warrant Certificate(s) evidencing such transferred Warrants shall be issued to the transferee(s) and the surrendered Warrant Certificate(s) shall be canceled. If less than all the Warrants evidenced by a Warrant Certificate(s) surrendered for transfer are to be transferred, a new Warrant Certificate(s) shall be issued to the Warrant Holder surrendering such Warrant Certificate(s) evidencing such remaining number of Warrants. (c) Warrant Certificates may be exchanged at the option of the Warrant Holder(s) thereof, when surrendered to the Company at the offices of the Company as set forth on the signature pages of this Agreement, for another Warrant Certificate or other Warrant Certificates of like tenor and representing in the aggregate a like number of Warrants. Warrant Certificates surrendered for exchange shall be canceled. (d) No charge shall be made for any such transfer or exchange except for any Tax or other governmental charge imposed in connection therewith. SECTION 5.3. MUTILATED OR MISSING WARRANT CERTIFICATES. If any Warrant Certificate shall be mutilated, lost, stolen or destroyed, the Company shall issue, in exchange and substitution for and upon cancellation of the mutilated Warrant Certificate, or in lieu of and substitution for the Warrant Certificate lost, stolen or destroyed, a new Warrant Certificate of like tenor and representing an equivalent number of Warrants, but only upon receipt of evidence satisfactory to the Company of such loss, theft or destruction of such Warrant Certificate and, if requested, indemnity satisfactory to it. No service charge shall be made for any such substitution, but all expenses and reasonable charges associated with procuring such indemnity and all stamp, Tax and other governmental duties that may be imposed in relation thereto shall be borne by the holder of such Warrant Certificate. SECTION 5.4. REGISTRATION, TRANSFER AND EXCHANGE OF NOTES. (a) The Company shall maintain 19 at the offices of the Company as set forth on the signature pages of this Agreement, the Note Register for registration of the Notes and transfers thereof. On the Closing Date, the Company shall register the outstanding Notes issued to SFP. The Company may deem and treat the registered Noteholder as the absolute owner of the Note registered to such Holder and (notwithstanding any notation of ownership or other writing on the Note made by any Person) for the purpose of any exercise thereof or any distribution to the Noteholder, and for all other purposes. (b) Upon satisfaction of each condition set forth in SECTION 5.1 hereof, the Company shall register the transfer of any outstanding Note in the Note Register upon surrender of such Note to the Company at the offices of the Company as set forth on the signature pages of this Agreement, accompanied (if so required by it) by a written instrument or instruments of transfer in form satisfactory to it, duly executed by the registered Noteholder or by the duly appointed legal representative thereof. Upon any such registration of transfer, a new Note evidencing such transferred Note shall be issued to the transferee and the surrendered Note shall be canceled. If less than all of the principal amount of a Note surrendered for transfer is to be transferred, a new Note shall be issued to the Noteholder surrendering such Note evidencing such remaining principal balance. (c) The Notes may be exchanged at the option of the Noteholders thereof, when surrendered to the Company at the offices of the Company as set forth on the signature pages of this Agreement, for another Note or other Notes of like tenor and representing in the aggregate a like number of Notes. Notes surrendered for exchange shall be canceled. (d) No charge shall be made for any such transfer or exchange except for any Tax or other governmental charge imposed in connection therewith. SECTION 5.5. MUTILATED OR MISSING NOTES. If any Note shall be mutilated, lost, stolen or destroyed, the Company shall issue, in exchange and substitution for and upon cancellation of the mutilated Note, or in lieu of and substitution for the Note lost, stolen or destroyed, a new Note of like tenor and representing the same outstanding principal, but only upon receipt of evidence satisfactory to the Company of such loss, theft or destruction of such Note and, if requested, indemnity satisfactory to it. No service charge shall be made for any such substitution, but all expenses and reasonable charges associated with procuring such indemnity and all stamp, Tax and other governmental duties that may be imposed in relation thereto shall be borne by the holder of such Note. ARTICLE VI CONDITIONS SECTION 6.1. CONDITIONS PRECEDENT TO SFP'S OBLIGATIONS AT CLOSING. The obligations of SFP to purchase the Securities pursuant to SECTION 2.1 are subject to the satisfaction of each of the conditions precedent set forth in this SECTION 6.1 on or before 10:00 a.m. (Dallas, Texas time) on the Closing Date. In the event all of the conditions precedent set forth in this SECTION 6.1 are not satisfied by such time, SFP may, 20 at its option, terminate this Agreement and the other Transaction Documents and all obligations of SFP hereunder and thereunder, or waive any and all of such conditions precedent and close the transactions as contemplated herein. (a) CLOSING DELIVERIES. The Company shall have delivered to SFP, in form and substance satisfactory to SFP each of the following: (i) the Note to be purchased by SFP pursuant to SECTION 2.1 duly executed and delivered by the Company and payable to SFP; (ii) certificates issued to SFP evidencing the Common Stock Shares to be purchased by SFP pursuant to SECTION 2.1; (iii) Warrant Certificates issued to SFP by the Company evidencing the Warrants to be purchased by SFP pursuant to SECTION 2.1; (iv) the Registration Rights Agreement duly executed and delivered by the Company and SFP; (v) the Employment Agreement duly executed and delivered by the Company and Floyd C. Wilson; (vi) a favorable opinion of Thrasher, Whitley, Hampton & Morgan, counsel for the Company, in form and substance satisfactory to SFP and its counsel; (vii) all resolutions, certificates and documents SFP may request relating to (A) the organization, existence, good standing and foreign qualification of the Company and each of its Subsidiaries, (B) the corporate authority for the execution, delivery and enforceability of this Agreement and the consummation of the Closing Transactions, (C) the stock ownership of the Company and each of its Subsidiaries, (D) evidence of all resolutions and related documents necessary to increase the Company's outstanding capital, if necessary, and (E) such other matters relevant to the foregoing as SFP shall reasonably request, all of which shall be in form and substance satisfactory to SFP and its counsel; (viii) if applicable, the waiting period applicable to the transactions contemplated hereby under the HSR Act shall have expired or been terminated and all filings required to be made prior to the Closing Date, and all consents, approvals, permits and authorizations required to be obtained prior to the Closing Date from, any Governmental Authority in connection with execution and delivery of this Agreement and the consummation of the transactions contemplated hereby shall have been made or obtained. (ix) evidence satisfactory to SFP that all Closing Transactions have been consummated; (x) a Subordination Agreement among SFP, Compass Bank and Bank of Oklahoma in the 21 form and substance reasonably acceptable to SFP; (xi) a certificate from an Authorized Officer of the Company certifying that (A) neither a Default nor an Event of Default has occurred, and (B) each and every representation and warranty of the Company in the Transaction Documents is true and correct in all material respects; (xii) the holders of the requisite number of shares of outstanding capital stock of the Company shall have duly and validly approved all items necessary to effect the transactions contemplated by this Agreement and the other Transaction Documents, the Closing Transactions and all other transactions contemplated hereby or thereby; (xiii) the Common Stock Shares, the Warrant Shares and the shares of Common Stock issuable upon conversion of the Notes shall have been approved for listing on the Nasdaq Small Cap Market, subject to official notice of issuance; (xiv) resignations in form acceptable to SFP of each of the directors of the Company who are not designated by the Major Shareholders pursuant to the provisions of the Shareholders Agreement; (xv) evidence of cancellation of the Company's Employee Net Profits Interest Incentive Compensation Plan ("NPI Plan") and termination of the Company's SEP/IRA Plan established in 1993;and (xvi) such other documents, instruments and agreements as SFP shall reasonably request in light of the transactions contemplated hereunder. The documents, certificates and opinions referred to in this SECTION 6.1(a) shall be delivered to SFP no later than the Closing Date and shall, except as expressly provided otherwise, be dated the Closing Date. (b) LEGAL MATTERS. All legal matters with respect to the Company and its Subsidiaries, the Transaction Documents and the Closing Transactions shall be acceptable to SFP. (c) ABSENCE OF DEFAULT. No Default or Event of Default shall have occurred which is continuing. (d) REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company contained in this Agreement and in the other Transaction Documents shall be true and correct in all material respects on the Closing Date as if they were made on such date (in determining the truth and correctness of any representation or warranty no effect shall be given to any limitation contained in such representation or warranty as to Knowledge). (e) NO MATERIAL ADVERSE EFFECT. No event has occurred or condition exists which has had or could be expected to have a Material Adverse Effect on the Company. (f) PAYMENT OF EXPENSES. The Company shall have paid, or will make arrangements to pay at 22 Closing, in full all documented and reasonable out of pocket fees, expenses and disbursements incurred by SFP in connection with its investigation, negotiation and closing of the transactions contemplated hereby. (g) WAIVER. SFP shall have been given evidence that the provisions, if any, listed on SCHEDULE 6.1(G) have been waived by the Company's shareholders or board of directors, as the case may be. (h) EMPLOYEE PARTICIPANT's Consent. Evidence of each employee participant's consent to the termination and release of all rights related to the NPI Plan. (i) DUE DILIGENCE REVIEW. Completion of Buyer's due diligence, the results of which are satisfactory to Buyer, including but not limited to, Buyer's review of all items listed on the Disclosure Schedule. SECTION 6.2. CONDITIONS PRECEDENT TO THE COMPANY'S OBLIGATIONS AT CLOSING. The obligations of the Company to sell the Securities pursuant to SECTION 2.1 are subject to the satisfaction of each of the conditions precedent set forth in this SECTION 6.2 on or before 10:00 a.m. (Dallas, Texas time) on the Closing Date. In the event all of the conditions precedent set forth in this SECTION 6.2 are not satisfied by such time, the Company may, at its option, terminate this Agreement and the other Transaction Documents and all obligations of the Company hereunder and thereunder. (a) CLOSING DELIVERIES. SFP shall have delivered to the Company, in form and substance satisfactory to the Company each of the following: (i) the Purchase Price to be paid by SFP pursuant to SECTION 2.1; (ii) the Registration Rights Agreement duly executed and delivered by the Company and SFP; (iii) the Employment Agreement duly executed and delivered by the Company and Floyd C. Wilson; (iv) all resolutions, certificates and documents the Company may request relating to (A) the organization, existence, good standing and foreign qualification of SFP, (B) the corporate authority for the execution, delivery and enforceability of this Agreement and the consummation of the Closing Transactions, and (C) such other matters relevant to the foregoing as the Company shall reasonably request, all of which shall be in form and substance satisfactory to the Company and its counsel; (v) if applicable, the waiting period applicable to the transactions contemplated hereby under the HSR Act shall have expired or been terminated and all filings required to be made prior to the Closing Date, and all consents, approvals, permits and authorizations required to be obtained prior to the Closing Date from, any Governmental Authority in connection with execution and delivery of this Agreement and the consummation of the transactions contemplated hereby shall have been made or obtained; 23 (vi) evidence satisfactory to the Company that all Closing Transactions have been consummated; (vii) a certificate from an Authorized Officer of SFP certifying that (A) each and every representation and warranty of the Company in the Transaction Documents is true and correct in all material respects; (viii) payment of $274,625 to current employees of the Company as set forth on the schedule previously provided by the Company to SFP as payment in full of each employee's rights under the NPI Plan; (ix) such other documents, instruments and agreements as the Company shall reasonably request. The documents and certificates referred to in this SECTION 6.2(A) shall be delivered to the Company no later than the Closing Date and shall, except as expressly provided otherwise, be dated the Closing Date. (b) REPRESENTATIONS AND WARRANTIES. The representations and warranties of SFP contained in this Agreement and in the other Transaction Documents shall be true and correct in all material respects on the Closing Date as if they were made on such date. ARTICLE VII REPRESENTATIONS AND WARRANTIES In order to induce SFP to purchase the Securities to be purchased by it hereunder, the Company hereby represents and warrants to SFP that each of the following statements (a) is true and correct on the date hereof, and (b) will be true and correct after giving effect to the Closing Transactions. SECTION 7.1. CORPORATE EXISTENCE AND POWER. Each of the Company and each of its Subsidiaries (a) is a corporation, duly organized, validly existing and in good standing under the Laws of its jurisdiction of incorporation set forth on SCHEDULE 7.1 of the Disclosure Schedule, (b) has all corporate power and authority necessary to carry on its business as now conducted and as proposed to be conducted, and (c) is duly qualified as a foreign corporation in each jurisdiction set forth on SCHEDULE 7.1 on the Disclosure Schedule which constitutes all jurisdictions where a failure to be so qualified could have a Material Adverse Effect on the Company or such Subsidiary. SECTION 7.2. CORPORATE AND GOVERNMENTAL AUTHORIZATION; CONTRAVENTION. The execution, delivery and performance of this Agreement and the other Transaction Documents by each of the Company and each of its Subsidiaries (to the extent each is a party to this Agreement or the other 24 Transaction Documents) are within its corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any Governmental Authority (other than filings with any applicable securities regulatory authorities to perfect exemptions from the registration or qualification requirements of applicable securities Laws and which will be made immediately following the Closing Date), and, except for matters which have been waived in writing by the appropriate Person, do not contravene, or constitute a default under, any provision of applicable Law or of the Charter Documents or of any material judgment, injunction, order, decree or Material Agreement binding upon the Company or any of its Subsidiaries or its respective assets, or result in the creation or imposition of any Lien on any asset of the Company or any of its Subsidiaries. SECTION 7.3. BINDING EFFECT. This Agreement constitutes the valid and binding agreement of the Company; each other Transaction Document when executed and delivered in accordance with this Agreement, will constitute the valid and binding obligation of the Company and each of its Subsidiaries which is a party thereto, in each case enforceable in accordance with its terms except as (i) the enforceability thereof may be limited by bankruptcy, insolvency or similar Laws affecting creditors rights generally, and (ii) the availability of equitable remedies may be limited by equitable principles of general applicability. SECTION 7.4. CAPITALIZATION. SCHEDULE 7.4 of the Disclosure Schedule accurately and completely sets forth for each of the Company and its Subsidiaries (a) its authorized, issued and outstanding capital stock of every class, and (b) the names of the record, and to the Company's knowledge, beneficial owner, of its capital stock of every class, including the number and class of shares held by each such shareholder. Except as set forth SCHEDULE 7.4 of the Disclosure Schedule and except for the Warrants and registration rights provided in the Registration Rights Agreement, (x) there are not outstanding any options, warrants or other rights to acquire capital stock of any class of the Company or any of its Subsidiaries or securities convertible into capital stock of the Company or any of its Subsidiaries of any class, (y) no Person has any preemptive or similar rights with respect to any subsequent issue of stock by the Company or any of its Subsidiaries, and (z) no Person has any right to require the Company or any of its Subsidiaries to register any securities of the Company or any of its Subsidiaries under the Securities Act. SECTION 7.5. ISSUANCE OF SECURITIES. The Securities to be issued on the Closing Date, when issued upon payment of the applicable Purchase Price in accordance with SECTION 2.1, will be duly authorized, validly issued, fully paid and non-assessable and will be free and clear of all Liens, claims and encumbrances including pre-emptive rights. The Warrant Shares, when issued upon an exercise of the Warrants, and the Conversion Shares, when issued upon a conversion of the amount of principal and unpaid interest on the Notes, will be duly authorized, validly issued, fully paid and nonassessable and free and clear of all Liens, claims and encumbrances, including, without limitation, all preemptive rights. SECTION 7.6. FINANCIAL STATEMENTS. The Company Financial Statements were prepared in accordance with the applicable published rules and regulations of the Commission with respect thereto and in accordance with GAAP applied on a consistent basis during the periods involved 25 (except as may be indicated in the notes thereto or, in the case of unaudited statements, as permitted by Rule 10-01 of Regulation S-X of the Commission) and fairly present in all material respects, in accordance with applicable requirements of GAAP (in the case of unaudited statements, subject to normal, recurring adjustments), the consolidated financial position of the Company and its Subsidiaries as of their respective dates and the consolidated results of operations and the consolidated cash flows of the Company and its Subsidiaries for the periods presented therein. The are no material liabilities of the Company or any Subsidiary (contingent or otherwise), other than as disclosed in the Company's Financial Statements. There are no material imbalances of production from the oil and gas properties of the Company or its Subsidiaries whether required to be disclosed pursuant to GAAP or otherwise. Since December 31, 1998, no event has occurred or condition exists which has had or could be expected to have a Material Adverse Effect. SECTION 7.7. MATERIAL AGREEMENTS. SCHEDULE 7.7 of the Disclosure Schedule contains a complete and accurate description of every Material Agreement to which the Company or any of its Subsidiaries is a party (other than the Transaction Documents) or by which the Company or any of its Subsidiaries or any of their respective assets are bound (including all amendments and modifications thereto). The Company has made available to SFP or provided SFP with a true and correct copy of all such Material Agreements, including all amendments and modifications thereof. No rights or obligations of any party to any of such Material Agreements has been waived, and no party to any of such Material Agreements is in default of its obligations thereunder. Each of such Material Agreements is a valid, binding and enforceable obligation of the parties thereto in accordance with its terms and is in full force and effect. SECTION 7.8. COMPASS DEBT DOCUMENTS. The Company has provided to or made available to SFP with a true and correct copy of all of the Compass Senior Debt Documents including all amendments and modifications thereto. No rights or obligations of any party to any of such Compass Senior Debt Documents have been waived, and no party to any of such Compass Senior Debt Documents is in default of its obligations thereunder. Each of such Compass Senior Debt Documents is a valid, binding and enforceable obligation of the parties thereto in accordance with its terms and is in full force and affect. SECTION 7.9. INVESTMENTS. Except as set forth on SCHEDULE 7.9 of the Disclosure Schedule, neither the Company nor any of its Subsidiaries has any outstanding Investments. SECTION 7.10. OUTSTANDING DEBT. SCHEDULE 7.10 of the Disclosure Schedule contains a complete and accurate description of all Debt of the Company and each of its Subsidiaries outstanding on the date hereof. Neither the Company nor any of its Subsidiaries is in default in payment of any Debt with respect to which it is an obligor or in default of any covenant, agreement, representation, warranty or other term of any document, instrument or agreement evidencing, securing or otherwise pertaining to any such Debt. SECTION 7.11. TRANSACTIONS WITH AFFILIATES. SCHEDULE 7.11 of the Disclosure Schedule contains a complete and accurate description of all contracts, agreements and other arrangements 26 (whether written, oral, express or implied) between the Company or any of its Subsidiaries and any Affiliate of the Company and its Subsidiaries in existence on the date hereof, including, without limitation, a complete and accurate description of all Investments of any of the Company or any of its Subsidiaries in any Affiliate of the Company or any of its Subsidiaries. SECTION 7.12. EMPLOYMENT MATTERS. SCHEDULE 7.12 of the Disclosure Schedule contains a complete and accurate list of all employees of the Company and each of its Subsidiaries. Such schedule also sets forth for the current fiscal year the annual salary (including projected bonuses and other cash compensation) of all such employees and all benefits (other than health insurance benefits and other similar benefits which are both customary in the industry in which the Company or any of its Subsidiaries is engaged and provided to all full time employees of the Company or any of its Subsidiaries generally) provided to such employees. SCHEDULE 7.12 of the Disclosure Schedule also contains a complete and accurate description of all employment contracts, consulting agreements, management agreements, non-compete and similar agreements to which the Company or any of its Subsidiaries is a party on the date hereof. SECTION 7.13. LITIGATION. Except as set forth on SCHEDULE 7.13 of the Disclosure Schedule, there is no action, suit or proceeding pending against, or to the knowledge of the Company, threatened against or affecting the Company or any of its Subsidiaries before any court or arbitrator or any Governmental Authority. SECTION 7.14. ERISA. Neither the Company nor any of its Subsidiaries nor any ERISA Affiliate maintains or contributes to any Pension Plan other than those disclosed on SCHEDULE 7.14 of the Disclosure Schedule. Each such Pension Plan is in compliance in all material respects with its terms and the applicable provisions of ERISA and the IRC. Except as required by law, none of the Company or any of its Subsidiaries nor any ERISA Affiliate has any commitment to create any additional Pension Plans. Except as set forth on SCHEDULE 7.14, neither the Company nor any of its Subsidiaries nor any ERISA Affiliate has ever sponsored, adopted, maintained or been obligated to contribute to, or had any liability under, any Pension Plan. There is no material violation of ERISA with respect to the filing of applicable reports, documents and notices regarding the Pension Plans with the Secretary of the Treasury or the furnishing of such documents to the participants and beneficiaries of the Pension Plans, and, to the best of the Company's knowledge, with respect to each Pension Plan all other reports required under ERISA or the IRC to be filed with any Governmental Authority have been duly filed and all such reports are true and correct in all material respects as of the dates given. Each Pension Plan that is intended to be "qualified" within the meaning of section 401(a) of the IRC is, and has been during the period from its adoption to date, so qualified, both as to form and, to the best of the Company's knowledge, has been qualified, and all necessary governmental approvals, including a favorable determination as to the qualification under the IRC of each of such Pension Plans and each amendment thereto, have been timely obtained or application for a favorable determination will be filed prior to the applicable filing deadlines. Except as disclosed on SCHEDULE 7.14 of the Disclosure Schedule, each trust created under any such Pension Plan intended to be qualified within the meaning of section 401(a) of the IRC and each trust described in section 501(c)(9) of the IRC is exempt from federal income taxation under section 501(a) of the IRC and has 27 been so exempt during the period from creation to date. The Company has no pending or, to the best of the Company's knowledge, threatened claims, lawsuits or actions (other than routine claims for benefits in the ordinary course) asserted or instituted against, and the Company has no knowledge of any threatened litigation or claims against, the assets of any Pension Plan or its related trust or against any fiduciary of a Pension Plan with respect to the operation of such Pension Plan. Neither the Company nor any of its Subsidiaries has received notice of any pending investigations, inquires or audits with respect to any Pension Plan by any regulatory agency. Neither the Company nor any of its Subsidiaries has engaged in any prohibited transactions, within the meaning of section 406 of ERISA or section 4975 of the IRC, in connection with any Pension Plan. Neither the Company nor any of its Subsidiaries maintains or has established any Pension Plan which is a welfare benefit plan within the meaning of section 3(1) of ERISA which provides for retiree medical liabilities or continuing benefits or coverage for any participant or any beneficiary of any participant after such participant's termination of employment except as may be required by the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA") and the regulations thereunder, and at the expense of the participant or the beneficiary of the participant. The Company and each of its Subsidiaries that maintains a Pension Plan that is a welfare benefit plan within the meaning of section 3(1) of ERISA has complied with any applicable notice and continuation requirements of COBRA and the regulations thereunder. To the best of the Company's knowledge, none of the Company or any of its Subsidiaries maintains, has established, or has ever participated in, a multiple employer welfare benefit arrangement within the meaning of section 3(40)(A) of ERISA. SECTION 7.15. TAXES AND FILING OF TAX RETURNS. The Company and each of its Subsidiaries has filed all Tax returns required to have been filed by it or has legally extended such returns and has paid all Taxes shown to be due and payable on such returns, including interest and penalties, and all other Taxes which are payable by the Company or any of its Subsidiaries. The Company does not know of any proposed Tax assessment against the Company or any of its Subsidiaries and all Tax liabilities of the Company and each of its Subsidiaries are adequately provided for and no Tax liability of the Company or any of its Subsidiaries has been asserted by the Internal Revenue Service or any other Governmental Authority for Taxes in excess of those already paid. SECTION 7.16. TITLE TO ASSETS. The Company and its Subsidiaries have Defensible Title to all Oil and Gas Interests of the Company and its Subsidiaries included or reflected in the Ownership Interests and all of their other assets, subject only to Permitted Encumbrances. Each Oil and Gas Interest included or reflected in the Ownership Interest entitles the Company and its Subsidiaries to receive not less than the undivided interest set forth in (or derived from) the Ownership Interests of all Hydrocarbons produced, saved and sold from or attributable to such Oil and Gas Interest, and the portion of such costs and expenses of operation and development of such Oil and Gas Interest that is borne or to be borne by the Company and its Subsidiaries is not greater than the undivided interest set forth in (or derived from) the Ownership Interests. All proceeds from the sale of each of the Company's and the Subsidiaries' shares of the Hydrocarbons being produced from its Oil and Gas Interests are currently being paid in full to such party by the purchasers thereof on a timely basis and none of such proceeds are currently being held in suspense by such purchaser or any other party, 28 except as set forth on SCHEDULE 7.16 of the Disclosure Schedule. SECTION 7.17. LICENSES, PERMITS, ETC. The Company and each of its Subsidiaries possess all franchises, certificates, licenses, permits, consents, authorizations, exemptions and orders of Governmental Authorities as are necessary to carry on their respective businesses as now being conducted and as proposed to be conducted, except to the extent a failure to have such franchises, certificates, licenses, permits, consents, authorizations, exemptions and orders could not have a Material Adverse Effect. SECTION 7.18. PROPRIETARY RIGHTS. The Company and each of its Subsidiaries has ownership of, or valid licenses to use, all trademarks, copyrights, patents and other proprietary rights used in their respective businesses. To the best of the Company's knowledge, the operation of the businesses of the Company and its Subsidiaries does not infringe any patent, copyright, trademark or other proprietary rights of others, and, neither the Company nor any of its Subsidiaries has received any notice from any third party of any such alleged infringement by the Company or any of its Subsidiaries. The Company and each of its Subsidiaries has taken reasonable steps to establish and preserve its respective ownership of all patents, copyrights, trademarks, trade secrets and other proprietary rights. The Company is not aware of any infringement by others of its or any its Subsidiaries' patents, copyrights, trademarks or other proprietary rights. SECTION 7.19. COMPLIANCE WITH LAW. To the Knowledge of the Company, the business and operations of the Company and each of its Subsidiaries have been and are being conducted in accordance with all applicable Laws. SECTION 7.20. ENVIRONMENTAL MATTERS. (a) Except as set forth on SCHEDULE 7.20 of the Disclosure Schedule, (i) the reserves reflected in the Company's Financial Statements relating to environmental matters were adequate under GAAP as of the date of such financial statements, and neither the Company nor its Subsidiaries has incurred any material liability in respect of any environmental matter since the that date, and (ii) the SEC Documents include all information relating to environmental matters required to be included therein under the rules and regulations of the Commission applicable thereto. (b) Except as set forth in SCHEDULE 7.20 of the Disclosure Schedule: (i) Each of the Company and its Subsidiaries has conducted its business and operated its assets, and is conducting its business and operating its assets, in material compliance with all Environmental Laws. (ii) Neither the Company nor any of its Subsidiaries has been notified by any Governmental Authority that any of the operations or assets of the Company or its Subsidiaries is the subject of any investigation or inquiry by any Governmental Authority evaluating whether any material remedial action is needed to respond to a release of Hazardous Substance or to the improper storage or disposal (including storage or disposal at 29 offsite locations) of any Hazardous Substance. (iii) Neither the Company nor any of its Subsidiaries and no other Person has filed any notice under any federal, state or local law indicating that (i) the Company or its Subsidiaries is responsible for the improper release into the environment, or the improper storage or disposal of any Hazardous Substance, or (ii) any Hazardous Substance is improperly stored or disposed of upon any property of the Company or its Subsidiaries. (iv) Neither the Company nor any of its Subsidiaries has any Substance contingent liability in connection with (i) release into the environment at or on the property now or previously owned or leased by the Company or its Subsidiaries, or (ii) the storage or disposal of any Hazardous Substance. (v) Neither the Company nor any of its Subsidiaries has received any claim, complaint, notice, inquiry or request for information which remains unresolved as of the date hereof with respect to any alleged violation of any Environmental Laws or regarding potential liability under any Environmental Laws relating to operations or conditions of any facilities or property owned, leased or operated by the Company or its Subsidiaries. (vi) There are no sites, locations or operations at which the Company or its Subsidiaries are currently undertaking, or have completed, any remedial or response action relating to any such disposal or release, as required by Environmental Laws. (vii) There are no physical or environmental conditions existing on any property owned or leased by the Company or any Subsidiary resulting from the Company's or any Subsidiary's operations or activities, past or present, at any location, that would give rise to any on-site or off-site remedial obligations under any applicable Environmental Laws, other than normal and ordinary remedial work associated with plugging and abandoning of oil and gas facilities. SECTION 7.21. Intentionally Left Blank. SECTION 7.22. FISCAL YEAR. The Company's fiscal year is from January 1 to December 31. SECTION 7.23. NO DEFAULT. Neither a Default nor an Event of Default has occurred. SECTION 7.24. INSURANCE. SCHEDULE 7.24 of the Disclosure Schedule contains a complete and accurate list and description of all insurance policies maintained by the Company as of the date hereof. SECTION 7.25. GOVERNMENT REGULATION. Neither the Company nor any of its Subsidiaries is subject to regulation under the Public Utility Holding the Company Act of 1935, the Interstate Commerce Act (as either of the preceding acts have been amended), or any other Law which regulates the incurring by the 30 Company or any of its Subsidiaries of Debt, including, but not limited to, Laws relating to common contract carriers of the sale of electricity, gas, steam, water or other public utility services. SECTION 7.26. SECURITIES LAWS. Assuming SFP's representations made herein are true and correct, the offer, issuance and sale of the Securities (a) are and will be exempt from the registration and prospectus delivery requirements of the Securities Act, (b) have been registered or qualified (or are exempt from registration and qualification) under the registration, permit or qualification requirements of all applicable state securities Laws, and (c) are and will be accomplished in conformity with all other federal and applicable state securities Laws. SECTION 7.27. BROKERS AND FINDERS. SCHEDULE 7.27 of the Disclosure Schedule sets forth all arrangements (including amounts payable by the Company or any of its Subsidiaries in connection therewith) pursuant to which any Person has, or as a result of the Closing Transactions will have, any right or valid claim against the Company or any of its Subsidiaries for any commission, fee or other compensation as an investment banker, finder or broker, or in any similar capacity. No Person engaged by the Company has or will have any right or valid claim against SFP for any such commission, fee or other compensation. The Company will indemnify and hold SFP harmless against any liability or expense arising out of, or in connection with, any such right or claim (including, without limitation, claims arising out of the matters disclosed on SCHEDULE 7.27 of the Disclosure Schedule). SECTION 7.28. SEC DOCUMENTS. The Company is current in its obligations to file all periodic reports and proxy statements with the Commission required to be filed under the Exchange Act. SFP has had available to it a true and correct complete copy of each report, schedule, Registration Statement and definitive proxy statement filed by the Company with the Commission since October 4, 1993, and prior to the date of this Agreement (the "SEC Documents"), which are all the documents (other than preliminary material) that the Company was required to file with the Commission since such date. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Securities Act or the Exchange Act as the case may be, and the rules and regulations of the Commission thereunder applicable to such SEC Documents, and none of the SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. SECTION 7.29. OIL AND GAS OPERATIONS. Except as set forth on SCHEDULE 7.29 of the Disclosure Schedule: (a) All wells included in the Oil and Gas Interests of the Company or its Subsidiaries (the "Wells") have been drilled and (if completed) completed, operated and produced in accordance with generally accepted oil and gas field practices and in compliance in all material respects with applicable oil and gas leases and applicable laws, rules, regulations. The Wells have been drilled and completed within the limits permitted by contract, pooling or unit agreement, and by law; and all drilling and completion of the Wells and all development and operations have been conducted in compliance with all applicable laws, ordinances, rules, regulations and permits, and judgments, orders and decrees of any court or governmental body or agency. No Well is subject to penalties on allowables because of any overproduction or any other violation of applicable 31 laws, rules, regulations or permits or judgments, orders or decrees of any court or governmental body or agency that would prevent such Well from being entitled to its full legal and regular allowable from and after the Closing Date as prescribed by any court or governmental body or agency. (b) There are no Wells that (i) the Company is currently obligated by law or contract to plug and abandon; (ii) the Company will be obligated by law or contract to plug and abandon with the lapse of time or notice or both because the Well is not currently capable of producing in commercial quantities; (iii) are subject to exceptions to a requirement to plug and abandon issued by a regulatory authority having jurisdiction over the applicable lease; or (iv) to the best knowledge of the Company, have been plugged and abandoned but have not been plugged in accordance with all applicable requirements of each regulatory authority having jurisdiction over the Oil and Gas Interests. (c) With respect to the oil, gas and other mineral leases, unit agreements, pooling agreements, communitization agreements and other documents creating interests comprising the Oil and Gas Interests: (a) the Company has fulfilled all requirements in all material respects for filings, certificates, disclosures of parties in interest, and other similar matters contained in (or otherwise applicable thereto by law, rule or regulation) such leases or other documents and are fully qualified to own and hold all such leases or other interests; (b) there are no provisions applicable to such leases or other documents which increase the royalty share of the lessor thereunder, and (c) upon the establishment and maintenance of production in commercial quantities, the leases and other interest are to be in full force and effect over the economic life of the property involved and do not have terms fixed by a certain number of years. (d) Proceeds from the sale of Hydrocarbons produced from the Company's and its Subsidiaries' Oil and Gas Interests are being received by the Company and its Subsidiaries in a timely manner and are not being held in suspense for any reason (except for amounts, individually or in the aggregate, not in excess of $100,000 and held in suspense in the ordinary course of business). (e) Seller is not obligated, by virtue of a prepayment arrangement, a "take or pay" arrangement, a production payment or any other arrangement to deliver Hydrocarbons produced from the Oil and Gas Interests at some future time without then or thereafter receiving full payment therefor. SECTION 7.30. FINANCIAL AND COMMODITY HEDGING. SCHEDULE 7.30 of the Disclosure Schedule accurately summarizes the outstanding Hydrocarbon and financial hedging positions of the Company and its Subsidiaries (including fixed price controls, collars, swaps, caps, hedges and puts) as of the date reflected on said Schedule. From the date of this Agreement to the date of Closing, the Company and its Subsidiaries will not enter into any new hedging positions without SFP's prior written consent. 32 SECTION 7.31. BOOKS AND RECORDS. All books, records and files of the Company and its Subsidiaries (including those pertaining to the Company's or its Subsidiaries' Oil and Gas Interests, wells and other assets, those pertaining to the production, gathering, transportation and sale of Hydrocarbons, and corporate, accounting, financial and employee records) (a) have been prepared, assembled and maintained in accordance with usual and customary policies and procedures and (b) fairly and accurately reflect the ownership, use, enjoyment and operation by the Company and its Subsidiaries of their respective assets. SECTION 7.32. RESERVE REPORT. To the knowledge of the Company, the estimates of proved reserves of oil and natural gas prepared by Lee Keeling & Associates, Inc. and H. J. Gruy and Associates, Inc. (together, the "Reserve Engineer") as of December 31, 1998 (the "Reserve Report"): (i) are reasonable; and (ii) were prepared in accordance with generally accepted petroleum engineering and evaluation principles as set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserve Information promulgated by the Society of Petroleum Engineers. The engineering information and production data used in the preparation of the Reserve Report, which information and data have been available to SFP, are the information and data which are used by the Company in good faith in the ordinary course of business. The factual information underlying the estimates of the reserves of the Company and the Subsidiaries, which was supplied by the Company to the Reserve Engineers for the purpose of preparing the Reserve Report, including, without limitation, production, volumes, sales prices for production, contractual pricing provisions under oil or gas sales or marketing contracts under hedging arrangements, costs of operations and development, and working interest and net revenue information relating to the Company's and the Subsidiaries' ownership interests in properties, was true and correct in all material respects on the date of such Reserve Report; the estimates of future capital expenditures and other future exploration and development costs supplied to the Reserve Engineers were prepared in good faith and with a reasonable basis; the information provided to the Reserve Engineers for purposes of preparing the Reserve Report was prepared in accordance with customary industry practices; other than normal production of the reserves and intervening oil and gas price fluctuations, the Company is not as of the date hereof and as of the Closing Date will not be, aware of any facts or circumstances that would result in a materially adverse change in the reserves in the aggregate, or the aggregate present value of future net cash flows therefrom, as described in the Reserve Report. SECTION 7.33. NATURE OF COMPANY ASSETS. The assets of the Company and of the Subsidiaries consist solely of (i) reserves of oil and gas, rights to reserves of oil and gas and associated exploration and production assets with a fair market value not exceeding $500 million and (ii) other assets with a fair market value not exceeding $15 million. For purposes of this Section 7.33, the term "associated exploration and production assets" shall have the meaning set forth in Section 802.3 of the Rules promulgated pursuant to HSR Act. SECTION 7.34. FULL DISCLOSURE. No information heretofore furnished by or on behalf of the Company or any of its Subsidiaries to SFP for the purposes of this Agreement or any other Transaction Document or any transaction contemplated hereby or thereby, contained, and no written information hereafter furnished by or on behalf of the Company or any of its Subsidiaries to SFP for purposes of this Agreement or any other Transaction Document or any transaction contemplated hereby or thereby will contain, any untrue statement of a material fact or omit a material fact necessary to make the statements therein not misleading. There is no fact or circumstance known to the Company which may have a Material Adverse Effect on the 33 Company or any of its Subsidiaries which has not been disclosed to SFP. SECTION 7.35. YEAR 2000 COMPLIANCE. The Company's disclosure in its Annual Report on Form 10-KSB for the year ended December 31, 1998 under the heading "Year 2000 Compliance" accurately states the Company's statement of readiness and contingency plans relative to the computer software which is material to the conduct of the business and operations of the Company and its Subsidiaries being capable of recording, storing, processing and presenting calendar dates falling on or after January 1, 2000 in substantially the same manner and with the same functionality as such software records, stores, processes and presents such calendar dated falling on or before December 31, 1999. ARTICLE VIII REPRESENTATIONS AND WARRANTIES OF SFP In order to induce the Company to issue and sell the Securities to SFP hereunder, SFP hereby represents and warrants to the Company as follows: SECTION 8.1. PARTNERSHIP EXISTENCE AND POWER. SFP (a) is a limited partnership, duly organized, validly existing and in good standing under the Laws of its jurisdiction of incorporation, (b) has all power and authority necessary to carry on its business as now conducted and as proposed to be conducted. SECTION 8.2. PARTNERSHIP AND GOVERNMENTAL AUTHORIZATION; CONTRAVENTION. The execution, delivery and performance of this Agreement and the other Transaction Documents by SFP are within its powers, have been duly authorized by all necessary action, require no action by or in respect of, or filing with, any Governmental Authority (other than filings with any applicable securities regulatory authorities to perfect exemptions from the registration or qualification requirements of applicable securities Laws and which will be made immediately following the Closing Date), and, except for matters which have been waived in writing by the appropriate Person, do not contravene, or constitute a default under, any provision of applicable Law or of the Charter Documents or of any material judgment, injunction, order, decree or Material Agreement binding upon SFP or its assets, or result in the creation or imposition of any Lien on any asset of SFP. SECTION 8.3. BINDING EFFECT. This Agreement constitutes the valid and binding agreement of SFP; each other Transaction Document when executed and delivered in accordance with this Agreement, will constitute the valid and binding obligation of SFP, in each case enforceable in accordance with its terms except as (i) the enforceability thereof may be limited by bankruptcy, insolvency or similar Laws affecting creditors rights generally, and (ii) the availability of equitable remedies may be limited by equitable principles of general applicability. SECTION 8.4. BROKERS AND FINDERS. No Person engaged by SFP has or will have any right or valid claim against the Company for any commission, fee or other compensation. SFP will indemnify and hold the Company harmless against any liability or expense arising out of, or in connection with, any such right or claim. 34 SECTION 8.5. TAXES AND FILING OF TAX RETURNS. SFP has filed all Tax returns required to have been filed by it or has legally extended such returns and has paid all Taxes shown to be due and payable on such returns, including interest and penalties, and all other Taxes which are payable by SFP. SFP does not know of any proposed Tax assessment against SFP and all Tax liabilities of SFP are adequately provided for and no Tax liability of SFP has been asserted by the Internal Revenue Service or any other Governmental Authority for Taxes in excess of those already paid. SECTION 8.6 INTENTIONALLY OMITTED. ARTICLE IX COVENANTS SECTION 9.1. MAINTENANCE OF INSURANCE. The Company will, and will cause each of its Subsidiaries to, at all times maintain or cause to be maintained insurance issued by insurers of recognized responsibility covering such risks and in such amounts as are customary in the case of companies of established reputation engaged in the same or similar business and similarly situated. SECTION 9.2. PAYMENT OF TAXES AND CLAIMS. The Company will, and will cause each of its Subsidiaries to, pay when due (a) all Taxes imposed upon it or its respective assets and, with respect to its respective franchises, business, income or profits, pay such Taxes before any material penalty or interest accrues thereon, and (b) all material claims (including, without limitation, claims for labor, services, materials and supplies) for sums which have become due and payable; PROVIDED, however, no payment of Taxes or claims shall be required if (i) the amount, applicability or validity thereof is being contested in good faith by appropriate action promptly initiated and diligently conducted in accordance with good business practices and no material part of the property or assets of each holder of Securities is the subject of any pending levy or execution, and (ii) the Company has notified each holder of Securities of such circumstances in reasonable detail. SECTION 9.3. COMPLIANCE WITH LAWS AND DOCUMENTS. The Company will, and will cause each of its Subsidiaries to, comply with the provisions of (a) all Laws, (b) its Charter Documents, and (c) every Material Agreement to which the Company or any of its Subsidiaries is a party or by which the Company's or any of its Subsidiaries' properties are bound. SECTION 9.4. OPERATION OF PROPERTIES AND EQUIPMENT. The Company will, and will cause each of its Subsidiaries to, at all times, maintain, preserve and keep all operating equipment used or useful in the operation of their respective businesses in proper repair, working order and condition, and make all necessary or appropriate repairs, renewals, replacements, additions and improvements thereto so that the efficiency of such equipment shall at all times be properly preserved and maintained; PROVIDED, that, no item of operating equipment need be so repaired, renewed, replaced, added to or improved, if the Company shall in good faith determine that such action is not necessary or desirable for the continued efficient and profitable operation of the Company's and its Subsidiaries' businesses. 35 SECTION 9.5. ADDITIONAL DOCUMENTS. The Company will, and will cause each of its Subsidiaries to, cure promptly any defects in the creation and issuance of the Securities, and the execution and delivery of this Agreement and the other Transaction Documents, and, at the Company's sole expense, promptly and duly execute and deliver, and cause each of its Subsidiaries to promptly execute and deliver, to the holders of the Securities, upon reasonable request, all such other and further documents, agreements and instruments in compliance with or accomplishment of the covenants and agreements of the Company and each of its Subsidiaries in this Agreement and the other Transaction Documents, all as may be reasonably necessary or appropriate in connection therewith. SECTION 9.6. MAINTENANCE OF BOOKS AND RECORDS. The Company will, and will cause each of its Subsidiaries to, maintain proper books of record and account in which true and correct entries in conformity with GAAP shall be made on a timely basis of all dealings and transactions in relation to the Company's and its Subsidiaries' businesses and activities. SECTION 9.7. ENIVIRONMENTAL MATTERS. (a) The Company will, and will cause each of its Subsidiaries to, comply with all Environmental Law and Laws applicable to their respective properties and operations, including, without limitation, all Hazardous Substances transportation, storage, disposal, remediation and similar requirements of applicable Environmental Law and Laws. (b) Notwithstanding any other provision contained within this Agreement or the other Transaction Documents, the Company shall immediately orally notify each holder of Securities of any Hazardous Discharge or the receipt of any Environmental Complaint relating to any property or assets owned by the Company or any of its Subsidiaries or affecting any properties or assets owned or leased by other Persons and shall furnish each holder of Securities with written notice of such Hazardous Discharge or Environmental Complaint within five (5) days of the oral notification. SECTION 9.8 ACCESS TO INFORMATION. The Company will (and will cause each of its Subsidiaries to) afford SFP and its representatives (including without limitation directors, officers and employees of SFP and its Affiliates, and counsel, accountants and other professionals retained by SFP) such access, during normal business hours throughout the period to the Closing Date, to the Company's books, records (including without limitation Tax returns and non-restricted work papers of the Company's independent auditors), properties, personnel and to such other information as SFP may reasonably request and will permit SFP to make such inspections as SFP may reasonably request and will cause the officers of the Company and those of its Subsidiaries to furnish SFP with such financial and operating data and other information with respect to the business, properties and personnel of the Company and its Subsidiaries as SFP may from time to time reasonably request, provided, however, that no investigation pursuant to this section will affect or be deemed to modify any of the representations or warranties made by the Company in this Agreement. SFP will afford the Company and its representatives (including without limitation directors, officers and employees of the Company and its Affiliates, and counsel, accountants and other professionals retained by the Company) such access, during normal business hours throughout the period to the Closing Date, to SFP's books, records 36 (including without limitation Tax returns and non-restricted workpapers of SFP's independent auditors), properties, personnel and to such other information as the Company may reasonably request and will permit the Company to make such inspections as the Company may reasonably request and will cause the officers of SFP to furnish the Company with such financial and operating data and other information with respect to the business, properties and personnel of SFP as the Company may from time to time reasonably request, provided, however, that no investigation pursuant to this section will affect or be deemed to modify any of the representations or warranties made by SFP in this Agreement. SECTION 9.9 CONDUCT OF THE BUSINESS OF THE COMPANY. Except as contemplated by this Agreement or to the extent that SFP shall otherwise consent in writing, during the period from the date of this Agreement to the Closing, the Company will conduct its operations only in, and the Company will not take any action except in the ordinary course of business and the Company will use all reasonable efforts to preserve intact in all material respects its business organizations, assets, prospects and advantageous business relationships, to keep available the services of its officers and key employees and to maintain satisfactory relationships with its licensors, licensees, suppliers, contractors, distributors, customers and others having advantageous business relationships with it. Without limiting the generality of the foregoing, except as contemplated by this Agreement, the Company will not, without the prior written consent of SFP: (a) amend its Charter Documents; (b) split, combine or reclassify any shares of its capital stock, declare, pay or set aside for payment any dividend or other distribution in respect of its capital stock, or directly or indirectly, redeem, purchase or otherwise acquire any shares of its capital stock or other securities; (c) authorize for issuance, issue, sell or deliver or agree or commit to issue, sell, or deliver (whether through the issuance or granting of any options, warrants, commitments, subscriptions, rights to purchase or otherwise) any of its capital stock or any securities convertible into or exercisable or exchangeable for shares of its capital stock, except the Company may, effective as of Closing, amend its Amended and Restated 1995 Stock Option and Stock Appreciation Rights Plan to provide that options granted to optionees prior to the date of this Agreement may be exercised for a one (1) year period from the following dates: (i) the date of termination of an optionee whose employment with the Company is terminated without cause by the Company during the six (6) month period commencing with Closing, (ii) the date of termination of an optionee's employment whose employment with Company is terminated by employee with "Good Reason" as defined in such employee's written employment agreement, or, (iii) from the date of resignation of a director of the Company who resigns at Closing; provided, that the form of any such amendment to such plan be approved in writing by SFP. (d) incur any material liability or obligation (absolute, accrued, contingent or otherwise) other than in the ordinary course of business or issue any debt securities or assume, guarantee, endorse or otherwise as an accommodation become responsible for, the obligations of any other individual or entity, or change any assumption underlying, or methods of calculating, any bad debt, contingency or other reserve; (e) enter into, adopt, or amend any employment agreement or Pension Plan, or grant, 37 or become obligated to grant, any increase in the compensation payable or to become payable to any of its officers or directors or any general increase in the compensation payable or to become payable to its employees. (f) acquire (by merger, consolidation, or acquisition of stock or assets) any corporation, partnership or other business organization or division thereof or make any investment either by purchase of stock or securities, contributions to capital, property transfer, or purchase of properties or assets of any Person; (g) pay, discharge or satisfy any material claims, liabilities or obligations (absolute, accrued, contingent or otherwise), other than the payment, discharge or satisfaction in the ordinary course of business of liabilities reflected or reserved against on the Company Financial Statements or subsequently incurred in the ordinary course of business, or disclosed pursuant to this Agreement; (h) acquire (including by lease) any material assets or properties or dispose of, mortgage or encumber any material assets or properties, other than in the ordinary course of business; (i) waive, release, grant or transfer any material rights or modify or change in any material respect any material existing license, lease, contract or other document, other than in the ordinary course of business and consistent with past practice; or (j) take any action or agree, in writing or otherwise, to take any of the foregoing actions or any action which would at any time make any representation or warranty in Article VII untrue or incorrect. SECTION 9.10 INTENTIONALLY OMITTED. SECTION 9.11 INTENTIONALLY OMITTED. ARTICLE X DEFAULTS; TERMINATION SECTION 10.1. EVENTS OF DEFAULT. If one or more of the following events (collectively, "EVENTS OF DEFAULT" and individually, an "EVENT OF DEFAULT") shall have occurred and be continuing: (a) the Company shall fail to pay when due any principal or interest on the Note; (2) the Company shall fail to pay when due any fees, expenses, reimbursements, indemnification payments or other monetary obligations when due under any of the Transaction Documents and such failure shall continue for ten (10) days following the due date of such payment; (3) the Company or any of its Subsidiaries shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or 38 its Debts under any bankruptcy, insolvency or other similar Law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its Debts as they become due, or shall take any corporate action to authorize any of the foregoing; or (4) an involuntary case or other proceeding shall be commenced against the Company or any of its Subsidiaries seeking liquidation, reorganization or other relief with respect to it or its Debts under any bankruptcy, insolvency or other similar Law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of sixty (60) days; or an order for relief shall be entered against the Company under the federal bankruptcy Laws as now or hereafter in effect; then, so long as any such event is continuing, any Noteholder shall without notice or demand of any kind (including, without limitation, notice of intention to accelerate and acceleration) (unless any such notice is expressly provided for herein or in the other Transaction Documents), all of which are hereby waived, take any and all actions as may be permitted by the Transaction Documents including, declaring the obligations in respect of the Note owned by such Noteholder (including all accrued interest thereon) to be, and such obligations shall thereupon become, immediately due and payable. SECTION 10.2 TERMINATION. This Agreement may be terminated, whether before or after approval of this Agreement by the stockholders of the Company, at any time prior to the Closing: (a) By mutual written consent of SFP and the Company; (b) By SFP if (i) there has been a breach of the representations and warranties made by the Company in this Agreement or (ii) the Company has failed to comply in any material respect with any of its covenants or agreements contained in this Agreement and such failure has not been, or cannot be, cured within a reasonable time after notice and demand for cure thereof; (c) By the Company if (i) there has been a breach of the representations and warranties made by SFP in this Agreement or (ii) SFP has failed to comply in any material respect with any of the its covenants or agreements contained in this Agreement and such failure has not been, or cannot be, cured within a reasonable time after notice and demand for cure thereof; SECTION 10.3. EFFECT OF TERMINATION. If this Agreement is terminated by either the Company or SFP pursuant to the provisions of SECTION 10.2, this Agreement shall forthwith become void and there shall be no further obligation on the part of any party hereto or its respective Affiliates, directors, officers, or stockholders, except pursuant to, the provisions of Section 11.3; provided, however, that a termination of this 39 Agreement shall not relieve any party hereto from any libility for damages incurred as a result of a breach by such party of its representations, warranties, covenants, agreements or other obligations hereunder occurring prior to such termination. ARTICLE XI MISCELLANEOUS SECTION 11.1. NOTICES. All notices, requests and other communications to any party hereunder shall be in writing (including bank wire, telex, telecopy or similar writing) and shall be given to such party at its address, telex or telecopy number set forth on the signature pages hereof or such other address, telex or telecopy number as such party may hereafter specify for the purpose by notice to the other party. Each such notice, request or other communication shall be effective (i) if given by telex or telecopy, when such telex or telecopy is transmitted to the telex or telecopy number specified in this SECTION 11.1 and the appropriate answer back is received or receipt is otherwise confirmed, (ii) if given by mail, three (3) Business Days after deposit in the mails with first class postage prepaid, addressed as aforesaid, or (iii) if given by any other means, when delivered at the address specified in this SECTION 11.1. SECTION 11.2. NO WAIVERS. No failure or delay by any holder of Securities in exercising any right, power or privilege hereunder or under any other Transaction Document shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by Law or in any of the other Transaction Documents. SECTION 11.3. EXPENSES; INDEMNIFICATION. (a) Except as provided in SECTION 6.1(F), all expenses incurred in connection with this Agreement shall be paid by the party incurring such expenses. (b) The Company agrees to indemnify and hold harmless, SFP, its shareholders and each subsequent holder of Securities and their respective directors, officers, employees, agents, successors and assigns (collectively, the "INDEMNIFIED PARTIES") from and against any and all liabilities, losses, damages, costs and expenses of any kind (including, without limitation, the reasonable fees and disbursements of counsel for the Indemnified Parties in connection with any investigative, administrative or judicial proceeding, whether or not any such Indemnified Party shall be designated a party thereto) which may be incurred by any Indemnified Party relating to or arising out of (a) this Agreement, the other Transaction Documents, the Closing Transactions and all other transactions contemplated hereby or thereby. (c) The Company further agrees to defend, indemnify and hold harmless each Indemnified Party from and against any and all losses, liabilities (including strict liability), damages (including for bodily injury and property damage), costs, expenses (including attorneys' fees and environmental consultants' expenses), relating to any of the properties or assets securing the Obligations, that any Indemnified Party may incur in connection with any Environmental Complaint or Hazardous Discharge or any violation of any Environmental Law and Laws regardless of whether or not caused by, or within the control 40 of, the Company, or any of its Subsidiaries as tenant, sub-tenant or prior owner or occupant of any of the properties or assets securing the Obligations or any properties owned or leased by other parties, and regardless of whether such claim is brought by Governmental Authorities or private parties. This indemnity shall survive the repayment of the Obligations and the discharge or release of any Lien granted hereunder or in any other Transaction Document. (d) (i) Promptly after receipt by an Indemnified Party of notice of the commencement of any action, suit or other proceeding against an Indemnified Party with respect to which an Indemnified Party demands indemnification hereunder, such Indemnified Party shall promptly notify the Company in writing of the commencement thereof, provided that the failure to so notify the Company shall not relieve it from any liability that it may have to an Indemnified Party, except to the extent that such failure has materially prejudiced the Company's ability to provide a defense in the proceeding. The Company shall have the right to assume the defense of any such proceeding, but the Indemnified Parties collectively shall have the right, at the expense of the Company, to retain not more than one counsel of their choice to represent the Indemnified Parties in such proceeding. The counsel for the Indemnified Parties may participate in, but not control, the defense of such proceeding. (ii) The indemnity provided for herein shall cover the amount of any settlements entered into by an Indemnified Party in connection with any claim for which an Indemnified Party may be indemnified hereunder; provided that, no settlement binding on an Indemnified Party may be made without the consent of an Indemnified Party and the Company (which consent shall not be reasonably withheld). (iii) Any indemnification hereunder shall be made no later than 45 days after receipt by the Company of the written request of the Indemnified Party. THE PARTIES RECOGNIZE THAT AN INDEMNITEE MAY BE ENTITLED TO INDEMNIFICATION HEREUNDER FROM ACTS OR OMISSIONS THAT ARISE OUT OF OR RESULT FROM THE ORDINARY, STRICT, SOLE OR CONTRIBUTORY NEGLIGENCE OF SUCH INDEMNITEE. (e) SFP hereby covenants and agrees with the Company that SFP shall indemnify the Company and hold it harmless from, against and in respect of any and all costs, losses, claims, liabilities, fines, penalties, damages and expenses (including interest which may be imposed in connection therewith and court costs and reasonable fees and disbursements of counsel) incurred by it resulting from any misrepresentation, breach of warranty or nonfulfillment of any agreement, covenant or obligation by SFP made in this Agreement (including without limitation any certificate or instrument delivered in connection herewith. SECTION 11.4. AMENDMENTS AND WAIVERS; SALE OF INTEREST. Any provision of this Agreement and the other Transaction Documents may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Company and (a) the Majority Noteholder and (b) the Majority Warrant Holder. The Company hereby consents to any participation, sale, assignment, transfer or other disposition which complies with ARTICLE V, at any time or times hereafter, of any Securities, this Agreement and any of the other Transaction Documents, or of any portion hereof or thereof, including, without limitation, 41 SFP's rights, title, interests, remedies, powers, and duties hereunder or thereunder, subject to compliance with applicable Laws and the provisions of the Compass Senior Debt Documents subject to the requirement that any such assignee, transferee or purchaser shall agree in writing to become bound by the terms of this Agreement and the other Transaction Documents. SECTION 11.5. SURVIVAL. All representations, warranties and covenants made by the Company herein or in any certificate or other instrument delivered by it or in its behalf under the Transaction Documents shall be considered to have been relied upon by SFP and shall survive the delivery to SFP of such Transaction Documents and the purchase of the Securities, regardless of any investigation made by or on behalf of SFP. All representations, warranties and covenants made by SFP herein or in any certificate or other instrument delivered by it or in its behalf under the Transaction Documents shall be considered to have been relied upon by the Company and shall survive the delivery to the Company of such Transaction Documents and the purchase of the Securities, regardless of any investigation made by or on behalf of the Company. SECTION 11.6. LIMITATION ON INTEREST. Regardless of any provision contained in the Transaction Documents, no Noteholder shall ever be entitled to receive, collect, or apply, as interest on the Note, any amount in excess of the Maximum Lawful Rate, and in the event any Noteholder ever receives, collects or applies as interest any such excess, such amount which would be deemed excessive interest shall be deemed a partial prepayment of principal and treated hereunder as such; and if the Note is paid in full, any remaining excess shall promptly be paid to the Company. In determining whether or not the interest paid or payable under any specific contingency exceeds the Maximum Lawful Rate, the Company and the Noteholder shall, to the extent permitted under applicable Law, (a) characterize any nonprincipal payment as an expense, fee or premium rather than as interest, (b) exclude voluntary prepayments and the effects thereof, and (c) amortize, prorate, allocate and spread, in equal parts, the total amount of the interest throughout the entire contemplated term of the Note, so that the interest rate is the Maximum Lawful Rate throughout the entire term of the Note; PROVIDED, HOWEVER, that, if the unpaid principal balance thereof is paid and performed in full prior to the end of the full contemplated term thereof, and if the interest received for the actual period of existence thereof exceeds the Maximum Lawful Rate, the Noteholder shall refund to the Company the amount of such excess and, in such event, the Noteholder shall not be subject to any penalties provided by any Laws for contracting for, charging, taking, reserving or receiving interest in excess of the Maximum Lawful Rate. SECTION 11.7. INVALID PROVISIONS. If any provision of the Transaction Documents is held to be illegal, invalid, or unenforceable under present or future Laws effective during the term thereof, such provision shall be fully severable, the Transaction Documents shall be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part thereof, and the remaining provisions thereof shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance therefrom. Furthermore, in lieu of such illegal, invalid, or unenforceable provision there shall be added automatically as a part of the Transaction Documents a provision as similar in terms to such illegal, invalid, or unenforceable provision as may be possible and be legal, valid and enforceable. SECTION 11.8. SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the 42 Company may not assign or otherwise transfer any of its rights or obligations under this Agreement. SECTION 11.9. GOVERNING LAW. THIS AGREEMENT AND THE TRANSACTION DOCUMENTS SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS. SECTION 11.10. COUNTERPARTS. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. SECTION 11.11. NO THIRD PARTY BENEFICIARIES. Except as provided in SECTION 11.3, it is expressly intended that there shall be no third party beneficiaries of the covenants, agreements, representations or warranties herein contained other than transferees or assignees of all or any part of SFP's interest hereunder. SECTION 11.12. FINAL AGREEMENT. THIS AGREEMENT AND THE OTHER TRANSACTION DOCUMENTS COLLECTIVELY REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS BETWEEN THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. SECTION 11.13. SUBMISSION TO JURISDICTION; WAIVER OF SERVICE AND VENUE. ANY SUIT, ACTION OR PROCEEDING BROUGHT BY SFP WITH RESPECT TO THIS AGREEMENT OR ANY OF THE OTHER TRANSACTION DOCUMENTS MAY BE BROUGHT IN THE COURTS OF THE STATE OF TEXAS, COUNTY OF DALLAS, OR IN THE FEDERAL COURTS LOCATED IN THE NORTHERN DISTRICT OF TEXAS, AS SFP MAY SELECT IN ITS SOLE DISCRETION. THE COMPANY HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURTS FOR THE PURPOSE OF ANY SUCH SUIT, ACTION OR PROCEEDING. THE COMPANY HEREBY IRREVOCABLE WAIVES ANY OBJECTIONS WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT BROUGHT IN THE COURTS LOCATED IN THE STATE OF TEXAS, COUNTY OF DALLAS, AND HEREBY WAIVES ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN ANY INCONVENIENT FORUM. SECTION 11.14. WAIVER OF RIGHT TO TRIAL BY JURY. SFP AND THE COMPANY EACH HEREBY WAIVE ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING UNDER THIS AGREEMENT, ANY TRANSACTION DOCUMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THEREWITH, OR (B) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR ANY OF THEM IN 43 RESPECT TO THIS AGREEMENT. SFP AND THE COMPANY EACH AGREE THAT THE OTHER MAY FILE A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. SECTION 11.15. PUBLIC ANNOUNCEMENTS. Except as may be required by applicable Law or this Section, SFP shall not issue any press release or otherwise make any public statement with respect to this Agreement or the transactions contemplated hereby without the prior written consent of the Company (which consent shall not be unreasonably withheld). Any such press release or public statement required by applicable Law shall only be made after reasonable notice to the other party. Upon execution of this Agreement, the Company shall make a press release in a form previously approved by SFP and promptly file a report on Form 8-K with the Commission. 44 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective Authorized Officers on the day and year first above written. COMPANY: MIDDLE BAY OIL COMPANY, INC. By: /s/ John J. Bassett Name: John J. Bassett ------------------------ Title: President ------------------------ Address for Notice: Middle Bay Oil Company, Inc. 1221 Lamar Street, Suite 1020 Houston, TX 77010 Fax: (713) 650-0352 SHOEMAKER FAMILY PARTNERS, LP By: /s/ Peter V. Shoemaker ------------------------- Name: Peter V. Shoemaker ------------------------- Title: Attorney in Fact ------------------------- Address for Notice: Shoemaker Family Partners, LP 60 Brushhill Road Kinnelon, NJ 07405 Fax: (310) 444-3833 45 EXHIBIT A SENIOR SUBORDINATE PROMISSORY NOTE THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THIS NOTE MAY NOT BE TRANSFERRED EXCEPT PURSUANT TO A VALID EXEMPTION COVERING SUCH TRANSFER. $50,000 Dallas, Texas __________________, 1999 FOR VALUE RECEIVED, the undersigned, MIDDLE BAY OIL COMPANY, INC, an Alabama corporation ("MAKER" or the "COMPANY") hereby promises to pay to the order of SHOEMAKER FAMILY PARTNERS, LP, a New Jersey limited partnership ("PAYEE"), not later than 2:00 P.M. (Dallas, Texas time), on the date when due, in Federal or other funds immediately available in Dallas, Texas, at Payee's offices at 60 Brushhill Road, Kinnelon, NJ 07405 or such other address, given to Maker by Payee, the principal sum of FIFTY THOUSAND AND NO/100 DOLLARS ($50,000), together with interest, as hereinafter described. Whenever any payment of principal of, or interest on, this Note shall be due on a day which is not a Business Day, the date for payment thereof shall be extended to the next succeeding Business Day. If the date for payment of principal is extended by operation of law or otherwise, interest thereon shall be payable for such extended time. This Note has been executed and delivered pursuant to, and is subject to and governed by, the terms of that certain Securities Purchase Agreement dated of even date herewith, by and between Maker and Payee (the "AGREEMENT"). This Note is the "Note" referred to in the Agreement. Unless otherwise defined herein or unless the context hereof otherwise requires, each term used herein with its initial letter capitalized has the meaning given to such term in the Agreement. This Note shall rank senior in right of payment to all Company notes and indebtedness other than the Compass Senior Debt. This Note shall rank pari passu with the 3TEC Note and that certain Senior Subordinate $100,000 Promissory Note dated of even date herewith payable to the order of Shoeinvest II, LP, a New Jersey limited partnership, without any preference or priority one over another. Maker reserves the right to prepay without premium or penalty, after thirty (30) days prior written notice to the Noteholder, the principal amount of the Note, in whole or in part, at any time after _______________, 2001. Maker promises to pay interest on the outstanding principal balance hereof, prior to the occurrence of an Event of Default, at a rate per annum equal to the lesser of (a) the Fixed Rate or (b) the Maximum Lawful Rate, in Federal or other funds immediately available in Dallas, Texas, at the offices of Payee above referenced. Interest shall accrue on the principal balance of the Note outstanding from time to time at the Fixed Rate; PROVIDED, that, interest shall accrue on any amounts past due and owing on the Note from the date due until paid at the Default Rate; PROVIDED FURTHER, that in no event shall the rate of interest charged hereunder exceed the Maximum Lawful Rate. Interest shall be payable on the Note as it accrues on December 1, 1999 and continuing on each March 1, June 1, September 1, and December 1 thereafter until maturity. Whenever any payment of principal of, or interest on, the Note shall be due on a day which is not a Business Day, the date for payment thereof shall be extended to the next succeeding Business Day. With respect to the first eight (8) quarterly interest payments payable hereunder commencing with the first such quarterly interest payment, the Company may, at least thirty (30) days prior to the subject payment date, elect to accrue and add to the principal of the Note up to fifty percent (50%) of the interest payment due and payable on such interest payment date. If such an election is made, the Company shall notify the Noteholder of the portion (up to 50%) of such quarterly interest payment which the Company elects to accrue and add to the principal of the Note. Interest shall be computed on the Note on the basis of the number of actual days elapsed, assuming that each calendar year consisted of 360 days. The entire outstanding principal balance of this Note and all accrued but unpaid interest thereon shall be due and payable in full in a single installment on ___________________, 2004. A Noteholder may elect to convert all or any portion of the amount of principal and accrued but unpaid interest on the Note as hereinafter provided. Each $3.00 (the "Conversion Price") of principal and accrued but unpaid interest on the Note shall be convertible into one share of Common Stock. The Conversion Price is subject to adjustment from time to time upon the occurrence of any of the events enumerated below: 1. In the event that the Company shall (a) declare a dividend on the Common Stock in shares of its capital stock (whether shares of such Common Stock or of capital stock of any other class of the Company), (b) split or subdivide the outstanding Common Stock, or (c) combine the outstanding Common Stock into a smaller number of shares, then (as a result of an event described in (a), (b) or (c)) the Conversion Price shall be adjusted to equal the product of the Conversion Price in effect immediately prior to such event multiplied by a fraction the numerator of which is equal to the number of shares of Common Stock outstanding on a Fully Diluted Basis (as defined below) immediately after the event and the denominator of which is equal to the number of shares of Common Stock outstanding on a Fully Diluted Basis immediately prior to such event. [Remainder of this page intentionally blank] 2. In the event that the Company shall (a) issue any shares of Common Stock without consideration or at a price per share less than the Conversion Price immediately prior to such issuance, or (b) issue options, rights or warrants to subscribe for or purchase such Common Stock (or securities convertible into such Common Stock) without consideration or at a price per share (or having a conversion price per share, if a security convertible into such Common Stock) less than the Conversion Price, then, effective upon such issuance, the Conversion Price shall be adjusted to equal the product obtained by multiplying the Conversion Price in effect immediately prior to the date of such issuance by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding on a Fully Diluted Basis immediately prior to such issuance PLUS the number of shares of Common Stock which the aggregate offering price of the total number of shares of such Common Stock so to be issued or to be offered for subscription or purchase (or the aggregate initial conversion price of the convertible securities so to be offered) would purchase at the Conversion Price immediately prior to such issuance, and the denominator of which shall be the number of shares of Common Stock outstanding on a Fully Diluted Basis immediately after such issuance. In case such consideration may be paid in a consideration part or all of which shall be in a form other than cash, the value of such consideration shall be as determined by an investment banking firm reasonably acceptable to the Noteholder (the cost of the engagement of said investment banking firm to be borne by the Company). Shares of such Common Stock owned by or held for the account of the Company or any Subsidiary thereof shall not be deemed outstanding for the purpose of any such computation. Such adjustment shall be made successively whenever the date of such issuance is fixed (which date of issuance shall be the record date for such issuance if a record date therefor is fixed); and, in the event that such shares or options, rights or warrants are not so issued, the Conversion Price shall again be adjusted to be the Conversion Price if the date of such issuance had not been fixed. 3. In case the Company shall make a distribution to all holders of Common Stock (including any such distribution made in connection with a consolidation or merger in which the Company is the surviving corporation) of shares of it stock, evidences of its indebtedness, assets, or rights, options or warrants (other than those referred to in paragraph 2 above) to subscribe for or purchase such shares, evidences of indebtedness, or assets, then, effective upon such distribution, the Conversion Price shall be adjusted to equal the product obtained by multiplying the Conversion Price in effect immediately prior to the date of such distribution by a fraction, the numerator of which shall be the Per Share Stock Price for the trading day immediately preceding the day of distribution ("Pre-Distribution Price") less the fair market value of the distribution (as determined in good faith by the Board of Directors of the Company) applicable to one share of Common Stock, and the denominator of which shall be the Pre-Distribution Price. Such adjustment shall be made successively whenever a date for such distribution is fixed (which date of distribution shall be the record date for such issuance if a record date therefor is fixed); and, if such distribution is not so made, the Conversion Price shall again be adjusted to be to be the Conversion Price if the date of such issuance had not been fixed. 4. No adjustment in the Conversion Price shall be required unless such adjustment would require an increase or decrease of at least one-tenth of one percent (.1%) in the total number of shares of Common Stock that would be issued as a result of the conversion of all the Note; PROVIDED that any adjustments which by reason of this section are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this section shall be made to the nearest hundredth of one percent. 5. In the event of any capital reorganization of the Company, or of any reclassification of any Common Stock for which the Note is convertible (other than a subdivision or combination of outstanding shares of such Common Stock), or in case of the consolidation of the Company with or the merger of the Company with or into any other corporation or of the sale of the properties and assets of the Company as, or substantially as, an entirety to any other entity, each $3.00 of principal and unpaid interest outstanding of the Note shall after such capital reorganization, reclassification of such Common Stock, consolidation, merger or sale be convertible, upon the terms and conditions specified in this Agreement, into the number of shares of stock or other securities or assets to which a holder of the number of shares of Common Stock into which amount of principal and interest payable under the Note is convertible (at the time of such capital reorganization, reclassification of such Common Stock, consolidation, merger or sale) would have been entitled upon such capital reorganization, reclassification of such Common Stock, consolidation, merger or sale; and in any such case, if necessary, the provisions set forth in this section with respect to the rights thereafter of such Note shall be appropriately adjusted so as to be applicable, as nearly as may reasonably be, to any shares of stock or other securities or assets thereafter deliverable upon the conversion of the Note. The Company shall not effect any such consolidation, merger or sale, unless prior to or simultaneously with the consummation thereof, the successor corporation (if other than the Company) resulting from such consolidation or merger or the corporation purchasing such assets or the appropriate corporation or entity shall assume, by written instrument, the obligation to deliver to the Noteholder the shares of stock, securities or assets to which, in accordance with the foregoing provisions, such Noteholder may be entitled pursuant to this section. 6. If any question shall at any time arise with respect to the Conversion Price or the number of shares issuable upon conversion of the Note, such question shall be determined by the independent firm of certified public accountants of recognized national standing selected by the Noteholder and acceptable to the Company. 