-----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, LFKzZUn992AiP2F5HAvxrwIYToZxuxrzLmpS/iwkEY3dJctneYjnGSW2VeMStD7L az4sXt/fr4btMj04gUoOqQ== 0000950134-97-002546.txt : 19970401 0000950134-97-002546.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950134-97-002546 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DLB OIL & GAS INC CENTRAL INDEX KEY: 0000945982 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 731358299 STATE OF INCORPORATION: OK FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-26484 FILM NUMBER: 97571815 BUSINESS ADDRESS: STREET 1: 1601 NORTHWEST EXPRESSWAY STREET 2: STE 700 CITY: OKLAHOMA CITY STATE: OK ZIP: 73118 BUSINESS PHONE: 4058488808 MAIL ADDRESS: STREET 1: 100 N BROADWAY STREET 2: 20TH FLOOR CITY: OKLAHOMA CITY STATE: OK ZIP: 73102 10-K 1 FORM 10-K FOR YEAR ENDED DECEMBER 31, 1996 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from to --------- -------- Commission File Number: 0-26484 DLB OIL & GAS, INC. (Exact name of Registrant as specified in its charter) OKLAHOMA 73-1358299 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1601 NORTHWEST EXPRESSWAY, SUITE 700 73118-1401 OKLAHOMA CITY, OKLAHOMA (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: 405-848-8808 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ------ ------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part II of this Form 10-K or any amendment to this Form 10-K. The aggregate market value of the voting stock held by non-affiliates of the Registrant on March 26, 1997 was $29,962,968. The number of common shares, $.001 par value, of the Registrant outstanding on March 26, 1997 was 12,975,000. Documents incorporated by reference: Proxy Statement of Registrant for the Annual Meeting to be held on May 21, 1997 (to be filed within 120 days of the close of the Registrant's fiscal year), which is incorporated into Part III of this Form 10-K. 2 TABLE OF CONTENTS
Page DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS...................................................... 1 PART I ............................................................................................ 1 Item 1. Business.................................................................. 1 Item 2. Properties................................................................ 19 Item 3 Legal Proceedings......................................................... 24 Item 4. Submission of Matters to a Vote of Security Holders....................... 25 Item 4A. Executive Officers of the Registrant...................................... 25 PART II Item 5. Market for Registrant's Common Stock and Related Shareholder Matters....................................................... 27 Item 6. Selected Financial Data................................................... 27 Item 7. Management's Discussion and Analysis of Financial Condition and Result of Operations........................................ 30 Item 8. Financial Statements and Supplementary Data............................... 40 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................................... 40 PART III ............................................................................................ 40 Item 10. Directors and Executive Officers of the Registrant........................ 40 Item 11. Executive Compensation.................................................... 40 Item 12. Security Ownership of Certain Beneficial Owners and Management............................................................ 40 Item 13. Certain Relationships and Related Transactions............................ 40 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................................................... 40 Signature Page............................................................ 42 Exhibit Index............................................................. 43 Index to Consolidated Financial Statements................................ F-1
As used in this report, "Bbl" means barrel, "MBbls" means thousand barrels, "MMBbls" means million barrels, "Mcf" means thousand cubic feet, "MMcf" mean million cubic feet, "Bcf" means billion cubic feet, "BOE" means barrel of oil equivalent determined using a ratio of six Mcf of gas for each Bbl of oil, "MBOE" means thousand barrels of oil equivalent, and "MMBOE" means million barrels of oil equivalent. i 3 DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS This Form 10-K includes "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). All statements, other than statements of historical facts, included in this From 10-K that address activities, events or developments that the Company expects or anticipates will or may occur in the future, including such things as estimated future net revenues from oil and gas reserves and the present value thereof, future capital expenditures (including the amount and nature thereof), business strategy and measures to implement strategy, competitive strengths, goals, expansion and growth of the Company's business and operations, plans, references to future success, references to intentions as to future matters and other such matters are forward-looking statements. These statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments as well as other factors it believes are appropriate in the circumstances. However, whether actual results and developments will conform with the Company's expectations and predictions is subject to a number of risks and uncertainties; general economic, market or business conditions; the opportunities (or lack thereof) that may be presented to and pursued by the Company; competitive actions by other oil and gas companies; changes in laws or regulations; and other factors, many of which are beyond the control of the Company. Consequently, all of the forward-looking statements made in this Form 10-K are qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequences to or effects on the Company or its business or operations. All subsequent written or oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by such continuing statements. PART I ITEM 1. BUSINESS DLB Oil & Gas, Inc. ("DLB" or the "Company") is an independent energy company engaged primarily in the exploration, development, production and acquisition of oil and gas properties in the Mid-Continent region and the coastal and shallow onshore regions of south Louisiana, two of the most prolific oil and gas producing regions in the United States. The Company's principal producing fields are presently concentrated in Oklahoma. Since commencing operations in 1991, the Company has experienced rapid and profitable growth as a result of its strategic acquisitions and exploration and development drilling programs. As of January 1, 1997, the Company had estimated proved reserves of 20.1 MMBOE, which consisted of 6.7 MMBbls of oil and 80.4 Bcf of gas, with a present value of future net reserves of $204.8 million and a reserve life of 9.7 years. On a BOE basis, 33% of the Company's estimated proved reserves as of January 1, 1997 were oil and 67% were natural gas, and 72% of the Company's proved reserves were classified as proved developed. In addition, through its wholly owned subsidiaries Bonray Drilling Company ("Bonray"), which was acquired in February 1997, and Gathering Energy Marketing Company, LLC ("GEMCO"), the Company is engaged in the land contract drilling of oil and gas wells and in the gathering, processing, transportation and marketing of hydrocarbons, respectively. DLB places special emphasis on the application of advanced geological technologies to areas it believes are undervalued and underanalyzed. As a result of the Company's successful exploration and acquisition efforts, including through the incorporation of these technologies, the Company's estimated 1 4 proved reserves, production, revenues and EBITDA (defined as earnings before interest, taxes, depreciation and amortization) have increased in each of the last six years. From 1991 through 1996, the Company achieved substantial growth in each of the following areas: o Estimated proved reserves increased from 1.8 MMBOE to 20.1 MMBOE. o Production increased from 0.1 MMBOE to 1.6 MMBOE. o Revenues increased from $0.5 million to $28.4 million. o EBITDA increased from $0.8 million to $18.1 million. Management believes that the Company benefits from favorable operating margins per BOE relative to its peers in the oil and gas industry. For the year ended December 31, 1996, the Company received an average sales price of $17.02 per BOE produced and incurred lease operating expenses (inclusive of gross production taxes), general and administrative expenses and interest expense of $4.62, $1.56 and $0.99 per BOE produced, respectively, resulting in the Company earning cash margin per BOE produced of $9.85. The Company believes that this margin reflects the success of the Company's exploration strategy and operating performance and has provided the Company with financial resources that it has utilized in pursuing its business strategy. BACKGROUND The Company was formed by Mike Liddell and Mark Liddell and commenced operations in 1991. Prior to forming the Company, Mike Liddell and Mark Liddell were the controlling shareholders and principal officers of DLB Energy Corporation ("DLB Energy"). From 1980 through 1990, DLB Energy drilled over 240 wells for itself, Charles E. Davidson (DLB Energy's largest and most active participant) and third party, non-industry participants. These wells were primarily developmental wells located in the Mid-Continent area. DLB Energy generated prospect locations and operated a majority of the completed wells. In December 1990, DLB Energy, Davidson and certain other third party participants sold their oil and gas properties to Louis Dreyfus Natural Gas Corp. for approximately $35.0 million, and DLB Energy discontinued substantially all of its operations. Shortly after that sale, the Company commenced operations and entered into a joint venture with Davidson to conduct exploratory activities in the Mid-Continent area. Since then, DLB has been one of the most active independent operators in the Mid-Continent area. Making extensive use of technological advances in geological and geophysical applications and utilizing a regional perspective in managing prospects and related petroleum assets, DLB's approach has led to 23 new field discoveries in the Mid-Continent area. DLB's activities have also involved the gathering, processing, transportation and marketing of hydrocarbons, the acquisition of mineral interests and secondary oil recovery. On July 20, 1995, in connection with its initial public offering, the Company effected the Merger pursuant to which Davidson Oil & Gas Company, Inc. was merged with and into DLB, the surviving corporation (the "Merger"). Unless the context otherwise requires, the consolidated historical financial and other business information presented in this Annual Report on Form 10-K give effect to the Merger as if such event occurred as of January 1, 1991. The Company's principal executive offices are located at 1601 Northwest Expressway, Suite 700, Oklahoma City, Oklahoma 73118-1401, and its telephone number at that location is (405) 848-8808. 2 5 BUSINESS STRATEGY The Company's objective is to maximize shareholder value by seeking growth in its reserves, production, cash flow and intrinsic value per share through exploration and development activities as well as opportunistic acquisitions. The Company's strategy to achieve this objective includes (i) exploring and developing new oil and gas reserves, (ii) acquiring producing oil and gas properties, (iii) utilizing advanced technology and experienced explorationists and (iv) maximizing net margins per BOE. EXPLORING AND DEVELOPING NEW OIL AND GAS RESERVES. The Company seeks to increase reserves and production on its properties and the properties it acquires. Since 1991, the Company has made 23 new field discoveries, drilling 133 gross (71.95 net) exploration wells and 74 gross (31.61 net) development wells with a success rate of 52% and 84%, respectively. Drilling efforts replaced 331% of production in 1996. Development efforts include workovers and recompletions of existing wells; the initiation of, or improvement to, secondary recovery projects, particularly through the use of waterflooding; and the drilling of lower risk development wells. The Company has budgeted $27.0 million for exploration and development activities in 1997. ACQUIRING PRODUCING OIL AND GAS PROPERTIES. The Company seeks to acquire oil and gas properties through strategic business transactions that it believes offer potential for increases in reserves, production and cash flow, including transactions in which management believes the target is undervalued or underutilized. In 1996, the Company acquired substantially all of the Oklahoma oil and gas producing properties, mineral rights and leasehold acreage of Amerada Hess Corporation, and in March 1997 the Company purchased an undivided 50% interest in the West Cote Blanche Bay field and certain related assets from Texaco Exploration and Production, Inc. ("Texaco"). See "--Recent Events" and "--The Texaco Acquisition." As of January 1, 1997, estimated proved reserves attributable to the properties acquired in these transactions were 21.6 MMBOE. In evaluating potential transactions, the Company utilizes the expertise of its senior management, including the Company's Chairman of the Board, Charles E. Davidson, who is also the managing partner of Wexford Capital LLC,a diverse capital management firm managing over $1.5 billion of assets. The Company and Wexford Capital LLC, on behalf of certain affiliated funds (collectively, "Wexford"), are currently proponents of a joint plan of reorganization for WRT Energy Corporation ("WRT Energy"). See "--Recent Events" And "--WRT Energy." UTILIZING ADVANCED TECHNOLOGY AND EXPERIENCED EXPLORATIONISTS. The Company seeks to acquire large amounts of geological and geophysical data to which it applies advanced technology to analyze the data for potential target areas. The information acquired by the Company includes geological studies and 3-D and high resolution 2-D seismic surveys. The Company currently owns approximately 385 square miles of 3-D seismic data focused primarily in the Mid-Continent region and in south Louisiana. Additionally, the Company's proprietary data base contains approximately 42,000 linear miles of conventional and high resolution 2-D seismic data and over 176,000 digitized well logs, core samples, pressure tests, petrographic studies and reservoir performance data. DLB believes that its use of this advanced technology to analyze its extensive, region-specific data base leads to a more accurate and detailed analysis of prospect opportunities than is available by using more conventional techniques. In particular, the Company believes that the use of these technologies facilitates the optimal placement of development wells, more clearly identifies elements of prospect risk and aids in the prediction of geological conditions and potential reserves, thereby lowering finding costs and improving the economics of oil and gas exploration. The Company currently utilizes 13 geologists and geophysicists. DLB believes that these scientists are among the most experienced explorationists using advanced geological and geophysical technology in these 3 6 areas. In addition, the Company's explorationists are experienced in conventional interpretive techniques, reflecting the Company's philosophy that advanced geological and geophysical technology should extend, rather than replace, conventional methodologies. MAXIMIZING NET MARGINS PER BOE. An important element of the Company's business strategy is its concentrated regional approach to asset management. In making capital allocation decisions, management focuses on the creation of core operating areas in which DLB can achieve competitive advantages through concentration of (i) geologic and geophysical data, which lead to greater regional knowledge, (ii) production, which leads to beneficial marketing and transportation arrangements, and (iii) operations, which lead to more efficient use of general and administrative expenditures. In addition, DLB seeks to control ancillary activities that can enhance net margins per BOE, such as the marketing of its oil and gas as well as oil and gas of third parties and the installation or purchase of gathering, processing and pipeline systems. RECENT EVENTS Since the beginning of 1996, the Company has undertaken several significant transactions that have increased, or are expected to increase, the Company's reserves, production, cash flow and intrinsic value per share. These transactions include the following: AMERADA HESS ACQUISITION. In a transaction completed in May 1996, DLB purchased substantially all of the Oklahoma oil and gas producing properties, mineral rights and leasehold acreage of Amerada Hess Corporation ("Amerada Hess"), including ownership interests in 44 fields containing approximately 1,200 wellbores. In addition, the acquisition included approximately 11,000 net acres of perpetual mineral rights, 15,100 miles of proprietary seismic data, geologic and well data and interests in certain gas gathering and processing assets. All of the assets are located in Oklahoma, the Company's historical core operating area. The purchase price, as adjusted, was approximately $32.1 million. As of January 1997, estimated proved reserves associated with the acquired properties represented 9.4 MMBOE, or 47% of the Company's total estimated proved reserve base of 20.1 MMBOE. BONRAY ACQUISITION. In February 1997, the Company acquired Bonray in a negotiated $12.7 million transaction involving a cash tender offer and subsequent merger of Bonray with a wholly-owned subsidiary of the Company (the "Bonray Acquisition"). As a result of the Bonray Acquisition, the Company acquired 15 land drilling rigs, including six rigs capable of drilling wells over 20,000 feet and nine rigs capable of drilling wells from 7,500 to 15,000 feet. Two of the six deep drilling rigs are presently being remobilized and are expected to be in operation by the second quarter of 1997. Ten of the remaining 13 rigs were in service or available for service at the time of acquisition and are currently employed in the Mid-Continent region, with three in stacked status. The Company believes that the Bonray Acquisition is of significant strategic importance to the Company because it (i) increases rig availability for use in DLB's exploration and development program; (ii) gives DLB control of rigs to allow it to hedge against increases in drilling costs, and (iii) creates new growth opportunities for the Company, including the ability to enter new core areas through joint ventures with companies requiring rig availability to protect expiring leasehold positions. See Item 2. "Properties--Contract Drilling Operations." TEXACO ACQUISITION. On March 11, 1997, the Company purchased from Texaco an undivided 50% interest in approximately 4,600 producing acres in the West Cote Blanche Bay field, which includes 53 producing and 343 shut-in wells as well as certain related equipment and facilities and 3-D and 2-D seismic, geophysical, geological and other technical data (the "Texaco Acquisition"). As a result of the Texaco Acquisition, the Company is the operator of the field which is located in the shallow onshore waters of south Louisiana, in Saint Mary's Parish, Louisiana. The interest in the West Cote Blanche Bay 4 7 field purchased by the Company from Texaco contained estimated proved reserves of 12.2 MMBOE as of January 1, 1997, all of which are oil and 71% of which are classified as proved developed. As discussed below, the Company has agreed to contribute the 50% interest in the West Cote Blanche Bay field and certain related assets to WRT Energy as part of the joint reorganization plan proposed for WRT Energy by the Company, Wexford and WRT Energy. WRT ENERGY. During 1996, the Company and Wexford acquired $34.3 million principal amount of WRT Energy debt securities and $2.2 million of secured claims. The Company's share of the debt securities and liens was $21.5 million for which it paid $7.9 million. Subsequently, DLB and Wexford, together with WRT Energy, proposed a joint plan of reorganization for WRT Energy. WRT Energy is an independent energy company that owns and operates mature oil and gas properties primarily in the Louisiana Gulf area. WRT Energy has reported estimated proved reserves as of December 31, 1996 of 16.4 MMBOE as determined by an independent engineering firm. In February 1996, WRT Energy sought protection under Chapter 11 of the Federal Bankruptcy Code. Under the plan of reorganization jointly proposed by the Company, Wexford and WRT Energy, as currently proposed, among other things, the Company would contribute its 50% interest in the West Cote Blanche Bay field and certain related assets to WRT Energy, which owns the remaining 50% undivided interest, in exchange for an additional equity interest in the post-bankruptcy WRT Energy, and the Company and Wexford would own at least approximately 46% and 9%, respectively, of the outstanding common stock of WRT Energy on the Effective Date as defined herein. If the plan is approved, the Company believes that the resulting 100% operating control of the West Cote Blanche Bay field, when combined with the Company's management and technical expertise and WRT Energy's improved financial condition, will facilitate the development of the property and lead to increases in reserves, production and cash flow. See "--WRT Energy." BARBADOS TRANSACTION. On November 27, 1996, the Company purchased a 20.8% equity interest in Waggoner (Barbados) Ltd. ("WBL") and a promissory note of WBL in the principal amount of $2.4 million payable to the Company, for approximately $3.2 million. WBL has entered into a series of agreements with the Barbados National Oil Company, Ltd. and one of its subsidiaries (together, "BNOC"), relating to the exploration, development and production of the onshore oil and gas reserves of Barbados by applying advanced technological methods. Pursuant to the terms of these agreements, WBL will be entitled to 60% of the profits from the joint venture, after the recovery of costs and subject to a production bonus paid to BNOC and an overriding royalty of 3% of certain revenues from sales. The 1997 drilling program approved by WBL and BNOC includes 22 developmental wells, 60 advanced stimulation treatments, 35 recompletions and two horizontal wells. Operations are scheduled to begin during the first quarter of 1997. PRINCIPAL PRODUCING AREAS The following table presents information regarding the Company's estimated proved reserves in its principal producing areas as of January 1, 1997 and the present value of future net reserves attributable thereto. 5 8
NET PROVED RESERVES (1) ------------------------------------------ PRESENT VALUE OIL GAS TOTAL PERCENTAGE OF FUTURE (MBBLS) (MMCF) (MBOE) OF TOTAL NET REVENUES (2) -------- -------- -------- -------- -------------- PRODUCING AREA (IN THOUSANDS) Anadarko Basin and Shelf 2,691 55,771 11,986 60% $ 134,014 Golden Trend and Southern Oklahoma 3,379 20,458 6,789 34% 57,764 All Other 600 4,128 1,288 6% 12,985 ======== ======== ======== ======== ============== Total 6,670 80,357 20,063 100% $ 204,763 ======== ======== ======== ======== ==============
- ------------------- (1) Excludes estimated proved reserves of 12.2 MMBOE attributable to Texaco's 50% undivided interest in the West Cote Blanche Bay field which was acquired by the Company in March 1997. (2) Present value of future net revenues is before income taxes and discounted at 10% per annum. MID-CONTINENT REGION. The Company's Mid-Continent producing properties are primarily located in two geological areas: (i) the Anadarko Basin and Shelf and (ii) the Golden Trend and Southern Oklahoma. Anadarko Basin and Shelf. The Anadarko Basin is a major Mid-Continent oil and natural gas producing area in western Oklahoma and the Texas Panhandle. The greatest concentration of oil fields occurs on the eastern flank of the basin, with natural gas fields dominating the shelf to the west, the Texas Panhandle area and the deep basin located in southwestern Oklahoma. Oil and natural gas are produced in this area from depths of only a few hundred feet to over 20,000 feet. The Company's wells in this area produce from depths between 6,000 and 16,000 feet. Since 1991, DLB has drilled 96 gross (37.08 net) exploratory wells and 62 gross (25.22 net) development wells in the Anadarko Basin and Shelf area and, as of March 1, 1997, held interests in 181,083 gross (97,184 net) leasehold acres. As of the same date, DLB held interests in 433 gross (132.37 net) wells in this area, 136 gross (79.46 net) of which it operated. Golden Trend and Southern Oklahoma. The Golden Trend and Southern Oklahoma area is a highly faulted, geologically complex province that extends across 11 counties in south-central Oklahoma. The Company's production in this area is mainly from the Pennsylvanian Hoxbar, Deese, Simpson and Springer sands and the Hunton and Viola carbonates. The Company's wells in this region produce from depths ranging from 5,000 to 17,000 feet. Since 1991, DLB has drilled 11 gross (3.16 net) exploratory wells and 4 gross (.49 net) development wells in the Golden Trend and Southern Oklahoma area and, as of March 1, 1997, held interests in 72,222 gross (42,357 net) leasehold acres. As of the same date, DLB held interests in 864 gross (136.6 net) wells in this area, 93 gross (68.55 net) of which it operated. DLB has over 42,000 miles of 2-D, and over 325 square miles of 3-D, seismic data over significant portions of the Anadarko Basin and Shelf and Golden Trend areas. The application of technology to these areas has resulted in the Company experiencing success rates of 52% and 84% on exploratory and development drilling, respectively, through 1996. These areas are serviced by interstate pipelines and numerous intrastate pipelines and gathering facilities providing the Company with multiple marketing options. LOUISIANA GULF COAST REGION (WEST COTE BLANCHE BAY). The Company's strategic acquisition of Texaco's interest in the West Cote Blanche Bay field established a new core area for the Company in the coastal onshore shallow water region of Louisiana. The West Cote Blanche Bay field was discovered in 6 9 1940 and lies approximately five miles off the coast of Louisiana in Saint Mary's Parish in a shallow bay with water depths averaging seven to eight feet. The Company's activities in this field are expected to focus on both shallow development and deeper exploration drilling targets. The complexly faulted and prolific salt dome dominated region possesses multiple proven reservoir targets. The area is served by interstate pipelines and many intrastate pipeline and gathering systems. The assignment of leasehold by Texaco was limited to a depth of approximately 10,500 feet as defined by a geologic marker. Texaco has retained all of its leasehold rights below this depth. See "--Recent Events--Texaco Acquisition." The Company's net interest in the Louisiana Gulf region would be increased by the completion of the proposed transaction with WRT Energy, which has interests in 19 fields in southern Louisiana. See "--WRT Energy." AREAS OF FUTURE EXPLORATION AND DEVELOPMENT ACTIVITIES The Company has identified numerous exploratory prospects as a result of its extensive regional mapping undertaken to identify potential new field areas. In addition, the Company has developed a large inventory of development projects. The Company has budgeted $27.0 million for exploration and development costs in 1997. The Company expects that a significant amount of these budgeted capital expenditures will be deployed in the areas described below. However, the actual level of capital expenditures and the areas in which they are expended is highly dependent upon the Company's success rate on these projects and prevailing conditions in the oil and gas industry. Accordingly, the actual level of capital expenditures and areas of exploration and development activity may vary materially from those described herein. See Item 7. "Management's Discussion and Analysis of Financial Condition and Result of Operations." PROJECTS IN THE MID-CONTINENT REGION - ANADARKO BASIN AND SHELF Sheridan - Hunton. DLB geoscientists have completed a 3,000 square mile regional study of the Hunton formation in the Anadarko Basin and the Anadarko Shelf. The Hunton formation is one of the most prolific natural gas reservoirs in the region. Exploratory wells drilled to the Hunton, in the study area, have penetrated several other potentially productive zones including the Red Fork, Chester and Mississippi. Total depths for planned Hunton exploratory tests range from approximately 7,500 to 11,000 feet. Management has approved the drilling of three wildcat wells in 1997 based on the regional geological study and interpretation of 20 miles of proprietary high resolution 2-D seismic data. South Elk City. The Company has also completed an evaluation of over 6,000 miles of 2-D seismic data located in the deep Anadarko Basin and intends to participate in the drilling of a 13,000 foot Atoka Wash exploratory well. The Atoka Wash is being actively developed to the east of the Company's acreage position with recent completions averaging 3,000 Mcf of gas per day. Additional potential pay zones to be tested include the Des Moinesian Wash and Springer formations. Sahara. In 1995, DLB discovered and is now developing the Sahara area which produces from the Tonkawa and Chester formations located at depths of approximately 5,000 to 6,000 feet, respectively. Through December 31, 1996, the Company successfully completed 19 of 20 of its wells in this area. Based on its success in this area, DLB conducted a regional study of these productive formations over a 750 square mile area and leased over 15,000 net leasehold acres. Current plans contemplate the drilling of ten exploratory wells based on this study with the objective of enhancing the economics of the area. Additional potential pay zones to be tested by these exploratory wells include the Cottage Grove, Oswega and Mississippi formations. 7 10 South Peek. Discovered in 1967, the South Peek field has produced over 100 Bcf of gas and 1.0 MMBbl of oil primarily from the Tonkawa formation at a depth of 8,400 feet. DLB operates 16 wells in the field and has non-operated interests in ten more. Average daily production from the field, net to DLB's interest, was approximately 1,200 Mcf of gas per day during the first quarter of 1997 (through March 20, 1997). In 1996, DLB drilled three exploratory wells in the field, and DLB controls at least 74% of the working interest in each of these wells. All of the wells were drilled to the Cottage Grove formation, a deeper zone known to be productive in the area. The result of these efforts yielded a new field discovery in the Cottage Grove from two of the wells which tested at initial rates of approximately 230 barrels of oil and 100 Mcf of gas per day and 100 barrels of oil and 100 Mcf of gas per day, respectively. All of the wells had productive Tonkawa pay. DLB plans to continue its development of this field and intends to drill at least six wells in 1997. Potential future development drilling could include eight additional new wells. The field also has further exploratory potential including the Lower Pennsylvanian Red Fork and Morrow sandstones and the Hunton limestone. PROJECTS IN THE MID-CONTINENT REGION - GOLDEN TREND AND SOUTHERN OKLAHOMA Sholem Alechem Anticline. This field, discovered in 1927, produces gas from multiple pays from the Pennsylvanian through the Ordovician formations. Current exploratory efforts are centered on horizontal drilling of the Sycamore and McClish formations located at true vertical depths of approximately 7,500 and 10,000 feet, respectively. There are presently approximately 12 proposed horizontal drilling locations in these reservoirs. Total measured depths for these wells are up to 15,000 feet. DLB owns working interests ranging from 1% to 60% in these locations. The Company's capital budget contemplates that it will participate in five horizontal wells in this field in 1997, three of which it will operate. Cement Field - Springer. The Cement field covers approximately 53,000 acres and produces from over 35 different pay zones. Current exploratory work in this field is centered on the Springer and Pre-Pennsylvanian carbonates located at depths of over 15,000 and over 18,000 feet, respectively. The Springer formation is being developed from east to west. The Company has acreage positions in over 15 sections in this field including a significant position on the west end of the field. See "--Cement West" below. A geologic study, including the potential use of 3-D seismic, is in progress to determine the optimum location for a 19,000 foot Springer exploratory well expected to be drilled on this acreage block in 1997. Cement West. The Company's most concentrated acreage position in the Cement field is located on the west end where it operates 11 wells in which it controls in excess of 90% of the working interests. These wells have produced nearly 50 Bcf of gas since 1956 from multiple reservoirs in the Middle Pennsylvanian sandstones found at depths from 7,000 to 8,600 feet. Average daily production for the first quarter of 1997 (through March 20, 1997), net to DLB, from these wells is about 4,800 Mcf of gas per day. Production from this field was approximately 1,500 Mcf of gas per day when DLB assumed operation at mid-year. The Company executed a successful workover program and drilled three gross (2.2 net) developmental wells in the field in late 1996 and early 1997 to achieve these gains. DLB plans to drill two additional development wells and perform four workovers in Cement West during the remainder of 1997. Dibble/Newcastle. The Dibble/Newcastle prospect consists of an area covering approximately 6,000 acres. DLB controls approximately 4,000 net leasehold acres in the area and in 1996 completed a 14 square mile 3-D seismic shoot. In 1997, DLB completed two wildcat wells, the Givens 34-3 and the Kidd 13-4, in each of which it holds a 100% working interest. Initial flow rates for the Givens 34-3 were 350 Mcf of gas per day and 115 barrels of oil per day. The Kidd 13-4 is currently in the testing stage with 8 11 good shows of oil and gas. These wells are presently completed in the Hunton and Viola formations and appear to have productive pay behind pipe in the Hart and Osborne formations. The Company believes that potential development in this prospect could reach 20 locations. Fitts. The Fitts field, discovered in 1933, covers in excess of seven square miles and has cumulative production of over 45 MMBOE. This field is being waterflooded from multiple zones, with the Cromwell, Hunton and Viola formations exhibiting the best performance. Current production is approximately 3,500 barrels of oil per day (210 net to DLB). A proposed plan to drill 56 additional wells to increase sweep efficiency has been proposed to the unit operator. If enacted, the infill drilling program is expected to significantly increase the field's estimated proved reserves which at January 1, 1997 were 15.9 MMBOE (1.03 MMBOE net to DLB). LOUISIANA GULF REGION West Cote Blanche Bay. The West Cote Blanche Bay field, discovered in 1940, is an intermediate depth salt dome feature which covers approximately nine square miles in area. This extremely faulted feature has produced oil from over 80 hydrocarbon bearing sands. Productive formations range from 1,200 to 12,700 feet, although the Company only has an interest in the field down to approximately 10,500 feet. Current production from the field (above 10,500 feet) is approximately 1,000 barrels of oil per day. In the Texaco Acquisition completed in March 1997, the Company acquired 53 producing and 343 shut-in wells, as well as related production and marketing facilities. DLB also obtained seismic, geophysical, geological and other technical data, which includes approximately 65 square miles of 3-D seismic data. See "--Texaco Acquisition." BARBADOS On November 27, 1996, the Company purchased preferred stock representing 20.8% of the total outstanding equity of WBL and a promissory note of WBL in the original principal amount of approximately $2.4 million for an aggregate purchase price of approximately $3.2 million. At such time as the Company has received dividends, interest and principal equal to the sum of all equity and debt contributions made by it, the preferred stock will be converted into common stock of WBL. WBL has entered into a series of agreements with BNOC relating to the exploration, development and production of the onshore oil and gas reserves of Barbados by applying advanced technological methods. Pursuant to the terms of these agreements, WBL will be entitled to 60% of the profits from the joint venture, after the recovery of costs and subject to a production bonus paid to BNOC and an overriding royalty of 3% of certain revenues from sales. WBL and BNOC jointly have the right to conduct activities for the exploration, development and production of oil and gas on Barbados. WBL has agreed to provide all of the financial and technical resources required and BNOC has agreed to be responsible as operator for all such petroleum operations. All of the petroleum operations will be managed by a committee consisting of one representative appointed by WBL and one representative appointed by BNOC, with BNOC's representative serving as chairman of the Committee and both representatives being elected as members of the board of directors of BNOC . In addition, the Company and each of the other equity holders of WBL have jointly and severally guaranteed the performance by WBL of its obligations under the agreements up to the 9 12 amount of funds committed but unpaid by WBL to the next date that WBL is entitled to terminate the agreements. The agreements between WBL and BNOC establish exploration and development plans for the island. The five phase exploration plan relates to all of the onshore territory of Barbados that is above the low water line. During Phase I (the first three years of the venture), WBL is obligated to spend at least $1.0 million to drill and acquire data from at least one exploratory well. During Phase II (the subsequent four year period), WBL is obligated to spend at least $2.0 million to drill at least two additional exploratory wells. In each of Phase III and Phase IV (each a subsequent four year period), WBL is obligated to spend at least $2.0 million for exploration activities. During Phase V (the subsequent ten year period), any proposals for work and expenditures are subject to approval of the parties. The current exploration plan calls for the drilling of two horizontal wells to test the Scotland sands located from approximately 4,000 to 6,200 feet. Productive pay sections from the two primary reservoirs found in existing production often exceed 200 feet in thickness. Extreme faulting and thrusting has created areas where these zones are dipping at 60 to 70 degrees making them excellent candidates for horizontal wells. BNOC may terminate the agreement at the end of Phase II if such phase expires without the establishment of a commercial discovery. The venture has exclusive exploratory rights during Phase I and a right of first refusal during Phase II through IV. The four phase development plan to enhance existing production of oil and gas relates to 16,189 acres and is premised on application of advanced oil field technology and more efficient operating practices to develop new reserves and maximize production and net margins per barrel. WBL and BNOC Sub jointly have the exclusive right to develop the area. Phase I of the development plan (the first six months of the venture), requires development of an engineering study and a plan of action. During Phase II (the remainder of the first three years of the venture), WBL is obligated to spend at least $11.5 million ($8.0 million of which is to be spent during the first two years) in drilling 25 new wells, performing 10 stimulations, reactivating 35 existing, inactive wells and beginning a pressure maintenance program. During Phase III (the subsequent four year period), WBL is obligated to spend at least $9.5 million in drilling 15 new wells, reactivating 15 existing inactive wells and performing a secondary recovery program. During the last phase, WBL is obligated to spend at least $2.0 million in each of the years eight to 15, $1.5 million in each of the years 16 to 23 and $1.0 million in each of the years 24 and 25. If no incremental production is achieved by the end of the first year, WBL may either relinquish its rights and be relieved of its obligations or request an extension for an additional year. If no incremental production is achieved by the end of the second year, the right to perform these development activities automatically terminates. The agreements provide that WBL will share in production increases above current levels adjusted for normal declines. TEXACO ACQUISITION On March 11, 1997, the Company and Texaco entered into that certain Purchase, Sale and Cooperation Agreement (the "PS&C Agreement") pursuant to which the Company purchased, among other things, (i) Texaco's 50% undivided interest in the shallow contract area of the West Cote Blanche Bay field as well as related facilities and seismic, geophysical, geological and other technical data (the "WCBB Assets") for $12.3 million and (ii) certain pre-petition claims against WRT Energy (the "Texaco Claim"), for approximately $6.0 million. In addition, the Company assumed certain operational liabilities, including Texaco's plugging and abandonment obligations related to the WCBB Assets. In connection with these obligations, the Company (i) contributed $1.0 million to an escrow account (the "P&A Trust") established to satisfy the costs of such plugging and abandonment obligations, (ii) agreed to contribute to the P&A Trust approximately $18,000 per month for the next seven years and (iii) granted to Texaco as security for the plugging and abandonment obligations, a security interest (not to exceed $15.0 million) in (A) 50% of 10 13 the production from the shallow contract area of the West Cote Blanche Bay field, as well as the proceeds therefrom, and (B) the Company's present and future interest in the P&A Trust. The PS&C Agreement also provides that on the effective date of the WRT Plan (the "Effective Date"), among other things, (i) the Company will transfer the WCBB Assets to New WRT Energy, (defined herein) (ii) New WRT Energy will transfer its interest in approximately 400 acres of non-producing land at West Cote Blanche Bay and certain related facilities to the Company, which will in turn transfer them to Texaco, (iii) New WRT Energy will issue to the Company five million shares of common stock of New WRT Energy, plus the additional number of shares of such common stock obtained by dividing the amount of capital expenditures incurred by the Company as of the Effective Date as owner of the WCBB Assets, to the extent not disapproved by the Bankruptcy Court by a purchase price of $3.50 per share, (iv) the Company will receive common stock of New WRT Energy for the Texaco Claim, and (v) New WRT Energy will assume all liabilities, duties and obligations of the Company that arise, or may arise, under the PS&C Agreement and related agreements. See "--WRT Energy" below for additional information concerning WRT Energy and the WRT Plan. WRT ENERGY WRT Energy is an independent energy company that owns and operates mature oil and gas properties primarily in the Louisiana Gulf Coast area. On February 14, 1996, WRT Energy commenced a voluntary reorganization case under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Western District of Louisiana, Lafaytte-Opelousa Division (the "Bankruptcy Court"), Case No. 96BK-50212. After formal efforts were taken by WRT Energy and its financial advisor to seek a restructuring partner, on or about October 1996, WRT Energy's Board of Directors selected the joint restructuring proposal of DLB and Wexford. In connection therewith, WRT Energy, DLB and Wexford filed with the Bankruptcy Court (i) the Second Amended Joint Plan Of Reorganization Under Chapter 11 of The United States Bankruptcy Code, dated March 11, 1997 (the "WRT Plan") and (ii) the related Second Amended Disclosure Statement, dated March 11, 1997 (the "Disclosure Statement"). On March 11, 1997, the Bankruptcy Court, among other things, approved the Disclosure Statement as containing adequate information to allow creditors and equity interest holders to make informed judgments about voting for or against the WRT Plan. Ballots were sent by WRT Energy to certain creditors and equity interest holders entitled to vote to accept or reject the WRT Plan. To be counted, such ballots must be returned by April 16, 1997. The WRT Plan sets forth the means by which creditors and equity interest holders of WRT Energy will be treated. The hearing on confirmation of the WRT Plan has been scheduled before the Bankruptcy Court for April 28, 1997. The WRT Plan contemplates, among other things, (i) the issuance to WRT Energy's unsecured creditors, on account of their allowed claims, of an aggregate of 10 million shares of the common stock of WRT Energy, as reorganized under the WRT Plan ("New WRT Energy") and the right to purchase an additional 3.8 million shares of the common stock of New WRT Energy at a purchase price of $3.50 per share (the "Rights Offering") and (ii) the performance of certain transfers by and between New WRT Energy and the Company pursuant to the PS&C Agreement on the Effective Date. The WRT Plan also provides for a Board of Directors for the New WRT Energy consisting of five members for the first three years following the Effective Date, three of whom have been selected by DLB: Charles E. Davidson, the Chairman of the Board of Directors of the Company, Mike Liddell, the Chief Executive Officer of the Company, and Mark Liddell, the President of the Company, and the two remaining directors to be selected by the Official Committee of Unsecured Creditors appointed in the WRT Energy bankruptcy proceeding. Under the WRT Plan, the officers of New WRT Energy will be: Gary C. Hanna, 11 14 President (the Chief Operating Officer of the Company); Raymond P. Landry, Executive Vice President; and Ronald D. Youtsey, Secretary and Treasurer (the Chief Financial Officer of the Company). On the Effective Date, New WRT Energy will enter into an Administrative Services Agreement pursuant to which the Company will provide, among other things, certain administrative and related services to New WRT Energy for a period of one year, subject to renewal. In addition, pursuant to a commitment agreement by and among WRT Energy, the Company and Wexford, dated as of January 20, 1997 (the "Commitment Agreement"), (a copy of which is attached as Exhibit H to the Disclosure Statement), the Company and Wexford, among other things, have agreed to perform the following (subject to the conditions precedent set forth therein): (a) The Company and Wexford, jointly and severally, agreed to subscribe for and purchase on the Effective Date from New WRT Energy, (i) their full pro rata share of the 3.8 million shares of common stock of New WRT Energy available in connection with the Rights Offering (approximately 1.14 million shares) and (ii) all of the remaining New WRT Energy common stock not otherwise purchased pursuant to the Rights Offering; (b) The Company agreed to perform, on the Effective Date, those transactions contemplated by the provisions of the PS&C Agreement (see Exhibit N to the Disclosure Statement); and (c) The Company and Wexford each agreed to (i) vote all claims held by them to accept the WRT Plan, and (ii) exercise any and all rights that they have under the WRT Plan on account of all claims held by them to elect to receive a distribution of common stock of New WRT Energy in lieu of a distribution of cash. As a consequence of the transactions contemplated by the WRT Plan and the Commitment Agreement, upon the Effective date, among other things, New WRT Energy will own 100% of the working interest in the shallow contract area of the West Cote Blanche Bay field and will continue to conduct business and own and operate the oil and gas properties of WRT Energy. In addition, it is contemplated that DLB and Wexford, which collectively own approximately $34.3 million in aggregate principal face amount of 13 7/8% Senior Notes due 2002 of WRT Energy out of an aggregate of $100 million principal face amount, the Texaco Claim, and which acquired (through an entity affiliated with Wexford) certain asserted lien claims against WRT Energy in the aggregate amount of approximately $4.7 million, together will hold between approximately 56% and 68% of the common stock of New WRT Energy issued on the Effective Date by virtue of the distributions to be made to DLB under the WRT Plan and in consideration for the assets contributed by the Company to New WRT Energy pursuant to the PS&C Agreement. The potential increase in share ownership primarily reflects shares of common stock of New WRT Energy that DLB and Wexford may purchase in the Rights Offering over and above their full pro rata share. It is currently expected that the Company will own between 46% and 55% of the outstanding common stock of New WRT Energy on the Effective Date, which is projected to be on or about July 1, 1997. The above description is only a summary concerning WRT Energy and the WRT Plan, and is qualified in its entirety by the more detailed discussions provided in the Disclosure Statement and WRT Plan, copies of which are filed as exhibits to this annual report. No assurances can be given that the WRT Plan will be confirmed by the Bankruptcy Court or that the Effective Date will occur. 12 15 OIL AND GAS MARKETING General. Revenues from DLB's oil and gas operations are highly dependent on the prices of, and the demand for, oil and gas. Oil and gas pricing depends on numerous factors beyond DLB's control, including seasonal demand, political conditions in the predominant oil producing countries, the actions of the Organization of Petroleum Exporting Countries, the health of the domestic economy and Federal and state laws and regulations. Decreases in the price of oil and gas will adversely affect the carrying value of DLB's proved properties and its revenues, profitability and cash flow from operations. Oil Sales. In 1996, 1995 and 1994, oil sales accounted for 51%, 69% and 66%, respectively, of the Company's oil and gas sales revenues. DLB sells its oil production under short-term purchase contracts. Before 1994, these contracts were based on field posted prices established by the purchasers within the market area. The sales price was typically the field posted price, plus an agreed premium, which price was adjusted for quality and gravity of the oil sold. In February 1994, DLB began selling oil under contracts based on New York Mercantile Exchange ("Merc") oil futures contract pricing rather than field posted pricing. Under Merc pricing, the sales price is typically the calendar month average Merc prompt month settle price, subject to an agreed discount and adjusted for the quality and gravity of the oil sold. The Merc prompt month settle price is the closing price during the trading month of production. DLB has pursued Merc pricing because it believes the Merc market is more efficient than the field posted market and offers DLB a better net price for its product. During 1995, the Company began to market a portion of its oil through its wholly-owned subsidiary, GEMCO. In 1996 and 1995, oil sales to Conoco, Inc. ("Conoco") accounted for approximately 35% and 46% of the Company's oil sales revenues. During the same period, oil sales to Koch Oil Company ("Koch") accounted for approximately 20% and 21% of the Company's oil sales revenues. Both the Conoco contract and the Koch contract are based on Merc pricing. No other single purchaser accounted for more than 10% of the Company's oil sales revenues during such years. Since the oil purchase markets within the Company's principal areas of production are highly competitive, the Company believes it can replace any of its purchase contracts with other contracts on substantially similar terms and without a significant disruption in oil sales revenues. Gas Sales. In 1996, 1995 and 1994, gas sales accounted for 49%, 31% and 34%, respectively, of DLB's oil and gas sales revenues. The Company's gas is sold under short-term contracts based on spot market pricing. During 1996 and 1995 Oneok Gas Marketing accounted for approximately 38% and 28%, respectively, of the Company's gas sales. No other purchaser accounted for more than 10% of the Company's gas sales revenues during such years. During 1996, the Company began to market a portion of its gas through GEMCO, with pricing based upon the appropriate posted index price. DLB may hedge its oil and gas sales through futures contracts from time to time as it deems appropriate. Its futures contracts positions will be primarily on a short-term basis. DLB does not intend to contract for positions that it cannot offset against actual production. 13 16 COMPETITION The exploration and production business is highly competitive. In seeking to obtain desirable new leases and exploration prospects, DLB faces competition from both major and independent oil and gas companies. Many of these competitors have financial and other resources substantially in excess of those available to DLB and may, accordingly, be better positioned to take advantage of industry opportunities and better able to withstand the effect of changes in factors such as worldwide oil and gas prices and levels of production, the availability of alternative energy sources and the application of government regulations. Increases in worldwide energy production capability, decreases in energy consumption as a result of conservation efforts and the continued development of alternate energy sources have brought about substantial surpluses in oil and gas supplies in recent years, resulting in substantial competition for the marketing of oil and gas. As a result, there have been reductions in oil and gas prices and delays in producing and marketing gas after it is discovered. Changes in government regulations relating to the production, transportation and marketing of gas have also resulted in significant changes in the historical marketing patterns of the industry. Generally, these changes have resulted in the abandonment by many pipeline companies of long-term contracts for the purchase of gas, the development by gas producers of their own marketing programs to take advantage of new regulations requiring pipelines to transport gas for regulated fees and an increasing tendency to rely on short-term sales contracts priced at spot market prices. REGULATION General. The oil and gas industry, and thus DLB's operations, are extensively regulated by Federal, state and local authorities. Legislation affecting the oil and gas industry is under continuous review and statutes are constantly being adopted, expanded or amended. Numerous departments and agencies, both Federal and state, have issued rules and regulations binding on the oil and gas industry, some of which contain substantial penalties for the failure to comply. The regulatory burden on the oil and gas industry increases DLB's cost of doing business and consequently affects its profitability. Because the laws, rules and regulations in this area are continuously changing, DLB is unable to predict the future cost and impact of complying with them. DLB does not believe, however, that it will be affected in a manner significantly different than its competitors. Exploration and Production. Regulation of DLB's exploration, production and related activities includes: requiring permits for the drilling of wells; maintaining bonding and insurance requirements to drill or operate wells; and requiring periodic reports about activities and regulating the location of wells, the method of drilling and casing wells, the surface use and restoration of properties upon which wells are drilled, the plugging and abandoning of wells and the disposal of fluids used in connection with operations. DLB's operations are also subject to various conservation laws, regulations and requirements. These include the regulation of the size and shape of drilling and spacing units or proration units and the density of wells which may be drilled and the unitization or pooling of oil and gas properties. In this regard, some states, such as Oklahoma, allow the forced pooling or integration of tracts to facilitate exploration, while other states rely on voluntary pooling of lands and leases. In addition, state conservation laws establish maximum rates of production from oil and gas wells, generally prohibit the venting or flaring of gas and impose requirements regarding the ratability of production. State statutes and regulations subject companies to various judicial and administrative hearings to resolve issues between producers, landowners, adjacent leaseholders, mineral interest owners and non-operating working interest owners. Environmental Matters. DLB's operations and properties are subject to extensive and changing Federal, state and local laws and regulations relating to environmental protection, including the generation, storage, handling, emission, transportation and discharge of materials into the environment, and relating to 14 17 safety and health. The recent trend in environmental legislation and regulation generally is toward stricter standards, and this trend will likely continue. These laws and regulations may require the acquisition of a permit or other authorization before construction or drilling commences and for certain other activities; restrict the types, quantities and concentration of various substances that can be released into the environment in connection with exploration and production activities; limit or prohibit construction, drilling and other activities on certain lands lying within wilderness or wetlands and other protected areas; and impose substantial liabilities for pollution resulting from DLB's operations. The permits required for various of DLB's operations are subject to revocation, modification and renewal by issuing authorities. DLB believes that its operations currently are in substantial compliance with applicable environmental regulations. Governmental authorities have the power to enforce compliance with their regulations, and violations are subject to fines or injunction, or both. DLB has adopted programs that it believes are appropriate and does not expect environmental compliance matters to have a material adverse effect on its financial position. It is also not anticipated that DLB will be required in the near future to expend amounts that are material to the financial condition or operations of DLB by reason of environmental laws and regulations, but because such laws and regulations are frequently changed, and may impose increasingly stricter requirements, DLB is unable to predict the ultimate cost of complying with such laws and regulations. In addition, it is not uncommon for landowners and other third parties to make demands and to file lawsuits claiming personal injuries and property damages allegedly caused by spills or other releases of solid wastes or hazardous substances into the environment in oil and gas operations. The following are examples of environmental, safety and health laws that potentially relate to DLB's operations: Solid Waste. DLB's operations may generate and result in the transportation, treatment and disposal of both hazardous and nonhazardous solid wastes that are subject to the requirements of the Federal Resource Conservation and Recovery Act ("RCRA") and comparable state and local requirements. The Environmental Protection Agency ("EPA") is currently considering the adoption of stricter disposal standards for nonhazardous waste. Further, legislation has been proposed in Congress from time to time that would reclassify certain oil and gas wastes, including wastes generated during pipeline, drilling and production operations, as "hazardous wastes" under RCRA, which reclassification would make such solid wastes subject to much more stringent handling, transportation, storage, disposal and clean-up requirements. If such legislation were to be enacted, it could have a significant impact on DLB's operating costs, as well as the oil and gas industry in general. State initiatives to further regulate oil and gas wastes could have a similar impact. Hazardous Substances. The Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") and comparable state statutes, also known as "Superfund" laws, impose joint and several liability, without regard to fault or the legality of the original conduct, on certain classes of persons for the release of a "hazardous substance" into the environment. These persons include the owner or operator of a site, and companies that transport, dispose of or arrange for the disposal of, the hazardous substances found at the site. CERCLA also authorizes the EPA, and in some cases, third parties to take actions in response to threats to the public health or the environment and to seek to recover from the classes of responsible persons the costs they incur. Although "petroleum" is currently excluded from CERCLA's definition of a "hazardous substance," in the course of its ordinary operations DLB may generate other materials which may fall within the definition of a "hazardous substance." DLB may be responsible under CERCLA for 15 18 all or part of the costs required to clean up sites at which such wastes have been disposed and for natural resource damages. DLB has not received any notification that it may be potentially responsible for cleanup costs and liabilities under CERCLA or any comparable state law but it is possible that it could be named in the future. Air. DLB's operations may be subject to the Clean Air Act ("CAA") and comparable state and local requirements. Amendments to the CAA were adopted in 1990 and contain provisions that may result in the gradual imposition of certain pollution control requirements with respect to air emissions from DLB's operations. The EPA has been developing regulations to implement these requirements. DLB may be required to incur certain capital expenditures in the next several years for air pollution control equipment in connection with maintaining or obtaining operating permits and approvals addressing other air emission-related issues. However, DLB does not believe its operations will be materially adversely affected by any such requirements. Water. The Federal Water Pollution Control Act ("FWPCA") imposes restrictions and strict controls regarding the discharge of polluted waters and other oil and gas wastes into navigable waters. The FWPCA provides for civil, criminal and administrative penalties for any unauthorized discharges of oil and other hazardous substances in reportable quantities and, along with the Oil Pollution Act of 1990, imposes substantial potential liability for the costs of removal, remediation and damages. State laws for the control of water pollution also provide varying civil, criminal and administrative penalties and liabilities in the case of a discharge of petroleum or its derivatives into state waters. Although future costs of compliance with water pollution requirements under federal or state law may be significant, the entire industry will experience similar costs and DLB believes that these costs will not have a material adverse impact on DLB's financial conditions and operations. Gas Sales and Transportation. The Federal Energy Regulatory Commission ("FERC") regulates the transportation and sale for resale of gas in interstate commerce pursuant to the Natural Gas Act of 1938 ("NGA") and the Natural Gas Policy Act of 1978 ("NGPA"). In the past, the Federal government has regulated the prices at which oil and gas could be sold. Deregulation of wellhead sales in the gas industry began with the enactment of the NGPA in 1978. Commencing in 1985, the FERC promulgated a series of orders (among others are Order Nos. 380, 436, 500, 528, 547 and, ultimately, 636) and regulations adopting changes that significantly affect the transportation and marketing of gas. These changes were intended to foster competition in interstate gas sales resulting in market-driven pricing and open and accessible transportation. Similar efforts have been made with respect to intrastate gas sales. In 1989, Congress enacted the Natural Gas Wellhead Decontrol Act (the "Decontrol Act"). The Decontrol Act removed all NGA and NGPA price and nonprice controls affecting wellhead sales of gas effective January 1, 1993. Although sales by producers of gas can currently be made at uncontrolled market prices, Congress could reenact price controls in the future. Virtually all aspects of Order Nos. 636, 636-A and 636-B, were opposed by various segments of the oil and gas industry and a number of parties sought judicial appeals of those orders. Furthermore, after the FERC issued orders approving the individual pipeline restructuring plans authorized pursuant to Order No. 636, various parties sought court review of certain of those individual pipeline restructuring orders. The United States Court of Appeals for the District of Columbia Circuit issued a decision in United Distribution Companies v. FERC, 88 F.3d 1105 (D.C. Cir. 1996) which upheld Order No. 636 generally, as well as most of the specific provisions of Order No. 636. A limited number of issues, however, were remanded to the FERC for further consideration, although the court permitted the orders to stand as formulated, pending Commission action on the issues remanded to it. Petitions for certiorari have been filed with the Supreme Court. 65 U.S.L.W. 3531-32 (U.S. Jan. 27, 1997) (No. 96-1186, et al.) On 16 19 February 27, 1997, the FERC issued Order No. 636-C to address the issues remanded to it by the D.C. Circuit. The FERC reaffirmed certain of its previous rulings on those issues and reversed others. Order No. 636-C is subject to further review by the FERC should parties file for rehearing of that order. Order No. 636-C is also subject to review by the courts, which could reverse Order No. 636-C, or an order on rehearing, in whole or in part and remand the matter to the FERC. Additionally, the individual pipeline restructuring plans authorized by Order No. 636 that were appealed to various courts are still pending before those courts. Moreover, any or all of the decision of the Court of Appeals in United Distribution Companies could be reversed if the Supreme Court grants certiorari to review Order Nos. 636, 636-A and 636-B. It is impossible for DLB to predict the ultimate outcome regarding FERC review of Order No. 636-C or the various petitions for judicial review. In addition, DLB cannot predict whether changed circumstances might cause the FERC to reverse or revise the current unbundled regulatory regime contemplated by Order No. 636 et al. All of the above matters have resulted in a degree of uncertainty with respect to interstate gas sales and transportation. DLB does not believe, however, that it will ultimately be affected any differently than its competitors. Additional proposals and proceedings that might affect the gas industry are considered from time to time by Congress, the FERC, state regulatory bodies and the courts. DLB cannot predict when or if any such proposals might become effective, or their effect, if any, on DLB's operations. The gas industry historically has been very heavily regulated; therefore, there is no assurance that the less stringent regulatory approach recently pursued by the FERC and Congress will continue indefinitely into the future. State Regulation of Gas Production. Certain producing states, including Oklahoma, have adopted or considered adopting measures that alter the methods used to prorate gas production from wells located in these states, including those in their territorial waters. These measures may limit the rate at which gas may be produced from the wells in which the Company might acquire an interest. Congress recently considered, but rejected, legislation that would have limited the states' rights to prorate production. DLB cannot predict whether such legislation will be reintroduced or what effect the new state rules may have on gas production in producing states. At the present time there are no allowables which would limit the production of oil or gas leases in which DLB presently owns an interest. Sales and Transportation of Petroleum. Sales of oil, condensate and natural gas liquids by DLB are not regulated and are made at market prices. The price DLB receives from the sale of these products is affected by the cost of transporting the products to market. Gathering. Under the NGA, facilities used for and operations involving the production and gathering of gas are exempt from FERC jurisdiction, while facilities used for and operations involving interstate transmission are not. However, the FERC's determination of what constitutes exempt gathering facilities as opposed to interstate transmission facilities has evolved over time. With respect to facilities owned by noninterstate pipeline companies, such as DLB's gathering facilities, the FERC has historically distinguished between these types of activities on a very fact-specific basis that makes it difficult to predict with certainty the status of DLB's gathering facilities. In 1994, the FERC issued a series of orders that modified the test it uses to determine whether facilities are classified as gathering or transmission. The change in that test that could be applicable to DLB's facilities, involves a redefinition by the FERC of its "behind the plant" factor. Specifically, the FERC held that gathering facilities downstream of a processing plant would be considered exempt from FERC jurisdiction only if those facilities are an incidental extension of the plant operation or an extension of a gathering system located behind (or "upstream" of) such a plant. This holding was based, in part, upon the FERC's observation that, in recent years, its "behind the plant" factor had eroded into a "behind the interstate pipeline" factor and the FERC wanted to turn to an approach which gave greater emphasis to its traditional "behind the plant" factor. Although the FERC has not issued, or been requested to issue, any order or opinion declaring DLB's facilities as 17 20 gathering rather than transmission facilities, DLB believes that these systems meet the currently applied tests that the FERC uses to establish a pipeline's status as a gatherer. State regulation of gathering facilities generally includes various safety, environmental and, in some circumstances, nondiscriminatory take requirements. Although some states provide for the rate regulation of pipelines engaged in the intrastate transportation of gas, such regulation has not generally been applied against gatherers of gas. Oklahoma has recently enacted legislation, however, that prohibits the imposition of unjustly or unlawfully discriminatory gathering rates. Gas gathering may receive greater regulatory scrutiny as a result of the pipeline restructuring implemented under Order No. 636. DLB's gathering operations could be adversely affected should they be subject in the future to the application of state or Federal regulation of rates and services. Safety and Health Regulations. DLB is also subject to laws and regulations concerning occupational safety and health. It is not anticipated that DLB will be required in the near future to expend amounts that are material in the aggregate to DLB's overall operations by reason of occupational safety and health laws and regulations, but inasmuch as such laws and regulations are frequently changed, DLB is unable to predict the ultimate cost of compliance. OPERATIONAL RISKS AND INSURANCE The oil and gas industry involves a variety of operating risks, including the risk of fire, explosions, blowouts, pipe failure, casing collapse, abnormally pressured formations and environmental hazards such as oil spills, gas leaks, ruptures and discharges of toxic fluids and gases. The occurrence of any of these risks could result in substantial losses to DLB from loss of life or destruction of property, loss of production or equipment, or liability for pollution or other environmental damage. To protect against these risks, DLB insures against some, but not all, potential hazards. Its insurance coverages include physical damage on certain assets, employer's liability, comprehensive general liability, automobile, workers compensation, and loss of production income insurance. Although DLB believes its insurance is adequate and customary for similarly situated companies, due to deductibles, policy limits, excluded hazards and other insurance limitations, such insurance does not fully cover all risks that DLB might incur. As a result, DLB could incur substantial liabilities to third parties or governmental entities, the payment of which could reduce or eliminate the funds available for development, acquisitions or exploration, or result in the loss of properties. Moreover, no assurance can be given that DLB will be able to maintain adequate insurance in the future at rates it considers reasonable. EMPLOYEES As of December 31, 1996, DLB employed 62 people on a full-time basis, including contract personnel. Nine employees are located in GEMCO's Houston, Texas office and all others are located in DLB's principal offices in Oklahoma City. The Company considers its relations with its employees to be good. The acquisition of Bonray in February 1997 added 162 additional employees, including Bonray's salaried personnel and hourly field employees. HEADQUARTERS AND OTHER FACILITIES DLB leases its Oklahoma City, Oklahoma headquarters under a lease covering approximately 20,100 square feet that expires in 2003. The monthly rent is approximately $20,600. In addition, as a result of the February, 1997 acquisition of Bonray Drilling, the Company owns approximately forty acres of land located in Oklahoma City, Oklahoma, on which an office building and repair, support and storage facilities for the Company's drilling operations are located. These facilities include a repair shop (8,000 square feet) and three warehouses. DLB also leases office space in Houston, Texas. 18 21 ITEM 2. PROPERTIES OIL AND GAS RESERVES Estimates of DLB's net proved developed and undeveloped oil and gas reserves as of January 1, 1997, and the present value (discounted at 10%) of estimated future net revenues before income tax from those reserves are set forth in the following table. This information is derived from the engineering reports of DeGolyer and MacNaughton ("D&M") and H.J. Gruy and Associates, Inc. ("Gruy"). These year-end reserve quantities, as determined by independent engineering firms, do not include 12.2 MMBOE as of January 1, 1997 with a present value of future net revenues of $46.1 million attributable to Texaco's 50% interest in the West Cote Blanche Bay field which was acquired by the Company in March 1997.
AS OF JANUARY 1, 1997 NET PROVED RESERVES (1) ------------------------------ PRESENT VALUE OIL GAS TOTAL OF FUTURE (MBBLS) (MMCF) (MBOE) NET REVENUES -------- -------- -------- -------------- (IN THOUSANDS) Proved Developed 5,234 54,797 14,367 $ 154,978 Proved Undeveloped 1,437 25,560 5,697 49,785 -------- -------- -------- -------------- Total 6,671 80,357 20,064 $ 204,763 ======== ======== ======== ==============
Estimated future net revenues represent estimated future gross revenues from the production of proved reserves, net of estimated production and future development costs, using prices and costs in effect as of January 1, 1997. These prices were held constant throughout the life of the properties except where different prices were fixed and determinable from applicable contracts. These price assumptions result in weighted average prices of $25.14 per barrel for oil and $3.70 per Mcf for gas over the life of the properties that the Company owned at December 31, 1996. The amounts shown do not reflect non-property related costs, such as general and administrative expenses, debt service, and future income tax expense or depreciation, depletion and amortization. The present value of estimated future net revenues is calculated by discounting estimated future net revenues by 10% annually. Prices used in calculating the estimated future net revenues attributable to proved reserves do not necessarily reflect market prices for oil and gas production subsequent to January 1, 1997. There can be no assurance that all of the proved reserves will be produced and sold within the periods assumed, that the assumed prices will actually be realized for such production, or that existing contracts will be honored. For supplemental information about the oil and gas activities of DLB, see Note 16 to the Company's Consolidated Financial Statements and Notes. There are numerous uncertainties inherent in estimating oil and gas reserves and their estimated values, including many factors beyond the control of the producer, and such estimates are affected by oil and gas prices which have fluctuated widely in recent years. There can be no assurance that these reserves will be realized as expected. The reserve data set forth in this annual report represent only estimates. Reserve engineering is a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. As a result, estimates of different engineers often vary. In addition, estimates of reserves are subject to revisions based on actual production, results of future exploration and development activities, prevailing oil and gas prices, operating costs and other factors. These revisions may be material. Accordingly, reserve estimates are often 19 22 different from the quantities of oil and gas that are ultimately recovered. The meaningfulness of such estimates is highly dependent on the accuracy of the assumptions on which they are based. DLB has not filed reports containing estimates of its total proved net oil and gas reserves with any Federal agency. ACREAGE DLB's developed and undeveloped oil and gas acreage as of December 31, 1996 is set forth in the following table.
DEVELOPED UNDEVELOPED TOTAL -------------------------------------------------------------------------------- GROSS NET GROSS NET GROSS NET -------------------------------------------------------------------------------- Oklahoma...................... 167,457 90,130 313,711 275,757 481,168 365,887 Texas......................... 5,220 1,719 24,210 3,175 29,430 4,894 Kansas........................ 1,080 1,013 5,466 5,094 6,526 6,107 Louisiana(1).................. 1,650 146 718 36 2,368 182 Barbados(2)................... -- -- 92,160 24,883 92,160 24,883 ---------- --------- --------- ---------- ---------- --------- Total.................... 175,407 93,008 436,245 308,945 611,652 401,953 ========== ========= ========= ========== ========== =========
- --------------------------- (1) Does not include 4,682 gross and 2,341 net developed acres attributable to Texaco's 50% interest in the West Cote Blanche Bay field which was acquired by the Company in March 1997. (2) Owned through DLB's interest in WBL. See Item 1. "Business--Areas of Future Exploration and Development Activities--Barbados." DLB's oil and gas leases are for varying primary terms and may require the payment of delay rentals to continue the primary term. The leases may be surrendered by the operator at any time by notice to the lessors, by the cessation of production or by failure to make timely payments of delay rentals. As of December 31, 1996, DLB held royalty, overriding royalty and other mineral interests in 11,943 net acres in addition to the developed and undeveloped acreage indicated above. PRODUCTION, PRICES AND PRODUCTION COSTS Information concerning DLB's oil and gas production, average sales prices and average lease operating expense is set forth below for the periods indicated. Information relating to gas includes natural gas liquids.
YEAR ENDED DECEMBER 31, ------------------------------ 1996 1995 1994 ------------------------------ Production: Oil (MBbls) .............. 664 708 663 Gas (MMcf) ............... 5,603 3,022 3,187 Total (MBOE) .......... 1,598 1,212 1,194 Average Sales Prices: Oil ($/Barrel) ........... $ 20.84 $ 17.45 $ 17.61 Gas ($/Mcf) .............. 2.38 1.82 1.93 Total ($/BOE) ......... $ 17.02 $ 14.74 $ 14.93 Lease operating expense: ($/BOE)(1) ............... $ 4.62 $ 4.08 $ 4.58
- --------------------------- (1) The components of lease operating expense may vary substantially among wells depending on the methods of recovery employed and other factors, but generally include production taxes, administrative overhead, maintenance and repairs, labor and utilities. 20 23 Since DLB conducts much of its exploratory activities in and about mature fields, existing markets are often nearby, thereby reducing transportation costs, which are a component of lease operating expense. DRILLING ACTIVITY AND PRODUCTIVE WELL SUMMARY The following table sets forth DLB's exploration and development drilling activity expressed on a well basis for the periods indicated.
YEAR ENDED DECEMBER 31, --------------------------------------------- 1996 1995 1994 --------------------------------------------- GROSS NET GROSS NET GROSS NET --------------------------------------------- Exploratory Wells: Oil ................. 3 2.1 1 0.6 9 4.3 Gas ................. 4 3.2 6 3.0 8 4.4 Dry ................. 14 11.4 12 10.7 14 8.4 ----- ----- ----- ----- ----- ----- Total ............ 21 16.7 19 14.3 31 17.1 ===== ===== ===== ===== ===== ===== Development Wells: Oil ................. 8 3.4 4 1.2 4 2.2 Gas ................. 15 5.1 8 3.9 6 1.9 Dry ................. 1 0.3 1 -- 6 4.3 ----- ----- ----- ----- ----- ----- Total ............ 24 8.8 13 5.1 16 8.4 ===== ===== ===== ===== ===== =====
"Gross wells" refers to the total wells in which DLB has a working interest. "Net wells" refers to these gross wells multiplied by DLB's percentage working interest. As of March 1, 1997, 23 gross (11.2 net) exploratory and developmental wells were in progress. In 1996, all of DLB's drilling activities were conducted on a contract basis with independent drilling contractors. However, with the acquisition of Bonray the Company will also utilize its own rigs for future drilling activities. In 1996, 1995 and 1994, the average well depths for all exploratory wells drilled were approximately 4,900, 6,900 and 8,600 feet, respectively, and the average well depths for all development wells drilled in such years were approximately 9,400, 9,800 and 8,100 feet, respectively. 21 24 The following table sets forth the number of productive oil and gas wells in which DLB owned an interest as of March 1, 1997.
COMPANY TOTAL OPERATED WELLS PRODUCTIVE WELLS --------------------------------- GROSS NET GROSS NET --------------------------------- Productive Wells: Oil ................. 165 107.0 1279 208.4 Gas ................. 91 66.0 379 102.3 ------ ------ ------ ------ Total ............ 256 173.0 1,658 310.7 ====== ====== ====== ======
(1) This does not include production wells acquired in the Texaco Acquisition of March 11, 1997 of 396 gross (198.0 net) operated wells. DLB seeks to act as operator of the wells in which it owns a significant interest. As operator of a well, DLB manages drilling and production operations for itself and the other working interest owners in the well. As compensation for its services, it receives operating fees from the other working interest owners. Acting as operator enables DLB to increase its revenue base, control the progress of drilling and production activity and enhance its knowledge and expertise. The following table sets forth DLB's historical finding and development costs and proved reserve changes.
YEAR ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 ------------------------------- Finding and Development Costs(1): Exploration costs ................... $ 9,161 $ 6,283 $ 7,694 Development costs ................... 10,015 5,177 6,510 Acquisition costs ................... 27,893 39 8,849 ------------------------------- Total costs ...................... $ 47,069 $ 11,499 $ 23,053 ------------------------------- Proved Reserve Changes (MBOE): Extensions and discoveries .......... 5,301 2,097 2,878 Revisions of previous estimates ..... 138 (1,000) -- Purchases ........................... 6,830 265 1,093 ------------------------------- Total reserve additions .......... 12,269 1,362 3,971 =============================== Finding and Development Costs ($/BOE)(1) $ 3.84 $ 8.44 $ 5.81
- --------------------------- (1) Excludes costs of oil and gas properties not subject to amortization, which consist of the cost of undeveloped leaseholds, wells-in-progress and secondary recovery projects before the assignment of proved reserves. 22 25 CONTRACT DRILLING OPERATIONS The Company is engaged in domestic onshore contract drilling of oil and gas wells through Bonray. The Company acquired Bonray in February 1997 in a negotiated transaction involving a cash tender offer and subsequent merger of Bonray with a wholly-owned subsidiary of the Company. As a result of this acquisition, the Company acquired 15 land drilling rigs having depth capabilities ranging from 7,000 to 25,000 feet. The Company believes that the Bonray Acquisition is of significant strategic importance because it (i) increases rig availability for use in DLB's exploration and development program, (ii) gives DLB control of rigs to allow it to hedge against increases in drilling costs, and (iii) creates new growth opportunities for the Company, including the ability to enter new core areas through joint ventures with companies requiring rig availability to protect expiring leasehold positions. The following table sets forth certain information relating to the Company's rigs.
DEPTH RIG CAPABILITY STATUS AT NUMBER (FEET)(1) HORSEPOWER TYPE MARCH 1, 1997 --------------------------------------------------------------------------------------- 1 16,000 1,000 Oilwell 760 Operating 2 20,000 2,000 Oilwell 860 Rigging Up 3 10,000 600 Ideco 525 Stacked 4 12,000 850 Unit U-40 Operating 5 9,000 500 National 50-A Stacked 6 9,000 500 National 50-A Stacked 7 7,000 550 Cooper 550 Operating 8 10,000 750 Cooper LTO 750 Operating 10 12,000 550 National 55 Operating 21 12,000 750 Ideco 750 Operating 30 20,000 1,500 National 1320-M Rigging Up 31 25,000 2,000 National 1320-M Operating 32 20,000 1,500 National 110-M Operating 33 20,000 1,500 Mid Continent U914 Operating 34 25,000 2,000 Gardner Denver 1500 Operating
- ------------------------ (1) Depth capabilities are based upon the use of 4.5 inch or 5 inch drill pipe and normal casing designs. The capabilities may vary as a result of the use of different drill pipe or unusual casing designs. The terms and rates of the Company's drilling contracts vary depending upon the location, duration and complexity of the drilling, the equipment and services provided and other factors. As of March 1, 1997, 11 rigs were under contract for the drilling of 11 wells. As of that date, 10 of the Company's rigs were operating on a daywork basis, pursuant to which the Company is paid monthly a specified amount per day based on the depth capability of the rig. The Company is paid for all days during the term of the contracts except days for which the rigs are not in operation because of repairs or maintenance. Daywork contracts generally specify the type of equipment to be used, the size of the hole and the depth of the well to be drilled, and provide for payment by the customer of certain costs and expenses of transporting, assembling and dismantling the rigs. While working under daywork contracts, the Company bears no part of the costs due to in-hole losses such as time delays for various reasons, including stuck drill strings and blowouts. 23 26 The Company may from time to time enter into footage and turnkey contracts. Footage and turnkey contracts, as opposed to daywork contracts, shift the risk of loss in drilling from the customer to the drilling contractor and, as a consequence, result in greater variation in profitability. As of March 1, 1997, one rig was operating under a footage contract. Footage contracts usually provide for payment of an agreed price per foot of hole drilled to a specified depth regardless of the time required or the problems encountered. Turnkey contracts, of which none were in process at March 1, 1997, provide for payment of an agreed price upon the attainment of a specified objective. Turnkey contracts require more services of the contractor and, consequently, result in additional risks, costs and higher revenues which are not inherent in footage or daywork contracts. Turnkey contracts include costs for casing, cementing, drilling mud, and logging services. The Company determines the manner of drilling and type of equipment to be used, subject to customer specifications. The Company prefers to work on a daywork basis, as it does not believe the potentially higher profit margins of footage and turnkey contracts justify the associated increased risks. However, in periods of lesser demand, the Company is generally required to work on a footage or turnkey basis, particularly with respect to shallow drilling. TITLE TO PROPERTIES Following industry practices, DLB makes a cursory review of title to undeveloped oil and gas leases and farmout acreage upon execution of the contracts. Before beginning drilling operations, a thorough title examination is conducted and curative work is performed to correct material title defects. If material title defects are present, DLB typically is responsible for curing the defects at its expense. If DLB were unable to cure a material defect, it could suffer the loss of its investment in the leasehold. DLB has obtained title opinions on substantially all its producing properties and believes that it has satisfactory title to such properties in accordance with industry standards. Before making any significant acquisition of producing properties, DLB obtains opinions of counsel as to title. DLB's leasehold interests are subject to customary royalty interests, liens for current taxes and other burdens not affecting the use or value of the interests. Substantially all of DLB's oil and gas properties are mortgaged to secure borrowings under the Company's credit facility. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations--Capital Expenditures, Capital Resources and Liquidity." ITEM 3. LEGAL PROCEEDINGS A lawsuit styled Agor et al v. Amerada Hess Corporation and DLB Oil & Gas, Inc. (CJ-96-32) was filed in the District Court of Dewey County, Oklahoma on January 22, 1997. The claims arise from the contentions of the mineral owners under one oil and gas lease ("the Lease") in a 640 acre drilling and spacing unit ("the Unit") that the Lease has expired in the absence of commercial production from the wells in the Unit. The plaintiffs seek cancellation of the Lease and an accounting for production from the alleged effective date of lease termination. This well was purchased as part of the Amerada Hess Acquisition and was allocated approximately $0.3 million of the purchase price. Counsel believes DLB's defense to be meritorious and will vigorously contest the issue. However, if the plaintiffs prevail, the Company will seek recovery of such amount pursuant to the provisions of the purchase agreement. 24 27 On July 15, 1996, a lawsuit styled Samson Resources Company et al v. Amerada Hess Corporation and DLB Oil & Gas, Inc. (CJ-96-38) was filed in the District Court of Ellis County, Oklahoma. In this action, Samson Resources Company ("Samson") claims that it has been denied its preferential rights to purchase certain properties under various operating agreements with Amerada Hess Corporation. DLB acquired such properties in its Amerada Hess Acquisition. DLB contends that Samson's preferential right elections were invalid as to the majority of such interests. On January 21, 1997, a hearing was held before the District Court of Ellis County on cross motions for summary judgment of DLB and Samson. The Court ruled in favor of DLB on most of Samson's claims against DLB. However, the Court appeared to adopt Samson's method of preferential right election, although judgment was not rendered in Samson's favor. DLB is considering all its options in light of the Court's ruling. If the Court rules in Samson's favor, barring appeal, DLB would be required to sell the subject properties for approximately $1.1 million, representing the values listed in the purchase agreement for such properties. DLB is also involved in the routine judicial and administrative proceedings that are common to companies of its size in the oil and gas industry. None of the Company's pending proceedings are believed, either individually or in aggregate, to be material to DLB's financial condition, liquidity or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders of the Company during the fourth quarter of 1996. ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth information regarding the names and ages (as of March 26, 1997) of and positions held by each of the Company's executive officers. The Company's executive officers serve at the discretion of the Board of Directors.
NAME AGE POSITION - ---- --- -------- Mike Liddell 43 Chief Executive Officer and Director Mark Liddell 42 President and Director Gary C. Hanna 39 Executive Vice President and Chief Operating Officer Ronald D. Youtsey 41 Senior Vice President and Chief Financial Officer William N. Young, III 43 President, GEMCO, L.L.C. Ted A. Campbell 36 Vice President of Drilling and Production Rick A. Carlson 37 Vice President of Exploration Wesley E. Myers 52 Vice President of Engineering Fred W. Standefer 43 Vice President of Corporate Development
25 28 Mike Liddell has served as Chief Executive Officer of DLB since October 1994, and as a director of DLB since 1991. From 1991 to 1994, Mr. Liddell was President of DLB. From 1979 to 1991, he was President and Chief Executive Officer of DLB Energy. He received a B.S. degree in education from Oklahoma State University. He is the brother of Mark Liddell. Mark Liddell has served as the President of DLB since October 1994, and since 1991 has been a director of Davidson Oil and Gas Company, Inc. and DLB. From 1991 to 1994, Mr. Liddell was Vice President of DLB. From 1985 to 1991, he was Vice President of DLB Energy. From 1991 to May 1995, Mr. Liddell served as a director of TGX Corporation, a publicly-held oil and gas company, and, from 1989 to 1990, he served as a director of Kaneb Services, Inc., a publicly-held industrial services and pipeline transportation company. He received a B.S. degree in education and a J.D. degree from the University of Oklahoma. He is the brother of Mike Liddell. Gary C. Hanna has served as Executive Vice President and Chief Operating Officer of DLB since October 1994. From 1982 to October 1994, he was President and Chief Executive Officer of Hanna Oil Properties, Inc., an Oklahoma City-based petroleum consulting company. Beginning in 1991 and continuing until Mr. Hanna joined the Company, Hanna Oil Properties, Inc. performed most of the Company's acquisition and land services. He received a B.B.A. degree in economics from the University of Oklahoma. Mr. Hanna is on the Board of Directors of the Oklahoma Independent Producers Association. Ronald D. Youtsey has served as Senior Vice President and Chief Financial Officer of DLB since October 1994. Mr. Youtsey joined DLB as Controller in 1991. From 1979 to 1991, he was employed by French Petroleum Corporation, an oil and gas exploration and production company, last serving as Vice President of Finance. Mr. Youtsey is a Certified Public Accountant and a member of the American Institute of Certified Public Accountants. He received a B.S. degree in accounting from the University of Central Oklahoma. William N. Young, III has served as President of GEMCO since the sale of LEDCO in February 1995, and from 1992 to that time, he was President of LEDCO. From 1986 to 1992, he was employed by Noram Energy Services, Inc., most recently serving as Vice President -- Gas Acquisitions and, from 1984 to 1986, he was employed by Midcon Services, Inc., most recently serving as Vice President of Marketing. From 1982 to 1984, he was Director, Transportation and Exchange for United Gas Pipe Line Co. Mr. Young received B.S. and M.S. degrees in civil engineering from North Carolina State University. Ted A. Campbell has served as Vice President of Drilling and Production for DLB since October 1994 and was Operations Manager from 1991 until 1994. From 1987 until the formation of DLB, he was employed by DLB Energy as a geologist. Mr. Campbell is a member of the American Association of Petroleum Geologists. He received a B.S. degree in geology from Oklahoma State University. Rick A. Carlson has served as Vice President of Exploration of DLB since October 1994 and was Senior Geologist from 1991 until 1994. From 1984 until the formation of DLB, he was a geologist for DLB Energy. He is a member of the American Association of Petroleum Geologists. Mr. Carlson received a B.S. degree in geology from Oklahoma State University. Wesley E. Myers has served as Vice President of Engineering for DLB since October 1994. From 1993 to 1994, he was a consulting petroleum engineer and, from 1975 to 1993, he was employed by Grace Petroleum Corporation, an oil and gas exploration and production company, last serving as Vice President of Engineering. Mr. Myers is a registered Professional Engineer and a member of the Society of Petroleum Engineers. He received a B.S. degree in civil engineering from the University of Missouri at Rolla. Fred W. Standefer has served as Vice President of Corporate Development since August 1995. From 1990 to 1995, he was a financial consultant with Merrill Lynch & Co. From 1983 to 1995, Mr. Standefer was an owner, officer and director of NYTEX Corporation, a closely-held independent oil company. He received a B.B.A. from the University of Texas at Austin. 26 29 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The common shares of the Company are traded on the Nasdaq National Market under the symbol "DLBI". The following table sets forth the quarterly high and low closing sales prices of the Company's common shares, as reported by NASDAQ for 1996. The prices quoted represent prices between dealers in securities, without adjustment for mark-ups, mark-downs or commissions, and do not necessarily reflect actual transactions.
1996: HIGH LOW -------------- ------ ----- First Quarter 10 6 7/8 Second Quarter 8 6 7/8 Third Quarter 8 1/2 7 1/8 Fourth Quarter 11 8 1/8
The closing market price of the common shares on March 10, 1997, was $14 1/4 per share. As of March 10, 1997, there were 45 shareholders of record of the Company's Common Stock, and the number of shares of Common Stock outstanding was 12,975,000 shares (excluding treasury shares). DLB intends to retain its earnings for use in the operation and expansion of its business and will not likely pay cash dividends on its Common Stock in the foreseeable future. In addition, the Company's credit facility limits the payment of dividends and the making of distributions to shareholders to no more than 25% of net earnings in any twelve month period. 27 30 ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial and operating data for DLB as of and for each of the years in the five year period ended December 31, 1996, was derived from the Company's consolidated financial statements. The information in the table gives effect to the Merger as if such event had occurred as of January 1, 1991. The selected consolidated financial and operating data set forth below should be read in conjunction with Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes included elsewhere in this annual report.
1996(5) 1995 1994 1993 1992 ------- -------- ------- ------- ------- STATEMENTS OF OPERATIONS DATA: (In thousands, except per share and operating data) Revenues: Oil and natural gas sales $27,194 $ 17,860 $17,826 $10,264 $ 5,824 Natural gas gathering, processing and transportation, net 821 3,293 1,652 764 -- Natural gas contract settlement -- -- 3,343 -- -- Interest income and other 400 899 334 281 383 ------- -------- ------- ------- ------- Total revenues $28,415 $ 22,052 $23,155 $11,309 $ 6,207 ------- -------- ------- ------- ------- Expenses: Lease operating 5,539 3,579 4,461 1,704 1,157 Gross production taxes 1,843 1,366 1,009 718 408 Depreciation, depletion and amortization 8,938 7,368 6,553 3,270 1,369 General and administrative 2,485 1,486 549 446 73 Interest 1,582 529 677 38 11 Loss on sale of assets 208 -- -- -- -- ------- -------- ------- ------- ------- Total expenses 20,595 14,328 13,249 6,176 3,018 ------- -------- ------- ------- ------- Income before income taxes 7,820 7,724 9,906 5,133 3,189 Pro forma income taxes (1) -- -- 3,962 2,054 1,276 Income taxes (1) 2,951 12,900 -- -- -- ------- -------- ------- ------- ------- Net income (loss) $ 4,869 $ (5,176) $ 5,944 $ 3,079 $ 1,913 ======= ======== ======= ======= ======= Net income (loss) per common share 0.38 (0.46) 0.59 0.31 0.19 ======= ======== ======= ======= ======= Weighted average common share outstanding (2) 12,978 11,250 10,000 10,000 10,000 ======= ======== ======= ======= ======= CASH FLOW DATA: Net cash provided by operating activities $19,559 $ 13,395 $17,261 $ 8,076 $ 5,700 Capital expenditures (3) 57,165 19,852 26,291 17,529 9,169 Distributions to shareholders (pre-Offering) -- 1,192 3,196 710 252 EBITDA (4) 18,340 15,621 17,143 8,441 4,569 OPERATING DATA: Wellhead production: Oil (MBBLS) 664 708 663 324 205 Gas (MMCF) 5,603 3,022 3,187 2,374 1,332 Total (MBOE) 1,598 1,212 1,194 720 427 Average sales price: Oil ($/BBL) $ 20.84 $ 17.45 $ 17.61 $ 18.29 $ 16.23 Gas ($/MCF) 2.38 1.82 1.93 1.83 1.87 Total ($/BOE) 17.02 14.74 14.93 14.26 13.64 Lease operating expense ($/BOE) 3.47 2.95 3.74 2.36 2.71 Gross production taxes ($/BOE) 1.15 1.13 0.84 1.00 0.96 Depreciation, depletion and amortization expense ($/BOE) 5.59 6.08 5.49 4.54 3.21 General and administrative expense ($/BOE) 1.56 1.23 0.46 0.62 0.17
28 31
1996 1995 1994 1993 1992 -------- ------- ------- ------- -------- BALANCE SHEET DATA (In thousands, except per share and operating data) Cash and cash equivalents $ 4,060 $14,313 $ 3,059 $ 4,475 $ 965 Working capital 1,237 13,724 773 2,591 (1,023) Property and equipment, net 104,958 58,661 46,375 26,637 12,554 Total assets 129,441 78,207 54,041 35,084 15,506 Long-term debt, including current portion 37,200 -- 8,231 483 -- Shareholders' equity 64,232 59,544 39,012 30,164 11,690
- -------- (1) Pro forma income taxes were computed at a blended statutory rate of 40% (34% Federal rate and a composite 6% state rate) of income before income taxes. The Company was subject to Subchapter S of the internal revenue code and, accordingly, was not a tax paying entity. Prior to the July 1995 equity offering, the Company terminated its S corporation election and recognized $11.5 million of deferred income taxes at that time. (2) As a result of the Merger, 10,000,000 shares of common stock were issued to the prior shareholders of the Company and Davidson Oil and Gas Company, Inc. The Merger was accounted for as a reorganization of interests in a manner similar to a pooling of interests. Accordingly, 10,000,000 shares of common stock were considered outstanding for all periods prior to the Merger. (3) Capital expenditures include those expenditures for oil and gas properties, leaseholds, gas processing plants, saltwater disposal systems and other property and equipment. (4) EBITDA is earnings before interest, taxes, depreciation, depletion and amortization. EBITDA is an analytical measure frequently used by securities analysts and is presented to provide additional information about the Company's ability to meet its future debt service, capital expenditure and working capital requirements. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Capital Expenditures, Capital Resources and Liquidity." EBITDA should not be considered as a better measure of the Company's operating performance than net income or as a better measure of liquidity than cash flow from operations. (5) On May 31, 1996, the Company purchased for approximately $32.1 million substantially all of the Oklahoma oil and gas producing properties, mineral rights and leasehold acreage of Amerada Hess Corporation. 29 32 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is intended to assist in an understanding of the Company's financial position as of December 31, 1996 and 1995, and its results of operations for each year in the three year period ended December 31, 1996. The consolidated financial statements and notes thereto included herein contain additional information and should be referred to in conjunction with this discussion. GENERAL Since commencing operations in 1991, the Company's primary focus has been to explore for oil and gas primarily in the Mid-Continent area utilizing 3-D and high resolution 2-D seismic technology. The Company believes that this focus has provided and will continue to provide the Company with numerous exploratory prospects. In addition, the Company's business strategy has been enhanced by a shift in industry focus to international exploration and domestic development and acquisition activities, rather than domestic exploration activities. By combining its advanced technologies with both proprietary and public data and successfully applying such technology to its exploration activities, the Company has made 23 new field discoveries since January 1991, seven of which were made in 1996. During 1996, the Company initiated efforts in adding the Louisiana Gulf Coast as a core area. The Company intends to apply the same concentrated area approach used by the Company in Oklahoma to the area in Louisiana. Previous to 1995, the Company utilized shareholder contributions, cash flow from operations and, to a lesser extent, borrowings to fund its exploratory and other capital expenditure programs. As a result of the Company's expansion of its proprietary and other data bases, additions to the Company's prospect inventory and acquisition plans and commitments, projected capital expenditures in 1997 will outpace management's estimate of internally generated cash flow from operations and existing working capital and will require additional external capital. See "--Capital Expenditures, Capital Resources and Liquidity." Management believes the Company's involvement in a number of ancillary activities distinguishes the Company from many of its competitors. Through the active marketing of the Company's oil and gas production, management believes the Company obtains prices that, on the whole, are more favorable than those received by its regional competitors. The Company also attempts to gain ownership of gathering, processing, transportation and saltwater disposal facilities when it believes such ownership can enhance net margins per BOE. The Company also seeks to control costs by focusing the Company's oil and gas operations in areas subject to less competitive pressure. The cost of acquiring leasehold and mineral interests are generally lower in these areas. The February 1997 acquisition of a domestic onshore drilling company further illustrates the Company's involvement in ancillary activities and is expected to assist the Company in controlling drilling costs. Each of these activities can improve the Company's production economics and help to maximize wellhead margins. The markets for oil and gas have been volatile and are likely to remain so in the future. Prices for oil and gas are subject to wide fluctuations in response to relatively minor changes in the supply and demand for oil and gas, market uncertainty and a variety of additional factors that are beyond the control of the Company. In the future, lower oil and gas prices may reduce (i) the attractiveness or viability of exploration prospects and the amount of oil and gas reserves that may be produced economically, (ii) the Company's cash flow from operations, (iii) the amount of outstanding borrowings under the Company's credit facility and (iv) the Company's net income and capital expenditures. 30 33 The Company may from time to time enter into certain swap or hedge transactions in an attempt to mitigate such price volatility on production that is subject to market sensitive pricing. To the extent the Company is unable to effect such transactions, continued fluctuations in oil and gas prices could have an effect on the Company's operating results. The Company had no hedge positions effecting results of operations for the year ended December 31, 1996. The Company has entered into futures contracts to fix the sales price of certain of its oil and gas production during 1997. The Company has entered into oil futures contracts for the months of January through August, with volumes ranging from 48,000 to 53,000 Bbls per month, and prices ranging from $25.47 per Bbl in January to $21.37 per Bbl in August. The Company has also entered into gas futures contracts for the months of January through September, with volumes ranging from 187,000 to 636,000 Mcf. of gas per month and prices ranging from $4.47 per Mcf. in January to $1.95 per Mcf. in September. These futures contracts are expected to mitigate the effect of lower product prices in the first quarter of 1997 as compared to December 1996. The Company uses the full cost method of accounting for its investment in oil and gas properties. Under the full cost method of accounting, all costs of acquisition, exploration and development of oil and gas reserves are capitalized into a "full cost pool" as incurred, and properties in the pool are depleted and charged to operations using the units-of-production method based on the ratio of current production to total proved oil and gas reserves. To the extent that such capitalized costs, net of depreciation, depletion and amortization, exceed the present value of estimated future net revenues, discounted at 10%, from proved oil and gas reserves, after income tax effects, such excess costs are charged to operations. Once incurred, a write down of oil and gas properties is not reversible at a later date, even if oil or gas prices increase. The discussion in this Item 7 includes statements that are not purely historical and are "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, including statements regarding the Company's expectations, hopes, beliefs, intentions and strategies regarding the future. The Company's actual results could differ materially from its expectations discussed herein. Certain important factors that could cause actual results to differ materially from the Company's expectations are disclosed elsewhere in this Form 10-K. See "Disclosure Regarding Forward-Looking Statements." 31 34 ]RESULTS OF OPERATIONS The following table sets forth certain operating information with respect to the oil and gas operations of DLB.
YEAR ENDED DECEMBER 31, ---------------------------------------------- 1996 1995 1994 -------------- -------------- -------------- (IN THOUSANDS OF DOLLARS, EXCEPT PER UNIT AND PRODUCTION DATA) OPERATING DATA: Oil and gas sales revenues $ 27,194 $ 17,860 $ 17,826 Lease operating expense 5,539 3,579 4,461 Gross production taxes 1,843 1,366 1,009 Depreciation, depletion and amortization (1) 8,364 6,687 6,185 General and administrative expense 2,485 1,486 549 PRODUCTION DATA: Oil (MBBLS) 664 708 663 Gas (MMCF) 5,603 3,022 3,187 Total (MBOE) 1,598 1,212 1,194 AVERAGE SALES PRICE DATA: Oil ($/BBL) $ 20.84 $ 17.45 $ 17.61 Gas ($/MCF) 2.38 1.82 1.93 Total ($/BOE) 17.02 14.74 14.93 EXPENSE DATA ($/BOE): Lease operating expense (2) 3.47 2.95 3.74 Gross production taxes 1.15 1.13 0.84 Depreciation, depletion and amortization (1) 5.23 5.52 5.18 General and administrative 1.56 1.23 0.46
- -------------------- (1) Includes only depreciation, depletion and amortization associated with oil and gas properties. Amounts pertaining to property and equipment other than oil and gas properties were $0.6 million, $0.7 million and $0.4 million for the years 1996, 1995 and 1994, respectively, and including all depreciation, depletion and amortization, the results were $5.59, $6.08 and $5.49 on a BOE basis for the year 1996, 1995 and 1994, respectively. (2) The components of lease operating expense may vary substantially among wells depending on the methods of recovery employed and other factors, but generally include administrative overhead, maintenance and repairs, and labor and utilities. YEAR ENDED DECEMBER 31, 1996 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1995 Revenues. Total revenues for the year ended December 31, 1996 were $28.4 million, an increase of $6.4 million from $22.0 million in 1995. Oil and gas sales revenues were $27.2 million in 1996 as compared to $17.9 million in 1995. Production of oil and gas was 664 Mbbl and 5,603 32 35 Mmcf, respectively, in 1996, as compared to 708 Mbbls and 3,022 Mmcf, respectively, for 1995. The increase in oil and gas revenues was due to the June 1996 acquisition of the Amerada Hess properties and an increase in product prices. The properties acquired from Amerada Hess produced 173 Mbbls of oil and 2,153 Mmcf of gas for the seven months during 1996 that the Company owned the properties. Increases in gas production offset decreases in oil production on a BOE basis. Oil production decreased in 1996 primarily from natural production declines. The average price received for oil increased to $20.84 per barrel in 1996 from $17.45 per barrel in 1995. The average price received for natural gas was $2.38 per Mcf for 1996 as compared to $1.82 per Mcf for 1995. Gathering, dehydration and compression fees decreased $2.5 million to $0.8 million in 1996 as compared to $3.3 million in 1995 primarily due to the sale of assets related to dissolution of the Carmen Field Joint Venture ("CFJV"). On February 7, 1996 the Company settled claims against a joint venture partner pertaining to the Carmen Field Joint Venture Agreement. The Company received $3.3 million as part of the settlement and CFJV was dissolved. The Company earned net income before income taxes from gathering, dehydration and compression fees, and demand charges of $2.9 million for 1995 from the assets subject to the settlement. (See Note 13 to the Consolidated Financial Statements.) Lease operating expense. Lease operating expense increased to $5.5 million for 1996 from $3.6 million in 1995 primarily due to the addition of lease operating expenses associated with the operation of the acquired Amerada Hess properties. On a BOE basis, lease operating expense was $3.47 per BOE for 1996 as compared to $2.95 per BOE in 1995. The increase in per BOE lease operating expense was attributable to decreased production from existing wells without a corresponding decrease in operating expense. Gross production taxes. Gross production taxes increased $0.5 million to $1.8 million for 1996 from $1.3 million for 1995. The increase in gross production taxes for 1996 was related to the increase in oil and gas sales for 1996. On a BOE basis, gross production taxes were $1.15 in 1996 and $1.13 in 1995. Depreciation, depletion and amortization expense. Depreciation, depletion and amortization ("DD&A") expense for 1996 totaled $8.9 million as compared to $7.4 million for 1995. The increase in DD&A is primarily attributable to the increase in the Company's oil and natural gas properties subject to amortization. The DD&A rate decreased to $5.59 per BOE for 1996, from $6.08 per BOE for 1995. The decrease in DD&A per BOE resulted primarily from an increased level of reserves at December 31, 1996. General and administrative expense. General and administrative expense increased to $2.5 million for 1996 from $1.5 million for 1995. This increase was primarily attributable to staffing increases and additional corporate expenses to handle higher levels of activity following the July 1995 initial public offering and the $32.1 million acquisition of properties from Amerada Hess on May 31, 1996. On a BOE basis, general and administrative expenses increased 23% from 1995 as compared to a 142% increase from 1994 to 1995. Interest expense. Interest expense increased to $1.6 million for 1996 from $0.5 million for 1995 as a result of an increase in the average amount of debt outstanding due to the acquisition of the Amerada Hess properties. (See Note 2 to the Consolidated Financial Statements.) Income before income taxes. Income before income taxes increased to $7.8 million for 1996 from $7.7 million for 1995, primarily due to the factors described above, including increased oil and gas revenues due to the acquisition of the Amerada Hess properties which were partially offset by the decreased 33 36 revenues due to the dissolution of the CFJV and the increased interest and general and administrative expense. Income taxes. The effective tax rate for 1996 was approximately 38%. The deferred income tax expense for 1995 included a $11.5 million charge for a required change in tax status from an S corporation (which is not taxed directly) to a C Corporation (which is taxed directly) and, as such, the effective tax rate for 1995 was not meaningful. (See Note 7 to the Consolidated Financial Statements.) Net income (loss). Net income increased 3% to $4.9 million for 1996 from $4.7 million for 1995 before the non-recurring deferred tax charge. The Company incurred a non-recurring charge of $11.5 million for deferred income tax expense in 1995, of which $9.9 million was attributed to periods prior to 1995. As a result of this item, net income increased to $4.9 million for 1996 from a loss of $5.2 million in 1995. YEAR ENDED DECEMBER 31, 1995 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1994 Revenues. Total revenues for the year ended December 31, 1995 were $22.1 million, a decrease of $1.1 million from $21.0 million in 1994. During 1994, the Company recognized $3.3 million from a settlement of a natural gas sales contract. Excluding the effect of this non-recurring item, total revenues for 1995 would have increased by $2.2 million. Production of oil and gas was 708 MBbl and 3,022 MMcf, respectively, in 1995, as compared to 663 MBbls and 3,187 MMcf, respectively, in 1994. The increase in equivalent barrel production was a result of the completion of 19 wells in 1995. However, this production increase was offset by a $0.16 and $0.11 decrease in the average price received per barrel and Mcf to $17.45 and $1.82, respectively, during 1995. A $1.3 million increase in revenues from gathering, dehydration and compression fees, and demand charges under a contract which commenced in July 1994 also contributed to the increase in total revenues. Also contributing to the increase in total revenues were increases of $0.3 million of interest income, and $0.4 million of other revenue that resulted from the termination of the Company's management agreement with LEDCO in connection with the sale of LEDCO in January 1995. Lease operating expense. Lease operating expense decreased $0.9 million to $3.6 million in 1995. On a BOE basis, lease operating expense decreased 21% in 1995 to $2.95 per BOE from $3.74 per BOE from $4.5 million in 1994. The decrease in such expense primarily related to decreased saltwater disposal expenses due to the Company's development of a saltwater disposal facility located in the Ames Field. Previously, the Company had to transport the saltwater to other disposal facilities further away. Gross Production Taxes. Gross production taxes increased $0.4 million to $1.4 million in 1995. This increase was primarily due to the expiration of the incremental tax credit for a waterflood project. Depreciation, depletion and amortization expense. DD&A increased $0.8 million to $7.4 million in 1995 from $6.6 million in 1994. The DD&A rate increased to $6.08 per BOE for 1995, from $5.49 per BOE for 1994. The 11% increase in DD&A per BOE resulted primarily from an increased level of capital expenditures for proved reserves in 1995 as compared to 1994. General and administrative expense. General and administrative expense increased $1.0 million to $1.5 million in 1995 from $0.5 million in 1994. This increase was a result of the Company hiring 34 37 additional employees and taking larger working interest positions in its wells. The Company had 50 employees at December 31, 1995 as compared to 35 employees at December 31, 1994. Third-party operating reimbursements represented 15% of gross general and administrative expense in 1995 as compared to 36% in 1994. The Company received operating reimbursements from third-party working interest participants which reduced overall general and administrative expense. Interest expense. Interest expense decreased to $0.5 million in 1995 from $0.7 million in 1994 primarily as a result of fully paying down the Company's credit facility with proceeds of the July 1995 equity offering. Income before income taxes. Due to the factors described above, primarily the $3.3 million non-recurring natural gas contract settlement, income before income taxes decreased 22% to $7.7 million in 1995 from $9.9 million in 1994. Income taxes. As a result of the Merger and termination of the Company's Subchapter S election, the Company recognized a charge against operations in the amount of $11.5 million for deferred income taxes in 1995. The charge represented the tax effect of the difference between the financial statement carrying values and the income tax bases of the Company's assets and liabilities on the date the election was terminated. This expense is a non-cash expense. Approximately $9.9 million of the 1995 provision relates to financial and tax differences generated prior to 1995. The Company's effective tax rate after removing the impact of the differences generated prior to 1995 was approximately 39% which is comparable to the 40% estimated tax rate used in calculating pro forma income taxes in 1994. Net income (loss). Primarily as a result of the recognition of income taxes in 1995, a net loss of $5.2 million was incurred. During 1994, net income (after pro forma income taxes) was $5.9 million. CAPITAL EXPENDITURES, CAPITAL RESOURCES AND LIQUIDITY The following summary table presents comparative cash flows of the Company for each of the three years ended December 31, 1996.
