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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-28608
PETSEC ENERGY INC.*
(Exact name of Registrant as specified in its charter)
Nevada
(State or other jurisdiction of incorporation or organization)
143 Ridgeway Drive, Suite 113 Lafayette, Louisiana 70503
(Address of principal executive offices)
(337) 989-1942
(Registrant's Telephone Number, including Area Code)
84-1157209
(IRS Employer Identification No.)
Securities registered pursuant to Section 12(b) of the Act.
None
Securities registered pursuant to Section 12(g) of the Act.
None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this
Form 10-K. [X]
All of the registrant's voting stock is held by affiliates of the registrant.
As of March 30, 2000, there was outstanding 1 share of Common Stock, par
value $1.00 per share, of the registrant.
* Petsec Energy Inc. is a wholly owned operating subsidiary of Petsec Energy
Ltd, a listed Australian public company registered with the Commission as a
result of its public offering of American Depositary Receipts ("ADRs") traded on
the OTC Bulletin Board (symbol: PSJEY). Shareholders and holders of American
Depositary Shares are advised to refer to the filings of Petsec Energy Ltd for
the consolidated results.
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TABLE OF CONTENTS
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Page
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Glossary of Certain Industry Terms.................................................................................. 3
PART I
Item 1. Business ......................................................................................... 5
Item 2. Description of Properties ........................................................................ 19
Item 3. Legal Proceedings ................................................................................ 20
Item 4. Submission of Matters to a Vote of Security Holders .............................................. 20
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ............................ 20
Item 6. Selected Financial Data .......................................................................... 21
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................................ 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ....................................... 30
Item 8. Financial Statements and Supplementary Data ...................................................... 32
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure....................................................................................... 33
PART III
Item 10. Directors and Executive Officers of the Registrant ............................................... 33
Item 11. Executive Compensation ........................................................................... 34
Item 12. Security Ownership of Certain Beneficial Owners and Management ................................... 38
Item 13. Certain Relationships and Related Transactions ................................................... 38
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ................................. 38
</TABLE>
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GLOSSARY OF CERTAIN INDUSTRY TERMS
The definitions set forth below apply to the indicated terms as used in
this Form 10-K. All volumes of natural gas referred to herein are stated at the
legal pressure base of the state or area where the reserves exist and at 60
degrees Fahrenheit and, in most instances, are rounded to the nearest major
multiple.
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used
herein in reference to crude oil or other liquid hydrocarbons.
Bcf. Billion cubic feet.
Bcfe. Billion cubic feet equivalent, determined using the ratio of six
Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
Btu. British thermal unit, which is the heat required to raise the
temperature of one-pound mass of water from 58.5 to 59.5 degrees Fahrenheit.
Completion. The installation of permanent equipment for the production
of oil or natural gas, or in the case of a dry hole, the reporting of
abandonment to the appropriate agency.
Developed acreage. The number of acres that are allocated or assignable
to producing wells or wells capable of production.
Development well. A well drilled within the proved area of an oil or
natural gas reservoir to the depth of a stratigraphic horizon known to be
productive.
Dry hole or well. A well found to be incapable of producing
hydrocarbons in sufficient quantities such that proceeds from the sale of such
production exceed production expenses and taxes.
Exploratory well. A well drilled to find and produce oil or natural gas
reserves not classified as proved, to find a new reservoir in a field previously
found to be productive of oil or natural gas in another reservoir or to extend a
known reservoir.
Field. An area consisting of a single reservoir or multiple reservoirs
all grouped on or related to the same individual geological structural feature
and/or stratigraphic condition.
Gross acreage or gross wells. The total acres or wells, as the case may
be, in which a working interest is owned.
Liquids. Crude oil, condensate and natural gas liquids.
MBbls. One thousand barrels of crude oil or other liquid hydrocarbons.
Mcf. One thousand cubic feet.
Mcf/d. One thousand cubic feet per day.
Mcfe. One thousand cubic feet of gas equivalent, determined using the
ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural
gas liquids.
MMS. Minerals Management Service of the United States Department of the
Interior.
MMbtu. One million Btus.
MMcf. One million cubic feet.
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MMcfe. One million cubic feet of gas equivalent, determined using the
ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural
gas liquids.
Net acres or net wells. The sum of the fractional working interests
owned in gross acres or gross wells.
OCS. Outer Continental Shelf.
Oil. Crude oil and condensate.
Present value or PV10. When used with respect to oil and natural gas
reserves, the estimated future gross revenue to be generated from the production
of proved reserves, net of estimated production and future development costs,
using prices and costs in effect as of the date indicated, without giving effect
to non-property related expenses such as general and administrative expenses,
debt service and future income tax expense or to depreciation, depletion and
amortization, discounted using an annual discount rate of 10%.
Productive well. A well that is found to be capable of producing
hydrocarbons in sufficient quantities such that proceeds from the sale of such
production exceed production expenses and taxes.
Proved developed nonproducing reserves. Proved developed reserves
expected to be recovered from zones behind casing in existing wells.
Proved developed producing reserves. Proved developed reserves that are
expected to be recovered from completion intervals currently open in existing
wells and capable of production to market.
Proved reserves. The estimated quantities of crude oil, 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 undeveloped location. A site on which a development well can be
drilled consistent with spacing rules for purposes of recovering proved
undeveloped reserves.
Proved undeveloped reserves. Proved reserves that are expected to be
recovered from new wells on undrilled acreage or from existing wells where a
relatively major expenditure is required for recompletion.
Recompletion. The completion for production of an existing well bore in
another formation from that in which the well has been previously completed.
Reservoir. A porous and permeable underground formation containing a
natural accumulation of producible oil and/or natural gas that is confined by
impermeable rock or water barriers and is individual and separate from other
reservoirs.
Royalty interest. An interest in an oil and natural gas property
entitling the owner to a share of oil or natural gas production free of costs of
production.
Undeveloped acreage. Lease acreage on which wells have not been drilled
or completed to a point that would permit the production of commercial
quantities of oil and natural gas regardless of whether such acreage contains
proved reserves.
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Working interest or W.I. The operating interest which gives the owner
the right to drill, produce and conduct operating activities on the property and
a share of production.
PART I
ITEM 1 - BUSINESS
GENERAL
The Company is the wholly owned principal operating subsidiary of Petsec
Energy Ltd (the "Parent"). The Parent is an Australian public company with
ordinary shares listed on the Australian Stock Exchange (symbol: PSA) and
American Depositary Receipts ("ADRs") traded on the OTC Bulletin Board (symbol:
PSJEY). The results discussed in this report refer only to the Company. The
Parent's results are filed with the Securities and Exchange Commission
separately under Forms 6-K (quarterly) and 20-F (annually). Shareholders and ADR
holders are advised to refer to these filings.
The Company was incorporated in March 1990 to evaluate oil and gas
exploration opportunities in the United States. In 1990, the Company
participated in an oil discovery in the Paradox Basin in Colorado. In addition,
the Company acquired oil and gas lease interests in northern California. The
Company also established an office in Lafayette, Louisiana, hired several former
employees of Tenneco Oil Company and acquired leases in the Gulf of Mexico,
offshore Louisiana. The Company subsequently made a strategic decision to focus
its efforts entirely in the Gulf of Mexico and disposed of its interests in the
Paradox Basin in January 1995.
The Company has acquired substantially all of its 48 leases on the Outer
Continental Shelf at federal or state lease sales, of which 18 are held by
production. Until December 31, 1998, the Company held 100% working interests in
its Gulf of Mexico properties, unlike many other independent energy companies
that conduct business through fractional working interests and non-operated
joint ventures. A disappointing drilling program in 1998 compounded by low oil
and gas prices caused the Company's outstanding debt to reach unacceptable
levels. Effective January 1, 1999, the Company sold a 50% working interest in a
substantial number of its properties to Apache Corporation, an unrelated
independent exploration and production company. It also transferred operations
on the properties sold. Proceeds from the sale were used to reduce debt.
The Company engaged a financial advisor in October 1999 to assist with the
restructure of its $100 million 9 1/2% Senior Subordinated Notes due 2007 (the
"9 1/2% Notes"). The Company did not make the interest payment due on the 9 1/2%
Notes at December 15, 1999, and is in default under the indenture governing the
9 1/2% Notes (the "Indenture"). The Company began discussions with a
subcommittee of holders of the 9 1/2% Notes on January 18, 2000 regarding
alternative solutions to its financial situation. While the Company is hopeful
that a solution acceptable to both the holders of the 9 1/2% Notes and the
Company can be reached, there can be no assurance that the Company will be able
to reach agreement on these proposals. Whether or not a consensual resolution
can be reached, it is likely that the Company will need to seek protection under
the United States Bankruptcy Code. The Company does not intend to make any
further public comments about the restructuring process until either agreement
on a solution is reached with the holders of the 9 1/2% Notes or it becomes
apparent that no such agreement can be reached. See "Item 7-- Management's
Discussion and Analysis of Financial Condition and Results of Operations;" "Risk
Factors -- Liquidity Problems."
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The Company completed a refinancing of its senior secured credit facility
with Foothill Capital Corporation on January 18, 2000. For a discussion of
certain events affecting the current liquidity of the Company, see "Risk Factors
- -- Liquidity Problems" and see "Item 7-- Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
OIL AND GAS RESERVES
The following table sets forth estimated net proved oil and gas reserves of
the Company, the estimated future net revenues before income taxes and the
present value of estimated future net revenues before income taxes related to
such reserves as of December 31, 1997, 1998 and 1999. All information in this
Annual Report relating to estimated net proved oil and gas reserves and the
estimated future net cash flows before income tax attributable thereto is based
upon reports by Ryder Scott Company, L.P., Petroleum Engineers. All calculations
of estimated net proved reserves have been made in accordance with the rules and
regulations of the Securities and Exchange Commission, and, except as otherwise
indicated, give no effect to federal or state income taxes otherwise
attributable to estimated future net revenues from the sale of oil and gas. The
present value of estimated future net revenues has been calculated using a
discount factor of 10% per annum.