7. Notwithstanding anything in this section to the contrary, the Company shall not be permitted to take any action described in this section, if such action is prohibited under any other provision of this Note or the Agreement. If a Noteholder elects to convert all or a portion of the outstanding principal and accrued and unpaid interest under the Note, then the Noteholder shall deliver the Note to the Company in exchange for an amended and restated note setting forth the new amount of principal and accrued and unpaid interest. Upon such exchange, the Company shall promptly issue and deliver, or cause to be issued and delivered, to the Noteholder a certificate or certificates for the number of whole shares of Common Stock to which the Noteholder is entitled under the terms hereof. To the extent permitted by law, such conversion shall be deemed to have been made immediately prior to the close of business on the date of such exchange of the Notes for the amended and restated note and Conversion Shares, and the Noteholder shall be treated for all purposes as the record holder of such shares of Common Stock on such date. No fractional shares or script of Common Stock shall be issued upon conversion of all or a portion of the outstanding principal and accrued unpaid interest of the outstanding principal and accrued unpaid interest under the Note. In lieu of a fractional share of Common Stock to which the holder would otherwise be entitled, the Company shall pay cash equal to the product of such fraction multiplied by the market value of one share of Common Stock on the date of conversion. Upon the occurrence and during the continuance of an Event of Default, and upon the conditions stated in the Agreement, the holder hereof may, at its option, declare the entire unpaid principal of and accrued interest on this Note immediately due and payable (provided that, upon the occurrence of certain Events of Default, and upon the conditions stated in the Agreement, such acceleration shall be automatic), without notice, demand, or presentment, all of which are hereby waived, and the holder hereof shall have the right to offset against this Note any sum or sums owed by the holder hereof to Maker. After the occurrence of an Event of Default, interest shall accrue on the outstanding principal balance of this Note and, to the extent permitted by applicable Law, on accrued but unpaid interest, at the lesser of (a) the Default Rate or (b) the Maximum Lawful Rate. After the occurrence of an Event of Default, all amounts collected or received by any Noteholder in respect of the Obligations shall be applied first, to the payment of all proper costs incurred by the Noteholder in connection with the collection thereof (including reasonable fees, expenses and disbursements of counsel for the Noteholder), second, to the reimbursement of any advances made by Noteholder to effect performance of any unperformed covenants of the Company under any of the Transaction Documents, third, to the payment of all accrued interest on the Note, fourth, to unpaid principal on the Note, and fifth to the Company or any other Person entitled to such proceeds under applicable Law. If this Note is placed in the hands of an attorney for collection, or if it is collected through any legal proceedings, Maker agrees to pay the court costs, reasonable attorneys' fees, and other costs of collection of the holder hereof. Maker, and each surety, endorser, guarantor, and other party ever liable for payment of any sums of money payable on this Note, jointly and severally waive presentment and demand for payment, protest, notice of protest and nonpayment, and notice of acceleration and the intention to accelerate, and agree that their liability on this Note shall not be affected by any renewal or extension in the time of payment hereof, by any indulgences, or by any release or change in any security for the payment of this Note, and hereby consent to any and all renewals, extensions, indulgences, releases, or changes, regardless of the number of such renewals, extensions, indulgences, releases or changes. THIS NOTE AND THE OTHER TRANSACTION DOCUMENTS COLLECTIVELY REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS BETWEEN THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. MIDDLE BAY OIL COMPANY, INC. By: ---------------------------- Name: John J. Bassett Title: President EXHIBIT "B" REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (the "Agreement") dated as of ________________, 1999, is entered into by and among MIDDLE BAY OIL COMPANY, INC., an Alabama corporation ("Corporation") and the parties listed on Schedule 1 attached hereto and incorporated herein by reference (each of such parties are referred to individually as "Shareholder" and collectively, as "Shareholders") and the parties listed on Schedule 2 attached hereto and incorporated herein by reference (each of such parties are referred to individually as "Piggy-Back Shareholder" and collectively, as "Piggy-Back Shareholders"). RECITALS WHEREAS, pursuant to those Securities Purchase Agreements by and between Corporation and each of the Shareholders executed on ______________, 1999 (the "Purchase Agreements"), each Shareholder will receive the number of shares of Common Stock, Notes and Warrants as set forth on Schedule 1. WHEREAS, each of the Piggy-Back Shareholders currently owns shares of Common Stock as set forth on Schedule 2. WHEREAS, as a condition to the Purchase Agreements, Corporation has agreed to grant to Shareholders certain registration rights with respect to their Registrable Securities (defined hereafter) and has agreed to grant the Piggy-Back Shareholders certain registration rights with respect to their Piggy-Back Registrable Securities (defined hereafter). WHEREAS, all the terms used but not defined in this Agreement shall have the meaning ascribed to them in the Purchase Agreements. NOW, THEREFORE, in consideration of the mutual promises contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: Section 1. DEFINITIONS. For purposes of this Agreement, the following terms shall have the respective meanings assigned to them in this Section 1 or in the recitals above or the subsections referred to below. "Piggy-Back Registrable Securities" shall mean (i) the shares of Common Stock owned by each Piggy-Back Shareholder as listed on Schedule 2 (ii) the shares of Common Stock owned by each Piggy-Back Shareholder during the term of this Agreement as a result of the conversion of the shares of the Company's Series B Convertible Preferred Shares as listed on Schedule 2, and (iii) any securities issued or issuable with respect to the shares described in clauses (i) and (ii) above by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization. "Registrable Securities" shall mean (i) the shares of Common Stock issued to the Shareholders pursuant to the Purchase Agreements (which, for purposes hereof, shall mean the Common Stock Shares, the Warrant Shares and the Conversion Shares as defined in the Purchase Agreements) and (ii) any securities issued or issuable with respect to the shares described in clause (i) above by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization. Section 2. INDEPENDENT REGISTRATION RIGHTS. 2.1 The Corporation hereby grants to each Shareholder separate rights to require the Corporation to use its best efforts to cause registration and sale in a public offering of all or a portion of such Shareholder's Registrable Securities in accordance with this Section 2; provided, however, the Corporation shall not have any obligation to effect more than a total of three (3) effective registrations pursuant to this Section 2 at the Corporation's expense. If the Corporation shall have received a written request submitted by Shareholder(s) owning at least a majority of the Registrable Securities outstanding at the time of such request (the "Requisite Holders") that such Shareholder(s) desires/desire to sell Registrable Securities and specifying the number of Registrable Securities proposed to be sold (for the purposes of this Section 2, "Shares") and the proposed plan for distribution of the Shares, Corporation will thereafter: 2.1.1 Give prompt (but in any event within fifteen (15) days after the receipt of the Requisite Holder(s)' notice) notice to all other Shareholders of such notice and of such other Shareholders' rights to have their Registrable Securities included in such registration. 2.1.2 Upon the request of any such Shareholder made within fifteen (15) days after the receipt by such Shareholder of any such notice given pursuant to subsection 2.1.1 (which request shall specify the Registrable Securities intended to be disposed of by such Shareholder and the intended method or methods of disposition thereof), the Corporation will use its best efforts to effect the registration of all Shares which the Corporation has been so requested to register pursuant to this subsection 2.1. 2.1.3 Prepare and file as soon as practicable, but in no event later than thirty (30) days from Corporation's receipt of the last Shareholder's request to have such Shareholder's Registrable Securities included in such registration within the time period specified in Section 2.1.2, a registration statement under the Securities Act of 1933, as amended (the "Securities Act") ("Registration Statement") with the Securities Exchange Commission ("Commission") on Form S-1 (or Form S-2 or Form S-3, if Corporation is entitled to use such forms, or similar forms available for use by small business issuers) and use its best efforts to cause such Registration Statement to become effective in order that the Shareholders may sell the Shares in accordance with the proposed plan of distribution. 2.1.4 Prepare and file with the Commission such amendment and supplements to such Registration Statement and prospectus used in connection therewith including any preliminary prospectus or supplemental or amended prospectus (the "Prospectus") as may be necessary to keep such Registration Statement continuously effective and to comply with the provisions of the Securities Act with respect to the offer of the Shares during the period required for distribution of the Shares, which period shall not be in excess of the earlier of (i) one year from the effective date of such Registration Statement, and (ii) the distribution of all Shares covered by such Registration Statement. 2.1.5 Furnish to each Shareholder such number of copies of the Prospectus (including any preliminary prospectus or supplemental or amended prospectus) as such Shareholder may reasonably request in order to facilitate the sale and distribution of the Shares. 2.2 The right of each Shareholder to register Shares pursuant to the provisions of this Section 2 shall be subject to the condition that if a request for registration is made within sixty (60) days prior to the conclusion of Corporation's then current fiscal year, Corporation shall have the right to delay the filing of the Registration Statement for such period of time until Corporation receives its audited financial statements for such fiscal year. 2.3 If the Requisite Holder(s) intend/intends to distribute the Registrable Securities covered by the notice pursuant to subsection 2.1 by means of an underwriting, the Requisite Holder(s) shall so advise the Corporation as a part of the notice made pursuant to subsection 2.1 and provide the name of the managing underwriter or underwriters that the Requisite Holder(s) proposes/propose to employ in connection with the public offering proposed to be made pursuant to the registration requested. If the managing underwriter of such underwritten offering shall inform the Corporation and the Shareholders requesting that their Shares be registered pursuant to this Section 2 by letter of its belief that the amount of Shares requested to be included in such registration exceeds the amount which can be sold in (or during the time of) such offering within a price range acceptable to the Requisite Holders, then the Corporation will include in such registration such amount of Shares which the Corporation is so advised can be sold in (or during the time of) such offering PRO RATA on the basis of the amount of such Shares so proposed to be sold and so requested to be included by such parties. 2.4 A registration shall not be deemed to have been effected (i) unless it has become effective and remained effective for the period specified in subsection 2.1.4, (ii) if, after it has become effective, such registration is terminated by a stop order, injunction or other order of the Commission or other governmental agency or court, or (iii) if the conditions to closing specified in any purchase agreement or underwriting agreement entered into in connection with such registration are not satisfied for any reason, other than as a result of the voluntary termination of such offering by the Requisite Holders. Section 3. PIGGY-BACK REGISTRATION RIGHTS. 3.1 If Corporation proposes to file, on its behalf, a Registration Statement under the Securities Act on Form S-1, S-2 or S-3 or similar forms available for use by small business issuers, other than pursuant to Section 2 of this Agreement or in connection with a dividend reinvestment, employee stock purchase, option or similar plan or in connection with a merger, consolidation or reorganization, Corporation shall give written notice to each Shareholder and Piggy-Back Shareholder at least thirty (30) days before the filing with the Commission of such Registration Statement. Such notice shall offer to include in such filing all or a portion of the Registrable Securities and Piggy-Back Registrable Securities owned by such Shareholder or Piggy-Back Shareholder. If a Shareholder or Piggy-Back Shareholder desires to include all or a portion of its Registrable Securities or Piggy-Back Registrable Securities in such Registration Statement, it shall give written notice to Corporation within fifteen (15) days after the date of mailing of such offer specifying the amount of Registrable Securities and/or Piggy-Back Registrable Securities to be registered (for the purpose of this Section 3, "Shares"). Corporation shall thereupon include in such filing the Shares, subject to priorities in registration set forth in this Agreement, and subject to its right to withdraw such filing, and shall use its best efforts to effect registration under the Securities Act of the Shares. 3.2 The right of the Shareholders and the Piggy-Back Shareholders to have the Shares included in any Registration Statement in accordance with the provisions of this Section 3 shall be subject to the following conditions: 3.2.1 Corporation shall have the right to require that each Shareholder or Piggy-Back Shareholder agree to refrain from offering or selling any shares of Common Stock that it owns which are not included in any such Registration Statement in accordance with this Section 3 for any reasonable time period specified, not to exceed ninety (90) days, by any managing underwriter of the offering to which such Registration Statement relates. 3.2.2 If (i) a registration pursuant to this Section 3 involves an underwritten offering of the securities being registered to be distributed (on a firm commitment basis) by or through one or more underwriters of recognized standing under underwriting terms appropriate for such a transaction and (ii) the managing underwriter of such underwritten offering shall inform the Corporation and the Shareholders and Piggy-Back Shareholders who have requested that their Shares be registered pursuant to this Section 3 by letter of its belief that the amount of Shares requested to be included in such registration exceeds the amount which can be sold in (or during the time of) such offering within a price range acceptable to a majority of such requesting holders, then the Corporation will include in such registration such amount of securities which the Corporation is so advised can be sold in (or during the time of) such offering as follows: FIRST, the securities being offered by the Corporation for its own account; SECOND such Shares of the Shareholders which are requested to be included in such registration PRO RATA on the basis of the amount of such Shares so proposed to be sold and so requested to be included by such Shareholders; and THIRD, such Shares of the Piggy-Back Shareholders and which are requested to be included in such registration PRO RATA on the basis of the amount of such Shares so proposed to be sold and so requested to be included by such Piggy-Back Shareholders. 3.2.3 Corporation shall furnish each Shareholder and Piggy-Back Shareholder with such number of copies of the Prospectus as such Shareholder or Piggy-Back Shareholder may reasonably request in order to facilitate the sale and distribution of its shares. 3.3 Notwithstanding the foregoing, Corporation in its sole discretion may determine not to file the Registration Statement or proceed with the offering as to which the notice specified herein is given without liability to the Shareholders or the Piggy-Back Shareholders. Section 4. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS. No Shareholder or Piggy-Back Shareholder may participate in any registration hereunder which relates to an underwritten offering unless such Shareholder or Piggy-Back Shareholder (a) agrees to sell such holder's securities on the basis provided in any underwriting arrangements approved by the holders of at least a majority of the Registrable Securities and Piggy-Back Registrable Securities to be included in such registration, or by a Person appointed by such holders to act on their behalf to approve such arrangements, and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements. Section 5. EXCLUSIVE REGISTRATION RIGHTS AND TRANSFER. The rights of each Shareholder under this Agreement may upon notice to the Corporation be transferred to its respective Affiliates in combination with a transfer of shares to such Affiliates. In addition, the rights of each Shareholder under this Agreement may upon notice to the Corporation be transferred to a non-Affiliate transferee in combination with a transfer of shares to such non-Affiliate transferee. However, such non-Affiliate transferee may not thereafter transfer its rights under this Agreement without the Corporation's written consent. Except as provided in this Section 5, the rights granted under this Agreement are granted specifically to and for the benefit of each Shareholder and Piggy Back Shareholder and shall not pass to any transferee of Registrable Securities. From and after the date of this Agreement, the Corporation will not, without the prior written consent of Shareholders holding at least a majority of the Registrable Securities then outstanding, enter into any agreement with respect to its securities which is inconsistent with or violates the rights granted to the Shareholders in this Agreement. Without limiting the foregoing, the Corporation also specifically agrees that during the period commencing on the date hereof and ending when the Shareholders have disposed of all of their Registrable Securities, the Corporation will not enter into an agreement with any party pertaining to the registration by the Corporation of such party's Common Stock. The Corporation represents and warrants to each of the Shareholders that, as of the date hereof, the Corporation is not a party to any agreement, other than this Agreement, pertaining to the registration by the Corporation of Common Stock. Section 6. EXPENSES. Corporation will bear all the expenses in connection with any Registration Statement under this Agreement, other than transfer taxes payable on the sale of such shares, the fees and expenses of counsel to the Shareholders and Piggy-Back Shareholders and fees and commissions of brokers, dealers and underwriters. Section 7. RECALL OF PROSPECTUSES, ETC. With respect to a Registration Statement or amendment thereto filed pursuant to this Agreement, if, at any time, Corporation notifies the Shareholders and Piggy-Back Shareholders that an amendment or supplement to such Registration Statement or amendment to the Prospectus included therein is necessary or appropriate, each Shareholder and Piggy-Back Shareholder will forthwith cease selling and distributing shares thereunder and will forthwith redeliver to Corporation all copies of such Registration Statement and Prospectuses then in its possession or under its control. Corporation will use its best efforts to cause any such amendment or supplement to become effective as soon as practicable and will furnish each Shareholder and Piggy-Back Shareholder with a reasonable number of copies of such amended or supplemented prospectus (and the period during which Corporation is required to use its best efforts to maintain such Registration Statement in effect pursuant to this Agreement will be increased by the period from the date on which such Shareholder or Piggy-Back Shareholder ceased selling and distributing shares thereunder to the date on which such amendment or supplement becomes effective). Section 8. COOPERATION WITH EXISTING SHAREHOLDERS. Corporation shall be entitled to require the Shareholders and Piggy-Back Shareholders to cooperate with Corporation in connection with a registration of Registrable Securities pursuant to this Agreement and furnish (i) such information as may be required by Corporation or the Commission in connection therewith and (ii) such representations, undertakings and agreements as may be required by the Commission in connection therewith. Section 9. REGISTRATION PROCEDURES Upon the receipt of a request for registration of any Registrable Securities pursuant to Section 2 or Section 3 of this Agreement, Corporation will use its best efforts to effect the registration of the Registrable Securities in accordance with the intended method of disposition thereof, and pursuant thereto Corporation will as expeditiously as possible: 9.1.1 Prepare and file with the Commission a registration statement on an appropriate form under the Securities Act and use its best efforts to cause such registration statement to become effective; provided, that before filing a registration statement or prospectus or any amendments or supplements thereto, including documents incorporated by reference after the initial filing of any registration statement, Corporation will promptly furnish to the holders of Registrable Securities and Piggy-Back Registrable Securities to be registered and sold pursuant to this Agreement (the "Registered Holders") and the underwriters, if any, copies of all such documents proposed to be filed, which documents will be subject to the review of the Registered Holders and the underwriters, and Corporation will not file any registration statement or amendment thereto, or any prospectus or any supplement thereto (including such documents incorporated by reference) to which the Registered Holders or the underwriters, if any, shall reasonably object in the light of the requirements of the Securities Act and any other applicable laws and regulations. 9.1.2 Prepare and file with the Commission such amendments and post-effective amendments to a registration statement as may be necessary to keep such registration statement effective for the applicable period; cause the related prospectus to be filed pursuant to Rule 424(b) (or any successor provision) under the Securities Act; cause such prospectus to be supplemented by any required prospectus supplement and, as so supplemented, to be filed pursuant to Rule 424(b) (or any successor provision) under the Securities Act; and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement during the applicable period in accordance with the intended methods of disposition set forth in such registration statement or supplement to such prospectus. 9.1.3 Notify the Registered Holders and the managing underwriters, if any, promptly, and (if requested by any such person) confirm such advice in writing, (i) when a prospectus or any prospectus supplement or post-effective amendment has been filed, and, with respect to a registration statement or any post-effective amendment, when the same has become effective, (ii) of any request by the Commission for amendments or supplements to a registration statement or related prospectus or for additional information, (iii) of the issuance by the Commission of any stop order suspending the effectiveness of a registration statement or the initiation of any proceeding for that purpose, (iv) if at any time the representations and warranties of Corporation contemplated by subsection 9.1.10 cease to be true and correct, (v) of the receipt by Corporation of any notification with respect to the suspension or qualification of any of the Registrable Securities for sale in any jurisdiction or the initiation of any proceeding for such purpose, (vi) of the happening of any event which requires the making of any changes in a registration statement or related prospectus so that such documents will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading and (vii) of Corporation's reasonable determination that a post-effective amendment to a registration statement would be appropriate or that there exist circumstances not yet disclosed to the public which make further sales under such registration statement inadvisable pending such disclosures and post-effective amendment. 9.1.4 Make reasonable efforts to obtain the withdrawal of any order suspending the effectiveness of a registration statement, or the lifting of any suspension of the qualification of any of the Registrable Securities for sale in any jurisdiction, at the earliest possible moment. 9.1.5 If requested by the managing underwriters or the Registered Holders in connection with an underwritten offering, immediately incorporate in a prospectus supplement or post effective amendment such information as the managing underwriters and the Registered Holders agree should be included therein relating to such sale and distribution of Registrable Securities, including, without limitation, information with respect to the number of shares of Registrable Securities being sold to such underwriters and the purchase price being paid therefor by such underwriters and with respect to any other terms of the underwritten (or best efforts underwritten) offering of the Registrable Securities to be sold in such offering; make all required filings of such prospectus supplement or post-effective amendment as soon as notified of the matters to be incorporated in such prospectus supplement or post-effective amendment; and supplement or make amendments to any registration statement if requested by the Registered Holders or any underwriter of such Registrable Securities. 9.1.6 Furnish to the Registered Holders and each managing underwriter, if any, without charge, at least one signed copy of the registration statement, any post-effective amendment thereto, including financial statements and schedules, all documents incorporated therein by reference and all exhibits (including those incorporated by reference). 9.1.7 Deliver without charge to the Registered Holders and the underwriters, if any, as many copies of the prospectus or prospectuses (including each preliminary prospectus) and any amendment or supplement thereto as such persons may reasonably request; and Corporation consents to the use of such prospectus or any amendment or supplement thereto by such Registered Holders and the underwriters, if any, in connection with the offer and sale of the Registrable Securities covered by such prospectus or any amendment or supplement thereto. 9.1.8 Prior to any public offering of Registrable Securities, register or qualify or cooperate with the Registered Holders, the underwriters, if any, and respective counsel in connection with the registration or qualification of such Registrable Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions as the Registered Holders or an underwriter reasonably requests in writing; keep each such registration or qualification effective during the period such registration statement is required to be kept effective and do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by the applicable registration statement; PROVIDED, HOWEVER, that Corporation will not be required in connection therewith or as a condition thereto to qualify generally to do business or subject itself to general service of process in any such jurisdiction where it is not then so subject. 9.1.9 Upon the occurrence of any event contemplated by subsection 9.1.3 (ii) - (vii) above, prepare, to the extent required, a supplement or post-effective amendment to the applicable registration statement or related prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchaser of the Registrable Securities being sold thereunder, such prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading. 9.1.10 Enter into such agreements (including an underwriting agreement) and take all such other actions in connection therewith in order to expedite or facilitate the disposition of such Registrable Securities and in such connection, whether or not an underwriting agreement is entered into and whether or not the Registrable Securities to be covered by such registration are to be offered in an underwritten offering: (i) make such representations and warranties to the Registered Holders to the registration statement, prospectus and documents incorporated by reference, if any, in form, substance and scope as are customarily made by issuers to underwriters in underwritten offerings and confirm the same if and when requested; (ii) obtain opinions of counsel to Corporation and updates thereof with respect to the registration statement and the prospectus in the form, scope and substance which are customarily delivered in underwritten offerings; (iii) in the case of an underwritten offering, enter into an underwriting agreement in form, scope and substance as is customary in underwritten offerings and obtain opinions of counsel to Corporation and updates thereof (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the managing underwriters and the Registered Holders) addressed to the Registered Holders and the underwriters, if any, covering the matters customarily covered in opinions delivered in underwritten offerings and such other matters as may be reasonably requested by the Registered Holders and such underwriters; (iv) obtain "cold comfort" letters and updates thereof from Corporation's independent certified public accountants addressed to the Registered Holders and the underwriters, if any, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters by accountants in connection with underwritten offerings; (v) if any underwriting agreement is entered into, the same shall set forth in full the indemnification provisions and procedures customarily included in underwriting agreements in underwritten offerings; and (vi) Corporation shall deliver such documents and certificates as may be requested by the Registered Holders and the managing underwriters, if any, to evidence compliance with clause (i) above and with any customary conditions contained in the underwriting agreement or other agreement entered into by Corporation. The above shall be done at each closing under such underwriting or similar agreement or as and to the extent required thereunder. 9.1.11 Make available for inspection by a representative of the Registered Holders, any underwriter participating in any disposition pursuant to such registration, and any attorney or accountant retained by the Registered Holders or such underwriter, all financial and other records, pertinent corporate documents and properties of Corporation, and cause Corporation's officers, directors and employees to supply all information reasonably requested by any such representative, underwriter, attorney or accountant in connection with such registration; provided that any records, information or documents that are designated by Corporation in writing as confidential shall be kept confidential by such Persons unless disclosures of such records, information or documents is required by court or administrative order. 9.1.12 Otherwise use its best efforts to comply with all applicable rules and regulations of the Commission and make generally available to its security holders earning statements satisfying the provisions of Section 11(a) of the Securities Act, no later than 90 days after the end of any 12-month period (i) commencing at the end of any fiscal quarter in which Registrable Securities are sold to underwriters in a firm or best efforts underwritten offering and (ii) beginning with the first day of Corporation's first fiscal quarter next succeeding each sale of Registrable Securities after the effective date of a registration statement, which statements shall cover said 12-month periods. 9.1.13 If Corporation, in the exercise of its reasonable judgment, objects to any change reasonably requested by the Registered Holders or the underwriters, if any, to any registration statement or prospectus or any amendments or supplements thereto (including documents incorporated or to be incorporated therein by reference) as provided for in this Section 9, Corporation shall not be obligated to make any such change and such Registered Holders may withdraw their Registrable Securities from such registration, in which event (i) Corporation shall pay all registration expenses (including its counsel fees and expenses) incurred in connection with such registration statement or amendment thereto or prospectus or supplement thereto, and (ii) in the case of a registration being effected pursuant to Section 2, such registration shall not count as one of the registrations Corporation is obligated to effect pursuant to Section 2 hereof. Section 10. INDEMNIFICATION. 10.1 In the event of any registration of any securities under the Securities Act pursuant to this Agreement, Corporation will indemnify and hold harmless each Shareholder, each Piggy-Back Shareholder, any underwriter and each other Person, if any, who controls such Shareholder, Piggy-Back Shareholder or underwriter within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which each such Shareholder, Piggy-Back Shareholder or any underwriter may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or action in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in such Registration Statement or preliminary prospectus (if used prior to the effective date of such Registration Statement) or final or summary prospectus contained therein (if used during the period the Corporation is required to keep the Registration Statement effective), or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements made therein not misleading, and will reimburse each such Shareholder, Piggy-Back Shareholder or underwriter for any legal or any other expenses as reasonably incurred by such person in connection with investigating or defending any such action or claim, excluding any amounts paid in settlement of any litigation, commenced or threatened, if such settlement is effected without prior written consent of Corporation; provided, however, that Corporation will not be liable to the Shareholders, Piggy-Back Shareholders or an underwriter in any such case to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or omission or alleged omission made in said Registration Statement, said preliminary prospectus or said final or summary prospectus or any amendment or supplement thereto, in reliance upon and in conformity with written information furnished to Corporation by that Shareholder, Piggy-Back Shareholder or their respective affiliates or representatives, or by that underwriter, as the case may be, specifically for use in the preparation thereof; and provided further that the indemnity agreement contained in this Section 10 with respect to any preliminary prospectus shall not inure to the benefit of the Shareholders, Piggy-Back Shareholders or any underwriter or to any Person selling the same in respect of any loss, claim, damage, liability or action asserted by someone who purchased shares from such person if a copy of the final prospectus (as the same may be amended or supplemented) in connection with such registration statement was not sent or given to such person with or prior to written confirmation of the sale and if the untrue statement or omission or alleged untrue statement or omission of a material fact contained in such preliminary prospectus was corrected in the final prospectus. 10.2 In the event of any registration of securities under the Securities Act pursuant to this Agreement, each Shareholder and Piggy-Back Shareholder will indemnify and hold harmless Corporation, each of its directors and officers, any underwriter and each other Person, if any, who controls Corporation or underwriter within the meaning of the Securities Acts, against any losses, claims, damages or liabilities, joint or several, to which Corporation or any such director, officer, underwriter may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or action in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in such Registration Statement or preliminary prospectus or final or summary prospectus contained therein, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements made therein not misleading, and will reimburse Corporation, each such director, officer, underwriter for any legal or any other expenses as reasonably incurred by them in connection with investigating or defending any such action or claim, excluding any amounts paid in settlement of any litigation, commenced or threatened, if such settlement is effected without prior written consent of the indemnifying Shareholder, Piggy-Back Shareholder or their respective representative; but in all cases only if, and to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission therein made in reliance upon and in conformity with written information furnished to Corporation by the indemnifying Shareholder, Piggy-Back Shareholder or their respective affiliates or representatives specifically for use in the preparation thereof. Notwithstanding the foregoing, the amount of the indemnity provided by each such Shareholder or Piggy-Back Shareholder pursuant to this Section 10 shall not exceed the net proceeds received by such Shareholder or Piggy-Back Shareholder in such related registration and sale. 10.3 Promptly after receipt by a party entitled to indemnification under subsection 10.1 or 10.2 hereof of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under either of such subsections, notify the indemnifying party in writing of the commencement thereof. In case any such action is brought against the indemnified party and it shall so notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in, and, to the extent that it so chooses, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party, and, after notice from the indemnifying party that it so chooses, such indemnifying party shall not be liable for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof, provided, however, that if the indemnifying party fails to take reasonable steps necessary to diligently defend such claim within twenty (20) days after receiving notice from the indemnified party that the indemnified party believes the indemnifying party has failed to take such steps, the indemnified party may assume its own defense and the indemnifying party shall be liable for any expenses therefor. The indemnity agreements in this Section 10 shall be in addition to any liabilities which the indemnifying parties may have pursuant to law. 10.4 If the indemnification provided for in this Section 10 from the indemnifying party is unavailable to an indemnified party hereunder in respect of any losses, claims, damages, liabilities or expenses referred to herein, then the indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses in such proportion as is appropriate to reflect the relative fault of the indemnifying party and indemnified parties in connection with the actions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative fault of such indemnifying party and indemnified parties shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, has been made by, or relates to information supplied by, such indemnifying party or indemnified parties, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, subject to the limitations set forth in Section 10 hereof, any legal or other fees or expenses reasonably incurred by such party in connection with any investigation or proceeding. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 10 were determined by pro rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to in the immediately preceding paragraph. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. Section 11. SALES UNDER RULE 144. With a view to making available to each Shareholder and Piggy-Back Shareholder the benefits of Rule 144 promulgated under the Securities Act and any other similar rule or regulation of the Commission that may at any time permit such Shareholder or Piggy-Back Shareholder to sell the Registrable Securities without registration, Corporation agrees to: (a) make and keep public information available, as those terms are understood and defined in Rule 144 (or any successor provision); (b) file with the Commission in a timely manner all reports and other documents required of Corporation under the Securities Act and the Exchange Act; (c) furnish to such Shareholder or Piggy-Back Shareholder forthwith upon request (i) a written statement by Corporation that it has complied with the reporting requirements of Rule 144 (or any successor provision), the Securities Act and the Exchange Act, (ii) a copy of the most recent annual or quarterly report of Corporation and such other reports and documents so filed by Corporation under the Securities Act and the Exchange Act and (iii) such other information as may be reasonably requested by such Shareholder or Piggy-Back Shareholder in availing itself of any rule or regulation of the Commission which permits the selling of any such securities without registration; and (d) after any sale of Registrable Securities pursuant to Rule 144, to the extent allowed by law, to cause any restrictive legends to be removed and any transfer restrictions to be rescinded with respect to such Registration Securities. Section 12. REMOVAL OF LEGEND. The Corporation agrees, to the extent allowed by law, to remove any legends on certificates representing Registrable Securities or Piggy-Back Registrable Securities describing transfer restrictions applicable to such securities upon the sale of such securities (i) pursuant to an effective Registration Statement under the Securities Act or (ii) in accordance with the provisions of Rule 144 under the Securities Act. Section 13. NOTICES. Any notice to be given by any party hereunder to any other shall be in writing, mailed by certified or registered mail, return receipt requested, and shall be addressed to the other parties at the addresses listed on the signature pages hereof. All such notices shall be deemed to be given three (3) days after the date of mailing thereof. Section 14. MODIFICATION. Notwithstanding anything to the contrary in this Agreement or otherwise, no modification, amendment or waiver of any of the provisions of this Agreement shall be effective unless in writing and signed by the Corporation and the Shareholders holding not less than 95% of the Registrable Securities then outstanding. Section 15. NON-WAIVER. The failure to enforce at any time any of the provisions of this Agreement, or to require at any time performance by any other party of any of the provisions hereof, shall in no way be construed to be a waiver of such provisions. Section 16. PARTIAL INVALIDITY. If any clause, sentence, paragraph, section or part of this Agreement shall be deemed invalid, unenforceable or against public policy, the part which is invalid, unenforceable or contrary to public policy shall not affect, impair, invalidate or nullify the remainder of this Agreement, but the invalidity, unenforceability or contrariness to public policy shall be confined only to the clause, sentence, paragraph, section or party of this Agreement so invalidated, unenforceable or against public policy. Section 17. CONSTRUCTION. The language in all parts of this Agreement shall in all cases be construed simply, according to its fair meaning, and shall not be construed strictly for or against either of the parties hereto. Section 18. GOVERNING LAW. This Agreement shall be governed and construed according to the laws of the State of Alabama, without regard to its conflicts of law principles. Section 19. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall constitute an original and all of which together shall constitute but one and the same instrument. Section 20. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors and permitted assigns. Section 21. SPECIFIC PERFORMANCE. The parties agree that, to the extent permitted by law, (i) the obligations imposed on them in this Agreement are special, unique and of an extraordinary character, and that in the event of a breach of any such party damages would not be an adequate remedy and (ii) the other party shall be entitled to specific performance and injunctive and equitable relief in addition to any other remedy to which it may be entitled at law or in equity. (REMAINDER OF PAGE INTENTIONALLY LEFT BLANK) EX-10.3 3 EXHIBIT 10.3 Exhibit 10.3 SECURITIES PURCHASE AGREEMENT BETWEEN SHOEINVEST II, LP AND MIDDLE BAY OIL COMPANY, INC. AUGUST 27, 1999 TABLE OF CONTENTS ARTICLE I TERMS DEFINED Section 1.1 Definitions.....................................................................................1 Section 1.2 Accounting Terms and Determinations............................................................11 Section 1.3 Gender and Number..............................................................................11 Section 1.4 References to Agreement........................................................................11 ARTICLE II PURCHASE AND SALE OF SECURITIES Section 2.1 Purchase and Sale..............................................................................11 Section 2.2 Closing........................................................................................11 Section 2.3 Delivery.......................................................................................11 Section 2.4 Payment........................................................................................12 ARTICLE III RESERVATION AND ISSUANCE OF CONVERSION SHARES..................................................12 ARTICLE IV CERTAIN TERMS APPLICABLE TO WARRANTS Section 4.1 Exercise of Warrants...........................................................................12 Section 4.2 Adjustment of Number of Warrant Shares Purchasable.............................................14 Section 4.3 Notices to Warrant Holders.....................................................................16 Section 4.4 Reservation and Issuance of Warrant Shares.....................................................17 ARTICLE V TRANSFER OF SECURITIES Section 5.1 Restrictions on Transfer.......................................................................17 Section 5.2 Registration, Transfer and Exchange of Warrants................................................18 Section 5.3 Mutilated or Missing Warrant Certificates......................................................18 Section 5.4 Registration, Transfer and Exchange of Notes...................................................19 Section 5.5 Mutilated or Missing Notes.....................................................................19 ARTICLE VI CONDITIONS Section 6.1 Conditions Precedent to Closing................................................................19 Section 6.2 Conditions Precedent to Closing................................................................22 ARTICLE VII REPRESENTATIONS AND WARRANTIES Section 7.1 Corporate Existence and Power..................................................................23 Section 7.2 Corporate and Governmental Authorization; Contravention........................................23 Section 7.3 Binding Effect.................................................................................24 Section 7.4 Capitalization.................................................................................24 Section 7.5 Issuance of Securities.........................................................................24 Section 7.6 Financial Statements...........................................................................24 Section 7.7 Material Agreements............................................................................25 Section 7.8 Compass Debt Documents.........................................................................25 Section 7.9 Investments ...................................................................................25 Section 7.10 Outstanding Debt...............................................................................25 Section 7.11 Transactions with Affiliates...................................................................25 Section 7.12 Employment Matters.............................................................................25 Section 7.13 Litigation.....................................................................................25 Section 7.14 ERISA..........................................................................................26 Section 7.15 Taxes and Filing of Tax Returns................................................................27 Section 7.16 Title to Assets................................................................................27 Section 7.17 Licenses, Permits, Etc.........................................................................27 Section 7.18 Proprietary Rights.............................................................................27 Section 7.19 Compliance with Law............................................................................27 Section 7.20 Environmental Matters..........................................................................27 Section 7.21 Intentionally Left Blank.......................................................................29 Section 7.22 Fiscal Year....................................................................................29 Section 7.23 No Default.....................................................................................29 Section 7.24 Insurance......................................................................................29 Section 7.25 Government Regulation..........................................................................29 Section 7.26 Securities Law.................................................................................29 Section 7.27 Brokers and Finders............................................................................29 Section 7.28 SEC Documents..................................................................................29 Section 7.29 Oil and Gas Operations.........................................................................30 Section 7.30 Financial and Commodity Hedging................................................................31 Section 7.31 Books and Records..............................................................................31 Section 7.32 Reserve Report.................................................................................31 Section 7.33 Nature of Company Assets.......................................................................31 Section 7.34 Full Disclosure................................................................................32 Section 7.35 Year 2000 Compliance...........................................................................32 ARTICLE VIII REPRESENTATIONS AND WARRANTIES OF Shoeinvest Section 8.1 Corporate Existence and Power..................................................................32 Section 8.2 Corporate and Governmental Authorization; Contravention........................................32 Section 8.3 Binding Effect.................................................................................32 Section 8.4 Brokers and Finders............................................................................33 Section 8.5 Taxes and Filing of Returns....................................................................33 Section 8.6 Intentionally Omitted..........................................................................33 ARTICLE IX COVENANTS Section 9.1 Maintenance of Insurance.......................................................................33 Section 9.2 Payment of Taxes and Claims....................................................................33 Section 9.3 Compliance with Laws and Documents.............................................................34 Section 9.4 Operation of Properties and Equipment..........................................................34 Section 9.5 Additional Documents...........................................................................34 Section 9.6 Maintenance of Books and Records...............................................................34 Section 9.7 Environmental Matters..........................................................................34 Section 9.8 Access to Information..........................................................................34 Section 9.9 Conduct of Business of the Company.............................................................35 Section 9.10 Intentionally Omitted..........................................................................36 Section 9.11 Intentionally Omitted..........................................................................36 ARTICLE X DEFAULTS; TERMINATION Section 10.1 Events of Default..............................................................................36 Section 10.2 Termination....................................................................................37 Section 10.3 Effect of Termination..........................................................................37 ARTICLE XI MISCELLANEOUS Section 11.1 Notices........................................................................................38 Section 11.2 No Waivers.....................................................................................38 Section 11.3 Expenses; Indemnification......................................................................38 Section 11.4 Amendments and Waivers; Sale of Interest.......................................................39 Section 11.5 Survival.......................................................................................39 Section 11.6 Limitation on Interest.........................................................................40 Section 11.7 Invalid Provisions.............................................................................40 Section 11.8 Successors and Assigns.........................................................................40 Section 11.9 Governing Law..................................................................................40 Section 11.10 Counterparts...................................................................................40 Section 11.11 No Third Party Beneficiaries...................................................................40 Section 11.12 Final Agreement................................................................................41 Section 11.13 Submission to Jurisdiction; Waiver of Service of Venue.........................................41 Section 11.14 Waiver of Right to Trial by Jury ............................................................41 Section 11.15 Public Announcements...........................................................................41
EXHIBITS Exhibit A Senior Subordinate Promissory Note Exhibit B Registration Rights Agreement Exhibit C Intentionally Omitted Exhibit D Form of Warrant Certificate Exhibit E Employment Agreement Exhibit F Intentionally Omitted Exhibit G Purchase Price to be Transferred at Closing Exhibit H Identification of Other Securities Purchase Agreements SECURITIES PURCHASE AGREEMENT THIS SECURITIES PURCHASE AGREEMENT is entered into effective this ___ day of August, 1999, by and between Shoeinvest II, LP, a New Jersey limited partnership ("SHOEINVEST") and Middle Bay Oil Company, Inc., an Alabama corporation (the "COMPANY"). W I T N E S S E T H: WHEREAS, the Company has authorized and desires to issue and sell to Shoeinvest (a) certain shares of the Company's Common Stock, par value $0.02 per share, (b) a Note, and (c) certain Warrants; WHEREAS, Shoeinvest desires to purchase such securities from the Company on the terms and conditions set forth herein; and NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: ARTICLE I TERMS DEFINED SECTION 1.1. DEFINITIONS. The following terms, as used herein, have the following meanings: "Affiliate" means, as to any Person, any Subsidiary of such Person, or any other Person which, directly or indirectly, controls, is controlled by, or is under common control with, such Person and, with respect to the Company, any executive officer of any Subsidiary or any Person who holds five percent (5%) or more of the voting stock of the Company. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or partnership interests, or by contract or otherwise. Shoeinvest shall not be considered an Affiliate of the Company for purposes of this Agreement or the other Transaction Documents. "Agreement" means this Securities Purchase Agreement. "Authorized Officer" means, as to any Person, its Chairman, its Chief Executive Officer, its President, its Chief Operating Officer, its Financial Officer and any Vice President. "Business Day" means any day except a Saturday, Sunday or other day on which national banks in Dallas, Texas are authorized by law to close. "Capital Lease" means, for any Person, as of any date, any lease of property, real or personal, which 1 would be capitalized on a balance sheet of the lessee of such lease prepared as of such date in accordance with GAAP. "Change of Control" means the occurrence of any of the following: (a) the sale, lease, transfer or other disposition, in one transaction or a series of related transactions, of more than fifty percent (50%) of the value of the Oil and Gas Interests as set forth in the most current reserve report of the Company and its Subsidiaries (on the date hereof, the Reserve Report is the most recent reserve report), or (b) any sale, transfer, merger, consolidation, disposition or other transaction which results in any Person or Persons individually or together with their Affiliates owning more than fifty percent (50%) of the Common Stock on a Fully Diluted Basis. "Charter Documents" means, with respect to any Person, its certificate of incorporation, articles of incorporation, bylaws, partnership agreement, regulations, operating agreement and all other comparable charter documents. "Closing" has the meaning given such term in SECTION 2.2 hereof. "Closing Date" means the tenth Business Day after the date of the Company's Shareholders' meeting whereby the transactions contemplated hereby are approved. "Closing Transactions" means the transactions which will occur on the Closing Date pursuant to the Transaction Documents. "COBRA" has the meaning given such term in SECTION 7.14 hereof. "Commission" means the Securities and Exchange Commission or any entity succeeding to any or all of its functions under the Securities Act or the Exchange Act. "Common Stock" means the Company's common stock, par value $0.02 per share. "Common Stock Shares" means the 44,444 shares of Common Stock to be purchased by Shoeinvest pursuant to this Agreement. "Company" has the meaning given such term in the preamble hereto. "Company Financial Statements" means the audited and unaudited consolidated financial statements of the Company and its Subsidiaries (including the related notes) included (or incorporated by reference) in the Company's Annual Report on Form 10-KSB for the year ended December 31, 1998, and the Company's Quarterly Report on Form 10-QSB for the quarterly period ended March 31, 1999, filed with the Commission. "Compass Senior Credit Agreement" means that certain Credit Agreement dated March 27, 1998, as amended, by and among Middle Bay Oil Company, Inc. and Enex Resources Corporation, as Borrower, 2 and Compass Bank, as Agent and a Lender, Bank of Oklahoma, National Association, as a Lender and the other lenders signatory thereto. "Compass Senior Debt" means all Debt of the Company outstanding under the Compass Senior Credit Agreement, including all renewals and extensions thereof. "Compass Senior Debt Documents" means the Compass Senior Debt Agreement and all promissory notes, security agreements, mortgages, deeds of trust, assignments, guarantees and other documents, instruments and agreements executed and delivered pursuant to the Compass Senior Credit Agreement evidencing, securing, guaranteeing or otherwise pertaining to the Compass Senior Debt and other obligations arising under the Compass Senior Credit Agreement, as the foregoing may be amended, renewed, extended, supplemented, increased or otherwise modified from time to time to the extent permitted hereunder. "Conversion Shares" means shares of Common Stock issued upon conversion of the Note. "Debt" means, for any Person, without duplication, (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (c) all indebtedness of such Person on which interest charges are customarily paid or accrued, (d) all Guarantees by such Person, (e) the unfunded or unreimbursed portion of all letters of credit issued for the account of such Person, (f) the present value of all obligations in respect of Capital Leases of such Person, (g) any obligation of such Person representing the deferred purchase price of property or services purchased by such Person other than trade payables incurred in the ordinary course of business and which are not more than ninety (90) days past invoice date, (h) any indebtedness, liability or obligation secured by a Lien on the assets of such Person whether or not such indebtedness, liability or obligation is otherwise non-recourse to such Person, (i) liabilities arising under future contracts, forward contracts, swap, cap or collar contracts, option contracts, hedging contracts, other derivative contracts and similar agreements, (j) liabilities with respect to payments received in consideration of oil, gas or other minerals yet to be acquired or produced at the time of payment (including obligations under "take-or-pay" contracts to deliver gas in return for payments already received and the undischarged balance of any production payment created by such Person or for the creation of which such Person directly or indirectly received payment, and (k) all liability of such Person as a general partner or joint venturer for obligations of the nature described in (a) through (k) preceding. "Default" means any condition or event which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Default Rate" means the Fixed Rate plus 3% per annum. "Defensible Title" means such right, title and interest that is (a) evidenced by an instrument or instruments filed of record in accordance with the conveyance and recording laws of the applicable jurisdiction to the extent necessary to prevail against competing claims of bona fide purchasers for value without notice and (b) subject to Permitted Encumbrances, free and clear of all Liens, claims, infringements, burdens or other defects. 3 "Disclosure Schedule" means the disclosure schedule entitled Middle Bay Disclosure Schedule separately provided by the Company to Shoeinvest on or before the date hereof, and any documents listed on such disclosure schedule and expressly incorporated therein by reference. "Employment Agreement" means that certain employment agreement to be executed at Closing by the Company and Floyd C. Wilson in substantially the form of Exhibit E. "Environmental Complaint" means any complaint, summons, citation, notice, directive, order, claim, litigation, investigation, proceeding, judgment, letter or other communication from any federal, state, municipal or other Governmental Authority or any other party involving a Hazardous Discharge, Environmental Contamination or any violation of any order, permit or Environmental Law and Laws. "Environmental Contamination" means the presence of any Hazardous Substances, which presence results from a Hazardous Discharge. "Environmental Law and Laws" means any law, common law, ordinance, regulation or policy of any Governmental Authority, as well as any order, decree, permit, judgment or injunction issued, promulgated, approved, or entered thereunder, relating to the environment, health and safety, Hazardous Substances (including, without limitation, the use, handling, transportation, production, disposal, discharge or storage thereof), industrial hygiene, the environmental conditions on, under, or about any real property owned, leased or operated at any time by the Company or any of its Subsidiaries or any real property owned, leased or operated by any other party, including, without limitation, soil, groundwater, and indoor and ambient air conditions or the reporting or remediation of Environmental Contamination. Environmental Law and Laws include, without limitation, the Clean Air Act, as amended, the Federal Water Pollution Control Act, as amended, the Rivers and Harbors Act of 1899, as amended, the Safe Drinking Water Act, as amended, the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), as amended, the Superfund Amendments and Reauthorization Act of 1986 ("SARA"), as amended, the Resource Conservation and Recovery Act of 1976 ("RCRA"), as amended, the Hazardous and Solid Waste Amendments Act of 1984, as amended, the Toxic Substances Control Act, as amended, the Occupational Safety and Health Act ("OSHA"), as amended, the Hazardous Materials Transportation Act, as amended, and any other federal, state and local law whose purpose is to conserve or protect health, the environment, wildlife or natural resource. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any regulation promulgated thereunder. "ERISA Affiliate" means the Company or any of its Subsidiaries and any other corporation or trade or business under common control with the Company or any of its Subsidiaries or treated as a single employer with the Company or any of its Subsidiaries as determined under sections 414(b), (c), (m) or (o) of the IRC. "Event of Default" has the meaning set forth in SECTION 10.1. "Exchange Act" means the Securities Exchange Act of 1934, as amended, or any successor federal statute. 4 "Exhibit" refers to an exhibit attached to this Agreement and incorporated herein by reference, unless specifically provided otherwise. "Financial Officer" means, as to any Person, its Chief Financial Officer, or if no Person serves in such capacity, the highest ranking executive officer of such Person with responsibility for accounting, financial reporting, financial compliance and similar functions. "Fixed Rate" means nine percent (9.0%) per annum. "Fully Diluted Basis" means, with reference to outstanding Common Stock, the shares of Common Stock that would be outstanding assuming that all outstanding options, warrants and other rights to acquire Common Stock had been exercised (regardless of whether such rights are then exercisable) and all securities convertible into Common Stock had then been converted (regardless of whether such securities are then convertible) and had been issued, all in accordance with GAAP. Any reference in this Agreement or any of the other Transaction Documents to "holder(s) of outstanding Common Stock on a Fully Diluted Basis" or words of similar import shall be deemed to include holder(s) of outstanding options, warrants or similar rights to acquire Common Stock or securities convertible into Common Stock. "GAAP" means generally accepted accounting principles, applied on a consistent basis, set forth in Opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants and/or in statements of the Financial Accounting Standards Board and/or their successors which are applicable in the circumstances as of the date in question; and the requirement that such principles be applied on a consistent basis means that the accounting principles observed in a current period are comparable in all material respects to those applied in a preceding period. "Governmental Authority" means any national, state or county, municipal government, domestic or foreign, any agency, board, bureau, commission, court, department or other instrumentality of any such government, or any arbitrator in any case that has jurisdiction over the Company or its Subsidiaries or any of their respective properties or assets. "Guaranty" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or other obligation (whether arising by virtue of partnership arrangements, by agreements to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions, by "comfort letter" or other similar undertaking of support of otherwise), or (b) entered into for the purpose of assuring in any other manner the obligee of such Debt or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); PROVIDED, that, the term "Guaranty" shall not include endorsements for collection or deposit in the ordinary course of business. For purposes of this Agreement, the amount of any Guaranty shall be the maximum amount that the guarantor could be legally required to pay under such Guaranty. "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. 5 "Hazardous Discharge" means any releasing, spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, disposing or dumping of a Hazardous Substance at, from, onto, under or within any real property owned, leased or operated at any time by the Company or any of its Subsidiaries or any real property owned, leased or operated by any other Person. "Hazardous Substance" means any pollutant, toxic substance, hazardous waste, compound, element or chemical that is defined as hazardous, toxic, noxious, dangerous or infectious pursuant to any Environmental Law and Laws or which is otherwise regulated by any Environmental Law and Laws. "Holder" with respect to any Security, shall mean the record or beneficial owner of such Security. "Hydrocarbons" means oil, condensate, gas, casinghead gas and other liquid or gaseous hydrocarbons. "Investment" in any Person means any investment, whether by means of securities purchase (whether by direct purchase from such Person or from an existing holder of securities of such Person), loan, advance, extension of credit, capital contribution or otherwise, in or to such Person, the Guaranty of any Debt or other obligation of such Person, or the subordination of any claim against such Person to other Debt or other obligation of such Person; PROVIDED, that, "Investments" shall not include advances made to employees of such Person for reasonable travel, entertainment and similar expenses incurred in the ordinary course of business. "IRC" means the Internal Revenue Code of 1986, as amended from time to time, and any regulation promulgated thereunder. "Knowledge" means actual knowledge after reasonable investigation consistent with the generally accepted business practices in the oil and gas industry. "Laws" means all applicable statutes, laws, ordinances, regulations, orders, writs, injunctions, or decrees of any state, commonwealth, nation, territory, possession, county, township, parish, municipality, or Governmental Authority. "Lien" means with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset. For the purposes of this Agreement, a Person shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement or other title retention agreement relating to such asset. "Majority Noteholder" means a Noteholder or Noteholders holding more than fifty percent (50%) of the aggregate principal balance of the Note. "Majority Warrantholder" means a Warrant Holder or Warrant Holders who hold more than fifty percent (50%) of the outstanding Warrant Shares. 6 "Major Shareholders" means Kaiser-Francis Oil Company, C.J. Lett, III, Weskids, L.P., and Alvin V. Shoemaker. "Material Adverse Effect" means, with respect to a Person, a material adverse effect on the business, financial condition, operations, assets or prospects of such Person or any of its Subsidiaries, and shall also mean, with respect to the Company or any of its Subsidiaries, a material adverse effect on such Person's ability to pay and perform its obligations under the Transaction Documents. "Material Agreement" means any written or oral agreement, contract, commitment, or understanding to which a Person is a party, by which such Person is directly or indirectly bound, or to which any assets of such Person may be subject (a) which is not cancelable by such Person upon notice of sixty (60) days or less without liability for further payment other than nominal penalty, (b) pursuant to which such Person acquires any material portion of the raw materials, supplies or services used or consumed by such Person in the operation of its business (unless such raw materials, supplies or services are readily available to such Person from other sources on comparable terms), or (c) pursuant to which such Person derives any material part of its revenues. "Maximum Lawful Rate" means the maximum rate (or, if the context so permits or requires, an amount calculated at such rate) of interest which, at the time in question would not cause the interest charged on the Note at such time to exceed the maximum amount which Noteholders would be allowed to contract for, charge, take, reserve, or receive under applicable Law after taking into account, to the extent required by applicable Law, any and all relevant payments or charges under the Transaction Documents. "Noteholder" means any Person in whose name a Note is registered on the Note Register. "Note Redemption Date" means the date on which the entire balance of the Note, including, without limitation, all accrued but unpaid interest thereon and all fees payable by the Company or its Subsidiaries in connection therewith, have been paid in full. "Note Register" means a register maintained by the Company setting forth the name and address of each Noteholder and the principal amount of the Note held by such Noteholder. "Notes" means the Company's Senior Subordinate Promissory Notes in the aggregate principal amount of $100,000 to be issued and sold by the Company to Shoeinvest pursuant to SECTION 2.1 hereof and any renewals, extensions or replacements thereof, and "Note" means any of such Notes. The Notes shall be substantially in the form of EXHIBIT A attached hereto. "Obligations" means all present and future indebtedness, obligations and liabilities, and all renewals and extensions thereof, or any part thereof, of the Company, its Subsidiaries and any other Person arising pursuant to the Transaction Documents, and all interest accrued thereon and costs, expenses, and attorneys' fees incurred in the enforcement or collection thereof, regardless of whether such indebtedness, obligations and liabilities are direct, indirect, fixed, contingent, liquidated, unliquidated, joint, several or joint and several. 7 "Oil and Gas Interest(s)" means (a) direct and indirect interests in and rights with respect to oil, gas, mineral and related properties and assets of any kind and nature, direct or indirect, including working, royalty and overriding royalty interests, production payments, operating rights, net profits interests, other non-working interests and non-operating interests; (b) interests in and rights with respect to Hydrocarbons and other minerals or revenues therefrom and contracts in connection therewith and claims and rights thereto (including oil and gas leases, operating agreements, unitization and pooling agreements and orders, division orders, transfer orders, mineral deeds, royalty deeds, oil and gas sales, exchange and processing contracts and agreements and, in each case, interests thereunder), surface interests, fee interests, mineral servitudes, reversionary interests, reservations and concessions; (c) easements, rights of way, licenses, permits, leases, and other interests associated with, appurtenant to, or necessary for the operation of any of the foregoing; and (d) interests in equipment and machinery (including well equipment and machinery), oil and gas production, gathering, transmission, compression, treating, processing and storage facilities (including tanks, tank batteries, pipelines and gathering systems), pumps, water plants, electric plants, gasoline and gas processing plants, refineries and other tangible personal property and fixtures associated with, appurtenant to, or necessary for the operation of any of the foregoing. "Ownership Interests" means the ownership interests of the Company and its Subsidiaries in its assets, as set forth on SCHEDULE 1.1A of the Disclosure Schedule. "Other Notes" means the Company notes to be issued and sold by the Company pursuant to provisions of the Other Securities Purchase Agreements. "Other Securities Purchase Agreements" shall mean those securities purchase agreements of even date herewith as listed on EXHIBIT H attached hereto. "Pension Plan" means any employee benefit plan or welfare benefit plan within the meaning of section 3(3) of ERISA maintained by the Company, any Subsidiary of the Company or any ERISA Affiliate that is or was previously covered by Title IV of ERISA or subject to the minimum funding standards under section 412 of the IRC, including a "multiemployer plan" as such term is defined in section 3(37) of ERISA, under which the Company or any Subsidiary of the Company has any current or future obligation or liability and under which any present or former employee of the Company or any Subsidiary of the Company, or such present or former employee's dependents or beneficiaries, has any current or future right to benefits. "Per Share Stock Price" means for the Common Stock on any day shall be the last sale price, or, in case no such sale takes place on such day, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotations System, or such other system then in use. "Permitted Encumbrances" means (a) Liens for Taxes, assessments or other governmental charges or levies if the same shall not at the particular time in question be due and delinquent or (if foreclosure, distraint, sale or other similar proceedings shall not have been commenced or if commenced, shall have been stayed) are being contested in good faith by appropriate proceedings and if the Company or its Subsidiaries shall have set aside on their books such reserves (segregated to the extent required by sound accounting 8 principles) as may be required by GAAP or otherwise determined by its board of directors to be adequate with respect thereto; (b) Liens of carriers, warehousemen, mechanics, laborers, materialmen, landlords, vendors, workmen and operators arising by operation of law in the ordinary course of business or by a written agreement existing as of the date hereof and necessary or incident to the exploration, development, operation and maintenance of Hydrocarbon properties and related facilities and assets for sums not yet due or being contested in good faith by appropriate proceedings, if any the Company or its Subsidiaries shall have set aside on its books such reserves(segregated to the extent required by sound accounting practices) as may be required by GAAP or otherwise determined by its board of directors to be adequate with respect thereto; (c) Liens incurred in the ordinary course of business in connection with worker's compensation, unemployment insurance and social security legislation (other than ERISA); (d) Liens incurred in the ordinary course of business to secure the performance of bids, tenders, trade contracts, leases, statutory obligations, surety and appeal bonds, performance and repayment bonds and other obligations of a like nature; (e) Liens, easements, rights-of-way, restrictions, servitudes, permits, conditions, covenants, exceptions, reservations and other similar encumbrances incurred in the ordinary course of business or existing on property and not (i) reducing the Company's net revenue interest in any Oil and Gas Interests below that set forth on Schedule 1.1A , (ii) increasing the Company's Working Interest in any Oil and Gas Interest above that set forth on Schedule 1.1A or (iii) in the aggregate materially impairing the value of the assets of the Company or its Subsidiaries or interfering with the ordinary conduct of the business of the Company or its Subsidiaries or rights to any of their assets; (f) Liens created or arising by operation of law to secure a party's obligations as a purchaser of oil and gas; (g) all rights to consent by, required notices to, filings with, or other actions by Governmental Authorities to the extent customarily obtained subsequent to Closing; (h) farmout, carried working interest, joint operating, unitization, royalty, overriding royalty, sales and similar arrangements relating to the exploration, development of, or production from, Hydrocarbon properties entered into in the ordinary course of business; (i) preferential rights to purchase and Third Party Consents (to the extent not triggered by the consummation of the transactions contemplated herein); and (j) Liens arising under or created pursuant to the Compass Senior Debt Documents. "Permitted Senior Debt" means the Compass Senior Debt or other debt or credit facility of the Company which is intended to replace the Compass Senior Debt. "Person" means an individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof and shall also mean the Company. "Pre-Distribution Price" has the meaning given such term in SECTION 4.2(c). "Purchase Price" has the meaning given such term in SECTION 2.1 "Redemption Date" means the date on which the entire balance of the Note, including, without limitation, all accrued but unpaid interest thereon and all fees payable by the Company or its Subsidiaries in connection therewith, have been paid in full. "Registration Rights Agreement" means a Registration Rights Agreement to be executed by the 9 Company, 3TEC and Shoeinvest at Closing, in the form attached hereto as Exhibit B. "Registration Statement" has the meaning giving such term in SECTION 5.1. "Reserve Engineer" shall have the meaning set forth in SECTION 7.32. "Reserve Report" shall have the meaning set forth in SECTION 7.32. "SEC Documents" shall have the meaning set forth in SECTION 7.28. "Schedule" means a "schedule" attached to this Agreement and incorporated herein by reference, unless specifically indicated otherwise. "Section" refers to a "section" or "subsection" of this Agreement unless specifically indicated otherwise. "Securities" means the Notes, the Common Stock Shares and the Warrants to be issued and sold to Shoeinvest and any Warrant Shares. "Securities Act" means the Securities Act of 1933, as amended, or any successor federal statute. "Senior Lender" means Compass Bank, Bank of Oklahoma, National Association and the other lenders who executed the Compass Senior Credit Agreement. "Series B Convertible Preferred Shares" shall mean those shares of Series B Convertible Preferred Stock of the Company as set forth on SCHEDULE 1.1B of the Disclosure Schedule. "Series C Convertible Preferred Shares" shall mean those shares of Series C Convertible Preferred Stock of the Company as set forth on SCHEDULE 1.1C of the Disclosure Schedule. "Shareholders Agreement" means a Shareholders Agreement to be entered into by and among the Company and the Major Shareholders of the Company at Closing. "Subsidiary" means, for any Person, any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other Persons performing similar functions (including that of a general partner) are at the time directly or indirectly owned, collectively, by such Person and any Subsidiaries of such Person. The term Subsidiary shall include Subsidiaries of Subsidiaries (and so on). "Taxes" means all taxes, assessments, filing or other fees, levies, imposts, duties, deductions, withholdings, stamp taxes, interest equalization taxes, capital transaction taxes, foreign exchange taxes or other charges of any nature whatsoever, from time to time or at any time imposed by law or any federal, state or local governmental agency. "Tax" means any one of the foregoing. 10 "Third Party Consents" means the consent or approval of any Person other than the Company, Shoeinvest or any Governmental Authority. "3TEC" shall mean 3TEC Energy Corporation, a Delaware corporation. "3TEC Note" shall mean that certain Senior Subordinate Promissory Note in the aggregate principal amount of $10,700,000 to be issued and sold by the Company to 3TEC. "Transaction Documents" means this Agreement, the Notes, the Warrant Certificates, the Registration Rights Agreement, the Shareholders Agreement, the Company's Charter Documents and all other agreements, certificates, documents or instruments now or at any time hereafter delivered in connection with this Agreement, as the foregoing may be renewed, extended, modified, amended or restated from time to time. "Warrant Certificate" means the Warrant Certificates to be issued by the Company evidencing Warrants issued hereunder which shall be in the form of EXHIBIT D attached hereto. "Warrant Exercise Price" means $1.00 per share (subject to adjustment as provided in SECTION 4.2). "Warrant Expiration Date" means 5:00 p.m., Dallas, Texas time, five (5) years following the Closing Date. "Warrant Holder" means any Person (i) in whose name any Warrant is registered on the Warrant Register, or (ii) in whose name any Warrant Shares are registered on the books and records of the Company. "Warrant Register" means a register maintained by the Company setting forth the name and address of each Warrant Holder, the number of Warrants held by such Warrant Holder and the certificate number of each Warrant Certificate held by such Warrant Holder. "Warrant Shares" means the shares of Common Stock issuable upon exercise of the Warrants. "Warrants" means the Common Stock Purchase Warrants to be issued by the Company to Shoeinvest pursuant to SECTION 2.1 of this Agreement, each of which shall entitle the holder thereof to purchase one (1) share of Common Stock at the Warrant Exercise Price (subject to adjustment as provided in SECTION 4.2). "Working Interests" means the Company's or its Subsidiaries' share of all of the costs, expenses, burdens, and obligations of any type or nature attributable to the Company's or its Subsidiaries' interests in its oil and gas properties or any well thereon. SECTION 1.2. ACCOUNTING TERMS AND DETERMINATIONS. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with GAAP as in effect from time to time, applied on a basis consistent with the most recent annual audited, consolidated financial statements of the Company delivered to Shoeinvest prior to the date hereof. 