YEAR ENDED DECEMBER 31, ------------------------------ 1996 1995 1994 -------- -------- -------- (IN THOUSANDS) Net cash provided by operating activities $ 19,559 $ 13,395 $ 17,261 Net cash used in investing activities (66,831) (19,618) (25,367) Net cash provided by financing activities 37,019 17,477 6,690
As of December 31, 1996, the Company had cash balances of $4.1 million and working capital of $1.2 million. The decrease in working capital to $1.2 million as of December 31, 1996, from $13.7 million as of December 31, 1995, reflects the increased level of capital expenditures during 1996. The increase in working capital to $13.7 million as of December 31, 1995, from $0.8 million as of December 1994, reflected the net proceeds of $15.7 million from the July 1995 public offering of common stock after debt repayment. For 1996, net cash provided by operating activities was $19.6 million, as compared to $13.4 million in 1995. The increase in net cash provided by operating activities in 1996 relates primarily to the 35 38 timing of receipts and disbursements relating to working capital as the Company's income before income taxes was substantially similar for 1996 and 1995. Net cash used in investing activities was $66.8 million in 1996 as compared to $19.6 million in 1995. This increase of $47.2 million in 1996 was primarily related to the acquisition of the Amerada Hess properties for $32.1 million, the acquisition of senior unsecured notes and other credit obligations of WRT Energy for $7.9 million (see Item 1. "Business - WRT Energy") and the acquisition of a 20.8% equity interest in WBL for $3.2 million. (See Item 1. "Business - Areas of Future Exploration and Development Activities - Barbados.") The majority of the $19.6 million spent on capital expenditures in 1995 related to exploration and production activity with $4.0 million for seismic surveys and other preliminary costs. During 1994, the Company expended the majority of the $25.4 million of capital expenditures on exploration and production activity. Additionally, the Company spent $8.5 million for property acquisitions including $2.1 million for producing properties and $6.0 million for undeveloped leaseholds through the net acquisition of additional interests in the Ames Field. During 1996, net cash provided by financing activities rose to $37.0 million as compared to $17.5 million in 1995. This increase was due to borrowings under the 1995 credit facility during 1996. In 1995, the amounts provided by financing activities primarily consisted of the proceeds of the July 1995 issuance of common stock after payment of debt. Capital expenditures. The Company's capital expenditures to date have focused primarily on the exploration, acquisition and development of oil and gas properties. The following table sets forth the Company's expenditures for exploration, development and property acquisitions for each of the three years ended December 31, 1996. The table includes costs of oil and gas properties not subject to amortization, which consist of the cost of undeveloped leaseholds, wells-in-progress and secondary recovery projects before the assignment of proved reserves. 36 39 YEAR ENDED DECEMBER 31, ---------------------------- 1996 1995 1994 -------- -------- -------- (IN THOUSANDS) Exploration costs $ 9,605 $ 12,482 $ 8,551 Development costs 11,503 5,884 7,688 Property acquisition costs 34,476 39 8,849 ======== ======== ======== Total $ 55,584 $ 18,405 $ 25,088 ======== ======== ======== During 1996, the Company financed its capital expenditures with cash flow provided by operations, borrowings under the Company's 1995 credit facility and the remainder of the net proceeds from the Company's July 1995 equity offering. Prior to the equity offering, the Company financed its capital expenditures through shareholder contributions and borrowings under the 1995 Credit Facility. The Company has budgeted $66.0 million for capital expenditures in 1997. It is currently anticipated that up to $45.9 million of such amount will be used as follows: (i) $19.3 million in connection with the Texaco Acquisition, consisting of $12.3 million for the acquisition of the WCBB Assets, $6.0 million for the purchase of the Texaco Claims and $1.0 million for payments to the P&A Trust; (ii) $12.7 million for the Bonray Acquisition; (iii) $3.8 million for the workover and enhancement of certain rigs acquired in the Bonray Acquisition; and (iv) from $2.4 million to $9.3 million will be used to purchase shares of common stock of the new WRT Energy in the Rights Offering, pursuant to the Company's commitment in the WRT Plan, if approved (v) and $0.8 million for the purchase of additional claims against WRT Energy. As of March 26, 1997, approximately $34.0 million had been expended by the Company in connection with the foregoing activities. Also included in the Company's budget is up to $27.0 million for oil and gas exploration activities of which $13.0 million is for exploratory wells and $14.0 million is for development wells. The aggregate level of capital expenditures in 1997 for drilling activities and the allocation thereof is highly dependent upon the Company's success rate on exploration drilling and prevailing conditions in the oil and gas industry as well as the amount of common stock of the New WRT Energy that the Company is required to purchase in the Rights Offering. Accordingly, the actual level of capital expenditures and the allocation of such expenditures may vary materially from the above estimates. Capital Resources. Prior to the July 1995 equity offering, the Company's cash requirements had been met primarily through capital contributions from shareholders, cash generated from operations and borrowings under credit facilities. 37 40 As of December 31, 1996, $37.2 million was outstanding under the 1995 credit facility. The 1995 credit facility was structured as a revolving loan agreement providing for aggregate borrowings of up to $60.0 million. Borrowings under the 1995 credit facility bore interest, at the banks' prime, floating, or the London Interbank Offered Rate ("LIBOR") plus 176 basis points or a pricing grid with the rate determined by the percentage of the borrowing base commitment outstanding. Principal payments on the credit facility were due at maturity in October 2000, or when any amounts outstanding thereunder were in excess of the borrowing base. Interest payments were due quarterly. The credit facility was collateralized by a mortgage on the Company's producing and non-producing oil and gas properties and contained restrictive covenants requiring, among other things, that the Company (i) maintained specific levels of tangible net worth and working capital, (ii) met specific financial ratios and (iii) limit the payment of dividends or distributions to shareholders. On March 5, 1997, the Company established a new revolving credit facility with a group of financial institutions, which, as amended, provides for aggregate borrowings of up to $85.0 million (the "1997 Credit Facility"). Borrowings under the 1997 Credit Facility were used to refinance indebtedness under the 1995 credit facility and to fund the Texaco Acquisition. Under the terms of the 1997 Credit Facility, interest is charged at the higher of the bank's prime rate plus 50 basis points plus the applicable margin or the rate at which Eurodollar deposits for one, two, three, six or twelve months are offered to the bank in the Interbank Eurodollar market plus the applicable margin. Loans made under the 1997 Credit Facility are payable in full on March 2002, the maturity date. The 1997 Credit Facility is secured by substantially all of the Company's assets and contains similar restrictive covenants to those described above relating to the 1995 credit facility. As of March 19, 1997, outstanding borrowings under the 1997 Credit Facility were $78.5 million. Liquidity. The Company intends to meet the remainder of its 1997 capital requirements and its other obligations primarily from existing cash balances, cash flow from operations and borrowings under the 1997 Credit Facility. The Company's cash flow from operations will be dependent upon its future performance, which will be subject to prevailing economic conditions and to financial and business conditions and other factors, many of which are beyond its control. In addition, as a result of borrowings under the 1997 Credit Facility to fund the Texaco Acquisition, the Company had $1.5 million of available borrowing capacity under such facility. Management believes that additional financing will be required to fully implement its proposed 1997 capital budget and has commenced discussions with the lenders under the 1997 credit facility to increase the Company's borrowing capacity thereunder to address it near-term liquidity requirements. The Company also intends to seek additional capital through offerings of debt and/or equity securities. There can be no assurance, however, that the lenders will increase the borrowing limits under the 1997 credit facility or that such offerings can be successfully completed. Should sufficient financing not be available from these or other sources, implementation of the Company's 1997 capital program would be delayed and, accordingly, the Company's growth strategy could be adversely affected. 38 41 The Company does not intend to pay dividends on its common stock in the near future. Earnings generated will be redeployed by the Company as it continues its growth strategies. In future periods, the Company expects to recognize deferred income taxes of approximately 37% to 39% of income before income taxes. The majority of the Company's income tax expense is expected to be recognized as deferred income tax expense due to the current tax treatment of oil and gas exploration costs. Impact of Recently Issued Accounting Standards Not Yet Adopted. In June, 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No. 125"). SFAS No. 125 is effective for certain transfers and servicing of financial assets and extinguishment of liabilities occurring after December 31, 1996. It is effective for other transfers of financial assets occurring after December 31, 1997. It is to be applied prospectively. SFAS No. 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities based on consistent application of a financial components approach that focuses on control. It distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. Management of DLB does not expect that adoption of SFAS No. 125 will have a material impact on DLB's financial position or results of operations. In October 1996, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 96-1, "Environmental Remediation Liabilities." SOP 96-1 was adopted by DLB on January 1, 1997. It requires, among other things, that environmental remediation liabilities be accrued when the criteria of SFAS No. 5, "Accounting for Contingencies," have been met. SOP 96-1 also provides guidance with respect to the measurement of the remediation liabilities. Such accounting is consistent with DLB's current method of accounting for environmental remediation costs. Therefore, adoption of SOP 96-1 will not have a material impact on DLB's financial position or results of operations. 39 42 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item appears on pages F-1 through F-27 following the signature pages of this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III For information concerning Item 10 - Directors and Executive Officers of the Registrant, Item 11 - Executive Compensation, Item 12 - Security Ownership of Certain Beneficial Owners and Management and Item 13 - Certain Relationships and Related Transactions, see the definitive Proxy Statement of DLB Oil & Gas, Inc. for the Annual Meeting of Shareholders to be held on May 21, 1997, which will be filed with the Securities and Exchange Commission within 120 days after the close of the Registrant's year end and is incorporated herein by this reference (with the exception of portions noted therein that are not incorporated by reference). See also Part I - Item 4A - Executive Officers of the Registrant. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements. The following Consolidated Financial Statements of the Company and its subsidiaries, the Notes thereto, and the reports thereon are filed under Item 8 of this Report. Independent Auditors' Report ............................... F-2 Consolidated Balance Sheets, December 31, 1996 and 1995 .... F-3 Consolidated Statements of Operations, Years Ended December 31, 1996, 1995 and 1994 ......................... F-4 Consolidated Statements of Shareholders' Equity, Years Ended December 31, 1996, 1995 and 1994 ................... F-5 Consolidated Statements of Cash Flows, Years Ended December 31, 1996, 1995 and 1994 ......................... F-6 Notes to Consolidated Financial Statements ................. F-7 2. Financial Statement Schedules. All financial statement schedules have been omitted, as the required information is inapplicable or is not present in amounts sufficient to require submission of the schedule or the information is presented in the Consolidated Financial Statements or the related notes. 40 43 3. Exhibits. 2.0 Agreement for Purchase and Sale dated April 16, 1996, between Amerada Hess Corporation and DLB Oil & Gas, Inc. (the "Agreement for Purchase and Sale").(4) 2.1 Letter agreement amending Agreement for Purchase and Sale dated May 7, 1996.(3) 2.2 Letter agreement amending Agreement for Purchase and Sale dated May 31, 1996.(3) 3.1 Amended and Restated Certificate of Incorporation(1) 3.2 Amended and Restated Bylaws(1) 10.1 Lease of office space, Oklahoma City, Oklahoma(1) 10.2 Credit Agreement dated December 28, 1995, between Registrant and First Union National Bank of North Carolina(2) 10.3 Stock Option Agreement by and between Registrant and Mike Liddell(1) 10.4 Stock Option Agreement by and between Registrant and Mark Liddell(1) 10.5 Employment Agreement by and between Registrant and Mike Liddell(1) 10.6 Employment Agreement by and between Registrant and Mark Liddell(1) 10.7 DLB Oil & Gas Stock Option Plan(1) 10.8 DLB Oil & Gas Omnibus Equity Compensation Plan(1) 10.9 Shareholder's Agreement by and among Charles E. Davidson, Mike Liddell and Mark Liddell dated May 25, 1995(1) 10.10 Agreement for Dissolution of Joint Venture dated February 9, 1996, between DLB Oil & Gas, Inc., Magic Circle Acquisition Corporation and Magic Circle Energy Corporation, Carmen Field Limited Partnership, and Carmen Field Joint Venture(2) 10.11 First Amendment to the Credit Agreement dated June 30, 1996, between Registrant and First Union National Bank of North Carolina(4) 10.12 Credit Agreement Dated as March 5, 1997 between registrant and Chase Manhattan Bank 10.13 Second Amended Disclosure Statement Under 11 U.S.C. Section 1125 in Support of Debtor and DLBW's Second Amended Joint Plan of Reorganization Under Chapter 22 of the United States Bankruptcy Code 10.14 Texaco Agreements 21.0 Subsidiaries of the Company(1) - ----------------- (1) Previously filed as an exhibit to Registration No. 33-92786 on Form S-1 and incorporated herein by reference. (2) Previously filed as an exhibit to Form 10-K for the year ended December 31, 1995, and incorporated herein by reference. (3) Previously filed as an exhibit to Form 8-K on May 12, 1996, and incorporated herein by reference. (4) Previously filed as an exhibit to Form 10-Q filed on August 14, 1996. (5) Pursuant to Item 601(b)(2) of Regulation S-K, the exhibits and schedules to Exhibit 2.0 are omitted. Exhibit 2.0 contains a list identifying the contents of its exhibits and schedules, and registrant agrees to furnish supplemental copies of such exhibits and schedules to the Securities and Exchange Commission upon request. (b) Reports on Form 8-K. February 7, 1997 Bonray Acquisition 41 44 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DLB OIL & GAS, INC. Date: March 28, 1997 By: /s/ Mike Liddell ------------------------------------------- Mike Liddell, Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date: March 28, 1997 /s/ Charles E. Davidson ------------------------------------------- Charles E. Davidson, Chairman of the Board Date: March 28, 1997 /s/ Mike Liddell ------------------------------------------- Mike Liddell, Director Date: March 28, 1997 /s/ Mark Liddell ------------------------------------------- Mark Liddell, Director Date: March 28, 1997 /s/ Joel-Andre Ornstein ------------------------------------------- Joel-Andre Ornstein, Director Date: March 28, 1997 /s/ David A. Rogath ------------------------------------------- David A. Rogath, Director Date: March 28, 1997 /s/ Martin L. Solomon ------------------------------------------- Martin L. Solomon, Director Date: March 28, 1997 /s/ Ronald D. Youtsey ------------------------------------------- Ronald D. Youtsey, Senior Vice President, Chief Financial Officer and Treasurer (Principal Accounting and Financial Officer) 42 45 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Independent Auditors' Report .................................... F-2 Consolidated Balance Sheets, December 31, 1996 and 1995 ......... F-3 Consolidated Statements of Operations, Years Ended December 31, 1996, 1995 and 1994 .............................. F-4 Consolidated Statements of Shareholders' Equity, Years Ended December 31, 1996, 1995, and 1994 ............................. F-5 Consolidated Statements of Cash Flows, Years Ended December 31, 1996, 1995 and 1994 .............................. F-6 Notes to Consolidated Financial Statements ...................... F-7
All financial statement schedules are omitted, as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes. F-1 46 INDEPENDENT AUDITORS' REPORT The Board of Directors DLB Oil & Gas, Inc.: We have audited the consolidated financial statements of DLB Oil & Gas, Inc. (as described in Note 1) as listed in the accompanying index. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion the consolidated financial statements referred to above present fairly, in all material respects, the financial position of DLB Oil & Gas, Inc. as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 1996, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Oklahoma City, Oklahoma March 12, 1997 F-2 47 DLB OIL & GAS, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ---------------------------- 1996 1995 ------------- ------------ ASSETS Current assets: Cash and cash equivalents $ 4,060,000 $ 14,313,000 Accounts receivable 8,998,000 4,850,000 Prepaid expenses 337,000 324,000 ------------- ------------ Total current assets 13,395,000 19,487,000 ------------- ------------ Property and equipment - at cost, based on the full cost method of accounting for oil and natural gas properties: Oil and natural gas properties subject to amortization 109,325,000 62,275,000 Oil and natural gas properties not subject to amortization 18,570,000 10,037,000 Natural gas processing plants and gathering systems 1,728,000 3,094,000 Saltwater disposal system 1,119,000 1,119,000 Other property and equipment 1,223,000 948,000 ------------- ------------ 131,965,000 77,473,000 Accumulated depreciation, depletion and amortization (27,007,000) (18,812,000) ------------- ------------ 104,958,000 58,661,000 ------------- ------------ Investment in Waggoner (Barbados) Ltd. 3,186,000 -- Other assets 7,902,000 59,000 ------------- ------------ Total assets $ 129,441,000 $ 78,207,000 ============= ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade accounts payable $ 8,119,000 $ 3,853,000 Revenue and royalty distributions payable 3,125,000 1,527,000 Drilling advances and other liabilities 42,000 190,000 Accrued liabilities 872,000 193,000 ------------- ------------ Total current liabilities 12,158,000 5,763,000 ------------- ------------ Long-term debt 37,200,000 -- Deferred income taxes 15,851,000 12,900,000 Shareholders' equity: Preferred stock, 5,000,000 shares authorized; no shares issued -- -- Common stock, 130,000,000 shares authorized; 13,000,000 shares issued; 12,975,000 and 13,000,000 outstanding at December 31, 1996 and December 31 1995, respectively 13,000 13,000 Treasury stock, at cost (181,000) -- Additional paid in capital 57,910,000 57,910,000 Retained earnings 6,490,000 1,621,000 ------------- ------------ Total shareholders' equity 64,232,000 59,544,000 Commitments and contingencies ------------- ------------ Total liabilities and shareholders' equity $ 129,441,000 $ 78,207,000 ============= ============
See accompanying notes to consolidated financial statements. F-3 48 DLB OIL & GAS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, --------------------------------------- 1996 1995 1994 ----------- ------------ ----------- Revenues: Oil and natural gas sales $27,194,000 $ 17,860,000 $17,826,000 Natural gas gathering, processing and transportation, net 821,000 3,293,000 1,652,000 Natural gas contract settlement -- -- 3,343,000 Interest income 355,000 469,000 140,000 Other 45,000 430,000 194,000 ----------- ------------ ----------- 28,415,000 22,052,000 23,155,000 Expenses: Lease operating 5,539,000 3,579,000 4,461,000 Gross production taxes 1,843,000 1,366,000 1,009,000 Depreciation, depletion and amortization 8,938,000 7,368,000 6,553,000 General and administrative 2,485,000 1,486,000 549,000 Interest 1,582,000 529,000 677,000 Loss on sale of assets 208,000 -- -- ----------- ------------ ----------- 20,595,000 14,328,000 13,249,000 ----------- ------------ ----------- Income before income taxes 7,820,000 7,724,000 9,906,000 Pro forma income taxes -- -- 3,962,000 Income taxes 2,951,000 12,900,000 -- =========== ============ =========== Net income (loss) $ 4,869,000 $ (5,176,000) $ 5,944,000 =========== ============ =========== Net income (loss) per common share $ 0.38 $ (0.46) $ 0.59 =========== ============ =========== Weighted average common shares outstanding 12,978,000 11,250,000 10,000,000 =========== ============ ===========
See accompanying notes to consolidated financial statements. F-4 49 DLB OIL & GAS, INC CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ADDITIONAL NO. OF COMMON TREASURY PAID-IN SHARES STOCK STOCK CAPITAL ------------ ------------ ------------ ------------ Balance, December 31, 1993 -- $ -- $ -- $ -- Income before income taxes -- -- -- -- Contributed capital -- -- -- -- Distributions to shareholders -- -- -- -- Balance, December 31, 1994 -- -- -- -- Contributed capital -- -- -- -- Distributions to shareholders -- -- -- -- Pre-public offering net loss -- -- -- -- Issuance of stock in connection with merger of Davidson Oil and Gas, Inc. 10,000,000 10,000 -- 31,017,000 Sale of stock in connection with public offering, net of costs 3,000,000 3,000 -- 26,893,000 Post-public offering net income -- -- -- -- ------------ ------------ ------------ ------------ Balance, December 31, 1995 13,000,000 13,000 -- 57,910,000 Purchase of treasury stock -- -- (181,000) -- Net income -- -- -- -- ------------ ------------ ------------ ------------ Balance, December 31, 1996 13,000,000 $ 13,000 $ (181,000) $ 57,910,000 ============ ============ ============ ============ COMBINED RETAINED SHAREHOLDERS' EARNINGS TOTAL EQUITY ------------ ------------ ------------ Balance, December 31, 1993 $ -- $ -- $ 30,164,000 Income before income taxes -- -- 9,906,000 Contributed capital -- -- 2,138,000 Distributions to shareholders -- -- (3,196,000) ------------ ------------ ------------ Balance, December 31, 1994 -- -- 39,012,000 Contributed capital -- -- 4,000 Distributions to shareholders -- -- (1,192,000) Pre-public offering net loss -- -- (6,797,000) Issuance of stock in connection with merger of Davidson Oil and Gas, Inc. -- 31,027,000 (31,027,000) Sale of stock in connection with public offering, net of costs -- 26,896,000 -- Post-public offering net income 1,621,000 1,621,000 -- ------------ ------------ ------------ Balance, December 31, 1995 1,621,000 59,544,000 -- Purchase of treasury stock -- (181,000) -- Net income 4,869,000 4,869,000 -- ------------ ------------ ------------ Balance, December 31, 1996 $ 6,490,000 $ 64,232,000 $ -- ============ ============ ============
See accompanying notes to consolidated financial statements. F-5 50 DLB OIL & GAS, INC CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------------------ 1996 1995 1994 ------------ ------------ ------------ Cash flows from operating activities: Net income (loss) $ 4,869,000 $ (5,176,000) $ 5,944,000 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation, depletion, and amortization 8,938,000 7,368,000 6,553,000 Pro forma income taxes -- -- 3,962,000 Deferred income taxes 2,951,000 12,900,000 -- Loss on sale of assets 208,000 -- -- Increase in accounts receivable (3,789,000) (676,000) (1,524,000) (Increase) decrease in prepaid expenses (13,000) 14,000 (35,000) Increase (decrease) in accounts payable, distributions payable and accrued liabilities 6,543,000 (865,000) 2,459,000 Decrease in drilling advances (148,000) (170,000) (98,000) ------------ ------------ ------------ Net cash provided by operating activities 19,559,000 13,395,000 17,261,000 ------------ ------------ ------------ Cash flows from investing activities: Expenditures for property and equipment (57,165,000) (19,852,000) (26,291,000) Proceeds from sale of property and equipment 1,399,000 234,000 -- Purchase of investments and other assets (11,065,000) -- (42,000) Collection of note receivable -- -- 966,000 ------------ ------------ ------------ Net cash used in investing activities (66,831,000) (19,618,000) (25,367,000) ------------ ------------ ------------ Cash flows from financing activities: Proceeds of long-term debt 37,200,000 3,000,000 15,751,000 Payments of long-term debt -- (11,231,000) (8,003,000) Contributed capital -- 4,000 2,138,000 Distributions to shareholders -- (1,192,000) (3,196,000) Proceeds from issuance of stock -- 26,896,000 -- Purchase of treasury stock (181,000) -- -- ------------ ------------ ------------ Net cash provided by financing activities 37,019,000 17,477,000 6,690,000 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents: (10,253,000) 11,254,000 (1,416,000) Cash and cash equivalents beginning of year 14,313,000 3,059,000 4,475,000 ------------ ------------ ------------ Cash and cash equivalents end of year $ 4,060,000 $ 14,313,000 $ 3,059,000 ============ ============ ============ Supplemental cash flow information: Cash payments for interest $ 1,403,000 $ 541,000 $ 551,000 ============ ============ ============ Supplemental schedule of noncash investing activities: Property and equipment received from settlement of contingency $ 231,000 $ -- $ -- ============ ============ ============
See accompanying notes to consolidated financial statements. F-6 51 DLB OIL & GAS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION, DESCRIPTION OF BUSINESS AND PRINCIPALS OF CONSOLIDATION DLB Oil & Gas, Inc. (DLB or the Company) engages primarily in the exploration for and development of crude oil and natural gas properties. The Company focuses its efforts and is an active explorer in Oklahoma and Kansas. The Company also engages to a lesser extent, in the gathering, processing, transportation and marketing of hydrocarbons. The accompanying consolidated financial statements covering periods prior to July 20, 1995, the date of the merger of Davidson Oil and Gas, Inc. (Davidson) into DLB, include each of their accounts and their proportionate share of a venture involved in the production of oil and natural gas and in the gathering, processing and transportation of natural gas. Due to the nature of a joint venture agreement between the Company and Davidson, the Company and Davidson were considered to be under common control prior to the merger. Accordingly, the merger of Davidson into DLB was accounted for as a reorganization of interests under common control in a manner similar to a pooling of interests. The accompanying consolidated financial statements covering periods on or after July 20, 1995, include the consolidated accounts of the Company and its wholly owned subsidiaries, and its proportionate share of a venture involved in the production of oil and natural gas and in the gathering, processing and transportation of natural gas. The Company accounts for its investment in Waggoner (Barbados) Ltd. using the equity method of accounting. All significant intercompany transactions and balances have been eliminated in consolidation. CASH AND CASH EQUIVALENTS For purposes of the consolidated statements of cash flows, the Company considers all short-term debt securities purchased with a maturity of three months or less to be cash equivalents. PROPERTY AND EQUIPMENT The Company accounts for its oil and natural gas exploration and development activities using the full cost method of accounting. Accordingly, all costs including nonproductive costs and certain general and administrative costs associated with acquisition, exploration and development of oil and natural gas properties are capitalized. Net capitalized costs are limited to the estimated future net revenues, after income taxes, discounted at 10% per year, from proved oil and natural gas reserves and F-7 52 DLB OIL & GAS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) the cost of properties not subject to amortization. Such capitalized costs including the estimated future development costs and site remediation costs, if any, are depleted by an equivalent units-of-production method, converting natural gas to barrels at the ratio of six Mcf of natural gas to one barrel of oil. No gain or loss is recognized upon disposal of oil and natural gas properties, unless such dispositions significantly alter the relationship between capitalized costs and proved oil and natural gas reserves. The cost of natural gas processing plants and gas gathering systems is also being depreciated on the units-of-production method. The cost of other property and equipment, including the saltwater disposal system, is depreciated over estimated useful lives of five to seven years. Oil and natural gas properties not subject to amortization consist of the cost of undeveloped leaseholds, exploratory and developmental wells in progress, and secondary recovery projects before the assignment of proved reserves. These costs are reviewed periodically by management for impairment, with the impairment provision included in the cost of oil and natural gas properties subject to amortization. Factors considered by management in its impairment assessment include drilling results by the Company and other operators, the terms of oil and gas leases not held by production, production response to secondary recovery activities and available funds for exploration and development. The Company adopted the provisions of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," on January 1, 1996. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Due to the Company's use of the full cost method of accounting for its oil and gas properties, SFAS No. 121 does not apply to the Company's oil and gas property assets which comprise approximately 97% of the Company's net property and equipment. Accordingly, the adoption of SFAS No. 121 did not have an impact on the Company's financial position or results of operations in 1996. INVESTMENTS AND OTHER ASSETS The Company's investment in Waggoner (Barbados) Ltd. is accounted for by the equity method. Other assets, including securities of WRT Energy Corporation, are accounted for at cost. REVENUE AND ROYALTY DISTRIBUTIONS PAYABLE For certain oil and gas properties, the Company receives production proceeds from the purchaser and further distributes such amounts to other revenue and royalty owners. Production proceeds applicable to other revenue and royalty owners are reflected as revenue and royalty distributions payable in the accompanying consolidated balance sheets. The Company accrues revenue for only its net revenue interest in its oil and natural gas properties. F-8 53 DLB OIL & GAS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NATURAL GAS IMBALANCES Natural gas production imbalances arise during the course of production from properties when owners produce more natural gas than their proportionate share of reserves. The Company utilizes the sales method of accounting for natural gas imbalances and, accordingly, has recognized revenue on all production delivered to its purchasers. As long as the remaining reserves of the properties are sufficient for the underproduced owners to recoup their share of production, no cash repayment by the Company will be required. If the recoverable reserves are insufficient for the underproduced owners to recoup their share of production, the Company records a liability for the repayment of its share of overproduction. No receivables are recorded for those wells where the Company has taken less than its ownership share of natural gas production. COMMITMENTS AND CONTINGENCIES Liabilities for loss contingencies arising from claims, assessments, litigation or other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. In October 1996, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 96-1, "Environmental Remediation Liabilities." SOP 96-1 was adopted by the Company on January 1, 1997. It requires, among other things, that environmental remediation liabilities be accrued when the criteria of SFAS No. 5, "Accounting for Contingencies," have been met. SOP 96-1 also provides guidance with respect to the measurement of the remediation liabilities. Such accounting is consistent with the Company's method of accounting for environmental remediation costs. Therefore, adoption of SOP 96-1 will not have a material impact on the Company's financial position or results of operations. OTHER REVENUES Included in other revenues in the 1995 consolidated statement of operations is $370,000 for amounts received for the management of an intrastate pipeline company engaged in the gathering, transmission and marketing of natural gas. Earlier years did not include significant revenues associated with management fees. This management agreement terminated in February 1995 upon sale of the intrastate pipeline company by its owners. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses are reported net of amounts charged to other working interest owners of the oil and natural gas properties operated by the Company, and net of general and administrative expenses capitalized by the Company as relating to its property exploration and development activities. F-9 54 DLB OIL & GAS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) INCOME TAXES Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. NET INCOME (LOSS) PER COMMON SHARE Net income (loss) per common share is based upon the number of common shares considered outstanding during each period after giving effect to the merger of Davidson and the Company, as of the beginning of the earliest period presented. Subsequent to the initial public offering of the Company's common stock, net income (loss) per common share is based upon the weighted average number of shares of common stock outstanding for the year. For the year end December 31, 1996, shares represented by granted stock options were not included in the net income per common share calculations as the option price was in excess of the trading price of the Company's securities. For the year ended December 31, 1995, shares represented by granted stock options were antidilutive to the net income (loss) per common share calculation. STOCK OPTIONS With regard to the Company's stock options granted, no accounting is made until such time as the options are exercised, in that the option price equaled the market value of the option at the date of the grant. Upon exercise, the proceeds are added to stockholders' equity, and no expense is recognized. Statement of Financial Accounting Standards No. 123 "Accounting for Stock Issued to Employees" provides companies with the option of expensing the "fair value" of stock options granted. The Company has elected not to change its current accounting method regarding stock options, and therefore SFAS No. 123 did not impact the Company's 1996 operating results. The Company has adopted the expanded disclosure requirements for stock options in 1996. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist of cash and cash equivalents, trade receivables, payables and long-term debt. As of December 31, 1996 and 1995, the consolidated financial statement carrying values of the Company's financial instruments, approximate their respective estimated fair value, because of the short maturity or the frequent interest rate repricing of these instruments. F-10 55 DLB OIL & GAS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DERIVATIVE FINANCIAL INSTRUMENTS The Company has utilized derivative financial instruments, in the form of futures contracts, on a limited basis to manage or hedge price risk associated with oil and gas production. The Company does not utilize derivative financial instruments for trading purposes. Gains and losses attributable to the Company's hedging activities are recorded as increases and decreases in oil and gas sales when the futures contracts are closed. When a futures contract ceases to qualify as a hedge, the change in fair value is reflected in operations at that time. USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses during the reporting periods, to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. RECLASSIFICATIONS Certain reclassifications have been made to the 1995 and 1994 financial statements to conform to the 1996 presentation. (2) PROPERTY ACQUISITION On May 31, 1996, the Company acquired certain Oklahoma oil and natural gas properties from Amerada Hess Corporation ("Amerada Hess") for approximately $32,100,000, with $25,500,000 allocated to producing properties and $6,600,000 allocated to undeveloped leasehold and to nonproducing minerals. The Company funded the purchase through use of cash funds and borrowings of $30,000,000 from its credit facilities. Total estimated proved reserves as of May 31, 1996, net to the Company, were 6.8 Mmboe. Proved reserves attributable to the acquired properties were divided approximately 43% oil and 57% natural gas. (The quantities of proved reserves in this paragraph were prepared by the Company's internal engineers and based on an independent reserve study prepared as of January 1, 1996 by Degolyer and MacNaughton and are unaudited.) The 1996 acquisition of the Amerada Hess properties described above was accounted for by the purchase method of accounting for business combinations. Accordingly, the accompanying 1996 Consolidated Statement of Operations does not include any revenues or expenses associated with the Amerada Hess properties prior to the acquisition date of May 31, 1996. Following are the Company's pro forma results assuming the acquisition occurred at the beginning of 1995: F-11 56 DLB OIL & GAS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1996 1995 ------- -------- Total revenues $33,242 $ 31,780 Net income (loss) $ 5,655 $ (5,485) Net income (loss) per share $ 0.44 $ (0.49)
(3) ACCOUNTS RECEIVABLE Accounts receivable consisted of the following:
December 31, December 31, 1996 1995 ------------ ------------ Joint interest billings $1,162,000 $ 945,000 Accrued oil and natural gas revenue 7,340,000 3,905,000 Other 496,000 -- ---------- ---------- Total $8,998,000 $4,850,000 ========== ==========
The Company requires other joint interest owners to pay drilling costs in advance. The advances are recorded as liabilities by the Company. The Company does not require parties to collateralize amounts owing to the Company for joint interest billings after the completion of the well. To mitigate this credit risk, the Company has the ability to offset amounts owed to the Company through application of revenues owing to the other parties and has the ability to file liens on the related properties. F-12 57 DLB OIL & GAS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (4) PROPERTY AND EQUIPMENT Property and equipment consisted of the following:
DECEMBER 31, DECEMBER 31, 1996 1995 ------------- ------------ Oil and natural gas properties: Subject to amortization $ 109,325,000 $ 62,275,000 Not subject to amortization: Cost incurred in 1996 14,674,000 -- Cost incurred in 1995 1,278,000 7,419,000 Cost incurred in 1994 1,518,000 1,518,000 Cost incurred in 1993 715,000 715,000 Cost incurred in 1992 385,000 385,000 ------------- ------------ 18,570,000 10,037,000 ------------- ------------ Accumulated depreciation, depletion and amortization (25,868,000) (17,505,000) ------------- ------------ Net oil and natural gas properties 102,027,000 54,807,000 ------------- ------------ Natural gas processing plants and gathering systems 1,728,000 3,094,000 Saltwater disposal system 1,119,000 1,119,000 Other property and equipment 1,223,000 948,000 ------------- ------------ 4,070,000 5,161,000 Accumulated depreciation (1,139,000) (1,307,000) ------------- ------------ Net processing plants, gathering and disposal systems, and other property and equipment 2,931,000 3,854,000 ------------- ------------ Property and equipment, net of accumulated depreciation, depletion and amortization $ 104,958,000 $ 58,661,000 ============= ============ Depreciation, depletion and amortization expense consisted of the following: Depreciation, depletion and amortization of oil and natural gas properties $ 8,364,000 $ 6,687,000 Depreciation and amortization of processing plants, gathering and disposal systems, and other property and equipment 538,000 645,000 Amortization of other assets 36,000 36,000 ============= ============ Total depreciation, depletion and amortization $ 8,938,000 $ 7,368,000 ============= ============
(5) INVESTMENT IN WAGGONER (BARBADOS) LTD. AND OTHER ASSETS On November 27, 1996, the Company purchased 21% of the equity of Waggoner (Barbados) Ltd. which has a joint venture agreement with the Barbados National Oil Company, Ltd. to more fully develop the onshore oil and gas reserves of Barbados by applying state-of-the-art exploration, completion, and production methods. As of December 31, 1996, Waggoner (Barbados) Ltd. had not begun significant operations. The cost of the Company's investment equals its share of the stockholders' equity of Waggoner F-13 58 DLB OIL & GAS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Barbados) Ltd. The assets of Waggoner (Barbados) Ltd. are comprised principally of cash as of December 31, 1996. Operations under the joint venture created by the agreements are expected to commence in the first quarter of 1997. The initial work plan contemplates both exploitation of existing fields and new exploration. The joint venture will share in sixty percent of the production enhancements over and above current volumes adjusted for normal production declines. During 1996, the Company acquired senior unsecured notes and other credit obligations of WRT Energy Corporation ("WRT Energy"), an oil and gas company operating under the provisions of Chapter 11 of the United States Bankruptcy Code since February of 1996. These notes and other credit obligations are being accounted for using the cost method. At December 31, 1996 the Company's cost of these notes and other credit obligations was approximately $7.9 million. On November 29, 1996 as amended on January 20, 1997, and March 11, 1997, the Company and Wexford Management L.L.C. ("Wexford"), an entity affiliated with the Chairman of the board of directors of the Company, filed a joint plan of reorganization with WRT Energy. No competing reorganization plans have been filed. The Company is anticipating confirmation of the plan during the second quarter of 1997, although delays caused by motions requested by other creditors could delay the proceedings. The plan is expected to go into effect sixty days after confirmation of the plan. The Company has been in contact with other creditors of WRT Energy and anticipates that the plan, substantially as filed, will be approved by at least the minimum number of creditors required by provisions of the United States Bankruptcy Code in order for the plan to be confirmed. Under the plan, a new WRT Energy will be created with approximately 21.3 million shares of common stock outstanding and the Company will exchange its WRT Energy notes, the Company's interest in the West Cote Blanche Bay Field acquired in March of 1997 (described in Note 14) and other assets for an equity interest in the new WRT Energy. In addition, the Company and Wexford have committed to funding a rights offering associated with the reorganization plan of WRT Energy. The rights to purchase new common stock of WRT Energy are being offered to all unsecured creditors of WRT Energy. Pursuant to provisions of the plan, the Company and Wexford have committed to purchase the rights not exercised by other creditors. Based upon the notes and other credit obligations, the Company's pro rata portion of the rights offering, as contemplated by the plan, ranges from a minimum of $2.4 million to a maximum of $9.3 million. The Company would own approximately 9.9 million to 11.8 million shares or between 46.2 % and 55.4 % of WRT Energy's equity. F-14 59 DLB OIL & GAS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (6) LONG-TERM DEBT 1995 Facility Under the terms of the revolving loan agreement dated December 24, 1995, the Company may borrow up to the borrowing base at either the banks' prime or floating rate, the London Interbank Offered Rate ("LIBOR") plus 176 basis points or a pricing grid rate with the rate determined by the percentage of borrowing base commitment outstanding. As of December 31, 1996, borrowings of $37,200,000 were outstanding at a weighted average interest rate of 7.3%. No amounts were borrowed as of December 31, 1995. As of December 31, 1996 and 1995, the Company's borrowing base was $50,000,000 and $20,000,000, respectively. Principal payments on the revolving loan are due at maturity or when the amounts outstanding under the revolving loan agreements are in excess of the borrowing base. Interest payments are due quarterly. The advances under the revolving loans are collateralized by a mortgage on the Company's producing and nonproducing oil and natural gas properties and are due in October 2000. The revolving loan agreement requires the Company to pay commitment fees for unused amounts. For 1996, 1995 and 1994, the Company's commitment fee expense was $174,000, $44,000 and $70,000, respectively. The revolving loan agreement contains restrictive covenants requiring, among other things, maintenance at specific levels of tangible net worth, working capital, and specific financial ratios, as well as limiting the payment of dividends. 1997 Facility On March 5, 1997, the Company established a new $85,000,000 revolving credit facility with a group of financial institutions. This facility was used to refinance indebtedness under the 1995 facility with the remainder to be used for funding of acquisitions and general corporate purposes. The maturity of the 1997 facility is March 2002. Under the terms of the 1997 facility, interest will be charged at the higher of the bank's prime rate plus 1/2 of 1% plus the applicable margin or the rate at which Eurodollar deposits for one, two, three, six or twelve months are offered to the bank in the Interbank Eurodollar market plus the applicable margin. Loans made under the 1997 facility are payable in full on the maturity date. The new revolving credit facility contains similar restrictive covenants to the 1995 facility. (7) INCOME TAXES Prior to the July 1995 merger and initial public offering, the Company and Davidson filed separate income tax returns as Subchapter S corporations under the provisions of the Internal Revenue Code. The Company's S election terminated in 1995 upon completion of the initial public offering. As a result of the Company's termination of the S election, the Company recognized a charge against operations in 1995 in the amount of $11,500,000 F-15 60 DLB OIL & GAS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) for deferred income taxes which represented the tax effect of the difference between the financial statement carrying values and the income tax basis of the Company's assets and liabilities on the date the S election was terminated. In addition to the $11,500,000 deferred income tax expense described above, the Company recorded $1,400,000 in deferred income tax expense in 1995 related to the period following the initial public offering. Tax strategies implemented by the shareholders of the Company and Davidson prior to the merger are not reflective of the results that the Company would have achieved if the Company had been directly subject to income taxes. Therefore, results of the operations for 1994, reflect a pro forma provision for income tax expense at a rate of 40% (based upon blended Federal and state rates) of income before taxes. At December 31, 1996, the Company had the following carryforwards available to reduce future federal and state income taxes:
YEAR OF CARRYFORWARD TYPES OF CARRYFORWARD EXPIRATION AMOUNTS --------------------------- Net operating loss - federal 2010 and 2011 $2,201,000 Net operating loss - various states 2010 and 2011 $2,600,000 Statutory depletion None $ 290,000
Total income tax expense for 1996 and 1995 differed from the amounts computed by applying the federal income tax rate of 34% to income before income taxes as a result of the following:
1996 1995 ----------- ----------- Computed "expected" federal income tax expense $ 2,659,000 $ 2,626,000 Effect of state income taxes 292,000 289,000 Effect of change in tax status -- 9,925,000 Other, net -- 60,000 ----------- ----------- $ 2,951,000 $12,900,000 =========== ===========
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities at December 31, 1996 and 1995 are presented below: F-16 61 DLB OIL & GAS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1996 1995 ------------ ------------ Deferred tax assets: Net operating loss carryforwards $ 831,000 $ 241,000 Statutory depletion carryforwards 110,000 55,000 ------------ ------------ Total deferred tax assets $ 941,000 $ 296,000 Deferred tax liability: Property and equipment, principally due to difference in depreciation, and expensing of intangible drilling cost, nonproductive well costs and general and administrative expenses for tax purposes (16,792,000) (13,196,000) ============ ============ Net deferred tax liability $(15,851,000) $(12,900,000) ============ ============
Because the temporary differences between financial carrying value and tax basis are expected to reverse before the expiration of the net operating loss carryforwards, management believes that it is more likely than not that the benefits of these carryforwards will be realized. As such, there is no valuation allowance for deferred tax assets at December 31, 1996. (8) SHAREHOLDERS' EQUITY Effective with the merger of DLB and Davidson, the capital structure of the Company consisted of 130,000,000 authorized common shares ($.001 par value) with 10,000,000 shares outstanding along with 5,000,000 authorized preferred shares with no preferred shares outstanding. For financial reporting purposes, combined shareholder's equity at the date of the merger was converted into the Company's common stock and additional paid-in-capital. On February 7, 1996, the Company adopted a common stock repurchase plan. Under the terms of the plan, up to $5,000,000 of common stock could have been repurchased from time to time. Pursuant to the plan, 25,000 shares were repurchased for $181,000. Repurchased stock is held as treasury stock by the Company. The repurchase plan expired on August 5, 1996. On July 25, 1995, the Company issued 3,000,000 shares of common stock through a public offering at $10 per share. Net proceeds to the Company from the offering, after selling and offering costs, were $26,896,000. The Company used $11,231,000 of these proceeds to retire then existing indebtedness under its revolving line of credit facilities. In 1995, the Company adopted a stock option plan ("the Plan") pursuant to which the Company's Board of Directors may grant stock options to officers and key employees. The Plan authorizes grants of options to purchase up to 1,625,000 shares of authorized but unissued common stock. Stock options are granted with an exercise price equal to the F-17 62 DLB OIL & GAS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) stock's fair market value at the date of grant. All stock options have ten year terms and vest ratably over a five year term. No grants were made during 1996. The per share weighted-average fair value of stock options granted during 1995 was $4.69 on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: expected dividend yield 0%, risk-free interest rate of 5.50%, expected volatility of 45% and an expected life of five years. The Company has elected to continue to apply APB Opinion No. 25 in accounting for its granted stock options and, accordingly no compensation cost has been recognized for the fair value of stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income would have been reduced to the pro forma amounts indicated below:
1996 1995 ----------- ------------ Net income (loss): As reported $ 4,869,000 $ (5,176,000) Pro forma 3,900,000 (5,362,000) Net income (loss) per share: As reported $ 0.38 $ (0.46) Pro forma 0.30 (0.48)
Pro forma net income reflects only options granted in 1995, as no options were granted in 1996. The full impact of compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented above because compensation cost is reflected over the options vesting period of five years. Stock option activity during the years indicated is as follows: F-18 63 DLB OIL & GAS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NUMBER OF WEIGHTED-AVERAGE SHARES EXERCISE PRICE ---------- ---------------- Balance as of December 31, 1994 -- $ -- Granted 1,625,000 10 Exercised -- -- Forfeited -- -- Expired -- -- ---------- ---------- Balance as of December 31, 1995 1,625,000 10 Granted -- -- Exercised -- -- Forfeited -- -- Expired -- -- ---------- ---------- Balance as of December 31, 1996 1,625,000 $ 10 ========== ==========
At December 31, 1996, the exercise prices and weighted-average remaining contractual life of outstanding options was $10 and 8.7 years, respectively. At December 31, 1996 and 1995, the number of options exercisable was 390,000 and 65,000, respectively, and the weighted-average exercise price of those options was $10. (9) NATURAL GAS CONTRACT SETTLEMENT During 1994, the Company entered into a settlement of a natural gas contractual dispute. As a result of the settlement, the Company recognized a gain in 1994 of $3,343,000 in a one time, lump sum payment which is not subject to any repayment conditions. (10) MAJOR CUSTOMERS The Company markets its oil and natural gas production to numerous purchasers under a combination of short-term and long-term contracts. During 1996, 1995 and 1994, the Company's largest purchasers accounted for 47%, 58% and 72%, respectively, of oil and natural gas revenues of the Company. The Company had no other purchasers that accounted for greater than 10% of its oil and natural gas revenues. The Company does not believe that the loss of any single customer would have a material effect on the results of the Company's operations. (11) EMPLOYEE BENEFIT PLANS In 1994, the Company adopted a qualified 401 (k) Profit Sharing Plan which permits eligible employees to defer up to 10% of their compensation. All employees over 18 years of age and with six months of service can participate in the Plan. Employees vest in the Company's matching contributions at a rate of 25% per year. The Company is not F-19 64 DLB OIL & GAS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) obligated to match the employees' contributions. During 1996, 1995 and 1994, the Company elected to make $35,000, $25,000 and $14,000 in matching contributions, respectively. Also in 1994, the Company adopted a money purchase pension plan, which commits the Company to contribute 8.33% of employees compensation to the plan up to maximum amounts allowed by regulation. All employees over 18 years of age and employed on the first of January of the plan year are eligible to participate in the plan. The plan does not permit employee contributions. Participants vest immediately in the contributions made by the Company. During 1996, 1995 and 1994, the Company contributed to the plan $169,000, $144,000 and $90,000, respectively. Prior to the merger, the Company granted selected key employees various carried interests in certain undeveloped and purchased producing oil and gas properties. The carried interests, which range in the aggregate from 0.5% to 2.5% of the properties, applied to wells drilled in certain areas of development and purchased producing properties. Compensation expense equal to the fair value of the grant of proved reserves was not recognized as the amount was not significant. The granting of carried interest ceased at the merger effective date. The employees' interests in the proved properties are not included in the Company's estimated quantities of proved oil and gas reserves. (12) RELATED PARTY TRANSACTIONS A company, the owner of which is related to certain officers of the Company, sold oil field equipment and provided oil field services which aggregated $3,829,000, $1,481,000 and $1,784,000 to the Company for 1996, 1995, and 1994, respectively. The transactions were settled on normal industry terms. As of December 31, 1996 and 1995, the Company owed the supplier $484,000 and $105,000, respectively. All amounts owed to the supplier related to sales of oil field equipment and oil field services provided to the Company. (13) COMMITMENTS AND CONTINGENCIES Minimum future rental payments under noncancelable operating leases having remaining terms in excess of one year as of December 31, 1996, for each of the next three years and in the aggregate are as follows: 1997 242,861 1998 309,938 1999 321,804 ---------- $ 874,603 ==========
Rental expense for the years ended December 31, 1996, 1995 and 1994 was $178,000, $140,000 and $104,000, respectively. F-20 65 DLB OIL & GAS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company is a defendant in two legal proceedings related to properties purchased from Amerada Hess. One suit relates to the validity of a leasehold interest. The claimants seek cancellation of the lease. The Company does not agree with the claimants position. However, if the claimant prevails, the Company would seek recovery from Amerada Hess pursuant to provisions of the purchase agreement. The lease involved in this suit had an agreed upon value of approximately $311,000 as documented in the purchase agreement. The second suit relates to the Company's denial of an unrelated party's preferential rights to purchase certain properties under various operating agreements with Amerada Hess. DLB acquired such properties in the Amerada Hess acquisition. DLB contends that the third party's preferential right elections were invalid as to the majority of such interests. On January 21, 1997, a hearing was held before the District Court of Ellis County, Oklahoma on cross motions for summary judgment of the Company and the third party. The Court ruled in favor of the Company on most of the third party's claims against the Company. However, the Court did not rule on the validity of the preferential rights. If the Court rules in the third party's favor, barring appeal, the Company would be required to sell the certain properties for the values listed in the purchase agreement, of approximately $1,123,000. DLB is also involved in the routine judicial and administrative proceedings that are common to companies of its size in the oil and gas industry. None of these proceedings are believed, either individually or in aggregate, to be material to DLB's financial condition, liquidity or results of operations. As of December 31, 1996, the Company had outstanding letters of credit of approximately $1,463,000. The letters of credit expire during the first quarter of 1997. In 1996, the Company settled claims submitted to arbitration against a joint venture partner alleging breach of contract and tortuous conduct. The claims arose under the terms of the Carmen Field Joint Venture Agreement dated May 26, 1993, between the Company and Magic Circle Acquisition Corporation ("Magic Circle"). In the proceeding, the Company sought actual damages in excess of $1,000,000, an accounting and other relief, including dissolution of the Carmen Field Joint Venture ("CFJV"). The Company settled its claims by agreement dated February 7, 1996. The settlement agreement provided for mutual releases of all claims arising out of the CFJV, dissolution of the CFJV, distribution to the Company of its interest in the CFJV oil and gas properties, the payment of $3,349,000 to the Company and transfer to the Company of its share of a gathering system in Stephens County, Oklahoma, and transfer to Magic Circle gathering, processing and compression facilities in Alfalfa and Woodward Counties, Oklahoma. As a result of the settlement, the Company recognized a $208,000 loss, including $212,000 of related legal fees. The Company earned net revenues before income taxes of $2,933,000 and $1,151,000 during 1995 and 1994, respectively, from its ownership of the assets transferred to Magic Circle as part of the settlement. F-21 66 DLB OIL & GAS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (14) EVENTS OCCURRING SUBSEQUENT TO DECEMBER 31, 1996 BONRAY DRILLING CORPORATION On February 10, 1997, the Company purchased the outstanding common stock of Bonray Drilling Corporation through a tender offer. DLB paid $30.00 per share, or approximately $12.7 million. As a result of the completed tender offer, Bonray Drilling Corporation became a wholly-owned subsidiary of DLB. Bonray owns a total of 15 rigs, including six rigs capable of drilling wells over 20,000 feet and nine rigs capable of drilling wells from 7,500 to 15,000 feet. Two of the six deep drilling rigs are presently being remobilized. These rigs are expected to be in operation by the second quarter of 1997. Ten rigs were in service or available for service at the time of acquisition with three in stacked status. WEST COTE BLANCHE BAY FIELD On March 11, 1997, the Company purchased Texaco Exploration and Production, Inc.'s 50% interest in the shallow rights in the West Cote Blanche Bay Field ("WCBB") located in Saint Mary's Parish, Louisiana. The purchase includes the right to operate existing and future wells completed above the Robb "C" (a geologic marker located at approximately 10,500 feet) and the right to operate the related production facilities which include oil and gas pipelines, salt water disposal wells, compression facilities and related equipment. The purchase price was $12.3 million. Proved reserves attributable to the acquisition were independently estimated at approximately 12.2 Mmboe (million barrels of oil equivalent) as of January 1, 1997, and are essentially 100% oil. (The quantities of proved reserves in this paragraph were prepared by the Company's internal engineers and based on an independent reserve study prepared as of January 1, 1996 by Netherland, Sewell and Associates, Inc. and are unaudited.) The remaining 50% working interest in the shallow rights to the WCBB property is owned by WRT Energy. As part of the WRT Energy reorganization plan, DLB expects to contribute the acquired interest in WCBB (described above) to WRT Energy in exchange for 5.0 million shares in the reorganized WRT Energy. See Note 5. Additionally, the Company purchased approximately $6.0 million of obligations of WRT Energy that relate to the West Cote Blanche Bay Field properties. Such obligations are expected to be converted into equity of the new WRT Energy and are included in the equity percentages disclosed in Note 5. (15) OIL AND NATURAL GAS OPERATIONS Below is a summary of results of operations for oil and natural gas producing activities. The results do not include any allocation of the Company's interest costs or general F-22 67 DLB OIL & GAS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) corporate overhead and therefore, are not necessarily indicative of the contribution to net income of the Company's oil and natural gas operations. Income taxes have not been considered in the summary.
YEAR ENDED DECEMBER 31, ------------------------------------- 1996 1995 1994 ----------- ----------- ----------- Income: Oil and natural gas sales $27,194,000 $17,860,000 $17,826,000 Expenses: Lease operating expenses 5,539,000 3,579,000 4,461,000 Gross production taxes 1,843,000 1,366,000 1,009,000 Depreciation, depletion, and amortization 8,364,000 6,687,000 6,185,000 ----------- ----------- ----------- 15,746,000 11,632,000 11,655,000 ----------- ----------- ----------- Results of operations from oil and natural gas producing activities $11,448,000 $ 6,228,000 $ 6,171,000 =========== =========== =========== Depreciation, depletion, and amortization per equivalent barrel of production $ 5.23 $ 5.52 $ 5.18 =========== =========== ===========
The following is a summary of costs incurred, all of which were capitalized, for oil and natural gas property exploration, development, and acquisition activities:
YEAR ENDED DECEMBER 31, ---------------------------------------- 1996 1995 1994 ----------- ----------- ---------- Exploration costs $ 9,605,000 $12,482,000 $8,551,000 Development costs 11,503,000 5,884,000 7,688,000 Acquisition costs 34,476,000 39,000 8,849,000
(16) SUPPLEMENTAL INFORMATION ON OIL AND NATURAL GAS OPERATIONS (UNAUDITED) The following supplemental unaudited information regarding the oil and gas activities of the Company is presented pursuant to the disclosure requirements promulgated by the Securities and Exchange Commission and Statement of Financial Accounting Standards No. 69 "Disclosures About Oil and Gas Producing Activities". OIL AND NATURAL GAS QUANTITIES Substantially all reserve information for the year ended December 31, 1996, presented below was prepared by the independent engineering firms of Degolyer and MacNaughton and H.J. Gruy & Associates, Inc. For the year ended December 31, 1995, substantially all reserve information presented was prepared by Netherland, Sewell and Associates, Inc. F-23 68 DLB OIL & GAS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) and H.J. Gruy & Associates, Inc. There are many uncertainties inherent in estimating reserve quantities, and in projecting future production rates and the timing of future development expenditures. In addition, reserve estimates of new discoveries are more imprecise than those of properties with a production history. Accordingly, these estimates are subject to change as additional information becomes available. Proved oil and natural gas reserves are the estimated quantities of crude oil, condensate, natural gas and natural gas liquids that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed oil and natural gas reserves are those reserves expected to be recovered through existing wells with existing equipment and operating methods. Estimates of net quantities of proved reserves and proved developed reserves of crude oil, including condensate and natural gas liquids, and natural gas, as well as the changes in proved reserves during the periods indicated, are set forth in the tables below. All reserves are located in the United States. The Company prepared the estimated reserves as of December 31, 1993 based on geological and engineering evaluations performed as of December 31, 1994. The reserve estimates as of December 31, 1993 were derived by analyzing actual historical production amounts and by adjusting the reserves attributable to wells acquired or disposed of during 1993. In addition, in deriving the estimates as of December 31, 1993, the Company used production costs and the estimated sales prices as of December 31, 1994. The Company has estimated its reserves as of December 31, 1993 in this manner because the actual information necessary to calculate estimated proved reserves and related information in accordance with guidelines of the Securities and Exchange Commission (SEC) as of December 31, 1993 was not available. Because the reserve estimates as of December 31, 1994 are based on additional information gained from the result of drilling, testing and production subsequent to the dates of the estimated reserves, the reserve estimates as of December 31, 1993 are not necessarily reflective of quantities that might have been estimated based on information available as of such date had estimates in accordance with SEC guidelines been made at such date. Management believes that, because of the methodology used, the reserve information presented is more reflective of actual quantities than estimates that might have been generated as of December 31, 1993. F-24 69 DLB OIL & GAS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CHANGES IN PROVED RESERVES OIL NATURAL GAS (BBLS) (MCF) --------- ----------- Proved reserves, at December 31, 1993 3,620,000 17,069,000 Extension and discoveries 1,375,000 9,019,000 Purchase of reserves 514,000 3,476,000 Production (663,000) (3,187,000) --------- ---------- Proved reserves, at December 31, 1994 4,846,000 26,377,000 Extension and discoveries 521,000 9,454,000 Purchase of reserves 130,000 803,000 Revisions of previous estimates (171,000) (4,969,000) Production (708,000) (3,022,000) --------- ---------- Proved reserves, at December 31, 1995 4,618,000 28,643,000 Extension and discoveries 270,000 30,186,000 Purchase of reserves 2,983,000 23,082,000 Revisions of previous estimates (537,000) 4,049,000 Production (664,000) (5,603,000) --------- ---------- Proved reserves, at December 31, 1996 6,670,000 80,357,000 ========= ==========
OIL NATURAL GAS PROVED DEVELOPED RESERVES AS OF: (BBLS) (MCF) --------- ----------- December 31, 1993 2,816,000 13,098,000 December 31, 1994 3,791,000 16,529,000 December 31, 1995 4,046,000 19,955,000 December 31, 1996 5,234,000 54,797,000
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS The following table sets forth the standardized measure of the discounted future cash flows attributable to the Company's proved oil and natural gas reserves. Future cash inflows were computed by applying year-end prices of oil and natural gas to the estimated future production of proved oil and natural gas reserves, except as described above for 1993. All prices were held constant except where a definite price escalation is provided in the sales contract. Contractually provided natural gas prices in excess of estimated market prices were used in computing the future cash inflows only if the Company expects to continue to receive higher prices under legally enforceable contract terms. Future prices received may differ from the estimates in the standardized measure. Future production and development costs represent the estimated future expenditures (based on current costs) to be incurred in developing and producing the proved reserves, F-25 70 DLB OIL & GAS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) assuming continuation of existing economic conditions. Future income taxes were computed by applying the appropriate statutory tax rates to the future pretax net cash flows relating to proved reserves, net of tax basis of the properties involved and certain tax carryforwards. The future income taxes give effect to permanent differences but do not include the impact of future operations. The resulting periodic future net cash flows were discounted using a 10% annual rate. The additions to proved reserves from new discoveries and extensions could vary significantly from year to year; additionally, the impact of changes to reflect current prices and costs of reserves proved in prior years could be significant. Accordingly, the information presented below should not be viewed as an estimate of the fair value of the Company's oil and natural gas properties, nor should it be considered indicative of any trends.
1996 1995 1994 ------------- ------------- ------------- Future cash inflows $ 464,712,000 $ 144,069,000 $ 125,546,000 Future production costs (106,027,000) (42,494,000) (32,021,000) Future development costs (17,180,000) (7,236,000) (7,053,000) Future income taxes (106,757,000) (27,265,000) (25,000,000) ------------- ------------- ------------- Future net cash flows 234,748,000 67,074,000 61,472,000 10% discount to reflect timing of cash flows (93,996,000) (23,409,000) (16,055,000) ------------- ------------- ------------- Standardized measure of discounted future cash flows $ 140,752,000 43,665,000 $ 45,417,000 ============= ========== ============= Discounted future net cash flows before income taxes $ 204,763,000 $ 61,501,000 $ 63,888,000 ============= ============= =============
The net weighted average prices at December 31, 1996 used in the computations in the table above were $25.14 per barrel of oil and $3.70 per Mcf of natural gas. F-26 71 DLB OIL & GAS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CHANGES RELATING TO STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS Principal changes in the standardized measure of discounted future net cash flows attributable to the Company's proved reserves are as follows:
1996 1995 1994 ------------- ------------ ------------ Beginning balance $ 43,665,000 $ 45,417,000 $ 27,957,000 Sales of oil and natural gas, net of production costs (19,812,000) (12,915,000) (12,356,000) Net changes in prices and production costs 81,807,000 4,787,000 -- Extensions, discoveries and improved recovery, net of future development costs 51,292,000 9,654,390 22,281,000 Purchase of reserves, net of future development costs 35,286,000 1,616,610 8,658,000 Development costs incurred during the period 1,178,000 1,993,000 -- Revisions of quantity estimates 916,000 (8,339,000) -- Change in income taxes (47,662,000) (1,477,000) (5,635,000) Accretion of discount 6,150,000 6,388,000 4,512,000 Other, primarily changes in timing (12,068,000) (3,460,000) -- ------------- ------------ ------------ Ending balance $ 140,752,000 $ 43,665,000 $ 45,417,000 ============= ============ ============
F-27 72 EXHIBIT INDEX 2.0 Agreement for Purchase and Sale dated April 16, 1996, between Amerada Hess Corporation and DLB Oil & Gas, Inc. (the "Agreement for Purchase and Sale").(4) 2.1 Letter agreement amending Agreement for Purchase and Sale dated May 7, 1996.(3) 2.2 Letter agreement amending Agreement for Purchase and Sale dated May 31, 1996.(3) 3.1 Amended and Restated Certificate of Incorporation(1) 3.2 Amended and Restated Bylaws(1) 10.1 Lease of office space, Oklahoma City, Oklahoma(1) 10.2 Credit Agreement dated December 28, 1995, between Registrant and First Union National Bank of North Carolina(2) 10.3 Stock Option Agreement by and between Registrant and Mike Liddell(1) 10.4 Stock Option Agreement by and between Registrant and Mark Liddell(1) 10.5 Employment Agreement by and between Registrant and Mike Liddell(1) 10.6 Employment Agreement by and between Registrant and Mark Liddell(1) 10.7 DLB Oil & Gas Stock Option Plan(1) 10.8 DLB Oil & Gas Omnibus Equity Compensation Plan(1) 10.9 Shareholder's Agreement by and among Charles E. Davidson, Mike Liddell and Mark Liddell dated May 25, 1995(1) 10.10 Agreement for Dissolution of Joint Venture dated February 9, 1996, between DLB Oil & Gas, Inc., Magic Circle Acquisition Corporation and Magic Circle Energy Corporation, Carmen Field Limited Partnership, and Carmen Field Joint Venture(2) 10.11 First Amendment to the Credit Agreement dated June 30, 1996, between Registrant and First Union National Bank of North Carolina(4) 10.12 Credit Agreement Dated as March 5, 1997 between registrant and Chase Manhattan Bank 10.13 Second Amended Disclosure Statement Under 11 U.S.C. Section 1125 in Support of Debtor and DLBW's Second Amended Joint Plan of Reorganization Under Chapter 22 of the United States Bankruptcy Code 10.14 Texaco Agreements 21.0 Subsidiaries of the Company(1)
- ----------------- (1) Previously filed as an exhibit to Registration No. 33-92786 on Form S-1 and incorporated herein by reference. (2) Previously filed as an exhibit to Form 10-K for the year ended December 31, 1995, and incorporated herein by reference. (3) Previously filed as an exhibit to Form 8-K on May 12, 1996, and incorporated herein by reference. (4) Previously filed as an exhibit to Form 10-Q filed on August 14, 1996. (5) Pursuant to Item 601(b)(2) of Regulation S-K, the exhibits and schedules to Exhibit 2.0 are omitted. Exhibit 2.0 contains a list identifying the contents of its exhibits and schedules, and registrant agrees to furnish supplemental copies of such exhibits and schedules to the Securities and Exchange Commission upon request. EX-10.12 2 CREDIT AGREEMENT DATED MARCH 5, 1997 1 EXHIBIT 10.12 CREDIT AGREEMENT DATED AS OF MARCH 5, 1997 AMONG DLB OIL & GAS, INC., AS BORROWER, THE CHASE MANHATTAN BANK, AS AGENT, AND THE LENDERS SIGNATORY HERETO 2 TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS AND ACCOUNTING MATTERS Section 1.01 Terms Defined Above . . . . . . . . . . . . . . . . . . 2 Section 1.02 Certain Defined Terms . . . . . . . . . . . . . . . . . 2 Section 1.03 Accounting Terms and Determinations . . . . . . . . . . 18 ARTICLE II COMMITMENTS Section 2.01 Loans, Letters of Credit, etc. . . . . . . . . . . . . 19 Section 2.02 Borrowings, Continuations and Conversions; Letters of Credit . . . . . . . . . . . . . . . . . . . 20 Section 2.03 Limitation on Aggregate Commitments . . . . . . . . . . 21 Section 2.04 Fees . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 2.05 Several Obligations . . . . . . . . . . . . . . . . . . 23 Section 2.06 Notes . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 2.07 Prepayments . . . . . . . . . . . . . . . . . . . . . . 23 Section 2.08 Minimum Amount Outstanding. . . . . . . . . . . . . . . 24 Section 2.09 Borrowing Base . . . . . . . . . . . . . . . . . . . . 24 Section 2.10 Lending Offices . . . . . . . . . . . . . . . . . . . . 26 Section 2.11 Assumption of Risks . . . . . . . . . . . . . . . . . . 26 Section 2.12 Obligation to Reimburse and to Prepay . . . . . . . . . 27 ARTICLE III PAYMENTS OF PRINCIPAL AND INTEREST Section 3.01 Repayment of Loans . . . . . . . . . . . . . . . . . . 28 Section 3.02 Interest . . . . . . . . . . . . . . . . . . . . . . . 28 ARTICLE IV PAYMENTS; PRO RATA TREATMENT; COMPUTATIONS; ETC. Section 4.01 Payments . . . . . . . . . . . . . . . . . . . . . . . 29 Section 4.02 Pro Rata Treatment . . . . . . . . . . . . . . . . . . 30 Section 4.03 Computations . . . . . . . . . . . . . . . . . . . . . 30
3 Section 4.04 Non-receipt of Funds by the Agent . . . . . . . . . . . 30 Section 4.05 Set-off, Sharing of Payments, Etc. . . . . . . . . . . 31 Section 4.06 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 4.07 Disposition of Proceeds . . . . . . . . . . . . . . . . 35 ARTICLE V ADDITIONAL COSTS, CAPITAL ADEQUACY Section 5.01 Additional Costs . . . . . . . . . . . . . . . . . . . 35 Section 5.02 Limitation on Eurodollar Loans . . . . . . . . . . . . 37 Section 5.03 Illegality . . . . . . . . . . . . . . . . . . . . . . 37 Section 5.04 Base Rate Loans Pursuant to Sections 5.01, 5.02 and 5.03 . . . . . . . . . . . . . . . . . . . . . 37 Section 5.05 Compensation . . . . . . . . . . . . . . . . . . . . . 38 ARTICLE VI CONDITIONS PRECEDENT Section 6.01 Initial Funding . . . . . . . . . . . . . . . . . . . . 38 Section 6.02 Initial and Subsequent Loans and Letters of Credit . . 40 Section 6.03 Conditions Relating to Letters of Credit . . . . . . . 40 Section 6.04 Conditions Relating to Loans to Finance the Texaco Acquisition or Other Acquisition. . . . . . . . . . . . 41 ARTICLE VII REPRESENTATIONS AND WARRANTIES Section 7.01 Corporate Existence . . . . . . . . . . . . . . . . . . 41 Section 7.02 Financial Condition . . . . . . . . . . . . . . . . . . 42 Section 7.03 Litigation . . . . . . . . . . . . . . . . . . . . . . 42 Section 7.04 No Breach . . . . . . . . . . . . . . . . . . . . . . . 42 Section 7.05 Authority . . . . . . . . . . . . . . . . . . . . . . . 42 Section 7.06 Approvals . . . . . . . . . . . . . . . . . . . . . . . 43 Section 7.07 Use of Loans . . . . . . . . . . . . . . . . . . . . . 43 Section 7.08 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . 43 Section 7.09 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . 44 Section 7.10 Titles, etc. . . . . . . . . . . . . . . . . . . . . . 44 Section 7.11 No Material Misstatements . . . . . . . . . . . . . . . 45 Section 7.12 Investment Company Act . . . . . . . . . . . . . . . . 45 Section 7.13 Public Utility Holding Company Act . . . . . . . . . . 46 Section 7.14 Subsidiaries and Partnerships . . . . . . . . . . . . . 46
-ii- 4 Section 7.15 Location of Business and Offices . . . . . . . . . . . 46 Section 7.16 Environmental Matters . . . . . . . . . . . . . . . . . 46 Section 7.17 Gas Imbalances . . . . . . . . . . . . . . . . . . . . 47 Section 7.18 Defaults . . . . . . . . . . . . . . . . . . . . . . . 47 Section 7.19 Compliance with the Law . . . . . . . . . . . . . . . . 47 Section 7.20 Insurance . . . . . . . . . . . . . . . . . . . . . . . 48 Section 7.21 Restriction on Liens . . . . . . . . . . . . . . . . . 49 Section 7.22 Bonray . . . . . . . . . . . . . . . . . . . . . . . . 49 Section 7.23 Value of WRT Notes . . . . . . . . . . . . . . . . . . 49 ARTICLE VIII AFFIRMATIVE COVENANTS Section 8.01 Reports . . . . . . . . . . . . . . . . . . . . . . . . 49 Section 8.02 Litigation . . . . . . . . . . . . . . . . . . . . . . 51 Section 8.03 Maintenance, Etc. . . . . . . . . . . . . . . . . . . . 51 Section 8.04 Environmental Matters . . . . . . . . . . . . . . . . . 53 Section 8.05 Engineering Reports . . . . . . . . . . . . . . . . . . 54 Section 8.06 Title Information . . . . . . . . . . . . . . . . . . . 55 Section 8.07 Additional Collateral . . . . . . . . . . . . . . . . . 55 Section 8.08 Further Assurances . . . . . . . . . . . . . . . . . . 56 Section 8.09 Performance of Obligations . . . . . . . . . . . . . . 56 Section 8.10 [DELETED] . . . . . . . . . . . . . . . . . . . . . . . 56 Section 8.11 ERISA Information and Compliance . . . . . . . . . . . 56 Section 8.12 Application of Certain Sale Proceeds. . . . . . . . . . 57 ARTICLE IX NEGATIVE COVENANTS Section 9.01 Debt . . . . . . . . . . . . . . . . . . . . . . . . . 57 Section 9.02 Liens . . . . . . . . . . . . . . . . . . . . . . . . . 58 Section 9.03 Investments, Loans and Advances . . . . . . . . . . . . 59 Section 9.04 Dividends, Distributions and Redemptions . . . . . . . 60 Section 9.05 Sales and Leasebacks . . . . . . . . . . . . . . . . . 60 Section 9.06 Nature of Business . . . . . . . . . . . . . . . . . . 60 Section 9.07 Limitation on Leases . . . . . . . . . . . . . . . . . 60 Section 9.08 Mergers, Etc. . . . . . . . . . . . . . . . . . . . . . 60 Section 9.09 Proceeds of Notes . . . . . . . . . . . . . . . . . . . 60 Section 9.10 ERISA Compliance . . . . . . . . . . . . . . . . . . . 61 Section 9.11 Sale or Discount of Receivables . . . . . . . . . . . . 62 Section 9.12 Current Ratio . . . . . . . . . . . . . . . . . . . . . 62
-iii- 5 Section 9.13 Tangible Net Worth . . . . . . . . . . . . . . . . . . 62 Section 9.14 Debt to Cash Flow Coverage . . . . . . . . . . . . . . 62 Section 9.15 Interest Coverage Ratio. . . . . . . . . . . . . . . . 62 Section 9.16 Sale of Oil and Gas Properties or Other Assets . . . . 63 Section 9.17 Environmental Matters . . . . . . . . . . . . . . . . . 63 Section 9.18 Transactions with Affiliates . . . . . . . . . . . . . 63 Section 9.19 Subsidiaries and Partnerships . . . . . . . . . . . . . 63 Section 9.20 Negative Pledge Agreements . . . . . . . . . . . . . . 63 Section 9.21 Derivative and Similar Agreements. . . . . . . . . . . 63 Section 9.22 Issuance of Securities. . . . . . . . . . . . . . . . . 64 Section 9.23 Capital Expenditures. . . . . . . . . . . . . . . . . . 64 ARTICLE X EVENTS OF DEFAULT; REMEDIES Section 10.01 Events of Default . . . . . . . . . . . . . . . . . . 64 Section 10.02 Remedies . . . . . . . . . . . . . . . . . . . . . . . 66 ARTICLE XI THE AGENT Section 11.01 Appointment, Powers and Immunities . . . . . . . . . . 67 Section 11.02 Reliance by Agent . . . . . . . . . . . . . . . . . . 68 Section 11.03 Defaults . . . . . . . . . . . . . . . . . . . . . . . 68 Section 11.04 Rights as a Lender . . . . . . . . . . . . . . . . . . 68 Section 11.05 Indemnification . . . . . . . . . . . . . . . . . . . 68 Section 11.06 Non-Reliance on Agent and other Lenders . . . . . . . 69 Section 11.07 Action by Agent . . . . . . . . . . . . . . . . . . . 69 Section 11.08 Resignation or Removal of Agent . . . . . . . . . . . 69 ARTICLE XII MISCELLANEOUS Section 12.01 Waiver . . . . . . . . . . . . . . . . . . . . . . . . 70 Section 12.02 Notices . . . . . . . . . . . . . . . . . . . . . . . 70 Section 12.03 Payment of Expenses, Indemnities, etc . . . . . . . . 70 Section 12.04 Amendments, Etc. . . . . . . . . . . . . . . . . . . . 73 Section 12.05 Successors and Assigns . . . . . . . . . . . . . . . . 73 Section 12.06 Assignments and Participations . . . . . . . . . . . . 73 Section 12.07 Invalidity . . . . . . . . . . . . . . . . . . . . . . 75
-iv- 6 Section 12.08 Counterparts . . . . . . . . . . . . . . . . . . . . . 75 Section 12.09 References . . . . . . . . . . . . . . . . . . . . . . 75 Section 12.10 Survival . . . . . . . . . . . . . . . . . . . . . . . 75 Section 12.11 Captions . . . . . . . . . . . . . . . . . . . . . . . 75 Section 12.12 No Oral Agreements . . . . . . . . . . . . . . . . . . 75 Section 12.13 GOVERNING LAW; SUBMISSION TO JURISDICTION . . . . . . 76 Section 12.14 Interest . . . . . . . . . . . . . . . . . . . . . . . 76 Section 12.15 Confidentiality . . . . . . . . . . . . . . . . . . . 77 Section 12.16 Effectiveness . . . . . . . . . . . . . . . . . . . . 78 Section 12.17 EXCULPATION PROVISIONS . . . . . . . . . . . . . . . . 78
-v- 7 Annex I - Maximum Credit Amounts and Percentage Shares Exhibit A - Form of Note Exhibit B - Form of Borrowing, Continuation and Conversion Request Exhibit C - Form of Compliance Certificate Exhibit D - Form of Legal Opinion of Fellers, Snider, Blankenship, Bailey & Tippens, P.C. Exhibit E - List of Security Instruments Exhibit F - Form of Assignment Agreement Schedule 6.01(i) - List of Hydrocarbon Gas Purchasers Schedule 7.03 - Litigation Schedule 7.09 - Taxes Schedule 7.10 - Titles, etc. Schedule 7.14 - Subsidiaries and Partnerships Schedule 7.16 - Environmental Matters Schedule 7.17 - Gas Imbalances Schedule 7.20 - Insurance Schedule 9.02 - Liens Schedule 9.03 - Investments, Loans and Advances -vi- 8 THIS CREDIT AGREEMENT dated as of March 5, 1997 is among: DLB OIL & GAS, INC., an Oklahoma corporation (the "Borrower"); each of the lenders that is a signatory hereto or which becomes a signatory hereto as provided in Section 12.06 (individually, together with its successors and assigns, a "Lender" and, collectively, the "Lenders"); and THE CHASE MANHATTAN BANK, a banking association organized under the laws of the state of New York (in its individual capacity, "Chase"), as agent for the Lenders (in such capacity, together with its successors in such capacity, the "Agent"). R E C I T A L S A. Pursuant to that certain Credit Agreement dated as of December 28, 1995 between the Borrower and First Union National Bank of North Carolina ("First Union") as amended by First Amendment to Credit Agreement dated as of June 30, 1996 AND BY SECOND AMENDMENT TO CREDIT AGREEMENT DATED AS OF FEBRUARY 10, 1997 (such Credit Agreement as amended is called the "Prior Credit Agreement"), First Union, Bank of Oklahoma, N.A. ("Bank of Oklahoma"), Bank One, Texas, N.A. ("Bank One"), Boatmen's First National Bank of Oklahoma ("Boatmen's Bank") (First Union, Bank of Oklahoma, Bank One and Boatmen's Bank are hereinafter called the "Assignors") provided to the Borrower loans and extensions of credit, which loans and extensions of credit are evidenced by certain promissory notes from the Borrower in the aggregate principal amount of $60,000,000 (the "Prior Notes"). B. By Assignment of Notes and Liens of even date herewith the Lenders have acquired the Prior Notes and all security for the payment of the Prior Notes and the performance of the Borrower's obligations under the Prior Credit Agreement. C. Borrower intends to purchase Texaco Exploration and Production, Inc.'s ("Texaco") fifty percent interest in the West Cote Blanche Bay property and the claims of Texaco against WRT Energy Corporation for unpaid operating expenses (the "Texaco Property") for a purchase price of approximately $20,000,000. D. Lenders have agreed to provide senior secured debt in the amount of up to $85,000,000 consisting of a rearrangement of the Prior Notes and advances to the Borrower for the purchase of the Texaco Property or Other Acquisition (as herein defined) and the Borrower, the Agent and the Lenders now desire to set forth their agreements with respect to such credit facility and to amend and restate in its entirety the Prior Credit Agreement and Prior Notes. E. In consideration of the mutual covenants and agreements herein contained and of the loans, extensions of credit and commitments hereinafter referred to, the parties hereto agree as follows: 9 ARTICLE I DEFINITIONS AND ACCOUNTING MATTERS Section 1.01 Terms Defined Above. As used in this Agreement, the terms "Agent," "Assignors," "Borrower," "Chase," "First Union," "Lender," "Lenders," "Prior Credit Agreement," "Prior Notes," "Purchaser," "Texaco," and "Texaco Property" shall have the meanings indicated above. Section 1.02 Certain Defined Terms. As used herein, the following terms shall have the following meanings (all terms defined in this Article I or in other provisions of this Agreement in the singular to have the same meanings when used in the plural and vice versa): "Additional Costs" shall have the meaning assigned such term in Section 5.01(a). "Affected Loans" shall have the meaning assigned such term in Section 5.04. "Affiliate" of any Person shall mean (i) any Person directly or indirectly controlled by, controlling or under common control with such first Person, (ii) any director or officer of such first Person or of any Person referred to in clause (i) above and (iii) if any Person in clause (i) above is an individual, any member of the immediate family (including parents, spouse and children) of such individual and any trust whose principal beneficiary is such individual or one or more members of such immediate family and any Person who is controlled by any such member or trust. As used in this definition, "control" (including, with its correlative meanings, "controlled by" and "under common control with") shall mean any Person which owns directly or indirectly 10% or more of the securities having ordinary voting power for the election of directors or other governing body of a corporation or 10% or more of the partnership or other ownership interests of any other Person (other than as a limited partner of such other Person) will be deemed to control such corporation or other Person. "Agreement" shall mean this Credit Agreement, as the same may from time to time be amended or supplemented. "Aggregate Commitments" at any time shall equal the amount calculated in accordance with Section 2.03 hereof. "Aggregate Maximum Credit Amounts" at any time shall equal the sum of the Maximum Credit Amounts of the Lenders ($85,000,000). "Applicable Lending Office" shall mean, for each Lender and for each 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 offices of such Lender (or of an Affiliate of -2- 10 such Lender) as such Lender may from time to time specify to the Agent and the Borrower as the office by which its Loans of such Type are to be made and maintained. "Applicable Margin" shall mean for Base Rate Loans or Eurodollar Loans the following rate per annum as applicable:
================================================================================ Threshold Utilization Base Rate Loans Eurodollar Loans Percentage - -------------------------------------------------------------------------------- equal to or less than 50% 0% 1% - -------------------------------------------------------------------------------- equal to or less than 75%, .25% 1.25% but greater than 50% - -------------------------------------------------------------------------------- equal to or less than 100% .50% 1.50% but greater than 75% - -------------------------------------------------------------------------------- greater than 100% 1% 2% ================================================================================
"Assignment" shall have the meaning assigned such term in Section 12.06(b). "Base Rate" shall mean, with respect to any Base Rate Loan, for any day, the highest of (i) the Prime Rate in effect on such day, and (ii) one-half of one percent (1/2%) plus the Federal Funds Effective Rate in effect for such day (rounded upwards, if necessary, to the nearest 1/16th of 1%), but in no event to exceed the Highest Lawful Rate. For purposes of this Agreement, any change in the Base Rate due to a change in the Federal Funds Effective Rate, or the Prime Rate shall be effective as of the opening of business on the effective date of such change in the Federal Funds Effective Rate, or the Prime Rate, as the case may be. If for any reason the Agent shall have determined (which determination shall be conclusive and binding, absent manifest error) that it is unable to ascertain the Federal Funds Effective Rate for any reason, including but not limited to the inability of the Agent to obtain sufficient bids or publications in accordance with the terms hereof, the Base Rate shall be the Prime Rate until the circumstances giving rise to such inability no longer exist. "Base Rate Loans" shall mean Loans that bear interest at rates based upon the Base Rate. "Bonray" shall mean Bonray Drilling Corporation, a Delaware corporation, and a wholly owned Subsidiary of the Borrower. -3- 11 "Borrowing Base" shall mean at any time an amount equal to the amount determined in accordance with Section 2.09. "Business Day" shall mean any day other than a day on which commercial banks are authorized or required to close in New York City and, where such term is used in the definition of "Quarterly Date" or if such day relates to a borrowing or continuation of, a payment or prepayment of principal of or interest on, or a conversion of or into, or the Interest Period for, a Eurodollar Loan or a notice by the Borrower with respect to any such borrowing or continuation, payment, prepayment, conversion or Interest Period, any day which is also a day on which dealings in Dollar deposits are carried out in the London interbank market. "Capital Expenditures" shall mean, for any period, expenditures, made by the Borrower or any of its Subsidiaries in connection with the acquisition and exploitation of, or the exploration for or development or production of Hydrocarbons or to acquire or construct fixed assets, plant and equipment (including renewals, improvements and replacements, and dry-hole and exploration expense but excluding repairs and workovers) during such period computed in accordance with GAAP. "Cash Flow" shall mean, for any period, the sum, for the Borrower and its Subsidiaries (determined on a consolidated basis without duplication in accordance with GAAP) of cash flow from operating activities. "Change of Control" shall mean the occurrence of an event or circumstance pursuant to which either (i) Charles E. Davidson, Mike Liddell and Mark Liddell in the aggregate between them cease to own and hold legal and beneficial title to in excess of 50% of the voting capital stock of the Borrower or (ii) Charles E. Davidson individually ceases to own and hold legal and beneficial title to in excess of 35% of the voting capital stock of the Borrower. "Closing Date" shall mean MARCH 5, 1997. "Code" shall mean the Internal Revenue Code of 1986, as amended. "Commitment" shall mean, for any Lender, its obligation to make Loans up to the lesser of such Lender's Maximum Credit Amount or the Lender's Percentage Share of the amount equal to the then effective Borrowing Base and to participate in the Letters of Credit as provided in Section 2.01(b). "Consolidated Subsidiaries" shall mean each Subsidiary of the Borrower (whether now existing or hereafter created or acquired) the financial statements of which shall be (or should have been) consolidated with the financial statements of the Borrower in accordance with GAAP. -4- 12 "Debt" shall mean, for any Person the sum of the following (without duplication): (i) all obligations of such Person for borrowed money or evidenced by bonds, debentures, notes or other similar instruments (including principal, interest, fees and charges); (ii) all obligations of such Person (whether contingent or otherwise) in respect of bankers' acceptances, letters of credit, surety or other bonds and similar instruments; (iii) all obligations of such Person to pay the deferred purchase price of Property or services (other than for borrowed money), arising in the ordinary course of business of such Person; (iv) all obligations under leases which shall have been, or should have been, in accordance with GAAP, recorded as capital leases in respect of which such Person is liable (whether contingent or otherwise); (v) all Debt (as described in the other clauses of this definition) and other obligations of others secured by a Lien on any asset of such Person, whether or not such Debt is assumed by such Person; (vi) all Debt (as described in the other clauses of this definition) and other obligations of others guaranteed by such Person or in which such Person otherwise assures a creditor against loss of the debtor or obligations of others; (vii) all obligations or undertakings of such Person to maintain or cause to be maintained the financial position or covenants of others; (viii) the undischarged balance of any production payment created by such Person or for the creation of which such Person directly or indirectly received payment; (ix) the net mark to market value of all obligations of such Person under Hedging Agreements; and (x) obligations to deliver goods or services including Hydrocarbons in consideration of advance payments. "Debt Service" shall mean, for any period, the sum, for the Borrower and its Subsidiaries (determined on a consolidated basis without duplication in accordance with GAAP), of the following: (a) all required payments of principal of Indebtedness made during such period plus (b) all Interest Expense for such period. For the purposes of this definition, payments of principal made pursuant to Section 2.07(a), (b), (c) or (d) hereof shall be deemed not to be regularly scheduled payments of principal. "Default" shall mean an Event of Default or an event which with notice or lapse of time or both would become an Event of Default. "Disposition" shall mean the sale by the Borrower or any of its Subsidiaries of any of their respective assets included in the Borrowing Base at any time that the Borrowing Base exceeds the Threshold Amount. "Dollars" and "$" shall mean lawful money of the United States of America. "Effective Date" shall have the meaning assigned such term in Section 12.16. "Engineering Reports" shall have the meaning assigned such term in Section 2.08(b). "Environmental Laws" shall mean any and all Governmental Requirements pertaining to health or the environment in effect in any and all jurisdictions in which the -5- 13 Borrower or any Subsidiary is conducting or at any time has conducted business, or where any Property of the Borrower or any Subsidiary is located, including without limitation, the Oil Pollution Act of 1990 ("OPA"), the Clean Air Act, as amended, the Comprehensive Environmental, Response, Compensation, and Liability Act of 1980 ("CERCLA"), as amended, the Federal Water Pollution Control Act, as amended, the Occupational Safety and Health Act of 1970, as amended, the Resource Conservation and Recovery Act of 1976 ("RCRA"), as amended, the Safe Drinking Water Act, as amended, the Toxic Substances Control Act, as amended, the Superfund Amendments and Reauthorization Act of 1986, as amended, the Hazardous Materials Transportation Act, as amended, and other environmental conservation or protection laws. The term "oil" shall have the meaning specified in OPA, the terms "hazardous substance" and "release" (or "threatened release") have the meanings specified in CERCLA, and the terms "solid waste" and "disposal" (or "disposed") have the meanings specified in RCRA; provided, however, that (i) in the event either OPA, CERCLA or RCRA is amended so as to broaden the meaning of any term defined thereby, such broader meaning shall apply subsequent to the effective date of such amendment, and (ii) to the extent the laws of the state in which any Property of the Borrower or any Subsidiary is located establish a meaning for "oil," "hazardous substance," "release," "solid waste" or "disposal" which is broader than that specified in either OPA, CERCLA or RCRA, such broader meaning shall apply. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and any successor statute. "ERISA Affiliate" shall mean each trade or business (whether or not incorporated) which together with the Borrower or any Subsidiary would be deemed to be a "single employer" within the meaning of section 4001(b)(1) of ERISA or subsections (b), (c), (m) or (o) of section 414 of the Code. "ERISA Event" shall mean (i) a "Reportable Event" described in Section 4043 of ERISA and the regulations issued thereunder, (ii) the withdrawal of the Borrower, any Subsidiary or any ERISA Affiliate from a Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA, (iii) the filing of a notice of intent to terminate a Plan or the treatment of a Plan amendment as a termination under Section 4041 of ERISA, (iv) the institution of proceedings to terminate a Plan by the PBGC or (v) any other event or condition which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan. "Eurodollar Loans" shall mean Loans the interest rates on which are determined on the basis of rates referred to in the definition of "Fixed Eurodollar Rate". "Event of Default" shall have the meaning assigned such term in Section 10.01. "Excepted Liens" shall mean: (i) Liens for taxes, assessments or other governmental charges or levies not yet due or which are being contested in good faith by -6- 14 appropriate action and for which adequate reserves have been maintained; (ii) Liens in connection with workmen's compensation, unemployment insurance or other social security, old age pension or public liability obligations not yet due or which are being contested in good faith by appropriate action and for which adequate reserves have been maintained in accordance with GAAP; (iii) operators', vendors', carriers', warehousemen's, repairmen's, mechanics', workmen's, materialmen's, construction or other like Liens arising by operation of law in the ordinary course of business or incident to the exploration, development, operation and maintenance of Oil and Gas Properties or statutory landlord's liens, each of which is in respect of obligations that have not been outstanding more than 90 days or which are being contested in good faith by appropriate proceedings and for which adequate reserves have been maintained in accordance with GAAP; (iv) any Liens reserved in leases or farmout agreements for rent or royalties and for compliance with the terms of the leases or farmout agreements in the case of leasehold estates, to the extent that any such Lien referred to in this clause does not materially impair the use of the Property covered by such Lien for the purposes for which such Property is held by the Borrower or any Subsidiary or materially impair the value of such Property subject thereto; (v) encumbrances (other than to secure the payment of borrowed money or the deferred purchase price of Property or services), easements, restrictions, servitudes, permits, conditions, covenants, exceptions or reservations in any rights of way or other Property of the Borrower or any Subsidiary for the purpose of roads, pipelines, transmission lines, transportation lines, distribution lines for the removal of gas, oil, coal or other minerals or timber, and other like purposes, or for the joint or common use of real estate, rights of way, facilities and equipment, and defects, irregularities, zoning restrictions and deficiencies in title of any rights of way or other Property which in the aggregate do not materially impair the use of such rights of way or other Property for the purposes of which such rights of way and other Property are held by the Borrower or any Subsidiary or materially impair the value of such Property subject thereto; (vi) deposits of cash or securities to secure the performance of bids, trade contracts, leases, statutory obligations and other obligations of a like nature incurred in the ordinary course of business; (vii) Liens arising under the terms and provisions of any joint operating agreement, pooling or unitization agreement, farm-out agreement, lease or similar agreement in effect as of the Closing Date or entered into in the ordinary course of business after the Closing Date, which grant to or create in favor of any Person any preferential purchase rights, calls on production, non-consent penalties or other similar rights with respect to any Property of the Borrower or any Subsidiary; (viii) Existing Burdens; and (ix) Liens permitted by the Security Instruments. "Excess Cash Flow" shall mean, for any fiscal quarter (beginning with the quarter ended June 30, 1997), the excess of: (a) the sum of (i) Cash Flow for such period; (ii) proceeds from Dispositions permitted pursuant to Section 9.16 hereof received during such period to the extent not previously applied pursuant to the terms of this Agreement to repay the Loans outstanding hereunder; (iii) the proceeds received by the Borrower from the issuance of any Debt permitted by Section 9.01(h) or the sale of equity securities to the extent not previously applied pursuant to the terms of this Agreement; and (iv) Interest Expense less -7- 15 (b) the sum of (i) the greater of (x) one quarter of the scheduled Capital Expenditures (excluding capitalized interest and general and administrative expenses) for the current fiscal year as set forth in the most recently delivered Reserve Report and (y) the amount of cash actually expended by the Borrower and its Subsidiaries in such period with respect to such Capital Expenditures; provided, however that the total amount of Capital Expenditures deducted pursuant to this clause (i) for any fiscal year of the Borrower and its Subsidiaries shall not exceed the total amount of Capital Expenditures as set forth on such Reserve Report; (ii) the greater of (x) $1,250,000 per each fiscal quarter of the Borrower and its Subsidiaries and (y) the actual amount expended by the Borrower and its Subsidiaries in cash during that quarter on Capital Expenditures (excluding capitalized interest and general and administrative expenses) in excess of those Capital Expenditures set forth in the most recently delivered Reserve Report, provided however that the aggregate amount of Capital Expenditures deducted pursuant to this clause (ii) shall not exceed $5,000,000 in any consecutive four fiscal quarters of the Borrower and its Subsidiaries; and (iii) the aggregate amount of Debt Service for such period. "Existing Burdens" means royalty interests, overriding royalty interests, net profits interests, production payments or other payments out of or with respect to the production, transportation or processing of Hydrocarbons, and which are (a) in existence on the Closing Date, (b) reserved by the grantor in an assignment of a lease to the Borrower or any Subsidiary after the date hereof or reserved by a lessor in any lease entered into with the Borrower or any Subsidiary after the date hereof, or (c) assigned or transferred by the Borrower or any Subsidiary in the ordinary course of business after the Closing Date; provided that the net interests reflected in the most recently delivered Reserve Report referred to in Section 7.10(a) or Section 8.05(a) are net of such Existing Burdens. "Federal Funds Effective Rate" shall mean, for any day, the weighted average (rounded upwards, if necessary, to the next 1/100 of 1%) of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average (rounded upwards, if necessary, to the next 1/100 of 1%) of the quotations for such day for such transactions received by the Agent from three Federal funds brokers of recognized standing selected by it. "Fee Letter" shall mean that certain letter agreement from Chase to the Borrower dated February 19, 1997 concerning certain fees in connection with this Agreement and any agreements or instruments executed in connection therewith, as the same may be amended or replaced from time to time. "Financial Statements" shall mean the financial statement or statements of the Borrower and its Consolidated Subsidiaries described or referred to in Section 7.02. -8- 16 "Fixed Eurodollar Rate" shall mean, with respect to any Eurodollar Loan, the rate per annum (rounded upwards, if necessary, to the nearest 1/16 of 1%) quoted by the Agent at approximately 11:00 a.m. London time (or as soon thereafter as practicable) two (2) Business Days prior to the first day of the Interest Period for such Loan for the offering by the Agent to leading banks in the London interbank market of Dollar deposits having a term comparable to such Interest Period and in an amount comparable to the principal amount of the Eurodollar Loan to be made by the Lenders for such Interest Period. "Fixed Rate" shall mean, with respect to any Eurodollar Loan, a rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) determined by the Agent to be equal to the quotient of (i) the Fixed Eurodollar Rate for such Loan for the Interest Period for such Loan divided by (ii) 1 minus the Reserve Requirement for such Loan for such Interest Period. "GAAP" shall mean generally accepted accounting principles in the United States of America in effect from time to time. "Governmental Authority" shall include the country, the state, county, city and political subdivisions in which any Person or such Person's Property is located or which exercises valid jurisdiction over any such Person or such Person's Property, and any court, agency, department, commission, board, bureau or instrumentality of any of them including monetary authorities which exercises valid jurisdiction over any such Person or such Person's Property. Unless otherwise specified, all references to Governmental Authority herein shall mean a Governmental Authority having jurisdiction over, where applicable, the Borrower, its Subsidiaries or any of their Property or the Agent, any Lender or any Applicable Lending Office. "Governmental Requirement" shall mean any law, statute, code, ordinance, order, determination, rule, regulation, judgment, decree, injunction, franchise, permit, certificate, license, authorization or other directive or requirement (whether or not having the force of law), including, without limitation, Environmental Laws, energy regulations and occupational, safety and health standards or controls, of any Governmental Authority. "Guarantors" shall mean Bonray, DLB International, Inc., and GEMCO, L.L.C. "Hedging Agreements" shall mean any commodity, interest rate or currency swap, rate cap, rate floor, rate collar, forward agreement or other exchange or rate protection agreements or any option with respect to any such transaction. "Highest Lawful Rate" shall mean, with respect to each Lender, the maximum nonusurious interest rate, if any, that at any time or from time to time may be contracted for, taken, reserved, charged or received on the Notes or on other Indebtedness under laws applicable to such Lender which are presently in effect or, to the extent allowed by law, under such applicable laws which may hereafter be in effect and which allow a higher maximum nonusurious interest rate than applicable laws now allow. -9- 17 "Hydrocarbon Interests" shall mean all rights, titles, interests and estates now or hereafter acquired in and to oil and gas leases, oil, gas and mineral leases, or other liquid or gaseous hydrocarbon leases, mineral fee interests, overriding royalty and royalty interests, net profit interests and production payment interests, including any reserved or residual interests of whatever nature. "Hydrocarbons" shall mean oil, gas, casinghead gas, drip gasoline, natural gasoline, condensate, distillate, liquid hydrocarbons, gaseous hydrocarbons and all products refined or separated therefrom. "Indebtedness" shall mean any and all amounts owing or to be owing by the Borrower to the Agent and/or Lenders in connection with the Loan Documents, the Letter of Credit Agreement and any Hedging Agreements now or hereafter existing between the Borrower or any Subsidiary and the Agent (or any Affiliate of the Agent) and/or Lenders and all renewals, extensions and/or rearrangements of any of the above. "Indemnified Parties" shall have the meaning assigned such term in Section 12.03(b). "Indemnity Matters" shall mean any and all actions, suits, proceedings (including any investigations, litigation or inquiries), claims, demands and causes of action made or threatened against a Person and, in connection therewith, all losses, liabilities, damages (including, without limitation, consequential damages) or reasonable costs and expenses of any kind or nature whatsoever incurred by such Person whether caused by the sole or concurrent negligence of such Person seeking indemnification. "Interest Expense" shall mean, for any period, the sum, for the Borrower and its Subsidiaries (determined on a consolidated basis without duplication in accordance with GAAP), of the following: (a) all interest in respect of Debt accrued or capitalized during such period (whether or not actually paid during such period). "Initial Funding" shall mean the funding of the initial Loans pursuant to Section 6.01 hereof. The Initial Funding shall include the purchase by the Lenders of the Prior Notes from the Assignors for a purchase price equal to the outstanding principal balance thereon not to exceed $60,000,000. "Initial Reserve Reports" shall mean (i) the reports of Degolyer & McNaughton and of Netherland, Sewell & Associates, Inc. dated as of January 1, 1997, with respect to the Oil and Gas Properties of the Borrower, and (ii) the report of Netherland, Sewell & Associates dated as of January 1, 1997 with respect to the Oil and Gas Properties to be acquired pursuant to the Texaco Acquisition, and copies of which have been delivered to the Agent. -10- 18 "Interest Period" shall mean, with respect to any Eurodollar Loan, the period commencing on the date such Eurodollar Loan is made and ending on the numerically corresponding day in the first, second, third, sixth or, subject to availability, twelfth (12th) calendar month thereafter, as the Borrower may select as provided in Section 2.02 (or such longer period as may be requested by the Borrower and agreed to by the Majority Lenders), except that each Interest Period which commences on the last Business Day of a calendar month (or on 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. Notwithstanding the foregoing: (i) no Interest Period may commence before and end after the Termination Date; (ii) each Interest Period 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); and (iii) no Interest Period shall have a duration of less than one month and, if the Interest Period for any Eurodollar Loans would otherwise be for a shorter period, such Loans shall not be available hereunder. "LC Commitment" at any time shall mean $5,000,000. "LC Exposure" at any time shall mean the difference between (i) the aggregate face amount of all undrawn and uncancelled Letters of Credit and the aggregate of all amounts drawn under all Letters of Credit and not yet reimbursed and (ii) the aggregate amount of all cash securing outstanding Letters of Credit pursuant to Section 2.11(b). "Letter of Credit Agreements" shall mean the written agreements with the Agent, as issuing lender for any Letter of Credit, executed or hereafter executed in connection with the issuance by the Agent of the Letters of Credit, such agreements to be on the Agent's customary form for letters of credit of comparable amount and purpose as from time to time in effect or as otherwise agreed to by the Borrower and the Agent. "Letters of Credit" shall mean the letters of credit issued pursuant to Section 2.01(b) and all reimbursement obligations pertaining to any such letters of credit, and "Letter of Credit" shall mean any one of the Letters of Credit and the reimbursement obligations pertaining thereto. "Lien" shall mean any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on the common law, statute or contract, and whether such obligation or claim is fixed or contingent, and including but not limited to (i) the lien or security interest arising from a mortgage, encumbrance, pledge, security agreement, conditional sale or trust receipt or a lease, consignment or bailment for security purposes or (ii) production payments and the like payable out of Oil and Gas Properties. The term "Lien" shall include reservations, exceptions, encroachments, easements, rights of way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting Property. For the purposes of this Agreement, the Borrower or any -11- 19 Subsidiary shall be deemed to be the owner of any Property which it has acquired or holds subject to a conditional sale agreement, or leases under a financing lease or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person in a transaction intended to create a financing. "Loan Documents" shall mean this Agreement, the Notes and the Security Instruments. "Loans" shall mean the loans as provided for by Section 2.01. "Majority Lenders" shall mean, at any time while no Loans are outstanding, Lenders having at least sixty-six and two-thirds percent (66-2/3%) of the Aggregate Commitments and, at any time while Loans are outstanding, Lenders holding at least sixty-six and two-thirds percent (66-2/3%) of the outstanding aggregate principal amount of the Loans (without regard to any sale by a Lender of a participation in any Loan under Section 12.06(c)). "Material Adverse Effect" shall mean any material and adverse effect on (i) the assets, liabilities, financial condition, business, operations or affairs of the Borrower and its Subsidiaries taken as a whole different from those reflected in the Financial Statements or from the facts represented or warranted in this Agreement or any Security Instrument, or (ii) the ability of the Borrower and its Subsidiaries taken as a whole to carry out their business as at the Closing Date or as proposed as of the Closing Date to be conducted or meet their obligations under the Loan Documents on a timely basis. "Maximum Credit Amount" shall mean, as to each Lender, the amount set forth opposite such Lender's name on Annex I under the caption "Maximum Credit Amount", as modified from time to time to reflect any assignments permitted by Section 12.06(b). "Mortgaged Property" shall mean the Property owned by the Borrower and which is subject to the Liens existing and to exist under the terms of the Security Instruments. "Multiemployer Plan" shall mean a Plan defined as such in Section 3(37) or 4001(a)(3) of ERISA. "Net Income" shall mean with respect to the Borrower, for any period, the aggregate of the net income (or loss) of the Borrower for such period, determined on a basis in accordance with GAAP; provided that there shall be excluded from such net income (to the extent otherwise included therein) the following: (a) the net income of any Person in which the Borrower has an interest (which interest does not cause the net income of such other Person to be consolidated with the net income of the Borrower in accordance with GAAP), except to the extent of the amount of dividends or distributions actually paid in such period by such other Person to the Borrower; (b) the net income (or loss) of any Person acquired in a pooling-of-interests transaction for any period prior to the date of such transaction; (c) any -12- 20 extraordinary gains or losses, including gains or losses attributable to Property sales not in the ordinary course of business; and (d) the cumulative effect of a change in accounting principle and any gains or losses attributable to writeups or writedowns of assets. "Notes" shall mean the Notes provided for by Section 2.06, together with any and all renewals, extensions for any period, increases, rearrangements, substitutions or modifications thereof. "Oil and Gas Properties" shall mean Hydrocarbon Interests; the Properties now or hereafter pooled or unitized with Hydrocarbon Interests; all presently existing or future unitization, pooling agreements and declarations of pooled units and the units created thereby (including without limitation all units created under orders, regulations and rules of any Governmental Authority) which may affect all or any portion of the Hydrocarbon Interests; all operating agreements, contracts and other agreements which relate to any of the Hydrocarbon Interests or the production, sale, purchase, exchange or processing of Hydrocarbons from or attributable to such Hydrocarbon Interests; all Hydrocarbons in and under and which may be produced and saved or attributable to the Hydrocarbon Interests, including all oil in tanks, the lands covered thereby and all rents, issues, profits, proceeds, products, revenues and other incomes from or attributable to the Hydrocarbon Interests; all tenements, hereditaments, appurtenances and Properties in any manner appertaining, belonging, affixed or incidental to the Hydrocarbon Interests; and all Properties, rights, titles, interests and estates described or referred to above, including any and all Property, real or personal, now owned or hereinafter acquired and situated upon, used, held for use or useful in connection with the operating, working or development of any of such Hydrocarbon Interests or Property (excluding drilling rigs, automotive equipment or other personal property which may be on such premises for the purpose of drilling a well or for other similar temporary uses) and including any and all oil wells, gas wells, injection wells or other wells, buildings, structures, fuel separators, liquid extraction plants, plant compressors, pumps, pumping units, field gathering systems, tanks and tank batteries, fixtures, valves, fittings, machinery and parts, engines, boilers, meters, apparatus, equipment, appliances, tools, implements, cables, wires, towers, casing, tubing and rods, surface leases, rights-of-way, easements and servitudes together with all additions, substitutions, replacements, accessions and attachments to any and all of the foregoing. "Other Acquisition" shall mean the acquisition by the Borrower of assets approved by the Majority Lenders on terms satisfactory to the Majority Lenders in lieu of the Texaco Acquisition. "Other Taxes" shall have the meaning assigned such term in Section 4.06(b). "PBGC" shall mean the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions. -13- 21 "Percentage Share" shall mean the percentage of the Aggregate Commitments to be provided by a Lender under this Agreement as indicated on Annex I hereto, as modified from time to time to reflect any assignments permitted by Section 12.06(b). "Person" shall mean any individual, corporation, company, voluntary association, partnership, joint venture, trust, unincorporated organization or government or any agency, instrumentality or political subdivision thereof, or any other form of entity. "Plan" shall mean any employee pension benefit plan, as defined in Section 3(2) of ERISA, which (i) is currently or hereafter sponsored, maintained or contributed to by the Borrower, any Subsidiary or an ERISA Affiliate or (ii) was at any time during the preceding six calendar years, sponsored, maintained or contributed to, by the Borrower, any Subsidiary or an ERISA Affiliate. "Post-Default Rate" shall mean, in respect of any principal of any Loan or any other amount payable by the Borrower under this Agreement or any Note which is not paid when due (whether at stated maturity, by acceleration or otherwise), a rate per annum during the period commencing on the due date until such amount is paid in full or the default is cured or waived equal to 2% per annum above the Base Rate as in effect from time to time plus the Applicable Margin (if any), but in no event to exceed the Highest Lawful Rate; provided that, if such amount in default is principal of a Eurodollar Loan, the "Post-Default Rate" for such principal shall be, for the period commencing on the due date and ending on the last day of the Interest Period therefor, 2% per annum above the interest rate for such Loan as provided in Section 3.02(b), but in no event to exceed the Highest Lawful Rate. "Present Value of Reserves" shall mean, as of any date, estimated cash flow in respect of Proved Developed Oil and Gas Reserves and Proved Oil and Gas Reserves attributable to Borrower's Oil and Gas Properties (calculated in accordance with the Agent's customary risk factors and product pricing models for Oil and Gas Properties of similar businesses and in similar locations in effect at the time such estimate is made) and discounted to present value at a discount rate for Proved Developed Oil and Gas Reserves and Proved Oil and Gas Reserves, in each case, acceptable to the Required Lenders. "Prime Rate" shall mean the rate of interest from time to time announced publicly by the Agent at the Principal Office as its prime commercial lending rate. Such rate is set by the Agent as a general reference rate of interest, taking into account such factors as it may deem appropriate, it being understood that many of the Agent's commercial or other loans are priced in relation to such rate, that it is not necessarily the lowest or best rate actually charged to any customer and that the Agent may make various commercial or other loans at rates of interest having no relationship to such rate. "Principal Office" shall mean the principal office of the Agent, presently located at 270 Park Avenue, New York, New York 10017. -14- 22 "Property" shall mean any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "Proved Developed Oil and Gas Reserves" has the meaning assigned to that term in Regulation S-X promulgated by the SEC, as such Rule is in effect on the date hereof. "Proved Oil and Gas Reserves" has the meaning assigned to that term in Regulation S-X promulgated by the SEC, as such Rule is in effect on the date hereof. "Quarterly Dates" shall mean the first day of each January, April, July, and October, in each year, the first of which shall be April 1, 1997; provided, however, that if any such day is not a Business Day, such Quarterly Date shall be the next succeeding Business Day. "Redetermination Date" shall mean the occurrence of any of the following: (a) the giving by the Agent or the Required Lenders of a notice to the Borrower indicating that the Borrowing Base and Threshold Amount will be redetermined pursuant to Section 2.09(c) hereof; (b) the giving by the Borrower of a notice to the Agent and the Lenders requesting that the Borrowing Base and Threshold Amount be determined pursuant to Section 2.09(c) hereof, provided that not more than two such notices may be given by the Borrower during any fiscal year of the Borrower; (c) any representation or warranty made or deemed made by the Borrower or any other Person obligated on the Indebtedness in or pursuant to this Agreement with respect to the enforceability of any Security Instrument or the creation, perfection or priority of the Lien of such Security Instrument on any Property with a value of more than $100,000, shall prove to have been false or misleading as of the time made or any subsequent date (whether or not the Borrower or any other Person obligated on the Indebtedness shall have actual knowledge that such representation or warranty is false or misleading); and (d) The Borrower shall default in its obligation to deliver or cause to be delivered any Reserve Report and such default shall continue unremedied for a period of 30 or more days. (e) Upon the issuance of Subordinated Debt as permitted pursuant to Section 9.01. "Regulation D" shall mean Regulation D of the Board of Governors of the Federal Reserve System (or any successor), as the same may be amended or supplemented from time to time. "Regulatory Change" shall mean, with respect to any Lender, any change after the Closing Date in any Governmental Requirement (including Regulation D) or the adoption or -15- 23 making after such date of any interpretations, directives or requests applying to a class of lenders (including such Lender or its Applicable Lending Office) of or under any Governmental Requirement (whether or not having the force of law) by any Governmental Authority charged with the interpretation or administration thereof. "Required Lenders" shall mean, at any time while no Loans are outstanding, Lenders having at least seventy-five percent (75%) of the Aggregate Commitments and, at any time while Loans are outstanding, Lenders holding at least seventy-five percent (75%) of the outstanding aggregate principal amount of the Loans (without regard to any sale by a Lender of a participation in any Loan under Section 12.06(c)); provided, however, prior to the earlier to occur of (i) the first anniversary of the Closing Date and (ii) the date that Chase's Percentage Share is reduced to less than 75%, the "Required Lenders" shall mean at any time while no Loans are outstanding, Lenders having at least one hundred percent (100%) of the Aggregate Commitments and, at any time while Loans are outstanding, Lenders holding at least one hundred percent (100%) of the outstanding aggregate principal amount of the Loans (without regard to any sale by a Lender of a participation in any Loan under Section 12.06(c). "Required Payment" shall have the meaning assigned such term in Section 4.04. "Reserve Report" shall mean a report, in form and substance satisfactory to the Agent, setting forth, as of each January 1 and July 1 (or such other date in the event of an unscheduled redetermination): (i) the oil and gas reserves attributable to the Borrower's Oil and Gas Properties together with a projection of the rate of production and future net income, taxes, operating expenses and capital expenditures with respect thereto as of such date, based upon the pricing and other assumptions as the Agent may determine, and (ii) such other information as the Agent may reasonably request. The term "Reserve Report" shall also include the information to be provided by the Borrower by August 14 of each year pursuant to Section 8.05(a). "Reserve Requirement" shall mean, for any Interest Period for any Eurodollar Loan, the average maximum rate at which reserves (including any marginal, supplemental or emergency reserves) are required to be maintained during such Interest Period under Regulation D by member banks of the Federal Reserve System in New York City with deposits exceeding one billion Dollars against "Eurocurrency liabilities" (as such term is used in Regulation D). Without limiting the effect of the foregoing, the Reserve Requirement shall reflect any other reserves required to be maintained by such member banks by reason of any Regulatory Change against (i) any category of liabilities which includes deposits by reference to which the Fixed Eurodollar Rate for Eurodollar Loans is to be determined as provided in the definition of "Fixed Eurodollar Rate" or (ii) any category of extensions of credit or other assets which include a Eurodollar Loan. -16- 24 "Responsible Officer" shall mean, as to any Person, the Chief Executive Officer, the President or any Vice President of such Person and, with respect to financial matters, the term "Responsible Officer" shall include the Chief Financial Officer of such Person. Unless otherwise specified, all references to a Responsible Officer herein shall mean a Responsible Officer of the Borrower. "Scheduled Redetermination" shall have the meaning assigned such term in Section 2.09(b). "SEC" shall mean the Securities and Exchange Commission or any successor Governmental Authority. "Security Instruments" shall mean the Letters of Credit, the Letter of Credit Agreements, the Fee Letter, the agreements or instruments described or referred to in Exhibit E, and any and all other agreements or instruments now or hereafter executed and delivered by the Borrower or any other Person (other than participation or similar agreements between any Lender and any other lender or creditor with respect to any Indebtedness pursuant to this Agreement) in connection with, or as security for the payment or performance of the Notes, this Agreement, or reimbursement obligations under the Letters of Credit, as such agreements may be amended, supplemented or restated from time to time. "Subsidiary" shall mean any corporation of which at least a majority of the outstanding shares of stock having by the terms thereof ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether or not at the time stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by the Borrower or one or more of its Subsidiaries or by the Borrower and one or more of its Subsidiaries. For purposes of this Agreement, the term "Subsidiary" shall include limited liability companies in which the Borrower or any Subsidiary owns a membership interest, including, without limitation, DLB Acquisition, L.L.C., a limited liability company organized under the laws of the State of Oklahoma. "Subordinated Debt" shall mean Debt of the Borrower subordinated to the Indebtedness on terms satisfactory to the Agent and Majority Lenders. "Tangible Net Worth" shall mean, as at any date, the sum of the following for the Borrower determined (without duplication) in accordance with GAAP: (a) the amount of preferred stock and common stock at par plus the amount of surplus of the Borrower, plus (b) the retained earnings (or, in the case of a retained earnings deficit, minus the amount of such deficit), minus -17- 25 (c) the sum of the following: cost of treasury shares and the book value of all assets of the Borrower which should be classified as intangibles (without duplication of deductions in respect of items already deducted in arriving at surplus and retained earnings) but in any event including as such intangibles the following: goodwill, research and development costs, trademarks, trade names, copyrights, patents and franchises, unamortized debt discount and expense, all reserves and any writeup in the book value of assets resulting from a revaluation thereof or resulting from any changes in GAAP subsequent to September 30, 1995. "Taxes" shall have the meaning assigned such term in Section 4.06(a). "Termination Date" shall mean, unless extended pursuant to Section 2.01(c) or terminated pursuant to Section 10.02, MARCH 5, 2002. "Texaco Acquisition" shall mean the purchase by the Borrower of the Texaco Property pursuant to the Texaco Purchase Agreement. "Texaco Purchase Agreement" shall have the meaning assigned such term in Section 6.04 hereof. "Threshold Amount" shall mean at any time an amount equal to the amount determined in accordance with Section 2.09. "Threshold Utilization Percentage" shall mean, as of any day, the fraction expressed as a percentage, the numerator of which is the balance of all Loans and the LC Exposure outstanding on such day, and the denominator of which is the Threshold Amount (or after the first anniversary of the Closing Date, the Borrowing Base) in effect on such day. "Type" shall mean, with respect to any Loan, a Base Rate Loan or a Eurodollar Loan. Section 1.03 Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all determinations with respect to accounting matters hereunder shall be made, and all financial statements and certificates and reports as to financial matters required to be furnished to the Agent or the Lenders hereunder shall be prepared, in accordance with GAAP, applied on a basis consistent with the audited financial statements of the Borrower referred to in Section 7.02 (except for changes concurred with by the Borrower's independent public accountants). -18- 26 ARTICLE II COMMITMENTS Section 2.01 Loans, Letters of Credit, etc.. (a) Loans. Each Lender severally agrees, on the terms of this Agreement, to make Loans to the Borrower during the period from and including (i) the Closing Date or (ii) such later date that such Lender becomes a party to this Agreement as provided in Section 12.06(b), to and up to, but excluding, the Termination Date in an aggregate principal amount at any one time outstanding up to but not exceeding the amount of such Lender's Commitment as then in effect; provided, however, that the aggregate principal amount of all such Loans by all Lenders hereunder at any one time outstanding together with the LC Exposure shall not exceed the Aggregate Commitments. Subject to the terms of this Agreement, during the period from the Closing Date to and up to, but excluding, the Termination Date, the Borrower may borrow, repay and reborrow the amount described in this Section 2.01. Subject to the other terms and provisions of this Agreement, at the option of the Borrower, the Loans may be Base Rate Loans or Eurodollar Loans; provided that no more than six (6) Eurodollar Loans may be outstanding at any time. (b) Letters of Credit. During the period from and including the Closing Date to but excluding the Termination Date, the Agent, as issuing bank for the Lenders, agrees to extend credit for the account of the Borrower at any time and from time to time by issuing, renewing, extending or reissuing Letters of Credit; provided however, the LC Exposure at any one time outstanding shall not exceed the lesser of (i) the LC Commitment or (ii) the Aggregate Commitments, as then in effect, minus the aggregate principal amount of all Loans then outstanding. The Lenders shall participate in such Letters of Credit according to their respective Percentage Shares. (c) Advances Above Threshold Amount. Notwithstanding the foregoing, no Loans or Letters of Credit shall be extended hereunder at a time when the aggregate principal amount of all Loans by all Lenders hereunder together with the LC Exposure shall by virtue of such Loans or Letters of Credit exceed the Threshold Amount except for the purpose of financing Borrower's purchase of the Texaco Acquisition or Other Acquisition as provided in Section 6.04 hereof. (d) Prior Credit Agreement. The Prior Credit Agreement and the Commitments thereunder are hereby superseded and replaced in their entirety by this Agreement. -19- 27 Section 2.02 Borrowings, Continuations and Conversions; Letters of Credit. (a) Borrowings. The Borrower shall give the Agent (which shall promptly notify the Lenders) advance notice as hereinafter provided of each borrowing hereunder, which shall specify the aggregate amount of such borrowing, the Type and the date (which shall be a Business Day) of the Loans to be borrowed and (in the case of Eurodollar Loans) the duration of the Interest Period therefor. (b) Minimum Amounts. All Base Rate Loan borrowings shall be in amounts of at least (i) $100,000 or any whole multiple of $50,000 in excess thereof or (ii) the remaining balance of the Aggregate Commitments, if less, and all Eurodollar Loan borrowings, continuations or conversions shall be in amounts of at least $1,000,000 or any whole multiple of $100,000 in excess thereof. (c) Notices. All borrowings, continuations and conversions shall require advance written notice to the Agent (which shall promptly notify the Lenders) in the form of Exhibit B hereto (or telecopy notice promptly confirmed by such a written notice), which in each case shall be irrevocable, from the Borrower to be received by the Agent not later than 11:00 a.m. New York time at least one (1) Business Day prior to the date of such Base Rate borrowing and three (3) Business Days prior to the date of each Eurodollar Loan borrowing, continuation or conversion. (d) Continuation Options. Subject to the provisions made in this Section 2.02(d), the Borrower may elect to continue all or any part of any Eurodollar Loan beyond the expiration of the then current Interest Period relating thereto by giving advance notice as provided in Section 2.02(c) to the Agent (which shall promptly notify the Lenders) of such election, specifying the amount of such Loan to be continued and the Interest Period therefor. In the absence of such a timely and proper election, the Borrower shall be deemed to have elected to convert such Eurodollar Loan to a Base Rate Loan pursuant to Section 2.02(e). All or any part of any Eurodollar Loan may be continued as provided herein, provided that (i) any continuation of any such Loan shall be (as to each Loan as continued for an applicable Interest Period) in amounts of at least $1,000,000 or any whole multiple of $100,000 in excess thereof and (ii) no Default shall have occurred and be continuing. If a Default shall have occurred and be continuing, each Eurodollar Loan shall be converted to a Base Rate Loan on the last day of the Interest Period applicable thereto. (e) Conversion Options. The Borrower may elect to convert all or any part of any Eurodollar Loan on the last day of the then current Interest Period relating thereto to a Base Rate Loan by giving advance notice to the Agent (which shall promptly notify the Lenders) of such election. Subject to the provisions made in this Section 2.02(e), the Borrower may elect to convert all or any part of any Base Rate Loan at any time and from time to time to a Eurodollar Loan by giving advance notice as provided in Section 2.02(c) to the Agent (which shall promptly notify the Lenders) of such election. All or any part of any outstanding Loan may be converted -20- 28 as provided herein, provided that (i) any conversion of any Base Rate Loan into a Eurodollar Loan shall be (as to each such Loan into which there is a conversion for an applicable Interest Period) in amounts of at least $1,000,000 or any whole multiple of $100,000 in excess thereof and (ii) no Default shall have occurred and be continuing. If a Default shall have occurred and be continuing, no Base Rate Loan may be converted into a Eurodollar Loan. (f) Advances. Not later than 11:00 a.m. New York time on the date specified for each borrowing hereunder, each Lender shall make available the amount of the Loan to be made by it on such date to the Agent, to an account which the Agent shall specify, in immediately available funds, for the account of the Borrower. The amounts so received by the Agent shall, subject to the terms and conditions of this Agreement, be made available to the Borrower by depositing the same, in immediately available funds, in an account of the Borrower, designated by the Borrower and maintained at the Principal Office. (g) Letters of Credit. The Borrower shall give the Agent (which shall promptly notify the Lenders of such request and their Percentage Share of such Letter of Credit) advance notice to be received by the Agent not later than 11:00 a.m. New York time not less than three (3) Business Days prior thereto of each request for the issuance and at least thirty (30) Business Days prior to the date of the renewal or extension of a Letter of Credit hereunder, which request shall specify the amount of such Letter of Credit, the date (which shall be a Business Day) such Letter of Credit is to be issued, renewed or extended, the duration thereof, the name and address of the beneficiary thereof, the form of the Letter of Credit and such other information as the Agent may reasonably request all of which shall be reasonably satisfactory to the Agent. Subject to the terms and conditions of this Agreement, on the date specified for the issuance, renewal or extension of a Letter of Credit, the Agent shall issue such Letter of Credit to the beneficiary thereof. In conjunction with the issuance of each Letter of Credit, the Borrower shall execute a Letter of Credit Agreement. In the event of any conflict between any provision of a Letter of Credit Agreement and this Agreement, the Borrower, the Agent and the Lenders hereby agree that the provisions of this Agreement shall govern. The Agent will send to the Borrower and each Lender, immediately upon issuance of any Letter of Credit, or an amendment thereto, a true and complete copy of such Letter of Credit, or such amendment thereto. Section 2.03 Limitation on Aggregate Commitments. The Aggregate Commitments shall at all times be equal to the lesser of (i) the Aggregate Maximum Credit Amounts or (ii) the Borrowing Base as determined from time to time. -21- 29 Section 2.04 Fees. (a) During each quarter, the Borrower shall pay to the Agent, for the account of each Lender, a commitment fee on the daily average unused amount of the Aggregate Commitments during such quarter (being, as of any day, an amount equal to the Aggregate Commitments minus (i) the aggregate amount of all Loans outstanding on such day and (ii) the LC Exposure minus the amount of cash collateral held by the Agent) for the period from and including the Closing Date up to but excluding the earlier of the date the Aggregate Commitments are terminated or the Termination Date at the following rate per annum as applicable: Threshold Amount Utilization
- -------------------------------------------------------------------------------- Threshold Amount Utilization Percentage Commitment Fee Rate - -------------------------------------------------------------------------------- equal to or less than 50% .30% - -------------------------------------------------------------------------------- equal to or less than 75% but greater than 50% .375% - -------------------------------------------------------------------------------- equal to or less than 100% but greater than 75% .375% - -------------------------------------------------------------------------------- greater than 100% .50% - --------------------------------------------------------------------------------