December 31, 1998 reserves are shown net of the sale to Apache of a 50%
working interest in certain of the Company's oil and gas properties which was
effective January 1, 1999.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
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1997 1998 1999
<S> <C> <C> <C>
TOTAL NET PROVED:
Gas (MMcf) 122,149 58,252 56,783
Oil (MBbls) 10,641 5,337 4,469
Total (MMcfe) 185,995 90,274 83,597
NET PROVED DEVELOPED:
Gas (MMcf) 88,199 26,965 21,950
Oil (MBbls) 8,430 3,054 2,090
Total (MMcfe) 138,779 45,289 34,490
Estimated future net revenues before income taxes $ 316,855 $ 83,132 $ 150,828
(in thousands)
Present value of estimated future net revenues $ 255,839 $ 67,053 $ 113,139
before income taxes (in thousands) (1)(2)
Standardized measure of discounted future net cash $ 204,114 $ 67,053 $ 113,139
flows (in thousands) (3)(4)
</TABLE>
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(1) The present value of estimated future net revenues attributable to the
Company's reserves was prepared using constant prices, including the
effects of hedging, as of the calculation date, discounted at 10% per annum
on a pre-tax basis.
(2) The present value as of December 31, 1999 was calculated using an average
oil price of $25.61 per barrel before hedging and an average gas price of
$2.43 per Mcf before hedging.
(3) The standardized measure of discounted future net cash flows represents the
present value of estimated future net revenues after income tax discounted
at 10% per annum.
(4) Income taxes have not been provided in 1999 and 1998 due to the Company's
current availability of net operating loss carryforwards.
Approximately 59% of the Company's total proved reserves at December 31,
1999 were undeveloped. Recovery of such reserves will require significant
capital expenditures and successful drilling operations. The Company's financial
resources are limited, and there can be no assurance that additional debt or
equity financing or cash generated by operations will be available to meet these
requirements. The Company's credit facility has a borrowing base that is
determined by the value of its oil and gas properties reviewed monthly by the
creditor. The creditor has substantial discretion to place reserves against the
borrowing base. See Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations - "Liquidity and Capital Resources" for
additional explanation regarding the Company's liquidity problems.
There are numerous uncertainties inherent in estimating quantities of
proved reserves, future rates of production and the timing of development
expenditures, including many factors beyond the control of the Company. The
reserve data set forth herein 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, and the accuracy of any reserve estimate
is a function of the quality of available data, engineering and geological
interpretation and judgment and the existence of development plans. As a result,
estimates of reserves made by different engineers for the same property will
often vary. Results of drilling, testing and production subsequent to the date
of an estimate may justify a revision of such estimates. Accordingly, reserve
estimates generally differ from the quantities of oil and gas ultimately
produced. Further, the estimated future net revenues from proved reserves and
the present value thereof are based upon certain assumptions, including
geological success, prices, future production levels and costs that may not
prove to be correct. Predictions about prices and future production levels are
subject to great uncertainty, and the meaningfulness of such estimates depends
on the accuracy of the assumptions upon which they are based.
ACQUISITION, PRODUCTION AND DRILLING ACTIVITY
Acquisition and Development Costs. The following table sets forth certain
information regarding the costs incurred by the Company in its acquisition,
exploration and development activities:
<TABLE>
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Years Ended December 31,
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1997 1998 1999
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(In thousands)
<S> <C> <C> <C>
Acquisition costs $ 8,437 $ 7,836 $ 2,610
Exploration costs 115,523 107,111 14,745
Development costs 31,327 10,301 1,216
------------ ------------ ------------
Total costs incurred $ 155,287 $ 125,248 $ 18,571
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Productive Well and Acreage Data. The following table sets forth certain
statistics for the Company regarding the number of productive wells and
developed and undeveloped acreage in the Gulf of Mexico as of December 31, 1999:
<TABLE>
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Gross Net
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<S> <C> <C>
Productive Wells(1):
Oil(2) 17 8.5
Gas(3) 37 19.5
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Total 54 28.0
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Developed Acreage(1) 51,823 28,412
Undeveloped Acreage(1)(4) 103,971 71,926
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Total 155,794 100,338
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(1) Productive wells consist of producing wells and wells capable of
production, including gas wells awaiting pipeline connections. Wells that
are completed in more than one producing horizon are counted as one well.
Undeveloped acreage includes leased acres on which wells have not been
drilled or completed to a point that would permit the production of
commercial quantities of oil and gas, regardless of whether or not such
acreage contains proved reserves. A gross acre is an acre in which an
interest is owned. A net acre is deemed to exist when the sum of fractional
ownership interests in gross acres equals one. The number of net acres is
the sum of the fractional interests owned in gross acres expressed as whole
numbers and fractions thereof.
(2) Two gross wells each have dual completions.
(3) Fourteen gross wells each have dual completions.
(4) Leases covering 7% of the Company's undeveloped acreage will expire in
2000, approximately 30% in 2001, 12% in 2002, 32% in 2003 and 19% in 2004.
Drilling Activity. The following table sets forth the Company's drilling
activity for the periods indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
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1997 1998 1999
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Gross Net Gross Net Gross Net
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<S> <C> <C> <C> <C> <C> <C>
Gulf of Mexico
Exploratory wells 13 13.0 4 4 6 2.6
Development wells 4 4.0 1 1 2 0.8
Dry holes 3 2.4 3 3 1 0.5
Abandoned wells -- -- -- -- 1 0.2
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Total 20 19.4 8 8 10 4.1
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</TABLE>
OIL AND GAS MARKETING
All of the Company's natural gas, oil and condensate production was sold at
market prices under short-term contracts providing for variable or market
sensitive prices. The Company has not experienced any difficulties in marketing
its oil or gas.
There are a variety of factors which affect the market for oil and gas,
including the extent of domestic production and imports of oil and gas, the
proximity and capacity of natural gas pipelines and other transportation
facilities, demand for oil and gas, the marketing of competitive fuels and the
effects of state
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and federal regulations of oil and gas production and sales. The oil and gas
industry also competes with other industries in supplying the energy and fuel
requirements of industrial, commercial and individual customers.
From time to time, the Company has utilized hedging transactions with
respect to a portion of its oil and gas production to achieve more predictable
cash flows, as well as to reduce its exposure to fluctuations in oil and gas
prices. The Company restricts the time and quantity of the aggregate oil and gas
production covered by such transactions. See "Item 7-- Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Hedging
Transactions."
Despite the measures taken by the Company to attempt to control price risk,
the Company remains subject to price fluctuations for oil and natural gas sold
in the spot market due primarily to seasonality of demand and other factors
beyond the Company's control. Domestic oil prices generally follow worldwide oil
prices, which are subject to price fluctuations resulting from changes in world
supply and demand. The Company continues to evaluate the potential for reducing
these risks, and expects to enter into additional hedge transactions in future
years. In addition, the Company also may close out any portion of the existing,
or yet to be entered into, hedges as determined to be appropriate by management.
PRODUCTION SALES CONTRACTS
The Company markets all of the gas production from its properties. All of
the Company's gas production is sold to a variety of purchasers under short-term
(one year or less) contracts or thirty-day spot purchase contracts. Natural gas
sales contracts are based upon field posted prices plus negotiated bonuses.
Apache Corporation markets all of the Company's oil production through marketing
arrangements it has with other companies, which accounted for 36% of the
Company's revenue in 1999. During 1999, Enron North America Corp. (formerly
Columbia Energy Services Corporation) ("Enron") purchased 49% of the gas sold by
the Company. Enron purchased all of the Company's gas after April 1, 1999
pursuant to a twelve-month contract that provided for monthly market pricing
adjustments. Based upon current demand for oil and gas in the Gulf of Mexico
region, the Company believes that there is sufficient competition for the
purchase of its hydrocarbons to ensure that the Company will continue to receive
market pricing.
Most of the Company's oil and all of the Company's gas is transported
through gathering systems and pipelines that are not owned by the Company.
Transportation space on such gathering systems and pipelines is occasionally
limited, and at times unavailable, due to repairs or improvements being made to
such facilities or due to such space being utilized by other oil or gas shippers
with priority transportation agreements. While the Company has not experienced
any inability to market its natural gas and oil, if transportation space is
restricted or unavailable, the Company's cash flow could be adversely impacted.
COMPETITION
The oil and gas industry is highly competitive. The Company competes for
the acquisition of oil and gas properties with numerous other entities,
including major oil companies, other independent oil and gas concerns and
individual producers and operators. Many of these competitors have financial,
technical and other resources substantially greater than those of the Company.
Such companies may be able to pay more for productive oil and gas properties and
exploratory prospects and to define, evaluate, bid for and purchase a greater
number of properties and prospects than the Company's financial or human
resources permit. The Company's ability to acquire additional properties and to
discover reserves in the future will be dependent upon its ability to evaluate
and select suitable properties, to access adequate financing, and to consummate
transactions in a highly competitive environment.
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REGULATION
The oil and gas industry is regulated extensively by federal, state and
local authorities. In particular, oil and gas production operations and
economics are affected by price controls, environmental protection statutes and
regulations, tax statutes and other laws relating to the petroleum industry, as
well as changes in such laws, changing administrative regulations and the
interpretations and application of such laws, rules and regulations. In October
1992, comprehensive national energy legislation was enacted which focuses on
electric power, renewable energy sources and conservation. This legislation,
among other things, guarantees equal treatment of domestic and imported natural
gas supplies, mandates expanded use of natural gas and other alternative fuel
vehicles, funds natural gas research and development, permits continued offshore
drilling and use of natural gas for electric generation and adopts various
conservation measures designed to reduce consumption of imported oil. The
legislation may be viewed as generally intended to encourage the development and
use of natural gas. Oil and gas industry legislation and agency regulation is
under constant review for amendment and expansion for a variety of political,
economic and other reasons.