11 SECTION 1.3. GENDER AND NUMBER. Words of any gender used in this Agreement shall be held and construed to include any other gender and words in the singular number shall be held to include the plural, and vice versa, unless the context requires otherwise. SECTION 1.4. REFERENCES TO AGREEMENT. Use of the words "herein", "hereof", "hereinabove", and the like are and shall be construed as references to this Agreement. ARTICLE II PURCHASE AND SALE OF SECURITIES SECTION 2.1. PURCHASE AND SALE. Subject to the satisfaction of the terms and conditions set forth herein and in reliance upon the representations and warranties of the parties set forth herein and in the other Transaction Documents (a) Shoeinvest agrees to purchase from the Company and the Company agrees to issue and sell to Shoeinvest, 44,444 shares of Common Stock and 33,644 Warrants for an aggregate purchase price of $100,000 (the "COMMON STOCK SHARES PURCHASE PRICE"), and (b) Shoeinvest agrees to purchase from the Company and the Company agrees to issue and sell to Shoeinvest the Note for the purchase price of $100,000 (the "NOTE PURCHASE PRICE," and together with the Common Stock Shares Purchase Price, the "PURCHASE PRICE"). SECTION 2.2. CLOSING. Closing of the purchase and sale of the Securities (the "CLOSING") shall take place at the offices of Thompson & Knight, P.C., Houston, Texas at 10:00 a.m. on the Closing Date, or at such other time, date and place as may be agreed upon in writing by the Company and Shoeinvest. SECTION 2.3. DELIVERY. At the Closing, the Company shall deliver to Shoeinvest, against payment therefor, certificates evidencing the Common Stock Shares, the Note and the Warrant Certificate purchased by Shoeinvest hereunder, in each case duly issued and in form sufficient to vest title thereto fully in Shoeinvest, free and clear of all Liens, claims and encumbrances. SECTION 2.4. PAYMENT. At the Closing, Shoeinvest shall pay the Purchase Price to the Company by wire transfer of immediately available funds. ARTICLE III RESERVATION AND ISSUANCE OF CONVERSION SHARES The Company will at all times have authorized, and reserve and keep available, free from preemptive rights, for the purpose of enabling it to satisfy any obligation to issue Conversion Shares upon the Noteholder's exercise of its conversion rights under the Note, the number of shares of Common Stock deliverable upon such conversion rights. The Company covenants that all Conversion Shares issued by it will, upon issuance in accordance with the terms of this Agreement, be fully paid and nonassessable and free from all Taxes with respect to the issuance thereof and free from all Liens other than Liens arising by, 12 through or under the Noteholder to whom such Conversion Shares were issued. ARTICLE IV CERTAIN TERMS APPLICABLE TO WARRANTS SECTION 4.1. EXERCISE OF WARRANTS. (a) One-half of the Warrants may be exercised in whole or in part at any time until the Warrant Expiration Date at which time the Warrants shall expire and shall thereafter no longer be exercisable. (b) The other half of the Warrants (the "Restricted Warrants") may be exercised, in whole or in part, until the Warrant Expiration Date, as follows: (i) up to 20% of the Restricted Warrants may be exercised during the one (1) year period commencing on the Closing Date; (ii) up to 40% of the Restricted Warrants (inclusive of any prior exercise under this subsection (b)) may be exercised during the one (1) year period commencing twelve (12) months after the Closing Date; (iii) up to 60% of the Restricted Warrants (inclusive of any prior exercise under this subsection (b)) may be exercised during the one (1) year period commencing twenty-four (24) months after the Closing Date; (iv) up to 80% of the Restricted Warrants (inclusive of any prior exercise under this subsection (b)) may be exercised during the one (1) year period commencing thirty-six (36) months after the Closing Date; and (v) up to 100% of the Restricted Warrants (inclusive of any prior exercise under this subsection (b)) may be exercised during the one (1) year period commencing forty-eight (48) months after the Closing Date; Notwithstanding the foregoing, in any event, the Restricted Warrants may be exercised at the earlier of: (i) the conversion of all or part of the Note into shares of Common Stock, subject to the restrictions set forth below in SECTION 4.1(C); (ii) a Change of Control; or (iii) the payment in full of the Note. 13 (c) If the entire amount of principal and interest due and payable under the Note is converted to Common Stock, all of the Restricted Warrants shall be immediately exercisable in whole or in part at any time until the Warrant Expiration Date. If less than the entire amount of principal and interest due and payable under the Note is converted, a pro-rata portion of the Restricted Warrants based upon the amount of the Note which is converted compared to the total amount of the Note prior to conversion, shall be immediately exercisable in whole or in part at any time until the Warrant Expiration Date. For example, if fifty percent (50%) of the Note is converted, one half of the Restricted Warrants would be exercisable. (d) The Warrants shall be exercised by presentation of the Warrant Certificate evidencing the Warrants to be exercised, with the form of election to purchase on the reverse thereof duly completed and signed, to the Company at the offices of the Company as set forth on the signature page of this Agreement, together with payment of the aggregate Warrant Exercise Price for the number of Warrant Shares in respect of which such Warrants are being exercised in lawful money of the United States of America; PROVIDED, that, to the extent the Warrant Holder exercising such Warrants is also the holder of a Note, such Warrant Holder or Noteholder may elect, by written notice to the Company delivered with such presentation, to elect to pay the applicable Warrant Exercise Price by offsetting the next scheduled payment of such Note by an amount equal to the aggregate Warrant Exercise Price payable in connection with such exercise of Warrants. Upon such presentation, the Company shall issue and cause to be delivered to or upon the written order of the registered Holder of such Warrants and in such name or names as such registered Holder may designate, a certificate or certificates for the aggregate number of Warrant Shares issued upon such exercise of such Warrants. Any Person so designated to be named therein shall be deemed to have become holder of record of such Warrant Shares as of the date of exercise of such Warrants; PROVIDED, that, no Warrant Holder will be permitted to designate that such Warrant Shares be issued to any Person other than such Warrant Holder unless each condition to transfer contained in ARTICLE V hereof which would be applicable to a transfer of Warrants or Warrant Shares has been satisfied. (b) If less than all of the Warrants evidenced by a Warrant Certificate are exercised at any time, a new Warrant Certificate or Certificates shall be issued for the remaining number of Warrants evidenced by such Warrant Certificate. All Warrant Certificates surrendered upon exercise of Warrants shall be canceled. (c) The Company shall not be required to issue fractional shares of Common Stock upon exercise of any Warrants issued by it, but shall pay for any such fraction of a share an amount in cash equal to the value of such fractional share determined by the Company's board of directors in good faith. (d) The Company will pay all Taxes attributable to the initial issuance of Warrant Shares upon the exercise of the Warrants issued by it; PROVIDED, that, each Warrant Holder shall use its reasonable efforts to avoid any such Tax on the issuance of Warrant Shares; and PROVIDED, further that, the Company shall not be required to pay any income Tax or any other Tax which may be payable in respect of any transfer involved in the issue of any Warrant Certificate or any certificate for Warrant Shares in a name other than that of the registered holder of a Warrant Certificate surrendered upon the exercise of such a Warrant, and the Company shall not be required to issue or deliver such certificates unless or until the Person or Persons requesting the issuance thereof shall have paid to the Company the amount of such Tax or shall 14 have established to the satisfaction of the Company that such Tax has been paid. SECTION 4.2. ADJUSTMENT OF NUMBER OF WARRANT SHARES PURCHASABLE. The number of Warrant Shares purchasable upon the exercise of each Warrant is subject to adjustment from time to time upon the occurrence of any of the events enumerated in this SECTION 4.2. (a) In the event that the Company shall at any time after the date of this Agreement declare a dividend on the Common Stock in shares of its capital stock (whether shares of such Common Stock or of capital stock of any other class of the Company), split or subdivide the outstanding Common Stock, or combine the outstanding Common Stock into a smaller number of shares, the number of Warrant Shares purchasable upon an exercise of each Warrant after the time of the record date for such dividend or of the effective date of such split, subdivision or combination shall be adjusted to equal the number of shares of Common Stock which a Holder having the same number of shares of Common Stock as the number of Warrant Shares into which each Warrant is exercisable immediately prior to such record date or effective date, as the case may be, would own or be entitled to receive after such record date or effective date. (b) In the event that the Company shall at any time after the date of this Agreement issue any shares of Common Stock without consideration or at a price per share less than $1.00, or issue options, rights or warrants to subscribe for or purchase such Common Stock (or securities convertible into such Common Stock) without consideration or at a price per share (or having a conversion price per share, if a security convertible into such Common Stock) less than $1.00, the number of Warrant Shares purchasable upon an exercise of each Warrant after the date of such issuance shall be adjusted to equal the product obtained by multiplying the number of Warrant Shares into which each Warrant is exercisable immediately prior to the date of such issuance by a fraction, the numerator shall be the number of shares of Common Stock outstanding on a Fully Diluted Basis immediately after such issuance, and the denominator of which shall be the number of shares of Common Stock outstanding on a Fully Diluted Basis immediately prior to such issuance PLUS the number of shares of such Common Stock which the aggregate offering price of the total number of shares of such Common Stock so to be issued or to be offered for subscription or purchase (or the aggregate initial conversion price of the convertible securities so to be offered) would purchase at $1.00 per share. In case such subscription price may be paid in a consideration part or all of which shall be in a form other than cash, the value of such consideration shall be as determined by an investment banker reasonably acceptable to the Warrant Holder (the cost of the engagement of said investment banking firm to be borne by the Company). Shares of such Common Stock owned by or held for the account of the Company or any Subsidiary thereof shall not be deemed outstanding for the purpose of any such computation. Such adjustment shall be made successively whenever the date of such issuance is fixed (which date of issuance shall be the record date for such issuance if a record date therefor is fixed); and, in the event that such shares or options, rights or warrants are not so issued, the number of Warrant Shares into which each Warrant is exercisable shall again be adjusted to be such number of Warrant Shares into which each Warrant is exercisable if the date of such issuance had not been fixed. (c) In case the Company shall make a distribution to all holders of Common Stock (including any such distribution made in connection with a consolidation or merger in which the Company is the surviving corporation) of shares of it stock, evidences of its indebtedness, assets, or rights, options or 15 warrants (other than those referred to in subsection (b) of this Section 4.2) to subscribe for or purchase such shares, evidences of indebtedness, or assets, the number of Warrant Shares into which each Warrant is exercisable after such date of distribution shall be adjusted to equal the product obtained by multiplying the number of Warrant Shares purchasable upon an exercise of each Warrant immediately prior to such date by a fraction, the numerator of which shall be the Per Share Stock Price for the trading day immediately preceding the day of distribution ("Pre-Distribution Price"), and the denominator of which shall be the Pre-Distribution Price less the fair market value of the distribution (as determined in good faith by the Board of Directors of the Company) applicable to one share of Common Stock. Such adjustment shall be made successively whenever a date for such distribution is fixed (which date of distribution shall be the record date for such issuance if a record date therefor is fixed); and, if such distribution is not so made, the number of Warrant Shares into which each Warrant is exercisable shall again be adjusted to be such number of Warrant Shares which would then be in effect if the date of such distribution had not been fixed. (d) No adjustment in the number of Warrant Shares purchasable upon an exercise of each Warrant shall be required unless such adjustment would require an increase or decrease of at least one-tenth of one percent (.1%) in such number of Warrant Shares; PROVIDED that any adjustments which by reason of this SECTION 4.2(D) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this SECTION 4.2 shall be made to the nearest hundredth of one percent. (e) The Warrant Exercise Price in effect immediately prior to any adjustment of the number of Warrant Shares into which each Warrant is exercisable shall be simultaneously adjusted (but not below the par value of the Common Stock) by multiplying the Warrant Exercise Price immediately prior to such adjustment by a fraction, the numerator of which shall be the number of Warrant Shares into which each Warrant is exercisable immediately prior to such adjustment, and the denominator of which shall be the number of Warrant Shares into which each Warrant is exercisable immediately after such adjustment. (f) In the event of any capital reorganization of the Company, or of any reclassification of any Common Stock for which any Warrant is exercisable (other than a subdivision or combination of outstanding shares of such Common Stock), or in case of the consolidation of the Company with or the merger of the Company with or into any other corporation or of the sale of the properties and assets of the Company as, or substantially as, an entirety to any other Person, each Warrant shall after such capital reorganization, reclassification of such Common Stock, consolidation, merger or sale be exercisable, upon the terms and conditions specified in this Agreement, for the number of shares of stock or other securities or assets to which a holder of the number of Warrant Shares purchasable (at the time of such capital reorganization, reclassification of such Common Stock, consolidation, merger or sale) upon exercise of such Warrant would have been entitled upon such capital reorganization, reclassification of such Common Stock, consolidation, merger or sale; and in any such case, if necessary, the provisions set forth in this SECTION 4 with respect to the rights thereafter of such Warrant shall be appropriately adjusted so as to be applicable, as nearly as may reasonably be, to any shares of stock or other securities or assets thereafter deliverable on the exercise of such Warrants. The Company shall not effect any such consolidation, merger or sale, unless prior to or simultaneously with the consummation thereof, the successor corporation (if other than the Company) resulting from such consolidation or merger or the corporation purchasing such assets or the appropriate 16 corporation or entity shall assume, by written instrument, the obligation to deliver to each Warrant Holder the shares of stock, securities or assets to which, in accordance with the foregoing provisions, such Warrant Holder may be entitled pursuant to this SECTION 4.2(F). (g) If any question shall at any time arise with respect to the adjusted number of Warrant Shares, such question shall be determined by the independent firm of certified public accountants of recognized national standing selected by the Warrant Holder. (h) Notwithstanding anything in this SECTION 4.2 to the contrary, the Company shall not be permitted to take any action described in this SECTION 4.2 (such as, but not by way of limitation, any dividend, consolidation merger or reorganization) if such action is prohibited under any other provision of this Agreement. (i) Notwithstanding that the number of Warrant Shares purchasable upon the exercise of each Warrant may have been adjusted pursuant to the terms hereof, the Company shall nonetheless not be required to issue fractions of Warrant Shares upon exercise of each Warrant or to distribute certificates that evidence fractional shares, but instead shall pay to the holder of each Warrant the cash value of any such fractional Warrant Shares. SECTION 4.3 NOTICES TO WARRANT HOLDERS. Upon any adjustment of the number of Warrant Shares issuable upon an exercise of the Warrants or any adjustment of the Warrant Exercise Price pursuant to SECTION 4.3, the Company shall promptly, but in any event within thirty (30) days thereafter, cause to be given to each Warrant Holder, at its address appearing on the Warrant Register, by first class mail, postage prepaid, a certificate signed by the Company's Financial Officer setting forth the number of Warrant Shares issuable upon the exercise of each Warrant as so adjusted and the Warrant Exercise Price as so adjusted, and describing in reasonable detail the facts accounting for such adjustment and the method of calculation used. Where appropriate, such certificate may be given in advance and included as part of the notice required to be mailed under the other provisions of this SECTION 4.3. In the event: (a) that the Company shall authorize the issuance to all holders of its Common Stock of rights or warrants to subscribe for or purchase capital stock of the Company or of any other subscription rights or warrants; or (b) that the Company shall issue any shares of Common Stock without consideration or at a price per share less than $1.00, or issue options, rights, or warrants to subscribe for or purchase such Common Stock (or securities convertible into such Common Stock) without consideration or at a price per share (or having a conversion price per share, if a security convertible into such Common Stock) less than $1.00; or 17 (c) that the Company shall authorize the distribution to all holders of its Common Stock of shares of its stock, evidences of its indebtedness, assets, or rights, options, or warrants to subscribe for or purchase such shares, evidences of indebtedness or assets; or (d) of any consolidation or merger to which the Company is a party and for which approval of any shareholders of the Company is required, or of the conveyance or transfer of the properties and assets of the Company substantially as an entirety, or of any capital reorganization or reclassification or change of the Common Stock (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination); or (d) of the voluntary dissolution, liquidation or winding up of the Company; or (e) that the Company proposes to take any other action which would require an adjustment of the Warrant Exercise Price of the Warrants issued by it pursuant to SECTION 4.2; then the Company shall cause to be given to each Warrant Holder at such Warrant Holder's address appearing on the Warrant Register, at least twenty (20) days prior to the applicable date hereinafter specified, by first class mail, postage prepaid, a written notice stating the date as of which the holders of record of Common Stock to be entitled to receive any such rights, warrants or distribution are to be determined, or the date on which any such consolidation, merger, conveyance, transfer, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that the holders of record of Common Stock shall be entitled to exchange their shares for securities or other property, if any, deliverable upon such reclassification, consolidation, merger, conveyance, transfer, dissolution, liquidation or winding up. SECTION 4.4. RESERVATION AND ISSUANCE OF WARRANT SHARES. The Company will at all times have authorized, and reserve and keep available, free from preemptive rights, for the purpose of enabling it to satisfy any obligation to issue Warrant Shares upon the exercise of the Warrants, the number of shares of Common Stock deliverable upon exercise of all outstanding Warrants. The Company covenants that all Warrant Shares issued by it will, upon issuance in accordance with the terms of this Agreement, be fully paid and nonassessable and free from all Taxes with respect to the issuance thereof and free from all Liens other than Liens arising by, through or under the Warrant Holder to whom such Warrant Shares were issued. ARTICLE V TRANSFER OF SECURITIES Section 5.1. RESTRICTIONS ON TRANSFER. Shoeinvest understands and agrees that the Securities have not been registered under the Securities Act or any state securities Laws, and that accordingly, they will not be fully transferable except as permitted under various exemptions contained in the Securities Act and applicable state securities Laws, or upon satisfaction of the registration and prospectus delivery requirements of the Securities Act and applicable state securities Laws. Shoeinvest acknowledges that it must bear the economic risk of its investment in the Securities for an indefinite period of time (subject, however, to the 18 payment terms of the Note, and the Company's obligations pursuant to the Registration Rights Agreement) since they have not been registered under the Securities Act and applicable state securities Laws and therefore cannot be sold unless they are subsequently registered or an exemption from registration is available. Absent an effective registration statement under the Securities Act and applicable state securities Laws covering the disposition of the Securities, Shoeinvest will not sell, transfer, assign, pledge, hypothecate or otherwise dispose of any or all of the Securities absent a valid exemption from the registration and prospectus delivery requirements of the Securities Act and the registration or qualification requirements of any applicable state securities Laws. The Company agrees that it will effect the transfer of the Securities on its books and records upon receipt of an opinion of counsel stating that Shoeinvest's proposed sale or transfer of the Securities is exempt from the registration and qualification requirements of the Securities Act. SECTION 5.2. REGISTRATION, TRANSFER AND EXCHANGE OF WARRANTS. (a) The Company shall maintain at the offices of the Company as set forth on the signature pages of this Agreement, the Warrant Register for registration of the Warrants and Warrant Certificates and transfers thereof. On the Closing Date, the Company shall register the outstanding Warrants and Warrant Certificates issued to Shoeinvest. The Company may deem and treat the registered Warrant Holders as the absolute owners of the Warrants registered to such Holders and (notwithstanding any notation of ownership or other writing on the Warrant Certificates made by any Person) for the purpose of any exercise thereof or any distribution to the Warrant Holders, and for all other purposes. (b) Upon satisfaction of each condition set forth in SECTION 5.1 hereof, the Company shall register the transfer of any outstanding Warrants in the Warrant Register upon surrender of the Warrant Certificate(s) evidencing such Warrants to the Company at the offices of the Company as set forth on the signature pages of this Agreement, accompanied (if so required by it) by a written instrument or instruments of transfer in form satisfactory to it, duly executed by the registered Warrant Holder or by the duly appointed legal representative thereof. Upon any such registration of transfer, new Warrant Certificate(s) evidencing such transferred Warrants shall be issued to the transferee(s) and the surrendered Warrant Certificate(s) shall be canceled. If less than all the Warrants evidenced by a Warrant Certificate(s) surrendered for transfer are to be transferred, a new Warrant Certificate(s) shall be issued to the Warrant Holder surrendering such Warrant Certificate(s) evidencing such remaining number of Warrants. (c) Warrant Certificates may be exchanged at the option of the Warrant Holder(s) thereof, when surrendered to the Company at the offices of the Company as set forth on the signature pages of this Agreement, for another Warrant Certificate or other Warrant Certificates of like tenor and representing in the aggregate a like number of Warrants. Warrant Certificates surrendered for exchange shall be canceled. (d) No charge shall be made for any such transfer or exchange except for any Tax or other governmental charge imposed in connection therewith. SECTION 5.3. MUTILATED OR MISSING WARRANT CERTIFICATES. If any Warrant Certificate shall be mutilated, lost, stolen or destroyed, the Company shall issue, in exchange and substitution for and upon cancellation of the mutilated Warrant Certificate, or in lieu of and substitution for the Warrant Certificate lost, stolen or destroyed, a new Warrant Certificate of like tenor and representing an equivalent number of 19 Warrants, but only upon receipt of evidence satisfactory to the Company of such loss, theft or destruction of such Warrant Certificate and, if requested, indemnity satisfactory to it. No service charge shall be made for any such substitution, but all expenses and reasonable charges associated with procuring such indemnity and all stamp, Tax and other governmental duties that may be imposed in relation thereto shall be borne by the holder of such Warrant Certificate. SECTION 5.4. REGISTRATION, TRANSFER AND EXCHANGE OF NOTES. (a) The Company shall maintain at the offices of the Company as set forth on the signature pages of this Agreement, the Note Register for registration of the Notes and transfers thereof. On the Closing Date, the Company shall register the outstanding Notes issued to Shoeinvest. The Company may deem and treat the registered Noteholder as the absolute owner of the Note registered to such Holder and (notwithstanding any notation of ownership or other writing on the Note made by any Person) for the purpose of any exercise thereof or any distribution to the Noteholder, and for all other purposes. (b) Upon satisfaction of each condition set forth in SECTION 5.1 hereof, the Company shall register the transfer of any outstanding Note in the Note Register upon surrender of such Note to the Company at the offices of the Company as set forth on the signature pages of this Agreement, accompanied (if so required by it) by a written instrument or instruments of transfer in form satisfactory to it, duly executed by the registered Noteholder or by the duly appointed legal representative thereof. Upon any such registration of transfer, a new Note evidencing such transferred Note shall be issued to the transferee and the surrendered Note shall be canceled. If less than all of the principal amount of a Note surrendered for transfer is to be transferred, a new Note shall be issued to the Noteholder surrendering such Note evidencing such remaining principal balance. (c) The Notes may be exchanged at the option of the Noteholders thereof, when surrendered to the Company at the offices of the Company as set forth on the signature pages of this Agreement, for another Note or other Notes of like tenor and representing in the aggregate a like number of Notes. Notes surrendered for exchange shall be canceled. (d) No charge shall be made for any such transfer or exchange except for any Tax or other governmental charge imposed in connection therewith. SECTION 5.5. MUTILATED OR MISSING NOTES. If any Note shall be mutilated, lost, stolen or destroyed, the Company shall issue, in exchange and substitution for and upon cancellation of the mutilated Note, or in lieu of and substitution for the Note lost, stolen or destroyed, a new Note of like tenor and representing the same outstanding principal, but only upon receipt of evidence satisfactory to the Company of such loss, theft or destruction of such Note and, if requested, indemnity satisfactory to it. No service charge shall be made for any such substitution, but all expenses and reasonable charges associated with procuring such indemnity and all stamp, Tax and other governmental duties that may be imposed in relation thereto shall be borne by the holder of such Note. ARTICLE VI 20 CONDITIONS SECTION 6.1. CONDITIONS PRECEDENT TO SHOEINVEST'S OBLIGATIONS AT CLOSING. The obligations of Shoeinvest to purchase the Securities pursuant to SECTION 2.1 are subject to the satisfaction of each of the conditions precedent set forth in this SECTION 6.1 on or before 10:00 a.m. (Dallas, Texas time) on the Closing Date. In the event all of the conditions precedent set forth in this SECTION 6.1 are not satisfied by such time, Shoeinvest may, at its option, terminate this Agreement and the other Transaction Documents and all obligations of Shoeinvest hereunder and thereunder, or waive any and all of such conditions precedent and close the transactions as contemplated herein. (a) CLOSING DELIVERIES. The Company shall have delivered to Shoeinvest, in form and substance satisfactory to Shoeinvest each of the following: (i) the Note to be purchased by Shoeinvest pursuant to SECTION 2.1 duly executed and delivered by the Company and payable to Shoeinvest; (ii) certificates issued to Shoeinvest evidencing the Common Stock Shares to be purchased by Shoeinvest pursuant to SECTION 2.1; (iii) Warrant Certificates issued to Shoeinvest by the Company evidencing the Warrants to be purchased by Shoeinvest pursuant to SECTION 2.1; (iv) the Registration Rights Agreement duly executed and delivered by the Company and Shoeinvest; (v) the Employment Agreement duly executed and delivered by the Company and Floyd C. Wilson; (vi) a favorable opinion of Thrasher, Whitley, Hampton & Morgan, counsel for the Company, in form and substance satisfactory to Shoeinvest and its counsel; (vii) all resolutions, certificates and documents Shoeinvest may request relating to (A) the organization, existence, good standing and foreign qualification of the Company and each of its Subsidiaries, (B) the corporate authority for the execution, delivery and enforceability of this Agreement and the consummation of the Closing Transactions, (C) the stock ownership of the Company and each of its Subsidiaries, (D) evidence of all resolutions and related documents necessary to increase the Company's outstanding capital, if necessary, and (E) such other matters relevant to the foregoing as Shoeinvest shall reasonably request, all of which shall be in form and substance satisfactory to Shoeinvest and its counsel; (viii) if applicable, the waiting period applicable to the transactions contemplated hereby under the HSR Act shall have expired or been terminated and all filings required to be made prior to the Closing Date, and all consents, approvals, permits and authorizations required to be obtained 21 prior to the Closing Date from, any Governmental Authority in connection with execution and delivery of this Agreement and the consummation of the transactions contemplated hereby shall have been made or obtained. (ix) evidence satisfactory to Shoeinvest that all Closing Transactions have been consummated; (x) a Subordination Agreement among Shoeinvest, Compass Bank and Bank of Oklahoma in the form and substance reasonably acceptable to Shoeinvest; (xi) a certificate from an Authorized Officer of the Company certifying that (A) neither a Default nor an Event of Default has occurred, and (B) each and every representation and warranty of the Company in the Transaction Documents is true and correct in all material respects; (xii) the holders of the requisite number of shares of outstanding capital stock of the Company shall have duly and validly approved all items necessary to effect the transactions contemplated by this Agreement and the other Transaction Documents, the Closing Transactions and all other transactions contemplated hereby or thereby; (xiii) the Common Stock Shares, the Warrant Shares and the shares of Common Stock issuable upon conversion of the Notes shall have been approved for listing on the Nasdaq Small Cap Market, subject to official notice of issuance; (xiv) resignations in form acceptable to Shoeinvest of each of the directors of the Company who are not designated by the Major Shareholders pursuant to the provisions of the Shareholders Agreement; (xv) evidence of cancellation of the Company's Employee Net Profits Interest Incentive Compensation Plan ("NPI Plan") and termination of the Company's SEP/IRA Plan established in 1993;and (xvi) such other documents, instruments and agreements as Shoeinvest shall reasonably request in light of the transactions contemplated hereunder. The documents, certificates and opinions referred to in this SECTION 6.1(A) shall be delivered to Shoeinvest no later than the Closing Date and shall, except as expressly provided otherwise, be dated the Closing Date. (b) LEGAL MATTERS. All legal matters with respect to the Company and its Subsidiaries, the Transaction Documents and the Closing Transactions shall be acceptable to Shoeinvest. (c) ABSENCE OF DEFAULT. No Default or Event of Default shall have occurred which is continuing. (d) REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company 22 contained in this Agreement and in the other Transaction Documents shall be true and correct in all material respects on the Closing Date as if they were made on such date (in determining the truth and correctness of any representation or warranty no effect shall be given to any limitation contained in such representation or warranty as to Knowledge). (e) NO MATERIAL ADVERSE EFFECT. No event has occurred or condition exists which has had or could be expected to have a Material Adverse Effect on the Company. (f) PAYMENT OF EXPENSES. The Company shall have paid, or will make arrangements to pay at Closing, in full all documented and reasonable out of pocket fees, expenses and disbursements incurred by Shoeinvest in connection with its investigation, negotiation and closing of the transactions contemplated hereby. (g) WAIVER. Shoeinvest shall have been given evidence that the provisions, if any, listed on SCHEDULE 6.1(G) have been waived by the Company's shareholders or board of directors, as the case may be. (h) EMPLOYEE PARTICIPANT'S CONSENT. Evidence of each employee participant's consent to the termination and release of all rights related to the NPI Plan. (i) DUE DILIGENCE REVIEW. Completion of Buyer's due diligence, the results of which are satisfactory to Buyer, including but not limited to, Buyer's review of all items listed on the Disclosure Schedule. SECTION 6.2. CONDITIONS PRECEDENT TO THE COMPANY'S OBLIGATIONS AT CLOSING. The obligations of the Company to sell the Securities pursuant to SECTION 2.1 are subject to the satisfaction of each of the conditions precedent set forth in this SECTION 6.2 on or before 10:00 a.m. (Dallas, Texas time) on the Closing Date. In the event all of the conditions precedent set forth in this SECTION 6.2 are not satisfied by such time, the Company may, at its option, terminate this Agreement and the other Transaction Documents and all obligations of the Company hereunder and thereunder. (a) CLOSING DELIVERIES. Shoeinvest shall have delivered to the Company, in form and substance satisfactory to the Company each of the following: (i) the Purchase Price to be paid by Shoeinvest pursuant to SECTION 2.1; (ii) the Registration Rights Agreement duly executed and delivered by the Company and Shoeinvest; (iii) the Employment Agreement duly executed and delivered by the Company and Floyd C. Wilson; (iv) all resolutions, certificates and documents the Company may request relating to (A) the organization, existence, good standing and foreign qualification of Shoeinvest, (B) the corporate 23 authority for the execution, delivery and enforceability of this Agreement and the consummation of the Closing Transactions, and (C) such other matters relevant to the foregoing as the Company shall reasonably request, all of which shall be in form and substance satisfactory to the Company and its counsel; (v) if applicable, the waiting period applicable to the transactions contemplated hereby under the HSR Act shall have expired or been terminated and all filings required to be made prior to the Closing Date, and all consents, approvals, permits and authorizations required to be obtained prior to the Closing Date from, any Governmental Authority in connection with execution and delivery of this Agreement and the consummation of the transactions contemplated hereby shall have been made or obtained; (vi) evidence satisfactory to the Company that all Closing Transactions have been consummated; (vii) a certificate from an Authorized Officer of Shoeinvest certifying that (A) each and every representation and warranty of the Company in the Transaction Documents is true and correct in all material respects; (viii) payment of $274,625 to current employees of the Company as set forth on the schedule previously provided by the Company to Shoeinvest as payment in full of each employee's rights under the NPI Plan; (ix) such other documents, instruments and agreements as the Company shall reasonably request. The documents and certificates referred to in this SECTION 6.2(A) shall be delivered to the Company no later than the Closing Date and shall, except as expressly provided otherwise, be dated the Closing Date. (b) REPRESENTATIONS AND WARRANTIES. The representations and warranties of Shoeinvest contained in this Agreement and in the other Transaction Documents shall be true and correct in all material respects on the Closing Date as if they were made on such date. ARTICLE VII REPRESENTATIONS AND WARRANTIES In order to induce Shoeinvest to purchase the Securities to be purchased by it hereunder, the Company hereby represents and warrants to Shoeinvest that each of the following statements (a) is true and correct on the date hereof, and (b) will be true and correct after giving effect to the Closing Transactions. 24 SECTION 7.1. CORPORATE EXISTENCE AND POWER. Each of the Company and each of its Subsidiaries (a) is a corporation, duly organized, validly existing and in good standing under the Laws of its jurisdiction of incorporation set forth on SCHEDULE 7.1 of the Disclosure Schedule, (b) has all corporate power and authority necessary to carry on its business as now conducted and as proposed to be conducted, and (c) is duly qualified as a foreign corporation in each jurisdiction set forth on SCHEDULE 7.1 on the Disclosure Schedule which constitutes all jurisdictions where a failure to be so qualified could have a Material Adverse Effect on the Company or such Subsidiary. SECTION 7.2. CORPORATE AND GOVERNMENTAL AUTHORIZATION; CONTRAVENTION. The execution, delivery and performance of this Agreement and the other Transaction Documents by each of the Company and each of its Subsidiaries (to the extent each is a party to this Agreement or the other Transaction Documents) are within its corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any Governmental Authority (other than filings with any applicable securities regulatory authorities to perfect exemptions from the registration or qualification requirements of applicable securities Laws and which will be made immediately following the Closing Date), and, except for matters which have been waived in writing by the appropriate Person, do not contravene, or constitute a default under, any provision of applicable Law or of the Charter Documents or of any material judgment, injunction, order, decree or Material Agreement binding upon the Company or any of its Subsidiaries or its respective assets, or result in the creation or imposition of any Lien on any asset of the Company or any of its Subsidiaries. SECTION 7.3. BINDING EFFECT. This Agreement constitutes the valid and binding agreement of the Company; each other Transaction Document when executed and delivered in accordance with this Agreement, will constitute the valid and binding obligation of the Company and each of its Subsidiaries which is a party thereto, in each case enforceable in accordance with its terms except as (i) the enforceability thereof may be limited by bankruptcy, insolvency or similar Laws affecting creditors rights generally, and (ii) the availability of equitable remedies may be limited by equitable principles of general applicability. SECTION 7.4. CAPITALIZATION. SCHEDULE 7.4 of the Disclosure Schedule accurately and completely sets forth for each of the Company and its Subsidiaries (a) its authorized, issued and outstanding capital stock of every class, and (b) the names of the record, and to the Company's knowledge, beneficial owner, of its capital stock of every class, including the number and class of shares held by each such shareholder. Except as set forth SCHEDULE 7.4 of the Disclosure Schedule and except for the Warrants and registration rights provided in the Registration Rights Agreement, (x) there are not outstanding any options, warrants or other rights to acquire capital stock of any class of the Company or any of its Subsidiaries or securities convertible into capital stock of the Company or any of its Subsidiaries of any class, (y) no Person has any preemptive or similar rights with respect to any subsequent issue of stock by the Company or any of its Subsidiaries, and (z) no Person has any right to require the Company or any of its Subsidiaries to register any securities of the Company or any of its Subsidiaries under the Securities Act. 25 SECTION 7.5. ISSUANCE OF SECURITIES. The Securities to be issued on the Closing Date, when issued upon payment of the applicable Purchase Price in accordance with SECTION 2.1, will be duly authorized, validly issued, fully paid and non-assessable and will be free and clear of all Liens, claims and encumbrances including pre-emptive rights. The Warrant Shares, when issued upon an exercise of the Warrants, and the Conversion Shares, when issued upon a conversion of the amount of principal and unpaid interest on the Notes, will be duly authorized, validly issued, fully paid and nonassessable and free and clear of all Liens, claims and encumbrances, including, without limitation, all preemptive rights. SECTION 7.6. FINANCIAL STATEMENTS. The Company Financial Statements were prepared in accordance with the applicable published rules and regulations of the Commission with respect thereto and in accordance with GAAP applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto or, in the case of unaudited statements, as permitted by Rule 10-01 of Regulation S-X of the Commission) and fairly present in all material respects, in accordance with applicable requirements of GAAP (in the case of unaudited statements, subject to normal, recurring adjustments), the consolidated financial position of the Company and its Subsidiaries as of their respective dates and the consolidated results of operations and the consolidated cash flows of the Company and its Subsidiaries for the periods presented therein. The are no material liabilities of the Company or any Subsidiary (contingent or otherwise), other than as disclosed in the Company's Financial Statements. There are no material imbalances of production from the oil and gas properties of the Company or its Subsidiaries whether required to be disclosed pursuant to GAAP or otherwise. Since December 31, 1998, no event has occurred or condition exists which has had or could be expected to have a Material Adverse Effect. SECTION 7.7. MATERIAL AGREEMENTS. SCHEDULE 7.7 of the Disclosure Schedule contains a complete and accurate description of every Material Agreement to which the Company or any of its Subsidiaries is a party (other than the Transaction Documents) or by which the Company or any of its Subsidiaries or any of their respective assets are bound (including all amendments and modifications thereto). The Company has made available to Shoeinvest or provided Shoeinvest with a true and correct copy of all such Material Agreements, including all amendments and modifications thereof. No rights or obligations of any party to any of such Material Agreements has been waived, and no party to any of such Material Agreements is in default of its obligations thereunder. Each of such Material Agreements is a valid, binding and enforceable obligation of the parties thereto in accordance with its terms and is in full force and effect. SECTION 7.8. COMPASS DEBT DOCUMENTS. The Company has provided to or made available to Shoeinvest with a true and correct copy of all of the Compass Senior Debt Documents including all amendments and modifications thereto. No rights or obligations of any party to any of such Compass Senior Debt Documents have been waived, and no party to any of such Compass Senior Debt Documents is in default of its obligations thereunder. Each of such Compass Senior Debt Documents is a valid, binding and enforceable obligation of the parties thereto in accordance with its terms and is in full force and affect. 26 SECTION 7.9. INVESTMENTS. Except as set forth on SCHEDULE 7.9 of the Disclosure Schedule, neither the Company nor any of its Subsidiaries has any outstanding Investments. SECTION 7.10. OUTSTANDING DEBT. SCHEDULE 7.10 of the Disclosure Schedule contains a complete and accurate description of all Debt of the Company and each of its Subsidiaries outstanding on the date hereof. Neither the Company nor any of its Subsidiaries is in default in payment of any Debt with respect to which it is an obligor or in default of any covenant, agreement, representation, warranty or other term of any document, instrument or agreement evidencing, securing or otherwise pertaining to any such Debt. SECTION 7.11. TRANSACTIONS WITH AFFILIATES. SCHEDULE 7.11 of the Disclosure Schedule contains a complete and accurate description of all contracts, agreements and other arrangements (whether written, oral, express or implied) between the Company or any of its Subsidiaries and any Affiliate of the Company and its Subsidiaries in existence on the date hereof, including, without limitation, a complete and accurate description of all Investments of any of the Company or any of its Subsidiaries in any Affiliate of the Company or any of its Subsidiaries. SECTION 7.12. EMPLOYMENT MATTERS. SCHEDULE 7.12 of the Disclosure Schedule contains a complete and accurate list of all employees of the Company and each of its Subsidiaries. Such schedule also sets forth for the current fiscal year the annual salary (including projected bonuses and other cash compensation) of all such employees and all benefits (other than health insurance benefits and other similar benefits which are both customary in the industry in which the Company or any of its Subsidiaries is engaged and provided to all full time employees of the Company or any of its Subsidiaries generally) provided to such employees. SCHEDULE 7.12 of the Disclosure Schedule also contains a complete and accurate description of all employment contracts, consulting agreements, management agreements, non-compete and similar agreements to which the Company or any of its Subsidiaries is a party on the date hereof. SECTION 7.13. LITIGATION. Except as set forth on SCHEDULE 7.13 of the Disclosure Schedule, there is no action, suit or proceeding pending against, or to the knowledge of the Company, threatened against or affecting the Company or any of its Subsidiaries before any court or arbitrator or any Governmental Authority. SECTION 7.14. ERISA. Neither the Company nor any of its Subsidiaries nor any ERISA Affiliate maintains or contributes to any Pension Plan other than those disclosed on SCHEDULE 7.14 of the Disclosure Schedule. Each such Pension Plan is in compliance in all material respects with its terms and the applicable provisions of ERISA and the IRC. Except as required by law, none of the Company or any of its Subsidiaries nor any ERISA Affiliate has any commitment to create any additional Pension Plans. Except as set forth on SCHEDULE 7.14, neither the Company nor any of its Subsidiaries nor any ERISA Affiliate has ever sponsored, adopted, maintained or been obligated to contribute to, or had any liability under, any Pension Plan. There is no material violation of ERISA with respect to the filing of applicable reports, documents and notices regarding the Pension Plans with the Secretary of the Treasury or the furnishing of such documents to the participants and 27 beneficiaries of the Pension Plans, and, to the best of the Company's knowledge, with respect to each Pension Plan all other reports required under ERISA or the IRC to be filed with any Governmental Authority have been duly filed and all such reports are true and correct in all material respects as of the dates given. Each Pension Plan that is intended to be "qualified" within the meaning of section 401(a) of the IRC is, and has been during the period from its adoption to date, so qualified, both as to form and, to the best of the Company's knowledge, has been qualified, and all necessary governmental approvals, including a favorable determination as to the qualification under the IRC of each of such Pension Plans and each amendment thereto, have been timely obtained or application for a favorable determination will be filed prior to the applicable filing deadlines. Except as disclosed on SCHEDULE 7.14 of the Disclosure Schedule, each trust created under any such Pension Plan intended to be qualified within the meaning of section 401(a) of the IRC and each trust described in section 501(c)(9) of the IRC is exempt from federal income taxation under section 501(a) of the IRC and has been so exempt during the period from creation to date. The Company has no pending or, to the best of the Company's knowledge, threatened claims, lawsuits or actions (other than routine claims for benefits in the ordinary course) asserted or instituted against, and the Company has no knowledge of any threatened litigation or claims against, the assets of any Pension Plan or its related trust or against any fiduciary of a Pension Plan with respect to the operation of such Pension Plan. Neither the Company nor any of its Subsidiaries has received notice of any pending investigations, inquires or audits with respect to any Pension Plan by any regulatory agency. Neither the Company nor any of its Subsidiaries has engaged in any prohibited transactions, within the meaning of section 406 of ERISA or section 4975 of the IRC, in connection with any Pension Plan. Neither the Company nor any of its Subsidiaries maintains or has established any Pension Plan which is a welfare benefit plan within the meaning of section 3(1) of ERISA which provides for retiree medical liabilities or continuing benefits or coverage for any participant or any beneficiary of any participant after such participant's termination of employment except as may be required by the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA") and the regulations thereunder, and at the expense of the participant or the beneficiary of the participant. The Company and each of its Subsidiaries that maintains a Pension Plan that is a welfare benefit plan within the meaning of section 3(1) of ERISA has complied with any applicable notice and continuation requirements of COBRA and the regulations thereunder. To the best of the Company's knowledge, none of the Company or any of its Subsidiaries maintains, has established, or has ever participated in, a multiple employer welfare benefit arrangement within the meaning of section 3(40)(A) of ERISA. SECTION 7.15. TAXES AND FILING OF TAX RETURNS. The Company and each of its Subsidiaries has filed all Tax returns required to have been filed by it or has legally extended such returns and has paid all Taxes shown to be due and payable on such returns, including interest and penalties, and all other Taxes which are payable by the Company or any of its Subsidiaries. The Company does not know of any proposed Tax assessment against the Company or any of its Subsidiaries and all Tax liabilities of the Company and each of its Subsidiaries are adequately provided for and no Tax liability of the Company or any of its Subsidiaries has been asserted by the Internal Revenue Service or any other Governmental Authority for Taxes in excess of those already paid. 28 SECTION 7.16. TITLE TO ASSETS. The Company and its Subsidiaries have Defensible Title to all Oil and Gas Interests of the Company and its Subsidiaries included or reflected in the Ownership Interests and all of their other assets, subject only to Permitted Encumbrances. Each Oil and Gas Interest included or reflected in the Ownership Interest entitles the Company and its Subsidiaries to receive not less than the undivided interest set forth in (or derived from) the Ownership Interests of all Hydrocarbons produced, saved and sold from or attributable to such Oil and Gas Interest, and the portion of such costs and expenses of operation and development of such Oil and Gas Interest that is borne or to be borne by the Company and its Subsidiaries is not greater than the undivided interest set forth in (or derived from) the Ownership Interests. All proceeds from the sale of each of the Company's and the Subsidiaries' shares of the Hydrocarbons being produced from its Oil and Gas Interests are currently being paid in full to such party by the purchasers thereof on a timely basis and none of such proceeds are currently being held in suspense by such purchaser or any other party, except as set forth on SCHEDULE 7.16 of the Disclosure Schedule. SECTION 7.17. LICENSES, PERMITS, ETC. The Company and each of its Subsidiaries possess all franchises, certificates, licenses, permits, consents, authorizations, exemptions and orders of Governmental Authorities as are necessary to carry on their respective businesses as now being conducted and as proposed to be conducted, except to the extent a failure to have such franchises, certificates, licenses, permits, consents, authorizations, exemptions and orders could not have a Material Adverse Effect. SECTION 7.18. PROPRIETARY RIGHTS. The Company and each of its Subsidiaries has ownership of, or valid licenses to use, all trademarks, copyrights, patents and other proprietary rights used in their respective businesses. To the best of the Company's knowledge, the operation of the businesses of the Company and its Subsidiaries does not infringe any patent, copyright, trademark or other proprietary rights of others, and, neither the Company nor any of its Subsidiaries has received any notice from any third party of any such alleged infringement by the Company or any of its Subsidiaries. The Company and each of its Subsidiaries has taken reasonable steps to establish and preserve its respective ownership of all patents, copyrights, trademarks, trade secrets and other proprietary rights. The Company is not aware of any infringement by others of its or any its Subsidiaries' patents, copyrights, trademarks or other proprietary rights. SECTION 7.19. COMPLIANCE WITH LAW. To the Knowledge of the Company, the business and operations of the Company and each of its Subsidiaries have been and are being conducted in accordance with all applicable Laws. SECTION 7.20. ENVIRONMENTAL MATTERS. (a) Except as set forth on SCHEDULE 7.20 of the Disclosure Schedule, (i) the reserves reflected in the Company's Financial Statements relating to environmental matters were adequate under GAAP as of the date of such financial statements, and neither the Company nor its Subsidiaries has incurred any material liability in respect of any environmental matter since the that date, and (ii) the SEC Documents include all information relating to environmental matters required to be included therein under the rules and regulations of the Commission applicable thereto. 29 (b) Except as set forth in SCHEDULE 7.20 of the Disclosure Schedule: (i) Each of the Company and its Subsidiaries has conducted its business and operated its assets, and is conducting its business and operating its assets, in material compliance with all Environmental Laws. (ii) Neither the Company nor any of its Subsidiaries has been notified by any Governmental Authority that any of the operations or assets of the Company or its Subsidiaries is the subject of any investigation or inquiry by any Governmental Authority evaluating whether any material remedial action is needed to respond to a release of Hazardous Substance or to the improper storage or disposal (including storage or disposal at offsite locations) of any Hazardous Substance. (iii) Neither the Company nor any of its Subsidiaries and no other Person has filed any notice under any federal, state or local law indicating that (i) the Company or its Subsidiaries is responsible for the improper release into the environment, or the improper storage or disposal of any Hazardous Substance, or (ii) any Hazardous Substance is improperly stored or disposed of upon any property of the Company or its Subsidiaries. (iv) Neither the Company nor any of its Subsidiaries has any Substance contingent liability in connection with (i) release into the environment at or on the property now or previously owned or leased by the Company or its Subsidiaries, or (ii) the storage or disposal of any Hazardous Substance. (v) Neither the Company nor any of its Subsidiaries has received any claim, complaint, notice, inquiry or request for information which remains unresolved as of the date hereof with respect to any alleged violation of any Environmental Laws or regarding potential liability under any Environmental Laws relating to operations or conditions of any facilities or property owned, leased or operated by the Company or its Subsidiaries. (vi) There are no sites, locations or operations at which the Company or its Subsidiaries are currently undertaking, or have completed, any remedial or response action relating to any such disposal or release, as required by Environmental Laws. (vii) There are no physical or environmental conditions existing on any property owned or leased by the Company or any Subsidiary resulting from the Company's or any Subsidiary's operations or activities, past or present, at any location, that would give rise to any on-site or off-site remedial obligations under any applicable Environmental Laws, other than normal and ordinary remedial work associated with plugging and abandoning of oil and gas facilities. SECTION 7.21. Intentionally Left Blank. 30 SECTION 7.22. FISCAL YEAR. The Company's fiscal year is from January 1 to December 31. SECTION 7.23. NO DEFAULT. Neither a Default nor an Event of Default has occurred. SECTION 7.24. INSURANCE. SCHEDULE 7.24 of the Disclosure Schedule contains a complete and accurate list and description of all insurance policies maintained by the Company as of the date hereof. SECTION 7.25. GOVERNMENT REGULATION. Neither the Company nor any of its Subsidiaries is subject to regulation under the Public Utility Holding the Company Act of 1935, the Interstate Commerce Act (as either of the preceding acts have been amended), or any other Law which regulates the incurring by the Company or any of its Subsidiaries of Debt, including, but not limited to, Laws relating to common contract carriers of the sale of electricity, gas, steam, water or other public utility services. SECTION 7.26. SECURITIES LAWS. Assuming Shoeinvest's representations made herein are true and correct, the offer, issuance and sale of the Securities (a) are and will be exempt from the registration and prospectus delivery requirements of the Securities Act, (b) have been registered or qualified (or are exempt from registration and qualification) under the registration, permit or qualification requirements of all applicable state securities Laws, and (c) are and will be accomplished in conformity with all other federal and applicable state securities Laws. SECTION 7.27. BROKERS AND FINDERS. SCHEDULE 7.27 of the Disclosure Schedule sets forth all arrangements (including amounts payable by the Company or any of its Subsidiaries in connection therewith) pursuant to which any Person has, or as a result of the Closing Transactions will have, any right or valid claim against the Company or any of its Subsidiaries for any commission, fee or other compensation as an investment banker, finder or broker, or in any similar capacity. No Person engaged by the Company has or will have any right or valid claim against Shoeinvest for any such commission, fee or other compensation. The Company will indemnify and hold Shoeinvest harmless against any liability or expense arising out of, or in connection with, any such right or claim (including, without limitation, claims arising out of the matters disclosed on SCHEDULE7.27 of the Disclosure Schedule). SECTION 7.28. SEC DOCUMENTS. The Company is current in its obligations to file all periodic reports and proxy statements with the Commission required to be filed under the Exchange Act. Shoeinvest has had available to it a true and correct complete copy of each report, schedule, Registration Statement and definitive proxy statement filed by the Company with the Commission since October 4, 1993, and prior to the date of this Agreement (the "SEC Documents"), which are all the documents (other than preliminary material) that the Company was required to file with the Commission since such date. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Securities Act or the Exchange Act as the case may be, and the rules and regulations of the Commission thereunder applicable to such SEC Documents, and none of the SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. SECTION 7.29. OIL AND GAS OPERATIONS. Except as set forth on SCHEDULE 7.29 of the Disclosure 31 Schedule: (a) All wells included in the Oil and Gas Interests of the Company or its Subsidiaries (the "Wells") have been drilled and (if completed) completed, operated and produced in accordance with generally accepted oil and gas field practices and in compliance in all material respects with applicable oil and gas leases and applicable laws, rules, regulations. The Wells have been drilled and completed within the limits permitted by contract, pooling or unit agreement, and by law; and all drilling and completion of the Wells and all development and operations have been conducted in compliance with all applicable laws, ordinances, rules, regulations and permits, and judgments, orders and decrees of any court or governmental body or agency. No Well is subject to penalties on allowables because of any overproduction or any other violation of applicable laws, rules, regulations or permits or judgments, orders or decrees of any court or governmental body or agency that would prevent such Well from being entitled to its full legal and regular allowable from and after the Closing Date as prescribed by any court or governmental body or agency. (b) There are no Wells that (i) the Company is currently obligated by law or contract to plug and abandon; (ii) the Company will be obligated by law or contract to plug and abandon with the lapse of time or notice or both because the Well is not currently capable of producing in commercial quantities; (iii) are subject to exceptions to a requirement to plug and abandon issued by a regulatory authority having jurisdiction over the applicable lease; or (iv) to the best knowledge of the Company, have been plugged and abandoned but have not been plugged in accordance with all applicable requirements of each regulatory authority having jurisdiction over the Oil and Gas Interests. (c) With respect to the oil, gas and other mineral leases, unit agreements, pooling agreements, communitization agreements and other documents creating interests comprising the Oil and Gas Interests: (a) the Company has fulfilled all requirements in all material respects for filings, certificates, disclosures of parties in interest, and other similar matters contained in (or otherwise applicable thereto by law, rule or regulation) such leases or other documents and are fully qualified to own and hold all such leases or other interests; (b) there are no provisions applicable to such leases or other documents which increase the royalty share of the lessor thereunder, and (c) upon the establishment and maintenance of production in commercial quantities, the leases and other interest are to be in full force and effect over the economic life of the property involved and do not have terms fixed by a certain number of years. (d) Proceeds from the sale of Hydrocarbons produced from the Company's and its Subsidiaries' Oil and Gas Interests are being received by the Company and its Subsidiaries in a timely manner and are not being held in suspense for any reason (except for amounts, individually or in the aggregate, not in excess of $100,000 and held in suspense in the ordinary course of business). 32 (e) Seller is not obligated, by virtue of a prepayment arrangement, a "take or pay" arrangement, a production payment or any other arrangement to deliver Hydrocarbons produced from the Oil and Gas Interests at some future time without then or thereafter receiving full payment therefor. SECTION 7.30. FINANCIAL AND COMMODITY HEDGING. SCHEDULE7.30 of the Disclosure Schedule accurately summarizes the outstanding Hydrocarbon and financial hedging positions of the Company and its Subsidiaries (including fixed price controls, collars, swaps, caps, hedges and puts) as of the date reflected on said Schedule. From the date of this Agreement to the date of Closing, the Company and its Subsidiaries will not enter into any new hedging positions without Shoeinvest's prior written consent. SECTION 7.31. BOOKS AND RECORDS. All books, records and files of the Company and its Subsidiaries (including those pertaining to the Company's or its Subsidiaries' Oil and Gas Interests, wells and other assets, those pertaining to the production, gathering, transportation and sale of Hydrocarbons, and corporate, accounting, financial and employee records) (a) have been prepared, assembled and maintained in accordance with usual and customary policies and procedures and (b) fairly and accurately reflect the ownership, use, enjoyment and operation by the Company and its Subsidiaries of their respective assets. SECTION 7.32. RESERVE REPORT. To the knowledge of the Company, the estimates of proved reserves of oil and natural gas prepared by Lee Keeling & Associates, Inc. and H. J. Gruy and Associates, Inc. (together, the "Reserve Engineer") as of December 31, 1998 (the "Reserve Report"): (i) are reasonable; and (ii) were prepared in accordance with generally accepted petroleum engineering and evaluation principles as set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserve Information promulgated by the Society of Petroleum Engineers. The engineering information and production data used in the preparation of the Reserve Report, which information and data have been available to Shoeinvest, are the information and data which are used by the Company in good faith in the ordinary course of business. The factual information underlying the estimates of the reserves of the Company and the Subsidiaries, which was supplied by the Company to the Reserve Engineers for the purpose of preparing the Reserve Report, including, without limitation, production, volumes, sales prices for production, contractual pricing provisions under oil or gas sales or marketing contracts under hedging arrangements, costs of operations and development, and working interest and net revenue information relating to the Company's and the Subsidiaries' ownership interests in properties, was true and correct in all material respects on the date of such Reserve Report; the estimates of future capital expenditures and other future exploration and development costs supplied to the Reserve Engineers were prepared in good faith and with a reasonable basis; the information provided to the Reserve Engineers for purposes of preparing the Reserve Report was prepared in accordance with customary industry practices; other than normal production of the reserves and intervening oil and gas price fluctuations, the Company is not as of the date hereof and as of the Closing Date will not be, aware of any facts or circumstances that would result in a materially adverse change in the reserves in the aggregate, or the aggregate present value of future net cash flows therefrom, as described in the Reserve Report. SECTION 7.33. NATURE OF COMPANY ASSETS. The assets of the Company and of the Subsidiaries consist solely of (i) reserves of oil and gas, rights to reserves of oil and gas and associated exploration and production assets with a fair market value not exceeding $500 million and (ii) other assets with a fair market 33 value not exceeding $15 million. For purposes of this Section 7.33, the term "associated exploration and production assets" shall have the meaning set forth in Section 802.3 of the Rules promulgated pursuant to HSR Act. SECTION 7.34. FULL DISCLOSURE. No information heretofore furnished by or on behalf of the Company or any of its Subsidiaries to Shoeinvest for the purposes of this Agreement or any other Transaction Document or any transaction contemplated hereby or thereby, contained, and no written information hereafter furnished by or on behalf of the Company or any of its Subsidiaries to Shoeinvest for purposes of this Agreement or any other Transaction Document or any transaction contemplated hereby or thereby will contain, any untrue statement of a material fact or omit a material fact necessary to make the statements therein not misleading. There is no fact or circumstance known to the Company which may have a Material Adverse Effect on the Company or any of its Subsidiaries which has not been disclosed to Shoeinvest. SECTION 7.35. YEAR 2000 COMPLIANCE. The Company's disclosure in its Annual Report on Form 10-KSB for the year ended December 31, 1998 under the heading "Year 2000 Compliance" accurately states the Company's statement of readiness and contingency plans relative to the computer software which is material to the conduct of the business and operations of the Company and its Subsidiaries being capable of recording, storing, processing and presenting calendar dates falling on or after January 1, 2000 in substantially the same manner and with the same functionality as such software records, stores, processes and presents such calendar dated falling on or before December 31, 1999. ARTICLE VIII REPRESENTATIONS AND WARRANTIES OF SHOEINVEST In order to induce the Company to issue and sell the Securities to Shoeinvest hereunder, Shoeinvest hereby represents and warrants to the Company as follows: SECTION 8.1. PARTNERSHIP EXISTENCE AND POWER. Shoeinvest (a) is a limited partnership, duly organized, validly existing and in good standing under the Laws of its jurisdiction of incorporation, (b) has all power and authority necessary to carry on its business as now conducted and as proposed to be conducted. SECTION 8.2. PARTNERSHIP AND GOVERNMENTAL AUTHORIZATION; CONTRAVENTION. The execution, delivery and performance of this Agreement and the other Transaction Documents by Shoeinvest are within its powers, have been duly authorized by all necessary action, require no action by or in respect of, or filing with, any Governmental Authority (other than filings with any applicable securities regulatory authorities to perfect exemptions from the registration or qualification requirements of applicable securities Laws and which will be made immediately following the Closing Date), and, except for matters which have been waived in writing by the appropriate Person, do not contravene, or constitute a default under, any provision of applicable Law or of the Charter Documents or of any material judgment, injunction, order, decree or Material Agreement binding upon Shoeinvest or its assets, or result in the creation or imposition of any Lien on any asset of Shoeinvest. 34 SECTION 8.3. BINDING EFFECT. This Agreement constitutes the valid and binding agreement of Shoeinvest; each other Transaction Document when executed and delivered in accordance with this Agreement, will constitute the valid and binding obligation of Shoeinvest, in each case enforceable in accordance with its terms except as (i) the enforceability thereof may be limited by bankruptcy, insolvency or similar Laws affecting creditors rights generally, and (ii) the availability of equitable remedies may be limited by equitable principles of general applicability. SECTION 8.4. BROKERS AND FINDERS. No Person engaged by Shoeinvest has or will have any right or valid claim against the Company for any commission, fee or other compensation. Shoeinvest will indemnify and hold the Company harmless against any liability or expense arising out of, or in connection with, any such right or claim. SECTION 8.5. TAXES AND FILING OF TAX RETURNS. Shoeinvest has filed all Tax returns required to have been filed by it or has legally extended such returns and has paid all Taxes shown to be due and payable on such returns, including interest and penalties, and all other Taxes which are payable by Shoeinvest. Shoeinvest does not know of any proposed Tax assessment against Shoeinvest and all Tax liabilities of Shoeinvest are adequately provided for and no Tax liability of Shoeinvest has been asserted by the Internal Revenue Service or any other Governmental Authority for Taxes in excess of those already paid. SECTION 8.6 INTENTIONALLY OMITTED. ARTICLE IX COVENANTS SECTION 9.1. MAINTENANCE OF INSURANCE. The Company will, and will cause each of its Subsidiaries to, at all times maintain or cause to be maintained insurance issued by insurers of recognized responsibility covering such risks and in such amounts as are customary in the case of companies of established reputation engaged in the same or similar business and similarly situated. SECTION 9.2. PAYMENT OF TAXES AND CLAIMS. The Company will, and will cause each of its Subsidiaries to, pay when due (a) all Taxes imposed upon it or its respective assets and, with respect to its respective franchises, business, income or profits, pay such Taxes before any material penalty or interest accrues thereon, and (b) all material claims (including, without limitation, claims for labor, services, materials and supplies) for sums which have become due and payable; PROVIDED, however, no payment of Taxes or claims shall be required if (i) the amount, applicability or validity thereof is being contested in good faith by appropriate action promptly initiated and diligently conducted in accordance with good business practices and no material part of the property or assets of each holder of Securities is the subject of any pending levy or execution, and (ii) the Company has notified each holder of Securities of such circumstances in reasonable detail. SECTION 9.3. COMPLIANCE WITH LAWS AND DOCUMENTS. The Company will, and will cause each 35 of its Subsidiaries to, comply with the provisions of (a) all Laws, (b) its Charter Documents, and (c) every Material Agreement to which the Company or any of its Subsidiaries is a party or by which the Company's or any of its Subsidiaries' properties are bound. SECTION 9.4. OPERATION OF PROPERTIES AND EQUIPMENT. The Company will, and will cause each of its Subsidiaries to, at all times, maintain, preserve and keep all operating equipment used or useful in the operation of their respective businesses in proper repair, working order and condition, and make all necessary or appropriate repairs, renewals, replacements, additions and improvements thereto so that the efficiency of such equipment shall at all times be properly preserved and maintained; PROVIDED, that, no item of operating equipment need be so repaired, renewed, replaced, added to or improved, if the Company shall in good faith determine that such action is not necessary or desirable for the continued efficient and profitable operation of the Company's and its Subsidiaries' businesses. SECTION 9.5. ADDITIONAL DOCUMENTS. The Company will, and will cause each of its Subsidiaries to, cure promptly any defects in the creation and issuance of the Securities, and the execution and delivery of this Agreement and the other Transaction Documents, and, at the Company's sole expense, promptly and duly execute and deliver, and cause each of its Subsidiaries to promptly execute and deliver, to the holders of the Securities, upon reasonable request, all such other and further documents, agreements and instruments in compliance with or accomplishment of the covenants and agreements of the Company and each of its Subsidiaries in this Agreement and the other Transaction Documents, all as may be reasonably necessary or appropriate in connection therewith. SECTION 9.6. MAINTENANCE OF BOOKS AND RECORDS. The Company will, and will cause each of its Subsidiaries to, maintain proper books of record and account in which true and correct entries in conformity with GAAP shall be made on a timely basis of all dealings and transactions in relation to the Company's and its Subsidiaries' businesses and activities. SECTION 9.7. ENVIRONMENTAL MATTERS. (a) The Company will, and will cause each of its Subsidiaries to, comply with all Environmental Law and Laws applicable to their respective properties and operations, including, without limitation, all Hazardous Substances transportation, storage, disposal, remediation and similar requirements of applicable Environmental Law and Laws. (b) Notwithstanding any other provision contained within this Agreement or the other Transaction Documents, the Company shall immediately orally notify each holder of Securities of any Hazardous Discharge or the receipt of any Environmental Complaint relating to any property or assets owned by the Company or any of its Subsidiaries or affecting any properties or assets owned or leased by other Persons and shall furnish each holder of Securities with written notice of such Hazardous Discharge or Environmental Complaint within five (5) days of the oral notification. SECTION 9.8 ACCESS TO INFORMATION. The Company will (and will cause each of its Subsidiaries to) afford Shoeinvest and its representatives (including without limitation directors, officers and employees 36 of Shoeinvest and its Affiliates, and counsel, accountants and other professionals retained by Shoeinvest) such access, during normal business hours throughout the period to the Closing Date, to the Company's books, records (including without limitation Tax returns and non-restricted work papers of the Company's independent auditors), properties, personnel and to such other information as Shoeinvest may reasonably request and will permit Shoeinvest to make such inspections as Shoeinvest may reasonably request and will cause the officers of the Company and those of its Subsidiaries to furnish Shoeinvest with such financial and operating data and other information with respect to the business, properties and personnel of the Company and its Subsidiaries as Shoeinvest may from time to time reasonably request, provided, however, that no investigation pursuant to this section will affect or be deemed to modify any of the representations or warranties made by the Company in this Agreement. Shoeinvest will afford the Company and its representatives (including without limitation directors, officers and employees of the Company and its Affiliates, and counsel, accountants and other professionals retained by the Company) such access, during normal business hours throughout the period to the Closing Date, to Shoeinvest's books, records (including without limitation Tax returns and non-restricted workpapers of Shoeinvest's independent auditors), properties, personnel and to such other information as the Company may reasonably request and will permit the Company to make such inspections as the Company may reasonably request and will cause the officers of Shoeinvest to furnish the Company with such financial and operating data and other information with respect to the business, properties and personnel of Shoeinvest as the Company may from time to time reasonably request, provided, however, that no investigation pursuant to this section will affect or be deemed to modify any of the representations or warranties made by Shoeinvest in this Agreement. SECTION 9.9 CONDUCT OF THE BUSINESS OF THE COMPANY. Except as contemplated by this Agreement or to the extent that Shoeinvest shall otherwise consent in writing, during the period from the date of this Agreement to the Closing, the Company will conduct its operations only in, and the Company will not take any action except in the ordinary course of business and the Company will use all reasonable efforts to preserve intact in all material respects its business organizations, assets, prospects and advantageous business relationships, to keep available the services of its officers and key employees and to maintain satisfactory relationships with its licensors, licensees, suppliers, contractors, distributors, customers and others having advantageous business relationships with it. Without limiting the generality of the foregoing, except as contemplated by this Agreement, the Company will not, without the prior written consent of Shoeinvest: (a) amend its Charter Documents; (b) split, combine or reclassify any shares of its capital stock, declare, pay or set aside for payment any dividend or other distribution in respect of its capital stock, or directly or indirectly, redeem, purchase or otherwise acquire any shares of its capital stock or other securities; (c) authorize for issuance, issue, sell or deliver or agree or commit to issue, sell, or deliver (whether through the issuance or granting of any options, warrants, commitments, subscriptions, rights to purchase or otherwise) any of its capital stock or any securities convertible into or exercisable or exchangeable for shares of its capital stock, except the Company may, effective as of Closing, amend its Amended and Restated 1995 Stock Option and Stock Appreciation Rights Plan to provide that options granted to optionees prior to the date of this Agreement may be exercised for a one (1) year period from the 37 following dates: (i) the date of termination of an optionee whose employment with the Company is terminated without cause by the Company during the six (6) month period commencing with Closing, (ii) the date of termination of an optionee's employment whose employment with Company is terminated by employee with "Good Reason" as defined in such employee's written employment agreement, or, (iii) from the date of resignation of a director of the Company who resigns at Closing; provided, that the form of any such amendment to such plan be approved in writing by Shoeinvest. (d) incur any material liability or obligation (absolute, accrued, contingent or otherwise) other than in the ordinary course of business or issue any debt securities or assume, guarantee, endorse or otherwise as an accommodation become responsible for, the obligations of any other individual or entity, or change any assumption underlying, or methods of calculating, any bad debt, contingency or other reserve; (e) enter into, adopt, or amend any employment agreement or Pension Plan, or grant, or become obligated to grant, any increase in the compensation payable or to become payable to any of its officers or directors or any general increase in the compensation payable or to become payable to its employees. (f) acquire (by merger, consolidation, or acquisition of stock or assets) any corporation, partnership or other business organization or division thereof or make any investment either by purchase of stock or securities, contributions to capital, property transfer, or purchase of properties or assets of any Person; (g) pay, discharge or satisfy any material claims, liabilities or obligations (absolute, accrued, contingent or otherwise), other than the payment, discharge or satisfaction in the ordinary course of business of liabilities reflected or reserved against on the Company Financial Statements or subsequently incurred in the ordinary course of business, or disclosed pursuant to this Agreement; (h) acquire (including by lease) any material assets or properties or dispose of, mortgage or encumber any material assets or properties, other than in the ordinary course of business; (i) waive, release, grant or transfer any material rights or modify or change in any material respect any material existing license, lease, contract or other document, other than in the ordinary course of business and consistent with past practice; or (j) take any action or agree, in writing or otherwise, to take any of the foregoing actions or any action which would at any time make any representation or warranty in Article VII untrue or incorrect. SECTION 9.10 INTENTIONALLY OMITTED. SECTION 9.11 INTENTIONALLY OMITTED. ARTICLE X 38 DEFAULTS; TERMINATION SECTION 10.1. EVENTS OF DEFAULT. If one or more of the following events (collectively, "EVENTS OF DEFAULT" and individually, an "EVENT OF DEFAULT") shall have occurred and be continuing: (a) the Company shall fail to pay when due any principal or interest on the Note; (5) the Company shall fail to pay when due any fees, expenses, reimbursements, indemnification payments or other monetary obligations when due under any of the Transaction Documents and such failure shall continue for ten (10) days following the due date of such payment; (6) the Company or any of its Subsidiaries shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its Debts under any bankruptcy, insolvency or other similar Law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its Debts as they become due, or shall take any corporate action to authorize any of the foregoing; or (7) an involuntary case or other proceeding shall be commenced against the Company or any of its Subsidiaries seeking liquidation, reorganization or other relief with respect to it or its Debts under any bankruptcy, insolvency or other similar Law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of sixty (60) days; or an order for relief shall be entered against the Company under the federal bankruptcy Laws as now or hereafter in effect; then, so long as any such event is continuing, any Noteholder shall without notice or demand of any kind (including, without limitation, notice of intention to accelerate and acceleration) (unless any such notice is expressly provided for herein or in the other Transaction Documents), all of which are hereby waived, take any and all actions as may be permitted by the Transaction Documents including, declaring the obligations in respect of the Note owned by such Noteholder (including all accrued interest thereon) to be, and such obligations shall thereupon become, immediately due and payable. SECTION 10.2 TERMINATION. This Agreement may be terminated, whether before or after approval of this Agreement by the stockholders of the Company, at any time prior to the Closing: 39 (a) By mutual written consent of Shoeinvest and the Company; (b) By Shoeinvest if (i) there has been a breach of the representations and warranties made by the Company in this Agreement or (ii) the Company has failed to comply in any material respect with any of its covenants or agreements contained in this Agreement and such failure has not been, or cannot be, cured within a reasonable time after notice and demand for cure thereof; (c) By the Company if (i) there has been a breach of the representations and warranties made by Shoeinvest in this Agreement or (ii) Shoeinvest has failed to comply in any material respect with any of the its covenants or agreements contained in this Agreement and such failure has not been, or cannot be, cured within a reasonable time after notice and demand for cure thereof; SECTION 10.3. EFFECT OF TERMINATION. If this Agreement is terminated by either the Company or Shoeinvest pursuant to the provisions of SECTION 10.2, this Agreement shall forthwith become void and there shall be no further obligation on the part of any party hereto or its respective Affiliates, directors, officers, or stockholders, except pursuant to, the provisions of Section 11.3; provided, however, that a termination of this Agreement shall not relieve any party hereto from any liability for damages incurred as a result of a breach by such party of its representations, warranties, covenants, agreements or other obligations hereunder occurring prior to such termination. ARTICLE XI MISCELLANEOUS SECTION 11.1. NOTICES. All notices, requests and other communications to any party hereunder shall be in writing (including bank wire, telex, telecopy or similar writing) and shall be given to such party at its address, telex or telecopy number set forth on the signature pages hereof or such other address, telex or telecopy number as such party may hereafter specify for the purpose by notice to the other party. Each such notice, request or other communication shall be effective (i) if given by telex or telecopy, when such telex or telecopy is transmitted to the telex or telecopy number specified in this SECTION 11.1 and the appropriate answer back is received or receipt is otherwise confirmed, (ii) if given by mail, three (3) Business Days after deposit in the mails with first class postage prepaid, addressed as aforesaid, or (iii) if given by any other means, when delivered at the address specified in this SECTION 11.1. SECTION 11.2. NO WAIVERS. No failure or delay by any holder of Securities in exercising any right, power or privilege hereunder or under any other Transaction Document shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by Law or in any of the other Transaction Documents. 40 SECTION 11.3. EXPENSES; INDEMNIFICATION. (a) Except as provided in SECTION 6.1(f), all expenses incurred in connection with this Agreement shall be paid by the party incurring such expenses. (b) The Company agrees to indemnify and hold harmless, Shoeinvest, its shareholders and each subsequent holder of Securities and their respective directors, officers, employees, agents, successors and assigns (collectively, the "INDEMNIFIED PARTIES") from and against any and all liabilities, losses, damages, costs and expenses of any kind (including, without limitation, the reasonable fees and disbursements of counsel for the Indemnified Parties in connection with any investigative, administrative or judicial proceeding, whether or not any such Indemnified Party shall be designated a party thereto) which may be incurred by any Indemnified Party relating to or arising out of (a) this Agreement, the other Transaction Documents, the Closing Transactions and all other transactions contemplated hereby or thereby. (c) The Company further agrees to defend, indemnify and hold harmless each Indemnified Party from and against any and all losses, liabilities (including strict liability), damages (including for bodily injury and property damage), costs, expenses (including attorneys' fees and environmental consultants' expenses), relating to any of the properties or assets securing the Obligations, that any Indemnified Party may incur in connection with any Environmental Complaint or Hazardous Discharge or any violation of any Environmental Law and Laws regardless of whether or not caused by, or within the control of, the Company, or any of its Subsidiaries as tenant, sub-tenant or prior owner or occupant of any of the properties or assets securing the Obligations or any properties owned or leased by other parties, and regardless of whether such claim is brought by Governmental Authorities or private parties. This indemnity shall survive the repayment of the Obligations and the discharge or release of any Lien granted hereunder or in any other Transaction Document. (d) (i) Promptly after receipt by an Indemnified Party of notice of the commencement of any action, suit or other proceeding against an Indemnified Party with respect to which an Indemnified Party demands indemnification hereunder, such Indemnified Party shall promptly notify the Company in writing of the commencement thereof, provided that the failure to so notify the Company shall not relieve it from any liability that it may have to an Indemnified Party, except to the extent that such failure has materially prejudiced the Company's ability to provide a defense in the proceeding. The Company shall have the right to assume the defense of any such proceeding, but the Indemnified Parties collectively shall have the right, at the expense of the Company, to retain not more than one counsel of their choice to represent the Indemnified Parties in such proceeding. The counsel for the Indemnified Parties may participate in, but not control, the defense of such proceeding. (ii) The indemnity provided for herein shall cover the amount of any settlements entered into by an Indemnified Party in connection with any claim for which an Indemnified Party may be indemnified hereunder; provided that, no settlement binding on an Indemnified Party may be made without the consent of an Indemnified Party and the Company (which consent shall not be reasonably withheld). (iii) Any indemnification hereunder shall be made no later than 45 days after receipt by the Company of the written request of the Indemnified Party. 