Accrued commitment fees shall be payable in arrears on each Quarterly Date and on the earlier of the date the Aggregate Commitments are terminated or the Termination Date. (b) The Borrower agrees to pay the Agent quarterly commissions for issuing the Letters of Credit on the daily average maximum liability of the Agent existing from time to time under such Letter of Credit (calculated separately for each Letter of Credit) equal to the product of the then effective Applicable Margin for Eurodollar Loans and the daily average maximum liability of the Agent under such Letter of Credit, provided that each Letter of Credit shall bear a minimum commission of $500. Such commissions are payable quarterly in arrears on each Quarterly Date and on the earlier of the date the Aggregate Commitments are terminated or the Termination Date. The Agent shall retain one-eighth of one percent (1/8 of 1%) as an issuing fee and pay to the Lenders pro rata the remaining balance of the fee. (c) Upon each transfer of any Letter of Credit to a successor beneficiary in accordance with its terms, the Borrower shall pay the sum of $200 to the Agent for its own account. (d) Upon each drawing of any Letter of Credit, the Borrower shall pay to the Agent for its own account a negotiation fee of $100; provided that such fee shall not be a condition to any drawing. -22- 30 (e) Upon each amendment of any Letter of Credit, the Borrower shall pay the sum of $50 to the Agent for its own account. Section 2.05 Several Obligations. The failure of any Lender to make any Loan to be made by it or to provide funds for disbursements or reimbursements under Letters of Credit on the date specified therefor shall not relieve any other Lender of its obligation to make its Loan or provide funds on such date, but no Lender shall be responsible for the failure of any other Lender to make a Loan to be made by such other Lender or to provide funds to be provided by such other Lender. Section 2.06 Notes. The Loans made by each Lender shall be evidenced by a single promissory note of the Borrower in substantially the form of Exhibit A hereto, dated (i) the Closing Date or (ii) the effective date of an Assignment pursuant to Section 12.06(b), payable to the order of such Lender in a principal amount equal to its Maximum Credit Amount as originally (or then) in effect and otherwise duly completed and such substitute Notes as required by Section 12.06(b). The date, amount, Type, interest rate and Interest Period of each Loan made by each Lender, and all payments made on account of the principal thereof, shall be recorded by such Lender on its books for its Note, and, prior to any transfer, endorsed by such Lender on the schedule attached to such Note or any continuation thereof. Failure to make any such notation shall not affect the Borrower's obligations in respect of such Lender's Loan or affect the validity of such transfer by any Lender of its Note. Section 2.07 Prepayments. (a) Voluntary Prepayments. The Borrower may prepay the Loans upon not less than one (1) Business Day's prior notice to the Agent (which shall promptly notify the Lenders), which notice shall specify the prepayment date (which shall be a Business Day) and the amount of the prepayment (which shall be at least $1,000,000 or the remaining aggregate principal balance outstanding on the Notes) and shall be irrevocable and effective only upon receipt by the Agent; provided, however, the Borrower shall pay the compensation called for in Section 5.05 hereof upon prepayment of any Eurodollar Loans, prior to the end of an Interest Period. (b) Borrowing Base. If the aggregate principal amount of the Loans and LC Exposure shall at any time exceed the lesser of (i) the Aggregate Maximum Credit Amounts and (ii) the Borrowing Base at such time (such condition being herein called an "overage"), the Borrower shall (subject to Sections 2.08 and 5.05 hereof) prepay Loans in an amount equal to the amount of such overage. Such prepayment shall be made no later than the date 30 days following the date on which such overage first occurred unless the Borrower shall theretofore have eliminated such overage (through a redetermination of the Borrowing Base as provided in Section 2.09 hereof) in a manner acceptable to the Agent and the Required Lenders, provided that if the Borrowing Base has decreased by reason of a sale, lease, transfer or other disposition of any Property of the Borrower or any other voluntary action taken by the Borrower, such prepayment shall be made on such earlier date or dates as the Required Lenders (through the Agent) may specify to the Borrower. -23- 31 (c) Threshold Amount. If the aggregate principal amount of the Loans shall on the first anniversary of the Closing Date exceed the Threshold Amount at such time, the Borrower shall (subject to Sections 2.08 and 5.05 hereof) immediately (without any grace period) prepay Loans in an amount equal to such excess. Notwithstanding any provision of this Agreement to the contrary, on any date after the first anniversary of the Closing Date, any reference in this Agreement or any of the other Loan Documents to the "Threshold Amount" shall be deemed to be a reference to the "Borrowing Base". (d) Excess Cash Flow. If at the end of any fiscal quarter of the Borrower (beginning with the quarter ending June 30, 1997) prior to the first anniversary of the Closing Date the aggregate principal amount of the Loans shall exceed the Threshold Amount (each such fiscal quarter, a "Specified Quarter"), then the Borrower shall (subject to Sections 2.08 and 5.05 hereof) prepay a principal amount of the Loans and accrued interest thereon in an aggregate amount equal to 100% of Excess Cash Flow for such specified quarter. Such prepayment shall be made no later than the date 30 days after the end of such specified quarter. (e) Any prepayment of principal of the Loans made pursuant to the clause (c) or (d) of this Section 2.07 or pursuant to Section 8.12 shall automatically reduce the Borrowing Base Amount, if applicable by the amount of such prepayment. (f) Prepayments permitted or required under this Section 2.07 shall be without premium or penalty, except as required under Section 5.05 for prepayment of Eurodollar Loans. Any prepayment may be reborrowed subject to the then effective Aggregate Commitments. Section 2.08 Minimum Amount Outstanding. Notwithstanding anything in Section 2.07 to the contrary, following the making of the initial Loan hereunder, the Borrower shall not, nor shall the Borrower be obligated to, prepay any Loan or Loans if, after giving effect to such prepayment, the aggregate principal amount of Loans outstanding would be less than $100 unless all Commitments of the Lenders have terminated or are terminated in conjunction therewith. Section 2.09 Borrowing Base and Threshold Amount Determinations and Computations. (a) Initial Amounts. The Borrowing Base in effect on the date of this Agreement is hereby determined to be $85,000,000, and the Threshold Amount in effect on the date of this Agreement is hereby determined to be $70,000,000. Except as otherwise provided herein, the Borrowing Base and the Threshold Amount shall remain at the respective amounts determined pursuant to the first sentence of this Section 2.09(a) until the date on which the Agent shall next establish the Borrowing Base and Threshold Amount (prior to the first anniversary of the Closing Date) as provided in Section 2.09(b) hereof or Section 2.09(c) hereof. -24- 32 (b) Scheduled Redeterminations. (i) As promptly as practicable, but in any event within 30 days, following the receipt of any Reserve Report required to be delivered under Section 8.05, the Agent (in consultation with the Lenders) shall (A) redetermine the Borrowing Base and the Threshold Amount on the basis of such Reserve Report in the manner provided in clause (ii) of this Section 2.09(b), (B) notify the Lenders of such redetermination and (C) if such redetermination is approved by the Required Lenders (provided that if any Lender fails to respond to the notification from the Agent delivered pursuant to clause (B) within 15 days of the delivery thereof, such Lender shall be deemed to have approved the proposed redetermination), notify the Lenders of the Borrowing Base and, if prior to the first anniversary of the Closing Date, the Threshold Amount as so redetermined. Such redetermined Borrowing Base and the Threshold Amount shall become effective on the date on which the Borrower receives written notice of the redetermined Borrowing Base or Threshold Amount, as applicable (or such later date as notified by the Agent to the Borrower and the Lenders) and shall remain effective until again redetermined pursuant to this Section 2.09. Each date on which a redetermination of the Borrowing Base or, if prior to the first anniversary of the Closing Date, the Threshold Amount becomes effective as provided in the preceding sentence is herein called a "Redetermination Date". (ii) Each redetermination by the Agent of the Borrowing Base (and the Required Lenders' approval thereof) shall be made on the basis of parameters which may include the Present Value of Reserves attributable to the Borrower's Oil and Gas Properties as set forth in the related Reserve Report, as adjusted by the Agent with the approval of the Required Lenders, in its and their reasonable discretion, using the rates, factors, values, estimates, assumptions and computations set forth in such Reserve Report and any other relevant information or factors (such adjustments being herein called "Borrowing Base Assumptions"). (iii) Notwithstanding the foregoing clauses (i) and (ii), there shall be no scheduled redetermination of the Borrowing Base during the first year following the Closing Date. (c) Unscheduled Redeterminations. Not later than the date 45 days after (x) a request by the Borrower accompanied by a new Reserve Report (provided no more than 2 of such requests may be made by the Borrower in any fiscal year) or (y) any Redetermination Event, the Agent may (and (i) if requested by the Required Lenders or the Borrower as aforesaid or (ii) if such Redetermination Event is an event referred to in paragraph (b) of the definition of such term in Section 1.02 hereof, shall), by notice to the Borrower and the Lenders, re-establish the Borrowing Base and, if prior to the first anniversary of the Closing Date, the Threshold Amount, with the approval of the Required Lenders. In determining the Borrowing Base and, if prior to the first anniversary of the Closing Date, the Threshold Amount, pursuant to this Section 2.09(c), the Agent shall (with the approval of the Required Lenders) be entitled to give effect to the occurrence of any events or circumstances giving rise to or constituting the relevant Redetermination Event. Any determination of the Borrowing Base following a Redetermination Event referred to in paragraph (d) of the definition of such term in Section 1.02 hereof shall be made by the Agent and the Required Lenders in their sole discretion based on such factors as -25- 33 they deem relevant. The effective date of the redetermined Borrowing Base and Threshold Amount, if applicable, shall be established in accordance with Section 2.09(b) hereof, provided that no Reserve Report shall be required for a determination of the Borrowing Base following a Redetermination Event referred to in paragraph (d) of the definition of such term in Section 1.02 hereof. Notwithstanding the foregoing, there shall be no redetermination of the Borrowing Base under this clause during the first year following the Closing Date other than with respect to a Redetermination Event referred to in paragraphs (c) or (e) of the definition of such term in Section 1.02 hereof. (d) The Agent may exclude any Oil and Gas Property or portion of production therefrom or any income from any other Property from the Borrowing Base, at any time, because title information is not reasonably satisfactory, such Property is not Mortgaged Property or such Property is not assignable. Section 2.10 Lending Offices. The Loans of each Type made by each Lender shall be made and maintained at such Lender's Applicable Lending Office for Loans of such Type. Section 2.11 Assumption of Risks. The Borrower assumes all risks of the acts or omissions of any beneficiary of any Letter of Credit or any transferee thereof with respect to its use of such Letter of Credit. Neither the Agent (except in the case of gross negligence or willful misconduct on the part of the Agent or any of its employees), its correspondents nor any Lender shall be responsible for the validity, sufficiency or genuineness of certificates or other documents or any endorsements thereon, even if such certificates or other documents should in fact prove to be invalid, insufficient, fraudulent or forged; for errors, omissions, interruptions or delays in transmissions or delivery of any messages by mail, telex, or otherwise, whether or not they be in code; for errors in translation or for errors in interpretation of technical terms; the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; the failure of any beneficiary or any transferee of any Letter of Credit to comply fully with conditions required in order to draw upon any Letter of Credit; or for any other consequences arising from causes beyond the Agent's control or the control of the Agent's correspondents. In addition, neither the Agent nor any Lender shall be responsible for any error, neglect, or default of any of the Agent's correspondents; and none of the above shall affect, impair or prevent the vesting of any of the Agent's or any Lender's rights or powers hereunder or under the Letter of Credit Agreements, all of which rights shall be cumulative. The Agent and its correspondents may accept certificates or other documents that appear on their face to be in order, without responsibility for further investigation of any matter contained therein regardless of any notice or information to the contrary. In furtherance and not in limitation of the foregoing provisions, the Borrower agrees that any action, inaction or omission taken or not taken by the Agent or by any correspondent for the Agent in good faith in connection with any Letter of Credit, or any related drafts, certificates, documents -26- 34 or instruments, shall be binding on the Borrower and shall not put the Agent or its correspondents under any resulting liability to the Borrower. Section 2.12 Obligation to Reimburse and to Prepay. (a) If a disbursement by the Agent is made under any Letter of Credit, the Borrower shall pay to the Agent within two (2) Business Days after notice of any such disbursement is received by the Borrower, the amount of each such disbursement made by the Agent under the Letter of Credit (if such payment is not sooner effected as may be required under this Section 2.12 or under other provisions of the Letter of Credit), together with interest on the amount disbursed from and including the date of disbursement until payment in full of such disbursed amount at a varying rate per annum equal to (i) the then applicable interest rate for Base Rate Loans through the second Business Day after notice of such disbursement is received by the Borrower and (ii) thereafter, the Post-Default Rate for Base Rate Loans (but in no event to exceed the Highest Lawful Rate) for the period from and including the third Business Day following the date of such disbursement to and including the date of repayment in full of such disbursed amount. The obligations of the Borrower under this Agreement with respect to each Letter of Credit shall be absolute, unconditional and irrevocable and shall be paid or performed strictly in accordance with the terms of this Agreement under all circumstances whatsoever, including, without limitation, but only to the fullest extent permitted by applicable law, the following circumstances: (i) any lack of validity or enforceability of this Agreement, any Letter of Credit or any of the Security Instruments; (ii) any amendment or waiver of (including any default), or any consent to departure from this Agreement (except to the extent permitted by any amendment or waiver), any Letter of Credit or any of the Security Instruments; (iii) the existence of any claim, setoff, defense or other rights which the Borrower may have at any time against the beneficiary of any Letter of Credit or any transferee of any Letter of Credit (or any Persons for whom any such beneficiary or any such transferee may be acting), the Agent, any Lender or any other Person, whether in connection with this Agreement, any Letter of Credit, the Security Instruments, the transactions contemplated hereby or any unrelated transaction; (iv) any statement, certificate, draft, notice or any other document presented under any Letter of Credit proves to have been forged, fraudulent, insufficient or invalid in any respect or any statement therein proves to have been untrue or inaccurate in any respect whatsoever; (v) payment by the Agent under any Letter of Credit against presentation of a draft or certificate which appears on its face to comply, but does not comply, with the terms of such Letter of Credit; and (vi) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing. Notwithstanding anything in this Agreement to the contrary, the Borrower will not be liable for payment or performance that results from the gross negligence or willful misconduct of the Agent, except (i) where the Borrower or any Subsidiary actually recovers the proceeds for itself or the Agent of any payment made by the Agent in connection with such gross negligence or willful misconduct or (ii) in cases where the Agent makes payment to the named beneficiary of a Letter of Credit. -27- 35 (b) In the event of the occurrence of any Event of Default, a payment or prepayment pursuant to Sections 2.07(a), (b), (c) or (d) hereof or the maturity of the Notes, whether by acceleration or otherwise, an amount equal to the LC Exposure shall be deemed to be forthwith due and owing by the Borrower to the Agent and the Lenders as of the date of any such occurrence; and the Borrower's obligation to pay such amount shall be absolute and unconditional, without regard to whether any beneficiary of any such Letter of Credit has attempted to draw down all or a portion of such amount under the terms of a Letter of Credit, and, to the fullest extent permitted by applicable law, shall not be subject to any defense or be affected by a right of setoff, counterclaim or recoupment which the Borrower may now or hereafter have against any such beneficiary, the Agent, the Lenders or any other Person for any reason whatsoever. Such payments shall be held by the Agent on behalf of the Lenders as cash collateral securing the LC Exposure in an account or accounts at the Principal Office; and the Borrower hereby grants to the Agent a security interest in such cash collateral. In the event of any such payment by the Borrower of amounts contingently owing under outstanding Letters of Credit and in the event that thereafter drafts or other demands for payment complying with the terms of such Letters of Credit are not made prior to the respective expiration dates thereof, the Agent agrees, if no Event of Default has occurred and is continuing or if no other amounts are outstanding under this Agreement, the Notes or the Security Instruments, to remit to the Borrower amounts for which the contingent obligations evidenced by the Letters of Credit have ceased. (c) Each Lender severally and unconditionally agrees that it shall promptly reimburse the Agent an amount equal to such Lender's Percentage Share of any disbursement made by the Agent under any Letter of Credit that is not reimbursed according to this Section 2.12. ARTICLE III PAYMENTS OF PRINCIPAL AND INTEREST Section 3.01 Repayment of Loans. The Borrower will pay to the Agent, for the account of each Lender, the principal payments required by this Section 3.01. On or before the Termination Date, the Borrower shall pay the principal outstanding and accrued but unpaid interest under the Notes. Section 3.02 Interest. (a) The Borrower will pay to the Agent, for account of each Lender, interest on the unpaid principal amount of each Loan made by such Lender for the period commencing on the date such Loan is made to but excluding the date such Loan shall be paid in full, at the following rates per annum: -28- 36 (i) if such a Loan is a Base Rate Loan, the Base Rate (as in effect from time to time) plus the Applicable Margin, but in no event to exceed the Highest Lawful Rate; and (ii) if such a Loan is a Eurodollar Loan, for each Interest Period relating thereto, the Fixed Rate for such Loan plus the Applicable Margin, but in no event to exceed the Highest Lawful Rate. (b) Notwithstanding the foregoing, to the fullest extent permitted by law, the Borrower will pay to the Agent, for the account of each Lender interest at the applicable Post-Default Rate on any principal of all Loans made by the Lenders and on any other amount payable by the Borrower hereunder, under any Security Instrument, or under any Note held by such Lender to or for account of such Lender, when and so long as any Loan shall not be paid in full when due (whether at stated maturity, by acceleration or otherwise), for the period commencing on the due date thereof until the same is paid in full. (c) Accrued interest on Base Rate Loans shall be payable quarterly commencing on the last day of each Quarterly Date commencing on April 1, 1997, and accrued interest on each Eurodollar Loan shall be payable on the last day of the Interest Period therefor and, if such Interest Period is longer than three months at three-month intervals following the first day of such Interest Period, except that interest payable at the Post-Default Rate shall be payable from time to time on demand and interest on any Eurodollar Loan that is converted into a Base Rate Loan (pursuant to Section 5.04) shall be payable on the date of conversion (but only to the extent so converted). (d) Promptly after the determination of any interest rate provided for herein or any change therein, the Agent shall notify the Lenders to which such interest is payable and the Borrower thereof. Each determination by the Agent of an interest rate or fee hereunder shall, except in cases of manifest error, be final, conclusive and binding on the parties. ARTICLE IV PAYMENTS; PRO RATA TREATMENT; COMPUTATIONS; ETC. Section 4.01 Payments. Except to the extent otherwise provided herein, all payments of principal, interest and other amounts to be made by the Borrower under this Agreement, the Notes and the Letter of Credit Agreements shall be made in Dollars, in immediately available funds, to the Agent at such account as the Agent shall specify by notice to the Borrower from time to time, not later than 11:00 a.m. New York time on the date on which such payments shall become due (each such payment made after such time on such due date to be deemed to have been made on the next succeeding Business Day). Such payments shall be made without (to the fullest extent permitted by applicable law) defense, set-off or counterclaim. -29- 37 Each payment received by the Agent under this Agreement or any Note for account of a Lender shall be paid promptly to such Lender, in immediately available funds. Except as provided in clause (ii) of the definition of "Interest Period", if the due date of any payment under this Agreement or any Note 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. At the time of each payment to the Agent of any principal of or interest on any borrowing, the Borrower shall notify the Agent of the Loans to which such payment shall apply. In the absence of such notice, the Agent may specify the Loans to which such payment shall apply, but to the extent possible such payment or prepayment will be applied first to the Loans comprised of Base Rate Loans. Section 4.02 Pro Rata Treatment. Except to the extent otherwise provided herein each Lender agrees that: (i) each borrowing from the Lenders under Section 2.01 shall be made from the Lenders pro rata in accordance with their Percentage Share, and each payment of fees under Section 2.04(a) and Section 2.04(b) shall be made for account of the Lenders pro rata in accordance with their Percentage Share; (ii) each payment of principal of Loans by the Borrower shall be made for account of the Lenders pro rata in accordance with the respective unpaid principal amount of the Loans held by the Lenders; (iii) each payment of interest on Loans by the Borrower shall be made for account of the Lenders pro rata in accordance with the amounts of interest due and payable to the respective Lenders; and (iv) each reimbursement by the Borrower of disbursements under Letters of Credit shall be made for account of the Agent or, if funded by the Lenders, pro rata for the account of the Lenders, in accordance with the amounts of reimbursement obligations due and payable to each respective Lender. Section 4.03 Computations. Interest on Eurodollar Loans and Base Rate Loans not based upon the Prime Rate and fees 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) occurring in the period for which such interest is payable, unless such calculation would exceed the Highest Lawful Rate, in which case interest shall be calculated on the per annum basis of a year of 365 or 366 days, as the case may be. Interest on Base Rate Loans based upon the Prime Rate 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) occurring in the period for which such interest is payable. Section 4.04 Non-receipt of Funds by the Agent. Unless the Agent shall have been notified by a Lender or the Borrower prior to the date on which such notifying party is scheduled to make payment to the Agent (in the case of a Lender) of the proceeds of a Loan or a payment under a Letter of Credit to be made by it hereunder or (in the case of the Borrower) a payment to the Agent for account of one or more of the Lenders hereunder (such payment being herein called the "Required Payment"), which notice shall be effective upon receipt, that it does not intend to make the Required Payment to the Agent, the Agent may assume that the Required Payment has been made and may, in reliance upon such assumption (but shall not be required to), make the amount thereof available to the intended recipient(s) on such date and, if such Lender or the Borrower (as the case may be) has not in fact made the Required Payment to the Agent, -30- 38 the recipient(s) of such payment shall, on demand, repay to the Agent the amount so made available together with interest thereon in respect of each day during the period commencing on the date such amount was so made available by the Agent until but excluding the date the Agent recovers such amount at a rate per annum which, for any Lender as recipient, will be equal to the Federal Funds Rate, and for the Borrower as recipient, will be equal to the Base Rate plus the Applicable Margin. Section 4.05 Set-off, Sharing of Payments, Etc. (a) The Borrower agrees that, in addition to (and without limitation of) any right of set-off, bankers' lien or counterclaim a Lender may otherwise have, each Lender shall have the right and be entitled (after consultation with the Agent), at its option, to offset balances held by it or by any of its Affiliates for account of the Borrower or any Subsidiary at any of its offices, in Dollars or in any other currency, against any principal of or interest on any of such Lender's Loans, Letters of Credit or any other amount payable to such Lender hereunder, which is not paid when due (regardless of whether such balances are then due to the Borrower), in which case it shall promptly notify the Borrower and the Agent thereof, provided that such Lender's failure to give such notice shall not affect the validity thereof. (b) If any Lender shall obtain payment of any principal of or interest on any Loan made by it to the Borrower under this Agreement (or reimbursement as to any Letter of Credit) through the exercise of any right of set-off, banker's lien or counterclaim or similar right or otherwise, and, as a result of such payment, such Lender shall have received a greater percentage of the principal or interest (or reimbursement) then due hereunder by the Borrower to such Lender than the percentage received by any other Lenders, it shall promptly (i) notify the Agent and each other Lender thereof and (ii) purchase from such other Lenders participations in (or, if and to the extent specified by such Lender, direct interests in) the Loans (or participations in Letters of Credit) made by such other Lenders (or in interest due thereon, as the case may be) in such amounts, and make such other adjustments from time to time as shall be equitable, to the end that all the Lenders shall share the benefit of such excess payment (net of any expenses which may be incurred by such Lender in obtaining or preserving such excess payment) pro rata in accordance with the unpaid principal and/or interest on the Loans held by each of the Lenders (or reimbursements of Letters of Credit). To such end all the Lenders shall make appropriate adjustments among themselves (by the resale of participations sold or otherwise) if such payment is rescinded or must otherwise be restored. The Borrower agrees that any Lender so purchasing a participation (or direct interest) in the Loans made by other Lenders (or in interest due thereon, as the case may be) may exercise all rights of set-off, banker's lien, counterclaim or similar rights with respect to such participation as fully as if such Lender were a direct holder of Loans (or Letters of Credit) in the amount of such participation. Nothing contained herein shall require any Lender to exercise any such right or shall affect the right of any Lender to exercise, and retain the benefits of exercising, any such right with respect to any other indebtedness or obligation of the Borrower. If under any applicable bankruptcy, insolvency or other similar law, any Lender receives a secured claim in lieu of a set-off to which this Section 4.05 applies, such Lender shall, -31- 39 to the extent practicable, exercise its rights in respect of such secured claim in a manner consistent with the rights of the Lenders entitled under this Section 4.05 to share the benefits of any recovery on such secured claim. Section 4.06 Taxes. (a) Payments Free and Clear. Any and all payments by the Borrower hereunder shall be made, in accordance with Section 4.01, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto excluding, in the case of each Lender and the Agent, taxes imposed on its income, and franchise or similar taxes imposed on it, by (i) any jurisdiction (or political subdivision thereof) of which the Agent or such Lender, as the case may be, is a citizen or resident or in which such Lender has an Applicable Lending Office, (ii) the jurisdiction (or any political subdivision thereof) in which the Agent or such Lender is organized, or (iii) any jurisdiction (or political subdivision thereof) in which such Lender or the Agent is presently doing business which taxes are imposed solely as a result of doing business in such jurisdiction (all such nonexcluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to the Lenders or the Agent (i) the sum payable shall be increased by the amount necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 4.06) such Lender or the Agent (as the case may be) shall receive an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant taxing authority or other Governmental Authority in accordance with applicable law. (b) Other Taxes. In addition, to the fullest extent permitted by applicable law, the Borrower agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies that arise from any payment made hereunder or from the execution, delivery or registration of, or otherwise with respect to, this Agreement, any Assignment or any Security Instrument (hereinafter referred to as "Other Taxes"). (c) Indemnification. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, THE BORROWER WILL INDEMNIFY EACH LENDER AND THE AGENT FOR THE FULL AMOUNT OF TAXES AND OTHER TAXES (INCLUDING, BUT NOT LIMITED TO, ANY TAXES OR OTHER TAXES IMPOSED BY ANY JURISDICTION ON AMOUNTS PAYABLE UNDER THIS SECTION 4.06) PAID BY SUCH LENDER OR THE AGENT (ON THEIR BEHALF OR ON BEHALF OF ANY LENDER), AS THE CASE MAY BE, AND ANY LIABILITY (INCLUDING PENALTIES, INTEREST AND EXPENSES) ARISING THEREFROM OR WITH RESPECT THERETO, WHETHER OR NOT SUCH TAXES OR OTHER TAXES WERE CORRECTLY OR LEGALLY ASSERTED UNLESS THE PAYMENT OF SUCH TAXES WERE NOT CORRECTLY OR LEGALLY ASSERTED AND SUCH LENDER'S PAYMENT OF SUCH TAXES OR OTHER TAXES WAS THE RESULT OF ITS GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. THE AGENT AND/OR ANY LENDER SEEKING INDEMNIFICATION PURSUANT TO -32- 40 THIS SECTION 4.06(C) SHALL GIVE THE BORROWER WRITTEN NOTICE OF SUCH CLAIM PROMPTLY UPON LEARNING OF THE EVENT OR CONDITION GIVING RISE TO SUCH TAX OR OTHER TAX BEING DUE (OR PROMPTLY UPON RECEIPT OF AN ASSESSMENT TO PAY SUCH TAX OR OTHER TAX); PROVIDED THAT THE FAILURE TO GIVE SUCH NOTICE SHALL NOT AFFECT THE AGENT'S OR SUCH LENDER'S RIGHT TO INDEMNIFICATION. ANY PAYMENT PURSUANT TO SUCH INDEMNIFICATION SHALL BE MADE WITHIN THIRTY (30) DAYS AFTER THE DATE ANY LENDER OR THE AGENT, AS THE CASE MAY BE, MAKES WRITTEN DEMAND THEREFOR. IF ANY LENDER OR THE AGENT RECEIVES A REFUND OR CREDIT IN RESPECT OF ANY TAXES OR OTHER TAXES FOR WHICH SUCH LENDER OR THE AGENT HAS RECEIVED PAYMENT FROM THE BORROWER HEREUNDER IT SHALL PROMPTLY NOTIFY THE BORROWER OF SUCH REFUND OR CREDIT AND SHALL, IF NO DEFAULT HAS OCCURRED AND IS CONTINUING, WITHIN THIRTY (30) DAYS AFTER RECEIPT OF A REQUEST BY THE BORROWER (OR PROMPTLY UPON RECEIPT, IF THE BORROWER HAS REQUESTED APPLICATION FOR SUCH REFUND OR CREDIT PURSUANT HERETO), PAY AN AMOUNT EQUAL TO SUCH REFUND OR CREDIT TO THE BORROWER WITHOUT INTEREST (BUT WITH ANY INTEREST SO REFUNDED OR CREDITED), PROVIDED THAT THE BORROWER, UPON THE REQUEST OF SUCH LENDER OR THE AGENT, AGREES TO RETURN SUCH REFUND OR CREDIT (PLUS ANY PENALTIES, INTEREST OR OTHER CHARGES WHICH SUCH LENDER OR THE AGENT MAY BE REQUIRED TO PAY WITH RESPECT THERETO) TO SUCH LENDER OR THE AGENT IN THE EVENT SUCH LENDER OR THE AGENT IS REQUIRED TO REPAY SUCH REFUND OR CREDIT. (d) Lender Representations. (i) Each Lender represents that it is either (1) a corporation organized under the laws of the United States of America or any state thereof or (2) it is entitled to complete exemption from United States withholding tax imposed on or with respect to any payments, including fees, to be made to it pursuant to this Agreement (A) under an applicable provision of a tax convention to which the United States of America is a party or (B) because it is acting through a branch, agency or office in the United States of America and any payment to be received by it hereunder is effectively connected with a trade or business in the United States of America. Each Lender that is not a corporation organized under the laws of the United States of America or any state thereof agrees to provide to the Borrower and the Agent on the Closing Date, or on the date of its delivery of the Assignment pursuant to which it becomes a Lender, and at such other times as required by United States law or as the Borrower or the Agent shall reasonably request, two accurate and complete original signed copies of either (A) Internal Revenue Service Form 4224 (or successor form) certifying that all payments to be made to it hereunder will be effectively connected to a United States trade or business (the "Form 4224 Certification") or (B) Internal Revenue Service Form 1001 (or successor form) certifying that it is entitled to the benefit of a provision of a tax convention to which the United States of America is a party which completely exempts from United States withholding tax all payments to be made to it hereunder (the "Form 1001 Certification"). In addition, each Lender agrees that if it previously filed a Form 4224 Certification, it will deliver to the Borrower and the Agent a new Form 4224 Certification prior to the first payment date -33- 41 occurring in each of its subsequent taxable years; and if it previously filed a Form 1001 Certification, it will deliver to the Borrower and the Agent a new certification prior to the first payment date falling in the third year following the previous filing of such certification. Each Lender also agrees to deliver to the Borrower and the Agent such other or supplemental forms as may at any time be required as a result of changes in applicable law or regulation in order to confirm or maintain in effect its entitlement to exemption from United States withholding tax on any payments hereunder, provided that the circumstances of such Lender at the relevant time and applicable laws permit it to do so. If a Lender determines, as a result of any change in either (i) a Governmental Requirement or (ii) its circumstances, that it is unable to submit any form or certificate that it is obligated to submit pursuant to this Section 4.06, or that it is required to withdraw or cancel any such form or certificate previously submitted, it shall promptly notify the Borrower and the Agent of such fact. If a Lender is organized under the laws of a jurisdiction outside the United States of America, unless the Borrower and the Agent have received a Form 1001 Certification or Form 4224 Certification satisfactory to them indicating that all payments to be made to such Lender hereunder are not subject to United States withholding tax, the Borrower shall withhold taxes from such payments at the applicable statutory rate. Each Lender agrees to indemnify and hold harmless the Borrower or Agent, as applicable, from any United States taxes, penalties, interest and other expenses, costs and losses incurred or payable by (i) the Agent as a result of such Lender's failure to submit any form or certificate that it is required to provide pursuant to this Section 4.06 or (ii) the Borrower or the Agent as a result of their reliance on any such form or certificate which such Lender has provided to them pursuant to this Section 4.06. (ii) For any period with respect to which a Lender has failed to provide the Borrower with the form required pursuant to this Section 4.06, if any, (other than if such failure is due to a change in a Governmental Requirement occurring subsequent to the date on which a form originally was required to be provided), such Lender shall not be entitled to indemnification under Section 4.06 with respect to taxes imposed by the United States which taxes would not have been imposed but for such failure to provide such forms; provided, however, that should a Lender, which is otherwise exempt from or subject to a reduced rate of withholding tax becomes subject to taxes because of its failure to deliver a form required hereunder, the Borrower shall take such steps as such Lender shall reasonably request to assist such Lender to recover such taxes. (iii) Any Lender claiming any additional amounts payable pursuant to this Section 4.06 shall use reasonable efforts (consistent with legal and regulatory restrictions) to file any certificate or document requested by the Borrower or the Agent or to change the jurisdiction of its Applicable Lending Office or to contest any tax imposed if the making of such a filing or change or contesting such tax would avoid the need for or reduce the amount of any such additional amounts that may thereafter accrue and would -34- 42 not, in the sole determination of such Lender, be otherwise disadvantageous to such Lender. Section 4.07 Disposition of Proceeds. The Security Instruments contain an assignment by the Borrower unto and in favor of the Agent for the benefit of the Lenders of all production and all proceeds attributable thereto which may be produced from or allocated to the Mortgaged Property, and the Security Instruments further provide in general for the application of such proceeds to the satisfaction of the Indebtedness and other obligations described therein and secured thereby. Until the occurrence of an Event of Default, the Agent and the Lenders agree that they will neither notify the purchaser or purchasers of such production nor take any other action to cause such proceeds to be remitted to the Agent, but the Lenders will instead permit such proceeds to be paid to the Borrower. ARTICLE V ADDITIONAL COSTS, CAPITAL ADEQUACY Section 5.01 Additional Costs. (a) Eurodollar Regulations, etc. The Borrower shall pay directly to each Lender from time to time such amounts as such Lender may determine to be necessary to compensate such Lender for any costs which it reasonably determines are attributable to its making or maintaining of any Eurodollar Loans hereunder or its issuance or participation in any Letters of Credit hereunder or its obligation to make any Eurodollar Loans or issue or participate in any Letters of Credit hereunder, or any reduction in any amount receivable by such Lender hereunder in respect of any of such Eurodollar Loans, Letters of Credit or such obligation (such increases in costs and reductions in amounts receivable being herein called "Additional Costs"), resulting from any Regulatory Change which: (i) changes the basis of taxation of any amounts payable to such Lender under this Agreement or any Note in respect of any of such Eurodollar Loans or Letters of Credit (other than taxes imposed on the overall net income of such Lender or of its Applicable Lending Office for any of such Eurodollar Loans by the jurisdiction in which such Lender has its principal office or Applicable Lending Office); or (ii) 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 Fixed Rate for such Loan) relating to any extensions of credit or other assets of, or any deposits with or other liabilities of such Lender (including any of such Eurodollar Loans or any deposits referred to in the definition of "Fixed Eurodollar Rate" in Section 1.02 hereof), or the Commitment or Loans of such Lender or the Eurodollar interbank market; or (iii) imposes any other condition affecting this Agreement or any Note (or any of such extensions of credit or liabilities) or such Lender's Commitment or Loans. Each Lender will notify the Agent and the Borrower of any event occurring after the Closing Date which will entitle such Lender to compensation pursuant to this Section 5.01(a) as promptly as practicable after it obtains knowledge thereof and determines to request such -35- 43 compensation, and will designate a different Applicable Lending Office for the Loans of such Lender affected by such event if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the sole opinion of such Lender, be disadvantageous to such Lender, provided that such Lender shall have no obligation to so designate an Applicable Lending Office located in the United States. If any Lender requests compensation from the Borrower under this Section 5.01(a), the Borrower may, by notice to such Lender, suspend the obligation of such Lender to make additional Loans of the Type with respect to which such compensation is requested until the Regulatory Change giving rise to such request ceases to be in effect (in which case the provisions of Section 5.04 shall be applicable). (b) Regulatory Change. Without limiting the effect of the provisions of Section 5.01(a), in the event that, by reason of any Regulatory Change or any other circumstances arising after the Closing Date affecting such Lender, the Eurodollar interbank market or such Lender's position in such market, any Lender either (i) 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 Eurodollar Loans is determined as provided in this Agreement or a category of extensions of credit or other assets of such Lender which includes Eurodollar Loans or (ii) becomes subject to restrictions on the amount of such a category of liabilities or assets which it may hold, then, if such Lender so elects by notice to the Borrower, the obligation of such Lender to make additional Eurodollar Loans shall be suspended until such Regulatory Change or other circumstances ceases to be in effect (in which case the provisions of Section 5.04 shall be applicable). (c) Capital Adequacy. Without limiting the effect of the foregoing provisions of this Section 5.01 (but without duplication), the Borrower shall pay directly to any Lender from time to time on request such amounts as such Lender may reasonably determine to be necessary to compensate such Lender or its parent or holding company for any costs which it determines are attributable to the maintenance by such Lender or its parent or holding company (or any Applicable Lending Office), pursuant to any Governmental Requirement following any Regulatory Change, of capital in respect of its Commitment, its Note, its Loans or any interest held by it in any Letter of Credit, such compensation to include, without limitation, an amount equal to any reduction of the rate of return on assets or equity of such Lender or its parent or holding company (or any Applicable Lending Office) to a level below that which such Lender or its parent or holding company (or any Applicable Lending Office) could have achieved but for such Governmental Requirement. Such Lender will notify the Borrower that it is entitled to compensation pursuant to this Section 5.01(c) as promptly as practicable after it determines to request such compensation. (d) Compensation Procedure. Any Lender notifying the Borrower of the incurrence of additional costs under this Section 5.01 shall in such notice to the Borrower and the Agent set forth in reasonable detail the basis and amount of its request for compensation. Determinations and allocations by each Lender for purposes of this Section 5.01 of the effect of any Regulatory Change pursuant to Section 5.01(a) or (b), or of the effect of capital maintained -36- 44 pursuant to Section 5.01(c), on its costs or rate of return of maintaining Loans or its obligation to make Loans or issue Letters of Credit, or on amounts receivable by it in respect of Loans or Letters of Credit, and of the amounts required to compensate such Lender under this Section 5.01, shall be conclusive and binding for all purposes, provided that such determinations and allocations are made on a reasonable basis. Any request for additional compensation under this Section 5.01 shall be paid by the Borrower within thirty (30) days of the receipt by the Borrower of the notice described in this Section 5.01(d). Section 5.02 Limitation on Eurodollar Loans. Anything herein to the contrary notwithstanding, if, on or prior to the determination of any Fixed Eurodollar Rate for any Interest Period: (i) the Agent determines (which determination shall be conclusive, absent manifest error) that quotations of interest rates for the relevant deposits referred to in the definition of "Fixed Eurodollar Rate" in Section 1.02 are not being provided in the relevant amounts or for the relevant maturities for purposes of determining rates of interest for Eurodollar Loans as provided herein; or (ii) the Agent determines (which determination shall be conclusive, absent manifest error) that the relevant rates of interest referred to in the definition of "Fixed Eurodollar Rate" in Section 1.02 upon the basis of which the rate of interest for Eurodollar Loans for such Interest Period is to be determined are not sufficient to adequately cover the cost to the Lenders of making or maintaining Eurodollar Loans; 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 additional Eurodollar Loans. Section 5.03 Illegality. Notwithstanding any other provision of this Agreement, in the event that it becomes unlawful for any Lender or its Applicable Lending Office to honor its obligation to make or maintain Eurodollar Loans hereunder, then such Lender shall promptly notify the Borrower thereof and such Lender's obligation to make Eurodollar Loans shall be suspended until such time as such Lender may again make and maintain Eurodollar Loans (in which case the provisions of Section 5.04 shall be applicable). Section 5.04 Base Rate Loans Pursuant to Sections 5.01, 5.02 and 5.03. If the obligation of any Lender to make Eurodollar Loans shall be suspended pursuant to Sections 5.01, 5.02 or 5.03 ("Affected Loans"), all Affected Loans which would otherwise be made by such Lender shall be made instead as Base Rate Loans (and, if an event referred to in Section 5.01(b) or Section 5.03 has occurred and such Lender so requests by notice to the Borrower, all Affected Loans of such Lender then outstanding shall be automatically converted into Base Rate Loans on the date specified by such Lender in such notice) and, to the extent that Affected Loans are so made as (or converted into) Base Rate Loans, all payments of principal which would otherwise be applied to such Lender's Affected Loans shall be applied instead to its Base Rate Loans. -37- 45 Section 5.05 Compensation. The Borrower shall pay to each Lender within thirty (30) days of receipt of written request of such Lender (which request shall set forth, in reasonable detail, the basis for requesting such amounts and which shall be conclusive and binding for all purposes provided that such determinations are made on a reasonable basis), such amount or amounts as shall compensate it for any loss, cost, expense or liability which such Lender determines are attributable to: (i) any payment, prepayment or conversion of a Eurodollar Loan properly made by such Lender or the Borrower for any reason (including, without limitation, the acceleration of the Loans pursuant to Section 10.02) on a date other than the last day of the Interest Period for such Loan; or (ii) any failure by the Borrower for any reason (including but not limited to, the failure of any of the conditions precedent specified in Article VI to be satisfied) to borrow, continue or convert a Eurodollar Loan from such Lender on the date for such borrowing, continuation or conversion specified in the relevant notice given pursuant to Section 2.02(c). Without limiting the effect of the preceding sentence, such compensation shall include an amount equal to the excess, if any, of (i) the amount of interest which would have accrued on the principal amount so paid, prepaid or converted or not borrowed for the period from the date of such payment, prepayment or conversion or failure to borrow to the last day of the 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 specified for such borrowing) at the applicable rate of interest for such Loan provided for herein over (ii) the interest component of the amount such Lender would have bid in the London interbank market for Dollar deposits of leading banks in amounts comparable to such principal amount and with maturities comparable to such period (as reasonably determined by such Lender). ARTICLE VI CONDITIONS PRECEDENT Section 6.01 Initial Funding. The obligation of the Lenders to make the Initial Funding is subject to the receipt by the Agent and the Lenders of all fees payable pursuant to Section 2.04 on or before the Closing Date and the receipt by the Agent of the following documents and satisfaction of the other conditions provided in this Section 6.01, each of which shall be satisfactory to the Agent in form and substance: -38- 46 (a) A certificate of the Secretary or an Assistant Secretary of the Borrower setting forth (i) resolutions of its board of directors with respect to the authorization of the Borrower to execute and deliver the Loan Documents to which it is a party and to enter into the transactions contemplated in those documents, (ii) the officers of the Borrower (y) who are authorized to sign the Loan Documents to which Borrower is a party and (z) who will, until replaced by another officer or officers duly authorized for that purpose, act as its representative for the purposes of signing documents and giving notices and other communications in connection with this Agreement and the transactions contemplated hereby, (iii) specimen signatures of the authorized officers, and (iv) the articles or certificate of incorporation and bylaws of the Borrower, certified as being true and complete. The Agent and the Lenders may conclusively rely on such certificate until the Agent receives notice in writing from the Borrower to the contrary. (b) Certificates of the appropriate state agencies with respect to the existence, qualification and good standing of the Borrower in such jurisdictions as the Agent may reasonably request. (c) A compliance certificate which shall be substantially in the form of Exhibit C, duly and properly executed by a Responsible Officer of the Borrower, and dated as of the date of the Initial Funding. (d) This Agreement and the Notes, duly completed and executed. (e) The Security Instruments described on Exhibit E (including, without limitation, guaranty agreements of each of the Guarantors), duly completed and executed in sufficient number of counterparts for recording, if necessary. (f) (i) An opinion of Fellers, Snider, Blankenship, Bailey & Tippens, P.C., special counsel to the Borrower, substantially in the form of Exhibit D hereto. (ii) An opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P. substantially in the form of Exhibit D1 hereto. (iii) A reliance letter from Derrick & Briggs substantially in the form of Exhibit D2 hereto. (g) A certificate of insurance coverage of the Borrower evidencing that the Borrower is carrying insurance in accordance with Section 7.20 hereof. (h) Such title information as the Agent may require concerning the status of title to the Oil and Gas Properties included in the Initial Reserve Report. -39- 47 (i) A list of all purchasers of Hydrocarbons produced from the Oil and Gas Properties for each purchaser listed on Schedule 6.01(i). (j) Such other documents as the Agent or any Lender or special counsel to the Agent may reasonably request. Section 6.02 Initial and Subsequent Loans and Letters of Credit. The obligation of the Lenders to make Loans to the Borrower upon the occasion of each borrowing hereunder and to issue, renew, extend or reissue Letters of Credit for the account of the Borrower (including the Initial Funding) is subject to the further conditions precedent that, as of the date of such Loans and after giving effect thereto: (i) no Default shall have occurred and be continuing; (ii) no Material Adverse Effect shall have occurred; and (iii) the representations and warranties made by the Borrower in Article VII and in the Security Instruments shall be true on and as of the date of the making of such Loans or issuance, renewal, extension or reissuance of a Letter of Credit with the same force and effect as if made on and as of such date and following such new borrowing, except to the extent such representations and warranties are expressly limited to an earlier date or the Majority Lenders may expressly consent in writing to the contrary. Each request for a borrowing or issuance, renewal, extension or reissuance of a Letter of Credit by the Borrower hereunder shall constitute a certification by the Borrower to the effect set forth in the preceding sentence (both as of the date of such notice and, unless the Borrower otherwise notifies the Agent prior to the date of and immediately following such borrowing or issuance, renewal, extension or reissuance of a Letter of Credit as of the date thereof). Section 6.03 Conditions Relating to Letters of Credit. In addition to the satisfaction of all other conditions precedent set forth in this Article VI, the issuance, renewal, extension or reissuance of the Letters of Credit referred to in Section 2.01(b) hereof is subject to the following conditions precedent: (a) At least three (3) Business Days prior to the date of the issuance and at least thirty (30) Business Days prior to the date of the renewal, extension or reissuance of each Letter of Credit, the Agent shall have received a written request for a Letter of Credit. (b) Each of the Letters of Credit shall (i) be issued by the Agent, (ii) contain such terms and provisions as are reasonably required by the Agent, (iii) be for the account of the Borrower and (iv) expire not later than two (2) days before the Termination Date. (c) The Borrower shall have duly and validly executed and delivered to the Agent a Letter of Credit Agreement pertaining to the Letter of Credit. Section 6.04 Conditions Relating to Loans to Finance the Texaco Acquisition or Other Acquisition. The obligation of the Lenders to make Loans to the Borrower in excess of the Threshold Amount is subject to the further conditions preceding that: -40- 48 (a) Borrower shall have entered into a Purchase Agreement with Texaco, IN FORM AND SUBSTANCE SATISFACTORY TO THE AGENT (the "Texaco Purchase Agreement"). (b) Simultaneously with such funding the Borrower shall have purchased the Texaco Property, THE BORROWER'S TITLE TO TEXACO'S UNDIVIDED 50% INTEREST IN THE WEST COTE BLANCHE BAY FIELD SHALL BE SATISFACTORY TO THE MAJORITY LENDERS and the Borrower shall have complied with Section 8.07 with respect to such Texaco Properties. (c) In the alternative, in the event conditions (a) and (b) above are not met the Borrower shall have consummated an Other Acquisition and shall have complied with Section 8.07 or taken other similar action satisfactory to the Majority Lenders. (d) The conditions stated in this Section 6.04(a) and (b) or (c) shall have been satisfied on or before 120 days following the Closing Date. ARTICLE VII REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants to the Agent and the Lenders that (each representation and warranty herein is given as of the Closing Date and shall be deemed repeated and reaffirmed on the dates of each borrowing and issuance, renewal, extension or reissuance of a Letter of Credit as provided in Section 6.02): Section 7.01 Corporate Existence. Each of the Borrower and each Subsidiary: (i) is a Person duly formed, legally existing and in good standing under the laws of the jurisdiction of its formation; (ii) has all requisite power, and has all material governmental licenses, authorizations, consents and approvals necessary to own its assets and carry on its business as now being or as proposed to be conducted; and (iii) is qualified to do business in all jurisdictions in which the nature of the business conducted by it makes such qualification necessary and where failure so to qualify would have a Material Adverse Effect. Section 7.02 Financial Condition. The unaudited consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as at September 30 1996 and the related consolidated statement of income, stockholders' equity and cash flow of the Borrower and its Consolidated Subsidiaries for the interim period ended on said date are complete and correct and fairly present the consolidated financial condition of the Borrower and its Consolidated Subsidiaries as at said date and the results of its operations for the interim period ended on said date, all in accordance with GAAP, as applied on a consistent basis. Neither the Borrower nor any Subsidiary has on the Closing Date any material Debt, contingent liabilities, liabilities for taxes, unusual forward or long-term commitments or unrealized or anticipated losses from any unfavorable commitments, except as referred to or reflected or provided for in said balance sheet. -41- 49 Since December 31, 1995, there has been no change or event having a Material Adverse Effect. Since the date of the Financial Statements, neither the business nor the Properties of the Borrower or any Subsidiary have been materially and 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 or of any public enemy. Section 7.03 Litigation. Except as disclosed to the Lenders in Schedule 7.03 hereto, at the Closing Date there is no litigation, legal, administrative or arbitral proceeding, investigation or other action of any nature pending or, to the knowledge of the Borrower threatened against or affecting the Borrower or any Subsidiary which involves the possibility of any judgment or liability against the Borrower or any Subsidiary not fully covered by insurance (except for normal deductibles), and which would have a Material Adverse Effect. Section 7.04 No Breach. Neither the execution and delivery of the Loan Documents, nor compliance with the terms and provisions hereof will conflict with or result in a breach of, or require any consent which has not been obtained as of the Closing Date under, the respective charter or by-laws of the Borrower or any Subsidiary, or any Governmental Requirement or any agreement or instrument to which the Borrower or any Subsidiary is a party or by which it is bound or to which it or its Properties are subject, or constitute a default under any such agreement or instrument, or result in the creation or imposition of any Lien upon any of the revenues or assets of the Borrower or any Subsidiary pursuant to the terms of any such agreement or instrument other than the Liens created by the Loan Documents. Section 7.05 Authority. The Borrower and each Subsidiary have all necessary corporate power and authority to execute, deliver and perform its obligations under the Loan Documents which it is a party; and the execution, delivery and performance by the Borrower and each Subsidiary of the Loan Documents to which it is a party, have been duly authorized by all necessary corporate action on its part; and the Loan Documents constitute the legal, valid and binding obligations of the Borrower and each Subsidiary, enforceable in accordance with their terms, except as the same may be limited by bankruptcy, insolvency, moratorium or other similar laws generally affecting creditors' rights and general principles of equity. Section 7.06 Approvals. No authorizations, approvals or consents of, and no filings or registrations with, any Governmental Authority are necessary for the execution, delivery or performance by the Borrower or any Subsidiary of this Agreement, the Notes, or the Security Instruments to which it is a party or for the validity or enforceability thereof, except for the recording and filing of the Security Instruments as required by this Agreement. Section 7.07 Use of Loans. The proceeds of the Loans shall be used to purchase the Texaco Properties and/or the Borrower's general corporate purposes, including, without limitation, the exploration, acquisition and development of direct oil and gas interests and the acquisition of Persons owning direct oil and gas interests. The Borrower is not engaged principally, -42- 50 or as one of its important activities, in the business of extending credit for the purpose, whether immediate, incidental or ultimate, of buying or carrying margin stock (within the meaning of Regulation U or X of the Board of Governors of the Federal Reserve System) and no part of the proceeds of any Loan hereunder will be used to buy or carry any margin stock (except the WRT Energy Corporation 13 7/8% Senior Notes listed in Schedule 9.03 hereof). Section 7.08 ERISA. (a) The Borrower, each Subsidiary and each ERISA Affiliate have complied in all material respects with ERISA and, where applicable, the Code regarding each Plan. (b) Each Plan is, and has been, maintained in substantial compliance with ERISA and, where applicable, the Code. (c) No act, omission or transaction has occurred which could result in imposition on the Borrower, any Subsidiary or any ERISA Affiliate (whether directly or indirectly) of (i) either a civil penalty assessed pursuant to section 502(c), (i) or (l) of ERISA or a tax imposed pursuant to Chapter 43 of Subtitle D of the Code or (ii) breach of fiduciary duty liability damages under section 409 of ERISA. (d) No Plan (other than a defined contribution plan) or any trust created under any such Plan has been terminated since September 2, 1974. No liability to the PBGC (other than for the payment of current premiums which are not past due) by the Borrower, any Subsidiary or any ERISA Affiliate has been or is expected by the Borrower, any Subsidiary or any ERISA Affiliate to be incurred with respect to any Plan. No ERISA Event with respect to any Plan has occurred. (e) Full payment when due has been made of all amounts which the Borrower, any Subsidiary or any ERISA Affiliate is required under the terms of each Plan or applicable law to have paid as contributions to such Plan, and no accumulated funding deficiency (as defined in section 302 of ERISA and section 412 of the Code), whether or not waived, exists with respect to any Plan. (f) The actuarial present value of the benefit liabilities under each Plan which is subject to Title IV of ERISA does not, as of the end of the Borrower's most recently ended fiscal year, exceed the current value of the assets (computed on a plan termination basis in accordance with Title IV of ERISA) of such Plan allocable to such benefit liabilities. The term "actuarial present value of the benefit liabilities" shall have the meaning specified in section 4041 of ERISA. (g) None of the Borrower, any Subsidiary or any ERISA Affiliate sponsors, maintains, or contributes to an employee welfare benefit plan, as defined in section 3(1) of ERISA, including, without limitation, any such plan maintained to provide benefits to former -43- 51 employees of such entities, that may not be terminated by the Borrower, a Subsidiary or any ERISA Affiliate in its sole discretion at any time without any material liability. (h) None of the Borrower, any Subsidiary or any ERISA Affiliate sponsors, maintains or contributes to, or has at any time in the preceding six-year period sponsored, maintained or contributed to, any Multiemployer Plan. (i) None of the Borrower, any Subsidiary or any ERISA Affiliate is required to provide security under section 401(a)(29) of the Code due to a Plan amendment that results in an increase in current liability for the Plan. Section 7.09 Taxes. Except as set out in Schedule 7.09, each of the Borrower and its Subsidiaries has filed all United States Federal income tax returns and all other tax returns which are required to be filed by them and have paid all material taxes due pursuant to such returns or pursuant to any assessment received by the Borrower or any Subsidiary. The charges, accruals and reserves on the books of the Borrower and its Subsidiaries in respect of taxes and other governmental charges are, in the opinion of the Borrower, adequate. No tax lien has been filed and, to the knowledge of the Borrower, no claim is being asserted with respect to any such tax, fee or other charge. Section 7.10 Titles, etc. (a) Except as set out in Schedule 7.10, the Borrower has marketable title in accordance with industry standards to its material (individually or in the aggregate) Properties, free and clear of all Liens except Liens permitted by Section 9.02. Except as set forth in Schedule 7.10, after giving full effect to the Excepted Liens, the Borrower owns the net interests in production attributable to the Hydrocarbon Interests reflected in the most recently delivered Reserve Report and the ownership of such Properties shall not in any material respect obligate the Borrower to bear the costs and expenses relating to the maintenance, development and operations of each such Property in an amount in excess of the working interest of each Property set forth in the most recently delivered Reserve Report. All information contained in the Initial Reserve Report is true and correct in all material respects as of the date thereof. (b) All material leases and agreements necessary for the conduct of the business of the Borrower and its Subsidiaries are valid and subsisting, in full force and effect and there exists no default or event or circumstance which with the giving of notice or the passage of time or both would give rise to a default under any such lease or leases, which would affect in any material respect the conduct of the business of the Borrower and its Subsidiaries. (c) The rights, Properties and other assets presently owned, leased or licensed by the Borrower and its Subsidiaries including, without limitation, all easements and rights of way, include all rights, Properties and other assets necessary to permit the Borrower and its -44- 52 Subsidiaries to conduct their business in all material respects in the same manner as its business has been conducted prior to the Closing Date. (d) All of the assets and Properties of the Borrower and its Subsidiaries which are reasonably necessary for the operation of its business are in good working condition and are maintained in accordance with prudent business standards. (e) As of the Closing Date, Oil and Gas Properties, representing not less than 95% of the discounted net present value of all of the Borrower's Oil and Gas Properties, are subject, except for Excepted Liens and Liens permitted by Section 9.02, to a first priority mortgage Lien in favor of the Agent for the benefit of the Lenders. (f) Following the Borrower's acquisition of the Texaco Property or Other Acquisition, the representations contained in this Section 7.10 shall be true and correct with respect to such Texaco Property or Properties acquired pursuant to the Other Acquisition. Section 7.11 No Material Misstatements. No written information, statement, exhibit, certificate, document or report furnished to the Agent and the Lenders (or any of them) by the Borrower or any Subsidiary in connection with the negotiation of this Agreement contained any material misstatement of fact or omitted to state a material fact or any fact necessary to make the statement contained therein not materially misleading in the light of the circumstances in which made and with respect to the Borrower and its Subsidiaries taken as a whole. There is no fact peculiar to the Borrower or any Subsidiary which has a Material Adverse Effect or in the future is reasonably likely to have (so far as the Borrower can now foresee) a Material Adverse Effect and which has not been set forth in this Agreement or the other documents, certificates and statements furnished to the Agent by or on behalf of the Borrower or any Subsidiary prior to, or on, the Closing Date in connection with the transactions contemplated hereby. Section 7.12 Investment Company Act. Neither the Borrower nor any Subsidiary is an "investment company or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. Section 7.13 Public Utility Holding Company Act. Neither the Borrower nor any Subsidiary is a "holding company or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company," or a "public utility" within the meaning of the Public Utility Holding Company Act of 1935, as amended. Section 7.14 Subsidiaries and Partnerships. Except as set forth on Schedule 7.14, the Borrower has no Subsidiaries and has no interest in any partnerships (other than tax partnerships which are not partnerships under applicable state law). The Borrower owns the equity interests in each Subsidiary and partnership that are specified in Schedule 7.14. -45- 53 Section 7.15 Location of Business and Offices. The Borrower's principal place of business and chief executive offices are located at the address stated on the signature page of this Agreement. The principal place of business and chief executive office of each Subsidiary is set forth in Schedule 7.14. Section 7.16 Environmental Matters. Except (i) as provided in Schedule 7.16 or (ii) as would not have a Material Adverse Effect (or with respect to (c), (d) and (e) below, where the failure to take such actions would not have a Material Adverse Effect): (a) Neither any Property of the Borrower or any Subsidiary nor the operations conducted thereon violate any order or requirement of any court or Governmental Authority or any Environmental Laws; (b) Without limitation of clause (a) above, no Property of the Borrower or any Subsidiary nor the operations currently conducted thereon or, to the best knowledge of the Borrower, by any prior owner or operator of such Property or operation, are in violation of or subject to any existing, pending or threatened action, suit, investigation, inquiry or proceeding by or before any court or Governmental Authority or to any remedial obligations under Environmental Laws; (c) All notices, permits, licenses or similar authorizations, if any, required to be obtained or filed in connection with the operation or use of any and all Property of the Borrower and each Subsidiary, including without limitation past or present treatment, storage, disposal or release of a hazardous substance or solid waste into the environment, have been duly obtained or filed, and the Borrower and each Subsidiary are in compliance with the terms and conditions of all such notices, permits, licenses and similar authorizations; (d) All hazardous substances, solid waste, and oil and gas exploration and production wastes, if any, generated at any and all Property of the Borrower or any Subsidiary have in the past been transported, treated and disposed of in accordance with Environmental Laws and so as not to pose an imminent and substantial endangerment to public health or welfare or the environment, and, to the best knowledge of the Borrower, all such transport carriers and treatment and disposal facilities have been and are operating in compliance with Environmental Laws and so as not to pose an imminent and substantial endangerment to public health or welfare or the environment, and are not the subject of any existing, pending or threatened action, investigation or inquiry by any Governmental Authority in connection with any Environmental Laws; (e) The Borrower has taken all steps reasonably necessary to determine and has determined that no hazardous substances, solid waste, or oil and gas exploration and production wastes, have been disposed of or otherwise released and there has been no threatened release of any hazardous substances on or to any Property of the Borrower or any Subsidiary except in -46- 54 compliance with Environmental Laws and so as not to pose an imminent and substantial endangerment to public health or welfare or the environment; (f) To the extent applicable, all Property of the Borrower and each Subsidiary currently satisfies all design, operation, and equipment requirements imposed by the OPA or scheduled as of the Closing Date to be imposed by OPA during the term of this Agreement, and the Borrower does not have any reason to believe that such Property, to the extent subject to OPA, will not be able to maintain compliance with the OPA requirements during the term of this Agreement; and (g) Neither the Borrower nor any Subsidiary has any known contingent liability in connection with any release or threatened release of any oil, hazardous substance or solid waste into the environment. Section 7.17 Gas Imbalances. As of the Closing Date, except as set forth on Schedule 7.17 or on the most recent certificate delivered pursuant to Section 8.05(c), on a net basis there are no gas imbalances, take or pay or other prepayments with respect to the Oil and Gas Properties which would require the Borrower to deliver Hydrocarbons produced from the Oil and Gas Properties at some future time without then or thereafter receiving full payment therefor exceeding 500,000 mcf of gas in the aggregate. Section 7.18 Defaults. Neither the Borrower nor any Subsidiary is in default nor has any event or circumstance occurred which, but for the expiration of any applicable grace period or the giving of notice, or both, would constitute a default under any material agreement or instrument to which the Borrower or any Subsidiary is a party or by which the Borrower or any Subsidiary is bound which default would have a Material Adverse Effect. No Default hereunder has occurred and is continuing. Section 7.19 Compliance with the Law. Neither the Borrower nor any Subsidiary has violated any Governmental Requirement or failed to obtain any license, permit, franchise or other governmental authorization necessary for the ownership of any of its Properties or the conduct of its business, which violation or failure would have (in the event such violation or failure were asserted by any Person through appropriate action) a Material Adverse Effect. Except for such acts or failures to act as would not have a Material Adverse Effect, the Oil and Gas Properties (and properties unitized therewith) have been maintained, operated and developed in a good and workmanlike manner and in conformity with all applicable laws and all rules, regulations and orders of all duly constituted authorities having jurisdiction and in conformity with the provisions of all leases, subleases or other contracts comprising a part of the Hydrocarbon Interests and other contracts and agreements forming a part of the Oil and Gas Properties; specifically in this connection, (i) after the Closing Date, no Oil and Gas Properties are subject to having allowable production reduced below the full and regular allowable production (including the maximum permissible tolerance) because of any overproduction (whether or not the same was permissible at the time) prior to the Closing Date, (ii) none of the -47- 55 wells comprising a part of the Oil and Gas Properties (or properties unitized therewith) are deviated from the vertical more than the maximum permitted by applicable laws, regulations, rules and orders, and such wells are, in fact, bottomed under and are producing from, and the well bores are wholly within, the Oil and Gas Property (or, in the case of wells located on properties unitized therewith, such unitized properties) and (iii) all royalties have been timely paid. Section 7.20 Insurance. Schedule 7.20 attached hereto contains an accurate and complete description of all material policies of fire, liability, workmen's compensation and other forms of insurance owned or held by the Borrower and each Subsidiary. All such policies are in full force and effect, all premiums with respect thereto covering all periods up to and including the date of the closing have been paid, and no notice of cancellation or termination has been received with respect to any such policy. Such policies are sufficient for compliance with all requirements of law and of all agreements to which the Borrower or any Subsidiary is a party; are valid, outstanding and enforceable policies; provide adequate insurance coverage in at least such amounts and against at least such risks (but including in any event public liability) as are usually insured against in the same general area by companies engaged in the same or a similar business for the assets and operations of the Borrower and each Subsidiary; will remain in full force and effect through the respective dates set forth in Schedule 7.20 without the payment of additional premiums; and will not in any way be affected by, or terminate or lapse by reason of, the transactions contemplated by this Agreement. Schedule 7.20 identifies all material risks, if any, which the Borrower and its Subsidiaries and their respective Board of Directors or officers have designated as being self insured. Neither the Borrower nor any Subsidiary has been refused any insurance with respect to its assets or operations, nor has its coverage been limited below usual and customary policy limits, by an insurance carrier to which it has applied for any such insurance or with which it has carried insurance during the last three years. Section 7.21 Restriction on Liens. Neither the Borrower nor any of its Subsidiaries is a party to any agreement or arrangement (other than this Agreement and the Security Instruments), or subject to any order, judgment, writ or decree, which either restricts or purports to restrict its ability to grant Liens to other Persons on or in respect of their respective assets of Properties. Section 7.22 Bonray. Acquisition Drilling, Inc. ("ADI"), a Delaware corporation, and wholly owned Subsidiary of the Borrower has been merged with and into Bonray pursuant to the Agreement and Plan of Merger dated January 6, 1997 between the Borrower, ADI and Bonray and Bonray is now a wholly owned Subsidiary of the Borrower and all of the capital stock of Bonray has been deregistered under the Securities Exchange Act of 1934 and such stock is not a "margin" stock within the meaning of Regulation U or X of the Board of Governors of the Federal Reserve System. Section 7.23 Value of WRT Notes. The 13-7/8% Senior Notes of WRT Energy Corporation due 2002 described in Schedule 9.03 hereto have a value of less than 10% of the value of the assets of the Borrower subject to Section 9.02. -48- 56 ARTICLE VIII AFFIRMATIVE COVENANTS The Borrower covenants and agrees that, so long as any of the Commitments are in effect and until payment in full of all Loans hereunder, all interest thereon and all other amounts payable by the Borrower hereunder: Section 8.01 Reports. The Borrower shall deliver, or shall cause to be delivered, to the Agent with sufficient copies of each for the Lenders: (a) As soon as available and in any event within 90 days after the end of each fiscal year of the Borrower, the audited consolidated and unaudited consolidating statements of income, stockholders' equity, changes in financial position and cash flow of the Borrower and its Consolidated Subsidiaries for such fiscal year, and the related consolidated and consolidating balance sheets of the Borrower and its Consolidated Subsidiaries as at the end of such fiscal year, and setting forth in each case in comparative form the corresponding figures for the preceding fiscal year, and accompanied by the related opinion of independent public accountants of recognized national standing acceptable to the Agent which opinion shall state that said financial statements fairly present the consolidated and consolidating financial condition and results of operations of the Borrower and its Consolidated Subsidiaries as at the end of, and for, such fiscal year and that such financial statements have been prepared in accordance with GAAP except for such changes in such principles with which the independent public accountants shall have concurred and such opinion shall not contain a "going concern" or like qualification or exception, and a certificate of such accountants stating that, in making the examination necessary for their opinion, they obtained no knowledge, except as specifically stated, of any Default. (b) As soon as available and in any event within 45 days after the end of each of the first three fiscal quarterly periods of each fiscal year of the Borrower, consolidated and consolidating statements of income, stockholders' equity, changes in financial position and cash flow of the Borrower and its Consolidated Subsidiaries for such period and for the period from the beginning of the respective fiscal year to the end of such period (which may be in the form of the Borrower's report on Form 10-Q filed with the SEC for such period, to the extent subsumed therein), and the related consolidated and consolidating balance sheets as at the end of such period, and setting forth in each case in comparative form the corresponding figures for the corresponding period in the preceding fiscal year, accompanied by the certificate of a Responsible Officer, which certificate shall state that said financial statements fairly present the consolidated and consolidating financial condition and results of operations of the Borrower and its Consolidated Subsidiaries in accordance with GAAP, as at the end of, and for, such period (subject to normal year-end audit adjustments and the inclusion only of abbreviated footnotes as permitted by Form 10-Q). -49- 57 (c) Promptly after the Borrower knows that any Default or any Material Adverse Effect has occurred, a notice of such Default or Material Adverse Effect, describing the same in reasonable detail and the action the Borrower proposes to take with respect thereto. (d) Promptly upon receipt thereof, a copy of each other report or letter submitted to the Borrower or any Subsidiary by independent accountants in connection with any annual, interim or special audit made by them of the books of the Borrower and its Subsidiaries, and a copy of any response by the Borrower or any Subsidiary of the Borrower, or the Board of Directors of the Borrower or any Subsidiary of the Borrower, to such letter or report. (e) Promptly upon its becoming available and in any event within fifteen (15) days of submission, each financial statement, report, notice or proxy statement sent by the Borrower to stockholders generally and each regular or periodic report and any registration statement, prospectus or written communication (other than transmittal letters) in respect thereof filed by the Borrower with or received by the Borrower in connection therewith from any securities exchange or the SEC or any successor agency. (f) Promptly after the furnishing thereof, copies of any statement, report or notice furnished to or by any Person pursuant to the terms of any material indenture, loan or credit or other similar agreement, other than this Agreement and not otherwise required to be furnished to the Lenders pursuant to any other provision of this Section 8.01. (g) From time to time such other information regarding the business, affairs or financial condition of the Borrower or any Subsidiary (including, without limitation, any Plan or Multiemployer Plan and any reports or other information required to be filed under ERISA) as any Lender or the Agent may reasonably request. (h) Concurrently with the delivery of the financial statements described in Sections 8.01(a) and (b), the Borrower will furnish to the Agent a revised list of purchasers of Hydrocarbons produced from the Oil and Gas Properties, as of the last day of the fiscal quarter immediately preceding such delivery date. (i) Concurrently with the submission of the Reserve Reports required by Section 8.05, the Borrower shall furnish to the Agent a "Capital Budget Report" denoting budgeted capital expenditures in excess of $500,000 for the next twelve (12) month period. The Borrower will furnish to the Agent, at the time it furnishes each set of financial statements pursuant to paragraph (a) or (b) above, a certificate substantially in the form of Exhibit C hereto executed by a Responsible Officer (i) certifying as to the matters set forth therein and stating that no Default has occurred and is continuing (or, if any Default has occurred and is continuing, describing the same in reasonable detail), and (ii) setting forth in reasonable detail the computations necessary to determine whether the Borrower is in compliance with Sections 9.12, 9.13 and 9.14 as of the end of the respective fiscal quarter or fiscal year. -50- 58 Section 8.02 Litigation. The Borrower shall promptly give to the Agent notice of: (i) all legal or arbitral proceedings, and of all proceedings before any Governmental Authority affecting the Borrower or any Subsidiary, except proceedings which, if adversely determined, would not have a Material Adverse Effect, and (ii) of any litigation or proceeding against or adversely affecting the Borrower or any Subsidiary in which the amount involved is not covered in full by insurance (subject to normal and customary deductibles) and for which the insurer has not assumed the defense, or in which injunctive or similar relief is sought, except proceedings which, if adversely determined, would not have a Material Adverse Effect. The Borrower will, and will cause each of its Subsidiaries to, promptly notify the Agent and each of the Lenders of any claim, judgment, Lien or other encumbrance affecting any Property of the Borrower or any Subsidiary if the value of the claim, judgment, Lien, or other encumbrance affecting such Property shall exceed $100,000. Section 8.03 Maintenance, Etc. (a) The Borrower shall and shall cause each Subsidiary to: preserve and maintain its corporate existence and all of its material rights, privileges and franchises; keep books of record and account in which full, true and correct entries will be made of all dealings or transactions in relation to its business and activities; comply with all Governmental Requirements if failure to comply with such requirements will have a Material Adverse Effect; pay and discharge all taxes, assessments and governmental charges or levies imposed on it or on its income or profits or on any of its Property prior to the date on which penalties attach thereto, except for any such tax, assessment, charge or levy the payment of which is being contested in good faith and by proper proceedings and against which adequate reserves are being maintained; upon reasonable notice, permit representatives of the Agent or any Lender, during normal business hours, to examine, copy and make extracts from its books and records, to inspect its Properties, and to discuss its business and affairs with its officers, all to the extent reasonably requested by such Lender or the Agent (as the case may be); and keep, or cause to be kept, insured by financially sound and reputable insurers all Property of a character usually insured by Persons engaged in the same or similar business similarly situated against loss or damage of the kinds and in the amounts customarily insured against by such Persons and carry such other insurance as is usually carried by such Persons including, without limitation, environmental risk insurance to the extent reasonably available. (b) Contemporaneously with the delivery of the financial statements required by Section 8.01(a) to be delivered for each year, the Borrower will furnish or cause to be furnished to the Agent and the Lenders a certificate of insurance coverage from the insurer in form and substance satisfactory to the Agent and, if requested, will furnish the Agent and the Lenders copies of the applicable policies. (c) The Borrower will, at its own expense, and will cause each Subsidiary to, do or cause to be done all things reasonably necessary to preserve and keep in good repair, working order and efficiency (except for normal wear and tear) all of its Oil and Gas Properties -51- 59 and other material Properties including, without limitation, all equipment, machinery and facilities, and from time to time will make all the reasonably necessary repairs, renewals and replacements so that at all times the state and condition of its Oil and Gas Properties and other material Properties will be fully preserved and maintained, except to the extent a portion of such Properties is no longer capable of producing Hydrocarbons in economically reasonable amounts. The Borrower will promptly: (i) pay and discharge, or make reasonable and customary efforts to cause to be paid and discharged, all delay rentals, royalties, expenses and indebtedness accruing under the leases or other agreements affecting or pertaining to the Oil and Gas Properties; (ii) perform or make reasonable and customary efforts to cause to be performed, in accordance with industry standards the obligations required by each and all of the assignments, deeds, leases, sub-leases, contracts and agreements affecting its interests in its Oil and Gas Properties and other material Properties; (iii) do all other things necessary to keep unimpaired, except for Liens described in Section 9.02, its rights with respect to each and all of the assignments, deeds, leases, sub-leases, contracts and agreements affecting its interests in its Oil and Gas Properties and other material Properties and prevent any forfeiture thereof or a default thereunder, except (A) to the extent a portion of such Properties is no longer capable of producing Hydrocarbons in economically reasonable amounts and (B) for dispositions permitted by Section 9.15 hereof. The Borrower will operate its Oil and Gas Properties and other material Properties or cause or make reasonable and customary efforts to cause such Oil and Gas Properties and other material Properties to be operated in a careful and efficient manner in accordance with the practices of the industry and in compliance in all material respects with all applicable contracts and agreements and in compliance in all material respects with all Governmental Requirements. (d) The Borrower will do or cause to be done such development work as may be reasonably necessary to the prudent and economical operation of the Oil and Gas Property in accordance with the most approved practices of operators in the industry, including all to be done that may be appropriate to protect from diminution the productive capacity of the Oil and Gas Property and each producing well thereon including, without limitation, cleaning out and reconditioning each well from time to time, plugging and completing at a different level each such well, drilling a substitute well to conform to changed spacing regulations and to protect the Oil and Gas Property against drainage whenever and as often as is necessary. Section 8.04 Environmental Matters. (a) The Borrower will and will cause each Subsidiary to establish and implement such procedures as may be reasonably necessary to continuously determine and assure that any failure of the following does not have a Material Adverse Effect: (i) all Property of the Borrower and its Subsidiaries and the operations conducted thereon and other activities of the Borrower and its Subsidiaries are in compliance with and do not violate the requirements of any Environmental Laws, (ii) no oil, hazardous substances or solid wastes are disposed of or otherwise released on or to any Property owned by any such party except in compliance with Environmental Laws, (iii) no hazardous substance will be released on or to any such Property in a quantity equal to or exceeding that quantity which requires reporting pursuant to Section 103 -52- 60 of CERCLA, and (iv) no oil, oil and gas exploration and production wastes or hazardous substance is released on or to any such Property so as to pose an imminent and substantial endangerment to public health or welfare or the environment. (b) The Borrower will promptly notify the Agent and the Lenders in writing of any threatened action, investigation or inquiry by any Governmental Authority of which the Borrower has knowledge in connection with any Environmental Laws, excluding routine testing and corrective action. (c) Upon the request of the Agent following consultation with the Borrower, the Borrower will have a Phase I environmental assessment conducted before the acquisition of any producing Oil and Gas Properties, pipelines, gas processing plants or other real property and fixtures by a recognized environmental consultant reasonably acceptable to the Agent, and will promptly provide a copy of such report to the Agent before completion of such acquisition. Also before the completion of such acquisition, the Borrower will provide to the Agent a plan, including a timetable, in form and substance reasonably satisfactory to the Agent, addressing the implementation of the recommendations contained in such environmental assessment. With the delivery of each quarterly certificate required by Section 8.01, the Borrower will deliver to the Agent a report summarizing the status of its compliance with each such environmental assessment. Section 8.05 Engineering Reports. (a) By February 14 and August 14 of each year commencing February 14, 1997, the Borrower shall furnish to the Agent and the Lenders a Reserve Report evaluating the Oil and Gas Properties of the Borrower as of January 1 or July 1 of such year. The Reserve Report due each February 14 shall be prepared by Degolyer and McNaughton or other certified independent petroleum engineers or other independent petroleum consultant(s) acceptable to the Agent, such acceptance not to be unreasonably withheld, and the Reserve Report due each August 14 shall be prepared by or under the supervision of the chief engineer of the Borrower who shall certify such Reserve Report to be true and accurate and to have been prepared in accordance with the procedures used in the Reserve Report due each February 14. (b) In the event of an unscheduled redetermination, the Borrower shall furnish to the Agent and the Lenders a Reserve Report prepared by or under the supervision of the chief engineer of the Borrower who shall certify such Reserve Report to be true and accurate and to have been prepared in accordance with the procedures used in the immediately preceding Reserve Report. For any unscheduled redetermination requested by the Agent (or as requested by the Lenders pursuant to Section 2.09(c), the Borrower shall provide such Reserve Report with an "as of" date as required by the Majority Lenders as soon as possible, but in any event no later than 30 days following the receipt of the request by the Agent. -53- 61 (c) With the delivery of each Reserve Report, the Borrower shall provide to the Agent and the Lenders, a certificate from a Responsible Officer certifying that, to the best of his knowledge and in all material respects: (i) the information contained in the Reserve Report and any other information delivered in connection therewith is true and correct, (ii) the Borrower owns marketable title in accordance with industry standards to its Oil and Gas Properties evaluated in such Reserve Report and such Properties are free of all Liens except for Excepted Liens and that the Borrower has created or allowed to be created no new Liens on its Oil and Gas Properties except for Liens permitted by Section 9.02, (iii) except as set forth on an exhibit to the certificate, on a net basis there are no gas imbalances, take or pay or other prepayments with respect to its Oil and Gas Properties evaluated in such Reserve Report which would require the Borrower to deliver Hydrocarbons produced from such Oil and Gas Properties at some future time without then or thereafter receiving full payment therefor, (iv) none of its Oil and Gas Properties have been sold since the date of the last Borrowing Base determination, except as permitted pursuant to Section 9.15 as set forth on an exhibit to the certificate, which certificate shall list all of its Oil and Gas Properties sold and in such detail as reasonably required by the Majority Lenders, (v) attached to the certificate is a list of its Oil and Gas Properties added to and deleted from the immediately prior Reserve Report, (vi) attached to the certificate is a list of all Persons disbursing proceeds to the Borrower from its Oil and Gas Properties, (vii) except as set forth on a schedule attached to the certificate all of the Oil and Gas Properties evaluated by such Reserve Report are Mortgaged Property and (viii) any change in working interest or net revenue interest in its Oil and Gas Properties occurring and the reason for such change. (d) As soon as available and in any event contemporaneous with the delivery of the each Reserve Report, the Borrower shall provide production reports and general and administrative cost summaries by lease for its Oil and Gas Properties, which reports shall include quantities or volume of production, revenue, realized product prices, operating expenses, taxes, capital expenditures and lease operating costs which have accrued to the Borrower's accounts in such period, and such other information with respect thereto as the Agent may require. Section 8.06 Title Information. (a) On or before the delivery to the Agent and the Lenders of each Reserve Report required by Section 8.07(a), the Borrower will provide the Agent with current title opinions covering the Oil and Gas Properties having a value in excess of $100,000, if any, evaluated by such Reserve Report that were not included in the immediately preceding Reserve Report and which the Borrower has designated for inclusion in the calculation of the Borrowing Base. (b) The Borrower shall cure any title defects or exceptions which are not Excepted Liens raised by such information delivered pursuant to Section 8.06(a), or substitute acceptable Mortgaged Properties with no title defects or exceptions except for Excepted Liens covering Mortgaged Properties of an equivalent value, within 60 days after a request by the Agent or the Lenders to cure such defects or exceptions. If the Borrower is unable to cure any title -54- 62 defect requested by the Agent or the Lenders to be cured within the 60-day period, such default shall not be a Default or an Event of Default, but instead such Property shall remain excluded from the Borrowing Base until such time as title is satisfactory to the Agent. (c) Upon the discovery of any title defect or exception which is not an Excepted Lien, the Agent and the Lenders shall have the right to exercise the following remedy in their sole discretion from time to time, and any failure to so exercise this remedy at any time shall not be a waiver as to future exercise of the remedy by the Agent or the Lenders. To the extent that the Agent or the Lenders are not satisfied with title to any Mortgaged Property, the Agent may, without regard to the expiration of the 60-day period described in Section 8.06(b), send a notice to the Borrower and the Lenders that the then outstanding Borrowing Base shall be reduced by an amount equal to the value of such Property as set forth in the most recent Reserve Report. This new Borrowing Base shall become effective immediately after receipt of such notice. Such reduction to the Borrowing Base may be reinstated if, at any time thereafter, such title defect or exception is corrected to the reasonable satisfaction of the Agent and the Lenders. Section 8.07 Additional Collateral. (a) Should the Borrower acquire any additional Oil and Gas Properties having a value in excess of $100,000, the Borrower will grant to the Agent as security for the Indebtedness a first-priority Lien interest (subject only to Liens permitted by Section 9.02) on the Borrower's interest in any Oil and Gas Properties not already subject to a Lien of the Security Instruments, which Lien will be created and perfected by and in accordance with the provisions of deeds of trust, security agreements and financing statements, or other Security Instruments, all in form and substance satisfactory to the Agent in its sole discretion and in sufficient executed (and acknowledged where necessary or appropriate) counterparts for recording purposes. (b) Concurrently with the granting of the Lien or other action referred to in Section 8.07(a) above, the Borrower will provide to the Agent (i) title information in form and substance satisfactory to the Agent in its sole discretion with respect to the Borrower's interests in such Oil and Gas Properties and (ii) information reasonably satisfactory to the Agent and Majority Lenders establishing that such Properties are in compliance with Environmental Laws. Section 8.08 Further Assurances. The Borrower will and will cause each Subsidiary to cure promptly any defects in the creation and issuance of the Notes and the execution and delivery of the Security Instruments, including this Agreement. The Borrower at its expense will and will cause each Subsidiary to promptly execute and deliver to the Agent upon request all such other documents, agreements and instruments to comply with or accomplish the covenants and agreements of the Borrower or any Subsidiary in the Security Instruments, including this Agreement, or to further evidence and more fully describe the collateral intended as security for the Notes, or to correct any omissions in the Security Instruments, or to state more fully the security obligations set out herein or in any of the Security Instruments, or to perfect, -55- 63 protect or preserve any Liens created pursuant to any of the Security Instruments, or to make any recordings, to file any notices or obtain any consents, all as may be reasonably necessary or appropriate in connection therewith. Section 8.09 Performance of Obligations. The Borrower will pay the Notes according to the reading, tenor and effect thereof; and the Borrower will and will cause each Subsidiary to do and perform every act and discharge all of the obligations to be performed and discharged by them under the Security Instruments, including this Agreement, at the time or times and in the manner specified. Section 8.10 [DELETED] Section 8.11 ERISA Information and Compliance. The Borrower will promptly furnish and will cause the Subsidiaries and any ERISA Affiliate to promptly furnish to the Agent with sufficient copies to the Lenders (i) promptly after the filing thereof with the United States Secretary of Labor, the Internal Revenue Service or the PBGC, copies of each annual and other report with respect to each Plan or any trust created thereunder, (ii) immediately upon becoming aware of the occurrence of any ERISA Event or of any "prohibited transaction," as described in section 406 of ERISA or in section 4975 of the Code, in connection with any Plan or any trust created thereunder, a written notice signed by a Responsible Officer specifying the nature thereof, what action the Borrower, the Subsidiary or the ERISA Affiliate is taking or proposes to take with respect thereto, and, when known, any action taken or proposed by the Internal Revenue Service, the Department of Labor or the PBGC with respect thereto, and (iii) immediately upon receipt thereof, copies of any notice of the PBGC's intention to terminate or to have a trustee appointed to administer any Plan. With respect to each Plan (other than a Multiemployer Plan), the Borrower will, and will cause each Subsidiary and ERISA Affiliate to, (i) satisfy in full and in a timely manner, without incurring any late payment or underpayment charge or penalty and without giving rise to any lien, all of the contribution and funding requirements of section 412 of the Code (determined without regard to subsections (d), (e), (f) and (k) thereof) and of section 302 of ERISA (determined without regard to sections 303, 304 and 306 of ERISA), and (ii) pay, or cause to be paid, to the PBGC in a timely manner, without incurring any late payment or underpayment charge or penalty, all premiums required pursuant to sections 4006 and 4007 of ERISA. Section 8.12 Application of Certain Sale Proceeds. So long as the Borrowing Base is in excess of the Threshold Amount, the Borrower shall immediately repay the Loans by the amount, not to exceed such excess, of (i) proceeds from Dispositions permitted by Section 9.16 hereof, (ii) proceeds received by the Borrower from issuance of Debt permitted by Section 9.01(h) and (iii) proceeds received from the sale of equity securities. -56- 64 ARTICLE IX NEGATIVE COVENANTS The Borrower covenants and agrees that, so long as any of the Commitments are in effect and until payment in full of Loans hereunder, all interest thereon and all other amounts payable by the Borrower hereunder, without the prior written consent of the Majority Lenders: Section 9.01 Debt. Neither the Borrower nor any Subsidiary will incur, create, assume or suffer to exist any Debt, except: (a) the Notes or other Indebtedness or any guaranty of or suretyship arrangement for the Notes or other Indebtedness; (b) Debt of the Borrower existing on the Closing Date which is reflected in the Financial Statements or is disclosed in Schedule 9.01, and any renewals or extensions (but not increases) thereof; (c) accounts payable (for the deferred purchase price of Property or services) from time to time incurred in the ordinary course of business which, if greater than 90 days past the invoice or billing date, are being contested in good faith by appropriate proceedings if reserves adequate under GAAP shall have been established therefor; (d) Debt associated with bonds or surety obligations required by Governmental Requirements in connection with the operation of the Oil and Gas Properties; (e) Debt, in form and substance customary for Debt of such type and otherwise reasonably satisfactory to the Agent, associated with Hedging Agreements which may be entered into after the Closing Date that are traded on exchanges or that are with the Agent (or any Affiliate of the Agent) or such other Person as the Agent may approve in writing; provided that (i) such Hedging Agreements are being used by the Borrower to hedge expected potential fluctuations of the price of oil and gas or for other business purposes and not for speculation and (ii) the aggregate amount (including the notional amount of notional amount contracts) of all such Hedging Agreements shall not exceed 50% of the Borrower's projected oil and gas production for any year; (f) At such time as the Borrowing Base is equal to the Threshold Amount, Debt of Bonray or any Subsidiary not existing on the date hereof (other than a Subsidiary which acquires the Texaco Property or the Property of any Other Acquisition, directly or indirectly), on terms reasonably acceptable to the Agent, for which the Person to whom such Debt is owed has no recourse to such Subsidiary (whether as a primary or secondary obligor) for the payment thereof except to the Property securing such Debt; provided, however that such Property is not Property owned by the Borrower, any Subsidiary existing on the date hereof (other than Bonray), -57- 65 or any other Subsidiary which acquires the Texaco Property or the Property of any Other Acquisition, directly or indirectly (g) Debt, resulting from the prepayment to the Borrower for well costs, which Debt is incurred, pursuant to joint operating agreements or drilling contracts entered into in the ordinary course of the Borrower's business; and (h) Subordinated Debt not to exceed $100,000,000 in the aggregate. Section 9.02 Liens. Except as provided in Section 9.20 below, neither the Borrower nor any Subsidiary will create, incur, assume or permit to exist any Lien on any of its Properties (now owned or hereafter acquired), except: (a) Liens securing the payment of any Indebtedness; (b) Excepted Liens; (c) Liens disclosed on Schedule 9.02; and (d) Liens on cash or securities of the Borrower securing the Debt described in Section 9.01(d) or on Property securing Debt permitted by Section 9.01(f). Section 9.03 Investments, Loans and Advances. Neither the Borrower nor any Subsidiary will make or permit to remain outstanding any loans or advances to or investments in any Person, except that the foregoing restriction shall not apply to: (a) investments, loans or advances reflected in the Financial Statements and which are disclosed to the Lenders in Schedule 9.03; (b) investments by the Borrower in direct ownership interests in additional Oil and Gas Properties and gas gathering systems related thereto; (c) accounts receivable arising out of the sale of Hydrocarbons, other assets or services in the ordinary course of business; (d) direct obligations of the United States or any agency thereof, or obligations guaranteed by the United States or any agency thereof, in each case maturing within one year from the date of creation thereof; (e) commercial paper maturing within one year from the date of creation thereof rated in one of the two highest grades by Standard & Poors Corporation or Moody's Investors Service, Inc.; -58- 66 (f) deposits maturing within one year from the date of creation thereof with, including certificates of deposit issued by, any Lender or any office located in the United States of any other lender or trust company which is organized under the laws of the United States or any state thereof, has capital, surplus and undivided profits aggregating at least $100,000,000.00 (as of the date of such Lender's or lender or trust company's most recent financial reports) and has a short term deposit rating of no lower than A2 or P2, as such rating is set forth from time to time, by Standard & Poors Ratings Group, a division of McGraw-Hill, Inc., or Moody's Investors Service, Inc., respectively; (g) deposits in money market funds investing exclusively in investments described in Sections 9.03(d), 9.03(e) or 9.03(f); (h) investments in joint ventures, partnerships, Subsidiaries or other Persons which in the aggregate do not exceed $750,000 at any time; (i) purchases of mechanics and materialmen's liens against properties of WRT Energy Corporation, not listed in Schedules 9.03, the aggregate purchase price of which does not exceed $500,000; and (j) purchases of seven (7) unites of PLC Energy Data Company L.L.C., the aggregate purchase price of which does not exceed $54,600. Section 9.04 Dividends, Distributions and Redemptions. The Borrower will not declare or pay any dividend, purchase, redeem or otherwise acquire for value any of its stock now or hereafter outstanding, return any capital to its stockholders or make any distribution of its assets to its stockholders; provided that the Borrower may, during any twelve month period, so long as no Default or Event of Default has occurred and is continuing or would result from such dividend, and so long as the Borrowing Base does not exceed the Threshold Amount, declare and pay dividends in an aggregate amount not to exceed 25% of Net Income generated by the Borrower and its Consolidated Subsidiaries during such twelve month period. Section 9.05 Sales and Leasebacks. Except for such transactions which in the aggregate do not exceed $100,000, neither the Borrower nor any Subsidiary will enter into any arrangement, directly or indirectly, with any Person whereby the Borrower or any Subsidiary shall sell or transfer any of its Property, whether now owned or hereafter acquired, and whereby the Borrower or any Subsidiary shall then or thereafter rent or lease as lessee such Property or any part thereof or other Property which the Borrower or any Subsidiary intends to use for substantially the same purpose or purposes as the Property sold or transferred. Section 9.06 Nature of Business. Neither the Borrower nor any Subsidiary will allow any material change to be made in the character of its business as an independent oil and gas exploration and production company and drilling contractor but may not acquire more drilling rigs without permission of the Majority Lenders. -59- 67 Section 9.07 Limitation on Leases. Neither the Borrower nor any Subsidiary will create, incur, assume or suffer to exist any obligation for the payment of rent or hire of Property of any kind whatsoever (real or personal including capital leases but excluding leases of Hydrocarbon Interests), under leases or lease agreements which would cause the aggregate amount of all payments made by the Borrower and its Subsidiaries pursuant to all such leases or lease agreements to exceed $300,000 in any period of twelve consecutive calendar months during the life of such leases. Section 9.08 Mergers, Etc. Neither the Borrower nor any Subsidiary will merge into or with or consolidate with any other Person, or sell, lease or otherwise dispose of (whether in one transaction or in a series of transactions) all or substantially all of its Property or assets to any other Person; provided that any Subsidiary may merge with or transfer all or substantially all of its assets (i) to any other Subsidiary or (ii) to the Borrower (with the Borrower being the surviving corporation). Section 9.09 Proceeds of Notes. The Borrower will not permit the proceeds of the Notes to be used for any purpose other than those permitted by Section 7.07. Neither the Borrower nor any Person acting on behalf of the Borrower has taken or will take any action which might cause the Notes or any of the Security Instruments, including this Agreement, to violate Regulation G, U or X or any other regulation of the Board of Governors of the Federal Reserve System or to violate Section 7 of the Securities Exchange Act of 1934 or any rule or regulation thereunder, in each case as now in effect or as the same may hereinafter be in effect. Section 9.10 ERISA Compliance. The Borrower will not at any time: (a) Engage in, or permit any Subsidiary or ERISA Affiliate to engage in, any transaction in connection with which the Borrower, any Subsidiary or any ERISA Affiliate could be subjected to either a civil penalty assessed pursuant to section 502(c), (i) or (l) of ERISA or a tax imposed by Chapter 43 of Subtitle D of the Code; (b) Terminate, or permit any Subsidiary or ERISA Affiliate to terminate, any Plan in a manner, or take any other action with respect to any Plan, which could result in any liability to the Borrower, any Subsidiary or any ERISA Affiliate to the PBGC; (c) Fail to make, or permit any Subsidiary or ERISA Affiliate to fail to make, full payment when due of all amounts which, under the provisions of any Plan, agreement relating thereto or applicable law, the Borrower, a Subsidiary or any ERISA Affiliate is required to pay as contributions thereto; (d) Permit to exist, or allow any Subsidiary or ERISA Affiliate to permit to exist, any accumulated funding deficiency within the meaning of Section 302 of ERISA or section 412 of the Code, whether or not waived, with respect to any Plan; -60- 68 (e) Permit, or allow any Subsidiary or ERISA Affiliate to permit, the actuarial present value of the benefit liabilities under any Plan maintained by the Borrower, any Subsidiary or any ERISA Affiliate which is regulated under Title IV of ERISA to exceed the current value of the assets (computed on a plan termination basis in accordance with Title IV of ERISA) of such Plan allocable to such benefit liabilities. The term "actuarial present value of the benefit liabilities" shall have the meaning specified in section 4041 of ERISA; (f) Contribute to or assume an obligation to contribute to, or permit any Subsidiary or ERISA Affiliate to contribute to or assume an obligation to contribute to, any Multiemployer Plan; (g) Acquire, or permit any Subsidiary or ERISA Affiliate to acquire, an interest in any Person that causes such Person to become an ERISA Affiliate with respect to the Borrower, any Subsidiary or any ERISA Affiliate if such Person sponsors, maintains or contributes to, or at any time in the six-year period preceding such acquisition has sponsored, maintained, or contributed to, (1) any Multiemployer Plan, or (2) any other Plan that is subject to Title IV of ERISA under which the actuarial present value of the benefit liabilities under such Plan exceeds the current value of the assets (computed on a plan termination basis in accordance with Title IV of ERISA) of such Plan allocable to such benefit liabilities; (h) Incur, or permit any Subsidiary or ERISA Affiliate to incur, a liability to or on account of a Plan under sections 515, 4062, 4063, 4064, 4201 or 4204 of ERISA; (i) Contribute to or assume an obligation to contribute to, or permit any Subsidiary or ERISA Affiliate to contribute to or assume an obligation to contribute to, any employee welfare benefit plan, as defined in section 3(1) of ERISA, including, without limitation, any such plan maintained to provide benefits to former employees of such entities, that may not be terminated by such entities in their sole discretion at any time without any material liability; or (j) Amend or permit any Subsidiary or ERISA Affiliate to amend, a Plan resulting in an increase in current liability such that the Borrower, any Subsidiary or any ERISA Affiliate is required to provide security to such Plan under section 401(a)(29) of the Code. Section 9.11 Sale or Discount of Receivables. Neither the Borrower nor any Subsidiary will discount or sell (with or without recourse) any of its notes receivable or accounts receivable. Section 9.12 Current Ratio. The Borrower will not permit its Current Ratio to be less than 1.0 to 1.0 at any time. As used in this Section 9.12, "Current Ratio" shall mean, as of any time, the ratio of (i) current assets at such time plus the unused portion of the Commitment having a maturity of greater than one year from the date of determination, minus the sum of (A) -61- 69 prepaid expenses at such time, (B) advance payments on wells at such time, (C) the aggregate book value of all of the Borrower's assets held for sale, to (ii) current liabilities at such time. Section 9.13 Tangible Net Worth. The Borrower will not permit its Tangible Net Worth to be less at any time than an amount equal to (i) $60,000,000, plus (ii) 75% of Net Income (but not any net loss) generated by the Borrower and its Consolidated Subsidiaries during the period commencing on December 31, 1996 through the date of determination, plus (iii) 75% of the net cash proceeds of any issuance of equity securities or securities converted into equity. Section 9.14 Debt to Cash Flow Coverage. The Borrower will not permit its Cash Flow Coverage Ratio as of the end of any fiscal quarter of the Borrower (calculated quarterly as of the last day of each fiscal quarter) to be greater than 4.5 to 1.0 during fiscal year 1997 and 3.5 to 1.0 for during any fiscal year thereafter. For the purposes of this Section 9.14, "Cash Flow Coverage Ratio" shall mean, as of the last day of any fiscal quarter, for the Borrower, the ratio of (i) Debt at such time, excluding current trade payables and deferred taxes at such time, to (ii) Cash Flow plus interest expense. Section 9.15 Interest Coverage Ratio. The Borrower will not permit its Interest Coverage Ratio for any fiscal quarter of the Borrower (calculated quarterly as of the last day of each fiscal quarter) to be less than 2.0 to 1.0 during fiscal year 1997 and 3.0 to 1.0 during any fiscal year thereafter. For purposes of this Section 9.15, "Interest Coverage Ratio" shall mean, as of the last day of any fiscal quarter, for the Borrower, the ratio of (i) Cash Flow plus Interest Expense to (ii) Interest Expense. Section 9.16 Sale of Oil and Gas Properties or Other Assets. Neither the Borrower nor any Subsidiary will sell, assign, farm-out, convey or otherwise transfer any Oil and Gas Property or any interest in any Oil and Gas Property or any material asset except for: (i) sales of Hydrocarbons in the ordinary course of business; (ii) farmouts of undeveloped acreage and assignments in connection with such farmouts; and (iii) during any 12-month period, sales in the ordinary course of business of Oil and Gas Properties or other assets which do not have a market value in excess of $500,000 in the aggregate. Section 9.17 Environmental Matters. Neither the Borrower nor any Subsidiary will cause or permit any of its Property to be in violation of, or do anything or permit anything to be done which will subject any such Property to any remedial obligations under, any Environmental Laws, assuming disclosure to the applicable Governmental Authority of all relevant facts, conditions and circumstances, if any, pertaining to such Property where such violations or remedial obligations would have a Material Adverse Effect. Section 9.18 Transactions with Affiliates. Neither the Borrower nor any Subsidiary will enter into any transaction, including, without limitation, any purchase, sale, lease or exchange of Property or the rendering of any service, with any Affiliate unless such transactions are otherwise permitted under this Agreement, are in the ordinary course of its -62- 70 business and are upon fair and reasonable terms no less favorable to it than it would obtain in a comparable arm's length transaction with a Person not an Affiliate. Section 9.19 Subsidiaries and Partnerships. Without the prior written consent of the Agent, which consent will not be unreasonably withheld, the Borrower shall not create or acquire any additional Subsidiaries or other Persons (other than tax law partnerships which are not partnerships under applicable state law) and Borrower will not permit any Subsidiary to issue securities to any Person other than the Borrower. Section 9.20 Negative Pledge Agreements. Neither the Borrower nor any Subsidiary will create, incur, assume or suffer to exist any contract, agreement or understanding (other than this Agreement and the Security Instruments) which in any way prohibits or restricts the granting, conveying, creation or imposition of any Lien on any of its Property or restricts any Subsidiary from paying dividends to the Borrower, or which requires the consent of or notice to other Persons in connection therewith. Section 9.21 Derivative and Similar Agreements. Neither the Borrower nor any Subsidiary will purchase, incur, assume or enter into any derivative or other similar obligations other than Hedging Agreements being used by the Borrower to hedge expected potential fluctuations of the price of oil and gas or for other business purposes and not for speculation and the aggregate amount (including the notionable amount of notion amount contracts) of all such Hedging Agreements shall not exceed 50% of the Borrower's projected oil and gas production for any year. Section 9.22 Issuance of Securities. The Borrower will not issue any securities other than (subject to Section 8.12) equity securities and/or Subordinated Debt. Section 9.23 Capital Expenditures. So long as the Borrowing Base is in excess of the Threshold Amount the Borrower and its Subsidiaries will not incur Capital Expenditures in the aggregate in any fiscal year of the Borrower in excess of the sum of (i) scheduled Capital Expenditures (excluding capitalized interest and general and administrative expenses) for the current fiscal year as set forth in the most recently delivered Reserve Report and (ii) $5,000,000. ARTICLE X EVENTS OF DEFAULT; REMEDIES Section 10.01 Events of Default. One or more of the following events shall constitute an Event of Default: (a) the Borrower shall default in the payment or prepayment when due of any principal of or interest on any Loan, or any reimbursement obligation for a disbursement made -63- 71 under any Letter of Credit, or any fees or other amount payable by it hereunder or under any Security Instrument; or (b) the Borrower or any Subsidiary shall default in the payment when due of any principal of or interest on any of its other Debt aggregating $100,000 or more, or any event specified in any note, agreement, indenture or other document evidencing or relating to any such Debt shall occur if the effect of such event is to cause, or (with the giving of any notice or the lapse of time or both) to permit the holder or holders of such Debt (or a trustee or agent on behalf of such holder or holders) to cause, such Debt to become due prior to its stated maturity; or (c) any representation, warranty or certification made or deemed made herein or in any Security Instrument by the Borrower or any Subsidiary, or any certificate furnished to any Lender or the Agent pursuant to the provisions hereof or any Security Instrument, shall prove to have been false or misleading as of the time made or furnished in any material respect; or (d) the Borrower shall default in the performance of any of its obligations under Article IX or any other Article of this Agreement other than under Article VIII; or the Borrower shall default in the performance of any of its obligations under Article VIII or any Security Instrument (other than the payment of amounts due which shall be governed by Section 10.01(a)) and such default shall continue unremedied for a period of thirty (30) days after the earlier to occur of (i) notice thereof to the Borrower by the Agent or any Lender (through the Agent), or (ii) the Borrower otherwise becoming aware of such default; or (e) the Borrower shall admit in writing its inability to, or be generally unable to, pay its debts as such debts become due; or (f) the Borrower shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property, (ii) make a general assignment for the benefit of its creditors, (iii) commence a voluntary case under the Federal Bankruptcy Code (as now or hereafter in effect), (iv) file a petition seeking to take advantage of any other law relating to bankruptcy, insolvency, reorganization, winding-up, liquidation or composition or readjustment of debts, (v) fail to controvert in a timely and appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under the Federal Bankruptcy Code, or (vi) take any corporate action for the purpose of effecting any of the foregoing; or (g) a proceeding or case shall be commenced, without the application or consent of the Borrower, in any court of competent jurisdiction, seeking (i) its liquidation, reorganization, dissolution or winding-up, or the composition or readjustment of its debts, (ii) the appointment of a trustee, receiver, custodian, liquidator or the like of the Borrower or of all or any substantial part of its assets, or (iii) similar relief in respect of the Borrower under any law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts, and such proceeding or case shall continue undismissed, or an order, judgment or decree -64- 72 approving or ordering any of the foregoing shall be entered and continue unstayed and in effect, for a period of 60 days; or (iv) an order for relief against the Borrower shall be entered in an involuntary case under the Federal Bankruptcy Code; or (h) a judgment or judgments for the payment of money in excess of $250,000 in the aggregate shall be rendered by a court against the Borrower or any Subsidiary and the same shall not be discharged (or provision shall not be made for such discharge), or a stay of execution thereof shall not be procured, within 30 days from the date of entry thereof and the Borrower or such Subsidiary shall not, within said period of thirty (30) days, or such longer period during which execution of the same shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal; or (i) the Security Instruments after delivery thereof shall for any reason, except to the extent permitted by the terms thereof, cease to be in full force and effect and valid, binding and enforceable in accordance with their terms, or cease to create a valid and perfected Lien of the priority required thereby on any of the collateral purported to be covered thereby, except to the extent permitted by the terms of this Agreement, or the Borrower shall so state in writing; or (j) The Borrower discontinues its usual business or there is any material change in the ownership of the Borrower; or (k) Any Subsidiary takes, suffers or permits to exist any of the events or conditions referred to in paragraphs (e), (f), (g) or (h) hereof; or (l) An event or events shall occur having a Material Adverse Effect; or (m) Any Letter of Credit becomes the subject matter of any order, judgment, injunction or any other such determination or if the Borrower or any other Person shall petition or apply for or obtain any order, which, in either case, has the effect of extending the Lenders' liability under any Letter of Credit beyond the expiration date stated therein or otherwise agreed to by the Agent. (n) The occurrence of a Change of Control with respect to the Borrower. Section 10.02 Remedies. (a) In the case of an Event of Default other than one referred to in clauses (e), (f) or (g) of Section 10.01 or in clause (k) to the extent it relates to clauses (e), (f) or (g), the Agent may and, upon request of the Majority Lenders, shall, by notice to the Borrower, cancel the Commitments and/or declare the principal amount then outstanding of and the accrued interest on the Loans and all other amounts payable by the Borrower hereunder and under the Notes (including without limitation the payment of cash collateral to secure the LC Exposure as provided in Section 2.11(b) hereof) to be forthwith due and payable, whereupon such amounts -65- 73 shall be immediately due and payable without presentment, demand, protest, notice of intent to accelerate, notice of acceleration or other formalities of any kind, all of which are hereby expressly waived by the Borrower. (b) In the case of the occurrence of an Event of Default referred to in clauses (e), (f) or (g) of Section 10.01 or in clause (k) to the extent it relates to clauses (e), (f) or (g), the Commitments shall be automatically canceled and the principal amount then outstanding of, and the accrued interest on, the Loans and all other amounts payable by the Borrower hereunder and under the Notes (including without limitation the payment of cash collateral to secure the LC Exposure as provided in Section 2.11(b) hereof) shall become automatically immediately due and payable without presentment, demand, protest, notice of intent to accelerate, notice of acceleration or other formalities of any kind, all of which are hereby expressly waived by the Borrower. (c) Upon the acceleration of the maturity of the Notes, the Agent, on behalf of the Lenders, may pursue any and all rights and remedies specified in the Loan Documents. (d) All proceeds received after maturity of the Notes, whether by acceleration or otherwise shall be applied first to reimbursement of expenses and indemnities provided for in this Agreement and the Security Instruments; second to accrued interest on the Notes; third to fees; fourth pro rata to principal outstanding on the Notes and other Indebtedness; fifth to serve as cash collateral to be held by the Agent to secure the LC Exposure; and, any excess shall be paid to the Borrower or as otherwise required by any Governmental Requirement. ARTICLE XI THE AGENT Section 11.01 Appointment, Powers and Immunities. Each Lender hereby irrevocably appoints and authorizes the Agent to act as its agent hereunder and under the Security Instruments with such powers as are specifically delegated to the Agent by the terms of this Agreement and the Security Instruments, together with such other powers as are reasonably incidental thereto. The Agent (which term as used in this sentence and in Section 11.05 and the first sentence of Section 11.06 shall include reference to its Affiliates and its and its Affiliates' officers, directors, employees, attorneys, accountants, experts and agents): (i) shall have no duties or responsibilities except those expressly set forth in the Loan Documents, and shall not by reason of the Loan Documents be a trustee or fiduciary for any Lender; (ii) makes no representation or warranty to any Lender and shall not be responsible to the Lenders for any recitals, statements, representations or warranties contained in this Agreement, or in any certificate or other document referred to or provided for in, or received by any of them under, this Agreement, or for the value, validity, effectiveness, genuineness, execution, effectiveness, legality, enforceability or sufficiency of this Agreement, any Note or any other document referred to or provided for herein -66- 74 or for any failure by the Borrower or any other Person (other than the Agent) to perform any of its obligations hereunder or thereunder or for the existence, value, perfection or priority of any collateral security or the financial or other condition of the Borrower, the Subsidiaries or any other obligor or guarantor; (iii) except pursuant to Section 11.07, shall not be required to initiate or conduct any litigation or collection proceedings hereunder; and (iv) shall not be responsible for any action taken or omitted to be taken by it hereunder or under any other document or instrument referred to or provided for herein or in connection herewith including its own ordinary negligence, except for its own gross negligence or willful misconduct. The Agent may employ agents, accountants, attorneys and experts and shall not be responsible for the negligence or misconduct of any such agents, accountants, attorneys or experts selected by it in good faith or any action taken or omitted to be taken in good faith by it in accordance with the advice of such agents, accountants, attorneys or experts. The Agent may deem and treat the payee of any Note as the holder thereof for all purposes hereof unless and until a written notice of the assignment or transfer thereof permitted hereunder shall have been filed with the Agent. The Agent is authorized to release any collateral that is permitted to be sold or released pursuant to the terms of the Loan Documents. Section 11.02 Reliance by Agent. The Agent shall be entitled to rely upon any certification, notice or other communication (including any thereof by telephone, telex, telecopier, telegram or cable) believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by the Agent. Section 11.03 Defaults. The Agent shall not be deemed to have knowledge of the occurrence of a Default (other than the non-payment of principal of or interest on Loans or of fees or failure to reimburse for Letter of Credit drawings) unless the Agent has received notice from a Lender or the Borrower specifying such Default and stating that such notice is a "Notice of Default." In the event that the Agent receives such a notice of the occurrence of a Default, the Agent shall give prompt notice thereof to the Lenders. In the event of a payment Default, the Agent shall give each Lender prompt notice of each such payment Default. Section 11.04 Rights as a Lender. With respect to its Commitments and the Loans made by it and its participation in the issuance of a Letter of Credit, Chase (and any successor acting as Agent) in its capacity as a Lender hereunder shall have the same rights and powers hereunder as any other Lender and may exercise the same as though it were not acting as the Agent, and the term "Lender" or "Lenders" shall, unless the context otherwise indicates, include the Agent in its individual capacity. Chase (and any successor acting as Agent) and its Affiliates may (without having to account therefor to any Lender) accept deposits from, lend money to and generally engage in any kind of banking, trust or other business with the Borrower (and any of its Affiliates) as if it were not acting as the Agent, and Chase and its Affiliates may accept fees and other consideration from the Borrower for services in connection with this Agreement or otherwise without having to account for the same to the Lenders. -67- 75 Section 11.05 Indemnification. THE LENDERS AGREE TO INDEMNIFY THE AGENT RATABLY IN ACCORDANCE WITH THEIR PERCENTAGE SHARES FOR THE INDEMNITY MATTERS AS DESCRIBED IN SECTION 12.03 TO THE EXTENT NOT INDEMNIFIED OR REIMBURSED BY THE BORROWER UNDER SECTION 12.03, BUT WITHOUT LIMITING THE OBLIGATIONS OF THE BORROWER UNDER SAID SECTION 12.03 FOR ANY AND ALL OTHER LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS OF ANY KIND AND NATURE WHATSOEVER WHICH MAY BE IMPOSED ON, INCURRED BY OR ASSERTED AGAINST THE AGENT IN ANY WAY RELATING TO OR ARISING OUT OF: (A) THIS AGREEMENT, THE SECURITY INSTRUMENTS OR ANY OTHER DOCUMENTS CONTEMPLATED BY OR REFERRED TO HEREIN OR THE TRANSACTIONS CONTEMPLATED HEREBY, BUT EXCLUDING, UNLESS A DEFAULT HAS OCCURRED AND IS CONTINUING, NORMAL ADMINISTRATIVE COSTS AND EXPENSES INCIDENT TO THE PERFORMANCE OF ITS AGENCY DUTIES HEREUNDER); OR (B) THE ENFORCEMENT OF ANY OF THE TERMS OF THIS AGREEMENT, ANY SECURITY INSTRUMENT OR OF ANY SUCH OTHER DOCUMENTS; WHETHER OR NOT ANY OF THE FOREGOING SPECIFIED IN THIS SECTION 11.05 ARISES FROM THE SOLE OR CONCURRENT NEGLIGENCE OF THE AGENT, PROVIDED THAT NO LENDER SHALL BE LIABLE FOR ANY OF THE FOREGOING TO THE EXTENT THEY ARISE FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF AGENT. Section 11.06 Non-Reliance on Agent and other Lenders. Each Lender acknowledges and agrees that it has, independently and without reliance on the Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own credit analysis of the Borrower and its decision to enter into this Agreement, and that it will, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement. The Agent shall not be required to keep itself informed as to the performance or observance by the Borrower of this Agreement, the Notes, the Security Instruments or any other document referred to or provided for herein or to inspect the properties or books of the Borrower. Except for notices, reports and other documents and information expressly required to be furnished to the Lenders by the Agent hereunder, the Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the affairs, financial condition or business of the Borrower (or any of its Affiliates) which may come into the possession of the Agent or any of its Affiliates. In this regard, each Lender acknowledges that Vinson & Elkins L.L.P. is acting in this transaction as special counsel to the Agent only, except to the extent otherwise expressly stated in any legal opinion or any Loan Document. Each Lender will consult with its own legal counsel to the extent that it deems necessary in connection with the Loan Documents and the matters contemplated therein. Section 11.07 Action by Agent. Except for action or other matters expressly required of the Agent hereunder, the Agent shall in all cases be fully justified in failing or refusing to act hereunder unless it shall (i) receive written instructions from the Majority Lenders specifying the action to be taken, and (ii) be indemnified to its satisfaction by the Lenders against any and all liability and expenses which may be incurred by it by reason of taking or continuing -68- 76 to take any such action. The instructions of the Majority Lenders and any action taken or failure to act pursuant thereto by the Agent shall be binding on all of the Lenders. If a Default has occurred and is continuing, the Agent shall take such action with respect to such Default as shall be directed by the Majority Lenders in the written instructions (with indemnities) described in this Section 11.07, provided that, unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default as it shall deem advisable in the best interests of the Lenders. In no event, however, shall the Agent be required to take any action which exposes the Agent to personal liability or which is contrary to this Agreement and the Security Instruments or applicable law. Section 11.08 Resignation or Removal of Agent. Subject to the appointment and acceptance of a successor Agent as provided below, the Agent may resign at any time by giving notice thereof to the Lenders and the Borrower, and the Agent may be removed at any time with or without cause by the Majority Lenders. Upon any such resignation or removal, the Majority Lenders shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by the Majority Lenders and shall have accepted such appointment within thirty (30) days after the retiring Agent's giving of notice of resignation or the Majority Lenders' removal of the retiring Agent, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent. Upon the acceptance of such appointment hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation or removal hereunder as Agent, the provisions of this Article XI and Section 12.03 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Agent. ARTICLE XII MISCELLANEOUS Section 12.01 Waiver. No failure on the part of the Agent or any Lender to exercise and no delay in exercising, and no course of dealing with respect to, any right, power or privilege under any of the Loan Documents shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under any of the Loan Documents preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. Section 12.02 Notices. All notices and other communications provided for herein and in the other Loan Documents (including, without limitation, any modifications of, or waivers or consents under, this Agreement or the other Loan Documents) shall be given or made by telex, telecopy, courier or U.S. Mail or in writing and telexed, telecopied, mailed or delivered to the -69- 77 intended recipient at the "Address for Notices" specified below its name on the signature pages hereof or in the other Loan Documents; or, as to any party, at such other address as shall be designated by such party in a notice to each other party. Except as otherwise provided in this Agreement or in the other Loan Documents, all such communications shall be deemed to have been duly given when transmitted, if transmitted before 1:00 p.m. local time on a Business Day (otherwise on the next succeeding Business Day) by telex or telecopier and evidence or confirmation of receipt is obtained, or personally delivered or, in the case of a mailed notice, three (3) Business Days after the date deposited in the mails, postage prepaid, in each case given or addressed as aforesaid. Section 12.03 Payment of Expenses, Indemnities, etc. The Borrower agrees: (a) whether or not the transactions hereby contemplated are consummated, pay all reasonable expenses of the Agent in the administration (both before and after the execution hereof and including advice of counsel as to the rights and duties of the Agent and the Lenders with respect thereto) of, and in connection with the negotiation, syndication, investigation, preparation, execution and delivery of, recording or filing of, preservation of rights under, enforcement of, and refinancing, renegotiation or restructuring of, the Loan Documents and any amendment, waiver or consent relating thereto (including, without limitation, travel, photocopy, mailing, courier, telephone and other similar expenses of the Agent, the cost of environmental audits, surveys and appraisals at reasonable intervals, the reasonable fees and disbursements of counsel and other outside consultants for the Agent and, in the case of enforcement, the reasonable fees and disbursements of counsel, for the Agent and any of the Lenders); and promptly reimburse the Agent for all amounts expended, advanced or incurred by the Agent or the Lenders to satisfy any obligation of the Borrower under this Agreement or any Security Instrument, including without limitation, all costs and expenses of foreclosure; (b) INDEMNIFY THE AGENT AND EACH LENDER AND EACH OF THEIR AFFILIATES AND EACH OF THEIR OFFICERS, DIRECTORS, EMPLOYEES, REPRESENTATIVES, AGENTS, ATTORNEYS, ACCOUNTANTS AND EXPERTS ("INDEMNIFIED PARTIES") FROM, HOLD EACH OF THEM HARMLESS AGAINST AND PROMPTLY UPON DEMAND PAY OR REIMBURSE EACH OF THEM FOR THE INDEMNITY MATTERS WHICH MAY BE INCURRED BY OR ASSERTED AGAINST OR INVOLVE ANY OF THEM (WHETHER OR NOT ANY OF THEM IS DESIGNATED A PARTY THERETO) AS A RESULT OF, ARISING OUT OF OR IN ANY WAY RELATED TO (I) ANY ACTUAL OR PROPOSED USE BY THE BORROWER OF THE PROCEEDS OF ANY OF THE LOANS OR LETTERS OF CREDIT, (II) THE EXECUTION, DELIVERY AND PERFORMANCE OF THIS AGREEMENT, THE NOTES, AND THE OTHER SECURITY INSTRUMENTS, (III) THE OPERATIONS OF THE BUSINESS OF THE BORROWER AND ITS SUBSIDIARIES, (IV) THE FAILURE OF THE BORROWER OR ANY SUBSIDIARY TO COMPLY WITH THE TERMS OF ANY SECURITY INSTRUMENT, INCLUDING THIS AGREEMENT, OR WITH ANY GOVERNMENTAL REQUIREMENT, (V) ANY INACCURACY OF ANY REPRESENTATION OR ANY BREACH OF ANY WARRANTY OF THE BORROWER SET FORTH IN THIS AGREEMENT OR THE OTHER SECURITY INSTRUMENTS, (VI) THE ISSUANCE, EXECUTION AND DELIVERY OR TRANSFER OF OR PAYMENT OR FAILURE TO PAY UNDER ANY LETTER OF CREDIT, -70- 78 OR (VII) THE PAYMENT OF A DRAWING UNDER ANY LETTER OF CREDIT NOTWITHSTANDING THE NONCOMPLIANCE, NONDELIVERY OR OTHER IMPROPER PRESENTATION OF THE MANUALLY EXECUTED DRAFT(S) AND CERTIFICATE(S), OR (VIII) ANY OTHER ASPECT OF THIS AGREEMENT, THE NOTES AND THE SECURITY INSTRUMENTS, INCLUDING, WITHOUT LIMITATION, THE REASONABLE FEES AND DISBURSEMENTS OF COUNSEL AND ALL OTHER EXPENSES INCURRED IN CONNECTION WITH INVESTIGATING, DEFENDING OR PREPARING TO DEFEND ANY SUCH ACTION, SUIT, PROCEEDING (INCLUDING ANY INVESTIGATIONS, LITIGATION OR INQUIRIES) OR CLAIM AND INCLUDING ALL INDEMNITY MATTERS ARISING BY REASON OF THE ORDINARY NEGLIGENCE OF ANY INDEMNIFIED PARTY, BUT EXCLUDING ALL INDEMNITY MATTERS ARISING SOLELY BY REASON OF CLAIMS BETWEEN THE LENDERS OR ANY LENDER AND THE AGENT OR A LENDER'S SHAREHOLDER AGAINST THE AGENT OR LENDER OR BY REASON OF THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT ON THE PART OF THE INDEMNIFIED PARTY; AND (c) INDEMNIFY AND HOLD HARMLESS FROM TIME TO TIME THE INDEMNIFIED PARTIES FROM AND AGAINST ANY AND ALL LOSSES, CLAIMS, COST RECOVERY ACTIONS, ADMINISTRATIVE ORDERS OR PROCEEDINGS, DAMAGES AND LIABILITIES TO WHICH ANY SUCH PERSON MAY BECOME SUBJECT (I) UNDER ANY ENVIRONMENTAL LAW APPLICABLE TO THE BORROWER OR ANY SUBSIDIARY OR ANY OF ITS PROPERTIES, INCLUDING WITHOUT LIMITATION, THE TREATMENT OR DISPOSAL OF HAZARDOUS SUBSTANCES ON ANY OF ITS PROPERTIES, (II) AS A RESULT OF THE BREACH OR NON-COMPLIANCE BY THE BORROWER OR ANY SUBSIDIARY WITH ANY ENVIRONMENTAL LAW APPLICABLE TO THE BORROWER OR ANY SUBSIDIARY, (III) DUE TO PAST OWNERSHIP BY THE BORROWER OR ANY SUBSIDIARY OF ANY OF ITS PROPERTIES OR PAST ACTIVITY ON ANY OF ITS PROPERTIES OR PAST ACTIVITY ON ANY OF ITS PROPERTIES WHICH, THOUGH LAWFUL AND FULLY PERMISSIBLE AT THE TIME, COULD RESULT IN PRESENT LIABILITY, (IV) THE PRESENCE, USE, RELEASE, STORAGE, TREATMENT OR DISPOSAL OF HAZARDOUS SUBSTANCES ON OR AT ANY OF THE PROPERTIES OWNED OR OPERATED BY THE BORROWER OR ANY SUBSIDIARY, OR (V) ANY OTHER ENVIRONMENTAL, HEALTH OR SAFETY CONDITION IN CONNECTION WITH THIS AGREEMENT, THE NOTES OR ANY OTHER SECURITY INSTRUMENT, PROVIDED, HOWEVER, NO INDEMNITY SHALL BE AFFORDED UNDER THIS SECTION 12.03(C) IN RESPECT OF ANY PROPERTY FOR ANY OCCURRENCE ARISING FROM THE ACTS OR OMISSIONS OF THE AGENT OR ANY LENDER DURING THE PERIOD AFTER WHICH SUCH PERSON, ITS SUCCESSORS OR ASSIGNS SHALL HAVE OBTAINED POSSESSION OF SUCH PROPERTY (WHETHER BY FORECLOSURE OR DEED IN LIEU OF FORECLOSURE, AS MORTGAGEE-IN-POSSESSION OR OTHERWISE). (d) No Indemnified Party may settle any claim to be indemnified without the consent of the indemnitor, such consent not to be unreasonably withheld; provided, that the indemnitor may not reasonably withhold consent to any settlement that an Indemnified Party proposes, if the indemnitor does not have the financial ability to pay all its obligations outstanding and asserted against the indemnitor at that time, including the maximum potential claims against the Indemnified Party to be indemnified pursuant to this Section 12.03. -71- 79 (e) In the case of any indemnification hereunder, the Agent or Lender, as appropriate shall give notice to the Borrower of any such claim or demand being made against the Indemnified Party and the Borrower shall have the non-exclusive right to join in the defense against any such claim or demand provided that if the Borrower provides a defense, the Indemnified Party shall bear its own cost of defense unless there is a conflict between the Borrower and such Indemnified Party. (f) THE FOREGOING INDEMNITIES SHALL EXTEND TO THE INDEMNIFIED PARTIES NOTWITHSTANDING THE SOLE OR CONCURRENT NEGLIGENCE OF EVERY KIND OR CHARACTER WHATSOEVER, WHETHER ACTIVE OR PASSIVE, WHETHER AN AFFIRMATIVE ACT OR AN OMISSION, INCLUDING WITHOUT LIMITATION, ALL TYPES OF NEGLIGENT CONDUCT IDENTIFIED IN THE RESTATEMENT (SECOND) OF TORTS OF ONE OR MORE OF THE INDEMNIFIED PARTIES OR BY REASON OF STRICT LIABILITY IMPOSED WITHOUT FAULT ON ANY ONE OR MORE OF THE INDEMNIFIED PARTIES. TO THE EXTENT THAT AN INDEMNIFIED PARTY IS FOUND TO HAVE COMMITTED AN ACT OF GROSS NEGLIGENCE OR WILLFUL MISCONDUCT, THIS CONTRACTUAL OBLIGATION OF INDEMNIFICATION SHALL CONTINUE BUT SHALL ONLY EXTEND TO THE PORTION OF THE CLAIM THAT IS DEEMED TO HAVE OCCURRED BY REASON OF EVENTS OTHER THAN THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE INDEMNIFIED PARTY. (g) The Borrower's obligations under this Section 12.03 shall survive any termination of this Agreement and the payment of the Notes and shall continue thereafter in full force and effect. (h) The Borrower shall pay any amounts due under this Section 12.03 within thirty (30) days of the receipt by the Borrower of notice of the amount due. Section 12.04 Amendments, Etc. Any provision of this Agreement or any Security Instrument may be amended, modified or waived with the Borrower's and the Majority Lenders' prior written consent; provided that (i) no amendment, modification or waiver which extends the maturity of the Loans, the Termination Date, increases the Aggregate Maximum Credit Amounts, modifies the Borrowing Base, forgives the principal amount of any Indebtedness outstanding under this Agreement, releases any guarantor of the Indebtedness or releases all or substantially all of the collateral, reduces the interest rate applicable to the Loans or the fees payable to the Lenders generally, affects Section 2.03, this Section 12.04 or Section 12.06(a) or modifies the definition of "Majority Lenders" shall be effective without consent of all Lenders; (ii) no amendment, modification or waiver which increases the Maximum Credit Amount of any Lender shall be effective without the consent of such Lender; and (iii) no amendment, modification or waiver which modifies the rights, duties or obligations of the Agent shall be effective without the consent of the Agent. Section 12.05 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. -72- 80 Section 12.06 Assignments and Participations. (a) The Borrower may not assign its rights or obligations hereunder or under the Notes or any Letters of Credit without the prior consent of all of the Lenders and the Agent. (b) Any Lender may, upon the written consent of the Agent (which consent will not be unreasonably withheld), assign to one or more assignees all or a portion of its rights and obligations under this Agreement pursuant to an Assignment Agreement substantially in the form of Exhibit F (an "Assignment") provided, however, that (i) any such assignment shall be in the amount of at least $1,000,000 or such lesser amount to which the Borrower has consented, and (ii) the assignee or assignor shall pay to the Agent a processing and recordation fee of $2500 for each assignment. Any such assignment will become effective upon the execution and delivery to the Agent of the Assignment and the consent of the Agent. Promptly after receipt of an executed Assignment, the Agent shall send to the Borrower a copy of such executed Assignment. Upon receipt of such executed Assignment, the Borrower, will, at its own expense, execute and deliver new Notes to the assignor and/or assignee, as appropriate, in accordance with their respective interests as they appear. Upon the effectiveness of any assignment pursuant to this Section 12.06(b), the assignee will become a "Lender," if not already a "Lender," for all purposes of this Agreement and the Security Instruments. The assignor shall be relieved of its obligations hereunder to the extent of such assignment (and if the assigning Lender no longer holds any rights or obligations under this Agreement, such assigning Lender shall cease to be a "Lender" hereunder except that its rights under Sections 4.06, 5.01, 5.05 and 12.03 shall not be affected). The Agent will prepare on the last Business Day of each month during which an assignment has become effective pursuant to this Section 12.06(b), a new Annex I giving effect to all such assignments effected during such month, and will promptly provide the same to the Borrower and each of the Lenders. (c) Each Lender may transfer, grant or assign participations in all or any part of such Lender's interests hereunder pursuant to this Section 12.06(c) to any Person, provided that: (i) such Lender shall remain a "Lender" for all purposes of this Agreement and the transferee of such participation shall not constitute a "Lender" hereunder; and (ii) no participant under any such participation shall have rights to approve any amendment to or waiver of any of the Loan Documents except to the extent such amendment or waiver would (x) forgive any principal owing on any Indebtedness or extend the Termination Date, (y) reduce the interest rate (other than as a result of waiving the applicability of any post-default increases in interest rates) or fees applicable to any of the Commitments, Loans or Letters of Credit in which such participant is participating, or postpone the payment of any thereof, or (z) release any guarantor of the Indebtedness or release all or substantially all of the collateral (except as expressly provided in the Loan Documents) supporting any of the Commitments, the Loans or Letters of Credit in which such participant is participating. In the case of any such participation, the participant shall not have any rights under this Agreement or any of the Security Instruments (the participant's rights against the granting Lender in respect of such participation to be those set forth in the agreement with such Lender creating such participation), and all amounts payable by the -73- 81 Borrower hereunder shall be determined as if such Lender had not sold such participation, provided that such participant shall be entitled to receive additional amounts under Article V on the same basis as if it were a Lender and be indemnified under Section 12.03 as if it were a Lender. In addition, each agreement creating any participation must include an agreement by the participant to be bound by the provisions of Section 12.15. (d) The Lenders may furnish any information concerning the Borrower in the possession of the Lenders from time to time to assignees and participants (including prospective assignees and participants); provided that, such Persons agree to be bound by the provisions of Section 12.15 hereof. (e) Notwithstanding anything in this Section 12.06 to the contrary, any Lender may assign and pledge all or any of its Notes to any Federal Reserve Bank or the United States Treasury as collateral security pursuant to Regulation A of the Board of Governors of the Federal Reserve System and any operating circular issued by such Federal Reserve System and/or such Federal Reserve Bank. No such assignment and/or pledge shall release the assigning and/or pledging Lender from its obligations hereunder. (f) Notwithstanding any other provisions of this Section 12.06, no transfer or assignment of the interests or obligations of any Lender or any grant of participations therein shall be permitted if such transfer, assignment or grant would require the Borrower to file a registration statement with the SEC or to qualify the Loans under the "Blue Sky" laws of any state. Section 12.07 Invalidity. In the event that any one or more of the provisions contained in any of the Loan Documents shall, for any reason, be held invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of any of the Loan Documents. Section 12.08 Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and any of the parties hereto may execute this Agreement by signing any such counterpart. Section 12.09 References. The words "herein," "hereof," "hereunder" and other words of similar import when used in this Agreement refer to this Agreement as a whole, and not to any particular article, section or subsection. Any reference herein to a Section shall be deemed to refer to the applicable Section of this Agreement unless otherwise stated herein. Any reference herein to an exhibit or schedule shall be deemed to refer to the applicable exhibit or schedule attached hereto unless otherwise stated herein. Section 12.10 Survival. The obligations of the parties under Section 4.06, Article V, and Sections 11.05 and 12.03 shall survive the repayment of the Loans and the termination of the Commitments. To the extent that any payments on the Indebtedness or proceeds of any collateral are subsequently invalidated, declared to be fraudulent or preferential, set aside or -74- 82 required to be repaid to a trustee, debtor in possession, receiver or other Person under any bankruptcy law, common law or equitable cause, then to such extent, the Indebtedness so satisfied shall be revived and continue as if such payment or proceeds had not been received and the Agent's and the Lenders' Liens, security interests, rights, powers and remedies under this Agreement and each Security Instrument shall continue in full force and effect. In such event, each Security Instrument shall be automatically reinstated and the Borrower shall take such action as may be reasonably requested by the Agent and the Lenders to effect such reinstatement. Section 12.11 Captions. Captions and section headings appearing herein are included solely for convenience of reference and are not intended to affect the interpretation of any provision of this Agreement. Section 12.12 No Oral Agreements. THE LOAN DOCUMENTS EMBODY THE ENTIRE AGREEMENT AND UNDERSTANDING BETWEEN THE PARTIES AND SUPERSEDE ALL OTHER AGREEMENTS AND UNDERSTANDINGS BETWEEN SUCH PARTIES RELATING TO THE SUBJECT MATTER HEREOF AND THEREOF. THE LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. Section 12.13 GOVERNING LAW; SUBMISSION TO JURISDICTION. (a) THIS AGREEMENT AND THE NOTES (INCLUDING, BUT NOT LIMITED TO, THE VALIDITY AND ENFORCEABILITY HEREOF AND THEREOF) SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, OTHER THAN THE CONFLICT OF LAWS RULES THEREOF. (b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THE LOAN DOCUMENTS SHALL BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE BORROWER, THE AGENT AND EACH LENDER HEREBY ACCEPTS FOR ITSELF AND (TO THE EXTENT PERMITTED BY LAW) IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. EACH OF THE BORROWER, THE AGENT AND EACH LENDER HEREBY IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING IN SUCH RESPECTIVE JURISDICTIONS. THIS SUBMISSION TO JURISDICTION IS NON- EXCLUSIVE AND DOES NOT PRECLUDE THE PARTIES FROM OBTAINING JURISDICTION OVER OTHER PARTIES IN ANY COURT OTHERWISE HAVING JURISDICTION. -75- 83 Section 12.14 Interest. It is the intention of the parties hereto that each Lender shall conform strictly to usury laws applicable to it. Accordingly, if the transactions contemplated hereby would be usurious as to any Lender under laws applicable to it (including the laws of the United States of America and the State of New York or any other jurisdiction whose laws may be mandatorily applicable to such Lender notwithstanding the other provisions of this Agreement), then, in that event, notwithstanding anything to the contrary in the Loan Documents or any agreement entered into in connection with or as security for the Notes, it is agreed as follows: (i) the aggregate of all consideration which constitutes interest under law applicable to any Lender that is contracted for, taken, reserved, charged or received by such Lender under any of the Loan Documents or agreements or otherwise in connection with the Notes shall under no circumstances exceed the maximum amount allowed by such applicable law, and any excess shall be canceled automatically and if theretofore paid shall be credited by such Lender on the principal amount of the Indebtedness (or, to the extent that the principal amount of the Indebtedness shall have been or would thereby be paid in full, refunded by such Lender to the Borrower); and (ii) in the event that the maturity of the Notes is accelerated by reason of an election of the holder thereof resulting from any Event of Default under this Agreement or otherwise, or in the event of any required or permitted prepayment, then such consideration that constitutes interest under law applicable to any Lender may never include more than the maximum amount allowed by such applicable law, and excess interest, if any, provided for in this Agreement or otherwise shall be canceled automatically by such Lender as of the date of such acceleration or prepayment and, if theretofore paid, shall be credited by such Lender on the principal amount of the Indebtedness (or, to the extent that the principal amount of the Indebtedness shall have been or would thereby be paid in full, refunded by such Lender to the Borrower). All sums paid or agreed to be paid to any Lender for the use, forbearance or detention of sums due hereunder shall, to the extent permitted by law applicable to such Lender, be amortized, prorated, allocated and spread throughout the full term of the Loans evidenced by the Notes until payment in full so that the rate or amount of interest on account of any Loans hereunder does not exceed the maximum amount allowed by such applicable law. If at any time and from time to time (i) the amount of interest payable to any Lender on any date shall be computed at the Highest Lawful Rate applicable to such Lender pursuant to this Section 12.14 and (ii) in respect of any subsequent interest computation period the amount of interest otherwise payable to such Lender would be less than the amount of interest payable to such Lender computed at the Highest Lawful Rate applicable to such Lender, then the amount of interest payable to such Lender in respect of such subsequent interest computation period shall continue to be computed at the Highest Lawful Rate applicable to such Lender until the total amount of interest payable to such Lender shall equal the total amount of interest which would have been payable to such Lender if the total amount of interest had been computed without giving effect to this Section. Section 12.15 Confidentiality. In the event that the Borrower provides to the Agent or the Lenders written confidential information belonging to the Borrower, if the Borrower shall denominate such information in writing as "confidential", the Agent and the Lenders shall thereafter maintain such information in confidence in accordance with the standards of care and diligence that each utilizes in maintaining its own confidential information. This obligation of -76- 84 confidence shall not apply to such portions of the information which (i) are in the public domain, (ii) hereafter become part of the public domain without the Agent or the Lenders breaching their obligation of confidence to the Borrower, (iii) are previously known by the Agent or the Lenders from some source other than the Borrower, (iv) are hereafter developed by the Agent or the Lenders without using the Borrower's information, (v) are hereafter obtained by or available to the Agent or the Lenders from a third party who owes no obligation of confidence to the Borrower with respect to such information or through any other means other than through disclosure by the Borrower, (vi) are disclosed with the Borrower's consent, (vii) must be disclosed either pursuant to any Governmental Requirement or to Persons regulating the activities of the Agent or the Lenders, or (viii) as may be required by law or regulation or order of any Governmental Authority in any judicial, arbitration or governmental proceeding. Further, the Agent or a Lender may disclose any such information to any other Lender, any independent petroleum engineers or consultants, any independent certified public accountants, any legal counsel employed by such Person in connection with this Agreement or any Security Instrument, including without limitation, the enforcement or exercise of all rights and remedies thereunder, or any assignee or participant (including prospective assignees and participants) in the Loans; provided, however, that the Agent or the Lenders shall receive a confidentiality agreement from the Person to whom such information is disclosed such that said Person shall have the same obligation to maintain the confidentiality of such information as is imposed upon the Agent or the Lenders hereunder. Notwithstanding anything to the contrary provided herein, this obligation of confidence shall cease three (3) years from the date the information was furnished, unless the Borrower requests in writing at least thirty (30) days prior to the expiration of such three year period, to maintain the confidentiality of such information for an additional three year period. The Borrower waives any and all other rights it may have to confidentiality as against the Agent and the Lenders arising by contract, agreement, statute or law except as expressly stated in this Section 12.15. Section 12.16 Effectiveness. This Agreement shall not be effective until the date (the "Effective Date") that it is delivered to the Agent in the State of New York and executed by the Agent in such state. Section 12.17 EXCULPATION PROVISIONS. EACH OF THE PARTIES HERETO SPECIFICALLY AGREES THAT IT HAS A DUTY TO READ THIS AGREEMENT AND THE SECURITY INSTRUMENTS AND AGREES THAT IT IS CHARGED WITH NOTICE AND KNOWLEDGE OF THE TERMS OF THIS AGREEMENT AND THE SECURITY INSTRUMENTS; THAT IT HAS IN FACT READ THIS AGREEMENT AND IS FULLY INFORMED AND HAS FULL NOTICE AND KNOWLEDGE OF THE TERMS, CONDITIONS AND EFFECTS OF THIS AGREEMENT; THAT IT HAS BEEN REPRESENTED BY INDEPENDENT LEGAL COUNSEL OF ITS CHOICE THROUGHOUT THE NEGOTIATIONS PRECEDING ITS EXECUTION OF THIS AGREEMENT AND THE SECURITY INSTRUMENTS; AND HAS RECEIVED THE ADVICE OF ITS ATTORNEY IN ENTERING INTO THIS AGREEMENT AND THE SECURITY INSTRUMENTS; AND THAT IT RECOGNIZES THAT CERTAIN OF THE TERMS OF THIS AGREEMENT AND THE SECURITY INSTRUMENTS RESULT IN ONE PARTY ASSUMING THE LIABILITY INHERENT IN SOME ASPECTS OF THE TRANSACTION AND RELIEVING THE OTHER PARTY OF ITS -77- 85 RESPONSIBILITY FOR SUCH LIABILITY. EACH PARTY HERETO AGREES AND COVENANTS THAT IT WILL NOT CONTEST THE VALIDITY OR ENFORCEABILITY OF ANY EXCULPATORY PROVISION OF THIS AGREEMENT AND THE SECURITY INSTRUMENTS ON THE BASIS THAT THE PARTY HAD NO NOTICE OR KNOWLEDGE OF SUCH PROVISION OR THAT THE PROVISION IS NOT "CONSPICUOUS." -78- 86 The parties hereto have caused this Agreement to be duly executed as of the day and year first above written. BORROWER: DLB OIL & GAS, INC. By: --------------------------------------- Name: ------------------------------------- Title: ------------------------------------ Address for Notices: 1601 Northwest Expressway Suite 700 Oklahoma City, Oklahoma 73118-1401 Telecopier No.: (405) 848-8808 Telephone No.: (405) 848-9449 Attention: Ronald D. Youtsey [Signature Page 1] 87 THE AGENT and LENDER: THE CHASE MANHATTAN BANK By: --------------------------------------- Name: ------------------------------------- Title: ------------------------------------ Address for Notices: The Chase Manhattan Bank One Chase Manhattan Plaza, 3rd Floor New York, New York 10081 Telecopier No.: (212) 552-1687 Telephone No.: (212) 552-1674 Attention: Martha Fetner Lending Office for Base Rate and Eurodollar Loans: The Chase Manhattan Bank One Chase Manhattan Plaza, 3rd Floor New York, New York 10081 Telecopier No.: (212) 552-5777 Telephone No.: (212) 552-7903 Attention: Loan & Agency Services With a copy to: Texas Commerce Bank National Association 2200 Ross Avenue, 3rd Floor Dallas, Texas 75201 Telecopier No.: (214) 965-2389 Telephone No.: (214) 965-2540 Attention: Donna J. German [Signature Page 2] 88 LENDER BANK OF OKLAHOMA, N.A. By: --------------------------------------- Name: John N. Huff Title: Vice President-Energy Banking Lending Office for Base Rate and Eurodollar Loans and Address for Notices: Bank of Oklahoma, N.A. Robinson at Robert S. Kerr Avenue Oklahoma City, OK 73124 Telecopier No.: (405) 272-2588 Telephone No.: (405) 272-2028 Attention: John N. Huff [Signature Page 3] 89 EXHIBIT A FORM OF NOTE $____________ ____________, 199__ FOR VALUE RECEIVED, DLB OIL & GAS, INC., an Oklahoma corporation (the "Borrower"), hereby promises to pay to the order of __________________________ (the "Lender"), at the Principal Office of THE CHASE MANHATTAN BANK (the "Agent"), at 270 Park Avenue, New York, New York 10017, the principal sum of _____________ Dollars ($____________) (or such lesser amount as shall equal the aggregate unpaid principal amount of the Loans made by the Lender to the Borrower under the Credit Agreement, as hereinafter defined), in lawful money of the United States of America and in immediately available funds, on the dates and in the principal amounts provided in the Credit Agreement, and to pay interest on the unpaid principal amount of each such Loan, at such office, in like money and funds, for the period commencing on the date of such Loan until such Loan shall be paid in full, at the rates per annum and on the dates provided in the Credit Agreement. The date, amount, Type, interest rate and Interest Period of each Loan made by the Lender to the Borrower, and each payment made on account of the principal thereof, shall be recorded by the Lender on its books and, prior to any transfer of this Note, endorsed by the Lender on the schedules attached hereto or any continuation thereof. This Note is one of the Notes referred to in the Credit Agreement dated as of March 5, 1997 among the Borrower, the Lenders which are or become parties thereto (including the Lender) and the Agent, and evidences Loans made by the Lender thereunder (such Credit Agreement as the same may be amended or supplemented from time to time, the "Credit Agreement"). Capitalized terms used in this Note have the respective meanings assigned to them in the Credit Agreement. This Note is issued pursuant to the Credit Agreement and is entitled to the benefits provided for in the Credit Agreement and the Security Instruments. The Credit Agreement provides for the acceleration of the maturity of this Note upon the occurrence of certain events and for prepayments of Loans upon the terms and conditions specified therein and other provisions relevant to the Note. A-1 90 THIS NOTE (INCLUDING, BUT NOT LIMITED TO, THE VALIDITY AND ENFORCEABILITY HEREOF) SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, OTHER THAN THE CONFLICT OF LAWS RULES THEREOF. DLB OIL & GAS, INC. By: ---------------------------------- Name: Title: A-2 91 EXHIBIT B FORM OF BORROWING, CONTINUATION AND CONVERSION REQUEST DLB OIL & GAS, INC., an Oklahoma corporation (the "Borrower"), pursuant to the Credit Agreement dated as of March 5, 1997 (together with all amendments or supplements thereto being the "Credit Agreement") among the Borrower, THE CHASE MANHATTAN BANK, individually and as Agent for the lenders (the "Lenders") which are or become parties thereto, and such Lenders, hereby makes the requests indicated below (unless otherwise defined herein, capitalized terms are defined in the Credit Agreement): [ ] 1. Loans: (a) Aggregate amount of new Loans to be $________________; (b) Requested funding date is _____________, 199__; (c) $_______________ of such borrowings are to be Eurodollar Loans; $_______________ of such borrowings are to be Base Rate Loans; and (d) Length of Interest Period(s) for Eurodollar Loans is/are: _________________. [ ] 2. Eurodollar Loan Continuation for Eurodollar Loans maturing on _________________: (a) Aggregate amount to be continued as Eurodollar Loans is $______________; (b) Aggregate amount to be converted to Base Rate Loans is $______________; (c) Length of Interest Period for continued Eurodollar Loans is __________________. B-1 92 [ ] 3. Conversion of Outstanding Base Rate Loans to Eurodollar Loans: Convert $______________ of the outstanding Base Rate Loans to Eurodollar Loans on _______________ with an Interest Period of _________________. [ ] 4. Conversion of outstanding Eurodollar Loans to Base Rate Loans: Convert $_______________ of the outstanding Eurodollar Loans with Interest Period maturing on __________, 199_, to Base Rate Loans. The undersigned certifies that he is the Vice President of the Borrower, and that as such he is authorized to execute this certificate on behalf of the Borrower. The undersigned further certifies, represents and warrants on behalf of the Borrower that the Borrower is entitled to receive the requested borrowing, continuation or conversion under the terms and conditions of the Credit Agreement. DLB OIL & GAS, INC. By: --------------------------------------- Name: Title: B-2 93 EXHIBIT C FORM OF COMPLIANCE CERTIFICATE The undersigned hereby certifies that he is the ______________________ of DLB OIL & GAS, INC., an Oklahoma corporation (the "Borrower"), and that as such he is authorized to execute this certificate on behalf of the Borrower. With reference to the Credit Agreement dated as of March 5, 1997 (together with all amendments or supplements thereto being the "Credit Agreement") among the Borrower, THE CHASE MANHATTAN BANK, individually and as agent for the lenders (the "Lenders") which are or become parties thereto, and such Lenders, the undersigned represents and warrants as follows (each capitalized term used herein having the same meaning given to it in the Credit Agreement unless otherwise specified): (a) The representations and warranties of the Borrower contained in the Credit Agreement and in the Security Instruments and otherwise made in writing by or on behalf of the Borrower pursuant to the Credit Agreement and the Security Instruments were true and correct when made, and are repeated at and as of the time of delivery hereof and are true and correct at and as of the time of delivery hereof, except as such representations and warranties are modified to give effect to the transactions expressly permitted by the Credit Agreement. (b) The Borrower has performed and complied with all covenants, agreements and conditions contained in the Credit Agreement required to be performed or complied with by it prior to or at the time of delivery hereof. (c) The Borrower has not incurred any material liabilities, direct or contingent, since September 30, 1996, except those set forth in Schedule 9.01 to the Credit Agreement and except those allowed by the terms of the Credit Agreement or consented to by the Lenders in writing. (d) Since December 31, 1995, change has occurred, either in any case or in the aggregate, in the condition, financial or otherwise, of the Borrower which would have a Material Adverse Effect. (e) There exists, and, after giving effect to the Loan or Loans with respect to which this certificate is being delivered, will exist, no Default under the Credit Agreement by Borrower or any Subsidiary or any event or circumstance which constitutes, or with notice or lapse of time (or both) would constitute, an event of default by Borrower or any Subsidiary under any loan or credit agreement, indenture, deed of trust, security agreement or other agreement or instrument evidencing or pertaining to any Debt of the Borrower, or under any material agreement or instrument to which the Borrower is a party or by which the Borrower is bound. C-1 94 (f) Attached hereto are the detailed computations necessary to determine whether the Borrower is in compliance with Sections 9.12, 9.13 and 9.14 as of the end of the [fiscal quarter] [fiscal year] ending ________________. EXECUTED AND DELIVERED this ____ day of March, 1997. DLB OIL & GAS, INC. By: --------------------------------------- Name: Title: C-2 95 EXHIBIT E LIST OF SECURITY INSTRUMENTS 1. Mortgage, Assignment of Production, Security Agreement and Financing Statement dated as of October 17, 1994 executed by the Borrower with respect to its Oil and Gas Properties located in the State of Oklahoma, as amended by First Amendment to Mortgage, Assignment of Production, Security Agreement and Financing Statement dated as of December 28, 1995 and by Second Amendment to Mortgage, Assignment of Production, Security Agreement and Financing Statement dated as of October 31, 1996. 2. Financing Statement and Financing Statement Amendments executed by the Borrower with respect to item 1 above. 3. Mortgage, Deed of Trust, Assignment of Production, Security Agreement and Financing Statement dated as of October 24, 1994 executed by the Borrower with respect to its Oil and Gas Properties located in the State of Texas, as amended by First Amendment to Mortgage, Assignment of Production, Security Agreement and Financing Statement dated as of December 28, 1995. 4. Financing Statement with respect to item 3 above. 5. Security Agreement covering accounts, general intangibles, inventory and securities dated as of December 28, 1995 executed by the Borrower, as amended by First Amendment to Security Agreement dated as of February 10, 1997 and Second Amendment to Security Agreement dated as of March 5, 1997 (which amended and restated Security Agreement dated as of October 24, 1994 executed by the Borrower). 6. Financing Statement and Financing Statement Amendment executed by the Borrower with respect to item 5 above 7. Stock power and stock certificate representing 100% of the common stock of Bonray Drilling Corporation ("Bonray") pledged pursuant to item 5 above. 8. Mortgage, Assignment of Production, Security Agreement and Financing Statement dated as of February 25, 1994 executed by Davidson Oil & Gas, Inc. ("Davidson") with respect to its Oil and Gas Properties located in the State of Oklahoma, as amended by First Supplement to Mortgage, Assignment of Production, Security Agreement and Financing Statement dated as of April 26, 1994, Second Supplement to Mortgage, Assignment of Production, Security Agreement and Financing Statement dated as of June 29, 1995 and Third Supplement to Mortgage, Assignment of Production, Security Agreement and Financing Statement dated as of December 28, 1995 executed by the Borrower as successor by merger to Davidson. E-1 96 9. Financing Statement executed by Davidson with respect to item 8 above, as amended by Financing Statement Amendment executed by the Borrower as successor by merger to Davidson. 10. Mortgage, Deed of Trust, Assignment of Production, Security Agreement and Financing Statement dated as of February 25, 1994 executed by Davidson with respect to its Oil and Gas Properties located in the State of Texas, as amended by First Amendment to Mortgage, Deed of Trust, Assignment of Production, Security Agreement and Financing Statement dated as of December 28, 1995 executed by the Borrower as successor by merger to Davidson. 11. Financing Statement executed by Davidson with respect to item 10 above, as amended by Financing Statement Amendment executed by the Borrower as successor by merger to Davidson. 12. Mortgage, Assignment of Production, Security Agreement and Financing Statement dated as of June 29, 1995 executed by Davidson with respect to its Oil and Gas Properties located in the State of Oklahoma, as amended by First Amendment to Mortgage, Assignment of Production, Security Agreement and Financing Statement dated as of December 28, 1995 executed by the Borrower as successor by merger to Davidson. 13. Financing Statement executed by Davidson with respect to item 12 above, as amended by Financing Statement Amendment executed by the Borrower as successor by merger with Davidson. 14. Mortgage, Deed of Trust, Assignment of Production, Security Agreement and Financing Statement dated as of June 29, 1995 executed by Davidson with respect to its Oil and Gas Properties located in the State of Texas, as amended by First Amendment to Mortgage, Deed of Trust, Assignment of Production, Security Agreement and Financing Statement dated as of December 28, 1995 executed by the Borrower as successor by merger with Davidson. 15. Financing Statement executed by Davidson with respect to item 14 above, as amended by Financing Statement Amendment executed by the Borrower as successor by merger with Davidson. 16. Mortgage, Assignment of Production, Security Agreement and Financing Statement dated as of June 28, 1996 executed by the Borrower with respect to its Oil and Gas Properties located in the State of Oklahoma acquired from Amerada Hess. 17. Financing Statement executed by the Borrower with respect to item 16 above. E-2 97 18. Mortgage, Assignment of Production, Security Agreement and Financing Statement dated as of February 10, 1997 executed by the Borrower with respect to its Oil and Gas Properties located in the State of Oklahoma. 19. Financing Statement executed by the Borrower with respect to item 18 above. 20. Mortgage, Deed of Trust, Assignment of Production, Security Agreement and Financing Statement dated as of February 10, 1997 executed by the Borrower with respect to its Oil and Gas Properties located in the State of Texas. 21. Financing Statement executed by the Borrower with respect to item 20 above. 22. Guaranty Agreement dated as of March 5, 1997 executed by Gemco, L.L.C. 23. Guaranty Agreement dated as of March 5, 1997 executed by DLB International, Inc. 24. Security Agreement dated as of March 5, 1997 executed by DLB International, Inc. 25. Financing Statement executed by DLB International, Inc. with respect to item 24 above. 26. Stock power and related stock certificate of Waggoner (Barbados) Ltd. issued to DLB International, Inc. and pledged with respect to item 24 above. 27. Guaranty Agreement dated as of March 5, 1997 executed by Bonray. 28. Security Agreement dated as of March 5, 1997 executed by Bonray. 29. Financing Statement executed by Bonray with respect to item 28 above. 30. Assignment of Notes and Liens and Amendments to Mortgages, Deeds of Trust, Assignments of Production, Security Agreements and Financing Statements dated as of March 5, 1997 executed by the Borrower, the prior bank group, the Agent and the Lenders. 31. Financing Statement Assignments executed with respect to item 30 above. E-3 98 EXHIBIT F [FORM OF] ASSIGNMENT AGREEMENT ASSIGNMENT AGREEMENT ("Agreement") dated as of ________________, 199___ between: ____________________________________________________ (the "Assignor") and ______________________________________________________ (the "Assignee"). RECITALS WHEREAS, the Assignor is a party to the Credit Agreement dated as of March 5, 1997 (as modified and supplemented and in effect from time to time, the "Credit Agreement") among DLB OIL & GAS, INC., an Oklahoma corporation (the "Borrower"), each of the lenders that is or becomes a party thereto as provided in Section 12.06 of the Credit Agreement (individually, together with its successors and assigns, a "Lender", and collectively, together with their successors and assigns, the "Lenders"), and THE CHASE MANHATTAN BANK, individually (in such capacity, "Chase"), as agent for the Lenders (in such capacity, together with its successors in such capacity, the "Agent"). WHEREAS, the Assignor proposes to sell, assign and transfer to the Assignee, and the Assignee proposes to purchase and assume from the Assignor, [all][a portion] of the Assignor's Maximum Credit Amount, outstanding Loans and its Percentage Share of the outstanding LC Exposure, all on the terms and conditions of this Agreement. NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I DEFINITIONS. Section 1.01 Definitions. All capitalized terms used but not defined herein have the respective meanings given to such terms in the Credit Agreement. Section 1.02 Other Definitions. As used herein, the following terms have the following respective meanings: "Assigned Interest" shall mean all of Assignor's (in its capacity as a "Lender") rights and obligations (i) under the Credit Agreement and the other Security Instruments F-1 99 in respect of the Maximum Credit Amount of the Assignor in an outstanding principal amount equal to $_______________, including, without limitation, any obligation to participate pro rata in any LC Exposure, and (ii) to make Loans under the Maximum Credit Amount and any right to receive payments for the Loans outstanding under the Maximum Credit Amount assigned hereby of $___________________ (the "Loan Balance"), plus the interest and fees which will accrue from and after the Assignment Date. "Assignment Date" shall mean _____________________, 199___. ARTICLE II SALE AND ASSIGNMENT. Section 2.01 Sale and Assignment. On the terms and conditions set forth herein, effective on and as of the Assignment Date, the Assignor hereby sells, assigns and transfers to the Assignee, and the Assignee hereby purchases and assumes from the Assignor, all of the right, title and interest of the Assignor in and to, and all of the obligations of the Assignor in respect of, the Assigned Interest. Such sale, assignment and transfer is without recourse and, except as expressly provided in this Agreement, without representation or warranty. Section 2.02 Assumption of Obligations. The Assignee agrees with the Assignor (for the express benefit of the Assignor and the Borrower) that the Assignee will, from and after the Assignment Date, perform all of the obligations of the Assignor in respect of the Assigned Interest. From and after the Assignment Date: (a) the Assignor shall be released from the Assignor's obligations in respect of the Assigned Interest, and (b) the Assignee shall be entitled to all of the Assignor's rights, powers and privileges under the Credit Agreement and the other Security Instruments in respect of the Assigned Interest. Section 2.03 Consent by Agent. By executing this Agreement as provided below, in accordance with Section 12.06(b) of the Credit Agreement, the Agent hereby acknowledges notice of the transactions contemplated by this Agreement and consents to such transactions. ARTICLE III PAYMENTS. Section 3.01 Payments. As consideration for the sale, assignment and transfer contemplated by Section 2.01 hereof, the Assignee shall, on the Assignment Date, assume Assignor's obligations in respect of the Assigned Interest and pay to the Assignor an amount equal to the Loan Balance, if any. An amount equal to all accrued and unpaid interest and fees shall be paid to the Assignor as provided in Section 3.02 (iii) below. Except as otherwise F-2 100 provided in this Agreement, all payments hereunder shall be made in Dollars and in immediately available funds, without setoff, deduction or counterclaim. Section 3.02 Allocation of Payments. The Assignor and the Assignee agree that (i) the Assignor shall be entitled to any payments of principal with respect to the Assigned Interest made prior to the Assignment Date, together with any interest and fees with respect to the Assigned Interest accrued prior to the Assignment Date, (ii) the Assignee shall be entitled to any payments of principal with respect to the Assigned Interest made from and after the Assignment Date, together with any and all interest and fees with respect to the Assigned Interest accruing from and after the Assignment Date, and (iii) the Agent is authorized and instructed to allocate payments received by it for account of the Assignor and the Assignee as provided in the foregoing clauses. Each party hereto agrees that it will hold any interest, fees or other amounts that it may receive to which the other party hereto shall be entitled pursuant to the preceding sentence for account of such other party and pay, in like money and funds, any such amounts that it may receive to such other party promptly upon receipt. Section 3.03 Delivery of Notes. Promptly following the receipt by the Assignor of the consideration required to be paid under Section 3.01 hereof, the Assignor shall, in the manner contemplated by Section 12.06(b) of the Credit Agreement, (i) deliver to the Agent (or its counsel) the Note held by the Assignor and (ii) notify the Agent to request that the Borrower execute and deliver new Notes to the Assignor (if Assignor continues to be a Lender) and the Assignee dated the date of this Agreement in respective principal amounts equal to the respective Maximum Credit Amounts of the Assignor (if appropriate) and the Assignee after giving effect to the sale, assignment and transfer contemplated hereby. Section 3.04 Further Assurances. The Assignor and the Assignee hereby agree to execute and deliver such other instruments, and take such other actions, as either party may reasonably request in connection with the transactions contemplated by this Agreement. ARTICLE IV CONDITIONS PRECEDENT. Section 4.01 Conditions Precedent. The effectiveness of the sale, assignment and transfer contemplated hereby is subject to the satisfaction of each of the following conditions precedent: (a) the execution and delivery of this Agreement by the Assignor and the Assignee; (b) the receipt by the Assignor of the payment required to be made by the Assignee under Section 3.01 hereof; and F-3 101 (c) the acknowledgment and consent by the Agent contemplated by Section 2.03 hereof. ARTICLE V REPRESENTATIONS AND WARRANTIES. Section 5.01 Representations and Warranties of the Assignor. The Assignor represents and warrants to the Assignee as follows: (a) it has all requisite power and authority, and has taken all action necessary to execute and deliver this Agreement and to fulfill its obligations under, and consummate the transactions contemplated by, this Agreement; (b) the execution, delivery and compliance with the terms hereof by Assignor and the delivery of all instruments required to be delivered by it hereunder do not and will not violate any Governmental Requirement applicable to it; (c) this Agreement has been duly executed and delivered by it and constitutes the legal, valid and binding obligation of the Assignor, enforceable against it in accordance with its terms; (d) all approvals and authorizations of, all filings with and all actions by any Governmental Authority necessary for the validity or enforceability of its obligations under this Agreement have been obtained; (e) the Assignor has good title to, and is the sole legal and beneficial owner of, the Assigned Interest, free and clear of all Liens, claims, participations or other charges of any nature whatsoever; and (f) the transactions contemplated by this Agreement are commercial banking transactions entered into in the ordinary course of the banking business of the Assignor. Section 5.02 Disclaimer. Except as expressly provided in Section 5.01 hereof, the Assignor does not make any representation or warranty, nor shall it have any responsibility to the Assignee, with respect to the accuracy of any recitals, statements, representations or warranties contained in the Credit Agreement or in any certificate or other document referred to or provided for in, or received by any Lender under, the Credit Agreement, or for the value, validity, effectiveness, genuineness, execution, effectiveness, legality, enforceability or sufficiency of the Credit Agreement, the Note or any other document referred to or provided for therein or for any failure by the Borrower or any other Person (other than Assignor) to perform any of its obligations thereunder prior or for the existence, value, perfection or priority of any collateral F-4 102 security or the financial or other condition of the Borrower or the Subsidiaries [or any other obligor or guarantor], or any other matter relating to the Credit Agreement or any other Security Instrument or any extension of credit thereunder. Section 5.03 Representations and Warranties of the Assignee. The Assignee represents and warrants to the Assignor as follows: (a) it has all requisite power and authority, and has taken all action necessary to execute and deliver this Agreement and to fulfill its obligations under, and consummate the transactions contemplated by, this Agreement; (b) the execution, delivery and compliance with the terms hereof by Assignee and the delivery of all instruments required to be delivered by it hereunder do not and will not violate any Governmental Requirement applicable to it; (c) this Agreement has been duly executed and delivered by it and constitutes the legal, valid and binding obligation of the Assignee, enforceable against it in accordance with its terms; (d) all approvals and authorizations of, all filings with and all actions by any Governmental Authority necessary for the validity or enforceability of its obligations under this Agreement have been obtained; (e) the Assignee has fully reviewed the terms of the Credit Agreement and the other Security Instruments and has independently and without reliance upon the Assignor, and based on such information as the Assignee has deemed appropriate, made its own credit analysis and decision to enter into this Agreement; (f) the Assignee hereby affirms that the representations contained in Section 4.06(d)[(i)][ii)] of the Credit Agreement are true and accurate as to it [use if (ii) selected][and, the Assignee has contemporaneously herewith delivered to the Agent and the Borrower such certifications as are required thereby to avoid the withholding taxes referred to in Section 4.06]; and (g) the transactions contemplated by this Agreement are commercial banking transactions entered into in the ordinary course of the banking business of the Assignee. F-5 103 ARTICLE VI MISCELLANEOUS. Section 6.01 Notices. All notices and other communications provided for herein (including, without limitation, any modifications of, or waivers, requests or consents under, this Agreement) shall be given or made in writing (including, without limitation, by telex or telecopy) to the intended recipient at its "Address for Notices" specified below its name on the signature pages hereof or, as to either party, at such other address as shall be designated by such party in a notice to the other party. Section 6.02 Amendment, Modification or Waiver. No provision of this Agreement may be amended, modified or waived except by an instrument in writing signed by the Assignor and the Assignee, and consented to by the Agent. Section 6.03 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. The representations and warranties made herein by the Assignee are also made for the benefit of the Agent and the Borrower, and the Assignee agrees that the Agent and the Borrower are entitled to rely upon such representations and warranties. Section 6.04 Assignments. Neither party hereto may assign any of its rights or obligations hereunder except in accordance with the terms of the Credit Agreement. Section 6.05 Captions. The captions and section headings appearing herein are included solely for convenience of reference and are not intended to affect the interpretation of any provision of this Agreement. Section 6.06 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be identical and all of which, taken together, shall constitute one and the same instrument, and each of the parties hereto may execute this Agreement by signing any such counterpart. Section 6.07 Governing Law. This Agreement shall be governed by, and construed in accordance with, the law of the State of New York. Section 6.08 Expenses. To the extent not paid by the Borrower pursuant to the terms of the Credit Agreement, each party hereto shall bear its own expenses in connection with the execution, delivery and performance of this Agreement. Section 6.09 Waiver of Jury Trial. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. F-6 104 IN WITNESS WHEREOF, the parties hereto have caused this Assignment Agreement to be executed and delivered as of the date first above written. ASSIGNOR -------- ------------------------------------------ By: -------------------------------------- Name: Title: Address for Notices: ------------------------------------------ ------------------------------------------ ------------------------------------------ Telecopier No.: -------------------------- Telephone No.: -------------------------- Attention: -------------------------- F-7 105 ASSIGNEE -------- ------------------------------------------ By: -------------------------------------- Name: Title: Address for Notices: ------------------------------------------ ------------------------------------------ ------------------------------------------ Telecopier No.: -------------------------- Telephone No.: -------------------------- Attention: -------------------------- ACKNOWLEDGED AND CONSENTED TO: THE CHASE MANHATTAN BANK, as Agent By: -------------------------------- Name: Title: F-8 106 SCHEDULE 9.02 LIENS Liens of Bonray Drilling Corporation securing the Indebtedness disclosed on Schedule 9.01, as follows: 1) Promissory Note dated October 7, 1996, in the original principal amount of $245,010.00, with a maturity date of October 7, 1997, and a current balance of $165,161.18: Secured by a purchase money security interest in certain drill pipe owned by Bonray, which was perfected by the filing of a UCC Financing Statement in the Office of the County Clerk of Oklahoma County on October 30, 1996, as Document No. 0056458. 2) Promissory Note dated October 31, 1996, in the original principal amount of $750,000.00, with a maturity date of November 3, 1997, and a current balance of $620,000.00: Secured by a security interest in all accounts receivable of Bonray, which was perfected by the filing of a UCC Financing Statement in the Office of the County Clerk of Oklahoma County on November 4, 1996, as Document No. 0056762. 3) Promissory Note dated November 14, 1996, in the original principal amount of $150,010.00, with a maturity date of November 14, 1997, and a current balance of $113,780.71: Secured by a purchase money security interest in certain drill pipe owned by Bonray, which was perfected by the filing of a UCC Financing Statement in the Office of the County Clerk of Oklahoma County on November 19, 1996, as Document No. 0059504. 107 SCHEDULE 9.03 INVESTMENTS 1) Investments in the issued and outstanding 13 7/8% Senior Notes of WRT Energy Corporation due in the year 2002 in the accumulated balance of $6,584,527.50 as is set forth on page 2 of 3 of this Schedule 9.03 2) Investments in mechanic's and materialmen's liens against property of WRT Energy Corporation made by Dublin Acquisition, LLC (an entity owned 75% by Borrower and 25% by Wexford Capital Corporation) in the accumulated balance of $2,383,319.23 as is set forth on page 3 of 3 of this Schedule 9.03 Page 1 of 3 EX-10.13 3 SECOND AMENDED DISCLOSURE STATEMENT UNDER 11 USC 1 EXHIBIT 10.13 UNITED STATES BANKRUPTCY COURT WESTERN DISTRICT OF LOUISIANA LAFAYETTE-OPELOUSAS DIVISION IN RE: ) ) WRT ENERGY CORPORATION ) CASE NO. 96BK-50212 ) (CHAPTER 11) DEBTOR. ) ================================================================================ SECOND AMENDED DISCLOSURE STATEMENT UNDER 11 U.S.C. SECTION 1125 IN SUPPORT OF DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION UNDER CHAPTER 11 OF THE UNITED STATES BANKRUPTCY CODE ================================================================================ IMPORTANT THIS SECOND AMENDED DISCLOSURE STATEMENT HAS BEEN PREPARED BY WRT ENERGY CORPORATION ("DEBTOR") AND DLB OIL & GAS, INC. AND WEXFORD MANAGEMENT LLC, ON BEHALF OF ITS AFFILIATED INVESTMENT FUNDS (COLLECTIVELY "DLBW"), CO-PROPONENTS, AND DESCRIBES THE TERMS AND PROVISIONS OF THE DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION UNDER CHAPTER 11 OF THE UNITED STATES BANKRUPTCY CODE DATED MARCH 11, 1997 (THE "PLAN"). THE DEBTOR'S CHAPTER 11 CASE IS PENDING IN THE UNITED STATES BANKRUPTCY COURT FOR THE WESTERN DISTRICT OF LOUISIANA, LAFAYETTE-OPELOUSAS DIVISION (THE "BANKRUPTCY COURT"), UNDER CHAPTER 11 OF THE UNITED STATES BANKRUPTCY CODE, TITLE 11 OF THE UNITED STATES CODE, AS AMENDED. A COPY OF THE PLAN IS ATTACHED HERETO AS EXHIBIT "A" AND SHOULD BE REVIEWED CAREFULLY. THE PLAN HAS BEEN PROPOSED WITH A VIEW TOWARD OBTAINING VOTES IN FAVOR OF THE PLAN BY CREDITORS WITHIN THE VARIOUS CLASSES SO AS TO CONFIRM A CONSENSUAL PLAN. IN THE EVENT THAT A CONSENSUAL PLAN CANNOT BE OBTAINED, HOWEVER, THE DEBTOR AND DLBW WILL PROCEED TO CONFIRMATION UNDER SECTION 1129(b) OF THE BANKRUPTCY CODE. THE BANKRUPTCY COURT HAS APPROVED THIS DISCLOSURE STATEMENT FOR SOLICITATION PURPOSES AS CONTAINING ADEQUATE INFORMATION CONCERNING THE PLAN SO AS TO ENABLE HOLDERS OF CLAIMS AND EQUITY INTERESTS TO 2 MAKE AN INFORMED DECISION ABOUT VOTING FOR OR AGAINST THE PLAN. HOWEVER, SUCH APPROVAL DOES NOT CONSTITUTE AN ENDORSEMENT BY THE BANKRUPTCY COURT OF THE PLAN OR ANY PROVISIONS WITHIN THE PLAN. EACH HOLDER OF A CLAIM OR EQUITY INTEREST MUST REACH ITS OWN DECISION CONCERNING THE PLAN. THE DEBTOR AND DLBW, AS WELL AS THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS THAT HAS BEEN APPOINTED IN THE CASE, URGE YOU TO VOTE IN FAVOR OF THE PLAN. Joel P. Kay, Esq. Edward Lee Morris, Esq. SHEINFELD, MALEY & KAY, P.C. 1001 Fannin Street, Suite 3700 Houston, Texas 77002-6797 Telephone: (713) 658-8881 Telecopy: (713) 658-9756 ATTORNEYS FOR DEBTOR WRT ENERGY CORPORATION Jeffrey S. Sabin, Esq. Mark A. Broude, Esq. SCHULTE, ROTH & ZABEL LLP 900 Third Avenue New York, New York 10022 Telephone: (212) 756-2000 Telecopy: (212) 593-5955 ATTORNEYS FOR DLB OIL & GAS, INC. AND WEXFORD MANAGEMENT LLC DATED: March 11, 1997 3 TABLE OF CONTENTS SUMMARY INFORMATION RELATIVE TO THE CHAPTER 11 REORGANIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 II. VOTING PROCEDURES AND REQUIREMENTS . . . . . . . . . . . . . . . . . . 10 A. Ballots and Voting Deadline . . . . . . . . . . . . . . . . . . . 10 B. Creditors Solicited to Vote . . . . . . . . . . . . . . . . . . . 12 C. Definition of Impairment . . . . . . . . . . . . . . . . . . . . 12 D. Classes Impaired Under the Plan . . . . . . . . . . . . . . . . . 13 E. Vote Required for Class Acceptance . . . . . . . . . . . . . . . 13 F. Distributions Only to Holders of Allowed Claims . . . . . . . . . 14 III. CONFIRMATION OF THE PLAN . . . . . . . . . . . . . . . . . . . . . . . 14 A. Confirmation Hearing . . . . . . . . . . . . . . . . . . . . . . 14 B. Requirements for Confirmation of the Plan . . . . . . . . . . . . 16 C. Cramdown . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 IV. HISTORICAL AND BACKGROUND INFORMATION . . . . . . . . . . . . . . . . . 19 A. Corporate Information . . . . . . . . . . . . . . . . . . . . . . 19 B. The Business of WRT and Its Operations . . . . . . . . . . . . . 19 1. Introduction . . . . . . . . . . . . . . . . . . . . 19 2. Business Strategy . . . . . . . . . . . . . . . . . . 20 3. Significant Oil and Gas Property Acquisitions . . . . 20 4. Technology . . . . . . . . . . . . . . . . . . . . . 21 5. Regulation . . . . . . . . . . . . . . . . . . . . . 21 C. Description of Assets of WRT . . . . . . . . . . . . . . . . . . 24 1. Principal Oil and Gas Properties . . . . . . . . . . 24 a. Abbeville Field . . . . . . . . . . . . . . . . . 25 b. Bayou Penchant Field . . . . . . . . . . . . . . 26 c. Bayou Pigeon Field. . . . . . . . . . . . . . . . 26 d. Deer Island Field . . . . . . . . . . . . . . . . 26 e. East Hackberry Field . . . . . . . . . . . . . . 27 f. Golden Meadow Field . . . . . . . . . . . . . . . 27 g. Lac Blanc Field . . . . . . . . . . . . . . . . . 27 h. Napoleonville Field . . . . . . . . . . . . . . . 28 i. West Hackberry Field . . . . . . . . . . . . . . 28 j. West Cote Blanche Bay Field . . . . . . . . . . . 28 2. Acreage . . . . . . . . . . . . . . . . . . . . . . . 29 3. Drilling and Recompletion Activities . . . . . . . . 29 4. Title to Oil and Gas Properties . . . . . . . . . . . 30
-i- 4 5. Reserves . . . . . . . . . . . . . . . . . . . . . . 31 6. Production, Prices and Cost . . . . . . . . . . . . . 32 7. Facilities and Equipment . . . . . . . . . . . . . . 32 D. Events Leading to Chapter 11 Filing . . . . . . . . . . . . . . . 33 1. Senior Note Offering and Credit Facility . . . . . . 33 2. 1995 Development Plan . . . . . . . . . . . . . . . . 34 3. Change in Strategy and Corporate Structure . . . . . 34 4. Impairment of Long-Lived Assets . . . . . . . . . . . 35 5. Filing of Reorganization Case . . . . . . . . . . . . 36 V. SIGNIFICANT EVENTS DURING THE CHAPTER 11 CASE . . . . . . . . . . . . . 36 A. Employment of Key Professionals . . . . . . . . . . . . . . . . . 36 1. Bankruptcy Counsel . . . . . . . . . . . . . . . . . 36 2. General Corporate and Oil and Gas Law Counsel; Special Counsel for Securities Litigation . . . . . . 37 3. Oil & Gas Engineers . . . . . . . . . . . . . . . . . 37 4. Financial Advisors . . . . . . . . . . . . . . . . . 37 5. Accountants . . . . . . . . . . . . . . . . . . . . . 37 B. Approval of Cash Management System . . . . . . . . . . . . . . . 37 C. Obtaining Authority to Use Cash Collateral . . . . . . . . . . . 38 D. Employment Stabilization . . . . . . . . . . . . . . . . . . . . 39 1. Executive Salaries Approved . . . . . . . . . . . . . 39 2. Reimbursement of Employee Expenses & Contributions to 401K Plan . . . . . . . . . . . . . . . . . . . . 39 3. Stay Bonus . . . . . . . . . . . . . . . . . . . . . 39 E. Appointment of Official Committee of Unsecured Creditors . . . . 40 F. Denial of Request for Appointment of Lien Creditors Committee . . 40 G. Establishment of Claims Bar Date . . . . . . . . . . . . . . . . 40 H. Compromise of Bear Stearns Litigation . . . . . . . . . . . . . . 41 I. Rejection of Tri-Deck Marketing Agreement and Suit for Turnover of Proceeds . . . . . . . . . . . . . . . . . . . . . . 41 J. Oil & Gas Lease Dispute . . . . . . . . . . . . . . . . . . . . . 42 K. Motion to Compel Release of Escrowed Production Proceeds . . . . 43 L. Adversary Proceeding to Enjoin Securities Litigation Against Officers and Directors . . . . . . . . . . . . . . . . . . . . . 44 M. Post-Petition Financing . . . . . . . . . . . . . . . . . . . . . 44 N. Sale of Minor Oil and Gas Properties . . . . . . . . . . . . . . 45 1. Sale of Rankin Field Interests . . . . . . . . . . . 45 2. Sale of Bayou Henry Interests . . . . . . . . . . . . 45 O. Appointment of Examiner . . . . . . . . . . . . . . . . . . . . . 45 P. Motion to Prohibit Use of Production Proceeds from West Cote Blanche Bay Field . . . . . . . . . . . . . . . . . . . 46 Q. The Search for an M&A Candidate or Restructuring Partner . . . . 46
-ii- 5 R. Tricore Avoidance Action . . . . . . . . . . . . . . . . . . . . 47 VI. SUMMARY OF THE CLAIMS, CLASSIFICATIONS AND TREATMENT UNDER THE PLAN . . . . . . . . . . . . . . . . . . . . . . . 48 A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . 48 B. Classification of Creditors . . . . . . . . . . . . . . . . . . . 49 C. Treatment of Classes of Claims and Equity Interests . . . . . . . 51 1. Treatment of Administrative Claims . . . . . . . . . 51 2. Treatment of Allowed Priority Tax Claims . . . . . . 52 3. Treatment of Allowed Priority Claims (Class A-1) . . 53 4. Treatment of Allowed Secured Claim of GMAC (Class B-1) . . . . . . . . . . . . . . . . . . 53 5. Treatment of Allowed Secured Claim of INCC (Class B-2). . . . . . . . . . . . . . . . . . . 53 6. Treatment of Allowed Secured Claim of MC Bank & Trust Company (Class B-3) . . . . . . . . . . . . . . 54 7. Treatment of Allowed Secured Claim of Tricore (Class B-4). . . . . . . . . . . . . . . . . 54 8. Treatment of Allowed Secured Claim of Woodforest National Bank (Class B-5). . . . . . . . . . . . . . 55 9. Treatment of Allowed Secured Claim of The Woodlands Corporation (Class B-6). . . . . . . . . . . . . . . 55 10. Treatment of Allowed Secured Claims of Oil & Gas Lien Claimants (Classes C-1 through C-16). . . . . . 55 11. Treatment of Allowed Convenience Claims (Class D-1). . . . . . . . . . . . . . . . . . 57 12. Treatment of Allowed Tort Claims (Class D-2). . . . . 57 13. Treatment of Allowed General Unsecured Claims (Class D-3) . . . . . . . . . . . . . . . . . . . . . 58 14. Treatment of Allowed Securities Litigation Claims Based Upon Senior Note Ownership (Class D-4) . . . . 60 15. Treatment of Interests of Holders of Preferred Stock (Class E-1) . . . . . . . . . . . . . . . . . . 61 16. Treatment of Allowed Securities Litigation Claims Based Upon Preferred Stock Ownership (Class E-2) . . 61 17. Treatment of Interests of Holders of Common Stock and Allowed Securities Litigation Claims Based Upon Common Stock Ownership (Class E-3) . . . . . . . 61 18. Treatment of Interests of Holders of WRT Warrants (Class E-4) . . . . . . . . . . . . . . . . 62 19. Treatment of Interest of Holders of WRT Stock Options (Class E-5) . . . . . . . . . . . . . . . . . 62 D. Impaired Classes . . . . . . . . . . . . . . . . . . . . . . . . 62 E. Disputed and Unliquidated Claims . . . . . . . . . . . . . . . . 62 1. Disputed Secured Claims (Other than Oil & Gas Lien Claimants) . . . . . . . . . . . . . . . . . . . 62 a. AFCO Credit Corporation . . . . . . . . . . . . 63
-iii- 6 b. Amerada Hess Corporation . . . . . . . . . . . 63 c. Baker Hughes Process Systems . . . . . . . . . 63 d. Costilla Petroleum Corporation . . . . . . . . 63 e. Floris Fay Forgey Driskill, et al . . . . . . . 63 f. Duck Lake Acquisition Partners . . . . . . . . 64 g. First Premium Services, Inc . . . . . . . . . . 64 h. Ford Motor Credit Company . . . . . . . . . . . 64 i. Freeport-McMoRan Oil & Gas Co . . . . . . . . . 64 j. GE Capital Corporation . . . . . . . . . . . . 64 k. Robert H. & Linda McGill Griffin . . . . . . . 65 l. Milam Royalty Corporation . . . . . . . . . . . 65 m. Mobil Oil Exploration & Production . . . . . . 65 n. NationsBank of Texas . . . . . . . . . . . . . 65 o. Eugene W. Russell . . . . . . . . . . . . . . . 66 p. Russell Resources, Inc . . . . . . . . . . . . 66 q. Tenneco Ventures Corporation . . . . . . . . . 66 r. Tricore Energy Venture, L.P . . . . . . . . . . 67 s. Woodlands Corporation . . . . . . . . . . . . . 67 2. Disputed Unsecured Claims . . . . . . . . . . . . . . 67 a. Class Proof of Claim - Securities Litigation. . . . . . . . . . . . . . . . . . 67 3. Unliquidated Claims. . . . . . . . . . . . . . . . . 68 VII. OTHER SIGNIFICANT PLAN PROVISIONS . . . . . . . . . . . . . . . . . . . 68 A. The Texaco West Cote Blanche Bay Transaction . . . . . . . . . . 68 B. Treatment of Executory Contracts and Unexpired Leases . . . . . . 69 C. Royalty Provisions . . . . . . . . . . . . . . . . . . . . . . . 69 D. State/LaFourche Settlement . . . . . . . . . . . . . . . . . . . 70 E. Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 F. Discharge of the Debtor . . . . . . . . . . . . . . . . . . . . . 72 G. Amendment and Modification to the Plan . . . . . . . . . . . . . 72 H. Retention of Jurisdiction . . . . . . . . . . . . . . . . . . . . 72 VIII. MANAGEMENT OF NEW WRT . . . . . . . . . . . . . . . . . . . . . . 74 A. Organization and Management of New WRT . . . . . . . . . . . . . 74 B. Identification of New WRT Directors and Officers . . . . . . . . 75 C. Information about New WRT Directors and Officers . . . . . . . . 75 Charles E. Davidson . . . . . . . . . . . . . . . . . . . . 75 Mike Liddell . . . . . . . . . . . . . . . . . . . . . . . 75 Mark Liddell . . . . . . . . . . . . . . . . . . . . . . . 75 Gary C. Hanna . . . . . . . . . . . . . . . . . . . . . . . 75 Ronald D. Youtsey . . . . . . . . . . . . . . . . . . . . . 76 Raymond P. Landry . . . . . . . . . . . . . . . . . . . . . 76 D. Employment Contract . . . . . . . . . . . . . . . . . . . . . . . 76
-iv- 7 E. DLBW's Stake in New WRT and Experience in Operating Mineral Interests . . . . . . . . . . . . . . . . . . . . . . . . 76 IX. FEASIBILITY OF THE PLAN . . . . . . . . . . . . . . . . . . . . . . . . 78 A. Feasibility Requirements and Reorganization Value . . . . . . . . 78 B. Future Business Plan of Operations . . . . . . . . . . . . . . . 79 X. COMPARISON OF PLAN TO ALTERNATIVES . . . . . . . . . . . . . . . . . . 80 A. Dismissal . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 B. Chapter 7 Liquidation . . . . . . . . . . . . . . . . . . . . . . 80 C. Alternative Plans . . . . . . . . . . . . . . . . . . . . . . . . 81 XI. CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN . . . . . . . . . . 82 A. General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 1. Statutory Overview . . . . . . . . . . . . . . . . . 82 2. Summary of Plan . . . . . . . . . . . . . . . . . . . 82 B. Tax Consequences to Debtor . . . . . . . . . . . . . . . . . . . 83 1. Existing Tax Attributes of Debtor . . . . . . . . . . 83 2. Treatment of Debt Forgiveness Income Under the Plan . . . . . . . . . . . . . . . . . . . . . . 83 3. Effect of Section 382 - General Rules . . . . . . . . 84 4. Special Rules for Chapter 11 Cases . . . . . . . . . 84 5. Computation of Alternative Minimum Tax ("AMT") . . . 85 C. Federal Income Tax Consequences to Claimants . . . . . . . . . . 85 1. General . . . . . . . . . . . . . . . . . . . . . . . 85 2. Claimants Receiving Cash . . . . . . . . . . . . . . 85 3. Claimants Receiving Stock . . . . . . . . . . . . . . 85 4. Tax Basis and Holding Period . . . . . . . . . . . . 86 5. Character of Gain or Loss . . . . . . . . . . . . . . 87 6. Receipt of Interest . . . . . . . . . . . . . . . . . 87 7. Backup Withholding . . . . . . . . . . . . . . . . . 87 8. Federal Income Tax Consequences to Equity Interests . . . . . . . . . . . . . . . . . . 87 D. Federal Income Tax Treatment of the Litigation Entity . . . . . . 88 1. In General . . . . . . . . . . . . . . . . . . . . . 88 2. Advance Ruling Criteria . . . . . . . . . . . . . . . 88 XII. SECURITIES LAW CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . 88 A. Issuance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 B. Resale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 C. Attributes of New WRT Common Stock . . . . . . . . . . . . . . . 90 D. New WRT Warrants . . . . . . . . . . . . . . . . . . . . . . . . 91 XIII. EXISTING AND POTENTIAL LITIGATION . . . . . . . . . . . . . . . . 91 A. Pre-Petition Litigation . . . . . . . . . . . . . . . . . . . . . 91
-v- 8 1. Employment Litigation . . . . . . . . . . . . . . . . 91 2. Securities Litigation . . . . . . . . . . . . . . . . 92 3. Tax Exemption Litigation . . . . . . . . . . . . . . 92 B. Post-Petition Litigation . . . . . . . . . . . . . . . . . . . . 92 1. Tri-Deck/Perry Gas Litigation . . . . . . . . . . . . 92 2. E. C. Energy Production, Inc. . . . . . . . . . . . . 93 3. Tricore . . . . . . . . . . . . . . . . . . . . . . . 93 C. Potential Litigation . . . . . . . . . . . . . . . . . . . . . . 93 1. Examiner . . . . . . . . . . . . . . . . . . . . . . 94 2. Avoidable Preferences . . . . . . . . . . . . . . . . 95 a. Trade Payables . . . . . . . . . . . . . . . . 95 b. Insiders . . . . . . . . . . . . . . . . . . . 95 3. Avoidable Fraudulent Transfers . . . . . . . . . . . 95 a. Oil and Gas Property Acquisitions . . . . . . . 95 b. INCC's Lien on West Cote Property . . . . . . . 96 c. Preferred Stock Dividend Payments . . . . . . . 96 d. Professionals and Others Involved in Securities Offering . . . . . . . . . . . . . . . . . . . 97 4. Other Potential Litigation . . . . . . . . . . . . . 97 a. Transactions Related to Reserve Reports . . . . 97 b. Transactions Related to Securities Offerings . 97 c. Oil and Gas Property Acquisitions . . . . . . . 97 XIV. MATERIAL UNCERTAINTIES AND RISK FACTORS . . . . . . . . . . . . . . . . 97 A. Competition and Markets . . . . . . . . . . . . . . . . . . . . . 97 1. Availability of Markets. . . . . . . . . . . . . . . 97 2. Impact of Energy Price Changes . . . . . . . . . . . 98 B. Environmental Risks; Governmental Actions . . . . . . . . . . . . 98 C. Operational Hazards and Insurance . . . . . . . . . . . . . . . . 99 D. Replacement of Reserves . . . . . . . . . . . . . . . . . . . . . 99 E. Uncertainty of Reserve Estimates . . . . . . . . . . . . . . . . 99 F. Financial Projections . . . . . . . . . . . . . . . . . . . . . 100 G. Risks with Respect to the New Securities . . . . . . . . . . . 100 1. Uncertainty With Respect to the Trading Prices of the New Securities . . . . . . . . . . . . . . . . . . 100 2. Possible Illiquidity of the New Securities . . . . 100 H. Net Operating Loss Carryforward . . . . . . . . . . . . . . . . 101 XV. CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
-vi- 9 EXHIBITS Exhibit "A" - Debtor's and DLBW's Second Amended Joint Plan of Reorganization Under Chapter 11 of the United States Bankruptcy Code Exhibit "B" - Estimated Liquidation Proceeds Assuming Conversion to Chapter 7 Exhibit "C" - Examiner's Preliminary Report Exhibit "D" - Oil & Gas Liens (By Class) Exhibit "E" - Potential Preference Actions Exhibit "F" - Financial Analysis as of March 11, 1997 Exhibit "G" - Administrative Services Agreement Exhibit "H" - Commitment Agreement Exhibit "I" - Term Sheet (ING (U.S.) Capital Corporation) Exhibit "J" - By-Laws (New WRT Energy Corporation) Exhibit "K" - Certificate of Incorporation (New WRT Energy Corporation) Exhibit "L" - Subscription Rights Agreement Exhibit "M" - Warrant Agreement Exhibit "N" - Material Terms to Purchase, Sale and Cooperation Agreement -vii- 10 UNITED STATES BANKRUPTCY COURT WESTERN DISTRICT OF LOUISIANA LAFAYETTE-OPELOUSAS DIVISION IN RE: ) ) WRT ENERGY CORPORATION ) CASE NO. 96BK-50212 Taxpayer I.D. No. 71-1133320 ) (CHAPTER 11) ) DEBTOR. ) ================================================================================ SECOND AMENDED DISCLOSURE STATEMENT UNDER 11 U.S.C. SECTION 1125 IN SUPPORT OF DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION UNDER CHAPTER 11 OF THE UNITED STATES BANKRUPTCY CODE ================================================================================ WRT Energy Corporation (the "Debtor") and DLB Oil & Gas, Inc. and Wexford Management LLC, on behalf of its affiliated investment funds (collectively "DLBW"), co-proponents, submit this Second Amended Disclosure Statement Under 11 U.S.C. Section 1125 in Support of Debtor's and DLBW's Second Amended Joint Plan of Reorganization Under Chapter 11 of the United States Bankruptcy Code (the "Disclosure Statement") in connection with its solicitation of acceptances of the Debtor's and DLBW's Second Amended Joint Plan of Reorganization Under Chapter 11 of the United States Bankruptcy Code (the "Plan") dated March 11, 1997. A copy of the Plan is attached hereto as Exhibit "A". This Disclosure Statement is being provided in order to disclose important and necessary information so as to enable a reasonably informed decision by Creditors and Equity Interest holders exercising their rights to vote on, or otherwise participate in, the Plan. The purpose of this Disclosure Statement is to answer questions which are most often asked by a party receiving a Disclosure Statement. Unless otherwise stated, the information contained herein is as of March 11, 1997. Terms which are used in this Disclosure Statement, but which are not otherwise defined herein, shall have the meaning assigned to them in the Plan or in the Bankruptcy Code. 11 SUMMARY INFORMATION RELATIVE TO THE CHAPTER 11 REORGANIZATION 1. WHO IS THE DEBTOR? WRT Energy Corporation, an oil and gas company which was incorporated under the laws of Texas on November 16, 1988. 2. HOW LONG HAS THE DEBTOR BEEN IN CHAPTER 11? On February 14, 1996, the Debtor commenced a voluntary reorganization case under Chapter 11 of the Bankruptcy Code by filing a voluntary petition for bankruptcy relief with the United States Bankruptcy Court for the Western District of Louisiana, Lafayette-Opelousas Division (the "Bankruptcy Court"). The case is pending under Case No. 96BK-50212. 3. HAS A TRUSTEE BEEN APPOINTED IN THIS CHAPTER 11 CASE? No. Since the filing of the bankruptcy case, the Debtor has remained in possession of its property and has continued to operate its business as a Debtor-in-Possession under the Bankruptcy Code. 4. HAS A COMMITTEE OF UNSECURED CREDITORS BEEN APPOINTED IN THIS CHAPTER 11 CASE? Yes. Pursuant to Section 1102(a) of the Bankruptcy Code, a Creditors' Committee was appointed on or about March 11, 1996, to represent the interests of the Unsecured Creditors of the Debtor. 5. WHAT IS THE DEBTOR ATTEMPTING TO DO IN CHAPTER 11? Chapter 11 is the principal reorganization chapter of the Bankruptcy Code. Under Chapter 11, the Debtor has been reorganizing its business for the benefit of the Debtor, the Creditors of the Debtor and holders of Equity Interests. Formulation and confirmation of a plan of reorganization is the principal purpose of the Chapter 11 process. The plan of reorganization is the legal document which sets forth the means by which holders of claims and equity interests against a debtor will be treated. 6. HAS THE DEBTOR PROPOSED A PLAN OF REORGANIZATION? Yes. Attached to this Disclosure Statement as Exhibit "A" is a copy of the Joint Plan proposed by the Debtor and DLBW. -2- 12 7. IF THE PLAN OF REORGANIZATION IS THE DOCUMENT WHICH GOVERNS HOW A CLAIM WILL BE TREATED, WHY AM I RECEIVING THIS DISCLOSURE STATEMENT? In order to confirm a plan of reorganization, the Bankruptcy Code requires that a plan proponent solicit acceptances of the proposed plan. Before a proponent may solicit such acceptances, however, the Bankruptcy Court must approve the information which is to be sent to the creditors and equity interest holders along with the plan of reorganization, to ensure that sufficient information is disclosed to allow them to make informed judgments about the plan of reorganization. The purpose of this Disclosure Statement, then, is to provide that information to you about the Debtor's and DLBW's Plan as required by the Bankruptcy Code. 8. HAS THIS DISCLOSURE STATEMENT BEEN APPROVED BY THE BANKRUPTCY COURT? The Bankruptcy Court approved this Disclosure Statement on March 11, 1997, as containing information of a kind, and in sufficient detail, adequate to enable a hypothetical, reasonable investor typical of each Class of Creditors or Equity Interests whose acceptance is being solicited to make an informed judgment whether to vote to accept or reject the Plan. THIS DISCLOSURE STATEMENT, TOGETHER WITH THE PLAN WHICH IS ATTACHED HERETO, SHOULD BE READ IN ITS ENTIRETY. FOR THE CONVENIENCE OF CREDITORS AND STOCKHOLDERS, THE TERMS OF THE PLAN ARE SUMMARIZED IN THIS DISCLOSURE STATEMENT, BUT THE SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE PLAN ITSELF, WHICH IS CONTROLLING IN THE EVENT OF ANY INCONSISTENCY. 9. HOW DO I DETERMINE WHICH CLASS I AM IN? To determine the Class of your Claim or Equity Interest, you must first determine the nature of your Claim against (or Equity Interest in) the Debtor (i.e., unsecured, secured, holder of a Senior Note, holder of stock); then, turn to the Table of Contents, which will direct you to the discussion of the Class in which you are a participant and to the treatment provided to such Class. Section VI of the Disclosure Statement explains, among other things, who is in each Class, what you will receive if the Plan is confirmed, and when you will receive what the Plan has provided for you if the Plan is confirmed. 10. WHY IS CONFIRMATION OF A PLAN OF REORGANIZATION IMPORTANT? Confirmation of a plan of reorganization is necessary for a debtor in Chapter 11 to permit the debtor to provide creditors and stockholders with the treatment proposed under the plan. Unless the plan of reorganization is confirmed, the debtor is legally prohibited from providing what it has proposed in its plan of reorganization. Therefore, confirmation of the Debtor's and DLBW's Plan is necessary to permit Distributions under the Plan to you, as provided therein. -3- 13 11. WHAT IS NECESSARY TO CONFIRM A PLAN OF REORGANIZATION? Confirmation of a plan requires, among other things, a vote in favor of the plan by at least two-thirds in total dollar amount and at least a majority in number of claims actually voting in each voting class of claims and a vote in favor of the Plan by two-thirds in total dollar amount of the equity interests actually voting in each voting class of stockholders. If the vote is insufficient, the Bankruptcy Court can still confirm the Plan, but only upon being provided additional proof regarding the ultimate fairness of the Plan to Creditors and holders of Equity Interests. 12. AM I ENTITLED TO VOTE ON THE PLAN? Any Creditor or Equity Interest holder of the Debtor whose Claim or Equity Interest is impaired under the Plan is entitled to vote, if either (1) (in the case of a Claim) the Claim has been scheduled by the Debtor and such Claim is not scheduled as disputed, contingent or unliquidated, or, in the case of an Equity Interest, the Equity Interest holder has been listed by the Debtor on the list of equity security holders filed pursuant to Bankruptcy Rule 1007 or (2) the Creditor or Equity Interest holder has filed a proof of claim or interest, as appropriate, on or before the last date set by the Bankruptcy Court for such filing. Holders of Claims as to which objections have been filed (and as to which such objections are still pending at the time of confirmation) are not entitled to have their votes counted to the extent of the objections, unless the Bankruptcy Court temporarily allows such holder to vote its Claim upon motion by the Creditor. Such motion must be heard and determined by the Bankruptcy Court prior to the date established by the Bankruptcy Court to vote on the Plan. 13. HOW DO I DETERMINE WHETHER I AM IN AN IMPAIRED CLASS? In Article 25 of the Plan, the Debtor has identified the Classes of Claims which are impaired under the Plan and the Classes of Equity Interests which are impaired under the Plan. In the event there are questions regarding whether a Claim or Equity Interest is in an impaired Class, the Creditor/Equity Interest holder should assume that his or her Claim/Interest is impaired and vote. If the Claim/Interest is determined to be impaired, the vote will be considered by the Bankruptcy Court. 14. WHEN IS THE DEADLINE BY WHICH I NEED TO RETURN MY BALLOT? By order of the Bankruptcy Court dated March 11, 1997, the Bankruptcy Court approved certain procedures for balloting and established deadlines for the receipt of ballots. If you are a holder of an Equity Interest, you will receive a ballot specially sent to you which will clearly state that it is to be used by a holder of an Equity Interest to vote on the Plan. If you receive the wrong ballot, contact American Stock Transfer & Trust, Shareholder Services Department at (800) 937-5449. Ballots cast by holders of Equity Interests must be received by no later than 5:00 p.m., Eastern Standard Time, on April 16, 1997, at the following address: -4- 14 AMERICAN STOCK TRANSFER & TRUST Attention: Shareholder Services Department 40 Wall Street, 46th Floor New York, New York 10005-1303 Except for those ballots cast by holders of Equity Interests, all ballots must be received by no later than 5:00 p.m., Central Standard Time, on April 16, 1997, at the following address: KPMG Peat Marwick LLP Attention: Steven List 200 Crescent Court, Suite 300 Dallas, Texas 75201-1885 BASIC VOTING INFORMATION AND INSTRUCTIONS FOR COMPLETING THE BALLOT 1. FOR YOUR VOTE TO BE COUNTED, YOU MUST COMPLETE THE BALLOT, INDICATE ACCEPTANCE OR REJECTION OF THE PLAN IN THE BOXES INDICATED ON THE BALLOT, MAKE THE APPROPRIATE ELECTIONS (IF APPLICABLE) AND SIGN AND RETURN THE BALLOT TO THE ADDRESS SET FORTH ON THE PRE-ADDRESSED ENVELOPE. IF A BALLOT IS RECEIVED AFTER THE VOTING DEADLINE, IT WILL NOT BE COUNTED. IF YOU RECEIVED A RETURN ENVELOPE ADDRESSED TO YOUR BANK OR BROKERAGE FIRM (OR ITS AGENT), YOU MUST RETURN YOUR BALLOT BY MAIL TO THAT ENTITY AND DO SO EARLY ENOUGH FOR YOUR VOTE TO BE PROCESSED AND THEN FORWARDED TO AND RECEIVED BY THE STOCK TRANSFER AGENT, AMERICAN STOCK TRANSFER & TRUST, PRIOR TO THE VOTING DEADLINE. 2. If you hold Claims in more than one Class under the Plan or if you hold more than one of the Equity Interests classified under the Plan, you may receive more than one ballot, color coded for different Classes of Claims and Equity Interests. Each ballot you receive can be voted only for your Claim or Equity Interest for that Class. Please complete and return each ballot you receive. 3. The ballot is for voting purposes only and does not constitute and shall not be deemed to be a proof of claim or interest, an assertion of a Claim or Equity Interest, or an acknowledgment by the Debtor of any Claim or Equity Interest or obligation. OVERVIEW OF THE PLAN The following summary of the Plan is qualified in its entirety by the more detailed discussions provided in this Disclosure Statement and the Exhibits hereto (including the Plan itself). -5- 15 Section 1123 of the Bankruptcy Code provides that a plan of reorganization shall classify the claims and equity interests of a debtor's creditors and equity interest holders into classes that contain claims and interests that are substantially similar. The Plan divides Allowed Claims and Equity Interests against the Debtor into various Classes which the Debtor believes are in accordance with the classification requirements of the Bankruptcy Code. A summary of the classification and treatment of Allowed Claims and Equity Interests under the Plan is set forth below. The Debtor has made efforts to anticipate the amount of Allowed Claims in each Class. However, the resolution of Disputed Claims involves many factual and legal issues which may or may not be resolved in the Debtor's favor. Accordingly, no assurances can be given that the anticipated amount of Allowed Claims in each Class will be achieved. The liabilities indicated herein have been derived from the Debtor's books and records and reconciled or otherwise compared against the proofs of claims which have been filed in the case. The dollar amounts contained in the following summary are the Debtor's estimates of valid claim amounts on a per class basis. The Debtor has received approximately 458 proofs of claims, aggregating approximately $272,553,829, which includes the Secured Claim of the Debtor's major lender, Internationale Nederlanden (U.S.) Capital Corporation, oil and gas lien Claimants, holders of WRT's 13 7/8% Senior Notes, and a "Class Proof of Claim" in excess of $100 million filed by counsel for the plaintiffs in the Securities Litigation on behalf of the yet-to-be certified class of plaintiffs. Of the approximately 458 proofs of claims filed, approximately 79 do not state a liquidated amount as owing, and therefore the $272,553,829 approximated total claims amount does not include an amount for such proofs of claims. The Debtor's preliminary analysis has also indicated that several Claims are duplicative or otherwise overlap other claims which have been filed. The total of all Claims asserted and undisputed, liquidated scheduled Claims is $276,400,868. Of the aggregate Claims asserted and scheduled, the Debtor has verified only $152,993,134 as duly owing; however, the Debtor is still in the process of reviewing and reconciling proof of claim amounts and priorities. The Debtor is confident that the liabilities will be resolved in a manner consistent with what its books and records have recorded and the aggregate claim amounts determined by actual studies based upon the claims asserted and the Debtor's historical claim experience. However, should the amount allowed by the Bankruptcy Court be in excess of amounts shown on the following table, in the case of Secured Claims, the amount to be paid by New WRT will exceed the amount shown on the table below, and in the case of General Unsecured Claims, the Claimants' pro rata share of New WRT Common Stock will be reduced. The table set forth on the following page details the anticipated allowable Claims held by Creditors of the Debtor and the anticipated recovery which Creditors and Equity Interest holders will obtain under the Plan. -6- 16 Creditors and Equity Interest holders under the Plan will receive Cash, New WRT Common Stock, New WRT Subscription Rights, New WRT Warrants and/or a restated note setting forth payment terms over time as partial or full payment of a Claim. The value of the New WRT Common Stock and New WRT Warrants will depend upon the conditions as they exist at the time such securities are issued and involves numerous risks and uncertainties, many of which cannot be verified at this time. I. INTRODUCTION The Debtor and DLBW submit this Disclosure Statement pursuant to 11 U.S.C. Section 1125 in connection with the solicitation of acceptances of the Plan. The Disclosure Statement, which contains the Plan as Exhibit "A", will be transmitted to all holders of Claims against and Equity Interests in the Debtor. However, the Debtor is seeking votes only from Creditors and holders of Equity Interests in impaired Classes. Capitalized terms used herein, if not separately defined, have the meanings assigned to them in the Plan or in the Bankruptcy Code. All persons receiving the Disclosure Statement and Plan are urged to review fully the provisions of the Plan and all Exhibits attached hereto, in addition to reviewing the text of this Disclosure Statement. The Debtor and DLBW have promulgated the Plan consistent with the provisions of the Bankruptcy Code. The purpose of the Plan is to provide the maximum recovery to each Class of Claims in light of the assets available for distribution to Creditors. The Debtor and DLBW believe that the Plan permits affected Creditors and Equity Interest holders to receive distributions not less than the amount such Creditors and Equity Interest holders would receive if the Debtor were liquidated under Chapter 7 of the Bankruptcy Code. This Disclosure Statement is not intended to replace careful review and analysis of the Plan. Rather, it is submitted as an aid and supplement in your review of the Plan and in an effort to explain the terms and implications of the Plan. Every effort has been made to explain fully the various aspects of the Plan as it may affect all Creditors and holders of Equity Interests. If you have any questions, the Debtor urges you to contact Debtor's legal counsel and every effort will be made to assist you. On March 11, 1997, after notice and a hearing, the Bankruptcy Court, The Honorable Gerald H. Schiff presiding, entered an order approving the Disclosure Statement as containing information of a kind and in sufficient detail, adequate to enable Creditors and holders of Equity Interests whose votes on the Plan are being solicited to make an informed judgment whether to accept or reject the Plan. Creditors and holders of Equity Interests should read this Disclosure Statement in its entirety prior to voting on the Plan. No solicitation of votes on the Plan may be made, except pursuant to this -7- 17 Disclosure Statement and Section 1125 of the Bankruptcy Code. No other party has been authorized to utilize any information concerning the Debtor or its business, other than the information contained in this Disclosure Statement, to solicit votes on the Plan. Creditors and holders of Equity Interests should not rely on any information relating to the Debtor or its business, other than that contained in this Disclosure Statement and the Exhibits attached hereto. On October 22, 1996, the Debtor accepted and signed the proposal submitted by DLBW on October 16, 1996 (the "DLBW Proposal") providing the terms of a proposed capital investment in, a plan of reorganization for the Debtor. The Debtor subsequently obtained Bankruptcy Court approval of the expense reimbursement provisions of the DLBW Proposal. Subsequent to the Debtor's execution of the DLBW Proposal, DLB commenced negotiations with Texaco and TEPI regarding, inter alia, (i) the claim asserted by Texaco and TEPI against the Debtor and its affiliates (the "Texaco Claim"), (ii) the WCBB Assets and (iii) the CAOA. As a result of the negotiations, Texaco, TEPI and DLB reached an agreement pursuant to which, inter alia, DLB (i) agreed to purchase the Texaco Claim, (ii) as required by Texaco and TEPI, agreed to purchase the WCBB Assets from TEPI, and (iii) will guarantee (the "P&A Guarantee") the performance of all plugging and abandonment obligations related to both the WCBB assets and the Debtor's interests in West Cote Blanche Bay Field ("WCBB") and, in order to implement the P&A Guarantee, will pay into a trust (the "P&A Trust") established for the benefit of the State of Louisiana, $1,000,000 on or before the Effective Date and certain other amounts. This transaction closed on March 11, 1997. On January 20, 1997, the Debtor and DLBW jointly filed the Plan, as more fully described in this Disclosure Statement. The Plan contemplates, inter alia, (i) the issuance to the Debtor's unsecured creditors, on account of their Allowed Claims, an aggregate of 10 million shares of New WRT Common Stock, (ii) the issuance to the Debtor's unsecured creditors, on account of their Allowed Claims, of the right to purchase an additional three million eight hundred thousand shares of New WRT Common Stock at a purchase price of $3.50 per share (the "Rights Offering"), (iii) the exercise by DLBW of its rights to purchase New WRT Common Stock pursuant to the Rights Offering on account of its Allowed Claims, (iv) the purchase by DLBW of all shares of New WRT Common Stock not otherwise purchased pursuant to the Rights Offering, and (v) pursuant to the Transfer and Exchange Agreement, as part of the Plan, (a) the transfer by DLB of the WCBB Assets to the Debtor, (b) as consideration for the transfer of the WCBB Assets, the issuance by DLB of the P&A Guarantee and the making by DLB of payments into the P&A Trust, (1) the delivery to DLB of (A) 5 million shares of New WRT Common Stock and (B) the number of shares of New WRT Common Stock obtained by dividing the net amount of capital expenditures incurred by DLB as of the Effective Date as owner of the WCBB Assets and/or operator of the Shallow Contract Area, to the extent not disapproved by the Bankruptcy Court, by a purchase price of $3.50 per share, (2) transfer by the Debtor to DLB of the Buyer's Leasehold and Facilities and (3) the assumption by DLB of the Assumed Obligations, and (c) the payment in full of the Texaco Claim by the Debtor. As a consequence of these transactions, upon the Effective Date of the Plan, the New WRT will own one hundred percent (100%) of the working interest in the shallow contract area at WCBB. -8- 18 The proceeds from the Rights Offering will be utilized to provide the cash necessary to satisfy Administrative and Priority Claims, fund the Litigation Entity with $3 million and provide New WRT with working capital. The New WRT will continue to conduct business and own and operate the oil and gas properties. The Litigation Entity will pursue Causes of Action assigned to it under the Plan. The beneficiaries of the Litigation Entity will be unsecured creditors and New WRT which will own 12% of the Litigation Entity. EXCEPT AS SET FORTH IN THIS DISCLOSURE STATEMENT AND THE EXHIBITS HERETO, NO REPRESENTATIONS CONCERNING THE DEBTOR, THE DEBTOR'S ASSETS, THE PAST OR FUTURE OPERATIONS OF THE DEBTOR, OR THE PLAN ARE AUTHORIZED, NOR ARE ANY SUCH REPRESENTATIONS TO BE RELIED UPON IN ARRIVING AT A DECISION WITH RESPECT TO THE PLAN. ANY REPRESENTATIONS MADE TO SECURE ACCEPTANCE OR REJECTION OF THE PLAN OTHER THAN AS CONTAINED IN THIS DISCLOSURE STATEMENT SHOULD BE REPORTED TO COUNSEL FOR THE DEBTOR AND COUNSEL FOR DLBW IMMEDIATELY. EXCEPT AS SPECIFICALLY NOTED, THERE HAS BEEN NO INDEPENDENT AUDIT OF THE FINANCIAL INFORMATION CONTAINED IN THIS DISCLOSURE STATEMENT. THE DEBTOR IS NOT ABLE TO WARRANT OR REPRESENT THAT THE INFORMATION CONTAINED HEREIN IS WITHOUT ANY INACCURACY. THE FACTUAL INFORMATION REGARDING THE DEBTOR, INCLUDING THE ASSETS AND LIABILITIES OF THE DEBTOR, HAS BEEN DERIVED FROM NUMEROUS SOURCES INCLUDING, BUT NOT LIMITED TO, THE DEBTOR'S BOOKS AND RECORDS, THE DEBTOR'S SCHEDULES, AND DOCUMENTS SPECIFICALLY IDENTIFIED HEREIN. SUCH DOCUMENTS INCLUDE, BUT ARE NOT LIMITED TO, CLAIMS FILED, PLEADINGS AND REPORTS ON FILE WITH THE BANKRUPTCY COURT, LOAN AGREEMENTS AND BUSINESS RECORDS. ESTIMATION OF GAS AND OIL RESERVES AND THEIR ESTIMATED VALUES REQUIRE NUMEROUS ENGINEERING ASSUMPTIONS AS TO THE PRODUCTIVE CAPACITY AND PRODUCTION RATES OF EXISTING GEOLOGICAL FORMATIONS AND REQUIRE THE USE OF CERTAIN SECURITIES AND EXCHANGE COMMISSION ("SEC") GUIDELINES AS TO ASSUMPTIONS REGARDING COSTS TO BE INCURRED IN DEVELOPING AND PRODUCING RESERVES AND PRICES TO BE REALIZED FROM THE SALE OF FUTURE PRODUCTION. ACCORDINGLY, ESTIMATES OF RESERVES AND THEIR VALUE ARE INHERENTLY IMPRECISE AND ARE SUBJECT TO REVISION AND CHANGE AND, WHILE THEY ARE PERTINENT AND CRITICAL TO AN APPROXIMATION OF QUANTITY, CASH FLOW, AND VALUE, THEY SHOULD NOT BE CONSTRUED AS REPRESENTING THE ACTUAL QUANTITIES OF FUTURE PRODUCTION OR CASH FLOWS TO BE REALIZED FROM THE DEBTOR'S OIL AND GAS PROPERTIES OR THE ACTUAL FAIR MARKET VALUE OF SUCH PROPERTIES. -9- 19 THE APPROVAL BY THE BANKRUPTCY COURT OF THE DISCLOSURE STATEMENT DOES NOT CONSTITUTE AN ENDORSEMENT BY THE BANKRUPTCY COURT OF THE PLAN OR A GUARANTY OF THE ACCURACY AND COMPLETENESS OF THE INFORMATION CONTAINED HEREIN. THE SEC HAS NEITHER APPROVED NOR DISAPPROVED THE INFORMATION CONTAINED IN THE DISCLOSURE STATEMENT. THE SEC HAS ALSO NOT PASSED UPON THE ACCURACY OR ADEQUACY OF THE STATEMENTS CONTAINED HEREIN. THE DEBTOR, COUNSEL FOR THE DEBTOR, DLBW, AND COUNSEL FOR DLBW CANNOT AND DO NOT WARRANT OR REPRESENT THAT THE INFORMATION CONTAINED IN THIS DISCLOSURE STATEMENT IS WITHOUT INACCURACY. NONE OF THE ABOVE-MENTIONED PARTIES OR COUNSEL HAVE VERIFIED IN EVERY ASPECT THE INFORMATION CONTAINED IN THIS DISCLOSURE STATEMENT, ALTHOUGH THEY DO NOT HAVE ACTUAL KNOWLEDGE OF ANY INACCURACIES EITHER. HOLDERS OF CLAIMS AND EQUITY INTERESTS SHOULD NOT CONSTRUE THE CONTENTS OF THIS DISCLOSURE STATEMENT AS PROVIDING ANY LEGAL, BUSINESS, FINANCIAL OR TAX ADVICE. EACH SUCH HOLDER SHOULD, THEREFORE, CONSULT WITH ITS OWN LEGAL, BUSINESS, FINANCIAL AND TAX ADVISORS AS TO ANY SUCH MATTERS CONCERNING THE SOLICITATION, THE PLAN, AND THE TRANSACTIONS CONTEMPLATED THEREBY. II. VOTING PROCEDURES AND REQUIREMENTS A. BALLOTS AND VOTING DEADLINE A ballot to be used for voting to accept or reject the Plan is enclosed with this Disclosure Statement for Creditors and Equity Interest holders entitled to vote. Creditors and Equity Interest holders must (1) carefully review the ballot and the instructions thereon, (2) execute the ballot, and (3) return the executed ballot to the address indicated thereon by the deadline to enable the ballot to be considered for voting purposes. The Bankruptcy Court has directed that, in order for a particular ballot to be counted for voting purposes, ballots for the acceptance or rejection of the Plan must be received at the address specified below by no later than the deadline specified below for the Classes of Claims and Equity Interests identified: -10- 20 FOR CREDITORS IN CLASSES B-2, B-4, B-6, C-11, D-1 THROUGH D-4, E-2, AND CREDITORS IN CLASS E-3 HOLDING SECURITIES LITIGATION CLAIMS BASED UPON COMMON STOCK OWNERSHIP GREEN BALLOTS -- AND -- FOR CREDITORS IN CLASSES C-1 THROUGH C-10 AND C-12 THROUGH C-16 PINK BALLOTS DEADLINE: Must Be Received By 5:00 p.m., Central Standard Time, on April 16, 1997 ADDRESSED TO: KPMG Peat Marwick L.L.P. Attention: Steven List 200 Crescent Court, Suite 300 Dallas, Texas 75201-1885 FOR EQUITY INTEREST HOLDERS IN CLASSES E-1 AND E-3 THROUGH E-5 YELLOW BALLOTS DEADLINE: Must Be Received By 5:00 p.m., Eastern Standard Time, on April 16, 1997 ADDRESSED TO: AMERICAN STOCK TRANSFER & TRUST Attention: Shareholder Services Department 40 Wall Street, 46th Floor New York, New York 10005-1303 The Record Date for determining which holders of publicly-traded securities and Senior Notes are entitled to vote on the Plan is March 11, 1997. The Indenture Trustee for the Senior Notes may not and will not vote on behalf of the holders of these securities. Holders must submit their own ballots. Do not return your securities, notes, or warrants with your ballots. Bank and broker nominees will transmit a ballot with a copy of this Disclosure Statement to each beneficial owner of the Debtor's securities and Senior Notes held in the name of such nominees. Some customers of brokerage firms and banks will receive pre-validated ballots. The assumptions that will be made about these direct votes are that (i) each ballot is for a single account, and (ii) each -11- 21 vote is a separate vote and not duplicative of any other vote cast by other customers of that firm (unless specific evidence exists that indicates that one vote is for the identical account number and amount of another customer). Some customers of brokerage firms and banks will receive ballots that will be forwarded back to the brokerage firm or bank (or its agent) in order to be counted. Such brokerage firms and banks (or their agents) will, in turn, cast master ballots (the "Master Ballots") on behalf of any customers who have returned ballots to them. If your securities or Senior Notes are held in the name of your brokerage firm or bank, please return your ballot in the envelope provided by them. If you are directed to return your ballot to your bank or broker, please return your ballot to them in sufficient time for them to process it and return it to American Stock Transfer & Trust or KPMG, as applicable, by the voting deadline specified above. The Debtor intends to make a pre-solicitation inquiry to determine (a) the number of beneficial owners of the Debtor's securities and Senior Notes, and (b) the number of copies of the Disclosure Statement necessary to supply record or nominee holders with the solicitation materials in sufficient time to enable an informed decision by beneficial owners. B. CREDITORS SOLICITED TO VOTE All Creditors of the Debtor who have a Claim which is impaired under the Plan are being solicited to vote if either (i) the Claim has been scheduled by the Debtor and such Claim is not scheduled as disputed, contingent or unliquidated, or (ii) the Creditor has filed a proof of claim on or before the last date set by the Bankruptcy Court for such filing. As to any Claim for which a proof of claim has been filed and as to which an objection has been filed, however, if such objection is still pending on the voting date, the Creditor's vote associated with such Claim will not be counted to the extent of the objection, unless and to the extent that the Bankruptcy Court temporarily allows the Claim upon motion by such Creditor in an amount which the Bankruptcy Court deems proper for the purpose of voting on the Plan. Such motion must be heard and determined by the Bankruptcy Court prior to the date and time established by the Bankruptcy Court for determination of confirmation of the Plan. In addition, a Creditor's vote may be disregarded if the Bankruptcy Court determines that the Creditor's acceptance or rejection was not solicited or procured in good faith or in accordance with the provisions of the Bankruptcy Code. C. DEFINITION OF IMPAIRMENT Under Section 1124 of the Bankruptcy Code, a Class of Claims or Equity Interests is impaired under a plan of reorganization UNLESS, with respect to each Claim or Equity Interest of such Class, the Plan does at least one of the following two (2) things: 1. leaves unaltered the legal, equitable, and contractual rights to which such Claim or Interest entitles the holder of such Claim or Interest; or -12- 22 2. notwithstanding any contractual provision or applicable law that entitles the holder of a Claim or Interest to demand or receive accelerated payment of its Claim or Interest after the occurrence of a default: (a) cures any such default that occurred before or after the commencement of the case under the Bankruptcy Code, other than a default of a kind specified in section 365(b)(2) of the Bankruptcy Code; (b) reinstates the maturity of such Claim or Interest as it existed before the default; (c) compensates the holder of such Claim or Interest for damages incurred as a result of reasonable reliance on such contractual provision or applicable law; and (d) does not otherwise alter the legal, equitable, or contractual rights to which such Claim or Equity Interest entitles the holder of such Claim or Interest. D. CLASSES IMPAIRED UNDER THE PLAN Creditors in Classes B-2, B-4, B-6, C-1 through C-16, D-1, D-2, D-3, D-4, E-1, E-2, E-3, E-4 and E-5 are impaired under the Plan, and, therefore, are being solicited to vote on the Plan, with the exception of Classes E-4 and E-5, which Classes are deemed to have rejected the Plan pursuant to 11 U.S.C. Section 1126(g). The remaining Classes are unimpaired under the Plan and, therefore, are not being solicited to vote on the Plan pursuant to 11 U.S.C. Section 1126(f). With respect to the foregoing, the Debtor specifically reserves the right to determine and contest, if necessary, (1) the impaired or unimpaired status of a Class under the Plan; and (2) whether any ballots cast by such Class should be allowed to be counted for purposes of confirmation of the Plan. E. VOTE REQUIRED FOR CLASS ACCEPTANCE The Bankruptcy Code defines acceptance of a plan by a Class of Creditors as voted acceptances by holders of at least two-thirds (2/3) in dollar amount and more than one half (1/2) in number of the Claims of the Class entitled to be voted who have actually cast ballots for acceptance or rejection of the Plan. -13- 23 The Bankruptcy Code defines acceptance of a plan by a Class of equity interests as voted acceptances by holders of at least two-thirds (2/3) in amount of the interests of that Class entitled to be voted who have actually cast ballots for acceptance or rejection of the Plan. F. DISTRIBUTIONS ONLY TO HOLDERS OF ALLOWED CLAIMS A Claim will receive a Distribution under the Plan only if it is an "Allowed Claim". An "Allowed Claim" means a Claim against the Debtor to the extent proof of which was filed with the Bankruptcy Court on or before the Bar Date (July 1, 1996, unless ordered otherwise), or which has been listed by the Debtor as liquidated in amount and not disputed or contingent, and, in any of these cases, as to which no objection to the allowance thereof has been interposed within the period of limitation fixed by the Plan, or which has been determined by an order or judgment of any court of competent jurisdiction and such order or judgment is no longer subject to appeal. "Allowed Claim" shall not include interest on the principal amount of such Claim or professional fees from and after the Debtor's Petition Date, except in the case of Secured Claims for which the value of the Collateral therefor is sufficient to satisfy the entire Claim, and then only to the extent that such value exceeds the amount of such Claim. III. CONFIRMATION OF THE PLAN Under the Bankruptcy Code, the following steps must be taken to confirm the Plan: A. CONFIRMATION HEARING Section 1128(a) of the Bankruptcy Code requires the Bankruptcy Court, after notice, to hold a hearing on confirmation of the Plan (the "Confirmation Hearing"). Section 1128(b) provides that any party in interest may object to confirmation of the Plan. By order of the Bankruptcy Court dated February 13, 1997, the Confirmation Hearing has been scheduled for April 28, 1997, at 9:00 a.m., in the United States Bankruptcy Court, Western District of Louisiana, Lafayette- Opelousas Division, Federal Building, Third Floor, Opelousas, Louisiana 70570. Any objection to confirmation must be made in writing and filed with the Bankruptcy Court with proof of service and served upon the following parties on or before April 16, 1997: -14- 24 DEBTOR: WRT ENERGY CORPORATION Attention: Raymond P. Landry 5718 Westheimer, Suite 1201 Houston, Texas 77057 Telephone: (713) 706-3295 Telecopy: (713) 706-4083 COUNSEL FOR THE DEBTOR: SHEINFELD, MALEY & KAY, P.C. Attention: Joel P. Kay, Esq. 1001 Fannin Street, Suite 3700 Houston, Texas 77002-6797 Telephone: (713) 658-8881 Telecopy: (713) 658-9756 COUNSEL FOR DLBW: SCHULTE ROTH & ZABEL LLP Attention: Jeffrey S. Sabin, Esq. 900 Third Avenue New York, New York 10002 Telephone: (212) 756-2000 Telecopy: (212) 593-5955 OFFICE OF THE UNITED STATES TRUSTEE: UNITED STATES TRUSTEE Attention: William E. O'Connor, Esq. United States Courthouse 300 Fannin Street, Suite 3196 Shreveport, Louisiana 71101-3079 Telephone: (318) 676-3456 Telecopy: (318) 676-3212 -15- 25 COUNSEL FOR THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS: STROOCK & STROOCK & LAVAN LLP Attention: Daniel H. Golden, Esq. 180 Maiden Lane New York, New York 10038 Telephone: (212) 806-5400 Telecopy: (212) 806-6006 - - AND - DRAPER & CULPEPPER Attention: Douglas S. Draper, Esq. LL&E Tower, Suite 2630 909 Poydras Street New Orleans, Louisiana 70112-1033 Telephone: (504) 581-9595 Telecopy: (504) 525-3761 UNLESS AN OBJECTION TO CONFIRMATION IS TIMELY SERVED AND FILED, IT WILL NOT BE CONSIDERED BY THE BANKRUPTCY COURT. B. REQUIREMENTS FOR CONFIRMATION OF THE PLAN At the Confirmation Hearing, the Bankruptcy Court will determine whether the confirmation requirements of Section 1129 of the Bankruptcy Code have been satisfied, and in the event that they have been, the Bankruptcy Court will enter an order confirming the Plan. The requirements are as follows: 1. The Plan complies with the applicable provisions of the Bankruptcy Code. 2. The Plan proponents (Debtor and DLBW) comply with the applicable provisions of the Bankruptcy Code. 3. The Plan has been proposed in good faith and not by any means forbidden by law. 4. Any payment made or promised by the Plan proponents (Debtor and DLBW) or by a person issuing securities or acquiring property under the Plan for services or for costs and expenses in, or in connection with, the case, or in connection with the Plan and incident to the case, has been approved by, or is subject to the approval of, the Bankruptcy Court as reasonable. -16- 26 5. The Plan proponents (Debtor and DLBW) have disclosed the identity and affiliations of any individual proposed to serve, after confirmation of the Plan, as a director, officer, or voting trustee of the Debtor, an affiliate of the Debtor participating in a joint plan with the Debtor, or a successor to the Debtor under the Plan, and the appointment to, or continuance in, such office of such individual, is consistent with the interests of creditors and equity security holders and with public policy, and the Debtor has disclosed the identity of any insider that will be employed or retained by the reorganized Debtor, and the nature of any compensation for such insider. 6. Any governmental regulatory commission with jurisdiction, after confirmation of the Plan, over the rates of the Debtor has approved any rate change provided for in the Plan, or such rate is expressly conditioned on such approval. 7. With respect to each class of impaired claims or interests, (1) either each holder of a claim or interest of such class has accepted the Plan, or will receive or retain under the Plan on account of such claim or interest property of a value, as of the Effective Date of the Plan, that is not less than the amount that such holder would so receive or retain if the Debtor were liquidated on such date under Chapter 7 of the Bankruptcy Code; or (2) if Section 1111(b)(2) of the Bankruptcy Code applies to the claims of such class, each holder of a claim of such class will receive or retain under the Plan an account of such claim property of a value, as of the Effective Date of the Plan, that is not less than the value of such holder's interest in the property that secures such claims. 8. Each class of claims or interests has either accepted the Plan or is not impaired under the Plan. 9. Except to the extent that the holder of a particular claim has agreed to a different treatment of such claim, the Plan provides that administrative expenses and priority claims (other than tax claims) will be paid in full in the allowed amount of such claims on the Effective Date of the Plan and that holders of priority tax claims will receive on account of such claims deferred cash payments, over a period not exceeding six years after the date of assessment of such claims, of a value, as of the Effective Date of the Plan, equal to the allowed amount of such claims. 10. At least one class of claims that is impaired under the Plan has accepted the Plan, determined without including any acceptance of the Plan by any insider holding a claim in such Class. -17- 27 11. Confirmation of the Plan is not likely to be followed by the liquidation, or the need for further financial reorganization, of the Debtor or any successor to the Debtor under the Plan, unless such liquidation or reorganization is proposed in the Plan. 12. The Plan provides for the payment of all fees payable under 28 U.S.C. Section 1930, as determined by the Bankruptcy Court at the hearing on confirmation of the Plan, on the Effective Date of the Plan. 13. The Plan provides for the continuation, after the Effective Date of the Plan, of the payment of all retiree benefits, as that term is defined in Section 1114 of the Bankruptcy Code, at the level established pursuant to subsection (e)(1)(B) or (G) of Section 1114 of the Bankruptcy Code, at any time prior to confirmation of the Plan, for the duration of the period the Debtor has obligated itself to provide such benefits. If a sufficient number of Creditors and amounts of Claims in the impaired Classes vote to accept the Plan, the Debtor believes that the Court will approve confirmation and that the Plan will satisfy all of the applicable statutory requirements of Bankruptcy Code Section 1129. C. CRAMDOWN The Bankruptcy Court can confirm the Plan at the request of the Debtor if all the requirements of Section 1129(a) of the Bankruptcy Code are met with the exception of Section 1129(a)(8), if at least one Class of Claims that is impaired under the Plan has accepted the Plan (excluding a Class of insiders), and, as to each impaired Class which has not accepted the Plan, the Plan "does not discriminate unfairly" and is "fair and equitable." A plan of reorganization does not discriminate unfairly within the meaning of the Bankruptcy Code if no class will receive more than it is legally entitled to receive for its claims or equity interests. "Fair and equitable" has different meanings for secured and unsecured claims and holders of equity interests. With respect to a class of secured claims which rejects the Plan, "fair and equitable" means either (i) the impaired secured creditors retain their lien securing their claims to the extent of their allowed claims and receive deferred cash payments at least equal to the allowed amount of their claims with a present value, as of the effective date of the Plan, at least equal to the value of each such creditor's interest in the estate's interest in the property securing their liens, (ii) if the property subject to the lien of the impaired secured creditor is sold free and clear of that lien, then the lien will attach to the proceeds of sale, and such lien must be treated in accordance with clauses (i) or (iii) hereof, or (iii) the impaired secured creditor realizes the "indubitable equivalent" of its claim under the Plan. With respect to a class of unsecured claims which rejects the Plan, "fair and equitable" means either (i) the impaired unsecured creditor receives or retains property of a value, as of the effective -18- 28 date of the Plan, equal to the amount of its allowed claim, or (ii) the holders of claims in interest that are junior to the claims of such class will not receive any property under the Plan. With respect to a class of equity interests which rejects the Plan, "fair and equitable" means either (i) each holder of an impaired equity interest receives or retains on account of such interest property of a value, as of the effective date of the Plan, equal to the greatest of the allowed amount of any fixed liquidation preference to which such holder is entitled, any fixed redemption price to which such holder is entitled, or the value of such interest; or (ii) the holder of any interest that is junior to the interest of such class will not receive or retain under the Plan on account of such junior interest any property. In the event at least one impaired Class of Claims under the Plan accepts the Plan and one or more Classes of impaired Claims rejects the Plan, the Bankruptcy Court will determine at the Confirmation Hearing whether the Plan is fair and equitable and does not discriminate unfairly against any rejecting impaired Class of Claims. IV. HISTORICAL AND BACKGROUND INFORMATION A. CORPORATE INFORMATION WRT Energy Corporation is a Texas corporation which was incorporated in November 1988. Until December 31, 1995, WRT owned 100% of the stock of two subsidiaries, Tesla Resources, Inc. ("Tesla") and Southern Petroleum, Inc ("SPI"). On that date, both Tesla and SPI were merged into WRT with WRT emerging as the sole surviving corporation. Through August 1993, WRT also owned a 20% investment in TesTech, Inc. ("TesTech"), for which it had funded 100% of the operations and had management control. In September 1993, WRT acquired the remaining 80% interest in TesTech and dissolved the company. In November 1995, WRT formed a wholly-owned subsidiary, WRT Technologies, Inc., which was established to own and operate WRT's proprietary radioactive cased hole logging technology. No assets or technologies have been transferred from WRT to WRT Technologies, Inc. during the course of WRT's Chapter 11 case. B. THE BUSINESS OF WRT AND ITS OPERATIONS 1. Introduction WRT owns and operates mature oil and gas properties primarily in the Louisiana Gulf Coast area. Prior to the filing of the Chapter 11 Case, WRT's intention was to increase both its production and total oil and gas recovery through the use of advanced technologies, including radioactive logging equipment and specialized fluid separation technologies. -19- 29 2. Business Strategy Until the fourth quarter of 1995, WRT's stated business strategy was the acquisition of operated working interests in large, mature oil and gas fields in south Louisiana and the development of such properties utilizing its technology and experience along the Louisiana Gulf Coast. WRT sought to utilize its technologies to take advantage of certain characteristics common to most of the principal oil and gas fields on the Louisiana Gulf Coast, including their complex geology, the presence of large numbers of shut-in wells, the presence of potentially productive bypassed geological zones in these mature fields, and excessive water production from producing wells. WRT continued to evaluate potential oil and gas properties which met its specific acquisition criteria until liquidity concerns and availability of capital forced WRT to reevaluate its acquisition program. Pending confirmation of the Plan and completion of the Chapter 11 Case, WRT has suspended its property acquisition activities. However, the Financial Analysis contemplates exploration and development expenditures for the six months ending December 31, 1997 of $18.1 million, increasing each year thereafter, as more fully described in Exhibit "F" attached hereto. 3. Significant Oil and Gas Property Acquisitions In December 1994, WRT purchased from BSFI Western E&P, Inc. ("BSFI") a 100% working interest (approximately 75% average net revenue interest) in approximately 300 acres of leases within the Napoleonville Field in exchange for the issuance of 1,300,000 shares of its Common Stock. Three producing wells, two shut-in wells and one salt water disposal well are located within such lease acreage. In December 1994, WRT entered into a definitive agreement with LLOG Exploration Company ("LLOG") for the purchase of LLOG's working interest in the Bayou Penchant Field (the "Initial LLOG Property"). WRT concluded the acquisition of the Initial LLOG Property in late January 1995 for a purchase price of approximately $15.6 million plus a $5.0 million non-refundable deposit towards the purchase from LLOG of certain additional oil and gas properties, described below. The approximately $20.6 million paid to LLOG was financed by borrowings of $15.0 million under WRT's Credit Facility with INCC, and by the issuance to LLOG of a short-term, promissory note for approximately $5.6 million (the "Seller Financing Note"). In early February 1995, WRT refinanced the Seller Financing Note from the proceeds of a $7.5 million bridge loan (the "Bridge Loan") from Cargill Financial Services Corporation. In December 1994, WRT and LLOG also entered into a letter of intent for the purchase by WRT of a second group of oil and gas properties owned by LLOG (the "Remaining LLOG Properties"). Separate purchase contracts for each of the Remaining LLOG Properties were entered into in January 1995. WRT concluded the acquisition of the Remaining LLOG Properties in early March 1995 for an aggregate purchase price of approximately $46.4 million, less the $5.0 million non-refundable deposit previously paid to LLOG in connection with WRT's acquisition of the Initial -20- 30 LLOG Property. The approximately $41.4 million paid to LLOG was financed through the Offering of Senior Notes in March 1995. The Remaining LLOG Properties consist of working interests in four south Louisiana oil and gas fields: the Bayou Pigeon Field, the Deer Island Field, the Abbeville Field, and the Golden Meadow Field. WRT owns a 100% working interest in substantially all acreage comprising the Initial and Remaining LLOG Properties, other than the Abbeville Field in which it owns approximately 70% of the working interest. WRT is the operator of the Initial LLOG Property and the Remaining LLOG Properties. In January 1995, Tesla entered into an agreement in principle with an affiliate of Benton Oil and Gas Company and two affiliates of Tenneco, Inc., to purchase an additional 43.75% working interest in a portion of the West Cote Blanche Bay Field, a property in which Tesla then owned a 6.25% working interest. Under the terms of the agreement, the sellers retained their interests in all depths below an average of approximately 10,500 feet. Texaco Inc. is the current operator of the field and is the owner of the remaining 50% working interest in the lease rights Tesla acquired. The purchase price for the additional interests in the West Cote Blanche Bay Field was $20.0 million and was financed from The Senior Note Offering. The purchase was completed in April 1995. WRT subsequently acquired Tesla's West Cote Blanche Bay Field interests as a result of Tesla's merger into WRT. 4. Technology WRT continued the development of its logging technologies during 1995, primarily in the area of logging tool development. WRT contracted for the construction of four additional logging tools during 1995, two of which were completed in 1995 and two of which were completed in 1996. WRT has maintained its wireline and logging assets, however, as discussed in "Events Leading to Chapter 11 Filing", WRT's recent reduction in workforce included substantially all of the employees involved in the wireline and logging operations. 5. Regulation Operations of WRT are subject to numerous federal, state, and local laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. These laws and regulations may require the acquisition of a permit before drilling commences, restrict or prohibit the types, quantities and concentration of substances that can be released into the environment in connection with drilling and production activities, prohibit drilling activities on certain lands lying within wetlands or other protected areas and impose substantial liabilities for pollution resulting from drilling and production operations. Moreover, state and federal environmental laws and regulations may become more stringent. These environmental laws and regulations may affect WRT's operations and costs as a result of their effect on oil and gas development, exploration, and production operations. For instance, legislation has been proposed in Congress from time to time that would amend the federal Resource Conservation and Recovery -21- 31 Act of 1976 ("RCRA") to reclassify oil and gas production wastes as "hazardous waste." If such legislation were enacted, it could have a significant impact on WRT's operating costs, as well as the oil and gas industry in general. It is not anticipated that WRT will be required in the near future to expend amounts that are material in relation to its total capital expenditures program by reason of environmental laws and regulations, but inasmuch as such laws and regulations are frequently changed, WRT is unable to predict the ultimate cost of compliance. In addition, The Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA" or "Superfund") and certain state laws and regulations impose liability for cleanup of waste sites and in some cases attorney's fees, exemplary damages and/or trebling of damages. The Oil Pollution Act of 1990 (the "OPA") and regulations thereunder impose a variety of regulations on "responsible parties' related to the prevention of oil spills and liability for damages resulting from such spills in United States waters. A "responsible party" includes the owner or operator of a facility or vessel, or the lessee or permittee of the area in which an offshore facility is located. The OPA assigns liability to each responsible party for oil removal costs and a variety of public and private damages. While liability limits apply in some circumstances, a party cannot take advantage of liability limits if the spill was caused by gross negligence or willful misconduct or resulted from violation of a federal safety, construction or operating regulation. If the party fails to report a spill or to cooperate fully in the cleanup, liability limits do not apply. Few defenses exist to the liability imposed by the OPA. The OPA also imposes ongoing requirements on a responsible party, including proof by owners and operators of offshore oil and gas facilities of establishment of $150 million in financial responsibility. Financial responsibility could be established by various means including insurance, guarantee, surety bond, letter of credit or qualification as a self-insurer. There is substantial uncertainty as to whether insurance companies or underwriters will be willing to provide coverage under the OPA. The financial tests or other criteria that will be used to judge self-insurance are also uncertain. WRT cannot predict the final resolution of these financial responsibility issues but such requirements have the potential to result in the imposition of substantial additional annual costs on WRT or otherwise materially adversely affect WRT. The impact of the rule should not be any more adverse to WRT than it will be to the other similarly situated or less well capitalized owners or operators. The Clean Water Act, together with the related National Pollution Discharge Elimination System ("NPDES"), and similar state environmental laws prohibit oil and gas producers from discharging produced water overboard into waters of the U.S. shoreward of the territorial seas ("Coastal Waters") . In June 1995, WRT began underground injection at its East Hackberry facility and discontinued overboard discharge. During 1996, WRT completed work on its surface facilities at the Tigre Lagoon Field, thereby eliminating the last location of overboard discharge within properties in which WRT holds an interest. WRT is licensed, regulated and subject to inspection by the LDEQ with respect to the ownership and operation of its radioactive well logging tools. Failure to comply with such licensing and regulatory requirements could cause WRT to lose its rights to operate its well logging tools. WRT has and will continue to comply with all such regulatory requirements. -22- 32 Complex regulations concerning all phases of energy development at the local, state and federal levels apply to WRT's operations and often require interpretation by WRT's professional staff or outside advisors. The federal government and various state governments have adopted numerous laws and regulations respecting the production, transportation, marketing and sale of oil and gas. Regulation by state and local governments usually covers matters such as the spacing of wells, allowable production rates, pooling and unitization, environmental protection, pollution control, pricing, taxation and other related matters. In Louisiana, the Commissioner of the Office of Conservation is empowered to create geographic or geological units for drilling and producing wells which units contain, in the Commissioner's sole judgment, the production acreage likely to be efficiently and economically drained by such wells. These units are created only after notice to interested parties and a hearing at which time the Commissioner will accept geological and engineering testimony from the interested parties. The creation of these units could have the result of combining WRT's leasehold interests with lease acreage held by competing producers and could have the effect of reducing WRT's interests in a drilling or producing well below the leasehold interest to which WRT would otherwise be entitled. Unitization of WRT's properties may force WRT to share production from its wells and leases with others and can occur after development or acquisition costs have been incurred by WRT. If WRT's leases are subjected to unitization, WRT may ultimately be entitled to a lesser share of production from its wells than it expected. Any federal leases acquired by WRT will be subject to various federal statutes and the rules and regulations of federal administrative agencies. Moreover, future changes in local, state or federal laws and regulations could adversely affect the operations of WRT. Legislation affecting the oil and gas industry is under constant review for amendment or expansion, frequently increasing the regulatory burden. Numerous departments and agencies, both federal and state, are also authorized by statute to issue, and have issued, rules and regulations binding the oil and gas industry that often are costly to comply with and that carry substantial penalties for non-compliance. In addition, production operations are affected by changing tax and other laws relating to the petroleum industry, by constantly changing administrative regulations and possible interruption or termination by government authorities. The Federal Energy Regulatory Commission (the "FERC") regulates the transportation and sale for resale of natural gas in interstate commerce pursuant to the Natural Gas Act of 1938 (the "NGA") and the Natural Gas Policy Act of 1978 (the "NGPA"). In the past, the federal government has regulated the prices at which oil and gas could be sold. Currently, sales by producers of natural gas, and all sales of crude oil, condensate and natural gas liquids can be made at uncontrolled market prices, but Congress could reenact price controls at any time. Commencing in April 1992, the FERC issued a series of orders, Order No. 636, Order No. 636-A, and Order No. 636-B ("Order No. 636"), which require interstate pipelines to provide transportation separate, or "unbundled", from the pipelines' sales of gas. Also, Order No. 636 requires pipelines to provide open-access transportation on a basis that is equal for all gas shippers. Although Order No. 636 does not directly regulate WRT's activities, the FERC has stated that it intends for Order No. 636 to foster increased competition within all phases of the natural gas -23- 33 industry. It is unclear what impact, if any, increased competition within the natural gas industry under Order 636 will have on WRT's activities. Although Order 636, assuming it is upheld in its entirety, could provide WRT with additional market access and more fairly applied transportation service rates, Order No. 636 could also subject WRT to more restrictive pipeline imbalance tolerances and greater penalties for violation of those tolerances. The FERC has issued final orders of virtually all Order No. 636 pipeline restructuring proceedings. Order No. 636 was upheld in all principal respects by the D. C. Circuit Court of Appeals. FERC has recently announced its intention to reexamine certain of its transportation-related policies, including the appropriate manner for setting rates for new interstate pipeline construction and the manner in which interstate pipelines release transportation capacity under Order No. 636. While any resulting FERC action would affect WRT only indirectly, these inquiries are intended to further enhance competition in natural gas markets. WRT's natural gas gathering operations may be or become subject to safety and operational regulations relating to the design, installation, testing, construction, operation, replacement, and management of facilities. Pipeline safety issues have recently become the subject of increasing focus in various political and administrative arenas at both the state and federal levels. WRT cannot predict what effect, if any, the adoption of additional pipeline safety legislation might have on its operations, but does not believe that any adverse effect will be material. Additional proposals and proceedings that might affect the oil and gas industry are pending before the Congress, FERC, and the courts. WRT cannot predict when or whether any such proposals may become effective. In the past, the natural gas industry has been very heavily regulated. There is no assurance that the current regulatory approach pursued by the FERC will continue indefinitely into the future. Notwithstanding the foregoing, it is not anticipated that compliance with existing federal, state and local laws, rules and regulations will have a material adverse effect upon the capital expenditures, earnings or competitive position of WRT. C. DESCRIPTION OF ASSETS OF WRT 1. Principal Oil and Gas Properties WRT owns interests in a number of producing oil and gas properties located along the Louisiana Gulf Coast and is serving as the operator on substantially all such properties with the exception of the West Cote Blanche Bay Field which is operated by Texaco, Inc. The following table presents certain information as of December 31, 1996, respecting WRT's net interests in its producing oil and gas properties, including those held through joint ventures: -24- 34
Producing Wells Shut-In Wells Acreage Proved Reserves (2) --------------- ------------- ------- ------------------- Property (1) Gross Net Gross Net Gross Net Gas Oil Total ------------ ----- --- ----- --- ----- --- ------ ------- ------ (MMcf) (MBbls) (MBoe) ------ ------- ------ Abbeville (3) 2 1.4 0 0.0 60 42 249 3 45 Bayou Penchant (3) 7 7.0 5 5.0 1360 1360 5767 25 986 Bayou Pigeon 11 9.9 2 2.0 1490 1490 831 317 456 Deer Island 6 5.4 0 0.0 412 412 3541 171 761 East Hackberry 22 11.8 63 32.8 3582 1791 2240 1661 2034 Golden Meadow 1 1.0 0 0.0 171 171 1063 29 206 Lac Blanc 3 0.2 6 4.0 4841 2887 90 0 15 Napoleonville 3 3.0 2 2.0 278 278 137 326 348 Tigre Lagoon 1 0.3 2 0.5 265 66 0 0 0 West Hackberry 7 7.0 18 18.0 592 592 0 31 31 West Cote Blanche Bay (3) 56 26.0 336 168.0 5892 2946 1213 11360 11562 Other Wells 1 0.4 6 3.8 1294 456 0 0 0 ------ ------ ------ ------ ------ ------ ------ ------ ------ Total at year-end 120 73.4 440 236.1 20,237 12,491 15,131 13,923 16,444
- --------------- (1) Substantially all properties are located in south Louisiana. (2) Represents proved reserves attributable to properties as estimated by independent petroleum engineers, Netherland, Sewell & Associates, Inc. ("NSAI"). The proved reserves are shown at SEC PV10 values. These reserves are calculated using year-end prices at 12/31/96, which were $25.93/Bbl and $3.99/Mcf. "PV10" means estimated future net revenue, discounted at a rate of 10% per annum, before income taxes and with no price or cost escalation or de-escalation in accordance with guidelines promulgated by the Securities and Exchange Commission. (3) Acreage subject to depth limitations. a. Abbeville Field. The Abbeville Field, purchased in March 1995, situated on dry land near Abbeville in Vermilion Parish, Louisiana, was first discovered by Continental Oil Company (Conoco) in 1939. WRT acquired approximately 70% of the working interest before payout (approximately 67% after payout) with an average net revenue interest of approximately 54% before payout (51% after payout) in approximately 60 gross acres in the field. The three tracts acquired contain varying depth limitations. In one tract WRT acquired only the rights below 9,550 feet. Another tract is limited to depths from the surface down to 13,000 feet. The third tract contains both leases without depth limitations and leases with depth limited from the surface to 13,000 feet. The two wells in the Abbeville Field produce primarily gas. During 1995, WRT successfully recompleted one gas well in -25- 35 the Abbeville Field. During 1996, both of the wells were recompleted to new producing horizons but one of the wells produced only a minimal amount of gas before depleting. b. Bayou Penchant Field. The Bayou Penchant Field, purchased in January 1995, consists of approximately 1,360 gross acres of leases, and includes seven producing wells, five shut-in wells and one salt water disposal well in Terrebonne Parish, Louisiana. WRT's working interest is 100% (approximately 86% average net revenue interest) in all but one well, the CL&F No. 7 well where WRT's working interest is approximately 70% (59% net revenue interest). The Bayou Penchant Field is located in a marshy area with existing dredged canals and produces primarily gas from multiple productive zones, ranging in depth from 2,400 to 10,400 feet. During 1995, there were eight successful gas zone recompletion attempts in the Bayou Penchant Field and no failures. In addition, two development wells were drilled, one resulting in a dry hole and the other successfully completed as a producing gas well. During 1996, two wells were the subject of unsuccessful recompletion attempts. Both of these operations involved the use of relatively low cost "through-tubing" techniques utilizing wireline equipment to perform the operations. A third well was also targeted for the use of similar procedures but the intended operations were aborted when it was discovered that the well's production tubing is damaged. Preparations are currently being made to perform this recompletion utilizing a workover rig. c. Bayou Pigeon Field. The Bayou Pigeon Field, purchased in March 1995, consists of approximately 1,490 gross acres located in the marshy coastal waters on both sides of Little Bayou Pigeon in Iberia Parish, Louisiana. WRT's working interest is 100% (approximately 80% average net revenue interest). See Section IV - "Historical and Background Information, Title to Oil and Gas Properties". Production from the Bayou Pigeon Field is predominately oil from multiple productive zones at depths ranging from 6,900 to 12,000 feet. During 1995, three successful gas zone and three successful oil zone recompletions were performed in the Bayou Pigeon Field with one attempt being unsuccessful. One new development well was successfully drilled for previously untapped reserves and completed as a producing oil well. During 1996, one well was successfully recompleted. d. Deer Island Field. The Deer Island Field, purchased in March 1995, is located in marshy, inland waters in Terrebonne Parish, Louisiana and is accessed by work boat through dredged canals. WRT acquired a 100% working interest (approximately 73% net revenue interest before payout and 66% thereafter) in approximately 412 acres, comprised of two non-contiguous lease blocks in the Deer Island Field. Current production from the southern lease block is primarily gas from multiple producing zones at depths ranging from 8,200 to 10,200 feet. The two wells in the northern lease block produce from an oil sand at a depth of approximately 10,350 feet. The interests in both tracts were originally acquired through two separate subleases from Exxon. In the southern lease block, the interest is composed of three tracts with varying depth limitations, with the greatest depth being approximately 10,500 feet. Exxon retained the rights below 10,500 feet and Exxon or other producers own the rights to the other outstanding depths. In the northern lease block, the interest is limited to depths between the surface and 10,720 feet. During 1996, LLOG Exploration Company completed a new well into a unit in which WRT holds an interest. Although not yet approved by the -26- 36 State of Louisiana, WRT will ultimately hold a minimum working interest of approximately 38.9% (34% NRI) of production from this unit. e. East Hackberry Field. In February 1994, WRT purchased a 100% working interest (approximately 82% average net revenue interest) in certain producing oil and gas properties situated in the East Hackberry Field in Cameron Parish, Louisiana. The purchase included two separate lease blocks, the Erwin Heirs Block, originally developed by Gulf Oil Company and the Texaco State Lease ("S/L") 50 Block, originally developed by Texaco, Inc. The East Hackberry Field is located along the western shore of Lake Calcasieu in Cameron Parish, Louisiana approximately 80 miles west of Lafayette and 15 miles inland from the Gulf of Mexico. The properties cover approximately 3,582 acres of oil and gas leases, together with 22 productive wells and 63 shut-in wells that were originally drilled by Gulf Oil Company and Texaco. In September 1994, WRT and Southern Petroleum sold overriding royalty interests in certain leases in the East Hackberry Field to Milam Royalty Corporation ("Milam"). On an aggregate basis the overriding royalty interests provide for payment to Milam of 62.5% of 80% (equal to 50% on a 100% working interest basis) of the net profits attributable to the wells covered by the arrangement until Milam recovers 150% of its cash investment and 46.875% of 80% thereafter (equal to 37.5% on a 100% working interest basis). Related agreements further provide that for an additional royalty purchase price based on the then effective percentage described in the two preceding sentences of WRT's future cost of drilling new wells or recompleting existing wells in new reservoirs (and subject to certain limitations stated in such agreements), Milam may elect to retain an identical royalty interest in the new wells. WRT retains complete operational control over the East Hackberry Field. During 1995, WRT made 20 successful oil zone recompletions and one successful gas zone recompletion. Seven such recompletion attempts proved to be unsuccessful. In addition, WRT attempted three sidetracks, two of which were completed successfully as oil wells and one of which missed the geological objective resulting in a dry hole. During 1996, three wells were successfully recompleted. Additionally, operations were conducted to convert six wells in this field to gas-lift. Two wells were the subject of unsuccessful recompletion attempts. f. Golden Meadow Field. The Golden Meadow Field, purchased in March 1995, is located in marshy, inland waters in LaFourche Parish, Louisiana and was discovered by Texaco in 1961. The portion of the Golden Meadow Field in which WRT owns a 100% working interest (approximately 79% average net revenue interest) covers approximately 171 acres. The Golden Meadow Field is presently producing from a gas bearing sand at a depth of approximately 12,500 feet. During 1996, the sole producing well in Golden Meadow was reworked to repair a downhole mechanical failure. This work was successful and the well was restored to production. g. Lac Blanc Field. The Lac Blanc Field, purchased in July 1993, consists of 4,841 gross acres and underlies a marsh and shoreline near the community of Pecan Island in Vermilion Parish, Louisiana and was first discovered in 1975. WRT purchased a 91% average working interest (55% average net revenue interest) in acreage within the Lac Blanc Field from an affiliate of Freeport-McMoRan, Inc. The sellers retained a 20% back-in working interest in any new wells -27- 37 drilled in previously undeveloped fault blocks. The field has produced approximately 150 Bcf of gas and 1.1 MMBbls of oil since its discovery, but in recent years it has experienced substantial production declines, which were accompanied by substantial increases in water production rates. Three unsuccessful attempts were made during 1995 to restore production to this field and compensate for the reduced gas volumes caused by the unexpected onset of water production. Two workover attempts were made in the Exxon Fee No. 23 well. A split in the casing ultimately resulted in the loss of future utility of the well. During 1996, one "through-tubing" recompletion was attempted but this operation was aborted due to encountered obstructions in the well's production tubing. In connection with the purchase of the Lac Blanc Field, WRT established a plugging and abandonment escrow arrangement. h. Napoleonville Field. The Napoleonville Field is located in Assumption Parish, Louisiana on dry land and produces primarily oil from multiple pay zones which range in depth from 9,500 to 10,000 feet. WRT's interest in the Napoleonville Field was purchased in exchange for the issuance of 1,300,000 shares of its Common Stock. During 1995, three unsuccessful attempts were made to recomplete two shut-in wells in this field. At this time there are still three producing wells, two shut-in wells, and one salt water disposal well. During 1995, WRT purchased for approximately $1.2 million and $600,000, respectively, certain additional leasehold acreage in the Napoleonville Field and saltwater disposal facilities from BSFI. At the time of the purchase, BSFI, as a 5.5% shareholder of WRT, was a related party. i. West Hackberry Field. In November 1992, WRT purchased a 100% working interest (approximately 80% average net revenue interest) in acreage within the West Hackberry Field, in Cameron Parish, Louisiana. The field was discovered in 1928 and was developed by Superior Oil Company (now Mobil) between 1938 and 1988. In connection with its purchase of the East Hackberry Field properties, WRT purchased a 7.5% overriding royalty interest in its West Hackberry Field that was retained by the original seller of the property. As a result, WRT's net revenue interest in the West Hackberry Field increased from approximately 80% to approximately 87.5%, effective March 1, 1994. j. West Cote Blanche Bay Field. Texaco Exploration and Production, Inc. ("Texaco"), the current operator of the property, discovered the West Cote Blanche Bay Field in 1938 (State Lease 340). This field lies approximately five miles off the coast of Louisiana in St. Mary Parish in a shallow bay, with water depths averaging seven to eight feet, and overlies one of the largest salt dome structures on the Gulf Coast. Tesla, a wholly owned subsidiary of WRT which was subsequently merged into WRT, acquired from Texaco a 6.25% working interest in the West Cote Blanche Bay Field in July 1988. In April 1995, Tesla completed the purchase of an additional 43.75% working interest in the West Cote Blanche Bay Field from an affiliate of Benton Oil and Gas Company and two affiliates of Tenneco, Inc. whereby the sellers conveyed their interests in the shallow depths, but retained their interests in all depths below approximately 10,500 feet. Texaco is the owner of the remaining 50% working interest and continues to operate the field. During 1995, ten successful oil and three successful gas recompletions were made with two attempts being unsuccessful. -28- 38 Additionally, five new development oil wells and one new development gas well were drilled. One development well was unsuccessful. During 1996, nine successful oil recompletions and one successful gas recompletion were made with two attempts being unsuccessful. One unsuccessful shallow attempt was made. 2. Acreage The following table sets forth WRT's developed acreage at December 31, 1996. WRT did not own any undeveloped acreage at December 31, 1996.
Developed Acreage (1) --------------------- Gross Net ------ ------ Louisiana Onshore and State Waters 19,856 12,396 Texas Onshore 381 95 Total 20,237 12,491
- --------------- (1) Developed acreage is acreage assigned to producing wells for the spacing unit of the producing formation. Developed acreage in certain of WRT's properties that include multiple formations with different well spacing requirements may be considered undeveloped for certain formations but have only been included as developed acreage in the presentation above. Certain acreage is subject to depth limitations. See Section C - "Description of Assets of WRT." The oil and gas leases in which WRT has an interest are for varying primary terms and may require the payment of delay rentals to continue the primary terms. The leases may be surrendered by the operator at any time by notice to the lessors, by the cessation of production or by failure to make timely payment of delay rentals. 3. Drilling and Recompletion Activities The following table contains data respecting certain of WRT's field operations during the years ended December 31, 1996, 1995 and 1994. No exploratory wells were drilled by WRT during the periods presented. -29- 39
Year Ended December 31 --------------------------------------- 1996 1995 1994 ----------- ----------- ----------- Gross Net Gross Net Gross Net ----- --- ----- --- ----- --- Recompletions, side-tracks and deepenings Oil 12 5.7 35 19.5 23 9.9 Gas 5 3.2 17 12.7 5 3.2 Non-Productive 7 4.7 18 13.1 8 6.7 Total 24 13.6 70 45.3 36 19.8 Development Wells Oil 0 0 6 3.5 1 1.0 Gas 0 0 2 1.1 1 0.1 Non-Productive 1 .5 2 1.1 -- -- Total 1 .5 10 5.7 2 1.1
4. Title to Oil and Gas Properties It is customary in the oil and gas industry to make only a cursory review of title to undeveloped oil and gas leases at the time they are acquired and to obtain more extensive title examinations when acquiring producing properties. However, with respect to future undeveloped leasehold and producing property acquisitions, if any, WRT will conduct title examinations on material portions of such properties in a manner generally consistent with industry practice. Certain of WRT's oil and gas properties may be subject to title defects, encumbrances, easements, servitudes or other restrictions, none of which, except as noted below, in management's opinion, will in the aggregate materially restrict WRT's operations. During 1996, WRT received notice that a third party is claiming that WRT's title has failed as to approximately 43 acres in the Bayou Pigeon Field. Some or all of the acreage in dispute is considered to be productive in three separate production units. Under the assumption that WRT's title is flawed, WRT's working interest in three units may be reduced to approximately 7% (5% NRI), 74% (63% NRI), and 95% (72% NRI). Financial statements as of and for the year ended December 31, 1995 and 1996, reflect operating results and proved reserves discounted for a substantial portion of this possible title failure. As the alleged title failure predates its ownership of the field, WRT is currently evaluating its recourse against the predecessors-in-title relative to this issue. -30- 40 5. Reserves The oil and gas reserve information set forth below represents only estimates. Reserve engineering is a subjective process of estimating volumes of economically recoverable oil and gas that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation. As a result, the estimates of different engineers often vary. In addition, the results of drilling, testing and production may justify revisions of such estimates. Accordingly, reserve estimates often differ from the quantities of oil and gas that are ultimately recovered. Estimates of economically recoverable oil and gas and of future net revenues are based on a number of variables and assumptions, all of which may vary from actual results, including geologic interpretation, prices, and future production rates and costs. The following table sets forth estimates of the proved oil and gas reserves of WRT at December 31, 1996, as estimated by WRT's independent petroleum engineers.
Proved Reserves -------------------------------- Developed Undeveloped Total --------- ----------- ----- Oil (MBbls) 9,550 4,373 13,923 Gas (MMcf) 11,687 3,434 15,121 Equivalents (MBoe) 11,498 4,945 16,443 Year-end present value of estimated future net revenues before income tax, discounted 10% per annum 67,527 31,140 98,667 ($000s)
The estimated future net revenues set forth above were determined by using reserve quantities of proved reserves and the periods in which they are expected to be developed and produced based on economic conditions prevailing at December 31, 1996. The estimated future production is priced at December 31, 1996, ($25.93 per Bbl and $3.99 per Mcf) without escalation. Such pricing is required for SEC disclosure purposes. However, for the projections, the Debtor has utilized prices of $20.83 per Bbl and $2.04 per Mcf. In compliance with federal law, WRT files annual reports with the Energy Information Agency of the U.S. Department of Energy with respect to its production of oil and gas during each calendar year and its estimated oil and gas reserves at the end of each year. The reserve values set forth above and in WRT's Consolidated Financial Statements attached hereto may vary within five percent from the estimates previously provided to the Department of Energy by WRT due to WRT's practice of including in its report to the U.S. Department of Energy all oil and gas production and reserves attributable to wells for which WRT serves as operator. -31- 41 6. Production, Prices and Cost WRT sells its oil and gas at the wellhead and does not refine petroleum products. Other than normal production facilities, WRT does not own an interest in any bulk storage facilities or pipelines. As is customary in the industry, WRT sells its production in any one area to relatively few purchasers, including transmission companies that have pipelines near WRT's producing wells. Gas purchase contracts are generally on a short-term 30-day "spot market" basis and usually contain provisions by which the prices and delivery quantities for future deliveries will be determined. Oil production is sold at prices based on postings plus a premium. The following table contains certain historical data respecting the average sales prices received and the average production costs incurred by WRT during the years ended December 31, 1996, 1995 and 1994.