Regulation of Natural Gas and Oil Exploration and Production. The Company's
operations are subject to various types of regulation at the federal, state and
local levels. Such regulation includes requiring permits for the drilling of
wells, maintaining bonding requirements in order to drill or operate wells 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. The Company's operations are also subject to various
conservation laws and regulations. These include the regulation of the size of
drilling and spacing units or proration units and the density of wells which may
be drilled in, and the unitization or pooling of oil and gas properties. In this
regard, some states (such as Louisiana) allow the forced pooling or integration
of tracts to facilitate exploration while other states (such as Texas) rely on
voluntary pooling of lands and leases. In areas where pooling is voluntary, it
may be more difficult to form units and, therefore, more difficult to develop a
project if the operator owns less than 100% of the leasehold. 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 certain requirements
regarding the ratability of production. The effect of these regulations may
limit the amount of oil and gas the Company can produce from its wells and may
limit the number of wells or the locations at which the Company can drill. The
regulatory burden on the oil and gas industry increases the Company's costs of
doing business and, consequently, affects its profitability. In as much as such
laws and regulations are frequently expanded, amended or reinterpreted, the
Company is unable to predict the future cost or impact of complying with such
regulations.
The Company has operations located on federal oil and gas leases, which are
administered by the MMS. Such leases are issued through competitive bidding,
contain relatively standardized terms and require compliance with detailed MMS
regulations and orders pursuant to the Outer Continental Shelf Lands Act
("OCSLA") (which are subject to change by the MMS). For offshore operations,
lessees must obtain MMS approval for exploration plans and development and
production plans prior to the commencement of such operations. In addition to
permits required from other agencies (such as the Coast Guard, the Army Corps of
Engineers and the Environmental Protection Agency (the "EPA")), lessees must
obtain a permit from the MMS prior to the commencement of drilling. Lessees must
also comply with detailed MMS regulations governing, among other things,
engineering and construction specifications for offshore production facilities,
safety procedures, flaring of production, plugging and abandonment of OCS wells,
calculation of royalty payments and the valuation of production for this
purpose, and removal of facilities. To cover the various obligations of lessees
on the OCS, the MMS generally requires that lessees post substantial bonds or
other acceptable assurances that such obligations will be met. The cost of such
bonds or other surety can be substantial and there is no assurance that bonds or
other surety can be obtained in all cases. Under certain circumstances, the MMS
may require Company operations on federal leases to be suspended or terminated.
Any such suspension or termination could materially and adversely affect the
Company's financial condition and operations.
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The MMS has proposed changes to the method of calculating royalties and the
valuation of crude oil produced from federal leases. These changes, if adopted,
would modify the valuation procedures for crude oil to reduce use of posted
prices and assign a value to crude oil intended to better reflect market value.
The Company cannot predict at this stage how it might be affected if the MMS
adopts such changes.
Natural Gas and Oil Marketing and Transportation. Historically, the
transportation and sale for resale of natural gas in interstate commerce have
been regulated pursuant to the Natural Gas Act of 1938, the Natural Gas Policy
Act of 1978 (the "NGPA") and the regulations promulgated thereunder by the
Federal Energy Regulatory Commission (the "FERC"). In the past, the federal
government has regulated the prices at which oil and gas could be sold.
Deregulation of wellhead sales in the natural gas industry began with the
enactment of the NGPA. The Natural Gas Wellhead Decontrol Act amended the NGPA
to remove both price and non-price controls from natural gas sold in "first
sales" as of January 1, 1993. While sales by producers of natural gas and all
sales of crude oil, condensate and natural gas liquids can currently be made at
uncontrolled market prices, Congress could reenact price controls in the future.
Several major regulatory changes have been implemented by the FERC from
1985 to the present that affect the economics of natural gas production,
transportation and sales. In addition, the FERC continues to promulgate
revisions to various aspects of the rules and regulations affecting those
segments of the natural gas industry, most notably interstate natural gas
transmission companies, which remain subject to the FERC's jurisdiction. These
initiatives may also affect the intrastate transportation of gas under certain
circumstances. The stated purposes of many of these regulatory changes is to
promote competition among the various sectors of the gas industry. The ultimate
impact of these complex and overlapping rules and regulations, many of which are
repeatedly subjected to judicial challenge and interpretation, cannot be
predicted.
Commencing in April 1992, the FERC issued Order Nos. 636, 636-A, 636-B and
636-C (collectively, "Order No. 636"), which, among other things, required
interstate pipelines to "restructure" 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 supplies. Order No. 636 has been implemented as a result of FERC orders in
individual pipeline service restructuring proceedings. In many instances, the
result of the Order No. 636 and related initiatives have been to substantially
reduce or bring to an end the interstate pipelines' traditional roles as
wholesalers of natural gas in favor of providing only storage and transportation
services.
Although Order No. 636 does not directly regulate natural gas producers
such as the Company, the FERC has stated that Order No. 636 is intended to
foster increased competition within all phases of the natural gas industry. It
is unclear what impact, if any, increased competition within the natural gas
industry under Order No. 636 will have on the Company and its natural gas
marketing efforts, although price declines for natural gas following the
implementation of order No. 636 may, in part, reflect increased competition and
more efficient gas transportation resulting from Order No. 636. The courts have
largely affirmed the significant features of Order No. 636 and numerous related
orders pertaining to the individual pipelines, although certain appeals remain
pending and the FERC continues to review and modify its open access regulations.
In particular, the FERC has recently issued Order No. 637, which, among other
things, (i) lifts the cost-based cap on pipeline transportation rates in the
capacity release market until September 30, 2002, for releases of pipeline
capacity of less than one year, (ii) permits pipelines to charge different
maximum cost-based rates for peak and off-peak times, (iii) encourages auctions
for pipeline capacity, (iv) requires pipelines to implement imbalance management
services, and (v) restricts the ability of pipelines to impose penalties for
imbalances, overruns, and non-compliance with operational flow orders. Order No.
637 also requires the FERC Staff to analyze whether the FERC should implement
additional fundamental policy changes, including, among other things, whether to
pursue performance-based ratemaking or other non-cost based ratemaking
techniques and whether the FERC should mandate greater standardization in terms
and conditions of service across the interstate pipeline grid. In addition, the
FERC recently implemented new regulations governing the procedure for obtaining
authorization to construct new pipeline facilities and has issued a policy
statement, which it largely affirmed in a recent order on rehearing,
establishing a presumption in favor of requiring owners of new pipeline
facilities to charge rates based solely on the costs associated with such new
pipeline facilities. The Company cannot predict what additional action the FERC
will take on
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these matters, nor can it accurately predict whether the FERC's actions will,
over the long-term, achieve the goal of increasing competition in markets in
which the Company's natural gas is sold. However, the Company does not believe
that it will be affected by any action taken materially differently than other
natural gas producers and marketers with which it competes.
The FERC has issued numerous orders approving the spindown or spin-off by
interstate pipelines of their gathering facilities. A "spin-off" is a
FERC-approved sale of gathering facilities to a non-affiliate. A "spin-down" is
a transfer of gathering facilities to an affiliate. These approvals were given
despite the strong protests of a number of producers concerned that any
diminution in FERC's oversight of interstate pipeline-related gathering services
might result in a denial of open access or otherwise enhance the pipeline's
monopoly power. While the FERC has stated that it will retain limited
jurisdiction over such gathering facilities and will hear complaints concerning
any denial of access, it is unclear what effect the FERC's gathering policy will
have, in the long-term, on producers such as the Company and the Company cannot
predict what further action the FERC will take on these matters.
The Outer Continental Shelf Lands Act (OCSLA) requires that all pipelines
operating on or across the Outer Continental Shelf (the OCS) provide
open-access, non-discriminatory service. Pursuant to one of the FERC's recent
initiatives regarding its regulatory treatment of pipelines and services on the
OCS, the FERC has proposed to adopt certain reporting requirements concerning
OCS rates and terms and conditions of service, which requirements are
applicable, with certain limited exceptions, to both gas pipelines and gatherers
operating on the OCS. The purpose of the proposed requirements is to provide
regulators and other interested parties with sufficient information to detect
and then seek to remedy discriminatory conduct in such operations. The Company
cannot predict what, if any, affect this matter may have on the Company.
In Order Nos. 561 and 561-A, the FERC established an indexing system under
which oil pipelines will be able to change their transportation rates, subject
to prescribed ceiling levels. The indexing system, which allows or may require
pipelines to make rate changes to track changes in the Producer Price Index for
Finished Goods, minus one percent, became effective January 1, 1995. The FERC's
decision in this matter was affirmed by the courts. The Company does not believe
that these rules affect it any differently than other oil producers and
marketers with which it competes.
Additional proposals and proceedings that might affect the oil and gas
industry are pending before the FERC and the courts. The Company cannot predict
when or whether any such proposals may become effective. In the past, the
natural gas industry has been heavily regulated. There is no assurance that the
regulatory approach currently pursued by the FERC will continue indefinitely.
Notwithstanding the foregoing, the Company does not anticipate that compliance
with existing federal, state and local laws, rules and regulations will have a
material or significantly adverse effect upon the capital expenditures, earnings
or competitive position of the Company.
Environmental Regulation. Activities of the Company with respect to the
exploration, development and production of oil and natural gas are subject to
stringent federal, state and local laws and regulations pertaining to the
discharge of materials into the environment or otherwise relating to protection
of the environment. Such laws and regulations have increased the cost of
planning, designing, drilling, operating and in some instances, abandoning
wells. In most instances, the regulatory requirements relate to the handling and
disposal of drilling and production waste products and waste created by water
and air pollution control procedures. Some laws and regulations relating to
protection of the environment may, in certain circumstances, impose "strict
liability" for environmental contamination, rendering a person liable for
environmental and natural resource damages and cleanup costs without regard to
negligence or fault on the part of such person. Although the Company believes
that compliance with environmental laws and regulations will not have a material
adverse effect on operations or earnings, the risks of substantial costs and
liabilities are inherent in oil and gas operations, and there can be no
assurance that significant costs and liabilities, including administrative,
civil, and criminal penalties, will not be incurred. Moreover, it is possible
that other developments, such as stricter environmental laws and regulations,
and claims for damages to property or person resulting from the Company's
operations could result in substantial costs and liabilities.