41 THE PARTIES RECOGNIZE THAT AN INDEMNITEE MAY BE ENTITLED TO INDEMNIFICATION HEREUNDER FROM ACTS OR OMISSIONS THAT ARISE OUT OF OR RESULT FROM THE ORDINARY, STRICT, SOLE OR CONTRIBUTORY NEGLIGENCE OF SUCH INDEMNITEE. (e) Shoeinvest hereby covenants and agrees with the Company that Shoeinvest shall indemnify the Company and hold it harmless from, against and in respect of any and all costs, losses, claims, liabilities, fines, penalties, damages and expenses (including interest which may be imposed in connection therewith and court costs and reasonable fees and disbursements of counsel) incurred by it resulting from any misrepresentation, breach of warranty or nonfulfillment of any agreement, covenant or obligation by Shoeinvest made in this Agreement (including without limitation any certificate or instrument delivered in connection herewith. SECTION 11.4. AMENDMENTS AND WAIVERS; SALE OF INTEREST. Any provision of this Agreement and the other Transaction Documents may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Company and (a) the Majority Noteholder and (b) the Majority Warrant Holder. The Company hereby consents to any participation, sale, assignment, transfer or other disposition which complies with ARTICLE V, at any time or times hereafter, of any Securities, this Agreement and any of the other Transaction Documents, or of any portion hereof or thereof, including, without limitation, Shoeinvest's rights, title, interests, remedies, powers, and duties hereunder or thereunder, subject to compliance with applicable Laws and the provisions of the Compass Senior Debt Documents subject to the requirement that any such assignee, transferee or purchaser shall agree in writing to become bound by the terms of this Agreement and the other Transaction Documents. SECTION 11.5. SURVIVAL. All representations, warranties and covenants made by the Company herein or in any certificate or other instrument delivered by it or in its behalf under the Transaction Documents shall be considered to have been relied upon by Shoeinvest and shall survive the delivery to Shoeinvest of such Transaction Documents and the purchase of the Securities, regardless of any investigation made by or on behalf of Shoeinvest. All representations, warranties and covenants made by Shoeinvest herein or in any certificate or other instrument delivered by it or in its behalf under the Transaction Documents shall be considered to have been relied upon by the Company and shall survive the delivery to the Company of such Transaction Documents and the purchase of the Securities, regardless of any investigation made by or on behalf of the Company. SECTION 11.6. LIMITATION ON INTEREST. Regardless of any provision contained in the Transaction Documents, no Noteholder shall ever be entitled to receive, collect, or apply, as interest on the Note, any amount in excess of the Maximum Lawful Rate, and in the event any Noteholder ever receives, collects or applies as interest any such excess, such amount which would be deemed excessive interest shall be deemed a partial prepayment of principal and treated hereunder as such; and if the Note is paid in full, any remaining excess shall promptly be paid to the Company. In determining whether or not the interest paid or payable under any specific contingency exceeds the Maximum Lawful Rate, the Company and the Noteholder shall, to the extent permitted under applicable Law, (a) characterize any nonprincipal payment as an expense, fee or premium rather than as interest, (b) exclude voluntary prepayments and the effects thereof, and (c) amortize, prorate, allocate and spread, in equal parts, the total amount of the interest 42 throughout the entire contemplated term of the Note, so that the interest rate is the Maximum Lawful Rate throughout the entire term of the Note; PROVIDED, HOWEVER, that, if the unpaid principal balance thereof is paid and performed in full prior to the end of the full contemplated term thereof, and if the interest received for the actual period of existence thereof exceeds the Maximum Lawful Rate, the Noteholder shall refund to the Company the amount of such excess and, in such event, the Noteholder shall not be subject to any penalties provided by any Laws for contracting for, charging, taking, reserving or receiving interest in excess of the Maximum Lawful Rate. SECTION 11.7. INVALID PROVISIONS. If any provision of the Transaction Documents is held to be illegal, invalid, or unenforceable under present or future Laws effective during the term thereof, such provision shall be fully severable, the Transaction Documents shall be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part thereof, and the remaining provisions thereof shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance therefrom. Furthermore, in lieu of such illegal, invalid, or unenforceable provision there shall be added automatically as a part of the Transaction Documents a provision as similar in terms to such illegal, invalid, or unenforceable provision as may be possible and be legal, valid and enforceable. SECTION 11.8. SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Company may not assign or otherwise transfer any of its rights or obligations under this Agreement. SECTION 11.9. GOVERNING LAW. THIS AGREEMENT AND THE TRANSACTION DOCUMENTS SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS. SECTION 11.10. COUNTERPARTS. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. SECTION 11.11. NO THIRD PARTY BENEFICIARIES. Except as provided in SECTION 11.3, it is expressly intended that there shall be no third party beneficiaries of the covenants, agreements, representations or warranties herein contained other than transferees or assignees of all or any part of Shoeinvest's interest hereunder. SECTION 11.12. FINAL AGREEMENT. THIS AGREEMENT AND THE OTHER TRANSACTION DOCUMENTS COLLECTIVELY REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS BETWEEN THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. 43 SECTION 11.13. SUBMISSION TO JURISDICTION; WAIVER OF SERVICE AND VENUE. ANY SUIT, ACTION OR PROCEEDING BROUGHT BY Shoeinvest WITH RESPECT TO THIS AGREEMENT OR ANY OF THE OTHER TRANSACTION DOCUMENTS MAY BE BROUGHT IN THE COURTS OF THE STATE OF TEXAS, COUNTY OF DALLAS, OR IN THE FEDERAL COURTS LOCATED IN THE NORTHERN DISTRICT OF TEXAS, AS SHOEINVEST MAY SELECT IN ITS SOLE DISCRETION. THE COMPANY HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURTS FOR THE PURPOSE OF ANY SUCH SUIT, ACTION OR PROCEEDING. THE COMPANY HEREBY IRREVOCABLY WAIVES ANY OBJECTIONS WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT BROUGHT IN THE COURTS LOCATED IN THE STATE OF TEXAS, COUNTY OF DALLAS, AND HEREBY WAIVES ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN ANY INCONVENIENT FORUM. SECTION 11.14. WAIVER OF RIGHT TO TRIAL BY JURY. SHOEINVEST AND THE COMPANY EACH HEREBY WAIVE ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING UNDER THIS AGREEMENT, ANY TRANSACTION DOCUMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THEREWITH, OR (B) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR ANY OF THEM IN RESPECT TO THIS AGREEMENT. SHOEINVEST AND THE COMPANY EACH AGREE THAT THE OTHER MAY FILE A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. SECTION 11.15. PUBLIC ANNOUNCEMENTS. Except as may be required by applicable Law or this Section, Shoeinvest shall not issue any press release or otherwise make any public statement with respect to this Agreement or the transactions contemplated hereby without the prior written consent of the Company (which consent shall not be unreasonably withheld). Any such press release or public statement required by applicable Law shall only be made after reasonable notice to the other party. Upon execution of this Agreement, the Company shall make a press release in a form previously approved by Shoeinvest and promptly file a report on Form 8-K with the Commission. 44 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective Authorized Officers on the day and year first above written. COMPANY: MIDDLE BAY OIL COMPANY, INC. By: /s/ John J. Bassett -------------------------- Name: John J. Bassett -------------------------- Title: President -------------------------- Address for Notice: Middle Bay Oil Company, Inc. 1221 Lamar Street, Suite 1020 Houston, TX 77010 Fax: (713) 650-0352 SHOEINVEST II, LP By: Alvin V. Shoemaker Investments, Inc. --------------------------------------- Its General Partner By: /s/ Peter Shoemaker ------------------------ Name: Peter Shoemaker ------------------------ Title: Executive Vice President ------------------------ Address for Notice: Shoeinvest II, LP 60 Brushhill Road Kinnelon, NJ 07405 Fax: (310) 444-3833 45 EXHIBIT A SENIOR SUBORDINATE PROMISSORY NOTE THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THIS NOTE MAY NOT BE TRANSFERRED EXCEPT PURSUANT TO A VALID EXEMPTION COVERING SUCH TRANSFER. $100,000 Dallas, Texas , 1999 ---------------- FOR VALUE RECEIVED, the undersigned, MIDDLE BAY OIL COMPANY, INC, an Alabama corporation ("MAKER" or the "COMPANY") hereby promises to pay to the order of SHOEINVEST II, LP, a New Jersey limited partnership ("PAYEE"), not later than 2:00 P.M. (Dallas, Texas time), on the date when due, in Federal or other funds immediately available in Dallas, Texas, at Payee's offices at 60 Brushhill Road, Kinnelon, NJ 07405 or such other address, given to Maker by Payee, the principal sum of ONE HUNDRED THOUSAND AND NO/100 DOLLARS ($100,000), together with interest, as hereinafter described. Whenever any payment of principal of, or interest on, this Note shall be due on a day which is not a Business Day, the date for payment thereof shall be extended to the next succeeding Business Day. If the date for payment of principal is extended by operation of law or otherwise, interest thereon shall be payable for such extended time. This Note has been executed and delivered pursuant to, and is subject to and governed by, the terms of that certain Securities Purchase Agreement dated of even date herewith, by and between Maker and Payee (the "AGREEMENT"). This Note is the "Note" referred to in the Agreement. Unless otherwise defined herein or unless the context hereof otherwise requires, each term used herein with its initial letter capitalized has the meaning given to such term in the Agreement. This Note shall rank senior in right of payment to all Company notes and indebtedness other than the Compass Senior Debt. This Note shall rank pari passu with the 3TEC Note and that certain Senior Subordinate $50,000 Promissory Note dated of even date herewith payable to the order of Shoemaker Family Partners, LP, a New Jersey limited partnership, without any preference or priority one over another. Maker reserves the right to prepay without premium or penalty, after thirty (30) days prior written notice to the Noteholder, the principal amount of the Note, in whole or in part, at any time after _______________, 2001. Maker promises to pay interest on the outstanding principal balance hereof, prior to the occurrence of an Event of Default, at a rate per annum equal to the lesser of (a) the Fixed Rate or (b) the Maximum Lawful Rate, in Federal or other funds immediately available in Dallas, Texas, at the offices of Payee above referenced. Interest shall accrue on the principal balance of the Note outstanding from time to time at the Fixed Rate; PROVIDED, that, interest shall accrue on any amounts past due and owing on the Note from the date due until paid at the Default Rate; PROVIDED FURTHER, that in no event shall the rate of interest charged hereunder exceed the Maximum Lawful Rate. Interest shall be payable on the Note as it accrues on December 1, 1999 and continuing on each March 1, June 1, September 1, and December 1 thereafter until maturity. Whenever any payment of principal of, or interest on, the Note shall be due on a day which is not a Business Day, the date for payment thereof shall be extended to the next succeeding Business Day. With respect to the first eight (8) quarterly interest payments payable hereunder commencing with the first such quarterly interest payment, the Company may, at least thirty (30) days prior to the subject payment date, elect to accrue and add to the principal of the Note up to fifty percent (50%) of the interest payment due and payable on such interest payment date. If such an election is made, the Company shall notify the Noteholder of the portion (up to 50%) of such quarterly interest payment which the Company elects to accrue and add to the principal of the Note. Interest shall be computed on the Note on the basis of the number of actual days elapsed, assuming that each calendar year consisted of 360 days. The entire outstanding principal balance of this Note and all accrued but unpaid interest thereon shall be due and payable in full in a single installment on ___________________, 2004. A Noteholder may elect to convert all or any portion of the amount of principal and accrued but unpaid interest on the Note as hereinafter provided. Each $3.00 (the "Conversion Price") of principal and accrued but unpaid interest on the Note shall be convertible into one share of Common Stock. The Conversion Price is subject to adjustment from time to time upon the occurrence of any of the events enumerated below: 1. In the event that the Company shall (a) declare a dividend on the Common Stock in shares of its capital stock (whether shares of such Common Stock or of capital stock of any other class of the Company), (b) split or subdivide the outstanding Common Stock, or (c) combine the outstanding Common Stock into a smaller number of shares, then (as a result of an event described in (a), (b) or (c)) the Conversion Price shall be adjusted to equal the product of the Conversion Price in effect immediately prior to such event multiplied by a fraction the numerator of which is equal to the number of shares of Common Stock outstanding on a Fully Diluted Basis (as defined below) immediately after the event and the denominator of which is equal to the number of shares of Common Stock outstanding on a Fully Diluted Basis immediately prior to such event. [Remainder of this page intentionally blank] 2. In the event that the Company shall (a) issue any shares of Common Stock without consideration or at a price per share less than the Conversion Price immediately prior to such issuance, or (b) issue options, rights or warrants to subscribe for or purchase such Common Stock (or securities convertible into such Common Stock) without consideration or at a price per share (or having a conversion price per share, if a security convertible into such Common Stock) less than the Conversion Price, then, effective upon such issuance, the Conversion Price shall be adjusted to equal the product obtained by multiplying the Conversion Price in effect immediately prior to the date of such issuance by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding on a Fully Diluted Basis immediately prior to such issuance PLUS the number of shares of Common Stock which the aggregate offering price of the total number of shares of such Common Stock so to be issued or to be offered for subscription or purchase (or the aggregate initial conversion price of the convertible securities so to be offered) would purchase at the Conversion Price immediately prior to such issuance, and the denominator of which shall be the number of shares of Common Stock outstanding on a Fully Diluted Basis immediately after such issuance. In case such consideration may be paid in a consideration part or all of which shall be in a form other than cash, the value of such consideration shall be as determined by an investment banking firm reasonably acceptable to the Noteholder (the cost of the engagement of said investment banking firm to be borne by the Company). Shares of such Common Stock owned by or held for the account of the Company or any Subsidiary thereof shall not be deemed outstanding for the purpose of any such computation. Such adjustment shall be made successively whenever the date of such issuance is fixed (which date of issuance shall be the record date for such issuance if a record date therefor is fixed); and, in the event that such shares or options, rights or warrants are not so issued, the Conversion Price shall again be adjusted to be the Conversion Price if the date of such issuance had not been fixed. 3. In case the Company shall make a distribution to all holders of Common Stock (including any such distribution made in connection with a consolidation or merger in which the Company is the surviving corporation) of shares of it stock, evidences of its indebtedness, assets, or rights, options or warrants (other than those referred to in paragraph 2 above) to subscribe for or purchase such shares, evidences of indebtedness, or assets, then, effective upon such distribution, the Conversion Price shall be adjusted to equal the product obtained by multiplying the Conversion Price in effect immediately prior to the date of such distribution by a fraction, the numerator of which shall be the Per Share Stock Price for the trading day immediately preceding the day of distribution ("Pre-Distribution Price") less the fair market value of the distribution (as determined in good faith by the Board of Directors of the Company) applicable to one share of Common Stock, and the denominator of which shall be the Pre-Distribution Price. Such adjustment shall be made successively whenever a date for such distribution is fixed (which date of distribution shall be the record date for such issuance if a record date therefor is fixed); and, if such distribution is not so made, the Conversion Price shall again be adjusted to be to be the Conversion Price if the date of such issuance had not been fixed. 4. No adjustment in the Conversion Price shall be required unless such adjustment would require an increase or decrease of at least one-tenth of one percent (.1%) in the total number of shares of Common Stock that would be issued as a result of the conversion of all the Note; PROVIDED that any adjustments which by reason of this section are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this section shall be made to the nearest hundredth of one percent. 5. In the event of any capital reorganization of the Company, or of any reclassification of any Common Stock for which the Note is convertible (other than a subdivision or combination of outstanding shares of such Common Stock), or in case of the consolidation of the Company with or the merger of the Company with or into any other corporation or of the sale of the properties and assets of the Company as, or substantially as, an entirety to any other entity, each $3.00 of principal and unpaid interest outstanding of the Note shall after such capital reorganization, reclassification of such Common Stock, consolidation, merger or sale be convertible, upon the terms and conditions specified in this Agreement, into the number of shares of stock or other securities or assets to which a holder of the number of shares of Common Stock into which amount of principal and interest payable under the Note is convertible (at the time of such capital reorganization, reclassification of such Common Stock, consolidation, merger or sale) would have been entitled upon such capital reorganization, reclassification of such Common Stock, consolidation, merger or sale; and in any such case, if necessary, the provisions set forth in this section with respect to the rights thereafter of such Note shall be appropriately adjusted so as to be applicable, as nearly as may reasonably be, to any shares of stock or other securities or assets thereafter deliverable upon the conversion of the Note. The Company shall not effect any such consolidation, merger or sale, unless prior to or simultaneously with the consummation thereof, the successor corporation (if other than the Company) resulting from such consolidation or merger or the corporation purchasing such assets or the appropriate corporation or entity shall assume, by written instrument, the obligation to deliver to the Noteholder the shares of stock, securities or assets to which, in accordance with the foregoing provisions, such Noteholder may be entitled pursuant to this section. 6. If any question shall at any time arise with respect to the Conversion Price or the number of shares issuable upon conversion of the Note, such question shall be determined by the independent firm of certified public accountants of recognized national standing selected by the Noteholder and acceptable to the Company. 7. Notwithstanding anything in this section to the contrary, the Company shall not be permitted to take any action described in this section, if such action is prohibited under any other provision of this Note or the Agreement. If a Noteholder elects to convert all or a portion of the outstanding principal and accrued and unpaid interest under the Note, then the Noteholder shall deliver the Note to the Company in exchange for an amended and restated note setting forth the new amount of principal and accrued and unpaid interest. Upon such exchange, the Company shall promptly issue and deliver, or cause to be issued and delivered, to the Noteholder a certificate or certificates for the number of whole shares of Common Stock to which the Noteholder is entitled under the terms hereof. To the extent permitted by law, such conversion shall be deemed to have been made immediately prior to the close of business on the date of such exchange of the Notes for the amended and restated note and Conversion Shares, and the Noteholder shall be treated for all purposes as the record holder of such shares of Common Stock on such date. No fractional shares or script of Common Stock shall be issued upon conversion of all or a portion of the outstanding principal and accrued unpaid interest of the outstanding principal and accrued unpaid interest under the Note. In lieu of a fractional share of Common Stock to which the holder would otherwise be entitled, the Company shall pay cash equal to the product of such fraction multiplied by the market value of one share of Common Stock on the date of conversion. Upon the occurrence and during the continuance of an Event of Default, and upon the conditions stated in the Agreement, the holder hereof may, at its option, declare the entire unpaid principal of and accrued interest on this Note immediately due and payable (provided that, upon the occurrence of certain Events of Default, and upon the conditions stated in the Agreement, such acceleration shall be automatic), without notice, demand, or presentment, all of which are hereby waived, and the holder hereof shall have the right to offset against this Note any sum or sums owed by the holder hereof to Maker. After the occurrence of an Event of Default, interest shall accrue on the outstanding principal balance of this Note and, to the extent permitted by applicable Law, on accrued but unpaid interest, at the lesser of (a) the Default Rate or (b) the Maximum Lawful Rate. After the occurrence of an Event of Default, all amounts collected or received by any Noteholder in respect of the Obligations shall be applied first, to the payment of all proper costs incurred by the Noteholder in connection with the collection thereof (including reasonable fees, expenses and disbursements of counsel for the Noteholder), second, to the reimbursement of any advances made by Noteholder to effect performance of any unperformed covenants of the Company under any of the Transaction Documents, third, to the payment of all accrued interest on the Note, fourth, to unpaid principal on the Note, and fifth to the Company or any other Person entitled to such proceeds under applicable Law. If this Note is placed in the hands of an attorney for collection, or if it is collected through any legal proceedings, Maker agrees to pay the court costs, reasonable attorneys' fees, and other costs of collection of the holder hereof. Maker, and each surety, endorser, guarantor, and other party ever liable for payment of any sums of money payable on this Note, jointly and severally waive presentment and demand for payment, protest, notice of protest and nonpayment, and notice of acceleration and the intention to accelerate, and agree that their liability on this Note shall not be affected by any renewal or extension in the time of payment hereof, by any indulgences, or by any release or change in any security for the payment of this Note, and hereby consent to any and all renewals, extensions, indulgences, releases, or changes, regardless of the number of such renewals, extensions, indulgences, releases or changes. THIS NOTE AND THE OTHER TRANSACTION DOCUMENTS COLLECTIVELY REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS BETWEEN THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. MIDDLE BAY OIL COMPANY, INC. By: ------------------------- Name: John J. Bassett Title: President EXHIBIT "B" REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (the "Agreement") dated as of ________________, 1999, is entered into by and among MIDDLE BAY OIL COMPANY, INC., an Alabama corporation ("Corporation") and the parties listed on Schedule 1 attached hereto and incorporated herein by reference (each of such parties are referred to individually as "Shareholder" and collectively, as "Shareholders") and the parties listed on Schedule 2 attached hereto and incorporated herein by reference (each of such parties are referred to individually as "Piggy-Back Shareholder" and collectively, as "Piggy-Back Shareholders"). RECITALS WHEREAS, pursuant to those Securities Purchase Agreements by and between Corporation and each of the Shareholders executed on ______________, 1999 (the "Purchase Agreements"), each Shareholder will receive the number of shares of Common Stock, Notes and Warrants as set forth on Schedule 1. WHEREAS, each of the Piggy-Back Shareholders currently owns shares of Common Stock as set forth on Schedule 2. WHEREAS, as a condition to the Purchase Agreements, Corporation has agreed to grant to Shareholders certain registration rights with respect to their Registrable Securities (defined hereafter) and has agreed to grant the Piggy-Back Shareholders certain registration rights with respect to their Piggy-Back Registrable Securities (defined hereafter). WHEREAS, all the terms used but not defined in this Agreement shall have the meaning ascribed to them in the Purchase Agreements. NOW, THEREFORE, in consideration of the mutual promises contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: Section 1. DEFINITIONS. For purposes of this Agreement, the following terms shall have the respective meanings assigned to them in this Section 1 or in the recitals above or the subsections referred to below. "Piggy-Back Registrable Securities" shall mean (i) the shares of Common Stock owned by each Piggy-Back Shareholder as listed on Schedule 2 (ii) the shares of Common Stock owned by each Piggy-Back Shareholder during the term of this Agreement as a result of the conversion of the shares of the Company's Series B Convertible Preferred Shares as listed on Schedule 2, and (iii) any securities issued or issuable with respect to the shares described in clauses (i) and (ii) above by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization. "Registrable Securities" shall mean (i) the shares of Common Stock issued to the Shareholders pursuant to the Purchase Agreements (which, for purposes hereof, shall mean the Common Stock Shares, the Warrant Shares and the Conversion Shares as defined in the Purchase Agreements) and (ii) any securities issued or issuable with respect to the shares described in clause (i) above by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization. Section 2. INDEPENDENT REGISTRATION RIGHTS. 2.1 The Corporation hereby grants to each Shareholder separate rights to require the Corporation to use its best efforts to cause registration and sale in a public offering of all or a portion of such Shareholder's Registrable Securities in accordance with this Section 2; provided, however, the Corporation shall not have any obligation to effect more than a total of three (3) effective registrations pursuant to this Section 2 at the Corporation's expense. If the Corporation shall have received a written request submitted by Shareholder(s) owning at least a majority of the Registrable Securities outstanding at the time of such request (the "Requisite Holders") that such Shareholder(s) desires/desire to sell Registrable Securities and specifying the number of Registrable Securities proposed to be sold (for the purposes of this Section 2, "Shares") and the proposed plan for distribution of the Shares, Corporation will thereafter: 2.1.1 Give prompt (but in any event within fifteen (15) days after the receipt of the Requisite Holder(s)' notice) notice to all other Shareholders of such notice and of such other Shareholders' rights to have their Registrable Securities included in such registration. 2.1.2 Upon the request of any such Shareholder made within fifteen (15) days after the receipt by such Shareholder of any such notice given pursuant to subsection 2.1.1 (which request shall specify the Registrable Securities intended to be disposed of by such Shareholder and the intended method or methods of disposition thereof), the Corporation will use its best efforts to effect the registration of all Shares which the Corporation has been so requested to register pursuant to this subsection 2.1. 2.1.3 Prepare and file as soon as practicable, but in no event later than thirty (30) days from Corporation's receipt of the last Shareholder's request to have such Shareholder's Registrable Securities included in such registration within the time period specified in Section 2.1.2, a registration statement under the Securities Act of 1933, as amended (the "Securities Act") ("Registration Statement") with the Securities Exchange Commission ("Commission") on Form S-1 (or Form S-2 or Form S-3, if Corporation is entitled to use such forms, or similar forms available for use by small business issuers) and use its best efforts to cause such Registration Statement to become effective in order that the Shareholders may sell the Shares in accordance with the proposed plan of distribution. 2.1.4 Prepare and file with the Commission such amendment and supplements to such Registration Statement and prospectus used in connection therewith including any preliminary prospectus or supplemental or amended prospectus (the "Prospectus") as may be necessary to keep such Registration Statement continuously effective and to comply with the provisions of the Securities Act with respect to the offer of the Shares during the period required for distribution of the Shares, which period shall not be in excess of the earlier of (i) one year from the effective date of such Registration Statement, and (ii) the distribution of all Shares covered by such Registration Statement. 2.1.5 Furnish to each Shareholder such number of copies of the Prospectus (including any preliminary prospectus or supplemental or amended prospectus ) as such Shareholder may reasonably request in order to facilitate the sale and distribution of the Shares. 2.2 The right of each Shareholder to register Shares pursuant to the provisions of this Section 2 shall be subject to the condition that if a request for registration is made within sixty (60) days prior to the conclusion of Corporation's then current fiscal year, Corporation shall have the right to delay the filing of the Registration Statement for such period of time until Corporation receives its audited financial statements for such fiscal year. 2.3 If the Requisite Holder(s) intend/intends to distribute the Registrable Securities covered by the notice pursuant to subsection 2.1 by means of an underwriting, the Requisite Holder(s) shall so advise the Corporation as a part of the notice made pursuant to subsection 2.1 and provide the name of the managing underwriter or underwriters that the Requisite Holder(s) proposes/propose to employ in connection with the public offering proposed to be made pursuant to the registration requested. If the managing underwriter of such underwritten offering shall inform the Corporation and the Shareholders requesting that their Shares be registered pursuant to this Section 2 by letter of its belief that the amount of Shares requested to be included in such registration exceeds the amount which can be sold in (or during the time of) such offering within a price range acceptable to the Requisite Holders, then the Corporation will include in such registration such amount of Shares which the Corporation is so advised can be sold in (or during the time of) such offering PRO RATA on the basis of the amount of such Shares so proposed to be sold and so requested to be included by such parties. 2.4 A registration shall not be deemed to have been effected (i) unless it has become effective and remained effective for the period specified in subsection 2.1.4, (ii) if, after it has become effective, such registration is terminated by a stop order, injunction or other order of the Commission or other governmental agency or court, or (iii) if the conditions to closing specified in any purchase agreement or underwriting agreement entered into in connection with such registration are not satisfied for any reason, other than as a result of the voluntary termination of such offering by the Requisite Holders. Section 3. PIGGY-BACK REGISTRATION RIGHTS. 3.1 If Corporation proposes to file, on its behalf, a Registration Statement under the Securities Act on Form S-1, S-2 or S-3 or similar forms available for use by small business issuers, other than pursuant to Section 2 of this Agreement or in connection with a dividend reinvestment, employee stock purchase, option or similar plan or in connection with a merger, consolidation or reorganization, Corporation shall give written notice to each Shareholder and Piggy-Back Shareholder at least thirty (30) days before the filing with the Commission of such Registration Statement. Such notice shall offer to include in such filing all or a portion of the Registrable Securities and Piggy-Back Registrable Securities owned by such Shareholder or Piggy-Back Shareholder. If a Shareholder or Piggy-Back Shareholder desires to include all or a portion of its Registrable Securities or Piggy-Back Registrable Securities in such Registration Statement, it shall give written notice to Corporation within fifteen (15) days after the date of mailing of such offer specifying the amount of Registrable Securities and/or Piggy-Back Registrable Securities to be registered (for the purpose of this Section 3, "Shares"). Corporation shall thereupon include in such filing the Shares, subject to priorities in registration set forth in this Agreement, and subject to its right to withdraw such filing, and shall use its best efforts to effect registration under the Securities Act of the Shares. 3.2 The right of the Shareholders and the Piggy-Back Shareholders to have the Shares included in any Registration Statement in accordance with the provisions of this Section 3 shall be subject to the following conditions: 3.2.1 Corporation shall have the right to require that each Shareholder or Piggy-Back Shareholder agree to refrain from offering or selling any shares of Common Stock that it owns which are not included in any such Registration Statement in accordance with this Section 3 for any reasonable time period specified, not to exceed ninety (90) days, by any managing underwriter of the offering to which such Registration Statement relates. 3.2.2 If (i) a registration pursuant to this Section 3 involves an underwritten offering of the securities being registered to be distributed (on a firm commitment basis) by or through one or more underwriters of recognized standing under underwriting terms appropriate for such a transaction and (ii) the managing underwriter of such underwritten offering shall inform the Corporation and the Shareholders and Piggy-Back Shareholders who have requested that their Shares be registered pursuant to this Section 3 by letter of its belief that the amount of Shares requested to be included in such registration exceeds the amount which can be sold in (or during the time of) such offering within a price range acceptable to a majority of such requesting holders, then the Corporation will include in such registration such amount of securities which the Corporation is so advised can be sold in (or during the time of) such offering as follows: FIRST, the securities being offered by the Corporation for its own account; SECOND such Shares of the Shareholders which are requested to be included in such registration PRO RATA on the basis of the amount of such Shares so proposed to be sold and so requested to be included by such Shareholders; and THIRD, such Shares of the Piggy-Back Shareholders and which are requested to be included in such registration PRO RATA on the basis of the amount of such Shares so proposed to be sold and so requested to be included by such Piggy-Back Shareholders. 3.2.3 Corporation shall furnish each Shareholder and Piggy-Back Shareholder with such number of copies of the Prospectus as such Shareholder or Piggy-Back Shareholder may reasonably request in order to facilitate the sale and distribution of its shares. 3.3 Notwithstanding the foregoing, Corporation in its sole discretion may determine not to file the Registration Statement or proceed with the offering as to which the notice specified herein is given without liability to the Shareholders or the Piggy-Back Shareholders. Section 4. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS. No Shareholder or Piggy-Back Shareholder may participate in any registration hereunder which relates to an underwritten offering unless such Shareholder or Piggy-Back Shareholder (a) agrees to sell such holder's securities on the basis provided in any underwriting arrangements approved by the holders of at least a majority of the Registrable Securities and Piggy-Back Registrable Securities to be included in such registration, or by a Person appointed by such holders to act on their behalf to approve such arrangements, and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements. Section 5. EXCLUSIVE REGISTRATION RIGHTS AND TRANSFER. The rights of each Shareholder under this Agreement may upon notice to the Corporation be transferred to its respective Affiliates in combination with a transfer of shares to such Affiliates. In addition, the rights of each Shareholder under this Agreement may upon notice to the Corporation be transferred to a non-Affiliate transferee in combination with a transfer of shares to such non-Affiliate transferee. However, such non-Affiliate transferee may not thereafter transfer its rights under this Agreement without the Corporation's written consent. Except as provided in this Section 5, the rights granted under this Agreement are granted specifically to and for the benefit of each Shareholder and Piggy Back Shareholder and shall not pass to any transferee of Registrable Securities. From and after the date of this Agreement, the Corporation will not, without the prior written consent of Shareholders holding at least a majority of the Registrable Securities then outstanding, enter into any agreement with respect to its securities which is inconsistent with or violates the rights granted to the Shareholders in this Agreement. Without limiting the foregoing, the Corporation also specifically agrees that during the period commencing on the date hereof and ending when the Shareholders have disposed of all of their Registrable Securities, the Corporation will not enter into an agreement with any party pertaining to the registration by the Corporation of such party's Common Stock. The Corporation represents and warrants to each of the Shareholders that, as of the date hereof, the Corporation is not a party to any agreement, other than this Agreement, pertaining to the registration by the Corporation of Common Stock. Section 6. EXPENSES. Corporation will bear all the expenses in connection with any Registration Statement under this Agreement, other than transfer taxes payable on the sale of such shares, the fees and expenses of counsel to the Shareholders and Piggy-Back Shareholders and fees and commissions of brokers, dealers and underwriters. Section 7. RECALL OF PROSPECTUSES, ETC. With respect to a Registration Statement or amendment thereto filed pursuant to this Agreement, if, at any time, Corporation notifies the Shareholders and Piggy-Back Shareholders that an amendment or supplement to such Registration Statement or amendment to the Prospectus included therein is necessary or appropriate, each Shareholder and Piggy-Back Shareholder will forthwith cease selling and distributing shares thereunder and will forthwith redeliver to Corporation all copies of such Registration Statement and Prospectuses then in its possession or under its control. Corporation will use its best efforts to cause any such amendment or supplement to become effective as soon as practicable and will furnish each Shareholder and Piggy-Back Shareholder with a reasonable number of copies of such amended or supplemented prospectus (and the period during which Corporation is required to use its best efforts to maintain such Registration Statement in effect pursuant to this Agreement will be increased by the period from the date on which such Shareholder or Piggy-Back Shareholder ceased selling and distributing shares thereunder to the date on which such amendment or supplement becomes effective). Section 8. COOPERATION WITH EXISTING SHAREHOLDERS. Corporation shall be entitled to require the Shareholders and Piggy-Back Shareholders to cooperate with Corporation in connection with a registration of Registrable Securities pursuant to this Agreement and furnish (i) such information as may be required by Corporation or the Commission in connection therewith and (ii) such representations, undertakings and agreements as may be required by the Commission in connection therewith. Section 9. REGISTRATION PROCEDURE Upon the receipt of a request for registration of any Registrable Securities pursuant to Section 2 or Section 3 of this Agreement, Corporation will use its best efforts to effect the registration of the Registrable Securities in accordance with the intended method of disposition thereof, and pursuant thereto Corporation will as expeditiously as possible: 9.1.1 Prepare and file with the Commission a registration statement on an appropriate form under the Securities Act and use its best efforts to cause such registration statement to become effective; provided, that before filing a registration statement or prospectus or any amendments or supplements thereto, including documents incorporated by reference after the initial filing of any registration statement, Corporation will promptly furnish to the holders of Registrable Securities and Piggy-Back Registrable Securities to be registered and sold pursuant to this Agreement (the "Registered Holders") and the underwriters, if any, copies of all such documents proposed to be filed, which documents will be subject to the review of the Registered Holders and the underwriters, and Corporation will not file any registration statement or amendment thereto, or any prospectus or any supplement thereto (including such documents incorporated by reference) to which the Registered Holders or the underwriters, if any, shall reasonably object in the light of the requirements of the Securities Act and any other applicable laws and regulations. 9.1.2 Prepare and file with the Commission such amendments and post-effective amendments to a registration statement as may be necessary to keep such registration statement effective for the applicable period; cause the related prospectus to be filed pursuant to Rule 424(b) (or any successor provision) under the Securities Act; cause such prospectus to be supplemented by any required prospectus supplement and, as so supplemented, to be filed pursuant to Rule 424(b) (or any successor provision) under the Securities Act; and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement during the applicable period in accordance with the intended methods of disposition set forth in such registration statement or supplement to such prospectus. 9.1.3 Notify the Registered Holders and the managing underwriters, if any, promptly, and (if requested by any such person) confirm such advice in writing, (i) when a prospectus or any prospectus supplement or post-effective amendment has been filed, and, with respect to a registration statement or any post-effective amendment, when the same has become effective, (ii) of any request by the Commission for amendments or supplements to a registration statement or related prospectus or for additional information, (iii) of the issuance by the Commission of any stop order suspending the effectiveness of a registration statement or the initiation of any proceeding for that purpose, (iv) if at any time the representations and warranties of Corporation contemplated by subsection 9.1.10 cease to be true and correct, (v) of the receipt by Corporation of any notification with respect to the suspension or qualification of any of the Registrable Securities for sale in any jurisdiction or the initiation of any proceeding for such purpose, (vi) of the happening of any event which requires the making of any changes in a registration statement or related prospectus so that such documents will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading and (vii) of Corporation's reasonable determination that a post-effective amendment to a registration statement would be appropriate or that there exist circumstances not yet disclosed to the public which make further sales under such registration statement inadvisable pending such disclosures and post-effective amendment. 9.1.4 Make reasonable efforts to obtain the withdrawal of any order suspending the effectiveness of a registration statement, or the lifting of any suspension of the qualification of any of the Registrable Securities for sale in any jurisdiction, at the earliest possible moment. 9.1.5 If requested by the managing underwriters or the Registered Holders in connection with an underwritten offering, immediately incorporate in a prospectus supplement or post effective amendment such information as the managing underwriters and the Registered Holders agree should be included therein relating to such sale and distribution of Registrable Securities, including, without limitation, information with respect to the number of shares of Registrable Securities being sold to such underwriters and the purchase price being paid therefor by such underwriters and with respect to any other terms of the underwritten (or best efforts underwritten) offering of the Registrable Securities to be sold in such offering; make all required filings of such prospectus supplement or post-effective amendment as soon as notified of the matters to be incorporated in such prospectus supplement or post-effective amendment; and supplement or make amendments to any registration statement if requested by the Registered Holders or any underwriter of such Registrable Securities. 9.1.6 Furnish to the Registered Holders and each managing underwriter, if any, without charge, at least one signed copy of the registration statement, any post-effective amendment thereto, including financial statements and schedules, all documents incorporated therein by reference and all exhibits (including those incorporated by reference). 9.1.7 Deliver without charge to the Registered Holders and the underwriters, if any, as many copies of the prospectus or prospectuses (including each preliminary prospectus) and any amendment or supplement thereto as such persons may reasonably request; and Corporation consents to the use of such prospectus or any amendment or supplement thereto by such Registered Holders and the underwriters, if any, in connection with the offer and sale of the Registrable Securities covered by such prospectus or any amendment or supplement thereto. 9.1.8 Prior to any public offering of Registrable Securities, register or qualify or cooperate with the Registered Holders, the underwriters, if any, and respective counsel in connection with the registration or qualification of such Registrable Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions as the Registered Holders or an underwriter reasonably requests in writing; keep each such registration or qualification effective during the period such registration statement is required to be kept effective and do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by the applicable registration statement; PROVIDED, HOWEVER, that Corporation will not be required in connection therewith or as a condition thereto to qualify generally to do business or subject itself to general service of process in any such jurisdiction where it is not then so subject. 9.1.9 Upon the occurrence of any event contemplated by subsection 9.1.3 (ii) - (vii) above, prepare, to the extent required, a supplement or post-effective amendment to the applicable registration statement or related prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchaser of the Registrable Securities being sold thereunder, such prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading. 9.1.10 Enter into such agreements (including an underwriting agreement) and take all such other actions in connection therewith in order to expedite or facilitate the disposition of such Registrable Securities and in such connection, whether or not an underwriting agreement is entered into and whether or not the Registrable Securities to be covered by such registration are to be offered in an underwritten offering: (i) make such representations and warranties to the Registered Holders to the registration statement, prospectus and documents incorporated by reference, if any, in form, substance and scope as are customarily made by issuers to underwriters in underwritten offerings and confirm the same if and when requested; (ii) obtain opinions of counsel to Corporation and updates thereof with respect to the registration statement and the prospectus in the form, scope and substance which are customarily delivered in underwritten offerings; (iii) in the case of an underwritten offering, enter into an underwriting agreement in form, scope and substance as is customary in underwritten offerings and obtain opinions of counsel to Corporation and updates thereof (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the managing underwriters and the Registered Holders) addressed to the Registered Holders and the underwriters, if any, covering the matters customarily covered in opinions delivered in underwritten offerings and such other matters as may be reasonably requested by the Registered Holders and such underwriters; (iv) obtain "cold comfort" letters and updates thereof from Corporation's independent certified public accountants addressed to the Registered Holders and the underwriters, if any, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters by accountants in connection with underwritten offerings; (v) if any underwriting agreement is entered into, the same shall set forth in full the indemnification provisions and procedures customarily included in underwriting agreements in underwritten offerings; and (vi) Corporation shall deliver such documents and certificates as may be requested by the Registered Holders and the managing underwriters, if any, to evidence compliance with clause (i) above and with any customary conditions contained in the underwriting agreement or other agreement entered into by Corporation. The above shall be done at each closing under such underwriting or similar agreement or as and to the extent required thereunder. 9.1.11 Make available for inspection by a representative of the Registered Holders, any underwriter participating in any disposition pursuant to such registration, and any attorney or accountant retained by the Registered Holders or such underwriter, all financial and other records, pertinent corporate documents and properties of Corporation, and cause Corporation's officers, directors and employees to supply all information reasonably requested by any such representative, underwriter, attorney or accountant in connection with such registration; provided that any records, information or documents that are designated by Corporation in writing as confidential shall be kept confidential by such Persons unless disclosures of such records, information or documents is required by court or administrative order. 9.1.12 Otherwise use its best efforts to comply with all applicable rules and regulations of the Commission and make generally available to its security holders earning statements satisfying the provisions of Section 11(a) of the Securities Act, no later than 90 days after the end of any 12-month period (i) commencing at the end of any fiscal quarter in which Registrable Securities are sold to underwriters in a firm or best efforts underwritten offering and (ii) beginning with the first day of Corporation's first fiscal quarter next succeeding each sale of Registrable Securities after the effective date of a registration statement, which statements shall cover said 12-month periods. 9.1.13 If Corporation, in the exercise of its reasonable judgment, objects to any change reasonably requested by the Registered Holders or the underwriters, if any, to any registration statement or prospectus or any amendments or supplements thereto (including documents incorporated or to be incorporated therein by reference) as provided for in this Section 9, Corporation shall not be obligated to make any such change and such Registered Holders may withdraw their Registrable Securities from such registration, in which event (i) Corporation shall pay all registration expenses (including its counsel fees and expenses) incurred in connection with such registration statement or amendment thereto or prospectus or supplement thereto, and (ii) in the case of a registration being effected pursuant to Section 2, such registration shall not count as one of the registrations Corporation is obligated to effect pursuant to Section 2 hereof. Section 10. INDEMNIFICATION. 10.1 In the event of any registration of any securities under the Securities Act pursuant to this Agreement, Corporation will indemnify and hold harmless each Shareholder, each Piggy-Back Shareholder, any underwriter and each other Person, if any, who controls such Shareholder, Piggy-Back Shareholder or underwriter within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which each such Shareholder, Piggy-Back Shareholder or any underwriter may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or action in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in such Registration Statement or preliminary prospectus (if used prior to the effective date of such Registration Statement) or final or summary prospectus contained therein (if used during the period the Corporation is required to keep the Registration Statement effective), or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements made therein not misleading, and will reimburse each such Shareholder, Piggy-Back Shareholder or underwriter for any legal or any other expenses as reasonably incurred by such person in connection with investigating or defending any such action or claim, excluding any amounts paid in settlement of any litigation, commenced or threatened, if such settlement is effected without prior written consent of Corporation; provided, however, that Corporation will not be liable to the Shareholders, Piggy-Back Shareholders or an underwriter in any such case to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or omission or alleged omission made in said Registration Statement, said preliminary prospectus or said final or summary prospectus or any amendment or supplement thereto, in reliance upon and in conformity with written information furnished to Corporation by that Shareholder, Piggy-Back Shareholder or their respective affiliates or representatives, or by that underwriter, as the case may be, specifically for use in the preparation thereof; and provided further that the indemnity agreement contained in this Section 10 with respect to any preliminary prospectus shall not inure to the benefit of the Shareholders, Piggy-Back Shareholders or any underwriter or to any Person selling the same in respect of any loss, claim, damage, liability or action asserted by someone who purchased shares from such person if a copy of the final prospectus (as the same may be amended or supplemented) in connection with such registration statement was not sent or given to such person with or prior to written confirmation of the sale and if the untrue statement or omission or alleged untrue statement or omission of a material fact contained in such preliminary prospectus was corrected in the final prospectus. 10.2 In the event of any registration of securities under the Securities Act pursuant to this Agreement, each Shareholder and Piggy-Back Shareholder will indemnify and hold harmless Corporation, each of its directors and officers, any underwriter and each other Person, if any, who controls Corporation or underwriter within the meaning of the Securities Acts, against any losses, claims, damages or liabilities, joint or several, to which Corporation or any such director, officer, underwriter may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or action in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in such Registration Statement or preliminary prospectus or final or summary prospectus contained therein, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements made therein not misleading, and will reimburse Corporation, each such director, officer, underwriter for any legal or any other expenses as reasonably incurred by them in connection with investigating or defending any such action or claim, excluding any amounts paid in settlement of any litigation, commenced or threatened, if such settlement is effected without prior written consent of the indemnifying Shareholder, Piggy-Back Shareholder or their respective representative; but in all cases only if, and to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission therein made in reliance upon and in conformity with written information furnished to Corporation by the indemnifying Shareholder, Piggy-Back Shareholder or their respective affiliates or representatives specifically for use in the preparation thereof. Notwithstanding the foregoing, the amount of the indemnity provided by each such Shareholder or Piggy-Back Shareholder pursuant to this Section 10 shall not exceed the net proceeds received by such Shareholder or Piggy-Back Shareholder in such related registration and sale. 10.3 Promptly after receipt by a party entitled to indemnification under subsection 10.1 or 10.2 hereof of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under either of such subsections, notify the indemnifying party in writing of the commencement thereof. In case any such action is brought against the indemnified party and it shall so notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in, and, to the extent that it so chooses, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party, and, after notice from the indemnifying party that it so chooses, such indemnifying party shall not be liable for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof, provided, however, that if the indemnifying party fails to take reasonable steps necessary to diligently defend such claim within twenty (20) days after receiving notice from the indemnified party that the indemnified party believes the indemnifying party has failed to take such steps, the indemnified party may assume its own defense and the indemnifying party shall be liable for any expenses therefor. The indemnity agreements in this Section 10 shall be in addition to any liabilities which the indemnifying parties may have pursuant to law. 10.4 If the indemnification provided for in this Section 10 from the indemnifying party is unavailable to an indemnified party hereunder in respect of any losses, claims, damages, liabilities or expenses referred to herein, then the indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses in such proportion as is appropriate to reflect the relative fault of the indemnifying party and indemnified parties in connection with the actions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative fault of such indemnifying party and indemnified parties shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, has been made by, or relates to information supplied by, such indemnifying party or indemnified parties, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, subject to the limitations set forth in Section 10 hereof, any legal or other fees or expenses reasonably incurred by such party in connection with any investigation or proceeding. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 10 were determined by pro rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to in the immediately preceding paragraph. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. Section 11. SALES UNDER RULE 144. With a view to making available to each Shareholder and Piggy-Back Shareholder the benefits of Rule 144 promulgated under the Securities Act and any other similar rule or regulation of the Commission that may at any time permit such Shareholder or Piggy-Back Shareholder to sell the Registrable Securities without registration, Corporation agrees to: (a) make and keep public information available, as those terms are understood and defined in Rule 144 (or any successor provision); (b) file with the Commission in a timely manner all reports and other documents required of Corporation under the Securities Act and the Exchange Act; (c) furnish to such Shareholder or Piggy-Back Shareholder forthwith upon request (i) a written statement by Corporation that it has complied with the reporting requirements of Rule 144 (or any successor provision), the Securities Act and the Exchange Act, (ii) a copy of the most recent annual or quarterly report of Corporation and such other reports and documents so filed by Corporation under the Securities Act and the Exchange Act and (iii) such other information as may be reasonably requested by such Shareholder or Piggy-Back Shareholder in availing itself of any rule or regulation of the Commission which permits the selling of any such securities without registration; and (d) after any sale of Registrable Securities pursuant to Rule 144, to the extent allowed by law, to cause any restrictive legends to be removed and any transfer restrictions to be rescinded with respect to such Registration Securities. Section 12. REMOVAL OF LEGEND. The Corporation agrees, to the extent allowed by law, to remove any legends on certificates representing Registrable Securities or Piggy-Back Registrable Securities describing transfer restrictions applicable to such securities upon the sale of such securities (i) pursuant to an effective Registration Statement under the Securities Act or (ii) in accordance with the provisions of Rule 144 under the Securities Act. Section 13. NOTICES. Any notice to be given by any party hereunder to any other shall be in writing, mailed by certified or registered mail, return receipt requested, and shall be addressed to the other parties at the addresses listed on the signature pages hereof. All such notices shall be deemed to be given three (3) days after the date of mailing thereof. Section 14. MODIFICATION. Notwithstanding anything to the contrary in this Agreement or otherwise, no modification, amendment or waiver of any of the provisions of this Agreement shall be effective unless in writing and signed by the Corporation and the Shareholders holding not less than 95% of the Registrable Securities then outstanding. Section 15. NON-WAIVER. The failure to enforce at any time any of the provisions of this Agreement, or to require at any time performance by any other party of any of the provisions hereof, shall in no way be construed to be a waiver of such provisions. Section 16. PARTIAL INVALIDITY. If any clause, sentence, paragraph, section or part of this Agreement shall be deemed invalid, unenforceable or against public policy, the part which is invalid, unenforceable or contrary to public policy shall not affect, impair, invalidate or nullify the remainder of this Agreement, but the invalidity, unenforceability or contrariness to public policy shall be confined only to the clause, sentence, paragraph, section or party of this Agreement so invalidated, unenforceable or against public policy. Section 17. CONSTRUCTION. The language in all parts of this Agreement shall in all cases be construed simply, according to its fair meaning, and shall not be construed strictly for or against either of the parties hereto. Section 18. GOVERNING LAW. This Agreement shall be governed and construed according to the laws of the State of Alabama, without regard to its conflicts of law principles. Section 19. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall constitute an original and all of which together shall constitute but one and the same instrument. Section 20. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors and permitted assigns. Section 21. SPECIFIC PERFORMANCE. The parties agree that, to the extent permitted by law, (i) the obligations imposed on them in this Agreement are special, unique and of an extraordinary character, and that in the event of a breach of any such party damages would not be an adequate remedy and (ii) the other party shall be entitled to specific performance and injunctive and equitable relief in addition to any other remedy to which it may be entitled at law or in equity. (REMAINDER OF PAGE INTENTIONALLY LEFT BLANK) IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. "CORPORATION" MIDDLE BAY OIL COMPANY, INC. By: ---------------------------------- Name: -------------------------------- Title: ------------------------------- Address for Notice: Middle Bay Oil Company, Inc. 1221 Lamar Street, Suite 1020 Houston, TX 77010 Fax: (713) 650-0352 "SHAREHOLDERS" 3TEC ENERGY CORPORATION By: ---------------------------------- Name: Floyd C. Wilson -------------------------------- Title: President ------------------------------- Address for Notice: 3TEC Energy Corporation 5910 N. Central Expressway Suite 1150 Dallas, TX 75206 Fax: (214) 373-9731 SHOEMAKER FAMILY PARTNERS, LP By: -------------------- Its General Partner By: ------------------------------- Name: ----------------------------- Title: ---------------------------- Address for Notice: Shoemaker Family Partners, LP 60 Brushhill Road Kinnelon, NJ 07405 Fax: (310) 444-3833 SHOEINVEST II, LP By: -------------------- Its General Partner By: ------------------------------- Name: ----------------------------- Title: ---------------------------- Address for Notice: Shoeinvest II, LP 60 Brushhill Road Kinnelon, NJ 07405 Fax: (310) 444-3833 "PIGGY-BACK SHAREHOLDERS" KAISER-FRANCIS OIL COMPANY By: ---------------------------- Name: -------------------------- Title: ------------------------- Address for Notice: Kaiser-Francis Oil Company 6733 South Yale Tulsa, OK 74136 Fax: (918) 491-4694 ------------------------------- C.J. LETT, III Address for Notice: C.J. Lett, III 9320 East Central Wichita, Kansas 67206 Fax: (316) 636-1803 WESKIDS, L.P. By: Weskids, Inc. Its General Partner By: ------------------------------- Name: ----------------------------- Title: ---------------------------- Address for Notice: Weskids, L.P. 310 South Street Morristown, NJ 07960 Fax: (973) 682-2684 ---------------------------------------- ALVIN V. SHOEMAKER Address for Notice: Alvin V. Shoemaker 8800 First Avenue Stone Harbor, NJ 08247 Fax: (609) 368-0147 SCHEDULE 1 3TEC Energy Corporation 4,775,556 shares of Common Stock Warrants exercisable for 3,600,000 shares of Common Stock $10,700,000 Note (which is convertible to Conversion Shares) Shoemaker Family Partners, LP 22,222 shares of Common Stock Warrants exercisable for 16,822 shares of Common Stock $50,000 Note (which is convertible to Conversion Shares) Shoeinvest II, LP 44,444 shares of Common Stock Warrants exercisable for 33,644 shares of Common Stock $100,000 Note (which is convertible to Conversion Shares)
SCHEDULE 2
PIGGY-BACK SHAREHOLDER NUMBER OF SHARES OF COMMON STOCK HELD SERIES B CONVERTIBLE IMMEDIATELY PRIOR TO PREFERRED SHARES HELD CLOSING Kaiser-Francis Oil Company 3,333,334 0 C.J. Lett, III 1,187,556 0 Weskids, L.P. 843,687 117,467 Alvin V. Shoemaker 684,222 117,466
EXHIBIT "C" INTENTIONALLY OMITTED EXHIBIT D FORM OF WARRANT CERTIFICATE --------------------------- THE OFFER AND SALE OF THE WARRANTS EVIDENCED BY THIS CERTIFICATE AND THE SECURITIES ISSUABLE UPON AN EXERCISE OF SUCH WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SALE OR TRANSFER OR THE COMPANY RECEIVES AN OPINION OF COUNSEL (WHICH MAY BE COUNSEL FOR THE COMPANY) STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT. THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE SECURITIES ISSUABLE UPON AN EXERCISE OF SUCH WARRANTS ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS SET FORTH IN A SHAREHOLDERS AGREEMENT AMONG THE COMPANY, CERTAIN OF ITS SHAREHOLDERS AND SHOEINVEST ENERGY CORPORATION, DATED AS OF _____________, 1999, A COPY OF WHICH MAY BE OBTAINED BY THE HOLDER HEREOF AT THE COMPANY'S PRINCIPAL PLACE OF BUSINESS. No. W-1 _______ Warrants WARRANT CERTIFICATE This Warrant Certificate ("WARRANT CERTIFICATE") certifies that Shoeinvest II, LP, a New Jersey limited partnership ("HOLDER"), or registered assigns, is the registered holder of ( ) Warrants ("WARRANTS") to purchase Common Stock of MIDDLE BAY OIL COMPANY, INC. an Alabama corporation (the "COMPANY"). Each Warrant entitles the holder, subject to the conditions set forth herein and in the Securities Purchase Agreement referred to below, to purchase from the Company before 5:00 P.M., Dallas, Texas time, five (5) years following the Closing Date (as defined in the Securities Purchase Agreement) (the "EXPIRATION DATE"), one fully paid and nonassessable share of the Common Stock of the Company (the "WARRANT SHARES") at a price (the "WARRANT EXERCISE PRICE") of $1.00 per Warrant Share, subject to adjustment as provided in SECTION 4.2 of the Securities Purchase Agreement, payable in lawful money of the United States of America (or, subject to the terms of SECTION 4.1 of the Securities Purchase Agreement, by offsetting the principal balance of the Note, upon surrender of this Warrant Certificate, execution of the form of Election to Purchase on the reverse hereof, and payment of the Warrant Exercise Price (in lawful money of the United States of America or by offsetting the principal balance of the Note) to the Company, at its offices located at 1221 Lamar Street, Suite 1020, Houston, Texas 77010, or at such other address as the Company may specify in writing to the registered holder of the Warrants evidenced hereby (the "WARRANT OFFICE"). The Warrant Exercise Price and number of Warrant Shares purchasable upon exercise of the Warrants are subject to adjustment prior to the Expiration Date upon the occurrence of certain events as set forth in SECTION 4.2 of the Securities Purchase Agreement. The Company may deem and treat the registered holder(s) of the Warrants evidenced hereby as the absolute owner(s) thereof (notwithstanding any notation of ownership or other writing hereon made by anyone), for the purpose of any exercise hereof and of any distribution to the holder(s) hereof, and for all other purposes, and the Company shall not be affected by any notice to the contrary. Warrant Certificates, when surrendered at the office of the Company at the above-mentioned address by the registered holder hereof in person or by a legal representative duly authorized in writing, may be exchanged, in the manner and subject to the limitations provided in the Securities Purchase Agreement, but without payment of any service charge, for another Warrant Certificate or Warrant Certificates of like tenor evidencing in the aggregate a like number of Warrants. Upon due presentment for registration of transfer of this Warrant Certificate at the office of the Company at the above-mentioned address and subject to the conditions set forth on this Certificate and in SECTION 4.2 of the Securities Purchase Agreement, a new Warrant Certificate or Warrant Certificates of like tenor and evidencing in the aggregate a like number of Warrants shall be issued in exchange for this Warrant Certificate to the transferee(s) and, if less than all the Warrants evidenced hereby are to be transferred, to the registered holder hereof, subject to the limitations provided in the Securities Purchase Agreement, without charge except for any tax or other governmental charge imposed in connection therewith. This Warrant Certificate is one of the Warrant Certificates referred to in the Securities Purchase Agreement, dated as of ____________, 1999, between the Company and Holder. Said Securities Purchase Agreement is hereby incorporated by referenced in and made a part of this instrument and is hereby referred to for a description of the rights, limitation of rights, obligations, duties and immunities thereunder of the Company and the holders. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be signed by its duly authorized officers and has caused its corporate seal to be affixed hereunto. MIDDLE BAY OIL COMPANY, INC. By: Name: JOHN J. BASSETT Title: PRESIDENT FORM OF ELECTION TO PURCHASE ---------------------------- (To be executed upon exercise of Warrant) The undersigned hereby irrevocably elects to exercise the right, represented by this Warrant Certificate, to purchase ______ Warrant Shares and herewith / / tenders payment for such Warrant Shares to the order of the Company in the amount of $_______ in accordance with the terms hereof, or represents and warrants to the Company that the undersigned is the legal and beneficial owner of the Warrant Shares and hereby advises the Company that the undersigned has offset the principal balance of the Note in the amount of $__________ in payment for the Warrant Shares. The undersigned requests that a certificate for such Warrant Shares be registered in the name of ___________ whose address is ________ _____________ and that such certificate be delivered to __________ whose address is ____________________. If said number of Warrant Shares is less than all of the Warrant Shares purchased hereunder, the undersigned requests that a new Warrant Certificate be registered in the name of ______________ whose address is ______________ and that such Warrant Certificate is to be delivered to _______________ whose address is __________________. SIGNATURE: ----------------------------- (Signature must conform in all respects to name as specified on the face of the Warrant Certificate.) Date: ---------------------------- EXHIBIT "E" EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT is made and entered into this ___ day of ________, 1999 (the "Effective Date"), by and between MIDDLE BAY OIL COMPANY, INC., an Alabama corporation (hereinafter referred to as the "Company") and FLOYD C. WILSON (hereinafter referred to as "Employee"). WITNESSETH: WHEREAS, the Company is engaged in the oil and gas business; WHEREAS, the Company desires to employ Employee as President and Chief Executive Officer of the Company and Employee desires to be employed by the Company in that capacity; and WHEREAS, the Company and Employee desire to set forth in writing the terms and conditions of their agreements and understandings; NOW, THEREFORE, in consideration of the foregoing, of the mutual promises herein contained, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties, intending to be legally bound, agree as follows: 1. TERM OF EMPLOYMENT. The Company shall employ Employee in the capacity set forth herein for a term commencing on the Effective Date and ending on November 25, 2000 (the "Employment Period"). Within the period commencing one hundred twenty (120) days prior to the end of the Employment Period, the Employee and the Company shall review the terms of this Employment Agreement in light of the circumstances existing at that time and, if the parties in good faith deem it necessary or advisable, agree to extend the term of this Employment Agreement or negotiate and enter into a new employment agreement. Notwithstanding the foregoing, Employee's employment hereunder may be terminated earlier in accordance with the provisions of Section 8 hereof. 2. RESPONSIBILITIES OF EMPLOYEE. (a) In accepting employment by the Company, Employee shall undertake and assume the responsibility of performing for and on behalf of the Company any and all duties of the Chief Executive Officer and President as set forth in the Company's Bylaws, as they may be amended from time to time, and shall have such other duties, functions, responsibilities and authority commensurate with such offices from time to time delegated to the Employee by the Board of Directors provided that such duties, functions, responsibilities and authority are customarily associated with the position of President and Chief Executive Officer. (b) Employee agrees to devote his full time and effort to his duties as an employee of the Company. Employee may devote a reasonable amount of his time to civic and community affairs, and subject to the provisions of Section 7, to the business and financial interests described on EXHIBIT A attached hereto; provided that such other activities do not materially interfere with the performance of Employee's responsibility as President and Chief Executive Officer; and provided further that no additional outside business activities shall be undertaken without the prior written consent of the Board of Directors. 3. COMPENSATION. As compensation for the services to be rendered by Employee for the Company under this Agreement, Employee shall be entitled to the following: (a) The Company shall pay Employee during the Employment Period an annual salary of not less than Two Hundred Thousand Dollars ($200,000). The amount of such annual salary may be amended by the Company's Board of Directors (the "Board") from time to time (but in no event shall such annual salary be less than Two Hundred Thousand Dollars ($200,000)). Such annual salary shall be payable periodically for such periods as may be established by the Company for payment of its employees under its normal payroll practices. (b) Employee may receive a bonus and fringe benefits each year in amounts to be determined by the Board. Such bonus may, in the discretion of the Board, be based, in part, upon the Company meeting certain financial goals, which goals may be agreed upon by the Board and Employee. 4. EXPENSES. Employee shall be reimbursed for all reasonable business expenses incurred by him in connection with or incident to the performance of his duties and responsibilities hereunder upon the Employee's submission to the Company of vouchers or expense statements evidencing such expenses in such form or format as the Company may reasonably require. 5. VACATION AND OTHER BENEFITS. (a) VACATION. Employee shall be entitled to four (4) weeks of paid vacation per year during the Employment Period. In addition, Employee shall be entitled to participate in all other present and future benefit plans provided by the Company to its employees and for which Employee meets the eligibility requirements thereof. (b) MEDICAL INSURANCE. The Company shall provide Employee and his dependents with medical insurance coverage under the Company's medical insurance plan, which plan shall be reasonably acceptable to Employee. 6. BUSINESS OPPORTUNITIES AND INTELLECTUAL PROPERTY. (a) During the period in which Employee is employed by the Company, Employee shall promptly disclose to the Company all "Business Opportunities" and "Intellectual Property" (each as defined below). (b) Employee hereby assigns and agrees to assign to the Company, its successors, assigns or designees, all of Employee's right, title and interest in and to all "Business Opportunities" and "Intellectual Property," and further acknowledges and agrees that all Business Opportunities and Intellectual Property constitute the exclusive property of the Company. (c) For purposes hereof, "Business Opportunities" shall mean all business ideas, prospects, proposals or other opportunities pertaining to the lease, acquisition, exploration, production, gathering or marketing of hydrocarbons and related products and the exploration potential of geographical areas on which hydrocarbon exploration prospects are located, which are: (i) developed by Employee (A) during the period in which Employee is employed by the Company, or (B) before the period in which Employee is employed by the Company, but only to the extent of Employee's rights thereto during such period, or (ii) originated by any third party and brought to the attention of Employee (A) during the period in which Employee is employed by the Company, or (B) before the period in which Employee is employed by the Company, but only to the extent of Employee's rights thereto during such period, together with information relating thereto, including, without limitation, any "Business Records" (as defined below). (d) For purposes hereof "Intellectual Property" shall mean all ideas, inventions, discoveries, processes, designs, methods, substances, articles, computer programs and improvements (including, without limitation, enhancements to, or further interpretation or processing of, information that was in the possession of Employee prior to the date of this Agreement), whether or not patentable or copyrightable, which do not fall within the definition of Business Opportunities, which are discovered, conceived, invented, created or developed by Employee, alone or with others: (i) during the period in which Employee is employed by the Company if such discovery, conception, invention, creation, or development (A) occurs in the course of the Employee's employment with the Company, or (B) occurs with the use of any of the Company's time, materials or facilities, or (C) in the opinion of the Board of Directors of the Company, relates or pertains in any way to the Company's purposes, activities or affairs, or (ii) before the period in which Employee is employed by the Company, but only to the extent of Employee's rights thereto during such period. 7. NON-COMPETITION AND NON-DISCLOSURE; INJUNCTIVE RELIEF. Employee acknowledges that the services he is to render in the course of his employment by the Company are of a special and unusual character with unique value to the Company. In view of the value to the Company of the services of Employee during the course of his employment by the Company, because of the Business Opportunities, Intellectual Property and "Confidential Information" (as defined below) to be obtained by or disclosed to Employee, and as a inducement to the Company to enter into this Agreement and to pay to Employee the compensation stated herein, Employee covenants and agrees as follows: (a) During the period in which Employee is employed by the Company, unless otherwise extended pursuant to the terms of this Section 7, Employee shall not directly or indirectly be employed by or render advisory, consulting or other services in connection with any business enterprise or person that is engaged in leasing, acquiring, exploring, producing, gathering or marketing hydrocarbons and related products. (b) During the period in which Employee is employed by the Company, unless otherwise extended pursuant to the terms of this Section 7, Employee shall not, directly or indirectly, in any capacity (including, without limitation, as a proprietor, investor, director or officer or in any other individual or representative capacity), be financially interested in or engage in any business that is engaged in leasing, acquiring, exploring, producing, gathering or marketing hydrocarbons and related products; however, it is specifically agreed between the parties that Employee may continue to be financially interested in and engage in any business similar to or related to the Company's business that is described on EXHIBIT A attached hereto, provided, that such activities do not materially detract from the Employee's performance of his responsibilities as President and Chief Executive Officer, provided, further that, nothing contained in this paragraph 7(b) shall relieve the Employee of his obligations contained in paragraph 7(a) above. (c) During the period in which Employee is employed by the Company, unless otherwise extended pursuant to the terms of this Section 7, all investments made by Employee (whether in his own name or in the name of any family members or made by Employee's controlled affiliates), which relate to the lease, acquisition, exploration, production, gathering or marketing or hydrocarbons and related products shall be made solely through the Company; and Employee will not (directly or indirectly through any family members), and will not permit any of his controlled affiliates to (i) invest or otherwise participate alongside the Company in any Business Opportunities, or (ii) invest or otherwise participate in any business or activity relating to a Business Opportunity, regardless of whether the Company ultimately participates in such business or activity. (d) During the period in which Employee is employed by the Company and thereafter, Employee will not disclose to any third party or directly or indirectly make use of, in a way materially detrimental to the Company, any and all trade secrets and confidential or proprietary information pertaining to the Company (collectively referred to as "Confidential Information"). For purposes of this Section 7, it is agreed that Confidential Information includes, without limitation, any information heretofore or hereafter acquired, developed or used by the Company relating to Business Opportunities or Intellectual Property or other geological, geophysical, economic, financial or management aspects of the business, operations, properties or prospects of the Company whether oral or in written form in a "Business Records" (as defined in paragraph 7(g) below). Notwithstanding the foregoing, no information of the Company will be deemed confidential for the purposes of this paragraph 7(d) if such information is or becomes public knowledge through no act of Employee or was previously known by Employee prior to entering into this Agreement. (e) During the Employment Period or the period in which Employee is employed by the Company, whichever is longer, and for a six-month period commencing upon the termination of such longer period, unless otherwise extended pursuant to the terms of this Section 7, Employee may not solicit, raid, entice or induce, directly or indirectly, any employee (or person who within the preceding ninety (90) days was an employee) of the Company or any other person who is under contract with or rendering services to the Company, to (i) terminate his employment by, or contractual relationship with, the Company, (ii) refrain from extending or renewing the same (upon the same or new terms), (iii) refrain from rendering services to or for the Company, (iv) become employed by or to enter into contractual relations with any persons other than the Company, or (v) enter into a relationship with a competitor of the Company; provided that during the six-month period commencing upon the termination of the Employment Period or the period in which the Employee is employed by the Company, whichever is longer, nothing in this paragraph 7(e) shall prohibit Employee from entering into contractual relations to obtain capital as long as the Board of Directors of the Company in good faith determines that such relations are not detrimental to the Company. (f) Employee acknowledges and agrees that the services to be rendered by him are of a special, unique and extraordinary character and, in connection with such services, he will have access to Business Opportunities, Intellectual Property and Confidential Information vital to the Company's businesses. By reason of this, the Employee consents and agrees that if he violates any of the provisions of this Section 7, the Company would sustain irreparable harm and, therefore, in addition to any other remedies which the Company may have under this Agreement or otherwise, the Company shall be entitled to an injunction restraining the Employee from committing or continuing any such violation of this Agreement. Such right to an injunction shall be cumulative and in addition to, and not in lieu of, any other remedies to which the Company may show itself justly entitled. Further, during any period in which the Employee is in breach of the covenants set forth in this Section 7, the time period of this covenant shall be extended for an amount of time that the Employee is in breach. (g) The Employee agrees to promptly deliver to the Company, upon termination of Employee's employment with the Company, or at any other time when the Company so requests, all documents relating to the business of the Company, including, without limitation: all geological and geophysical reports and related data such as maps, charts, logs, seismographs, seismic records and other reports and related data, calculations, summaries, memoranda and opinions relating to the foregoing, production records, electric logs, core data, pressure data, lease files, well files and records, land files, abstracts, title opinions, title or curative matters, contract files, notes, records, drawings, manuals, correspondence, financial and accounting information, customer lists, statistical data and compilations, patents, copyrights, trademarks, trade names, inventions, formulae, methods, processes, agreements, contracts, manuals or any other documents relating to the business of the Company (collectively, the "Business Records"), and all copies thereof and therefrom. The Employee confirms that all of the Business Records (and all copies thereof and therefrom) that are required to be delivered to the Company pursuant to this paragraph 7(g) constitute the exclusive property of the Company. The obligation of confidentiality set forth in this Section 7 shall continue notwithstanding the Employee's delivery of any such documents to the Company. Notwithstanding the foregoing provisions of this Section 7 or any other provision of this Agreement, the Employee shall be entitled to retain any written materials which, as shown by the Employee's records, were in Employee's possession on or prior to the date hereof, subject to the Company's right to receive a copy of all such materials. (h) The representations and covenants contained in this Section 7 on the part of the Employee will be construed as ancillary to and independent of any other provision of this Agreement, and the existence of any claim or cause of action of the Employee against the Company or any officer, director, or shareholder of the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of the covenants of the Employee contained in this Section 7. In addition, the provisions of this Section 7 shall continue to be binding upon the Employee in accordance with their terms, notwithstanding the termination of the Employee's employment hereunder for any reason. (i) The parties to this Agreement agree that the limitations contained in this Section 7 with respect to time, geographical area, and scope of activity are reasonable. However, if any court shall determine that the time, geographical area, or scope of activity of any restriction contained in this Section 7 is unenforceable, it is the intention of the parties that such restrictive covenants set forth herein shall not thereby be terminated but shall be deemed amended to the extent required to render it valid and enforceable. 8. TERMINATION BY THE COMPANY FOR CAUSE. (a) The Company may terminate Employee's employment under this Agreement for Cause. The termination shall be evidenced by written notice thereof to the Employee and shall specify the Cause for termination. For purposes hereof, the term "Cause" shall mean (i) the inability of Employee, despite any reasonable accommodation required by law, due to bodily injury or disease or any other physical or mental incapacity, to perform the services provided for hereunder for a period of 120 days in the aggregate, within any given period of 180 consecutive days during the term of this Agreement, in addition to any statutorily required leave of absence, (ii) conduct of the Employee that constitutes fraud, dishonesty, theft, or a criminal act involving moral turpitude, in each case only if it materially affects his ability to perform the duties and responsibilities of his position or has a material adverse effect on the Company, (iii) commission of a material act of fraud against the Company, (iv) embezzlement of funds or misappropriation of other property by the Employee from the Company; or (v) failure of Employee to observe or perform his material duties and obligations as an employee of the Company or a material breach of this Agreement, after thirty (30) days advance written notice of such failure or breach which has not been cured. (b) Upon Employee's death or if Employee's employment with the Company is terminated for Cause, Employee shall be paid his salary through the month of his death or termination. 9. TERMINATION BY THE COMPANY WITHOUT CAUSE. (a) The Company may terminate Employee's employment under this Agreement without Cause. The termination shall be evidenced by written notice thereof to the Employee and shall specify that the termination was without Cause. (b) If Employee's employment with the Company is terminated without Cause during any period in which Employee is employed by the Company, Employee shall be entitled to receive, within ten (10) days of such termination, the amount of compensation Employee would have earned if his employment had continued through the remainder of the Employment Period. Notwithstanding the foregoing, if the payment referred to above is not made within ten (10) days of Employee's termination, all unpaid amounts shall bear interest at a rate equal to the New York Prime (as published in the Wall Street Journal) on the date of such termination. 10. BURDEN AND BENEFIT. This Agreement shall be binding upon, and shall inure to the benefit of, the Company and Employee, and their respective heirs, personal and legal representatives, successors and permitted assigns. 11. GOVERNING LAW. It is understood and agreed that the construction and interpretation of this Agreement shall at all times and in all respects be governed by the laws of the State of Texas. The parties hereto hereby irrevocably submit to the exclusive jurisdiction of the courts of the State of Texas and the federal courts of the United States of America located in Texas, and appropriate appellate courts therefrom, over any dispute arising out of or relating to this Agreement or any of the transactions contemplated hereby, and each party hereby irrevocably agrees that all claims in respect of such dispute or proceeding may be heard and determined in such courts. The parties hereby irrevocably waive, to the fullest extent permitted by applicable law, any objection which they may now or hereafter have to the laying of venue of any dispute arising out of or relating to this Agreement or any of the transactions contemplated hereby brought in such court or any defense of inconvenient forum for the maintenance of such dispute. Each of the parties hereto agrees that a judgment in any such dispute may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. This consent to jurisdiction is being given solely for purposes of this Agreement and is not intended to, and shall not, confer consent to jurisdiction with respect to any other dispute in which a party to this Agreement may become involved. Each of the parties hereto hereby consents to process being served by any party to this Agreement in any suit, action, or proceeding of the nature specified above by the mailing of a copy thereof in the manner specified by the provisions of Section 13. 12. SEVERABILITY. The provisions of this Agreement shall be deemed severable, and the invalidity or unenforceability of any one or more of the provisions of this Agreement shall not affect the validity and enforceability of the other provisions. 13. NOTICE. Any notice required to be given shall be sufficient if it is in writing and sent by certified or registered mail, return receipt requested, first-class postage prepaid, to his last know residence in the case of Employee, and to its principal office in the State of Texas in the case of the Company. 14. ENTIRE AGREEMENT. This Agreement contains the entire agreement and understanding by and between the Company and Employee with respect to the employment of Employee, and no representations, promises, agreements, or understandings, written or oral, not contained herein shall be of any force or effect. No waiver of any provision of this Agreement shall be valid unless it is in writing and signed by the party against whom the waiver is sought to be enforced. No valid waiver of any provision of this Agreement at any time shall be deemed a waiver of any other provision of this Agreement at such time or any other time. 15. MODIFICATION. No amendment, alteration or modification to any of the provisions of this Agreement shall be valid unless made in writing and signed by both parties. 16. PARAGRAPH HEADINGS. The paragraph headings have been inserted for convenience only and are not to be considered when construing the provisions of this Agreement. 17. 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 together shall constitute but one and the same instrument. IN WITNESS WHEREOF, the Company and Employee have executed this Agreement on the day and year first above written. "COMPANY" "EMPLOYEE" MIDDLE BAY OIL COMPANY, INC. ------------------------------------ FLOYD C. WILSON By: ______________________________ Name: ______________________________ Title: ______________________________ EXHIBIT A ENERGY RELATED INVESTMENTS 1. Employee owns a 50% interest in Encorp Inc., a privately held energy and production company which hold oil and gas properties valued at less than $2 million. 2. Employee owns or controls two Kansas corporations FCW Energy Corporation and FCW Holding Corporation. The assets of these two corporations consist of a net operating loss and non-operated, non-managed working interests and overriding royalty interests of nominal value located in Kansas, Oklahoma and Texas. 3. Employee holds non-operated, non-managed working interests in oil and gas properties alongside the following entities: (1) RAK Energy Corp.; (2) Javelin Exploration Company; and (3) JAVEX Inc. Employee is also a limited partner in certain limited partnerships related to the foregoing entities. The aggregate value of Employee's working interests and partnership interests is less than $2 million. 4. Employee owns approximately 2,500,000 shares of common stock of Chesapeake Energy Corporation (NYSE:CHK). 5. Employee owns shares of capital stock of various publicly-traded energy and production companies. The aggregate number of shares Employee owns in each entity does not exceed 1% of the outstanding shares of capital stock of such entity. EXHIBIT "F" INTENTIONALLY OMITTED EXHIBIT G Purchase Price to be transferred at Closing Immediately available funds $200,000 EXHIBIT H Securities Purchase Agreement dated July 1, 1999, by and between the Company and 3TEC Securities Purchase Agreement of even date herewith by and between the Company and Shoeinvest II, LP EX-10.5 4 EXHIBIT 10.5 Exhibit 10.5 SHAREHOLDERS' AGREEMENT This Shareholders' Agreement (the "Agreement") is made and entered into this 27th day of August, 1999, by and among MIDDLE BAY OIL COMPANY, INC., an Alabama corporation (the "Company") and the undersigned shareholders of the Company (the "Shareholders") RECITALS WHEREAS, as of the date hereof, there are 13,379,153 issued and outstanding shares of the Company's common stock, $.02 par value (the "Common Stock"); WHEREAS, as of the date hereof, the Shareholders collectively own 10,804,355 shares or 80.76% of the issued and outstanding shares of Common Stock, as follows:
- ------------------------------------- -------------------------------- --------------------------------------------- SHAREHOLDER SHARES PERCENTAGE - ------------------------------------- -------------------------------- --------------------------------------------- 3TEC Energy Corporation 4,755,556 35.55% - ------------------------------------- -------------------------------- --------------------------------------------- Kaiser-Francis Oil Company 3,333,334 24.91% - ------------------------------------- -------------------------------- --------------------------------------------- C.J. Lett, III 1,187,556 8.88% - ------------------------------------- -------------------------------- --------------------------------------------- Weskids, L.P. 843,687 6.31% - ------------------------------------- -------------------------------- --------------------------------------------- Alvin V. Shoemaker 684,222 5.11% - ------------------------------------- -------------------------------- ---------------------------------------------
WHEREAS, Kaiser-Francis Oil Company, C.J. Lett, III, Weskids, L.P. and Alvin V. Shoemaker are referred to herein collectively as the "Major Shareholders"; WHEREAS, the Shareholders desire to promote their mutual interests and interests of the Company by imposing certain restrictions and obligations upon themselves, the Company and the shares of Common Stock; and WHEREAS, the execution and delivery of this Shareholders' Agreement is a condition to the closing of that certain Securities Purchase Agreement between the Company and 3TEC Energy Corporation dated July 1, 1999 (the "Purchase Agreement"). NOW, THEREFORE, in consideration of the mutual promises contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. NOMINATION AND ELECTION OF DIRECTORS. Each of the Shareholders agrees, so long as it owns such shares, to vote (including the taking of any action by written consent, as necessary or appropriate) and cause its Affiliates to vote all shares of Common Stock (and any and all shares of any other voting class of capital stock of the Company presently or at any future time owned by the Shareholders) which it is entitled to vote (or control the voting directly or indirectly) to ensure that the following shall occur: (a) The Company shall at all times be managed by or under the direction of the Board of Directors of the Company (the "Board"), which shall consist of five (5) members. (b) The Shareholders shall use their best efforts (including voting the shares owned by them and their affiliates, in calling special meetings of the Shareholders and executing and delivering written consents), to elect five (5) members of the Board, consisting of the following: (i) Three (3) members designated by 3TEC Energy Corporation ("3TEC"); and (ii) Two (2) members designated by the Major Shareholders. The party designating a director may remove such director, with or without cause, and designate his or her successor. If the director designated by a party resigns, dies, becomes incapacitated or is otherwise unable to serve, the party designating such director may designate his or her successor. All Shareholders shall vote all shares held by them in favor of the election or removal of such persons so designated. Action taken by either 3TEC or the Major Shareholders in designating or removing directors shall be in writing executed by either 3TEC or the Major Shareholders, as the case may be, and promptly delivered to the other Shareholders and the Company. 2. ADVISORY MEMBER. As long as the Board of Directors of the Company shall consist of five (5) members, the Major Shareholders may request that a non-voting advisory board member be appointed. Upon such request, the Major Shareholders shall, subject to 3TEC's approval, select the person whom it desires to have serve as such non-voting advisory board member. Such non-voting advisory board member shall be permitted but not required to attend meetings of the Board of Directors. 3. VOTE IN FAVOR OF CHANGE OF STATE OF INCORPORATION. Each of the Shareholders agrees, so long as it owns such shares, to vote (including the taking of any action by written consent, as necessary or appropriate) and cause its Affiliates to vote all shares of Common Stock (and any and all shares of any other voting class of capital stock of the Company presently or at any future time owned by the Shareholders) which it is entitled to vote (or control the voting directly or indirectly) to ensure that, at the request of 3TEC, to vote their shares of Common Stock in favor of changing the state of incorporation of the Company from Alabama to another jurisdiction recommended by the Board of Directors. 4. TERMINATION OF 3TEC'S RIGHT TO ELECT DIRECTORS. 3TEC's right to designate the directors as provided in paragraph 1(b)(i) above shall terminate as follows: (a) if 3TEC's ownership of Common Stock is below 15% of the Adjusted Outstanding Common Stock, 3TEC shall be entitled to designate only two (2) members to the Board; (b) if 3TEC's ownership of Common Stock is below 7 1/2% of the Adjusted Outstanding Common Stock, 3TEC shall be entitled to designate only one (1) member to the Board; and (c) if 3TEC's ownership of Common Stock is below 5% of the Adjusted Outstanding Common Stock, 3TEC's right to designate a member to the Board shall terminate. For purposes hereof, "Adjusted Outstanding Common Stock" shall mean the number of shares of Common Stock outstanding less any shares of Common Stock purchased by Kaiser-Francis Oil Company pursuant to its respective Purchase Agreement. 5. TERMINATION OF MAJOR SHAREHOLDERS' RIGHT TO ELECT DIRECTORS. The Major Shareholders' right to designate the directors as provided in paragraph 1(b)(ii) above shall terminate as follows: 2 (a) if the Major Shareholders' ownership of Common Stock is below 7 1/2% of the outstanding Common Stock, the Major Shareholders shall be entitled to designate only one (1) member to the Board; (b) if the Major Shareholders' ownership of Common Stock is below 5% of the outstanding Common Stock, the Major Shareholders' right to designate a member to the Board shall terminate. 6. REPLACEMENT DIRECTOR. If either 3TEC or the Major Shareholders is no longer eligible to designate a director or directors to the Board, the Board shall (i) decrease the size of the Board, (i) leave the vacated seat empty, or (iii) appoint a replacement to serve until the next of election of directors by the shareholders of the Company through its normal nominating procedure, and select a nominee to fill the open seat for election by shareholders at the next annual meeting. 7. RESTRICTIVE LEGEND. Each certificate evidencing Common Stock subject hereto shall bear a legend as follows: "The shares of stock represented by this certificate are, until sale, subject to a Shareholders' Agreement, dated as of August 27, 1999, a copy of which is on file in the office of the Company." Any certificate evidencing Common Stock subject to this Agreement which is hereafter issued shall bear the same legend. 8. TERMINATION OF AGREEMENT. This Agreement shall continue until, and shall terminate immediately upon (a) execution of a written agreement of termination by the Shareholders and the Company, (b) the adjudication of the Company as a bankrupt or insolvent by a court of competent jurisdiction, or (c) each of 3TEC and the Major Stockholders own less than five percent of the issued and outstanding shares of Common Stock. 9. SHAREHOLDERS' REPRESENTATION AND WARRANTIES. Each Shareholder, severally, as to itself only, represents and warrants to the Company that (a) the Shareholder has duly authorized, executed and delivered this Agreement and this Agreement constitutes a valid and binding agreement, enforceable in accordance with its terms and neither the execution and delivery of this Agreement nor the consummation by the Shareholder of the transactions contemplated hereby will constitute a violation of, a default under, or conflict with any contract, commitment, agreement, understanding, arrangement or restriction of any kind to which the Shareholder is a party or by which the Shareholder is a party or by which the Shareholder is bound; (b) consummation by the Shareholder of the transactions contemplated hereby will not violate, or require any consent, approval, or notice under, any provision of law other than filing on Form 13D that may be required under the Securities Exchange Act of 1934, as amended; (c) except to the extent contemplated herein each Shareholder's shares of Common Stock and the certificates representing same are now and at all times during the term of this Agreement will be held by the Shareholder, or by a nominee or custodian for the benefit of the Shareholder, free and clear of all liens, claims, security interests, proxies, voting trusts or agreement or any other encumbrances whatsoever ("Encumbrances") with respect to the ownership or voting of such shares of Common Stock or otherwise, other than Encumbrances created by or arising pursuant to this Agreement; (d) there are no outstanding options, warrants or rights to purchase or acquire, or proxies, powers-of-attorney, voting agreements, trust agreements or other agreements relating to, such shares of Common Stock other than this Agreement and the Registration Rights Agreement of even date as defined in the Purchase Agreement; (e) the shares of Stock listed in the second recital paragraph hereof constitutes all of the Common Stock of each Shareholder owned beneficially or of record by such Shareholder on the date hereof; and (f) the Shareholder has the present power and right to vote all of the shares of Common Stock as contemplated herein. 3 10. NEGATIVE COVENANTS OF EACH SHAREHOLDER. Except to the extent contemplated herein or in the Purchase Agreements, each Shareholder hereby covenants and agrees that such Shareholder will not, and will not agree to, directly or indirectly, except pursuant to an effective registration statement or through "brokers" transactions as contemplated by subparagraphs (f) and (g) and subject to the limitations on amount provided by subparagraph (e) of Rule 144 under the Securities Act, (a) sell, transfer, assign, cause to be redeemed or otherwise dispose of any of its shares of Stock or enter into any contract, option or other agreement or understanding with respect to the sale, transfer, assignment, redemption or other disposition of its shares of Stock; (b) grant any proxy, power-of-attorney or other authorization or interest in or with respect to its shares of Stock pertaining or relating to the Purchase Agreements or any of the transactions contemplated thereby; or (c) deposit such Stock into a voting trust or enter into a voting agreement or arrangement with respect to such Stock, unless and until, in the case of (a), (b) or (c) above, the Shareholder shall have taken all actions (including, without limitation, the endorsement of a legend on the certificates evidencing such Stock) reasonably necessary to ensure that such Stock shall at all times be subject to all the rights, powers and privileges granted or conferred, and subject to all the restrictions, covenants and limitations imposed, by this Agreement and shall have caused, as a condition to any sale, transfer, pledge or other disposition of any shares of Stock, any transferee of any of the Stock, unless it is already a signatory to this Agreement, shall become a signatory to and be bound by the terms of this Agreement. 11. CERTAIN DEFINED TERMS. Unless otherwise expressly provided herein, all capitalized terms used herein without definition shall have the meanings assigned to them in the Purchase Agreement. 12. SUCCESSORS. This Agreement shall be binding upon and shall operate for the benefit of the Company, its shareholders, and their respective successors, assigns, executors, administrators and heirs, and it shall be binding upon any entity to whom any Stock is transferred in accord with or in violation of the provisions of this Agreement, and the executor or administrator of such entity. 13. MODIFICATION. Notwithstanding anything to the contrary in this Agreement or otherwise, no modification, amendment or waiver of any of the provisions of this Agreement shall be effective unless in writing and signed by all parties hereto. Each Shareholder covenants not to vote any shares of Stock in favor of any amendment of the articles of incorporation or bylaws of the Company, if such amendment would materially modify the terms or frustrate the purpose of this Agreement or the Purchase Agreements, unless the vote on such amendment is approved unanimously by the parties to this Agreement. 14. NON-WAIVER. The failure to enforce at any time any of the provisions of this Agreement, or to require at any time performance by any other party of any of the provisions hereof, shall in no way be constructed to be a waiver of such provisions. 15. 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 thereof, such provision shall be fully severable, this Agreement shall be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part thereof, and the remaining provisions thereof shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance therefrom. 16. ENTIRE AGREEMENT. This Agreement contains the full understanding of the parties hereto with respect to the subject matter hereof, and there are no representations, warranties, agreements or understandings other than expressly contained herein. 17. NOTICES. Any notice to be given by any party hereunder to any other shall be in writing, mailed by 4 certified or registered mail, return receipt requested, and shall be addressed to all other parties at the addresses listed on the signature page hereof. All such notices shall be deemed to be given three (3) days after the date of mailing thereof. 18. SPECIFIC PERFORMANCE. Each of the Shareholders acknowledges and agrees that the Company would be damaged irreparably in the event that any of the provisions of this Agreement are not performed in accordance with their specific terms or otherwise are breached. Accordingly, each of the Shareholders agrees that the Company shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Agreement and to enforce specifically this Agreement and the terms and provisions hereof in any action instituted in any court having jurisdiction over the parties hereto and the subject matter hereof, in addition to any other remedy to which the Company may be entitled at law or in equity. 19. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF ALABAMA. 20. COUNTERPARTS. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. [Signature Page to Follow] 5 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed on the day and year first above written. COMPANY: MIDDLE BAY OIL COMPANY, INC. By: /s/ John J. Bassett -------------------------------- Name: John J. Bassett ------------------------------ Title: President ----------------------------- Address for Notice: Middle Bay Oil Company, Inc. 1221 Lamar Street, Suite 1020 Houston, TX 77010 Fax: (713) 650-0352 3TEC ENERGY CORPORATION By: /s/ Floyd C. Wilson -------------------------------- Name: Floyd C. Wilson ------------------------------ Title: President ----------------------------- Address for Notice: 3TEC Energy Corporation 5910 N. Central Expressway Suite 1150 Dallas, TX 75206 Fax: (214) 373-9731 6 KAISER-FRANCIS OIL COMPANY By: /s/ Gary R. Christopher -------------------------------- Name: Gary R. Christopher ------------------------------ Title: Acquisitions Coordinator ----------------------------- Address for Notice: Kaiser-Francis Oil Company 6733 South Yale Tulsa, OK 74136 Fax: (918) 491-4694 /s/ C.J. Lett, III ---------------------------------- C.J. Lett, III Address for Notice: C.J. Lett, III 9320 East Central Wichita, Kansas 67206 Fax: (316) 636-1803 7 WESKIDS, L.P. By: Weskids, Inc. Its General Partner By: /s/ Christine W. Jenkins -------------------------------------- Name: Christine W. Jenkins ------------------------------------ Title: Vice President ----------------------------------- Address for Notice: Weskids, L.P. 310 South Street Morristown, NJ 07960 Fax: (973) 682-2684 /s/ Alvin V. Shoemaker -------------------------------------------------- ALVIN V. SHOEMAKER Address for Notice: Alvin V. Shoemaker 8800 First Avenue Stone Harbor, NJ 08247 Fax: (609) 368-0147 EX-10.6 5 EXHIBIT 10.6 Exhibit 10.6 REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (the "Agreement") dated as of August 27, 1999, is entered into by and among MIDDLE BAY OIL COMPANY, INC., an Alabama corporation ("Corporation") and the parties listed on Schedule 1 attached hereto and incorporated herein by reference (each of such parties are referred to individually as "Shareholder" and collectively, as "Shareholders") and the parties listed on Schedule 2 attached hereto and incorporated herein by reference (each of such parties are referred to individually as "Piggy-Back Shareholder" and collectively, as "Piggy-Back Shareholders"). RECITALS WHEREAS, pursuant to those Securities Purchase Agreements by and between Corporation and each of the Shareholders executed on the dates as set forth on Schedule 1 (the "Purchase Agreements"), each Shareholder will receive the number of shares of Common Stock, Notes and Warrants as set forth on Schedule 1. WHEREAS, each of the Piggy-Back Shareholders currently owns shares of Common Stock as set forth on Schedule 2. WHEREAS, as a condition to the Purchase Agreements, Corporation has agreed to grant to Shareholders certain registration rights with respect to their Registrable Securities (defined hereafter) and has agreed to grant the Piggy-Back Shareholders certain registration rights with respect to their Piggy-Back Registrable Securities (defined hereafter). WHEREAS, all the terms used but not defined in this Agreement shall have the meaning ascribed to them in the Purchase Agreements. NOW, THEREFORE, in consideration of the mutual promises contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: Section 1. DEFINITIONS. For purposes of this Agreement, the following terms shall have the respective meanings assigned to them in this Section 1 or in the recitals above or the subsections referred to below. "Piggy-Back Registrable Securities" shall mean (i) the shares of Common Stock owned by each Piggy-Back Shareholder as listed on Schedule 2 (ii) the shares of Common Stock owned by each Piggy-Back Shareholder during the term of this Agreement as a result of the conversion of the shares of the Company's Series B Convertible Preferred Shares as listed on Schedule 2, and (iii) any securities issued or issuable with respect to the shares described in clauses (i) and (ii) above by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization. "Registrable Securities" shall mean (i) the shares of Common Stock issued to the Shareholders pursuant to the Purchase Agreements (which, for purposes hereof, shall mean the Common Stock Shares, the Warrant Shares and the Conversion Shares as defined in the Purchase Agreements) and (ii) any securities issued or issuable with respect to the shares described in clause (i) above by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization. Section 2. INDEPENDENT REGISTRATION RIGHTS. 2.1 The Corporation hereby grants to each Shareholder separate rights to require the Corporation to use its best efforts to cause registration and sale in a public offering of all or a portion of such Shareholder's Registrable Securities in accordance with this Section 2; provided, however, the Corporation shall not have any obligation to effect more than a total of three (3) effective registrations pursuant to this Section 2 at the Corporation's expense. If the Corporation shall have received a written request submitted by Shareholder(s) owning at least a majority of the Registrable Securities outstanding at the time of such request (the "Requisite Holders") that such Shareholder(s) desires/desire to sell Registrable Securities and specifying the number of Registrable Securities proposed to be sold (for the purposes of this Section 2, "Shares") and the proposed plan for distribution of the Shares, Corporation will thereafter: 2.1.1 Give prompt (but in any event within fifteen (15) days after the receipt of the Requisite Holder(s)' notice) notice to all other Shareholders of such notice and of such other Shareholders' rights to have their Registrable Securities included in such registration. 2.1.2 Upon the request of any such Shareholder made within fifteen (15) days after the receipt by such Shareholder of any such notice given pursuant to subsection 2.1.1 (which request shall specify the Registrable Securities intended to be disposed of by such Shareholder and the intended method or methods of disposition thereof), the Corporation will use its best efforts to effect the registration of all Shares which the Corporation has been so requested to register pursuant to this subsection 2.1. 2.1.3 Prepare and file as soon as practicable, but in no event later than thirty (30) days from Corporation's receipt of the last Shareholder's request to have such Shareholder's Registrable Securities included in such registration within the time period specified in Section 2.1.2, a registration statement under the Securities Act of 1933, as amended (the "Securities Act") ("Registration Statement") with the Securities Exchange Commission ("Commission") on Form S-1 (or Form S-2 or Form S-3, if Corporation is entitled to use such forms, or similar forms available for use by small business issuers) and use its best efforts to cause such Registration Statement to become effective in order that the Shareholders may sell the Shares in accordance with the proposed plan of distribution. 2.1.4 Prepare and file with the Commission such amendment and supplements to such Registration Statement and prospectus used in connection therewith including any preliminary prospectus or supplemental or amended prospectus (the "Prospectus") as may be necessary to keep such Registration Statement continuously effective and to comply with the provisions of the Securities Act with respect to the offer of the Shares during the period required for distribution of the Shares, which period shall not be in excess of the earlier of (i) one year from the effective date of such Registration Statement, and (ii) the distribution of all Shares covered by such Registration Statement. 2.1.5 Furnish to each Shareholder such number of copies of the Prospectus (including any preliminary prospectus or supplemental or amended prospectus ) as such Shareholder may reasonably request in order to facilitate the sale and distribution of the Shares. 2.2 The right of each Shareholder to register Shares pursuant to the provisions of this Section 2 shall be subject to the condition that if a request for registration is made within sixty (60) days prior to the conclusion of Corporation's then current fiscal year, Corporation shall have the right to delay the filing of the Registration Statement for such period of time until Corporation receives its audited financial statements for such fiscal year. 2.3 If the Requisite Holder(s) intend/intends to distribute the Registrable Securities covered by the notice pursuant to subsection 2.1 by means of an underwriting, the Requisite Holder(s) shall so advise the Corporation as a 2 part of the notice made pursuant to subsection 2.1 and provide the name of the managing underwriter or underwriters that the Requisite Holder(s) proposes/propose to employ in connection with the public offering proposed to be made pursuant to the registration requested. If the managing underwriter of such underwritten offering shall inform the Corporation and the Shareholders requesting that their Shares be registered pursuant to this Section 2 by letter of its belief that the amount of Shares requested to be included in such registration exceeds the amount which can be sold in (or during the time of) such offering within a price range acceptable to the Requisite Holders, then the Corporation will include in such registration such amount of Shares which the Corporation is so advised can be sold in (or during the time of) such offering PRO RATA on the basis of the amount of such Shares so proposed to be sold and so requested to be included by such parties. 2.4 A registration shall not be deemed to have been effected (i) unless it has become effective and remained effective for the period specified in subsection 2.1.4, (ii) if, after it has become effective, such registration is terminated by a stop order, injunction or other order of the Commission or other governmental agency or court, or (iii) if the conditions to closing specified in any purchase agreement or underwriting agreement entered into in connection with such registration are not satisfied for any reason, other than as a result of the voluntary termination of such offering by the Requisite Holders. Section 3. PIGGY-BACK REGISTRATION RIGHTS. 3.1 If Corporation proposes to file, on its behalf, a Registration Statement under the Securities Act on Form S-1, S-2 or S-3 or similar forms available for use by small business issuers, other than pursuant to Section 2 of this Agreement or in connection with a dividend reinvestment, employee stock purchase, option or similar plan or in connection with a merger, consolidation or reorganization, Corporation shall give written notice to each Shareholder and Piggy-Back Shareholder at least thirty (30) days before the filing with the Commission of such Registration Statement. Such notice shall offer to include in such filing all or a portion of the Registrable Securities and Piggy-Back Registrable Securities owned by such Shareholder or Piggy-Back Shareholder. If a Shareholder or Piggy-Back Shareholder desires to include all or a portion of its Registrable Securities or Piggy-Back Registrable Securities in such Registration Statement, it shall give written notice to Corporation within fifteen (15) days after the date of mailing of such offer specifying the amount of Registrable Securities and/or Piggy-Back Registrable Securities to be registered (for the purpose of this Section 3, "Shares"). Corporation shall thereupon include in such filing the Shares, subject to priorities in registration set forth in this Agreement, and subject to its right to withdraw such filing, and shall use its best efforts to effect registration under the Securities Act of the Shares. 3.2 The right of the Shareholders and the Piggy-Back Shareholders to have the Shares included in any Registration Statement in accordance with the provisions of this Section 3 shall be subject to the following conditions: 3.2.1 Corporation shall have the right to require that each Shareholder or Piggy-Back Shareholder agree to refrain from offering or selling any shares of Common Stock that it owns which are not included in any such Registration Statement in accordance with this Section 3 for any reasonable time period specified, not to exceed ninety (90) days, by any managing underwriter of the offering to which such Registration Statement relates. 3.2.2 If (i) a registration pursuant to this Section 3 involves an underwritten offering of the securities being registered to be distributed (on a firm commitment basis) by or through one or more underwriters of recognized standing under underwriting terms appropriate for such a transaction and (ii) the managing underwriter of such underwritten offering shall inform the Corporation and the Shareholders and Piggy-Back Shareholders who have requested that their Shares be registered pursuant to this Section 3 by letter of its belief that the amount of Shares 3 requested to be included in such registration exceeds the amount which can be sold in (or during the time of) such offering within a price range acceptable to a majority of such requesting holders, then the Corporation will include in such registration such amount of securities which the Corporation is so advised can be sold in (or during the time of) such offering as follows: FIRST, the securities being offered by the Corporation for its own account; SECOND such Shares of the Shareholders which are requested to be included in such registration PRO RATA on the basis of the amount of such Shares so proposed to be sold and so requested to be included by such Shareholders; and THIRD, such Shares of the Piggy-Back Shareholders and which are requested to be included in such registration PRO RATA on the basis of the amount of such Shares so proposed to be sold and so requested to be included by such Piggy-Back Shareholders. 3.2.3 Corporation shall furnish each Shareholder and Piggy-Back Shareholder with such number of copies of the Prospectus as such Shareholder or Piggy-Back Shareholder may reasonably request in order to facilitate the sale and distribution of its shares. 3.3 Notwithstanding the foregoing, Corporation in its sole discretion may determine not to file the Registration Statement or proceed with the offering as to which the notice specified herein is given without liability to the Shareholders or the Piggy-Back Shareholders. Section 4. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS. No Shareholder or Piggy-Back Shareholder may participate in any registration hereunder which relates to an underwritten offering unless such Shareholder or Piggy-Back Shareholder (a) agrees to sell such holder's securities on the basis provided in any underwriting arrangements approved by the holders of at least a majority of the Registrable Securities and Piggy-Back Registrable Securities to be included in such registration, or by a Person appointed by such holders to act on their behalf to approve such arrangements, and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements. Section 5. EXCLUSIVE REGISTRATION RIGHTS AND TRANSFER. The rights of each Shareholder under this Agreement may upon notice to the Corporation be transferred to its respective Affiliates in combination with a transfer of shares to such Affiliates. In addition, the rights of each Shareholder under this Agreement may upon notice to the Corporation be transferred to a non-Affiliate transferee in combination with a transfer of shares to such non-Affiliate transferee. However, such non-Affiliate transferee may not thereafter transfer its rights under this Agreement without the Corporation's written consent. Except as provided in this Section 5, the rights granted under this Agreement are granted specifically to and for the benefit of each Shareholder and Piggy Back Shareholder and shall not pass to any transferee of Registrable Securities. From and after the date of this Agreement, the Corporation will not, without the prior written consent of Shareholders holding at least a majority of the Registrable Securities then outstanding, enter into any agreement with respect to its securities which is inconsistent with or violates the rights granted to the Shareholders in this Agreement. Without limiting the foregoing, the Corporation also specifically agrees that during the period commencing on the date hereof and ending when the Shareholders have disposed of all of their Registrable Securities, the Corporation will not enter into an agreement with any party pertaining to the registration by the Corporation of such party's Common Stock. The Corporation represents and warrants to each of the Shareholders that, as of the date hereof, the Corporation is not a party to any agreement, other than this Agreement, pertaining to the registration by the Corporation of Common Stock. Section 6. EXPENSES. Corporation will bear all the expenses in connection with any Registration 4 Statement under this Agreement, other than transfer taxes payable on the sale of such shares, the fees and expenses of counsel to the Shareholders and Piggy-Back Shareholders and fees and commissions of brokers, dealers and underwriters. Section 7. RECALL OF PROSPECTUSES, ETC. With respect to a Registration Statement or amendment thereto filed pursuant to this Agreement, if, at any time, Corporation notifies the Shareholders and Piggy-Back Shareholders that an amendment or supplement to such Registration Statement or amendment to the Prospectus included therein is necessary or appropriate, each Shareholder and Piggy-Back Shareholder will forthwith cease selling and distributing shares thereunder and will forthwith redeliver to Corporation all copies of such Registration Statement and Prospectuses then in its possession or under its control. Corporation will use its best efforts to cause any such amendment or supplement to become effective as soon as practicable and will furnish each Shareholder and Piggy-Back Shareholder with a reasonable number of copies of such amended or supplemented prospectus (and the period during which Corporation is required to use its best efforts to maintain such Registration Statement in effect pursuant to this Agreement will be increased by the period from the date on which such Shareholder or Piggy-Back Shareholder ceased selling and distributing shares thereunder to the date on which such amendment or supplement becomes effective). Section 8. COOPERATION WITH EXISTING SHAREHOLDERS. Corporation shall be entitled to require the Shareholders and Piggy-Back Shareholders to cooperate with Corporation in connection with a registration of Registrable Securities pursuant to this Agreement and furnish (i) such information as may be required by Corporation or the Commission in connection therewith and (ii) such representations, undertakings and agreements as may be required by the Commission in connection therewith. Section 9. REGISTRATION PROCEDURES Upon the receipt of a request for registration of any Registrable Securities pursuant to Section 2 or Section 3 of this Agreement, Corporation will use its best efforts to effect the registration of the Registrable Securities in accordance with the intended method of disposition thereof, and pursuant thereto Corporation will as expeditiously as possible: 9.1.1 Prepare and file with the Commission a registration statement on an appropriate form under the Securities Act and use its best efforts to cause such registration statement to become effective; provided, that before filing a registration statement or prospectus or any amendments or supplements thereto, including documents incorporated by reference after the initial filing of any registration statement, Corporation will promptly furnish to the holders of Registrable Securities and Piggy-Back Registrable Securities to be registered and sold pursuant to this Agreement (the "Registered Holders") and the underwriters, if any, copies of all such documents proposed to be filed, which documents will be subject to the review of the Registered Holders and the underwriters, and Corporation will not file any registration statement or amendment thereto, or any prospectus or any supplement thereto (including such documents incorporated by reference) to which the Registered Holders or the underwriters, if any, shall reasonably object in the light of the requirements of the Securities Act and any other applicable laws and regulations. 9.1.2 Prepare and file with the Commission such amendments and post-effective amendments to a registration statement as may be necessary to keep such registration statement effective for the applicable period; cause the related prospectus to be filed pursuant to Rule 424(b) (or any successor provision) under the Securities Act; cause such prospectus to be supplemented by any required prospectus supplement and, as so supplemented, to be filed pursuant to Rule 424(b) (or any successor provision) under the Securities Act; and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement during the 5 applicable period in accordance with the intended methods of disposition set forth in such registration statement or supplement to such prospectus. 9.1.3 Notify the Registered Holders and the managing underwriters, if any, promptly, and (if requested by any such person) confirm such advice in writing, (i) when a prospectus or any prospectus supplement or post-effective amendment has been filed, and, with respect to a registration statement or any post-effective amendment, when the same has become effective, (ii) of any request by the Commission for amendments or supplements to a registration statement or related prospectus or for additional information, (iii) of the issuance by the Commission of any stop order suspending the effectiveness of a registration statement or the initiation of any proceeding for that purpose, (iv) if at any time the representations and warranties of Corporation contemplated by subsection 9.1.10 cease to be true and correct, (v) of the receipt by Corporation of any notification with respect to the suspension or qualification of any of the Registrable Securities for sale in any jurisdiction or the initiation of any proceeding for such purpose, (vi) of the happening of any event which requires the making of any changes in a registration statement or related prospectus so that such documents will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading and (vii) of Corporation's reasonable determination that a post-effective amendment to a registration statement would be appropriate or that there exist circumstances not yet disclosed to the public which make further sales under such registration statement inadvisable pending such disclosures and post-effective amendment. 9.1.4 Make reasonable efforts to obtain the withdrawal of any order suspending the effectiveness of a registration statement, or the lifting of any suspension of the qualification of any of the Registrable Securities for sale in any jurisdiction, at the earliest possible moment. 9.1.5 If requested by the managing underwriters or the Registered Holders in connection with an underwritten offering, immediately incorporate in a prospectus supplement or post effective amendment such information as the managing underwriters and the Registered Holders agree should be included therein relating to such sale and distribution of Registrable Securities, including, without limitation, information with respect to the number of shares of Registrable Securities being sold to such underwriters and the purchase price being paid therefor by such underwriters and with respect to any other terms of the underwritten (or best efforts underwritten) offering of the Registrable Securities to be sold in such offering; make all required filings of such prospectus supplement or post-effective amendment as soon as notified of the matters to be incorporated in such prospectus supplement or post-effective amendment; and supplement or make amendments to any registration statement if requested by the Registered Holders or any underwriter of such Registrable Securities. 9.1.6 Furnish to the Registered Holders and each managing underwriter, if any, without charge, at least one signed copy of the registration statement, any post-effective amendment thereto, including financial statements and schedules, all documents incorporated therein by reference and all exhibits (including those incorporated by reference). 9.1.7 Deliver without charge to the Registered Holders and the underwriters, if any, as many copies of the prospectus or prospectuses (including each preliminary prospectus) and any amendment or supplement thereto as such persons may reasonably request; and Corporation consents to the use of such prospectus or any amendment or supplement thereto by such Registered Holders and the underwriters, if any, in connection with the offer and sale of the Registrable Securities covered by such prospectus or any amendment or supplement thereto. 9.1.8 Prior to any public offering of Registrable Securities, register or qualify or cooperate with the Registered Holders, the underwriters, if any, and respective counsel in connection with the registration or qualification of such Registrable Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions as the Registered Holders or an underwriter reasonably requests in writing; keep each such registration or qualification 6 effective during the period such registration statement is required to be kept effective and do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by the applicable registration statement; PROVIDED, HOWEVER, that Corporation will not be required in connection therewith or as a condition thereto to qualify generally to do business or subject itself to general service of process in any such jurisdiction where it is not then so subject. 9.1.9 Upon the occurrence of any event contemplated by subsection 9.1.3 (ii) - (vii) above, prepare, to the extent required, a supplement or post-effective amendment to the applicable registration statement or related prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchaser of the Registrable Securities being sold thereunder, such prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading. 9.1.10 Enter into such agreements (including an underwriting agreement) and take all such other actions in connection therewith in order to expedite or facilitate the disposition of such Registrable Securities and in such connection, whether or not an underwriting agreement is entered into and whether or not the Registrable Securities to be covered by such registration are to be offered in an underwritten offering: (i) make such representations and warranties to the Registered Holders to the registration statement, prospectus and documents incorporated by reference, if any, in form, substance and scope as are customarily made by issuers to underwriters in underwritten offerings and confirm the same if and when requested; (ii) obtain opinions of counsel to Corporation and updates thereof with respect to the registration statement and the prospectus in the form, scope and substance which are customarily delivered in underwritten offerings; (iii) in the case of an underwritten offering, enter into an underwriting agreement in form, scope and substance as is customary in underwritten offerings and obtain opinions of counsel to Corporation and updates thereof (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the managing underwriters and the Registered Holders) addressed to the Registered Holders and the underwriters, if any, covering the matters customarily covered in opinions delivered in underwritten offerings and such other matters as may be reasonably requested by the Registered Holders and such underwriters; (iv) obtain "cold comfort" letters and updates thereof from Corporation's independent certified public accountants addressed to the Registered Holders and the underwriters, if any, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters by accountants in connection with underwritten offerings; (v) if any underwriting agreement is entered into, the same shall set forth in full the indemnification provisions and procedures customarily included in underwriting agreements in underwritten offerings; and (vi) Corporation shall deliver such documents and certificates as may be requested by the Registered Holders and the managing underwriters, if any, to evidence compliance with clause (i) above and with any customary conditions contained in the underwriting agreement or other agreement entered into by Corporation. The above shall be done at each closing under such underwriting or similar agreement or as and to the extent required thereunder. 9.1.11 Make available for inspection by a representative of the Registered Holders, any underwriter participating in any disposition pursuant to such registration, and any attorney or accountant retained by the Registered Holders or such underwriter, all financial and other records, pertinent corporate documents and properties of Corporation, and cause Corporation's officers, directors and employees to supply all information reasonably requested by any such representative, underwriter, attorney or accountant in connection with such registration; provided that any records, information or documents that are designated by Corporation in writing as confidential shall be kept confidential by such Persons unless disclosures of such records, information or documents is required by court or administrative order. 9.1.12 Otherwise use its best efforts to comply with all applicable rules and regulations of the Commission and make generally available to its security holders earning statements satisfying the provisions of Section 11(a) of the 7 Securities Act, no later than 90 days after the end of any 12-month period (i) commencing at the end of any fiscal quarter in which Registrable Securities are sold to underwriters in a firm or best efforts underwritten offering and (ii) beginning with the first day of Corporation's first fiscal quarter next succeeding each sale of Registrable Securities after the effective date of a registration statement, which statements shall cover said 12-month periods. 9.1.13 If Corporation, in the exercise of its reasonable judgment, objects to any change reasonably requested by the Registered Holders or the underwriters, if any, to any registration statement or prospectus or any amendments or supplements thereto (including documents incorporated or to be incorporated therein by reference) as provided for in this Section 9, Corporation shall not be obligated to make any such change and such Registered Holders may withdraw their Registrable Securities from such registration, in which event (i) Corporation shall pay all registration expenses (including its counsel fees and expenses) incurred in connection with such registration statement or amendment thereto or prospectus or supplement thereto, and (ii) in the case of a registration being effected pursuant to Section 2, such registration shall not count as one of the registrations Corporation is obligated to effect pursuant to Section 2 hereof. Section 10. INDEMNIFICATION. 10.1 In the event of any registration of any securities under the Securities Act pursuant to this Agreement, Corporation will indemnify and hold harmless each Shareholder, each Piggy-Back Shareholder, any underwriter and each other Person, if any, who controls such Shareholder, Piggy-Back Shareholder or underwriter within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which each such Shareholder, Piggy-Back Shareholder or any underwriter may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or action in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in such Registration Statement or preliminary prospectus (if used prior to the effective date of such Registration Statement) or final or summary prospectus contained therein (if used during the period the Corporation is required to keep the Registration Statement effective), or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements made therein not misleading, and will reimburse each such Shareholder, Piggy-Back Shareholder or underwriter for any legal or any other expenses as reasonably incurred by such person in connection with investigating or defending any such action or claim, excluding any amounts paid in settlement of any litigation, commenced or threatened, if such settlement is effected without prior written consent of Corporation; provided, however, that Corporation will not be liable to the Shareholders, Piggy-Back Shareholders or an underwriter in any such case to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or omission or alleged omission made in said Registration Statement, said preliminary prospectus or said final or summary prospectus or any amendment or supplement thereto, in reliance upon and in conformity with written information furnished to Corporation by that Shareholder, Piggy-Back Shareholder or their respective affiliates or representatives, or by that underwriter, as the case may be, specifically for use in the preparation thereof; and provided further that the indemnity agreement contained in this Section 10 with respect to any preliminary prospectus shall not inure to the benefit of the Shareholders, Piggy-Back Shareholders or any underwriter or to any Person selling the same in respect of any loss, claim, damage, liability or action asserted by someone who purchased shares from such person if a copy of the final prospectus (as the same may be amended or supplemented) in connection with such registration statement was not sent or given to such person with or prior to written confirmation of the sale and if the untrue statement or omission or alleged untrue statement or omission of a material fact contained in such preliminary prospectus was corrected in the final prospectus. 10.2 In the event of any registration of securities under the Securities Act pursuant to this Agreement, each 8 Shareholder and Piggy-Back Shareholder will indemnify and hold harmless Corporation, each of its directors and officers, any underwriter and each other Person, if any, who controls Corporation or underwriter within the meaning of the Securities Acts, against any losses, claims, damages or liabilities, joint or several, to which Corporation or any such director, officer, underwriter may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or action in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in such Registration Statement or preliminary prospectus or final or summary prospectus contained therein, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements made therein not misleading, and will reimburse Corporation, each such director, officer, underwriter for any legal or any other expenses as reasonably incurred by them in connection with investigating or defending any such action or claim, excluding any amounts paid in settlement of any litigation, commenced or threatened, if such settlement is effected without prior written consent of the indemnifying Shareholder, Piggy-Back Shareholder or their respective representative; but in all cases only if, and to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission therein made in reliance upon and in conformity with written information furnished to Corporation by the indemnifying Shareholder, Piggy-Back Shareholder or their respective affiliates or representatives specifically for use in the preparation thereof. Notwithstanding the foregoing, the amount of the indemnity provided by each such Shareholder or Piggy-Back Shareholder pursuant to this Section 10 shall not exceed the net proceeds received by such Shareholder or Piggy-Back Shareholder in such related registration and sale. 10.3 Promptly after receipt by a party entitled to indemnification under subsection 10.1 or 10.2 hereof of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under either of such subsections, notify the indemnifying party in writing of the commencement thereof. In case any such action is brought against the indemnified party and it shall so notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in, and, to the extent that it so chooses, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party, and, after notice from the indemnifying party that it so chooses, such indemnifying party shall not be liable for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof, provided, however, that if the indemnifying party fails to take reasonable steps necessary to diligently defend such claim within twenty (20) days after receiving notice from the indemnified party that the indemnified party believes the indemnifying party has failed to take such steps, the indemnified party may assume its own defense and the indemnifying party shall be liable for any expenses therefor. The indemnity agreements in this Section 10 shall be in addition to any liabilities which the indemnifying parties may have pursuant to law. 10.4 If the indemnification provided for in this Section 10 from the indemnifying party is unavailable to an indemnified party hereunder in respect of any losses, claims, damages, liabilities or expenses referred to herein, then the indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses in such proportion as is appropriate to reflect the relative fault of the indemnifying party and indemnified parties in connection with the actions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative fault of such indemnifying party and indemnified parties shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, has been made by, or relates to information supplied by, such indemnifying party or indemnified parties, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, subject to the limitations set forth in Section 10 hereof, any legal or other fees or expenses reasonably incurred by such party in connection with any 9 investigation or proceeding. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 10 were determined by pro rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to in the immediately preceding paragraph. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. Section 11. SALES UNDER RULE 144. With a view to making available to each Shareholder and Piggy-Back Shareholder the benefits of Rule 144 promulgated under the Securities Act and any other similar rule or regulation of the Commission that may at any time permit such Shareholder or Piggy-Back Shareholder to sell the Registrable Securities without registration, Corporation agrees to: (a) make and keep public information available, as those terms are understood and defined in Rule 144 (or any successor provision); (b) file with the Commission in a timely manner all reports and other documents required of Corporation under the Securities Act and the Exchange Act; (c) furnish to such Shareholder or Piggy-Back Shareholder forthwith upon request (i) a written statement by Corporation that it has complied with the reporting requirements of Rule 144 (or any successor provision), the Securities Act and the Exchange Act, (ii) a copy of the most recent annual or quarterly report of Corporation and such other reports and documents so filed by Corporation under the Securities Act and the Exchange Act and (iii) such other information as may be reasonably requested by such Shareholder or Piggy-Back Shareholder in availing itself of any rule or regulation of the Commission which permits the selling of any such securities without registration; and (d) after any sale of Registrable Securities pursuant to Rule 144, to the extent allowed by law, to cause any restrictive legends to be removed and any transfer restrictions to be rescinded with respect to such Registration Securities. Section 12. REMOVAL OF LEGEND. The Corporation agrees, to the extent allowed by law, to remove any legends on certificates representing Registrable Securities or Piggy-Back Registrable Securities describing transfer restrictions applicable to such securities upon the sale of such securities (i) pursuant to an effective Registration Statement under the Securities Act or (ii) in accordance with the provisions of Rule 144 under the Securities Act. Section 13. NOTICES. Any notice to be given by any party hereunder to any other shall be in writing, mailed by certified or registered mail, return receipt requested, and shall be addressed to the other parties at the addresses listed on the signature pages hereof. All such notices shall be deemed to be given three (3) days after the date of mailing thereof. Section 14. MODIFICATION. Notwithstanding anything to the contrary in this Agreement or otherwise, no modification, amendment or waiver of any of the provisions of this Agreement shall be effective unless in writing and signed by the Corporation and the Shareholders holding not less than 95% of the Registrable Securities then outstanding. 10 Section 15. NON-WAIVER. The failure to enforce at any time any of the provisions of this Agreement, or to require at any time performance by any other party of any of the provisions hereof, shall in no way be construed to be a waiver of such provisions. Section 16. PARTIAL INVALIDITY. If any clause, sentence, paragraph, section or part of this Agreement shall be deemed invalid, unenforceable or against public policy, the part which is invalid, unenforceable or contrary to public policy shall not affect, impair, invalidate or nullify the remainder of this Agreement, but the invalidity, unenforceability or contrariness to public policy shall be confined only to the clause, sentence, paragraph, section or party of this Agreement so invalidated, unenforceable or against public policy. Section 17. CONSTRUCTION. The language in all parts of this Agreement shall in all cases be construed simply, according to its fair meaning, and shall not be construed strictly for or against either of the parties hereto. Section 18. GOVERNING LAW. This Agreement shall be governed and construed according to the laws of the State of Alabama, without regard to its conflicts of law principles. Section 19. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall constitute an original and all of which together shall constitute but one and the same instrument. Section 20. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors and permitted assigns. Section 21. SPECIFIC PERFORMANCE. The parties agree that, to the extent permitted by law, (i) the obligations imposed on them in this Agreement are special, unique and of an extraordinary character, and that in the event of a breach of any such party damages would not be an adequate remedy and (ii) the other party shall be entitled to specific performance and injunctive and equitable relief in addition to any other remedy to which it may be entitled at law or in equity. (REMAINDER OF PAGE INTENTIONALLY LEFT BLANK) 11 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. "CORPORATION" MIDDLE BAY OIL COMPANY, INC. By: /s/ John J. Bassett ------------------------------------- Name: John J. Bassett ----------------------------------- Title: President ---------------------------------- Address for Notice: Middle Bay Oil Company, Inc. 1221 Lamar Street, Suite 1020 Houston, TX 77010 Fax: (713) 650-0352 "SHAREHOLDERS" 3TEC ENERGY CORPORATION By: /s/ Floyd C. Wilson ------------------------------------- Name: Floyd C. Wilson ----------------------------------- Title: President ---------------------------------- Address for Notice: 3TEC Energy Corporation 5910 N. Central Expressway Suite 1150 Dallas, TX 75206 Fax: (214) 373-9731 12 "PIGGY-BACK SHAREHOLDERS" KAISER-FRANCIS OIL COMPANY By: /s/ Gary R. Christopher ------------------------------------- Name: Gary R. Christopher ----------------------------------- Title: Acquisitions Coordinator ---------------------------------- Address for Notice: Kaiser-Francis Oil Company 6733 South Yale Tulsa, OK 74136 Fax: (918) 491-4694 /s/ C.J. Lett, III - ---------------------------------------- C.J. LETT, III Address for Notice: C.J. Lett, III 9320 East Central Wichita, Kansas 67206 Fax: (316) 636-1803 13 WESKIDS, L.P. By: Weskids, Inc. Its General Partner By: /s/ Christine W. Jenkins -------------------------------------- Name: Christine W. Jenkins ------------------------------------ Title: Vice President ----------------------------------- Address for Notice: Weskids, L.P. 310 South Street Morristown, NJ 07960 Fax: (973) 682-2684 /s/ Alvin V. Shoemaker ----------------------------------------- ALVIN V. SHOEMAKER Address for Notice: Alvin V. Shoemaker 8800 First Avenue Stone Harbor, NJ 08247 Fax: (609) 368-0147 14 SHOEMAKER FAMILY PARTNERS, LP By: Alvin V. Shoemaker ----------------------------------------- Its General Partner By: /s/ Peter Shoemaker -------------------------------------- Name: Peter Shoemaker ------------------------------------ Title: Attorney In Fact ----------------------------------------- Address for Notice: Shoemaker Family Partners, LP 60 Brushhill Road Kinnelon, NJ 07405 Fax: (310) 444-3833 SHOEINVEST II, LP By: ALVIN V. SHOEMAKER INVESTMENTS, INC. ----------------------------------------- Its General Partner By: /s/ PETER SHOEMAKER ---------------------------------------- Name: PETER SHOEMAKER ----------------------------------------- Title: EXECUTIVE VICE PRESIDENT ----------------------------------- Address for Notice: Shoeinvest II, LP 60 Brushhill Road Kinnelon, NJ 07405 Fax: (310) 444-3833 15 SCHEDULE 1 3TEC Energy Corporation Securities Purchase Agreement by and between 3TEC Energy Corporation and Middle Bay Oil Company, Inc., dated July 1, 1999 4,775,556 shares of Common Stock Warrants exercisable for 3,600,000 shares of Common Stock $10,700,000 Note (which is convertible to Conversion Shares) Shoemaker Family Partners, LP Securities Purchase Agreement by and between Shoemaker Family Partners, LP and Middle Bay Oil Company, Inc., dated August 27, 1999 22,222 shares of Common Stock Warrants exercisable for 16,822 shares of Common Stock $50,000 Note (which is convertible to Conversion Shares) Shoeinvest II, LP Securities Purchase Agreement by and between Shoeinvest II, LP and Middle Bay Oil Company, Inc., dated August 27, 1999 44,444 shares of Common Stock Warrants exercisable for 33,644 shares of Common Stock $100,000 Note (which is convertible to Conversion Shares)
SCHEDULE 2
Number of Shares of Number of Shares of Series B Convertible Common Stock Held Preferred Shares Held Piggy-Back Shareholder Immediately Prior To Closing Immediately Prior to Closing ---------------------- ---------------------------- ---------------------------- Kaiser-Francis Oil Company 3,333,334 0 C.J. Lett, III 1,187,556 0 Weskids, L.P. 843,687 117,467 Alvin V. Shoemaker 684,222 117,466
EX-10.9 6 EXHIBIT 10.9 Exhibit 10.9 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT is made and entered into this 27th day of August, 1999 (the "Effective Date"), by and between MIDDLE BAY OIL COMPANY, INC., an Alabama corporation (hereinafter referred to as the "Company") and FLOYD C. WILSON (hereinafter referred to as "Employee"). WITNESSETH: WHEREAS, the Company is engaged in the oil and gas business; WHEREAS, the Company desires to employ Employee as President and Chief Executive Officer of the Company and Employee desires to be employed by the Company in that capacity; and WHEREAS, the Company and Employee desire to set forth in writing the terms and conditions of their agreements and understandings; NOW, THEREFORE, in consideration of the foregoing, of the mutual promises herein contained, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties, intending to be legally bound, agree as follows: 1. TERM OF EMPLOYMENT. The Company shall employ Employee in the capacity set forth herein for a term commencing on the Effective Date and ending on November 25, 2000 (the "Employment Period"). Within the period commencing one hundred twenty (120) days prior to the end of the Employment Period, the Employee and the Company shall review the terms of this Employment Agreement in light of the circumstances existing at that time and, if the parties in good faith deem it necessary or advisable, agree to extend the term of this Employment Agreement or negotiate and enter into a new employment agreement. Notwithstanding the foregoing, Employee's employment hereunder may be terminated earlier in accordance with the provisions of Section 8 hereof. 2. RESPONSIBILITIES OF EMPLOYEE. (a) In accepting employment by the Company, Employee shall undertake and assume the responsibility of performing for and on behalf of the Company any and all duties of the Chief Executive Officer and President as set forth in the Company's Bylaws, as they may be amended from time to time, and shall have such other duties, functions, responsibilities and authority commensurate with such offices from time to time delegated to the Employee by the Board of Directors provided that such duties, functions, responsibilities and authority are customarily associated with the position of President and Chief Executive Officer. (b) Employee agrees to devote his full time and effort to his duties as an employee of the Company. Employee may devote a reasonable amount of his time to civic and community affairs, and subject to the provisions of Section 7, to the business and financial interests described on EXHIBIT A attached hereto; provided that such other activities do not materially interfere with the performance of Employee's responsibility as President and Chief Executive Officer; and provided further that no additional outside business activities shall be undertaken without the prior written consent of the Board of Directors. 3. COMPENSATION. As compensation for the services to be rendered by Employee for the Company under this Agreement, Employee shall be entitled to the following: (a) The Company shall pay Employee during the Employment Period an annual salary of not less than Two Hundred Thousand Dollars ($200,000). The amount of such annual salary may be amended by the Company's Board of Directors (the "Board") from time to time (but in no event shall such annual salary be less than Two Hundred Thousand Dollars ($200,000)). Such annual salary shall be payable periodically for such periods as may be established by the Company for payment of its employees under its normal payroll practices. (b) Employee may receive a bonus and fringe benefits each year in amounts to be determined by the Board. Such bonus may, in the discretion of the Board, be based, in part, upon the Company meeting certain financial goals, which goals may be agreed upon by the Board and Employee. 4. EXPENSES. Employee shall be reimbursed for all reasonable business expenses incurred by him in connection with or incident to the performance of his duties and responsibilities hereunder upon the Employee's submission to the Company of vouchers or expense statements evidencing such expenses in such form or format as the Company may reasonably require. 5. VACATION AND OTHER BENEFITS. (a) VACATION. Employee shall be entitled to four (4) weeks of paid vacation per year during the Employment Period. In addition, Employee shall be entitled to participate in all other present and future benefit plans provided by the Company to its employees and for which Employee meets the eligibility requirements thereof. (b) MEDICAL INSURANCE. The Company shall provide Employee and his dependents with medical insurance coverage under the Company's medical insurance plan, which plan shall be reasonably acceptable to Employee. 6. BUSINESS OPPORTUNITIES AND INTELLECTUAL PROPERTY. (a) During the period in which Employee is employed by the Company, Employee shall promptly disclose to the Company all "Business Opportunities" and "Intellectual Property" (each as defined below). (b) Employee hereby assigns and agrees to assign to the Company, its successors, assigns or designees, all of Employee's right, title and interest in and to all "Business Opportunities" and "Intellectual Property," and further acknowledges and agrees that all Business Opportunities and Intellectual Property constitute the exclusive property of the Company. (c) For purposes hereof, "Business Opportunities" shall mean all business ideas, prospects, proposals or other opportunities pertaining to the lease, acquisition, exploration, production, gathering or marketing of hydrocarbons and related products and the exploration potential of geographical areas on which hydrocarbon exploration prospects are located, which are: (i) developed by Employee (A) during the period in which Employee is employed by the Company, or (B) before the period in which Employee is employed by the Company, but only to the extent of Employee's rights thereto during such period, or (ii) originated by any third party and brought to the attention of Employee (A) during the period in which Employee is employed by the Company, or (B) before the period in which Employee is employed 2 by the Company, but only to the extent of Employee's rights thereto during such period, together with information relating thereto, including, without limitation, any "Business Records" (as defined below). (d) For purposes hereof "Intellectual Property" shall mean all ideas, inventions, discoveries, processes, designs, methods, substances, articles, computer programs and improvements (including, without limitation, enhancements to, or further interpretation or processing of, information that was in the possession of Employee prior to the date of this Agreement), whether or not patentable or copyrightable, which do not fall within the definition of Business Opportunities, which are discovered, conceived, invented, created or developed by Employee, alone or with others: (i) during the period in which Employee is employed by the Company if such discovery, conception, invention, creation, or development (A) occurs in the course of the Employee's employment with the Company, or (B) occurs with the use of any of the Company's time, materials or facilities, or (C) in the opinion of the Board of Directors of the Company, relates or pertains in any way to the Company's purposes, activities or affairs, or (ii) before the period in which Employee is employed by the Company, but only to the extent of Employee's rights thereto during such period. 7. NON-COMPETITION AND NON-DISCLOSURE; INJUNCTIVE RELIEF. Employee acknowledges that the services he is to render in the course of his employment by the Company are of a special and unusual character with unique value to the Company. In view of the value to the Company of the services of Employee during the course of his employment by the Company, because of the Business Opportunities, Intellectual Property and "Confidential Information" (as defined below) to be obtained by or disclosed to Employee, and as a inducement to the Company to enter into this Agreement and to pay to Employee the compensation stated herein, Employee covenants and agrees as follows: (a) During the period in which Employee is employed by the Company, unless otherwise extended pursuant to the terms of this Section 7, Employee shall not directly or indirectly be employed by or render advisory, consulting or other services in connection with any business enterprise or person that is engaged in leasing, acquiring, exploring, producing, gathering or marketing hydrocarbons and related products. (b) During the period in which Employee is employed by the Company, unless otherwise extended pursuant to the terms of this Section 7, Employee shall not, directly or indirectly, in any capacity (including, without limitation, as a proprietor, investor, director or officer or in any other individual or representative capacity), be financially interested in or engage in any business that is engaged in leasing, acquiring, exploring, producing, gathering or marketing hydrocarbons and related products; however, it is specifically agreed between the parties that Employee may continue to be financially interested in and engage in any business similar to or related to the Company's business that is described on EXHIBIT A attached hereto, provided, that such activities do not materially detract from the Employee's performance of his responsibilities as President and Chief Executive Officer, provided, further that, nothing contained in this paragraph 7(b) shall relieve the Employee of his obligations contained in paragraph 7(a) above. (c) During the period in which Employee is employed by the Company, unless otherwise extended pursuant to the terms of this Section 7, all investments made by Employee (whether in his own name or in the name of any family members or made by Employee's controlled affiliates), which relate to the lease, acquisition, exploration, production, gathering or marketing or hydrocarbons and related products shall be made solely through the Company; and Employee will not (directly or indirectly through any family members), and will not permit any of his controlled affiliates to (i) invest or otherwise participate alongside the Company in any Business Opportunities, or (ii) invest or otherwise participate in any business or activity relating to a Business Opportunity, regardless of whether the Company ultimately participates in such business or activity. (d) During the period in which Employee is employed by the Company and thereafter, Employee 3 will not disclose to any third party or directly or indirectly make use of, in a way materially detrimental to the Company, any and all trade secrets and confidential or proprietary information pertaining to the Company (collectively referred to as "Confidential Information"). For purposes of this Section 7, it is agreed that Confidential Information includes, without limitation, any information heretofore or hereafter acquired, developed or used by the Company relating to Business Opportunities or Intellectual Property or other geological, geophysical, economic, financial or management aspects of the business, operations, properties or prospects of the Company whether oral or in written form in a "Business Records" (as defined in paragraph 7(g) below). Notwithstanding the foregoing, no information of the Company will be deemed confidential for the purposes of this paragraph 7(d) if such information is or becomes public knowledge through no act of Employee or was previously known by Employee prior to entering into this Agreement. (e) During the Employment Period or the period in which Employee is employed by the Company, whichever is longer, and for a six-month period commencing upon the termination of such longer period, unless otherwise extended pursuant to the terms of this Section 7, Employee may not solicit, raid, entice or induce, directly or indirectly, any employee (or person who within the preceding ninety (90) days was an employee) of the Company or any other person who is under contract with or rendering services to the Company, to (i) terminate his employment by, or contractual relationship with, the Company, (ii) refrain from extending or renewing the same (upon the same or new terms), (iii) refrain from rendering services to or for the Company, (iv) become employed by or to enter into contractual relations with any persons other than the Company, or (v) enter into a relationship with a competitor of the Company; provided that during the six-month period commencing upon the termination of the Employment Period or the period in which the Employee is employed by the Company, whichever is longer, nothing in this paragraph 7(e) shall prohibit Employee from entering into contractual relations to obtain capital as long as the Board of Directors of the Company in good faith determines that such relations are not detrimental to the Company. (f) Employee acknowledges and agrees that the services to be rendered by him are of a special, unique and extraordinary character and, in connection with such services, he will have access to Business Opportunities, Intellectual Property and Confidential Information vital to the Company's businesses. By reason of this, the Employee consents and agrees that if he violates any of the provisions of this Section 7, the Company would sustain irreparable harm and, therefore, in addition to any other remedies which the Company may have under this Agreement or otherwise, the Company shall be entitled to an injunction restraining the Employee from committing or continuing any such violation of this Agreement. Such right to an injunction shall be cumulative and in addition to, and not in lieu of, any other remedies to which the Company may show itself justly entitled. Further, during any period in which the Employee is in breach of the covenants set forth in this Section 7, the time period of this covenant shall be extended for an amount of time that the Employee is in breach. (g) The Employee agrees to promptly deliver to the Company, upon termination of Employee's employment with the Company, or at any other time when the Company so requests, all documents relating to the business of the Company, including, without limitation: all geological and geophysical reports and related data such as maps, charts, logs, seismographs, seismic records and other reports and related data, calculations, summaries, memoranda and opinions relating to the foregoing, production records, electric logs, core data, pressure data, lease files, well files and records, land files, abstracts, title opinions, title or curative matters, contract files, notes, records, drawings, manuals, correspondence, financial and accounting information, customer lists, statistical data and compilations, patents, copyrights, trademarks, trade names, inventions, formulae, methods, processes, agreements, contracts, manuals or any other documents relating to the business of the Company (collectively, the "Business Records"), and all copies thereof and therefrom. The Employee confirms that all of the Business Records (and all copies thereof and therefrom) that are required to be delivered to the Company pursuant to this paragraph 7(g) constitute the exclusive property of the Company. The obligation of confidentiality set forth in this Section 7 shall continue notwithstanding the Employee's delivery of any such documents to the Company. Notwithstanding the foregoing provisions of this Section 7 or any other provision of this Agreement, the Employee shall be entitled to retain any written materials which, as shown by 4 the Employee's records, were in Employee's possession on or prior to the date hereof, subject to the Company's right to receive a copy of all such materials. (h) The representations and covenants contained in this Section 7 on the part of the Employee will be construed as ancillary to and independent of any other provision of this Agreement, and the existence of any claim or cause of action of the Employee against the Company or any officer, director, or shareholder of the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of the covenants of the Employee contained in this Section 7. In addition, the provisions of this Section 7 shall continue to be binding upon the Employee in accordance with their terms, notwithstanding the termination of the Employee's employment hereunder for any reason. (i) The parties to this Agreement agree that the limitations contained in this Section 7 with respect to time, geographical area, and scope of activity are reasonable. However, if any court shall determine that the time, geographical area, or scope of activity of any restriction contained in this Section 7 is unenforceable, it is the intention of the parties that such restrictive covenants set forth herein shall not thereby be terminated but shall be deemed amended to the extent required to render it valid and enforceable. 8. TERMINATION BY THE COMPANY FOR CAUSE. (a) The Company may terminate Employee's employment under this Agreement for Cause. The termination shall be evidenced by written notice thereof to the Employee and shall specify the Cause for termination. For purposes hereof, the term "Cause" shall mean (i) the inability of Employee, despite any reasonable accommodation required by law, due to bodily injury or disease or any other physical or mental incapacity, to perform the services provided for hereunder for a period of 120 days in the aggregate, within any given period of 180 consecutive days during the term of this Agreement, in addition to any statutorily required leave of absence, (ii) conduct of the Employee that constitutes fraud, dishonesty, theft, or a criminal act involving moral turpitude, in each case only if it materially affects his ability to perform the duties and responsibilities of his position or has a material adverse effect on the Company, (iii) commission of a material act of fraud against the Company, (iv) embezzlement of funds or misappropriation of other property by the Employee from the Company; or (v) failure of Employee to observe or perform his material duties and obligations as an employee of the Company or a material breach of this Agreement, after thirty (30) days advance written notice of such failure or breach which has not been cured. (b) Upon Employee's death or if Employee's employment with the Company is terminated for Cause, Employee shall be paid his salary through the month of his death or termination. 9. TERMINATION BY THE COMPANY WITHOUT CAUSE. (a) The Company may terminate Employee's employment under this Agreement without Cause. The termination shall be evidenced by written notice thereof to the Employee and shall specify that the termination was without Cause. (b) If Employee's employment with the Company is terminated without Cause during any period in which Employee is employed by the Company, Employee shall be entitled to receive, within ten (10) days of such termination, the amount of compensation Employee would have earned if his employment had continued through the remainder of the Employment Period. Notwithstanding the foregoing, if the payment referred to above is not made within ten (10) days of Employee's termination, all unpaid amounts shall bear interest at a rate equal to the New York Prime (as published 5 in the Wall Street Journal) on the date of such termination. 10. BURDEN AND BENEFIT. This Agreement shall be binding upon, and shall inure to the benefit of, the Company and Employee, and their respective heirs, personal and legal representatives, successors and permitted assigns. 11. GOVERNING LAW. It is understood and agreed that the construction and interpretation of this Agreement shall at all times and in all respects be governed by the laws of the State of Texas. The parties hereto hereby irrevocably submit to the exclusive jurisdiction of the courts of the State of Texas and the federal courts of the United States of America located in Texas, and appropriate appellate courts therefrom, over any dispute arising out of or relating to this Agreement or any of the transactions contemplated hereby, and each party hereby irrevocably agrees that all claims in respect of such dispute or proceeding may be heard and determined in such courts. The parties hereby irrevocably waive, to the fullest extent permitted by applicable law, any objection which they may now or hereafter have to the laying of venue of any dispute arising out of or relating to this Agreement or any of the transactions contemplated hereby brought in such court or any defense of inconvenient forum for the maintenance of such dispute. Each of the parties hereto agrees that a judgment in any such dispute may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. This consent to jurisdiction is being given solely for purposes of this Agreement and is not intended to, and shall not, confer consent to jurisdiction with respect to any other dispute in which a party to this Agreement may become involved. Each of the parties hereto hereby consents to process being served by any party to this Agreement in any suit, action, or proceeding of the nature specified above by the mailing of a copy thereof in the manner specified by the provisions of Section 13. 12. SEVERABILITY. The provisions of this Agreement shall be deemed severable, and the invalidity or unenforceability of any one or more of the provisions of this Agreement shall not affect the validity and enforceability of the other provisions. 13. NOTICE. Any notice required to be given shall be sufficient if it is in writing and sent by certified or registered mail, return receipt requested, first-class postage prepaid, to his last know residence in the case of Employee, and to its principal office in the State of Texas in the case of the Company. 