Year Ended December 31 ---------------------- 1996 1995 1994 ---- ---- ---- Production Volumes: Oil (MBbls) 615 778 270 Gas (MMcf) 3,629 7,403 3,503 Oil equivalents (MBoe) 1,220 2,012 854 Average Prices: Oil (MBbls) $21.36 $16.59 $16.44 Gas (MMcf) $ 2.62 $ 1.59 $ 1.88 Oil equivalents (MBoe) $18.54 $12.25 $12.92 Average production costs (per MBoe) $ 6.97 $ 4.74 $ 3.60
7. Facilities and Equipment As part of management's plans to reduce operating costs and overhead, WRT relocated its principal offices to Lafayette, Louisiana in 1995, occupying approximately 12,000 square feet of leased premises. WRT moved its corporate offices from The Woodlands, Texas, where it occupied approximately 24,000 square feet, to Houston, Texas where it occupies approximately 7,000 square feet of leased space. In connection with the Chapter 11 Reorganization Case, the Court has approved WRT's rejection of the office lease in The Woodlands, Texas. WRT owns an industrial building located in Lafayette, Louisiana with approximately 12,500 square feet of office, warehouse and shop space. This space currently houses WRT's technology and well logging equipment. WRT's cased hole logging equipment includes two wireline logging trucks, two skid mounted wireline units, four sets of small diameter radioactive well logging tools, five sets of large diameter radioactive well logging tools, and all necessary wireline and pressure control equipment for onshore and offshore well logging. -32- 42 In December 1994, WRT sold four drilling and workover rigs, obtained in connection with certain oil and gas property acquisitions, to an oil field service contractor for a total consideration of $3.9 million. The purchaser gave a 6% secured promissory note in exchange. No gain or loss was recognized at the date of the sale and the $1.0 million gain on the sale was deferred and was being realized over the life of the note. Concerns about the ability of the purchaser to perform pursuant to the terms of the contract resulted in WRT reversing, in September 1995, the deferred gain. In addition, WRT negotiated the return of all but one drilling and workover rig and the cancellation of the related note receivable. The Debtor has employed legal counsel to compel turnover of such rig. In December 1994 and May 1995, WRT sold to an oil field service contractor marine and oil field service equipment for a total consideration of $5.2 million. The purchaser gave two 6% secured promissory notes in exchange. No gain or loss was recognized at the date of the sale and the $800,000 gain on the sale was deferred and was being realized over the life of the notes. Concerns about the ability of the purchaser to perform pursuant to the terms of the contracts resulted in WRT reversing, in September 1995, the deferred gain. Prior to filing the Chapter 11 Case, WRT was negotiating with the purchaser for the return of the equipment and cancellation of the related notes receivable. The Debtor has employed legal counsel to compel turnover of the equipment. D. EVENTS LEADING TO CHAPTER 11 FILING 1. Senior Note Offering and Credit Facility In February 1995, WRT offered 100,000 Units consisting of $100.0 million aggregate principal amount of 13 7/8% Senior Notes due 2002 and warrants to purchase an aggregate of 800,000 shares of WRT's Common Stock (the "Warrants") (collectively, the "Offering"). The net proceeds from the Offering were used to acquire the Remaining LLOG Properties, to repay both the Bridge Loan and substantially all borrowings under the Credit Facility (defined herein), to acquire an additional working interest in the West Cote Blanche Bay Field and for general corporate purposes. In December 1994, WRT entered into a $40.0 million credit facility (the "Credit Facility") with International Nederlanden (U.S.) Capital Corporation ("INCC") that is secured by substantially all of WRT's assets. WRT borrowed $15.0 million thereunder to purchase the Initial LLOG Property. In March 1995, $12.0 million of the outstanding borrowings under the then existing borrowing base of the Credit Facility was repaid from the proceeds of the Offering. During 1995, WRT borrowed an additional $12.0 million under the Credit Facility, bringing the outstanding borrowings to $15.0 million, the maximum amount of borrowings available under the borrowing base of the Credit Facility. On December 31, 1995, the Credit Facility converted to a term loan whereby quarterly principal payments of one-sixteenth of the outstanding indebtedness are due and payable. -33- 43 2. 1995 Development Plan Upon completion of the acquisitions, and commencing in May 1995, WRT initiated a significant capital expenditure program to increase oil and gas production levels in each of its fields. This program consisted of 70 workover, side track and recompletion projects and 10 new development wells. Funding was provided from operating cash flow, remaining proceeds from the Offering and borrowings under WRT's existing revolving Credit Facility. WRT's production levels increased on a gas equivalent (Mcfe) basis from and after March 1995, when the oil and gas property acquisitions were completed, through September 1995; however, the production increases were realized at a slower pace than expected earlier in the year and the peak levels ultimately achieved were less than anticipated. The lower than expected level of production resulted from various factors including a combination of ordinary production declines, unexpected losses of production from several key wells, mechanical difficulties in the Lac Blanc Field and significant production declines in the predominantly oil producing West Cote Blanche Bay Field, which is not operated by WRT. Contributing significantly to the shortfall in anticipated production rates were three major well projects which proved to be unsuccessful in September 1995, for which WRT expended a total of approximately $3.6 million. Also contributing to lower than expected net revenues and operating cash flow was a significant decline in oil and gas prices during the third and early fourth quarters of 1995. Average oil and gas prices received in the third quarter of 1995 were 9% and 18% lower, respectively, than those received during the corresponding quarter of the previous year. The lower than expected production rates, together with decreased oil and gas prices during the third quarter of 1995, had a significant negative effect on WRT's liquidity and cash flow from operations. Due to the lack of success in its exploitation program and the correspondingly lower level of operating cash flow, WRT fully utilized the $15 million borrowing base available under the revolving Credit Facility in the early fourth quarter of 1995. 3. Change in Strategy and Corporate Structure Based on operating results for the quarter ended September 30, 1995, WRT had not yet realized the oil and gas production levels required at then current prices and costs to support WRT's capital requirements, fund existing debt service on WRT's Senior Notes and pay dividends on its 9% Convertible Preferred Stock. In early October 1995, in response to liquidity and cash flow concerns, WRT changed its focus from acquisition and development of non-producing reserves, to conservation of cash resources and maintenance of existing producing properties. WRT curtailed its activities to the minimum level of maintenance necessary to operate prudently its producing oil and gas wells. All other activities, including prospect acquisitions, new drilling, and development of WRT's proved, non-producing and undeveloped reserves ceased. In connection with this strategy, WRT made certain changes to its corporate structure and organization aimed at reducing costs and improving operations. On November 10, 1995, Steven S. McGuire resigned as a director, Chairman of the Board and Chief Executive Officer of WRT. Samuel C. Guy, WRT's Executive Vice President at the time, also resigned as a director. Mr. Guy's employment contract, which expired on February 29, 1996, was not renewed by WRT. The Board -34- 44 of Directors appointed Raymond P. Landry, previously President and Chief Operating Officer of WRT, to the position of Chairman of the Board and Chief Executive Officer. WRT also implemented a plan to reduce general and administrative expenses. WRT's oil and gas operations were consolidated in Lafayette, Louisiana and the remaining corporate offices were moved from The Woodlands, Texas to smaller offices located in Houston, Texas. WRT reduced its workforce from 76 in October 1995 to 35 in March 1996. These reductions, primarily from WRT's research and development activities and wireline/logging operations, were consistent with WRT's focus on conservation of cash and maintenance of existing producing properties. 4. Impairment of Long-Lived Assets Effective December 31, 1995, WRT adopted Statement of Financial Accounting Standards No. 121 ("SFAS No. 121") - "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of." WRT recorded a non-cash charge of $103.3 million in connection with the adoption of this new accounting standard. Based upon the preliminary oil and gas reserve data then available, WRT estimated that in October 1995 it would recognize in the fourth quarter a $60 to $65 million charge related to the adoption of SFAS No. 121. However, final year-end estimates of proved oil and gas reserves resulted in significant downward revisions from the amounts estimated in October 1995. These downward revisions were partially the result of differences in professional opinion between WRT's current and predecessor independent engineering firms. These differences, many of which relate to classification of reserves within the different oil and gas reserve categories (i.e. proved, probable and possible) are due to the numerous engineering, geological and operational assumptions that generally are derived from limited data. Additional downward revisions are attributed to field development activity and production data during the year. Drilling and recompletion activities, including the unsuccessful well projects in WRT's East Hackberry and Bayou Penchant fields and the mechanical failure of the Lac Blanc Exxon Fee #23 well resulted in significant reserve losses. These downward revisions resulted in WRT recognizing an impairment of oil and gas properties of approximately $95 million. Of this $95 million impairment, WRT believes that approximately 46% (or approximately $44 million) is attributable to the differences in professional opinion, the October 1995 preliminary estimates having been based on the prior professionals' reports. WRT also recorded a non-cash charge related to certain rig, marine and field equipment owned or securing notes receivable. WRT originally expected that this equipment would provide drilling and field services in WRT's oil and gas development program. Due to liquidity problems and the reduced level of development activity, WRT did not utilize these assets to the extent originally anticipated and accordingly, recovery of the related carrying cost was largely lost. As a result of the adoption of SFAS No. 121, WRT has recorded an impairment of $7.9 million related to this equipment. -35- 45 5. Filing of Reorganization Case WRT experienced further decreases in oil and gas production and related cash flows in late 1995 and early 1996, which further deteriorated WRT's already weakened financial condition. As a result, WRT was not generating and did not expect to generate in the near term sufficient cash flow to meet its existing obligations, including: the $6.9 million interest payment on Senior Notes due March 1, 1996, trade payable obligations remaining from WRT's 1995 capital expenditure program, principal and interest due on the Credit Facility, dividends on the Preferred Stock and ongoing field operating and general and administrative expenses. As liquidity problems became more severe, WRT concluded that a comprehensive financial restructuring would provide the best result to the various stakeholders in WRT. Consequently, after discussions with WRT's financial and legal advisors, INCC and certain holders of the Senior Notes, WRT's Board of Directors determined it would be desirable to effectuate its financial restructuring through a Chapter 11 filing. V. SIGNIFICANT EVENTS DURING THE CHAPTER 11 CASE During the course of the Debtor's Chapter 11 case, numerous pleadings have been filed with the Bankruptcy Court and numerous hearings have been conducted. The following is a general description of the more significant events which have transpired during the pendency of the case. For a comprehensive listing of the pleadings which have been filed in the case, however, the docket for the Chapter 11 Case should be consulted and the relevant pleadings referenced thereby may be obtained and reviewed from the Bankruptcy Court. A. EMPLOYMENT OF KEY PROFESSIONALS 1. Bankruptcy Counsel On February 14, 1996, the Petition Date, the Debtor filed an Application of Debtor in Possession for an Order Authorizing the Retention of Sheinfeld, Maley & Kay, P.C. as Counsel for its bankruptcy reorganization. On February 15, 1996, the Bankruptcy Court approved such employment. On the Petition Date, the Debtor also filed an Application to Employ Attorney, requesting authority to retain the firm of DeBaillon & DeBaillon as local counsel for the case. On February 15, 1996, the Bankruptcy Court entered an Order Authorizing Retention of Attorney for the Debtor-in-Possession, approving DeBaillon & DeBaillon as local counsel. 2. General Corporate and Oil and Gas Law Counsel; Special Counsel for Securities Litigation On or about March 4, 1996, the Debtor filed an Application to Employ Special Counsel for Chapter 11 Debtor in Possession, requesting authority to employ the firm of Porter & Hedges, LLP to assist the Debtor in defending against the Securities Litigation and advising the Debtor as to matters involving corporate, securities, and oil and gas law. On March 5, 1996, the Bankruptcy Court entered an Order Authorizing Employment of Special Counsel for Chapter 11 Trustee [sic.], approving the Debtor's retention of Porter & Hedges. Since such time, however, Porter & Hedges has withdrawn as counsel in both capacities. -36- 46 3. Oil & Gas Engineers On or about March 13, 1996, the Debtor filed an Application to Retain Netherland, Sewell & Associates, Inc. as Engineering Consultants. Netherland, Sewell & Associates, Inc. ("NSAI") had been retained by the Debtor prior to bankruptcy to provide a valuation of the Debtor's oil and gas reserves, which valuation was not complete by the time of the Debtor's Chapter 11 bankruptcy filing. Therefore, the Debtor's Application sought approval to continue NSAI's retention to enable completion of NSAI's report. On March 18, 1996, the Bankruptcy Court entered an Order Authorizing Employment of Netherland, Sewell & Associates, Inc. as Petroleum Engineering Consultants. 4. Financial Advisors On or about February 26, 1996, the Debtor filed an Application for Retention of Jefferies & Company, Inc. as Financial Advisor, seeking authority to retain Jefferies & Company, Inc. to assist the Debtor in restructuring and/or soliciting third party bids for the merger, sale, or other substantial disposition of the Debtor's assets. On April 9, 1996, the Bankruptcy Court entered an Order Approving Retention of Jefferies & Company, Inc. as Financial Advisor. 5. Accountants On or about March 4, 1996, the Debtor filed an Application for Authority to Retain KPMG Peat Marwick LLP ("KPMG") as Accountants and Consultants to the Debtor, seeking authority to retain KPMG for the purpose of providing accounting and auditing services, tax guidance and return preparation, and general financial advice including assistance with the bankruptcy restructuring efforts. On March 5, 1996, the Bankruptcy Court entered an Order Authorizing the Employment and Retention of KPMG Peat Marwick LLP as Accountants and Consultants to the Debtor. KPMG commenced providing assistance with bankruptcy related issues, including development of the Plan and Disclosure Statement, on or about October 8, 1996. B. APPROVAL OF CASH MANAGEMENT SYSTEM On the Petition Date, the Debtor filed a Motion for Authority to Maintain and Use Existing Depository Accounts and Business Forms (the "Cash Management Motion"). The Cash Management Motion sought Court approval for maintenance of the Debtor's pre-petition operational bank accounts and authorization to continue use of its checks and other business forms without alteration or change. On or about February 16, 1996, the Bankruptcy Court entered an order granting such requests. C. OBTAINING AUTHORITY TO USE CASH COLLATERAL The Debtor also filed an Emergency Motion for Use of Cash Collateral on February 14, 1996, seeking authority to use proceeds from its oil and gas production to continue funding operations. Among other Creditors, Internationale Nederlanden (U.S.) Capital Corporation and Creditors holding oil and gas liens against the Debtor's properties asserted and continue to assert a security interest in cash generated from the Debtor's mineral production making it necessary to obtain -37- 47 authority from the Bankruptcy Court pursuant to Section 363 of the Bankruptcy Code. On February 21, 1996, after notice and a hearing, the Court entered a Preliminary Order authorizing Use of Proceeds from Oil and Gas Operations (the "Preliminary Order"). Pursuant to the Preliminary Order, the Debtor was instructed to maintain a Revenue Receipts Account, an Operating Account, a Suspended Royalty Trust Account, and a Capital Distribution Account. All post-petition funds received by the Debtor are to be initially deposited into the Revenue Receipts Account. From there, production proceeds attributable to royalty owners, overriding royalty owners and working interest owners are to be distributed to such owners on a timely basis, at least monthly; provided, however, that any such distribution which is to be setoff against joint interest billings for lease operating expenses due from working interest holders is to be transferred to the Operating Account instead, and any such distribution which is undetermined by a division order is to be placed in the Suspended Royalty Trust Account. On the 28th day of each month, the remaining proceeds in the Revenue Receipts Account are to be disbursed to the Operating Account and Capital Distribution Account, in accordance with the Debtor's budgeted expenditures. Mechanically, the Debtor was preliminarily authorized to expend funds for general and administrative expenses from the Operating Account in accordance with the Budget attached to the motion, or as supplemented by written consent from INCC and the Committee. To the extent of the Debtor's use of cash, INCC obtained a post-petition lien and security interest against post-petition funds received by the Debtor, other than those attributable to royalties and overriding royalties, subject only to competing priority claims and lienholders. On March 5, 1996, the Bankruptcy Court entered a Final Order Authorizing Use of Proceeds from Oil and Gas Operations (the "Final Order"). Pursuant to the Final Order, the procedures set forth in the Preliminary Order were fully ratified and continued in force, with the substitution of a new initial budget. As to the time period following the initial budget, the Debtor has been submitting proposed monthly Budget Extensions to INCC and the Committee for approval. In addition to the post-petition security given to INCC in the Preliminary Order, the Final Order also provides that as to Creditors holding perfected liens or privileges on the Debtor's post-petition revenue, such Creditors shall have a post petition lien and security interest in funds belonging to the Debtor from its operations, second in priority to the post- petition lien granted to INCC, in the event that the Debtor's use of such revenue results in a diminution in the value of such Creditor's secured position. As of the filing of this Disclosure Statement, the Debtor is still operating under the terms of the Final Order. D. EMPLOYMENT STABILIZATION The following significant steps were taken by the Debtor to ensure continuing employment of the Debtor's necessary staff. -38- 48 1. Executive Salaries Approved On the Petition Date, the Debtor filed a Verified Application for Authorization to Compensate Officers and Directors, seeking approval to continue payment of annual salaries to the Debtor's officers and directors, including its President/CEO, Vice-President of Finance/CFO, Vice-President of Engineering and Geology, Vice-President of Operations, and two other independent outside directors. On March 27, 1996, the Bankruptcy Court entered an Order Authorizing Debtor in Possession to Pay Compensation to Raymond P. Landry, Ronald E. Hale, Wayne A. Beninger, and Tom C. Stewart. 2. Reimbursement of Employee Expenses & Contributions to 401K Plan On or about March 26, 1996, the Debtor filed a Motion for Authority to Pay Pre-Petition Reimbursable Employee Expenses and Employer Matching Contributions to the 401K Plan, requesting that it be permitted to reimburse pre-petition employee expenses and to make matching 401K plan contributions which had fallen due pre-petition, collectively in amounts not to exceed $4,000 per person, the amount which would be allowable as a priority expense in bankruptcy. On April 30, 1996, the Bankruptcy Court entered an Order Authorizing Payment of Pre-Petition Reimbursable Employee Expenses and Employer Matching Contributions to the 401K Plan. 3. Stay Bonus Finally, on August 23, 1996, the Debtor filed an initial Motion for Authorization to Provide Employment "Stay Bonus" to Employees. The Motion was subsequently denied without prejudice to the filing of an amended motion, due to substantial changes which had occurred to the proposal, and on or about October 7, 1996, the Debtor filed a new Motion by WRT Energy Corporation for Authorization to Provide Employment "Stay Bonus" to Employees. As described in the Motion, prior to bankruptcy WRT's Board of Directors determined that it was necessary to provide a "stay bonus" to facilitate retention of employees during the Chapter 11 Case in view of the uncertainties of the future of the Company. The policy approved by the Board, and proposed in the Motion, was to provide (1) certain designated "key" employees with a stay bonus of 50% of salary earned subsequent to the Petition Date, limited to a maximum of six months salary; and (2) non-"key" employees with a stay bonus of 25% of salary earned subsequent to the Petition Date, limited to maximum of three months' salary. A condition precedent to the receipt of such bonus is continued employment through confirmation or a sale of a substantial portion of the Debtor's properties, unless permitted otherwise by order of the Bankruptcy Court under extenuating circumstances. On November 6, 1996, the Bankruptcy Court entered an Order Authorizing Debtor to Provide Employment "Stay Bonus" to Employees. Thereafter, on December 17, 1996, the Debtor filed a motion requesting approval to pay the stay bonus to Kathleen Ruegsegger under such extenuating circumstances. On or about January 21, 1997, the Court entered an order authorizing such bonus. E. APPOINTMENT OF OFFICIAL COMMITTEE OF UNSECURED CREDITORS On or about March 11, 1996, the United States Trustee's Office appointed an official Committee of Unsecured Creditors to participate in the Chapter 11 Case. Upon consideration of the -39- 49 Debtor's schedules and solicitation to the largest Creditors in the Case, the Committee was compiled by the U.S Trustee. Since the Committee's appointment, the Committee has retained professionals in the Case to assist its participation in the case including Stroock & Stroock & Lavan LLP as its bankruptcy counsel, along with Draper & Culpepper as local counsel, and Coopers & Lybrand L.L.P. as its financial advisors. F. DENIAL OF REQUEST FOR APPOINTMENT OF LIEN CREDITORS COMMITTEE On March 7, 1996, Halliburton Company and certain other lien creditors filed a motion for appointment of a Lien Creditor's Committee in the Case. After due consideration by the Court, such request was denied. An additional request was lodged by Halliburton in connection with the Debtor's request for authority to obtain post-petition financing, but such request has not been granted and no lien creditor's committee has been approved or appointed in the case to date. To accommodate certain concerns of the lien creditors in the case, however, Texaco, Inc. and Diamond Services, Inc. were placed on the Committee to act as a representative of all lien creditors in the case. G. ESTABLISHMENT OF CLAIMS BAR DATE On April 3, 1996, the Debtor filed a motion to establish deadline for the filing of Claims in the case, requesting that the deadline for the filing of proofs of claims be set as July 1, 1996. The establishment of a claims bar date was critical to the Debtor's ability to determine its outstanding liabilities, especially oil and gas lien Claimants. By order entered on April 8, 1996, the Bankruptcy Court granted the motion and established July 1, 1996, as the bar date. Thereafter, the Debtor provided direct notice to all known Creditors, and publication notice, via applicable regional newspapers, was provided to all unknown Creditors. On June 26, 1996, the Debtor filed a motion for establishment of a supplemental deadline requesting an extended deadline of August 23, 1996, for certain parties whose addresses were discovered subsequent to July 1, 1996 (listed on Exhibit "A" to the motion). The Bankruptcy Court granted the motion and established the supplemental bar date of August 23, 1996 as to such additional parties. Several Creditors have also independently filed motions for extension of the bar date, and the Bankruptcy Court has provided certain of the Creditors with an extended deadline in accordance with their requests. Finally, in connection with the denial of Continental Land & Fur Co.'s motion to compel release of certain escrowed production proceeds, the Bankruptcy Court established a new deadline of January 16, 1997, for the filing of proofs of claims by Claimants asserting Claims based upon unpaid royalties. H. COMPROMISE OF BEAR STEARNS LITIGATION Prior to the filing of the Debtor's Chapter 11 Case, on December 10, 1992, WRT, one of its executives, a former executive and others instituted a lawsuit against Bear, Stearns & Co., Inc. ("Bear Stearns"), Drake Capital Securities, Inc. ("Drake"), Seven Antebi ("Antebi") and Jerry Friedman ("Friedman") in the District Court of Harris County, Texas, 133rd Judicial District. After settling with Drake and Friedman, the plaintiffs commenced trial on February 28, 1995. On March 31, 1995, the jury returned a verdict in favor of the Debtor and five of its shareholders against Antebi for approximately $1.1 million. The Debtor, however, considered the jury verdict to be -40- 50 insufficient. Accordingly, the Debtor requested, and on August 4, 1995 was granted, a new trial. The new trial, originally docketed to begin on October 30, 1995, was postponed and was rescheduled for April 8, 1996. Prior to commencement of the new trial, the case went to mediation and was settled on February 16, 1996, for $600,000 plus court costs of approximately $69,000, subject to the approval of the Bankruptcy Court. Consequently on April 22, 1996, Debtor filed a Motion for Authority to Compromise the Bear Stearns Litigation, requesting that the settlement be approved and that the distribution of proceeds generated therefrom be authorized to the respective parties to the Litigation pursuant to the Settlement Agreement reached. Due to objections raised as to the distribution of the Bear Stearns Litigation Proceeds, the Bankruptcy Court approved the Settlement Agreement but instructed that a subsequent Motion be provided to resolve the issue of disposition of the proceeds. As a result on August 27, 1996, the Debtor filed a Motion for Authorization to finally settle distribution of the Bear Stearns Litigation Proceeds. On September 10, 1996, the Bankruptcy Court approved such Motion and the proceeds have since been distributed accordingly, including the distribution of approximately $152,000 to the Debtor. I. REJECTION OF TRI-DECK MARKETING AGREEMENT AND SUIT FOR TURNOVER OF PROCEEDS Prior to filing its Chapter 11 Case, WRT allegedly entered into a marketing agreement with Tri-Deck Oil & Gas Company ("Tri-Deck") pursuant to which Tri-Deck would market all of WRT's oil and gas production. Subsequent to the agreement, Tri-Deck's principal, James Florence (WRT's Director of Marketing) on behalf of WRT assigned to Plains Marketing its right to market WRT's oil production. During the early stages of the Debtor's Chapter 11 Case, Tri-Deck failed to make payments to WRT attributable to several months of WRT's gas production. Consequently, the Debtor responded in two ways. First, on May 20, 1996, the Debtor filed a Motion to Reject the Tri-Deck Marketing Agreement (Motion to Reject Oil and Gas Sales and Purchase Agreement with Tri-Deck by WRT Energy Corporation). Second, on May 29, 1996, the Debtor initiated an adversary proceeding against Tri-Deck and Perry Gas Companies, Inc. ("Perry Gas"), styled WRT Energy Corporation v. Tri-Deck Oil & Gas Company and Perry Gas Companies, Inc., Case No. 96-5028 (the "Adversary Proceeding"). Perry Gas was the party which ultimately purchased WRT's gas production for the months in question. With respect to the Motion to Reject, on June 11, 1996, the Bankruptcy Court entered an order authorizing the rejection, effective June 4, 1996. On June 20, 1996, the Debtor filed a motion requesting the Bankruptcy Court to amend the rejection order to reflect an earlier effective date for the rejection. On July 22, 1996, after receiving briefs from both the Debtor and Tri-Deck, the Bankruptcy Court entered its Reasons for Decision, finding that the effective date would not change, but directing Tri-Deck and the Debtor to determine the amount of production proceeds attributable to the Debtor's June gas production which are unquestionably payable to the Debtor, and to submit an order effectively directing Perry Gas to pay such amounts to the Debtor. Accordingly, on August 8, 1996, the Bankruptcy Court entered an Amended Order to that effect. Thereafter, however, Tri-Deck appealed the order, and requested a stay pending the appeal. On August 21, 1996, the Bankruptcy Court entered an order denying the request for a stay, and the appeal has since been dismissed. Consequently, Perry Gas thereafter made payment to WRT of the June gas proceeds less -41- 51 $75,000 for a set-off claim by Perry Gas, which is subject to further consideration by the Bankruptcy Court. Next, with respect to the Adversary Proceeding, the Debtor sought turnover by Tri-Deck and/or Perry Gas of all unpaid production proceeds payable to the Debtor under the marketing agreement and the issuance of a temporary restraining order and preliminary injunction against both parties to prevent further disposition of such proceeds pending outcome of the adversary. On May 31, 1996, after conducting a hearing on notice, the Bankruptcy Court entered a consensual temporary restraining order against both Tri-Deck and Perry Gas. The TRO was carried forward in a Preliminary Injunction entered by the Court on June 18, 1996. Pursuant to the terms of the Preliminary Injunction, Perry Gas was required to segregate into a separate depository account the funds due for the purchase of WRT's April and May 1996 gas production from Tri-Deck. Subsequently, upon Motion by WRT the Court ordered such funds to be placed into the Court's registry, as Perry had made certain withdrawals from the separate depository account without authorization by the Court. Currently, the funds remain in the registry of the Court; additionally, a dispute exists between Debtor and Perry Gas as to additional funds owed by Perry Gas for the purchase of Debtor's April and May production. Currently, the Adversary Proceeding remains pending as to the ultimate issue of turnover of proceeds. Tri-Deck has also filed an answer and counterclaim in which Tri- Deck is asserting, among other things, damages for tortious interference of its contractual relationships with others. The Debtor believes that Tri-Deck's counterclaim is without merit. J. OIL & GAS LEASE DISPUTE On or about April 3, 1996, the Debtor filed a Motion to Extend Time to Assume or Reject Certain Unexpired Leases. In the Motion, the Debtor expressed its uncertainty, at the time, as to whether mineral leases constitute executory contracts and/or unexpired leases, but moved for an extension of time to assume or reject such mineral leases under Section 365 of the Bankruptcy Code as a precautionary measure to prevent the possibility of automatic rejection of the leases under Subsection (d)(4) of Section 365 in the event the Court should find that Section 365 does apply. On April 30, 1996, the Court entered an order granting the extension, but required the Debtor to file pleadings with the Court on or before June 21, 1996 for the assumption or rejection of mineral leases under which the State of Louisiana is the lessor, and for the assumption or rejection a mineral lease and related agreements under which the LaFourche Parish School Board is the lessor. Consequently, the Debtor thereafter filed motions for the conditional assumption of the State and LaFourche Parish School Board mineral leases -- conditioned upon final, non-appealable orders determining that the mineral leases at issue constitute executory contracts and/or unexpired leases subject to the provisions of Section 365 of the Bankruptcy Code. Prior to the June 21, 1996 filing deadline, on May 20, 1996, Pigeon Land Company and several additional parties (co-movants) filed a motion, pursuant to Section 365 of the Bankruptcy Code, to compel assumption or rejection of certain oil and gas leases and associated land agreements. Having had the chance to research Section 365's applicability to mineral leases, both the Debtor and -42- 52 the Committee opposed the motion based upon the assertion that Louisiana oil and gas leases do not constitute executory contracts or unexpired leases within the meaning of Section 365. On July 2, 1996, the Bankruptcy Court conducted a hearing to receive arguments at the conclusion of which the Pigeon Land Company et al motion was taken under advisement. Numerous additional parties stand to be affected by the Court's ruling and additional Creditors filed similar motions to compel, including Continental Land & Fur Co. On November 13, 1996, the Bankruptcy Court rendered its Reasons for Decision in which the Bankruptcy Court determined that Louisiana oil and gas leases do not constitute executory contracts or unexpired leases under Section 365 of the Bankruptcy Code. On the same date, the Bankruptcy Court entered a corresponding order denying both Pigeon Land Company's motion to compel and Continental Land & Fur's motion to compel (the "Pigeon & CLF Order"). Similarly, Exxon Corporation's motion to compel was subsequently denied by a supplemental order entered on December 18, 1996 (the "Exxon Order"). Timely appeals were filed as to the Pigeon & CLF Order by Pigeon Land Co. et al. and Continental Land & Fur. Jeanerette Lumber and Shingle later also filed an appeal. With respect to the Exxon Order, Exxon Corporation timely filed an appeal therefrom. Currently, the appeals as to both the Pigeon and CLF Order and the Exxon Order are pending determination by the District Court for the Western District of Louisiana. Certain creditors in the case have also asserted that WRT's mineral leases are terminable due to non-payment of royalties. While the Plan provides treatment for both pre- and post-petition royalties, a couple of landowners have nevertheless requested relief from the automatic stay to take actions under state law to dispossess WRT of such interests. WRT and DLBW do not believe that such relief is warranted, nor that the landowners would be successful under state law. However, to date, the issue has not been finally ruled upon by the Bankruptcy Court or any other court of competent jurisdiction. K. MOTION TO COMPEL RELEASE OF ESCROWED PRODUCTION PROCEEDS In connection with the Motion by the Debtor to obtain approval to use Cash collateral in funding operations, the Debtor agreed to segregate $170,000 representing an estimation of the oil and gas proceeds attributable to oil and gas royalties just prior to the Debtor's bankruptcy filing. On or about June 11, 1996, Continental Land & Fur ("CL&F") filed a motion to compel distribution of greater than $79,000 from such segregated account in satisfaction of certain oil and gas royalty payments it deemed due and owing to CL&F from such fund. Both the Debtor and the Committee filed objections to such distribution, claiming that such funds were not property of CL&F, as claimed, but instead represented commingled funds of the Debtor subject to the Debtor's use in funding continuing operations, and that CL&F would have a Claim for unpaid royalties in the nature of an Unsecured Claim. On November 15, 1996, the Bankruptcy Court entered an order denying CL&F's Motion, determining that such funds do not belong to CL&F but instead represent property of the estate and that unpaid prepetition royalties are unsecured claims. In conjunction with such ruling, the Bankruptcy Court instructed the Debtor to provide notice of the order to all known royalty Claimants along with a notice of an additional forty-five day bar date period in which to file Claims for unpaid prepetition royalties. -43- 53 L. ADVERSARY PROCEEDING TO ENJOIN SECURITIES LITIGATION AGAINST OFFICERS AND DIRECTORS Prior to the filing of the Debtor's Chapter 11 Case, two class action securities litigation cases (collectively the "Securities Litigation") were filed against the Debtor and certain other Defendants, including several of WRT's current and former officers and directors, in the District Court for the Southern District Court of California. On or about April 22, 1996, the Debtor filed an action to enjoin further prosecution of the Securities Litigation as against such officers' and directors', claiming that if the litigation were permitted to proceed it would place the Debtor at risk for the possibility for certain issues being held against the Debtor under principles of collateral estoppel and rejudication, and that the officers and directors efforts in defending such litigation would divert attention from the reorganizational needs of the Debtor in its Chapter 11 Case. The suit was joined with a request for a preliminary injunction which became largely unnecessary due to the Defendants consent to a stand still arrangement during the period in which negotiations could take place. During such standstill period, the Securities Litigation was transferred to the District Court for the Southern District of New York where it remains pending. On September 16, 1996, the Bankruptcy Court entered an order denying the request for preliminary injunction and the case was subsequently dismissed. M. POST-PETITION FINANCING On May 10, 1996, the Debtor filed a motion for authority to obtain post- petition financing seeking authority to obtain additional financing from INCC pursuant to Section 364 of the Bankruptcy Code (the "INCC Financing Motion"). After several continuances of the hearing on the motion, on July 19, 1996, the Debtor filed a second motion for authority to obtain post-petition financing, this time from Wexford Management LLC (the "Wexford Financing Motion"). Thereafter the Debtor filed a motion to withdraw the INCC Financing Motion, which the Bankruptcy Court thereafter granted. The Wexford Financing Motion has been continued several times since such time, and remains pending as of the filing of this Disclosure Statement. N. SALE OF MINOR OIL AND GAS PROPERTIES 1. Sale of Rankin Field Interests On June 20, 1996, the Debtor filed a motion to sell and assign its oil and gas interests and related property interests in the Rankin Field, Harris County, Texas to American Energy Sources, Inc. free and clear of liens. The consideration proposed by American Energy in exchange for an assignment of all of the Rankin Field Interests was $5,000 plus American Energy's agreement to assume all plugging and abandonment liability and all post-sale environmental liabilities associated with the land. On July 2, 1996, the Bankruptcy Court approved the sale and entered an order to that effect. With respect to the cash proceeds received, the Court authorized the Debtor to pay the Secured Claims of Huffman Independent School District and Spanish Cove Public Utility District, and directed the Debtor to place the remaining funds into a segregated account pending allowance -44- 54 of all other Secured Claims associated with the Rankin Field. Correspondingly, all liens previously attached to the Rankin Field Interests were transferred to the funds held in the segregated account. 2. Sale of Bayou Henry Interests On or about September 30, 1996, the Debtor filed a motion requesting authority to consummate a sale of the Debtor's oil and gas interests (if any remaining) and associated property in the Bayou Henry Field, Iberia Parish, Louisiana to Hunter Oil & Gas. The consideration proposed by Hunter in exchange for an assignment of all such interests was $10.00 plus the assumption of all costs and liabilities associated with WRT's obligations to plug and abandon the wells and restore the surface. Previously, WRT had entered into a settlement agreement with ATC Realty Eight, Inc. and Gulf Coast Package Limited whereby WRT agreed to provide certain letters of credit to secure P&A costs. Two letters of credit remain in the amount of $50,000 each. Therefore, ATC Realty Eight and Gulf Coast Package Ltd. filed an objection to the proposed sale to the extent that the letters of credit would not remain in place. On October 29, 1996, the Bankruptcy Court approved the transaction, but subject to the Debtor's filing of supplemental information detailing the P&A security to be provided by Hunter. O. APPOINTMENT OF EXAMINER On July 15, 1996, Baker Hughes, Inc. filed a motion for appointment of an examiner in the Case pursuant to Section 1104 of the Bankruptcy Code. Thereafter, on August 8, 1996, Schlumberger Well Services, Double Eagle Marine, Inc., and Inland Marine Services, Inc. also filed a motion for appointment of an examiner. On August 13, 1996, the Bankruptcy Court granted the motion, establishing certain specified matters for the examiner to collect information for the purpose of reporting back to the Court and Creditors. On August 10, 1996, the U.S. Trustee filed a letter indicating the Trustee's selection of David J. Moore as the examiner. Baker Hughes objected to the appointment, and on August 27, 1996, the Court entered an order denying such appointment. Consequently, on September 3, 1996, the U.S. Trustee filed a new letter with the Court indicating the Trustee's selection of Jason R. Searcy as the examiner, and on September 10, 1996, the Court entered an order authorizing Mr. Searcy as the examiner. Pursuant to the original order appointing an examiner in the case, a report was to be filed by the examiner by no later than November 12, 1996, reflecting the examiner's findings to that point. On November 15, 1996, such preliminary report was filed by the Examiner, a copy of which is attached hereto as Exhibit "C". Subsequent to that time, on November 19, 1996, the Examiner filed a Supplement thereto making certain minor modifications, and such Supplement is attached hereto as Exhibit "C" as well. As of the filing of this Disclosure Statement, the Examiner has also conducted and will likely continue to conduct examinations of individuals and entities pursuant to Bankruptcy Rule 2004, and should be filing a final, or supplemental, report regarding his findings. The Plan provides that Causes of Action, other than the Marine Equipment Causes of Action and the Tri-Deck Causes of Action, shall be transferred into Litigation Equity, and such Causes of Action shall be prosecuted for the benefit of the holders of the Litigation Equity Interests. -45- 55 P. MOTION TO PROHIBIT USE OF PRODUCTION PROCEEDS FROM WEST COTE BLANCHE BAY FIELD On or about August 20, 1996, Texaco filed a motion pursuant to Section 363(e) of the Bankruptcy Code seeking to prohibit the Debtor's use of proceeds from production from the West Cote Blanche Bay Field until such time as Texaco has "recouped" sufficient funds to satisfy the Debtor's indebtedness to Texaco pursuant to the operating agreement in force as to such field. Both the Debtor and the Committee filed objections to the motion. On September 17, 1996, a hearing was conducted at which time the motion was taken under advisement, and to date, a decision has yet to be rendered. Furthermore, in connection with a transaction involving the West Cote Blanche Bay Field, Texaco has adjourned and agreed to ultimately dismiss such Motion. See Section VII.A.-- The Texaco West Cote Blanche Bay Transaction. Q. THE SEARCH FOR AN M&A CANDIDATE OR RESTRUCTURING PARTNER During the first quarter of 1995, the Debtor and its financial advisor, Jefferies & Company, Inc. ("Jefferies") commenced a process to systematically determine and assess the Debtor's strategic options including the potential sale of all or part of the Debtor's assets or stock by merger, tender offer, exchange offer, plan of reorganization or other acquisition of the Debtor's debt or securities (the "M&A/Restructuring Process"). Jefferies was authorized to undertake such an assignment pursuant to a Bankruptcy Court Order dated March 26, 1996. At the commencement of the M&A/Restructuring Process, the Debtor, through Jefferies, mailed over seventy Information Memoranda to potentially interested parties, with the majority of such memoranda having been mailed on June 22, 1996. Parties receiving the Information Memorandum were asked to submit preliminary indications of value by July 9, 1996. Indications of value were received from 13 parties with 9 invites to a data room for comprehensive due diligence activities extended to parties expressing significant values. The Data Room was open from August 1, 1996 through September 18, 1996. On or about October 1, 1996, the Debtor received five non-binding bids or restructuring proposals for the Debtor and/or its assets. After consultation with the Debtor's Board of Directors, Jefferies was directed to contact each bidder or restructuring candidate for an offer or proposal of higher value for the estate. Two asset bidders raised the aggregate amounts of their bids based upon these efforts. As each of the bids and proposals differed in certain respects, Jefferies performed financial analyses concerning the valuation of each bid. The Debtor's Board of Directors, after consultation with Jefferies, selected the DLBW Restructuring Proposal. At or about the same time Jefferies met with the Debtor's Board of Directors and to coordinate strategy and efforts concerning the bids and proposals, Jefferies initiated communications with the financial advisors to the Committee of Unsecured Creditors in an effort to apprise the Committee of the bid procedure undertaken and the preliminary results obtained. -46- 56 In mid-October 1996, Jefferies circulated an information book and met with members of the Committee and their advisors to summarize for the Committee members the terms and conditions of each bid along with preliminary financial analyses concerning the same. The Committee concurred with the Debtor that the DLBW Proposal was the most favorable option to both the Debtor and Creditors. On October 29, 1996, the Debtor filed a motion requesting approval of a break-up fee of $1,000,000.00, contained in the DLBW Proposal, and of the reimbursement of DLBW's attorneys' fees and expenses up to a maximum of $500,000.00. On December 16, 1996, the Court rendered its Reasons for Decision whereby it indicated that the reimbursement of expenses would be approved, but the break-up fee, as requested, would be denied. Accordingly, on December 24, 1996, an order was entered to that effect, without prejudice to DLBW's subsequent filing of an additional motion for approval of a break-up fee in alignment with the Court's ruling. On or about January 29, 1997, the Debtor and DLBW filed a Joint Motion for an Order (A) Approving the Commitment Agreement, (B) Authorizing and Directing WRT to Enter Into Commitment Agreement and (C) Approving a Break-Up Fee and an Increased Expense Reimbursement. By Order entered by the Court on or about February 18, 1997, the Joint Motion was granted authorizing the Debtor's entry into a Commitment Agreement with DLBW, approving a break-up fee of $700,000 to DLBW in the event that one or more contingencies arise under the terms of the Commitment Agreement, and expanding the maximum out-of-pocket expense reimbursement amount in favor of DLBW to $1,500,000 in connection with DLBW's participation in the development of the Plan and Disclosure Statement. A true and correct copy of the Commitment Agreement is attached to this Disclosure Statement as Exhibit "H". R. TRICORE AVOIDANCE ACTION On January 14, 1997 the Debtor initiated an adversary proceeding to obtain a declaration of the invalidity of the security interests or liens allegedly securing Tricore Energy Venture, LP's ("Tricore's") asserted Secured Claim of "up to $9,223,741.00," or alternatively for avoidance of such security interests or liens pursuant to Sections 544 and 547 of the Bankruptcy Code. Such suit is pending as of the filing of this Disclosure Statement. On March 7, 1997, the Debtor also filed an objection to both the allowance and amount of Tricore's Claims. VI. SUMMARY OF THE CLAIMS, CLASSIFICATIONS AND TREATMENT UNDER THE PLAN A. INTRODUCTION A summary of the principal provisions of the Plan and the treatment of Classes of Allowed Claims and Equity Interests in the Plan is set out in this section VI. The summary is qualified in its -47- 57 entirety by reference to the Plan. THE AMOUNTS OF CLAIMS IN THE VARIOUS CLASSES AND THE NUMBER OF HOLDERS OF SUCH CLAIMS CANNOT NOW BE EXACTLY DETERMINED. WHILE THE DEBTOR HAS REFLECTED IN THE SCHEDULES, AS AMENDED, THE DEBTS AND CLAIMANTS KNOWN TO IT OR REFLECTED ON ITS BOOKS, ADDITIONAL CLAIMS ARISING FROM THE REJECTION OF EXECUTORY CONTRACTS OR UNEXPIRED LEASES MAY ALSO BE FILED AT A LATER DATE AND ROYALTY CLAIMS ARE CONTINUING TO BE RECEIVED BY THE DEBTOR DUE TO THE COURT'S EXTENDED FILING DEADLINE OF JANUARY 16, 1997 FOR SUCH CLAIMS. IN MOST INSTANCES, THEREFORE, THE AMOUNT OF CLAIMS IN THE VARIOUS CLASSES AND THE NUMBER OF HOLDERS OF SUCH CLAIMS SET FORTH HEREIN ARE ESTIMATES. HOWEVER, THE DEBTOR BELIEVES THE ESTIMATES TO BE REASONABLE. When reviewing Section VI of this Disclosure Statement, readers should keep in mind that: 1. The projections assume that the Bankruptcy Court will confirm the Plan on or before April 30, 1997 (the "Confirmation Date") and that the Effective Date under the Plan will be on or before July 1, 1997. If the Effective Date were to occur prior to July 1, 1997, the Debtor believes that it will have sufficient Cash to consummate the Plan. 2. The following statements relating to the Claims against the Debtor and the instruments evidencing the Claims are summaries of provisions contained therein and do not purport to be complete. The provisions of the specific instruments referred to in the summaries, whether to sections or defined terms, are incorporated herein by reference and the summaries are qualified in their entirety by reference to the applicable instruments evidencing the Claims against the Debtor. B. CLASSIFICATION OF CREDITORS As set out below, the Plan provides for the division of the Debtor's Creditors into Classes. All Claims and Interests, except Administrative Claims and Priority Tax Claims, are placed in the following Classes. A Claim or Interest is classified in a particular Class only to the extent that the Claim or Interest qualifies within the description of the Class and is classified in a different Class to the extent that the Claim or Interest qualifies within the description of that Class. A proof of claim or interest which asserts a Claim or an Interest which is properly includible in more than one Class is in the Class asserted only to the extent it qualifies within the description of such Class and is in a different Class to the extent it qualifies within a description of such different Class. -48- 58 UNCLASSIFIED CLAIMS Allowed Administrative Claims Allowed Priority Tax Claims CLASSIFIED CLAIMS PRIORITY CLAIMS: Class A-1: Allowed Priority Claims SECURED CONTRACT CLAIMS: Class B-1: Allowed Secured Claim of GMAC Class B-2: Allowed Secured Claim of INCC Class B-3: Allowed Secured Claim of MC Bank & Trust Company Class B-4: Allowed Secured Claim of Tricore Class B-5: Allowed Secured Claim of Woodforest National Bank Class B-6: Allowed Secured Claim of The Woodlands Corporation SECURED OIL AND GAS LIEN CLAIMS: Class C-1: Abbeville Field Claims Class C-2: Bayou Henry Field Claimants Class C-3: Bayou Penchant Field Claims Class C-3-A: North Lease Claimants Class C-3-B: South Lease Claimants Class C-3-C: South/North Lease Claimants Class C-4: Bayou Pigeon Field Claims Class C-4-A: Brownell Kidd 90 Lease Claimants Class C-4-B: David R. McHugh Estate Lease Claimants Class C-4-C: Edward H. Peterman Lease Claimants Class C-4-D: Lynch McHugh Heirs et al Lease Claimants Class C-4-E: VF Landry et al 52 Lease Claimants Class C-4-F: VF Landry et al 90 Lease Claimants Class C-4-G: Brownell Kidd Lease Claimants Class C-4-H: Richard Lynch Heirs Lease Claimants Class C-4-I: VF Landry 11/66 Lease Claimants -49- 59 Class C-5: Darrow Field Claims Class C-6: Deer Island Field Claims Class C-6-A: CL&F 12/21/45 Lease Claimants Class C-6-B: CL&F 12/26/45 Lease Claimants Class C-6-C: CL&F SWD Well #1 Claimants Class C-7: East Hackberry Field Claims Class C-7-A: M.P. Erwin Lease Claimants Class C-7-B: State Lease 50 Lease Claimants Class C-8: Golden Meadow Field Claims Class C-9: Lac Blanc Field Claims Class C-10: Napoleonville Field Claims Class C-10-A: Dugas & LeBlanc Ltd 2/94 Lease Claimants Class C-10-B: Dugas & LeBlanc Ltd 3/94 Lease Claimants Class C-10-C: Dugas & LeBlanc Ltd 93 Lease Claimants Class C-10-D: E. Robert Sternfels et al 90 Lease Claimants Class C-10-E: Dougas LeBlanc A SWD Well Claimants Class C-11: Rankin Field Claims Class C-12: South Atchafalaya Bay Field Claims Class C-13: Tigre Lagoon Field Claims Class C-14: West Cote Blanche Bay Field Claims Class C-15: West Hackberry Field Claims Class C-15-A: R Vincent 1/18/38 Lease Claimants Class C-15-B: R Vincent 5/36 Lease Claimants Class C-16: West Lake Pontchartrain Field Claims -50- 60 UNSECURED CLAIMS: Class D-1: Allowed Convenience Claims Class D-2: Allowed Tort Claims Class D-3: Allowed General Unsecured Claims Class D-4: Allowed Securities Litigation Claims Based Upon Senior Note Ownership EQUITY INTERESTS: Class E-1: Preferred Stock Class E-2: Allowed Securities Litigation Claims Based Upon Preferred Stock Ownership Class E-3: Common Stock and Allowed Securities Litigation Claims Based Upon Common Stock Ownership Class E-4: WRT Warrants Class E-5: WRT Stock Options C. TREATMENT OF CLASSES OF CLAIMS AND EQUITY INTERESTS 1. Treatment of Administrative Claims Pursuant to the Plan, each Allowed Administrative Claim will be paid in full by no later than the later of the Effective Date or fifteen days after allowance of the Claim by Final Order, unless the Claim was incurred by the Debtor in the ordinary course of the Debtor's business during the course of the Chapter 11 Case in which case the Claim will be paid in the ordinary course. Administrative Claims are Claims against the Debtor for any cost or expense of the Chapter 11 Case allowed under Section 503(b) of the Bankruptcy Code, including all actual and necessary expenses relating to the preservation of the Debtor's estate or the operation of WRT's business and allowance of compensation or reimbursement of expenses to the extent allowed by the Bankruptcy Code. Allowed Administrative Expense Claims will include the Indenture Trustee Claim of approximately $170,000. The Indenture Trustee has agreed, upon the occurrence of the Effective Date and its receipt of Cash in the amount of the Indenture Trustee Claim, to waive any lien against, or that would otherwise affect, the Distributions provided in the Plan in respect of any Claim. Any person requesting compensation or expense reimbursement pursuant to Sections 328, 330, 503(b)(2) through (6) or 1103 of the Bankruptcy Code shall file Compensation Estimates (i) on or before three (3) calendar days before the first date set for the hearing or the confirmation of the Plan, and (ii) on or before five (5) calendar days before the first date scheduled for the Effective Date. Each holder of an Administrative Claim other than (i) an Allowed Administrative Claim or (ii) an Administrative Claim incurred in the ordinary course of the Debtor's business must file a proof of Administrative Claim (or an application for approval in the case of a Fee Claim) on or before the Administrative Claims Bar Date and serve a copy on counsel for New WRT. All payments to professionals for compensation and reimbursement of expenses are made in accordance with detailed procedures established by the Bankruptcy Code relating to the payment of interim and final fees. The Bankruptcy Court will review all requests for compensation and -51- 61 reimbursement of expenses. Attorneys and other professionals may make application to the Bankruptcy Court for payment of such compensation. In addition, the assumption that professionals will be paid or have been paid in the ordinary course assumes that there will be no material litigation involving any aspect of the Plan or any Claims thereunder and that the Plan will be confirmed without substantial controversy. If any events occur or if confirmation of the Plan is delayed for any reason, such assumptions may not prove to be reasonable and the estimated Administrative Claims may be much higher. Finally, the Plan proposes to treat unpaid post-petition oil and gas royalties as Administrative Claims. At this time all royalties have been paid on proceeds received by WRT from oil and gas production after the Petition Date. Additionally, as further described in Section V of the Disclosure Statement, the Debtor has commenced an adversary proceeding against Tri-Deck Oil & Gas and Perry Gas Companies, Inc. The amount in controversy in the Tri-Deck Litigation exceeds $4,000,000. As part of that litigation, Perry Gas has deposited $1,524,236 into the registry of the Court subject to further Order as to the fund's disposition. Perry Gas has asserted an Administrative Expense Claim in the amount of $120,467.88, as to the amount of which negotiations are continuing between the Debtor and Perry Gas. 2. Treatment of Allowed Priority Tax Claims Priority Tax Claims consist of Claims against the Debtor entitled to priority in accordance with Section 507(a)(8) of the Bankruptcy Code. These Claims consist of Claims asserted by governmental taxing authorities. The estimated amount of Allowed Priority Tax Claims is $1,200,000. Under Section 1129(a)(9)(C) of the Bankruptcy Code, Priority Tax Claims may be paid in deferred Cash payments over a period of six (6) years from the date of assessment. The Priority Tax Claims at issue in WRT's case were assessed in 1995 or later. Pursuant to the Plan, New WRT will pay Allowed Priority Tax Claims in full in deferred Cash payments in equal quarterly payments through the end of year 2001 with interest at a rate of LIBOR (London Inter-Bank Offered Rate), plus 2%. However, New WRT shall have the option to prepay (without penalty or premium) any or all of the Allowed Priority Tax Claims at any time up until December 31, 2001. 3. Treatment of Allowed Priority Claims (Class A-1). Allowed Priority Claims within Class A-1 consist of Claims entitled to priority in payment under Section 507(a)(3)-(a)(7) of the Bankruptcy Code. The Debtor estimates that the total amount of Allowed Priority Claims against the Debtor as of the Effective Date will be nominal. Such Claims will be paid in full by no later than the later of the Effective Date or fifteen days after allowance of the Claims by Final Order. -52- 62 4. Treatment of Allowed Secured Claim of GMAC (Class B-1). Class B-1 is comprised of the Allowed Secured Claim of General Motors Acceptance Corporation ("GMAC"). GMAC has asserted two different Secured Claims in the Case in the aggregate amount of in excess of $21,908.07. One of the Claims (totaling in excess of $6,044.97) was filed after the Bar Date and will be opposed accordingly. The remaining Claim is based upon a truck loan which was made in 1994. The Plan proposes to cure all outstanding monetary defaults to GMAC, reinstate the obligations evidenced in the applicable loan documents supporting such Claim, and to resume payments thereafter in accordance with such loan documents. 5. Treatment of Allowed Secured Claim of INCC (Class B-2). Class B-2 is comprised of the Allowed Secured Claim of Internationale Nederlanden (U.S.) Capital Corporation ("INCC"). INCC has asserted a Secured Claim in the Case in the amount of $15,367,257.56, based upon financing which INCC provided to WRT prior to the Petition Date. The INCC indebtedness is secured by a blanket lien on virtually all of WRT's oil and gas properties, including, but not limited to, wells and equipment located on such properties and the production thereof. Based upon their review of the INCC financing transaction, however, the Debtor and DLBW believes that the lien asserted by INCC on the Debtor's interest in West Cote Blanche Bay is avoidable under Sections 544, 547 and 548 of the Bankruptcy Code. DLBW and ING (U.S.) Capital Corporation (successor to INCC) ("ING") have reached an agreement in principle providing for the consensual treatment of INCC's Claim and for availability of a new loan to New WRT. The agreement remains subject to the completion of definitive documentation, corporate approvals and certain other conditions. The basic terms and conditions of the agreement are set forth on Exhibit "I" hereto and may be summarized as follows: (a) INCC's Claim will be an Allowed Secured Claim in the approximate amount of $17.7 million which will be satisfied by a cash payment in full on the Effective Date. This Allowed Secured Claim consists of $15 million of principal outstanding as of the Petition Date, approximately $2.3 million of interest at the non- default contract rate (estimated as of a July 1, 1997 Effective Date), and approximately $475,000 of expenses (estimated as of January 1997) (allowable under Section 506(b) of the Bankruptcy Code) and represents the Debtor's belief that the value of INCC's interest in the Debtor's Assets (other than WCBB) exceeds the amount of INCC's Claim. INCC has asserted that it is entitled to be paid interest at the default rate, and that its allowable expenses are in excess of $400,000. Nonetheless, INCC has indicated that it will accept the Plan notwithstanding the lower payments set forth above. (b) ING's proposal to lend to New WRT (to be finalized shortly in a formal commitment to DLB) contemplates, among other things, a term loan to New WRT of a principal amount of $15 million which will (i) mature two (2) years after the Effective Date, (ii) require three (3) $1 million installments of -53- 63 principal to be paid at the end of September 1998, December 1998 and March 1999, respectively, (iii) bear interest at either LIBOR plus three percent (3%) or ING's fluctuating "reference rate" plus 1.25%, at the option of New WRT, (iv) be secured by a first lien covering substantially all of New WRT's Assets, and (v) such other terms consistent with Exhibit "I" hereto. 6. Treatment of Allowed Secured Claim of MC Bank & Trust Company (Class B-3): Class B-3 is comprised of the Allowed Secured Claim of MC Bank & Trust Company ("MCBT"). The Debtor scheduled MCBT as having a non-disputed, non- contingent Secured Claim as of the Petition Date of $215,130. MCBT has not filed a proof of claim in the Case; therefore, taking into account payments which have been made by the Debtor for installments falling due post-petition, MCBT's Allowed Secured Claim as of the filing of this Disclosure Statement is approximately $200,000. MCBT's Claim is secured by Collateral in the form of an office complex located in Lafayette, Louisiana, such Collateral having a value sufficient to support the entire outstanding balance of the MCBT indebtedness as an Allowed Secured Claim. Accordingly, the Plan proposes to cure all outstanding monetary defaults under the applicable loan documents to MCBT, and to reinstate WRT's obligations to MCBT and continue to make payments to MCBT pursuant to such loan documents from and after the date of cure. 7. Treatment of Allowed Secured Claim of Tricore (Class B-4). Class B-4 is comprised of the Allowed Secured Claim of Tricore Energy Venture, L.P. ("Tricore"). Tricore has asserted a Secured Claim in the Case in an amount of "an amount not exceeding $9,223,741", based upon certain alleged defaults which occurred under a certain Joint Venture Agreement between Tricore, WRT, and Stagg Energy Corporation. The secured nature of such Claim is presumably premised upon certain Collateral Assignments made subject to the terms and provisions of the Joint Venture Agreement, which were provided by WRT as to certain oil and gas interests in the West Cote Blanche Bay Field. WRT has initiated an adversary proceeding against Tricore seeking a declaration that the security interests or liens pursuant to such Collateral Assignments are invalid and of no effect, or alternatively avoidance of such security interests or liens pursuant to Sections 544 and/or 547 of the Bankruptcy Code. Nevertheless, pursuant to the Plan, to the extent that Tricore obtains an Allowed Secured Claim, WRT proposes to pay such Claim in full by no later than the Effective Date or fifteen days after allowance of such Claim by a Final Order. 8. Treatment of Allowed Secured Claim of Woodforest National Bank (Class B-5). Class B-5 is comprised of the Allowed Secured Claim of Woodforest National Bank ("WFNB"). WFNB has asserted a Secured Claim in the Case in the amount of $9,696, based upon certain truck loans. The vehicles supporting the secured nature of such Claim are of a value sufficient to support the total indebtedness to WFNB as an Allowed Secured Claim. Therefore, pursuant to the Plan, WRT proposes to cure all existing monetary defaults under the applicable loan -54- 64 documents supporting the WFNB Claim, to reinstate the obligations thereunder, and to continue making payments thereafter in accordance with such loan documents. 9. Treatment of Allowed Secured Claim of The Woodlands Corporation (Class B-6). Class B-6 is comprised of the Allowed Secured Claim of The Woodlands Corporation ("TWC"). TWC has asserted a Secured Claim in the amount of $250,000, the portion of TWC's total Claim for rejection damages under Section 365 of the Bankruptcy Code attributable to rental obligations associated with WRT's lease of office space in The Woodlands, Texas, and allegedly secured by the value of certain office equipment and furniture pledged by WRT. The value of such Collateral is substantially less than the asserted Secured Claim; therefore, WRT will object to TWC's Secured Claim to the extent that such Claim amount exceeds the value of the Collateral. To the extent that the Claim is allowed as an Allowed Secured Claim, however, the Plan proposes to pay such Claim in full by no later than the later of the Effective Date or fifteen days after the allowance of such Claim by Final Order. 10. Treatment of Allowed Secured Claims of Oil & Gas Lien Claimants (Classes C-1 through C-16). Classes C-1 through C-16 consist of Claimants who have asserted Secured Claims based upon statutory oil and gas Liens under the provisions of the Louisiana Oil Well Lien Act and/or the Texas Property Code. The purpose of the classification of oil and gas Liens in the foregoing manner is to assure that the Claim of each oil and gas lien holder is determined solely in the context of the Debtor's particular Asset as to which each Claim has been asserted. Therefore, based on proofs of claim filed in the Chapter 11 Case, public reports reflecting oil and gas liens filed in South Louisiana and recorded documents in the various Parishes in which the Debtor's assets are located, the Debtor has determined that the Creditors asserting Liens in each Class are as set forth in Exhibit "D." Exhibit "D" expressly excludes from the listing of Lien Claimants in each particular Class all those Lien Claimants which the Debtor, in its initial review, has determined do not hold validly perfected Liens in the particular oil and gas field in question. The Debtor has not completed its review of the Claims and Liens asserted by Lien Claimants who are listed on Exhibit "D", however, and the Debtor reserves the right to dispute in full or in part the Claims and/or Liens of such listed Lien Claimants. The Liens asserted by the holders of Claims in these Classes are, in the Debtor's opinion, junior in priority to the Lien asserted by INCC to the extent that such Lien is valid and perfected. As a result, each Claim in these Classes is secured only to the extent of the value of the Asset against which the Lien securing the Claim is asserted after taking into account the Lien asserted by INCC. The determination of whether the Lien asserted by INCC should be applied in whole or in part to -55- 65 each Asset against which such Lien is asserted and, if the Lien is to be applied in part, the method by which the Lien is to be allocated to such Assets, would require complicated, expensive and time-consuming litigation involving issues such as marshaling and the equitable power of the Bankruptcy Court. The results of such litigation cannot be predicted, but range from a determination that each Claim allegedly secured by an oil and gas Lien is fully secured, partially secured or fully unsecured. Based upon the Liquidation Analysis attached as Exhibit "B" hereto, the Debtor has arrived at a provisional determination of the amount of Collateral value that would be available to satisfy the holders of Secured Claims based upon statutory oil and gas Liens. However, that Liquidation Analysis makes certain assumptions in arriving at the value of the Debtor's oil and gas fields. For example, as more fully set forth in the Liquidation Analysis, it is assumed that the purchaser of those fields would make certain capital investments in order to maximize field production. Based upon that assumption, the Liquidation Analysis valued the "back-in" component at the highest cash bid made for those fields at $16.2 million, and the total bid at $36.2 million. If, however, it is assumed instead that no such capital investments were made, the "back-in" component of the calculated value would be eliminated, and the value of those fields would decline to $20 million, resulting in little or no Collateral value available to satisfy the Allowed Secured Claims based upon statutory oil and gas Liens. The chart set forth on the following page reflects such valuation without capital investment. The Debtor has proposed under the Plan that, in consideration of the risks involved in potential litigation regarding Collateral value, and to spare the estate the costs of such litigation, each holder of an Allowed Secured Claim will be entitled to (i) in Class C-1, C-3, C-4, C-6, C-7-A, C-8 and C-10 a cash payment equal to the amount of such holder's Allowed Secured Claim (excluding therefrom all interests, fees and expenses included therein), (ii) in Class C-7-B a cash payment equal to 75% of the amount of such holder's Allowed Secured Claim (excluding therefrom all interests, fees and expenses included therein), and (iii) in Classes C-2, C-5, C-9, C-12, C-13, C-15 and Class C-16 a cash payment equal to 50% of the amount of such holder's Allowed Secured Claim (excluding therefrom all interests, fees and expenses included therein). In each case, each holder of an Allowed Secured Claim in Classes C-1 through C-10, C-12, C-13, C-15 and C-16 may elect on its Ballot to receive, in lieu of its cash payment, the number of shares of New WRT Common Stock obtained by dividing the amount of such cash payment by a purchase price of $3.50 per share. For Classes C-2, C-5, C-7-B, C-9, C-12, C-13, C-15 and C-16, "Allowed Secured Claim" should be determined as the allowable amount of such Secured Claim with the exception of a valuation analysis of the Secured Claimant's interest in the Debtor's interest in the underlying Collateral, which value is defined under the Plan to be 50% or 75%, as the case may be, of the otherwise allowable amount of the asserted Secured Claim. There are two Classes of oil and gas Lien Claimants excluded from the treatment described above. The first is Class C-14, the Class consisting of West Cote Blanche Bay Field Claims. The Debtor believes that the Lien of INCC on West Cote Blanche Bay is avoidable under Sections 544, 547 and 548 of the Bankruptcy Code. As a result, the Debtor believes that no part of the INCC Lien should be applied against that Asset. Therefore, the value of the Debtor's interest in West Cote Blanche Bay is sufficient to support the aggregate amount of allowable Claims in Class C-14. The -56- 66 plan proposes that each holder of an Allowed Claim in Class C-14 will, at such holder's election, either receive a cash payment equal to the amount of such holder's Allowed Secured Claim or the number of shares of New WRT Common Stock obtained by dividing such payment by a purchase price at $3.50 per share. The second exception is Class C-11. Class C-11 consists of oil and gas Lien Claims filed with respect to the Rankin Field in Harris County, Texas, which has been sold pursuant to an Order previously entered in the Chapter 11 Case. The Allowed Secured Claims in this Class will be paid from the sale proceeds currently held in a separate account. 11. Treatment of Allowed Convenience Claims (Class D-1). Class D-1 is comprised of Allowed Unsecured Claims in the amount of $2,500 or less. The Plan proposes to pay each holder of an Allowed Convenience Claim 50% of the allowed amount of such Claim. The estimated amount of all Class D-1 Claims is $257,000. 12. Treatment of Allowed Tort Claims (Class D-2). Class D-2 is comprised of Allowed Unsecured Claims premised upon certain legally defined tort causes of action including, but not limited to, Claims arising out of or related to personal injuries, wrongful death, physical damage to property and rights of contribution and indemnity arising therefrom, together with all resulting or related damages as to any such Claims which may be asserted pursuant to applicable laws. The aggregate amount of such Claims which have been asserted is $1,024,000. WRT has had, and continues to have, multiple insurance policies designed to protect against injuries sustained by WRT's employees and contractors and to damage to property. Accordingly, the Plan proposes to satisfy Allowed Claims in Class D-2 first out of any insurance proceeds which would be available to satisfy such Claims and second from WRT's estate. In this way, WRT will insure maximization of its rights under existing insurance policies in its favor while at the same time minimizing the total exposure from the estate for the ultimate benefit of all other Creditors. In order to provide distribution to holders of Allowed Class D-2 Claims on a timely basis, the Plan proposes to provide certain interim distributions throughout the course of the post-confirmation period until such time as all Allowed Claims in relation to a particular insurance policy are finally resolved at which time a final distribution to such Claimants shall occur. 13. Treatment of Allowed General Unsecured Claims (Class D-3). Class D-3 is comprised of Unsecured Claims in excess of $2,500 which are not otherwise treated within the Tort Claims Class (Class D-2) or the Shareholder Litigation Claims Classes (Classes D-4, E-2 and E-3). The aggregate amount of Claims estimated to be allowed in such Class is approximately $119,000,000. The Plan proposes to provide to each holder of an Allowed General Unsecured Claim (a) a Pro Rata Share of the 10,000,000 shares of New WRT Common Stock to be distributed to Class D-3 as a whole; (b) a certificate representing the holder's Pro Rata Percentage of the Litigation Entity Interests; and (c) the opportunity to participate in a Rights Offering for the -57- 67 purchase of 3,800,000 additional shares of New WRT Common Stock (subject to an affirmative vote in favor of the Plan by holders of no less than two-thirds (2/3) in amount of the Claims entitled to be voted and which actually vote within Class D-3). First, with respect to the aggregate distribution of the 10,000,000 shares of New WRT Common Stock, the Plan proposes to provide an initial distribution and interim distributions of such Stock during the course of the resolution of all Disputed Unsecured Claims, which Claims shall potentially consist of, among other things, Deficiency Claims of Secured Creditors, Claims obtained by Creditors against whom preference actions have been successfully litigated and Claims held by parties to executory contracts and unexpired leases which have been rejected by the Debtor. Once all Allowed General Unsecured Claims have been finally determined, a final distribution will occur at which time the balance of the 10,000,000 shares will be distributed accordingly. Next, with respect to the Litigation Entity Interests, Article 33.16 provides, in conjunction with the Litigation Agreement to be executed in accordance therewith, that the Litigation Entity will be established. New WRT shall hold twelve percent (12%) of the Litigation Entity Interests, and holders of Allowed Claims in Class D-3 shall hold the remaining eighty-eight percent (88%) of the Litigation Entity Interests. The Litigation Entity shall retain and preserve all of the Debtor's Causes of Action, with the exception of the Marine Equipment Causes of Action and the Tri-Deck Causes of Action. It shall be funded by a one-time capital contribution of $3.0 million (raised as part of the Rights Offering), and shall be empowered to take all actions deemed appropriate to prosecute such Causes of Action and to thereafter make distributions of any proceeds recovered to holders of the Litigation Entity Interests in accordance with the percentage interests reflected above. The Litigation Equity shall be managed by a litigation agent selected with the approval of the Committee. The Bankruptcy Court shall retain jurisdiction over the Litigation Entity and the Causes of Action prosecuted by it. Finally, provided that holders of no less than two-thirds (2/3) in dollar amount of Claims in Class D-3 entitled to vote and who actually vote, vote to accept the Plan, the holders of Allowed General Unsecured Claims will also receive the right to participate in an offering of 3,800,000 additional shares of New WRT Common Stock, such shares to be offered at a price of $3.50 per share. The Rights Offering shall take place in three segments. In the first segment, as soon as is practicable, but in no event greater than five (5) Business Days after the Subscription Rights Record Date, each holder of an Allowed Claim in Class D-3 or a Disputed Claim within or potentially within Class D-3 determined as of the Subscription Rights Record Date shall be sent a Subscription Rights Election Form which may be used by such holder to elect to participate in the Rights Offering by promising to purchase its Interim Pro Rata Share of New WRT Subscription Common Stock at $3.50 per share. To exercise the right to participate, the Claimant must: (i) return a duly completed Subscription Rights Election Form to the Disbursing Agent so that it is received by the Disbursing Agent by no later than the Subscription Rights Election Deadline, and (ii) pay to the Disbursing Agent on or before the Subscription Rights Election Deadline an amount equal to the Subscription Purchase Price, calculated as each Claimant's Interim Pro Rata Share of New WRT Subscription Common Stock times $3.50 per share. Payment may take the form of either a wire transfer to the -58- 68 Subscription Rights Reserve Account in accordance with the wire instructions set forth on the Subscription Rights Election Form, or by bank or cashier's check drawn on a United States bank delivered to the Disbursing Agent along with the duly executed Subscription Rights Election Form. To ensure that the Rights Offering is fully subscribed, DLBW has committed, under the Plan and pursuant to its contractual commitment in the Commitment Agreement, to exercise all of its New WRT Subscription Rights, all Unexercised Subscription Rights, other than Unexercised Disputed Subscription Rights, and all Disputed New WRT Subscription Rights which are not otherwise subscribed to by holders of Allowed Class D-3 Claims pursuant to Article 29.6(b) of the Plan. DLBW shall thereafter pay to the Disbursing Agent by no later than the Effective Date the corresponding Subscription Purchase Price attributable to the exercise of all such Rights. All holders of Allowed Claims in Class D-3 as of the Subscription Rights Record Date shall have the option of oversubscribing to the Rights Offering with respect to Disputed New WRT Subscription Rights by (i) returning the duly completed Subscription Rights Election Form to the Disbursing Agent by the deadline identified above, which Form must indicate thereon the dollar amount of such oversubscription (the "Oversubscription Amount"), and (ii) paying to the Disbursing Agent on or before the Subscription Rights Election Deadline an amount equal to such holder's Oversubscription Amount (and in addition to such holder's Subscription Purchase Price), such payment to be made by one of the same methods specified above as to payment of the Subscription Purchase Price. In the event that the Unexercised Disputed Subscription Rights are oversubscribed by holders of Allowed Class D-3 Claims (the "Oversubscribing Creditors"), the Disbursing Agent shall return such Excess Oversubscription to Oversubscribing Creditors by paying to each such Creditor an amount of Cash equal to the Excess Oversubscription Amount. In the second segment, on the Effective Date of the Plan, or as soon thereafter as is reasonably practicable but in no event more than ten (10) Business Days after the Effective Date, the Disbursing Agent will distribute to the Claimants who have exercised their Subscription Rights ("Exercising Claimants") New WRT Common Stock purchased thereby to the extent of their Allowed Claims in Class D-3, and to Oversubscribing Creditors such Oversubscribing Creditor's Pro Rata Disputed Percentage of the Disputed New WRT Subscription Common Stock. Finally, in the third segment, to the extent that an Exercising Claimant's Class D-3 Claim has not been Allowed as of such distribution date, the Disbursing Agent shall retain in a Disputed Claims Reserve Account both the Disputed New WRT Common Stock otherwise distributable to the Exercising Claimant on account of the Disputed Claim and the Disputed Subscription Purchase Price paid by such Exercising Claimant. Pursuant to the Plan, the Disbursing Agent shall pay to New WRT on the Effective Date an amount equal to the aggregate amount of all Disputed Subscription Purchase Prices. Thereafter, the Disbursing Agent will periodically make additional interim distributions of New WRT Common Stock to account for the Disputed Claim of an Exercising Claimant that has subsequently become an Allowed Claim, in which case the Disputed Subscription Purchase Price paid by such Exercising Claimant will be released to all Oversubscribing Creditors on a pro rata basis determined with respect to the Oversubscription Amounts paid by such Creditors. If, instead, a Disputed Claim is disallowed, then the New WRT Common Stock reserved for such -59- 69 Claim amount shall be distributed to the Oversubscribing Creditors on the same pro rata basis and the Disputed Subscription Purchase Price previously paid by such Exercising Claimant shall be returned to such Exercising Claimant. As stated previously, however, if holders of no less than two-thirds ( 2/3) in amount of Class D-3 Claims entitled to vote who actually vote on the Plan fail to accept the Plan, then the Rights Offering will not occur and instead DLBW will purchase the 3,800,000 shares of New WRT Subscription Common Stock at a price of $3.50 per share. 14. Treatment of Allowed Securities Litigation Claims Based Upon Senior Note Ownership (Class D-4). Class D-4 Claims consist of Claims based on Senior Note ownership which have been asserted in the Securities Litigation. At this time there has been no certification of a class of plaintiffs in the Securities Litigation. Nevertheless, a "Class Proof of Claim" has been asserted by counsel for the existing plaintiffs on behalf of potential Plaintiffs. The Class Proof of Claim asserts a total claim of approximately $100,000,000, which would include Claims attributable to Classes E-2 and E-3 as well as Class D-4. WRT does not believe that any of these Claims are valid. Additionally, WRT has or will shortly be filing an objection to the Class Proof of Claim, based upon the non- existence of a certified class of plaintiffs to date. However, to the extent that any of the Class D-4 Claims become Allowed Claims, the Plan provides to holders of such Claims, on a pro rata basis, an aggregate distribution of New WRT Warrants equal to 2% of the New WRT Common Stock to be issued under the Plan, provided Classes D-1, D-2 and D-3 vote to accept the Plan. If any of the before-mentioned Classes rejects the Plan, though, then the holders of Claims within Class D-4 will receive no distribution under the Plan. As set forth in Article 1.110 of the Plan, the New WRT Warrants shall have an exercise period of five (5) years from the Effective Date and shall provide to the holders thereof the right, per each New WRT Warrant, to purchase one share of New WRT Common Stock for a purchase price of $10.00. 15. Treatment of Interests of Holders of Preferred Stock (Class E-1) Class E-1 consists of holders of Preferred Stock. Provided that Classes D-1, D-2, D-3 and D-4 vote to accept the Plan, holders of Allowed Interests in Class E-1 shall receive on a pro rata basis an aggregate distribution of New WRT Warrants equal to 1% of the New WRT Common Stock to be issued pursuant to the Plan. However, if any one of the before-mentioned Classes rejects the Plan, the holders of Interests in Class E-1 will receive no distribution under the Plan. In either case, existing shares of WRT Preferred Stock will be canceled on the Effective Date. 16. Treatment of Allowed Securities Litigation Claims Based Upon Preferred Stock Ownership (Class E-2) Class E-2 Claims consist of Claims based on Preferred Stock ownership which have been asserted in the Securities Litigation. At this time there has been no certification of a class of plaintiffs -60- 70 in the Securities Litigation. Nevertheless, a "Class Proof of Claim" has been asserted by counsel for the existing plaintiffs on behalf of potential plaintiffs. The Class Proof of Claim asserts a total Claim of approximately $100,000,000, which would include Claims attributable to Classes D-4 and E-3 as well as Class E-2. WRT does not believe that any of these Claims are valid. Additionally, WRT has or will shortly be filing an objection to the Class Proof of Claim, based upon the non-existence of a certified class of plaintiffs to date. However, to the extent that any of the Class E-2 Claims become Allowed Claims, the Plan provides to holders of such Claims, on a pro rata basis, an aggregate distribution of New WRT Warrants equal to 1% of the New WRT Common Stock to be issued pursuant to the Plan, but only if Classes D-1, D-2, D-3, D- 4, and E-1 vote to accept the Plan. In the event that any one of the before- mentioned Classes should reject the Plan, however, then Claimants in Class E-2 will receive no distribution under the Plan. 17. Treatment of Interests of Holders of Common Stock and Allowed Securities Litigation Claims Based Upon Common Stock Ownership (Class E-3) Class E-3 consists of holders of Common Stock and holders of Claims based on Common Stock ownership asserted in the Securities Litigation. With respect to the Securities Litigation Claims, while at this time there has been no certification of a class of plaintiffs, a "Class Proof of Claim" has been asserted by counsel for the existing Plaintiffs on behalf of potential plaintiffs. The Class Proof of Claim asserts a total Claim of approximately $100,000,000, which would include Claims attributable to Classes D-4 and E-2 as well as Class E-3. WRT does not believe that any of the Class E-3 Securities Litigation Claims are valid. Additionally, WRT has or will shortly be filing an objection to the Class Proof of Claim, based upon the non-existence of a certified class of plaintiffs to date. With respect to all Allowed Interests and Claims which become Allowed Claims within Class E-3, however, the Plan provides to holders of such Interests and Claims, on a pro rata basis (based upon the number of shares of Common Stock currently owned or bought or sold), an aggregate distribution of New WRT Warrants equal to 1% of the New WRT Common Stock to be issued under the Plan, but only if Classes D-1, D-2, D-3, D-4, E-1, and E-2 vote to accept the Plan. In the event that any one of the before- mentioned Classes should reject the Plan, however, the Claimants in Class E-3 will receive no distribution under the Plan. In any event, on the Effective Date, all outstanding shares of WRT Common Stock shall be canceled. 18. Treatment of Interests of Holders of WRT Warrants (Class E-4) The holders of WRT Warrants in Class E-4 will receive no distribution under the Plan and their rights will be extinguished. 19. Treatment of Interest of Holders of WRT Stock Options (Class E-5) The holders of WRT Stock Options in Class E-5 will receive no distribution under the Plan and their rights will be extinguished. -61- 71 D. IMPAIRED CLASSES Classes B-2, B-4, B-6, C-1 through C-16, D-1 through D-4, and E-1 through E-5 consist of impaired Claims and Interests within the meaning of Section 1126 of the Bankruptcy Code. E. DISPUTED AND UNLIQUIDATED CLAIMS 1. Disputed Secured Claims (Other than Oil & Gas Lien Claimants) Several Secured Claims have been filed in the case as to which the Debtor has or will shortly be filing objections and/or adversary proceedings, as appropriate, in opposition thereto. Of such Claims, with the exception of Secured Claims which have been asserted by Claimants alleging security in the form of oil and gas Liens (and as to which special provisions are contained within the Plan), the following are identified for discussion herein due to their magnitude and/or the fact that the Plan has not provided for their separate Class B classification: PLEASE TAKE NOTICE: ALL OF THE FOLLOWING IDENTIFIED CLAIMS HAVE BEEN FILED AS SECURED CLAIMS IN THE DEBTOR'S CHAPTER 11 CASE. ALL OF THE BELOW- MENTIONED SECURED CLAIMS HAVE BEEN OR WILL SHORTLY BE OBJECTED TO IN FULL AS SECURED CLAIMS AND, WITH THE EXCEPTION OF THE SECURED CLAIMS OF TRICORE ENERGY VENTURE, LP ("TRICORE") AND THE WOODLANDS CORPORATION, NO SEPARATE SECURED CLASSES HAVE BEEN ESTABLISHED FOR THEM IN THE PLAN. NOTWITHSTANDING THE ESTABLISHMENT OF A CLASS FOR THE SECURED CLAIM OF TRICORE, THE DEBTOR, AS DISCUSSED BELOW, DISPUTES THE VALIDITY OF TRICORE'S ASSERTED SECURED CLAIM. SUCH CLAIMS ARE TREATED IN THE PLAN AS UNSECURED CLAIMS AND SHALL ENTITLE THE HOLDERS THEREOF, IF AND TO THE EXTENT THAT SUCH CLAIMS ARE DETERMINED TO BE ALLOWED UNSECURED CLAIMS, TO DISTRIBUTIONS IN ACCORDANCE WITH CLASSES D-1 OR D-3, AS THE CASE MAY BE. a. AFCO Credit Corporation. AFCO Credit Corporation ("AFCO") filed a Secured Claim in the amount of $4,241.43 based upon gross unearned premiums, if any, under a premium financing agreement dated April 9, 1990. The Claim is allegedly secured by return premiums and coverage payments under the insurance policy financed. Such policy is no longer in existence, however, such that there is no basis for an Allowed Secured Claim. Furthermore, AFCO's Claim is barred by the relevant statute of limitations. Therefore, a separate Secured Class has not been designated for AFCO's Secured Claim in the Plan. b. Amerada Hess Corporation. Amerada Hess ("Amerada") filed a Secured Claim in the amount of $301,758.25 based upon certain alleged unpaid amounts associated with Amerada's asserted net profit interest in the Lac Blanc Field, asserted net profits and working interest in the Exxon Fee #23 well, and asserted production expenses associated with State Lease 8396. Amerada's proof of claim reflects no basis for its secured nature, and the Debtor is of the opinion that no such unavoidable basis exists. Therefore, the Debtor has or will shortly be objecting to Amerada's Secured Claim as a Secured Claim, among other things. Therefore, no separate Class has been provided for Amerada's Secured Claim in the Plan. -62- 72 c. Baker Hughes Process Systems. Baker Hughes Process Systems ("Baker Hughes") filed a Secured Claim in an amount in excess of $81,000 based upon certain equipment furnished to WRT under a lease agreement dated December 15, 1995. The Debtor's interest in such equipment is as a lessee; the Debtor has no present proprietary interest in such equipment (although the Debtor does have the option to purchase such equipment for additional consideration and has filed a motion to assume the lease agreement and to exercise such purchase option). Therefore, the Debtor has or will shortly be objecting to Baker Hughes Secured Claim as to both its amount and asserted secured nature in the event that Baker Hughes' Claim is not satisfied in the course of assumption and exercise of the option to purchase. Correspondingly, no separate Secured Class has been established in the Plan for Baker Hughes' Claim. d. Costilla Petroleum Corporation. Costilla Petroleum Corporation ("Costilla") filed a Secured Claim in the amount of $168,489.63 based upon certain unidentified joint interest billings and accounts receivable. Costilla's Claim is allegedly secured by a "contractual and/or statutory non- operators lien on sale of production." The Debtor has or will shortly be filing an objection to the secured nature of the Claim as no contractual lien was provided by WRT to Costilla and Costilla's statutory lien, if valid, is avoidable pursuant to Section 545 of the Bankruptcy Code. For the same reason, a separate Secured Class was not established for Costilla's Claim in the Plan. e. Floris Fay Forgey Driskill, et al. Floris Fay Forgey and several additional individuals (the "Driskill Group") collectively filed a Secured Claim in the case for $129,570.03. The Driskill Group's Secured Claim is allegedly based upon a statutory lessor's lien. Such lien, to the extent valid, is avoidable pursuant to Section 545 of the Bankruptcy Code. Therefore, the Debtor has or will shortly be objecting to the Driskill Group's Claim on such basis, among possible others, and no separate Secured Class has been designated in the Plan for it. f. Duck Lake Acquisition Partners. Duck Lake Acquisition Partners, LP ("Duck Lake") has filed a Secured Claim for $318,377.12 based upon certain alleged unpaid royalties associates with the Lac Blanc Field. Duck Lake's Claim is allegedly secured by a statutory lessor's lien. Such lien, if valid, is avoidable pursuant to Section 545 of the Bankruptcy Code. Accordingly, the Debtor will be objecting to such Claim on that basis, among possible others, and no separate Secured Class has been provided for Duck Lake's Claim in the Plan. g. First Premium Services, Inc. First Premium Services, Inc. ("First Premium") filed a Secured Claim in the amount of $69,857.20 based upon amounts allegedly owing by WRT under an insurance financing agreement related to insurance coverage between 1995 and 1996. The Claim is allegedly secured by return premiums and coverage payments under the insurance policy financed. WRT paid such amount in full during the course of the Chapter 11 Case, however, such that no further liability exists. Accordingly, a separate Secured Class has not been designated for First Premium's Secured Claim either. h. Ford Motor Credit Company. Ford Motor Credit Company ("FMCC") filed a Secured Claim in the amount of $25,316.92 based upon its alleged interest in a vehicle leased by -63- 73 WRT prior to the Chapter 11 Case. During the course of the Chapter 11 Case, the FMCC lease was rejected and the automobile at issue was returned to FMCC. Therefore, there is no basis for an Allowed Secured Claim by FMCC, and a separate Secured Class for FMCC's Claim has not be designated. i. Freeport-McMoRan Oil & Gas Co. Freeport-McMoRan Oil & Gas Co. ("Freeport") filed a Secured Claim in the amount of $589,505.00 based upon certain alleged final adjustments due under a Purchase and Sale Agreement dated as of June 14, 1993. The Claim has been asserted as a Secured Claim based upon an alleged vendor's lien under Louisiana law. The Debtor has or will shortly be objecting to Freeport's Secured Claim for the following reasons, among possible others: (i) failure to timely assert a final settlement statement as required by the Purchase and Sale Agreement, (ii) Freeport's vendor's lien, to the extent valid, is avoidable pursuant to Section 545 of the Bankruptcy Code. Therefore, no separate Secured Class for Freeport's Secured Claim has been designated in the Plan. j. GE Capital Corporation. GE Capital Corporation ("GE") filed a Secured Claim in the amount of $48,017.06 based upon certain equipment leased to WRT beginning in 1993. The Debtor's interest in the equipment held under the GE leases is as a lessee; the Debtor has no propriety interest in such equipment to form the basis for an allowable Secured Claim in favor of GE. Furthermore, the Debtor assumed the GE leases during the course of the Chapter 11 case, all existing monetary defaults at that time, and has been current on lease payments to date. Therefore, the Debtor has or will be objecting to GE's Secured Claim as to both its amount and asserted secured nature. Correspondingly, no separate Secured Class has been established within the Plan for GE's Claim. k. Robert H. & Linda McGill Griffin. Robert H. Griffin and Linda McGill Griffin (the "Griffins") filed a Secured Claim in the amount of $133,698.51 based upon WRT's alleged failure to pay in full a purchase price for certain oil and gas interests in the Napoleonville Field. The Griffins' Claim is allegedly secured by a vendor's lien under applicable state law. The Debtor has or will shortly be filing an objection to the Griffins' Claim in full due to lack of any contractual obligation on the part of WRT to pay any amounts to the Griffins. Furthermore, to the extent that the Griffins may have obtained a statutory vendor's lien, such lien is avoidable pursuant to Section 545 of the Bankruptcy Code. Consequently, no separate Secured Class in the Plan is established for the Griffins' Claim. l. Milam Royalty Corporation. Milam Royalty Corporation ("Milam") filed an Unsecured Claim in the case for $1,204,513.00 based upon certain adjustments allegedly owing in connection with WRT's acquisition and operation of certain oil and gas interests in the East Hackberry Field. While the claim is identified as unsecured in the proof of claim, the proof of claim also asserts that it is to be considered a Secured Claim to the extent that Milam may have set-off rights against the Debtor, and Milam has also asserted rights of recoupment. The Debtor is unaware of any such set-off or recoupment rights and, therefore, has or will shortly be objecting to Milam's Claim as a Secured Claim, among possible other reasons. Correspondingly, no separate Secured -64- 74 Class has been designated in the Plan for Milam's Claim. Notwithstanding the above, the Debtor acknowledges that nothing contained in this Disclosure Statement or the Plan shall result in a waiver by or a prohibition of Milam regarding the assertion of any setoff and/or recoupment rights it may possess or to the exercising of such rights, as permitted by law, if such rights exist. m. Mobil Oil Exploration & Production. Mobil Oil Exploration & Production ("Mobil") filed a Secured Claim in the amount of $13,100,000, plus certain allegedly unknown additional damages, based upon contingent liability which Mobil asserts will result if and when CXY Energy Inc. ("CXY") earns certain farmout acreage from WRT in the Lac Blanc Field (and as to which CXY has contractually obligated itself to assign to Mobil at such time). The largest components of such Claim consist of a contingent reimbursement piece of $12 million associated with the alleged cost of eliminating INCC's Lien on WRT's Lac Blanc Field interests and a contingent reimbursement piece of $1.1 million associated with certain allegedly unpaid oil and gas Lien Claim in the Field. Mobil's basis in asserting the Claim as secured in nature is an alleged right of recoupment under bankruptcy and Louisiana law. The Debtor has or will shortly be objecting to Mobil's Claim as secured for the following reasons, among possible others: (i) there is no contractual privity between the Debtor and Mobil to support its Claim; (ii) Mobil's Claim is contingent in nature, at best; (iii) Mobil's Claim, to the extent of $13.1 million, is duplicative of INCC's Secured Claim and the oil and gas Lien Claims associated with the Lac Blanc Field, all of which are already provided for within the Plan; and (iv) Mobil has asserted no valid, unavoidable basis for the secured nature of its Claim. As a result of the foregoing, no separate Secured Class is designated in the Plan for Mobil's Claim. n. NationsBank of Texas. NationsBank of Texas ("NationsBank") filed a Secured Claim in the amount of $400,000.00 based upon 4 outstanding letters of credit (the "LCs") which NationsBank issued on behalf of WRT to cover certain contingent plugging and abandonment liabilities. NationsBank obtained a pledge of certain of WRT's bank accounts to secure repayment of the LCs to NationsBank in the event of a call on the LCs by the beneficiaries thereto. NationsBank has recently informed the Debtor that it will not be renewing the LCs for an additional year after the end of January 1997. Therefore, the Debtor has obtained substitute LCs from another lending institution to replace the NationsBank LCs. Now that such replacements have been obtained, NationsBank's contingent liability has been eliminated such that NationsBank will have no basis for a Claim whether Secured or Unsecured. o. Eugene W. Russell. Eugene W. Russell ("Russell") filed a Secured Claim in this case for $28,790.15 based upon WRT's alleged failure to pay in full a purchase price associated with certain oil and gas interests in the Napoleonville Field. Russell has based the secured nature of his Claim on an alleged statutory vendor's lien. Such lien to the extent valid, is avoidable pursuant to Section 545 of the Bankruptcy Code. Therefore, the Debtor has or will shortly be objecting to Russell's Claim on such basis, among possible others, and no separate Secured Class is established for the Claim in the Plan. p. Russell Resources, Inc. Russell Resources, Inc. ("Russell Resources") filed a Secured Claim in the case for $135,040.74, based upon an alleged failure on the part of WRT to pay in full -65- 75 a purchase price for certain oil and gas interests in the Napoleonville Field (the "Napoleonville Piece"), plus $5,983.00, based upon certain alleged unpaid overriding royalties associated with the Debtor's oil and gas interests in the Abbeville Field (the "Abbeville Piece"). Russell Resources has asserted its Claim as secured as to the Napoleonville Piece based upon an alleged vendor's lien. Such lien, to the extent valid, is avoidable pursuant to Section 545 of the Bankruptcy Code. Russell Resources has presented no basis for the secured nature of the Abbeville Piece, and the Debtor and DLBW are aware of no such unavoidable basis. Therefore, the Debtor has or will shortly be objecting to the entirety of Russell Resource's Claim as secured, among possible other reasons, and a separate Secured Class for its Claim is not designated in the Plan. q. Tenneco Ventures Corporation. Tenneco Ventures Corporation ("Tenneco") has asserted two Secured Claims in the aggregate amount of $240,888.00. Both of the Claims are based upon WRT's alleged contractual obligation to pay for Tenneco's portion of certain joint interest billings ("JIBs") to Texaco in connection with operation of oil and gas properties in the West Cote Blanche Bay Field -- one of the Claims (in the amount of $100,888.00) asserting a right of reimbursement for payments actually made by Tenneco to Texaco; and the other (in the amount of $140,000.00) asserting an approximated, contingent claim for Tenneco's portion of certain unpaid JIBs to Texaco (which unpaid JIBs form a part of the claim asserted by Texaco in Class C-14). Both of the Claims also base their secured nature on a vendor's privilege and right of rescission under Louisiana law. With respect to the $140,000.00 contingent claim, the Debtor has or will be objecting to the Claim based upon its contingency and the fact that, as a result of the payment in full of the claims in Class C-14, Tenneco will no longer be obligated to Texaco for the unpaid JIBs. With respect to the $100,888.00 Secured Claim, Tenneco's Lien, if valid, is avoidable under Section 545 of the Bankruptcy Code. Accordingly, the Debtor will be objecting to such Claim on that basis, among possible others, and no separate Secured Class has been designated in the Plan for Tenneco's Claims. r. Tricore Energy Venture, L.P. Tricore Energy Venture, L.P. ("Tricore") has asserted a Secured Claim in an amount identified as "no greater than $9,223,741.00." On January 14, 1997, the Debtor initiated an adversary proceeding to obtain a declaration of the invalidity of the security interests or liens allegedly securing Tricore's Claim, or alternatively for avoidance of such security interests or liens pursuant to Sections 544 and 547 of the Bankruptcy Code. In addition, the Debtor has filed an objection to the asserted Claim of Tricore (i) under Section 502(d) of the Bankruptcy Code seeking to disallow such asserted Claim in full on the grounds that Tricore is the transferee of a transfer available under Sections 544 and 547 of the Bankruptcy Code, and (ii) under Section 502(c) of the Bankruptcy Code seeking to estimate such asserted Claim on the grounds that it is a contingent claim the liquidation of which would unduly delay the administration of the Chapter 11 Case. Nevertheless, to the extent that Tricore may obtain an Allowed Secured Claim, the Plan provides for specific treatment of the Claim in Class B-4. s. Woodlands Corporation. The Woodlands Corporation ("TWC") has asserted a Secured Claim in the amount of $250,000.00 based upon rejection damages from the Debtor's rejection of the TWC lease of certain office space in the Woodlands, Texas, which damages are -66- 76 allegedly secured by TWC's security interest in the Debtor's office furniture and equipment. The Debtor has reason to believe that the value of the Collateral securing TWC's Claim is considerably less than $250,000.00 and is in the process of analyzing such value. Pursuant to Section 506 of the Bankruptcy Code, TWC's Allowed Secured Claim will amount to only such value. Furthermore, the Debtor is in the process of determining whether, and to what extent, TWC has released the premises at issue, such that TWC's Claim might be reduced by mitigation. To the extent that TWC's Secured Claim becomes an Allowed Secured Claim, however, the Plan provides for specific treatment of it in Class B-6. 2. Disputed Unsecured Claims The Debtor has internally identified numerous objectionable Unsecured Claims, and will be filing objections to such Claims as merited. None of the Disputed Unsecured Claims, with the exception of the Class Proof of Claim described below, are specifically identified herein due to the fact that the outcome of litigation on such Claims will not materially affect the proposal set forth for satisfaction of Allowed Unsecured Claims, as a whole, under the Plan. With respect to General Unsecured Claims, to the extent such Claims are successfully challenged and disallowed, the other holders of the Allowed Unsecured Claims in Class D-3 obtain the benefit of such disallowance in the form of a proportionate allocation of the shares of New WRT Common Stock which would have otherwise been distributable to such Disputed Unsecured Claims to them. a. Class Proof of Claim - Securities Litigation. A Class Proof of Claim has been filed in the case, on behalf of a yet-to-be certified class of plaintiffs, by counsel for the existing plaintiffs in the Securities Litigation. The Debtor has or will shortly be filing an objection to such Claim based upon, among other things, the fact that no class certification has been obtained to date. Should such class certification be obtained, however, and the Class Proof of Claim is otherwise Allowed, the plaintiffs represented by such class Claim shall be entitled to the Distributions set forth in the Plan applicable to such Securities Litigation Claims. 3. Unliquidated Claims. Numerous Claims have been filed in the Case in an unliquidated amount. The Debtor has or will be filing an objection to all such Claims. VII. OTHER SIGNIFICANT PLAN PROVISIONS A. THE TEXACO WEST COTE BLANCHE BAY TRANSACTION DLB has executed definitive documentation (the material terms of which are more particularly described in Exhibit "N" attached hereto, and available upon written request to counsel for the Debtor) with TEPI regarding, inter alia, (i) the Claim asserted by Texaco and TEPI against -67- 77 WRT in Class C-14 (the "Texaco Claim"), (ii) the WCBB Assets and (iii) the CAOA. The essence of these agreements is that New WRT would obtain ultimate ownership of the WCBB Assets. Texaco and TEPI have insisted (and the documentation reflects) that because of concerns over WRT's financial status, certain time exigencies and other matters relating to that certain Global Settlement Agreement, DLB be in the chain of title of the WCBB Assets, and furthermore, that DLB, for TEPI's and Texaco's benefit, be jointly and severally (in solido under Louisiana law) liable with New WRT for the performance of those obligations with respect to the operation of WCBB Assets should New WRT fail to perform such obligations. The transaction will occur in two stages pursuant to that certain Purchase, Sale and Cooperation Agreement entered into by and between TEPI and DLB dated March 11, 1997 (the "PS&C Agreement"). At the first closing, which also occurred on March 11, 1997 (the "First Closing Date"), among other things, (i) DLB acquired the Texaco Claim and the WCBB Assets, (ii) DLB assumed certain operational liabilities and executed certain agreements and subleases related thereto, including, an agreement (the "P&A Guaranty") pursuant to which (a) DLB assumed plugging and abandonment obligations related to the WCBB Assets, (b) DLB contributed $1,000,000 to an escrow account (the "P&A Trust") established to satisfy solely the costs of such plugging and abandonment obligations, (c) DLB will contribute to the P&A Trust approximately $18,000 per month for the next seven (7) years, and (d) DLB granted to TEPI a security interest in (1) 50% of the production, as well as the proceeds therefrom, arising from the WCBB Assets and (2) DLB's present and future interest in and to the P&A Trust, (iii) DLB transferred, for the benefit of TEPI, (y) $12,500,000 for the purchase of the WCBB Assets and (z) $5,960,825.30 for the Texaco Claim, and (iv) DLB obtained from TEPI certain operating services and shorebase facilities in connection with operations at the West Cote Blanche Bay Field. At the second closing, which will occur on the Effective Date of the Plan (the "Second Closing Date"), among other things, (i) DLB will transfer the WCBB Assets to New WRT, (ii) New WRT will transfer the Buyer's Leasehold and Facilities to DLB, which will in turn transfer them to TEPI pursuant to that certain Assignment, Conveyance and Bill of Sale by and between TEPI and DLB dated March 11, 1997, (iii) New WRT will issue to DLB five (5) million shares of New WRT Common Stock plus the additional number of shares of New WRT Common Stock obtained by dividing the amount of capital expenditures incurred by DLB as of the Effective Date as owner of the WCBB Assets and/or operator of the Shallow Contract Area, to the extent not disapproved by the Bankruptcy Court, by a purchase price of $3.50 per share, (iv) the Texaco Claim will be paid in accordance with the provisions of the Plan, and (v) New WRT will assume all liabilities, duties and obligations that arise, or may arise, under the PS&C Agreement and the agreements attached thereto, including, without limitation, the Assumed Obligations. B. TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES Pursuant to the Plan, the Debtor shall file and serve on or before April 9, 1997, a listing of all executory contracts and unexpired leases which it intends to assume and which have not already been made the subject of a pending Motion or otherwise assumed or rejected prior to such time. -68- 78 Such listing shall also identify the payment amount ("the Cure Payment") pursuant to Section 365 of the Bankruptcy Code. Consent to the assumption of such contracts or leases as listed, if required, shall be deemed to have been given unless any Person who is a party to such executory contract or unexpired lease objects by filing a written objection to the Plan with the Bankruptcy Court and serving the same on the Debtor and the Debtor's counsel not less than five days prior to the date set for the hearing on Confirmation. Thereafter, all executory contracts and unexpired leases which have not been listed by the Debtor or which have not previously been made the object of a Motion to Assume or Reject or otherwise assumed or rejected shall be deemed rejected as of Confirmation. All Claims arising from the rejection of executory contracts and unexpired leases shall be evidenced by properly filed proofs of claims which much be filed within any applicable deadline previously established by the Bankruptcy Court or, if no such deadline has been established, within fifteen (15) days of the earlier of the Confirmation Date of the Plan or the date of entry of a Final Order authorizing rejection of the executory contract or unexpired lease. Such proofs of claims must also be served on counsel for the Debtor and counsel for DLBW. Failure to file a proof of claim on or before such deadline shall result in disallowance in full of such Claim. C. ROYALTY PROVISIONS All Allowed Claims for unpaid Royalties that are determined to have become payable on or after the Petition Date shall constitute Allowed Administrative Claims and shall be paid in full in accordance with Article 3.1 of the Plan. On November 13, 1996, the Bankruptcy Court rendered its Reasons for Decision and the Pigeon & CLF Order in which it determined that Louisiana oil and gas leases do not constitute executory contracts or unexpired leases under Section 365 of the Bankruptcy Code. (See V. J., supra, Significant Events During the Chapter 11 Case - Oil & Gas Lease Dispute.) Consequently, all Allowed Claims for unpaid Royalties that are determined to have become payable prior to the Petition Date shall constitute Allowed Unsecured Claims and the holders of such Claims shall receive Distributions in accordance with Article 16 or Article 18 of the Plan, as the case may be. The Pigeon & CLF Order has subsequently been appealed by a number of Claimants asserting Claims for unpaid Royalties. While the Debtor believes that the Bankruptcy Court's order will be upheld on appeal, no assurances can be given. Should the Pigeon & CLF Order be reversed prior to the Confirmation Date, the Debtor and DLBW reserve the right to determine whether they will still seek confirmation of the Plan notwithstanding such reversal. Should the Pigeon & CLF Order be reversed after the Confirmation Date, the Debtor and DLBW believe that, under controlling case law, the holders of Claims for pre- petition Royalties will, unless they obtain appropriate relief from the Bankruptcy Court, be bound by the provisions in the Plan providing for the treatment of those Claims as Unsecured Claims in Class D-1 or D-3, as the case may be. -69- 79 D. STATE/LAFOURCHE SETTLEMENT Notwithstanding the entry of the Pigeon & CLF Order, the Debtor and DLBW believe that the State of Louisiana (the "State") and the LaFourche Parish School Board ("LaFourche"), as lessors, are situated differently from the other Claimants asserting Claims for unpaid pre-petition Royalties. This belief is based upon, inter alia, (a) the possibility that the State and LaFourche, as governmental units, have the ability under the police and regulatory powers exceptions to the automatic stay to terminate the leases under which they are lessors notwithstanding the automatic stay, (b) the requirement that the State, through the Louisiana State Mineral Board, approve the transfer of the WCBB Assets from TEPI to DLB and from DLB to New WRT and (c) disagreements between the Debtor and the State with respect to whether the Debtor is currently in compliance with its obligations under the Global Settlement Agreement, dated February 22, 1994, among the State, Texaco and the Louisiana Land and Exploration Company (the "Global Settlement Agreement") with respect to the properties known as East Hackberry and South Atchafalaya Bay. As a result of the foregoing, DLBW has reached a tentative agreement with the State and LaFourche pursuant to which DLBW and the Debtor will prepare one or more settlement agreements with the State and LaFourche (the "State/LaFourche Settlement") providing for payment in full of all Royalties owed to them, subject to an audit to determine the amount thereof. The preparation of the State/LaFourche Settlement, and its submission to the Bankruptcy Court for approval under Rule 9019 of the Bankruptcy Rules, will be conditioned on obtaining from the State, following meeting of the Louisiana State Mineral Board on April 8 and/or 9, 1997 of the following: (a) the consent to the transfer of the WCBB Assets by TEPI to DLB, and by DLB to New WRT, and to the transfer of the Buyer's Leasehold and Facilities from New WRT to DLB and from DLB to TEPI; and (b) the approval of the assignments of the lease related to South Atchafalaya Bay to the Debtor and the grant of certain relief from certain obligations of New WRT under the Global Settlement Agreement. E. CONDITIONS The Plan contains conditions both as to the confirmation of the Plan and as to the Effective Date of the Plan. The Plan provides that it may only be confirmed if the following conditions are met: (a) the Commitment Agreement shall be in full force and effect and shall not have been terminated by DLBW in accordance with its terms; -70- 80 (b) The Debtor shall have included the CAOA on its listing of executory contracts and unexpired leases to be assumed, filed with the Bankruptcy Court in accordance with Article 30.1 of this Plan; (c) The Bankruptcy Court shall have entered an order or orders, which may be the Confirmation Order, permitting the Debtor to maintain in the Disputed Claims Reserve Accounts an amount of Cash on account of all Disputed Claims that shall not exceed $100,000; and (d) The closing under the Purchase, Sale and Cooperation Agreement with respect to the WCBB Assets and the claim of TEPI in Class C- 14 shall have occurred. The Plan provides that the effectiveness of the plan will be subject to the satisfaction of the following conditions: (a) The Bankruptcy Court shall have made findings of fact and conclusions of law as to confirmation of the Plan and entered a Confirmation Order, in each case satisfactory to the Debtor and DLBW; (b) The Commitment Agreement shall be in full force and effect and shall not have been terminated in accordance with its terms; (c) Each of the conditions set forth in Articles VIII and IX of the Commitment Agreement has been satisfied; and (d) New WRT and INCC shall have agreed upon the terms of and executed definitive documentation with respect to New ING Term Sheet; and (e) The Louisiana State Mineral Board shall have executed a consent to the transfer of the WCBB Assets to DLB or its designee pursuant to the terms of the Purchase, Sale and Cooperation Agreement. The conditions to confirmation and to effectiveness may be waived jointly by DLBW and the Debtor. F. DISCHARGE OF THE DEBTOR The Debtor shall receive a full and complete discharge, pursuant to Section 1141(d) of the Bankruptcy Code, of all Claims and other debts that have arisen prior to confirmation, including, but not limited to, a discharge of all Claims of the kind specified in Section 502(g), (h) and (i) of the Bankruptcy Code (including any fine, penalty, multiple or exemplary damages or forfeitures). Such discharge shall also eliminate any and all avoided or avoidable Liens and security interests, -71- 81 notwithstanding the provisions of Section 551 of the Bankruptcy Code. All Creditors and holders of Equity Interests will be precluded from asserting against New WRT or its Assets any other or further Claims based upon any act or omission, transaction or other activity of any kind or nature that occurred prior to the Confirmation Date. All current officers and directors (which consist of Ray Landry, Dominic Lam, James Rash, Wayne Beninger and Thomas Stewart) will be released by Debtor from all claims and causes of action arising from their employment by the Debtor, other than actions based on gross negligence as willful misconduct, and New WRT shall indemnify such current officers and directors from any and all damages, costs (including reasonable attorneys' fees) and other liabilities arising from or relating to all claims and causes of action, excluding actions based on gross negligence or willful misconduct. The Debtor is unaware of any Causes of Action that will be released by such release and indemnification. The Committee, each member of the Committee and their respective current and former representatives, agents, advisors and professionals will also be released from all Causes of Action arising from or relating to the activities of the Committee. G. AMENDMENT AND MODIFICATION TO THE PLAN The Plan may be altered, amended or modified by the Debtor in the manner provided for by Section 1127 of the Bankruptcy Code or as otherwise permitted by law. H. RETENTION OF JURISDICTION Pursuant to the Plan, the Bankruptcy Court will retain jurisdiction over all matters arising under, or arising in, or relating to the Chapter 11 Case or this Plan to the fullest extent permitted by 28 U.S.C. Section 1334 to hear, and by 28 U.S.C. Section 157 to determine, all proceedings in respect thereof, including, but not limited to, proceedings for supervision of the Plan. Specifically, but without limitation, and if applicable law provides, the Bankruptcy Court will have jurisdiction: (a) to hear and determine any and all objections or other matters relating to the allowance of Claims, including, without limitation, Administrative Claims; (b) to hear and determine any and all applications for allowance and payment of fees and expenses made by attorneys and other professionals pursuant to Sections 330 or 503 of the Bankruptcy Code, or for payment of any other fees or expenses authorized to be paid or reimbursed by the Debtor pursuant to provisions within the Bankruptcy Code, and any objections thereto; (c) to hear and determine any and all pending applications for rejection, assumption or assumption and assignment, as the case may be, of unexpired leases and executory contracts to which the Debtor is a party or with respect to which it may be liable, and any and all Claims arising therefrom, and any other issue that may arise under Section 365 of the Bankruptcy Code; -72- 82 (d) to hear and determine any and all motions, applications, adversary proceedings and contested or litigated matters regarding Claims or interest, accrued prior to the Confirmation Date, as to assets revested pursuant to Section 1141 of the Bankruptcy Code; (e) to consider and approve modifications of or amendments to the Plan; (f) to hear and determine disputes regarding the implementation or consummation of the Plan; (g) to hear and determine all controversies, disputes, settlements, and suits which may arise in connection with the interpretation or enforcement of this Plan, or in connection with the enforcement of remedies under this Plan; (h) to hear and determine during the period in which the Chapter 11 Case remains open all controversies, disputes and issues relating to the discharge of the Debtor; (i) to consider and approve compromises, settlements and adjudications of any objections to Claims; (j) to estimate disputed, contingent and unliquidated Claims for purposes of distribution under the Plan; (k) to correct any defect, cure any omission or reconcile any inconsistency in the Plan; (l) to resolve any issues or disputes relating to the revesting of title, sale, or liquidation of Assets in accordance with provisions within the Plan; (m) to enter a final decree closing the Chapter 11 Case; (n) to hear and determine such other matters as may arise in connection with the Plan or the Confirmation Order; (o) to hear and determine all adversary proceedings filed before or after the Confirmation Date seeking relief under Sections 542, 543, 544, 547, 548, 549 or 550 of the Bankruptcy Code; (p) over the Litigation Entity, and to hear and determine all Causes of Action filed after the Effective Date by the Litigation Entity; -73- 83 (q) to hear and determine any other matter not inconsistent with the Bankruptcy Code and Title 28 of the United States Code that may arise in connection with or related to the Plan; and (r) to hear and determine such other matters as may arise in connection with the Plan or the Confirmation Order. VIII. MANAGEMENT OF NEW WRT A. ORGANIZATION AND MANAGEMENT OF NEW WRT The Plan proposes that New WRT will be organized under the laws of the State of Delaware and that the New WRT Certificate of Incorporation and the New WRT By-Laws will be in the form attached as Exhibits "K" and "J" hereto, respectively. Subject to the Bankruptcy Court's approval pursuant to Section 1129(a)(5) of the Bankruptcy Code, the Plan also proposes to provide for a Board of Directors for New WRT consisting of five members for the first three years following the Effective Date. Such directors shall consist of three individuals selected by DLBW and the remaining two selected by the Committee. Such initial Board of Directors shall take all actions necessary to implement the Plan and upon the Effective Date the operation of New WRT shall be and become the general responsibility of such Board of Directors who shall thereafter have the responsibility for the management, control, and operation of the company. Among the responsibilities which the new board shall take on are (i) selection of the officers of New WRT and (ii) the preparation, execution, and issuance of New WRT Common Stock, New WRT Warrants, the Rights Offering and such other notes, securities, and documents of New WRT as may be necessary to carry out the Plan. The Board shall also call the first shareholder meeting of New WRT within twelve months after the Effective Date. To effectuate the initial identification of directors, DLBW has set forth below its designation of initial Directors and Officers, and the Committee shall identify their selections for the board by no later than fifteen days prior to the Confirmation Date and shall notify Debtor's counsel of such selections within such period as well. In the event that any one or more nominations are not timely received by New WRT and/or its counsel, the existing directors of WRT shall be authorized to make such nominations in the place of the Committee, subject to the approval of DLBW and the Committee. B. IDENTIFICATION OF NEW WRT DIRECTORS AND OFFICERS The three directors of New WRT appointed by DLBW will be Charles E. Davidson, Mark Liddell and Mike Liddell. The remaining two directors will be appointed by the Committee on or before the Effective Date. The officers of New WRT will be: Gary C. Hanna, President; Raymond P. Landry, Executive Vice President; and Ronald Youtsey, Secretary and Treasurer. -74- 84 C. INFORMATION ABOUT NEW WRT DIRECTORS AND OFFICERS Charles E. Davidson has served as Chairman of the Board of Directors of DLB since July 1995. Prior to that, he was Chairman of the Board of Directors of Davidson Oil & Gas, Inc. ("Davidson Oil") since its incorporation in 1993, and from 1991 until such incorporation he managed the operations of its incorporated predecessor. Since 1994, Mr. Davidson has also served as managing partner of Wexford Capital Corporation, a private investment firm, and is Chairman of the Board of Directors of the Board of Resurgence Properties, Inc. and of Presido Capital, Inc., both of which are publicly-held real estate companies. Mr. Davidson received a B.A. degree in economics and an M.B.A. degree from the University of California at Los Angeles. Mike Liddell has served as Chief Executive Officer of DLB since October 1994, and as a director of DLB since 1991. From 1991 to 1994, Mr. Liddell was President of DLB. From 1979 to 1991, he was President and Chief Executive Officer of DLB Energy. He received a B.S. degree in education from Oklahoma State University. He is the brother of Mark Liddell. Mark Liddell has served as the President of DLB since October 1994, and since 1991 has been a director of Davidson Oil and DLB. From 1991 to 1994, Mr. Liddell was Vice President of DLB. From 1985 to 1991, he was Vice President of DLB Energy. From 1991 to May 1995, Mr. Liddell served as a director of TGX Corporation, a publicly-held oil and gas company, and, from 1989 to 1990, he served as a director of Kaneb Services, Inc., a publicly-held industrial services and pipeline transportation company. He received a B.S. degree in education and a J.D. degree from the University of Oklahoma. He is the brother of Mike Liddell. Gary C. Hanna has served as Executive Vice President and Chief Operating Officer of DLB since October 1994. From 1982 to October 1994, he was President and Chief Executive Officer of Hanna Oil Properties, Inc., an Oklahoma City- based petroleum consulting company. Beginning in 1991 and continuing until Mr. Hanna joined the Company, Hanna Oil Properties, Inc. performed most of the Company's acquisition and land services. He received a B.B.A. degree in economics from the University of Oklahoma. Mr. Hanna is on the Board of Directors of the Oklahoma Independent Producers Association. Ronald D. Youtsey has served as Senior Vice President and Chief Financial Officer of DLB since October 1994. Mr. Youtsey joined DLB as Controller in 1991. From 1979 to 1991, he was employed by French Petroleum Corporation, an oil and gas exploration and production company, last serving as Vice President of Finance. Mr. Youtsey is a Certified Public Accountant and a member of the American Institute of Certified Public Accountants. He received a B.S. degree in accounting from the University of Central Oklahoma. Raymond P. Landry. Mr. Landry has served as WRT's President and Chief Operating Officer since April 1995 and as Chairman of the Board and Chief Executive Officer since November 10, 1995. Mr. Landry was elected by the shareholders in December 1994 to serve as a Class I Director for a three-year term. From June 1991 to April 1995, Mr. Landry served as the Executive Vice -75- 85 President of Offshore Pipelines, Inc. Mr. Landry is a Certified Public Accountant and holds a B.S. degree in Accounting from Louisiana State University. D. EMPLOYMENT CONTRACT As part of the consummation of the Plan, New WRT will enter into an employment agreement with Raymond P. Landry. That employment agreement will, among other things, provide for (i) a two year term, (ii) a salary at $156,000 per year and (iii) stock options to purchase 60,000 shares of New WRT Common Stock at $3.50 per share. E. DLBW'S STAKE IN NEW WRT AND EXPERIENCE IN OPERATING MINERAL INTERESTS DLBW collectively owns $34,288,000 in principal face amount of Senior Notes. In addition, an entity related to Wexford has also purchased the following Lien Claims:
ORIGINAL CLAIMANT ASSERTED AMOUNT OF CLAIM - ----------------- ------------------------ Apollo Services $ 431,531.27 B.J. Services $ 186,123.74 Ace Fishing & Rental Tools $ 72,273.87 Thomas Tools (1) $ 160,888.44 Thomas Tools (2) $ 17,414.03 Halliburton $ 575,527.36 Anchor Drilling Fluids $ 149,753.53 Charles Halston $ 6,392.66 Newport Operators $ 56,731.64 Mallard Bay Drilling $ 936,966.78 Diamond Services (1) $1,763,892.24 Diamond Services (2) $ 201,952.00 Wyco International $ 148,143.27 ------------- TOTAL CLAIMS: $4,707,590.83