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The Comprehensive Environmental Response, Compensation and Liability Act,
as amended, ("CERCLA"), also known as the "Superfund" law, and comparable state
laws impose liability, without regard to fault or the legality of the original
conduct, on certain classes of persons with respect to the release of a
"hazardous substance" into the environment. These persons include the owner and
operator of the disposal site or sites where the release occurred and companies
that disposed or arranged for the disposal of the hazardous substances found at
such site. Persons who are or were responsible for releases of hazardous
substances under CERCLA may be subject to joint and several liability for the
costs of cleaning up the hazardous substances that have been released into the
environment and for damages to natural resources, and it is not uncommon for
neighboring landowners and other third parties to file claims for personal
injury and property damage allegedly caused by the hazardous substances released
into the environment.
The Company generates wastes, including hazardous wastes, that are subject
to the federal Resource Conservation and Recovery Act, as amended, ("RCRA"), and
comparable state statutes. The EPA and various state agencies have limited the
disposal options for certain hazardous and nonhazardous wastes. Furthermore,
certain wastes generated by the Company's oil and natural gas operations that
are currently exempt from treatment as "hazardous wastes" may in the future be
designated as "hazardous wastes," and therefore be subject to more rigorous and
costly operating and disposal requirements.
The Company currently owns or leases, and has in the past owned or leased,
numerous properties that for many years have been used for the exploration and
production of oil and gas. Although the Company has utilized operating and
disposal practices that were standard in the industry at the time, hydrocarbons
or other wastes may have been disposed of or released on or under the properties
owned or leased by the Company or on or under other locations where such wastes
have been taken for disposal. In addition, many of these properties have been
operated by third parties whose treatment and disposal or release of
hydrocarbons or other wastes was not under the Company's control. These
properties and the wastes disposed thereon may be subject to CERCLA, RCRA and
analogous state laws. Under such laws, the Company could be required to remove
or remediate previously disposed wastes (including wastes disposed of or
released by prior owners or operators) or property contamination (including
groundwater contamination) or to perform remedial plugging operations to prevent
future contamination.
The Oil Pollution Act of 1990, as amended, (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 vessel, pipeline, or onshore facility 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
cooperate fully in the cleanup, liability limits likewise do not apply. Few
defenses exist to the liability imposed by the OPA.
The OPA also imposes ongoing requirements on responsible parties, including
proof of financial responsibility to cover at least some costs in a potential
spill. Certain amendments to OPA that were enacted in 1996 and a final rule
adopted by the MMS in 1998 require responsible parties of covered offshore
facilities that have a worst case oil spill potential of more than 1,000 barrels
(which includes many of the Company's offshore producing facilities), to
demonstrate financial responsibility in amounts ranging from $10 million in
specified state waters to $35 million in federal OCS waters, with higher
amounts, up to $150 million, in certain limited circumstances where the MMS
believes such a level is justified by the risks posed by the operations or if
the worst-case spill discharge volume possible at the facility may exceed the
applicable threshold volumes specified under the MMS's final rule.
The operator will provide evidence of financial responsibility on the
properties in which the Company has a non-operating working interest. The
Company will satisfy OPA financial responsibility obligations
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with respect to its other properties through insurance over the level of
$200,000, which is the Company's self-insurance amount. The Company believes
that it currently has established adequate proof of financial responsibility for
its offshore facilities at no significant increase in expense over recent prior
years. However, the Company cannot predict whether these financial
responsibility requirements under the OPA amendments or final rule will result
in the imposition of substantial additional annual costs to the Company in the
future or otherwise materially adversely affect the Company. The impact,
however, should not be any more adverse to the Company than it will be to other
similarly situated or less capitalized owners or operators in the Gulf of
Mexico. OPA also imposes other requirements on facility operators, such as the
preparation of an oil spill contingency plan. The Company has such plans in
place. The failure to comply with ongoing requirements or inadequate cooperation
in a spill event may subject a responsible party to administrative, civil or
criminal liability.
The Federal Water Pollution Control Act, as amended ("FWPCA"), imposes
restrictions and strict controls regarding the discharge of produced waters and
other oil and gas wastes in navigable waters. Permits must be obtained to
discharge pollutants to waters and to conduct construction activities in waters
and wetlands. The FWPCA and analogous state laws provide for administrative,
civil, and criminal penalties for any unauthorized discharges of pollutants and
reportable quantities of oil and other hazardous substances. Many state
discharge regulations and the National Pollutant Discharge Elimination system
generally prohibit the discharge of produced water and sand, drilling fluids,
drill cuttings, and certain other substances related to the oil and gas industry
into coastal waters. Although the costs to comply with these zero discharge
mandates under federal or state law may be significant, the entire industry is
expected to experience similar costs in the western Gulf of Mexico, and the
Company believes that these costs will not have a material adverse impact on the
Company's financial condition and operations.
OPERATING HAZARDS AND INSURANCE
Oil and gas drilling and production activities are subject to numerous
risks, many of which are beyond the Company's control. These risks include the
risk that no commercially productive oil or natural gas reservoirs will be
encountered, that operations may be curtailed, delayed or canceled as a result
of title problems, weather conditions, compliance with governmental
requirements, mechanical difficulties or shortages or delays in the delivery of
equipment and that the availability or capacity of gathering systems, pipelines
or processing facilities may limit the Company's ability to market its
production. There can be no assurance that new wells drilled by the Company will
be productive or that the Company will recover all or any portion of its
investment. Drilling for oil and natural gas may involve unprofitable efforts,
not only from dry wells, but from wells that are productive but do not produce
sufficient net revenues to return a profit after drilling, operating and other
costs.
In addition, the Company's properties may be susceptible to hydrocarbon
drainage from production by other operators on adjacent properties. Industry
operating risks include the risk of fire, explosions, blowouts, pipe failure,
abnormally pressured formations and environmental hazards such as oil spills,
gas leaks, ruptures or discharges of toxic gases, the occurrence of any of which
could result in substantial losses to the Company due to injury or loss of life,
severe damage to or destruction of property, natural resources and equipment,
pollution or other environmental damage, clean-up responsibilities, regulatory
investigation and penalties and suspension of operations. Additionally, the
Company's oil and gas operations are located in an area that is subject to
tropical weather disturbances, some of which can be severe enough to cause
substantial damage to facilities and possibly interrupt production.
The MMS requires lessees of OCS properties to post performance bonds in
connection with the plugging and abandonment of wells located offshore and the
removal of all production facilities. The Company has posted an area wide bond
meeting MMS requirements and has obtained additional supplemental bonding on its
offshore leases as required by the MMS.
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The Company maintains customary oil and gas related third party liability
coverage, which it must renew annually, that insures the Company against certain
sudden and accidental risks associated with drilling, completing and operating
its wells. There can be no assurance that this insurance will be adequate to
cover any losses or exposure to liability or that the Company will be able to
renew its coverage annually. The Company carries workers' compensation insurance
in all states in which it operates. While the Company believes this coverage is
customary in the industry, it does not provide complete coverage against all
operating risks.
EMPLOYEES
The Company currently has 23 full-time employees, primarily professionals,
including geologists, geophysicists and engineers. The Company also relies on
the services of certain consultants for technical and operational guidance. The
Company believes that its relationships with its employees and consultants are
satisfactory and has entered into employment and consulting contracts with its
executives and agreements with certain technical personnel and consultants whom
it considers particularly important to the operations of the Company. There can
be no assurance that such individuals will remain with the Company for the
immediate or foreseeable future. None of the Company's employees are covered by
a collective bargaining agreement. From time to time, the Company also utilizes
the services of independent consultants and contractors to perform various
professional services, particularly in the areas of construction, design, well
site surveillance, permitting and environmental assessment. Field and on-site
production operation services, such as maintenance, dispatching, inspection and
testing, are generally provided by independent contractors supervised by Company
employees.
RISK FACTORS
LIQUIDITY PROBLEMS
The Company is experiencing a liquidity problem. As of December 31, 1999,
the Company's long-term debt including current maturities was $144.9 million, of
which $99.7 million was senior subordinated notes, $7.9 million was borrowings
under the Company's bank credit facility and $37.3 million was a subordinated
shareholder loan.
On October 29, 1999, in order to preserve available cash, the Company
elected not to pay $3.2 million due to the syndicate of banks under its
revolving credit facility (the "Chase Credit Facility") in which the Chase
Manhattan Bank, N.A., Bank of America, N.A. (formerly NationsBank N.A.) and
Credit Lyonnais (collectively, the "Banks") were participants. This caused a
default of its secured debt and a cross default under the Indenture.
Subsequently, the Company refinanced the Chase Credit Facility with Foothill
Capital Corporation ("Foothill"), completing a $30 million revolving credit
facility on January 18, 2000 (the "Foothill Credit Facility"). At March 22,
2000, the Company's borrowing base was $29.3 million. After subtracting
borrowings and letters of credit issued under the Foothill Credit Facility to
secure hedging obligations, the Company had $15.3 million available for
additional borrowing at March 22, 2000. The Company's ability to borrow under
the Foothill Credit Facility is dependent upon the reserve value of its oil and
gas properties, as determined monthly by Foothill. If the reserve value of the
Company's borrowing base declines, the amount available to the Company under the
Foothill Credit Facility will be reduced and, to the extent that the borrowing
base is less than the amount then outstanding (including letters of credit)
under the facility, the Company will be obligated to repay such excess amount
immediately upon notice from Foothill. Moreover, Foothill has broad discretion
under the Foothill Credit Facility to set reserves against the borrowing base.