14. ENTIRE AGREEMENT. This Agreement contains the entire agreement and understanding by and between the Company and Employee with respect to the employment of Employee, and no representations, promises, agreements, or understandings, written or oral, not contained herein shall be of any force or effect. No waiver of any provision of this Agreement shall be valid unless it is in writing and signed by the party against whom the waiver is sought to be enforced. No valid waiver of any provision of this Agreement at any time shall be deemed a waiver of any other provision of this Agreement at such time or any other time. 15. MODIFICATION. No amendment, alteration or modification to any of the provisions of this Agreement shall be valid unless made in writing and signed by both parties. 16. PARAGRAPH HEADINGS. The paragraph headings have been inserted for convenience only and are not to be considered when construing the provisions of this Agreement. 17. 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 together shall constitute but one and the same instrument. 6 IN WITNESS WHEREOF, the Company and Employee have executed this Agreement on the day and year first above written. "COMPANY" "EMPLOYEE" MIDDLE BAY OIL COMPANY, INC. /s/ Floyd C. Wilson ------------------- FLOYD C. WILSON By: /s/ John J. Basset ------------------- Name: John J. Bassett ------------------- Title: President ------------------- 7 EXHIBIT A ENERGY RELATED INVESTMENTS 1. Employee owns a 50% interest in Encorp Inc., a privately held energy and production company which hold oil and gas properties valued at less than $2 million. 2. Employee owns or controls two Kansas corporations FCW Energy Corporation and FCW Holding Corporation. The assets of these two corporations consist of a net operating loss and non-operated, non-managed working interests and overriding royalty interests of nominal value located in Kansas, Oklahoma and Texas. 3. Employee holds non-operated, non-managed working interests in oil and gas properties alongside the following entities: (1) RAK Energy Corp.; (2) Javelin Exploration Company; and (3) JAVEX Inc. Employee is also a limited partner in certain limited partnerships related to the foregoing entities. The aggregate value of Employee's working interests and partnership interests is less than $2 million. 4. Employee owns approximately 2,500,000 shares of common stock of Chesapeake Energy Corporation (NYSE:CHK). 5. Employee owns shares of capital stock of various publicly-traded energy and production companies. The aggregate number of shares Employee owns in each entity does not exceed 1% of the outstanding shares of capital stock of such entity. -4- EX-10.10 7 EXHIBIT 10.10 Exhibit 10.10 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement") is made to be effective as of the 27th day of August, 1999 (the "Effective Date") by and between MIDDLE BAY OIL COMPANY, INC., an Alabama corporation (hereinafter referred to as the "Company"), and JOHN J. BASSETT (hereinafter referred to as "Employee"). W I T N E S S E T H : WHEREAS, the Company is engaged in the oil and gas business; WHEREAS, as of the Effective Date of this Agreement, Employee has resigned his position as President and Chief Executive Officer of the Company; and WHEREAS, the Company and Employee desire to embody in this Agreement the terms and conditions under which Employee shall continue his employment as Executive Vice President of the Company; NOW, THEREFORE, in consideration of the foregoing, of the mutual promises herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties, intending to be legally bound, agree as follows: 1. TERM OF EMPLOYMENT. The Company shall employ Employee in the capacity set forth herein for a term commencing on the Effective Date and ending on February 1, 2002 (the "Employment Period"). Within the period commencing one hundred twenty (120) days prior to the end of the Employment Period, Employee and the Company shall review the terms of this Employment Agreement in light of the circumstances existing at that time and, if the parties in good faith deem it necessary or advisable, agree to extend the term of this Employment Agreement or negotiate and enter into a new employment agreement. Notwithstanding the foregoing, Employee's employment hereunder may be terminated earlier in accordance with the provisions of Section 8 hereof. 2. RESPONSIBILITIES OF EMPLOYEE. (a) In accepting employment by the Company, Employee shall undertake and assume the responsibility of performing for and on behalf of the Company any and all duties of the sole Executive Vice President of the Company as set forth in the Company's Bylaws, as they may be amended from time to time, and shall have such other duties, functions, responsibilities and authority commensurate with such office from time to time delegated to Employee by the Board of Directors; provided, that such duties, functions, responsibilities and authority (and the office -1- facilities, staff and working environment made available to Employee) are customarily associated with the senior executive position of Executive Vice President and are subordinate only to the offices of President and/or Chief Executive Officer. (b) Employee agrees to devote his full time and effort to his duties as an employee of the Company. Employee may devote a reasonable amount of his time to civic and community affairs, and subject to the provisions of Section 7, to the business and financial interests described on EXHIBIT A attached hereto; provided that such other activities do not materially interfere with the performance of Employee's responsibility as Executive Vice President, and provided further that no additional outside business activities shall be undertaken without the prior written consent of the Board of Directors. 3. COMPENSATION. As compensation for the services to be rendered by Employee for the Company under this Agreement, Employee shall be entitled to the following: (a) The Company shall pay Employee during the Employment Period an annual salary of not less than One Hundred Twenty Thousand Dollars ($120,000). The amount of such annual salary may be amended by the Company's Board of Directors (the "Board") from time to time (but in no event shall such annual salary be less than One Hundred Twenty Thousand Dollars ($120,000)). Such annual salary shall be payable periodically for such periods as may be established by the Company for payment of its employees under its normal payroll practices. (b) Employee may receive a bonus and fringe benefits each year in amounts to be determined by the Board. Such bonus may, in the discretion of the Board, be based, in part, upon the Company meeting certain financial goals, which goals may be agreed upon by the Board and Employee. 4. EXPENSES. Employee shall be reimbursed for all reasonable business expenses incurred by him in connection with or incident to the performance of his duties and responsibilities hereunder upon the Employee's submission to the Company of vouchers or expense statements evidencing such expenses in such form or format as the Company may reasonably require. 5. VACATION AND OTHER BENEFITS. (a) VACATION. Employee shall be entitled to four (4) weeks of paid vacation per year during the Employment Period. In addition, Employee shall be entitled to participate in all other present and future benefit plans provided by the Company to its employees and for which Employee meets the eligibility requirements thereof. (b) MEDICAL INSURANCE. The Company shall provide Employee and his dependents with medical insurance coverage under the Company's medical insurance plan, which plan shall be reasonably acceptable to Employee. 6. BUSINESS OPPORTUNITIES AND INTELLECTUAL PROPERTY. -2- (a) During the period in which Employee is employed by the Company, Employee shall promptly disclose to the Company all "Business Opportunities" and "Intellectual Property" (each as defined below). (b) Employee hereby assigns and agrees to assign to the Company, its successors, assigns or designees, all of Employee's right, title and interest in and to all "Business Opportunities" and "Intellectual Property," and further acknowledges and agrees that all Business Opportunities and Intellectual Property constitute the exclusive property of the Company. (c) For purposes hereof, "Business Opportunities" shall mean all business ideas, prospects, proposals or other opportunities pertaining to the lease, acquisition, exploration, production, gathering or marketing of hydrocarbons and related products and the exploration potential of geographical areas on which hydrocarbon exploration prospects are located, which are: (i) developed by Employee (A) during the period in which Employee is employed by the Company, or (B) before the period in which Employee is employed by the Company, but only to the extent of Employee's rights thereto during such period, or (ii) originated by any third party and brought to the attention of Employee (A) during the period in which Employee is employed by the Company, or (B) before the period in which Employee is employed by the Company, but only to the extent of Employee's rights thereto during such period, together with information relating thereto, including, without limitation, any "Business Records" (as defined below). (d) For purposes hereof "Intellectual Property" shall mean all ideas, inventions, discoveries, processes, designs, methods, substances, articles, computer programs and improvements (including, without limitation, enhancements to, or further interpretation or processing of, information that was in the possession of Employee prior to the date of this Agreement), whether or not patentable or copyrightable, which do not fall within the definition of Business Opportunities, which are discovered, conceived, invented, created or developed by Employee, alone or with others: (i) during the period in which Employee is employed by the Company if such discovery, conception, invention, creation, or development (A) occurs in the course of the Employee's employment with the Company, or (B) occurs with the use of any of the Company's time, materials or facilities, or (C) in the opinion of the Board of Directors of the Company, relates or pertains in any way to the Company's purposes, activities or affairs, or (ii) before the period in which Employee is employed by the Company, but only to the extent of Employee's rights thereto during such period. 7. NON-COMPETITION AND NON-DISCLOSURE; INJUNCTIVE RELIEF. Employee acknowledges that the services he is to render in the course of his employment by the Company are of a special and unusual character with unique value to the Company. In view of the value to the Company of the services of Employee during the course of his employment by the Company, because of the Business Opportunities, Intellectual Property and "Confidential Information" (as defined below) to be obtained by or disclosed to Employee, and as a inducement to the Company to enter into this Agreement and to pay to Employee the compensation stated herein, Employee covenants and agrees as follows: -3- (a) During the period in which Employee is employed by the Company, unless otherwise extended pursuant to the terms of this Section 7, Employee shall not directly or indirectly be employed by or render advisory, consulting or other services in connection with any business enterprise or person that is engaged in leasing, acquiring, exploring, producing, gathering or marketing hydrocarbons and related products. (b) During the period in which Employee is employed by the Company, unless otherwise extended pursuant to the terms of this Section 7, Employee shall not, directly or indirectly, in any capacity (including, without limitation, as a proprietor, investor, director or officer or in any other individual or representative capacity), be financially interested in or engage in any business that is engaged in leasing, acquiring, exploring, producing, gathering or marketing hydrocarbons and related products; however, it is specifically agreed between the parties that Employee may continue to be financially interested in and engage in any business similar to or related to the Company's business that is described on EXHIBIT A attached hereto, provided that such activities do not materially detract from the Employee's performance of his responsibilities as Executive Vice President, and provided, further, that nothing contained in this paragraph 7(b) shall relieve Employee of his obligations contained in paragraph 7(a) above. (c) During the period in which Employee is employed by the Company, unless otherwise extended pursuant to the terms of this Section 7, all investments made by Employee (whether in his own name or in the name of any family members or made by Employee's controlled affiliates), which relate to the lease, acquisition, exploration, production, gathering or marketing or hydrocarbons and related products shall be made solely through the Company; and Employee will not (directly or indirectly through any family members), and will not permit any of his controlled affiliates to (i) invest or otherwise participate alongside the Company in any Business Opportunities, or (ii) invest or otherwise participate in any business or activity relating to a Business Opportunity, regardless of whether the Company ultimately participates in such business or activity. (d) During the period in which Employee is employed by the Company and thereafter, Employee will not disclose to any third party or directly or indirectly make use of, in a way materially detrimental to the Company, any and all trade secrets and confidential or proprietary information pertaining to the Company (collectively referred to as "Confidential Information"). For purposes of this Section 7, it is agreed that Confidential Information includes, without limitation, any information heretofore or hereafter acquired, developed or used by the Company relating to Business Opportunities or Intellectual Property or other geological, geophysical, economic, financial or management aspects of the business, operations, properties or prospects of the Company whether oral or in written form in a "Business Records" (as defined in paragraph 7(g) below). Notwithstanding the foregoing, no information of the Company will be deemed confidential for the purposes of this paragraph 7(d) if such information is or becomes public knowledge through no act of Employee or was previously known by Employee prior to entering into this Agreement. (e) During the Employment Period or the period in which Employee is employed by the Company, whichever is longer, and for a six-month period commencing upon the termination of such longer period, unless otherwise extended pursuant to the terms of this Section 7, Employee may not solicit, raid, entice or induce, directly or indirectly, any employee (or person who within the preceding ninety (90) days was an employee) of the Company or any other person who is under contract with or rendering services to the Company, to (i) terminate his employment by, or contractual relationship with, the Company, (ii) refrain from extending or renewing the same (upon -4- the same or new terms), (iii) refrain from rendering services to or for the Company, (iv) become employed by or to enter into contractual relations with any persons other than the Company, or (v) enter into a relationship with a competitor of the Company; provided that during the six-month period commencing upon the termination of the Employment Period or the period in which the Employee is employed by the Company, whichever is longer, nothing in this paragraph 7(e) shall prohibit Employee from entering into contractual relations to obtain capital as long as the Board of Directors of the Company in good faith determines that such relations are not detrimental to the Company. (f) Employee acknowledges and agrees that the services to be rendered by him are of a special, unique and extraordinary character and, in connection with such services, he will have access to Business Opportunities, Intellectual Property and Confidential Information vital to the Company's businesses. By reason of this, Employee consents and agrees that if he violates any of the provisions of this Section 7, the Company would sustain irreparable harm and, therefore, in addition to any other remedies which the Company may have under this Agreement or otherwise, the Company shall be entitled to an injunction restraining Employee from committing or continuing any such violation of this Agreement. Such right to an injunction shall be cumulative and in addition to, and not in lieu of, any other remedies to which the Company may show itself justly entitled. Further, during any period in which Employee is in breach of the covenants set forth in this Section 7, the time period of this covenant shall be extended for an amount of time that Employee is in breach. (g) Employee agrees to promptly deliver to the Company, upon termination of Employee's employment with the Company, or at any other time when the Company so requests, all documents relating to the business of the Company, including, without limitation: all geological and geophysical reports and related data such as maps, charts, logs, seismographs, seismic records and other reports and related data, calculations, summaries, memoranda and opinions relating to the foregoing, production records, electric logs, core data, pressure data, lease files, well files and records, land files, abstracts, title opinions, title or curative matters, contract files, notes, records, drawings, manuals, correspondence, financial and accounting information, customer lists, statistical data and compilations, patents, copyrights, trademarks, trade names, inventions, formulae, methods, processes, agreements, contracts, manuals or any other documents relating to the business of the Company (collectively, the "Business Records") and all copies thereof and therefrom. Employee confirms that all of the Business Records (and all copies thereof and therefrom) that are required to be delivered to the Company pursuant to this paragraph 7(g) constitute the exclusive property of the Company. The obligation of confidentiality set forth in this Section 7 shall continue notwithstanding Employee's delivery of any such documents to the Company. Notwithstanding the foregoing provisions of this Section 7 or any other provision of this Agreement, Employee shall be entitled to retain any written materials which, as shown by Employee's records, were in Employee's possession on or prior to the date hereof, subject to the Company's right to receive a copy of all such materials. (h) The representations and covenants contained in this Section 7 on the part of Employee will be construed as ancillary to and independent of any other provision of this Agreement, and the existence of any claim or cause of action of Employee against the Company or any officer, director, or shareholder of the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of the covenants of Employee contained in this Section 7. In addition, the provisions of this Section 7 shall continue to be binding upon Employee in accordance with their terms, notwithstanding the termination of Employee's employment hereunder for any reason. -5- (i) The parties to this Agreement agree that the limitations contained in this Section 7 with respect to time, geographical area, and scope of activity are reasonable. However, if any court shall determine that the time, geographical area, or scope of activity of any restriction contained in this Section 7 is unenforceable, it is the intention of the parties that such restrictive covenants set forth herein shall not thereby be terminated but shall be deemed amended to the extent required to render it valid and enforceable. 8. TERMINATION BY THE COMPANY FOR CAUSE. (a) The Company may terminate Employee's employment under this Agreement for Cause. The termination shall be evidenced by written notice thereof to Employee and shall specify the Cause for termination. For purposes hereof, the term "Cause" shall mean (i) the inability of Employee, despite any reasonable accommodation required by law, due to bodily injury or disease or any other physical or mental incapacity, to perform the services provided for hereunder for a period of 120 days in the aggregate, within any given period of 180 consecutive days during the term of this Agreement, in addition to any statutorily required leave of absence, (ii) conduct of Employee that constitutes fraud, dishonesty, theft, or a criminal act involving moral turpitude, in each case only if it materially affects his ability to perform the duties and responsibilities of his position or has a material adverse effect on the Company, (iii) commission of a material act of fraud against the Company, (iv) embezzlement of funds or misappropriation of other property by Employee from the Company; or (v) failure of Employee to observe or perform his material duties and obligations as an employee of the Company or a material breach of this Agreement, after thirty (30) days advance written notice of such failure or breach which has not been cured. (b) Upon Employee's death or if Employee's employment with the Company is terminated for Cause, Employee shall be paid his salary through the month of his death or termination. 9. TERMINATION BY THE COMPANY WITHOUT CAUSE OR BY EMPLOYEE FOR GOOD REASON. (a) The Company may terminate Employee's employment under this Agreement without Cause. The termination shall be evidenced by written notice thereof to Employee and shall specify that the termination was without Cause. (b) If Employee elects to terminate his employment by written notice to the Company during the three (3) month period after the Effective Date, such election by Employee shall be deemed termination of employment for "Good Reason." (c) If Employee's employment with the Company is terminated without Cause or if Employee terminates his employment for Good Reason, Employee shall be entitled to receive, within ten (10) days of such termination, an amount equal to the greater of: (i) two (2) times his annual compensation as initially set forth in paragraph 3(a) herein, as such may be amended by the Board from time to time; or (ii) the amount of compensation Employee would have earned if his employment had continued through the remainder of the Employment Period. Notwithstanding the foregoing, if the payment referred to above is not made within ten (10) days of Employee's -6- termination, all unpaid amounts shall bear interest at a rate equal to the New York Prime (as published in the Wall Street Journal) on the date of such termination. 10. BURDEN AND BENEFIT. This Agreement shall be binding upon, and shall inure to the benefit of, the Company and Employee, and their respective heirs, personal and legal representatives, successors and permitted assigns. 11. GOVERNING LAW. It is understood and agreed that the construction and interpretation of this Agreement shall at all times and in all respects be governed by the laws of the State of Texas. The parties hereto hereby irrevocably submit to the exclusive jurisdiction of the courts of the State of Texas and the federal courts of the United States of America located in Texas, and appropriate appellate courts therefrom, over any dispute arising out of or relating to this Agreement or any of the transactions contemplated hereby, and each party hereby irrevocably agrees that all claims in respect of such dispute or proceeding may be heard and determined in such courts. The parties hereby irrevocably waive, to the fullest extent permitted by applicable law, any objection which they may now or hereafter have to the laying of venue of any dispute arising out of or relating to this Agreement or any of the transactions contemplated hereby brought in such court or any defense of inconvenient forum for the maintenance of such dispute. Each of the parties hereto agrees that a judgment in any such dispute may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. This consent to jurisdiction is being given solely for purposes of this Agreement and is not intended to, and shall not, confer consent to jurisdiction with respect to any other dispute in which a party to this Agreement may become involved. Each of the parties hereto hereby consents to process being served by any party to this Agreement in any suit, action, or proceeding of the nature specified above by the mailing of a copy thereof in the manner specified by the provisions of Section 13. 12. SEVERABILITY. The provisions of this Agreement shall be deemed severable, and the invalidity or unenforceability of any one or more of the provisions of this Agreement shall not affect the validity and enforceability of the other provisions. 13. NOTICE. Any notice required to be given shall be sufficient if it is in writing and sent by certified or registered mail, return receipt requested, first-class postage prepaid, to his last know residence in the case of Employee, and to its principal office in the State of Texas in the case of the Company. 14. ENTIRE AGREEMENT. This Agreement contains the entire agreement and understanding by and between the Company and Employee with respect to the employment of Employee, and no representations, promises, agreements, or understandings, written or oral, not contained herein shall be of any force or effect. No waiver of any provision of this Agreement shall be valid unless it is in writing and signed by the party against whom the waiver is sought to be enforced. No valid waiver of any provision of this Agreement at any time shall be deemed a waiver of any other provision of this Agreement at such time or any other time. 15. MODIFICATION. No amendment, alteration or modification to any of the provisions of this Agreement shall be valid unless made in writing and signed by both parties. 16. PARAGRAPH HEADINGS. The paragraph headings have been inserted for convenience only and are not -7- to be considered when construing the provisions of this Agreement. 17. 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 together shall constitute but one and the same instrument. IN WITNESS WHEREOF, the parties have executed, acknowledged, sealed and delivered this Agreement on the 27th day of August, 1999, to become effective as of the Effective Date. MIDDLE BAY OIL COMPANY, INC. By: /s/ Floyd C. Wilson ------------------------ Name: ---------------------- Title: --------------------- EMPLOYEE /s/ John J. Bassett -------------------------- John J. Bassett -8- EXHIBIT "A" ENERGY RELATED BUSINESS 1. Employee owns a 9.1644% limited partnership interest in the Bay City Energy Fund, LTD. The aggregate value of Employee's limited partnership interest is less than $2 million in value. 2. Employee owns approximately 53 shares (8.32%) of common stock of Bay City Energy Group, Inc. 3. Employee owns shares of capital stock of various publicly traded energy and production companies. The aggregate number of shares the Employee owns in each entity does not exceed 1% of the total outstanding shares. 4. Employee holds non-operated, non-managed working and royalty interests in oil and gas properties through Middle Bay Oil Company or other entities. 5. Employee owns interest in a newly developed patented traveling valve to be installed in wells that are having gas locking problems. SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MIDDLE BAY OIL COMPANY, INC. (Registrant) Date: November 12, 1999 By: /s/ Frank C. Turner II ------------------------ Frank C. Turner II Chief Financial Officer EX-10.11 8 EXHIBIT 10.11 - ------------------------------------------------------------------------------- CREDIT AGREEMENT BETWEEN MIDDLE BAY OIL COMPANY, INC. AND ENEX RESOURCES CORPORATION AS BORROWER AND COMPASS BANK, AS AGENT AND A LENDER BANK OF OKLAHOMA, NATIONAL ASSOCIATION, AS A LENDER AND THE OTHER LENDERS SIGNATORY HERETO MARCH 27, 1998 ------------------------------------ REDUCING REVOLVING LINE OF CREDIT OF UP TO $100,000,000 - ------------------------------------------------------------------------------- TABLE OF CONTENTS
Page ARTICLE I DEFINITIONS AND INTERPRETATION 1.1 Terms Defined Above 1 1.2 Additional Defined Terms 1 1.3 Undefined Financial Accounting Terms 15 1.4 References 15 1.5 Articles and Sections 15 1.6 Number and Gender 15 1.7 Incorporation of Schedules and Exhibits 15 ARTICLE II TERMS OF FACILITY 2.1 Revolving Line of Credit 16 2.2 Letter of Credit Facility 17 2.3 Use of Loan Proceeds and Letters of Credit. 18 2.4 Interest 19 2.5 Repayment of Loans and Interest 19 2.6 Outstanding Amounts 19 2.7 Time, Place, and Method of Payments 20 2.8 Pro Rata Treatment; Adjustments 20 2.9 Borrowing Base Determinations 21 2.10 Mandatory Prepayments 22 2.11 Voluntary Prepayments and Conversions of Loans 22 2.12 Commitment Fee 22 2.13 Facility Fee 23 2.14 Engineering Fee 23 2.15 Letter of Credit Fee 23 2.16 Agency Fee 24 2.17 Loans to Satisfy Obligations of Borrower 24 2.18 Security Interest in Accounts; Right of Offset 24 2.19 General Provisions Relating to Interest 24 2.20 Yield Protection 25 2.21 Limitation on Types of Loans 27 2.22 Illegality 27 2.23 Regulatory Change 28 2.24 Limitations on Interest Periods 28 2.25 Letters in Lieu of Transfer Orders 28 2.26 Power of Attorney 28 ARTICLE III CONDITIONS -i- 3.1 Receipt of Loan Documents and Other Items 29 3.2 Each Loan 32 3.3 Each Letter of Credit 33 ARTICLE IV REPRESENTATIONS AND WARRANTIES 4.1 Due Authorization 33 4.2 Corporate Existence 34 4.3 Valid and Binding Obligations 34 4.4 Security Instruments 34 4.5 Title to Assets 34 4.6 Scope and Accuracy of Financial Statements 34 4.7 No Material Misstatements 34 4.8 Liabilities, Litigation, and Restrictions 34 4.9 Compliance with Laws 35 4.10 ERISA 35 4.11 Environmental Laws 35 4.12 Compliance with Federal Reserve Regulations 35 4.13 Investment Company Act Compliance 35 4.14 Public Utility Holding Company Act Compliance 36 4.15 Proper Filing of Tax Returns; Payment of Taxes Due 36 4.16 Refunds 36 4.17 Gas Contracts 36 4.18 Intellectual Property 36 4.19 Casualties or Taking of Property 36 4.20 Locations of Borrower 37 4.21 Subsidiaries 37 ARTICLE V AFFIRMATIVE COVENANTS 5.1 Maintenance and Access to Records 37 5.2 Quarterly Financial Statements; Compliance Certificates 37 5.3 Annual Financial Statements 38 5.4 Oil and Gas Reserve Reports 38 5.5 Title Opinions; Title Defects 38 5.6 Notices of Certain Events 39 5.7 Letters in Lieu of Transfer Orders; Division Orders 40 5.8 Additional Information 40 5.9 Compliance with Laws 40 5.10 Payment of Assessments and Charges 40 5.11 Maintenance of Corporate Existence and Good Standing 40 5.12 Payment of Notes; Performance of Obligations 40 5.13 Further Assurances 41 5.14 Initial Fees and Expenses of Counsel to Agent 41 5.15 Subsequent Fees and Expenses of Agent and Lenders 41 -ii- 5.16 Operation of Oil and Gas Properties 41 5.17 Maintenance and Inspection of Properties 42 5.18 Maintenance of Insurance 42 5.19 INDEMNIFICATION 42 5.20 Operating Accounts 43 ARTICLE VI NEGATIVE COVENANTS 6.1 Indebtedness 44 6.2 Contingent Obligations 44 6.3 Liens 44 6.4 Sales of Assets 44 6.5 Leasebacks 45 6.6 Loans or Advances 45 6.7 Investments 45 6.8 Dividends and Distributions 46 6.9 Changes in Corporate Structure 46 6.10 Transactions with Affiliates 46 6.11 Lines of Business 46 6.12 Plan Obligations 46 6.13 New Subsidiaries 46 6.14 Cash Flow Coverage 46 6.15 Current Ratio 46 6.16 Change of Fiscal Year 46 ARTICLE VII EVENTS OF DEFAULT 7.1 Enumeration of Events of Default 46 7.2 Remedies 48 ARTICLE VIII THE AGENT 8.1 Appointment 49 8.2 Waivers, Amendments 49 8.3 Delegation of Duties 50 8.4 Exculpatory Provisions 50 8.5 Reliance by Agent 50 8.6 Notice of Default 51 8.7 Non-Reliance on Agent and Other Lenders 51 8.8 Indemnification 52 8.9 Restitution 52 8.10 Agent in Its Individual Capacity 53 8.11 Successor Agent 53 8.12 Applicable Parties 53 ARTICLE IX MISCELLANEOUS -iii- 9.1 Assignments; Participations 54 9.2 Survival of Representations, Warranties, and Covenants 55 9.3 Notices and Other Communications 55 9.4 Parties in Interest 56 9.5 Rights of Third Parties 56 9.6 Renewals; Extensions 57 9.7 No Waiver; Rights Cumulative 57 9.8 Survival Upon Unenforceability 57 9.9 Amendments; Waivers 57 9.10 Controlling Agreement 57 9.11 Disposition of Collateral 57 9.12 GOVERNING LAW 58 9.13 JURISDICTION AND VENUE 58 9.14 ENTIRE AGREEMENT 58 9.15 Counterparts 58 LIST OF SCHEDULES Schedule 4.8 - Liabilities and Litigation Schedule 4.12 - Environmental Matters Schedule 4.16 - Refunds Schedule 4.17 - Gas Contracts Schedule 4.19 - Casualties Schedule 4.21 - Subsidiaries LIST OF EXHIBITS Exhibit I - Form of Notes Exhibit II - Form of Borrowing Request Exhibit III - Form of Compliance Certificate Exhibit IV - Form of Borrowing Base Utilization Certificate Exhibit V - Form of Opinion of Counsel Exhibit VI - Form of Lender Assignment Agreement
-iv- CREDIT AGREEMENT This CREDIT AGREEMENT is made and entered into this 27th day of March, 1998, by and between MIDDLE BAY OIL COMPANY, INC., an Alabama corporation ("MIDDLE BAY"), and ENEX RESOURCES CORPORATION, a Delaware corporation ("ENEX") (collectively, the "BORROWER", but with such entities constituting the Borrower being jointly and severally liable for the Obligations and each reference herein to the Borrower being applicable to each of such entities) and COMPASS BANK, a Texas state chartered banking institution ("COMPASS"), BANK OF OKLAHOMA, NATIONAL ASSOCIATION, a national banking association ("BOK") and each other lender that becomes a signatory hereto as provided in Section 9.1 (Compass and each such other lender, together with its successors and assigns, individually a "Lender" and collectively, the "Lenders"), and Compass, as agent for the Lenders pursuant to the terms hereof (in such capacity, together with its successors in such capacity pursuant to the terms hereof, (the "AGENT"). W I T N E S S E T H: In consideration of the mutual covenants and agreements herein contained, the Lender or Lenders hereby agree as follows: ARTICLE I DEFINITIONS AND INTERPRETATION 1.1 TERMS DEFINED ABOVE. As used in this Credit Agreement, each of the terms "AGENT", "AGREEMENT", "BOK", "BORROWER", "COMPASS", "LENDER" and "LENDERS" shall have the meaning assigned to such term hereinabove. 1.2 ADDITIONAL DEFINED TERMS. As used in this Agreement, each of the following terms shall have the meaning assigned thereto in this Section, unless the context otherwise requires: "ADDITIONAL COSTS" shall mean reasonable costs which the Agent or any Lender determines are attributable to its obligation to make or its making or maintaining any LIBO Rate Loan or issuing or participating in Letters of Credit, or any reduction in any amount receivable by the Agent or any Lender in respect of any such obligation or any LIBO Rate Loan or Letter of Credit, resulting from any Regulatory Change which (a) changes the basis of taxation of any amounts payable to the Agent or such Lender under this Agreement or any Note in respect of any LIBO Rate Loan or Letter of Credit (other than taxes imposed on the overall net income of the Agent or such Lender or its Applicable Lending Office for any such LIBO Rate Loan by the jurisdiction in which the Agent or such Lender has its principal office or Applicable Lending Office), (b) imposes or modifies any reserve, special deposit, minimum capital, capital ratio, or similar requirements (other than the Reserve Requirement utilized in the determination of the Adjusted LIBO Rate for such Loan) relating to any extensions of credit or other assets of, or any deposits with or other liabilities of, the Agent or such Lender (including LIBO Rate Loans and Dollar deposits in the London interbank market in connection with LIBO Rate Loans), or the Commitment of the Agent or such Lender, or the London interbank market, or (c) imposes any other condition affecting this Agreement or any Note or any of such extensions of credit, liabilities, or Commitments. "ADJUSTED LIBO RATE" shall mean, for any LIBO Rate Loan, an interest rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) determined by the Agent to be equal to the sum of the LIBO Rate for such Loan plus the Applicable Margin, but in no event exceeding the Highest Lawful Rate. "AFFILIATE" shall mean any Person directly or indirectly controlling, or under common control with, the Borrower and includes any Subsidiary of the Borrower and any "affiliate" of the Borrower within the meaning of Reg. Section 240.12b-2 of the Securities Exchange Act of 1934, as amended, with "control," as used in this definition, meaning possession, directly or indirectly, of the power to direct or cause the direction of management, policies or action through ownership of voting securities, contract, voting trust, or membership in management or in the group appointing or electing management or otherwise through formal or informal arrangements or business relationships. "AGENCY FEE LETTER" shall mean the letter agreement dated March 27, 1998, between Compass and the Borrower concerning certain fees in connection with the transactions contemplated hereby, and any agreements or instruments executed in connection therewith, as amended, restated, or supplemented from time to time. "AGREEMENT" shall mean this Credit Agreement, as it may be amended, supplemented, restated or otherwise modified from time to time. "APPLICABLE LENDING OFFICE" shall mean, for each Lender and type of Loan, the lending office of such Lender (or an affiliate of such Lender) designated for such type of Loan on the signature pages hereof or such other office of such Lender (or an affiliate of such Lender) as such Lender may from time to time specify to the Agent and the Borrower as the office by which Loans of such type are to be made and maintained. 2 "APPLICABLE MARGIN" shall mean as to each LIBO Rate Loan, the following:
Borrowing Base LIBO Rate Loan Utilization Applicable Margin ---------------------------------------------------------------- equal to or greater than 75% two percent (2%) of Borrowing Base less than 75% but greater one and three-fourths than 50% of Borrowing percent (1-3/4%) Base less than or equal to one and one-half 50% of Borrowing Base percent (1-1/2%),
with the Borrowing Base Utilization and the corresponding LIBO Rate being set at the close of each calendar quarter for the next calendar quarter. The Borrower shall furnish to the Agent, within five (5) days of the end of each calendar quarter, except for the quarter ending March 31, 1998, a Borrowing Base Utilization Certificate, substantially in the form attached as Exhibit IV to this Agreement, which shall stipulate the Borrowing Base Utilization level at the end of such quarter. "AVAILABLE COMMITMENT" shall mean, at any time, an amount equal to the remainder, if any, of (a) the Borrowing Base in effect at such time MINUS (b) the sum of the Loan Balance at such time and the L/C Exposure at such time. "BORROWING BASE" shall mean, at any time, the amount determined by the Lenders in accordance with Section 2.9 and then in effect. "BORROWING BASE UTILIZATION" shall mean, at any time, the Loan Balance, plus any L/C Exposure hereunder, expressed as a percentage of the Borrowing Base. "BORROWING REQUEST" shall mean each written request, in substantially the form attached hereto as Exhibit II, by the Borrower to the Agent for a borrowing or conversion pursuant to Sections 2.1 or 2.11, each of which shall: (a) be signed by a Responsible Officer of the Borrower; (b) specify the amount and type of Loan requested, and, as applicable, the Loan to be converted and the date of the borrowing or conversion (which shall be a Business Day); 3 (c) when requesting a Floating Rate Loan, be delivered to the Agent no later than 10:00 a.m., Central Standard or Daylight Savings Time, as the case may be, on the Business Day of the requested borrowing or conversion, and (d) when requesting a LIBO Rate Loan, be delivered to the Agent no later than 10:00 a.m., Central Standard or Daylight Savings Time, as the case may be, two Business Days preceding the requested borrowing or conversion and designate the Interest Period requested with respect to such Loan. "BUSINESS DAY" shall mean (a) for all purposes other than as covered by clause (b) of this definition, a day other than a Saturday, Sunday, legal holiday for commercial banks under the laws of the State of Texas, or any other day when banking is suspended in the State of Texas, and (b) with respect to all requests, notices, and determinations in connection with, and payments of principal and interest on, LIBO Rate Loans, a day which is a Business Day described in clause (a) of this definition and which is a day for trading by and between banks for Dollar deposits in the London interbank market. "CASH FLOW" shall mean, for any relevant accounting period, Net Income for such period plus, without duplication and to the extent deducted from revenues in determining Net Income for the relevant period, depreciation, amortization, depletion, other non-cash expenses, exploration expenses, dry-hole expenses, and geological and geophysical costs, less, without duplication and to the extent added to revenues in determining Net Income for the relevant period, all non-cash revenue and non-recurring gains of the Borrower for the relevant period. "CLOSING DATE" shall mean the date of this Agreement. "CODE" shall mean the United States Internal Revenue Code of 1986, as amended from time to time. "COLLATERAL" shall mean the Mortgaged Properties and any other Property now or at any time used or intended as security for the payment or performance of all or any portion of the Obligations of the Borrower or any Subsidiary or other Affiliate of the Borrower owing to the Agent or any Lender or any branch, Subsidiary or other Affiliate of the Agent or any Lender which is subject to a Security Instrument. "COMMITMENTS" shall mean the several obligations of the Lenders, subject to applicable provisions of this Agreement, to make Loans to or for the benefit of the Borrower pursuant to Section 2.1 or participate in the issuance of Letters of Credit pursuant to Section 2.2. 4 "COMMITMENT AMOUNT" shall mean $18,850,000 as to Compass and $10,150,000 as to BOK as of the Closing Date. "COMMITMENT FEE" shall mean each fee payable to the Agent for the benefit of the Lenders by the Borrower pursuant to Section 2.12. "COMMITMENT PERIOD" shall mean the period from and including the Closing Date to but not including the Commitment Termination Date. "COMMITMENT TERMINATION DATE" shall mean April 1, 2001. "COMMONLY CONTROLLED ENTITY" shall mean any Person which is under common control with the Borrower within the meaning of Section 4001 of ERISA. "COMPLIANCE CERTIFICATE" shall mean each certificate, substantially in the form attached hereto as Exhibit III, executed by a Responsible Officer of the Borrower and furnished to the Agent from time to time in accordance with Section 5.2. "CONTINGENT OBLIGATION" shall mean, as to any Person, any obligation of such Person guaranteeing or in effect guaranteeing any Indebtedness, leases, dividends, or other obligations of any other Person (for purposes of this definition, a "PRIMARY OBLIGATION") in any manner, whether directly or indirectly, including, without limitation, any obligation of such Person, regardless of whether such obligation is contingent, (a) to purchase any primary obligation or any Property constituting direct or indirect security therefor, (b) to advance or supply funds (i) for the purchase or payment of any primary obligation, or (ii) to maintain working or equity capital of any other Person in respect of any primary obligation, or otherwise to maintain the net worth or solvency of any other Person, (c) to purchase Property, securities or services primarily for the purpose of assuring the owner of any primary obligation of the ability of the Person primarily liable for such primary obligation to make payment thereof, or (d) otherwise to assure or hold harmless the owner of any such primary obligation against loss in respect thereof, with the amount of any Contingent Obligation being deemed to be equal to the stated or determinable amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by such Person in good faith. "CURRENT RATIO" means the ratio of (a) consolidated current assets of the Borrower and it Subsidiaries to (b) consolidated current liabilities (excluding the current portion of Loans hereunder). "DEBT SERVICE" shall mean, for each relevant accounting period, an amount equal to (i) actual principal amounts paid on debt other than the Obligations during 5 each quarter, plus (ii) required principal payments under the Obligations during such quarter. "DEFAULT" shall mean any event or occurrence which with the lapse of time or the giving of notice or both would become an Event of Default. "DEFAULT RATE" shall mean a per annum interest rate equal to the Index Rate plus five percent (5%), but in no event exceeding the Highest Lawful Rate. "DOLLARS" and "$" shall mean dollars in lawful currency of the United States of America. "ENVIRONMENTAL COMPLAINT" shall mean any written complaint, order, directive, claim, citation, notice of environmental report or investigation, or other notice by any Governmental Authority with respect to (a) air emissions, (b) spills, releases, or discharges to soils, any improvements located thereon, surface water, groundwater, or the sewer, septic, waste treatment, storage, or disposal systems servicing any Property of the Borrower, (c) solid or liquid waste disposal, (d) the use, generation, storage, transportation, or disposal of any Hazardous Substance, or (e) other environmental, health, or safety matters affecting any Property of the Borrower or the business conducted thereon. "ENVIRONMENTAL LAWS" shall mean (a) the following federal laws as they may be cited, referenced, and amended from time to time: the Clean Air Act, the Clean Water Act, the Safe Drinking Water Act, the Comprehensive Environmental Response, Compensation and Liability Act, the Endangered Species Act, the Resource Conservation and Recovery Act, the Occupational Safety and Health Act, the Hazardous Materials Transportation Act, the Superfund Amendments and Reauthorization Act, and the Toxic Substances Control Act; (b) any and all equivalent environmental statutes of any state in which Property of the Borrower is situated, as they may be cited, referenced and amended from time to time; (c) any rules or regulations promulgated under or adopted pursuant to the above federal and state laws; and (d) any other equivalent foreign, federal, state, or local statute or any requirement, rule, regulation, code, ordinance, or order adopted pursuant thereto, including, without limitation, those relating to the generation, transportation, treatment, storage, recycling, disposal, handling, or release of Hazardous Substances. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations thereunder and interpretations thereof. "EXISTING LIENS" shall mean the liens held by BOK. 6 "EVENT OF DEFAULT" shall mean any of the events specified in Section 7.1. "FACILITY FEE" shall mean the fee payable to the Agent for the benefit of the Lenders by the Borrower pursuant to Section 2.13. "FINAL MATURITY" shall mean April 1, 2001. "FINANCIAL STATEMENTS" shall mean statements of the financial condition of the Borrower and its consolidated Subsidiaries on a consolidated and consolidating basis as at the point in time and for the period indicated and consisting of at least a balance sheet and related statements of operations, common stock and other stockholders' equity, and cash flows, and when such statements prepared on a consolidated basis are required by applicable provisions of this Agreement to be audited, accompanied by the unqualified certification of a nationally-recognized firm of independent certified public accountants or other independent certified public accountants acceptable to the Agent and footnotes to any of the foregoing, all of which shall be prepared in accordance with GAAP consistently applied and in comparative form with respect to the corresponding period of the preceding fiscal period. "FIXED RATE LOAN" shall mean any LIBO Rate Loan. "FLOATING RATE" shall mean an interest rate per annum equal to the Index Rate from time to time in effect, but in no event exceeding the Highest Lawful Rate. "FLOATING RATE LOAN" shall mean any Loan and any portion of the Loan Balance which the Borrower has requested, in the initial Borrowing Request for such Loan or a subsequent Borrowing Request for such portion of the Loan Balance, bear interest at the Floating Rate, or which pursuant to the terms hereof is otherwise required to bear interest at the Floating Rate. "GAAP" shall mean generally accepted accounting principles established by the Financial Accounting Standards Board or the American Institute of Certified Public Accountants and in effect in the United States from time to time. "GOVERNMENTAL AUTHORITY" shall mean any nation, country, commonwealth, territory, government, state, county, parish, municipality, or other political subdivision and any entity exercising executive, legislative, judicial, regulatory, or administrative functions of or pertaining to government. "HAZARDOUS SUBSTANCES" shall mean flammables, explosives, radioactive materials, hazardous wastes, asbestos, or any material containing asbestos, polychlorinated biphenyls (PCBs), toxic substances or related materials, petroleum, petroleum products, associated oil or natural gas exploration, production, and 7 development wastes, or any substances defined as "hazardous substances," "hazardous materials," "hazardous wastes," or "toxic substances" under the Comprehensive Environmental Response, Compensation and Liability Act, as amended, the Superfund Amendments and Reauthorization Act, as amended, the Hazardous Materials Transportation Act, as amended, the Resource Conservation and Recovery Act, as amended, the Toxic Substances Control Act, as amended, or any other law or regulation now or hereafter enacted or promulgated by any Governmental Authority. "HIGHEST LAWFUL RATE" shall mean the maximum non-usurious interest rate, if any (or, if the context so requires, an amount calculated at such rate), that at any time or from time to time may be contracted for, taken, reserved, charged, or received under applicable laws of the State of Texas or the United States of America, whichever authorizes the greater rate, as such laws are presently in effect or, to the extent allowed by applicable law, as such laws may hereafter be in effect and which allow a higher maximum non-usurious interest rate than such laws now allow. "INDEBTEDNESS" shall mean, as to any Person, without duplication, (a) all liabilities (excluding reserves for deferred income taxes, deferred compensation liabilities, and other deferred liabilities and credits) which in accordance with GAAP would be included in determining total liabilities as shown on the liability side of a balance sheet, (b) all obligations of such Person evidenced by bonds, debentures, promissory notes, or similar evidences of indebtedness, (c) all other indebtedness of such Person for borrowed money, (d) all obligations issued, undertaken or assumed as the deferred purchase price of property or services (other than trade payables, which include amounts owed to drilling contractors, entered into in the ordinary course of business on ordinary terms); (e) all indebtedness created or arising under any conditional sale or other title retention agreement, or incurred as financing, in either case with respect to property acquired by the Person (even though the rights and remedies of the seller or bank under such agreement in the event of default are limited to repossession or sale of such property) including, without limitation, production payments, net profit interests and other hydrocarbon interests subject to repayment out of future oil and gas production; (f) all obligations with respect to capital leases; (g) all net obligations with respect to derivative contracts; and (h) all obligations, including Contingent Obligations of others, to the extent any such obligation is secured by a Lien on the assets of such Person (whether or not such Person has assumed or become liable for the obligation secured by such Lien). "INDEX RATE" shall mean the prime rate established in THE WALL STREET JOURNAL'S "MONEY RATES" or similar table. If multiple prime rates are quoted in the table, then the highest prime rate will be the Index Rate. In the event that the prime rate is no longer published by THE WALL STREET JOURNAL in the "MONEY RATES" or similar table, then Agent may select an alternative published index based upon 8 comparable information as a substitute Index Rate. Upon the selection of a substitute Index Rate, the applicable interest rate shall thereafter vary in relation to the substitute index. Such substitute index shall be the same index that is generally used as a substitute by Agent on all Index Rate loans. "INSOLVENCY PROCEEDING" shall mean application (whether voluntary or instituted by another Person) for or the consent to the appointment of a receiver, trustee, conservator, custodian, or liquidator of any Person or of all or a substantial part of the Property of such Person, or the filing of a petition (whether voluntary or instituted by another Person) commencing a case under Title 11 of the United States Code, seeking liquidation, reorganization, or rearrangement or taking advantage of any bankruptcy, insolvency, debtor's relief, or other similar law of the United States, the State of Texas, or any other jurisdiction. "INTELLECTUAL PROPERTY" shall mean patents, patent applications, trademarks, tradenames, copyrights, technology, know-how, and processes. "INTEREST PERIOD" shall mean, subject to the limitations set forth in Section 2.24, and with respect to any LIBO Rate Loan, a period commencing on the date such Loan is made or converted from a Loan of another type pursuant to this Agreement or the last day of the next preceding Interest Period with respect to such Loan and ending on the numerically corresponding day in the calendar month that is one, two, three, or, subject to availability, six months thereafter, as the Borrower may request in the Borrowing Request for such Loan. "INVESTMENT" in any Person shall mean any stock, bond, note, or other evidence of Indebtedness, or any other security (other than current trade and customer accounts) of, investment or partnership interest in or loan to, such Person. "L/C EXPOSURE" shall mean, at any time, the aggregate maximum amount available to be drawn under outstanding Letters of Credit at such time. "LETTER OF CREDIT" shall mean any standby letter of credit issued by the Agent for the account of the Borrower pursuant to Section 2.2. "LETTER OF CREDIT APPLICATION" shall mean the standard letter of credit application employed by the Agent as the issuer of the Letters of Credit, from time to time, in connection with Letters of Credit. "LETTER OF CREDIT FEE" shall mean each fee payable by the Borrower to the Agent for the account of the Lenders pursuant to Section 2.15 upon or in connection with the issuance or renewal of each Letter of Credit. 9 "LETTER OF CREDIT PAYMENT" shall mean any payment made by the Agent on behalf of the Lenders under a Letter of Credit, to the extent that such payment has not been repaid by the Borrower. "LIBO RATE" shall mean, with respect to any Interest Period for any LIBO Rate Loan, the lesser of (a) the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) equal to the average of the offered quotations appearing on Telerate Page 3750 (or if such Telerate Page shall not be available, any successor or similar service selected by the Agent and the Borrower) as of approximately 11:00 a.m., Central Standard or Daylight Savings Time, as the case may be, on the day two Business Days prior to the first day of such Interest Period for Dollar deposits in an amount comparable to the principal amount of such LIBO Rate Loan and having a term comparable to the Interest Period for such LIBO Rate Loan, or (b) the Highest Lawful Rate. If neither such Telerate Page 3750 nor any successor or similar service is available, the term "LIBO Rate" shall mean, with respect to any Interest Period for any LIBO Rate Loan, the lesser of (a) the rate per annum (rounded upwards if necessary, to the nearest 1/100 of 1%) quoted by the Agent at approximately 11:00 a.m., London time (or as soon thereafter as practicable) two Business Days prior to the first day of the Interest Period for such LIBO Rate Loan for the offering by the Agent to leading banks in the London interbank market of Dollar deposits in an amount comparable to the principal amount of such LIBO Rate Loan and having a term comparable to the Interest Period for such LIBO Rate Loan, or (b) the Highest Lawful Rate. "LIBO RATE LOAN" shall mean any Loan and any portion of the Loan Balance which the Borrower has requested, in the initial Borrowing Request for such Loan or a subsequent Borrowing Request for such portion of the Loan Balance, bear interest at the Adjusted LIBO Rate and which is permitted by the terms hereof to bear interest at the Adjusted LIBO Rate. "LIEN" shall mean any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of such Property, whether such interest is based on common law, statute, or contract, and including, but not limited to, the lien or security interest arising from a mortgage, ship mortgage, encumbrance, pledge, security agreement, conditional sale or trust receipt, or a lease, consignment, or bailment for security purposes (other than true leases or true consignments), liens of mechanics, materialmen, and artisans, maritime liens and reservations, exceptions, encroachments, easements, rights of way, covenants, conditions, restrictions, leases, and other title exceptions and encumbrances affecting Property which secure an obligation owed to, or a claim by, a Person other than the owner of such Property (for the purpose of this Agreement, the Borrower shall be deemed to be the owner of any Property which it has acquired or holds subject to a conditional sale agreement, financing lease, or other arrangement pursuant to which title to the Property has been 10 retained by or vested in some other Person for security purposes), and the filing or recording of any financing statement or other security instrument in any public office. "LIMITATION PERIOD" shall mean any period while any amount remains owing on the Notes and interest on such amount, calculated at the applicable interest rate, plus any fees or other sums payable under any Loan Document and deemed to be interest under applicable law, would exceed the amount of interest which would accrue at the Highest Lawful Rate. "LOAN" shall mean any loan made by any Lender to or for the benefit of the Borrower pursuant to this Agreement and any payment made by the Agent or any Lender under a Letter of Credit. "LOAN BALANCE" shall mean, at any time, the outstanding principal balance of the Notes at such time. "LOAN DOCUMENTS" shall mean the Assignment, this Agreement, the Notes, any Letter of Credit Applications, any Letters of Credit, the Security Instruments, and all other documents and instruments now or hereafter delivered pursuant to the terms of or in connection with the Assignment, this Agreement, the Notes, any Letter of Credit Applications, any Letters of Credit, or the Security Instruments, and all renewals and extensions of, amendments and supplements to, and restatements of, any or all of the foregoing from time to time in effect. "MATERIAL ADVERSE EFFECT" shall mean (a) any material adverse effect on the business, operations, properties, condition (financial or otherwise), or prospects of the Borrower taken as a whole, or (b) any adverse effect upon the Collateral taken as a whole. "MAXIMUM COMMITMENT AMOUNT" shall mean the sum of the Commitment Amounts of all Lenders. "MORTGAGED PROPERTIES" shall mean all Oil and Gas Properties of the Borrower subject to a perfected first-priority Lien in favor of the Agent for the benefit of the Lenders, subject only to Permitted Liens, as security for the Obligations owing to the Agent or any Lender. "NET INCOME" shall mean, for any relevant accounting period, the net income of the Borrower and its consolidated Subsidiaries on a consolidated basis for such period, determined in accordance with GAAP. 11 "NOTES" shall mean, collectively, each of the promissory notes of the Borrower, in the form attached hereto as Exhibit I, together with all renewals, extensions for any period, increases, and rearrangements thereof. "OBLIGATIONS" shall mean, without duplication, (a) all Indebtedness evidenced by the Notes, (b) the undrawn, unexpired amount of all outstanding Letters of Credit, (c) the obligation of the Borrower for the payment of Commitment Fees, Facility Fees and Letter of Credit Fees, and (e) all other obligations and liabilities of the Borrower to the Agent and/or the Lenders, now existing or hereafter incurred, under, arising out of or in connection with any Loan Document, and to the extent that any of the foregoing includes or refers to the payment of amounts deemed or constituting interest, only so much thereof as shall have accrued, been earned and which remains unpaid at each relevant time of determination. "OIL AND GAS PROPERTIES" shall mean fee, leasehold, or other interests in or under mineral estates or oil, gas, and other liquid or gaseous hydrocarbon leases with respect to Properties situated in the United States or offshore from any State of the United States, including, without limitation, overriding royalty and royalty interests, leasehold estate interests, net profits interests, production payment interests, and mineral fee interests, together with contracts executed in connection therewith and all tenements, hereditaments, appurtenances and Properties appertaining, belonging, affixed, or incidental thereto. "PERCENTAGE SHARE" shall mean, as to each Lender, the percentage such Lender's Commitment Amount constitutes of the Maximum Commitment Amount. "PERMITTED INDEBTEDNESS" shall mean (a) the Obligations, (b) Indebtedness arising from endorsing negotiable instruments for deposit or collection in the ordinary course of business, (c) current liabilities incurred in the ordinary course of business, (d) other Indebtedness which does not exceed an aggregate principal amount of $250,000 during any fiscal year, and (e) Indebtedness existing by virtue of the requirements of GAAP or any changes in the requirements of GAAP. "PERMITTED LIENS" shall mean (a) Liens for taxes, assessments, or other governmental charges or levies not yet due or which (if foreclosure, distraint, sale, or other similar proceedings shall not have been initiated) are being contested in good faith by appropriate proceedings, and such reserve as may be required by GAAP shall have been made therefor, (b) Liens in connection with workers' compensation, unemployment insurance or other social security (other than Liens created by Section 4068 of ERISA), old-age pension, or public liability obligations which are not yet due or which are being contested in good faith by appropriate proceedings, if such reserve as may be required by GAAP shall have been made therefor, (c) Liens in favor of vendors, carriers, warehousemen, repairmen, mechanics, workmen, 12 materialmen, construction, or similar Liens arising by operation of law in the ordinary course of business in respect of obligations which are not yet due or which are being contested in good faith by appropriate proceedings, if such reserve as may be required by GAAP shall have been made therefor, (d) Liens in favor of operators and non-operators under joint operating agreements or similar contractual arrangements arising in the ordinary course of the business of the Borrower to secure amounts owing, which amounts are not yet due or are being contested in good faith by appropriate proceedings, if such reserve as may be required by GAAP shall have been made therefor, (e) Liens under production sales agreements, division orders, operating agreements, and other agreements customary in the oil and gas business for processing, producing, and selling hydrocarbons securing obligations not constituting Indebtedness and provided that such Liens do not secure obligations to deliver hydrocarbons at some future date without receiving full payment therefor within 90 days of delivery, (f) easements, rights of way, restrictions, and other similar encumbrances, and minor defects in the chain of title which are customarily accepted in the oil and gas financing industry, none of which interfere with the ordinary conduct of the business of the Borrower or materially detract from the value or use of the Property to which they apply, and (g) Liens in favor of the Agent for the benefit of the Lenders and other Liens expressly permitted under the Security Instruments. "PERSON" shall mean an individual, corporation, limited liability company, partnership, trust, unincorporated organization, government, any agency or political subdivision of any government, or any other form of entity. "PLAN" shall mean, at any time, any employee benefit plan which is covered by ERISA and in respect of which the Borrower or any Commonly Controlled Entity is (or, if such plan were terminated at such time, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "PRINCIPAL OFFICE" shall mean the principal office of the Agent in Houston, Texas, presently located at 24 Greenway Plaza, 14th Floor, Houston, Texas 77046. "PROPERTY" shall mean any interest in any kind of property or asset, whether real, personal or mixed, tangible or intangible. "REGULATION D" shall mean Regulation D of the Board of Governors of the Federal Reserve System, as the same may be amended or supplemented from time to time. "REGULATORY CHANGE" shall mean the passage, adoption, institution, or amendment of any federal, state, local, or foreign Requirement of Law (including, without limitation, Regulation D), or any interpretation, directive, or request of any 13 Governmental Authority or monetary authority charged with the enforcement, interpretation, or administration thereof, occurring after the Closing Date and applying to a class of banks including any Lender or its Applicable Lending Office. "RELEASE OF HAZARDOUS SUBSTANCES" shall mean any emission, spill, release, disposal, or discharge, except in accordance with the Requirement of Law, a valid permit, license, certificate, or approval of the relevant Governmental Authority, of any Hazardous Substance into or upon (a) the air, (b) soils or any improvements located thereon, (c) surface water or groundwater, or (d) the sewer or septic system, or the waste treatment, storage, or disposal system servicing any Property of the Borrower. "REQUIRED LENDERS" shall mean, Lenders (including the Agent) holding at least 75% of the then Loan Balance, or, if there is no Loan Balance, Lenders (including the Agent) having at least 75% of the aggregate amount of the Commitments. "REQUIREMENT OF LAW" shall mean, as to any Person, the certificate or articles of incorporation and by-laws or other organizational or governing documents of such Person, and any applicable law, treaty, ordinance, order, judgment, rule, decree, regulation, or determination of an arbitrator, court, or other Governmental Authority, including, without limitation, rules, regulations, orders, and requirements for permits, licenses, registrations, approvals, or authorizations, in each case as such now exist or may be hereafter amended and are applicable to or binding upon such Person or any of its Property or to which such Person or any of its Property is subject. "RESERVE REPORT" shall mean each report delivered to the Agent and each Lender pursuant to Section 5.4. "RESPONSIBLE OFFICER" shall mean, as to any Person, its President, Chief Executive Officer, Chief Financial Officer or any Vice President. "SCHEDULED REDUCTION AMOUNT" shall mean the amount by which the Borrowing Base shall be reduced each calendar month as determined by the Lenders under Section 2.9(b) from time to time. "SECURITY INSTRUMENTS" shall mean the security instruments executed and delivered in satisfaction of the condition set forth in Section 3.1(f), and all other documents and instruments at any time executed as security for all or any portion of the Obligations of the Borrower or any Subsidiary or other Affiliate of the Borrower owing to the Agent or any Lender or any branch, Subsidiary or other Affiliate of the Agent or any Lender, as such instruments may be amended, restated, or supplemented from time to time. 14 "SUBSIDIARY" shall mean, as to any Person, a corporation of which shares of stock having ordinary voting power (other than stock having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Person. "SUPERFUND SITE" shall mean those sites listed on the Environmental Protection Agency National Priority List and eligible for remedial action or any comparable state registries or list in any state of the United States. "UCC" shall mean the Uniform Commercial Code as from time to time in effect in the State of Texas. 1.3 UNDEFINED FINANCIAL ACCOUNTING TERMS. Undefined financial accounting terms used in this Agreement shall be defined according to GAAP at the time in effect. 1.4 REFERENCES. References in this Agreement to Schedule, Exhibit, Article, or Section numbers shall be to Schedules, Exhibits, Articles, or Sections of this Agreement, unless expressly stated to the contrary. References in this Agreement to "hereby," "herein," "hereinafter," "hereinabove," "hereinbelow," "hereof," "hereunder" and words of similar import shall be to this Agreement in its entirety and not only to the particular Schedule, Exhibit, Article, or Section in which such reference appears. 1.5 ARTICLES AND SECTIONS. This Agreement, for convenience only, has been divided into Articles and Sections; and it is understood that the rights and other legal relations of the parties hereto shall be determined from this instrument as an entirety and without regard to the aforesaid division into Articles and Sections and without regard to headings prefixed to such Articles or Sections. 1.6 NUMBER AND GENDER. Whenever the context requires, reference herein made to the single number shall be understood to include the plural; and likewise, the plural shall be understood to include the singular. Definitions of terms defined in the singular or plural shall be equally applicable to the plural or singular, as the case may be, unless otherwise indicated. Words denoting sex shall be construed to include the masculine, feminine and neuter, when such construction is appropriate; and specific enumeration shall not exclude the general but shall be construed as cumulative. 1.7 INCORPORATION OF SCHEDULES AND EXHIBITS. The Exhibits attached to this Agreement are incorporated herein and shall be considered a part of this Agreement for all purposes. 15 ARTICLE II TERMS OF FACILITY 2.1 REVOLVING LINE OF CREDIT. Upon the terms and conditions (including, without limitation, the right of the Lenders to decline to make any Loan so long as any Default or Event of Default exists) and relying on the representations and warranties contained in this Agreement, the Lenders severally agree, during the Commitment Period, to make Loans, in immediately available funds at the Applicable Lending Office or the Principal Office, to or for the benefit of the Borrower, from time to time on any Business Day designated by the Borrower following receipt by the Agent of a Borrowing Request; provided, however, no Loan at the time it is made shall exceed the then existing Available Commitment. (b) Subject to the terms of this Agreement, during the Commitment Period, the Borrower may borrow, repay, and reborrow and convert Loans of one type or with one Interest Period into Loans of another type or with a different Interest Period. Except for prepayments made pursuant to Section 2.10, each borrowing, conversion, and prepayment of principal of Loans shall be in an aggregate amount at least equal to $100,000. Each borrowing, prepayment, or conversion of or into a Loan of a different type or, in the case of a Fixed Rate Loan, having a different Interest Period, shall be deemed a separate borrowing, conversion, or prepayment for purposes of the foregoing, one for each type of Loan or Interest Period. Anything in this Agreement to the contrary notwithstanding, the aggregate principal amount of LIBO Rate Loans having the same Interest Period shall be at least equal to $1,000,000; and if any LIBO Rate Loan would otherwise be in a lesser aggregate principal amount for any period, such Loan shall be a Floating Rate Loan during such period. (c) The Loans shall be made and maintained at the Applicable Lending Office or the Principal Office and shall be evidenced by the Notes. (d) Not later than 3:00 p.m., Central Standard or Daylight Savings Time, as the case may be, on the date specified for each borrowing, each Lender shall make available an amount equal to its Percentage Share of the borrowing to be made on such date to the Agent, at an account designated by the Agent, in immediately available funds, for the account of the Borrower. The amount so received by the Agent shall, subject to the terms and conditions hereof, be made available to the Borrower in immediately available funds at the Principal Office. All Loans by each Lender shall be maintained at the Applicable Lending Office of such Lender and shall be evidenced by the Note of such Lender. (e) The failure of any Lender to make any Loan required to be made by it hereunder shall not relieve any other Lender of its obligation to make any Loan required to be made by it, and no Lender shall be responsible for the failure of any other Lender to make any Loan. 16 (f) The face amounts of the Notes have been established as an administrative convenience and do not commit any Lender to advance funds hereunder in excess of the then current Borrowing Base. 2.2 LETTER OF CREDIT FACILITY. Upon the terms and conditions and relying on the representations and warranties contained in this Agreement, the Agent, as issuing bank for the Lenders, agrees from the date of this Agreement until the date which is thirty days prior to the Commitment Termination Date, to issue on behalf of the Lenders in their respective Percentage Shares Letters of Credit for the account of the Borrower and to renew and extend such Letters of Credit. Letters of Credit shall be issued, renewed, or extended from time to time on any Business Day designated by the Borrower following the receipt in accordance with the terms hereof by the Agent of the written (or oral, confirmed promptly in writing) request by a Responsible Officer of the Borrower therefor and a Letter of Credit Application. Letters of Credit shall be issued in such amounts as the Borrower may request; provided, however, that (i) no Letter of Credit shall have an expiration date which is more than 365 days after the issuance thereof or subsequent to the Final Maturity, (ii) each automatically renewable Letter of Credit shall provide that it may be terminated by the Agent at its then current expiry date by not less than 30 days' written notice by the Agent to the beneficiary of such Letter of Credit, and (iii) the Agent shall not be obligated to issue any Letter of Credit if (A) the face amount thereof would exceed the Available Commitment, or (B) after giving effect to the issuance thereof, (I) the L/C Exposure, when added to the Loan Balance then outstanding, would exceed the lesser of the Maximum Commitment Amount or the Borrowing Base, or (II) the L/C Exposure would exceed $2,000,000. (b) Prior to any Letter of Credit Payment in respect of any Letter of Credit, each Lender shall be deemed to be a participant through the Agent with respect to the relevant Letter of Credit in the obligation of the Agent, as the issuer of such Letter of Credit, in an amount equal to the Percentage Share of such Lender of the maximum amount which is or at any time may become available to be drawn thereunder. Upon delivery by such Lender of funds requested pursuant to Section 2.2(c), such Lender shall be treated as having purchased a participating interest in an amount equal to such funds delivered by such Lender to the Agent in the obligation of the Borrower to reimburse the Agent, as the issuer of such Letter of Credit, for any amounts payable, paid, or incurred by the Agent, as the issuer of such Letter of Credit, with respect to such Letter of Credit. (c) Each Lender shall be unconditionally and irrevocably liable, without regard to the occurrence of any Default or Event of Default, to the extent of the Percentage Share of such Lender at the time of issuance of each Letter of Credit, to reimburse, on demand, the Agent, as the issuer of such Letter of Credit, for the amount of each Letter of Credit Payment under such Letter of Credit. Each Letter of Credit Payment shall be deemed to be a Floating Rate Loan by each Lender to the extent of funds delivered by such Lender to the Agent with respect to such Letter of Credit Payment and shall to such extent be deemed a Floating Rate Loan under and shall be evidenced by the Note of such Lender and shall be payable by the Borrower upon demand by the Agent. 17 (d) EACH LENDER AGREES TO SEVERALLY INDEMNIFY THE AGENT, AS THE ISSUER OF EACH LETTER OF CREDIT, AND THE OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT AND AFFILIATES OF THE AGENT (TO THE EXTENT NOT REIMBURSED BY THE BORROWER AND WITHOUT LIMITING THE OBLIGATION OF THE BORROWER TO DO SO), RATABLY ACCORDING TO THE PERCENTAGE SHARE OF SUCH LENDER AT THE TIME OF ISSUANCE OF SUCH LETTER OF CREDIT, FROM AND AGAINST ANY AND ALL LIABILITIES, CLAIMS, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES AND DISBURSEMENTS OF ANY KIND WHATSOEVER WHICH MAY AT ANY TIME (INCLUDING, WITHOUT LIMITATION, ANY TIME FOLLOWING THE PAYMENT AND PERFORMANCE OF ALL OBLIGATIONS AND THE TERMINATION OF THIS AGREEMENT) BE IMPOSED ON, INCURRED BY OR ASSERTED AGAINST THE AGENT AS THE ISSUER OF SUCH LETTER OF CREDIT OR ANY OF ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT OR AFFILIATES IN ANY WAY RELATING TO OR ARISING OUT OF THIS AGREEMENT OR SUCH LETTER OF CREDIT OR ANY ACTION TAKEN OR OMITTED BY THE AGENT AS THE ISSUER OF SUCH LETTER OF CREDIT OR ANY OF ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT OR AFFILIATES UNDER OR IN CONNECTION WITH ANY OF THE FOREGOING, INCLUDING, WITHOUT LIMITATION, ANY LIABILITIES, CLAIMS, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES AND DISBURSEMENTS IMPOSED, INCURRED OR ASSERTED AS A RESULT OF THE NEGLIGENCE, WHETHER SOLE OR CONCURRENT, OF THE AGENT AS THE ISSUER OF SUCH LETTER OF CREDIT OR ANY OF ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT OR AFFILIATES; PROVIDED THAT NO LENDER (OTHER THAN THE AGENT AS THE ISSUER OF A LETTER OF CREDIT) SHALL BE LIABLE FOR THE PAYMENT OF ANY PORTION OF SUCH LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS RESULTING FROM THE GROSS NEGLIGENCE WHETHER SOLE OR CONCURRENT OR WILLFUL MISCONDUCT OF THE AGENT AS THE ISSUER OF A LETTER OF CREDIT. THE AGREEMENTS IN THIS Section 2.2(D) SHALL SURVIVE THE PAYMENT AND PERFORMANCE OF ALL OBLIGATIONS AND THE TERMINATION OF THIS AGREEMENT. 2.3 USE OF LOAN PROCEEDS AND LETTERS OF CREDIT. (a) Proceeds of all Loans shall be used to refinance the existing debt with Bank of Oklahoma, for general corporate purposes of the Borrower, including, without limitation, costs of acquiring, exploring on and developing Oil and Gas Properties and general working capital needs; and (b) Letters of Credit shall be used solely for general corporate purposes of the Borrower; provided, however, no Letter of Credit may be used in lieu or in support of stay or appeal bonds. 18 2.4 INTEREST. Subject to the terms of this Agreement (including, without limitation, Section 2.19), interest on the Loans shall accrue and be payable at a rate per annum equal to the Floating Rate for each Floating Rate Loan and the Adjusted LIBO Rate for each LIBO Rate Loan. Interest on all Floating Rate Loans shall be computed on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed (including the first day but excluding the last day) during the period for which payable. Interest on all LIBO Rate Loans shall be computed on the basis of a year of 360 days, and actual days elapsed (including the first day but excluding the last day) during the period for which payable. Notwithstanding the foregoing, interest on past-due principal and, to the extent permitted by applicable law, past-due interest, shall accrue at the Default Rate, computed on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed (including the first day but excluding the last day) during the period for which payable, and shall be payable upon demand by the Lenders at any time as to all or any portion of such interest. In the event that the Borrower fails to select the duration of any Interest Period for any Fixed Rate Loan within the time period and otherwise as provided herein, such Loan (if outstanding as a Fixed Rate Loan) will be automatically converted into a Floating Rate Loan on the last day of the then current Interest Period for such Loan or (if outstanding as a Floating Rate Loan) will remain as, or (if not then outstanding) will be made as, a Floating Rate Loan. Interest provided for herein shall be calculated on unpaid sums actually advanced and outstanding pursuant to the terms of this Agreement and only for the period from the date or dates of such advances until repayment. 2.5 REPAYMENT OF LOANS AND INTEREST. Accrued and unpaid interest on each outstanding Floating Rate Loan shall be due and payable monthly commencing on the first day of May, 1998, and continuing on the first day of each calendar month thereafter while any Floating Rate Loan remains outstanding, the payment in each instance to be the amount of interest which has accrued and remains unpaid in respect of the relevant Loan. Accrued and unpaid interest on each outstanding Fixed Rate Loan shall be due and payable on the last day of the Interest Period for such Fixed Rate Loan and, in the case of any Interest Period in excess of three months, on the day of the third calendar month following the commencement of such Interest Period corresponding to the day of the calendar month on which such Interest Period commenced, the payment in each instance to be the amount of interest which has accrued and remains unpaid in respect of the relevant Loan. The Loan Balance, together with all accrued and unpaid interest thereon, shall be due and payable at Final Maturity. At the time of making each payment hereunder or under the Notes, the Borrower shall specify to the Agent the Loans or other amounts payable by the Borrower hereunder to which such payment is to be applied. In the event the Borrower fails to so specify, or if an Event of Default has occurred and is continuing, the Agent may apply such payment as it may elect in its sole discretion. 2.6 OUTSTANDING AMOUNTS. The Loan Balance reflected by the notations by the Lenders on their records shall be deemed rebuttably presumptive evidence of the Loan Balance. The liability for payment of principal and interest evidenced by the Notes shall be limited to principal amounts actually advanced and outstanding pursuant to this Agreement and interest on such amounts calculated in accordance with this Agreement. 19 2.7 TIME, PLACE, AND METHOD OF PAYMENTS. All payments required pursuant to this Agreement or the Notes shall be made in lawful money of the United States of America and in immediately available funds, shall be deemed received by the Lenders on the next Business Day following receipt if such receipt is after 2:00 p.m., Central Standard or Daylight Savings Time, as the case may be, on any Business Day, and shall be made to the Agent at the Principal Office. Except as provided to the contrary herein, if the due date of any payment hereunder or under the Notes would otherwise fall on a day which is not a Business Day, such date shall be extended to the next succeeding Business Day, and interest shall be payable for any principal so extended for the period of such extension. 2.8 PRO RATA TREATMENT; ADJUSTMENTS. Except to the extent otherwise expressly provided herein, (i) each borrowing made pursuant to this Agreement shall be from the Lenders pro rata in accordance with their Percentage Shares, (ii) each payment by the Borrower of Commitment Fees shall be made for the account of the Lenders pro rata in accordance with their respective Percentage Shares, (iii) Facility Fees and Letter of Credit Fees shall be made for the account of the Lenders in accordance with each Lender's Percentage Share of any increase in the Commitment Amount or any Letter of Credit issued, (iv) each payment of principal of Loans shall be made for the account of the Lenders pro rata in accordance with their respective Percentage Shares of the Loan Balance, and (v) each payment of interest on Loans shall be made for the account of the Lenders pro rata in accordance with their Percentage Shares of the aggregate amount of interest due and payable to the Lenders. (b) The Agent shall distribute all payments with respect to the Obligations to the Lenders promptly upon receipt in like funds as received. In the event that any payments made hereunder by the Borrower at any particular time are insufficient to satisfy in full the Obligations due and payable at such time, such payments shall be applied (a) first, to fees and expenses due pursuant to the terms of this Agreement or any other Loan Document, (b) second, to accrued interest, (c) third, to the Loan Balance, and (d) last, to any other Obligations. (c) If any Lender (for purposes of this Section, a "benefitted Lender") shall at any time receive any payment of all or part of its portion of the Obligations, or receive any Collateral in respect thereof (whether voluntarily or involuntarily, by set-off, pursuant to events or proceedings of the nature referred to in Sections 7.1(f) or 7.1(g), or otherwise) in an amount greater than such Lender was entitled to receive pursuant to the terms hereof, such benefitted Lender shall purchase for cash from the other Lenders such portion of the Obligations of such other Lenders or shall provide such other Lenders with the benefits of any such Collateral or the proceeds thereof as shall be necessary to cause such benefitted Lender to share the excess payment or benefits of such Collateral or proceeds with each of the Lenders according to the terms hereof. If all or any portion of such excess payment or benefits is thereafter recovered from such benefitted Lender, such purchase shall be rescinded and the purchase price and benefits returned by such Lender, to the extent of such recovery, but without interest. The Borrower agrees that each such Lender so purchasing a portion of the Obligations of another Lender may exercise all rights of payment (including, without limitation, rights of set-off) with respect to such portion as fully as if such Lender 20 were the direct holder of such portion. If any Lender ever receives, by voluntary payment, exercise of rights of set-off or banker's lien, counterclaim, cross-action or otherwise, any funds of the Borrower to be applied to the Obligations, or receives any proceeds by realization on or with respect to any Collateral, all such funds and proceeds shall be immediately forwarded to the Agent for distribution in accordance with the terms of this Agreement. 2.9 BORROWING BASE DETERMINATIONS. (a) The Borrowing Base as of the Closing Date is acknowledged by the Borrower and the Lenders to be $29,000,000 and shall reduce to a level of $27,500,000 within ten days of the Closing Date. Commencing on May 1, 1998, and continuing thereafter on the first day of each calendar month until the earlier of the date such amount is redetermined or the Commitment Termination Date, the Scheduled Reduction Amount shall be $275,000. (b) The Borrowing Base and the Scheduled Reduction Amount shall be redetermined semi-annually by unanimous consent of the Lenders beginning October 1, 1998, on the basis of information supplied by the Borrower in compliance with the provisions of this Agreement, including, without limitation, Reserve Reports, and all other information available to the Lenders. In addition, the Lenders shall, in the normal course of business following a request of the Borrower, redetermine the Borrowing Base; provided, however, the Lenders shall not be obligated to respond to more than four such requests during any calendar year, and in no event shall the Lenders be required to redetermine the Borrowing Base more than twice in any three-month period, including, without limitation, each scheduled semi-annual redetermination provided for above. Notwithstanding the foregoing, the Lenders may at their discretion and by unanimous consent redetermine the Borrowing Base and the Scheduled Reduction Amount at any time and from time to time. (c) Upon each determination of the Borrowing Base and the Scheduled Reduction Amount by the Lenders, the Agent shall notify the Borrower orally (confirming such notice promptly in writing) of such determination, and the Borrowing Base and the Scheduled Reduction Amount shall become effective upon such written notification and shall remain in effect until the next subsequent determination of the Borrowing Base. Upon request, Agent will furnish detailed information as to the determination of the Borrowing Base. (d) The Borrowing Base shall represent the determination by the Lenders, in accordance with the applicable definitions and provisions herein contained and their customary lending practices for loans of this nature, of the value, for loan purposes, of the Mortgaged Properties, plus certain other Oil and Gas Properties to be determined in sole discretion of the Lenders subject, in the case of any increase in the Borrowing Base, to the credit approval process of the Lenders. Furthermore, the Borrower acknowledges that the determination of the Borrowing Base contains an equity cushion (market value in excess of loan value), which is acknowledged by the Borrower to be essential for the adequate protection of the Lenders. The Borrowing Base shall be determined in the sole discretion of the Lenders by using the Lenders' then current engineering and credit standards. 21 2.10 MANDATORY PREPAYMENTS. If at any time the sum of the Loan Balance and the L/C Exposure exceeds the Borrowing Base then in effect, the Borrower shall, within 60 days of notice from the Agent of such occurrence, (a) prepay, or make arrangements acceptable to the Lenders for the prepayment of, the amount of such excess for application on the Loan Balance, (b) provide additional Collateral, of character and value satisfactory to the Lenders in their sole discretion, to secure the amount of such excess by the execution and delivery to the Agent for the benefit of the Lenders of Security Instruments in form and substance satisfactory to the Agent, or (c) effect any combination of the alternatives described in clauses (a) and (b) of this Section and acceptable to the Lenders in their sole discretion. In the event that a mandatory prepayment is required under this Section and the Loan Balance is less than the amount required to be prepaid, the Borrower shall repay the entire Loan Balance and, in accordance with the provisions of the relevant Letter of Credit Applications executed by the Borrower or otherwise to the satisfaction of the Lenders, deposit with the Agent for the benefit of the Lenders, as additional collateral securing the Obligations, an amount of cash, in immediately available funds, equal to the L/C Exposure minus the lesser of the aggregate Commitment Amounts or the Borrowing Base. The cash deposited with the Agent for the benefit of the Lenders in satisfaction of the requirement provided in this Section may be invested, at the sole discretion of the Lenders and then only at the express direction of the Borrower as to investment vehicle and maturity (which shall be no later than the latest expiry date of any then outstanding Letter of Credit), for the account of the Borrower in cash or cash equivalent investments offered by or through the Agent. 2.11 VOLUNTARY PREPAYMENTS AND CONVERSIONS OF LOANS. Subject to applicable provisions of this Agreement, the Borrower shall have the right at any time or from time to time to prepay Loans without penalty and to convert Loans of one type or with one Interest Period into Loans of another type or with a different Interest Period; provided, however, that (a) the Borrower shall give the Agent notice of each such prepayment or conversion of all or any portion of a Fixed Rate Loan no less than two Business Days prior to prepayment or conversion, (b) any Fixed Rate Loan may be prepaid or converted only on the last day of an Interest Period for such Loan, (c) the Borrower shall pay all accrued and unpaid interest on the amounts prepaid or converted, and (d) no such prepayment or conversion shall serve to postpone the repayment when due of any Obligation. 2.12 COMMITMENT FEE. In addition to interest on the Notes as provided herein and other fees payable hereunder and to compensate the Lenders for maintaining funds available, the Borrower shall pay to the Agent, for the account of the Lenders, in immediately available funds, on the first day of April, 1998, and on the first day of each third calendar month thereafter during the Commitment Period and on the Commitment Termination Date, a fee in the amount per annum as set forth below, calculated on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed (including the first day but excluding the last day), on the average daily amount of the Available Commitment during the preceding quarterly period as follows: 22