As a result, it is contemplated by the Debtor and DLBW that by virtue of distributions to be made to DLBW under the Plan, DLBW will hold between approximately 56% and 68% of the New WRT Common Stock issued on the Effective Date. Therefore, the following information relative to Wexford Management LLC and to DLB and its experience in operating oil and gas interests is provided to Creditors and Equity Interest holders. Wexford is a full service asset management firm that currently has assets under management of over one billion dollars. DLB is an independent energy company engaged primarily in the exploration, development, and acquisition of oil and gas properties in the Mid- Continent Region and the -76- 86 coastal onshore and shallow offshore regions of south Louisiana, two of the most prolific oil and gas producing regions in the United States. Since its start in 1990, DLB has experienced rapid and profitable growth as a result of its exploration and development drilling programs and acquisitions. As of January 1, 1997, DLB has proved reserves of 32.2 MMBOE, as estimated by DLB's independent reservoir engineering consultants, which consisted of 18.9 MMBbls of oil and 80.4 Bcf of gas, with a present value of future net reserves of $270.2 million. On a BOE basis, 59% of DLB's estimated proved reserves as of January 1, 1997 were oil and 41% were natural gas. As a result of DLB's successful exploration and acquisition efforts, DLB's estimated proved reserves have increased annually from 1.8 MMBOE in 1991 to 32.2 MMBOE on January 1, 1997. Production has increased from 0.1 MMBOE in 1991 to 1.6 MMBOE in 1996. During the same period, revenues increased from $1.8 million to $28.4 million, and EBITDA increased from $0.8 million to $18.1 million. DLB's principal producing fields are presently concentrated in Oklahoma and Louisiana. In addition, through its wholly-owned subsidiaries Bonray Drilling Corporation ("Bonray") and Gathering Energy Marketing Company, LLC ("GEMCO"), the Company is engaged in the land contract drilling of oil and gas wells and in the gathering, processing, transportation and marketing of hydrocarbons. Since 1991, DLB has made 23 new field discoveries, drilling 71 gross exploration wells and 62 gross development wells with a success rate of 50% and 84%, respectively. Drilling efforts replaced 331% of production in 1996. DLB has budgeted approximately $27.0 million for exploration, exploitation and development activities in 1997. DLB seeks to acquire oil and gas properties that it believes offer potential for increases in reserves, production and cash flow. This element of DLB's strategy is illustrated by DLB's purchase, effective January 1, 1996, of substantially all of the Oklahoma oil and gas producing properties, mineral rights and leasehold acreage of Amerada Hess Corporation, including ownership interests in 44 fields containing approximately 1,200 wellbores. At the effective time of the Amerada Hess acquisition, the acquired assets had total estimated proved reserves of 7.1 MMBOE. DLB seeks to acquire large amounts of geological and geophysical data and apply advanced technology to analyze the data for potential target areas. The information acquired by DLB includes geographical studies and 3-D and high resolution 2-D seismic surveys. DLB currently owns approximately 385 square miles of 3-D seismic data focused primarily in the Mid-Continent Region and in south Louisiana. Additionally, DLB's proprietary database contains approximately 42,000 linear miles of conventional and high resolution 2-D seismic data, over 176,000 digitized well logs. -77- 87 In February 1997, DLB acquired Bonray in a negotiated $12.8 million transaction involving a cash tender offer and subsequent merger of Bonray with a wholly-owned subsidiary of DLB (the "Bonray Acquisition"). As a result of the Bonray Acquisition, DLB acquired 15 land drilling rigs having depth capabilities ranging from 7,000 to 25,000 feet. The drilling rigs are currently employed in the Mid-Continent Region. IX. FEASIBILITY OF THE PLAN A. FEASIBILITY REQUIREMENTS AND REORGANIZATION VALUE The Bankruptcy Code requires that confirmation of a plan is not likely to be followed by liquidation or the need for further financial reorganization. For purposes of determining whether the Plan meets this requirement, the Debtor and DLBW have analyzed the ability of the Debtor, upon and after the Effective Date, to meet its obligations under the Plan. As part of this analysis, the Debtor, on behalf of the Debtor and DLBW, has prepared projections of New WRT's financial performance for each of the fiscal years in the period ending December 31, 2000 (the "Projection Period"). These projections, and the assumptions on which they are based, are annexed hereto as Exhibit "F" (the "Financial Forecast"). See also Section XII(F) "Material Uncertainties and Risk Factors -- Financial Projections." In developing an estimate of the reorganization value of the Debtor, the Debtor has been advised by Jefferies & Company, Inc. (the "Financial Advisor"). The Financial Advisor developed a range of reorganization values by utilizing the Financial Forecast and examining comparable public companies to determine a range of appropriate multiples of EBITDA (earnings before interest, taxes, depreciation and amortization). The Financial Advisor believes this approach is considered by the financial community to be an appropriate valuation technique for estimating the going concern value of an oil and gas exploration and production business undergoing a chapter 11 plan of reorganization. The Financial Advisor's estimate of the range of the Debtor's reorganization value is based upon a number of assumptions, including a successful reorganization of the Debtor's business and finances in a timely manner in accordance with the Plan, the Debtor's and DLBW's estimates of the Debtor's future operations, and the Financial Forecast. Many of such assumptions are beyond the control of the Debtor, DLBW and the Financial Advisor. Actual events may vary from such assumptions and the variations may be material. See Section XII herein, "Material Uncertainties and Risk Factors." Based on the foregoing, and assuming 21.4 million shares of New WRT Common Stock will be issued and outstanding on the Effective Date, the Financial Advisor estimates the reorganization value of the New WRT Common Stock to be from $3.00 to $5.77 per share. No assurance can be given that a liquid trading market will develop after the effectiveness of the Plan or that the New WRT Common Stock will trade in such price range. See Section XII - "Material Uncertainties and Risk Factors -- Risks With Respect to New Securities". The per share reorganization value utilized by the Debtor and DLBW in calculating Distributions to Creditors is thus considered to be reasonable by the Financial Advisor based upon the methodologies employed and utilizing the -78- 88 Financial Forecast and the Debtor's and DLBW's estimates of the reorganized Debtor's (New WRT's) future operations. The Financial Advisor will provide testimony at the Confirmation Hearing as to the reasonableness of the reorganization value utilized by the Debtor and DLBW, the valuation approaches undertaken and the assumptions underlying such valuation. Based upon the Financial Forecast, the Debtor and DLBW believe that New WRT will be able to make all payments required pursuant to the Plan and, therefore, that confirmation of the Plan is not likely to be followed by liquidation or the need for further reorganization. The Debtor and DLBW further believe that New WRT will be able to repay or refinance any and all of the then outstanding indebtedness under the Plan at or prior to the maturity of such indebtedness. Further, the Financial Forecasts contemplate that New WRT will in the ordinary course of business plug each well at the time that a determination is made to abandon the well. B. FUTURE BUSINESS PLAN OF OPERATIONS The Debtor and DLBW have set forth in Exhibit "F", attached to this Disclosure Statement a description of New WRT's future business plan and operations. Included within such exhibit are projections for New WRT's financial performance for each of the fiscal years in the period ending December 31, 2000. X. COMPARISON OF PLAN TO ALTERNATIVES There are three likely possible consequences if the Plan is rejected or if the Court refuses to confirm the Plan: (1) the Bankruptcy Court could dismiss the Chapter 11 Case; (2) the Chapter 11 Case could be converted to a liquidation case under Chapter 7 of the Bankruptcy Code; or (3) the Bankruptcy Court could consider and confirm a plan of reorganization proposed by a party other than the Debtor and DLBW. A. DISMISSAL The most remote possibility is dismissal. If dismissal were to occur, the Debtor would no longer have the protection of the Bankruptcy Court and the applicable provisions of the Bankruptcy Code. Dismissal would force a race among Creditors to take over and dispose of the Debtor's available assets. Unsecured Creditors, on an aggregate basis, would likely fail to realize recovery on their Claims. B. CHAPTER 7 LIQUIDATION A straight liquidation bankruptcy or "Chapter 7 case" requires liquidation of each of the Debtor's assets by an impartial trustee. In a Chapter 7 case, the amount Unsecured Creditors receive depends upon the net estate available after all assets of the Debtor have been reduced to cash. The -79- 89 cash realized from liquidation of each of the Debtor's assets would be distributed in accordance with the order of distribution prescribed in Section 726 of the Bankruptcy Code. Whether a bankruptcy case is one under Chapter 7 or Chapter 11, allowed secured claims, administrative claims and priority claims are entitled to be paid in cash and in full before unsecured creditors receive any funds. If this Chapter 11 Case were to be converted to one under Chapter 7 of the Bankruptcy Code, the present Priority Claims may have a priority lower than Priority Claims generated by the Chapter 7 case, such as the Chapter 7 trustee's fee or the fees of attorneys, accountants and other professionals the trustee may engage. Conversion to Chapter 7, then, would create an additional layer of priority claims. In a Chapter 7 liquidation case, a secured creditor would be entitled to full payment, including interest, from the proceeds of sale of the secured creditor's collateral, provided the realized value of the collateral is sufficient to pay both the principal and interest. A secured creditor whose collateral is insufficient to pay its secured claim in full will be entitled to assert an unsecured claim for its deficiency and share with general unsecured creditors. In the event this case were converted to one under Chapter 7, the Bankruptcy Court would appoint a trustee to liquidate the assets of the Debtor and to distribute the proceeds as described immediately above. The Chapter 7 trustee would be entitled to receive compensation under Section 326 of the Bankruptcy Code based upon distributions to creditors. The trustee's fee would not exceed 25% on the first $5,000 or less, 10% on any amount in excess of $5,000, but not in excess of $50,000, 5% on any amount in excess of $50,000, but not in excess of $1,000,000, and 3% on any amount in excess of $1,000,000 from all monies disbursed or turned over in the case to parties in interest, excluding the Debtor, but including holders of secured claims. The trustee's fees would be paid as a cost of administration and may be paid in full prior to the costs and expenses incurred in a Chapter 11 case and prior to any payment to unsecured creditors. It is also highly likely that the Chapter 7 trustee would retain his or her own attorneys and accountants, and perhaps other professionals such as appraisers, whose fees would also constitute priority claims in a Chapter 7 case, with a priority that may be higher than those claims arising under a Chapter 11 case. Liquidation under Chapter 7 of the Bankruptcy Code would also entail the appointment of a trustee having no experience or knowledge of the Debtor's business, its records or assets. Hence, a substantial amount of time would be required in order for any Chapter 7 trustee to wind the case up effectively. Also, in the event litigation proves necessary on multiple issues, the Chapter 7 trustee would likely be in an inferior position to prosecute such actions without prior knowledge regarding the Debtor's business. -80- 90 If the Debtor were to be liquidated under Chapter 7 of the Bankruptcy Code, the amount estimated to be available for distribution to Creditors would go first to Allowed Secured Claims, second to Chapter 7 Allowed Priority Claims, third to Chapter 11 Allowed Priority Claims, then to Allowed General Unsecured Claims. Annexed hereto as Exhibit "B" is the Debtor's Liquidation Analysis. The analysis provided is believed to be a reasonable estimate of value distributable in a hypothetical liquidation of the Company. Readers are urged to review both the exhibit and the assumptions underlying it. C. ALTERNATIVE PLANS To date, no other party besides the Debtor and DLBW has sought to file a plan of reorganization. -81- 91 XI. CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN A. GENERAL 1. Statutory Overview Under the Internal Revenue Code of 1986, as amended (the "Tax Code") and income tax regulations (the "Regulations") promulgated thereunder, there are certain significant federal income tax consequences associated with the Plan described in this Disclosure Statement. Certain of these consequences are discussed below. Due to the unsettled nature of several of the tax issues presented by the Plan, including the changes made by the Bankruptcy Tax Act of 1980 ("BTA80"), the Tax Reform Act of 1984 ("TRA84"), the Tax Reform Act of 1986 ("TRA86"), the Omnibus Reconciliation Act of 1987 ("ORA87"), the Technical and Miscellaneous Revenue Act of 1988 ("TAMRA"), the Omnibus Budget Reconciliation Act of 1989 ("OBRA89"), the Revenue Reconciliation Act of 1990 ("RRA90") and the Revenue Reconciliation Act of 1993 ("RRA93"), the differences in the nature of the Claims of the various Claimants, their taxpayer status, residence and methods of accounting (including Claimants within the same Class of Claims) and prior actions taken by Claimants with respect to their Claims, as well as the possibility that events or legislation subsequent to the date hereof could change the federal tax consequences of the transactions, the federal tax consequences described herein are subject to significant uncertainties. No administrative rulings will be sought from the Internal Revenue Service ("IRS") with respect to any of the federal income tax aspects of the Plan. Consequently, there can be no assurance that the treatment described in this Disclosure Statement will be accepted by the IRS. No opinion of counsel has either been sought or obtained with respect to the federal income tax aspects of the Plan. THE DISCUSSION SET FORTH IN THIS DISCLOSURE STATEMENT IS INCLUDED FOR GENERAL INFORMATION ONLY. ALL CLAIMANTS AND STOCKHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE FEDERAL INCOME TAX CONSEQUENCES CONTEMPLATED UNDER OR IN CONNECTION WITH THE PLAN, INCLUDING STATE AND LOCAL TAX CONSEQUENCES. 2. Summary of Plan Pursuant to the Plan, 10,000,000 shares of New WRT Common Stock will be issued to Class D-3 Creditors. In addition, these same Creditors will be granted rights to purchase 3,800,000 shares of New WRT Common Stock at a price of $3.50 per share and will receive eighty-eight percent (88%) of the Litigation Entity Interests. These rights will be exercised by existing Creditors and/or the DLBW. The cash will be used to pay administrative, priority, certain secured Claims, and a -82- 92 portion of the Unsecured Claims. Other existing Creditors of the Debtor will exchange their Allowed Claims for New WRT Common Stock or New WRT Warrants. As part of the Plan, DLB will (or has) acquire(ed) from Texaco/TEPI certain oil and gas assets (the WCBB Assets) and the Claim of Texaco/TEPI against WRT, and will guarantee the performance by New WRT of certain plugging and abandonment obligations with respect to the WCBB Assets should New WRT fail to perform these obligations. DLB will then transfer the WCBB Assets to New WRT for 5,000,000 shares of New WRT Common Stock. DLB will also receive approximately 1.7 million shares of New WRT Common Stock in exchange for the Texaco Claim. B. TAX CONSEQUENCES TO DEBTOR 1. Existing Tax Attributes of Debtor For its fiscal year ending December 31, 1995, the Debtor had a net operating loss carry forward of approximately $30,000,000. Management anticipates that Debtor will realize additional operating losses during the 1996 fiscal year. The 1995 tax return of the Debtor reflects approximately $165,000,000 of basis in assets. This amount is in excess of the basis for financial reporting purposes. Most of these assets are depreciable or depletable properties. Such amounts of net operating losses and basis are subject to adjustment as a result of tax audits. 2. Treatment of Debt Forgiveness Income Under the Plan The satisfaction of debentures (Senior Notes) and trade Claims aggregating approximately $120,000,000 with stock having an estimated fair market value of $35,000,000 will give rise to approximately $85 million of debt forgiveness income. The satisfaction of the Section 10(b)(5) claims at less than their face amount should not give rise to debt forgiveness income since a payment of the claim would generate a current tax deduction. Since Debtor is in a Chapter 11 proceeding, the receipt of debt forgiveness income will not give rise to taxable income. However, pursuant to Tax Code Section 108(b), the Debtor is required to reduce its tax attributes to reflect the debt forgiveness income. The tax attributes, and the order in which they are required to be reduced, is set forth in Tax Code Section 108(b). Assuming that the normal ordering rule for attribute reduction is followed, the net operating loss carryovers would be reduced or eliminated and the balance would be applied to reduce tax basis. Tax Code Section 108(b)(5) allows taxpayers to elect to vary the normal ordering rule for attribute reduction. A taxpayer can elect to first reduce the basis of depreciable assets, as opposed to starting with the net operating loss carryover. If this election were made, the net operating loss carryover would remain intact, but the basis would be reduced by the entire amount of debt forgiveness income. -83- 93 3. Effect of Section 382 - General Rules Under the Plan, there will be almost a complete change in ownership of the Debtor. Accordingly, an ownership change under Tax Code Section 382 will occur. When an ownership change occurs, a corporation is limited in its ability to utilize net operating losses incurred before such ownership change to offset taxable income generated after such ownership change. The Tax Code Section 382 limitation is determined by multiplying the value of the loss corporation (immediately before the ownership change) by the appropriate Federal long term tax exempt rate. For ownership changes occurring during March, 1997, the applicable Federal long-term tax exempt rate was 5.50%. The value of the Debtor before the ownership change, and before giving effect to the debt forgiveness occurring under the Plan, is negligible. Accordingly, under the general Tax Code Section 382 limitation, New WRT would not be able to utilize any of its net operating losses. Moreover, the excess of the bases in assets over their fair market value will be treated as a built-in loss. This built-in loss, if triggered as a loss within the five year recognition period, would be added to the otherwise available net operating loss, and the total would be subject to the Tax Code Section 382 annual limitation. Also, even if the built-in losses are not triggered, the annual depreciation or depletion deductions attributable to such built-in losses would themselves be subject to the Tax Code Section 382 limitation. 4. Special Rules for Chapter 11 Cases Tax Code Section 382(l)(5) provides a special rule for certain ownership changes occurring pursuant to a Chapter 11 Plan of Reorganization. Under this special rule, otherwise available net operating losses, after reduction by a toll change, are not subject to an annual limitation. This is true only, if former shareholders and "qualifying creditors" receive more than 50 per cent of the stock. Debtor does not believe that the requirements of Tax Code Section 382(l)(5) will be met but does believe that Tax Code Section 382(l)(6) will be beneficial. Tax Code Section 382(l)(6) also provides a special rule for ownership changes occurring pursuant to a Chapter 11 Plan of Reorganization. Under this special rule, the value of the loss corporation is determined by giving effect to the increase in value of the loss corporation resulting from any surrender or cancellation of Creditors' Claims. The Regulations provide that the value of the loss corporation is the lesser of -- "(1) The value of the stock of the loss corporation immediately after the ownership change (determined under the rules of paragraph (k) of this section); or (2) The value of the loss corporation's pre-change assets (determined under the rules of paragraph (l) of this section)." -84- 94 The regulations provide various limitations and special rules to be applied in valuing a loss company for Section 382(l)(6). In general, however, the Debtor believes that the stock value of New WRT should be the total amount paid in as capital for the stock, including the indebtedness exchanged for stock. This should give a value of approximately $70 million which will equate to a Section 382 limitation of approximately $4 million of net operating losses. 5. Computation of Regular Tax and Alternative Minimum Tax ("AMT") As a result of the reduced tax attributes discussed above, New WRT could incur regular income tax liability at the normal corporate rate of up to thirty-five percent (35%) in future years. Alternatively, to the extent NOLs are used to eliminate regular tax liability, New WRT may be subject to the AMT. AMT must be paid by a corporation when and to the extent that its liability for AMT is greater than its regular tax liability. AMT is equal to twenty percent (20%) of alternative minimum taxable income ("AMTI") less certain allowable credits. Under the Tax Code, AMT generally equals regular taxable income, increased or decreased by certain adjustments and preference items. However, only ninety percent (90%) of AMTI can be offset with net operating loss carryovers. AMT liability, regardless of the amount of available net operating loss carryovers, will be at least twenty percent (20%) of the ten percent (10%) of AMTI that cannot be offset with NOL carryovers. C. FEDERAL INCOME TAX CONSEQUENCES TO CLAIMANTS 1. General The tax consequences of the implementation of the Plan to a Claimant will depend in part on whether the Claimant's present debt constitutes a "security" for federal income tax purposes, the type of consideration received by the Claimant in exchange for its Allowed Claim, whether the Claimant reports income on the accrual basis, whether the Claimant receives consideration in more than one tax year of the Claimant, whether the Claimant is a resident of the United States, and whether all the consideration received by the Claimant is deemed to be received by that Claimant in an integrated transaction. 2. Claimants Receiving Cash A Claimant who receives Cash in full satisfaction of his Claim will be required to recognize gain or loss on the exchange. The Claimant will recognize gain or loss equal to the difference between the "amount of cash received" in respect of such Claim and the Claimant's tax basis in the Claim. 3. Claimants Receiving Stock and Warrants The receipt of shares of New WRT Common Stock by the Claimants for their existing Claims may generate Federal income tax consequences. The income tax consequences to the Claimants will -85- 95 depend in part on whether the Claims they are exchanging for the share constitute "tax securities" for federal income tax purposes. The determination as to whether a Claim of any particular Claimant constitutes a "tax security" for federal income tax purposes is based on the facts and circumstances surrounding the origin and nature of the Claim and its maturity date. Generally, Claims arising out of the extension of trade credit have been held not to be tax securities. Instruments with a five-year term or less also rarely qualify as tax securities. On the other hand, bonds or debentures with an original term in excess of ten years have generally been held to be tax securities. Tax Code Section 354 generally provides for nonrecognition of gain or loss by holders of stock or tax securities of a corporation who exchange such stock or tax securities solely for new stock or tax securities pursuant to a tax reorganization as defined in Tax Code Section 368. The Senior Notes (part of Class D-4) were originally issued in 1995 with a maturity of seven years. While the issue is not free from doubt, the Debtor believes that the Senior Notes will constitute tax securities. Under the Plan the Class D-4 claimants will receive warrants to purchase WRT Stock in the future. Under current law the receipt of warrants in exchange for stock or tax securities would constitute a taxable event as opposed to a tax-free reorganization. However, the Treasury has proposed regulations which would likely cause warrants issued in a reorganization to be treated as stock or tax securities. If these regulations were adopted in their proposed form, Class D-4 creditors receiving warrants might be viewed as participating in a tax- free reorganization and would not be entitled to recognize any loss. The regulations will not be effective until sixty days after adopted. The Debtor does not believe that any of the other Claims will constitute tax securities; accordingly, such other Claimants (including Class D-3) will recognize gain or loss in an amount equal to the difference between the value of the consideration received and the adjusted tax basis of their Claims. In this regard, with respect to the Litigation Entity Interests provided to Claimants with Allowed Claims in Class D-3, the value of 100% of the Litigation Entity Interests (i.e. including New WRT's 12% interest in the Litigation Entity Interests) should be equal to the corresponding $3 million cash infusion to the Litigation Entity since the Debtor does not believe (and will report consistently for tax purposes) that any value can be ascribed to the Causes of Action that will be transferred to the Litigation Entity on the Effective Date, given the attendant litigation risks associated therewith. 4. Tax Basis and Holding Period If a Claimant's shares of New WRT Common Stock under the Plan are deemed to be acquired via an exchange under Tax Code Section 1001, such Claimant will take a basis in the shares equal to the "amount realized" for tax purposes with respect to such Claimant. The Claimant's holding period for the shares will begin on the day following the exchange. If no gain or loss is recognized because the exchange is governed by Tax Code Section 354, the Claimants will take a carryover tax basis and holding period. -86- 96 5. Character of Gain or Loss The character of gain or loss recognized by a holder of a Claim as capital or ordinary gain or loss and, in the case of capital gain or loss, as short term or long term, will depend on a number of factors, including: (i) the nature of the origin of the Claims; (ii) the tax status of the holder of the Claims; (iii) whether the holder is a financial institution; (iv) whether the Claim is a capital asset in the hands of the holder; (v) whether the Claim has been held for more than one (1) year; and (vi) the extent to which the holder previously claims a loss, bad debt deduction or charge to a reserve for bad debts with respect to the Claim. CLAIMANTS ARE URGED TO CONSULT THEIR INDIVIDUAL TAX ADVISORS REGARDING THESE ISSUES. 6. Receipt of Interest The BTA80 reversed prior law by providing that consideration attributable to accrued but unpaid interest will be treated as ordinary income, regardless of whether the Claimant's existing Claims are capital assets in his hands and the exchange is pursuant to a tax reorganization. A Claimant, who, under his accounting method, was not previously required to include in income, accrued but unpaid interest attributable to his existing Claims, and who exchanges his interest Claim for Cash, other property, shares of New WRT Common Stock or a combination thereof, pursuant to the Plan, will be treated as receiving ordinary interest income to the extent of any consideration so received allocable to such interest, regardless of whether that Claimant realizes an overall gain or loss as a result of the exchange of his existing Claims. 7. Backup Withholding Under the Tax Code, interest, dividends and other "reportable payments" may, under certain circumstances, be subject to "backup withholding" at a thirty-one percent (31%) rate. Withholding generally applies if the holder (i) fails to furnish his social security number or other taxpayer identification number (hereinafter "TIN"), (ii) furnishes an incorrect TIN, (iii) fails properly to report interest or dividends, or (iv) under certain circumstances, fails to provide a certified statement, signed under penalty of perjury, that the TIN provided is his correct number and that he is not subject to backup withholding. 8. Federal Income Tax Consequences to Equity Interests Pursuant to the Plan, the existing Equity Interest holders may receive New WRT Warrants to buy stock in New WRT. Under current law this would be a taxable exchange and any realized gain or loss would be recognized. For purposes of computing gain or loss the amount realized will be the fair market value of the warrants. However, the Department of the Treasury has proposed regulations which would likely cause warrants issued in a reorganization to be treated as stock or securities. If these regulations were adopted in their proposed form, Equity Interest Holders receiving warrants would likely have a tax free exchange. The regulations will not be effective until sixty days after adopted. -87- 97 D. FEDERAL INCOME TAX TREATMENT OF THE LITIGATING ENTITY 1. In General Under the Plan, a Litigation Entity will be created. On the Effective Date, New WRT will transfer to the Litigation Entity various Causes of Action and will fund it with $3 million in cash. New WRT will hold 12% of the Litigation Entity Interests and holders of Allowed Claims in Class D-3 will hold 88% of the Litigation Entity Interests. For tax purposes the Debtor will treat the transfer of assets to the Litigation Entity as a transfer of assets to the D-3 Claimants to the extent they are beneficiaries followed by a deemed transfer by such beneficiaries to the Litigation Entity. Accordingly, such Creditors will be taxable on the fair market value of the Litigation Entity Interests they receive. The fair market value will equal the pro rata share of the $3 million cash contribution and the estimated value of the Causes of Action transferred thereto. The Creditors will be treated as the owners of a grantor trust with respect to their 88% Interest. New WRT will be treated as the grantor of a grantor trust with respect to its 12% Interest. The Debtor does not believe that any value can be ascribed to the Causes of Action that will be transferred to the Litigation Entity, given the attendant litigation risks involved, and will not take a position on any tax return inconsistent with this belief. 2. Advance Ruling Criteria The Debtor has not requested any advance ruling from the Internal Revenue Service regarding the tax characterization of the Litigating Entity as a liquidating trust. However, to the extent possible, the Debtor is complying with the requirements or guidelines set forth in Rev. Proc. 94-45 which specifies conditions under which the Internal Revenue Service will consider issuing advance rulings, including the possibility that the Litigation Entity will pay taxes on income which is retained to maintain the value of its assets or to meet claims and contingent liabilities. XII. SECURITIES LAW CONSIDERATIONS Section 1145 of the Bankruptcy Code provides that federal and state registration requirements do not apply to the issuance of securities by a debtor under a plan of reorganization to holders of claims or equity interests wholly or principally in exchange for those claims or interests. With certain exceptions discussed below, recipients of such securities may also resell them without restriction. Set forth below is a discussion of the securities law considerations to the Plan. -88- 98 A. ISSUANCE Section 1145 of the Bankruptcy Code exempts the original issuance of securities under a plan of reorganization from registration under the Securities Act of 1933, as amended ("Securities Act"), and state law. For the original issuance to be exempt, three principal requirements must be satisfied: (i) the securities must be issued by the debtor or its successor under a plan of reorganization, (ii) each recipient of the securities must hold a claim against the debtor, equity interest in the debtor or a claim for an administrative expense against the debtor, and (iii) the securities must be issued entirely in exchange for the recipient's claim against or equity interest in the debtor or "principally" in such exchange and "partly" for cash or property. Under the Plan, New WRT will issue New WRT Common Stock in satisfaction of Claims in Class D-3. Class D-3 Claimants shall also obtain the right to participate in a Rights Offering for an additional three million eight hundred thousand (3,800,000) shares of New WRT Common Stock. Distributions of stock to Class D-3 Claimants pursuant to the Rights Offering shall occur on a staggered basis as Claims within Class D-3 are finally Allowed. Nevertheless, such shares shall be immediately transferable. The Debtor believes that the exemption from registration requirements provided by Section 1145 of the Bankruptcy Code applies with respect to the issuance of up to 3,800,000 shares of New Common Stock for the Rights Offering. The SEC has provided no action relief with respect to the principally/partly requirement of Section 1145 when the value of the claims exceeded the amount of cash or other property being contributed by the creditor receiving securities. The Debtor believes that the Section 1145 exemption applies in part because the relative value of the claims is greater than the cash being tendered for purchase of the New WRT Common Stock included in the Rights Offering. B. RESALE Although Debtor believes that the subsequent distribution of New WRT Common Stock by its recipients would be exempt from registration and not subject to a holding period in most circumstances, certain recipients of the securities - i.e. those recipients who may be deemed "underwriters" as defined under Section 1145(b) of the Bankruptcy Code - may be unable to resell such securities absent registration of the securities under the Securities Act and applicable state law, or absent exemption therefrom. THE DEBTOR RECOMMENDS THAT CREDITORS AFFECTED BY THIS RISK CONSULT THEIR OWN COUNSEL. Section 1145(b) of the Bankruptcy Code defines four types of "underwriters": (i) a person who purchases a claim against, an equity interest in, or a claim for administrative expenses against the debtor with a view to distributing any security received in exchange for such a claim or equity interest; (ii) a person who offers to sell securities authorized under a plan of reorganization for the holders of such securities; (iii) a person who offers to buy such securities from the holders of such securities, if the offer is (a) with a view to distributing such securities, or (b) made under a distribution agreement; and (iv) a person who is an "issuer" with respect to the security, as the term "issuer" as defined in Section 2(11) of the Securities Act. An "issuer" includes any person directly or indirectly controlling or controlled by the debtor, or any person under direct or indirect common control with the debtor. -89- 99 Whether a person is an "issuer", and therefore an "underwriter" for purposes of Section 1145(b) of the Bankruptcy Code depends on a number of factors. Such factors include (i) the person's equity interest in a company; (ii) the distribution and concentration of other equity interests in a company; (iii) whether the person is an officer or director of the company; (iv) whether the person, either alone or acting in concert with others, has a contractual or other relationship giving that person power over management policies and decisions of the company; and (v) whether the person actually has such power notwithstanding the absence of formal indicia of control. An officer or director of the company may be deemed a controlling person, particularly if his position is coupled with ownership of a significant percentage of voting stock. In addition, the legislative history of Section 1145 of the Bankruptcy Code suggests that a creditor with at least 20% of the securities of the debtor could be deemed a controlling person. To the extent that persons deemed "underwriters" receive securities pursuant to the Plan, resales by such persons would not be exempted by Section 1145 of the Bankruptcy Code from registration under the Securities Act. Given the complex, subjective nature of the question whether a particular holder may be an underwriter, the Debtor makes no representation concerning the right of any person to trade in the New WRT Common Stock. The Debtor recommends that potential recipients of the New WRT Common Stock consult their own counsel concerning the impact of the Securities Act on the ability to trade securities. The New WRT Common Stock, absent underwriter status, should be freely transferable, although the Debtor recommends that potential recipients consult their own counsel with respect to their particular situation. New WRT shall use its best efforts to cause the New WRT Common Stock to be listed on a national securities exchange, or failing that, to be listed for quotation on the NASDAQ National Market System. The Debtor intends, on or prior to the Effective Date, to become current on all securities filings and/or to obtain relief from such requirements from the SEC. To that end, the Debtor has submitted to the SEC's Office of Chief Counsel of the Division of Corporate Finance a request for modification of the reporting requirements for the period in which the Debtor has been in bankruptcy. C. ATTRIBUTES OF NEW WRT COMMON STOCK Under the Plan, the existing Common Stock and Preferred Stock of WRT shall be canceled and New WRT Common Stock shall be issued to the holders of Allowed Claims in Class D-3. Creditors holding Allowed Claims in Class D-3 will receive a proportionate part of 10,000,000 shares of New WRT Common Stock, such shares to be distributed in potentially several interim distributions and a final distribution during the course of resolution of all potential D-3 Claims. The current Certificate of Incorporation of WRT does not, and the anticipated New WRT Certificate of Incorporation will not provide for any restrictions upon the power of the Board of Directors to authorize the issuance of additional authorized but unissued shares of stock. The current Certificate of Incorporation authorizes the issuance of 50,000,000 shares of Common Stock and no amendment to this provision is anticipated. At this time, the Debtor does not foresee any -90- 100 need or justification for the issuance of Common Stock other than as contemplated by the Plan, including those shares to be distributed pursuant to the Rights Offering in Article 29 of the Plan. The Debtor estimates that up to 16,000,000 shares of New WRT Common Stock will be issued to Creditors under the Plan including such Rights Offering shares. D. NEW WRT WARRANTS In addition to the issuance of actual New WRT Common Stock shares, the Plan contemplates the issuance of New WRT Warrants as well, such Warrants to be exercisable over a period of five years from the Effective Date for the purchase of one additional share of New WRT Common Stock per Warrant at $10.00 per share. Claimants holding Allowed Claims in Class D-4 shall obtain Warrants equal to 2% of the total number of shares to be issued pursuant to the Plan, provided that Classes D-1, D-2, and D-3 vote in favor of the Plan. Classes E-1 and E-2 Allowed Claims and Equity Interest holders shall similarly obtain Warrants equal to 1%, respectively, of the total number of shares to be issued pursuant to the Plan, provided that Classes D-1, D-2, D-3, and D-4 (and E-1, in the case of Equity Interests in Class E-2) vote in favor of the Plan. Finally, Creditors holding Claims and Equity Interests in Class E-3 shall obtain, collectively, Warrants equal to 1% of the total number of shares to be issued pursuant to the Plan, but only if Classes D-1, D-2, D-3, D-4, E-1 and E-2 vote in favor of the Plan. As with shares of New WRT Common Stock, the Debtor believes that such Warrants shall be freely transferable in the absence of a potential restriction as to "underwriters". Nevertheless, the Debtor advises all such holders of Claims and Equity Interests likely to receive New WRT Warrants pursuant to the Plan to consult their own respective counsel regarding such transferability. XIII. EXISTING AND POTENTIAL LITIGATION A. PRE-PETITION LITIGATION 1. Employment Litigation On September 28, 1995, a lawsuit was served against the Debtor, Arnoult Equipment and Construction, Inc., Steven S. McGuire, Donald J. Arnoult and others in the 24th Judicial District Court for the Parish of Jefferson, State of Louisiana. The plaintiff Donald Muller, the former president, chief executive officer and stockholder in certain oilfield service companies used by the Debtor in its filed development activities, alleged that the Debtor and others interfered with his employment, ultimately resulting in his forced resignation from such companies. The plaintiff further alleged the Debtor and others acted in a manner which resulted in the devaluing of the services companies' assets and plaintiff's corresponding equity holdings in the companies. On November 9, 1995, the Debtor, et al. filed with the Court exceptions of no cause of action, no right of action, and vagueness. The plaintiff has taken no action since the filing of the case and no court date has been set. The Debtor's filing of the Chapter 11 Case has resulted in an automatic stay of this litigation. -91- 101 The Debtor believes the case to be without merit and that the outcome of the litigation will not have a material effect on its financial condition or results of operations. 2. Securities Litigation On December 18 and 19, 1995, two class-action suits were filed in the United States District Court for the Southern District of California, seeking damages on behalf of a purported class of persons who purchased the publicly- traded securities of the Debtor between October 20, 1993 and October 27, 1995. In these complaints, the plaintiffs have sued the Debtor, certain of the members or past members of its Board of Directors, and others, alleging joint and several liability for violations of Section 12(2) and Section 15 of the Securities Act of 1933. The plaintiffs also complain that all defendants violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10(b)(5) of the Securities Exchange Commission. The individual defendants are alleged to be liable under Section 20(a) of the Securities Exchange Act of 1934. On February 23, 1996, a Notice of Stay by reason of the Debtor's bankruptcy was filed in both actions. On March 21, 1996, all parties entered into a Stipulation whereby the plaintiffs agreed to consolidate the two actions under an amended and consolidated complaint. Thereafter, on June 1, 1996, by agreement of all parties, the case was transferred to the Southern District of New York. 3. Tax Exemption Litigation In 1994, the Debtor received a certification from the Louisiana Department of Natural Resources ("DNR"), qualifying certain gas production under Section 107(c)(2) of the Natural Gas Policy Act of 1978 (the "NGPA") as gas produced from geopressured brine. As required under the NGPA, the DNR's determination was forwarded to the FERC for review. In April 1995, the FERC reversed the position of the DNR, rejecting the qualification of the wells under Section 107(c)(2) of the NGPA. The Debtor has appealed the FERC determination to the United States Court of Appeals for the Fifth Circuit, located in New Orleans, Louisiana. Oral arguments in the case took place on November 7, 1996, and the Debtor is awaiting a decision from the Court. B. POST-PETITION LITIGATION 1. Tri-Deck/Perry Gas Litigation On May 29, 1996, the Debtor initiated an adversary proceeding against Tri-Deck Oil & Gas Co. and Perry Gas Companies, Inc. to recover certain unpaid production proceeds and to otherwise enjoin any further disposition of such proceeds pending a final judgment in the suit. For a detailed discussion of such litigation, see Section V.I. of this Disclosure Statement. The Debtor is also reviewing other potentially assertable causes of action, such as actions pursuant to Sections 547 and 548 of the Bankruptcy Code, and other potential defendants who may be added to the suit. As of the filing of this Disclosure Statement, the suit remains pending. -92- 102 2. E. C. Energy Production, Inc. In November of 1994, WRT sold certain drilling rigs to E.C. Energy Production, Inc. The payment price represented by the promissory note in the amount of $3.9 million was never paid and therefore to cancel the indebtedness, WRT and E. C. Energy Production, Inc. entered into a dation en paiement dated May 18, 1995 as a giving in payment to satisfy the indebtedness which at the execution of the dation amounted to $4,017,000.00. The property or assets transferred to WRT in satisfaction of the indebtedness was WRT Rig No. 1, WRT Rig No. 2, WRT Rig No. 3, WRT Rig No. 4 and WRT Rig No. 4-A. All but WRT Rig No. 4 were involved in the sale from WRT to E.C. Energy Production, Inc.; Rig No. 4-A, however, came from parts of a separate WRT rig which were cannibalized to comprise Rig No. 4-A. Rig No. 4-A is still in the possession of the E.C. Energy Production, Inc. and/or its related corporations. Suit was filed by the Debtor under adversary proceeding number 96-5036 for the turnover of Rig No. 4-A. The defendant alleges that Rig No. 4-A is not owned by E.C. Energy Production, Inc. or was not owned by E.C. Energy Production, Inc. at the time the dation was entered into with WRT, and therefore E.C. Energy Production, Inc. could not transfer title of the asset to the Debtor. The corporation alleged to be the owner by E.C. Energy Production, Inc. is Energy Workover and Drilling Services, Inc. which has intervened into the adversary proceeding. The defendants also assert that WRT Rig No. 4-A was not included in the original sale package from WRT to the defendant E.C. Energy Production, Inc. and therefore could not be transferred by means of a dation. To date, the adversary proceeding remains pending. 3. Tricore On January 14, 1997, the Debtor initiated an adversary proceeding against Tricore Energy Venture, L.P. to obtain a declaration of the invalidity of certain asserted security interests in WRT's interest in the West Cote Blanche Bay Field, or alternatively to obtain avoidance of such security interests or liens pursuant to Sections 544 and 547 of the Bankruptcy Code. See Section V.R. of this Disclosure Statement for a detailed discussion of such litigation. As of the filing of this Disclosure Statement, the suit remains pending. C. POTENTIAL LITIGATION On the Effective Date, all of the Causes of Action (or potential Causes of Action) described herein will be assigned to the Litigation Entity, with the exception of the Marine Equipment Causes of Action and the Tri-Deck Causes of Action. 1. Examiner By orders entered on August 13, 1996 and September 10, 1996, the Bankruptcy Court appointed Jason R. Searcy as a Chapter 11 Examiner in the case pursuant to Section 1104 of the -93- 103 Bankruptcy Code. Among other things, the Examiner has been instructed to review transactions between WRT and certain individuals and entities, and to otherwise review conduct undertaken by such individuals and entities which may have resulted in compensable damage to WRT. Those individuals and entities currently under review by the Examiner are listed below. In conjunction therewith, the Examiner has scheduled Bankruptcy Rule 2004 examinations for January 27 and 28, 1997 to obtain further insight into such possibilities. See also Exhibit "C" (Examiner's Preliminary Report). If the Examiner obtains evidence of wrongdoing by any such individual or entity, the Litigation Entity will pursue such actions as are reasonably likely to result in recovery by the Litigation Entity after payment of litigation expenses. IDENTIFIED FOR REVIEW BY EXAMINER o Aftech and Affiliated Parties o Arnoult Equipment & Construction, Inc. o A.E.C. and Affiliated Parties o Current and Former Officers and Directors o James Florence o Tri-Deck o Seqouia Marketing o Oilfield Production Equipment Company and Affiliated Parties o John Peterson o Joseph Brantley o Mark Miller o Mayronne Energy Services and Affiliated Parties o Plains Marketing and Transportation o Stephen Edwards and Affiliated Parties -94- 104 2. Avoidable Preferences Pursuant to the Bankruptcy Code, the Debtor, acting as Debtor-in- Possession, may recover certain transfers of property made while insolvent during the ninety (90) days, and in other instances one (1) year, prior to the filing of its bankruptcy petition in payment of antecedent debts to the extent the transferees thereof received more than they would have received as to such debts had the Debtor been liquidated under Chapter 7 of the Bankruptcy Code. If a transfer is recovered by a Debtor, the transferee obtains a general unsecured claim against the Debtor to the extent of the recovery. a. Trade Payables. Payments totaling $10,988,832 were made to Creditors (including Insiders who received non-payroll payments) during the ninety (90) day period prior to the Petition Date. The Debtor is analyzing all payments to creditors in instances where the creditor received aggregate payments of $25,000 or more during the ninety (90) days prior to the Petition Date. Subject to such analysis, the Litigation Entity will pursue all discovered preferential payments which are reasonably likely to result in recovery by New WRT after payment of litigation expenses. A Potential Preference Actions listing is attached hereto as Exhibit "E." b. Insiders. Payments and other forms of transfers made to Insiders within a year prior to the Petition Date could potentially be preferential in nature. The Examiner appointed in the case is currently reviewing all insider transactions; accordingly, the Litigation Entity will pursue all discovered preferential payments which are reasonably likely to result in recovery by New WRT after payment of litigation expenses. 3. Avoidable Fraudulent Transfers Under the Bankruptcy Code and various state laws, the Debtor, acting as Debtor-in-Possession, may recover certain transfers of property, including the grant of a security interest in property, made while insolvent, or which rendered it insolvent, if and to the extent the Debtor received less than reasonably equivalent value for such property. At this time, the Debtor is reviewing all payments and other transfers of property made by the Debtor under the circumstances described above, but such analysis has not yet been completed. a. Oil and Gas Property Acquisitions. During the four-year period prior to the filing of WRT's Chapter 11 Case, WRT acquired virtually all of its existing oil and gas properties. The Debtor is currently reviewing such acquisitions to determine whether the consideration given by WRT in any particular transaction was fraudulently obtained, in whole or part, or whether it was not of a reasonably equivalent value of the property received by WRT in exchange for such consideration during a period of WRT's insolvency. All such acquisitions which are determined to be avoidable under the Bankruptcy Code and/or applicable state law shall be pursued by the Litigation Entity if likely to result in recovery by the Litigation Entity after payment of litigation expenses. A listing of the potential fraudulent property acquisitions currently under analysis by the Debtor as possible fraudulent transfers is set forth below: -95- 105
- ------------------------------------------------------------------------------- PARTY PROPERTIES - ------------------------------------------------------------------------------- Benton Oil and Gas Company West Cote Blanche Bay - ------------------------------------------------------------------------------- BSFI, Southfork Investments and Napoleonville Field Affiliated Parties - ------------------------------------------------------------------------------- Buckingham and Affiliated Parties South Hackberry Field - ------------------------------------------------------------------------------- Freeport McMoRan and Affiliated Parties Lac Blanc Field - ------------------------------------------------------------------------------- LLOG Exploration and Affiliated Parties Abbeville Field Bayou Penchant Field Bayou Pigeon Field Bayou Pigeon Field - Top Lease Issue Deer Island Field Deer Island Field - D-5 Well Stray Sand Issue Golden Meadow Field - ------------------------------------------------------------------------------- Tenneco Gas Production and Affiliated West Cote Blanche Bay Parties - ------------------------------------------------------------------------------- Texas American Resources and Affiliated East Hackberry Field Parties Rankin Field - ------------------------------------------------------------------------------- Tico and Affiliated Parties South Hackberry Field - -------------------------------------------------------------------------------
b. INCC's Lien on West Cote Property. The indebtedness owing to INCC is secured by a blanket lien on virtually all of WRT's oil and gas properties. With respect to the West Cote Blanche Bay Field interests of WRT (the "WCBB Interests"), while WRT obtained the benefit of the INCC financing, WRT's wholly-owned subsidiary, Tesla Resources, Inc. ("Tesla"), was the record owner of the WCBB Interests and was the entity that actually granted a lien thereon to INCC in exchange for the provision of credit to WRT. Based upon the Debtor's and DLBW's review of such financing transaction, and the financial condition of Tesla at the time, the Debtor and DLBW believe that INCC's lien on the WCBB Interests is avoidable under Sections 544, 547 and 548 of the Bankruptcy Code. Accordingly, the Debtor and DLBW have structured the Plan in a manner consistent with such belief. Should there be resistance to such treatment in the Plan, it may become necessary for the Debtor to pursue one or more of the causes of action above. c. Preferred Stock Dividend Payments. During the one-year period prior to the filing of the Debtor's Chapter 11 case, the Debtor paid dividends to holders of Preferred Stock in the total aggregate amount of $2,134,687.44. Such payments may be avoidable as fraudulent transfers, and the Debtor is currently reviewing them and the likelihood of recovery and the Litigation Entity will pursue any such actions as it ultimately determines to be economical. d. Professionals and Others Involved in Securities Offering. The Debtor is also reviewing payments and other transfers of property which were made by WRT to professionals and -96- 106 other third parties associated with the Securities Offering, including, but not limited to, Triumph Securities and its affiliates, to determine whether such payments are avoidable as fraudulent transfers (e.g., less than reasonably equivalent value received for services performed at time of the Debtor's insolvency). The Litigation Entity will pursue recovery of such transfers if it is determined that there is a reasonable likelihood of recovery, taking into account litigation costs. 4. Other Potential Litigation a. Transactions Related to Reserve Reports. The Debtor is in the process of determining if there was negligence regarding reserve data provided by various engineering firms. The firms and affiliated parties being analyzed include Huddleston and Co., The Scotia Group, Inc. and Veazey & Associates. If the Debtor concludes that any or all of the above firms were negligent in providing reserve data, actions will be taken to recover damages, if provided such actions are likely to result in recovery by the Litigation Entity after payment of litigation expenses. b. Transactions Related to Securities Offerings. The Debtor is in the process of determining if there was negligence in transactions related to the public securities offering. The firms and affiliated parties being analyzed include Oppenheimer & Co. and Schroeder Wertheim. If the Litigation Entity concludes that either or both of the above firms were negligent in providing services related to the public securities offering, actions will be taken to recover damages, if such actions are likely to result in recovery by the Litigation Entity after payment of litigation expenses. c. Oil and Gas Property Acquisitions. The Debtor is in the process of determining if there was any fraudulent and/or negligent actions taken by third parties in the course of WRT's acquisition of its oil and gas properties. Various parties have been identified as being either directly or indirectly involved in purchase and sale transactions which may have resulted in over- payments by WRT. If the Litigation Entity concludes that any such fraudulent or negligent action was undertaken by any such third party, the Litigation Entity will take action to recover damages, provided such action is likely to result in recovery by the Litigation Entity after payment of litigation expenses. XIV. MATERIAL UNCERTAINTIES AND RISK FACTORS A. COMPETITION AND MARKETS 1. Availability of Markets. The availability of a ready market for oil and gas produced by the Debtor depends on numerous factors beyond the control of management, including but not limited to, the extent of domestic production and imports of oil, the proximity and capacity of gas pipelines, the availability of skilled labor, materials and equipment, the effect of state and federal regulation of oil and gas -97- 107 production and federal regulation of gas sold in interstate commerce. Gas produced by the Debtor in Louisiana is sold to various purchasers who service the areas where the Debtor's wells are located. The Debtor's wells are not subject to any agreements that would prevent the Debtor from either selling its gas production on the spot market or committing such gas to a long-term contract; however, there can be no assurance the Debtor will continue to have ready access to suitable markets for its future oil and gas production. 2. Impact of Energy Price Changes Oil and gas prices can be extremely volatile and are subject to substantial seasonal, political, and other fluctuations. The prices at which oil and gas produced by the Debtor may be sold is uncertain and it is possible that under some market conditions the production and sale of oil and gas from some or all of the Debtor's properties may not be economical. The availability of a ready market for oil and gas, and the prices obtained for such oil and gas, depend upon numerous factors beyond the control of the Debtor, including competition from other oil and gas suppliers and national and international economic and political developments. Because of all the factors influencing the price of oil and gas, it is impossible to accurately predict future prices. B. ENVIRONMENTAL RISKS; GOVERNMENTAL ACTIONS The Debtor's operations are subject to numerous laws and regulations, including laws and regulations controlling the discharge of materials into the environment or requiring removal and cleanup of environmental damages under certain circumstances. Laws and regulations protecting the environment have generally become more stringent in recent years, and may in certain circumstances impose "strict liability," rendering a person liable for environmental damages without regard to negligence or fault on the part of such person. Such laws and regulations may expose the Debtor to liability for the conduct of operations or conditions caused by others, or for acts of the Debtor which were in compliance with all applicable laws at the time such acts were performed. The modification of existing laws or regulations or the adoption of new laws or regulations relating to environmental matters could have a material adverse effect on the Debtor's operations. In addition, the Debtor's existing and proposed operations could result in liability for fires, blowouts, oil spills, discharge of hazardous materials into surface and subsurface aquifers and other environmental damage, any one of which could result in personal injury, loss of life, property damage or destruction or suspension of operations. While the Debtor presently discharges produced water overboard from wells at one of its properties under exemptive orders from the Louisiana Department of Environmental Quality, applicable federal and state laws and regulations generally prohibit such overboard discharge and it is anticipated that such discharge will be prohibited in areas where the property is located. When the prohibition becomes effective, the Debtor will be required to install underground disposal facilities for its properties in such areas or abandon the portion of reserves in those properties where high levels of saltwater are produced. -98- 108 C. OPERATIONAL HAZARDS AND INSURANCE The Debtor's operations are subject to all of the risks normally incident to the production of oil and gas, including blowouts, cratering, pipe failure, casing collapse, oil spills and fires, each of which could result in severe damage to or destruction of oil and gas wells, production facilities or other property, or injury to persons. The energy business is also subject to environmental hazards, such as oil spills, gas leaks, and ruptures and discharge of toxic substances or gases that could expose the Debtor to substantial liability due to pollution and other environmental damage. Although the Debtor maintains insurance coverage considered to be customary in the industry, it is not fully insured against certain of these risks, either because such insurance is not available or because of high premium costs. The occurrence of a significant event that is not fully insured against could have a material adverse effect on the Debtor's financial position. D. REPLACEMENT OF RESERVES The Debtor's future success depends upon its ability to find, acquire and develop additional oil and gas reserves that are economically recoverable. The proved reserves of the Debtor will generally decline as they are produced, except to the extent that the Debtor conducts successful revitalization activities, or acquires properties containing proved reserves, or both. To increase reserves and production, the Debtor must continue its development drilling and recompletion programs, identify and produce previously overlooked or bypassed zones in shut-in wells, acquire additional properties or undertake other replacement activities. The Debtor's current strategy is to increase its reserve base, production and cash flow through the revitalization of its existing oil and gas fields and selective acquisitions of producing properties where the Debtor can utilize its technology. There can be no assurance, however, that the Debtor's planned revitalization, development and acquisition activities will result in significant additional reserves or that the Debtor will have continued success finding and producing reserves at low finding and development costs. Furthermore, while the Debtor's revenues may increase if prevailing oil and gas prices increase significantly, the Debtor's finding costs for additional reserves could also increase. E. UNCERTAINTY OF RESERVE ESTIMATES Oil and gas reserve estimates and the discounted present value estimates associated therewith are based on numerous engineering, geological and operational assumptions that generally are derived from limited data. Common assumptions include such matters as the areal extent and average thickness of a particular reservoir, the average porosity and permeability of the reservoir, the anticipated future production from existing and future wells, future development and production costs and the ultimate hydrocarbon recovery percentage. As a result, oil and gas reserve estimates and discounted present value estimates are frequently revised in subsequent periods to reflect production data obtained after the date of the original estimate. If reserve estimates are inaccurate, production rates may decline more rapidly than anticipated, and future production revenues may be less than estimated. Moreover, significant downward revisions of reserve estimates may adversely affect the Debtor's borrowing capacity or have an adverse impact on other financing arrangements. In addition, any estimates of future net revenue and the present value thereof are based on period ending prices and on cost assumptions made by the Debtor which only represent its best estimate. If these estimates of quantities, prices and costs prove inaccurate, the Debtor is -99- 109 unsuccessful in expanding its oil and gas reserves base, and/or declines in and instability of oil and gas prices occur, writedowns in the capitalized costs associated with the Debtor's oil and gas assets may be required. The Debtor will also rely to a substantial degree on reserve estimates in connection with the acquisition of producing properties. If the Debtor over-estimates the potential oil and gas reserves of a property to be acquired, or if its subsequent operations on the property are not successful, the acquisition of the property could result in substantial losses to the Debtor. F. FINANCIAL PROJECTIONS The Debtor with the assistance of DLBW has prepared the Financial Forecast based upon certain assumptions which it believes to be reasonable under the circumstances. Those assumptions considered to be significant are described in the Financial Forecast. The Financial Forecast has not been examined or compiled by independent accountants. The Debtor and DLBW make no representation as to the accuracy of the projections or their ability to achieve the projection results. Many of the assumptions on which the projections are subject to significant uncertainties. Inevitably, some assumptions will not materialize and unanticipated events and circumstances may affect the actual financial results. Therefore, the actual results achieved throughout the Projection Period may vary from the projected results and the variations may be material. All holders of Claims that are entitled to vote to accept or reject the Plan are urged to examine carefully all of the assumptions on which the Financial Forecast is based in evaluating the Plan. See Section XII herein, "Material Uncertainties and Risk Factors." Additionally, the Financial Forecast, the Debtor and DLBW have made assumptions with respect to the terms of the restructured INCC loan and Texaco's ownership interest in West Cote Blanche Bay that are consistent with the ongoing discussions with INCC and Texaco. The Financial Forecast is also based on the assumption that the Plan will be confirmed by the Bankruptcy Court and, for projection purposes, that the Effective Date under the Plan and the initial distributions thereunder will commence on July 1, 1997. G. RISKS WITH RESPECT TO THE NEW SECURITIES 1. Uncertainty With Respect to the Trading Prices of the New Securities No trading market currently exists for the New WRT Common Stock or any of the New WRT Warrants. Because Creditors may have little, if any, ability to liquidate their Claims during the pendency of the Chapter 11 Case, the Debtor anticipates that upon the establishment of a trading market, there may initially be a large number of holders who wish to dispose of the New WRT Common Stock received pursuant to the Plan. As a result, the trading market for the New WRT Common Stock may be expected to be unstable for some period of time following Confirmation. 2. Possible Illiquidity of the New Securities If the Plan is confirmed, a substantial number of New WRT Warrants and shares of New WRT Common Stock will be concentrated in a relatively small number of Persons. Sales or offers to sell the substantial blocks of the New WRT Common Stock, or the New WRT Warrants issued pursuant to the Plan, or the perception by investors, investment professionals and securities analysts of the possibility that such sales may occur, could adversely affect the price of and market for such New WRT Common Stock. In addition, New WRT does not anticipate the payout of dividends on the New WRT Common Stock in the foreseeable future. -100- 110 H. NET OPERATING LOSS CARRYFORWARD As of December 31, 1995, the Debtor had a net operating loss carryforward. Management anticipates that the Debtor will realize an additional operating loss in 1996. The Debtor believes that such carryforwards are significant assets of the Debtor which may be available to offset future taxable income of the Debtor, if any, and thereby reduce the Debtor's tax obligation. The potential ability of the Debtor to have the benefit of such carryforwards may be restricted upon Confirmation of the Plan. XV. CONCLUSION The Debtor, DLBW and the Committee urge Creditors and holders of Equity Interests solicited by this Disclosure Statement to vote to accept the Plan and to evidence such acceptance by returning the ballot so that it is received by the Balloting Agent prior to the Voting Deadline. DATED: March _____, 1997 WRT ENERGY CORPORATION, DEBTOR AND DEBTOR IN POSSESSION By: --------------------------------------- RAYMOND P. LANDRY Chief Executive Officer and Chairman of Board of Directors Joel P. Kay, Esq. Edward Lee Morris, Esq. SHEINFELD, MALEY & KAY, P.C. 1001 Fannin Street, Suite 3700 Houston, Texas 77002-6796 ATTORNEYS FOR WRT ENERGY CORPORATION -101- 111 DLB OIL & GAS, INC., CO-PROPONENT By: --------------------------------------- MARK LIDDELL President WEXFORD MANAGEMENT LLC, CO-PROPONENT By: --------------------------------------- CHARLES E. DAVIDSON Chairman of Board of Directors Jeffrey S. Sabin, Esq. Mark A. Broude, Esq. SCHULTE ROTH & ZABEL LLP 900 Third Avenue New York, New York 10022 ATTORNEYS FOR DLB OIL & GAS, INC. AND WEXFORD MANAGEMENT LLC -102- 112 UNITED STATES BANKRUPTCY COURT WESTERN DISTRICT OF LOUISIANA LAFAYETTE-OPELOUSAS DIVISION IN RE: ) ) WRT ENERGY CORPORATION, ) CASE NO. 96BK-50212 Taxpayer I.D. No. 71-1133320 ) (CHAPTER 11) ) DEBTOR. ) ================================================================================ DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION UNDER CHAPTER 11 OF THE UNITED STATES BANKRUPTCY CODE ================================================================================ Joel P. Kay, Esq. --- AND --- Jeffrey S. Sabin, Esq. Edward Lee Morris, Esq. Mark A. Broude, Esq. SHEINFELD, MALEY & KAY, P.C. SCHULTE ROTH & ZABEL LLP 1001 Fannin Street, Suite 3700 900 Third Avenue Houston, Texas 77002-6797 New York, New York 10022 Telephone: (713) 658-8881 Telephone: (212) 756-2000 Telecopy: (713) 658-9756 Telecopy: (212) 593-5955 ATTORNEYS FOR DEBTOR, ATTORNEYS FOR DLB OIL & WRT ENERGY CORPORATION GAS, INC. AND WEXFORD MANAGEMENT LLC DATED: March 11, 1997 113 UNITED STATES BANKRUPTCY COURT WESTERN DISTRICT OF LOUISIANA LAFAYETTE-OPELOUSAS DIVISION IN RE: ) ) WRT ENERGY CORPORATION, ) CASE NO. 96BK-50212 Taxpayer I.D. No. 71-1133320 ) (CHAPTER 11) ) DEBTOR. ) DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION UNDER CHAPTER 11 OF THE UNITED STATES BANKRUPTCY CODE This Second Amended Joint Plan of Reorganization Under Chapter 11 of the United States Bankruptcy Code (the "Plan") is proposed by WRT Energy Corporation ("WRT", "Debtor" or "New WRT", as applicable) and DLB Oil & Gas, Inc. and Wexford Management LLC, on behalf of its affiliated investment funds (collectively "DLBW"), pursuant to Sections 1121(a) and 1127, Title 11, United States Code, as follows: ARTICLE 1 DEFINITIONS Unless the context otherwise requires, the following capitalized terms shall have the following meanings in this Plan. Such meanings shall be equally applicable to both the singular and plural forms of such terms. The words "herein," "hereof," "hereunder" and other words of similar import refer to this Plan as a whole and not to any particular section, subsection or clause contained in this Plan unless the context requires otherwise. Whenever it appears appropriate from the context, each term stated in either the singular or the plural includes the singular and the plural, and pronouns stated in the masculine, feminine or neuter gender include the masculine, feminine and neuter. Any capitalized term in this Plan which is not defined herein shall have the meaning assigned to such term by the Bankruptcy Code or the Bankruptcy Rules. 1.1 ABBEVILLE FIELD CLAIMS: Allowed Secured Claims, the Collateral for which is in or on the Abbeville Field, Vermilion Parish, Louisiana. 1.2 ADJUSTED AMOUNT: With respect to a Disputed Claim, (a) to the extent such Disputed Claim is a liquidated Claim, the maximum liquidated face amount of such Disputed Claim as asserted in the relevant proof of claim or such other amount as the Bankruptcy Court shall have determined on or prior to the Subscription Rights Record Date in accordance with the Bankruptcy 114 Code is adequate for determining the amount of Cash or number of shares of New WRT Common Stock to be deposited in the Disputed Claims Reserve Account on account of such Disputed Claim and the number of New WRT Subscription Rights that the holder of such Disputed Claim shall be entitled to exercise pursuant to the Rights Offering in accordance with Article 29 of the Plan, or (b) to the extent that such Disputed Claim is a contingent or unliquidated Claim, an amount that the Bankruptcy Court shall determine on or prior to the Subscription Rights Record Date in accordance with the Bankruptcy Code is adequate for determining the amount of Cash or number of shares of New WRT Common Stock to be deposited in the Disputed Claims Reserve Account on account of such Disputed Claim and the number of New WRT Subscription Rights that the holder of such Disputed Claim shall be entitled to exercise pursuant to the Rights Offering in accordance with Article 29 of the Plan; in each case, such amount shall be the maximum allowable amount of such Claim unless the Bankruptcy Court shall order otherwise. 1.3 ADMINISTRATIVE CLAIM: A Claim for payment of an administrative expense of a kind specified in Section 503(b) of the Bankruptcy Code and referred to in Sections 507(a)(1) and 1114 of the Bankruptcy Code, including, without limitation, the actual, necessary costs and expenses incurred after the commencement of the Chapter 11 Case for preserving the estate and operating the business of the Debtor including wages, salaries or commissions for services, compensation for legal and other services and reimbursement of expenses awarded under Sections 330(a) or 331 of the Bankruptcy Code, costs of providing notices and ballots in connection with the Plan and of making distributions hereunder, taxes incurred after the Petition Date, the Stay Bonus, Indenture Trustee Claim, the DLBW Expense Reimbursement, and all fees and charges assessed against the estate under Chapter 123, Title 28, United States Code. 1.4 ADMINISTRATIVE CLAIMS BAR DATE: The last day for filing certain Administrative Claims in the Chapter 11 Case, to the extent fixed pursuant to an order of the Bankruptcy Court. 1.5 ADMINISTRATIVE SERVICES AGREEMENT: That certain Administrative Services Agreement, dated as of the Effective Date, between DLB and New WRT, attached as Exhibit "G" to the Disclosure Statement. 1.6 ALLOCATED OVERSUBSCRIPTION AMOUNT: For each Oversubscribing Creditor, the amount equal to (a) the fraction the numerator of which is such Oversubscribing Creditor's Oversubscription Amount and the denominator of which is the Total Oversubscription Amount times (b) the Disputed Exercise Price. 1.7 ALLOWED ADMINISTRATIVE CLAIM: All or that portion of an Administrative Claim which (a) has become an Allowed Claim or (b) was incurred by the Debtor in the ordinary course of business during the Chapter 11 Case. 1.8 ALLOWED CLAIM: All or that portion of a Claim, other than a Disputed Claim, as to which (a) on or by the Bar Date (i) no proof of claim was filed with the Bankruptcy Court to evidence such Claim and (ii) the liquidated and noncontingent amount is scheduled by the Debtor pursuant to the Bankruptcy Code as undisputed; (b) a proof of claim has been filed in a liquidated amount with the Court on or before the Bar Date or, in the case of an Administrative Claim subject to the DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 2 115 Administrative Claims Bar Date, a proof of Administrative Claim has been filed on or before the Administrative Claims Bar Date, provided that (i) no objection to the allowance of such Claim or a motion to expunge such Claim has been interposed on or prior to the applicable Claims Objection Deadline or (ii) if such objection or motion has been filed, such Claim has been allowed in whole or in part by a Final Order; (c) a stipulation to the amount of such Claim has been signed by the Debtor and the respective Creditor and approved by a Final Order; or (d) is otherwise deemed allowed under this Plan. 1.9 ALLOWED CONVENIENCE CLAIM: All or that portion of a Convenience Claim which has become an Allowed Claim. 1.10 ALLOWED GENERAL UNSECURED CLAIM: All or that portion of a General Unsecured Claim that has become an Allowed Claim. 1.11 ALLOWED INTEREST: Any Equity Interest exclusive of any shares of such stock held in treasury, which is registered as of the Record Date in such stock register as may be maintained by or on behalf of the Debtor and as to which no objection has been made or which has been allowed (and only to the extent allowed) by a Final Order. 1.12 ALLOWED PRIORITY CLAIM: All or that portion of a Priority Claim that has become an Allowed Claim. 1.13 ALLOWED PRIORITY TAX CLAIM: All or that portion of a Priority Tax Claim that has become an Allowed Claim. 1.14 ALLOWED SECURED CLAIM: All or that portion of a Secured Claim that (a) has become an Allowed Claim and as to which the Lien securing same is valid, perfected and enforceable under applicable law and is not subject to avoidance under the Bankruptcy Code or other applicable non-bankruptcy law; (b) which is duly established in the Chapter 11 Case, but only to the extent of the value of the interest of the holder of such Secured Claim in the Debtor's interest in the Assets which the Bankruptcy Court finds to be valid Collateral for such Claim (except if the class of which such Claim is a part validly and timely makes the election provided for in Section 1111(b)(2) of the Bankruptcy Code, in which case the entire amount of the Allowed Claim shall be an Allowed Secured Claim); and (c) less all payments which have been made to the holder of such Claim on account of such Claim on or after the Petition Date. For the purposes of Articles 11, 12 and 15 of the Plan, "Allowed Secured Claim" shall have the meaning as set forth therein. 1.15 ALLOWED SECURITIES LITIGATION CLAIM: All of that portion of a Securities Litigation Claim that has become an Allowed Claim. 1.16 ALLOWED TORT CLAIM: All of that portion of a Tort Claim that has become an Allowed Claim. DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 3 116 1.17 ALLOWED UNSECURED CLAIM: All or that portion of an Unsecured Claim that has become an Allowed Claim. "Allowed Unsecured Claim" shall not include interest on the principal amount of such Claim or attorney's fees from and after the Petition Date. 1.18 ASSETS: All right, title and interest in and to any and all property of every kind or nature, owned by the Debtor as of the Effective Date, including, but not limited to, property as defined in Section 541 of the Bankruptcy Code (each identified item of property being herein sometimes referred to as an "asset") including without limitation, Causes of Action and the Debtor's interest in D&O Policies. 1.19 ASSUMED OBLIGATIONS: Certain obligations relating to the WCBB Assets as more completely defined in the Purchase, Sale and Cooperation Agreement. 1.20 BALLOTING AGENT: The Person approved by the Bankruptcy Court to act as balloting agent with respect to the Plan. 1.21 BANKRUPTCY CODE: The Bankruptcy Reform Act of 1978, as amended and codified in Title 11, United States Code. 1.22 BANKRUPTCY COURT OR COURT: The unit of the United States District Court for the Western District of Louisiana, Lafayette-Opelousas Division, having jurisdiction over the Chapter 11 Case, or in the event such court ceases to exercise jurisdiction over the Chapter 11 Case, such court or adjunct thereof which exercises jurisdiction over the Chapter 11 Case in lieu of such unit of the United States District Court for the Western District of Louisiana. 1.23 BANKRUPTCY RULES: The Federal Rules of Bankruptcy Procedure, as amended and prescribed under 28 U.S.C. Section 2075, as applicable to the Chapter 11 Case, together with the Local Rules of the Bankruptcy Court. 1.24 BAR DATE: The final date for the filing of proofs of claims in the Chapter 11 Case, set by the Bankruptcy Court as July 1, 1996, or such other date as may apply to a particular Claim pursuant to a duly-entered order of the Bankruptcy Court. 1.25 BAYOU HENRY FIELD CLAIMS: Allowed Secured Claims, the Collateral for which is in or on the Iberville Parish, Louisiana. 1.26 BAYOU PENCHANT FIELD CLAIMS: Allowed Secured Claims, the Collateral for which is in or on the Bayou Penchant Field, Terrebonne Parish, Louisiana. 1.27 BAYOU PIGEON FIELD CLAIMS: Allowed Secured Claims, the Collateral for which is in or on the Bayou Pigeon Field, Iberia Parish, Louisiana. 1.28 BUSINESS DAY: Any day other than a Saturday, Sunday or "legal holiday" as defined in Bankruptcy Rule 9006(a). DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 4 117 1.29 BUYER'S LEASEHOLD AND FACILITIES: WRT's interest in (a) the approximately 400 acres of non-producing land included within the Contract Area (as defined in the CAOA), as more completely described in Schedule 1 hereto and (b) certain facilities related thereto, as more completely described in Schedule 2 hereto. 1.30 CAOA: Collectively, (a) the Contract Area Operating Agreement, dated as of July 1, 1987, among Texaco, Pelham Partners, Ltd., Breck Operating Corp., Fuller Petroleum, Inc., Chilicote Inc. and Tesla Resources, Inc. (as subsequently amended or modified), (b) the Sale and Assignment, dated July 22, 1988 but effective as of July 1, 1987, among Texaco, Inc., Pelham Partners, Ltd., Breck Operating Corp., Fuller Petroleum, Inc., Chilicote Inc., Tesla Resources, Inc. and Producing Property Management, Inc., (c) the Purchase and Sale Agreement, dated March 31, 1995, among Tenneco Gas Production Corporation, Tenneco Ventures Corporation and Tesla Resources, Inc., (d) the Purchase and Sale Agreement, dated March 31, 1995 between Benton Oil and Gas Company of Louisiana and Tesla Resources, Inc., (e) the Saltwater Disposal Letter Agreement, dated December 1, 1995, between TEPI and Tesla Resources, Inc., (f) the Compressor Facilities Letter Agreement, dated December 1, 1995, between TEPI and Tesla Resources, Inc. (g) the Dehydration Facilities Letter Agreement, dated December 1, 1995, between TEPI and Tesla Resources, Inc.; and (h) the Oil/Condensate Treating, Handling and Storage Facilities Letter Agreement, dated December 1, 1995, between TEPI and Tesla Resources, Inc. 1.31 CASH: Cash and cash equivalents including without limitation, bank deposits, checks, government securities, and other similar items. 1.32 CASUALTY INSURANCE POLICIES: All casualty insurance policies and all similar insurance policies that are property of the Debtor. 1.33 CAUSES OF ACTION: Any and all causes of action, claims, rights of action, suits or proceedings, whether in law or equity, whether known or unknown, which have been or could be asserted, by the Debtor, including, without limitation, causes of action under Sections 542, 543, 544, 545, 546, 547, 548, 549, 550, or 553(b) of the Bankruptcy Code. 1.34 CHAPTER 11 CASE: The case under Chapter 11 of the Bankruptcy Code in which WRT is the Debtor-in-Possession. 1.35 CLAIM: As defined in Section 101(5) of the Bankruptcy Code. 1.36 CLAIMANT OR CREDITOR: A Person asserting a Claim. 1.37 CLAIMS OBJECTION DEADLINE: With respect to any Claim other than an Administrative Claim, the date established by the Bankruptcy Court as the last date for filing objections to, or motions contesting the allowance or seeking the estimation of, such Claim. 1.38 CLASS: A group of Claims or Interests as classified by the Plan. DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 5 118 1.39 COLLATERAL: Any Asset subject to a valid and enforceable Lien securing the payment of a Claim. 1.40 COMMITMENT AGREEMENT: That certain Commitment Agreement, dated as of January 20, 1997, among WRT, DLB and Wexford, attached as Exhibit "H" to the Disclosure Statement, as may be amended or modified and as approved by the Bankruptcy Court. 1.41 COMMITTEE: The Official Committee of Unsecured Creditors appointed in the Chapter 11 Case of the Debtor. 1.42 COMMON STOCK: The common stock of WRT authorized and issued prior to the Petition Date. 1.43 COMPENSATION ESTIMATE: A good faith written estimate (a) to be filed on or before three (3) calendar days before the first date set for the hearing on the confirmation of the Plan of the maximum amount of compensation and reimbursement of expenses to be requested for any period prior to the Confirmation Date including, without limitation, any compensation for substantial contribution in the Chapter 11 Case and for any fees or premiums in addition to normal hourly charges or quoted fees and (b) to be filed on or before five (5) calendar days before the first date scheduled for the Effective Date of the maximum amount of compensation and reimbursement of expenses to be requested for any period subsequent to the Confirmation Date but prior to the Effective Date including, without limitation, any compensation for substantial contribution in the Chapter 11 Case and for any fees or premiums in addition to normal hourly charges or quoted fees. 1.44 CONFIRMATION DATE: The date of entry by the Bankruptcy Court of the Confirmation Order on the docket of the Bankruptcy Court. 1.45 CONFIRMATION ORDER: An order of the Bankruptcy Court and any amendment thereto confirming the Plan in accordance with the provisions of Chapter 11 of the Bankruptcy Code including Section 1129 of the Bankruptcy Code. 1.46 CONVENIENCE CLAIM: Any Unsecured Claim, the face amount or, if lower, the allowed amount of which (whether upon filing, amendments, allowances or otherwise) prior to any subdivision or assignment of any portion or portions thereof, does not exceed $2,500.00 in amount. 1.47 DARROW FIELD CLAIMS: Allowed Secured Claims, the Collateral for which is in or on the Darrow Field, Ascension Parish, Louisiana. 1.48 DEBTOR: WRT Energy Corporation, as Debtor and Debtor in Possession in the Chapter 11 case. 1.49 DEER ISLAND FIELD CLAIMS: Allowed Secured Claims, the Collateral for which is in or on the Deer Island Field, Terrebonne Parish, Louisiana. DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 6 119 1.50 DEFICIENCY CLAIM: A Claim of a Creditor asserting a Secured Claim equal to the amount by which the total Allowed Claim of such Creditor exceeds the sum of (a) any setoff rights of the Creditor permitted under Section 553 of the Bankruptcy Code as to such Claim, plus (b) the amount of the Claim which is determined to be an Allowed Secured Claim of such Creditor; provided, however, that if the holder of a Secured Claim or the Class of which such Claim is a member validly makes the election provided in Section 1111(b)(2) of the Bankruptcy Code, there shall be no Deficiency Claim with respect to such Claim. 1.51 DISBURSING AGENT: The Person approved by the Bankruptcy Court to act as disbursing agent with respect to the Plan. 1.52 DISBURSING AGENT AGREEMENT: The written agreement between the Disbursing Agent and New WRT, setting forth the duties and compensation of the Disbursing Agent. 1.53 DISCLOSURE STATEMENT: The First Amended Disclosure Statement issued in connection with the Plan, and approved by the Bankruptcy Court, together with all supplements thereto approved by the Bankruptcy Court. 1.54 DISPUTED CLAIM: A Claim against the Debtor as to which an objection or motion pursuant to Section 502 of the Bankruptcy Code has been timely filed, which objection or motion has not been withdrawn or resolved by entry of an order of the Bankruptcy Court. To the extent that such objection or motion relates to the allowance of any part of a Claim, such Claim shall be a Disputed Claim only to the extent of the objection or motion. Prior to the time that an objection has been or may be timely filed, for the purposes of the Plan, a Claim shall be considered a Disputed Claim to the extent that (a) the Debtor's Schedules do not list such Claim or list such Claim as contingent, unliquidated, or disputed, or (b) the amount of the Claim specified in the relevant proof of claim exceeds the amount that the Debtor's Schedules list as undisputed, liquidated and not contingent. 1.55 DISPUTED CLAIMS RESERVE ACCOUNT: The escrow accounts maintained by the Disbursing Agent as described in Article 27.5 of this Plan. 1.56 DISPUTED NEW WRT SUBSCRIPTION COMMON STOCK: New WRT Common Stock purchased as a result of the exercise of Disputed New WRT Subscription Rights pursuant to Articles 29.3 and 29.6 of this Plan. 1.57 DISPUTED NEW WRT SUBSCRIPTION RIGHTS: New WRT Subscription Rights issued on account of Disputed Claims pursuant to Articles 18.2 and 29.2 of this Plan. 1.58 DISPUTED EXERCISE PRICE: The product of (a) the number of shares of New WRT Common Stock available to be purchased on account of all Disputed New WRT Subscription Rights, times (b) $3.50. 1.59 DISPUTED SUBSCRIPTION PURCHASE PRICE: The meaning set forth in Article 29.6(d) of the Plan. DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 7 120 1.60 DISTRIBUTION RECORD DATE: The date established by the Bankruptcy Court as the record date for making Distributions under the Plan, which shall be no earlier than the Voting Deadline. 1.61 DISTRIBUTIONS: The Cash, New WRT Common Stock (including New WRT Subscription Common Stock), Litigation Entity Interests or New WRT Warrants required by the Plan to be delivered to the holders of Allowed Claims and Allowed Equity Interests. 1.62 DISTRICT COURT: The United States District Court for the Western District of Louisiana. 1.63 DLB: DLB Oil & Gas, Inc. 1.64 DLBW: DLB Oil & Gas, Inc. and Wexford Management LLC, on behalf of its affiliated investment funds, collectively as co-proponents of this Plan. 1.65 DLBW EXPENSE REIMBURSEMENT: The expenses to be reimbursed by the Debtor to DLBW pursuant to the order of the Bankruptcy Court dated December 24, 1996 and February 18, 1997 permitting or authorizing the Debtor's reimbursement of expenses of DLBW. 1.66 D&O POLICIES: All director and officer liability insurance policies and any interests or rights therein that are property of the Debtor. 1.67 EAST HACKBERRY FIELD CLAIMS: Allowed Secured Claims, the Collateral for which is in or on the East Hackberry Field, Cameron Parish, Louisiana. 1.68 EFFECTIVE DATE: The first date, no less than thirty (30) days and not more than ninety (90) days following the Confirmation Date on which (i) the Confirmation Order has not been stayed and (ii) the conditions to effectiveness have been satisfied. 1.69 EQUITY INTERESTS OR INTERESTS: Rights of the owners of the issued and outstanding shares of the Preferred Stock and Common Stock, WRT Warrants, and WRT Stock Options. 1.70 EXAMINER: Jason R. Searcy, Esq., heretofore appointed Examiner in the Chapter 11 Case. 1.71 EXCESS OVERSUBSCRIPTION: The amount, if any, by which the Total Oversubscription Amount exceeds the Disputed Exercise Price. 1.72 EXCESS OVERSUBSCRIPTION AMOUNT: For each Oversubscribing Creditor, the amount of Cash equal to the Oversubscription Amount minus the Allocated Oversubscription Amount. 1.73 EXERCISING CLAIMANT: The holder of an Allowed Claim in Class D-3, a Disputed Claim within Class D-3 or a Disputed Claim potentially within Class D-3 that has exercised, pursuant DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 8 121 to Article 29 of this Plan, the New WRT Subscription Rights that such holder was entitled to exercise on account of such Claim. 1.74 EXERCISED DISPUTED CLAIM: A Disputed Claim within Class D-3 or a Disputed Claim potentially within Class D-3 the holder of which has exercised, pursuant to Article 29 of this Plan, the Disputed New WRT Subscription Rights that such holder was entitled to exercise on account of such Disputed Claim. 1.75 FEE CLAIM: A Claim under Sections 330 or 503 of the Bankruptcy Code for the allowance of compensation and reimbursement of expenses in the Chapter 11 Case. 1.76 FINAL INSURANCE DISTRIBUTION: The meaning set forth in Article 17.1(a) of this Plan. 1.77 FINAL ORDER: An order or judgment of the Bankruptcy Court (or any other Court of competent jurisdiction) which is conclusive of all matters adjudicated thereby and is in full force and effect and has not been reversed, stayed, modified or amended and as to which (a) any appeal that has been filed has been finally determined or dismissed, or (b) the time for appeal has expired and no notice of appeal has been filed. 1.78 GENERAL UNSECURED CLAIMS: All Unsecured Claims other than Unsecured Claims in Classes D-1, D-2, D-4, E-2 and E-3. 1.79 GMAC: The meaning set forth in Article 5.1 of this Plan. 1.80 GMAC LOAN DOCUMENTS: The meaning set forth in Article 5.1 of this Plan. 1.81 GOLDEN MEADOW FIELD CLAIMS: Allowed Secured Claims, the Collateral for which is in or on the Golden Meadow Field, LaFourche Parish, Louisiana. 1.82 HOLDBACK PERCENTAGE: The meaning set forth in Article 17.1(c) of this Plan. 1.83 INCC: Internationale Nederlanden (U.S.) Capital Corporation and its successors. 1.84 INCC CREDIT AGREEMENT: That certain Credit Agreement between WRT Energy Corporation and Internationale Nederlanden (U.S.) Capital Corporation, dated December 30, 1994, as amended by that certain First Amendment to Credit Agreement, dated as of June 30, 1995, and that certain Second Amendment to Credit Agreement, dated as of August 18, 1995. 1.85 INCC NOTE: That certain Promissory Note, dated December 30, 1994, executed by WRT Energy Corporation, as the Borrower, and Internationale Nederlanden (U.S.) Capital Corporation, as the Lender, in the principal amount of up to $40,000,000.00. 1.86 INDENTURE AGREEMENT: The Indenture dated as of February 28, 1995, between WRT Energy Corporation, a Texas corporation and NationsBank of Texas, National Association, a national banking association. DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 9 122 1.87 INDENTURE TRUSTEE: The Bank of New York, a banking corporation organized under the laws of the State of New York, successor to NationsBank of Texas, National Association. 1.88 INDENTURE TRUSTEE CLAIM: The Claim of the Indenture Trustee in its capacity as such in an amount to which the Debtor, DLBW and Indenture Trustee agree which Claim shall be treated as an Allowed Administrative Claim in exchange for the Indenture Trustee's agreement to waive, as of the Effective Date, any and all of its rights under the Indenture Agreement relating to the payment of fees, expenses, indemnification or other amounts, including, without limitation, any direct rights against the Debtor and any right to enforce a lien against or otherwise affect the Distributions provided in this Plan in respect of any Claim. 1.89 INTERIM INSURANCE DISTRIBUTION: The meaning set forth in Article 17.1(c) of this Plan. 1.90 INTERIM INSURANCE DISTRIBUTION AMOUNTS: The meaning set forth in Article 17.1(c) of this Plan. 1.91 INTERIM PRO RATA PERCENTAGE: For each holder of an Allowed Claim in Class D-3, the percentage, calculated as of the Effective Date, equal to the product of (a) eighty-eight percent (88%), times (b) a fraction the numerator of which is the aggregate number of shares of New WRT Common Stock to be received by such holder on the Effective Date pursuant to Article 18.1 of the Plan and purchased by such holder pursuant to the Rights Offering and the denominator of which is thirteen million eight hundred thousand (13,800,000). 1.92 INTERIM PRO RATA SHARE: The proportion, calculated as of any given date, that a given Allowed Claim in a particular Class of Claims bears to the sum of (a) the amount of all Allowed Claims within such Class, (b) the Adjusted Amount of all Disputed Claims within such Class and (c) the Adjusted Amount of all Claims potentially within such Class which New WRT and the Committee, in their sole and absolute discretion, determine should be included in such calculation. 1.93 LAC BLANC FIELD CLAIMS: Allowed Secured Claims, the Collateral for which is in or on the Lac Blanc Field, Vermilion Parish, Louisiana. 1.94 LIEN: As defined in Section 101(37) of the Bankruptcy Code. 1.95 LITIGATION AGREEMENT: The agreement governing the terms of the Litigation Entity, in form and substance satisfactory to the Debtor, DLBW and the Committee, to be filed with the Bankruptcy Court on or before the Confirmation Date. 1.96 LITIGATION ENTITY: The entity to be created pursuant to Article 33.16 of the Plan. 1.97 LITIGATION ENTITY INTERESTS: Ownership interests in the Litigation Entity. 1.98 MARINE EQUIPMENT CAUSES OF ACTION: Any and all Causes of Action related to title to or rights to possession of the M/V AEC Energy II, M/V Latin Lady, M/V Cheryl Lynn, M/V DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 10 123 Energy IX, M/V Wiremaster, S/B Energy V, S/B Energy VI, M/V Energy Support I, M/V Miss Ashley, Crewboat My-O-My, Crewboat Skedaddle, M/V Energy X, M/V Energy VII, and WRT Rig No. 4A, and related equipment, together with any other Causes of Action which, pursuant to any applicable law, must be asserted or prosecuted in connection with such Causes of Action or counterclaims asserted with respect thereto. 1.99 MCBT: The meaning set forth in Article 8.1 of this Plan. 1.100 MCBT LOAN DOCUMENTS: The meaning set forth in Article 7.1 of this Plan. 1.101 NAPOLEONVILLE FIELD CLAIMS: Allowed Secured Claims, the Collateral for which is in or on the Napoleonville Field, Assumption Parish, Louisiana. 1.102 NEW ING TERM SHEET: That certain Summary of Terms and Conditions, setting forth the terms of a proposed loan from INCC to New WRT, attached as Exhibit "I" to the Disclosure Statement. 1.103 NEW WRT: From and after the Effective Date, WRT as reorganized pursuant to this Plan. 1.104 NEW WRT BY-LAWS: The by-laws for New WRT substantially in the form attached as Exhibit "J" to the Disclosure Statement. 1.105 NEW WRT CERTIFICATE OF INCORPORATION: The certificate of incorporation for New WRT substantially in the form attached as Exhibit "K" to the Disclosure Statement. 1.106 NEW WRT COMMON STOCK: 50,000,000 shares of common stock of New WRT, to be authorized and issued in part in accordance with the terms and conditions of this Plan. 1.107 NEW WRT SUBSCRIPTION COMMON STOCK: The 3,800,000 shares of New WRT Common Stock purchased as a result of the exercise of New WRT Subscription Rights pursuant to, and in accordance with the terms of, Article 29 of this Plan and the terms of the New WRT Subscription Rights Agreement. 1.108 NEW WRT SUBSCRIPTION RIGHTS: The right to subscribe to 3,800,000 shares of New WRT Common Stock to be given to Unsecured Creditors pursuant to Articles 18.2 and 29 of this Plan and pursuant to the New WRT Subscription Rights Agreement. 1.109 NEW WRT SUBSCRIPTION RIGHTS AGREEMENT: That certain Subscription Rights Agreement, dated as of the Confirmation Date, between WRT and the Disbursing Agent, with respect to the New WRT Subscription Rights, attached as Exhibit "L" to the Disclosure Statement. 1.110 NEW WRT WARRANTS: Warrants which shall be issued by New WRT on the Effective Date in accordance with the terms of this Plan and the New WRT Warrant Agreement. The aggregate amount of warrants issued shall be not more than five percent (5%) of the total New WRT DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 11 124 Common Stock that would be issued on the Effective Date if all New WRT Warrants were exercised on the Effective Date. Such New WRT Warrants shall have an exercise period of five (5) years from the Effective Date of the Plan and shall provide to the holders thereof the right, per each New WRT Warrant, to purchase one share of New WRT Common Stock for a purchase price of $10.00. 1.111 NEW WRT WARRANT AGREEMENT: That certain Warrant Agreement, dated as of the Effective Date, between New WRT and the Disbursing Agent, with respect to the New WRT Warrants, attached as Exhibit "M" to the Disclosure Statement. 1.112 OIL & GAS LIEN CLASS: The meaning set forth in Article 11.1 of this Plan. 1.113 OIL & GAS LIEN NOTE: The meaning set forth in Articles 11.5(a), 12.5(a) and 15.5(a) of this Plan. 1.114 OTHER OIL & GAS LIEN CLASS: The meaning set forth in Article 15.1 of the Plan. 1.115 OVERSUBSCRIBING CREDITOR: The meaning set forth in Article 29.6(b) of the Plan. 1.116 OVERSUBSCRIPTION AMOUNT: The meaning set forth in Article 29.6(b) of the Plan. 1.117 PERSON: An individual, corporation, partnership, association, joint stock company, joint venture, estate, trust, unincorporated organization or governmental entity or any particular subdivision thereof or other entity. 1.118 PETITION DATE: February 14, 1996, the date of filing of the Chapter 11 Case by WRT. 1.119 PLAN: This Second Amended Joint Plan of Reorganization and all exhibits and schedules annexed hereto or referred to herein, either in its or their present form(s) or as it or they may be altered, amended, or modified from time to time pursuant to Article 36 hereof. 1.120 PREFERRED STOCK: 9% Convertible Preferred Stock of WRT authorized and issued prior to the Petition Date. 1.121 PRIORITY CLAIM: Any Claim entitled to priority in payment under Sections 507(a)(3) through 507(a)(7) of the Bankruptcy Code. 1.122 PRIORITY TAX CLAIM: Any Claim entitled to priority in payment under Section 507(a)(8) of the Bankruptcy Code. 1.123 PRO RATA DISPUTED PERCENTAGE: For each Oversubscribing Creditor, the percentage, calculated as of the first Business Day after the Subscription Rights Election Deadline and after giving effect to the adjustments set forth in Article 29.6(b) of the Plan, equal to the product of (a) one hundred percent (100%), times (b) the fraction the numerator of which is such Oversubscribing Creditor's Oversubscription Amount and the denominator of which is the Disputed Exercise Price. DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 12 125 1.124 PRO RATA PERCENTAGE: For each holder of an Allowed Claim in Class D-3, the percentage, calculated after the date on which all Disputed Claims within or potentially within Class D-3 have been either allowed or disallowed by Final Order, equal to the product of (a) eighty-eight percent (88%), times (b) the fraction the numerator of which is the aggregate number of shares of New WRT Common Stock received by such holder pursuant to Article 18.1 of the Plan and purchased by such holder pursuant to the Rights Offering and the denominator of which is thirteen million eight hundred thousand (13,800,000). 1.125 PRO RATA SHARE: The proportion, calculated after the date on which all Disputed Claims within a particular Class and all other Disputed Claims potentially within such Class have been either allowed or disallowed by Final Order, that a given Allowed Claim in such Class bears to the amount of all Allowed Claims within such Class. 1.126 PURCHASE, SALE AND COOPERATION AGREEMENT: The Purchase, Sale and Cooperation Agreement, dated March 11, 1997, between Texaco and DLB, as described in the Disclosure Statement. 1.127 RANKIN FIELD CLAIMANTS: Creditors asserting Secured Claims supported by Liens attached to Rankin Field Proceeds. 1.128 RANKIN FIELD PROCEEDS: The net sales proceeds generated from the sale of the Debtor's Assets located in or on the Rankin Field, Harris County, Texas to American Energy Sources, Inc., as authorized by the Bankruptcy Court by order entered on July 2, 1996. 1.129 RECORD DATE: The date set by the Bankruptcy Court as the date for determining record holders of Claims against the Debtor, Common Stock and Preferred Stock for purposes of voting on the Plan. 1.130 REGISTRATION RIGHTS AGREEMENT: That certain Registration Rights Agreement, dated as of the Effective Date, among New WRT, DLB and Wexford. 1.131 REPURCHASED NEW WRT SUBSCRIPTION COMMON STOCK: The meaning set forth in Article 29.6(e) of this Plan. 1.132 RESERVE AMOUNT: The number of shares of New WRT Common Stock and the amount of Cash required to be deposited in the appropriate Disputed Claims Reserve Account on account of a Disputed Claim or Claims, in each case determined on the basis of the Adjusted Amount of such Disputed Claim or Claims. 1.133 RIGHTS OFFERING: The issuance to the holders of Allowed Claims in Class D-3, of the right to purchase shares of New WRT Subscription Common Stock pursuant to, and in accordance with the terms of, Article 29 of this Plan and the New WRT Subscription Rights Agreement. 1.134 ROYALTY: Sums payable to the holder of a Royalty Interest out of the proceeds received from production of oil and gas. DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 13 126 1.135 ROYALTY INTEREST: an interest created in oil, gas or other hydrocarbons or minerals that entitles the owner of such interest to a share of production and/or the proceeds realized therefrom (a) if, as and when there is production of such oil, gas or other hydrocarbons or minerals, free of the costs of production, or (b) measured by net profits derived from the operation of the property from which the oil, gas or other hydrocarbons or minerals are produced. 1.136 SCHEDULES: The Schedules and Statement of Affairs, as amended, filed by the Debtor with the Bankruptcy Court listing liabilities and assets. 1.137 SECURED CLAIM: A Claim subject to setoff under Section 553 of the Bankruptcy Code or secured by a Lien on Assets of the Debtor which Lien is valid, perfected and enforceable under applicable law and is not subject to avoidance under the Bankruptcy Code or applicable non-bankruptcy law and which is duly established in the Chapter 11 Case, but only to the extent of the value of the Collateral that secures payment of the Claim or to the extent of the amount subject to setoff, as the case may be. 1.138 SECURED CREDITOR: The holder of a Secured Claim. 1.139 SECURITIES LITIGATION: That certain litigation which is pending in the United States District Court for the Southern District of New York, styled In re WRT Energy Securities Litigation, Case No. 96 Civ. 3610 (JFK), United States District Court, Southern District of New York. 1.140 SECURITIES LITIGATION CLAIMS: Claims of Creditors and holders of Equity Interests asserted within the Securities Litigation. 1.141 SENIOR NOTES: Notes evidencing 100,000 Units of 13-7/8% Senior Notes Due 2002, aggregating a principal amount of $100.0 million, and executed and issued by WRT prior to the Petition Date in accordance with the Indenture Agreement. 1.142 SHALLOW CONTRACT AREA: The leasehold ownership in State Lease 340 located in St. Mary Parish in the western portion of West Cote Blanche Bay known as West Cote Blanche Bay Field limited to depths from the surface to the base of the Robb "C" marker found in the Texaco, WCBB #265 well at 10,575 feet. 1.143 SOUTH ATCHAFALAYA FIELD CLAIMS: Allowed Secured Claims, the Collateral for which is assets in or on the South Atchafalaya Field, St. Mary Parish, Louisiana. 1.144 STATE/LAFOURCHE SETTLEMENT: Any and all stipulations of settlement or settlement agreement between the Debtor and the State of Louisiana and/or the LaFourche Parish School Board approved by the Bankruptcy Court pursuant to Rule 9019 of the Bankruptcy Rules. 1.145 STAY BONUS: Bonuses payable to the Debtor's employees pursuant to the bonus program as authorized by the Bankruptcy Court pursuant to its Order entered November 6, 1996. DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 14 127 1.146 STOCK TRANSFER AGENT: American Stock Transfer & Trust Company, a New York corporation 1.147 SUBSCRIPTION PURCHASE PRICE: The purchase price that an Exercising Claimant must pay in order to exercise its Subscription Rights and purchase the New WRT Subscription Common Stock pursuant to such Subscription Rights in accordance with Article 29 of this Plan and the terms of the New WRT Subscription Rights Agreement, which price shall be equal to the product of (a) the number of shares of New WRT Subscription Common Stock being purchased pursuant to such Subscription Rights, times (b) $3.50. 1.148 SUBSCRIPTION RIGHTS ELECTION DEADLINE: The date by which any Creditor entitled to exercise New WRT Subscription Rights must deliver such Creditor's Subscription Rights Election Form and pay the Subscription Purchase Price and any Oversubscription Amount to the Disbursing Agent in order to exercise such New WRT Subscription Rights, which date shall be on or about the forty-fifth (45th) day after the date of the hearing with respect to the confirmation of the Plan. 1.149 SUBSCRIPTION RIGHTS ELECTION FORM: As defined in the New WRT Subscription Rights Agreement. 1.150 SUBSCRIPTION RIGHTS RECORD DATE: The date established by the Bankruptcy Court as the record date for distributing the Subscription Rights Elections Forms to the Claimants entitled to receive New WRT Subscription Rights pursuant to Article 29 of this Plan. 1.151 SUBSCRIPTION RIGHTS RESERVE ACCOUNT: The escrow account maintained by the Disbursing Agent as described in the New WRT Subscription Rights Agreement. 1.152 TEPI: Texaco Exploration and Production Inc. 1.153 TEXACO: Texaco Inc. and its subsidiaries and affiliates, as the particular context dictates. 1.154 TIGRE LAGOON FIELD CLAIMS: Allowed Secured Clams, the Collateral for which is in or on the Tigre Lagoon Field, Vermilion Parish, Louisiana. 1.155 TORT CLAIMS: All Unsecured Claims based on legally defined torts, including, but not limited to Claims arising out of or related to personal injuries, wrongful death, physical damage to property, and rights of contribution and indemnity arising therefrom, together with all resulting or related damages as to any such Claims which may be asserted pursuant to applicable laws. 1.156 TOTAL OVERSUBSCRIPTION AMOUNT: The meaning set forth in Article 29.6(b) of the Plan. 1.157 TRANSFER AND EXCHANGE AGREEMENT: The Transfer and Exchange Agreement, dated as of the Effective Date, between DLB and New WRT, providing for, inter alia, the transfer to New DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 15 128 WRT of the WCBB Assets and the transfer to DLB of the Buyer's Leasehold and Facilities, as described in the Disclosure Statement. 1.158 TRICORE: Tricore Energy Venture, L.P. 1.159 TRI-DECK CAUSES OF ACTION: Causes of Action of the Debtor against Tri-Deck Oil & Gas Company, related Persons and Perry Gas Companies, Inc. relating to the purchase and sale of oil, gas and other hydrocarbons produced by the Debtor and the proceeds therefrom. 1.160 UNCLAIMED DISTRIBUTION: Any Distribution (together with any interest earned thereon) which is unclaimed six (6) months following the date on which the Disbursing Agent makes or attempts to make payment in respect of such Distribution. Unclaimed Distributions shall include (a) checks (and the funds represented thereby) that have been returned as undeliverable without a proper forwarding address, (b) funds for checks that have not cleared, (c) checks (and the funds represented thereby) that were not mailed or delivered because of the absence of a proper address to which to mail or deliver such property and (d) New WRT Common Stock and New WRT Warrants that the Disbursing Agent has been unable to deliver. 1.161 UNEXERCISED DISPUTED SUBSCRIPTION RIGHTS: Any and all Disputed New WRT Subscription Rights that are Unexercised Subscription Rights. 1.162 UNEXERCISED DISPUTED NEW WRT SUBSCRIPTION COMMON STOCK: All New WRT Subscription Common Stock related to Unexercised Disputed Subscription Rights. 1.163 UNEXERCISED SUBSCRIPTION RIGHTS: Any and all New WRT Subscription Rights that, as of the Subscription Rights Election Deadline, have not been exercised or have been deemed not to have been exercised due to the failure of the holders thereof to meet the requirements of Article 29.3 of this Plan including, without limitation, all New WRT Subscription Rights that are not exercised as a result of the inability of the Disbursing Agent to distribute such New WRT Subscription Rights pursuant to Article 27.4 of this Plan. 1.164 UNSECURED CLAIMS: Any and all Claims held by Creditors of the Debtor which Claims are not secured by Assets of the Debtor, including, but not limited to, Deficiency Claims, Claims arising from rejection of executory contracts and unexpired leases which are not otherwise secured by Liens, and Claims arising from litigation or suits against WRT. For purposes of the definition, "Unsecured Claims" do not include Administrative Claims, Priority Claims, Priority Tax Claims, or Secured Claims. 1.165 UNSECURED CREDITOR: Any Creditor that holds an Unsecured Claim. 1.166 VOTING DEADLINE: The date set by the Bankruptcy Court by which the Balloting Agent must receive ballots for accepting or rejecting the Plan. 1.167 WCBB ASSETS: The interests of TEPI and Texaco in the producing area of the leasehold ownership in State Lease 340 located in St. Mary Parish in the western portion of West DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 16 129 Cote Blanche Bay known as West Cote Blanche Bay Field limited to depths from the surface to the base of the Robb "C" marker found in the Texaco, WCBB #265 well at 10,575 feet, together with certain facilities related thereto, as more completely described Schedule 3 hereto. 1.168 WARRANT AGENT: American Stock Transfer & Trust Company, a New York corporation. 1.169 WARRANT AGREEMENT: The Warrant Agreement dated as of February 28, 1995, between WRT Energy Corporation, a Texas corporation, and American Stock Transfer & Trust Company, a New York corporation. 1.170 WEST COTE BLANCHE BAY FIELD CLAIMS: Allowed Secured Claims, the Collateral for which is in or on the West Cote Blanche Bay Field, St. Mary Parish, Louisiana. 1.171 WEST HACKBERRY FIELD CLAIMS: Allowed Secured Claims, the Collateral for which is in or on the West Hackberry Field, Cameron Parish, Louisiana. 1.172 WEST LAKE PONTCHARTRAIN FIELD CLAIMS: Allowed Secured Claims, the Collateral for which is in or on the West Lake Pontchartrain Field, Jefferson Parish, Louisiana. 1.173 WEXFORD: Wexford Management LLC, on behalf of its affiliated investment funds. 1.174 WFNB: The meaning set forth in Article 9.1 of this Plan. 1.175 WFNB LOAN DOCUMENTS: The meaning set forth in Article 9.1 of this Plan. 1.176 WRT: WRT Energy Corporation, a Texas corporation and the Debtor in the Chapter 11 Case. 1.177 WRT STOCK OPTIONS: Options authorized and granted by WRT prior to the Petition Date, giving the holders thereof the right to purchase Common Stock of WRT. 1.178 WRT WARRANTS: Warrant certificates and Senior Notes containing thereon the endorsement "Warrant Endorsement" representing beneficial ownership of warrants, issued by WRT in conjunction with the Warrant Agreement, and entitling the holders thereof to exercise the option to purchase one share of WRT Common Stock per each warrant for $10.00, or such other price as determined pursuant to provisions within the Warrant Agreement, and exercisable through March 1, 2000, which were authorized and issued prior to the Petition Date. ARTICLE 2 CLASSIFICATION OF CLAIMS AND INTERESTS 2.1 CLASSIFICATION GENERALLY: All Claims and Equity Interests, except Administrative Claims and Priority Tax Claims are placed in the following Classes. A Claim or Equity Interest is DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 17 130 classified in a particular Class only to the extent that the Claim or Equity Interest qualifies within the description of the Class and is classified in a different Class to the extent that the Claim or Equity Interest qualifies within the description of that Class. A proof of Claim or Equity Interest which asserts a Claim or an Equity Interest which is properly includible in more than one Class is in the Class asserted only to the extent it qualifies within the description of such Class and is in a different Class to the extent it qualifies within a description of such different Class. UNCLASSIFIED CLAIMS Allowed Administrative Claims Allowed Priority Tax Claims CLASSIFIED CLAIMS PRIORITY CLAIMS: Class A-1: Allowed Priority Claims SECURED CONTRACT CLAIMS: Class B-1: Allowed Secured Claim of GMAC Class B-2: Allowed Secured Claim of INCC Class B-3: Allowed Secured Claim of MC Bank & Trust Company Class B-4: Allowed Secured Claim of Tricore Class B-5: Allowed Secured Claim of Woodforest National Bank Class B-6: Allowed Secured Claim of The Woodlands Corporation DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 18 131 ALLOWED SECURED OIL AND GAS LIEN CLAIMS: Class C-1: Abbeville Field Claims Class C-2: Bayou Henry Field Claims Class C-3: Bayou Penchant Field Claims Class C-3-A: North Lease Claimants Class C-3-B: South Lease Claimants Class C-3-C: South/North Lease Claimants Class C-4: Bayou Pigeon Field Claims Class C-4-A: Brownell Kidd 90 Lease Claimants Class C-4-B: David R. McHugh Estate Lease Claimants Class C-4-C: Edward H. Peterman Lease Claimants Class C-4-D: Lynch McHugh Heirs et al Lease Claimants Class C-4-E: VF Landry et al 52 Lease Claimants Class C-4-F: VF Landry et al 90 Lease Claimants Class C-4-G: Brownell Kidd 11/66 Lease Claimants Class C-4-H: Richard Lynch Heirs Lease Claimants Class C-4-I: VF Landry 11/66 Lease Claimants Class C-5: Darrow Field Claims Class C-6: Deer Island Field Claims Class C-6-A: CL&F 12/21/45 Lease Claimants Class C-6-B: CL&F 12/26/45 Lease Claimants Class C-6-C: CL&F SWD Well #1 Claimants Class C-7: East Hackberry Field Claims Class C-7-A: M.P. Erwin Lease Claimants Class C-7-B: State Lease 50 Lease Claimants Class C-8: Golden Meadow Field Claims Class C-9: Lac Blanc Field Claims DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 19 132 Class C-10: Napoleonville Field Claims Class C-10-A: Dugas & LeBlanc Ltd 2/94 Lease Claimants Class C-10-B: Dugas & LeBlanc Ltd 3/94 Lease Claimants Class C-10-C: Dugas & LeBlanc Ltd 93 Lease Claimants Class C-10-D: E. Robert Sternfels et al 90 Lease Claimants Class C-10-E: Dougas LeBlanc A SWD Well Claimants Class C-11: Rankin Field Claims Class C-12: South Atchafalaya Bay Field Claims Class C-13: Tigre Lagoon Field Claims Class C-14: West Cote Blanche Bay Field Claims Class C-15: West Hackberry Field Claims Class C-15-A: R Vincent 1/18/38 Lease Claimants Class C-15-B: R Vincent 5/36 Lease Claimants Class C-16: West Lake Pontchartrain Field Claims UNSECURED CLAIMS: Class D-1: Allowed Convenience Claims Class D-2: Allowed Tort Claims Class D-3: Allowed General Unsecured Claims Class D-4: Allowed Securities Litigation Claims Based Upon Senior Note Ownership EQUITY INTERESTS: Class E-1: Preferred Stock Class E-2: Allowed Securities Litigation Claims Based Upon Preferred Stock Ownership Class E-3: Common Stock and Allowed Securities Litigation Claims Based Upon Common Stock Ownership Class E-4: WRT Warrants Class E-5: WRT Stock Options DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 20 133 ARTICLE 3 PROVISIONS FOR PAYMENT OF UNCLASSIFIED CLAIMS 3.1 PAYMENT IN FULL TO ADMINISTRATIVE CLAIMANTS: Unless otherwise agreed, each Allowed Administrative Claim shall be paid in full in Cash by no later than the later of (a) the Effective Date or (b) fifteen (15) days after the Administrative Claim becomes an Allowed Administrative Claim; provided, however, that Administrative Claims that represent liabilities incurred by the Debtor in the ordinary course of business during the Chapter 11 Case shall be paid in the ordinary course of business in accordance with any related agreements. 3.2 BAR DATE FOR ADMINISTRATIVE CLAIMS: (a) Compensation Estimate. Any Person retained or requesting compensation or expense reimbursement pursuant to Sections 328, 330, 503(b)(2) through (6) or 1103 of the Bankruptcy Code shall file a Compensation Estimate (i) on or before three (3) calendar days before the first date set for the hearing on the confirmation of this Plan and (ii) on or before five (5) calendar days before the first date scheduled for the Effective Date, ten (10) calendar days notice of which shall be provided to all persons filing compensation estimates under clause (i) of this Article 3.2(a). (b) Filing and Allowance of Administrative Claims. The holder of an Administrative Claim other than (i) an Allowed Administrative Claim or (ii) an Administrative Claim that represents a liability incurred by the Debtor in the ordinary course of business, must (a) file a proof of Administrative Claim (or, in the case of a Fee Claim, an application seeking the Bankruptcy Court's approval of such Fee Claim) on or before the Administrative Claims Bar Date and (b) serve a copy of such proof of Administrative Claim or the application for the approval of such Fee Claim upon the parties set forth in the order of the Bankruptcy Court establishing the Administrative Claims Bar Date. Failure to timely file such proof of Administrative Claim (or application) shall result in the Administrative Claim being forever barred and discharged. An Administrative Claim other than a Fee Claim, proof of which has been timely filed, shall become an Allowed Administrative Claim if no objection thereto is filed within thirty (30) days after the later of the Confirmation Date and the date of filing and service of such proof of Administrative Claim or application, as the case may be . If an objection is filed within such thirty (30) day period, the Administrative Claim shall only become an Allowed Administrative Claim to the extent allowed by Final Order. A Fee Claim with respect to which an application is timely filed shall become an Allowed Administrative Claim only to the extent allowed by Final Order. Notwithstanding the foregoing, for reasonable services rendered after the Confirmation Date, the Debtor or New WRT, as applicable, shall promptly pay any professional person retained by DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 21 134 the Debtor or the Committee, and any member of the Committee, upon submission of proper written invoices detailing the reasonable services rendered and expenses incurred for which compensation or reimbursement is sought. 3.3 PAYMENT IN FULL TO PRIORITY TAX CLAIMANTS: Unless otherwise agreed, each Allowed Priority Tax Claim shall be paid in full in equal quarter- annual installments of principal during a period of time from the Effective Date to December 31, 2001, plus interest at the rate of LIBOR (London Inter- Bank Offered Rate) plus 2% per annum from and after the Effective Date which shall also be paid quarter-annually. The first such installment shall be paid on the first day of the calendar quarter (a) next following the Effective Date or (b) next following the Priority Tax Claim becoming an Allowed Claim, whichever occurs later; and subsequent installments shall be paid quarter-annually thereafter; provided, however, that New WRT shall have the option to prepay (without penalty or premium) any or all of the Allowed Priority Tax Claims at any time up until December 31, 2001. ARTICLE 4 PROVISIONS FOR TREATMENT OF ALLOWED PRIORITY CLAIMS (CLASS A-1) 4.1 PAYMENT IN FULL TO PRIORITY CLAIMANTS: Unless otherwise agreed, each Allowed Priority Claim shall be paid in full in Cash by no later than the later of (a) the Effective Date or (b) fifteen (15) days after the Priority Claim becomes an Allowed Priority Claim. 4.2 STATUS OF CLASS: Class A-1 is unimpaired. Therefore, votes for acceptance or rejection of the Plan from members of such Class will not be solicited. ARTICLE 5 PROVISIONS FOR TREATMENT OF ALLOWED SECURED CLAIM OF GMAC (CLASS B-1) 5.1 CURE OF EXISTING DEFAULTS: Unless otherwise agreed, New WRT shall cure all existing monetary defaults under the documents evidencing the Allowed Secured Claim of General Motors Acceptance Corporation ("GMAC") (the "GMAC Loan Documents"), such cure to occur by no later than the later of (a) the Effective Date or (b) fifteen (15) days after the entry of a Final Order determining such cure amount in the event of a disagreement between GMAC and New WRT as to such amount. 5.2 REINSTATEMENT OF OBLIGATIONS: Unless otherwise agreed, the obligations of WRT to GMAC with respect to the Allowed Secured Claim of GMAC shall be reinstated and New WRT shall make payments to GMAC pursuant to the GMAC Loan Documents from and after the date of cure of all monetary defaults as provided in Article 5.1 of the Plan. DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 22 135 5.3 RELEASE OF LIEN: Upon final payment to GMAC under the GMAC Loan Documents, GMAC, or its successor in interest if applicable, shall promptly provide to New WRT all such documentation as New WRT deems necessary to effectuate a release of all of GMAC's Liens against Collateral of New WRT. 5.4 STATUS OF CLASS: Class B-1 is unimpaired. Therefore, a vote for acceptance or rejection of the Plan from the Claimant within such Class will not be solicited. ARTICLE 6 PROVISIONS FOR TREATMENT OF ALLOWED SECURED CLAIM OF INCC (CLASS B-2) 6.1 DETERMINATION OF ALLOWED SECURED CLAIM OF INCC: The Allowed Secured Claim of INCC shall be fixed and allowed as of the Effective Date as the sum of (a) the principal indebtedness under the INCC Note and INCC Credit Agreement, which indebtedness shall include all accrued interest, fees and costs as of the Petition Date; (b) accrued interest on the principal set forth in (a) above at the non-default rate of interest provided in the INCC Credit Agreement from and after the Petition Date and through the Effective Date, and (c) any reasonable fees, costs or other charges provided for under the INCC Credit Agreement as agreed between INCC and DLBW and the Debtor. 6.2 LOAN: The Allowed Secured Claim of INCC will be paid in full in cash on the Effective Date. 6.3 STATUS OF CLASS: Class B-2 is impaired. Therefore, a vote for acceptance or rejection of the Plan will be solicited from the Claimant within such Class. ARTICLE 7 PROVISIONS FOR TREATMENT OF ALLOWED SECURED CLAIM OF MC BANK & TRUST COMPANY (CLASS B-3) 7.1 CURE OF EXISTING DEFAULTS: Unless otherwise agreed, New WRT shall cure all existing monetary defaults under the documents evidencing the Allowed Secured Claim of MC Bank & Trust Company ("MCBT") (the "MCBT Loan Documents"), such cure to occur by no later than the later of (a) the Effective Date or (b) fifteen (15) days after the entry of a Final Order determining such cure amount in the event of a disagreement between MCBT and New WRT as to such amount. 7.2 REINSTATEMENT OF OBLIGATIONS: Unless otherwise agreed, the obligations of WRT to MCBT with respect to the Allowed Secured Claim of MCBT shall be reinstated and New WRT shall make payments to MCBT pursuant to the MCBT Loan Documents from and after the date of cure of all monetary defaults as provided in Article 7.1 of the Plan. DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 23 136 7.3 RELEASE OF LIEN: Upon final payment to MCBT under the MCBT Loan Documents, MCBT, or its successor in interest if applicable, shall promptly provide to New WRT all such documentation as New WRT deems necessary to effectuate a release of all of MCBT's Liens against Collateral of New WRT. 7.4 STATUS OF CLASS: Class B-3 is unimpaired. Therefore, a vote for acceptance or rejection of the Plan from the Claimant within such Class will not be solicited. ARTICLE 8 PROVISIONS FOR TREATMENT OF ALLOWED SECURED CLAIM OF TRICORE (CLASS B-4) 8.1 PAYMENT IN FULL: Unless otherwise agreed, the Allowed Secured Claim, if any, of Tricore shall be paid in full in Cash by no later than the later of (a) the Effective Date or (b) fifteen (15) days after such Secured Claim becomes an Allowed Secured Claim, provided the conditions set forth in Article 8.2 below are met. 8.2 RELEASE OF COLLATERAL: Contemporaneous with and as a condition to New WRT's payment of Tricore's Allowed Secured Claim pursuant to the terms of Article 8.1 above, Tricore, or its successor in interest if applicable, shall execute and deliver to New WRT all such documentation which New WRT deems necessary to effectuate a release by Tricore of all Collateral securing Tricore's Claim. 8.3 STATUS OF CLASS: Class B-4 is impaired. Therefore, a vote for acceptance or rejection of the Plan from the Claimant within such Class will be solicited. ARTICLE 9 PROVISIONS FOR TREATMENT OF ALLOWED SECURED CLAIM OF WOODFOREST NATIONAL BANK (CLASS B-5) 9.1 CURE OF EXISTING DEFAULTS: Unless otherwise agreed, New WRT shall cure all existing monetary defaults under the documents evidencing the Allowed Secured Claim to Woodforest National Bank ("WFNB") (the "WFNB Loan Documents"), such cure to occur by no later than the later of (a) the Effective Date or (b) fifteen (15) days after the entry of a Final Order determining such cure amount in the event of a disagreement between WFNB and New WRT as to such amount. 9.2 REINSTATEMENT OF OBLIGATIONS: Unless otherwise agreed, the obligations of WRT to WFNB with respect to the Allowed Secured Claim of WFNB shall be reinstated and New WRT shall make payments to WFNB pursuant to the WFNB Loan Documents from and after the date of cure of all monetary defaults as provided in Article 9.1 of the Plan. DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 24 137 9.3 RELEASE OF LIEN: Upon final payment to WFNB under the WFNB Loan Documents, WFNB, or its successor in interest if applicable, shall promptly provide to New WRT all such documentation as New WRT deems necessary to effectuate a release all of WFNB's Liens against Collateral of New WRT. 9.4 STATUS OF CLASS: Class B-5 is unimpaired. Therefore, a vote for acceptance or rejection of the Plan from the Claimant within such Class will not be solicited. ARTICLE 10 PROVISIONS FOR TREATMENT OF ALLOWED SECURED CLAIM OF THE WOODLANDS CORPORATION (CLASS B-6) 10.1 PAYMENT IN FULL: Unless otherwise agreed, the Allowed Secured Claim of The Woodlands Corporation shall be paid in full in Cash by no later than the later of (a) the Effective Date or (b) fifteen (15) days after such Secured Claim becomes an Allowed Secured Claim, provided the conditions set forth in Article 10.2 below are met. 10.2 RELEASE OF LIEN: Contemporaneous with and as a condition to New WRT's payment of The Woodlands Corporation's Allowed Secured Claim pursuant to the terms of Article 10.1 above, The Woodlands Corporation, or its successor in interest if applicable, shall execute and deliver to New WRT all such documentation which New WRT deems necessary to effectuate a release of all of The Woodlands Corporation's Liens against Collateral of New WRT. 10.3 STATUS OF CLASS: Class B-6 is impaired. Therefore, a vote for acceptance or rejection of the Plan from the Claimant within such Class will be solicited. ARTICLE 11 PROVISIONS FOR TREATMENT OF ALLOWED SECURED CLAIMS OF OIL & GAS LIEN CLASS CLAIMANTS (CLASSES C-1, C-3, C-4, C-6, C-7-A, C-8 AND C-10) 11.1 APPLICABILITY OF PROVISIONS: The provisions of this Article 11 shall apply independently to each of the following Classes: C-1, C-3 and C-4, C-6, C-7-A, C-8 and C-10 (each respective Class referred to as "Oil & Gas Lien Class" herein). 11.2 PAYMENT OF ALLOWED SECURED CLAIMS: (a) Unless a particular Oil & Gas Lien Class elects treatment under Section 1111(b)(2) of the Bankruptcy Code, in full and final satisfaction of its Claim, each holder of an Allowed Secured Claim in such Class shall, at the option of such holder, either (i) be paid in Cash in an amount equal to the amount of such holder's Allowed Secured Claim (excluding therefrom all interest, fees DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 25 138 or expenses, all which accrued post-petition, included in such Allowed Secured Claim) or (ii) receive the number of shares of New WRT Common Stock obtained by dividing the amount of such holder's Allowed Secured Claim (excluding therefrom all interest, fees or expenses, all which accrued post-petition, included in such Allowed Secured Claim) by a purchase price of $3.50 per share, in either case by no later than the later of (i) the Effective Date or (ii) fifteen (15) days after its Secured Claim has become an Allowed Secured Claim, provided that the conditions set forth in Article 11.3 are met. (b) For the purpose of Article 11.2(a) hereof, the amount of the Allowed Secured Claim of each Claimant in an Oil & Gas Lien Class will be determined on the basis of the assumption that the value of such Claimant's interest in the Debtor's interest in the applicable Collateral is equal to one hundred percent (100%) of the principal amount of such Claimant's Secured Claim as allowed. 11.3 RELEASE OF COLLATERAL: Contemporaneous with and as a condition to New WRT's payment of Allowed Secured Claims in the Oil and Gas Lien Classes pursuant to the terms of Article 11.2 above, holders of Allowed Secured Claims in the Oil and Gas Lien Classes, or their successors in interest if applicable, shall execute and deliver to New WRT all such documentation which New WRT deems necessary to effectuate a release of the applicable Liens against Collateral of New WRT. 11.4 ELECTION OF SECTION 1111(b)(2) TREATMENT: On or before the conclusion of the hearing on the Disclosure Statement, each Oil & Gas Lien Class shall have the option to elect treatment under Section 1111(b)(2) of the Bankruptcy Code in accordance with Bankruptcy Rule 3014. An Oil & Gas Lien Class shall have made such election if at least 2/3 in amount and more than 1/2 in number of the Claims in such Class make such election. 11.5 PROVISIONS FOR TREATMENT OF CLASSES ELECTING 1111(b)(2) TREATMENT: Each Oil & Gas Lien Class electing treatment under Section 1111(b)(2) of the Bankruptcy, as provided in Article 11.4 above, shall receive the following treatment: (a) Payment: Each holder of an Allowed Secured Claim in such Class shall receive, in equal monthly installments over a period of seven (7) years, deferred Cash payments totaling at least the amount of the Allowed Secured Claim, with a value as of the Effective Date, of at least the holder's interest in the estate's interest in the Collateral securing such Claim. By no later than the later of (a) the Effective Date or (b) fifteen (15) days after the Claim becomes an Allowed Secured Claim, New WRT shall execute and deliver to the holder of such Allowed Secured Claim a non-recourse promissory note (the "Oil & Gas Lien Note") evidencing such payment terms. (b) Retention of Liens: Each holder of an Allowed Secured Claim who is in a Class which has elected treatment under Section 1111(b)(2) shall retain its Liens to secure repayment of the Oil & Gas Lien Note until such Oil & Gas Lien Note is fully paid or until the holder otherwise agrees. DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 26 139 (c) Release of Liens: Upon satisfaction of the Oil & Gas Lien Note, the holder thereof shall promptly execute and deliver to New WRT all such documentation which New WRT deems necessary to effectuate a release of the holder's Liens against Collateral of New WRT. (d) Prepayment: Each Oil & Gas Lien Note may be prepaid by New WRT or on behalf of New WRT at any time without penalty, provided that such payment include any accrued interest through the date of such prepayment. (e) No Recourse Against New WRT: Holders of Allowed Secured Claims who are in Classes which have elected treatment under Section 1111(b)(2) of the Bankruptcy Code shall have no recourse against New WRT. In the event of a default under the Oil & Gas Lien Note provided by Article 11.5(a), such Creditor's recourse shall be limited to the Collateral to which such Creditor's Liens are attached. 11.6 STATUS OF CREDITORS: The Oil & Gas Lien Classes are impaired. Therefore, votes for acceptance or rejection of the Plan will be solicited from Claimants within each Oil & Gas Lien Class. ARTICLE 12 PROVISIONS FOR TREATMENT OF ALLOWED SECURED EAST HACKBERRY STATE LEASE 50 CLAIMS (CLASS C-7-B) 12.1 APPLICABILITY OF PROVISIONS: The provisions of this Article 12 shall apply to Class C-7-B. 12.2 PAYMENT OF ALLOWED SECURED CLAIMS: (a) Unless Class C-7-B elects treatment under Section 1111(b)(2) of the Bankruptcy Code, in full and final satisfaction of its Claim, each holder of an Allowed Secured Claim in such Class shall, at the option of such holder, either (i) be paid in Cash in an amount equal to 75% of the amount of such holder's Allowed Secured Claim (as determined by Section 12.2(b)) or (ii) receive the number of shares of New WRT Common Stock obtained by dividing the 75% of amount of such holder's Allowed Secured Claim (as determined by Section 12.2(b)) by a purchase price of $3.50 per share, in either case by no later than the later of (i) the Effective Date or (ii) fifteen (15) days after its Secured Claim has become an Allowed Secured Claim, provided that the conditions set forth in Article 12.3 are met. (b) For the purpose of Article 12.2(a) hereof, the amount of the Allowed Secured Claim of each Claimant in Class C-7-B will be determined on the basis of the assumption that the value of such Claimant's interest in the Debtor's interest DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 27 140 in the applicable Collateral is equal to seventy-five percent (75%) of the principal amount of such Claimant's Secured Claim as allowed. 12.3 RELEASE OF COLLATERAL: Contemporaneous with and as a condition to New WRT's payment of Allowed Secured Claims in Class C-7-B pursuant to the terms of Article 12.2 above, holders of Allowed Secured Claims in Class C-7-B, or their successors in interest if applicable, shall execute and deliver to New WRT all such documentation which New WRT deems necessary to effectuate a release of the applicable Liens against Collateral of New WRT. 12.4 ELECTION OF SECTION 1111(b)(2) TREATMENT: On or before the conclusion of the hearing on the Disclosure Statement, Class C-7-B shall have the option to elect treatment under Section 1111(b)(2) of the Bankruptcy Code in accordance with Bankruptcy Rule 3014. Class C-7-B shall have made such election if at least 2/3 in amount and more than 1/2 in number of the Claims in the Class make such election. 12.5 PROVISIONS FOR TREATMENT OF CLASS IF ELECTING 1111(b)(2) TREATMENT: If Class C-7-B elects treatment under Section 1111(b)(2) of the Bankruptcy, as provided in Article 12.4 above, shall receive the following treatment: (a) Payment: Each holder of an Allowed Secured Claim in Class C-7-B shall receive, in equal monthly installments over a period of seven (7) years, deferred Cash payments totaling at least the amount of the Allowed Secured Claim, with a value as of the Effective Date, of at least the holder's interest in the estate's interest in the Collateral securing such Claim. By no later than the later of (a) the Effective Date or (b) fifteen (15) days after the Claim becomes an Allowed Secured Claim, New WRT shall execute and deliver to the holder of such Allowed Secured Claim a non-recourse promissory note (the "Oil & Gas Lien Note") evidencing such payment terms. (b) Retention of Liens: Each holder of an Allowed Secured Claim in a Class C-7-B shall retain its Liens to secure repayment of the Oil & Gas Lien Note until such Oil & Gas Lien Note is fully paid or until the holder otherwise agrees. (c) Release of Liens: Upon satisfaction of the Oil & Gas Lien Note, the holder thereof shall promptly execute and deliver to New WRT all such documentation which New WRT deems necessary to effectuate a release of the holder's Liens against Collateral of New WRT. (d) Prepayment: Each Oil & Gas Lien Note may be prepaid by New WRT or on behalf of New WRT at any time without penalty, provided that such payment include any accrued interest through the date of such prepayment. (e) No Recourse Against New WRT: Holders of Allowed Secured Claims in Class C-7-B shall have no recourse against New WRT. In the event of a default under the Oil & Gas Lien Note provided by Article 12.5(a), such Creditor's DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 28 141 recourse shall be limited to the Collateral to which such Creditor's Liens are attached. 12.6 STATUS OF CREDITORS: Class C-7-B is impaired. Therefore, votes for acceptance or rejection of the Plan will be solicited from Claimants within such Class. ARTICLE 13 PROVISIONS FOR TREATMENT OF ALLOWED SECURED CLAIMS OF RANKIN FIELD CLAIMANTS (CLASS C-11) 13.1 PAYMENT IN FULL: Unless otherwise agreed, the Allowed Secured Claims of Rankin Field Claimants shall be paid in full in Cash out of the Rankin Field Proceeds by no later than the later of (a) the Effective Date or (b) fifteen (15) days after all such Secured Claims held by Rankin Field Claimants become Allowed Secured Claims or are disallowed. 13.2 STATUS OF CREDITOR: Class C-11 is impaired. Therefore, votes for acceptance or rejection of the Plan by Claimants within Class C-11 will be solicited. ARTICLE 14 PROVISIONS FOR TREATMENT OF ALLOWED SECURED WEST COTE BLANCHE BAY FIELD CLAIMS (CLASS C-14) 14.1 PAYMENT IN FULL: Unless otherwise agreed, each holder of a West Cote Blanche Bay Field Claim that is an Allowed Secured Claim shall, at such holder's option, either (i) be paid in full in Cash or (ii) receive the number of shares of New WRT Common Stock obtained by dividing the liquidated amount of such holder's Allowed Secured Claim by a purchase price of $3.50 per share, in either case by no later than the later of (a) the Effective Date or (b) fifteen (15) days after the date on which such Claim becomes an Allowed Secured Claim, provided that the conditions set forth in Article 14.2 are met. 14.2 RELEASE OF COLLATERAL: Contemporaneous with and as a condition to New WRT's payment of an Allowed Secured Claim within Class C-14 pursuant to the terms of Article 14.1, the holder of such Allowed Secured Claim shall execute and deliver to New WRT all such documentation as New WRT deems necessary to effectuate the release by such holders of Liens against Collateral of New WRT. 14.3 STATUS OF CLASS: Class C-14 is impaired. Therefore, votes for acceptance or rejection of the Plan from Claimants within such Class will be solicited. DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 29 142 ARTICLE 15 PROVISIONS FOR TREATMENT OF ALLOWED OTHER OIL & GAS LIEN CLASS CLAIMANTS (CLASSES C-2, C-5, C-9, C-12, C-13, C-15 AND C-16) 15.1 APPLICABILITY OF PROVISIONS: The provisions of this Article 15 shall apply independently to each of the following Classes: C-2, C-5, C-9, C- 12, C-13, C-15 and C-16 (each respective Class referred to as "Other Oil & Gas Lien Class" herein). 15.2 PAYMENT OF ALLOWED SECURED CLAIMS: (a) Unless a particular Other Oil & Gas Lien Class elects treatment under Section 1111(b)(2) of the Bankruptcy Code, in full and final satisfaction of its Claim, each holder of an Allowed Secured Claim in such Class shall, at the option of such holder, either (i) be paid in Cash in an amount equal to 50% of the amount of such holder's Allowed Secured Claim (as determined by Section 15.2(b)) or (ii) receive the number of shares of New WRT Common Stock obtained by dividing the 50% of amount of such holder's Allowed Secured Claim (as determined by Section 15.2(b)) by a purchase price of $3.50 per share, in either case by no later than the later of (i) the Effective Date or (ii) fifteen (15) days after its Secured Claim becomes an Allowed Secured Claim, provided that the conditions set forth in Article 15.3 are met. (b) For the purpose of Article 15.2(a) hereof the amount of the Allowed Secured Claim of each Claimant in an Other Oil & Gas Lien Class will be determined on the basis of the assumption that the value of such Claimant's interest in the Debtor's interest in the applicable Collateral is equal to fifty percent (50%) of the principal amount of such Claimant's Secured Claim as allowed. 15.3 RELEASE OF COLLATERAL: Contemporaneous with and as a condition to New WRT's payment of Allowed Secured Claims in the Other Oil & Gas Lien Classes pursuant to the terms of Article 15.2 above, holders of Allowed Secured Claims in the Other Oil & Gas Lien Classes, or their successors in interest if applicable, shall execute and deliver to New WRT all such documentation which New WRT deems necessary to effectuate a release of the applicable Liens against Collateral of New WRT. 15.4 ELECTION OF SECTION 1111(B)(2) TREATMENT: On or before the conclusion of the hearing on the Disclosure Statement, each Other Oil & Gas Lien Class shall have the option to elect treatment under Section 1111(b)(2) of the Bankruptcy Code in accordance with Bankruptcy Rule 3014. An Other Oil & Gas Lien Class shall have made such election if at least 2/3 in amount and more than 1/2 in number of the Claims in such Class make such election. 15.5 PROVISIONS FOR TREATMENT OF CLASSES ELECTING 1111(B)(2) TREATMENT: Each Other Oil & Gas Lien Class electing treatment under Section 1111(b)(2) of the Bankruptcy, as provided in Article 15.4 above, shall receive the following treatment: DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 30 143 (a) Payment: Each holder of an Allowed Secured Claim in such Class shall receive, in equal monthly installments over a period of seven (7) years, deferred Cash payments totaling at least the amount of the Allowed Secured Claim, with a value as of the Effective Date, of at least the holder's interest in the estate's interest in the Collateral securing such Claim. By no later than the later of (a) the Effective Date or (b) fifteen (15) days after the Claim becomes an Allowed Secured Claim, New WRT shall execute and deliver to the holder of such Allowed Secured Claim a non-recourse promissory note (the "Oil & Gas Lien Note") evidencing such payment terms. (b) Retention of Liens: Each holder of an Allowed Secured Claim who is in a Class which has elected treatment under Section 1111(b)(2) shall retain its Liens to secure repayment of the Oil & Gas Lien Note until such Oil & Gas Lien Note is fully paid or until the holder otherwise agrees. (c) Release of Liens: Upon satisfaction of the Oil & Gas Lien Note, the holder thereof shall promptly execute and deliver to New WRT all such documentation which New WRT deems necessary to effectuate a release of the holder's Liens against Collateral of New WRT. (d) Prepayment: Each Oil & Gas Lien Note may be prepaid by New WRT or on behalf of New WRT at any time without penalty, provided that such payment include any accrued interest through the date of such prepayment. (e) No Recourse Against New WRT: Holders of Allowed Secured Claims who are in Classes which have elected treatment under Section 1111(b)(2) of the Bankruptcy Code shall have no recourse against New WRT. In the event of a default under the Oil & Gas Lien Note provided by Article 15.5(a), such Creditor's recourse shall be limited to the Collateral to which such Creditor's Liens are attached. 15.6 STATUS OF CREDITORS: The Other Oil & Gas Lien Classes are impaired. Therefore, votes for acceptance or rejection of the Plan will be solicited from Claimants within each Other Oil & Gas Lien Class. ARTICLE 16 PROVISIONS FOR TREATMENT OF ALLOWED CONVENIENCE CLAIMS (CLASS D-1) 16.1 PARTIAL PAYMENT IN CASH: Unless otherwise agreed, in full and final satisfaction of its Claim, each holder of an Allowed Convenience Claim shall be paid 50% of such Allowed Claim in Cash by no later than the later of (a) the Effective Date, or (b) fifteen (15) days after the Unsecured Claim becomes an Allowed Convenience Claim. DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 31 144 16.2 STATUS OF CREDITORS: Class D-1 is impaired. Therefore, votes for acceptance or rejection of the Plan will be solicited from Claimants within such Class. ARTICLE 17 PROVISIONS FOR TREATMENT OF ALLOWED TORT CLAIMS (CLASS D-2) 17.1 PAYMENT OF ALLOWED TORT CLAIMS: In full and final satisfaction of Allowed Tort Claims, all such Claims shall be satisfied and discharged in the following manner: (a) Insurance Proceeds: If and when a Claim in Class D-2 becomes an Allowed Claim, proceeds from Casualty Insurance Policies which become payable as a consequence of such allowance shall be disbursed by the insurer obligated to pay such proceeds as part of an Interim Insurance Distribution (as hereinafter defined), or shall be held by the insurer until such time as all Claims in Class D-2 payable from proceeds of a particular Casualty Insurance Policy are either allowed or disallowed pursuant to Final Order (the time of "Final Insurance Distribution"). The insurer under the particular policy involved may submit to the Bankruptcy Court an affidavit attesting that it is aware of no further Claims being asserted against the Debtor against such Casualty Insurance Policy and thereupon seek an order of the Bankruptcy Court determining that all Claims in Class D-2 payable from proceeds of such Casualty Insurance Policy have either become Allowed Claims or have been disallowed pursuant to Final Order. The insurer under a particular Casualty Insurance Policy may apply insurance proceeds for payment of the insurer's fees and expenses without further order of the Bankruptcy Court. Any insurance proceeds held by an insurer until such time as all Claims in Class D-2 payable from proceeds of a particular Casualty Insurance Policy are either Allowed Claims or disallowed pursuant to Final Order, and any amounts for fees and expenses incurred by insurers shall reduce the remaining insurance policy limits by the amounts of such held proceeds or expenditures. (b) Disbursements: At such time as all Claims in Class D-2 payable from proceeds of a particular Casualty Insurance Policy for which proceeds are being held as set forth above either (i) become Allowed Claims or (ii) are disallowed pursuant to Final Order, the insurer shall disburse to the holders of such Allowed Claims the insurance proceeds then being held, and in the event that there are insufficient proceeds being held to pay in full each said Allowed Claim, then and in such event the distribution shall be made on a pro-rata basis as follows: Each holder of an Allowed Claim in Class D-2 payable from proceeds of a particular Casualty Insurance Policy for which funds are being held shall receive an amount equal to the product of all proceeds from such Casualty Insurance Policy held or previously distributed by the insurer, multiplied by a fraction, the numerator of which is the holder's Allowed Claim DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 32 145 in Class D-2, and the denominator of which is the total amount of all Allowed Claims in Class D-2 to the holders of which such held proceeds are payable, less any Interim Insurance Distribution Amount (as hereinafter defined) previously distributed to such Class D-2 Claimant pursuant to the provisions of Article 17.1(c) hereof. (c) Interim Insurance Distributions: Notwithstanding the provisions of Article 17.1(a) and 17.1(b) above, an insurer may make a distribution (an "Interim Insurance Distribution") of proceeds of a particular Casualty Insurance Policy (the "Interim Insurance Distribution Amounts") for an Allowed Claim in Class D-2 at any time, upon the following conditions: (i) the Claimant to receive such Interim Insurance Distribution Amount is the holder of an Allowed Claim in Class D-2; (ii) the Interim Insurance Distribution Amount to be distributed to the holder of such Allowed Claim does not exceed the Holdback Percentage (as hereinafter defined) times the total amount of such Allowed Claim; and (iii) the holder of such Allowed Claim has complied with all other provisions of this Plan. As used herein, the "Holdback Percentage" shall mean a fraction, the numerator of which is the stated policy limits of coverage provided by a particular policy and the denominator of which is the sum, for such Casualty Insurance Policy, of the amounts listed on timely filed proofs of claim of those Claimants asserting Tort Claims asserted to be covered by such Casualty Insurance Policy. The Holdback Percentage and the Interim Insurance Distribution Amounts may be recalculated to reflect reductions, if any, in available insurance proceeds and/or outstanding Claims. All Claims in Class D-2 shall be deemed objected to until allowed. In no event shall any holder of a Claim in Class D-2, or affiliate thereof, or the Debtor assert any action related to a policy or the Debtor against any insurer of the Debtor except as provided herein, and any order confirming this Plan shall function as an injunction under 11 U.S.C. Section 105 enjoining such action. (d) Effect of Retention Provisions: Notwithstanding any provision herein to the contrary, if insurance proceeds become payable as a consequence of the allowance of a Claim in Class D-2 and the relevant Casualty Insurance Policy contains a retention (deductible) provision that has not been previously paid by the Debtor, then and in such event (i) the amount of proceeds to be paid by the insurer shall be reduced by the unpaid retention and (ii) the holder of DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 33 146 the Allowed Claim in Class D-2 shall be deemed to hold an Allowed Claim in Class D-3 in the amount of such unpaid retention. 17.2 RESERVATION OF RIGHTS IN INSURERS: Except as specifically above set forth herein with respect to Articles 17.1(b) and 17.1(c), the insurers under all Casualty Insurance Policies shall retain all rights (including, but not limited to, rights to defend claims, settle claims, and retain and pay defense counsel), remedies, defenses, discretions and corresponding obligations as provided in each such Casualty Insurance Policy and any related agreements. No insurer shall be required to make a disbursement to the holder of an Allowed Claim in Class D-2, as provided above, unless the holder of such Allowed Claim executes and delivers to the insurer a release of all Claims and Causes of Action in such form and containing such provisions as may be required by the insurer. 