As a consequence of the October 29, 1999 default on the Chase Credit
Facility, a cross default occurred under the Indenture. The Indenture trustee or
the holders of $25 million or more of the 9 1/2% Notes can elect to accelerate
the entire debt that is due to them, which is $100 million, and to commence
collection proceedings. The semi-annual interest payment under the Indenture in
the amount of $4.75 million due on December 15, 1999, was also not paid. The
Foothill Credit Facility prohibits the Company from paying interest or principal
due under the Indenture. Given the Company's current liquidity position and the
prohibition in the Foothill Credit Facility on the payment of interest due under
the Indenture, it is unlikely the Company will make this payment in the
foreseeable future. The Company has commenced discussions with
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the holders of the 9 1/2% Notes on alternative solutions to its financial
situation. There can be no assurance that discussions with these holders will
result in a satisfactory solution in respect of the 9 1/2% Notes, or the holders
or trustee of the 9 1/2% Notes will not commence collection proceedings against
the Company. Whether or not a consensual resolution can be reached, it is likely
that the Company will need to seek protection under Chapter 11 of the United
States Bankruptcy Code.
If the Company is able to resolve its current liquidity problems, it still
may have substantial indebtedness. The Company's level of indebtedness will have
several important effects on its operations, including (i) a substantial portion
of the Company's cash flow from operations will be dedicated to the payment of
interest on its indebtedness and will not be available for other purposes, (ii)
the covenants contained in the Indenture limit its ability to borrow additional
funds or to dispose of assets and may affect the Company's flexibility in
planning for, and reacting to, changes in business conditions and (iii) the
Company's ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions, general corporate purposes or other
purposes may be impaired. Moreover, future acquisition or development activities
may require the Company to alter its capitalization significantly. These changes
in capitalization may significantly alter the leverage of the Company. The
Company's ability to meet its debt service obligations and to reduce its total
indebtedness will be dependent upon the Company's future performance, which will
be subject to general economic conditions and to financial, business and other
factors affecting the operations of the Company, many of which are beyond its
control. There can be no assurance that the Company's future performance will
not be adversely affected by such economic conditions and financial, business
and other factors. See "Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
VOLATILITY OF OIL AND GAS PRICES; MARKETABILITY OF PRODUCTION
The Company's revenue, profitability and future rate of growth are
substantially dependent upon the prevailing prices of, and demand for, oil and
natural gas. Prices for oil and natural gas are subject to wide fluctuation in
response to relatively minor changes in the supply of and demand for oil and
natural gas, market uncertainty and a variety of additional factors that are
beyond the control of the Company. These factors include the level of consumer
product demand, weather conditions, domestic and foreign governmental
regulations, the price and availability of alternative fuels, political
conditions in the Middle East, the foreign supply of oil and natural gas, the
price of oil and gas imports and overall economic conditions. From time to time,
oil and gas prices have been depressed by excess domestic and imported supplies,
as experienced in 1998 when oil prices were depressed. In 1999 oil prices
significantly improved, however there can be no assurance that current price
levels will be sustained. It is impossible to predict future oil and natural gas
price movements with any certainty. Declines in oil and natural gas prices may
adversely affect the Company's financial condition, liquidity and results of
operations and may reduce the amount of the Company's oil and natural gas that
can be produced economically. Additionally, substantially all of the Company's
sales of oil and natural gas are made in the spot market or pursuant to
contracts based on spot market prices and not pursuant to long-term fixed price
contracts. With the objective of reducing price risk, the Company enters into
hedging transactions with respect to a portion of its expected future
production. There can be no assurance, however, that such hedging transactions
will reduce risk or mitigate the effect of any substantial or extended decline
in oil or natural gas prices. Any substantial or extended decline in the prices
of oil or natural gas would have a material adverse effect on the Company's
financial condition and results of operations.
In addition, the marketability of the Company's production depends upon the
availability and capacity of gas gathering systems, pipelines and processing
facilities. Federal and state regulation of oil and gas production and
transportation, general economic conditions and changes in supply and demand all
could adversely affect the Company's ability to produce and market its oil and
natural gas. If market factors were to change dramatically, the financial impact
on the Company could be substantial. The availability of markets and the
volatility of product prices are beyond the control of the Company and represent
a significant risk. See "Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview" and "Item 1 -
Business -- Oil and Gas Marketing."
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UNCERTAINTY OF ESTIMATES OF OIL AND GAS RESERVES
This Annual Report contains estimates of the Company's proved oil and gas
reserves and the estimated future net revenues therefrom based upon the reserve
report prepared by Ryder Scott Company, L.P., that rely upon various
assumptions, including assumptions required by the Securities and Exchange
Commission as to oil and gas prices, drilling and operating expenses, capital
expenditures, taxes and availability of funds. The process of estimating oil and
gas reserves is complex, requiring significant decisions and assumptions in the
evaluation of available geological, geophysical, engineering and economic data
for each reservoir. As a result, such estimates are inherently imprecise. Actual
future production, oil and gas prices, revenues, taxes, development
expenditures, operating expenses and quantities of recoverable oil and gas
reserves may vary substantially from those estimated in the reserve report
prepared by Ryder Scott Company, L.P. Any significant variance in these
assumptions could materially affect the estimated quantity and value of reserves
set forth in this Annual Report. In addition, the Company's proved reserves may
be subject to downward or upward revision based upon production history, results
of future exploration and development, prevailing oil and gas prices and other
factors, many of which are beyond the Company's control. Actual production,
revenues, taxes, development expenditures and operating expenses with respect to
the Company's reserves will likely vary from the estimates used, and such
variances may be material.
Approximately 59% of the Company's total proved reserves at December 31,
1999 were undeveloped, which are by their nature less certain. Recovery of such
reserves will require significant capital expenditures and successful drilling
operations. The reserve data set forth in the report prepared by Ryder Scott
Company, L.P., assumes that substantial capital expenditures by the Company will
be required to develop such reserves. Although cost and reserve estimates
attributable to the Company's oil and gas reserves have been prepared in
accordance with industry standards, no assurance can be given that the estimated
costs are accurate, that development will occur as scheduled, that the Company
will have adequate capital resources to make the expenditures when anticipated
or that the results will be as estimated. See "Item 1 -- Business -- Oil and Gas
Reserves."
The present value of future net revenues referred to in this Annual Report
should not be construed as the current market value of the estimated oil and gas
reserves attributable to the Company's properties. In accordance with applicable
requirements of the Securities and Exchange Commission, the estimated discounted
future net cash flows from proved reserves are generally based on prices and
costs as of the date of the estimate, whereas actual future prices and costs may
be materially higher or lower. Actual future net cash flows also will be
affected by changes in consumption by gas purchasers and changes in governmental
regulations or taxation. The timing of actual future net cash flows from proved
reserves, and thus their actual present value, will be affected by the timing of
both the production and the incurrence of costs in connection with development
and production of oil and gas properties. In addition, the 10% discount factor,
which is required by the Securities and Exchange Commission to be used in
calculating discounted future net cash flows for reporting purposes, is not
necessarily the most appropriate discount factor based on interest rates in
effect from time to time and risks associated with the Company or the oil and
gas industry in general.
REPLACEMENT OF RESERVES
As is customary in the oil and gas exploration and production industry, the
Company's future success depends upon its ability to find, develop or acquire
additional oil and gas reserves that are economically recoverable. Unless the
Company replaces its estimated proved reserves (through development, exploration
or acquisition), the Company's proved reserves will generally decline as they
are produced.
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Given the discussions that are underway presently with the holders of the
9 1/2% Notes and the Company liquidity problems, the Company's drilling program
has been curtailed substantially and its future drilling plans are uncertain.
Accordingly, there can be no assurance that the Company's management will be
able to effect a strategy that will result in significant additional reserves or
that the Company will have success drilling productive wells at economically
viable costs. Furthermore, while the Company's revenues may increase if
prevailing oil and gas prices increase significantly, the Company's finding
costs for additional reserves could also increase. For a discussion of the
Company's reserves, see "Item 1 -- Business -- Oil and Gas Reserves."
SUBSTANTIAL CAPITAL REQUIREMENTS
In the past, the Company has made substantial expenditures for development,
exploration, acquisition and production of oil and gas reserves. Capital
expenditures were $19 million in 1999, $125 million in 1998 and $155 million in
1997. Substantial capital expenditures will be required in the future to access
existing reserves and undertake a drilling program to find new reserves. The
Company's financial resources are limited, and there can be no assurance that
additional debt or equity financing or cash generated by operations will be
available to meet these requirements. See "Item 7 -- Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
INDUSTRY RISKS
Oil and gas drilling and production activities are subject to numerous
risks, many of which are beyond the Company's control. These risks include the
risk that no commercially productive oil or natural gas reservoirs will be
encountered, that operations may be curtailed, delayed or canceled and that
title problems, weather conditions, compliance with governmental requirements,
mechanical difficulties or shortages or delays in the delivery of drilling rigs,
work boats and other equipment may limit the Company's ability to market its
production. There can be no assurance that new wells drilled by the Company will
be productive or that the Company will recover all or any portion of its
investment. Drilling for oil and natural gas may involve unprofitable efforts,
not only from dry wells but also from wells that are productive but do not
produce sufficient net revenues to return a profit after drilling, operating and
other costs. In addition, the Company's properties may be susceptible to
hydrocarbon drainage from production by other operators on adjacent properties.
Industry operating risks include the risk of fire, explosions, blow-outs,
pipe failure, abnormally pressured formations and environmental hazards such as
oil spills, gas leaks, ruptures or discharges of toxic gases, the occurrence of
any of which could result in substantial losses to the Company due to injury or
loss of life, severe damage to or destruction of property, natural resources and
equipment, pollution or other environmental damage, clean-up responsibilities,
regulatory investigation and penalties and suspension of operations.