Borrowing Base Utilization Commitment Fee ------------------------------------------------------- greater than 50% one-half percent (1/2%) of Borrowing Base less than or equal to 50% three-eighths percent (3/8%) of Borrowing Base
The Borrowing Base Utilization and the corresponding Commitment Fee shall be set at the close of each calendar quarter for the next such quarter. 2.13 FACILITY FEE. In addition to interest on the Notes as provided herein and other fees payable hereunder and to compensate the Lenders for the costs of the extension of credit hereunder, the Borrower shall pay to the Agent for the account of the Lenders, in immediately available funds, an initial facility fee in the amount of $108,750. Such fee shall be paid on the Closing Date to the Agent for the benefit of the Lenders as of the Closing Date. In addition, the Borrower shall pay to the Agent for the account of the Lenders three-eighths percent (3/8%) on any future increase in the Borrowing Base within five days of written notice. 2.14 ENGINEERING FEE. In addition to the interest on the Notes as provided herein and other fees payable hereunder and to compensate the Agent for costs of evaluating the Mortgaged Properties and reviewing the Reserve Reports, the Borrower shall pay to the Agent, in immediately available funds, an engineering fee of $5,000 per each semi-annual Borrowing Base review and to the Agent for the benefit of the Lenders other than the Agent, an engineering fee of $2,500 per each semi-annual Borrowing Base review. The Borrower shall pay to the Agent an engineering fee of $2,500 per each interim Borrowing Base review and to the Agent for the benefit of the Lenders other than the Agent, an engineering fee of $1,250 per each interim Borrowing Base review. 2.15 LETTER OF CREDIT FEE. In addition to interest on the Notes as provided herein and Commitment Fees and Facility Fees payable hereunder, the Borrower agrees to pay to the Agent, for the account of the Lenders, on the date of issuance or renewal of each Letter of Credit, a fee equal to the greater of (a) $500 or (b) one and one-half percent (1 1/2%) per annum calculated on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed (including the first day but excluding the last day), on the face amount of such Letter of Credit and for the period for which such Letter of Credit is issued or renewed; provided, however, in the event such Letter of Credit is canceled prior to its original expiry date or a payment is made by the Agent for the account of the Lenders with respect to such Letter of Credit, the Agent and the Lenders shall, within 30 days after such cancellation or the making of such payment, rebate to the Borrower the unearned portion of any such fee. The Borrower also agrees to pay on demand to the Agent, for its own account as the issuer of the Letters of Credit, its reasonable customary letter of credit transactional fees, including, without limitation, amendment fees, payable with respect to each Letter of Credit. 23 2.16 AGENCY FEE. The Borrower shall pay to the Agent, for its own account, all fees owing or which may become owing under the Agency Fee Letter as provided therein. 2.17 LOANS TO SATISFY OBLIGATIONS OF BORROWER. The Lenders may, by unanimous consent, but shall not be obligated to, make Loans for the benefit of the Borrower and apply proceeds thereof to the satisfaction of any condition, warranty, representation, or covenant of the Borrower contained in this Agreement or any other Loan Document. Any such Loan shall be evidenced by the Notes and shall be made as a Floating Rate Loan. 2.18 SECURITY INTEREST IN ACCOUNTS; RIGHT OF OFFSET. As security for the payment and performance of the Obligations, the Borrower hereby transfers, assigns, and pledges to the Agent, for the benefit of the Lenders, and grants to the Agent, for the benefit of the Lenders, a security interest in all funds of the Borrower now or hereafter or from time to time on deposit with the Agent or any Lender, with such interest of the Lenders to be retransferred, reassigned, and/or released by the Agent and each Lender, as the case may be, at the expense of the Borrower upon payment in full and complete performance by the Borrower of all Obligations. All remedies as secured party or assignee of such funds shall be exercisable by the Agent and each Lender upon the occurrence of any Event of Default, regardless of whether the exercise of any such remedy would result in any penalty or loss of interest or profit with respect to any withdrawal of funds deposited in a time deposit account prior to the maturity thereof. Furthermore, the Borrower hereby grants to the Agent and each Lender the right, exercisable at such time as any Obligation shall mature, whether by acceleration of maturity or otherwise, of offset or banker's lien against all funds of the Borrower now or hereafter or from time to time on deposit with the Agent and each Lender, regardless of whether the exercise of any such remedy would result in any penalty or loss of interest or profit with respect to any withdrawal of funds deposited in a time deposit account prior to the maturity thereof. 2.19 GENERAL PROVISIONS RELATING TO INTEREST. It is the intention of the parties hereto to comply strictly with the usury laws of the State of Texas to the extent applicable to each Lender and the United States of America. In this connection, there shall never be collected, charged, or received on the sums advanced hereunder interest in excess of that which would accrue at the Highest Lawful Rate. For purposes of Tex. Fin. Code Ann. Section 303.301 (Vernon 1998), the Borrower agrees that the Highest Lawful Rate shall be the "indicated (weekly) rate ceiling" as defined in such Article, provided that the Agent and the Lenders may also rely, to the extent permitted by applicable laws of the State of Texas or the United States of America, on alternative maximum rates of interest under other laws of the State of Texas or other states or the United States of America applicable to the Agent and/or such Lender, if greater. (b) Notwithstanding anything herein or in the Notes to the contrary, during any Limitation Period, the interest rate to be charged on amounts evidenced by the Notes shall be the Highest Lawful Rate, and the obligation, if any, of the Borrower for the payment of fees or other charges deemed to be interest under applicable law shall be suspended. During any period or periods of time following a Limitation Period, to the extent permitted by applicable laws of the State of 24 Texas or other states or the United States of America, the interest rate to be charged hereunder shall remain at the Highest Lawful Rate until such time as there has been paid to the Agent for the account of each Lender (i) the amount of interest in excess of that accruing at the Highest Lawful Rate that the Agent and the Lenders would have received during the Limitation Period had the interest rate remained at the otherwise applicable rate, and (ii) all interest and fees otherwise payable to the Agent and the Lenders but for the effect of such Limitation Period. (c) If, under any circumstances, the aggregate amounts paid on the Notes or under this Agreement or any other Loan Document include amounts which by law are deemed interest and which would exceed the amount permitted if the Highest Lawful Rate were in effect, the Borrower stipulates that such payment and collection will have been and will be deemed to have been, to the greatest extent permitted by applicable laws of the State of Texas any other applicable states' laws or the United States of America, the result of mathematical error on the part of the Borrower and the Agent and the Lenders; and the Agent and the Lenders shall promptly refund the amount of such excess (to the extent only of such interest payments in excess of that which would have accrued and been payable on the basis of the Highest Lawful Rate) upon discovery of such error by the Agent and the Lenders or notice thereof from the Borrower. In the event that the maturity of any Obligation is accelerated, by reason of an election by the Agent and the Lenders or otherwise, or in the event of any required or permitted prepayment, then the consideration constituting interest under applicable laws may never exceed the Highest Lawful Rate; and excess amounts paid which by law are deemed interest, if any, shall be credited by the Lenders on the principal amount of the Obligations, or if the principal amount of the Obligations shall have been paid in full, refunded to the Borrower. (d) All sums paid, or agreed to be paid, to the Agent and the Lenders for the use, forbearance and detention of the proceeds of any advance hereunder shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and spread throughout the full term hereof until paid in full so that the actual rate of interest is uniform but does not exceed the Highest Lawful Rate throughout the full term hereof. 2.20 YIELD PROTECTION. (a) Without limiting the effect of the other provisions of this Section (but without duplication), the Borrower shall pay to the Agent and each Lender from time to time upon written request such amounts as the Agent and such Lender may determine are necessary to compensate it for any Additional Costs incurred by the Agent and such Lender. (b) Without limiting the effect of the other provisions of this Section (but without duplication), the Borrower shall pay to each Lender from time to time upon written request such amounts as each Lender may determine are necessary to compensate each Lender for any reasonable costs attributable to the maintenance by each Lender (or any Applicable Lending Office), pursuant to any Regulatory Change, of capital in respect of the Commitment, such compensation to include, without limitation, an amount equal to any reduction of the rate of return on assets or equity of each Lender (or any Applicable Lending Office) to a level below that which each Lender (or any Applicable Lending Office) could have achieved but for such Regulatory Change. 25 (c) Without limiting the effect of the other provisions of this Section (but without duplication), the Borrower shall pay to each Lender the reasonable administrative and re-employment costs customarily charged by Lenders as a result of: (i) any payment, prepayment, or conversion by the Borrower of a Fixed Rate Loan on a date other than the last day of an Interest Period for such Loan; or (ii) any failure by the Borrower to borrow a Fixed Rate Loan from the Lenders on the date for such borrowing specified in the relevant Borrowing Request; such compensation to include, without limitation, with respect to any LIBO Rate Loan, an amount equal to the excess, if any and only to the extent actually incurred by such Lender, of (A) the amount of interest which would have accrued on the principal amount so paid, prepaid, converted, or not borrowed for the period from the date of such payment, prepayment, conversion, or failure to borrow to the last day of the then current Interest Period for such Loan (or, in the case of a failure to borrow, the Interest Period for such Loan which would have commenced on the date of such failure to borrow) at the applicable rate of interest for such Loan provided for herein over (B) the interest component (as reasonably determined by the Lenders) of the amount (as reasonably determined by the Agent and such Lender) the Agent and such Lender would have bid in the London interbank market for Dollar deposits of amounts comparable to such principal amount and maturities comparable to such period. (d) Determinations by the Agent and any Lender for purposes of this Section of the effect of any Regulatory Change on capital maintained, their costs or rate of return, maintaining Loans, their obligation to make Loans or on amounts receivable by it in respect of Loans or such obligations, and the additional amounts required to compensate the Agent and the Lenders under this Section shall be conclusive, absent manifest error, provided that such determinations are made on a reasonable basis. The Agent or such Lender shall furnish the Borrower with a certificate setting forth in reasonable detail the basis and amount of increased costs incurred or reduced amounts receivable as a result of any such event, and the statements set forth therein shall be conclusive, absent manifest error. The Agent or such Lender shall (i) notify the Borrower, as promptly as practicable after any Lender obtains knowledge of any Additional Costs or other sums payable pursuant to this Section and determine to request compensation therefor, of any event occurring after the Closing Date which will entitle the Agent and such Lender to compensation pursuant to this Section; provided that the Borrower shall not be obligated for the payment of any Additional Costs or other sums payable pursuant to this Section to the extent such Additional Costs or other sums accrued more than 30 days prior to the date upon which the Borrower was given such notice; and (ii) designate a different Applicable Lending Office for the Loans of the Lenders affected by such event if such designation will avoid the need for or reduce the amount of such compensation. If the Agent or any Lender requests compensation from the Borrower under this Section, the Borrower may, by notice to the Agent and any Lender, require that the Loans by the Lenders of the type with 26 respect to which such compensation is requested be converted into Floating Rate Loans in accordance with Section 2.11. Any compensation requested by the Lenders pursuant to this Section shall be due and payable to the Lenders within five days of delivery of any such notice by the Lenders to the Borrower. (e) Each Lender agrees that it shall not request, and the Borrower shall not be obligated to pay, any Additional Costs or other sums payable pursuant to this Section unless similar additional costs and other sums payable are also generally assessed by the Lenders against other customers of such Lenders similarly situated where such customers are subject to documents providing for such assessment. 2.21 LIMITATION ON TYPES OF LOANS. Anything herein to the contrary notwithstanding, no more than six separate Loans shall be outstanding at any one time, with, for purposes of this Section, all Floating Rate Loans constituting one Loan and all LIBO Rate Loans for the same Interest Period constituting one Loan. Anything herein to the contrary notwithstanding, if, on or prior to the determination of any interest rate for any LIBO Rate Loan for any Interest Period therefor: (a) the Agent determines (which determination shall be conclusive) that quotations of interest rates for the deposits referred to in the definition of "LIBO Rate" in Section are not being provided in the relevant amounts or for the relevant maturities for purposes of determining the rate of interest for such Loan as provided in this Agreement; or (b) the Agent determines (which determination shall be conclusive) that the rates of interest referred to in the definition of "LIBO Rate" in Section upon the basis of which the rate of interest for such Loan for such Interest Period is to be determined does not accurately reflect the cost to the Lenders of making or maintaining such Loan for such Interest Period, then the Agent shall give the Borrower prompt notice thereof; and so long as such condition remains in effect, the Lenders shall be under no obligation to make LIBO Rate Loans or to convert Loans of any other type into LIBO Rate Loans, and the Borrower shall, on the last day of the then current Interest Period for each outstanding LIBO Rate Loan, either prepay such LIBO Rate Loan or convert such Loan into another type of Loan in accordance with Section 2.11. Before giving such notice pursuant to this Section, the Agent will designate a different available Applicable Lending Office for LIBO Rate Loans or take such other action as the Borrower may request if such designation or action will avoid the need to suspend the obligation of the Lenders to make LIBO Rate Loans hereunder and will not, in the opinion of any Lender, be disadvantageous to the Lenders. 2.22 ILLEGALITY. Notwithstanding any other provision of this Agreement, in the event that it becomes unlawful for any Lender or its Applicable Lending Office to (a) honor its obligation to make any type of Fixed Rate Loans hereunder, or (b) maintain any type of Fixed Rate 27 Loans hereunder, then such Lender shall promptly notify the Agent and the Borrower thereof; and the obligation of such Lender hereunder to make such type of Fixed Rate Loans and to convert other types of Loans into Fixed Rate Loans of such type shall be suspended until such time as such Lender may again make and maintain Fixed Rate Loans of such type, and the outstanding Fixed Rate Loans of such type shall be converted into Floating Rate Loans in accordance with Section 2.11. Before giving such notice pursuant to this Section, such Lender will designate a different available Applicable Lending Office for Fixed Rate Loans or take such other action as the Borrower may request if such designation or action will avoid the need to suspend the obligation of the Lenders to make Fixed Rate Loans and will not, in the opinion of any Lender, be disadvantageous to the Lenders. 2.23 REGULATORY CHANGE. In the event that by reason of any Regulatory Change, any Lender (a) incurs Additional Costs based on or measured by the excess above a specified level of the amount of a category of deposits or other liabilities of such Lender which includes deposits by reference to which the interest rate on any Fixed Rate Loan is determined as provided in this Agreement or a category of extensions of credit or other assets of such Lender which includes any Fixed Rate Loan, or (b) becomes subject to restrictions on the amount of such a category of liabilities or assets which it may hold, then, at the election of such Lender with notice to the Agent and the Borrower, the obligation of the Lenders to make such Fixed Rate Loans and to convert Floating Rate Loans into such Fixed Rate Loans shall be suspended until such time as such Regulatory Change ceases to be in effect, and all such outstanding Fixed Rate Loans shall be converted into Floating Rate Loans in accordance with Section 2.11. 2.24 LIMITATIONS ON INTEREST PERIODS. Each Interest Period selected by the Borrower (a) which commences on the last Business Day of a calendar month (or, with respect to any LIBO Rate Loan, any day for which there is no numerically corresponding day in the appropriate subsequent calendar month) shall end on the last Business Day of the appropriate subsequent calendar month, (b) which would otherwise end on a day which is not a Business Day shall end on the next succeeding Business Day (or, if such next succeeding Business Day falls in the next succeeding calendar month, on the next preceding Business Day), (c) which would otherwise commence before and end after Final Maturity shall end on Final Maturity, and (d) shall have a duration of not less than one month, as to any LIBO Rate Loan, and, if any Interest Period would otherwise be a shorter period, the relevant Loan shall be a Floating Rate Loan during such period. 2.25 LETTERS IN LIEU OF TRANSFER ORDERS. The Agent agrees that none of the letters in lieu of transfer or division orders provided by the Borrower pursuant to Section 3.1(f)(v) or Section will be sent to the addressees thereof prior to the occurrence of an Event of Default, at which time the Agent may, at its option and in addition to the exercise of any of its other rights and remedies, send any or all of such letters. 2.26 POWER OF ATTORNEY. The Borrower hereby designates the Agent as its agent and attorney-in-fact, to act in its name, place, and stead for the purpose of completing and, upon the occurrence of an Event of Default, delivering any and all of the letters in lieu of transfer orders 28 delivered by the Borrower to the Agent pursuant to Section 3.1(f)(v) or Section 5.7, including, without limitation, completing any blanks contained in such letters and attaching exhibits thereto describing the relevant Collateral. The Borrower hereby ratifies and confirms all that the Agent shall lawfully do or cause to be done by virtue of this power of attorney and the rights granted with respect to such power of attorney. This power of attorney is coupled with the interests of the Agent in the Collateral, shall commence and be in full force and effect as of the Closing Date and shall remain in full force and effect and shall be irrevocable so long as any Obligation remains outstanding or unpaid or any Commitment exists. The powers conferred on the Agent by this appointment are solely to protect the interests of the Agent and the Lenders under the Loan Documents and shall not impose any duty upon the Agent to exercise any such powers. The Agent shall be accountable only for amounts that it actually receives as a result of the exercise of such powers and shall not be responsible to the Borrower or any other Person for any act or failure to act with respect to such powers, except for gross negligence or willful misconduct. ARTICLE III CONDITIONS The obligations of the Lenders to enter into this Agreement and to make Loans or participate in the issuance of Letters of Credit are subject to the satisfaction of the following conditions precedent: 3.1 RECEIPT OF LOAN DOCUMENTS AND OTHER ITEMS. The Lenders shall have no obligation under this Agreement unless and until all matters incident to the consummation of the transactions contemplated herein, including, without limitation, the review by the Agent or its counsel of the title of the Borrower shall be satisfactory to the Agent, and the Agent shall have received, reviewed, and approved the following documents and other items, appropriately executed when necessary and, where applicable, acknowledged by one or more authorized officers of the Borrower all in form and substance satisfactory to the Agent and dated, where applicable, of even date herewith or a date prior thereto and acceptable to the Agent: (a) multiple counterparts of this Agreement as requested by the Lenders; (b) the Note or Notes; (c) copies of the Certificate of Incorporation and all amendments thereto and the bylaws and all amendments thereto of the Borrower accompanied by a certificate issued by the secretary or an assistant secretary of the Borrower as the case may be, to the effect that each such copy is correct and complete; 29 (d) a certificate of incumbency and signatures of all officers of the Borrower who are authorized to execute Loan Documents on behalf of the Borrower, each such certificate being executed by the secretary or an assistant secretary of the Borrower; (e) copies of corporate resolutions approving the Loan Documents and authorizing the transactions contemplated herein and therein, duly adopted by the boards of directors of the Borrower accompanied by a certificate of the secretary or an assistant secretary of the Borrower to the effect that such copies are true and correct copies of resolutions duly adopted at a meeting or by unanimous consent of the board of directors of the Borrower and that such resolutions constitute all the resolutions adopted with respect to such transactions, have not been amended, modified, or revoked in any respect, and are in full force and effect as of the date of such certificate; (f) multiple counterparts, as requested by the Lenders, of the following Security Instruments creating, evidencing, perfecting, and otherwise establishing Liens in favor of the Agent for the benefit of the Lenders in and to the Collateral as security for the Obligations of the Borrower or any Subsidiary or other Affiliate of the Borrower owing to the Agent or any Lender or any branch, Subsidiary or other Affiliate of the Agent or any Lender: (i) Assignment of Note and Liens from Bank of Oklahoma, National Association covering Oil and Gas Properties of Middle Bay; (ii) Ratification of and Amendment to Mortgage, Deed of Trust, Indenture, Security Agreement, Assignment of Production, and Financing Statement from Middle Bay to or for the benefit of the Agent covering the Oil and Gas Properties of Middle Bay and all improvements, personal property, and fixtures related thereto; (iii) Mortgage, Deed of Trust, Indenture, Security Agreement, Assignment of Production, and Financing Statement from the Borrower to or for the benefit of the Agent covering certain Oil and Gas Properties of Middle Bay and Enex designated by the Agent and all improvements, personal property, and fixtures related thereto; (iv) Financing Statements from Middle Bay and Enex, as debtors, in favor of the Agent, as secured party, constituent to the instruments described in clause (ii) or clause (iii) above; 30 (v) abundated letters, in form and substance satisfactory to the Agent, from Middle Bay and Enex to each purchaser of production and disburser of the proceeds of production from or attributable to the Mortgaged Properties, together with additional letters with the addressees left blank, authorizing and directing the addressees to make future payments attributable to production from the Mortgaged Properties directly to the Agent; (vi) Security Agreement (Stock Pledge) by Middle Bay in favor of the Agent and covering 1,064,432 shares, equal to approximately 79% of the shares of the common stock of Enex; (g) unaudited Financial Statements of the Borrower as of September 30, 1997; (h) certificates dated as of a recent date from the Secretary of State or other appropriate Governmental Authority evidencing the existence or qualification and good standing of the Borrower in its jurisdiction of incorporation and in any other jurisdiction in which it conducts business; (i) results of searches of the UCC Records of the Secretary of State of the States of Alabama, Arkansas, Kansas, Louisiana, Michigan, Mississippi, New Mexico, Oklahoma, Texas, and Wyoming from a source acceptable to the Agent and reflecting no Liens, other than Permitted Liens, against any of the Collateral as to which perfection of a Lien is accomplished by the filing of a financing statement; (j) confirmation, acceptable to the Agent, of the title of the Borrower to the Mortgaged Properties, free and clear of Liens other than Permitted Liens; (k) copies of all operating, lease, sublease, royalty, sales, exchange, processing, farmout, bidding, pooling, unitization, communitization, and other agreements relating to the Mortgaged Properties requested by the Agent; (l) engineering reports covering the Mortgaged Properties; (m) the opinion of Thrasher, Whitley, Hampton & Morgan, counsel to the Borrower, substantially in the form attached hereto as Exhibit V, with such changes thereto as may be approved by the Agent; (n) certificates evidencing the insurance coverage required pursuant to Section 5.18, 5.19; and 31 (o) such other agreements, documents, instruments, opinions, certificates, waivers, consents, and evidence as the Agent or any Lender may reasonably request. 3.2 EACH LOAN. In addition to the conditions precedent stated elsewhere herein, the Lenders shall not be obligated to make any Loan unless: (a) the Borrower shall have delivered to the Agent a Borrowing Request at least the requisite time prior to the requested date for the relevant Loan, and each statement or certification made in such Borrowing Request shall be true and correct in all material respects on the requested date for such Loan; (b) no Event of Default or Default shall exist or will occur as a result of the making of the requested Loan; (c) if requested by the Agent or any Lender, the Borrower shall have delivered evidence satisfactory to the Agent or such Lender substantiating any of the matters contained in this Agreement which are necessary to enable the Borrower to qualify for such Loan; (d) the Agent shall have received, reviewed, and approved such additional documents and items as described in Section as may be requested by any Lender with respect to such Loan; (e) no event shall have occurred which, in the reasonable opinion of the Lenders, could have a Material Adverse Effect; (f) each of the representations and warranties contained in this Agreement shall be true and correct and shall be deemed to be repeated by the Borrower as if made on the requested date for such Loan; (g) the Security Instruments shall be in full force and effect and provide to the Lenders the security intended thereby; (h) neither the consummation of the transactions contemplated hereby nor the making of such Loan shall contravene, violate, or conflict with any Requirement of Law; (i) the Borrower shall hold full legal title to the Collateral pledged by such entities and be the sole beneficial owners thereof; (j) the Agent and/or each Lender shall have received payment of all Facility Fees, Letter of Credit Fees, and other fees payable to the Agent and/or each Lender hereunder and reimbursement from the Borrower, or special legal counsel for the Agent shall have received payment from the Borrower, for (i) all reasonable fees and expenses of counsel to the Agent for which the Borrower is responsible pursuant to applicable provisions of this Agreement and for which invoices have been presented as of or prior to the date of the relevant Loan, and (ii) estimated fees charged by filing 32 officers and other public officials incurred or to be incurred in connection with the filing and recordation of any Security Instruments, for which invoices have been presented as of or prior to the date of the requested Loan; and (k) all matters incident to the consummation of the transactions hereby contemplated shall be satisfactory to the Agent and each Lender. 3.3 EACH LETTER OF CREDIT. The obligation of the Agent, as the issuer of the Letters of Credit, to issue, renew, or extend any Letter of Credit is subject to the satisfaction of the following additional conditions precedent: (a) the Borrower shall have delivered to the Agent a written (or oral, confirmed promptly in writing) request for the issuance, renewal, or extension of a Letter of Credit at least two Business Days prior to the requested issuance, renewal, or extension date and a completed Letter of Credit Application at least two Business Days prior to the requested issuance date; and each statement or certification made in such Letter of Credit Application shall be true and correct in all material respects on the requested date for the issuance of such Letter of Credit; (b) no Default or Event of Default shall exist or will occur as a result of the issuance, renewal, or extension of such Letter of Credit; and (c) the terms, provisions, and beneficiary of the Letter of Credit or such renewal or extension shall be satisfactory to the Agent, as the issuer of the Letters of Credit, in its sole discretion. ARTICLE IV REPRESENTATIONS AND WARRANTIES To induce the Agent and the Lenders to enter into this Agreement and to make the Loans and issue, or participate in the issuance of, Letters of Credit, the Borrower represents and warrants to the Agent and the Lenders (which representations and warranties shall survive the delivery of the Notes) that: 4.1 DUE AUTHORIZATION. The execution and delivery by the Borrower of this Agreement and the borrowings hereunder, the execution and delivery by the Borrower of the Notes, the repayment of the Notes and interest and fees provided for in the Notes and this Agreement, the execution and delivery of the Security Instruments by the Borrower and the performance of all obligations of the Borrower under the Loan Documents are within the power of the Borrower, have been duly authorized by all necessary corporate action by the Borrower, and do not and will not to our knowledge, (a) require the consent of any Governmental Authority, (b) contravene or conflict 33 with any Requirement of Law, (c) contravene or conflict with any indenture, instrument, or other agreement to which the Borrower is a party or by which any Property of the Borrower may be presently bound or encumbered, or (d) result in or require the creation or imposition of any Lien in, upon or of any Property of the Borrower under any such indenture, instrument, or other agreement, other than the Loan Documents. 4.2 CORPORATE EXISTENCE. The Borrower is a corporation duly organized, legally existing, and in good standing under the laws of its state of incorporation and is duly qualified as a foreign corporation and are in good standing in all jurisdictions wherein the ownership of Property or the operation of its business necessitates same, other than those jurisdictions wherein the failure to so qualify will not have a Material Adverse Effect. 4.3 VALID AND BINDING OBLIGATIONS. All Loan Documents, when duly executed and delivered by the Borrower, will be the legal, valid, and binding obligations of the Borrower, enforceable against the Borrower in accordance with their respective terms. 4.4 SECURITY INSTRUMENTS. The provisions of each Security Instrument are effective to create in favor of the Agent for the benefit of the Lenders, a legal, valid, and enforceable Lien in all right, title, and interest of the Borrower in the Collateral described therein, which Liens, assuming the accomplishment of recording and filing in accordance with applicable laws prior to the intervention of rights of other Persons, shall constitute fully perfected first-priority Liens on all right, title, and interest of the Borrower in the Collateral described therein. The Existing Liens, as assigned by BOK to the Agent for the benefit of the Lenders, continue to constitute good and valid first-priority Liens as of the original date of recordation thereof. 4.5 TITLE TO ASSETS. The Borrower has good and defensible title to all of its Properties, free and clear of all Liens except Permitted Liens. 4.6 SCOPE AND ACCURACY OF FINANCIAL STATEMENTS. The Financial Statements of the Borrower as of September 30, 1997, present fairly the financial position and results of operations and cash flows of the Borrower and its consolidated Subsidiaries in accordance with GAAP as at the relevant point in time or for the period indicated, as applicable. No event or circumstance has occurred since September 30, 1997, which could reasonably be expected to have a Material Adverse Effect. 4.7 NO MATERIAL MISSTATEMENTS. To the knowledge of the Borrower, no information, exhibit, statement, or report furnished to the Lenders by or at the direction of the Borrower in connection with this Agreement contains any material misstatement of fact or omits to state a material fact or any fact necessary to make the statements contained therein not misleading as of the date made or deemed made. 4.8 LIABILITIES, LITIGATION, AND RESTRICTIONS. Other than as reflected in the Financial Statements referred to in Section 4.6 or as listed on Schedule 4.8 attached hereto, the 34 Borrower has no liabilities, direct, or contingent, which may materially and adversely affect its business or operations or its ownership of the Collateral and no litigation or other action of any nature affecting the Borrower is pending before any Governmental Authority or, to the best knowledge of the Borrower, threatened against or affecting the Borrower which might reasonably be expected to result in any impairment of its ownership of any Collateral or have a Material Adverse Effect. No unusual or unduly burdensome restriction, restraint or hazard exists by contract, Requirement of Law, or otherwise relative to the business or operations of the Borrower or the ownership and operation of the Collateral other than such as relate generally to Persons engaged in business activities similar to those conducted by the Borrower. 4.9 COMPLIANCE WITH LAWS. The Borrower and its Property, including, without limitation, the Mortgaged Property, are in compliance with all applicable Requirements of Law, including, without limitation, Environmental Laws, the Natural Gas Policy Act of 1978, as amended, and ERISA, except to the extent non-compliance with any such Requirements of Law could not reasonably be expected to have a Material Adverse Effect. 4.10 ERISA. The Borrower does not maintain nor has it maintained any Plan. The Borrower does not currently contribute to or have any obligation to contribute to or otherwise have any liability with respect to any Plan. 4.11 ENVIRONMENTAL LAWS. To the best knowledge and belief of the Borrower, except as would not have a Material Adverse Effect or as described on Schedule 4.11 attached hereto: (a) no Property of the Borrower is currently on or has ever been on, or is adjacent to any Property which is on or has ever been on, any federal or state list of Superfund Sites; (b) no Hazardous Substances have been generated, transported, and/or disposed of by the Borrower at a site which was, at the time of such generation, transportation, and/or disposal, or has since become, a Superfund Site; (c) except in accordance with applicable Requirements of Law or the terms of a valid permit, license, certificate, or approval of the relevant Governmental Authority, no Release of Hazardous Substances by the Borrower or from, affecting, or related to any Property of the Borrower or adjacent to any Property of the Borrower has occurred; and (d) no Environmental Complaint has been received by the Borrower. 4.12 COMPLIANCE WITH FEDERAL RESERVE REGULATIONS. No transaction contemplated by the Loan Documents is in violation of any regulations promulgated by the Board of Governors of the Federal Reserve System, including, without limitation, Regulations G, T, U, or X. 35 4.13 INVESTMENT COMPANY ACT COMPLIANCE. The Borrower is not, nor is the Borrower directly or indirectly controlled by or acting on behalf of any Person which is, an "investment company" or an "affiliated person" of an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 4.14 PUBLIC UTILITY HOLDING COMPANY ACT COMPLIANCE. The Borrower is not a "holding company," or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company," within the meaning of the Public Utility Holding Company Act of 1935, as amended. 4.15 PROPER FILING OF TAX RETURNS; PAYMENT OF TAXES DUE. The Borrower has duly and properly filed a United States income tax return and all other tax returns which are required to be filed and has paid all taxes due except such as are being contested in good faith and as to which adequate provisions and disclosures have been made. The respective charges and reserves on the books of the Borrower with respect to taxes and other governmental charges are adequate. 4.16 REFUNDS. Except as described on Schedule 4.16 attached hereto, no orders of, proceedings pending before, or other requirements of the Minerals Management Service, Bureau of Land Management, the Federal Energy Regulatory Commission, the Texas Railroad Commission, or any Governmental Authority exist which could result in the Borrower being required to refund any material portion of the proceeds received or to be received from the sale of hydrocarbons constituting part of the Mortgaged Property. 4.17 GAS CONTRACTS. Except as described on Schedule 4.17 attached hereto, the Borrower (a) is not obligated in any material respect by virtue of any prepayment made under any contract containing a "take-or-pay" or "prepayment" provision or under any similar agreement to deliver hydrocarbons produced from or allocated to any of the Mortgaged Property at some future date without receiving full payment therefor within 90 days of delivery, and (b) has not produced gas, in any material amount, subject to, and neither the Borrower nor any of the Mortgaged Properties is subject to, balancing rights of third parties or subject to balancing duties under governmental requirements or joint operating agreements, except as to such matters for which the Borrower has established monetary reserves adequate in amount to satisfy such obligations and have segregated such reserves from other accounts. 4.18 INTELLECTUAL PROPERTY. The Borrower owns or is licensed to use all Intellectual Property necessary to conduct all business material to its condition (financial or otherwise), business, or operations as such business is currently conducted. No claim has been asserted or is pending by any Person with respect to the use of any such Intellectual Property or challenging or questioning the validity or effectiveness of any such Intellectual Property; and the Borrower knows of no valid basis for any such claim. The use of such Intellectual Property by the Borrower does not infringe on the rights of any Person, except for such claims and infringements as do not, in the aggregate, give rise to any material liability on the part of the Borrower. 36 4.19 CASUALTIES OR TAKING OF PROPERTY. Except as disclosed on Schedule 4.19 attached hereto, since September 30, 1997, neither the business nor any Property of the Borrower has been materially adversely affected 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 Governmental Authority, riot, activities of armed forces, or acts of God. 4.20 LOCATIONS OF BORROWER. The principal place of business and chief executive office of the Borrower is located at the address of the Borrower set forth in Section 9.3 or at such other location as the Borrower may have, by proper written notice hereunder, advised the Agent and the Lenders, provided that such other location is within a state in which appropriate financing statements from the Borrower in favor of the Agent have been filed. 4.21 SUBSIDIARIES. The Borrower has no Subsidiaries other than as listed on Schedule 4.21 attached hereto. ARTICLE V AFFIRMATIVE COVENANTS So long as any Obligation remains outstanding or unpaid or any Commitment exists, the Borrower shall: 5.1 MAINTENANCE AND ACCESS TO RECORDS. Keep adequate records, in accordance with GAAP, of all its transactions so that at any time, and from time to time, its true and complete financial condition may be readily determined, and within two Business Days following the reasonable request of the Agent or any Lender, make such records available for inspection by the Agent or any Lender and, at the expense of the Borrower, allow the Agent or any Lender to make and take away copies thereof. 5.2 QUARTERLY FINANCIAL STATEMENTS; COMPLIANCE CERTIFICATES. Deliver to the Agent and each Lender, (a) on or before the 45th day after the close of each of the first three quarterly periods of each fiscal year of the Borrower, a copy of the unaudited consolidated and consolidating Financial Statements of the Borrower and its consolidated Subsidiaries as at the close of such quarterly period and from the beginning of such fiscal year to the end of such period, such Financial Statements to be certified by a Responsible Officer of the Borrower as having been prepared in accordance with GAAP consistently applied and as a fair presentation of the condition of the Borrower, subject to changes resulting from normal year-end audit adjustments, and (b) on or before the 45th day after the close of each fiscal quarter and on or before the 120th day after the close of each fiscal year, a Compliance Certificate and calculations of compliance with the financial covenants included therein. 37 5.3 ANNUAL FINANCIAL STATEMENTS. (a) Deliver to the Agent and each Lender, on or before the 120th day after the close of each fiscal year of the Borrower, a copy of the annual audited consolidated and unaudited consolidating Financial Statements of the Borrower. 5.4 OIL AND GAS RESERVE REPORTS. Deliver to the Agent and each Lender, no later than April 1 of each year during the term of this Agreement, engineering reports in form and substance satisfactory to the Agent and the Lenders, certified by any nationally- or regionally-recognized independent consulting petroleum engineers acceptable to the Agent and the Lenders as fairly and accurately setting forth (i) the proven and producing, shut-in, behind-pipe, and undeveloped oil and gas reserves (separately classified as such) attributable to the Oil and Gas Properties as of January 1 of the year for which such reserve reports are furnished, (ii) the aggregate present value of the future net income with respect to such Oil and Gas Properties, discounted at a stated per annum discount rate of proven and producing reserves, (iii) projections of the annual rate of production, gross income, and net income with respect to such proven and producing reserves, and (iv) information with respect to the "take-or-pay," "prepayment," and gas-balancing liabilities of the Borrower. (b) Deliver to the Agent and each Lender no later than October 1 of each year during the term of this Agreement, engineering reports in form and substance satisfactory to the Agent and the Lenders prepared by or under the supervision of the chief petroleum engineer of the Borrower evaluating the Oil and Gas Properties as of July 1 of the year for which such reserve reports are furnished and updating the information provided in the reports pursuant to Section 5.4(a). (c) Each of the reports provided pursuant to this Section shall be submitted to the Agent and each Lender together with additional data concerning pricing, quantities of production from the Oil and Gas Properties to be determined in sole discretion of the Agent and the Lenders, volumes of production sold, purchasers of production, gross revenues, expenses, and such other information and engineering and geological data with respect thereto as the Agent and the Lenders may reasonably request. 5.5 TITLE OPINIONS; TITLE DEFECTS. For additions of Oil and Gas Properties after the Closing Date, promptly upon the request of the Agent or any Lender, furnish to the Agent title opinions, in form and substance and by counsel satisfactory to the Agent, or other confirmation of title acceptable to the Agent, covering a percentage of the present value, acceptable by the Agent in its sole discretion, of the Oil and Gas Properties of the Borrower, and promptly, but in any event within 60 days after notice by the Agent of any defect, material in the reasonable opinion of the Agent and the Lenders in value, in the title of the Borrower to any of its Oil and Gas Properties, cure such title defects, and, in the event any such title defects are not cured in a timely manner, pay all reasonable related costs and fees incurred by the Agent to do so. Provided, however, to the extent it is determined by the Lenders that such title defects cannot be cured or the Borrower so notifies the Lenders, the Lenders may reduce the Borrowing Base by the amount equal to the value of the Oil and Gas Property affected by such title defect. 38 5.6 NOTICES OF CERTAIN EVENTS. Deliver to the Agent and each Lender, immediately upon having knowledge of the occurrence of any of the following events or circumstances, a written statement with respect thereto, signed by a Responsible Officer of the Borrower and setting forth the relevant event or circumstance and the steps being taken by the Borrower with respect to such event or circumstance: (a) any Default or Event of Default; (b) any default or event of default under any contractual obligation of the Borrower, or any litigation, investigation, or proceeding between the Borrower and any Governmental Authority which, in either case, if not cured or if adversely determined, as the case may be, could reasonably be expected to have a Material Adverse Effect; (c) any litigation or proceeding involving the Borrower as a defendant or in which any Property of the Borrower is subject to a claim and in which the amount involved is $500,000 or more and which is not covered by insurance or in which injunctive or similar relief is sought; (d) the receipt by the Borrower of any material Environmental Complaint; (e) any actual, proposed, or threatened testing or other investigation by any Governmental Authority or other Person concerning the environmental condition of, or relating to, any Property of the Borrower or adjacent to any Property of the Borrower following any allegation of a violation of any Requirement of Law; (f) any Release of Hazardous Substances by the Borrower or from, affecting, or related to any Property of the Borrower or adjacent to any Property of the Borrower except in accordance with applicable Requirements of Law or the terms of a valid permit, license, certificate, or approval of the relevant Governmental Authority, or the violation of any Environmental Law, or the revocation, suspension, or forfeiture of or failure to renew, any permit, license, registration, approval, or authorization which could reasonably be expected to have a Material Adverse Effect; (g) upon request from the Agent, the change in identity or address of any Person remitting to the Borrower proceeds from the sale of hydrocarbon production from or attributable to any Mortgaged Property; (h) within two days of any change in the senior management of the Borrower; and (i) any other event or condition which could reasonably be expected to have a Material Adverse Effect. 39 5.7 LETTERS IN LIEU OF TRANSFER ORDERS; DIVISION ORDERS. Promptly upon request by the Agent at any time and from time to time, execute such letters in lieu of transfer orders, in addition to the letters signed by the Borrower and delivered to the Agent in satisfaction of the condition set forth in Section 3.1 (f)(v) and/or division and/or transfer orders as are necessary or appropriate to transfer and deliver to the Agent proceeds from or attributable to any Mortgaged Property. 5.8 ADDITIONAL INFORMATION. Furnish to the Agent and each Lender, promptly upon the request of the Agent or any Lender, such additional financial or other information concerning the assets, liabilities, operations, and transactions of the Borrower as the Agent or any Lender may from time to time reasonably request; and notify the Agent and each Lender not less than ten Business Days prior to the occurrence of any condition or event that may change the proper location for the filing of any financing statement or other public notice or recording for the purpose of perfecting a Lien in any Collateral, including, without limitation, any change in its name or the location of its principal place of business or chief executive office; and upon the request of the Agent or any Lender, execute such additional Security Instruments as may be necessary or appropriate in connection therewith. 5.9 COMPLIANCE WITH LAWS. Comply with all applicable Requirements of Law, including, without limitation, (a) the Natural Gas Policy Act of 1978, as amended, (b) ERISA, (c) Environmental Laws, and (d) all permits, licenses, registrations, approvals, and authorizations issued to it or of which it has knowledge (i) related to any natural or environmental resource or media located on, above, within, in the vicinity of, related to or affected by any Property of the Borrower, (ii) required for the performance of the operations of the Borrower, or (iii) applicable to the use, generation, handling, storage, treatment, transport, or disposal of any Hazardous Substances; and instruct all employees, crew members, agents, contractors, subcontractors, and future lessees (pursuant to appropriate lease provisions) of the Borrower, while such Persons are acting within the scope of their relationship with the Borrower, to comply with all such Requirements of Law as may be necessary or appropriate to enable the Borrower to so comply. 5.10 PAYMENT OF ASSESSMENTS AND CHARGES. Pay all taxes, assessments, governmental charges, rent, and other Indebtedness which, if unpaid, might become a Lien against the Property of the Borrower, except any of the foregoing being contested in good faith and as to which adequate reserve in accordance with GAAP has been established or unless failure to pay would not have a Material Adverse Effect. 5.11 MAINTENANCE OF CORPORATE EXISTENCE AND GOOD STANDING. Maintain its corporate existence or qualification and good standing in its jurisdiction of incorporation and in all jurisdictions wherein the Property now owned or hereafter acquired or business now or hereafter conducted necessitates same, unless the failure to do so would not have a Material Adverse Effect. 5.12 PAYMENT OF NOTES; PERFORMANCE OF OBLIGATIONS. Pay the Notes according to the reading, tenor, and effect thereof, as modified hereby, and do and perform every act and 40 discharge all of its other Obligations. Each Borrower is jointly and severally liable for all Obligations. 5.13 FURTHER ASSURANCES. Upon the Agent's written request, promptly cure any defects in the execution and delivery of any of the Loan Documents and all agreements contemplated thereby, and execute, acknowledge, and deliver such other assurances and instruments as shall, in the opinion of the Agent, be necessary to fulfill the terms of the Loan Documents. 5.14 INITIAL FEES AND EXPENSES OF COUNSEL TO AGENT. Upon request by the Agent, promptly reimburse the Agent for all reasonable fees and expenses of Jackson Walker L.L.P., special counsel to the Agent, for which an invoice in reasonable detail has been provided, in connection with the preparation of this Agreement and all documentation contemplated hereby, the satisfaction of the conditions precedent set forth herein, the filing and recordation of Security Instruments, and the consummation of the transactions contemplated in this Agreement. 5.15 SUBSEQUENT FEES AND EXPENSES OF AGENT AND LENDERS. Upon request by the Agent, promptly reimburse the Agent (to the fullest extent permitted by law) for all amounts reasonably expended, advanced, or incurred by or on behalf of the Agent to ratify, amend, restate, or prepare additional Loan Documents, as the case may be and for the filing and recordation of Security Instruments. Promptly reimburse the Agent and each Lender for all amounts reasonably expended, advanced, or incurred to satisfy any obligation of the Borrower under any of the Loan Documents; to collect the Obligations; to enforce the rights of the Agent and each Lender under any of the Loan Documents; and to protect the Properties or business of the Borrower, including, without limitation, the Collateral, which amounts shall be deemed compensatory in nature and liquidated as to amount upon notice to the Borrower by the Agent and each Lender and which amounts shall include, but not be limited to (a) all court costs, (b) reasonable attorneys' fees, (c) reasonable fees and expenses of auditors and accountants incurred to protect the interests of the Agent and each Lender, (d) fees and expenses incurred in connection with the participation by the Agent and each Lender as a member of the creditors' committee in a case commenced under any Insolvency Proceeding, (e) fees and expenses incurred in connection with lifting the automatic stay prescribed in Section 362 Title 11 of the United States Code, and (f) fees and expenses incurred in connection with any action pursuant to Section 1129 Title 11 of the United States Code all reasonably incurred by the Agent and each Lender in connection with the collection of any sums due under the Loan Documents, together with interest at the per annum interest rate equal to the Floating Rate, calculated on a basis of a calendar year of 365 or 366 days, as the case may be, counting the actual number of days elapsed, on each such amount from the date of notification that the same was expended, advanced, or incurred by the Agent and each Lender until the date it is repaid to the Agent and each Lender, with the obligations under this Section surviving the non-assumption of this Agreement in a case commenced under any Insolvency Proceeding and being binding upon the Borrower and/or a trustee, receiver, custodian, or liquidator of the Borrower appointed in any such case. 5.16 OPERATION OF OIL AND GAS PROPERTIES. Develop, maintain, and operate its Oil and Gas Properties in a prudent and workmanlike manner in accordance with industry standards. 41 5.17 MAINTENANCE AND INSPECTION OF PROPERTIES. Maintain all of its tangible Properties in good repair and condition, ordinary wear and tear excepted; make all necessary replacements thereof and operate such Properties in a good and workmanlike manner; and permit on two Business Days prior notice any authorized representative of the Agent or any Lender to visit and inspect any tangible Property of the Borrower which is operated by the Borrower. 5.18 MAINTENANCE OF INSURANCE. Maintain insurance with respect to its Properties and businesses against such liabilities, casualties, risks, and contingencies as is customary in the relevant industry and sufficient to prevent a Material Adverse Effect, all such insurance to be in amounts and from insurers acceptable to the Lenders and, within 60 days of the Closing Date for property damage insurance covering Collateral and business interruption insurance, if any, maintained by Borrower, naming the Agent as loss payee, and, upon any renewal of any such insurance and at other times upon request by the Agent or any Lender, furnish to the Agent or any Lender evidence, satisfactory to the Agent and each Lender of the maintenance of such insurance. The Agent shall have the right to collect, and the Borrower hereby assigns to the Agent for the benefit of the Lenders, any and all monies that may become payable under any policies of insurance relating to business interruption or by reason of damage, loss, or destruction of any of the Collateral. In the event of any damage, loss, or destruction for which insurance proceeds relating to business interruption or Collateral exceed $100,000, the Agent for the benefit of the Lenders may, at its option, apply all such sums or any part thereof received by it toward the payment of the Obligations, whether matured or unmatured, application to be made first to interest and then to principal, and shall deliver to the Borrower the balance, if any, after such application has been made. In the event of any such damage, loss, or destruction for which insurance proceeds are $100,000 or less, provided that no Default or Event of Default has occurred and is continuing, the Agent shall deliver any such proceeds received by it to the Borrower. In the event the Agent receives insurance proceeds not attributable to Collateral or business interruption, the Agent shall deliver any such proceeds to the Borrower. 5.19 INDEMNIFICATION. INDEMNIFY AND HOLD THE AGENT AND EACH LENDER AND THEIR SHAREHOLDERS, OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT, AND AFFILIATES AND EACH TRUSTEE FOR THE BENEFIT OF THE AGENT AND EACH LENDER UNDER ANY SECURITY INSTRUMENT HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS, LOSSES, DAMAGES, LIABILITIES, FINES, PENALTIES, CHARGES, ADMINISTRATIVE AND JUDICIAL PROCEEDINGS AND ORDERS, JUDGMENTS, REMEDIAL ACTIONS, REQUIREMENTS AND ENFORCEMENT ACTIONS OF ANY KIND, AND ALL COSTS AND EXPENSES INCURRED IN CONNECTION THEREWITH (INCLUDING, WITHOUT LIMITATION, ATTORNEYS' FEES AND EXPENSES), ARISING DIRECTLY OR INDIRECTLY, IN WHOLE OR IN PART, FROM (A) THE PRESENCE OF ANY HAZARDOUS SUBSTANCES ON, UNDER, OR FROM ANY PROPERTY OF THE BORROWER, WHETHER PRIOR TO OR DURING THE TERM HEREOF, (B) ANY ACTIVITY CARRIED ON OR UNDERTAKEN ON OR OFF ANY PROPERTY OF THE BORROWER, , WHETHER PRIOR TO OR DURING THE TERM HEREOF, AND WHETHER BY THE BORROWER OR ANY PREDECESSOR IN TITLE, 42 EMPLOYEE, AGENT, CONTRACTOR, OR SUBCONTRACTOR OF THE BORROWER OR ANY OTHER PERSON AT ANY TIME OCCUPYING OR PRESENT ON SUCH PROPERTY, IN CONNECTION WITH THE HANDLING, TREATMENT, REMOVAL, STORAGE, DECONTAMINATION, CLEANUP, TRANSPORTATION, OR DISPOSAL OF ANY HAZARDOUS SUBSTANCES AT ANY TIME LOCATED OR PRESENT ON OR UNDER SUCH PROPERTY, (C) ANY RESIDUAL CONTAMINATION ON OR UNDER ANY PROPERTY OF THE BORROWER, (D) ANY CONTAMINATION OF ANY PROPERTY OR NATURAL RESOURCES ARISING IN CONNECTION WITH THE GENERATION, USE, HANDLING, STORAGE, TRANSPORTATION OR DISPOSAL OF ANY HAZARDOUS SUBSTANCES BY THE BORROWER OR ANY EMPLOYEE, AGENT, CONTRACTOR, OR SUBCONTRACTOR OF THE BORROWER WHILE SUCH PERSONS ARE ACTING WITHIN THE SCOPE OF THEIR RELATIONSHIP WITH THE BORROWER, IRRESPECTIVE OF WHETHER ANY OF SUCH ACTIVITIES WERE OR WILL BE UNDERTAKEN IN ACCORDANCE WITH APPLICABLE REQUIREMENTS OF LAW, OR (E) THE PERFORMANCE OF ANY LOAN DOCUMENT, ANY ALLEGATION BY ANY BENEFICIARY OF A LETTER OF CREDIT OF A WRONGFUL DISHONOR BY THE AGENT OR ANY LENDER OF A CLAIM OR DRAFT PRESENTED THEREUNDER, OR ANY OTHER ACT OR OMISSION IN CONNECTION WITH OR RELATED TO ANY LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING, WITHOUT LIMITATION, ANY OF THE FOREGOING IN THIS SECTION ARISING FROM NEGLIGENCE, OTHER THAN GROSS NEGLIGENCE, WHETHER SOLE OR CONCURRENT, ON THE PART OF THE AGENT OR ANY LENDER OR ANY OF THEIR SHAREHOLDERS, OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT, OR AFFILIATES OR ANY TRUSTEE FOR THE BENEFIT OF THE AGENT OR ANY LENDER UNDER ANY SECURITY INSTRUMENT; WITH THE FOREGOING INDEMNITY SURVIVING SATISFACTION OF ALL OBLIGATIONS AND THE TERMINATION OF THIS AGREEMENT, UNLESS ALL SUCH OBLIGATIONS HAVE BEEN SATISFIED WHOLLY IN CASH FROM THE BORROWER AND NOT BY WAY OF REALIZATION AGAINST ANY COLLATERAL OR THE CONVEYANCE OF ANY PROPERTY IN LIEU THEREOF, PROVIDED THAT SUCH INDEMNITY SHALL NOT EXTEND TO ANY ACT OR OMISSION BY THE AGENT OR ANY LENDER WITH RESPECT TO ANY PROPERTY SUBSEQUENT TO THE AGENT OR ANY LENDER BECOMING THE OWNER OF SUCH PROPERTY AND WITH RESPECT TO WHICH PROPERTY SUCH CLAIM, LOSS, DAMAGE, LIABILITY, FINE, PENALTY, CHARGE, PROCEEDING, ORDER, JUDGMENT, ACTION, OR REQUIREMENT ARISES SUBSEQUENT TO THE ACQUISITION OF TITLE THERETO BY THE AGENT OR ANY LENDER. 5.20 OPERATING ACCOUNTS. The Borrower shall maintain their principal operating accounts with the Agent. 43 ARTICLE VI NEGATIVE COVENANTS So long as any Obligation remains outstanding or unpaid or any Commitment exists, the Borrower will not and will not allow any of its Subsidiaries or other Affiliates to: 6.1 INDEBTEDNESS. Create, incur, assume, or suffer to exist any Indebtedness, whether by way of loan or otherwise; provided, however, the foregoing restriction shall not apply to (a) the Obligations, (b) Permitted Indebtedness, and (c) unsecured accounts payable incurred in the ordinary course of business, which are not unpaid in excess of 60 days beyond receipt date or are being contested in good faith, and (d) crude oil, natural gas, or other hydrocarbon floor, collar, cap, price protection, or swap agreements, in form and substance and with a Person acceptable to the Lenders, provided that (i) such agreements shall not be entered into with respect to Mortgaged Properties constituting more than 75% of the monthly production of proven producing reserves as forecast in Lenders' most recent engineering evaluation, (ii) that the strike prices in connection with option and swap agreements are not less than the prices used by the Lenders in their most recent Borrowing Base determination, (iii) the counterparty shall be approved by Lenders, (iv) Borrowers and/or Co-Borrowers shall notify Lenders within five days of executing a hedge transaction of the strike price and the volume of production, as well as the duration of the transaction, (v) Borrowers and/or Co-Borrowers shall only enter into hedge transactions with durations of eighteen months or less, (vi) Borrower and/or Co-Borrowers shall pay any liabilities created under the hedge transactions as they become due and in any event no later than 60 days from the date such liability was incurred; and (vii) the Lenders shall receive a security interest in the hedging contracts. 6.2 CONTINGENT OBLIGATIONS. Create, incur, assume, or suffer to exist any Contingent Obligation not otherwise prohibited by Section 6.1; provided, however, the foregoing restriction shall not apply to (a) performance guarantees and performance surety or other bonds provided in the ordinary course of business, or (b) trade credit incurred or operating leases entered into in the ordinary course of business. 6.3 LIENS. Create, incur, assume, or suffer to exist any Lien on any of its Oil and Gas Properties or any other Property, whether now owned or hereafter acquired; provided, however, the foregoing restrictions shall not apply to Permitted Liens. 6.4 SALES OF ASSETS. Without the prior written consent of the Agent and the Lenders, Borrower shall sell, transfer, or otherwise dispose of any assets, if such assets are material to the operations of Borrower, other than (a) sales of inventory in the ordinary course of business, (b) occasional sales, leases or other dispositions of immaterial assets for consideration not less than fair market value, (c) sales, leases or other dispositions of assets that are obsolete or have negligible fair market value, and (d) sales of equipment for fair and adequate consideration. The Agent and the Lenders will consent to sales of assets representing up to 10% in the aggregate of the net present 44 value of the Oil and Gas Properties which comprise the Borrowing Base, as calculated by the Agent and the Lenders pursuant to the terms of this Agreement, provided that the Borrowing Base shall be reduced, and if necessary, proceeds from such sale shall be applied to Loan Balance in an amount equal to the loan value attributable to such assets sold. 6.5 LEASEBACKS. Enter into any agreement to sell or transfer any Property and thereafter rent or lease as lessee such Property or other Property intended for the same use or purpose as the Property sold or transferred. 6.6 LOANS OR ADVANCES. Make or agree to make or allow to remain outstanding any loans or advances to any Person, other than to the other entity also constituting a Borrower in excess of $100,000 in the aggregate; provided, however, the foregoing restrictions shall not apply to (a) advances or extensions of credit in the form of accounts receivable incurred in the ordinary course of business and upon terms common in the industry for such accounts receivable, or (b) advances to employees of the Borrower for the payment of expenses in the ordinary course of business. 6.7 INVESTMENTS. Acquire Investments in, or purchase or otherwise acquire all or substantially all of the assets of, any Person which exceeds $250,000 in the aggregate during any calendar year, without the prior consent of the Lenders provided, however, such restriction shall not apply to the following Investments: (a) marketable obligations issued or unconditionally guaranteed by the United States Government or issued by any of its agencies and backed by the full faith and credit of the United States of America; (b) short-term investment grade domestic or Eurodollar certificates of deposit or time deposits that are fully insured by the Federal Deposit Insurance Corporation; (c) commercial paper and similar obligations rated "P-1" or better by Moody's Investors Services, Inc. or "A-1" or better by Standard & Poors Corporation; (d) intercompany loans to, advances to or investments in, wholly owned Subsidiaries; (e) readily marketable tax-free municipal bonds of a domestic issuer or rated "aaa" or better by Moody's Investors Services, Inc. or "AAA" by Standard & Poors Corporation; and (f) demand deposit accounts maintained in the ordinary course of business. 45 6.8 DIVIDENDS AND DISTRIBUTIONS. Declare, pay, or make, any cash dividend or distribution on, or purchase, redeem, or otherwise acquire for value, any share of any class of its capital stock. 6.9 CHANGES IN CORPORATE STRUCTURE. Enter into any transaction of consolidation, merger, or amalgamation; or liquidate, wind up, or dissolve (or suffer any liquidation or dissolution). 6.10 TRANSACTIONS WITH AFFILIATES. Directly or indirectly, enter into any transaction (including the sale, lease, or exchange of Property or the rendering of service) with any of its Affiliates, other than upon fair and reasonable terms no less favorable than could be obtained in an arm's length transaction with a Person which was not an Affiliate. 6.11 LINES OF BUSINESS. Expand, on their own or through any Subsidiary, into any line of business other than those in which the Borrower is engaged as of the date hereof. 6.12 PLAN OBLIGATIONS. Assume or otherwise become subject to an obligation to contribute to or maintain any Plan not set forth in Schedule 6.12 or acquire any Person which has at any time had an obligation to contribute to or maintain any Plan. 6.13 NEW SUBSIDIARIES. Form any new Subsidiaries without the prior written consent of the Lenders. 6.14 CASH FLOW COVERAGE. Permit, as of the close of any fiscal quarter of Borrower, the ratio of Cash Flow to Debt Service to be less than 1.25 to 1.00. 6.15 CURRENT RATIO. Permit, as of the close of any fiscal quarter of Borrower, the Current Ratio to be less than .90 to 1.00. Receivables from Bay City Energy Group and the current portion of the Loan Balance shall be excluded from calculation of Current Ratio. 6.16 CHANGE OF FISCAL YEAR. The Borrower will not change its fiscal year. ARTICLE VII EVENTS OF DEFAULT 7.1 ENUMERATION OF EVENTS OF DEFAULT. Any of the following events shall constitute an Event of Default: (a) default shall be made in the payment when due of any installment of principal or interest under this Agreement or the Notes or in the payment when due of any fee or other sum payable under any Loan Document. 46 (b) default shall be made by the Borrower in the due observance or performance of any obligation of the Borrower under the Loan Documents, and such default shall continue for 30 days after the earlier of written notice thereof to the Borrower by the Agent or actual knowledge thereof by the Borrower; (c) any representation or warranty made by the Borrower in any of the Loan Documents proves to have been untrue in any material respect or any representation, statement (including Financial Statements), certificate, or data furnished or made to the Agent and/or the Lenders in connection herewith proves to have been untrue in any material respect as of the date the facts therein set forth were stated or certified; (d) default shall be made by the Borrower (as principal or guarantor or other surety) in the payment or performance of any Indebtedness in excess of $100,000 and such default shall remain unremedied for in excess of the period of grace, if any, with respect thereto; (e) the Borrower shall be unable to satisfy any condition or cure any circumstance specified in Article , the satisfaction or curing of which is a condition precedent to the right of the Borrower to obtain a Loan or for the issuance of a Letter of Credit, and such inability shall continue for a period in excess of 30 days; (f) the Borrower shall (i) apply for or consent to the appointment of a receiver, trustee, or liquidator of their or all or a substantial part of its assets, (ii) file a voluntary petition commencing an Insolvency Proceeding, (iii) make a general assignment for the benefit of creditors, (iv) be unable, or admit in writing its inability, to pay its debts generally as they become due, or (v) file an answer admitting the material allegations of a petition filed against it in any Insolvency Proceeding; (g) an order, judgment, or decree shall be entered against the Borrower by any court of competent jurisdiction or by any other duly authorized authority, on the petition of a creditor or otherwise, granting relief in any Insolvency Proceeding or approving a petition seeking reorganization or an arrangement of its debts or appointing a receiver, trustee, conservator, custodian, or liquidator of their or all or any substantial part of its assets, and such order, judgment, or decree shall not be dismissed or stayed within 90 days; (h) the levy against any significant portion of the Property of the Borrower or any execution, garnishment, attachment, sequestration, or other writ or similar proceeding which is not permanently dismissed or discharged within 30 days after the levy; 47 (i) a final and non-appealable order, judgment, or decree shall be entered against the Borrower for money damages and/or Indebtedness due in an amount in excess of $100,000, and such order, judgment, or decree shall not be dismissed or stayed within 30 days; (j) any charges are filed or any other action or proceeding is instituted by any Governmental Authority against the Borrower under the Racketeering Influence and Corrupt Organizations Statute (18 U.S.C. Section 1961 ET SEQ.), the result of which could be the forfeiture or transfer of any material Property of the Borrower subject to a Lien in favor of the Agent for the benefit of the Lenders without (i) satisfaction or provision for satisfaction of such Lien, or (ii) such forfeiture or transfer of such Property being expressly made subject to such Lien; (k) the Borrower shall have (i) concealed, removed, or diverted, or permitted to be concealed, removed, or diverted, any part of their Property, with intent to hinder, delay, or defraud its creditors or any of them, (ii) made or suffered a transfer of any of its Property which may be fraudulent under any bankruptcy, fraudulent conveyance, or similar law, or (iii) shall have suffered or permitted, while insolvent, any creditor to obtain a Lien upon any of its Property through legal proceedings or distraint which is not vacated within 30 days from the date thereof; (l) any Security Instrument shall for any reason (other than the Agent's or the Lender's fault or negligence) not, or cease to, create valid and perfected first-priority Liens against the Collateral purportedly covered thereby and not cured within 30 days; and (m) the occurrence of a Material Adverse Effect and the same shall remain unremedied for in excess of 30 days after notice given by the Agent. 7.2 REMEDIES. Upon the occurrence of an Event of Default specified in Sections 7.1(f) or 7.1(g), immediately and without notice, (i) all Obligations shall automatically become immediately due and payable, without presentment, demand, protest, notice of protest, default, or dishonor, notice of intent to accelerate maturity, notice of acceleration of maturity, or `other notice of any kind, except as may be provided to the contrary elsewhere herein, all of which are hereby expressly waived by the Borrower; (ii) the Commitments shall immediately cease and terminate unless and until reinstated by the Agent and the Lenders in writing; and (iii) to the extent permitted by and in compliance with applicable law, the Agent and the Lenders may set-off and apply any and all deposits (general or special, time or demand, provisional or final) held by the Agent and the Lenders and any and all other indebtedness at any time owing by the Agent and the Lenders to or for the credit or account of the Borrower against any and all of the Obligations although such Obligations may be unmatured. 48 (b) Upon the occurrence of any Event of Default other than those specified in Sections 7.1(f) or 7.1(g), (i) the Agent and the Lenders may, by notice to the Borrower, declare all Obligations immediately due and payable, without presentment, demand, protest, notice of protest, default, or dishonor, notice of intent to accelerate maturity, notice of acceleration of maturity, or other notice of any kind, except as may be provided to the contrary elsewhere herein, all of which are hereby expressly waived by the Borrower; (ii) the Commitments shall immediately cease and terminate unless and until reinstated by the Agent and the Lenders in writing; and (iii) to the extent permitted by and in compliance with applicable law, the Agent and the Lenders may set-off and apply any and all deposits (general or special, time or demand, provisional or final) held by the Agent and the Lenders and any and all other indebtedness at any time owing by the Agent and the Lenders to or for the credit or account of the Borrower against any and all of the Obligations although such Obligations may be unmatured. (c) Upon the occurrence of any Event of Default, the Agent and the Lenders may, in addition to the foregoing in this Section, exercise any or all of their rights and remedies provided by law or pursuant to the Loan Documents. ARTICLE VIII THE AGENT 8.1 APPOINTMENT. Each Lender hereby designates and appoints the Agent as the agent of such Lender under this Agreement and the other Loan Documents. Each Lender authorizes the Agent, as the agent for such Lender, to take such action on behalf of such Lender under the provisions of this Agreement and the other Loan Documents and to exercise such powers and perform such duties as are expressly delegated to the Agent by the terms of this Agreement and the other Loan Documents, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in this Agreement or in any other Loan Document, the Agent shall not have any duties or responsibilities except those expressly set forth herein or in any other Loan Document or any fiduciary relationship with any Lender; and no implied covenants, functions, responsibilities, duties, obligations, or liabilities on the part of the Agent shall be read into this Agreement or any other Loan Document or otherwise exist against the Agent. 8.2 WAIVERS, AMENDMENTS. The provisions of this Agreement and of each other Loan Document may from time to time be amended, modified or waived, if such amendment, modification, or waiver is in writing and consented to by the Borrower and the Required Lenders; provided, however, that no such amendment, modification or waiver would: (a) modify any requirement hereunder that any particular action be taken by all of the Lenders or by the Required Lenders unless consented to by each Lender; (b) modify this Section 8.2, change the definition of "Required Lenders", or change the Commitment Amount or Percentage Share of any Lender, reduce the fees described in Article II, extend the Commitment Termination Date or Final Maturity, release any Security Instrument or Lien, or initiate any foreclosure, enforcement or collection procedure 49 without the consent of each Lender; (c) extend the due date for, (or reduce the amount of any scheduled repayment or prepayment of principal of or interest on any Loan) without the consent of the holder of that Note evidencing such Loan; (d) affect, adversely the interests, rights, or obligations of the Agent without the consent of the Agent; or (e) modify the Borrowing Base or modify the Scheduled Reduction Amount. 8.3 DELEGATION OF DUTIES. The Agent may execute any of its duties under this Agreement and the other Loan Documents by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. 8.4 EXCULPATORY PROVISIONS. Neither the Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates shall be (a) required to initiate or conduct any litigation or collection proceedings hereunder, except with the concurrence of the Lenders and contribution by each Lender of its Percentage Share of costs reasonably expected by the Agent to be incurred in connection therewith, (b) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement or any other Loan Document (except for gross negligence or willful misconduct of the Agent or such Person), or (c) responsible in any manner to any Lender for any recitals, statements, representations or warranties made by the Borrower or any officer thereof contained in this Agreement or any other Loan Document or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, this Agreement or any other Loan Document, or for the sufficiency, accuracy, or completeness of any materials provided by the Agent, or the failure of the Agent to provide any materials or disclose any matter to any Lender except as may be expressly required herein, or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document or for any failure of the Borrower to perform its obligations hereunder or thereunder. The Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of the Borrower. 8.5 RELIANCE BY AGENT. The Agent shall be entitled to rely, and shall be fully protected in relying, upon any Note, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Borrower), independent accountants and other experts selected by the Agent. The Agent may deem and treat the payee of any Note as the owner thereof for all purposes unless and until an executed Lender Assignment Agreement shall have been received by the Agent. The Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Lenders as it deems appropriate and contribution by each Lender of its Percentage Share of costs reasonably 50 EX-10.12 9 EXHIBIT 10.12 FIRST AMENDMENT TO CREDIT AGREEMENT between MIDDLE BAY OIL COMPANY, INC. AND ENEX RESOURCES CORPORATION AS BORROWER AND COMPASS BANK, AS AGENT AND A LENDER BANK OF OKLAHOMA, NATIONAL ASSOCIATION, AS A LENDER AND THE OTHER LENDERS SIGNATORY HERETO Effective as of August __, 1999 TABLE OF CONTENTS
PAGE ---- ARTICLE I. DEFINITIONS....................................................1 1.01 Terms Defined Above......................................1 1.02 Terms Defined in Agreement...............................1 1.03 References...............................................1 1.04 Articles and Sections....................................2 1.05 Number and Gender........................................2 ARTICLE II. AMENDMENTS.....................................................2 2.01 Amendment of Section 1.2.................................2 2.02 Amendment of Section 2.2.................................2 2.03 Amendment of Article V...................................3 ARTICLE III. CONDITIONS.....................................................3 3.01 Receipt of Documents.....................................3 3.02 Accuracy of Representations and Warranties...............3 3.03 Matters Satisfactory to Lender...........................4 ARTICLE IV. REPRESENTATIONS AND WARRANTIES.................................4 ARTICLE V. RATIFICATION...................................................4 ARTICLE VI. MISCELLANEOUS..................................................4 6.01 Scope of Amendment.......................................4 6.02 Agreement as Amended.....................................4 6.03 Parties in Interest......................................4 6.04 Rights of Third Parties..................................4 6.05 ENTIRE AGREEMENT.........................................5 6.06 GOVERNING LAW............................................5 6.07 JURISDICTION AND VENUE...................................5
FIRST AMENDMENT TO CREDIT AGREEMENT This FIRST AMENDMENT TO CREDIT AGREEMENT (this "FIRST AMENDMENT") is made and entered into effective as of August __, 1999, by and between MIDDLE BAY OIL COMPANY, INC., an Alabama corporation ("MIDDLE BAY"), and ENEX RESOURCES CORPORATION, a Delaware corporation ("ENEX") (collectively, the "BORROWER", but with such entities constituting the Borrower being jointly and severally liable for the Obligations and each reference herein to the Borrower being applicable to each of such entities) and COMPASS BANK, an Alabama state chartered banking institution ("COMPASS"), BANK OF OKLAHOMA, NATIONAL ASSOCIATION, a national banking association ("BOK") and each other lender that becomes a signatory hereto as provided in Section 9.1 of the Credit Agreement (Compass and each such other lender, together with its successors and assigns, individually a "Lender" and collectively, the "Lenders"), and Compass, as agent for the Lenders pursuant to the terms hereof (in such capacity, together with its successors in such capacity pursuant to the terms hereof, (the "AGENT"). W I T N E S S E T H: WHEREAS, the above named parties did execute and exchange counterparts of that certain Credit Agreement dated March 27, 1998, as amended by various letter amendments (the "AGREEMENT"), to which reference is here made for all purposes; WHEREAS, the parties subject to and bound by the Agreement are desirous of amending the Agreement in the particulars hereinafter set forth; NOW, THEREFORE, in consideration of the mutual covenants and agreements of the parties to the Agreement, as set forth therein, and the mutual covenants and agreements of the parties hereto, as set forth in this First Amendment, the parties hereto agree as follows: ARTICLE I. DEFINITIONS 1.01 TERMS DEFINED ABOVE. As used herein, each of the terms "AGENT," "AGREEMENT," "BOK," "BORROWER," "COMPASS," "ENEX," "MIDDLE BAY," "LENDERS", and "FIRST AMENDMENT," shall have the meaning assigned to such term hereinabove. 1.02 TERMS DEFINED IN AGREEMENT. As used herein, each term defined in the Agreement shall have the meaning assigned thereto in the Agreement, unless expressly provided herein to the contrary. 1.03 REFERENCES. References in this First Amendment to Article or Section numbers shall be to Articles and Sections of this First Amendment, unless expressly stated herein to the contrary. References in this First Amendment to "hereby," "herein," "hereinafter," "hereinabove," "hereinbelow," "hereof," and "hereunder" shall be to this First Amendment in its entirety and not only to the particular Article or Section in which such reference appears. 1.04 ARTICLES AND SECTIONS. This First Amendment, for convenience only, has been divided into Articles and Sections and it is understood that the rights, powers, privileges, duties, and other legal relations of the parties hereto shall be determined from this First Amendment as an entirety and without regard to such division into Articles and Sections and without regard to headings prefixed to such Articles and Sections. 1.05 NUMBER AND GENDER. Whenever the context requires, reference herein made to the single number shall be understood to include the plural and likewise the plural shall be understood to include the singular. Words denoting sex shall be construed to include the masculine, feminine, and neuter, when such construction is appropriate, and specific enumeration shall not exclude the general, but shall be construed as cumulative. Definitions of terms defined in the singular and plural shall be equally applicable to the plural or singular, as the case may be. ARTICLE II. AMENDMENTS The Borrower and the Lenders hereby amend the Agreement in the following particulars: 2.01 AMENDMENT OF SECTION 1.2. Section 1.2 of the Agreement is hereby amended as follows: The following definitions are added and/or amended to read as follows: "PERMITTED INDEBTEDNESS" shall mean (a) the Obligations, (b) Indebtedness arising from endorsing negotiable instruments for deposit or collection in the ordinary course of business, (c) current liabilities incurred in the ordinary course of business, (d) other Indebtedness which does not exceed an aggregate principal amount of $250,000 during any fiscal year, (e) Indebtedness existing by virtue of the requirements of GAAP or any changes in the requirements of GAAP, and (f) Subordinated Debt. "SUBORDINATED DEBT" shall mean (i) the Senior Subordinated Promissory Note dated August __, 1999, from Middle Bay Oil Company, Inc. payable to 3TEC Energy Corporation in the principal 2 amount of $10,700,000, (ii) the Senior Subordinated Promissory Note dated August __, 1999, from Middle Bay Oil Company, Inc., payable to Shoemaker Family Partners, LP in the amount of $50,000, and (iii) the Senior Subordinated Promissory Note dated August __, 1999, from Middle Bay Oil Company, Inc., payable to Shoeinvest II, LP in the amount of $100,000. ARTICLE III. CONDITIONS The obligation of the Lenders to amend the Agreement as provided herein is subject to the fulfillment of the following conditions precedent: 3.01 RECEIPT OF DOCUMENTS. The Lenders shall have received, reviewed, and approved the following documents and other items, appropriately executed when necessary and in form and substance satisfactory to the Agent: (a) multiple counterparts of this First Amendment as requested by the Agent; (b) Subordination Agreement dated August __, 1999, by and among 3TEC Energy Corporation, Middle Bay Oil Company, Inc. and Compass Bank and Bank of Oklahoma, National Association.; and (c) Subordination Agreement dated August __, 1999, by and mong Shoemaker Family Partners, LP, Middle Bay Oil Company, nc. and Compass Bank and Bank of Oklahoma, National ssociation.; and (d) Subordination Agreement dated August __, 1999, by and among Shoeinvest II, LP, Middle Bay Oil Company, Inc. and Compass Bank and Bank of Oklahoma, National Association.; and (e) such other agreements, documents, items, instruments, opinions, certificates, waivers, consents, and evidence as the Agent may reasonably request. 3.02 ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations and warranties contained in Article IV of the Agreement and this First Amendment shall be true and correct. 3.03 MATTERS SATISFACTORY TO LENDERS. All matters incident to the consummation of the transactions contemplated hereby shall be satisfactory to the Lenders. 3 ARTICLE IV. REPRESENTATIONS AND WARRANTIES The Borrower hereby expressly re-makes, in favor of the Agent and the Lenders, all of the representations and warranties set forth in Article IV of the Agreement, and represents and warrants that all such representations and warranties remain true and unbreached. ARTICLE V. RATIFICATION Each of the parties hereto does hereby adopt, ratify, and confirm the Agreement and the other Loan Documents, in all things in accordance with the terms and provisions thereof, as amended by this First Amendment. ARTICLE VI. MISCELLANEOUS 6.01 SCOPE OF AMENDMENT. The scope of this First Amendment is expressly limited to the matters addressed herein and this First Amendment shall not operate as a waiver of any past, present, or future breach, Default, or Event of Default under the Agreement, except to the extent, if any, that any such breach, Default, or Event of Default is remedied by the effect of this First Amendment. 6.02 AGREEMENT AS AMENDED. All references to the Agreement in any document heretofore or hereafter executed in connection with the transactions contemplated in the Agreement shall be deemed to refer to the Agreement as amended by this First Amendment. 6.03 PARTIES IN INTEREST. All provisions of this First Amendment shall be binding upon and shall inure to the benefit of the Borrower, the Lender and their respective successors and assigns. 6.04 RIGHTS OF THIRD PARTIES. All provisions herein are imposed solely and exclusively for the benefit of the Agent and the Lenders and the Borrower, and no other Person shall have standing to require satisfaction of such provisions in accordance with their terms and any or all of such provisions may be freely waived in whole or in part by the Lender at any time if in its sole discretion it deems it advisable to do so. 6.05 ENTIRE AGREEMENT. THIS AGREEMENT AND THE OTHER WRITTEN LOAN DOCUMENTS CONSTITUTE THE ENTIRE AGREEMENT BETWEEN THE PARTIES HERETO WITH RESPECT TO THE SUBJECT HEREOF AND SHALL SUPERSEDE ANY PRIOR AGREEMENT BETWEEN THE PARTIES HERETO, 4 WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT HEREOF. FURTHERMORE, IN THIS REGARD, THIS AGREEMENT AND THE OTHER WRITTEN LOAN DOCUMENTS REPRESENT, COLLECTIVELY, THE FINAL AGREEMENT AMONG THE PARTIES THERETO AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF SUCH PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG SUCH PARTIES. 6.06 GOVERNING LAW. THIS AGREEMENT AND THE NOTE SHALL BE DEEMED TO BE CONTRACTS MADE UNDER AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS WITHOUT GIVING EFFECT TO PRINCIPLES THEREOF RELATING TO CONFLICTS OF LAW; PROVIDED, HOWEVER, THAT CHAPTER 345 OF THE TEXAS FINANCE CODE (WHICH REGULATES CERTAIN REVOLVING CREDIT LOAN ACCOUNTS AND REVOLVING TRIPARTY ACCOUNTS) SHALL NOT APPLY. 6.07 JURISDICTION AND VENUE. ALL ACTIONS OR PROCEEDINGS WITH RESPECT TO, ARISING DIRECTLY OR INDIRECTLY IN CONNECTION WITH, OUT OF, RELATED TO, OR FROM THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE LITIGATED, AT THE SOLE DISCRETION AND ELECTION OF THE LENDERS, IN COURTS HAVING SITUS IN HOUSTON, HARRIS COUNTY, TEXAS. THE BORROWER HEREBY SUBMIT TO THE JURISDICTION OF ANY LOCAL, STATE, OR FEDERAL COURT LOCATED IN HOUSTON, HARRIS COUNTY, TEXAS, AND HEREBY WAIVE ANY RIGHTS THEY MAY HAVE TO TRANSFER OR CHANGE THE JURISDICTION OR VENUE OF ANY LITIGATION BROUGHT AGAINST THEM BY THE LENDERS IN ACCORDANCE WITH THIS SECTION. IN WITNESS WHEREOF, this First Amendment to Credit Agreement is executed effective the date first hereinabove written. BORROWER: MIDDLE BAY OIL COMPANY, INC. By: ------------------------------- John J. Bassett President 5 ENEX RESOURCES CORPORATION By: ------------------------------- John J. Bassett President LENDER AND AGENT: COMPASS BANK By: ------------------------------- Dorothy Marchand Wilson Senior Vice President LENDER: BANK OF OKLAHOMA, NATIONAL ASSOCIATION By: ------------------------------- Michael M. Coats Senior Vice President 6 EX-10.13 10 EXHIBIT 10.13 SECOND AMENDMENT TO CREDIT AGREEMENT between MIDDLE BAY OIL COMPANY, INC. AND ENEX RESOURCES CORPORATION AS BORROWER AND COMPASS BANK, AS AGENT AND A LENDER BANK OF OKLAHOMA, NATIONAL ASSOCIATION, AS A LENDER AND THE OTHER LENDERS SIGNATORY HERETO Effective as of October __, 1999 TABLE OF CONTENTS