17.3 DUTY OF COOPERATION: New WRT shall have a continuing duty to cooperate with and assist the insurers issuing or having issued Casualty Insurance Policies to the Debtor in defense of Claims against the Debtor. New WRT shall, inter alia, provide the insurers, upon request, with all relevant documentation and witnesses (both fact and expert) for the defense, trial and resolution of Claims against the Debtor, provided that the documentation is in the custody of New WRT and the witnesses (both fact and expert) are in the employ or subject to the control of New WRT. 17.4 STATUS OF CREDITORS: Class D-2 is impaired. Therefore, votes for acceptance or rejection of the Plan will be solicited from Claimants within such Class. ARTICLE 18 PROVISIONS FOR TREATMENT OF ALLOWED GENERAL UNSECURED CLAIMS (CLASS D-3) 18.1 DISTRIBUTIONS OF STOCK AND LITIGATION ENTITY INTERESTS: In full and final satisfaction of its Claim, each holder of an Allowed Claim within Class D-3 shall receive (a) its Pro Rata Share of an aggregate distribution of ten million (10,000,000) shares of New WRT Common Stock, (b) a certificate representing its Pro Rata Percentage of the Litigation Entity Interests, and (c) the option to participate in the Rights Offering as provided in Articles 18.2 and 29 of the Plan. 18.2 OPTION TO PARTICIPATE IN RIGHTS OFFERING: Each holder of an Allowed Claim within Class D-3 shall also receive its Interim Pro Rata Share, calculated as of the Subscription Rights Record Date, of the New WRT Subscription Rights provided for in Article 29 of the Plan, entitling such holder to participate in the Rights Offering described in and under the terms of such Article; provided, however, that if holders of at least two-thirds ( 2/3) in dollar amount of Claims entitled to vote held by Class D-3 Claimants voting on the Plan do not vote to accept the Plan, the Rights Offering will not occur and the holders of Allowed Claims in Class D-3 will receive no New WRT Subscription Rights. 18.3 STATUS OF CREDITORS: Class D-3 is impaired. Therefore, votes for acceptance or rejection of the Plan will be solicited from Claimants within such Class. DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 34 147 ARTICLE 19 PROVISIONS FOR TREATMENT OF ALLOWED SECURITIES LITIGATION CLAIMS BASED UPON SENIOR NOTE OWNERSHIP (CLASS D-4) 19.1 CONTINGENT DISTRIBUTION: If Classes D-1, D-2, and D-3 accept the Plan, in full and final satisfaction of its Claim, each holder of an Allowed Claim in Class D-4 shall receive its Pro Rata Share of an aggregate distribution of New WRT Warrants equal to 2% of the total New WRT Common Stock that would be issued pursuant to the Plan on the Effective Date if all New WRT Warrants were exercised on the Effective Date. 19.2 REJECTION BY CLASSES D-1, D-2, OR CLASS D-3: If Class D-1, D-2, or D-3 rejects the Plan, then holders of Allowed Claims in Class D-4 shall receive no Distribution under the Plan. 19.3 STATUS OF CREDITORS: Class D-4 is impaired. Therefore, votes for acceptance or rejection of the Plan will be solicited from Claimants within such Class. ARTICLE 20 PROVISIONS FOR TREATMENT OF INTERESTS OF HOLDERS OF PREFERRED STOCK(CLASS E-1) 20.1 CONTINGENT DISTRIBUTION: If Classes D-1, D-2, D-3, and D-4 accept the Plan, in full and final satisfaction of their Interests, each holder of an Allowed Interest in Class E-1 as of the Distribution Record Date shall receive its Pro Rata Share of an aggregate distribution of New WRT Warrants equal to 1% of the total New WRT Common Stock that would be issued pursuant to the Plan on the Effective Date if all New WRT Warrants were exercised on the Effective Date. The New WRT Warrants will be issued pro rata to each holder of an Allowed Interest in Class E-1 based upon its respective number of shares of Preferred Stock. 20.2 REJECTION BY CLASSES D-1, D-2, D-3, OR D-4: If Class D-1, D-2, D-3 or D-4 rejects the Plan, the New WRT Warrants otherwise distributable to Class E-1 shall not be so distributed and holders of Allowed Interests in Class E-1 shall receive no Distribution. 20.3 STATUS OF CLASS: Class E-1 is impaired. Therefore, votes for acceptance or rejection of the Plan will be solicited from holders with Equity Interests in such Class. ARTICLE 21 PROVISIONS FOR TREATMENT OF ALLOWED SECURITIES LITIGATION CLAIMS BASED UPON PREFERRED STOCK OWNERSHIP (CLASS E-2) 21.1 CONTINGENT DISTRIBUTION: If Classes D-1, D-2, D-3, D-4 and E-1 accept the Plan, in full and final satisfaction of its Claim each holder of an Allowed Claim in Class E-2 shall receive its Pro Rata Share of an aggregate distribution of New WRT Warrants equal to 1% of the total New DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 35 148 WRT Common Stock that would be issued pursuant to the Plan on the Effective Date if all New WRT Warrants were exercised on the Effective Date. 21.2 REJECTION BY CLASSES D-1, D-2, D-3, D-4 OR E-1: If Class D-1, D-2, D-3, D-4 or E-1 rejects the Plan, the New WRT Warrants otherwise distributable to holders of Allowed Claims in Class E-2 shall not be so distributed and holders of Allowed Claims in Class E-2 shall receive no distribution. 21.3 STATUS OF CLASS: Class E-2 is impaired. Therefore, votes for acceptance or rejection of the Plan will be solicited from holders of Claims in such Class. ARTICLE 22 PROVISIONS FOR TREATMENT OF INTERESTS OF HOLDERS OF COMMON STOCK AND ALLOWED SECURITIES LITIGATION CLAIMS BASED UPON COMMON STOCK OWNERSHIP (CLASS E-3) 22.1 CONTINGENT DISTRIBUTION: If Classes D-1, D-2, D-3, D-4, E-1 and E-2 accept the Plan, in full and final satisfaction of their Claims and Interests, each holder of an Allowed Claim or Allowed Interest in Class E-3 as of the Distribution Record Date shall receive its Pro Rata Share (based upon the number of shares of Common Stock currently owned, or bought or sold) of an aggregate distribution of New WRT Warrants equal to 1% of the total New WRT Stock that would be issued pursuant to the Plan on the Effective Date if all New WRT Warrants were exercised on the Effective Date. The New WRT Warrants will be issued pro rata to each holder of an Allowed Claim or Allowed Interest in Class E-3 based upon its respective number of shares of Common Stock or, in the case of Claims, the number of shares of Common Stock upon which the holder's Securities Litigation Claim is premised. 22.2 REJECTION BY CLASSES D-1, D-2, D-3, D-4, E-1 OR E-2: If Class D- 1, D-2, D-3, D-4, E-1 or E-2 rejects the Plan, the New WRT Warrants otherwise distributable to Class E-3 shall not be so distributed, and holders of Allowed Claims and Allowed Interests in Class E-3 shall receive no Distribution. 22.3 STATUS OF CLASS: Class E-3 is impaired. Therefore, votes for acceptance or rejection of the Plan from holders of Claims and Equity Interests in such Class will be solicited. ARTICLE 23 PROVISIONS FOR TREATMENT OF INTERESTS OF HOLDERS OF WRT WARRANTS (CLASS E-4) 23.1 NO DISTRIBUTION: Holders of WRT Warrants shall receive no Distribution under the Plan. DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 36 149 23.2 STATUS OF CLASS: Class E-4 is impaired. Because holders of Equity Interests in Class E-4 are deemed to have rejected the Plan by virtue of Section 1126(g) of the Bankruptcy Code, their votes for acceptance or rejection of the Plan will not be solicited. ARTICLE 24 PROVISIONS FOR TREATMENT OF INTERESTS OF HOLDERS OF WRT STOCK OPTIONS (CLASS E-5) 24.1 NO DISTRIBUTION: Holders of WRT Stock Options shall receive no Distribution under the Plan. 24.2 STATUS OF CLASS: Class E-5 is impaired. Because holders of Equity Interests in Class E-5 Interest Holders are deemed to have rejected the Plan by virtue of Section 1126(g) of the Bankruptcy Code, their votes for acceptance or rejection of the Plan will not be solicited. ARTICLE 25 IDENTIFICATION OF CLAIMS AND INTERESTS NOT IMPAIRED BY THE PLAN 25.1 UNIMPAIRED CLASSES: Classes A-1, B-1, B-3, and B-5 are not impaired under the Plan and, therefore, votes for the Plan by the holders of Claims in such Classes will not be solicited due to the presumed acceptance of the Plan by such holders pursuant to Section 1126(f) of the Bankruptcy Code, unless otherwise indicated in this Plan. 25.2 IMPAIRED CLASSES ENTITLED TO VOTE ON PLAN: Classes B-2, B-4, B- 6, C-1 through C-16, D-1, D-2, D-3, D-4, E-1, E-2, E-3, E-4 and E-5 are impaired and holders of Claims or Equity Interests in such Classes are, therefore, entitled to vote for acceptance or rejection of the Plan, and their votes will be solicited, with the exception of Classes E-4 and E-5, unless otherwise indicated in this Plan. 25.3 DEEMED REJECTIONS BY HOLDERS OF EQUITY INTERESTS: Notwithstanding votes which are actually cast by holders of Equity Interests and Claims within Classes D-4, E-1, E-2 and E-3, if Class D-1, D-2 or D-3 rejects the Plan, then Classes D-4, E-1, E-2 and E-3 shall be deemed to have rejected the Plan in accordance with Section 1126(g) of the Bankruptcy Code. Similarly, (a) if Class D-4 rejects the Plan, then Classes E-1 through E-3 shall be deemed to have rejected the Plan; (b) if Class E-1 rejects the Plan, then Classes E-2 and E-3 shall be deemed to have rejected the Plan; and (c) if Class E-2 rejects the Plan, then Class E-3 shall be deemed to have rejected the Plan. Classes E-4 and E-5 are deemed to have rejected the Plan. DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 37 150 ARTICLE 26 ACCEPTANCE OR REJECTION OF THE PLAN; EFFECT OF REJECTION BY ONE OR MORE CLASSES OF IMPAIRED CLAIMS 26.1 ACCEPTANCE OF PLAN BY CLASS OF CREDITORS: A Class of Creditors shall have accepted the Plan if the Plan is accepted by holders of Claims of at least 2/3 in amount and more than 1/2 in number in such Class who vote to accept or reject the Plan. 26.2 ACCEPTANCE OF PLAN BY CLASS OF EQUITY INTERESTS: A Class of Equity Interests shall have accepted the Plan if the Plan is accepted by holders of Equity Interests of at least 2/3 in amount who vote to accept or reject the Plan. 26.3 CRAMDOWN: In the event that one or more Classes of Creditors or Equity Interests rejects the Plan, as long as at least one impaired Class of Creditors votes to accept the Plan (disregarding the votes of insiders), the Debtor shall request the Bankruptcy Court to confirm the Plan in accordance with Section 1129(b) of the Bankruptcy Code. ARTICLE 27 DISTRIBUTIONS UNDER THE PLAN 27.1 DELIVERY OF DISTRIBUTIONS TO DISBURSING AGENT: On the Effective Date, New WRT shall (a) issue shares of New WRT Common Stock in an amount sufficient to make all Distributions under the Plan constituting New WRT Common Stock and (b) issue New WRT Warrants and (c) deliver to the Disbursing Agent such New WRT Common Stock, such New WRT Warrants and an amount of Cash sufficient to make all Distributions constituting Cash required under this Plan, in each case for distribution to the holders of Allowed Claims and Allowed Interests in accordance with the terms of this Plan. 27.2 INITIAL DISTRIBUTIONS: All Distributions under this Plan shall be made to (or in the case of Disputed Claims, reserved on behalf of) holders of Claims and Equity Interests determined as of the Distribution Record Date. On the Effective Date, or as soon thereafter as is reasonably practicable, but in no event more than ten (10) Business Days after the Effective Date, the Disbursing Agent shall make all Distributions and payments required under this Plan, and shall deposit the Reserve Amounts in the Disputed Claims Reserve Accounts to the extent required by this Plan or the Bankruptcy Court in respect of Disputed Claims. The Disbursing Agent shall distribute to each holder of an Allowed Claim in Class D-3 determined as of the Distribution Record Date (a) the number of shares of New WRT Common Stock equal to the sum of (i) such holder's Interim Pro Rata Share of ten million shares of New WRT Common Stock plus (ii) the shares of New WRT Subscription Common Stock, if any, purchased by such holder pursuant to the Rights Offering, and (b) a certificate representing such holder's Interim Pro Rata Percentage of the Litigation Entity Interests. DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 38 151 27.3 INTERIM AND FINAL DISTRIBUTIONS TO CLASS D-3: The Disbursing Agent may, from time to time, make additional distributions to holders of Allowed Claims in Class D-3, by distributing to each such holder shares of New WRT Common Stock equal to the recalculation, at the time, of such holder's Interim Pro Rata Share of ten million shares of New WRT Common Stock less the number of shares of New WRT Common Stock previously received by such holder (excluding any shares of New WRT Subscription Common Stock purchased pursuant to the Rights Offering). The Disbursing Agent shall make such an interim distribution at any time that at least fifty thousand (50,000) shares of New WRT Common Stock would be distributed as a result of such interim distribution. The Disbursing Agent shall make such interim distributions until such time as all Disputed Claims within or potentially within Class D-3 have been allowed or disallowed by Final Order. As soon as practicable, but in any event with ten (10) Business Days after the first date on which all Disputed Claims within or potentially within Class D-3 have been allowed or disallowed by Final Order, the Disbursing Agent shall (a) make a final distribution to holders of Allowed Claims in Class D-3, by distributing the each such holder such holder's Pro Rata Share of ten million shares of New WRT Common Stock less the number of shares of New WRT Common Stock previously received by such holder (excluding any shares of New WRT Subscription Common Stock purchased pursuant to the Rights Offering), and (b) issue to each holder of an Allowed Claim in Class D- 3, in exchange for the certificate, if any, issued to such holder pursuant to clause (b) of the last sentence of Article 27.2 of the Plan, a certificate representing such holder's Pro Rata Percentage of the Litigation Entity Interests. 27.4 DELIVERY OF DISTRIBUTIONS BY DISBURSING AGENT: Subject to Bankruptcy Rule 9010, distributions to holders of Allowed Claims or Allowed Interests shall be made at the address of each such holder as set forth in the proofs of Claim or proofs of Equity Interest filed by such holders (or at the last known address of such a holder if no proof of Claim or proof of Equity Interest is filed or if the Debtor has been notified in writing of a change of address) or, in the case of holders of Claims based upon the Senior Notes, may be made at the addresses contained in the records of the Indenture Trustee. If any holder's Distribution is returned as undeliverable, no further distribution to such holder shall be made unless and until New WRT, the Disbursing Agent or the Indenture Trustee is notified of such holder's then current address, at which time all undelivered Distributions shall be made to such holder without interest. If any Claimant holding an Allowed Claim in Class D-3 advises the Disbursing Agent in writing that it is prohibited by applicable law from holding New WRT Common Stock, then in such event the Disbursing Agent shall hold the stock otherwise distributable to such Claimant, sell the stock in an commercially reasonable transaction as determined by the Disbursing Agent, and then remit the net proceeds to such Claimant. 27.5 RESERVES FOR DISPUTED CLAIMS: (a) Amount of Reserves: Except to the extent that the Bankruptcy Court shall determine that a lesser amount is adequate, the Disbursing Agent shall deposit in segregated interest bearing (in the case of deposits of Cash) escrow accounts for each Class or category of Claims in which there are Disputed Claims (the "Disputed Claims Reserve Accounts") Cash, Litigation Entity Interests or shares of New WRT Common Stock equal to the Distributions that would have been made to the holders of Disputed Claims in such Class DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 39 152 or category if such Claims were allowed in the Adjusted Amount. The Disbursing Agent shall also maintain in the Disputed Claims Reserve Account shares of Disputed New WRT Subscription Common Stock purchased by the holder of a Disputed Claim on account of such Disputed Claim in accordance with Article 29.6 of this Plan. (b) Held in Trust: All earnings on funds deposited in the Disputed Claims Reserve Account, and all dividends or distributions on account of shares of New WRT Common Stock or Litigation Entity Interests held in the Disputed Claims Reserve Account, shall be held in trust in the Disputed Claims Reserve Account and shall be distributed only in the manner described in this Plan. (c) Release of Reserves from Disputed Claims Reserve Accounts: At such time as all or any portion of a Disputed Claim becomes an Allowed Claim, the Distributions reserved for such Disputed Claim or portion (including any interest thereon or dividends received with respect thereto) shall be released from the appropriate Disputed Claims Reserve Account and paid or distributed by the Disbursing Agent to the holder of such Allowed Claim, net of any taxes or other applicable charges required to be paid by the Disbursing Agent in respect thereof. At such time as all or any portion of a Disputed Claim is determined not to be an Allowed Claim, the Distributions reserved for such Disputed Claim or portion (including any interest thereon or dividends received with respect thereto) shall be (i) in the case of Cash, released from the appropriate Disputed Claims Reserve Account and paid to New WRT, (ii) in the case of New WRT Common Stock other than Disputed New WRT Subscription Common Stock, released from the appropriate Disputed Claims Reserve Account and distributed to holders of Allowed Claims in Class D-3 in accordance with Article 27.3 of this Plan, and (iii) in the case of Disputed New WRT Subscription Common Stock, purchased by Oversubscribing Creditors or DLBW, as the case may be, and the proceeds distributed to the holder of such Disputed Claim or portion in accordance with Article 29.6(c) of this Plan, in each case net of any taxes or other applicable charges required to be paid by the Disbursing Agent in respect thereof. 27.6 UNCLAIMED DISTRIBUTIONS: (a) Safeguarding of Unclaimed Distributions: For a period of six (6) months following the Effective Date, Distributions, including any interest as may have been earned thereon and dividends as may have been received with respect thereto, as have not been claimed shall be held by the Disbursing Agent in the Disputed Claims Reserve Accounts, solely for the benefit of the holders of Allowed Claims and Allowed Administrative Claims that have failed to claim such Distributions and shall be released from the Disputed Claims Reserve Accounts and delivered to such holder, net of any taxes or other applicable DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 40 153 charges required to be paid by the Disbursing Agent in respect thereof, upon presentation of proper proof by such holder of its entitlement thereto. (b) Release of Unclaimed Distributions: On the date on which all or any portion of any Distribution becomes an Unclaimed Distribution (including interest thereon and dividends with respect thereto), such Unclaimed Distribution shall be released by the Disbursing Agent from the appropriate Disputed Claims Reserve Account and paid or reallocated to holders of Allowed Claims in Class D-3, which shall thereupon cancel all New WRT Common Stock contained in any such Unclaimed Distribution. 27.7 FORM OF DISTRIBUTIONS: Any Cash payment to be made pursuant to the Plan may be made by a check or wire transfer or as otherwise required by an order of the Bankruptcy Court. 27.8 ROUNDING: Whenever a payment of a fraction of a cent would otherwise be called for, the actual payment shall reflect a rounding of such fraction down to the nearest whole cent. 27.9 FRACTIONAL SHARES: Fractional shares of New WRT Common Stock and fractional New WRT Warrants shall not be issued or distributed. Whenever the issuance or distribution of a fractional share of New WRT Common Stock or New WRT Warrant would otherwise be called for, the actual Distribution of shares of New WRT Common Stock or New WRT Warrants shall reflect a rounding down to the nearest whole share or warrant. 27.10 DISPUTED PAYMENT: In the event that any dispute arises as to the right of a holder of an Allowed Claim to receive any Distribution to be made under this Plan, the Disbursing Agent may, in lieu of making such Distribution to such holder, make such Distribution into an escrow account or hold such Distribution until the disposition thereof shall be determined by the Bankruptcy Court or by written agreement among the interested parties to such dispute. 27.11 CONDITIONS TO DISTRIBUTIONS: As a condition to receiving distributions provided for in the Plan in respect of Claims based upon the ownership of Senior Notes or in respect of Equity Interests, the holder thereof must surrender such security to New WRT, the Indenture Trustee (in the case of Senior Notes) or the Stock Transfer Agent (in the case of Equity interests or submit an affidavit of loss together with an indemnity reasonably acceptable to the Disbursing Agent). In the case of securities delivered to the Indenture Trustee or Stock Transfer Agent, the delivered securities shall be marked canceled and promptly delivered to New WRT. Whether or not actually surrendered or delivered to New WRT, on the Effective Date all outstanding certificates, notes, debentures, stock, warrants and other instruments shall be canceled on the books of the Debtor and become settled and compromised solely as provided in this Plan. 27.12 DE MINIMUS DISTRIBUTIONS: No Distribution of less than five dollars ($5) or fewer than five (5) shares of New WRT Common Stock or New WRT Warrants shall be made to any holder of an Allowed Claim or Allowed Interest. Such undistributed amount shall be retained by New WRT and such undistributed shares of New WRT Common Stock and New WRT Warrants shall be canceled. DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 41 154 ARTICLE 28 ROYALTY PROVISIONS 28.1 TREATMENT OF POST-PETITION ROYALTY CLAIMS: All Allowed Claims for unpaid Royalties which are determined to have become payable on or after the Petition Date shall constitute Allowed Administrative Claims and shall be paid in accordance with Article 3.1 of the Plan. 28.2 TREATMENT OF PRE-PETITION ROYALTY CLAIMS: All Allowed Claims for unpaid Royalties which are determined to have become payable prior to the Petition Date shall constitute Allowed Unsecured Claims and the holders of such Claims shall receive Distributions in accordance with Article 16 or Article 18 of the Plan, as the case may be. ARTICLE 29 THE RIGHTS OFFERING 29.1 ISSUANCE OF STOCK: On the Effective Date of the Plan, New WRT shall issue three million eight hundred thousand (3,800,000) shares of New WRT Common Stock (the "New WRT Subscription Common Stock") for use in the Rights Offering. 29.2 DISTRIBUTION OF NEW WRT SUBSCRIPTION RIGHTS: Each holder of an Allowed Claim in Class D-3 or a Disputed Claim within or potentially within Class D-3 on the Subscription Rights Record Date shall be entitled to receive New WRT Subscription Rights entitling each such holder to purchase its Interim Pro Rata Share of the New WRT Subscription Common Stock. As soon as practicable, but in no event more than five (5) Business Days after the Subscription Rights Record Date, the Debtor shall distribute to each such holder a Subscription Rights Election Form with respect to the New WRT Subscription Rights to which such holder is entitled. 29.3 EXERCISE OF NEW WRT SUBSCRIPTION RIGHTS: In order to exercise the New WRT Subscription Rights effectively, each Claimant that receives New WRT Subscription Rights must (i) return a duly completed Subscription Rights Election Form to the Disbursing Agent so that it is received by the Disbursing Agent on or before the Subscription Rights Election Deadline and (ii) pay to the Disbursing Agent on or before the Subscription Rights Election Deadline, an amount equal to such holder's Subscription Purchase Price, such payment to be made either by wire transfer to the Subscription Rights Reserve Account in accordance with the wire instructions set forth on the Subscription Rights Election Form or by bank or cashier's check drawn on a United States bank delivered to the Disbursing Agent along with the Subscription Rights Election Form in accordance with the instructions contained therein. If, on or prior to the Subscription Rights Election Deadline, the Disbursing Agent for any reason does not receive from a given Claimant both a duly completed Subscription Rights Election Form and in an amount equal to such Claimant's Subscription Purchase Price such Claimant shall be deemed to have not exercised its New WRT Subscription Rights and to have relinquished and waived its right to participate in the Rights Offering. DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 42 155 29.4 DLBW BACKSTOP: Pursuant to the terms of the Commitment Agreement, DLBW shall be deemed to have exercised all New WRT Subscription Rights that it is entitled to receive pursuant to the terms of this Plan as an Unsecured Creditor. In addition, pursuant to the terms of the Commitment Agreement, DLBW shall be entitled to, and shall, exercise all Unexercised Subscription Rights other than Unexercised Disputed Subscription Rights and shall purchase all New WRT Subscription Common Stock related thereto at the Subscription Purchase Price for such New WRT Subscription Common Stock. Pursuant to the terms of the Commitment Agreement, DLBW shall pay to the Disbursing Agent on or before the Effective Date, immediately available funds in an amount equal to the Subscription Purchase Price for all New WRT Subscription Common Stock to be purchased by DLBW pursuant to the terms hereof and of the Commitment Agreement. On the Effective Date, in accordance with the terms of the Commitment Agreement, the Disbursing Agent shall distribute to DLBW all New WRT Common Stock (including all New WRT Subscription Common Stock) purchased by DLBW pursuant to the terms hereof and the Commitment Agreement and otherwise purchased or to be received by DLBW pursuant to the terms of the Commitment Agreement. 29.5 RELEASE FROM SUBSCRIPTION RIGHTS RESERVE ACCOUNT: On the Effective Date, the Disbursing Agent shall release from the Subscription Rights Reserve Account and pay to New WRT all funds received by the Disbursing Agent pursuant to the exercise of New WRT Subscription Rights and the payment of the Subscription Purchase Price by each Exercising Claimant, subject to the provisions of Article 29.6(b) and (c) with respect to funds received pursuant to the exercise of Disputed New WRT Subscription Rights. The Disbursing Agent shall, pursuant to Article 27.2 of this Plan, distribute the New WRT Subscription Common Stock (other than Disputed New WRT Subscription Common Stock) purchased by each Exercising Claimant to such Exercising Claimant. 29.6 PROCEDURES WITH RESPECT TO DISPUTED CLAIMS: (a) Exercise of Disputed New WRT Subscription Rights: Each holder of a Disputed Claim within or potentially in Class D-3 on the Subscription Rights Record Date shall be entitled to exercise its Disputed New WRT Subscription Rights in accordance with Article 29.3 of this Plan. Each such holder must comply with the terms of Article 29.3 or such holder shall be deemed to have not exercised its Disputed New WRT Subscription Rights and to have relinquished and waived its right to participate in the Rights Offering. (b) Oversubscription Rights: Each holder on the Subscription Rights Record Date of an Allowed Claim in Class D-3 shall have the option of oversubscribing to the Rights Offering in an amount not to exceed the Disputed Exercise Price by (i) returning a duly completed Subscription Rights Election Form to the Disbursing Agent so that it is received by the Disbursing Agent on or before the Subscription Rights Election Deadline and so that it specifies thereon the dollar amount of such oversubscription (such amount being such holder's "Oversubscription Amount") and (ii) paying to the Disbursing Agent on or before the Subscription Rights Election Deadline, in addition to such holder's Subscription Purchase Price, an amount equal to DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 43 156 such holder's Oversubscription Amount, such payment to be made either by wire transfer to the Subscription Rights Reserve Account in accordance with the wire instructions set forth on the Subscription Rights Election Form or by bank or cashier's check drawn on a United States bank delivered to the Disbursing Agent with the Subscription Rights Election Form (each holder who oversubscribes in compliance with this sentence being an "Oversubscribing Creditor" and the aggregate of all Oversubscribing Amounts received by the Disbursing Agent on or before the Subscription Rights Election Deadline being the "Total Oversubscription Amount"). If, on the first Business Day after the Subscription Rights Election Deadline, the Total Oversubscription Amount is less than the Disputed Exercise Price, on or before the Effective Date, in accordance with the terms of the Commitment Agreement, DLBW shall increase its Oversubscription Amount by paying to New WRT an amount of Cash equal to the amount by which the Disputed Exercise Price exceeds the Total Oversubscription Amount. If, on the first Business Day after the Subscription Rights Election Deadline, the Total Oversubscription Amount exceeds the Disputed Exercise Price, the Disbursing Agent shall promptly return to each Oversubscribing Creditor an amount of Cash equal to the Excess Oversubscription Amount, and shall reduce the Oversubscription Amount of such Oversubscribing Creditor by the amount so returned. (c) Distribution of Unexercised Disputed New WRT Subscription Common Stock: On the Effective Date or as soon thereafter as is reasonably practicable, but in no event more than ten (10) Business Days after the Effective Date, the Disbursing Agent shall distribute to each Oversubscribing Creditor such Oversubscribing Creditor's Pro Rata Disputed Percentage of the Unexercised Disputed New WRT Subscription Common Stock. (d) Retention of Disputed New WRT Subscription Common Stock: (i) The Disbursing Agent, notwithstanding anything in Articles 27.2 and 29.5 to the contrary, shall not deliver the Disputed New WRT Subscription Common Stock to the holders of Exercised Disputed Claims and shall not deliver to New WRT the Subscription Purchase Price paid by such holders on account of the Disputed New WRT Subscription Common Stock (such aggregate Subscription Purchase Price being the "Disputed Subscription Purchase Price"), but shall instead deposit into the Disputed Claims Reserve Accounts all Disputed New WRT Subscription Common Stock and funds in the amount of the Disputed Subscription Purchase Price. All dividends or distributions on account of shares of Disputed New WRT Subscription Common Stock held in the Disputed Claims Reserve Account shall be held in trust in the Disputed DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 44 157 Claims Reserve Account and shall be distributed only in the manner described in this Plan. (ii) On the Effective Date, the Disbursing Agent shall pay to New WRT an amount of Cash from the Total Oversubscription Amount received by the Disbursing Agent equal to the Disputed Subscription Purchase Price. (e) Release of Disputed New WRT Subscription Common Stock: At such time as all or any portion of an Exercised Disputed Claim becomes an Allowed Claim, (i) the Disputed New WRT Subscription Common Stock purchased by the holder of such Exercised Disputed Claim on account of such Exercised Disputed Claim or portion thereof (including any dividends received with respect thereto) shall be released from the appropriate Disputed Claims Reserve Account and distributed by the Disbursing Agent to the holder of such Allowed Claim, net of any taxes or other applicable charges required to be paid by the Disbursing Agent in respect thereof and (ii) the Disbursing Agent shall release from the appropriate Disputed Claims Reserve Account and pay to each Oversubscribing Creditor that portion of the Disputed Subscription Purchase Price equal to such Oversubscribing Creditor's Pro Rata Disputed Percentage of the Subscription Purchase Price for the Disputed New WRT Subscription Common Stock so released and distributed. At such time as all or any portion of an Exercised Disputed Claim is determined by Final Order not to be an Allowed Claim, (i) the Disbursing Agent shall release from the appropriate Disputed Claims Reserve Account and distribute to each Oversubscribing Creditor such Oversubscribing Creditor's Pro Rata Disputed Percentage of the Disputed New WRT Subscription Common Stock (the "Repurchased New WRT Subscription Common Stock") purchased by the holder of such Exercised Disputed Claim on account of such Exercised Disputed Claim or portion thereof (including any dividends received with respect thereto), and (ii) that portion of the Disputed Subscription Purchase Price equal to the Subscription Purchase Price for such Repurchased New WRT Subscription Common Stock shall be released from the appropriate Disputed Claims Reserve Account and paid by the Disbursing Agent to the holder of such Exercised Disputed Claim or portion thereof. 29.7 CLASS D-3 REJECTION: If holders of at least two-thirds ( 2/3) in dollar amount of Claims entitled to vote held by Class D-3 Claimants voting on the Plan do not vote to accept the Plan, the Rights Offering will not occur and the Disbursing Agent shall return all Subscription Purchase Prices theretofore received. In such instance, in accordance with the terms of the Commitment Agreement, DLBW shall purchase all of the New WRT Subscription Common Stock at the Subscription Purchase Price therefor. DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 45 158 ARTICLE 30 EXECUTORY CONTRACTS AND UNEXPIRED LEASES UNDER THE PLAN 30.1 REJECTION OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES: All contracts and leases constituting executory contracts or unexpired leases under the provisions of Section 365 of the Bankruptcy Code which have not already been assumed or rejected, not made the subject of a pending motion to assume or reject, and which are not otherwise included in a list of executory contracts and unexpired leases to be assumed, such listing to be filed with the Bankruptcy Court and served on the affected Person not less than twenty (20) days before the first date set for the hearing on confirmation of the Plan, shall be deemed to have been rejected by the Debtor as of the Confirmation Date in accordance with Section 365 of the Bankruptcy Code. The list of executory contracts to be assumed which is filed and served by the Debtor shall also specify the amount of cash to be paid pursuant to Bankruptcy Code Section 365(b)(1)(A) and (B) (the "Cure Payment"). The Confirmation Order will approve such assumptions and rejections. Consent to the assumption, if required, of each executory contract and unexpired lease set forth on the list and the adequacy of the Cure Payment also set forth on the list shall be deemed to have been given, unless any Person who is a party to such executory contract objects by filing with the Court a written objection to the Plan and serving the same on the Debtor and Debtor's Counsel not less than five (5) days prior to the first date set for the hearing on confirmation of the Plan. 30.2 FILING OF CLAIMS FOR REJECTION DAMAGES: All Claims arising from the rejection of executory contracts and unexpired leases under Section 365 of the Bankruptcy Code must be evidenced by properly filed proofs of claims. Such proofs of claims must be filed with the Clerk's Office of the Bankruptcy Court within any applicable deadlines previously established by the Bankruptcy Court or, if no previously established deadline is applicable, within fifteen (15) days of the earlier of the Confirmation Date of the Plan or the date of the entry of a Final Order authorizing rejection of the executory contract or unexpired lease. Such proofs of claims must also be served on counsel for the Debtor and counsel for DLBW. Failure to file a proof of claim on or before the deadline established in this Article shall result in disallowance in full of the Claim. Objections to Claims filed pursuant to this provision shall be governed by the procedures set forth in Article 34 of the Plan. Unsecured Claims resulting from the rejection of executory contracts shall be treated as Class D-1 or Class D-3 Claims hereunder as appropriate. ARTICLE 31 PROVISIONS FOR NEW WRT 31.1 CORPORATE GOVERNANCE: On the Effective Date, the Debtor shall be deemed merged with and into New WRT. The New WRT Certificate of Incorporation and the New WRT By-Laws shall be effective on the Effective Date, and on or prior to the Effective Date, New WRT shall file the New WRT Certificate of Incorporation with the Secretary of State of the State of Delaware pursuant to the applicable provisions of Delaware Law. DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 46 159 31.2 NEW WRT COMMON STOCK: The provisions of New WRT Common Stock to be issued pursuant to the Plan are as follows: (a) Authorization: The New WRT Certificate of Incorporation shall authorize the issuance of fifty (50) million shares of New WRT Common Stock. Of such authorized shares, up to twenty-five (25) million shares shall be issued on the Effective Date to make the distributions contemplated by this Plan. Except as provided by this Plan, no additional shares of New WRT Common Stock may be issued other than as directed by the board of directors of New WRT after the Effective Date. (b) Listing: New WRT shall use its best efforts to cause the New WRT Common Stock to be listed on a national securities exchange or, failing that, to be listed for quotation on the NASDAQ National Market System. (c) Employee Shares: On the Effective Date, New WRT shall reserve 300,000 authorized shares of New WRT Common Stock for issuance pursuant to an employee stock option plan. The date of issuance of such shares and the vesting period under, and other terms with respect to, such employee stock option plan shall be determined by the board of directors of New WRT after the Effective Date. 31.3 NEW WRT WARRANTS: The New WRT Warrants shall represent the right, in the aggregate, to purchase shares of New WRT Common Stock in an aggregate amount of not more than five percent (5%) of the total New WRT Common Stock that would be issued on the Effective Date if all New WRT Warrants were exercised on the Effective Date. The exercise price of the New WRT Warrants shall be $10.00 per share. Each New WRT Warrant may be exercised at any time commencing after the Effective Date until the fifth anniversary thereof unless the expiration thereof has been accelerated pursuant to its terms. 31.4 DIRECTORS: As of the Effective Date, the board of directors for New WRT shall consist of five (5) members for the first three (3) years following the Effective Date. Three (3) such directors shall be selected by DLBW and the remaining two (2) directors shall be selected by the Committee. Within five (5) days before the Confirmation Date, DLBW and the Committee shall nominate the initial directors and immediately notify New WRT and its attorneys of such selections. In the event that any one or more nominations are not received by New WRT by twenty (20) days from the Confirmation Date, then New WRT shall be authorized to make such nominations, subject to the approval of DLBW and the Committee. The tenure and manner of selection of directors of New WRT thereafter shall be governed by Certificate of Incorporation and the New WRT By-Laws. 31.5 EXECUTION OF DOCUMENTS: On the Effective Date, New WRT shall execute and enter into (a) the Administrative Services Agreement, (b) the Registration Rights Agreement and (c) the New WRT Warrant Agreement. DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 47 160 ARTICLE 32 CONDITIONS PRECEDENT 32.1 CONDITIONS TO CONFIRMATION: The Plan may only be confirmed if: (a) The Commitment Agreement shall be in full force and effect and shall not have been terminated in accordance with its terms; (b) The Debtor shall have included the CAOA on its listing of executory contracts and unexpired leases to be assumed, filed with the Bankruptcy Court in accordance with Article 30.1 of this Plan on the terms set forth in Article 33.13 of the Plan which assumption shall, among other things, require the Debtor to execute the Transfer and Exchange Agreement and to release any claims against Texaco under or related to the CAOA; (c) The Bankruptcy Court shall have entered an order or orders, which may be the Confirmation Order, permitting the Debtor to maintain in the Disputed Claims Reserve Accounts an amount of Cash on account of all Disputed Claims that shall not exceed $100,000; and (d) The closing under the Purchase, Sale and Cooperation Agreement with respect to the WCBB Assets and the Claim of TEPI in Class C- 14 shall have occurred. 32.2 CONDITIONS TO EFFECTIVE DATE: The following shall be conditions precedent to the effectiveness of the Plan: (a) The Bankruptcy Court shall have made findings of fact and conclusions of law as to confirmation of the Plan and entered a Confirmation Order, in each case satisfactory to the Debtor and DLBW; (b) The Commitment Agreement shall be in full force and effect and shall not have been terminated in accordance with its terms; (c) Each of the conditions set forth in Articles VIII and IX of the Commitment Agreement has been satisfied; (d) New WRT and INCC shall have agreed upon the terms of and executed definitive documentation with respect to New ING Term Sheet; and (e) The Louisiana State Mineral Board shall have executed a consent to the transfer of the WCBB Assets to DLB and its designee pursuant to the terms of the Purchase, Sale and Cooperation Agreement. DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 48 161 32.3 WAIVER OF CONDITIONS: The conditions set forth in this Article 32 may only be waived jointly by both the Debtor and DLBW. ARTICLE 33 MEANS FOR IMPLEMENTATION OF PLAN 33.1 COMMITMENT AGREEMENT: The Commitment Agreement shall be executed on or before the conclusion of the hearing on the Disclosure Statement. 33.2 WRT TECHNOLOGY DISSOLUTION: On or before the Effective Date, WRT Technology Corporation shall be dissolved. 33.3 THE DISBURSING AGENT: (a) Appointment: On or prior to the Confirmation Date, the Bankruptcy Court shall enter an order approving the Disbursing Agent Agreement and appointing the Disbursing Agent, which shall serve from and after the Effective Date until the completion of its responsibilities or its resignation or discharge and the appointment of a subsequent Disbursing Agent. From and after the Effective Date, the Disbursing Agent and New WRT shall have the right to amend or modify the Disbursing Agent Agreement without further order of the Bankruptcy Court but subject to the Disbursing Agent's obligations provided for in this Plan. (b) Powers: The rights, powers and duties of the Disbursing Agent shall include the following: (i) The investment of amounts held for distribution to creditors or deposited in the Disputed Claims Reserve Accounts pursuant to Section 345 of the Bankruptcy Code; (ii) The making of all Distributions and the making of all other payments required under this Plan; (iii) The maintenance and oversight of the Disputed Claims Reserve Accounts; (iv) The maintenance of Unclaimed Distributions and the transfer to New WRT of any Unclaimed Distributions; (v) Making annual and other periodic reports regarding the making of Distributions; and DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 49 162 (vi) Any and all other actions necessary or appropriate to implement or consummate this Plan. (c) Stock Powers: The Disbursing Agent shall not be entitled to vote or exercise any other right of ownership with respect to any shares of New WRT Common Stock held in the Disputed Claims Reserve Accounts. (d) Compensation: The Disbursing Agent shall be compensated by New WRT pursuant to the Disbursing Agent Agreement (e) Appointment of Successor: In the event of the death, resignation or discharge of the Disbursing Agent, New WRT shall appoint a successor to the Disbursing Agent. Any such successor to the Disbursing Agent shall be bound by the provisions of the Plan, the Disbursing Agent Agreement and the order appointing the Disbursing Agent. (f) Termination of Disbursing Agent: After the Effective Date and upon the final resolution of all Disputed Claims, the release from the Disputed Claims Reserve Accounts of all Distributions including all Unclaimed Distributions, if any, the Disbursing Agent shall so inform New WRT and shall be relieved of further responsibilities under this Plan. 33.4 CANCELLATION OF SECURITIES AND ISSUANCE OF NEW WRT COMMON STOCK AND NEW WRT WARRANTS: On the Effective Date, all existing Common Stock and Preferred Stock of WRT, and all options, warrants, or other rights to acquire such stock, shall be canceled, annulled and extinguished, and new certificates representing shares of New WRT Common Stock and new certificates representing ownership of New WRT Warrants will be issued in accordance with the Plan. 33.5 CANCELLATION OF INDENTURE: The Indenture Agreement between WRT and the Indenture Trustee shall be deemed canceled pursuant to Section 1123(a)(5)(F) of the Bankruptcy Code as of the Effective Date, provided, however, that the Indenture Trustee thereunder shall be responsible for the distribution of New WRT Common Stock to the Creditors for whom they act and shall be permitted to assert their liens for their fees against such distributions as allowed by the Indenture and applicable law. 33.6 CANCELLATION OF WARRANT AGREEMENT: The Warrant Agreement between WRT and the Warrant Agent shall be deemed canceled pursuant to Section 1123(a)(5)(F) of the Bankruptcy Code as of the Effective Date, provided, however, that the Warrant Agent thereunder shall be responsible for the distribution of New WRT Warrants to the warrant holders for whom they act, if applicable. 33.7 EXECUTION OF NEW NOTES AND INSTRUMENTS: On or before the Effective Date, New WRT shall execute and deliver such instruments, trust agreements, and other documents as are necessary to evidence its obligations to all Classes of Creditors under the Plan. DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 50 163 33.8 COMMITTEE: The Committee shall be dissolved as of the Effective Date and the duties of the Committee and its professionals shall terminate, except with respect to (a) any appeal of the Confirmation Order, (b) any Fee Claim and (c) such other matters as may be necessary for the Committee to carry out its fiduciary duties. 33.9 PRESERVATION OF ACTIONS: Except as otherwise provided in this Plan, the Confirmation Order or in any contract, instrument, release or other agreement entered into in connection with this Plan, the Litigation Entity shall retain and may enforce or prosecute all Causes of Action. 33.10 DISCHARGE OF INDENTURE TRUSTEE: Subsequent to the performance by the Indenture Trustee or its agents of its obligations required under the provisions of the Plan and the Confirmation Order and under the terms of the Indenture Agreement, the Indenture Trustee and its agents, successors and assigns shall be discharged of all of its obligations under the Indenture Agreement and released from all claims and causes of action arising in the Chapter 11 Case and, as of the Effective Date, the Indenture Agreement shall be deemed terminated, except that such termination shall not impair the rights of holders of Claims based upon the Senior Notes to receive Distributions in respect of such Claims. 33.11 NEW ING LOAN AGREEMENT: On the Effective Date, New WRT will execute definitive documentation containing the terms set forth in the New ING Term Sheet and shall borrow $15,000,000 in accordance with the terms thereof. 33.12 EXAMINER: The Examiner shall be dismissed as of, and shall have no authority or duties on and after, the Effective Date except that the Examiner shall cooperate with the Litigation Entity in the prosecution of the Causes of Action. 33.13 ASSUMPTION OF CAOA: As of the Effective Date, the Debtor will assume the CAOA pursuant to Section 365 of the Bankruptcy Code. The Debtor shall cure existing defaults under the CAOA by virtue of the payments to the holders of Claims in Class C-14 pursuant to Article 14 of this Plan, and shall make adequate assurance of future performance under the CAOA in accordance with the terms of the Commitment Agreement and the Transfer and Exchange Agreement. New WRT shall be the operator of the Shallow Contract Area under the CAOA. 33.14 TRANSFER AND EXCHANGE OF WCBB ASSETS: In accordance with the terms and subject to the conditions of the Transfer and Exchange Agreement and the Commitment Agreement, on the Effective Date (a) DLB shall transfer the WCBB Assets to New WRT, (b) New WRT shall (i) deliver to DLB (x) 5 million shares of New WRT Common Stock, and (y) the number of shares of New WRT Common Stock obtained by dividing the net amount of capital expenditures incurred by DLB as of the Effective Date as owner of the WCBB Assets and/or operator of the Shallow Contract Area, to the extent not disapproved by the Bankruptcy Court, by a purchase price of $3.50 per share, (ii) transfer to DLB the Buyer's Leasehold and Facilities and (iii) assume the Assumed Obligations, and (c) New WRT shall become the operator of the WCBB Assets pursuant to the CAOA. 33.15 ASSIGNMENT OF CAUSES OF ACTION: All Causes of Action other than the Marine Equipment Causes of Action and the Tri-Deck Causes of Action (which Causes of Action will remain DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 51 164 property of New WRT; provided, however, that if any equipment title to which is obtained by New WRT as a result of the Marine Equipment Causes of Action is sold by New WRT within six (6) months of obtaining such title, New WRT shall promptly pay the net proceeds of such sale to the Litigation Entity) shall be assigned by New WRT to the Litigation Entity, which may pursue such Causes of Action, as appropriate, in accordance with the Litigation Agreement. The Litigation Entity shall have the power to settle or otherwise litigate each Cause of Action for the benefit of the holders of Litigation Entity Interests consistent with the best interests of such holders. 33.16 LITIGATION ENTITY: The Litigation Entity will be formed as of the Effective Date. New WRT will hold twelve percent (12%) of the Litigation Entity Interests, and the holders of Allowed Claims in Class D-3 will hold eighty-eight percent (88%) of the Litigation Entity Interests, which Litigation Entity Interests will be allocated in accordance with the provisions of Article 18.1 of the Plan. The Litigation Entity will be governed by the terms of the Litigation Agreement. The Litigation Entity will retain and preserve the Causes of Action (other than the Marine Equipment Causes of Action and the Tri- Deck Causes of Action), as the representative of and successor to New WRT, in accordance with sections 1123(b)(3)(B) and 1145(a)(1) of the Bankruptcy Code. The Litigation Entity shall be empowered to make distributions to holders of Litigation Entity Interests from time to time out of net recoveries on Causes of Action. The costs of the Litigation Entity shall be funded by a one-time capital contribution of three million dollars ($3,000,000) to be made by New WRT on the Effective Date from the proceeds of the Rights Offering. The Bankruptcy Court will retain jurisdiction over the Litigation Entity and to hear and determine all Causes of Action filed by the Litigation Entity. 33.17 STATE/LAFOURCHE SETTLEMENT: On the Effective Date, New WRT shall pay to the State of Louisiana and the LaFourche Parish School Board the payments required to be made under the terms of the State/LaFourche Settlement. ARTICLE 34 PROCEDURES FOR RESOLVING DISPUTED CLAIMS UNDER THE PLAN 34.1 BAR DATE FOR OBJECTIONS TO CLAIMS: Except as otherwise set forth in the Plan, objections to Claims shall be made and filed by New WRT and/or any other party in interest and shall be served upon the holders of such Claims, if any, to which objections are made and filed with the Bankruptcy Court as soon as practicable. Objections shall be filed on or prior to the Claims Objection Deadline. 34.2 PROSECUTION OF OBJECTIONS TO CLAIMS: New WRT shall use its best efforts to object to, compromise and/or settle all Claims at amounts accurately reflecting the amount of each respective Creditor's allowable Claim, subject to reasonable litigation expense limits. New WRT shall litigate to judgment, settlement or withdrawal all objections that it may file. Any other party filing an objection shall be responsible for prosecuting to judgment, settlement or withdrawal its objections. New WRT shall be permitted to settle any Disputed Claims as to which objections are not timely filed by parties in interest other than New WRT without further notice or Court approval. Any stipulations DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 52 165 regarding a Claim filed by a Claimant and New WRT shall be deemed an amendment to any previously filed proof of claim and shall be deemed an amendment by the Debtor to its Schedules, and any modifications or supplements thereto. Any proposed settlement of an objection filed by a party in interest other than New WRT shall be consented to by New WRT in writing or shall be approved by the Court before becoming effective. ARTICLE 35 DISCHARGE OF DEBTOR; INJUNCTION; VESTING OF ASSETS 35.1 DISCHARGE OF DEBTOR: Except as otherwise provided in this Plan or in the Confirmation Order, entry of the Confirmation Order acts as a discharge effective as of the Effective Date of any and all Claims against and Equity Interests in the Debtor or any of its assets or properties, including any rights to set-off or recoupment, that arose at any time before the entry of the Confirmation Order. In addition, pursuant to the Confirmation Order the substantial consummation of the Plan on the Effective Date acts as a discharge effective as of the Effective Date of all Claims and Equity Interests of any holder of a Claim against or Equity Interest in the Debtor that is classified under this Plan and any direct or indirect right or Claim such Person had or may have had against the Debtor. The discharge of the Debtor shall be effective as to each Claim or Interest except as otherwise expressly provided for in the Confirmation Order, regardless of whether a proof of Claim or Equity Interest therefore was filed, whether the Claim or Equity Interest is a Disputed Claim or Equity Interest or an Allowed Claim, Allowed Interest or Allowed Administrative Claim, or whether the holder thereof votes to accept or reject the Plan. 35.2 INJUNCTION: Except as provided in the Plan or Confirmation Order, on and as of the Confirmation Date all entities that have transferred by sale or otherwise, currently hold or may come to hold a Claim or other debt or liability that is discharged or an Equity Interest or other right of an equity security holder that is canceled pursuant to the terms of the Plan are permanently enjoined from taking any of the following actions on account of any such discharged Claims, debts or liabilities or terminated Equity Interests: (a) asserting commencing or continuing in any manner any action or other proceeding against New WRT or its property; (b) enforcing, attaching, collecting or recovering in any manner any judgment, award, decree or order against New WRT or its property; (c) creating, perfecting or enforcing any lien or encumbrance against New WRT or its property; (d) asserting a setoff, right of subrogation or recoupment right of any kind against any debt, liability or obligation due to New WRT or in connection with its property; and (e) commencing or continuing any action, in any manner, in any place that does not comply with or is inconsistent with the provisions of the Plan. 35.3 VESTING OF ASSETS: Except as otherwise provided by the Plan, on the Confirmation Date of the Plan, all of the Assets of the Debtor's Estate (other than the Causes of Action, but including the Marine Equipment Causes of Action and the Tri-Deck Causes of Action; provided, however, that if any equipment title to which is obtained by New WRT as a result of the Marine Equipment Causes of Action is sold by New WRT within six (6) months of obtaining title, New WRT shall promptly pay the net proceeds of such sale to the Litigation Entity), shall vest in New WRT in accordance with Section 1141 of the Bankruptcy Code, free and clear of all Liens, Claims and DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 53 166 Encumbrances of any kind or nature (including liens that may otherwise be preserved for the benefit of the Debtor's Estate under Section 551 of the Bankruptcy Code), and the Confirmation Order shall constitute a judicial determination of discharge of the Debtor's liabilities, except as provided in the Plan. 35.4 RELEASE OF OFFICERS AND DIRECTORS; INDEMNIFICATION: On the Effective Date current officers and directors of the Debtor shall be released of any and all of Debtor's Causes of Action arising from or relating to their employment by the Debtor, excluding actions based on gross negligence or willful misconduct. In order to effectuate such release, New WRT shall indemnify such current officers and directors from any and all damages, costs (including reasonable attorneys' fees) and other liabilities arising from or relating to such Causes of Action, excluding actions based on gross negligence or willful misconduct. 35.5 RELEASES. On the Effective Date, except as otherwise expressly contemplated by this Plan, each holder (and trustees and agents on behalf of each holder) of a Claim or Equity Interest, including each holder of Notes, and the Debtor, in consideration of the obligations of the Debtor under this Plan, shall be deemed to have forever waived, released and discharged the Committee, each member of the Committee, and each of their respective present and former agents, advisors and professionals from any and all rights, claims and liabilities arising prior to the Effective Date, on the Effective Date, out of or relating to such Claim or Equity Interest of any such holder or otherwise relating to the activities of the Committee. Persons deemed to have released Claims pursuant to this Section 35.5 shall be forever precluded from asserting any such Claim against any released Person. ARTICLE 36 MODIFICATIONS AND INTERPRETATION OF THE PLAN; GENERAL PROVISIONS 36.1 MODIFICATION: This Plan may be altered, amended or modified by the Debtor and DLBW jointly in the manner provided for by Section 1127 of the Bankruptcy Code or as otherwise permitted by law. 36.2 HEADINGS: The headings used in this Plan are inserted for convenience only and neither constitute a portion of this Plan nor in any manner affect the provisions or interpretations of this Plan. 36.3 SEVERABILITY: Should the Bankruptcy Court determine that any provision in this Plan be determined to be unenforceable, either on its face or as applied to any Claim or Equity Interest or transaction, the Debtor and DLBW jointly may modify this Plan in accordance with Article 36.1 of this Plan so that such provision shall not be applicable to the holder of any Claim or Equity interest. Such determination shall in no way limit or affect the enforceability and operative effect of any other provision within this Plan. DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 54 167 36.4 SUCCESSORS AND ASSIGNS; TRANSFERABILITY: The rights and obligations of any Person named or referred to in this Plan shall inure to the benefit of, and shall be binding upon, as the case may be, the successors and assigns of such Person. 36.5 GOVERNING LAW: Except to the extent that the Bankruptcy Code or Bankruptcy Rules are applicable, the rights, obligations and provisions of this Plan shall be governed by, and construed and enforced in accordance with, the laws of the State of Texas without giving effect to the conflicts of laws principles thereof. 36.6 REVOCATION: The Debtor and DLBW, acting jointly, reserve the right to revoke and withdraw this Plan prior to the Effective Date. If the Debtor and DLBW revoke or withdraw this Plan or if the Effective Date does not occur, then this Plan shall be deemed null and void and in such event nothing herein shall be deemed to constitute a waiver or release of any Claims by or against the Debtors or any other Person or to prejudice in any manner the rights of the Debtor or any Persons in any further proceeding involving the Debtor. 36.7 COMPLIANCE WITH TAX REQUIREMENTS: In connection with the Plan, the Disbursing Agent shall comply with all withholding and reporting requirements imposed by federal, state, local and foreign taxing authorities and all distributions hereunder shall be subject to such withholding and reporting requirements. 36.8 COMPLIANCE WITH APPLICABLE LAWS: If notified by any governmental authority that it is in violation of any applicable law, rule, regulation or order of such governmental authority relating to its business, New WRT shall comply with such law, rule, regulation or order; provided, however, that nothing contained herein shall require such compliance by New WRT where the legality or applicability of such law, rule, regulation or order is being contested in good faith in appropriate proceedings by New WRT and, if appropriate, for which an adequate reserve has been set aside on the books of New WRT. 36.9 BUSINESS DAYS: In the event that any payment or distribution to be made hereunder would otherwise be required to be made on a day that is not a Business Day, such payment or distribution shall instead be made on the next succeeding Business Day. 36.10 PAYMENT OF STATUTORY FEES: All fees payable pursuant to 28 U.S.C. Section 1930, as determined by the Bankruptcy Court at the Confirmation hearing, shall be paid on or before the Effective Date. 36.11 CONFLICT: In the event that there is any conflict or inconsistency between this plan, the Commitment Agreement, the New WRT Subscription Rights Agreement and/or the Disclosure Statement, the terms and provisions of this Plan shall govern. 36.12 NOTICES: Except as otherwise specified in the Plan, all notices and requests hereunder shall be given by any written means, including, but not limited to, telex, telecopy, telegram, first class mail, express mail or similar overnight delivery service and hand-delivered letter; and any such notice or request shall be deemed to have been given when received. Notices shall be given as follows: TO DEBTOR: WRT Energy Corporation Attention: Mr. Raymond P. Landry 5718 Westheimer, Suite 1201 Houston, Texas 77057 --- AND --- DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 55 168 DLB Oil & Gas, Inc. Attention: Mr. Mark Liddell 1601 N. W. Expressway, Suite 700 Oklahoma City, Oklahoma 73118-1101 WITH COPIES TO: Sheinfeld, Maley & Kay, P.C. Attention: Joel P. Kay, Esq. 1001 Fannin Street, Suite 3700 Houston, Texas 77002-6797 ---AND--- Schulte Roth & Zabel LLP Attention: Jeffrey S. Sabin, Esq 900 Third Avenue New York, New York 10022 36.13 COMPUTATION OF TIME: In computing any time prescribed by this Plan, the day of the act, event or default from which the designated period of time begins to run shall not be included. The last day of the period so computed shall be included, unless it is a Saturday, a Sunday, or a "legal holiday" as defined in Bankruptcy Rule 9006(a), in which event the period runs until the end of the next day which is not one of the aforementioned days. ARTICLE 37 PROVISIONS FOR RETENTION OF JURISDICTION BY THE BANKRUPTCY COURT FOR SUPERVISION OF CONSUMMATION The Bankruptcy Court shall retain jurisdiction over all matters arising under, or arising in, or relating to the Chapter 11 Case or this Plan to the fullest extent permitted by 28 U.S.C. Section 1334 to hear, and by 28 U.S.C. Section 157 to determine, all proceedings in respect thereof, including, but not limited to, proceedings for supervision of the Plan. Specifically, but without limitation, and if applicable law provides, the Bankruptcy Court shall have jurisdiction: (a) to hear and determine any and all objections or other matters relating to the allowance of Claims including, without limitation, Administrative Claims; (b) to hear and determine any and all applications for allowance and payment of fees and expenses made by attorneys and other professionals pursuant to Sections 330 or 503 of the Bankruptcy Code, or for payment of any other fees or expenses authorized to be paid or reimbursed by the Debtor pursuant to provisions within the Bankruptcy Code, and any objections thereto; DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 56 169 (c) to hear and determine any and all pending applications for rejection, assumption or assumption and assignment, as the case may be, of unexpired leases and executory contracts to which the Debtor is a party or with respect to which it may be liable, any and all Claims arising therefrom; and any other issue that may arise under Section 365 of the Bankruptcy Code. (d) to hear and determine any and all motions, applications, adversary proceedings and contested or litigated matters regarding Claims or interest, accrued prior to the Confirmation Date, as to assets revested pursuant to Section 1141 of the Bankruptcy Code; (e) to consider and approve modifications of or amendments to the Plan; (f) to hear and determine disputes regarding the implementation or consummation of the Plan; (g) to hear and determine all controversies, disputes, settlements, and suits which may arise in connection with the interpretation or enforcement of this Plan, or in connection with the enforcement of remedies under this Plan; (h) to hear and determine during the period in which the Chapter 11 Case remains open all controversies, disputes and issues relating to the discharge of the Debtor; (i) to consider and approve compromises, settlements and adjudications of any objections to Claims; (j) to estimate disputed, contingent and unliquidated Claims for purposes of distribution under the Plan; (k) to correct any defect, cure any omission or reconcile any inconsistency in the Plan; (l) to resolve any issues or disputes relating to the revesting of title, sale, or liquidation of Assets in accordance with provisions within the Plan; (m) to enter a final decree closing the Chapter 11 Case; (n) to hear and determine matters concerning state, local and federal taxes in accordance with Sections 346, 505 and 1146 of the Bankruptcy Code; (o) to hear and determine all adversary proceedings filed before or after the Confirmation Date seeking relief under Sections 542, 543, 544, 547, 548, 549 or 550 of the Bankruptcy Code; DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 57 170 (p) over the Litigation Entity, and to hear and determine all Causes of Action filed after the Effective Date by the Litigation Entity; (q) to hear and determine any other matter not inconsistent with the Bankruptcy Code and title 28 of the United States Code that may arise in connection with or related to this Plan; and (r) to hear and determine such other matters as may arise in connection with the Plan or the Confirmation Order. DATED: March ___, 1997 WRT ENERGY CORPORATION, DEBTOR AND DEBTOR IN POSSESSION By: --------------------------------------- RAYMOND P. LANDRY Chief Executive Officer and Chairman of Board of Directors Joel P. Kay, Esq. Edward Lee Morris, Esq. SHEINFELD, MALEY & KAY, P.C. 1001 Fannin Street, Suite 3700 Houston, Texas 77002-6796 ATTORNEYS FOR WRT ENERGY CORPORATION DLB OIL & GAS, INC. CO-PROPONENT By: --------------------------------------- MARK LIDDELL President DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 58 171 WEXFORD MANAGEMENT LLC CO-PROPONENT By: --------------------------------------- CHARLES E. DAVIDSON Chairman of Board of Directors Jeffrey S. Sabin, Esq. Mark A. Broude, Esq. SCHULTE ROTH & ZABEL LLP 900 Third Avenue New York, New York 10022 ATTORNEYS FOR DLB OIL & GAS, INC. AND WEXFORD MANAGEMENT LLC DEBTOR'S AND DLBW'S SECOND AMENDED JOINT PLAN OF REORGANIZATION PAGE 59 EX-10.14 4 TEXACO AGREEMENTS 1 EXHIBIT 10.14 ================================================================================ PURCHASE, SALE AND COOPERATION AGREEMENT DATED AS OF MARCH 11, 1997 BY AND BETWEEN TEXACO EXPLORATION AND PRODUCTION, INC., ("TEPI" OR "SELLER") AND DLB OIL & GAS, INC. ("BUYER") ================================================================================ 2 TABLE OF CONTENTS
PAGE ---- PART ONE - SUBJECT MATTER, DEFINITIONS AND RULES OF CONSTRUCTION 1 1.1 SUBJECT MATTER. 1 1.2 DEFINED TERMS. 1 1.3 OTHER DEFINITIONS. 10 1.4 GOVERNANCE. 10 1.5 RULES OF CONSTRUCTION. 10 PART TWO - SALE AND PURCHASE 11 2.1 ASSETS. 11 2.2 PURCHASE PRICE. 11 2.3 [Intentionally Omitted]. 11 2.4 PRELIMINARY RECAPITULATION. 11 2.5 CLOSINGS AND PAYMENT. 11 2.6 WIRING INSTRUCTIONS. 12 2.7 ASSUMPTION OF OBLIGATIONS. 12 2.8 GLOBAL SETTLEMENT. 13 2.9 SALT WATER OR PRODUCED WATER DISCHARGES. 16 PART THREE - REPRESENTATIONS AND WARRANTIES 17 3.1 SELLER. 17 3.2 BUYER. 18 3.3 NO OTHER REPRESENTATIONS AND WARRANTIES. 19 PART FOUR - COVENANTS 19 4.1 COVENANTS OF SELLER. 19 4.2 COVENANTS OF BUYER. 20 PART FIVE - ACCESS TO INFORMATION 22 5.1 FILES. 22 5.2 OTHER FILES. 22 5.3 CONFIDENTIAL DATA. 22
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PAGE ---- PART SIX - ON-SITE INSPECTIONS 22 6.1 ON-SITE INSPECTIONS. 22 PART SEVEN - CONDITIONS TO CLOSING 23 7.1 SELLER'S CLOSING CONDITIONS. 23 7.2 BUYER'S CLOSING CONDITIONS. 24 PART EIGHT - FIRST AND SECOND CLOSING 26 8.1 CLOSING. 26 8.2 TRANSACTIONS AT FIRST CLOSING. 26 8.3 TRANSACTIONS AT SECOND CLOSING. 28 8.4 SUBSEQUENT TO FIRST CLOSING. 28 8.5 RIGHT OF BUYER TO UNWIND AFTER FIRST CLOSING. 29 PART NINE - DISCLAIMER, ASSUMPTION AND INDEMNITY 30 9.1 DISCLAIMER/ASSUMPTION OF RISK (SELLER). 30 9.2 DISCLAIMER/ASSUMPTION OF RISK (BUYER). 32 9.3 INDEMNITY. 34 PART TEN - SPECIAL PROVISIONS 36 10.1 CAPACITY RESERVATIONS. 36 10.2 SURFACE RIGHT OF WAY ALLOWANCES. 40 10.3 POLLUTION RESPONSE/PAYMENT. 41 10.4 ABILITY TO DRILL SALT WATER DISPOSAL WELLS. 41 10.5 ABILITY TO MOVE RIGS. 41 10.6 CATHODIC PROTECTION. 41 10.7 EXISTING EMPLOYEES AND CONTRACTORS. 41 10.8 ACCESS TO FRESH WATER. 42 10.9 ACCESS TO FIELD. 42 10.10 INSURANCE. 42 10.11 WELL PROPOSAL BY BUYER. 42 10.12 NONINTERFERENCE OF OPERATIONS. 42 10.13 RIGHT TO PURCHASE PRODUCTION. 42 10.14 BUYER'S RETAINED INTEREST IN TANK BATTERY 1-A. 43 10.15 MISCELLANEOUS. 43
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PAGE ---- PART ELEVEN - MISCELLANEOUS 44 11.1 SUCCESSORS AND ASSIGNS. 44 11.2 WAIVERS AND AMENDMENTS. 44 11.3 NOTICES. 44 11.4 COUNTERPARTS. 45 11.5 ENTIRE AGREEMENT. 45 11.6 SEVERABILITY. 45 11.7 APPLICABLE LAW. 45 11.8 EXPENSES. 45 11.9 FILING AND RECORDING OF ASSIGNMENTS, ETC. 45 11.10 PAYMENT OF BURDENS. 45 11.11 LAWS AND REGULATIONS. 46 11.12 PUBLIC ANNOUNCEMENTS. 46 11.13 ASSIGNABILITY. 46 11.14 PROVISIONS SURVIVE EACH CLOSING. 46 11.15 DISPUTE RESOLUTION. 47 11.16 SELLER'S ELECTION TO ELECT A TAX DEFERRED EXCHANGE. 47 11.17 TERMINATION. 47
iii 5 EXHIBIT LIST Exhibit A: Contracts Exhibit B-1: Sale and Assignment of Assets Exhibit B-2: Sale and Assignment of Buyer's Leasehold Exhibit C-1: Escrow Agreement Exhibit C-2: Security Agreement Exhibit D: Dispute Resolution Exhibit E-1: Gas Purchase Contract (Buyer to Seller) Exhibit E-2: Gas Purchase Contract (Seller to Buyer) Exhibit F: Contract Operating Agreement Exhibit G: Shorebase Service Agreement Exhibit H: Commitment Agreement Exhibit I: Claim (Invoices) Exhibit J: Receipt Exhibit K-1: Wiring Instructions Exhibit K-2: Wiring Instructions Exhibit K-3: Wiring Instructions Exhibit K-4: Wiring Instructions Exhibit L: Buyer's Insurance Binder Exhibit M: East Hackberry Letter Agreement Exhibit N: Assignment and Assumption Agreement
6 PURCHASE, SALE AND COOPERATION AGREEMENT This Purchase, Sale and Cooperation Agreement is made and entered into this 11th day of March, 1997, by and between Texaco Exploration and Production Inc., a Delaware corporation (hereinafter "TEPI" or "Seller"), and DLB Oil & Gas, Inc., an Oklahoma corporation, (hereinafter "Buyer"). Seller and Buyer are sometimes separately referred to herein as a "Party" and collectively as "Parties." PART ONE SUBJECT MATTER, DEFINITIONS AND RULES OF CONSTRUCTION 1.1 SUBJECT MATTER. The subject matter of this Agreement is, inter alia, the sale by Seller to Buyer of the Assets, the purchase of the Assets by Buyer, the assignment of Buyer's Leasehold from Buyer to Seller, the purchase of the Claim by Buyer from Seller, and the terms and conditions of all of the foregoing. 1.2 DEFINED TERMS. For purposes of this Agreement, including the Exhibits, except as otherwise expressly provided or unless the context otherwise requires, the terms defined in this Section 1.2 have the meanings assigned to them herein and the capitalized terms defined elsewhere in the Agreement by inclusion in quotation marks and parentheses have the meanings so ascribed to them. "AFFILIATE" means, with respect to any Person, any other Person directly or indirectly controlling or controlled by, or under common control with, such Person. For purposes of this definition, the term "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with") as applied to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management of such Person, whether through ownership of voting securities, by contract or otherwise, and specifically with respect to a corporation or partnership means ownership of fifty percent (50%) or more of the voting stock in such corporation or of the voting interest as a partner in such partnership. "AGREEMENT" means this Purchase, Sale and Cooperation Agreement between Seller and Buyer, including the Exhibits attached hereto. "APPLICABLE LAW" means all laws, Environmental Laws, statutes, treaties, rules, codes, ordinances, regulations, certificates, orders, interpretations, licenses and permits of any Governmental Body and judgments, decrees, injunctions, writs, orders or like action of any court, arbitrator or other competent jurisdiction (including, without limitation, those pertaining to health, safety or the environment). "ASSETS" means collectively the Lease, the Equipment, the Non- Excluded Material, the Wells and the Contracts, except to the extent constituting Excluded Assets. 1 7 "ASSUMED OBLIGATIONS" means (i) all liabilities, duties and obligations that arise in any way from ownership or operation of the Assets, except those which arise, relate to or accrue (a) prior to the Effective Date from personal injury, Burdens, production, windfall profit, severance, ad valorem or any other similar taxes or supply and service contracts, and (b) prior to the First Closing Date from federal or state income taxes; (ii) all liabilities, duties and obligations with respect to plugging, replugging and abandoning any Wells whether or not covered by or under a Contract, the restoration of the Leases and any Well sites, and the proper removal, disposal, and abandonment of any fixtures which are included in the Assets, including, without limitation, those matters set forth in Section 2.7(b); and (iii) all duties, liabilities and obligations as of the Effective Date under any Contracts. "BANKRUPTCY CODE" means the United States Bankruptcy Code, 11 U.S.C. Sections 101 et seq. "BURDENS" means royalties (including both lessors' royalties and nonparticipating royalty interests), overriding royalties, net profits interests, reversionary interests, production payments, and other similar obligations and burdens payable out of production from or attributable to the Lease. "BUSINESS DAY" means a day on which the commercial banks are open for regular business in New York City. "BUYER'S LEASEHOLD" means all of Buyer's right, title and interest in State of Louisiana Lease No. 340 by and between the State of Louisiana, as Grantor, and William T. Burton, as Grantee, dated February 7, 1936, and recorded at Vol. 5-F, Page 387, Entry No. 60,191, St. Mary Parish, Louisiana and Vol. 126, Page 185, Entry No. 49,234, Iberia Parish, Louisiana described on Exhibit B-2 to the Agreement, insofar and only insofar, as Buyer's leasehold pertains to the lands described in said Exhibit. Buyer's Leasehold shall also mean fifty (50%) percent of Buyer's interest in the facilities which were excluded from Assets, and with the limitations contained in Exhibit "B-2". "CASE" means the bankruptcy case of WRT, pending under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Western District of Louisiana, Lafayette-Opelousas Division (the "Bankruptcy Court"). "CAOA" means that certain Contract Area Operating Agreement, dated effective as of July 1, 1987, by and among Texaco Inc., Pelham Partners, Ltd., Breck Operating Corp., Fuller Petroleum, Inc., Chilicote Inc. and Tesla Resources, Inc., as subsequently amended or modified from time to time. Said Contract Area Operating Agreement is also identified on Exhibit "A" hereto. "CLAIM" means the unpaid amounts due and owing, as illustrated by the summary of the invoices attached hereto as Exhibit "I," for goods and services provided by Seller to 2 8 WRT (formerly TESLA) related to the Contract Area prior to the commencement of the Case, in the amount of $5,960,825.30, together with all right, title and interest of Seller in and to (i) any and all property, whether real or personal, tangible or intangible, of whatever kind and wherever located, whether now owned or hereafter acquired or created, in which a lien or security interest exists or purports to exist, whether by statute, contract or otherwise, securing repayment of such amount, and (ii) all rights of recoupment under Applicable Law, as more particularly set forth in the Texaco Recoupment Motion. "COMMITMENT AGREEMENT" means that certain Commitment Agreement, dated as of January 20, 1997, attached hereto as Exhibit "H", among WRT, Buyer and Wexford Management LLC, as agent, as may be amended and modified and further approved by the Bankruptcy Court. "CODE" means the Internal Revenue Code of 1986, as amended from time to time, and any successor statute or statutes. "CONTEMPLATED TRANSACTIONS" means each and all of the transactions contemplated by this Agreement, except such term shall not include the Plan or the Commitment Agreement. "CONTRACTS" means all of Seller's right, title and interest in and to those contracts and other agreements listed on Exhibit "A" hereto insofar and only insofar as the same relate to the Lease, the Equipment and the Wells. "CONTRACT AREA" means the acreage and other interests covered by the CAOA, as said term is more fully defined therein. "DISTRIBUTIONS" means any and all cash, debt securities, equity securities and other property or consideration which may be exchanged for or distributed or collected or otherwise received on account of the Claim after the First Closing Date and all proceeds thereof. "EAST HACKBERRY LETTER AGREEMENT" means that certain letter from Buyer to Seller dated March 11, 1997, attached hereto as Exhibit "M," pursuant to which DLB has guaranteed the performance of the plugging and abandonment obligations of WRT, as reorganized, with respect to State Lease 50 insofar only as to the East Hackberry Field. "EFFECTIVE DATE" shall mean 7:00 a.m., local time, January 1, 1997. "ENVIRONMENT" means navigable waters, ocean waters, natural resources, surface waters, ground water, drinking water supply, land surface, subsurface strata, ambient air, both inside and outside of buildings and structures, and wildlife, aquatic species and vegetation. 3 9 "ENVIRONMENTAL CLAIM" means any claim, demand, or cause of action asserted by any Governmental Body or any Person for personal injury (including sickness, disease or death), property damage or damage to the Environment resulting from the transport, discharge or Release of any chemical, material or emission into the Environment at or in the vicinity of the Assets. "ENVIRONMENTAL LAWS" means all federal, state and local laws, statutes, ordinances, now or hereafter in effect, and in each case as amended, and any judicial or administrative interpretation thereof, including any judicial or administrative order, consent decree or judgment, relating to the regulation and protection of human health, safety or the Environment, including, without limitation, laws and regulations relating to emissions, discharges, Releases or threatened Releases of Hazardous Materials or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials. Environmental Laws include, but are not limited to, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended; the Federal Insecticide, Fungicide, and Rodenticide Act, as amended; the Resource Conservation and Recovery Act, as amended; the Toxic Substances Control Act, as amended; the Clean Air Act, as amended; the Federal Water Pollution Control Act, as amended; the Clean Water Act, as amended; the Oil Pollution Control Act, as amended; the Oil Pollution Act of 1990, as amended; the Endangered Species Act, as amended; the Wild and Scenic Rivers Act, as amended; the Rivers and Harbors Act of 1899, as amended; the National Historic Preservation Act of 1966, as amended; the Natural Gas Pipeline Safety Act of 1968, as amended; and the Safe Drinking Water Act, as amended; and their state and local counterparts or equivalents. "EQUIPMENT" means, except to the extent constituting Excluded Assets, all right, title and interest of Seller in and to all Wells, equipment, facilities, including but not limited to tubing, casing, wellheads, pumping units, production units, compressors, valves, meters, flowlines, tanks, heaters, separators, dehydrators, pumps and injection units, disposal facilities, platforms, and the like, which are located on the Lease and which are or have been used solely and exclusively in connection with the production or treatment of Hydrocarbons from the Lease or the Wells, and all wellbores and the tubing and equipment located therein. "ESCROW AGREEMENT" means that certain Escrow Agreement by and among Seller, Buyer and The Chase Manhattan Bank, as escrow agent, to be entered into at the First Closing, substantially in the form attached hereto as Exhibit "C-1." "EXCLUDED ASSETS" means the following: (a) (i) all trade credits, accounts receivable, notes receivable and other receivable attributable to Seller's interest in the Assets with respect to any period of time prior to the Effective Date, except for the Claim, (ii) all trade payables, accounts payable, notes payable and other payables attributable to Seller's interest in the Assets with respect to any period of time prior to the Effective Date and (iii) all deposits, cash, checks in 4 10 process of collection, cash equivalents and funds attributable to Seller's interest in the Assets with respect to any period of time prior to the Effective Date; (b) all corporate, financial, and tax records of Seller; however, Buyer shall be entitled to receive copies of any financial and tax records which relate to the Assets or any Assumed Obligations, or which are necessary for Buyer's ownership, administration, or operation of the Assets. Buyer shall provide a written request to Seller indicating its desire to obtain copies, and the purpose for the same; (c) all claims and causes of action of Seller (i) arising from acts, omissions or events, or damage to or destruction of property occurring prior to the Effective Date, and (ii) with respect to any of the Excluded Assets; (d) all rights, titles, claims and interests of Seller (i) under any policy or agreement of insurance or indemnity, (ii) under any bond, or (iii) to any insurance or condemnation proceeds or awards; (e) all Hydrocarbons produced from or attributable to the Assets with respect to all periods prior to the Effective Date, together with all proceeds from or of such Hydrocarbons; (f) claims of Seller for refund of or loss carry forwards with respect to (i) production, windfall profit, severance, ad valorem or any other similar taxes attributable to any period prior to the Effective Date, (ii) income or franchise taxes attributable to any period prior to the First Closing Date, or (iii) any taxes attributable to the Excluded Assets; (g) all amounts due or payable to Seller as adjustments or refunds under any Contracts respecting periods prior to the Effective Date; (h) all amounts due or payable to Seller as adjustments to insurance premiums related to the Assets with respect to any period prior to the Effective Date; (i) all proceeds, benefits, income or revenues accruing (and any security or other deposits made) with respect to (i) the Assets prior to the Effective Date; and (ii) any Excluded Assets; (j) all files, information and data expressly excluded from the definition of "Non-Excluded Material;" (k) all of Seller's intellectual property, including but not limited to proprietary computer software, geological interpretations, patents, trade secrets, copyrights, names, marks, seismic information and interpretation, and logos; 5 11 (l) all of Seller's vehicles, trucks (including associated tools), boats (except for the two pollution response vessels at West Cote Blanche Bay which each have aluminum bottoms), tools, pulling machines, warehouse stocks, microwave equipment, computer equipment, remote terminal units, equipment or material temporarily located on the Assets; any pipelines, fixtures, tanks or equipment located on the Assets which belong to third parties, including, without limitation, Affiliates of Seller, lessors or purchasers of Hydrocarbons; (m) all of Seller's interest in any oil, gas and/or mineral leases, lands or any mineral or surface fee which (i) are not specifically referenced on Exhibit "B-1" and/or (ii) cover or pertain to lands other than the particular lands described in the Lease, specifically referenced on Exhibit "B-1"; (n) the deep wells numbered 720, 831, 868, and 871. Also excluded are the present flowlines along with the separators and measurement equipment serving these wells. Flowlines shall mean the piping between the wellhead tree and header presently in place for each well; (o) tank battery 1-A, including, without limitation, all equipment and piping beginning at the header and ending at: i) salt water line leaving treater, and ii) point where LP gas enters suction line, immediately downstream of sales meter to Buyer. This includes, without limitation, separators, treaters, LACT, tanks, lightplant, meters, and all accessories and piping up to the designated exit point. Seller will also retain ownership of two 3 1/2" HP lines running to the dehydration platform. However, Excluded Assets shall not include, with respect to tank battery 1-A, the production header, one 24" by 10' LP test separator (125 psi WP), currently located on tank battery 1-A and one LP 60" by 15' production separator (250 psi WP); The Excluded Assets located at tank battery 1-A shall include, but not be limited to: 1-HP separator for well #868; 1-60" by 15' LP production separator for well #720 (presently used for well #261); 1-HP separator for well #831; 1-LP separator for well #720; 1-flare regulator system; 3-1500 bbl tanks; 1-treater; 1-flare separator; 3-M8 pumps (two gas, one air); 2-electric pumps; 1-LACT unit; 1-generator with building; 1-550 gallon methanol tank; 1-350 gallon chemical tank owned by Champion Chemical Company; 6 12 1-pumpers building: and other miscellaneous piping, connections, fittings, and related equipment, all located on the platforms designated as tank battery 1-A. Buyer's ownership of the piping shall begin at: (i) the treater outlet for saltwater, and (ii) the point where LP gas enters the compressor suction line, immediately downstream of Buyer's sale meter. (p) one natural gas driven air compressor which was originally used for the Yale compressors, currently out of service at the SWD platform; (q) miscellaneous compressor parts for compression units located in Cote Blanch Island and Vermilion Bay fields which are presently stored in West Cote Blanche Bay field. These items will be relocated out of West Cote Blanche Bay field; (r) Ivanhoe shorebase facility; (s) Ivanhoe fuel stock; (t) rented barge Arc #23; and (u) any and all pipelines, gathering lines, and transmission lines wholly owned by Seller or its affiliates, which are physically located in West Cote Blanche Bay Field, including but not limited to the Ivanhoe Gas Gathering System which begins at Seller's sales meter for buying Buyer's production. "FIRST CLOSING" means the closing of the Contemplated Transactions listed in Section 8.2 of this Agreement, held on the First Closing Date, at the offices of Texaco Exploration and Production Inc., 400 Poydras St., New Orleans, Louisiana. All transactions occurring at the First Closing shall be deemed to have occurred simultaneously, and no one transaction shall be deemed to be complete until all such transactions are completed. "FIRST CLOSING DATE" means March 11, 1997, or such other date as the Parties may agree in writing. "GOVERNMENTAL BODY" means any Federal, state, county, municipal, or other Federal, state or local governmental authority or judicial or regulatory agency, board, body, department, bureau, commission, instrumentality, court, tribunal or quasi-governmental authority in any jurisdiction (domestic or foreign) having jurisdiction over any Asset or Person that is a party to any of the Contemplated Transactions, or any property of any of them. 7 13 "HAZARDOUS MATERIALS" means any material (including naturally occurring radioactive materials), the emission, discharge, transportation, use, presence or disposal of which is regulated by or which must be remediated under any Environmental Law, and shall include, but not be limited to, any material defined as "hazardous" under the Resource Recovery and Conservation Act of 1980, as amended, or the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended. "HYDROCARBONS" means only crude oil, natural gas, casinghead gas, condensate, sulphur, natural gas liquids, plant products and other liquid or gaseous hydrocarbons. "LEASE" means, except to the extent constituting Excluded Assets, and with the limitations contained in Exhibit "B-1" any and all rights, titles and interests owned by Seller in State of Louisiana Lease No. 340 by and between the State of Louisiana as grantor and William T. Burton as grantee, dated February 7, 1936, and recorded at Vol. 5-F, Page 387, Entry No. 60,191, St. Mary Parish, and Vol. 126, Page 185, Entry No. 49,234, Iberia Parish, described on Exhibit "B-1" to the Agreement, insofar and only insofar as such Lease pertains to the lands and depths described in said Exhibit. "LOSSES" means any and all losses, liabilities, claims, demands, penalties, fines, settlements, damages, actions, or suits of whatsoever kind and nature (but expressly excluding consequential damages), whether or not subject to litigation, including, without limitation (i) claims or penalties arising from products liability, negligence, statutory liability or violation of any Applicable Law or in tort (strict, absolute or otherwise) and (ii) loss of or damage to any property, and all reasonable out-of-pocket costs, disbursements and expenses (including, without limitation, legal, accounting, consulting and investigation expenses and litigation costs) imposed on, incurred by or asserted against an indemnified Party in connection therewith. "NON EXCLUDED MATERIAL" means copies of the following, insofar as the same are attributable to, appurtenant to, incidental to, or used for the operation of the Assets: (i) all unitization, communitization, and pooling designations, declarations, agreements and orders covering the Assets, or any portion thereof, and the units and pooled or communitized areas created thereby; and (ii) all lease files, land files, well files, gas and oil sales contract files, gas processing files, division order files, abstracts, title opinions, core data books, well utility books, field production/gauge books, water analysis files, directional survey books, the Ivanhoe shorebase facility well and log files, the Production Analyst Production Database, the BHP books, the seismic data received from Western Geophysical unprocessed by Seller relating to the Lease, and all other books, files and records, information and data relating to the Assets (excluding, however, all legal files, attorney-client communications or attorney work product, records and documents subject to confidentiality provisions, auditor's reports, reserve information and reports, economic runs, interpretative structure maps, correlated logs, and any interpretive seismic, geochemical, and geophysical information and data, or other proprietary information relating thereto). The costs associated with copying the Non-Excluded Material shall be borne by Buyer. 8 14 "PERSON" means an individual, corporation, association, joint stock company, trust, partnership, joint venture, unincorporated organization, a government or any department or agency thereof, or any other legal entity. "PLAN" means the Second Amended Joint Plan of Reorganization under Chapter 11 of the United States Bankruptcy Code of WRT, Buyer and Wexford Management LLC, as agent ("Wexford"), dated March 11, 1997, as may be amended or modified with the consent of Buyer and Wexford. "RECEIPT" means the receipt for the Claim executed by Seller at the First Closing, in substantially the form of Exhibit "J" hereto. "RELEASE" means any release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or migration into the Environment or into or out of any property, including the movement of Hazardous Materials through or in the air, soil, surface water, ground water or property. "SECOND CLOSING" means the closing of the Contemplated Transactions listed in Section 8.3 of this Agreement, held on the Second Closing Date, at the offices of Schulte, Roth & Zabel LLP, 900 Third Avenue, New York, New York 10022. All transactions occurring at the Second Closing shall be deemed to have occurred simultaneously, and no one transaction shall be deemed to be complete until all such transactions are completed. "SECOND CLOSING DATE" means the Effective Date under, and as such term is defined in the Plan, or such other date as the Parties may agree in writing. "SECURITY AGREEMENT" means that certain Security Agreement and Assignment of Production Proceeds, substantially in the form of Exhibit "C-2" hereto, to be executed by Buyer in favor of Seller at the First Closing. "SHOREBASE SERVICE AGREEMENT" means the Shorebase Service Agreement attached hereto as Exhibit "G". "SUBORDINATION AGREEMENT" means that certain Subordination Agreement by and between Seller and ING Capital Corporation to be executed at the Second Closing. "TERMINATION DATE" means the earlier of (a) the date on which the "Unwind" occurs, if applicable, pursuant to Section 8.5 hereof, and (b) the date of termination of the Agreement, if applicable, pursuant to Section 11.17 hereof. "TESLA" means TESLA Resources, Inc., a California corporation, which was a wholly owned subsidiary of WRT Energy Corporation, whose place of business was 4200 Research Forest Drive, The Woodlands, Texas 77381, now merged into WRT Energy Corporation. 9 15 "TEXACO RECOUPMENT MOTION" means that certain Motion Of Texaco Exploration And Production Inc. Pursuant To 11 U.S.C. Section 363(e) Prohibiting Debtor From Using Proceeds From Production At West Cote Blanche Bay Field dated August 19, 1996, currently pending before the Bankruptcy Court. "WCBB" means State Lease 340 located in St. Mary and Iberia Parishes, Louisiana, in the western portion of West Cote Blanche Bay known as West Cote Blanche Bay Field. "WELL(S)" shall mean, except as to the extent constituting Excluded Assets, all rights, titles and interests of Seller as of the First Closing Date in all oil and gas wells and injection and disposal wells located on the Lease, or used or useful in connection therewith, or on lands pooled or unitized therewith, or owned by Seller by virtue of any operating rights created by or under any Contract, including, but not limited to, those which are active or inactive, productive or non-productive, plugged and abandoned or temporarily abandoned. "WRT" means WRT Energy Corporation. 1.3 OTHER DEFINITIONS. Terms otherwise not defined in Section 1.2 above shall have the respective meanings ascribed to such terms in the other provisions of this Agreement. 1.4 GOVERNANCE. In the event of any inconsistency between any of the Exhibits to this Agreement and the provisions of this Agreement, the terms of this Agreement shall control. 1.5 RULES OF CONSTRUCTION. For purposes of this Agreement, including the Exhibits hereto: GENERAL. Unless the context otherwise requires, (i) "or" is not exclusive; (ii) an accounting term not otherwise defined has the meaning assigned to it in accordance with accounting principles that are generally accepted in the United States of America; (iii) words in the singular include the plural and words in the plural include the singular; (iv) words in the masculine include the feminine and words in the feminine include the masculine; and (v) a reference to a Person includes its successors and assigns. (a) PARTS AND SECTIONS. References to Parts and Sections are, unless otherwise specified, solely references to Parts and Sections of the Agreement. Neither the captions to Parts or Sections hereof nor the Table of Contents shall be deemed to be a part of this Agreement. (b) EXHIBITS. Subject to Section 1.3 of this Agreement, the Exhibits form part of this Agreement and shall have the same force and effect as if set out in the body of this Agreement, subject, however, to the provisions of Section 1.4 of this Agreement. 10 16 (c) OTHER AGREEMENTS. References herein to any agreement or other instrument shall, unless the context otherwise requires (or the definition thereof otherwise specifies), be deemed references to that agreement or instrument as it may from time to time be changed, amended or extended. PART TWO SALE AND PURCHASE 2.1 ASSETS AND CLAIM. Seller hereby agrees to sell, assign and convey to the Buyer and Buyer agrees to purchase and pay for the Assets and the Claim, and Buyer agrees to assume the Assumed Obligations. This will be accomplished at the First Closing. In addition, Buyer agrees to assign and convey to Seller Buyer's Leasehold more particularly described on Exhibit "B-2". This will be accomplished at the Second Closing. The above transactions will occur in accordance with this Agreement and will be evidenced by the sale and assignments attached hereto as Exhibits "B-1" and "B-2" as more fully set forth in Part Eight of this Agreement, and by the Fed. R. Bankr. P. Rule 3001 filing in Section 4.1(c) hereof. 2.2 PURCHASE PRICE. The consideration shall be a purchase price of TWELVE MILLION, FIVE HUNDRED THOUSAND, AND NO/100 DOLLARS ($12,500,000.00) (the "Purchase Price") and the conveyance by Buyer to Seller of Buyer's Leasehold which is more particularly described on Exhibit "B-2". Also, at the First Closing, Buyer shall pay Seller in cash FIVE MILLION, NINE HUNDRED SIXTY THOUSAND, EIGHT HUNDRED TWENTY-FIVE AND 30/100 DOLLARS ($5,960,825.30) in payment of the Claim. The amount of the Purchase Price is set in consideration of Buyer's assuming all plugging, replugging, abandonment, removal, disposal, cleanup and restoration obligations as more fully provided in Section 2.7(b), and also in consideration of Buyer's entering into Exhibit "C-1" and "C-2", which are the Escrow Agreement, and the Security Agreement, respectively. 2.3 [Intentionally Omitted]. 2.4 PRELIMINARY RECAPITULATION. At least two (2) days prior to First Closing, Seller shall provide to Buyer a preliminary settlement statement ("Preliminary Recap"). The Preliminary Recap will account for actual production proceeds received by Seller and all necessary and reasonable capital costs, overhead costs, severance taxes or other taxes measured by production, ad valorem taxes, and including prorated estimates of ad valorem taxes in absence of actuals, expenses and Burdens paid by Seller attributable to the Assets as of the Effective Date. Any amounts due by Seller to Buyer as set forth in the Preliminary Recap shall be paid by Seller by wire transfer of collected funds payable to Buyer at the First Closing. 2.5 CLOSINGS AND PAYMENT. Subject to the terms and conditions contained herein, the Contemplated Transactions shall close on the First Closing Date and the Second Closing Date. At First Closing, Buyer will pay Seller the Purchase Price by wire transfer of 11 17 collected funds payable to Seller and Seller shall deliver to Buyer duly executed conveyances of the Assets which shall be effective on the Effective Date. At First Closing, Buyer shall pay Seller the amount set forth in Section 2.2 above in payment of the Claim by wire transfer of collected funds payable to Seller and Seller shall deliver to Buyer the Receipt duly executed. At Second Closing, Buyer shall deliver to Seller duly executed conveyances of Buyer's Leasehold which shall be effective on the Effective Date of the Plan. At First Closing, Buyer shall make the initial deposit required under the Escrow Agreement by wire transfer of collected funds to the Escrow Account (as defined in the Escrow Agreement). 2.6 WIRING INSTRUCTIONS. The payments and deposit required in Section 2.5 above shall be made in accordance with the wiring instructions set forth on Exhibits "K-1", "K-2", "K-3" and "K-4" hereto. 2.7 ASSUMPTION OF OBLIGATIONS. (a) At the First Closing, Buyer shall assume, effective as of the Effective Date, the Assumed Obligations. (b) Without limiting the foregoing, Buyer specifically acknowledges and agrees that as of the Effective Date, Buyer shall assume all of Seller's plugging, replugging, abandonment, removal, disposal and restoration obligations associated with the Assets being acquired hereunder, regardless of whether such obligations arose prior to or after the Effective Date. Such obligations being assumed shall include, but not be limited to, all necessary and proper plugging and abandonment and/or removal and disposal of the Wells, structures, and Equipment located on or associated with the Assets, the necessary and proper removal or capping and burying of all associated flow lines, and any necessary disposal of naturally occurring radioactive material (NORM) or of asbestos. All plugging, replugging, abandonment, removal, disposal, cleanup and restoration operations shall be in compliance with Applicable Laws and regulations and with the terms and conditions of the Lease and Contracts, and shall be conducted in a good and workmanlike manner. (c) Unless otherwise agreed to by the Parties, Buyer shall assume Seller's obligations for operatorship of any Seller-operated Assets conveyed herein at 7:00 A.M. local time on the day immediately succeeding the First Closing Date; provided, that Seller shall act as contract operator of the Assets in accordance with that certain Contract Operating Agreement attached hereto as Exhibit "F". (d) The CAOA covering the Lease shall continue in effect following the First Closing Date; and Seller will continue to be named as operator for all depths below the "Rob C Marker", which marker is defined as the correlative point as seen in the Texaco West Cote Blanche Bay #265 well at a measured depth of 10,575 feet. 12 18 2.8 GLOBAL SETTLEMENT This Agreement is made subject to that certain Global Settlement Agreement by and among Texaco Inc., The Louisiana Land and Exploration Company, and the State of Louisiana ("Global Settlement"), dated February 22, 1994, a complete copy of which is recorded at Vol. 36-W, Entry No. 244,947 in the records of St. Mary Parish, Louisiana, and Vol. 1071, Entry No. 94-2838, in the records of Iberia Parish, Louisiana. Buyer hereby acknowledges receipt of a copy of the Global Settlement. (a) Unless otherwise indicated, capitalized terms used under this Section 2.8 have the meaning given them in the Global Settlement, or if not defined in the Global Settlement, as defined in this Agreement. (b) Buyer acknowledges that the Lease is subject to the Global Settlement and agrees to comply with and assume all obligations arising from and after the Effective Date of this Agreement under, or in any manner related to or created and/or recognized by the Global Settlement insofar only as the same relate to the Lease and the Wells. (c) Buyer acknowledges that the Lease is subject to the Global Settlement and agrees to notify Seller in writing within seven (7) days after its receipt of any material communications outside of the ordinary course of business from the Louisiana State Mineral Board ("SMB") relating in any manner to the Assets. Additionally, except as provided herein with respect to Force Majeure events and Potential Suspending Events, Buyer agrees to give Seller thirty (30) days written notice prior to initiating any material communication outside of the ordinary course of business and/or docketing of any such matters with the SMB and/or its technical staff relating in any manner to the obligations assumed under the Global Settlement and the Lease and the Wells; and Buyer agrees that Seller, in Seller's sole discretion, shall have the right in cooperation with Buyer to handle the proposed communication, docketing or presentation of all such matters. Notice required by this paragraph shall be directed to the attention of Seller's New Orleans Land Manager at the mailing address Post Office Box 60252, New Orleans, Louisiana 70160. (d) Notwithstanding anything to the contrary stated above, but except as otherwise provided in this Agreement, Buyer shall not assign, sublease, farmout, convey, transfer, alienate, mortgage, hypothecate, pledge, or otherwise transfer or encumber the rights and interests that it is acquiring hereunder (in whole or in part) without prior written consent of Seller, which shall not be unreasonably withheld. Seller shall have the right to review any further conveyance in whole or in part, and any proposed conveyance contemplated herein. If Seller does provide its consent to such transaction, Seller's consent shall not have the effect of waiving this limitation with respect to any future or subsequent transaction(s). Except as provided herein, every transaction that is made without Seller's prior written consent shall be void ab initio; and, even if Seller's prior 13 19 written consent is obtained, the transaction shall be void unless it requires that any future or subsequent transaction(s) require Seller's prior written consent as provided herein. Further, Buyer is required to furnish Seller a copy of any conveyance within five (5) days of execution of such conveyance. (e) Future transactions (including, but not limited to, those transactions identified in Section 2.8(d) above), shall be void unless they are specifically made subject to this Agreement and the Global Settlement and the Burton Sublease, and unless any future successor(s) in interest to the rights (in whole or in part) acquired by Buyer hereunder assumes the obligations of Buyer hereunder; provided, however, that any such transaction shall not relieve Seller of its previously incurred obligations to Buyer hereunder without Buyer's express written consent. (f) The Lease is subject to the entirety of the Global Settlement, including, but not limited to the release obligations under Attachment "B" thereof. Buyer recognizes that the rights acquired hereunder may be the subject of a release in favor of the State of Louisiana, and that such a release may either be mandatory under the terms of Attachment "B" (where there is no discretion as to which acreage is the subject of a release) or discretionary under the terms of Attachment "B" (where there is some discretion to select the acreage that is the subject of a release). In the event of a release under the terms of Attachment "B", Seller and Buyer shall cooperate to achieve a pro rata release of acreage or other mutually acceptable designation of acreage which shall be released. In the event of a release (whether mandatory or discretionary) pursuant to the terms of Attachment "B" that affects the rights acquired by Buyer hereunder (in whole or in part), BUYER SHALL HAVE NO RIGHTS, CLAIMS OR CAUSES OF ACTION AGAINST SELLER WHATSOEVER. (g) Seller shall retain sole responsibility for the completion of the reports required under Attachment "B" of the Global Settlement and the maintenance and retention of any records, data, information, and documents relating to the affected acreage necessary for the completion of such reports, unless and until the Lease, or any portion thereof, is designated by the State Mineral Board as "Nonproducing State Lease Acreage" within the meaning of Attachment "B" of the Global Settlement. If the Lease, or any part thereof, is so designated by the State Mineral Board, Buyer shall thereupon assume sole responsibility for the completion of the reports required under Attachment "B" with respect to the Lease, and the maintenance and retention of any records, data, information and documents relating to the affected acreage necessary for the completion of such reports. (h) Except as otherwise provided in this Agreement, the Lease is subject to the entirety of the Global Settlement, including, but not limited to, Section XI of Attachment "C". 14 20 (i) Buyer, its affiliate(s) or subsidiary(ies), shall provide separate written notices to Seller's New Orleans Land Manager and Comptroller's Department at the mailing address hereinabove set forth in Section 2.8(c), within ten (10) days after executing an agreement under which an Affiliate of Seller (including, but not limited to Texaco Trading and Transportation Inc., Texaco Gas Marketing Inc., Texaco Natural Gas Inc. and Bridgeline Gas Distribution LLC) or of Buyer becomes a purchaser of Hydrocarbons produced from the acreage affected by this Agreement. (j) Seller shall have the right, at its sole option, to calculate and pay royalties to the State of Louisiana and any other royalty or overriding royalty owner under the terms of the agreements listed in Section 2.8(l), herein, attributable to Buyer's interest. If Seller agrees to pay royalty (or overriding royalty under the Hankamer Compromise) on Hydrocarbons produced hereunder and if, as a result of Buyer's failure to comply with any provision of Attachment "C" or Section 2.8(i) hereinabove, Buyer or Seller fails to pay, or fails to cause to be paid, royalty due on such production in accordance with the terms of Attachment "C" (or the overriding royalty under the "Hankamer Compromise"), Buyer shall hold harmless and indemnify Seller from and against each and every claim and liability, directly and indirectly, for any and all damages, penalties, attorneys fees and interest which result from the failure to comply. (k) Seller makes no representation with respect to the tax effects or implications arising from the fact that the Lease hereunder is subject to the Global Settlement. (l) In addition, Buyer agrees upon the execution of this Agreement to comply with, and this Agreement shall be specifically subject to, the provisions and obligations stated in the following agreements (as amended or as may, from time to time, be amended) insofar and only insofar as the same relate to the Lease and the Wells: 1) State Lease No. 340 dated February 7, 1936, granted by the State of Louisiana to W. T. Burton. Buyer hereby acknowledges receipt of a copy of this lease. 2) Sublease dated February 15, 1936, executed by W. T. Burton and The Texas Company. Buyer hereby acknowledges receipt of a copy of the sublease (the "Burton Sublease"). 3) Compromise Agreement dated effective October 15, 1981, executed by Raymond E. Hankamer et al and Texaco Inc. as amended by Agreement with the overriding royalty owners dated effective March 1, 1995 or otherwise ("Hankamer Compromise"). Buyer hereby acknowledges receipt of a copy of these agreements. 15 21 4) Agreement with the overriding royalty owners dated February 22, 1994. Buyer hereby acknowledges receipt of a copy of this agreement. (m) Buyer acknowledges that it is aware that the Assets are subject to certain overriding royalties (in addition to lessor's retained royalty) which burden the Lease. Seller has completed negotiations with certain overriding royalty owners and is currently engaged in negotiations with other overriding royalty owners in regard to the method of calculating their overriding royalty required by the Hankamer Compromise. This Agreement shall be subject to the provisions of any agreement reached by Seller with these overriding royalty owners. Seller hereby agrees to provide Buyer with copies of those agreements affecting the payment of royalties on acreage subject to this Agreement, which have been entered into with the royalty owners (provided Seller is not contractually restricted from providing such agreements), and also to provide Buyer with any future agreements affecting the payment of royalties on acreage subject to this Agreement, entered into between Seller and the royalty owners, provided Seller is not contractually restricted from providing such agreements. (n) Notwithstanding the above, Buyer shall provide Seller written notice within forty-eight (48) hours (exclusive of Saturday, Sunday and Federal holidays) after the occurrence of a Force Majeure event or a Potential Suspending Event as specified in Subsection 2.8(c) above. Buyer agrees that Seller, in Seller's sole discretion, shall have the right in cooperation with Buyer to handle the communication, docketing and/or presentation to the SMB of the Force Majeure or Potential Suspending Event . (o) Without limiting in any way Seller's rights to inspect pursuant to any other contractual relationship between Seller and Buyer, upon notice to Buyer, Seller shall have access to the Assets for the express purpose of visually inspecting the Assets for verification that Buyer is complying with all contractual obligations. 2.9 SALT WATER OR PRODUCED WATER DISCHARGES (a) This Agreement is made subject to that certain Consent Judgment between the Sierra Club and Seller, dated September 3, 1992, and the Amendment to Consent Judgment, filed July 21, 1994 (hereinafter jointly referred to as "Consent Judgment"). Buyer hereby acknowledges receipt of a copy of the Consent Judgment. From and after the Effective Date, Buyer, its successors and assigns, hereby agree to comply with and assume all obligations arising under or in connection with the Consent Judgment as it pertains to the Assets. (b) Buyer, its successors and assigns, hereby agree to notify Seller of any and all amendments or revisions to the Consent Judgment pertaining to the Assets and to provide Seller with a copy of any and all such amendments or revisions within five (5) days. 16 22 (c) Currently there is produced water injection taking place at West Cote Blanche Bay Field. Buyer will continue to inject produced water only into zones approved by the Department of Conservation for the State of Louisiana until other disposal operations are approved by the State of Louisiana. PART THREE REPRESENTATIONS AND WARRANTIES 3.1 SELLER. Seller represents and warrants to Buyer that, as of the First Closing Date: (a) Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and is duly qualified to carry on its business in all jurisdictions in which the Assets are located. (b) Seller has the corporate power and authority to enter into and perform this Agreement and to consummate the Contemplated Transactions. The execution, delivery and performance of this Agreement by Seller, and the Contemplated Transactions have been duly authorized by all requisite corporate action, and do not violate (i) any provision of the articles of incorporation or bylaws of Seller, (ii) any material agreement or instrument to which Seller is a party or by which Seller is bound, (iii) any judgment, order, ruling or decree applicable to Seller as a party in interest, or (iv) to the best of Seller's knowledge after diligent inquiry, any law, rule or regulation applicable to Seller or the Assets. (c) This Agreement constitutes a legal, valid and binding obligation of Seller, (d) There are no bankruptcy, reorganization or receivership proceedings pending, being contemplated by, or to the actual knowledge of Seller, threatened against Seller. (e) Seller has not incurred any liability, contingent or otherwise, for brokers' or finders' fees relating to the Contemplated Transactions. (f) Seller is not a non-resident, alien, foreign corporation, foreign partnership, or foreign estate (as those terms are defined in the Code and in the regulations promulgated thereunder). (g) There are no material gas imbalances which exist in and with respect to the Assets. 17 23 Seller shall use all reasonable efforts to assure that the warranties and representations herein contained are true and correct as of the First Closing Date and the Second Closing Date and will give prompt written notice to Buyer after the execution of this Agreement of any matter which affects any warranty or representation herein contained or which renders such warranty or representation untrue. 3.2 BUYER. Buyer represents and warrants to Seller that, as of the First Closing Date: (a) Buyer is a corporation duly organized, validly existing, under the laws of the State of Oklahoma, and is duly qualified to carry on its business in all jurisdictions in which the Assets are located. (b) Buyer has the corporate power and authority to enter into and perform this Agreement and to consummate the Contemplated Transactions. The delivery and performance of this Agreement by Buyer and the Contemplated Transactions have been duly authorized by all requisite corporate action, and do not violate (i) any material agreement or instrument to which Buyer is a party or by which Buyer is bound, (ii) any judgment, order, ruling or decree applicable to Buyer as a party in interest, or (iii) to the best of Buyer's knowledge after diligent inquiry, any law, rule or regulation applicable to Buyer. (c) This Agreement constitutes a legal, valid and binding obligation of Buyer, enforceable against Buyer in accordance with its terms, except that such enforcement may be subject to (i) bankruptcy, insolvency, reorganization or other similar laws, now or hereafter in effect, affecting the enforcement of creditors' rights generally, and (ii) general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law). (d) There are no bankruptcy, reorganization or receivership proceedings pending, being contemplated by, or to the actual knowledge of Buyer, threatened against Buyer. (e) Buyer is an experienced and knowledgeable investor and operator in the oil and gas business. (f) Buyer has not incurred any liability, contingent or otherwise, for brokers' or finders' fees relating to the transactions contemplated by this Agreement. Buyer shall use all reasonable efforts to assure that the warranties and representations herein contained are true and correct as of the First Closing Date and the Second Closing Date and will give prompt written notice to Seller after the execution of this Agreement of any matter which affects any warranty or representation herein contained or which renders such warranty or representation untrue. 18 24 3.3 NO OTHER REPRESENTATIONS AND WARRANTIES. There are no warranties, representations, or implied covenants between the Parties except the matters expressly provided for in this Agreement. PART FOUR COVENANTS 4.1 COVENANTS OF SELLER. Seller covenants with the Buyer as follows: (a) Except as may be expressly permitted by this Agreement or set forth in any Exhibit hereto, from and after the First Closing Date through the earlier of the Termination Date and the Second Closing Date, Seller shall use its reasonable efforts to achieve the Contemplated Transactions. Without limiting the generality of the foregoing, Seller shall not: (i) prosecute, or cause to be prosecuted, the Texaco Recoupment Motion; provided, however, Seller may take any steps requested by the Bankruptcy Court; (ii) amend, modify or terminate in any manner the CAOA without Buyer's consent; (iii) seek relief of any type under section 365 of the Bankruptcy Code with respect to the CAOA or any other executory contract related to WCBB or otherwise seek judicial determination or declaration as to any of its rights under the CAOA or any such other putative executory contract; (iv) seek relief from the automatic stay, or any similar relief, with respect to WCBB other than requested relief currently pending; (v) seek the appointment of a trustee in the Case; (vi) seek adequate protection of any type under section 361 of the Bankruptcy Code with respect to its interests in WCBB other than requested relief currently pending; (vii) seek the conversion of the Case to a case under chapter 7 of the Bankruptcy Code; (viii) seek the dismissal of the Case; (ix) act to oppose the extension of, or to limit or terminate, the exclusive time for WRT to file its Plan and solicit acceptances to that Plan unless 19 25 Buyer shall also be opposing the extension of, or seeking to limit or terminate, such exclusivity period; or (x) propose or otherwise support any plan of reorganization for WRT other than the Plan. (b) From and after the First Closing Date, Seller shall, in the event Seller receives any Distributions on or after the First Closing Date, accept the same as Buyer's agent and shall hold all such Distributions in trust on behalf of and for the sole benefit of Buyer, and shall promptly deliver all such Distributions to Buyer in the same form received (free of any withholding, set-off, claim or deduction of any kind). (c) If requested, Seller shall execute a notice of transfer of the Claim pursuant to Fed. R. Bankr. P. Rule 3001, and Seller agrees (i) to waive any notice or hearing requirements under Rule 3001, and (ii) that an order may be entered by the Bankruptcy Court recognizing the assignment of the Claim as an unconditional assignment and Buyer as the valid owner of the Claim. (d) Seller covenants and agrees that no later than close of business on March 12, 1997, it shall file or cause to have filed with the State Mineral Board for the State of Louisiana, for approval by the State Mineral Board, the following documents, in sufficient number of originals as may be required to comply with the rules and requirements of the State Mineral Board, together with such transmittal letters and required forms as are required to be submitted therewith: (i) fully executed Assignment, Conveyance and Bill of Sale substantially in the form of Exhibit "B-1" hereto; (ii) fully executed Assignment, Conveyance and Bill of Sale substantially in the form of Exhibit "B-2" hereto; and (iii) a fully executed sale and assignment from WRT, as reorganized under the Plan, to Buyer covering the Buyer's Leasehold, which sale and assignment shall be substantially similar in form to Exhibit "B-2" hereto except for a change in the parties named therein to be WRT, as reorganized under the Plan, as seller thereunder, and Buyer, as purchaser thereunder. 4.2 COVENANTS OF BUYER. Buyer covenants with Seller as follows: (a) As of the Effective Date, Buyer shall be responsible for the payment of all necessary and reasonable capital costs, taxes, expenses and Burdens incurred against and/or applicable to the operation and use of the Assets after the Effective Date, whether invoiced or not. All production of Hydrocarbons from the Assets occurring after the Effective Date and all proceeds from or attributable thereto shall be the property of and belong to Buyer as of the Effective Date. 20 26 (b) Buyer agrees that, within thirty (30) days after the First Closing, it will remove or cause to be removed the names and marks used by Seller and all variations and derivatives thereof and logos relating thereto from the Assets and will not thereafter make any use whatsoever of such names, marks and logos. (c) Buyer hereby covenants that it will use all reasonable efforts to comply with all Applicable Laws in its ownership and operation of the Assets. Buyer specifically covenants that it will comply with all Applicable Laws with respect to (i) all exploration, drilling, production, plugging and abandonment procedures and operations, and (ii) the control, regulation and prevention of pollution, including, but not limited to, saltwater discharge and contamination. (d) Buyer shall at First Closing provide security to Seller in accordance with the terms and conditions of the Escrow Agreement and the Security Agreement. (e) From and after the First Closing Date through the earlier of the Termination Date and the Second Closing Date, Buyer shall use its reasonable efforts diligently and in good faith to comply with and abide by the provisions of the Commitment Agreement, as the same relates to this Agreement. (f) From and after the First Closing Date through the earlier of the Termination Date and the Second Closing Date, Buyer shall not seek to amend or modify, or cause to be amended or modified, the Plan, as the same relates to this Agreement, without first obtaining the written consent of the Seller. (g) Promptly following the First Closing Date, Buyer shall file with the Bankruptcy Court, pursuant to Fed. R. Bankr. P. Rule 3001(e), that DLB is the proper owner of the Claim. (h) From and after the First Closing, Buyer shall not voluntarily convey, assign or otherwise transfer, in whole or in part, its 50% interest in WCBB to another party other than WRT pursuant to the Commitment Agreement and related transfer documents, without first obtaining the written consent of the Seller (which will not be unreasonably withheld). (i) To the extent Seller holds liens or security interests securing the Claim and also securing postpetition obligations to Seller arising out of WCBB or otherwise, Seller and Buyer shall cooperate in the enforcement of such liens and security interests and Seller shall have the first and prior right to all rents, profits, revenues, and proceeds of such security interests to the extent necessary to satisfy all Seller's postpetition obligations from WRT and its successors and assigns, including enforcement fees and expenses. 21 27 (j) Buyer agrees and covenants that it will not encumber in any way, any of the collateral granted to Seller (except the security interest provided for in favor of Seller in this Agreement without the prior written consent of Seller, from the First Closing until the transfer to WRT, as reorganized under the Plan (the "Gap Period"). If any inferior liens or encumbrances arise during that Gap Period, Buyer agrees to eliminate said liens and encumbrances prior to the transfer to WRT, as reorganized under the Plan, so that the property transferred to WRT, as reorganized, is encumbered solely by the liens and security interest granted in favor of Seller as provided for in this Agreement. PART FIVE ACCESS TO INFORMATION 5.1 FILES. Prior to the First Closing, Seller shall permit Buyer and its representatives at reasonable times during normal business hours to examine, in Sellers' offices at their actual location, ownership maps, lease files, assignments, division orders, check vouchers payout statements and agreements pertaining to the Assets insofar as the same may now be in existence and in the possession of Seller. Nothing in this paragraph shall constitute a waiver of attorney/client privilege or attorney work product. 5.2 OTHER FILES. Prior to the First Closing, Seller shall make available to Buyer for inspection by Buyer at reasonable times during normal business hours at their actual location, all production and engineering books, records and data in possession of Seller which are directly related to the Assets, and all other files, records, and data pertaining to the Assets, except such records or data which Seller is prevented by contractual obligations with third parties from disclosing and as to which, where requested by Buyer, after reasonable efforts, a waiver of such contractual obligation cannot be secured. 5.3 CONFIDENTIAL DATA. Nothing in 5.1 or 5.2 above shall require Seller to furnish any confidential data. PART SIX ON- SITE INSPECTIONS 6.1 ON-SITE INSPECTIONS. Prior to the First Closing, and subject to any necessary third-party operator approval, Seller shall permit Buyer and its representatives at reasonable times and at their own risk, cost and expense, to conduct reasonable inspections of the Assets; and to undertake an examination of the environmental condition of the Assets (including without limitation a Phase II assessment of the Assets); provided, however, Buyer shall repair any damage to the Assets resulting from such inspections and BUYER DOES HEREBY INDEMNIFY AND HOLD HARMLESS SELLER FROM AND AGAINST ANY AND ALL LOSSES, COSTS, DAMAGES, OBLIGATIONS, CLAIMS, LIABILITIES, EXPENSES 22 28 (INCLUDING COURT COSTS AND ATTORNEYS' FEES), OR CAUSES OF ACTION ARISING FROM BUYER'S INSPECTION AND OBSERVATION OF THE ASSETS, INCLUDING, WITHOUT LIMITATION, CLAIMS FOR PERSONAL INJURIES OR DEATH OF EMPLOYEES OF THE BUYER, ITS CONTRACTORS, AGENTS, CONSULTANTS AND REPRESENTATIVES, AND PROPERTY DAMAGES, OR EMPLOYEES OF SELLER, ITS CONTRACTORS, AGENTS, CONSULTANTS AND REPRESENTATIVES OR THIRD PARTIES, EXCEPT TO THE EXTENT SUCH LOSSES RESULT FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SELLER, ITS REPRESENTATIVES, AGENTS OR EMPLOYEES. PART SEVEN CONDITIONS TO CLOSING 7.1 SELLER'S CLOSING CONDITIONS. The obligations of Seller to consummate the Contemplated Transactions shall be subject to the satisfaction of or waiver by Seller: (a) with respect to the First Closing, on or before the First Closing Date, each of the following conditions: (i) the execution, delivery, and performance of this Agreement, the Assignment, Conveyance and Bill of Sale substantially in the form of Exhibit "B-1" hereto, the Escrow Agreement substantially in the form of Exhibit "C-1" and the Security Agreement substantially in the form of Exhibit "C-2", and any other documents or agreements to be executed, delivered and performed by Seller in furtherance of the Contemplated Transactions, and the execution and delivery of the Assignment, Conveyance and Bill of Sale substantially in the form of Exhibit "B-2" hereto shall have been duly and validly authorized by all necessary corporate action, including approval or concurrence by Texaco Inc.'s executive management and Board of Directors, on the part of Seller; (ii) as of the First Closing Date, no suit, action or other proceeding (excluding any such matter initiated by Seller) shall be pending or threatened before any court or governmental agency seeking to restrain Seller or prohibit closing of any of the Contemplated Transactions to be completed as of the First Closing or seeking damages against Seller as a result of the consummation of this Agreement or any of the Contemplated Transactions to be completed as of the First Closing; (iii) all representations and warranties of Buyer contained in this Agreement shall be true and correct in all material respects at and as of the First Closing as though such representations and warranties were made at and as of such time; and 23 29 (iv) Buyer shall have complied in all material respects with all agreements and conditions in this Agreement to be performed or complied with by Buyer on or prior to the First Closing. (b) with respect to the Second Closing, on or before the Second Closing Date, each of the following conditions: (i) the performance of the Assignment, Conveyance and Bill of Sale substantially in the form of Exhibit "B-2" hereto shall have been duly and validly authorized by all necessary corporate action, including approval or concurrence of Texaco Inc.'s executive management and Board of Directors, on the part of Seller; (ii) as of the Second Closing Date, no suit, action or other proceeding (excluding any matter initiated by Seller) shall be pending or threatened before any court or governmental agency seeking to restrain Seller or prohibit the Second Closing or seeking damages against Seller as a result of the consummation of this Agreement or any of the Contemplated Transactions; (iii) the Bankruptcy Court in the voluntary proceeding commenced on February 14, 1996 by WRT under Chapter 11 of the Bankruptcy Code, shall have confirmed the Plan and such order of confirmation shall be final or, if not final, execution thereof shall not be subject to a stay of execution; (iv) all other conditions to consummation of the Plan, as set forth in Section 32.2 thereof, shall have been satisfied or waived; (v) Buyer shall have executed in favor of Seller the East Hackberry Letter Agreement; (vi) Buyer shall have complied in all material respects with all agreements and conditions of this Agreement to be performed or complied with by Buyer on or prior to the Second Closing, including performance of the Commitment Agreement; and (vii) all representations and warranties of Buyer contained in this Agreement shall be true and correct in all material respects at and as of the Second Closing as though such representations and warranties were made as of such time. 7.2 BUYER'S CLOSING CONDITIONS. The obligations of Buyer to consummate the Contemplated Transactions shall be subject to the satisfaction of or waiver by Buyer: (a) with respect to the First Closing, on or before the First Closing Date, each of the following conditions: 24 30 (i) the execution, delivery, and performance of this Agreement, the Assignment, Conveyance and Bill of Sale substantially in the form of Exhibit "B-1" hereto, the Escrow Agreement substantially in the form of Exhibit "C-1" and the Security Agreement substantially in the form of Exhibit "C-2", and any other documents or agreements to be executed, delivered and performed by Buyer in furtherance of the Contemplated Transactions and the execution and delivery of the Assignment, Conveyance and Bill of Sale substantially in the form of Exhibit "B-2" hereto shall have been duly and validly authorized by all necessary corporate action, on the part of Buyer; (ii) as of the First Closing Date, no suit, action or other proceeding (excluding any such matter initiated by Buyer) shall be pending or threatened before any court or governmental agency seeking to restrain Buyer or prohibit closing of any of the Contemplated Transactions or seeking damages against Buyer as a result of the consummation of this Agreement or any of the Contemplated Transactions; (iii) all representations and warranties of Seller contained in this Agreement shall be true and correct in all material respects at and as of the First Closing as though such representations and warranties were made at and as of such time; (iv) Seller shall have complied in all material respects with all agreements and conditions in this Agreement to be performed or complied with by Seller on or prior to the First Closing; (v) the written consent of WRT to the designation of Buyer as operator of the Assets, and to any subsequent designation by Buyer of an operator of the Assets, for all purposes, including without limitation, under and pursuant to the CAOA, shall have been received by Buyer; and (vi) the written waiver by WRT of any preferential rights of purchase WRT may have in and to the Assets shall have been received by Buyer. (b) with respect to the Second Closing, on or before the Second Closing Date, each of the following conditions: (i) the performance of the Assignment, Conveyance and Bill of Sale substantially in the form of Exhibit "B-2" hereto shall have been duly and validly authorized by all necessary corporate action on the part of Buyer; (ii) as of the Second Closing Date, no suit, action or other proceeding (excluding any matter initiated by Seller) shall be pending or threatened before any court or governmental agency seeking to restrain Seller or prohibit the Second 25 31 Closing or seeking damages against Seller as a result of the consummation of this Agreement or any of the Contemplated Transactions; (iii) the Bankruptcy Court in the voluntary proceeding commenced on February 14, 1996 by WRT under Chapter 11 of the Bankruptcy Code, shall have confirmed the Plan and such order of confirmation shall be final, or, if not final, execution thereof shall not be subject to a stay of execution and the failure of any such condition is not the fault of Buyer; (iv) all other conditions to consummation of the Plan, as set forth in Section 32.2 thereof, shall have been satisfied or waived and the failure of any such condition is not the fault of Buyer; (v) all representations and warranties of Seller contained in this Agreement shall be true and correct in all material respects at and as of the Second Closing as though such representations and warranties were made as of such time; and (vi) Seller shall have complied in all material respects with all agreements and conditions in this Agreement to be performed or complied with by Seller on or prior to the Second Closing. PART EIGHT FIRST AND SECOND CLOSING 8.1 CLOSING. The First Closing shall be held at the offices of Texaco Exploration and Production Inc., 400 Poydras St., New Orleans, Louisiana, on the First Closing Date or at such other date or place as the parties may agree in writing. The Second Closing shall be held at the offices of Schulte, Roth & Zabel LLP, 900 Third Avenue, New York, New York 10022 on the Second Closing Date or at such other date or place as the parties may agree in unity. 8.2 TRANSACTIONS AT FIRST CLOSING. (a) At First Closing, except to the extent comprising the Excluded Assets, Seller shall deliver (duly executed and acknowledged as required) to Buyer the following: (i) the Assignment, Conveyance and Bill of Sale, substantially in the form attached hereto as Exhibit "B-1", and such other documents as may be reasonably necessary to convey Seller's interest in the Assets to Buyer, in accordance with the provisions hereof; (ii) all appropriate regulatory documents required for change of operator to be executed by Buyer; 26 32 (iii) exclusive possession of the Assets; (iv) the Shorebase Service Agreement attached hereto as Exhibit "G"; (v) the amounts, if any, due by Seller to Buyer as set forth in the Preliminary Recap by wire transfer in immediately available funds to the account designated by Buyer; (vi) the Gas Purchase Contracts attached hereto as Exhibits "E-1" and "E-2"; (vii) the Receipt attached hereto as Exhibit "J"; (viii) the Contract Operating Agreement attached hereto as Exhibit "F"; and (ix) such other documents as are reasonably requested by Buyer. (b) At First Closing, Buyer shall deliver (duly executed and acknowledged as required) to Seller the following: (i) the Purchase Price for the Assets and the payment for the Claim in the amount set forth in Section 2.2 by wire transfer in immediately available funds to the account or accounts designated by Seller; (ii) the Escrow Agreement attached as Exhibit "C-1" hereto; (iii) The Security Agreement attached as Exhibit "C-2" hereto; (iv) the Gas Purchase Contracts attached hereto as Exhibits "E-1" and "E-2"; (v) a copy of the insurance binder naming Seller as an additional insured, together with proof of insurance, attached hereto as Exhibit "L"; (vi) the Contract Operating Agreement attached hereto as Exhibit "F" ; (vii) evidence that the initial deposit under the Escrow Agreement has been made in accordance with the terms of the Escrow Agreement; and (viii) such other documents as are reasonably requested by Seller. 27 33 (c) All events of the First Closing shall each be deemed to have occurred simultaneously with one another, regardless of when actually occurring, and each shall be a condition precedent to all others. 8.3 TRANSACTIONS AT SECOND CLOSING. At the Second Closing, Buyer shall deliver (duly executed and acknowledged as required) to Seller the following: (a) the East Hackberry Letter Agreement attached hereto as Exhibit "M"; (b) recordation of the Assignment, Conveyance and Bill of Sale attached hereto as Exhibit "B-2"; (c) exclusive possession of the Buyer's Leasehold, including without limitation Buyer's interests, if any, in the Excluded Assets obtained by Buyer pursuant to the Commitment Agreement (which shall be at no additional cost to Seller); and (d) Assignment and Assumption Agreement substantially in the form attached hereto as Exhibit "N." All events of the Second Closing shall each be deemed to have occurred simultaneously with one another, regardless of when actually occurring, and each shall be a condition precedent to all others. 8.4 SUBSEQUENT TO FIRST CLOSING. After First Closing, Seller and Buyer agree to do the following: (a) With the exception of those items constituting Excluded Assets, copies of the Non-Excluded Material shall be shipped to Buyer within sixty (60) days after First Closing. Buyer shall designate the method of shipment and the carrier far enough in advance to allow for timely shipment and will be solely responsible for the cost and expense of reproduction costs and shipment and for any Losses occurring as a result of such shipment. (b) As far as is necessary Seller shall execute, acknowledge and deliver transfer orders or letters in lieu prepared by Buyer directing all purchasers of production to make payments to Buyer of proceeds attributable to production from the Assets within sixty (60) days after First Closing. (c) Within one hundred fifty (150) days after the First Closing Date, Seller shall provide to Buyer, for Buyer's concurrence, a final recapitulation settlement ("Final Recap") to account for all production proceeds received by Seller and all necessary and reasonable capital costs, overhead costs, severance taxes or other taxes measured by production, ad valorem taxes and including prorated estimates of ad valorem taxes in the absence of actuals, expenses and royalties paid by Seller attributable to the Assets as of the Effective Date. Buyer shall have the right, within sixty (60) days after receipt of the Final Recap, to audit and either (i) accept the Final Recap or (ii) take exceptions to the 28 34 Final Recap. Any disagreements shall be resolved on a best efforts and good faith basis by Seller and Buyer, and any such disagreements which cannot be so resolved shall be subject to dispute resolution pursuant to Section 11.15. (d) Payment of any amounts owed under the Final Recap is due within thirty (30) days of receipt of Buyer's notice of acceptance of the Final Recap, or within thirty (30) days of resolution of any exceptions to the Final Recap, whichever is later. After the expiration of the thirty (30) day period, interest will be applied to the balance due at the rate of 9% per annum, simple. (e) Each Party shall provide reasonable access to all relevant documents, data and other information which may be required by the other Party for the purpose of preparing tax returns and responding to any audit by any Governmental Body. Each Party shall cooperate with all reasonable requests of the other Party made in connection with contesting the imposition of taxes. Notwithstanding anything to the contrary in this Agreement, neither Party shall be required at any time to disclose to the other Party any tax returns or other confidential tax information. (f) Within one year after the First Closing Date, Seller and Buyer may, at its own expense and by appointment only, audit the other party's books, accounts and records relating to such production proceeds, capital costs, overhead costs, taxes, expenses and royalties relating to this transaction; provided, however, Buyer's right to audit the books, accounts and records of Seller shall not terminate one year after the First Closing Date with respect to those matters, if any, undertaken by Seller pursuant to Section 2.8 of this Agreement (including, without limitation, reporting under Attachment "B" of the Global Settlement, the calculation and payment of Burdens and the making of appearances before the SMB). Any such audits shall be conducted so as to cause a minimum of inconvenience to the audited party. (g) Following each of the First Closing and the Second Closing, Seller and Buyer agree to take such further actions and to execute, acknowledge and deliver all such further documents as are necessary or useful in carrying out the purposes of this Agreement or of any document delivered pursuant hereto. 