Additionally, the Company's oil and gas operations are located in an area that
is subject to tropical weather disturbances, some of which can be severe enough
to cause substantial damage to facilities and possibly interrupt production. In
accordance with customary industry practice, the Company maintains insurance
against some, but not all, of the risks described above. There can be no
assurance that any insurance will be adequate to cover losses or liabilities.
The Company cannot predict the continued availability of insurance at premium
levels that justify its purchase.
GOVERNMENTAL REGULATION
Oil and gas operations are subject to various United States federal, state
and local governmental regulations that change from time to time in response to
economic or political conditions. Matters subject to regulation include
discharge permits for drilling operations, drilling and abandonment bonds,
reports concerning operations, the spacing of wells, and unitization and pooling
of properties and taxation. From
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time to time, regulatory agencies have imposed price controls and limitations on
production by restricting the rate of flow of oil and gas wells below actual
production capacity in order to conserve supplies of oil and gas. In addition,
the production, handling, storage, transportation and disposal of oil and gas,
by-products thereof and other substances and materials produced or used in
connection with oil and gas operations are subject to regulation under federal,
state and local laws and regulations primarily relating to protection of human
health and the environment. To date, expenditures related to complying with
these laws and for remediation of existing environmental contamination have not
been significant in relation to the results of operations of the Company.
Although the Company believes it is in substantial compliance with all
applicable laws and regulations, the requirements imposed by such laws and
regulations are frequently changed and subject to interpretation, and the
Company is unable to predict the ultimate cost of compliance with these
requirements or their effect on its operations. See "Item 1 -- Business --
Regulation."
RELIANCE ON KEY PERSONNEL
The Company's operations are dependent upon a relatively small group of key
management and technical personnel. There can be no assurance that such
individuals will remain with the Company for the immediate or foreseeable
future. The unexpected loss of the services of one or more of these individuals
could have a detrimental effect on the Company. See "Item 10 -- Directors and
Executive Officers of the Registrant."
COMPETITION
The Company operates in a highly competitive environment. The Company
competes with major and independent oil and gas companies for the acquisition of
desirable oil and gas properties, as well as for the equipment and labor
required to develop and operate such properties. Many of these competitors have
financial and other resources substantially greater than those of the Company.
See "Item 1 -- Business -- Competition."
RISKS OF HEDGING TRANSACTIONS
In order to manage its exposure to price risks in the marketing of its oil
and natural gas, the Company has in the past and expects to continue to enter
into oil and natural gas price hedging arrangements with respect to a portion of
its expected production. These arrangements may include futures contracts on the
New York Mercantile Exchange (NYMEX), fixed price delivery contracts and
financial swaps. While intended to reduce the effects of volatility of the price
of oil and natural gas, such transactions may limit potential gains by the
Company if oil and natural gas prices were to rise substantially over the price
established by the hedge. In addition, such transactions may expose the Company
to the risk of financial loss in certain circumstances, including instances in
which (i) production is less than expected, (ii) if there is a widening of price
differentials between delivery points for the Company's production and the
delivery point assumed in the hedge arrangement, (iii) the counterparties to the
Company's future contracts fail to perform the contract or (iv) a sudden,
unexpected event materially impacts oil or natural gas prices. See "Item 7 --
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Hedging Transactions" and "Item 1 -- Business -- Oil and Gas
Marketing."
ITEM 2 - DESCRIPTION OF PROPERTIES
ITEM 2(a) - SIGNIFICANT PROPERTIES
The Company has grown principally through the acquisition and development
of properties in the Gulf of Mexico offshore Louisiana. The first four leases
were acquired from the State of Louisiana, four leases were purchased from third
parties and the remaining leases have been acquired at Gulf of Mexico State and
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Federal OCS lease sales. At December 31, 1999, the Company had 48 lease blocks
in the Gulf of Mexico. All of the Company's proved oil and gas reserves at
December 31, 1999 were in these blocks.
ITEM 2 (b) - RESERVES
The information on the Company's oil and gas reserves is set out under Item
1 on page 6.
The information on the Company's oil and gas production is set out under
Item 7 on page 23.
ITEM 3 - LEGAL PROCEEDINGS
LEGAL PROCEEDINGS
The Company has been named as a defendant in certain lawsuits arising in
the ordinary course of business. While the outcome of these lawsuits cannot be
predicted with certainty, the Company does not expect these matters to have a
material adverse effect on the financial position, results of operations or
liquidity of the Company.
In addition, the Company is the plaintiff in a lawsuit brought against
certain of its underwriters based on the underwriters' denial of a portion of an
insurance claim in the amount of approximately $820,000 to recover losses
arising from Hurricane Georges in September 1998. The lawsuit was filed in
February 2000 in the Western District of Louisiana, Lafayette Division. No trial
date has been set. The Company maintains that certain contractual obligations it
incurred to Falcon Drilling Company, Inc. resulting from hurricane damage to a
Falcon drilling rig are covered under its energy insurance policy. The
underwriters on the insurance policy disagree. While there can be no assurance
that the Company will prevail in this lawsuit, the Company believes it has a
strong basis for its claim and will pursue the matter vigorously.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
All the shares of common stock of the Company are held by the Parent
Company, Petsec Energy Ltd. See "Notes to Financial Statements - Note 1(a)
Description of Business" on page 44.
20
<PAGE> 21
ITEM 6 - SELECTED FINANCIAL DATA
The following table sets forth selected historical financial data for the
Company as of and for each of the periods indicated. The financial data, for the
years ended December 31, 1995, 1996, 1997, 1998 and 1999 are derived from the
financial statements of the Company audited by KPMG LLP, independent auditors.
The following information should be read in conjunction with "Item 7 --
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements of the Company and the related notes
thereto included elsewhere in this Annual Report.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Statement of Operations data:
Oil and gas sales $ 30,462 $ 67,027 $ 125,139 $ 92,017 $ 31,000
Lease operating expenses 4,757 6,161 11,527 14,989 7,045
Depletion, depreciation and amortization 9,256 29,639 63,864 57,576 21,261
Exploration expenditures 3,396 7,061 7,328 7,427 2,750
Dry hole costs and abandonments -- -- 10,454 27,503 2,840
Impairments -- -- -- 72,916 7,480
General and administrative 4,502 5,259 6,054 7,868 5,287
Stock compensation -- 481 905 591 246
----------- ----------- ----------- ----------- -----------
Total operating expenses 21,911 48,601 100,132 188,870 46,909
----------- ----------- ----------- ----------- -----------
Income (loss) from operations 8,551 18,426 25,007 (96,853) (15,909)
Other income (expense): 35 -- 1,418 517 (322)
Gain on sale of property, plant and
equipment 4,312 6 -- -- --
Interest expense (2,452) (3,369) (7,586) (11,721) (13,517)
Interest income 64 172 871 302 260
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes 10,510 15,235 19,710 (107,755) (29,488)
Income tax (expense) benefit (3,537) (6,311) (6,610) 16,458 --
----------- ----------- ----------- ----------- -----------
Net income (loss) $ 6,973 $ 8,924 $ 13,100 $ (91,297) $ (29,488)
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
-----------------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets $ 89,110 $ 146,145 $ 234,104 $ 185,032 $ 93,508
Senior subordinated notes -- -- 99,630 99,656 99,684
Bank credit facility 32,350 37,000 -- 74,000 7,875
Subordinated shareholder loan 25,038 57,954 37,298 36,792 37,330
Shareholder's equity (deficit) 5,631 15,036 48,635 (42,071) (71,313)
</TABLE>
21
<PAGE> 22
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion is intended to assist in the understanding of the
Company's historical financial position and results of operations for each year
in the three years ended December 31, 1999. Financial Statements and notes
thereto included elsewhere in this Annual Report should be referred to in
conjunction with the following discussion.
In order to preserve available cash, the Company did not make principal
payments due October 29, 1999, in the amount of $3.2 million under its revolving
credit facility at the time, in which The Chase Manhattan Bank, N.A., Bank of
America, N.A. (formerly NationsBank, N.A.) and Credit Lyonnais were
participants. The Company was in default under the Chase Credit Facility, and
this default caused a cross default under the Indenture governing the 9 1/2%
Notes. Accordingly, the amounts outstanding under the 9 1/2% Notes have been
reclassified as current liabilities. See discussion, "Liquidity and Capital
Resources."
Subsequent to year end, the Company refinanced the Chase Credit Facility
with the completion of the $30 million Foothill Credit Facility. The Company has
commenced discussions with the holders of the 9 1/2% Notes regarding alternative
solutions to its financial situation. The Company has commenced discussions with
the holders of the 9 1/2% Notes on alternative solutions to its financial
situation. There can be no assurance that discussions with these holders will
result in a satisfactory solution in respect of the 9 1/2% Notes or the holders
or trustee of the 9 1/2% Notes will not commence collection proceedings against
the Company. Whether or not a consensual resolution can be reached, it is likely
that the Company will need to seek protection under Chapter 11 of the United
States Bankruptcy Code.
The liquidity issues faced by the Company are discussed in detail in the
"Liquidity and Capital Resources" section of this 10-K.
OVERVIEW
The Company is the wholly owned principal operating subsidiary of the
Parent. The Parent is an Australian public company with ordinary shares listed
on the Australian Stock Exchange (symbol: PSA) and American Depositary Receipts
("ADRs") traded on the OTC Bulletin Board (symbol: PSJEY). The results discussed
in this report refer only to the Company. The Parent's results are filed with
the Securities and Exchange Commission separately under Forms 6-K (quarterly)
and 20-F (annually). Shareholders and ADR holders are advised to refer to these
filings.