PAGE ---- ARTICLE I. DEFINITIONS .................................................... 1 1.01 Terms Defined Above ..................................... 1 1.02 Terms Defined in Agreement .............................. 1 1.03 References .............................................. 1 1.04 Articles and Sections ................................... 2 1.05 Number and Gender ....................................... 2 ARTICLE II. AMENDMENTS ..................................................... 2 2.01 Amendment of Section 1.2 ................................ 2 2.02 Amendment of Section 2.2 ................................ 2 2.03 Amendment of Article V. ................................. 3 ARTICLE III. CONDITIONS ..................................................... 3 3.01 Receipt of Documents .................................... 3 3.02 Accuracy of Representations and Warranties .............. 3 3.03 Matters Satisfactory to Lender .......................... 4 ARTICLE IV. REPRESENTATIONS AND WARRANTIES ................................. 4 ARTICLE V. RATIFICATION ................................................... 4 ARTICLE VI. MISCELLANEOUS .................................................. 4 6.01 Scope of Amendment ...................................... 4 6.02 Agreement as Amended .................................... 4 6.03 Parties in Interest ..................................... 4 6.04 Rights of Third Parties ................................. 4 6.05 ENTIRE AGREEMENT ........................................ 5 6.06 GOVERNING LAW ........................................... 5 6.07 JURISDICTION AND VENUE .................................. 5
i SECOND AMENDMENT TO CREDIT AGREEMENT ------------------------------------ This SECOND AMENDMENT TO CREDIT AGREEMENT (this "SECOND AMENDMENT") is made and entered into effective as of October __, 1999, by and between MIDDLE BAY OIL COMPANY, INC., an Alabama corporation ("MIDDLE Bay"), and ENEX RESOURCES CORPORATION, a Delaware corporation ("ENEX") (collectively, the "BORROWER", but with such entities constituting the Borrower being jointly and severally liable for the Obligations and each reference herein to the Borrower being applicable to each of such entities) and COMPASS BANK, an Alabama state chartered banking institution ("COMPASS"), BANK OF OKLAHOMA, NATIONAL ASSOCIATION, a national banking association ("BOK") and each other lender that becomes a signatory hereto as provided in Section 9.1 of the Credit Agreement (Compass and each such other lender, together with its successors and assigns, individually a "Lender" and collectively, the "Lenders"), and Compass, as agent for the Lenders pursuant to the terms hereof (in such capacity, together with its successors in such capacity pursuant to the terms hereof, (the "AGENT"). W I T N E S S E T H: -------------------- WHEREAS, the above named parties did execute and exchange counterparts of that certain Credit Agreement dated March 27, 1998, as amended by various letter amendments, and as further amended by First Amendment to Credit Agreement dated August 27, 1999 (the "AGREEMENT"), to which reference is here made for all purposes; WHEREAS, the parties subject to and bound by the Agreement are desirous of amending the Agreement in the particulars hereinafter set forth; NOW, THEREFORE, in consideration of the mutual covenants and agreements of the parties to the Agreement, as set forth therein, and the mutual covenants and agreements of the parties hereto, as set forth in this Second Amendment, the parties hereto agree as follows: ARTICLE I. DEFINITIONS ----------- 1.01 TERMS DEFINED ABOVE. As used herein, each of the terms "AGENT," "AGREEMENT," "BOK," "BORROWER," "COMPASS," "ENEX," "MIDDLE BAY," "LENDERS", and "SECOND AMENDMENT," shall have the meaning assigned to such term hereinabove. 1.02 TERMS DEFINED IN AGREEMENT. As used herein, each term defined in the Agreement shall have the meaning assigned thereto in the Agreement, unless expressly provided herein to the contrary. 1.03 REFERENCES. References in this Second Amendment to Article or Section numbers shall be to Articles and Sections of this Second Amendment, unless expressly stated herein to the contrary. References in this Second Amendment to "hereby," "herein," "hereinafter," "hereinabove," "hereinbelow," "hereof," and "hereunder" shall be to this Second Amendment in its entirety and not only to the particular Article or Section in which such reference appears. 1.04 ARTICLES AND SECTIONS. This Second Amendment, for convenience only, has been divided into Articles and Sections and it is understood that the rights, powers, privileges, duties, and other legal relations of the parties hereto shall be determined from this Second Amendment as an entirety and without regard to such division into Articles and Sections and without regard to headings prefixed to such Articles and Sections. 1.05 NUMBER AND GENDER. Whenever the context requires, reference herein made to the single number shall be understood to include the plural and likewise the plural shall be understood to include the singular. Words denoting sex shall be construed to include the masculine, feminine, and neuter, when such construction is appropriate, and specific enumeration shall not exclude the general, but shall be construed as cumulative. Definitions of terms defined in the singular and plural shall be equally applicable to the plural or singular, as the case may be. ARTICLE II. AMENDMENTS ---------- The Borrower and the Lenders hereby amend the Agreement in the following particulars: 2.01 AMENDMENT OF SECTION 1.2. Section 1.2 of the Agreement is hereby amended as follows: The following definitions is added and/or amended to read as follows: "SUBORDINATED DEBT" shall mean (i) the Senior Subordinated Promissory Note dated August 27, 1999, from Middle Bay Oil Company, Inc. payable to 3TEC Energy Corporation in the principal amount of $10,700,000, (ii) the Senior Subordinated Promissory Note dated August 27, 1999, from Middle Bay Oil Company, Inc., payable to Shoemaker Family Partners, LP in the amount of $50,000, (iii) the Senior Subordinated Promissory Note dated August 27, 1999, from Middle Bay Oil Company, Inc., payable to Shoeinvest II, LP in the amount of $100,000, and (iv) the Senior Subordinated Convertible Promissory Note dated October __, 1999, from Middle Bay Oil Company, Inc., payable to The Prudential Insurance Company of America in the principal amount of $2,373,844. 2 ARTICLE III. CONDITIONS ------------ The obligation of the Lenders to amend the Agreement as provided herein is subject to the fulfillment of the following conditions precedent: 3.01 RECEIPT OF DOCUMENTS. The Lenders shall have received, reviewed, and approved the following documents and other items, appropriately executed when necessary and in form and substance satisfactory to the Agent: (a) multiple counterparts of this Second Amendment as requested by the Agent; and (b) such other agreements, documents, items, instruments, opinions, certificates, waivers, consents, and evidence as the Agent may reasonably request. 3.02 ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations and warranties contained in Article IV of the Agreement and this Second Amendment shall be true and correct. 3.03 MATTERS SATISFACTORY TO LENDERS. All matters incident to the consummation of the transactions contemplated hereby shall be satisfactory to the Lenders. ARTICLE IV. REPRESENTATIONS AND WARRANTIES ------------------------------ The Borrower hereby expressly re-makes, in favor of the Agent and the Lenders, all of the representations and warranties set forth in Article IV of the Agreement, and represents and warrants that all such representations and warranties remain true and unbreached. ARTICLE V. RATIFICATION ------------ Each of the parties hereto does hereby adopt, ratify, and confirm the Agreement and the other Loan Documents, in all things in accordance with the terms and provisions thereof, as amended by this Second Amendment. 3 ARTICLE VI. MISCELLANEOUS ------------- 6.01 SCOPE OF AMENDMENT. The scope of this Second Amendment is expressly limited to the matters addressed herein and this Second Amendment shall not operate as a waiver of any past, present, or future breach, Default, or Event of Default under the Agreement, except to the extent, if any, that any such breach, Default, or Event of Default is remedied by the effect of this Second Amendment. 6.02 AGREEMENT AS AMENDED. All references to the Agreement in any document heretofore or hereafter executed in connection with the transactions contemplated in the Agreement shall be deemed to refer to the Agreement as amended by this Second Amendment. 6.03 PARTIES IN INTEREST. All provisions of this Second Amendment shall be binding upon and shall inure to the benefit of the Borrower, the Lender and their respective successors and assigns. 6.04 RIGHTS OF THIRD PARTIES. All provisions herein are imposed solely and exclusively for the benefit of the Agent and the Lenders and the Borrower, and no other Person shall have standing to require satisfaction of such provisions in accordance with their terms and any or all of such provisions may be freely waived in whole or in part by the Lender at any time if in its sole discretion it deems it advisable to do so. 6.05 ENTIRE AGREEMENT. THIS AGREEMENT AND THE OTHER WRITTEN LOAN DOCUMENTS CONSTITUTE THE ENTIRE AGREEMENT BETWEEN THE PARTIES HERETO WITH RESPECT TO THE SUBJECT HEREOF AND SHALL SUPERSEDE ANY PRIOR AGREEMENT BETWEEN THE PARTIES HERETO, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT HEREOF. FURTHERMORE, IN THIS REGARD, THIS AGREEMENT AND THE OTHER WRITTEN LOAN DOCUMENTS REPRESENT, COLLECTIVELY, THE FINAL AGREEMENT AMONG THE PARTIES THERETO AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF SUCH PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG SUCH PARTIES. 6.06 GOVERNING LAW. THIS AGREEMENT AND THE NOTE SHALL BE DEEMED TO BE CONTRACTS MADE UNDER AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS WITHOUT GIVING EFFECT TO PRINCIPLES THEREOF RELATING TO CONFLICTS OF LAW; PROVIDED, HOWEVER, THAT CHAPTER 345 OF THE TEXAS FINANCE CODE (WHICH REGULATES CERTAIN REVOLVING CREDIT LOAN ACCOUNTS AND REVOLVING TRIPARTY ACCOUNTS) SHALL NOT APPLY. 4 6.07 JURISDICTION AND VENUE. ALL ACTIONS OR PROCEEDINGS WITH RESPECT TO, ARISING DIRECTLY OR INDIRECTLY IN CONNECTION WITH, OUT OF, RELATED TO, OR FROM THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE LITIGATED, AT THE SOLE DISCRETION AND ELECTION OF THE LENDERS, IN COURTS HAVING SITUS IN HOUSTON, HARRIS COUNTY, TEXAS. THE BORROWER HEREBY SUBMIT TO THE JURISDICTION OF ANY LOCAL, STATE, OR FEDERAL COURT LOCATED IN HOUSTON, HARRIS COUNTY, TEXAS, AND HEREBY WAIVE ANY RIGHTS THEY MAY HAVE TO TRANSFER OR CHANGE THE JURISDICTION OR VENUE OF ANY LITIGATION BROUGHT AGAINST THEM BY THE LENDERS IN ACCORDANCE WITH THIS SECTION. IN WITNESS WHEREOF, this Second Amendment to Credit Agreement is executed effective the date first hereinabove written. BORROWER: --------- MIDDLE BAY OIL COMPANY, INC. By: ______________________________________ Floyd C. Wilson President and Chief Executive Officer ENEX RESOURCES CORPORATION By: ______________________________________ Floyd C. Wilson President and Chief Executive Officer LENDER AND AGENT: COMPASS BANK By: ______________________________________ Dorothy Marchand Wilson Senior Vice President 5 LENDER: BANK OF OKLAHOMA, NATIONAL ASSOCIATION By: ______________________________________ Michael M. Coats Senior Vice President 6 EX-10.14 11 EXHIBIT 10.14 SUBORDINATION AGREEMENT THIS SUBORDINATION AGREEMENT (this "AGREEMENT") is made and entered into effective this ___ day of August, 1999, by and among 3TEC ENERGY CORPORATION, a Delaware corporation ("3TEC"); MIDDLE BAY OIL COMPANY, INC., an Alabama corporation (the "BORROWER") and COMPASS BANK, an Alabama state chartered banking institution, as Agent for itself and BANK OF OKLAHOMA, NATIONAL ASSOCIATION (collectively, the "LENDERS"). WITNESSETH: WHEREAS, pursuant to that certain Credit Agreement dated March 27, 1998, by and between the Borrower and ENEX RESOURCES CORPORATION as Borrowers and the Lenders as amended by various letter amendments and by First Amendment of even date herewith (as such agreement may be amended, modified, supplemented or restated from time to time, the "CREDIT AGREEMENT"), the Lenders has agreed to make Loans to or for the benefit of the Borrower; WHEREAS, 3TEC has or is obligated to advance certain funds to the Borrower pursuant to that certain note dated August __, 1999, from the Borrower to 3TEC ( the "3TEC NOTE"), in the amount of $10,700,000 (the "DEBT"); WHEREAS, pursuant to the Credit Agreement and as an inducement to the Lenders to extend credit to the Borrower under the Credit Agreement, 3TEC and the Borrower have agreed to execute this Agreement in favor of the Lenders; NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties hereto agree as follows: ARTICLE I DEFINITIONS 1.01 TERMS DEFINED ABOVE. As used in this Agreement, each of the terms "AGREEMENT," "BORROWER," "CREDIT AGREEMENT," "DEBT," "LENDERS," "3TEC," and the "3TEC NOTE" shall have the meaning assigned to such term hereinabove. 1.02 TERMS DEFINED IN CREDIT AGREEMENT. Each term defined in the Credit Agreement and used herein without definition shall have the meaning assigned to such term in the Credit Agreement. 1.03 OTHER DEFINITIONAL PROVISIONS. (a) The words "hereby," "herein," "hereinafter," "hereinabove," "hereinbelow," "hereof," "hereunder," and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular Article, Section or provision of this Agreement. (b) Section references are to such Sections of this Agreement unless otherwise specified. (c) As used herein and in any certificate or other document made or delivered pursuant hereto, accounting and financial terms not otherwise defined shall be defined according to GAAP. ARTICLE II SUBORDINATION 2.01 SUBORDINATION OF PAYMENT. The payment of the Debt is hereby expressly subordinated in right of payment to the prior payment in full of all Obligations and all other indebtedness of the Borrower owed to the Lenders; PROVIDED, HOWEVER, so long as no Event of Default has occurred and is continuing for which (other than an event specified in Subsection 7.1(d) of the Credit Agreement) the Lenders have given written notice of such Event of Default to the Borrower (a "DEFAULT NOTICE"), the Borrower may pay only interest due on the Debt according to its terms. At any time following the occurrence and during the continuance of any Event of Default and provided that the Lenders have given a Default Notice, 3TEC will not request, accept or receive, and the Borrower will not make, any payments, whether in cash or other Property, on or with respect to the Debt unless and until (a) such Event of Default shall have been cured or waived or shall have ceased to exist, or (b) such time as all Obligations shall have been fully paid and performed and the obligation of the Lenders to make Loans under the Credit Agreement shall have terminated. Notwithstanding the above, if within ninety (90) days after the giving of such Default Notice by the Lenders such Event of Default has not become the subject of (a) judicial proceedings or (b) an acceleration notice by the Lenders, then the Borrower shall (unless in such interval the provision of this Section 2.01 have again come into effect on account of any other Event of Default), resume making any and all required payments in respect of the Debt in any manner authorized under the terms governing such Debt until such time (if any) that such judicial proceedings are instituted, such an acceleration notice is given or a Default Notice (on account of any other Event of Default) is given and a period of ninety (90) days shall not have elapsed since the giving of such Default Notice as contemplated above. In the event any direct or indirect payment or distribution, whether in cash or other Property, shall be received by 3TEC in contravention of the provisions hereof, such payment or distribution shall be held in trust for, and shall be immediately paid over or delivered to, the Lenders. 2 2.02 3TEC DEBT SUBORDINATED TO PRIOR PAYMENT OF OBLIGATIONS ON DISSOLUTION, LIQUIDATION OR REORGANIZATION OF THE BORROWER. Upon any distribution of assets of the Borrower upon any voluntary or involuntary dissolution, winding up, liquidation or reorganization of the Borrower (whether in bankruptcy, insolvency or receivership proceedings or upon an assignment for the benefit of creditors or otherwise): (a) the Lenders shall first be entitled to receive payment in full (or to have such payment duly provided for to their satisfaction) of the principal thereof and interest due on the Obligations and other amounts due in connection therewith before 3TEC is entitled to receive any payment on account of the principal of or interest on the Debt; (b) any payment or distribution of assets of the Borrower of any kind or character, whether in cash, property or securities, to which 3TEC would be entitled except for the provisions of this Agreement, shall be paid by the liquidating trustee or agent or other person making such payment or distribution directly to the Lenders or its representative, to the extent necessary to make payment in full of all Obligations remaining unpaid, after giving effect to any concurrent payment or distribution or provision therefor to the Lenders; and (c) in the event that, notwithstanding the foregoing, any payment or distribution of assets of the Borrower of any kind or character, whether in cash, property or securities, shall be received by 3TEC on account of principal of or interest on the Debt before all Obligations are paid in full or provision made for their payment, such payment or distribution (subject to the further provisions of this Article) shall be paid over to the Lenders or their representative for application to the payment of all Obligations remaining unpaid or unprovided for until all such Obligations shall have been paid in full, after giving effect to any concurrent payment or distribution or provision therefor to the Lenders. 2.03 SUBORDINATION OF LIENS. So long as any Obligation remains outstanding or any obligation of the Lenders exists to make Loans under the Credit Agreement, 3TEC hereby subordinates all Liens, now existing or hereafter created or arising, securing all or any portion of the Debt to all Liens, now existing or hereafter created or arising, securing all or any portion of the Obligations, notwithstanding any defect, deficiency, error or omission which may be contained in any Loan Document creating or perfecting any such Lien securing all or any portion of the Obligations. All Liens, now existing or hereafter created or arising, securing all or any portion of the Debt shall at all times remain subordinate, secondary and inferior to all Liens, now existing or hereafter created or arising, securing all or any portion of the Obligations. 2.04 SUBORDINATION OF REMEDIES. So long as any Obligation remains outstanding or any obligation of the Lenders exists to make Loans under the Credit Agreement, 3TEC shall not, without the prior written consent of the Lenders, declare any Debt due or in default (other than to accelerate the Debt and take such other actions as reasonably required to protect 3TEC's claims upon any bankruptcy, insolvency, or receivership proceeding with respect to Borrower) or foreclose upon 3 or exercise any power of sale with respect to any security for all or any portion of the Debt or exercise any other right, power or remedy of 3TEC provided for in any document or instrument executed in connection with the Debt or by law or initiate or join with any other creditor of the Borrower in initiating any plan or proceeding pursuant to any bankruptcy, insolvency or receivership proceedings or seeking an assignment for the benefit of creditors or the marshalling of the assets and liabilities of the Borrower. Upon any distribution of assets of the Borrower or the dissolution, winding up, liquidation or reorganization (whether in bankruptcy, insolvency or receivership proceedings or upon an assignment for the benefit of creditors or the marshalling of the assets and liabilities of the Borrower or otherwise), any payment to which 3TEC would otherwise be entitled with respect to the Debt shall be held in trust for, and shall be immediately paid over or delivered to, the Lenders for application to the Obligations until all Obligations shall have been paid in full. Notwithstanding any provision of this Agreement (i) the holder of the 3TEC Note may convert the 3TEC Note to shares of common stock of Borrower at any time in accordance with the terms of the 3TEC Note; and (ii) 3TEC may exercise any warrants for shares of common stock of the Borrower in accordance with the terms of any such warrants. 2.05 CONTINUING AGREEMENT. This Agreement shall continue in full force and effect and the liabilities and obligations of the Borrower and 3TEC hereunder shall not be affected or impaired by any amendment, modification or alteration of any Loan Document, except as may be expressly provided in any such amendment, modification or alteration. This Agreement shall continue to be effective or shall be reinstated, as the case may be, if at any time any payment of any of the Obligations is rescinded or must otherwise be returned by the Lenders upon the insolvency, bankruptcy or reorganization of the Borrower or otherwise, all as though such payment had not been made. 2.06 LIABILITY NOT IMPAIRED. The liabilities and obligations of the Borrower and 3TEC hereunder shall not be affected or impaired by (a) the failure of the Agent or the Lenders or any other Person to exercise diligence or reasonable care in the preservation, protection or other handling or treatment of all or any part of any Collateral for all or any portion of the Obligations, (b) the failure of any Lien intended to be granted or created to secure all or any part of the Obligations to be properly perfected or created or the unenforceability of any such Lien for any other reason, or (c) the subordination of any such Lien to any other Lien. The Lenders may at any time and from time to time, without the consent of or notice to 3TEC, and without incurring any responsibility to 3TEC, and without impairing or releasing or otherwise affecting any of the obligations or agreements of 3TEC hereunder, (a) change the manner, place or terms of payment, or change or extend the time of payment of, renew, or alter all or any portion of the Obligations, (b) exchange, release, surrender, realize upon or otherwise deal with, in any manner and any order, any Property at any time subject to any Lien in favor of the Lenders, (c) exercise or refrain from exercising any rights against the Borrower or others, and (d) sell, transfer, assign or grant participations in the Obligations or any portion thereof. 2.07 WAIVERS. 3TEC waives any right to require the Lenders to (a) proceed against the Borrower or make any effort at the collection of the Obligations from the Borrower or any other Person liable for all or any portion of the Obligations, (b) proceed against or exhaust any Collateral securing all or any portion of the Obligations, or (c) pursue any other remedy in the power of the 4 Lenders. The liability and obligations of 3TEC hereunder shall not be affected or impaired by any action or inaction by the Lenders in regard to any matter waived herein. 2.08 MODIFICATION OF 3TEC DEBT. Without the prior written consent of the Lenders, none of the terms or provisions of the 3TEC Note, or the payment of the Debt evidenced thereby, shall be modified, amended, accelerated, renewed or extended. Notwithstanding the foregoing, Borrower may, without the consent of Lender (a) extend the date on which payments are required on the 3TEC Note, (b) reduce the interest rate applicable to the 3TEC Note, (c) waive compliance with the terms of the 3TEC Note or loan documents associated therewith or any default arising from non-compliance, or (d) relax or make less restrictive any covenant in the 3TEC Note or loan documents associated therewith. 2.09 KNOWLEDGE OF 3TEC. 3TEC shall not at any time be charged with knowledge of the existence of any facts which would prohibit the making of any payment to 3TEC under the 3TEC Note or the taking of any action under the 3TEC Note by 3TEC unless and until 3TEC shall have received written notice thereof from the Borrower or the Agent or the Lenders or from any trustee or representative therefor and, prior to the receipt of any such written notice, shall be entitled in all respects conclusively to assume that no such facts exist. 2.10 OBLIGATION OF THE BORROWER. Nothing contained in this Agreement shall affect the obligation of the Borrower to make, or prevent the Borrower from making, payment of the principal of or interest on the Debt, except as otherwise provided in this Agreement and the 3TEC Note. ARTICLE III MISCELLANEOUS 3.01 SURVIVAL OF COVENANTS AND AGREEMENTS. All covenants and agreements of the Borrower and 3TEC herein made shall survive the execution and delivery hereof and shall remain in force and effect so long as any Obligation remains outstanding or any obligation of the Lenders exists to make Loans under the Credit Agreement. 3.02 PARTIES IN INTEREST. All covenants and agreements herein contained by or on behalf of the Borrower, 3TEC or the Lenders shall be binding upon and inure to the benefit of the Borrower, 3TEC, or the Lenders, as the case may be, and their respective legal representatives, successors and assigns. 3.03 RIGHTS OF THIRD PARTIES. All provisions herein are imposed solely and exclusively for the benefit of the Borrower, 3TEC, and the Lenders. No other Person shall have any right, benefit, priority or interest hereunder or as a result hereof or have standing to require satisfaction of provisions hereof in accordance with their terms; and any or all of such provisions may be freely waived in whole or in part by the Lenders at any time if in their sole discretion it deems it advisable to do so. 5 3.04 ARTICLES AND SECTIONS. This Agreement, for convenience only, has been divided into Articles and Sections; and it is understood and agreed that the rights and other legal relations of the parties hereto shall be determined from this Agreement as an entirety and without regard to the aforesaid division into Articles and Sections and without regard to headings prefixed to such Articles or Sections. 3.05 NUMBER AND GENDER. Whenever the context requires, reference herein made to the single number shall be understood to include the plural; and likewise, the plural shall be understood to include the singular. Definitions of terms defined in the singular or plural shall be equally applicable to the plural or singular, as the case may be, unless otherwise indicated. Words denoting sex shall be construed to include the masculine, feminine and neuter, when such construction is appropriate; and specific enumeration shall not exclude the general but shall be construed as cumulative. 3.06 NO WAIVER; RIGHTS CUMULATIVE. No course of dealing on the part of the Lenders, their officers or employees, nor any failure or delay by the Lenders with respect to exercising any of its rights hereunder or under any Loan Document shall operate as a waiver of any of the rights of the Lenders hereunder or under such Loan Document. The rights of the Lenders hereunder and under the Loan Documents shall be cumulative, and the exercise or partial exercise of any such right shall not preclude the exercise of any other right. 3.07 SURVIVAL UPON UNENFORCEABILITY. In the event any one or more of the provisions contained herein or executed in connection herewith shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision hereof or of any such other instrument. 3.08 AMENDMENTS OR MODIFICATIONS. Neither this Agreement nor any provision hereof may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against whom enforcement of the change, waiver, discharge or termination is sought. 3.09 GOVERNING LAW. THIS AGREEMENT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS. 3.10 JURISDICTION AND VENUE. ALL ACTIONS OR PROCEEDINGS WITH RESPECT TO, ARISING DIRECTLY OR INDIRECTLY IN CONNECTION WITH, OUT OF, RELATED TO OR FROM THIS AGREEMENT MAY BE LITIGATED, AT THE SOLE DISCRETION AND ELECTION OF THE LENDERS, IN COURTS HAVING SITUS IN HOUSTON, HARRIS COUNTY, TEXAS. EACH OF THE BORROWER AND 3TEC HEREBY SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT LOCATED IN HOUSTON, HARRIS COUNTY, TEXAS, AND HEREBY WAIVES ANY RIGHTS IT MAY HAVE TO TRANSFER OR CHANGE THE JURISDICTION OR VENUE OF ANY LITIGATION BROUGHT AGAINST IT BY THE LENDERS IN ACCORDANCE WITH THIS SECTION. 6 3.11 ENTIRE AGREEMENT. THIS AGREEMENT CONSTITUTES THE ENTIRE AGREEMENT AMONG THE PARTIES HERETO WITH RESPECT TO THE SUBJECT HEREOF AND SHALL SUPERSEDE ANY PRIOR AGREEMENT AMONG THE PARTIES HERETO, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT HEREOF. THIS AGREEMENT AND THE OTHER WRITTEN LOAN DOCUMENTS REPRESENT, COLLECTIVELY, THE FINAL AGREEMENT AMONG THE PARTIES THERETO AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF SUCH PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG SUCH PARTIES. IN WITNESS WHEREOF, this Agreement is deemed executed effective as of the date first above written. 3TEC ENERGY CORPORATION By: -------------------------------- Printed Name: ---------------------- Title: ----------------------------- MIDDLE BAY OIL COMPANY, INC. By: -------------------------------- John J. Bassett President LENDER AND AGENT: COMPASS BANK By: -------------------------------- Dorothy Marchand Wilson Senior Vice President 7 LENDER: BANK OF OKLAHOMA, NATIONAL ASSOCIATION By: -------------------------------- Michael M. Coats Senior Vice President 8 EX-10.15 12 EXHIBIT 10.15 SUBORDINATION AGREEMENT ----------------------- THIS SUBORDINATION AGREEMENT (this "AGREEMENT") is made and entered into effective this ___ day of August, 1999, by and among SHOEMAKER FAMILY PARTNERS, LP, a Delaware corporation ("SFP"); MIDDLE BAY OIL COMPANY, INC., an Alabama corporation (the "BORROWER") and COMPASS BANK, an Alabama state chartered banking institution, as Agent for itself and BANK OF OKLAHOMA, NATIONAL ASSOCIATION (collectively, the "LENDERS"). W I T N E S S E T H : WHEREAS, pursuant to that certain Credit Agreement dated March 27, 1998, by and between the Borrower and ENEX RESOURCES CORPORATION as Borrowers and the Lenders as amended by various letter amendments and by First Amendment of even date herewith (as such agreement may be amended, modified, supplemented or restated from time to time, the "CREDIT AGREEMENT"), the Lenders has agreed to make Loans to or for the benefit of the Borrower; WHEREAS, SFP has or is obligated to advance certain funds to the Borrower pursuant to that certain note dated August __, 1999, from the Borrower to SFP ( the "SFP NOTE"), in the amount of $50,000 (the "DEBT"); WHEREAS, pursuant to the Credit Agreement and as an inducement to the Lenders to extend credit to the Borrower under the Credit Agreement, SFP and the Borrower have agreed to execute this Agreement in favor of the Lenders; NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties hereto agree as follows: ARTICLE I DEFINITIONS 1.01 TERMS DEFINED ABOVE. As used in this Agreement, each of the terms "AGREEMENT," "BORROWER," "CREDIT AGREEMENT," "DEBT," "LENDERS," "SFP," and the "SFP NOTE" shall have the meaning assigned to such term hereinabove. 1.02 TERMS DEFINED IN CREDIT AGREEMENT. Each term defined in the Credit Agreement and used herein without definition shall have the meaning assigned to such term in the Credit Agreement. 1.03 OTHER DEFINITIONAL PROVISIONS. (a) The words "hereby," "herein," "hereinafter," "hereinabove," "hereinbelow," "hereof," "hereunder," and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular Article, Section or provision of this Agreement. (b) Section references are to such Sections of this Agreement unless otherwise specified. (c) As used herein and in any certificate or other document made or delivered pursuant hereto, accounting and financial terms not otherwise defined shall be defined according to GAAP. ARTICLE II SUBORDINATION 2.01 SUBORDINATION OF PAYMENT. The payment of the Debt is hereby expressly subordinated in right of payment to the prior payment in full of all Obligations and all other indebtedness of the Borrower owed to the Lenders; PROVIDED, HOWEVER, so long as no Event of Default has occurred and is continuing for which (other than an event specified in Subsection 7.1(d) of the Credit Agreement) the Lenders have given written notice of such Event of Default to the Borrower (a "DEFAULT NOTICE"), the Borrower may pay only interest due on the Debt according to its terms. At any time following the occurrence and during the continuance of any Event of Default and provided that the Lenders have given a Default Notice, SFP will not request, accept or receive, and the Borrower will not make, any payments, whether in cash or other Property, on or with respect to the Debt unless and until (a) such Event of Default shall have been cured or waived or shall have ceased to exist, or (b) such time as all Obligations shall have been fully paid and performed and the obligation of the Lenders to make Loans under the Credit Agreement shall have terminated. Notwithstanding the above, if within ninety (90) days after the giving of such Default Notice by the Lenders such Event of Default has not become the subject of (a) judicial proceedings or (b) an acceleration notice by the Lenders, then the Borrower shall (unless in such interval the provision of this Section 2.01 have again come into effect on account of any other Event of Default), resume making any and all required payments in respect of the Debt in any manner authorized under the terms governing such Debt until such time (if any) that such judicial proceedings are instituted, such an acceleration notice is given or a Default Notice (on account of any other Event of Default) is given and a period of ninety (90) days shall not have elapsed since the giving of such Default Notice as contemplated above. In the event any direct or indirect payment or distribution, whether in cash or other Property, shall be received by SFP in contravention of the provisions hereof, such payment or distribution shall be held in trust for, and shall be immediately paid over or delivered to, the Lenders. 2 2.02 SFP DEBT SUBORDINATED TO PRIOR PAYMENT OF OBLIGATIONS ON DISSOLUTION, LIQUIDATION OR REORGANIZATION OF THE BORROWER. Upon any distribution of assets of the Borrower upon any voluntary or involuntary dissolution, winding up, liquidation or reorganization of the Borrower (whether in bankruptcy, insolvency or receivership proceedings or upon an assignment for the benefit of creditors or otherwise): (a) the Lenders shall first be entitled to receive payment in full (or to have such payment duly provided for to their satisfaction) of the principal thereof and interest due on the Obligations and other amounts due in connection therewith before SFP is entitled to receive any payment on account of the principal of or interest on the Debt; (b) any payment or distribution of assets of the Borrower of any kind or character, whether in cash, property or securities, to which SFP would be entitled except for the provisions of this Agreement, shall be paid by the liquidating trustee or agent or other person making such payment or distribution directly to the Lenders or its representative, to the extent necessary to make payment in full of all Obligations remaining unpaid, after giving effect to any concurrent payment or distribution or provision therefor to the Lenders; and (c) in the event that, notwithstanding the foregoing, any payment or distribution of assets of the Borrower of any kind or character, whether in cash, property or securities, shall be received by SFP on account of principal of or interest on the Debt before all Obligations are paid in full or provision made for their payment, such payment or distribution (subject to the further provisions of this Article) shall be paid over to the Lenders or their representative for application to the payment of all Obligations remaining unpaid or unprovided for until all such Obligations shall have been paid in full, after giving effect to any concurrent payment or distribution or provision therefor to the Lenders. 2.03 SUBORDINATION OF LIENS. So long as any Obligation remains outstanding or any obligation of the Lenders exists to make Loans under the Credit Agreement, SFP hereby subordinates all Liens, now existing or hereafter created or arising, securing all or any portion of the Debt to all Liens, now existing or hereafter created or arising, securing all or any portion of the Obligations, notwithstanding any defect, deficiency, error or omission which may be contained in any Loan Document creating or perfecting any such Lien securing all or any portion of the Obligations. All Liens, now existing or hereafter created or arising, securing all or any portion of the Debt shall at all times remain subordinate, secondary and inferior to all Liens, now existing or hereafter created or arising, securing all or any portion of the Obligations. 2.04 SUBORDINATION OF REMEDIES. So long as any Obligation remains outstanding or any obligation of the Lenders exists to make Loans under the Credit Agreement, SFP shall not, without the prior written consent of the Lenders, declare any Debt due or in default (other than to accelerate the Debt and take such other actions as reasonably required to protect SFP's claims upon any bankruptcy, insolvency, or receivership proceeding with respect to Borrower) or foreclose upon 3 or exercise any power of sale with respect to any security for all or any portion of the Debt or exercise any other right, power or remedy of SFP provided for in any document or instrument executed in connection with the Debt or by law or initiate or join with any other creditor of the Borrower in initiating any plan or proceeding pursuant to any bankruptcy, insolvency or receivership proceedings or seeking an assignment for the benefit of creditors or the marshalling of the assets and liabilities of the Borrower. Upon any distribution of assets of the Borrower or the dissolution, winding up, liquidation or reorganization (whether in bankruptcy, insolvency or receivership proceedings or upon an assignment for the benefit of creditors or the marshalling of the assets and liabilities of the Borrower or otherwise), any payment to which SFP would otherwise be entitled with respect to the Debt shall be held in trust for, and shall be immediately paid over or delivered to, the Lenders for application to the Obligations until all Obligations shall have been paid in full. Notwithstanding any provision of this Agreement (i) the holder of the SFP Note may convert the SFP Note to shares of common stock of Borrower at any time in accordance with the terms of the SFP Note; and (ii) SFP may exercise any warrants for shares of common stock of the Borrower in accordance with the terms of any such warrants. 2.05 CONTINUING AGREEMENT. This Agreement shall continue in full force and effect and the liabilities and obligations of the Borrower and SFP hereunder shall not be affected or impaired by any amendment, modification or alteration of any Loan Document, except as may be expressly provided in any such amendment, modification or alteration. This Agreement shall continue to be effective or shall be reinstated, as the case may be, if at any time any payment of any of the Obligations is rescinded or must otherwise be returned by the Lenders upon the insolvency, bankruptcy or reorganization of the Borrower or otherwise, all as though such payment had not been made. 2.06 LIABILITY NOT IMPAIRED . The liabilities and obligations of the Borrower and SFP hereunder shall not be affected or impaired by (a) the failure of the Agent or the Lenders or any other Person to exercise diligence or reasonable care in the preservation, protection or other handling or treatment of all or any part of any Collateral for all or any portion of the Obligations, (b) the failure of any Lien intended to be granted or created to secure all or any part of the Obligations to be properly perfected or created or the unenforceability of any such Lien for any other reason, or (c) the subordination of any such Lien to any other Lien. The Lenders may at any time and from time to time, without the consent of or notice to SFP, and without incurring any responsibility to SFP, and without impairing or releasing or otherwise affecting any of the obligations or agreements of SFP hereunder, (a) change the manner, place or terms of payment, or change or extend the time of payment of, renew, or alter all or any portion of the Obligations, (b) exchange, release, surrender, realize upon or otherwise deal with, in any manner and any order, any Property at any time subject to any Lien in favor of the Lenders, (c) exercise or refrain from exercising any rights against the Borrower or others, and (d) sell, transfer, assign or grant participations in the Obligations or any portion thereof. 2.07 WAIVERS . SFP waives any right to require the Lenders to (a) proceed against the Borrower or make any effort at the collection of the Obligations from the Borrower or any other Person liable for all or any portion of the Obligations, (b) proceed against or exhaust any Collateral securing all or any portion of the Obligations, or (c) pursue any other remedy in the power of the 4 Lenders. The liability and obligations of SFP hereunder shall not be affected or impaired by any action or inaction by the Lenders in regard to any matter waived herein. 2.08 MODIFICATION OF SFP DEBT. Without the prior written consent of the Lenders, none of the terms or provisions of the SFP Note, or the payment of the Debt evidenced thereby, shall be modified, amended, accelerated, renewed or extended. Notwithstanding the foregoing, Borrower may, without the consent of Lender (a) extend the date on which payments are required on the SFP Note, (b) reduce the interest rate applicable to the SFP Note, (c) waive compliance with the terms of the SFP Note or loan documents associated therewith or any default arising from non-compliance, or (d) relax or make less restrictive any covenant in the SFP Note or loan documents associated therewith. 2.09 KNOWLEDGE OF SFP. SFP shall not at any time be charged with knowledge of the existence of any facts which would prohibit the making of any payment to SFP under the SFP Note or the taking of any action under the SFP Note by SFP unless and until SFP shall have received written notice thereof from the Borrower or the Agent or the Lenders or from any trustee or representative therefor and, prior to the receipt of any such written notice, shall be entitled in all respects conclusively to assume that no such facts exist. 2.10 OBLIGATION OF THE BORROWER. Nothing contained in this Agreement shall affect the obligation of the Borrower to make, or prevent the Borrower from making, payment of the principal of or interest on the Debt, except as otherwise provided in this Agreement and the SFP Note. ARTICLE III MISCELLANEOUS 3.01 SURVIVAL OF COVENANTS AND AGREEMENTS . All covenants and agreements of the Borrower and SFP herein made shall survive the execution and delivery hereof and shall remain in force and effect so long as any Obligation remains outstanding or any obligation of the Lenders exists to make Loans under the Credit Agreement. 3.02 PARTIES IN INTEREST . All covenants and agreements herein contained by or on behalf of the Borrower, SFP or the Lenders shall be binding upon and inure to the benefit of the Borrower, SFP, or the Lenders, as the case may be, and their respective legal representatives, successors and assigns. 3.03 RIGHTS OF THIRD PARTIES . All provisions herein are imposed solely and exclusively for the benefit of the Borrower, SFP, and the Lenders. No other Person shall have any right, benefit, priority or interest hereunder or as a result hereof or have standing to require satisfaction of provisions hereof in accordance with their terms; and any or all of such provisions may be freely waived in whole or in part by the Lenders at any time if in their sole discretion it deems it advisable to do so. 5 3.04 ARTICLES AND SECTIONS. This Agreement, for convenience only, has been divided into Articles and Sections; and it is understood and agreed that the rights and other legal relations of the parties hereto shall be determined from this Agreement as an entirety and without regard to the aforesaid division into Articles and Sections and without regard to headings prefixed to such Articles or Sections. 3.05 NUMBER AND GENDER. Whenever the context requires, reference herein made to the single number shall be understood to include the plural; and likewise, the plural shall be understood to include the singular. Definitions of terms defined in the singular or plural shall be equally applicable to the plural or singular, as the case may be, unless otherwise indicated. Words denoting sex shall be construed to include the masculine, feminine and neuter, when such construction is appropriate; and specific enumeration shall not exclude the general but shall be construed as cumulative. 3.06 NO WAIVER; RIGHTS CUMULATIVE. No course of dealing on the part of the Lenders, their officers or employees, nor any failure or delay by the Lenders with respect to exercising any of its rights hereunder or under any Loan Document shall operate as a waiver of any of the rights of the Lenders hereunder or under such Loan Document. The rights of the Lenders hereunder and under the Loan Documents shall be cumulative, and the exercise or partial exercise of any such right shall not preclude the exercise of any other right. 3.07 SURVIVAL UPON UNENFORCEABILITY. In the event any one or more of the provisions contained herein or executed in connection herewith shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision hereof or of any such other instrument. 3.08 AMENDMENTS OR MODIFICATIONS. Neither this Agreement nor any provision hereof may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against whom enforcement of the change, waiver, discharge or termination is sought. 3.09 GOVERNING LAW. THIS AGREEMENT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS. 3.10 JURISDICTION AND VENUE. ALL ACTIONS OR PROCEEDINGS WITH RESPECT TO, ARISING DIRECTLY OR INDIRECTLY IN CONNECTION WITH, OUT OF, RELATED TO OR FROM THIS AGREEMENT MAY BE LITIGATED, AT THE SOLE DISCRETION AND ELECTION OF THE LENDERS, IN COURTS HAVING SITUS IN HOUSTON, HARRIS COUNTY, TEXAS. EACH OF THE BORROWER AND SFP HEREBY SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT LOCATED IN HOUSTON, HARRIS COUNTY, TEXAS, AND HEREBY WAIVES ANY RIGHTS IT MAY HAVE TO TRANSFER OR CHANGE THE JURISDICTION OR VENUE OF ANY LITIGATION BROUGHT AGAINST IT BY THE LENDERS IN ACCORDANCE WITH THIS SECTION. 6 3.11 ENTIRE AGREEMENT. THIS AGREEMENT CONSTITUTES THE ENTIRE AGREEMENT AMONG THE PARTIES HERETO WITH RESPECT TO THE SUBJECT HEREOF AND SHALL SUPERSEDE ANY PRIOR AGREEMENT AMONG THE PARTIES HERETO, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT HEREOF. THIS AGREEMENT AND THE OTHER WRITTEN LOAN DOCUMENTS REPRESENT, COLLECTIVELY, THE FINAL AGREEMENT AMONG THE PARTIES THERETO AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF SUCH PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG SUCH PARTIES. IN WITNESS WHEREOF, this Agreement is deemed executed effective as of the date first above written. SHOEMAKER FAMILY PARTNERS, LP By: ---------------------------------- Printed Name: ------------------------ Title: ------------------------------- MIDDLE BAY OIL COMPANY, INC. By: ---------------------------------- John J. Bassett President LENDER AND AGENT: COMPASS BANK By: ---------------------------------- Dorothy Marchand Wilson Senior Vice President 7 LENDER: BANK OF OKLAHOMA, NATIONAL ASSOCIATION By: ---------------------------------- Michael M. Coats Senior Vice President 8 EX-10.16 13 EXHIBIT 10.16 SUBORDINATION AGREEMENT THIS SUBORDINATION AGREEMENT (this "AGREEMENT") is made and entered into effective this ___ day of August, 1999, by and among SHOEINVEST II, LP, a Delaware corporation ("Shoeinvest"); MIDDLE BAY OIL COMPANY, INC., an Alabama corporation (the "BORROWER") and COMPASS BANK, an Alabama state chartered banking institution, as Agent for itself and BANK OF OKLAHOMA, NATIONAL ASSOCIATION (collectively, the "LENDERS"). W I T N E S S E T H : WHEREAS, pursuant to that certain Credit Agreement dated March 27, 1998, by and between the Borrower and ENEX RESOURCES CORPORATION as Borrowers and the Lenders as amended by various letter amendments and by First Amendment of even date herewith (as such agreement may be amended, modified, supplemented or restated from time to time, the "CREDIT AGREEMENT"), the Lenders has agreed to make Loans to or for the benefit of the Borrower; WHEREAS, Shoeinvest has or is obligated to advance certain funds to the Borrower pursuant to that certain note dated August __, 1999, from the Borrower to Shoeinvest ( the "SHOEINVEST NOTE"), in the amount of $100,000 (the "DEBT"); WHEREAS, pursuant to the Credit Agreement and as an inducement to the Lenders to extend credit to the Borrower under the Credit Agreement, Shoeinvest and the Borrower have agreed to execute this Agreement in favor of the Lenders; NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties hereto agree as follows: ARTICLE I DEFINITIONS 1.01 TERMS DEFINED ABOVE. As used in this Agreement, each of the terms "AGREEMENT," "BORROWER," "CREDIT AGREEMENT," "DEBT," "LENDERS," "SHOEINVEST," and the "SHOEINVEST NOTE" shall have the meaning assigned to such term hereinabove. 1.02 TERMS DEFINED IN CREDIT AGREEMENT. Each term defined in the Credit Agreement and used herein without definition shall have the meaning assigned to such term in the Credit Agreement. 1.03 OTHER DEFINITIONAL PROVISIONS. (a) The words "hereby," "herein," "hereinafter," "hereinabove," "hereinbelow," "hereof," "hereunder," and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular Article, Section or provision of this Agreement. (b) Section references are to such Sections of this Agreement unless otherwise specified. (c) As used herein and in any certificate or other document made or delivered pursuant hereto, accounting and financial terms not otherwise defined shall be defined according to GAAP. ARTICLE II SUBORDINATION 2.01 SUBORDINATION OF PAYMENT. The payment of the Debt is hereby expressly subordinated in right of payment to the prior payment in full of all Obligations and all other indebtedness of the Borrower owed to the Lenders; PROVIDED, HOWEVER, so long as no Event of Default has occurred and is continuing for which (other than an event specified in Subsection 7.1(d) of the Credit Agreement) the Lenders have given written notice of such Event of Default to the Borrower (a "DEFAULT NOTICE"), the Borrower may pay only interest due on the Debt according to its terms. At any time following the occurrence and during the continuance of any Event of Default and provided that the Lenders have given a Default Notice, Shoeinvest will not request, accept or receive, and the Borrower will not make, any payments, whether in cash or other Property, on or with respect to the Debt unless and until (a) such Event of Default shall have been cured or waived or shall have ceased to exist, or (b) such time as all Obligations shall have been fully paid and performed and the obligation of the Lenders to make Loans under the Credit Agreement shall have terminated. Notwithstanding the above, if within ninety (90) days after the giving of such Default Notice by the Lenders such Event of Default has not become the subject of (a) judicial proceedings or (b) an acceleration notice by the Lenders, then the Borrower shall (unless in such interval the provision of this Section 2.01 have again come into effect on account of any other Event of Default), resume making any and all required payments in respect of the Debt in any manner authorized under the terms governing such Debt until such time (if any) that such judicial proceedings are instituted, such an acceleration notice is given or a Default Notice (on account of any other Event of Default) is given and a period of ninety (90) days shall not have elapsed since the giving of such Default Notice as contemplated above. In the event any direct or indirect payment or distribution, whether in cash or other Property, shall be received by Shoeinvest in contravention of the provisions hereof, such payment or distribution shall be held in trust for, and shall be immediately paid over or delivered to, the Lenders. 2.02 SHOEINVEST DEBT SUBORDINATED TO PRIOR PAYMENT OF OBLIGATIONS ON DISSOLUTION, LIQUIDATION OR REORGANIZATION OF THE BORROWER. Upon any distribution of assets of the Borrower upon any voluntary or involuntary dissolution, winding up, liquidation or reorganization of the Borrower (whether in bankruptcy, insolvency or receivership proceedings or upon an assignment for the benefit of creditors or otherwise): -2- (a) the Lenders shall first be entitled to receive payment in full (or to have such payment duly provided for to their satisfaction) of the principal thereof and interest due on the Obligations and other amounts due in connection therewith before Shoeinvest is entitled to receive any payment on account of the principal of or interest on the Debt; (b) any payment or distribution of assets of the Borrower of any kind or character, whether in cash, property or securities, to which Shoeinvest would be entitled except for the provisions of this Agreement, shall be paid by the liquidating trustee or agent or other person making such payment or distribution directly to the Lenders or its representative, to the extent necessary to make payment in full of all Obligations remaining unpaid, after giving effect to any concurrent payment or distribution or provision therefor to the Lenders; and (c) in the event that, notwithstanding the foregoing, any payment or distribution of assets of the Borrower of any kind or character, whether in cash, property or securities, shall be received by Shoeinvest on account of principal of or interest on the Debt before all Obligations are paid in full or provision made for their payment, such payment or distribution (subject to the further provisions of this Article) shall be paid over to the Lenders or their representative for application to the payment of all Obligations remaining unpaid or unprovided for until all such Obligations shall have been paid in full, after giving effect to any concurrent payment or distribution or provision therefor to the Lenders. 2.03 SUBORDINATION OF LIENS. So long as any Obligation remains outstanding or any obligation of the Lenders exists to make Loans under the Credit Agreement, Shoeinvest hereby subordinates all Liens, now existing or hereafter created or arising, securing all or any portion of the Debt to all Liens, now existing or hereafter created or arising, securing all or any portion of the Obligations, notwithstanding any defect, deficiency, error or omission which may be contained in any Loan Document creating or perfecting any such Lien securing all or any portion of the Obligations. All Liens, now existing or hereafter created or arising, securing all or any portion of the Debt shall at all times remain subordinate, secondary and inferior to all Liens, now existing or hereafter created or arising, securing all or any portion of the Obligations. 2.04 SUBORDINATION OF REMEDIES. So long as any Obligation remains outstanding or any obligation of the Lenders exists to make Loans under the Credit Agreement, Shoeinvest shall not, without the prior written consent of the Lenders, declare any Debt due or in default (other than to accelerate the Debt and take such other actions as reasonably required to protect Shoeinvest's claims upon any bankruptcy, insolvency, or receivership proceeding with respect to Borrower) or foreclose upon or exercise any power of sale with respect to any security for all or any portion of the Debt or exercise any other right, power or remedy of Shoeinvest provided for in any document or instrument executed in connection with the Debt or by law or initiate or join with any other creditor of the Borrower in initiating any plan or proceeding pursuant to any bankruptcy, insolvency or receivership proceedings or seeking an assignment for the benefit of creditors or the marshalling of the assets and liabilities of the Borrower. Upon any distribution of assets of the Borrower or the -3- dissolution, winding up, liquidation or reorganization (whether in bankruptcy, insolvency or receivership proceedings or upon an assignment for the benefit of creditors or the marshalling of the assets and liabilities of the Borrower or otherwise), any payment to which Shoeinvest would otherwise be entitled with respect to the Debt shall be held in trust for, and shall be immediately paid over or delivered to, the Lenders for application to the Obligations until all Obligations shall have been paid in full. Notwithstanding any provision of this Agreement (i) the holder of the Shoeinvest Note may convert the Shoeinvest Note to shares of common stock of Borrower at any time in accordance with the terms of the Shoeinvest Note; and (ii) Shoeinvest may exercise any warrants for shares of common stock of the Borrower in accordance with the terms of any such warrants. 2.05 CONTINUING AGREEMENT. This Agreement shall continue in full force and effect and the liabilities and obligations of the Borrower and Shoeinvest hereunder shall not be affected or impaired by any amendment, modification or alteration of any Loan Document, except as may be expressly provided in any such amendment, modification or alteration. This Agreement shall continue to be effective or shall be reinstated, as the case may be, if at any time any payment of any of the Obligations is rescinded or must otherwise be returned by the Lenders upon the insolvency, bankruptcy or reorganization of the Borrower or otherwise, all as though such payment had not been made. 2.06 LIABILITY NOT IMPAIRED. The liabilities and obligations of the Borrower and Shoeinvest hereunder shall not be affected or impaired by (a) the failure of the Agent or the Lenders or any other Person to exercise diligence or reasonable care in the preservation, protection or other handling or treatment of all or any part of any Collateral for all or any portion of the Obligations, (b) the failure of any Lien intended to be granted or created to secure all or any part of the Obligations to be properly perfected or created or the unenforceability of any such Lien for any other reason, or (c) the subordination of any such Lien to any other Lien. The Lenders may at any time and from time to time, without the consent of or notice to Shoeinvest, and without incurring any responsibility to Shoeinvest, and without impairing or releasing or otherwise affecting any of the obligations or agreements of Shoeinvest hereunder, (a) change the manner, place or terms of payment, or change or extend the time of payment of, renew, or alter all or any portion of the Obligations, (b) exchange, release, surrender, realize upon or otherwise deal with, in any manner and any order, any Property at any time subject to any Lien in favor of the Lenders, (c) exercise or refrain from exercising any rights against the Borrower or others, and (d) sell, transfer, assign or grant participations in the Obligations or any portion thereof. 2.07 WAIVERS. Shoeinvest waives any right to require the Lenders to (a) proceed against the Borrower or make any effort at the collection of the Obligations from the Borrower or any other Person liable for all or any portion of the Obligations, (b) proceed against or exhaust any Collateral securing all or any portion of the Obligations, or (c) pursue any other remedy in the power of the Lenders. The liability and obligations of Shoeinvest hereunder shall not be affected or impaired by any action or inaction by the Lenders in regard to any matter waived herein. 2.08 MODIFICATION OF SHOEINVEST DEBT. Without the prior written consent of the Lenders, none of the terms or provisions of the Shoeinvest Note, or the payment of the Debt evidenced thereby, shall be modified, amended, accelerated, renewed or extended. Notwithstanding -4- the foregoing, Borrower may, without the consent of Lender (a) extend the date on which payments are required on the Shoeinvest Note, (b) reduce the interest rate applicable to the Shoeinvest Note, (c) waive compliance with the terms of the Shoeinvest Note or loan documents associated therewith or any default arising from non-compliance, or (d) relax or make less restrictive any covenant in the Shoeinvest Note or loan documents associated therewith. 2.09 KNOWLEDGE OF SHOEINVEST. Shoeinvest shall not at any time be charged with knowledge of the existence of any facts which would prohibit the making of any payment to Shoeinvest under the Shoeinvest Note or the taking of any action under the Shoeinvest Note by Shoeinvest unless and until Shoeinvest shall have received written notice thereof from the Borrower or the Agent or the Lenders or from any trustee or representative therefor and, prior to the receipt of any such written notice, shall be entitled in all respects conclusively to assume that no such facts exist. 2.10 OBLIGATION OF THE BORROWER. Nothing contained in this Agreement shall affect the obligation of the Borrower to make, or prevent the Borrower from making, payment of the principal of or interest on the Debt, except as otherwise provided in this Agreement and the Shoeinvest Note. ARTICLE III MISCELLANEOUS 3.01 SURVIVAL OF COVENANTS AND AGREEMENTS. All covenants and agreements of the Borrower and Shoeinvest herein made shall survive the execution and delivery hereof and shall remain in force and effect so long as any Obligation remains outstanding or any obligation of the Lenders exists to make Loans under the Credit Agreement. 3.02 PARTIES IN INTEREST. All covenants and agreements herein contained by or on behalf of the Borrower, Shoeinvest or the Lenders shall be binding upon and inure to the benefit of the Borrower, Shoeinvest, or the Lenders, as the case may be, and their respective legal representatives, successors and assigns. 3.03 RIGHTS OF THIRD PARTIES. All provisions herein are imposed solely and exclusively for the benefit of the Borrower, Shoeinvest, and the Lenders. No other Person shall have any right, benefit, priority or interest hereunder or as a result hereof or have standing to require satisfaction of provisions hereof in accordance with their terms; and any or all of such provisions may be freely waived in whole or in part by the Lenders at any time if in their sole discretion it deems it advisable to do so. 3.04 ARTICLES AND SECTIONS. This Agreement, for convenience only, has been divided into Articles and Sections; and it is understood and agreed that the rights and other legal relations of the parties hereto shall be determined from this Agreement as an entirety and without -5- regard to the aforesaid division into Articles and Sections and without regard to headings prefixed to such Articles or Sections. 3.05 NUMBER AND GENDER. Whenever the context requires, reference herein made to the single number shall be understood to include the plural; and likewise, the plural shall be understood to include the singular. Definitions of terms defined in the singular or plural shall be equally applicable to the plural or singular, as the case may be, unless otherwise indicated. Words denoting sex shall be construed to include the masculine, feminine and neuter, when such construction is appropriate; and specific enumeration shall not exclude the general but shall be construed as cumulative. 3.06 NO WAIVER; RIGHTS CUMULATIVE. No course of dealing on the part of the Lenders, their officers or employees, nor any failure or delay by the Lenders with respect to exercising any of its rights hereunder or under any Loan Document shall operate as a waiver of any of the rights of the Lenders hereunder or under such Loan Document. The rights of the Lenders hereunder and under the Loan Documents shall be cumulative, and the exercise or partial exercise of any such right shall not preclude the exercise of any other right. 3.07 SURVIVAL UPON UNENFORCEABILITY. In the event any one or more of the provisions contained herein or executed in connection herewith shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision hereof or of any such other instrument. 3.08 AMENDMENTS OR MODIFICATIONS. Neither this Agreement nor any provision hereof may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against whom enforcement of the change, waiver, discharge or termination is sought. 3.09 GOVERNING LAW. THIS AGREEMENT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS. 3.10 JURISDICTION AND VENUE. ALL ACTIONS OR PROCEEDINGS WITH RESPECT TO, ARISING DIRECTLY OR INDIRECTLY IN CONNECTION WITH, OUT OF, RELATED TO OR FROM THIS AGREEMENT MAY BE LITIGATED, AT THE SOLE DISCRETION AND ELECTION OF THE LENDERS, IN COURTS HAVING SITUS IN HOUSTON, HARRIS COUNTY, TEXAS. EACH OF THE BORROWER AND SHOEINVEST HEREBY SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT LOCATED IN HOUSTON, HARRIS COUNTY, TEXAS, AND HEREBY WAIVES ANY RIGHTS IT MAY HAVE TO TRANSFER OR CHANGE THE JURISDICTION OR VENUE OF ANY LITIGATION BROUGHT AGAINST IT BY THE LENDERS IN ACCORDANCE WITH THIS SECTION. -6- 3.11 ENTIRE AGREEMENT. THIS AGREEMENT CONSTITUTES THE ENTIRE AGREEMENT AMONG THE PARTIES HERETO WITH RESPECT TO THE SUBJECT HEREOF AND SHALL SUPERSEDE ANY PRIOR AGREEMENT AMONG THE PARTIES HERETO, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT HEREOF. THIS AGREEMENT AND THE OTHER WRITTEN LOAN DOCUMENTS REPRESENT, COLLECTIVELY, THE FINAL AGREEMENT AMONG THE PARTIES THERETO AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF SUCH PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG SUCH PARTIES. IN WITNESS WHEREOF, this Agreement is deemed executed effective as of the date first above written. SHOEINVEST II, LP By: -------------------------------- Printed Name: ---------------------- Title: ----------------------------- MIDDLE BAY OIL COMPANY, INC. By: -------------------------------- John J. Bassett President LENDER AND AGENT: COMPASS BANK By: --------------------------------- Dorothy Marchand Wilson Senior Vice President -7- LENDER: BANK OF OKLAHOMA, NATIONAL ASSOCIATION By: --------------------------------- Michael M. Coats Senior Vice President -8- EX-10.17 14 EXHIBIT 10.17 SUBORDINATION AGREEMENT THIS SUBORDINATION AGREEMENT (this "AGREEMENT") is made and entered into effective this ___ day of October, 1999, by and among THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, a Delaware corporation ("Prudential"); MIDDLE BAY OIL COMPANY, INC., an Alabama corporation (the "BORROWER") and COMPASS BANK, an Alabama state chartered banking institution, as Agent for itself and BANK OF OKLAHOMA, NATIONAL ASSOCIATION (collectively, the "LENDERS"). W I T N E S S E T H : WHEREAS, pursuant to that certain Credit Agreement dated March 27, 1998, by and between the Borrower and ENEX RESOURCES CORPORATION as Borrowers and the Lenders as amended by various letter amendments, by First Amendment dated August 27, 1999, and by Second Amendment of even date herewith (as such agreement may be amended, modified, supplemented or restated from time to time, the "CREDIT AGREEMENT"), the Lenders has agreed to make Loans to or for the benefit of the Borrower; WHEREAS, Prudential has or is obligated to advance certain funds to the Borrower pursuant to that certain note dated October __, 1999, from the Borrower to Prudential ( the "PRUDENTIAL NOTE"), in the amount of $__________ (the "DEBT"); WHEREAS, pursuant to the Credit Agreement and as an inducement to the Lenders to extend credit to the Borrower under the Credit Agreement, Prudential and the Borrower have agreed to execute this Agreement in favor of the Lenders; NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties hereto agree as follows: ARTICLE I DEFINITIONS 1.01 TERMS DEFINED ABOVE. As used in this Agreement, each of the terms "AGREEMENT," "BORROWER," "CREDIT AGREEMENT," "DEBT," "LENDERS," "PRUDENTIAL," and the "PRUDENTIAL NOTE" shall have the meaning assigned to such term hereinabove. 1.02 TERMS DEFINED IN CREDIT AGREEMENT. Each term defined in the Credit Agreement and used herein without definition shall have the meaning assigned to such term in the Credit Agreement. 1.03 OTHER DEFINITIONAL PROVISIONS. (a) The words "hereby," "herein," "hereinafter," "hereinabove," "hereinbelow," "hereof," "hereunder," and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular Article, Section or provision of this Agreement. (b) Section references are to such Sections of this Agreement unless otherwise specified. (c) As used herein and in any certificate or other document made or delivered pursuant hereto, accounting and financial terms not otherwise defined shall be defined according to GAAP. ARTICLE II SUBORDINATION 2.01 SUBORDINATION OF PAYMENT. The payment of the Debt is hereby expressly subordinated in right of payment to the prior payment in full of all Obligations and all other indebtedness of the Borrower owed to the Lenders; PROVIDED, HOWEVER, so long as no Event of Default has occurred and is continuing for which (other than an event specified in Subsection 7.1(d) of the Credit Agreement) the Lenders have given written notice of such Event of Default to the Borrower (a "DEFAULT NOTICE"), the Borrower may pay only interest due on the Debt according to its terms. At any time following the occurrence and during the continuance of any Event of Default and provided that the Lenders have given a Default Notice, Prudential will not request, accept or receive, and the Borrower will not make, any payments, whether in cash or other Property, on or with respect to the Debt unless and until (a) such Event of Default shall have been cured or waived or shall have ceased to exist, or (b) such time as all Obligations shall have been fully paid and performed and the obligation of the Lenders to make Loans under the Credit Agreement shall have terminated. Notwithstanding the above, if within ninety (90) days after the giving of such Default Notice by the Lenders such Event of Default has not become the subject of (a) judicial proceedings or (b) an acceleration notice by the Lenders, then the Borrower shall (unless in such interval the provision of this Section 2.01 have again come into effect on account of any other Event of Default), resume making any and all required payments in respect of the Debt in any manner authorized under the terms governing such Debt until such time (if any) that such judicial proceedings are instituted, such an acceleration notice is given or a Default Notice (on account of any other Event of Default) is given and a period of ninety (90) days shall not have elapsed since the giving of such Default Notice as contemplated above. In the event any direct or indirect payment or distribution, whether in cash or other Property, shall be received by Prudential in contravention of the provisions hereof, such payment or distribution shall be held in trust for, and shall be immediately paid over or delivered to, the Lenders. 2 2.02 PRUDENTIAL DEBT SUBORDINATED TO PRIOR PAYMENT OF OBLIGATIONS ON DISSOLUTION, LIQUIDATION OR REORGANIZATION OF THE BORROWER. Upon any distribution of assets of the Borrower upon any voluntary or involuntary dissolution, winding up, liquidation or reorganization of the Borrower (whether in bankruptcy, insolvency or receivership proceedings or upon an assignment for the benefit of creditors or otherwise): (a) the Lenders shall first be entitled to receive payment in full (or to have such payment duly provided for to their satisfaction) of the principal thereof and interest due on the Obligations and other amounts due in connection therewith before Prudential is entitled to receive any payment on account of the principal of or interest on the Debt; (b) any payment or distribution of assets of the Borrower of any kind or character, whether in cash, property or securities, to which Prudential would be entitled except for the provisions of this Agreement, shall be paid by the liquidating trustee or agent or other person making such payment or distribution directly to the Lenders or its representative, to the extent necessary to make payment in full of all Obligations remaining unpaid, after giving effect to any concurrent payment or distribution or provision therefor to the Lenders; and (c) in the event that, notwithstanding the foregoing, any payment or distribution of assets of the Borrower of any kind or character, whether in cash, property or securities, shall be received by Prudential on account of principal of or interest on the Debt before all Obligations are paid in full or provision made for their payment, such payment or distribution (subject to the further provisions of this Article) shall be paid over to the Lenders or their representative for application to the payment of all Obligations remaining unpaid or unprovided for until all such Obligations shall have been paid in full, after giving effect to any concurrent payment or distribution or provision therefor to the Lenders. 2.03 SUBORDINATION OF LIENS. So long as any Obligation remains outstanding or any obligation of the Lenders exists to make Loans under the Credit Agreement, Prudential hereby subordinates all Liens, now existing or hereafter created or arising, securing all or any portion of the Debt to all Liens, now existing or hereafter created or arising, securing all or any portion of the Obligations, notwithstanding any defect, deficiency, error or omission which may be contained in any Loan Document creating or perfecting any such Lien securing all or any portion of the Obligations. All Liens, now existing or hereafter created or arising, securing all or any portion of the Debt shall at all times remain subordinate, secondary and inferior to all Liens, now existing or hereafter created or arising, securing all or any portion of the Obligations. 2.04 SUBORDINATION OF REMEDIES. So long as any Obligation remains outstanding or any obligation of the Lenders exists to make Loans under the Credit Agreement, Prudential shall not, without the prior written consent of the Lenders, declare any Debt due or in default (other than to accelerate the Debt and take such other actions as reasonably required to protect Prudential's claims upon any bankruptcy, insolvency, or receivership proceeding with respect to Borrower) or 3 foreclose upon or exercise any power of sale with respect to any security for all or any portion of the Debt or exercise any other right, power or remedy of Prudential provided for in any document or instrument executed in connection with the Debt or by law or initiate or join with any other creditor of the Borrower in initiating any plan or proceeding pursuant to any bankruptcy, insolvency or receivership proceedings or seeking an assignment for the benefit of creditors or the marshalling of the assets and liabilities of the Borrower. Upon any distribution of assets of the Borrower or the dissolution, winding up, liquidation or reorganization (whether in bankruptcy, insolvency or receivership proceedings or upon an assignment for the benefit of creditors or the marshalling of the assets and liabilities of the Borrower or otherwise), any payment to which Prudential would otherwise be entitled with respect to the Debt shall be held in trust for, and shall be immediately paid over or delivered to, the Lenders for application to the Obligations until all Obligations shall have been paid in full. Notwithstanding any provision of this Agreement (i) the holder of the Prudential Note may convert the Prudential Note to shares of common stock of Borrower at any time in accordance with the terms of the Prudential Note; and (ii) Prudential may exercise any warrants for shares of common stock of the Borrower in accordance with the terms of any such warrants. 2.05 CONTINUING AGREEMENT. This Agreement shall continue in full force and effect and the liabilities and obligations of the Borrower and Prudential hereunder shall not be affected or impaired by any amendment, modification or alteration of any Loan Document, except as may be expressly provided in any such amendment, modification or alteration. This Agreement shall continue to be effective or shall be reinstated, as the case may be, if at any time any payment of any of the Obligations is rescinded or must otherwise be returned by the Lenders upon the insolvency, bankruptcy or reorganization of the Borrower or otherwise, all as though such payment had not been made. 2.06 LIABILITY NOT IMPAIRED. The liabilities and obligations of the Borrower and Prudential hereunder shall not be affected or impaired by (a) the failure of the Agent or the Lenders or any other Person to exercise diligence or reasonable care in the preservation, protection or other handling or treatment of all or any part of any Collateral for all or any portion of the Obligations, (b) the failure of any Lien intended to be granted or created to secure all or any part of the Obligations to be properly perfected or created or the unenforceability of any such Lien for any other reason, or (c) the subordination of any such Lien to any other Lien. The Lenders may at any time and from time to time, without the consent of or notice to Prudential, and without incurring any responsibility to Prudential, and without impairing or releasing or otherwise affecting any of the obligations or agreements of Prudential hereunder, (a) change the manner, place or terms of payment, or change or extend the time of payment of, renew, or alter all or any portion of the Obligations, (b) exchange, release, surrender, realize upon or otherwise deal with, in any manner and any order, any Property at any time subject to any Lien in favor of the Lenders, (c) exercise or refrain from exercising any rights against the Borrower or others, and (d) sell, transfer, assign or grant participations in the Obligations or any portion thereof. 2.07 WAIVERS. Prudential waives any right to require the Lenders to (a) proceed against the Borrower or make any effort at the collection of the Obligations from the Borrower or any other Person liable for all or any portion of the Obligations, (b) proceed against or exhaust any Collateral securing all or any portion of the Obligations, or (c) pursue any other remedy in the power 4 of the Lenders. The liability and obligations of Prudential hereunder shall not be affected or impaired by any action or inaction by the Lenders in regard to any matter waived herein. 2.08 MODIFICATION OF PRUDENTIAL DEBT. Without the prior written consent of the Lenders, none of the terms or provisions of the Prudential Note, or the payment of the Debt evidenced thereby, shall be modified, amended, accelerated, renewed or extended. Notwithstanding the foregoing, Borrower may, without the consent of Lender (a) extend the date on which payments are required on the Prudential Note, (b) reduce the interest rate applicable to the Prudential Note, (c) waive compliance with the terms of the Prudential Note or loan documents associated therewith or any default arising from non-compliance, or (d) relax or make less restrictive any covenant in the Prudential Note or loan documents associated therewith. 2.09 KNOWLEDGE OF PRUDENTIAL. Prudential shall not at any time be charged with knowledge of the existence of any facts which would prohibit the making of any payment to Prudential under the Prudential Note or the taking of any action under the Prudential Note by Prudential unless and until Prudential shall have received written notice thereof from the Borrower or the Agent or the Lenders or from any trustee or representative therefor and, prior to the receipt of any such written notice, shall be entitled in all respects conclusively to assume that no such facts exist. 2.10 OBLIGATION OF THE BORROWER. Nothing contained in this Agreement shall affect the obligation of the Borrower to make, or prevent the Borrower from making, payment of the principal of or interest on the Debt, except as otherwise provided in this Agreement and the Prudential Note. ARTICLE III MISCELLANEOUS 3.01 SURVIVAL OF COVENANTS AND AGREEMENTS. All covenants and agreements of the Borrower and Prudential herein made shall survive the execution and delivery hereof and shall remain in force and effect so long as any Obligation remains outstanding or any obligation of the Lenders exists to make Loans under the Credit Agreement. 3.02 PARTIES IN INTEREST. All covenants and agreements herein contained by or on behalf of the Borrower, Prudential or the Lenders shall be binding upon and inure to the benefit of the Borrower, Prudential, or the Lenders, as the case may be, and their respective legal representatives, successors and assigns. 3.03 RIGHTS OF THIRD PARTIES. All provisions herein are imposed solely and exclusively for the benefit of the Borrower, Prudential, and the Lenders. No other Person shall have any right, benefit, priority or interest hereunder or as a result hereof or have standing to require satisfaction of provisions hereof in accordance with their terms; and any or all of such provisions 5 may be freely waived in whole or in part by the Lenders at any time if in their sole discretion it deems it advisable to do so. 3.04 ARTICLES AND SECTIONS. This Agreement, for convenience only, has been divided into Articles and Sections; and it is understood and agreed that the rights and other legal relations of the parties hereto shall be determined from this Agreement as an entirety and without regard to the aforesaid division into Articles and Sections and without regard to headings prefixed to such Articles or Sections. 3.05 NUMBER AND GENDER. Whenever the context requires, reference herein made to the single number shall be understood to include the plural; and likewise, the plural shall be understood to include the singular. Definitions of terms defined in the singular or plural shall be equally applicable to the plural or singular, as the case may be, unless otherwise indicated. Words denoting sex shall be construed to include the masculine, feminine and neuter, when such construction is appropriate; and specific enumeration shall not exclude the general but shall be construed as cumulative. 3.06 NO WAIVER; RIGHTS CUMULATIVE. No course of dealing on the part of the Lenders, their officers or employees, nor any failure or delay by the Lenders with respect to exercising any of its rights hereunder or under any Loan Document shall operate as a waiver of any of the rights of the Lenders hereunder or under such Loan Document. The rights of the Lenders hereunder and under the Loan Documents shall be cumulative, and the exercise or partial exercise of any such right shall not preclude the exercise of any other right. 3.07 SURVIVAL UPON UNENFORCEABILITY. In the event any one or more of the provisions contained herein or executed in connection herewith shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision hereof or of any such other instrument. 3.08 AMENDMENTS OR MODIFICATIONS. Neither this Agreement nor any provision hereof may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against whom enforcement of the change, waiver, discharge or termination is sought. 3.09 GOVERNING LAW. THIS AGREEMENT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS. 3.10 JURISDICTION AND VENUE. ALL ACTIONS OR PROCEEDINGS WITH RESPECT TO, ARISING DIRECTLY OR INDIRECTLY IN CONNECTION WITH, OUT OF, RELATED TO OR FROM THIS AGREEMENT MAY BE LITIGATED, AT THE SOLE DISCRETION AND ELECTION OF THE LENDERS, IN COURTS HAVING SITUS IN HOUSTON, HARRIS COUNTY, TEXAS. EACH OF THE BORROWER AND PRUDENTIAL HEREBY SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT LOCATED IN HOUSTON, HARRIS COUNTY, TEXAS, AND HEREBY 6 WAIVES ANY RIGHTS IT MAY HAVE TO TRANSFER OR CHANGE THE JURISDICTION OR VENUE OF ANY LITIGATION BROUGHT AGAINST IT BY THE LENDERS IN ACCORDANCE WITH THIS SECTION. 3.11 ENTIRE AGREEMENT. THIS AGREEMENT CONSTITUTES THE ENTIRE AGREEMENT AMONG THE PARTIES HERETO WITH RESPECT TO THE SUBJECT HEREOF AND SHALL SUPERSEDE ANY PRIOR AGREEMENT AMONG THE PARTIES HERETO, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT HEREOF. THIS AGREEMENT AND THE OTHER WRITTEN LOAN DOCUMENTS REPRESENT, COLLECTIVELY, THE FINAL AGREEMENT AMONG THE PARTIES THERETO AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF SUCH PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG SUCH PARTIES. IN WITNESS WHEREOF, this Agreement is deemed executed effective as of the date first above written. THE PRUDENTIAL INSURANCE COMPANY OF AMERICA By: ------------------------------------- Printed Name: --------------------------- Title: ---------------------------------- MIDDLE BAY OIL COMPANY, INC. By: ------------------------------------- John J. Bassett President LENDER AND AGENT: COMPASS BANK 7 By: ------------------------------------- Dorothy Marchand Wilson Senior Vice President LENDER: BANK OF OKLAHOMA, NATIONAL ASSOCIATION By: ------------------------------------- Michael M. Coats Senior Vice President 8 EX-27 15 EX-27
5 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 25,076,465 0 2,716,165 0 0 27,883,197 81,648,100 (34,486,362) 75,682,810 7,699,604 35,026,249 0 8,862,083 48,404,967 (26,433,735) 75,682,810 11,328,502 12,967,332 4,450,843 16,466,363 0 0 1,739,362 (3,458,803) (923,324) (2,963,988) 0 0 0 (2,963,988) (0.32) (0.32)
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