8.5 UNWIND OF THE CONTEMPLATED TRANSACTIONS. (a) If the Parties mutually agree that the SMB will not approve the assignment of the Assets by Seller to Buyer, pursuant to the terms of the Assignment, Conveyance and Bill of Sale executed by Seller and Buyer substantially in the form of Exhibit B-1 hereto, without any material adverse conditions or changes, the Parties may unwind the Contemplated Transactions, including, without limitation, the purchase of the Assets and the transfer of the Buyer's Leasehold. For purposes of this Section 8.5, a material adverse condition or change ("Material Change") is one which (i) exceeds one million dollars in value or (ii) requires the Buyer to accept or perform an unreasonable term or condition. 29 35 A Party wishing to so unwind the Contemplated Transactions shall give written notice thereof to the other Party. The Parties shall then use reasonable best efforts to determine whether a Material Change has occurred. If the Parties are unable to so agree, the matter shall be resolved pursuant to the dispute resolution procedures outlined in Exhibit D hereto. The unwinding of the Contemplated Transactions shall occur thirty (30) Business Days following the determination that a Material Change has occurred, at the offices of Buyer, or at such other date or place as the Parties may agree in writing. (b) Upon the determination that a Material Change has occurred (pursuant to and in accordance with the terms and provisions of this Section 8.5), Buyer and Seller agree to take such actions and to execute such documents and agreements as reasonably necessary to place the Parties in the respective positions they would have been had this Agreement not been entered into and the Contemplated Transactions, or any part thereof, not been consummated. (c) Upon completion of the unwinding of the Contemplated Transactions, this Agreement shall terminate and be void and without further effect whatsoever, and neither Buyer nor Seller shall have any further rights or duties to the other hereunder. PART NINE DISCLAIMER, ASSUMPTION AND INDEMNITY 9.1 DISCLAIMER/ASSUMPTION OF RISK. (a) IT IS EXPRESSLY UNDERSTOOD BY THE PARTIES HERETO THAT SELLER DOES NOT MAKE ANY REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, AS TO TITLE OR THE CONDITION OR STATE OF REPAIR OF THE ASSETS, THEIR VALUE, QUALITY, MERCHANTABILITY, SUITABILITY OR FITNESS FOR ANY USES OR PURPOSES, NOR AS TO THE CURRENT VOLUME, NATURE, QUALITY, CLASSIFICATION, OR VALUE OF THE OIL, GAS OR OTHER MINERAL RESERVES THEREUNDER OR COVERED THEREBY, NOR WITH RESPECT TO ANY APPURTENANCES THERETO BELONGING OR IN ANY WISE APPERTAINING TO SAID ASSETS, OR OTHERWISE. Seller has advised Buyer and Buyer has acknowledged that certain spills of oil and chemicals from oil and gas exploration, development, or production (regulated or under the jurisdiction of the applicable Governmental Body) have occurred, or may have occurred, upon the Assets, which could have resulted in contamination of the soil, water, ground water, or improvements on the Assets. Furthermore, Seller has cautioned Buyer to thoroughly examine and inspect the Assets for any such conditions or violations and generally as to the condition of the Assets and its improvements, including a recommendation by Seller to Buyer that Buyer engage an environmental consulting firm to make an environmental survey of the Assets, and Buyer hereby acknowledges such obligations and assumes all liabilities associated therewith. 30 36 (b) Further, Buyer certifies that the Assets (including, but not limited to, any oil, gas or other mineral reserves underlying the Assets) have been, or will be prior to First Closing, carefully inspected by Buyer, that Buyer is, or will be prior to First Closing, familiar with their condition and value thereof, and the improvements and appurtenances (including electric wiring and machinery installed thereon) located on the Assets, inclusive of any Hydrocarbons, other soil contaminants or waste substances, whether similar or dissimilar, that may be present in the soil, water and groundwater, that Buyer has engaged, or will engage prior to First Closing, such contractors or consultants as Buyer deems prudent for tests and surveys of the soil, water, groundwater, Wells and Equipment, and improvements on the Assets, and that Buyer assumes any and all obligations, risks and liabilities associated therewith. Buyer acknowledges that the Assets have been or may have been used in connection with oil, gas and other mineral exploration, development and operations, as well as with respect to processing and refining operations, and, as such, equipment, appurtenances, processing and other facilities, plants, buildings, structures, improvements, abandoned and other tanks and piping (including above ground and underground tanks and piping), storage facilities, gathering and distribution lines, wells and other petroleum production facilities and appurtenances which have not been excepted and excluded from this conveyance may be located thereon. Buyer further accepts the Assets (including, but not limited to, any oil, gas or other minerals and/or mineral reserves underlying said Assets) AS IS, WHERE IS, IN THEIR PRESENT CONDITION AND STATE OF REPAIR, AND WITHOUT ANY REPRESENTATIONS, GUARANTIES, OR WARRANTIES, EXPRESS OR IMPLIED, AS TO THEIR TITLE, VALUE, QUALITY, MERCHANTABILITY, OR THEIR SUITABILITY OR FITNESS FOR BUYER'S INTENDED USE, OR FOR ANY USES OR PURPOSES WHATSOEVER, OR THAT THE ASSETS HAVE BEEN RENDERED FREE FROM ANY DEFECTS, HAZARDS, OR DANGEROUS CONDITIONS. (c) Without limiting the generality of the foregoing, but in furtherance of same, Buyer accepts the Assets in their "AS IS, WHERE IS" condition. SELLER DISCLAIMS ANY AND ALL LIABILITY ARISING IN CONNECTION WITH ANY ENVIRONMENTAL MATTERS INCLUDING, WITHOUT LIMITATION, ANY PRESENCE OF NATURALLY OCCURRING RADIOACTIVE MATERIAL (NORM) ON THE ASSETS. IN ADDITION, THERE ARE NO WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED, AS TO THE ACCURACY OR COMPLETENESS OF ANY DATA, INFORMATION OR MATERIALS HERETOFORE OR HEREAFTER FURNISHED IN CONNECTION WITH THE ASSETS OR AS TO THE QUALITY OR QUANTITY OF THE HYDROCARBONS AND ANY OTHER MINERAL RESERVES, IF ANY, ATTRIBUTABLE TO THE INTEREST CONVEYED HEREIN OR THE ABILITY OF THE ASSETS TO PRODUCE HYDROCARBONS OR ANY OTHER MINERALS, AND ANY AND ALL DATA, INFORMATION AND MATERIAL FURNISHED BY SELLER IS PROVIDED AS A CONVENIENCE ONLY AND ANY RELIANCE ON OR USE OF THE SAME IS AT BUYER'S SOLE RISK. 31 37 (d) BUYER UNDERSTANDS THAT UNDER ARTICLES 2520 THROUGH 2548 OF THE LOUISIANA CIVIL CODE, AS AMENDED, AND OTHER PROVISIONS OF LAW THIS SALE WOULD ORDINARILY INCLUDE A WARRANTY, IMPLIED BY LAW , AGAINST CERTAIN DEFECTS IN THE SALE CONTEMPLATED HEREUNDER. BUYER EXPRESSLY WAIVES ANY AND ALL SUCH WARRANTIES WITH RESPECT TO ALL DEFECTS, WHETHER APPARENT OR LATENT, VISIBLE OR NOT, AND REGARDLESS OF WHETHER BUYER IS PRESENTLY AWARE OF SUCH DEFECTS. THIS WAIVER OF WARRANTY EXTENDS TO ALL DEFECTS, EVEN IF THE DEFECT OR DEFECTS RENDER THE PROPERTY ABSOLUTELY USELESS, OR SO INCONVENIENT AND IMPERFECT THAT BUYER WOULD NOT HAVE PURCHASED THE PROPERTY HAD BUYER KNOWN OF THE DEFECT. BUYER HAS EXAMINED THE PROPERTY THOROUGHLY AND IS FULLY SATISFIED WITH ITS CONDITION. BUYER HAS READ AND UNDERSTANDS THE FOREGOING WAIVER OF THE IMPLIED WARRANTY PROVIDED FOR UNDER ARTICLES 2520 THROUGH 2548 OF THE LOUISIANA CIVIL CODE, AS AMENDED, THE WAIVER HAS BEEN POINTED OUT AND EXPLAINED, AND QUESTIONS OR DOUBTS BUYER HAS CONCERNING THE SAME HAVE BEEN ANSWERED SATISFACTORILY. SELLER AND BUYER ACKNOWLEDGE AND STIPULATE THAT THE SALE PRICE WAS NEGOTIATED AND AGREED UPON AFTER CONSIDERATION OF THE WAIVER OF WARRANTY HEREIN SET FORTH. BUYER AND SELLER ACKNOWLEDGE READING; AND UNDERSTANDING OF THE WARRANTY WAIVER PROVISIONS CONTAINED IN THIS INSTRUMENT BY THEIR INITIALS: BUYER: ______ SELLER: ________ 9.2 DISCLAIMER/ASSUMPTION OF RISK. (a) IT IS EXPRESSLY UNDERSTOOD BY THE PARTIES HERETO THAT BUYER DOES NOT MAKE ANY REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, AS TO TITLE OR THE CONDITION OR STATE OF REPAIR OF THE BUYER'S LEASEHOLD, THEIR VALUE, QUALITY, MERCHANTABILITY, SUITABILITY OR FITNESS FOR ANY USES OR PURPOSES, NOR AS TO THE CURRENT VOLUME, NATURE, QUALITY, CLASSIFICATION, OR VALUE OF THE OIL, GAS OR OTHER MINERAL RESERVES THEREUNDER OR COVERED THEREBY, NOR WITH RESPECT TO ANY APPURTENANCES THERETO BELONGING OR IN ANY WISE APPERTAINING TO SAID BUYER'S LEASEHOLD, OR OTHERWISE. Buyer has advised Seller and Seller has acknowledged that certain spills of oil and chemicals from oil and gas exploration, development, or production (regulated or under the jurisdiction of the applicable Governmental Body) have occurred, or may have occurred, upon the Buyer's Leasehold, which could have resulted in contamination of the soil, water, ground water, or improvements on the Buyer's Leasehold. Furthermore, Buyer has cautioned Seller to thoroughly examine and inspect the Buyer's Leasehold for any such conditions or violations and generally as to the condition of the Buyer's Leasehold and its 32 38 improvements, including a recommendation by Buyer to Seller that Seller engage an environmental consulting firm to make an environmental survey of the Buyer's Leasehold, and Seller hereby acknowledges such obligations and assumes all liabilities associated therewith. (b) Further, Seller certifies that the Buyer's Leasehold (including, but not limited to, any oil, gas or other mineral reserves underlying the Buyer's Leasehold) have been, or will be prior to Second Closing, carefully inspected by Seller, that Seller is, or will be prior to Second Closing, familiar with their condition and value thereof, and the improvements and appurtenances (including electric wiring and machinery installed thereon) located on the Buyer's Leasehold, inclusive of any Hydrocarbons, other soil contaminants or waste substances, whether similar or dissimilar, that may be present in the soil, water and groundwater, that Seller has engaged, or will engage prior to Second Closing, such contractors or consultants as Seller deems prudent for tests and surveys of the soil, water, groundwater, wells and equipment, and improvements on the Buyer's Leasehold, and that Seller assumes any and all obligations, risks and liabilities associated therewith. Seller acknowledges that the Buyer's Leasehold has been or may have been used in connection with oil, gas and other mineral exploration, development and operations, as well as with respect to processing and refining operations, and, as such, equipment, appurtenances, processing and other facilities, plants, buildings, structures, improvements, abandoned and other tanks and piping (including above ground and underground tanks and piping), storage facilities, gathering and distribution lines, wells and other petroleum production facilities and appurtenances which have not been excepted and excluded from this conveyance may be located thereon. Seller further accepts the Buyer's Leasehold (including, but not limited to, any oil, gas or other minerals and/or mineral reserves underlying said Buyer's Leasehold) AS IS, WHERE IS, IN THEIR PRESENT CONDITION AND STATE OF REPAIR, AND WITHOUT ANY REPRESENTATIONS, GUARANTIES, OR WARRANTIES, EXPRESS OR IMPLIED, AS TO THEIR TITLE, VALUE, QUALITY, MERCHANTABILITY, OR THEIR SUITABILITY OR FITNESS FOR SELLER'S INTENDED USE, OR FOR ANY USES OR PURPOSES WHATSOEVER, OR THAT THE ASSETS HAVE BEEN RENDERED FREE FROM ANY DEFECTS, HAZARDS, OR DANGEROUS CONDITIONS. (c) Without limiting the generality of the foregoing, but in furtherance of same, Seller accepts the Buyer's Leasehold in their "AS IS, WHERE IS" condition. BUYER DISCLAIMS ANY AND ALL LIABILITY ARISING IN CONNECTION WITH ANY ENVIRONMENTAL MATTERS INCLUDING, WITHOUT LIMITATION, ANY PRESENCE OF NATURALLY OCCURRING RADIOACTIVE MATERIAL (NORM) ON THE BUYER'S LEASEHOLD. IN ADDITION, THERE ARE NO WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED, AS TO THE ACCURACY OR COMPLETENESS OF ANY DATA, INFORMATION OR MATERIALS HERETOFORE OR HEREAFTER FURNISHED IN CONNECTION WITH THE BUYER'S LEASEHOLD OR AS TO THE QUALITY OR QUANTITY OF THE HYDROCARBONS AND ANY OTHER MINERAL RESERVES, IF ANY, 33 39 ATTRIBUTABLE TO THE INTEREST CONVEYED HEREIN OR THE ABILITY OF THE BUYER'S LEASEHOLD TO PRODUCE HYDROCARBONS OR ANY OTHER MINERALS, AND ANY AND ALL DATA, INFORMATION AND MATERIAL FURNISHED BY BUYER IS PROVIDED AS A CONVENIENCE ONLY AND ANY RELIANCE ON OR USE OF THE SAME IS AT SELLER'S SOLE RISK. (d) SELLER UNDERSTANDS THAT UNDER ARTICLES 2520 THROUGH 2548 OF THE LOUISIANA CIVIL CODE, AS AMENDED, AND OTHER PROVISIONS OF LAW THIS SALE WOULD ORDINARILY INCLUDE A WARRANTY, IMPLIED BY LAW , AGAINST CERTAIN DEFECTS IN THE SALE CONTEMPLATED HEREUNDER. SELLER EXPRESSLY WAIVES ANY AND ALL SUCH WARRANTIES WITH RESPECT TO ALL DEFECTS, WHETHER APPARENT OR LATENT, VISIBLE OR NOT, AND REGARDLESS OF WHETHER SELLER IS PRESENTLY AWARE OF SUCH DEFECTS. THIS WAIVER OF WARRANTY EXTENDS TO ALL DEFECTS, EVEN IF THE DEFECT OR DEFECTS RENDER THE PROPERTY ABSOLUTELY USELESS, OR SO INCONVENIENT AND IMPERFECT THAT SELLER WOULD NOT HAVE PURCHASED THE PROPERTY HAD BUYER KNOWN OF THE DEFECT. SELLER HAS EXAMINED THE PROPERTY THOROUGHLY AND IS FULLY SATISFIED WITH ITS CONDITION. SELLER HAS READ AND UNDERSTANDS THE FOREGOING WAIVER OF THE IMPLIED WARRANTY PROVIDED FOR UNDER ARTICLES 2520 THROUGH 2548 OF THE LOUISIANA CIVIL CODE, AS AMENDED, THE WAIVER HAS BEEN POINTED OUT AND EXPLAINED, AND QUESTIONS OR DOUBTS SELLER HAS CONCERNING THE SAME HAVE BEEN ANSWERED SATISFACTORILY. BUYER AND SELLER ACKNOWLEDGE AND STIPULATE THAT THE SALE PRICE WAS NEGOTIATED AND AGREED UPON AFTER CONSIDERATION OF THE WAIVER OF WARRANTY HEREIN SET FORTH. SELLER AND BUYER ACKNOWLEDGE READING AND UNDERSTANDING OF THE WARRANTY WAIVER PROVISIONS CONTAINED IN THIS INSTRUMENT BY THEIR INITIALS: SELLER: ______ BUYER: ________ 9.3 INDEMNITY. (a) BUYER FURTHER AGREES, AS PART CONSIDERATION FOR THE SALE OF THE ASSETS, TO FULLY DEFEND, PROTECT, INDEMNIFY, HOLD HARMLESS, AND RENDER WHOLE SELLER, ITS AFFILIATES AND THE RESPECTIVE DIRECTORS, OFFICERS, AGENTS AND EMPLOYEES OF SELLER AND ITS AFFILIATES FROM AND AGAINST EACH AND EVERY CLAIM, DEMAND OR CAUSE OF ACTION, AND ANY LIABILITY, COST, EXPENSES (INCLUDING, BUT NOT LIMITED TO, REASONABLE ATTORNEYS' FEES), OR CLAIMS WITH RESPECT TO DAMAGE, INJURY OR LOSS, INCLUDING, WITHOUT LIMITATION, PUNITIVE, IN CONNECTION THEREWITH, WHICH MAY BE MADE OR ASSERTED BY BUYER, ITS AGENTS, OR SUCCESSORS, OR BY ANY THIRD PARTY OR PARTIES (INCLUDING, BUT NOT LIMITED TO, GOVERNMENTAL BODIES) ON ACCOUNT OF OR ARISING OUT OF THE 34 40 ASSUMED OBLIGATIONS OR PREFERENTIAL RIGHTS OF PURCHASE RELATING TO THE ASSETS OR BUYER'S LEASEHOLD, HOWSOEVER OCCURRING, WHETHER SUCH INJURIES, LOSSES, AND LIABILITIES WITH OR WITHOUT FAULT, WERE CAUSED BY BUYER'S SOLE NEGLIGENCE, FAULT OR CONTRIBUTORY OR COMPARATIVE NEGLIGENCE OR FAULT, SELLER'S CONTRIBUTORY NEGLIGENCE OR FAULT, OR IMPOSED ON SAID PARTIES OR OTHERS UNDER ANY THEORY OF STRICT LIABILITY BY OPERATION OF LAW OR ANY OTHER THEORY OF LAW; PROVIDED, HOWEVER, THAT BUYER SHALL NOT SO INDEMNIFY SELLER FOR ANY LOSS ATTRIBUTABLE TO SELLER'S GROSS NEGLIGENCE OR WANTON, WILLFUL OR CRIMINAL ACTS OR OMISSIONS. (b) WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, BUT IN FURTHERANCE OF SAME, BUYER EXPRESSLY AGREES TO FULLY AND PROMPTLY PAY, PERFORM AND DISCHARGE, DEFEND, INDEMNIFY AND HOLD HARMLESS SELLER, ITS AFFILIATES, AND THE RESPECTIVE DIRECTORS, OFFICERS, AGENTS AND EMPLOYEES OF SELLER AND ITS AFFILIATES FROM AND AGAINST ANY CLAIM, DEMAND, ACTION OR SUIT, LOSS (INCLUDING, WITHOUT LIMITATION, PUNITIVE DAMAGES), COST, DAMAGE, FINE, PENALTY OR EXPENSE (INCLUDING REASONABLE ATTORNEYS' FEES) RESULTING FROM ANY ENVIRONMENTAL CLAIM ARISING OUT OF ANY OPERATIONS CONDUCTED, COMMITMENT MADE OR ANY ACTION TAKEN OR OMITTED BY SELLER AT ANY TIME WITH RESPECT TO THE ASSETS (INCLUDING, BUT NOT LIMITED TO, BUSINESS OPERATIONS, TRANSACTIONS OR CONDUCT OF THE BUSINESS DIRECTLY OR INDIRECTLY RELATED THERETO). (c) EACH PARTY HEREBY AGREES TO INDEMNIFY AND HOLD THE OTHER HARMLESS FROM AND AGAINST ANY CLAIM FOR A BROKERAGE OR FINDER'S FEE OR COMMISSION IN CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT TO THE EXTENT SUCH CLAIM ARISES FROM OR IS ATTRIBUTABLE TO THE ACTIONS OF SUCH INDEMNIFYING PARTY, INCLUDING, WITHOUT LIMITATION, ANY AND ALL LOSSES, COSTS AND EXPENSES OF ANY KIND OR CHARACTER ARISING OUT OF OR INCURRED IN CONNECTION WITH ANY SUCH CLAIM OR DEFENDING AGAINST THE SAME. 35 41 PART TEN SPECIAL PROVISIONS 10.1 CAPACITY RESERVATIONS. (a) Salt Water Disposal Buyer shall handle produced water volumes attributable to Seller's interest in West Cote Blanche Bay Field ("WCBB") from the wells operated by Seller after the Effective Date, for disposal of up to a maximum capacity guarantee of 5,000 Barrels of Water Per Day, through Buyer's salt water disposal facility in existence in WCBB as of the First Closing Date ("SWDF"). Should the SWDF at any time be temporarily limited from full capacity, Buyer shall make available to Seller no more than 30% of the SWDF's then available capacity for disposal of produced water from such Seller operated wells. If the condition causing the temporary capacity limitations has not been addressed by Buyer with a solution, plan or option to restore the diminished system capacity within twenty (20) days from when the condition arose, Seller reserves the right to purchase the affected SWDF asset(s) at salvage value. Should this purchase of the affected SWDF asset occur, Seller will have ninety (90) days either to leave the purchased asset in its present location but make it exclusive for Seller's use or to remove the purchased asset from Buyer's property, at Seller's sole cost and expense. Should the actual volume of produced water attributable to Seller's interest in WCBB from such Seller operated wells exceed 5,000 BWPD, Buyer may, in its sole discretion, but shall not be obligated to continue to accept and dispose of such additional volume as long as SWDF capacity exists. This capacity reservation by Seller is expressly limited to the SWDF and, except as provided herein, shall not apply to or burden any expansion of the SWDF or any other or additional salt water disposal facilities which may be owned or constructed by Buyer after the First Closing Date. Seller reserves the right to drill its own wells for salt water disposal on the Lease and to install its own salt water disposal facility on the Lease at some point in the future; provided that spacing of Seller's salt water disposal wells are at least one thousand five hundred (1500) feet away from Buyer's existing salt water disposal wells, and provided that such reserved rights shall not be exercised in a manner that interferes with the surface operations of Buyer on the Lease. Seller shall have the option of connecting its salt water disposal wells or equipment into Buyer's SWDF, which option, if exercised, shall not be exercised in a manner that interferes with Buyer's use of the SWDF. Should Buyer decide to modify, expand or replace a portion or portions of the SWDF in order to increase system capacity, Seller shall have the option to participate with Buyer and partially fund the project in order to increase Seller's maximum capacity guarantee upon terms and conditions mutually acceptable to Buyer and Seller. 36 42 Reference is made to an agreement dated December 1, 1995 described as "Salt Water Disposal Letter Agreement" between Seller and TESLA, the then owners of the SWDF, and Benton Oil and Gas Company of Louisiana ("BENTON") and Tenneco Ventures Corporation ("TVC") and Tenneco Gas Production Corporation ("TGPC") (TVC and TGPC hereinafter collectively referred to as TENNECO), working interest owners in WCBB field but having no ownership interest in the SWDF. As described in that agreement, each month, the SWDF owners shall bill the owners of each well for their respective shares of all charges incurred in the operation, maintenance, and repair of the SWDF for the previous month. As per the referenced agreement, each owner (of each well) is charged a percentage of the total expenses based on the ratio that the total volume of produced disposed of from his well bears to the total volume of salt water disposed of through the SWDF during that previous month. However, Buyer and Seller hereby agree that Seller shall be charged under the referenced agreement for only actual costs which exclude costs for equipment depreciation. The December 1, 1995 agreement shall continue to remain in effect, with the stipulation that within the body of the December 1, 1995 agreement, all references to Seller as co-owner of the SWDP shall be to Buyer as sole owner of the SWDF. As noted in the December 1, 1995 agreement, following the initial one year period (which has now expired), such agreement shall terminate within one hundred and eighty (180) days after the parties elect to no longer dispose of salt water through the SWDF. Upon termination of such agreement by Buyer, Seller shall have the option to purchase any or all portions of SWDF at salvage value. Should this purchase of SWDF asset(s) occur, Seller will have ninety (90) days either to leave the purchased asset in its present location but make it exclusive for Seller's use or to remove the purchased asset from Buyer's property, at Seller's sole cost and expense. Seller's capacity reservation under this Section 10.1(a), and the rights associated therewith, may be assigned by Seller; provided, however, that any such assignment shall only be in association with the assignment by Seller of all or any part of its interest in WCBB and further, that the assignment of such capacity reservation shall be in a pro rata share equal to the percentage interest in WCBB assigned by Seller. (b) Compression Buyer shall handle produced LP gas volumes attributable to Seller's interest in WCBB from the wells operated by Seller after the Effective Date in WCBB, for compression of up to a maximum capacity guarantee of 5 MMCFD, through Buyer's compression facility in existence as of the First Closing Date (the "Compression Facility"); provided, however, that there shall serve as a credit against this capacity reservation those volumes of gas, if any, purchased by Buyer pursuant to that certain Gas Purchase Contract attached hereto as Exhibit "E-2" to the effect that, if Buyer purchases 5 MMCFD of gas thereunder, then Buyer shall have no commensurate obligation to compress 5 MMCFD of gas under this capacity reservation. Should the Compression Facility at any time be temporarily limited from full capacity, Buyer shall make available to Seller no more than 20% of the Compression Facility's then available capacity for compression of LP gas volumes attributable to Seller's interest in WCBB from such Seller operated wells. If the 37 43 condition causing the temporary capacity limitations has not been addressed by Buyer with a solution, plan or option to restore the diminished system capacity within twenty (20) days from when the condition arose, Seller reserves the right to purchase the affected compression asset(s) at salvage value. Should this purchase of the affected compression asset(s) occur, Seller will have ninety (90) days either to leave the purchased asset in its present location but make it exclusive for Seller's use or remove the purchased asset from Buyer's property at Seller's sole cost and expense. Should the actual volume of produced LP gas attributable to Seller's interest in WCBB from those wells operated by Seller after the Effective Date exceed 5 MMCFD, Buyer may, in its sole discretion, but shall not be obligated to, accept and compress such additional volume as long as Compression Facility capacity exists. This capacity reservation by Seller is expressly limited to the Compression Facility and, except as provided herein, shall not apply to or burden any expansion of the Compression Facility or any other or additional compression facilities which may be owned or constructed by Buyer after the First Closing Date. Seller reserves the right to install its own compression facilities at some point in the future on the Lease; provided, however, that such reserved rights shall not be exercised in a manner that interferes with the surface operations of Buyer on the Lease. Seller shall have the option of connecting its compression facility into Buyers compression system, which option, if exercised, shall not be exercised in a manner that interferes with Buyer's use of the compression system. Should Buyer decide to modify, expand or replace a portion or portions of the compression facility in order to increase system capacity, Seller shall have the option to participate with Buyer and partially fund the project in order to increase Seller's maximum capacity guarantee upon terms and conditions mutually acceptable to Buyer and Seller. Reference is made to an agreement dated December 1, 1995 described as "Compression Facility Letter Agreement" between Seller and TESLA, the then owners of the Compression Facility, and BENTON and TENNECO, working interest owners in WCBB field but having no ownership in the Compression Facility. As described in that agreement, each month the Compression Facility owners will bill the owners of each well for their respective shares of all charges incurred in the operation, maintenance, and repair of the Compression Facility for the previous month. As per the referenced agreement, each owner will be charged a percentage of the total expenses based on the ratio that the total volume of gas compressed from his well bears to the total volume of the gas compressed by the Compression Facility during that previous month. However, Buyer and Seller hereby agree that Seller shall be charged under the referenced agreement for only actual costs which exclude costs for equipment depreciation. The December 1, 1995 agreement shall continue to remain in effect, with the stipulation that within the body of the December 1, 1995 agreement, all references to Seller as co-owner of the Compression Facility shall be transferred to Buyer as sole owner of the Compression Facility. 38 44 As noted in the December 1, 1995 agreement, following the initial one year period (which has now expired), such agreement shall terminate within one hundred and eighty (180) days after the parties elect to no longer utilize the Compression Facility to compress gas. Upon termination of such agreement by Buyer, Seller shall have the option to purchase any or all portions of Compression Facility at salvage value. Should this purchase of Compression Facility asset(s) occur, Seller will have ninety (90) days either to leave the purchased asset in its present location but make it exclusive for Seller's use or to remove the purchased asset from Buyer's property, at Seller's sole cost and expense. Seller's capacity reservation under this Section 10.1(b), and the rights associated therewith, may be assigned by Seller; provided, however, that any such assignment shall only be in association with the assignment by Seller of all or any part of its interest in WCBB and further, that the assignment of such capacity reservation shall be in a pro rata share equal to the percentage interest in WCBB assigned by Seller. (c) Dehydration Buyer shall handle produced gas volumes attributable to Seller's interest in WCBB from wells operated by Seller after the Effective Date in WCBB, for dehydration of up to a maximum guarantee of 5 MMCFD, through Buyer's dehydration facility in existence in WCBB as of the First Closing Date (the "Dehydration Facility"); provided, however, that there shall serve as a credit against this capacity reservation those volumes of gas, if any, purchased by Buyer pursuant to that certain Gas Purchase Contract attached hereto as Exhibit "E-2" to the effect that, if Buyer purchases 5 MMCFD of gas thereunder, then Buyer shall have no commensurate obligation to dehydrate 5 MMCFD of gas under this capacity reservation. Should the Dehydration Facility at any time be temporarily limited from full capacity, Buyer shall make available to Seller no more than 20% of the Dehydration Facility's then available capacity for dehydration of produced gas volumes attributable to Seller's interest in WCBB from such Seller operated wells. If the condition causing the temporary capacity limitations has not been addressed by Buyer with a solution, plan or option to restore the diminished system capacity within twenty (20) days form when the condition arose, Seller reserves the right to purchase the affected dehydration asset(s) at salvage value. Should this purchase of the affected dehydration asset(s) occur, Seller will have ninety (90) days either to leave the purchased asset in its present location but make it exclusive for Seller's use or remove the purchased asset from Buyer's property, at Seller's sole cost and expense. Should the actual volume of produced gas attributable to Seller's interest in WCBB from such Seller operated wells exceed 5 MMCFD, Buyer may, in its sole discretion, but shall not be obligated to, accept and dehydrate such additional volume as long as the Dehydration Facility capacity exists. This capacity reservation by Seller is expressly limited to Dehydration Facility and, except as provided herein, shall not apply to or burden any expansion of the Dehydration Facility or any other or additional dehydration facilities which may be owned or constructed by Buyer. Seller reserves the right to install its own dehydration facilities at some point in the future on the Lease; provided, however, that such reserved rights shall not be exercised in a manner that interferes with the surface operations of Buyer on the Lease. Seller shall 39 45 have the option of connecting its dehydration equipment into Buyer's dehydration system which option, if exercised, shall not be exercised in a manner that interferes with Buyer's use of the dehydration system. Should Buyer decide to modify, expand or replace a portion or portions of the dehydration facility in order to increase the system capacity, Seller shall have the option to participate with Buyer and partially fund the project in order to increase Seller's maximum capacity guarantee upon terms and conditions mutually acceptable to Buyer and Seller. Reference is made to an agreement dated December 1, 1995 described as "Dehydration Facility Letter Agreement" between Seller and TESLA, the then owners of the Dehydration Facility, and BENTON and TENNECO, working interest owners in WCBB field but having no ownership in the Dehydration Facility. As described in that agreement, each month the Dehydration Facility owners will bill the owners of each well for their respective shares of all charges incurred in the operation, maintenance, and repair of the Dehydration Facility for the previous month. As per the referenced agreement, each owner is charged a percentage of the total expenses based on the ratio that the total volume of gas dehydrated from his well bears to the total volume of the gas dehydrated by the Dehydration Facility during that previous month. However, Buyer and Seller hereby agree that Seller shall be charged under the referenced agreement for only actual costs which exclude costs for equipment depreciation. The December 1, 1995 agreement shall continue to remain in effect, with the stipulation that within the body of the December 1, 1995 agreement, all references to Seller as co-owner of the Dehydration Facility shall be transferred to Buyer as sole owner of the Dehydration Facility. As noted in the December 1, 1995 agreement, following the initial one year period (which has now expired), such agreement shall terminate within one hundred and eighty (180) days after the parties elect to no longer utilize the Dehydration Facility to dehydrate gas. Upon termination of such agreement by Buyer, Seller shall have the option to purchase any or all portions of the Dehydration Facility at salvage value. Should this purchase of Dehydration Facility asset(s) occur, Seller will have ninety (90) days either to leave the purchased asset in its present location but make it exclusive for Seller's use or remove the purchased asset from Buyer's property, at Seller's sole cost and expense. Seller's capacity reservation under this Section 10.1(c), and the rights associated therewith, may be assigned by Seller; provided, however, that any such assignment shall only be in association with the assignment by Seller of all or any part of its interest in WCBB and further, that the assignment of such capacity reservation shall be in a pro rata share equal to the percentage interest in WCBB assigned by Seller. 10.2 SURFACE RIGHT OF WAY ALLOWANCES. To the extent necessary, Seller reserves the right to install any pipeline (of any size) as well as any facility including salt water disposal (of any size) upon the Lease for production, as long as its location or installation does not impede Buyer's operations. 40 46 Both parties agree to allow the other party to install additional lines in such a manner that a new line is laid over an existing line at each crossing. Seller reserves the right to conduct seismic on the Lease with only notification being required (no permits or fees). Seller reserves the right of access to, and the right to maintain and repair, any line(s) under TEPI's ownership that is physically located on the property of Buyer, such as on benches along the walkways or laying on the mudline in the area sold. It is understood and acknowledged by Buyer and Seller, that each party has the right of use of the surface of the area covered by the Lease as co-owners under the Lease. 10.3 POLLUTION RESPONSE/PAYMENT. In the event of an observed spill condition, both Seller and Buyer agree that the first observing party shall initiate proper response and immediately notify the proper authorities, as well as the other party to this Agreement. Each party shall respond to its own spill. In the event one party responds to another party's spill, upon discovery of the actual cause of the spill condition, the party responsible for the spill (through its own fault or the fault of its contractors), agrees to reimburse the responding party for actual costs associated with the response and cleanup. This reimbursement shall be made within thirty (30) days of billing. 10.4 ABILITY TO DRILL SALT WATER DISPOSAL WELLS. Buyer agrees to allow Seller the right to drill and maintain separate ownership of additional salt water disposal wells within the designated area sold to Buyer for shallow production, as long as its location or installation does not impede Buyer's operation. 10.5 ABILITY TO MOVE RIGS. Seller shall retain the right to move drilling rigs or other equipment across the Lease when it considers it necessary to do so for conduction of operations. 10.6 CATHODIC PROTECTION. The cathodic protection system currently in operation shall continue to be operated by Buyer in a manner such that it protects the exit (sales or distribution) lines owned by Seller or its subsidiaries. 10.7 EXISTING EMPLOYEES AND CONTRACTORS. Buyer agrees not to hire current employees of Seller for a period of two years from the Effective Date without Seller's prior consent. Buyer shall hire no more than 4 employees from Seller. These employees shall be limited to hourly employees only (excluding a production supervisor and a clerk), and shall include no more than one mechanic. Buyer agrees not to interfere with Seller's right to maintain contracts with the following vessels for Seller's continued use in the Ivanhoe area. These vessels shall include, but shall not be limited to the Miss Kimberly (serving VB), the Mr. Bill (serving CBI), the Miss 1 47 Carmen (serving the Area Mechanics), the Miss Sissy (serving the Ivanhoe Production Supv), and the Clay B (acting as the work barge for the Ivanhoe area) 10.8 ACCESS TO FRESH WATER. Buyer shall furnish Seller freshwater from existing freshwater well(s) located at the WCBB Tank Battery, at no charge to Seller for the fresh water so furnished, for use in compression cooling, engine cooling, washdown on tank battery 1-A , and other miscellaneous uses. 10.9 ACCESS TO FIELD. Seller shall retain general access to the Lease as it considers necessary for the conduction of operations. 10.10 INSURANCE. Buyer shall obtain a $1,000,000 general liability insurance policy, a $10,000,000 umbrella insurance policy and other insurance generally required in the industry covering the Lease (from base of "Rob C Marker" to surface) and Buyer's operations therein, under which Seller will be named as an additional insured. Attached hereto as Exhibit "L" is a copy of Buyer's insurance binder with Seller named thereon as an additional insured. 10.11 WELL PROPOSAL BY BUYER. At any time that Buyer proposes to drill a well in a location that may be deemed to enter onto or affect the area outside of the Lease, Buyer will advise Seller sixty (60) days in advance of the proposed drilling of such well. No well may be drilled which would affect the area outside of the Lease, without the consent of the Seller, within one year of the First Closing Date. 10.12 NONINTERFERENCE OF OPERATIONS. Seller and Buyer each agree than neither shall exercise any of the rights either reserved or granted to it in this Agreement, including without limitation the rights reserved in this Part Ten, so as to interfere with or impede the other party's operations on or in connection with the Lease, Assets, or Buyer's Leasehold. 10.13 RIGHT TO PURCHASE PRODUCTION. Oil: Seller reserves on behalf of Texaco Trading and Transportation Inc. ("TTTI"), the right from time to time, to purchase from Buyer at a price equivalent to the price offered to Buyer by any bona fide third party purchaser, the oil and/or other liquid hydrocarbons produced and saved from the Assets except any used for operating purposes thereon. Said third party offer shall be made either: (i) in writing; or, (ii) orally, subsequently confirmed in writing. TTTI's election to purchase said oil and/or other liquid hydrocarbons shall be given to Buyer in writing within thirty (30) days from receipt of notice from Grantee as to the terms and conditions of the third party contract to purchase the oil and/or related liquid hydrocarbons, including, but not limited to, the date when such purchases by TTTI shall begin. Once commenced, TTTI's purchases shall continue until such date as may be specified by written notice from TTTI to Buyer given at least thirty (30) days in advance, specifying the date for discontinuance of such purchases. If TTTI fails to notify Buyer within said period of time, TTTI shall be deemed to have waived its election to exercise such right for the term of the third party contract, the term of which third party contract shall not exceed one (1) year. The reservation provided for hereinabove shall apply separately as to the oil and other liquid hydrocarbons produced and 2 48 saved from the Assets, and TTTI may purchase the oil and the other liquid hydrocarbons, or any one or more of them, without purchasing the remaining products. The effective date of change will be no earlier than the first of the month following thirty (30) days notice of change, unless mutually agreed otherwise. For the purpose of this Section, all notices shall be sent to the attention of Mr. Paul E. Fowler, Division Manager TTTI, Texaco Heritage Plaza, 1111 Bagby, Houston, Texas 77002-2543, phone number (713) 666-8000, fax number (713) 752-6376, or such other party or address as TTTI may specify, in writing, from time to time. Notwithstanding anything contained in this Section to the contrary hereinabove, if Buyer receives from any bona fide third party purchaser an offer to purchase the oil and/or other liquid hydrocarbons produced and saved from the Assets at a price equivalent to or higher than that currently received by Buyer from TTTI for such products, Buyer shall immediately notify TTTI, in writing, of such offer as set forth above. TTTI shall have the same right to purchase the oil and/or other liquid hydrocarbons as provided hereinabove at the newly offered price and TTTI shall exercise said right in he same manner as heretofore provided. 10.14 BUYER'S RETAINED INTEREST IN TANK BATTERY 1-A. Buyer will receive the purchased header, LP test separator (24" by 10'), and LP production separator (60" by 15') at their respective current locations on tank battery 1- A. Buyer will be responsible for making the piping connection off their separator outlets and sending Buyer's production to one of Buyer's tank batteries for processing and sale. Buyer shall remove all of Buyer's Wells to another tank battery. Buyer shall remove this equipment and relocate and move its production from tank battery 1-A no later than December 31, 1998. Until this time, Buyer shall have the right to pass across Seller's tank battery 1-A, and shall also have use of tank battery 1-A for its production provided Seller receives and gives permission for such use, which permission shall not be unreasonably withheld. As new flowlines are laid or present flowlines repaired by Buyer, every attempt shall be made to route these flowlines to tank batteries other than Seller operated tank battery 1-A. Buyer shall have the right to lay lines on tank battery 1-A in order to route Buyer's production coming to the tank battery 1-A header to another facility operated by Buyer. Seller will maintain the current tank battery 1-A platform and generator for use by Buyer. Buyer will maintain its equipment on tank battery 1-A for proper operation and condition. 10.15 MISCELLANEOUS. Seller shall install turbine meter on salt water line leaving tank battery 1-A going to Buyer's disposal facility. This meter shall serve as the allocation point for charges on Seller's salt water disposal volume. Buyer will maintain and service existing perimeter lighting around the WCBB. Seller will maintain and service existing channel lighting (Navaids) on the route from the Ivanhoe shorebase facility to WCBB. Twenty-five percent of charges relating to the maintenance and service of the existing channel lighting on such route shall be borne by Buyer. 3 49 PART ELEVEN MISCELLANEOUS 11.1 SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of the respective Parties. 11.2 WAIVERS AND AMENDMENTS. All amendments and other modifications hereof shall be in writing and signed by each of the Parties. Any Party may by written instrument (i) waive compliance by the other Party with, or modify any of, the covenants or agreements made by the other Party in this Agreement or (ii) waive or modify performance of any of the obligations or other acts of the other Party. The delay or failure on the part of any Party to insist, in any one instance or more, upon strict performance of any of the terms or conditions of this Agreement, or to exercise any right or privilege herein conferred shall not be construed as a waiver of any such terms, conditions, rights or privileges but the same shall continue and remain in full force and effect. All rights and remedies are cumulative. 11.3 NOTICES. All notices, consents and other communications under this Agreement shall be in writing and shall be deemed to have been duly given (a) when delivered by hand, (b) when sent by telecopier (with receipt confirmed), provided that a copy is promptly thereafter mailed in the USA by first class postage prepaid registered or certified mail, return receipt requested, (c) when received by the addressee, if sent by Express Mail, Federal Express, other express delivery service (receipt requested) or by such other means as the Parties may agree from time to time or (d) five (5) Business Days after being mailed in the USA, by first class postage prepaid registered or certified mail, return receipt requested; in each case to the appropriate address and telecopier number set forth below (or to such other address and telecopier number as may be designated elsewhere in the Agreement or as a Party may designate as to itself by notice to the other Party): (i) if to Seller: Mr. Norman A. Duplantis Assistant Division Manager - Onshore Texaco Exploration and Production Inc. 400 Poydras New Orleans, Louisiana 70130 Fax: (504) 593-4665 4 50 (ii) if to the Buyer: Mr. Mark Liddell DLB Oil & Gas, Inc. 1601 N. W. Expressway Suite 700 Oklahoma City, Oklahoma 73118-1401 Fax: (405) 848-9449 Each Party shall have the right upon giving ten (10) Business Days prior written notice to the other in the manner hereinabove provided, to change its address for purposes of notice. 11.4 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be an original, but all of which together shall constitute one and the same document. 11.5 ENTIRE AGREEMENT. This Agreement and the Exhibits hereto, if any, contain the entire agreement between the Parties hereto with respect to the subject matter hereof and supersede all prior discussions, understandings, agreements and undertakings between the Parties hereto relating to the subject matter hereof. There are no additional terms, whether consistent or inconsistent, oral or written which are intended to be part of the Parties' understanding which have not been incorporated into this Agreement and Exhibits hereto. 11.6 SEVERABILITY. Except for Section 8.5, which shall not be severable from any other provision of this Agreement, each provision in this Agreement is intended to be severable. If any term or provision hereof is held by a court of competent jurisdiction to be illegal or invalid for any reason whatsoever, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect. 11.7 APPLICABLE LAW. This Agreement shall be governed by and interpreted, construed and enforced in accordance with the laws of the State of Louisiana. 11.8 EXPENSES. Except as specified herein, or allowed by the Bankruptcy Court, and as the Parties may otherwise agree, each Party shall be solely responsible for all expenses incurred by it in connection with any and all transactions that are contemplated by this Agreement. 11.9 FILING AND RECORDING OF ASSIGNMENTS, ETC. Seller shall be solely responsible for recording of the sale and assignments and any other documents related to the Assets and Seller shall promptly provide Buyer with recorded copies of same. 11.10 PAYMENT OF BURDENS. Without in any way limiting the provisions of the Contract Operating Agreement attached hereto as Exhibit "F", Seller hereby agrees to and shall continue paying such Burdens, on behalf of Buyer, for all liquid and gaseous hydrocarbons, whether 5 51 similar or dissimilar, produced during the month in which the First Closing occurs; and Buyer shall commence the payment of the Burdens for all such liquid and gaseous hydrocarbons produced beginning the first day of the month following the month in which the First Closing occurs and thereafter. Buyer expressly agrees to calculate and timely pay royalties to the State of Louisiana in accordance with Attachment "C" of the Global Settlement, and any other royalty owners, in accordance with the Lease or other agreements providing for the payment of royalties with respect to production from the Assets. BUYER SHALL INDEMNIFY, PROTECT AND HOLD HARMLESS SELLER FROM AND AGAINST EACH AND EVERY CLAIM AND CAUSE OF ACTION AND LIABILITY IN CONNECTION THEREWITH, RESULTING FROM OR ATTRIBUTABLE TO THE CALCULATION AND PAYMENT OF ANY BURDENS IN ACCORDANCE WITH THE PROVISIONS OF SAID LEASE(S) AND AS PROVIDED FOR IN SECTION 2.8 OF THIS AGREEMENT. 11.11 LAWS AND REGULATIONS. This Agreement is subject to all federal, state and local laws and to all orders, rules, regulations and standards issued thereunder by all duly constituted political subdivisions and agencies having jurisdiction. 11.12 PUBLIC ANNOUNCEMENTS. The Parties hereto agree that prior to making any public announcement or statement with respect to the transaction contemplated by this Agreement, the Party desiring to make such public announcement or statement shall consult with the other Party hereto and exercise its best efforts to (i) agree upon the text of a joint public announcement or statement to be made by both such Parties or (ii) obtain approval of the other party hereto to the text of a public announcement or statement to be made solely by Seller or Buyer, as the case may be. Nothing contained in this paragraph shall be construed to require either Party to obtain approval of the other Party hereto to disclose information with respect to the Contemplated Transactions to any state or federal governmental authority or agency or to the extent required by the Bankruptcy Code or Applicable Law or by any applicable rules, regulations or orders of any governmental authority or agency having jurisdiction (including, without limitation, any governmental authority or agency having jurisdiction with respect to the Case) or necessary to comply with disclosure requirements of the New York Stock Exchange or any other regulated stock exchange and applicable securities laws. 11.13 ASSIGNABILITY. This Agreement and the rights and obligations created or assumed hereunder shall not be assignable or delegable by Buyer and any assignment shall be void ab initio, provided, however, that Seller hereby consents to Buyer's assignment of its rights, as of the Effective Date of the Plan, to WRT, as reorganized, as more particularly set forth in and contemplated by the Plan, the Commitment Agreement and the Assignment and Assumption Agreement (attached hereto as Exhibit "N"), provided, further, that notwithstanding such assignment (or any subsequent assignment) and the assumption by WRT, as reorganized, of Buyer's obligations under this Agreement, no such assignment shall effect a novation, discharge or release of this Agreement and Buyer shall in no way be relieved of its obligations hereunder and shall remain liable therefor. 11.14 PROVISIONS SURVIVE EACH CLOSING. Except as may be specifically provided herein, the provisions of this Agreement, including all representations, warranties, covenants and 6 52 agreements made hereunder or pursuant hereto shall survive each Closing and be and remain enforceable and continue in full force and effect as to their terms and conditions following each Closing and shall not be deemed to have been merged into any Closing or into any sale and assignment. 11.15 DISPUTE RESOLUTION. All disputes, controversies or claims relating to or arising out of the Contemplated Transactions shall be resolved in accordance with Exhibit "D" hereto. 11.16 SELLER'S ELECTION TO ELECT A TAX DEFERRED EXCHANGE. Seller retains the right to sell its interest in the Assets to Buyer as a non-simultaneous like-kind property exchange for cash pursuant to Section 1031 of the Code. Seller shall have the right to elect this tax-deferred exchange at any time prior to the First Closing Date. Buyer agrees to execute additional escrow instructions, documents, agreements, or instruments to effect the exchange, provided that Buyer shall incur no material additional costs, expenses, fees or liabilities as a result of or in connection with the exchange. 11.17 TERMINATION. This Agreement may be terminated at any time by mutual consent of Seller and Buyer. Buyer agrees to use reasonable efforts to obtain ownership of the Buyer's Leasehold for purposes of conveying the same to Seller as contemplated by this Agreement. If Buyer has not been successful in obtaining ownership of the Buyer's Leasehold, and conveying the same to Seller, within one (1) year of the First Closing Date, Buyer and Seller shall agree on the value of the Buyer's Leasehold and Buyer shall pay to Seller an amount (by wire transfer in immediately available funds) equal to the Parties' agreed upon value of the Buyer's Leasehold. If the Parties are unable to agree upon the value of the Buyer's Leasehold, Seller shall have the right at any time after such one (1) year period to invoke the provisions of Exhibit "D" hereto concerning dispute resolution for purposes of establishing the value of the Buyer's Leasehold for purposes of the payment to be made by Buyer to Seller under this Section 11.17. If the Second Closing has not occurred and upon Buyer paying to Seller the value of the Buyer's Leasehold (as determined either by mutual agreement or otherwise), this Agreement shall terminate and neither Buyer nor Seller shall have any further right or obligation to the other hereunder, except as provided in Section 11.14, and as otherwise expressly provided herein. 7 53 IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date first above written. WITNESSES: SELLER: TEXACO EXPLORATION AND PRODUCTION INC. - ------------------------------ By: NAME: ------------------------------- ------------------------- NAME: ------------------------------ TITLE: ----------------------------- - ------------------------------ Tax ID: 51-0265713 NAME: ------------------------- WITNESSES: BUYER: DLB OIL & GAS, INC. - ------------------------------ By: NAME: ------------------------------- ------------------------- NAME: ------------------------------ TITLE: ----------------------------- - ------------------------------ Tax ID: 73-1358299 NAME: ------------------------- 8 54 CONTRACT OPERATING AGREEMENT THIS CONTRACT OPERATING AGREEMENT ("Agreement") entered into this 11th day of March, 1997, by and between DLB Oil & Gas, Inc. ("DLB") and Texaco Exploration and Production Inc. ("TEPI"), under and according to the following terms and conditions: WHEREAS, TEPI and DLB have executed that certain Purchase, Sale and Cooperation Agreement dated March 11, 1997 ("Purchase Agreement") regarding the sale of a portion of State Lease 340 by TEPI to DLB insofar and only as the same covers those lands and depths described on Exhibit "A" to Exhibit "B-1" to the Purchase Agreement (the "Mineral Property"); WHEREAS, TEPI has assigned and conveyed to DLB all of its right, title and interest in and to the Mineral Property; WHEREAS, TEPI has been operator of the Mineral Property but DLB has assumed operatorship of the Mineral Property; WHEREAS, DLB desires TEPI to undertake the administration, management and operation of the Mineral Property for a period of time to facilitate the transition of operatorship of the Mineral Property from TEPI to DLB; and WHEREAS, TEPI is willing and agreeable to undertake and perform said duties regarding the Mineral Property on the terms and conditions set out in this Agreement; NOW THEREFORE, in consideration of the mutual promises and covenants hereinafter set forth, DLB and TEPI agree as follows, to wit: 1. Designation of Contract Operator DLB hereby designates TEPI to administer, manage and operate the Mineral Property consistent with the terms and conditions of that certain Contract Area Operating Agreement dated July 1, 1987 by and among Texaco, Inc., as Operator, and Pelham Partners, Ltd., et al., as Non-Operators recorded at COB 37-J, page 255, Entry No. 246,862, St. Mary Parish, Louisiana ("Operating Agreement"). DLB and TEPI hereby agree that TEPI is hereby designated as Contract Operator and is authorized to conduct all operations for the Mineral Property in accordance with the terms and conditions of the Operating Agreement as if TEPI were named as Operator. For purposes of this Agreement, all references to "Operator" in the Operating Agreement, shall be deemed to be TEPI, and all references to "Non-Operator" shall be deemed to include DLB as an owner of a working interest in and to the Mineral Property. 55 2. Duties and Obligations TEPI hereby agrees to administer, manage and operate the Mineral Property in a manner consistent with the management and administrative practices currently being provided by TEPI in connection with the Mineral Property (the "Services"). During normal business hours, DLB shall be entitled to reasonably consult with TEPI or its representatives providing the Services. TEPI shall make such representatives reasonably available to DLB. 3. Costs and Expenses TEPI shall be entitled to receive payment from DLB, and to continue to invoice the other owner or owners of a working interest in the Mineral Property, for all costs, expenses and charges, but only to the extent that such costs and expenses are permitted under Article 5 of the Operating Agreement and approved by DLB for such costs in excess of $25,000.00. Notwithstanding anything to the contrary, however, during the term of this Agreement, TEPI shall not be required to make any capital expenditures to the Mineral Property, unless TEPI and DLB shall otherwise agree to such capital expenditures. (a) Projects Costing Less Than $25,000. TEPI may, but shall not be obligated to, undertake single projects, as defined below, reasonably estimated to require expenditures of Twenty-Five Thousand ($25,000) Dollars each or less, without obtaining the prior approval of DLB. As used herein, the term "single project" shall mean a planned undertaking with a specific goal, and shall include all of the various components of such undertaking. In case of explosion, fire, flood or other sudden emergency, whether of the same or different nature (an "Emergency"), TEPI may take such steps and incur such expenses as in its opinion are required to deal with the Emergency to safeguard life and property. Upon the expenditure of funds by TEPI in response to an Emergency, as defined herein, TEPI shall provide DLB, immediately thereafter with actual notice (within 24 hours) and a detailed accounting or authority for expenditure ("AFE") of the funds expended (within 5 days). (b) Projects Costing More Than $25,000. In all cases where a single project, as defined hereinabove, is reasonably estimated to require expenditures in excess of Twenty-Five Thousand ($25,000) Dollars, TEPI shall prepare and submit to DLB an AFE which shall describe, in reasonable detail, the operation proposed to be conducted and the estimated cost thereof. Within a reasonable time after receipt of such AFE, DLB shall approve such AFE by signing the same and returning it to TEPI or by otherwise evidencing its approval thereof, or shall disapprove such AFE by written notice to TEPI in accordance with Article 5 of the Operating Agreement. 2 56 4. Term This Agreement shall become effective on the 12th day of March, 1997 at 7:00 a.m., and continue in effect for a period of sixty (60) days or until the approval of the Assignment, Conveyance and Bill of Sale from TEPI to DLB of the Mineral Property by the Louisiana State Mineral Board is received, whichever is longer. 5. Transition TEPI and DLB agree to cooperate and assist the other to effectuate the change of operator of the Mineral Property from TEPI to DLB, upon the termination of this Agreement. 6. Liability (a) Standard of Care. TEPI shall provide the Services in a timely and current manner, consistent with management and administrative practices that it would provide for itself in the performance of services similar to the Services. TEPI shall have no responsibility for and shall incur no liability for any damage or loss of any nature suffered or incurred by DLB arising out of or in connection with the rendering by TEPI of the Services including liability arising out of TEPI negligence or a claim of strict liability unless such damage or loss is the result of the gross negligence or willful misconduct of TEPI. DLB, at its expense, shall defend, protect and indemnify and hold harmless TEPI, its affiliates, and their respective representatives from and against each and every claim, demand or cause of action and any liability, damage or loss in connection therewith, which may be made or asserted by DLB, its agents or any third persons (including, but not limited to, TEPI's representatives), arising out of or in connection with the furnishing of Services hereunder by TEPI, except to the extent attributable to TEPI's gross negligence or willful misconduct. (b) Independent Contractor Relationship. With respect to its performance of the Services, TEPI is an independent contractor, with the authority to control, oversee and direct the performance of the details of the Services, DLB being only interested in the results obtained. DLB shall have the right (to the extent not in violation of the law or inconsistent with reasonable business practices) to direct TEPI to conduct or not conduct certain Services (consistent with TEPI's obligations contained herein) with respect to the Mineral Property, but the means and manner of the same shall be in the exclusive control of TEPI. (c) No Joint Venture or Partnership. This Agreement is not intended to and shall not be construed as creating a joint venture, partnership, agency or other association within the meaning of the law or under the laws of the state in which either Party is incorporated, organized or conducting business. Except as otherwise provided therein, neither party shall be responsible for the obligations or actions of the other Party, each Party being severally responsible only for its obligations and actions arising hereunder. 3 57 7. Notices All notices authorized or required between the parties and required by any of the provisions of this Agreement shall, unless otherwise and specifically provided, be given in accordance with the Notices provision contained in Part Eleven of the Purchase Agreement. 8. Insurance DLB shall procure and maintain during the term hereof the insurance specified in Article 6 of the Operating Agreement and Section 10.10 of the Purchase Agreement to include insurance coverage for TEPI as contract operator. TEPI shall be an additional named assured and co-loss-payee under the terms of such policies. DLB shall furnish a waiver of subrogation. DLB shall provide TEPI with thirty (30) days advance written notice of termination of any insurance required hereunder and all certificates of insurance requested by TEPI shall provide for at least thirty (30) days prior notice to TEPI of cancellation. 9. Conflicts To the extent the provisions of this Agreement are deemed to be in conflict with or contrary to the provisions of any extant agreements concerning the Mineral Property, DLB and TEPI agree that the provisions of this Agreement deemed to be in conflict with or contrary to under the provisions of any extant agreements shall be suspended until consents or waivers under the extant agreements are received. DLB and TEPI further agree to make all reasonable efforts to obtain said consents or waivers from third parties. 10. Dispute Resolution Part 11.15 of the Purchase Agreement shall apply to all disputes between the parties. 11. Amendment This Agreement constitutes the entire understanding between the parties with regard to the operation of the Mineral Property by TEPI and supersedes any prior understanding, whether written or oral, and this Agreement cannot be amended except in writing executed by the parties. 4 58 IN WITNESS WHEREOF the parties have executed the same as of the day first written above. DLB OIL & GAS, INC. By: ------------------------------- Name: ------------------------------- Title: ------------------------------- TEXACO EXPLORATION AND PRODUCTION INC. By: ------------------------------- Name: ------------------------------- Title: ------------------------------- 5 59 ASSIGNMENT AND ASSUMPTION AGREEMENT This Agreement (the "Agreement") is made and entered into this 11th day of March, 1997, by and between DLB Oil & Gas, Inc., an Oklahoma corporation (hereinafter "DLB") and WRT Energy Corporation, a Texas corporation, as reorganized pursuant to the Second Amended Joint Plan of Reorganization, dated March 11, 1997, as may be amended or modified (the "Plan") (hereinafter "New WRT"). Unless the context otherwise requires, all capitalized terms not otherwise defined herein shall have the same meanings herein as in that certain Purchase, Sale and Cooperation Agreement by and between Texaco Exploration and Production Inc. ("TEPI") and DLB dated March 11, 1997 ("PS&C Agreement"). ARTICLE I THE ASSIGNMENTS Section 1.1 Assignments by DLB. In implementation of the closing of the transactions contemplated by (i) that certain Commitment Agreement dated as of January 20, 1997, among WRT, as debtor-in-possession, DLB and Wexford Management LLC and (ii) the Plan, and in consideration of the exchange of consideration set forth in the Commitment Agreement, the receipt and adequacy of which is hereby acknowledged, effective as of the "Effective Date" of the Plan (as such term is defined in the Plan), DLB assigns, grants, conveys and delivers to New WRT, subject to those certain exclusions set forth in Section 1.2 herein, all of DLB's right, title and interest in, to and under the following: (a) The Assets acquired by DLB from TEPI pursuant to the PS&C Agreement, and that certain Assignment, Conveyance and Bill of Sale by and between TEPI and DLB dated March 11, 1997 (the "Assignment"), attached as Exhibit B-1 to the PS&C Agreement; (b) Those certain Gas Purchase Contracts by and between TEPI and DLB, each dated March 11, 1997 (attached as Exhibits E-1 and E-2 to the PS&C Agreement), which provide for, inter alia, the mutual sale and purchase by DLB and TEPI of certain quantities of DLB and TEPI gas; (c) That certain Shorebase Service Agreement by and between TEPI and DLB dated March 11, 1997 (attached as Exhibit G to the PS&C Agreement), pursuant to which TEPI, as an independent contractor, will provide to DLB certain operating services and shorebase facilities in connection with the West Cote Blanche Bay Field; and (d) Those certain procedures for resolving disputes relating to or arising out of the Contemplated Transactions as set forth in Exhibit D to the PS&C Agreement, and as acknowledged by DLB and New WRT (the "Dispute Resolutions"). 1 60 Section 1.2 Exclusions to Assignment. Notwithstanding the assignments by DLB set forth in Section 1.1 hereinabove, DLB's right, title and interest in the following shall not be assigned or conveyed to New WRT: (a) The Claim acquired by DLB pursuant to the PS&C Agreement, as well as all rights related thereto as set forth in the PS&C Agreement; (b) All funds that DLB received, or is entitled to receive, from TEPI in connection with the Preliminary Recap and the Final Recap pursuant to the PS&C Agreement, and all rights related thereto as set forth in the PS&C Agreement; and (c) DLB's right to unwind the Contemplated Transactions pursuant to Section 8.5 of the PS&C Agreement, and all rights related thereto. ARTICLE II THE ASSUMPTIONS Section 2.1 Assumptions by New WRT. In consideration of DLB's assignment to New WRT of certain assets and rights described in Section 1.1 hereinabove, effective as of the Effective Date of the Plan, New WRT shall assume any and all liabilities, duties and obligations that arise, or may arise, from and under the following: (a) The PS&C Agreement, including, without limitation, the Assumed Obligations, as well as all other obligations provided in Sections 2.7 (b), (c) and (d), 2.8, 2.9, 4.2(a) and (c), 9.1, 9.3, 10.1,10.2, 10.3, 10.4,10.5, 10.6, 10.7, 10.8, 10.9, 10.10, 10.11, 10.12, 10.13, 10.14, 10.15, 11.10 and 11.13 of the PS&C Agreement; (b) The Assignment; (c) The Gas Purchase Contracts; (d) The Shorebase Service Agreement; (e) That certain Escrow Agreement by and among, TEPI, DLB and The Chase Manhattan Bank, as escrow agent, dated March 11, 1997 (attached as Exhibit C to the PS&C Agreement), which requires the performance of certain (i) plugging and abandonment obligations arising under the Lease, and (ii) periodic deposits of funds into an escrow account for a fixed period of time; (f) That certain Security Agreement and Assignment of Production Proceeds by and between New WRT and TEPI, dated as of the Effective Date of the Plan, which grants to TEPI a security interest in (i) the Escrow Account (as defined in the Escrow Agreement) and (ii) 50% of the production, as well as the proceeds therefrom, arising from the Assets; and 2 61 (g) The Dispute Resolutions. Section 2.2 Obligations of DLB. Notwithstanding New WRT's assumption of the liabilities and obligations identified in Section 2.1 hereinabove, DLB shall remain liable (on and after the Effective Date of the Plan, and jointly and severally with New WRT) for all obligations set forth in Section 2.1 hereinabove. ARTICLE III COVENANTS Section 3.1 Covenants of DLB. DLB agrees to execute and deliver such additional documents, as well as any amendmentsthereof or supplements thereto, as may be required to assign and convey to New WRT all of DLB's right, title and interests described in Section 1.1 hereinabove (subject to those "exclusions" described in Section 1.2 hereinabove), including, without limitation, the Assets acquired by DLB from TEPI pursuant to the PS&C Agreement and the Assignment. DLB shall also cause New WRT to be named as a named insured under the policy of insurance delivered to TEPI at the First Closing. Section 3.2 Covenants of New WRT. New WRT agrees to execute and deliver such additional documents, as well as any amendments thereof or supplements thereto, as may be required to (i) assign and convey to DLB all of New WRT's right, title and interest in, to and under the Buyer's Leasehold, including, without limitation, New WRT's interest in the facilities which were excluded from the Assets pursuant to the PS&C Agreement, and (ii) grant to TEPI a security interest in such collateral as set forth more fully in and pursuant to the Security Agreement and Assignment of Production Proceeds. ARTICLE IV MISCELLANEOUS Section 4.1 Counterparts. This Agreement may be executed in one or more counterparts, each of which, when so executed and delivered, shall be an original and all of which together shall constituted the same instrument. Section 4.2 Amendments. No amendment of any provision of this Agreement shall be effective unless it is in writing and signed by DLB and New WRT and no waiver of any provisions of this Agreement, nor consent to any departure by DLB or New WRT therefrom, shall be effective unless it is in writing and signed by DLB or New WRT, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. Section 4.3 Notices. All demands, notices, requests, consents and communications hereunder shall be in writing and shall be delivered by courier service, messenger, telecopy or by certified or registered mail, postage prepaid -- return receipt requested, to the following addresses, or such other addresses as may be furnished hereafter by notice in writing, to the following persons: 3 62 In the case of DLB: Mark Liddell DLB Oil & Gas, Inc. 1601 N.W. Expressway, Suite 700 Oklahoma City, Oklahoma 73118-1401 Phone No.: (405) 848-8808 Fax No.: (405) 848-9449 -with a copy to- Jeffrey S. Sabin, Esq. Schulte Roth & Zabel, LLP 900 Third Avenue New York, New York 10022 Phone No.: (212) 756-2000 Fax No.: (212) 593-5955 In the case of New WRT: Raymond P. Landry WRT Energy Corporation 1405 Pinhook Drive, Suite 210 Lafayette, Louisiana 70503 Phone No.: (318) 234-4620 Fax No.: (318) 237-6140 Section 4.4 Governing Law; Jurisdiction. This Agreement shall be governed by and construed in accordance with the laws of the State of Louisiana, and DLB and New WRT each consent to jurisdiction of the federal and state courts in the State of Louisiana. DLB and New WRT hereby agree that any such court shall have in personam jurisdiction over it, consents to service of process, and agrees that a final judgment in any action or proceeding in any such court shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner specified by law. Section 4.5 Section Headings. The section captions and headings in this Agreement are for convenience only and are not intended to be full or accurate descriptions of the contents thereof. They shall not be deemed to be part of this Agreement and in no way define, limit, extend or describe the scope or intent of any provisions hereof. 4 63 IN WITNESS WHEREOF, DLB and New WRT have executed this Agreement on the date first set forth above by the respective signatures of their duly authorized representatives. DLB OIL & GAS, INC. By: ----------------------------------------- Name: Mark Liddell President WRT ENERGY CORPORATION, as reorganized under the Plan By: ----------------------------------------- Name: Mark Liddell President CONSENTED TO THIS , 1997, BY: ------------------ TEXACO EXPLORATION AND PRODUCTION INC. By: ------------------------------------ Name: ------------------------------------ Title: ------------------------------------ 5 64 ESCROW AGREEMENT STATE OF LOUISIANA PARISH OF ORLEANS THIS ESCROW AGREEMENT ("Agreement") entered into this 11th of March, 1997, by and among the following parties: DLB OIL & GAS, INC., ("DLB"), a corporation doing business in the State of Louisiana, whose address is 1601 N.W. Expressway, Suite 700, Oklahoma City, Oklahoma 73118-1401; and TEXACO EXPLORATION AND PRODUCTION INC. ("TEPI"), whose address is Post Office Box 60252, New Orleans, Louisiana 70160; and THE CHASE MANHATTAN BANK, a national banking association whose address is 270 Park Avenue, New York, New York 10017 (the "Escrow Agent" or "Bank"). W I T N E S S E T H: I. DLB and TEPI have entered into that certain Purchase, Sale and Cooperation Agreement ("Purchase and Sale Agreement") dated March 11, 1997, wherein TEPI agreed to sell and DLB agreed to purchase, among other things, a portion of TEPI's interest in the West Cote Blanche Bay Field, St. Mary Parish, Louisiana. Simultaneously with the execution of the Purchase and Sale Agreement, DLB and TEPI have entered into that certain Assignment, Conveyance and Bill 1 65 of Sale ("Assignment"), dated March 11, 1997, effective January 1, 1997, which conveys to DLB a portion of TEPI's interest in State of Louisiana Lease 340 (the "Lease") in the West Cote Blanche Bay Field, St. Mary Parish, Louisiana, more particularly described on Exhibit "A" to such Assignment (the "Property"), a copy of which Assignment is attached hereto as Exhibit "A". The Purchase and Sale Agreement and the Assignment provide among other things that DLB shall assume and be primarily responsible for all liabilities and obligations with respect to plugging, replugging and abandoning any Wells whether or not covered by or under a Contract; the restoration of the Leases and any Well sites; and the proper removal, disposal, and abandonment of any fixtures which are included in the Assets, all in accordance with the terms and conditions of the Lease and all applicable federal, state and local governmental laws, rules and regulations, as more particularly set forth in the Purchase and Sale Agreement and Assignment ("Abandonment Obligation"). II. The Purchase and Sale Agreement further provides that DLB shall pay, or cause to be paid, certain funds into a special escrow account, styled "DLB West Cote Blanche Bay Escrow Account" ("Escrow Account"), to be used solely for the purpose of satisfying the Abandonment Obligations in accordance with this Agreement. TEPI and DLB, for valuable consideration and the mutual covenants and agreements herein contained, hereby agree as follows. 2 66 III. DLB and TEPI hereby agree and appoint Bank as escrow agent under this Agreement and said Bank accepts the appointment pursuant to the terms and conditions hereof, and may hereinafter sometimes be referred to as the "Escrow Agent." Upon execution of this Agreement by the parties hereto, the Escrow Agent shall establish the Escrow Account for the purpose set forth in this Agreement including the periodic deposit by DLB of funds into such Escrow Account in accordance with the terms and provisions of this Agreement. IV. DLB does, in order to secure the faithful compliance with the Abandonment Obligations, agree to pay, or cause to be paid, into the Escrow Account funds as follows: (1) At the First Closing as such term is defined in the Purchase and Sale Agreement, DLB shall make an initial deposit of ONE MILLION AND NO/100 DOLLARS ($1,000,000.00). (2) Thereafter, DLB shall make eighty-four (84) consecutive monthly deposits of EIGHTEEN THOUSAND, THREE HUNDRED, NINETY, AND 83/100 DOLLARS ($18,390.83) each, not later than the fifth day of each consecutive month. Said monthly payments to commence on or before the fifth day of the month immediately following the First Closing. (3) If DLB fails to plug and abandon the minimum number of wells DLB is obligated to plug and abandon during any year pursuant to Section VII of this Agreement, then DLB shall, within ten (10) days before the end of such year, deposit into the Escrow Account a sum of money equal to the product of (a) Forty Eight Thousand and No/100 Dollars ($48,000) times (b) the remainder of (i) the minimum number of wells DLB is obligated to plug and abandon during such year pursuant to Section VII of this Agreement less (ii) the number of wells actually plugged and abandoned by DLB during such year. The maximum amount DLB shall be obligated to deposit into the Escrow Account pursuant to this Section IV(3) for any year shall be $960,000. 3 67 All funds deposited into the Escrow Account, including interest accrued thereon, shall be received by the Escrow Agent and held for satisfaction of the Abandonment Obligations in accordance with the terms and provisions of this Agreement. V. All funds deposited with the Escrow Agent and credited to the Escrow Account shall be invested and reinvested in a manner consistent with and according to the Investment Policy annexed hereto as Exhibit "B", with the interest thereon and any gains realized with respect thereto to be accumulated and reinvested. The Chief Financial Officer of DLB shall direct the Escrow Agent regarding the investment direction of the funds in the Escrow Account in accordance with the terms and provisions of this Agreement. Except as hereinafter set forth, the Escrow Agent shall not be obligated to render any statements or notices of non-performance hereunder. Within thirty (30) days of the end of each calendar quarter during the term of the Agreement, commencing with the calendar quarter ending June 30, 1997, the Escrow Agent shall furnish to DLB and TEPI a statement of account with respect to the Escrow Account which shall contain the following: (1) a schedule of receipts and disbursements, if any, during such calendar quarter; (2) a statement of income and unrealized gains or losses during such calendar quarter; and (3) a schedule of all assets held by the Escrow Agent in the Escrow Account as of the last day of such calendar quarter. VI. In order to secure the faithful compliance with its Abandonment Obligations, DLB does hereby pledge, pursuant to and in accordance with the terms and provisions of the Security 4 68 Agreement and Assignment of Production Proceeds identified hereinbelow, unto and in favor of TEPI the Escrow Account and the funds deposited and to be deposited therein, together with all interest accrued thereon. DLB represents and warrants that the funds to be deposited into the Escrow Account shall be unencumbered and free and clear of all liens, encumbrances, security interests or other burdens. In order to further secure the faithful compliance with its Abandonment Obligations, DLB shall, at the First Closing (as defined in the Purchase and Sale Agreement), execute a "Security Agreement and Assignment of Production Proceeds" in the form of Exhibit "C" attached hereto, pursuant to which DLB shall grant certain security interests and make certain collateral assignments in favor of TEPI. VII. DLB agrees to plug and abandon a minimum number of wells located on the Property each year during the twenty (20) years following execution of this Agreement, commencing with the year ending March 11, 1998 as follows (the minimum number of wells for each such year being referred to herein as such year's "Minimum Requirement"): (a) the Minimum Requirement for the calendar year ended March 11, 1998, shall be twenty (20) wells. (b) the Minimum Requirement for the calendar year ended March 11, 1999, and for each successive calendar year until and including the calendar year ending March 11, 2017, shall be equal to the remainder of (i) twenty (20) wells less (ii) the number of wells plugged and abandoned by DLB in excess (if any) of the Minimum Requirement for the immediately preceding year. 5 69 DLB shall never have any obligation under this Agreement to plug and abandon more than twenty (20) wells in any calendar year and, in lieu of its obligation to plug and abandon a minimum number of wells pursuant to this Section VII, DLB may deposit in the Escrow Account a sum of money as provided in Section IV hereof. Notwithstanding the foregoing, this Agreement shall not be construed to limit or restrict in any way the Assumed Obligations as defined in the Purchase and Sale Agreement or DLB's obligation to plug and abandon wells to the extent required by the Assumed Obligations, the Purchase and Sale Agreement, the Assignment, the Lease, or other applicable provisions of state law. In order to illustrate the foregoing and by way of example only, if in a given calendar year (Year 1) DLB should plug and abandon twenty-five (25) wells, then in the immediately succeeding year (Year 2), DLB shall be obligated either to plug and abandon at least fifteen (15) wells or to deposit in the Escrow Account a sum of money equal to the product of Forty Eight Thousand and No/100 Dollars ($48,000) times the difference between (i) fifteen (15) wells and (ii) the number of wells actually plugged and abandoned in Year 2 (if less than fifteen (15)). If in Year 2 DLB should plug and abandon sixteen (16) wells, then in the next immediately succeeding calendar year (Year 3) DLB shall be obligated to either plug and abandon at least nineteen (19) wells or to deposit in the Escrow Account a sum of money equal to the product of Forty Eight Thousand and No/100 Dollars ($48,000) times the difference between (i) nineteen (19) wells and (ii) the number of wells actually plugged and abandoned during Year 3 (if less than nineteen (19)). 6 70 VIII. Simultaneous with the filing with the State Office of Conservation, DLB shall provide to TEPI a copy of the Plug and Abandonment Report of the Office of Conservation of the State of Louisiana with respect to each well or wells on the Property plugged and abandoned by DLB, evidencing that the well or wells have been satisfactorily plugged and abandoned in accordance with all appropriate governmental requirements including all amendments or modifications thereto. IX. DLB shall not have the right to withdraw any funds from the Escrow Account for the first twelve (12) years of the term of this Agreement, and, thereafter, may withdraw only up to NINE HUNDRED SIXTY THOUSAND AND NO/100 DOLLARS ($960,000.00) per calendar year, provided DLB first furnishes the Escrow Agent and TEPI with invoices pertaining to the plugging, abandonment or restoration operation, as applicable, and proof of payment of said invoices and DLB has not defaulted under the terms of this Agreement. The parties hereto agree that if any time after the expiration of the fifth year of this Agreement the parties mutually agree that the amounts deposited in the Escrow Account exceed the amount the parties mutually agree represents the net present value of the then existing Abandonment Obligations then the parties will, in good faith, renegotiate the future payments required of DLB under this Agreement (see Paragraph IV(2)), but not the obligation to plug 20 wells per year as per Section VII. 7 71 X. Following two years after the Effective Date (as defined in the Plan) of the Plan (as defined in the Purchase and Sale Agreement), TEPI may withdraw the funds deposited in the Escrow Account if and only after (i) three (3) Events of Default as defined hereinbelow have occurred subsequent to such two year period, or (ii) in the event of DLB's failure, insolvency, application for adjudication in bankruptcy, the application by or against DLB for assignment, composition, extension or receivership, or the foreclosure on or seizure of all or part of the Property. It shall be lawful for, and DLB does hereby authorize, the Escrow Agent to immediately assign, transfer and deliver the whole of any of the amounts herein pledged and deposited, without recourse to judicial proceedings and without either demand, appraisal, advertisement or notice of any kind, all of which are hereby expressly waived, to TEPI at such time as TEPI has furnished the Escrow Agent a written statement executed by a duly authorized officer, agent or attorney-in-fact setting forth the reason for the direction to distribute. TEPI's right to withdraw funds from the Escrow Account as herein provided shall be subject to and subordinate to the Escrow Agent's right to collect its fees by direct debit as more fully set forth in Section XII(j) hereof. An "Event of Default" shall occur if DLB fails to comply with any obligations arising under this Agreement within (30) days of the date that the obligation or obligations arise. No notice of default or placing in default by TEPI shall be required. The pledge and security interest granted to TEPI by DLB pursuant to Section VI hereof shall, at all times, remain valid and enforceable and TEPI may, at any time, but subject to Section 8 72 X hereof, exercise any and all rights and remedies available to TEPI by operation of law pursuant to the terms and conditions of this Escrow Agreement, the "Security Agreement and Assignment of Production Proceeds" more fully described in Section VI hereof or as otherwise provided for under law. XI. TEPI shall have the right, at its own costs and expense, following reasonable notice in writing and during normal business hours, to conduct an annual audit of DLB's records relating to the Abandonment Obligations in order to satisfy itself that DLB has complied with all of its obligations under this Agreement and with the Abandonment Obligations. XII. The following shall govern the rights, privileges, immunities and liabilities of Escrow Agent: (a) Depository Only. Escrow Agent is not a party to and is not bound by or charged with notice of any agreement out of which this Escrow Account may arise and acts hereunder as depository only. (b) Disbursals. Escrow Agent shall disburse assets in the Escrow Account only pursuant to the terms of the Agreement and any such disbursements shall relieve the Escrow Agent of any liability or responsibility whatsoever in connection with acting as Escrow Agent with respect to such assets (except any liability or responsibility attributable to the Escrow Agent's own negligence or willful misconduct). (c) Actions Protected. Escrow Agent shall be protected absolutely in acting on any written notice, request, waiver, consent, certificate, receipt, authorization, power of attorney or other paper or document provided by TEPI or DLB which Escrow Agent in good faith believes to be genuine and what it purports to be. Escrow Agent shall not be obligated to make any inquiry as to the 9 73 authority, capacity, existence or identity of any person purporting to give such notice in other document. (d) Good Faith Actions. Escrow Agent shall not be personally liable for anything which it may do or refrain from doing in connection therewith, provided that it acts in good faith and in the exercise of its own best judgment. (e) Legal Counsel. Escrow Agent may consult with legal counsel in the event of any dispute or questions as to the construction of any of the provisions of this Agreement or its duties hereunder and it shall incur no liability and shall be fully protected in acting in accordance with the opinion and instructions of its counsel. DLB agrees to pay any legal fees which may be incurred by the Escrow Agent should it consult with legal counsel for the aforementioned purposes. (f) Event of Dispute. In the event of any disagreement involving the parties resulting in adverse claims or demands being made in connection with the matters covered by this Agreement or in the event that Escrow Agent, in good faith, shall be in doubt as to what action it should take hereunder, Escrow Agent shall follow TEPI's instructions. (g) Resignation. The Escrow Agent may at any time resign hereunder by giving written notice of its resignation to the other parties hereto, at their address set forth herein, at least thirty (30) business days prior to the date specified for such resignation to take effect, and upon the effective date of such resignation, the escrowed funds hereunder shall be delivered to such person as may be designated in writing by such other parties hereto executing this Agreement, whereupon all the Escrow Agent's obligations hereunder shall cease and terminate. The Escrow Agent's sole responsibility until such termination shall be to keep safely all escrowed funds and to deliver the same to a person designated by the other parties hereto or in accordance with the directions of a final order or judgment of a court of competent jurisdiction. (h) Indemnification. DLB agrees to indemnify, defend and hold the Escrow Agent harmless from and against any and all loss, damage, tax, liability and expense that may be incurred by the Escrow Agent arising out of or in connection with its acceptance 10 74 or appointments as Escrow Agent hereunder, including costs and expenses of defending itself against any claim or liability in connection with its performance hereunder, except as same arise from Escrow Agent's gross negligence or willful misconduct. (i) No Taxes. DLB warrants to the Escrow Agent that there are no federal, state or local tax liabilities or filing requirements whatsoever concerning the Escrow Agent's actions contemplated hereunder, and warrants and represents to the Escrow Agent that the Escrow Agent has no duty to withhold or file any report of any tax liability under any federal or state income tax, local or state property tax, local or state sales or use taxes, or any other tax by any taxing authority. DLB agrees to indemnify the Escrow Agent fully for any tax liability, penalties or interest incurred by the Escrow Agent arising hereunder and agrees to pay in full any such tax liability together with penalty and interest if any tax liability is ultimately assessed against the Escrow Agent for any reason as a result of its action hereunder (except for the Escrow Agent's individual income tax liability arising from its income fees). (j) Discharge. Escrow Agent, after having delivered all of the documents, instruments, checks, certificates or agreements pursuant to the terms of the Agreement, shall be discharged from any further obligation hereunder. (k) Fees. Escrow Agent's fees shall be charged in accordance with its published schedule of fees which is attached hereto as Exhibit "D." The Escrow Agent shall be reimbursed for its fees from income earned on the investments and is authorized to collect said fees by direct debit. (l) Acceptance. The Escrow Agent hereby accepts the appointment hereunder and acknowledges establishment of the Escrow Account and agrees to pledge and hold in pledge all funds deposited in the Escrow Account in accordance with the terms of this Agreement. XIII. All notices and communications hereunder shall be in writing and shall be deemed to be duly given if sent by registered or certified mail, return receipt requested, to the respective 11 75 address set forth herein. The Escrow Agent shall not be charged with knowledge of any fact, including but not limited to, performance or non-performance of any condition, unless it has actually received written notice thereof from one of the parties thereto or their authorized representative clearly referring to this Agreement. Addresses for notice or communications are as follows: Texaco Exploration and DLB Oil & Gas, Inc. Production Inc. 1601 N.W. Expressway P.O. Box 60252 Suite 700 New Orleans, LA 70160 Oklahoma City, Oklahoma 73118-1401 Attn: Land Manager Attn: Mark Liddell Telephone No: Telephone No.:(405) 848-8808 Facsimile No: Facsimile No.:(405) 848-9449 The Chase Manhattan Bank 270 Park Avenue, 20th Floor New York, New York 10017 Attn: _____________________ Telephone No: (212) 270-7129 Facsimile No: (212) ________ Any of the above addresses may be changed from time to time provided appropriate written notice is given to all other parties. XIV. Neither the existence of this Agreement nor any of the terms or conditions contained herein shall amend, revise or in any way modify the obligations, responsibilities and indemnities owed by DLB in and under the Purchase and Sale Agreement and the Assignment, it being the intent of the parties that this Agreement shall supplement the Purchase and Sale Agreement and the Assignment and shall constitute a covenant which shall run with the Property. 12 76 XV. After December 31, 2016, DLB shall have no further obligations to deposit monies into the Escrow Account or, in lieu thereof, to plug and abandon at least twenty (20) wells per calendar year pursuant to the respective provisions of Section IV and VII hereof. Expiration of this twenty (20) year period shall not in any way (i) relieve DLB from any of its liabilities and obligations under the Purchase and Sale Agreement, the Assignment, the Lease or with respect to the Abandonment Obligations or (ii) result in a release of funds to DLB, except as otherwise may be provided herein. XVI. This Agreement may not be changed, altered, modified or amended except by instrument in writing executed by all parties hereto. This Agreement shall be construed, governed and enforced in accordance with the laws of the State of Louisiana and be binding upon and inure to the benefit of their respective heirs, legal representatives, and successors. This Agreement shall not be assignable by the Escrow Agent, whether in whole or in part without the express written consent of the other parties to this Agreement. This Agreement shall not be assignable by either DLB or TEPI, whether in whole or in part, without the express written consent of the other. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original whether or not signed by all the parties hereto; provided, however, this Agreement shall not become effective until this instrument or a counterpart hereof has been executed by each of the parties hereto and delivered to the Escrow Agent. 13 77 XVII. Each party hereto, except Escrow Agent, shall provide the Escrow Agent with its Employer Identification Number as assigned by the Internal Revenue Service. Additionally, each party shall complete and return to the Escrow Agent any and all tax forms or reports required to be maintained or obtained by the Escrow Agent. XVIII. Unless otherwise agreed to in writing by the parties hereto, this Agreement shall terminate on the earlier of (a) the fulfillment of all Abandonment Obligations by DLB or (b) by the mutual agreement of DLB and TEPI after March 11, 2017. 14 78 IN WITNESS WHEREOF, this Escrow Agreement has been executed on the day and year first written above. WITNESSES: DLB OIL & GAS, INC. By: - ----------------------------- ---------------------------------- Title: ------------------------------- - ----------------------------- Taxpayer ID# ------------------------- TEXACO EXPLORATION AND PRODUCTION INC. By: - ----------------------------- ---------------------------------- Title: ------------------------------- - ----------------------------- Taxpayer ID# ------------------------- THE CHASE MANHATTAN BANK By: - ----------------------------- ---------------------------------- Title: ------------------------------- - ----------------------------- Taxpayer ID# ------------------------- 15 79 STATE OF LOUISIANA PARISH OF ORLEANS Before me, _________________________, Notary Public, on this day personally appeared, Mark Liddell, known to me to be the person whose name is subscribed to the foregoing instrument, and known to me to be President, DLB Oil & Gas, Inc., a Oklahoma corporation, and acknowledged to me that he executed said instrument for the purposes and consideration therein expressed, as the act of said corporation. Given under my hand and official seal on this ____ day of __________, 1997, ----------------------------- Notary Public Parish of Orleans State of Louisiana My Commission Expires: - --------------- 16 80 STATE OF LOUISIANA PARISH OF ORLEANS Before me, _________________________, Notary Public, on this day personally appeared, __________________, known to me to be the person whose name is subscribed to the foregoing instrument, and known to me to be Attorney- in-Fact of Texaco Exploration and Production Inc., a Delaware corporation, and acknowledged to me that he executed said instrument for the purposes and consideration therein expressed, as the act of said corporation. Given under my hand and official seal on this ____ day of __________, 1997, ----------------------------- Notary Public Parish of Orleans State of Louisiana My Commission Expires: - --------------- 17 81 STATE OF ---------- COUNTY OF --------- Before me, _________________________, Notary Public, on this day personally appeared, __________________, known to me to be the person whose name is subscribed to the foregoing instrument, and known to me to be ________________, of The Chase Manhattan Bank, and acknowledged to me that he executed said instrument for the purposes and consideration therein expressed, as the act of said banking institution. Given under my hand and official seal on this ____ day of __________, 1997, ----------------------------- Notary Public in and to the State of ________________ County of ______________ My Commission Expires: - --------------- 18 82 CONTRACTS WEST COTE BLANCHE BAY ST. MARY AND IBERIA PARISH, LOUISIANA 63653 Sublease from William T. Burton to The Texas Company, dated February 15, 1936, recorded in Volume 126, Page 188, Entry No. 49,235, Iberia Parish, Louisiana, and Volume 5-F, Page 416, Entry No. 60,211, St. Mary Parish, Louisiana. 63653 Judgment, dated September 3, 1992, between Sierra Club Legal Defense Fund and Texaco Exploration and Production Inc. 63653 Four Letter Agreements, dated July 1, 1995, between Texaco Exploration and Production Inc. et al and Benton Oil and Gas Company of Louisiana et al relating to, respectively: a) Coil/Condensate Treating, Handling and Storage Facilities b) Compressor Facility c) Disposal Facility d) Dehydration Facility 63653 Several Compromise Agreements, dated March 1, 1995, between Texaco Exploration and Production Inc. and various Overriding Royalty Owners. These instruments were recorded in both St. Mary and Iberia Parishes, Louisiana (see attached list). 63653-38R Compromise Agreement, dated October 15, 1981, between Raymond E. Hankamer et al and Texaco Inc., recorded in Volume 24-U, Page 34, Entry No. 194,130, St. Mary Parish, Louisiana. 63653-40L Operating Agreement, dated July 1, 1987, between Texaco Inc., Operator, and Pelham Partners Ltd., Non- Operator, recorded in Volume 37-J, Page 255, Entry No. 246,862, St. Mary Parish, Louisiana. 902137 Global Settlement Agreement, dated February 1, 1994, between Texaco Exploration and Production Inc. and the State of Louisiana et al, recorded in Volume 36-W, Entry No. 244,947, St. Mary Parish, and Volume 1071, Entry No. 94-2838, Iberia Parish, Louisiana. 902137 Several Reservation of Claims agreements between Texaco Inc. et al and various Overriding Royalty Owners (see attached list). 83 WEST COTE BLANCHE BAY ST. MARY AND IBERIA PARISHES, LOUISIANA COMPROMISE AGREEMENT DATED MARCH 1, 1995 BETWEEN TEXACO EXPLORATION AND PRODUCTION INC., ET AL AND THE FOLLOWING PARTIES:
RECORDING -------------------------------------------------------------- ST. MARY PARISH IBERIA PARISH -------------------------------------------------------------- PARTIES BOOK PAGE ENTRY BOOK ENTRY ------- ---- ---- ----- ---- ----- William E. Shaddock, Jr., et al 37-V 489 248,427 1090 95-2408 Christopher J. Daniel 38-S 106 251,694 1108 96-910 Joel Wolfe Cowand 38-S 91 251,693 1108 96-909 Janette Gray McLendon Moss 37-X 653 248,699 1091 95-3074 Nathaniel P. Phillips, Jr. 38-R 598 251,680 1107 96-866 American Association of Petroleum 37-X 668 248,700 1091 95-3075 Geologists Foundation, et al Amoco Production Company 37-X 636 248,698 1091 95-3076 Irma A. Erickson Trust 38-S 275 251,704 1108 96-880 Mildred B. Heskett 38-S 370 251,710 1108 96-886 Succession of Gay Noe McLendon 38-S 320 251,707 1108 96-883 Charlotte Hillyer Dupuy 38-S 305 251,706 1108 96-882 Karen Y. Elliott 38-S 415 251,713 1108 96-889 Sabine Louisiana Royalty Trust 38-S 355 251,709 1108 96-885 Leslie Claire Newman Trust 38-S 400 251,712 1108 96-888 John D. Wolfe 38-S 227 251,702 1108 96-918 Gladys J. Averill 38-R 629 251,682 1108 96-898 Bryan G. Allen 38-M 369 251,082 1107 96-867 William A. Wilkins, Jr. 38-S 385 251,711 1108 96-887 Succession of Seymour Weiss, et al 38-S 335 251,708 1108 96-884 Charlotte Angus Alexander 38-S 454 251,715 1108 96-891 Robin F. Scully 38-S 167 251,698 1108 96-914 Mary Lois McIlwain 38-S 469 251,716 1108 96-892 Ronald T. Monsour, et al 38-M 446 251,087 1107 96-872 Linda Yates Nanney 38-M 401 251,084 1107 96-869 George W. Schneider, III 38-M 338 251,080 1107 96-864 Susan Schneider King 38-S 529 251,720 1108 96-896 Kathryn Schneider King 38-M 431 251,086 1107 96-871 Walter J. Oliphant 38-M 353 251,081 1107 96-865 William Scully 38-S 197 251,700 1108 96-916 Haywood H. Hillyer, Jr. 38-S 484 251,717 1108 96-893 Steven Murray Schneider 38-S 514 251,719 1108 96-895 The Bayou Country Trust 38-R 614 251,681 1108 96-897 Alwyn P. King, Jr., Family Trust 38-S 212 251,701 1108 96-917 Mary Louise Warren 38-S 121 251,695 1108 96-911 A and J Trust, et al 38-M 541 251,093 1108 96-878 Jennifer J. Jasper 38-S 499 251,718 1108 96-894 William S. Childress, et al 38-S 242 251,703 1108 96-879 Morris W. Newman 38-S 290 251,705 1108 96-881 Ray C. Fish Foundation 38-S 182 251,699 1108 96-915
1 84
RECORDING -------------------------------------------------------------- ST. MARY PARISH IBERIA PARISH -------------------------------------------------------------- PARTIES BOOK PAGE ENTRY BOOK ENTRY ------- ---- ---- ----- ---- ----- Robert R. Wolfe 38-R 674 251,685 1108 96-901 Phantor, Ltd. 38-S 61 251,691 1108 96-907 Joseph S. Glickhauf, Jr. 38-M 461 251,088 1107 96-873 John Glassell, III Trust 38-M 477 251,089 1107 96-874 Adele M. Wolfe 38-S 16 251,688 1108 96-904 Suzanne Wilkins Kearney 38-R 659 251,684 1108 96-900 Catherine M. Daniel 38-S 137 251,696 1108 96-912 Barbara Fish Daniel Louisiana 38-S 152 251,697 1108 96-913 Trust Agency Mrs. Bobby P. Babcock 38-M 509 251,091 1107 96-876 Mary E. Hodge Fleming 38-M 493 251,090 1107 96-875 Susan Y. Dulske 38-M 525 251,092 1107 96-877 Marsha Fleming Eatherton 38-S 76 251,692 1108 96-908 Anna Gray McLendon 38-S 1 251,687 1108 96-903 Marie Minette Wolfe 38-R 689 251,686 1108 96-902 H. Brad Fleming, Jr. 38-R 644 251,613 1108 96-899 Estate of Marjorie R. Holdar 38-M 385 251,083 1107 96-868 Amy Scott McKenzie 38-S 31 251,689 1108 96-905 J. Carol Jackson 38-S 46 251,690 1108 96-906 Catherine J. McGowen 38-M 323 251,079 1107 96-863 John F. Bricker 39-A 699 253,130 1117 96-5993 Lyle H. Harvey 39-B 1 253,131 1117 96-5994 E. H. Jackson, III N/A N/A James A. Noe, Jr., et al 38-S 430 251,714 1108 96-890
2 85 March 11, 1997 Texaco Exploration & Production Inc. 400 Poydras Street New Orleans, Louisiana 70130 RE: East Hackberry Field, Cameron Parish, Louisiana Reference is made to Section 7.1(b)(5) of that certain Purchase, Sale and Cooperation Agreement by and between Texaco Exploration and Production Inc. ("TEPI") and DLB Oil & Gas, Inc. ("DLB") dated March 11, 1997, whereby, as additional consideration for the execution of said agreement, as of the "Effective Date" of the Second Amended Plan of Reorganization dated March 11, 1997, as may be modified or amended (the "Plan"), DLB hereby irrevocably and unconditionally guarantees to TEPI the performance by WRT Energy Corporation, as reorganized under the Plan, of all plugging and abandonment of wells located on the East Hackberry Field, Cameron Parish, Louisiana, State Lease No. 50, as the same may be affected by the settlement outlined in that certain letter and term sheet dated March 4, 1997, a copy of which is attached hereto as Exhibit A and is incorporated herein by reference. DLB hereby waives any notice of the incurring or accruing at any time of any of the liabilities or obligations described above, waives any and all presentment, demand, protests, notice of nonperformance, nonpayment or other default with respect to any of the liabilities and waives all pleas or claims of division or discussion. This agreement shall be governed by and construed and enforced in accordance with the laws of the State of Louisiana. GUARANTOR: DLB OIL & GAS, INC. -------------------------------------- Name: --------------------------------- Title: -------------------------------- Tax ID: ------------------------------- 86 RECEIPT FOR THE CLAIM Texaco Exploration and Production Inc. does hereby acknowledge receipt of $_________________ from DLB Oil & Gas, Inc. as payment in full for the sale, assignment and transfer of the Claim pursuant to the Purchase, Sale and Cooperation Agreement executed in full as of March 11, 1997 between Texaco Exploration and Production Inc. and DLB Oil & Gas, Inc. Dated: March 12, 1997 TEXACO EXPLORATION AND PRODUCTION INC. By: ------------------------------------------ Name: ----------------------------------- Title: ---------------------------------- Date: ----------------------------------- 87 ASSIGNMENT, CONVEYANCE AND BILL OF SALE STATE OF LOUISIANA PARISH OF ST. MARY KNOW ALL MEN BY THESE PRESENTS, that TEXACO EXPLORATION AND PRODUCTION INC., a Delaware corporation, herein represented by A.N. Duplantis, its duly authorized Attorney in Fact, whose address is P. O. Box 60252, New Orleans, Louisiana 70160, Federal Tax ID No. 51-0265713, hereinafter referred to as "Assignor", for and in consideration of the sum of TEN AND NO/100 DOLLARS ($10.00), and other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged and full acquittance granted therefor, has granted, sold, conveyed and delivered and does hereby grant, sell, convey and deliver unto DLB Oil & Gas, Inc., an Oklahoma corporation, herein represented by Mark Liddell, its President, whose address is 1601 N. W. Expressway, Suite 700, Oklahoma City, Oklahoma 73118-1401, Federal Tax ID No. 73-1358299, hereinafter referred to as "Assignee", all of Assignor's right, title and interest in, to and under the following properties, assets, rights and interests: 1. Except as constitutes Excluded Assets, (as defined in the Purchase, Sale and Cooperation Agreement between Assignor and Assignee, fully executed on March 11, 1997, but effective as of January 1, 1997 ["Agreement"]), that certain oil, gas and mineral lease and other interests owned by Assignor in State of Louisiana Lease No. 340 by and between the State of Louisiana as grantor and William T. Burton as grantee, dated February 7, 1936, and recorded at Vol. 5-F Page 387, Entry No. 60,191, St. Mary Parish, and Vol. 126, Page 185, Entry No. 49,234, Iberia Parish, described on Exhibit "A" attached hereto and incorporated herein by reference, INSOFAR AND ONLY INSOFAR AS such lease pertains to the lands and depths described in said Exhibit "A" and reflected on the plat also made a part of said Exhibit "A" hereinafter referred to individually and collectively as "Lease." 2. Except as constitutes Excluded Assets, (as defined in the Agreement), copies of all of the following insofar as the same are attributable to, appurtenant to, incidental to, or used for the operation of the Assets: (i) all unitization, communitization and pooling designations, declarations, agreements and orders covering the Assets, or any portion thereof, and the units and pooled or communitized areas created thereby; (ii) all lease files, land files, well files, gas and oil sales contract files, gas processing files, division order files, abstracts, title opinions, core data books, well utility books, field production/gauge books, water analysis files, directional survey books, the Ivanhoe shorebase facility well and log files, the Production Analyst Production Database, the bottom hole pressure books, the seismic data received from Western Geophysical unprocessed by Assignor relating to the Lease Page 1 88 and all other books, files and records, information and data, relating to the Assets (excluding, however, all legal files, attorney-client communications or attorney work product, records and documents subject to confidentiality provisions, auditor's reports, reserve information and reports, economic runs, interpretative structure maps, correlated logs, and any interpretive seismic, geochemical, and geophysical information and data, or other proprietary information relating thereto), hereinafter referred to individually and collectively as the "Non Excluded Material". 3. Except as constitutes Excluded Assets, (as defined in the Agreement), all of Assignor's right, title and interest in and to those contracts and other agreements listed on Exhibit "B" attached hereto and incorporated herein by referenceINSOFAR AND ONLY INSOFAR AS the same relate to the Lease, the Equipment and the Wells, hereinafter referred to individually and collectively as the "Contracts." 4. Except as constitutes Excluded Assets, (as defined in the Agreement), all of Assignor's right, title and interest in and to all Wells, equipment, facilities, including but not limited to tubing, casing, wellheads, pumping units, production units, compressors, valves, meters, flow lines, tanks, heaters, separators, dehydrators, pumps and injection units, disposal facilities, platforms, and the like, which are located on the Lease and which are or have been used solely and exclusively in connection with the production or treatment of Hydrocarbons (as defined in the Agreement) from the Lease or the Wells, and all wellbores and the tubing and equipment located therein, hereinafter referred to individually and collectively as "Equipment." 5. Except as constitutes Excluded Assets, (as defined in the Agreement), all rights, titles and interests owned by Assignor in all oil and gas wells and injection and disposal wells located on the Lease, or used or useful in connection therewith, or on lands pooled or unitized therewith, or owned by Assignor by virtue of any operating rights created by or under any Contract, including, but not limited to, those which are active or inactive, productive or non-productive, plugged and abandoned or temporarily abandoned, hereinafter referred to individually and collectively as "Wells." The Leases, the Non Excluded Material, the Contracts, the Equipment and the Wells referred to above are hereinafter sometimes referred to individually and collectively in the singular as "Assets." However, this Assignment, Conveyance and Bill of Sale is made and accepted by Assignee subject to the following additional exceptions, reservations, covenants, conditions, agreements and stipulations: 1. This Assignment, Conveyance and Bill of Sale is subject to the provisions of that certain Purchase, Sale and Cooperation Agreement between Assignor and Assignee, fully executed on March 11, 1997, but effective as of January 1, 1997. Page 2 89 2. This Assignment, Conveyance and Bill of Sale is subject to the provisions of that certain Escrow Agreement dated March 11, 1997, by and among Assignor, Assignee and The Chase Manhattan Bank, a complete copy of which is recorded in the records of the parishes of St. Mary and Iberia, Louisiana. 3. This Assignment, Conveyance and Bill of Sale is subject to the provisions of that certain Security Agreement and Assignment of Production Proceeds dated March 11, 1997, by and between Assignor and Assignee. 4. Assignee hereby assumes the Assumed Obligations (as defined in the Agreement) and agrees to hold Assignor free and harmless from any and all liability therefor, with the exceptions contained, and as more fully described, in the Agreement. 5. As more fully described in the Agreement, Assignor reserves on behalf of its subsidiaries, the preferential right at any time and from time to time to purchase all oil and other liquid hydrocarbons produced and saved from the Assets. 6. Global Settlement. This Assignment, Conveyance and Bill of Sale is made subject to that certain Global Settlement Agreement by and among Texaco Inc., The Louisiana Land and Exploration Company, and the State of Louisiana ("Global Settlement"), dated February 22, 1994, a complete copy of which is recorded at Vol. 36-W, Entry No. 244,947 in the records of St. Mary Parish, Louisiana, and Vol. 1071, Entry No. 94-2838, in the records of Iberia Parish, Louisiana. Assignee hereby acknowledges receipt of a copy of the Global Settlement. (a) Unless otherwise indicated, capitalized terms used under this Paragraph 6 have the meaning given them in the Global Settlement, or if not defined in the Global Settlement, as defined in the Agreement. (b) Assignee acknowledges that the Lease is subject to the Global Settlement and agrees to comply with and assume all obligations arising from and after the Effective Date under, or in any manner related to or created and/or recognized by the Global Settlement insofar only as the same relate to the Lease and the Wells. (c) Assignee acknowledges that the Lease is subject to the Global Settlement and agrees to notify Assignor in writing within seven (7) days after its receipt of any material communications outside of the ordinary course of business from the Louisiana State Mineral Board ("SMB") relating in any manner to the Assets. Additionally, except as provided herein with respect to Force Majeure events and Potential Suspending Events, Assignee agrees to give Assignor thirty (30) days written notice prior to initiating any material communication outside of the ordinary course of business and/or docketing of any such matters with the SMB and/or its technical staff relating in any manner to the obligations assumed under Page 3 90 the Global Settlement and the Lease and the Wells; and Assignee agrees that Assignor, in Assignor's sole discretion, shall have the right in cooperation with Assignee to handle the proposed communication, docketing or presentation of all such matters. Notice required by this paragraph shall be directed to the attention of Assignor's New Orleans Land Manager at the mailing address Post Office Box 60252, New Orleans, Louisiana 70160. (d) Notwithstanding anything to the contrary stated above, but except as otherwise provided in the Agreement, Assignee shall not assign, sublease, farmout, convey, transfer, alienate, mortgage, hypothecate, pledge, or otherwise transfer or encumber the rights and interest that it is acquiring hereunder (in whole or in part) without prior written consent of Assignor, which shall not be unreasonably withheld. Assignor shall have the right to review any further conveyance in whole or in part, and any proposed conveyance contemplated herein. If Assignor does provide its consent to such transaction, Assignor's consent shall not have the effect of waiving this limitation with respect to any future or subsequent transaction(s). Except as provided in the Agreement, every transaction that is made without Assignor's prior written consent shall be void ab initio; and, even if Assignor's prior written consent is obtained, the transaction shall be void unless it requires that any future or subsequent transaction(s) require Assignor's prior written consent as provided herein. Further, Assignee is required to furnish Assignor a copy of any conveyance within five (5) days of execution of such conveyance. (e) Future transactions (including, but not limited to, those transactions identified in subsection (d) of this Paragraph 6 above), shall be void unless they are specifically made subject to this Assignment, Conveyance and Bill of Sale and the Global Settlement and the Burton Sublease, and unless any future successor(s) in interest to the rights (in whole or in part) acquired by Assignee hereunder assumes the obligations of Assignee hereunder; provided, however, that any such transaction shall not relieve Assignor of its previously incurred obligations to Assignee hereunder without Assignee's express written consent. (f) This assignment is made subject to the entirety of the Global Settlement, including, but not limited to the release obligations under Attachment "B" thereof. Assignee recognizes that the rights acquired hereunder may be the subject of a release in favor of the State of Louisiana, and that such a release may either be mandatory under the terms of Attachment "B" (where there is no discretion as to which acreage is the subject of a release) or discretionary under the terms of Attachment "B" (where there is some discretion to select the acreage that is the subject of a release). In the event of a release under the terms of Attachment "B", Assignor and Assignee shall cooperate to achieve a pro rata release of acreage or other mutually acceptable designation of acreage which shall be released. In the event of a release by Assignor (whether mandatory or discretionary) pursuant to the terms of Attachment "B" that affects the rights acquired by Assignee Page 4 91 hereunder (in whole or in part), ASSIGNEE SHALL HAVE NO RIGHTS, CLAIMS OR CAUSES OF ACTION AGAINST ASSIGNOR WHATSOEVER. (g) Assignor shall retain sole responsibility for the completion of the reports required under Attachment "B" of the Global Settlement and the maintenance and retention of any records, data, information, and documents relating to the affected acreage necessary for the completion of such reports, unless and until the Lease, or any portion thereof, is designated by the State Mineral Board as "Nonproducing State Lease Acreage" within the meaning of Attachment "B" of the Global Settlement. If the Lease, or any part thereof, is so designated by the State Mineral Board, Assignee shall thereupon assume sole responsibility for the completion of the reports required under Attachment "B" with respect to the Lease, and the maintenance and retention of any records, data, information and documents relating to the affected acreage necessary for the completion of such reports. (h) Except as otherwise provided in this Assignment, Conveyance and Bill of Sale, the assignment is made subject to the entirety of the Global Settlement, including, but not limited to, Section XI of Attachment "C". (i) Assignee, its affiliate(s) or subsidiary(ies), shall provide separate written notices to Assignor's New Orleans Land Manager and Comptroller's Department at the mailing address hereinabove set forth in subsection (c) of this Paragraph 6, within ten (10) days after executing an agreement under which an Affiliate of Assignor (including, but not limited to Texaco Trading and Transportation Inc., Texaco Gas Marketing Inc., Texaco Natural Gas Inc. and Bridgeline Gas Distribution LLC) or of Assignee becomes a purchaser of Hydrocarbons produced from the acreage affected by this Assignment, Conveyance and Bill of Sale. (j) Assignor shall have the right, at its sole option, to calculate and pay royalties to the State of Louisiana and any other royalty or overriding royalty owner under the terms of the agreements listed in subsection (e) of this Paragraph 6, below, attributable to Assignee's interest. If Assignor has agreed to pay royalty (or overriding royalty under the Hankamer Compromise) on hydrocarbons produced hereunder and if, as a result of Assignee's failure to comply with any provision of Attachment "C" or subsection (i) of this Paragraph 6 above, Assignee or Assignor fails to pay, or fails to cause to be paid, royalty due on such production in accordance with the terms of Attachment "C" (or the overriding royalty under the Hankamer Compromise), Assignee shall hold harmless and indemnify Assignor from and against each and every claim and liability, directly and indirectly, for any and all damages, penalties, attorneys fees and interest which result from the failure to comply. (k) Assignor makes no representation with respect to the tax effects or implications arising from the fact that the Lease hereunder is subject to the Global Settlement. Page 5 92 (l) In addition, Assignee agrees upon the execution of this Assignment, Conveyance and Bill of Sale to comply with, and this Assignment, Conveyance and Bill of Sale shall be specifically subject to, the provisions and obligations stated in the following agreements (as amended or as may, from time to time, be amended) insofar and only insofar as the same relate to the Lease and the Wells: 1) State Lease No. 340 dated February 7, 1936, granted by the State of Louisiana to W. T. Burton. 2) Sublease dated February 15, 1936, executed by W. T. Burton and The Texas Company (the "Burton Sublease"). 3) Compromise Agreement dated effective October 15, 1981, executed by Raymond E. Hankamer et al and Texaco Inc. as amended by Agreement with the overriding royalty owners dated effective March 1, 1995 or otherwise ("Hankamer Compromise"). 4) Agreement with the overriding royalty owners dated February 22, 1994. (m) Assignee acknowledges that it is aware that the Assets are subject to certain overriding royalties (in addition to lessor's retained royalty) which burden the Lease. Assignor has completed negotiations with certain overriding royalty owners and is currently engaged in negotiations with other overriding royalty owners in regard to the method of calculating their overriding royalty required by the Hankamer Compromise. This Assignment, Conveyance and Bill of Sale shall be subject to the provisions of any agreement reached by Assignor with these overriding royalty owners. Assignor hereby agrees to provide Assignee with copies of those agreements affecting the payment of royalties on acreage subject to this Assignment, Conveyance and Bill of Sale, which have been entered into with the royalty owners (provided Assignor is not contractually restricted from providing such agreements), and also to provide Assignee with any future agreements affecting the payment of royalties on acreage subject to this Assignment, Conveyance and Bill of Sale, entered into between Assignor and the royalty owners, provided Assignor is not contractually restricted from providing such agreements. (n) Notwithstanding the above, Assignee shall provide Assignor written notice within forty-eight (48) hours (exclusive of Saturday, Sunday and Federal holidays) after the occurrence of a Force Majeure event or a Potential Suspending Event as specified in subsection (c) of this Paragraph 6 above. Assignee agrees that Assignor, in Assignor's sole discretion, shall have the right in cooperation with Assignee to handle the communication, docketing and/or presentation to the SMB of the Force Majeure or Potential Suspending Event. Page 6 93 (o) Without limiting in any way Assignor's rights to inspect pursuant to any other contractual relationship between Assignor and Assignee, upon notice to Assignee, Assignor shall have access to the Assets for the express purpose of visually inspecting the Assets for verification that Assignee is complying with all contractual obligations. TO HAVE AND TO HOLD the Assets, together with all and singular the rights, privileges and appurtenances in anywise belonging thereto, unto Assignee, its successors and assigns forever, pursuant to and subject to all of the terms and conditions set forth in this Assignment, Conveyance and Bill of Sale. This Assignment, Conveyance and Bill of Sale shall be effective January 1, 1997, 7:00 A.M., local time ("Effective Date"). All the terms and provisions of this Assignment, Conveyance and Bill of Sale are hereby expressly made subject to all federal, state, and local laws and to all orders, rules, regulations and standards issued thereunder by all duly constituted political subdivisions and agencies having jurisdiction. THIS ASSIGNMENT, CONVEYANCE AND BILL OF SALE IS EXECUTED WITHOUT, AND ASSIGNOR DOES NOT MAKE ANY, REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR IMPLIED, AS TO TITLE OR THE CONDITION OR STATE OF REPAIR OF THE ASSETS, THEIR VALUE, QUALITY , MERCHANTABILITY, SUITABILITY OR FITNESS FOR ANY USES OR PURPOSES, NOT AS TO THE CURRENT VOLUME, NATURE, QUALITY, CLASSIFICATION, OR VALUE OF THE OIL, GAS OR OTHER MINERAL RESERVES THEREUNDER OR COVERED THEREBY, NOR WITH RESPECT TO ANY APPURTENANCES THERETO BELONGING OR IN ANY WISE APPERTAINING TO SAID ASSETS, OR OTHERWISE. All of the terms, provisions, covenants and agreements herein contained shall constitute covenants running with the land, and shall extend to and be binding upon the parties hereto, their respective successors and assigns. Executed on the date set forth below in the acknowledgment, but effective for all purposes as of the Effective Date. Page 7 94 ASSIGNOR: WITNESSES: TEXACO EXPLORATION AND PRODUCTION INC. - ------------------------- By: ------------------------------------ Attorney in Fact - ------------------------- Dated: --------------------------------- ASSIGNEE: WITNESSES: DLB OIL & GAS, INC. - ------------------------- By: ------------------------------------ Mark Liddell, President - ------------------------- Dated: --------------------------------- Page 8 95 STATE OF LOUISIANA PARISH OF ORLEANS BEFORE ME, ____________________________, on this day personally appeared A.N. Duplantis, known to me to be the person whose name is subscribed to the foregoing instrument, and known to me to be the Attorney-in-Fact of TEXACO EXPLORATION AND PRODUCTION INC., a Delaware corporation, and acknowledged to me that he executed said instrument for the purposes and consideration therein expressed, and as the act of said corporation. Given under my hand and official seal this _______ day of ______________, 1997. --------------------------------------- Notary Public My Commission Is For Life STATE OF LOUISIANA PARISH OF ORLEANS BEFORE ME, ____________________________, on this day personally appeared Mark Liddell, known to me to be the person whose name is subscribed to the foregoing instrument, and known to me to be the President of DLB Oil & Gas, Inc., an Oklahoma corporation, and acknowledged to me that he executed said instrument for the purposes and consideration therein expressed, and as the act of said corporation. Given under my hand and official seal this _______ day of ______________, 1997. --------------------------------------- Notary Public My Commission Is For Life Page 9 96 EXHIBIT "A" ST. MARY PARISH, LOUISIANA IBERIA PARISH, LOUISIANA Attached to and made a part of that certain Assignment, Conveyance and Bill of Sale dated March 11, 1997, by and between DLB Oil & Gas, Inc. as assignor, and Texaco Exploration and Production Inc. as Assignee WEST COTE BLANCHE BAY FIELD ************************************************************ LESSOR: STATE OF LOUISIANA - STATE LEASE 340 TEXACO FILE NUMBER: 063653-A LEASE DATE: 07-FEB-1936 RECORDATION: Vol.5-F,Pg.387,Entry No.60191,St.Mary Ph. Vol. 126, Pg. 185, Entry No. 49234, Iberia Ph. LAND DESCRIPTION: INSOFAR AND ONLY INSOFAR as to all of the lands, beds and bottoms of the rivers, creeks, bayous, lakes, lagoons, coves, sounds and inlets, including all islands, belonging to the State of Louisiana and covered by State Mineral Lease No. 340, situated in he Parishes of St. Mary and Iberia, State of Louisiana and being situated or included within the following described boundaries: Three certain tracts located in West Cote Blanche Bay, Townships 15 and 16 South, Ranges 6 and 7 East, Iberia and St. Mary Parishes, Louisiana, being more particularly described as follows: Tract 1 (587.72 Acres) Beginning at a point having Coordinates of X = 1,850,173.69 feet and Y = 380,701.90 feet; Thence South 44 degrees 14 minutes 25 seconds West 2,940.95 feet; Thence South 08 degrees 06 minutes 04 seconds West 4,245.65 feet; Thence South 64 degrees 28 minutes 44 seconds West 4,288.83 feet; Thence South 17 degrees 15 minutes 46 seconds West 4,616.25 feet; Thence South 44 degrees 29 minutes 21 seconds East 3,284.52 feet; Thence South 60 degrees 49 minutes 44 seconds East 2,380.67 feet; Thence North 68 degrees 41 minutes 43 seconds West 5,635.51 feet; 1 97 Thence North 00 degrees 14 minutes 14 seconds East 4,900.08 feet; Thence North 41 degrees 02 minutes 15 seconds East 12,098.36 feet; Thence South 89 degrees 45 minutes 51 seconds East 796.82 feet to the point of beginning and containing 587.72 acres. All Coordinates, Bearings and Distances are based on the Louisiana Coordinate System of 1927 (SOUTH ZONE). Tract 2(593.33 Acres) Beginning at a point having Coordinates of X = 1,852,476.86 feet and Y = 380,692.43 feet; Thence South 38 degrees 53 minutes 08 seconds East 12,201.52 feet; Thence South 00 degrees 14 minutes 08 seconds West 10,899.99 feet; Thence North 89 degrees 45 minutes 52 seconds West 620.27 feet; Thence North 59 degrees 40 minutes 38 seconds East 424.27 feet; Thence North 14 degrees 13 minutes 09 seconds West 6,241.26 feet; Thence North 07 degrees 07 minutes 03 seconds West 4,067.46 feet; Thence North 22 degrees 33 minutes 30 seconds West 3,982.13 feet; Thence North 23 degrees 13 minutes 32 seconds West 2,615.36 feet; Thence North 36 degrees 22 minutes 03 seconds West 4,985.64 feet; Thence South 89 degrees 45 minutes 51 seconds East 191.53 feet to the point of beginning and containing 593.33 acres. All Coordinates, Bearings and Distances are based on the Louisiana Coordinate System of 1927 (SOUTH ZONE). Tract 3 (120.71 Acres) Beginning at a point having Coordinates of X = 1,847,140.82 feet and Y = 364,446.01 feet; Thence North 89 degrees 16 minutes 04 seconds East 1,518.00 feet; Thence South 77 degrees 26 minutes 56 seconds East 3,746.29 feet; Thence South 47 degrees 43 minutes 14 seconds East 3,183.92 feet; Thence North 68 degrees 41 minutes 43 seconds West 8,082.70 feet to the point of beginning and containing 120.71 acres. All Coordinates, Bearings and Distances are based on the Louisiana Coordinate System of 1927 (SOUTH ZONE). 2 98 WEST COTE BLANCHE BAY ST. MARY AND IBERIA PARISHES, LOUISIANA RESERVATION OF CLAIMS BETWEEN TEXACO INC., ET AL AND THE FOLLOWING PARTIES (THESE LETTER AGREEMENTS ARE UNRECORDED):
PARTIES DATE ------- ---- Catherine J. McGowen 5/11/95 E. H. Jackson III 5/11/95 Christopher J. Daniel 6/19/95 Catherine M. Daniel 6/19/95 Barbara Fish Daniel Louisiana Trust Agency 6/19/95 Ray C. Fish Foundation 6/19/95 Marie Minette Wolfe 5/23/95 Robert R. Wolfe 5/23/95 Adele M. Wolfe 5/23/95 J. Carol Jackson 5/11/95 Amy Scott McKenzie 5/23/95 Marsha Fleming Eatherton 5/11/95 Phantor, Ltd. 5/11/95 Susan Y. Dulske 5/11/95 Estate of Marjorie R. Holdar 5/11/95 H. Brad Fleming, Jr. 5/11/95 Joseph S. Glickhauf, Jr. 5/11/95 John Glassell, III Trust 5/11/95 Mary E. Hodge Fleming 5/11/95 Mrs. Bobby P. Babcock 5/11/95 Gladys J. Averill 5/11/95 Robin F. Scully 5/23/95 William Scully 5/23/95 John D. Wolfe 5/23/95 Irma A. Erickson Trust 5/11/95 Morris W. Newman 5/23/95 Mildred B. Heskett 5/23/95 Leslie Claire Newman Trust 5/23/95 Karen Y. Elliott 5/23/95 Linda Yates Nanney 5/11/95 Ronald T. Monsour, et al 5/11/95 Kathryn Schneider King 5/11/95 Mary Louise McIlwain 5/11/95 Steven Murray Schneider 5/11/95 Jennifer J. Jasper 5/11/95 Susan Schneider King 5/11/95 George W. Schneider III 5/11/95 Walter J. Oliphant 5/11/95 Nathaniel P. Phillips, Jr. 5/11/95 The Bayou Country Trust 5/11/95
99 ASSIGNMENT, CONVEYANCE AND BILL OF SALE STATE OF LOUISIANA PARISH OF ST. MARY KNOW ALL MEN BY THESE PRESENTS, that DLB Oil & Gas, Inc., an Oklahoma corporation, herein represented by Mark Liddell, its President, whose address is 1601 N. W. Expressway, Suit 700, Oklahoma City, Oklahoma 73118-1401, Federal Tax ID No. 73-1358299, hereinafter referred to as "Assignor," for and in consideration of the sum of TEN AND NO/100 ($10.00) Dollars and other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged and full acquittance granted therefor, has granted, sold, conveyed and delivered and does hereby grant, sell, convey and deliver unto TEXACO EXPLORATION AND PRODUCTION INC., a Delaware corporation, herein represented by A. N. Duplanits, its duly authorized Attorney in Fact, whose address is P. O. Box 60252, New Orleans, Louisiana 70160, Federal Tax ID No. 51- 0265713 , hereinafter referred to as "Assignee", all of Assignor's right, title and interest in, to and under the following properties, assets, rights and interests: 1. That certain oil, gas and/or mineral lease and other interests owned by Assignor in State of Louisiana Lease No. 340 by and between the State of Louisiana, as Grantor, and William T. Burton, as Grantee, dated February 7, 1936, and recorded at Vol. 5-F, Page 387, Entry No. 60,191, St. Mary Parish, Louisiana and Vol. 126, Page 185, Entry No. 49,234, Iberia Parish, Louisiana described on Exhibit "A" attached hereto and incorporated herein by reference, INSOFAR AND ONLY INSOFAR AS such lease pertains to the lands described in said Exhibit "A" and reflected on the plat also made a part of said Exhibit "A," hereinafter referred to individually and collectively as "Lease"; 2. Those contracts and other agreements listed on Exhibit "B" attached hereto and incorporated herein by reference INSOFAR AND ONLY INSOFAR AS the same relate to the Lease, the Equipment and the Wells), hereinafter referred to individually and collectively as the "Contracts"; 3. All Wells, equipment, facilities, including but not limited to tubing, casing, wellheads, pumping units, production units, compressors, valves, meters, flow lines, tanks, heaters, separators, dehydrators, pumps and injection units, disposal facilities, platforms, and the like, which are located on the Lease and which are or have been used solely and exclusively in connection with the production or treatment of Hydrocarbons (as defined in the Purchase Agreement) from the Lease or the Wells, and all wellbores and the tubing and equipment located therein, hereinafter referred to individually and collectively as "Equipment"; Page 1 100 4. All oil and gas wells and injection and disposal wells located on the Lease, or used or useful in connection therewith, or on lands pooled or unitized therewith, or owned by Assignor by virtue of any operating rights created by or under any Contract, including, but not limited to, those which are active or inactive, productive or non-productive, plugged and abandoned or temporarily abandoned, hereinafter referred to individually and collectively as "Wells"; 5. Tank battery 1-A, including all equipment and piping beginning at the header and ending at: i) salt water line leaving treater, and ii) point where LP gas enters suction line, immediately downstream of the sales meter owned by Assignee. This includes separators, treaters, LACT, tanks, lightplant, meters, and all accessories and piping up to the designated exit point; together with two 3 1/2" HP lines running to the dehydration platform; but expressly excluding the production header, one 24" by 10' LP test separator (125 psi WP), currently located on tank battery 1-A and one LP 60" by 15' production separator (250 psi WP). The equipment herein assigned located at tank battery 1-A shall include, but not be limited to: 1-HP separator for well #868; 1-60" by 15' LP production separator for well #720 (presently used for well #261); 1-HP separator for well #831; 1-LP separator for well #720; 1-flare regulator system; 3-1500 bbl tanks; 1-treater; 1-flare separator; 3-M8 pumps (two gas, one air); 2-electric pumps; 1-LACT unit; 1-generator with building; 1-550 gallon methanol tank; 1-350 gallon chemical tank owned by Champion Chemical Company; 1-pumpers building: and other miscellaneous piping, connections, fittings, and related equipment, all located on the platform designated as tank battery 1-A, all hereinafter being referred to individually and collectively as the "Facilities"; and 6. All files, information, data and records relating to the Assets (excluding, however, all legal files, attorney-client communications or attorney work product, records and documents subject to confidentiality provisions, auditors reports, reserve information and reports, economic runs, interpretative structure maps, correlated logs and any interpretative seismic, geochemical and geophysical information and Page 2 101 data or other proprietary information related thereto) hereinafter referred to individually and collectively as "Non Excluded Material." The Leases, the Contracts, the Equipment, the Wells, the Facilities and the Non Excluded Material referred to above are herein sometimes referred to individually and collectively as "Assets." However, this Assignment, Conveyance and Bill of Sale is made and accepted by Assignee subject to the following additional exceptions, reservations, covenants, conditions, agreements and stipulations: This Assignment, Conveyance and Bill of Sale is subject to the provisions of that certain Purchase, Sale and Cooperation Agreement between Texaco Exploration and Production Inc. and DLB Oil & Gas, Inc., fully executed on March 11, 1997 (the "Purchase Agreement"). TO HAVE AND TO HOLD the Assets, together with all and singular the rights, privileges and appurtenances in anywise belonging thereto, unto Assignee, its successors and assigns forever, pursuant to and subject to all of the terms and conditions set forth in this Assignment, Conveyance and Bill of Sale. This Assignment, Conveyance and Bill of Sale shall be effective as of the Effective Date of the Second Amended Joint Plan of Reorganization of WRT Energy Corporation dated as of March 11, 1997, as that term is defined therein ("Effective Date"). All the terms and provisions of this Assignment, Conveyance and Bill of Sale are hereby expressly made subject to all federal, state, and local laws and to all orders, rules, regulations and standards issued thereunder by all duly constituted political subdivisions and agencies having jurisdiction. THIS ASSIGNMENT, CONVEYANCE AND BILL OF SALE IS EXECUTED WITHOUT, AND ASSIGNOR DOES NOT MAKE ANY, REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR IMPLIED, AS TO TITLE OR THE CONDITION OR STATE OF REPAIR OF THE ASSETS, THEIR VALUE, QUALITY , MERCHANTABILITY, SUITABILITY OR FITNESS FOR ANY USES OR PURPOSES, NOT AS TO THE CURRENT VOLUME, NATURE, QUALITY, CLASSIFICATION, OR VALUE OF THE OIL, GAS OR OTHER MINERAL RESERVES THEREUNDER OR COVERED THEREBY, NOR WITH RESPECT TO ANY APPURTENANCES THERETO BELONGING OR IN ANY WISE APPERTAINING TO SAID ASSETS, OR OTHERWISE. All of the terms, provisions, covenants and agreements herein contained shall constitute covenants running with the land, and shall extend to and be binding upon the parties hereto, their respective successors and assigns. Page 3 102 Executed on the date set forth below in the acknowledgment, but effective for all purposes as of the Effective Date. WITNESSES: ASSIGNOR: DLB OIL & GAS, INC. - --------------------------------- By: ----------------------------------- - --------------------------------- President Dated: -------------------------------- WITNESSES: ASSIGNEE: TEXACO EXPLORATION AND - --------------------------------- PRODUCTION INC. By: ----------------------------------- - --------------------------------- Attorney-in-Fact Dated: -------------------------------- Page 4 103 STATE OF LOUISIANA PARISH OF ORLEANS BEFORE ME, ____________________________, on this day personally appeared _______________________________, known to me to be the person whose name is subscribed to the foregoing instrument, and known to me to be the Attorney-in-Fact of TEXACO EXPLORATION AND PRODUCTION INC., a Delaware corporation, and acknowledged to me that he executed said instrument for the purposes and consideration therein expressed, and as the act of said corporation. Given under my hand and official seal this _______ day of ______________, 1997. -------------------------------------- Notary Public My Commission Is For Life STATE OF LOUISIANA PARISH OF ORLEANS BEFORE ME, ____________________________, on this day personally appeared Mark Liddell, known to me to be the person whose name is subscribed to the foregoing instrument, and known to me to be the President of DLB Oil & Gas, Inc., an Oklahoma corporation, and acknowledged to me that he executed said instrument for the purposes and consideration therein expressed, and as the act of said corporation. Given under my hand and official seal this _______ day of ______________, 1997. -------------------------------------- Notary Public My Commission Is For Life Page 5 104 EXHIBIT "A" ST. MARY PARISH, LOUISIANA IBERIA PARISH, LOUISIANA Attached to and made a part of that certain Assignment, Conveyance and Bill of Sale dated effective January 1, 1997, by and between., DLB Oil & Gas, Inc., as Assignor, and WRT Energy Corporation, as Assignee. LEASE The Lease is to be conveyed subject to the specific reservations shown below. WEST COTE BLANCHE BAY FIELD ******************************************************************************** LESSOR: STATE OF LOUISIANA - STATE LEASE 340 TEXACO FILE NUMBER: 063653-A LEASE DATE: 07-FEB-1936 RECORDATION: Vol. 5-F, Pg. 387, Entry No. 60191, St. Mary Ph. Vol. 126, Pg. 185, Entry No. 49234, Iberia Ph. LAND DESCRIPTION: INSOFAR AND ONLY INSOFAR as to all of the lands, beds and bottoms of the rivers, creeks, bayous, lakes, lagoons, coves, sounds and inlets, including all islands, belonging to the State of Louisiana and covered by State Mineral Lease No. 340, situated in the Parish of St. Mary, State of Louisiana and being situated or included within the following described boundaries: Beginning at a point having Coordinates of X = 1,852,315.46 feet and Y = 363,651.30 feet; Thence North 77 degrees 26 minutes 56 seconds West 3,746.29 feet; Thence South 89 degrees 16 minutes 04 seconds West 1,517.99 feet; Thence North 68 degrees 55 minutes 21 seconds West 512.07 feet; Thence North 60 degrees 49 minutes 44 seconds West 2,380.67 feet; Thence North 44 degrees 29 minutes 21 seconds West 3,284.52 feet; Thence North 17 degrees 15 minutes 46 seconds East 4,616.25 feet; Thence North 64 degrees 28 minutes 44 seconds East 4,288.83 feet; Thence North 08 degrees 06 minutes 04 seconds East 4,245.65 feet; Thence North 44 degrees 14 minutes 25 seconds East 2,940.95 feet; Thence East 2,111.66 feet; Thence South 36 degrees 22 minutes 03 seconds East 4,985.64 feet; Thence South 23 degrees 13 minutes 32 seconds East 2,615.36 feet; Thence South 22 degrees 33 minutes 30 seconds East 3,982.13 feet; Thence South 07 degrees 07 minutes 03 seconds East 4,067.46 feet; Thence South 14 degrees 13 minutes 09 seconds East 6,241.26 feet; Thence South 59 degrees 40 minutes 38 seconds West 424.27 feet; Thence West 1,710.72 feet; Thence North 68 degrees 55 minutes 21 seconds West 3,316.25 feet; Thence North 43 degrees 42 minutes 23 seconds West 166.59 feet; Thence North 47 degrees 42 minutes 14 seconds West 2,987.32 feet to the point of beginning and containing 4,590.26 acres, more or less. All Coordinates, Bearings and Distances are based on the Louisiana Coordinate System of 1927 (SOUTH ZONE). 105 INSOFAR AND ONLY INSOFAR as to depths above the stratigraphic equivalent of the "Rob C Marker", which marker is defined as the correlative point as seen in the Texaco West Cote Blanche Bay #265 well at a measured depth of 10,575'. 2 106 FEE SCHEDULE 1. $5,000.00 fee for establishing the Escrow Account. 2. .20% per annum of all fixed income investments. 3. 1.00% per annum of all equity investments. Said fees to be due and payable as provided in that certain agreement entered into between Escrow Agent and DLB establishing the Escrow Account. EX-27 5 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 4,060 0 8,998 0 0 13,395 131,965 27,007 129,441 12,158 0 0 0 13 64,219 129,441 27,194 28,415 7,590 7,590 8,938 0 1,582 7,820 2,951 4,869 0 0 0 4,869 0.38 0.38
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