The Company was incorporated in March 1990 to evaluate oil and gas
exploration opportunities in the United States. In 1990, the Company
participated in an oil discovery in the Paradox Basin in Colorado. In addition,
the Company acquired oil and gas lease interests in northern California. The
Company also established an office in Lafayette, Louisiana, hired several former
employees of Tenneco Oil Company and acquired leases in the Gulf of Mexico,
offshore Louisiana. The Company subsequently made a strategic decision to focus
its efforts entirely in the Gulf of Mexico and disposed of its interests in the
Paradox Basin in January 1995.
The Company has acquired substantially all of its 48 leases in the Gulf of
Mexico at federal or state lease sales. A disappointing drilling program in 1998
compounded by low oil and gas prices caused the Company's outstanding debt to
reach unacceptable levels. Effective January 1, 1999, the Company sold a 50%
working interest in 17 developed leases and 6 exploration leases to Apache
Corporation. In addition, Apache assumed operatorship of these assets. The $68.3
million sale was completed on February 1, 1999, reducing debt at that time to $9
million under the Chase Credit Facility and total debt, including the 9 1/2%
Notes and the subordinated shareholder loan, to $145.4 million.
22
<PAGE> 23
The Company is allocated stock compensation expense in respect to options
in the Parent which are granted to the Company's employees and certain
consultants. The Parent accounts for stock compensation according to SFAS No.
123, Accounting for Stock-Based Compensation under which it recognizes as
expense over the vesting period the fair value of all stock-based awards on the
date of grant. See Note 6 to the Financial Statements.
The Company reimburses the Parent for direct expenses incurred in
connection with its operations. In addition, the Company has received
subordinated loans from the Parent to finance its operations. See discussion,
"Liquidity and Capital Resources."
The Company's revenues, profitability and future rate of growth are
substantially dependent upon prevailing prices for oil and gas, which are in
turn dependent upon numerous factors that are beyond the Company's control, such
as economic, political and regulatory developments and competition from other
sources of energy. The energy markets have historically been volatile, and there
can be no assurance that oil and gas prices will not be subject to wide
fluctuations in the future. Notwithstanding the recent increase in oil and gas
prices, a substantial or extended decline in prices could have a material
adverse effect on the Company's financial position, results of operations and
access to capital, as well as the quantities of oil and gas reserves that may be
economically produced.
The following table sets forth certain operating information with respect
to the oil and gas operations of the Company.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net production:
Gas (MMcf) 27,940 25,390 8,247
Oil (MBbls) 3,078 2,353 812
Total (MMcfe) 46,408 39,511 13,119
Net sales data (in thousands):
Gas $ 64,770 $ 54,171 $ 18,430
Oil $ 60,369 $ 37,846 $ 12,570
Total $ 125,139 $ 92,017 $ 31,000
Average sales price (1):
Gas (per Mcf) $ 2.32 $ 2.13 $ 2.23
Oil (per Bbl) $ 19.61 $ 16.08 $ 15.48
Total (per Mcfe) $ 2.70 $ 2.33 $ 2.36
Average costs (per Mcfe):
Lease operating expenses $ 0.25 $ 0.38 $ 0.54
General, administrative and other expenses $ 0.13 $ 0.20 $ 0.40
</TABLE>
(1) Includes effects of hedging activities.
23
<PAGE> 24
RESULTS OF OPERATIONS
1999 COMPARED TO 1998
General. The Company participated in ten wells during the year ended
December 31, 1999, of which two have been completed and brought into production,
six are awaiting installation of facilities and pipelines in order to commence
production, one was a dry hole and one was abandoned. Production in 1999 of 13.1
Bcfe was 67% less than 1998 (29% due to the asset sale to Apache, 38% due to
natural decline).
Oil and Gas Revenues. Oil and gas revenues for 1999 were $31 million, a
decrease of $61.0 million, or 66% below 1998 revenues of $92 million. A 65%
decrease in oil production (34% related to the Apache asset sale, 31% due to
natural decline) coupled with a 4% decrease in oil prices combined to account
for $25 million of the decrease. A 68% decrease in gas production (27% related
to the asset sale to Apache, 41% due to natural decline) partially offset by a
5% increase in the gas price accounted for the remaining $36 million of the
decrease.
The average realized gas price in 1999 was $2.23 per Mcf, or 7% above the
$2.09 per Mcf average gas price before hedging. In the same period, the average
realized oil price was $15.48 per Bbl, or 7% below the $16.57 per Bbl average
oil price before hedging. In 1998 the average realized gas price was $2.13 per
Mcf, or 2% above the $2.08 per Mcf price average gas price before hedging. In
the same period the average realized oil price was $16.08 per Bbl, or 20% above
the $13.36 per Bbl average oil price before hedging. Hedging activities
resulted in a $0.3 million increase in revenues for 1999 compared to a $7.7
million increase in 1998.
Lease Operating Expenses (including production taxes). Lease operating
expenses in 1999 were $7.0 million, a decrease of $8.0 million, or 53%, from
$15.0 million in 1998. The decrease was attributable to the asset sale. Due to
lower production, the per unit rate increased from $0.38 per Mcfe in 1998 to
$0.54 per Mcfe in 1999.
Depletion, Depreciation and Amortization ("DD&A"). DD&A expense decreased
$36.3 million, or 63%, from $57.6 million in 1998 to $21.3 million in 1999. The
decrease is due to lower production offset by an increase in the unit rate. The
average rate per unit increased from $1.46 to $1.62 per Mcfe due to Ryder Scott
Company, L.P., downward reserve revisions in the fourth quarter. The unit DD&A
rate increased to $1.83 per Mcfe in the fourth quarter compared to an average
rate of $1.56 for the preceding three quarters.
Exploration Expenditures and Dry Hole Costs. The Company uses the
successful efforts method to account for oil and gas exploration, evaluation and
development expenditures. Under this method in 1999 $2.8 million was expensed as
incurred for dry hole costs and abandonments, and $2.8 million was expensed for
seismic, geological and geophysical expenditures. In 1998 the comparative
expense was $27.5 million for dry hole costs and $7.4 million for seismic,
geological and geophysical expenditures.
Impairments. A non-cash charge of $7.5 million reflecting an adjustment to
the carrying value of three of the Company's oil and gas properties was taken in
1999. A non-cash charge of $72.9 million reflecting the impact of lower oil and
gas prices on the carrying value of the Company's oil and gas properties was
taken in 1998.
General and Administrative Expense. General and administrative expense
decreased $2.6 million, or 33%, to $5.3 million in 1999 from $7.9 million in
1998. Contributing to this decrease are costs associated with staff downsizing
following the sale of a 50% working interest in certain properties to Apache. On
a per Mcfe basis the rate increased 100% from $0.20 to $0.40 due to decreased
production.
24
<PAGE> 25
Interest Expense. Interest expense in 1999 increased $1.8 million, or 15%,
to $13.5 million from $11.7 million in 1998 due to no capitalized interest in
1999.
Net Loss. As a result of the conditions noted above, a net loss of $29.5
million was recorded for 1999, a decrease of $61.8 million over the loss of
$91.3 million for 1998.
1998 COMPARED TO 1997
General. The Company drilled and/or sidetracked eight wells during the year
ended December 31, 1998, of which three have been brought into production, two
encountered mechanical difficulties and were suspended pending further
evaluation at December 31, 1998, and three were plugged and abandoned.
Production in 1998 of 39.5 Bcfe was 15% less than 1997 due to natural decline
and disappointing drilling results.
Oil and Gas Revenues. Oil and gas revenues for 1998 were $92 million, a
decrease of $33.1 million, or 26% below 1997 revenues of $125.1 million. A 24%
decrease in oil production coupled with an 18% decrease in oil prices combined
to account for $22.5 million of the decrease. A 9% decrease in gas production
and an 8% decrease in the gas price accounted for the remaining $10.6 million of
the decrease.
The average realized gas price in 1998 was $2.13 per Mcf, or 2% above the
$2.08 per Mcf average gas price before hedging. In the same period, the average
realized oil price was $16.08 per Bbl, or 20% above the $13.36 per Bbl average
oil price before hedging. In 1997 the average realized gas price was $2.32 per
Mcf, or 8% below the $2.53 per Mcf average gas price before hedging. In the same
period the average realized oil price was $19.61 per Bbl, or 3% above the $19.10
per Bbl average oil price before hedging. Hedging activities resulted in a $7.7
million increase in revenues for 1998 compared to a $4.4 million decrease in
1997.
Lease Operating Expenses. Lease operating expenses in 1998 were $15.0
million, an increase of $3.5 million, or 30%, from $11.5 million in 1997. The
increase was attributable to workovers and recompletions in wells with declining
production from zones that were first perforated. These costs coupled with lower
production resulted in the per unit rate increasing from $0.25 per Mcfe in 1997
to $0.38 per Mcfe in 1998.
Depletion, Depreciation and Amortization ("DD&A"). DD&A expense decreased
$6.3 million, or 10%, from $63.9 million in 1997 to $57.6 million in 1998. Lower
production accounted for a decrease of $9.5 million partially offset by an
increase in the average rate per unit from $1.38 to $1.46 per Mcfe. The increase
in the unit rate was due to increased costs of drilling goods and services,
platform and facilities construction and transportation services in the
industry. Lower commodity prices caused Ryder Scott Company, L.P., downward
reserve revisions in the fourth quarter and the unit DD&A rate increased to
$1.80 per Mcfe in that quarter compared to an average rate of $1.36 for the
preceding three quarters.
Exploration Expenditures and Dry Hole Costs. The Company uses the
successful efforts method to account for oil and gas exploration, evaluation and
development expenditures. Under this method $27.5 million was expensed for dry
hole costs and $7.4 million for seismic, geological and geophysical expenditures
was expensed as incurred in 1998. In 1997 expenses were $10.5 million for dry
hole costs and $7.3 million for seismic, geological and geophysical
expenditures.
Impairments. A non-cash charge of $72.9 million reflecting the impact of
lower oil and gas prices on the carrying value of the Company's oil and gas
properties was taken in 1998. There were no impairments recorded in 1997.
General and Administrative Expense. General and administrative expense
increased $1.9 million, or 32%, to $7.9 million in 1998 from $6.0 million in
1997. Contributing to this increase are costs associated with increased activity
and the sale of a 50% working interest in certain properties to Apache which
resulted
25
<PAGE> 26
in severance charges of $422,000 related to employee terminations. On a per Mcfe
basis the rate increased 54% from $0.13 to $0.20 due to the costs noted above
and decreased production.
Interest Expense. Interest expense in 1998 increased $4.1 million, or 54%,
to $11.7 million from $7.6 million in 1997 due to increased borrowings under the
bank credit facility.
Net Loss. As a result of the conditions noted above, a net loss of $91.3
million was recorded for 1998, a decrease of $104.4 million from the earnings of
$13.1 million for 1997.
LIQUIDITY AND CAPITAL RESOURCES
In 1999, the Company experienced liquidity problems. On October 29, 1999,
in order to preserve available cash, the Company elected not to pay $3.2 million
due to the Banks under the Chase Credit Facility. This caused a default under
the Chase Credit Facility and a cross default under the Indenture. On January
18, 2000 the Company refinanced the Chase Credit Facility through a new $30
million revolving credit facility with Foothill. The Foothill Credit Facility
has lessened the severity of the Company's liquidity problem in the near term,
but the Company still has inadequate capital resources to service its debt and
meet anticipated capital requirements necessary to maintain and grow its
business. At March 22, 2000, the Company's borrowing base was $29.3 million.
After subtracting borrowings and letters of credit issued under the Foothill
Credit Facility to secure hedging obligations, the Company had $15.3 million
available for additional borrowing at March 22, 2000.
As a consequence of the October 29, 1999 default on the Chase Credit
Facility, and the cross default under the Indenture, the Indenture trustee or
the holders of $25 million or more of the 9 1/2% Notes can elect to accelerate
the entire debt that is due to them, which is $100 million, and to commence
collection proceedings. The semi-annual interest payment under the Indenture in
the amount of $4.75 million that was due on December 15, 1999 was not paid, and
given the Company's current liquidity position and prohibitions in the Foothill
Credit Facility on the payment of interest due under the Indenture, it is
unlikely the Company will make this payment. The Company has commenced
discussions with the holders of the 9 1/2% Notes regarding alternative solutions
to its financial situation. There can be no assurance that discussions with
these holders will result in a satisfactory proposal in respect of the 9 1/2%
Notes, or the holders or trustee of the 9 1/2% Notes will not commence
collection proceedings against the Company. Whether or not a satisfactory
resolution can be reached, it is likely that the Company will need to seek
protection under Chapter 11 of the United States Bankruptcy Code.
The Company would incur material non-recourse financial penalties under its
joint venture agreements if because of liquidity problems it were unable to
participate in operations proposed by its joint venture partners.
Cash Flow
The following table represents cash flow data for the Company for the
periods indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1997 1998 1999
------------ ---------- ----------
(in thousands)
<S> <C> <C> <C>
CASH FLOW DATA:
Net cash provided by operating activities $ 92,401 $ 54,711 $ 11,137
Net cash (used in) provided by investing activities (145,093) (135,118) 57,871
Net cash provided by (used in) financing activities 59,781 74,000 (66,125)
</TABLE>
26
<PAGE> 27
The decrease in cash provided by operating activities from 1998 to 1999 was
due to the sale to Apache of a 50% working interest in certain oil and gas
properties coupled with natural decline in production. The decrease in cash
provided by operating activities from 1997 to 1998 was due to lower oil and gas
production coupled with lower prices. Before changes in operating assets and
liabilities, cash flow from operations was $2.7 million in 1999, $51.4 million
in 1998 and $93.7 million in 1997.
The cash provided by investing activities in 1999 was due to the receipt of
proceeds from the sale of a 50% working interest in certain assets to Apache. In
response to lower commodity prices and earlier disappointing drilling results,
the Company deferred certain of its exploration program in 1998. As a result,
cash used in investing activities in 1998 was below that of 1997.
The cash used in financing activities in 1999 reflects the proceeds from
the Apache sale being utilized to repay the Chase Credit Facility. In 1998, cash
provided by financing activities consisted entirely of borrowings under the
Chase Credit Facility. The cash provided by financing activities in 1997
consisted of proceeds from the 9 1/2% Note issue in June 1997 (described below)
a portion of which was used to repay outstanding borrowings under the Chase
Credit Facility.
Capital Expenditures and Commitments
In response to changing market conditions and restricted capital
availability, in 1999 the Company took a more risk averse approach to its
exploration and development program resulting in a much lower capital budget
than previous years. During 1999, the Company signed participation agreements
over certain exploration leases with Coastal Oil & Gas USA., L.P. ("Coastal")
and LLOG Exploration Inc ("LLOG"). Under the terms of the participation
agreements the Company recovered $3.4 million in leasehold costs. In addition,
Coastal and LLOG were required to pay a disproportionate share of the drilling
costs of the initial test wells on the leases to earn their respective working
interests.
During 1999, the Company spent $19 million in capital and exploration
expenditures. In the comparable periods in 1998 and 1997 the Company spent $125
million and $155 million, respectively. During the 1999 year, the Company was a
successful bidder on 4 leases at the Central and Western Gulf of Mexico federal
lease sales and paid $2.7 million for award of the leases. In addition the
Company was awarded a Texas State lease for $126,875 as successful bidder at the
State of Texas lease sale in October 1999.
Given the uncertainties arising from the Company's negotiations with the
holders of the 9 1/2% Notes on the restructure of this debt, the Company has not
formulated a capital expenditure program for 2000. The Company does intend to
participate in certain exploration and development activities that it expects
its joint venture partners to propose during the year. However, if liquidity
problems restrict the Company from participating in operations proposed by its
joint venture partners, the Company would incur substantial non-recourse
penalties under its joint venture agreements. These penalties would not create
liabilities to the Company but would require the forfeiture of certain mineral
interests and of the revenues associated with those mineral interests until the
penalties were recouped by the joint venture partners.
Senior Secured Bank Loans
In April 1996, the Company entered into the Chase Credit Facility. Under
the Chase Credit Facility, $3.2 million in principal was due on October 29,
1999. Of this amount, $2.075 million resulted from the required repayment of
principal with respect to a borrowing base redetermination on July 30, 1999, and
$1.125 million was a regularly scheduled quarterly installment payment. The
Company did not make the payment, which created a default under the Chase Credit
Facility.
27
<PAGE> 28
Subsequent to year end, the Company completed a refinancing of its Chase
Credit Facility with a $30 million revolving credit facility with Foothill.
Outstanding borrowings accrue interest at the prime rate plus a margin of 2.5%
per annum. The Company is also required to pay an unused line fee of 0.5% of the
unused line available for borrowing, a $10,000 per month service charge and
certain other fees and expenses. The Company has paid all interest that is
presently due. Borrowings under the Foothill Credit Facility were $10.9 million
at March 22, 2000.
The Foothill Credit Facility is secured by a lien on all of the Company's
assets and contains financial covenants that require the Company to maintain the
sum of net income plus interest expense, plus income tax expense, plus
depreciation and amortization expense at no less than the following:
<TABLE>
<CAPTION>
Period Amount
- ------------------------------------------------------------------------ ------------
<S> <C>
Three months ending March 31, 2000 $ 1,900,000
Six months ending June 30, 2000 $ 6,700,000
Nine months ending September 30, 2000 $ 12,000,000
Twelve months ending December 31 2000 $ 16,500,000
and the twelve month period ending each March 31, June 30, September
30 and December 31 thereafter
</TABLE>
In addition, the Foothill Credit Facility limits the amount that the
Company can spend on capital expenditures and development expenditures. The
Company was in compliance with all financial covenants under the Foothill Credit
Facility at February 29, 2000.
The Company's ability to borrow under the Foothill Credit Facility is
dependent upon the reserve value of its oil and gas properties, as determined
monthly by Foothill. If the reserve value of the Company's borrowing base
declines, the amount available to the Company under the Foothill Credit Facility
will be reduced and, to the extent that the borrowing base is less than the
amount then outstanding (including letters of credit) under the Foothill Credit
Facility, the Company will be obligated to repay such excess amount immediately
upon receipt of notice from Foothill. Additionally, Foothill also has broad
discretion to place reserves against the borrowing base. At March 22, 2000, the
Company's borrowing base was $29.3 million. After subtracting borrowings and
letters of credit issued under the Foothill Credit Facility to secure hedging
obligations, the Company had $15.3 million available for additional borrowing at
March 22, 2000.
Public Senior Subordinated Indebtedness
In June 1997 the Company issued $100 million of 9 1/2% Notes. The principal
is due in a lump sum in June 2007. The 9 1/2% Notes were issued at a discount
with a yield to maturity of 9.56% per annum. Interest at the rate of 9.5% per
annum is payable semiannually on June 15 and December 15 of each year. The net
proceeds from the offering of the Notes were approximately $96.4 million. The
Company used a portion of the net proceeds to repay borrowings under the Chase
Credit Facility. The remainder of the net proceeds was used to provide working
capital for the Company and to fund further exploration and development of its
oil and gas properties, the acquisition of lease blocks and other general
corporate purposes.
The Company engaged a financial advisor in October 1999 to assist with the
restructure of its 9 1/2% Notes due 2007. The Company did not make the interest
payment due on the 9 1/2% Notes at December 15, 1999, and is in default under
the Indenture governing the 9 1/2% Notes. The Company began discussions with a
subcommittee of holders of the 9 1/2% Notes on January 18, 2000 to restructure
the indebtedness due under the 9 1/2% Notes. While the Company is hopeful that a
solution acceptable to both the holders of the 9 1/2% Notes and the Company can
be reached, there can be no assurance that the Company will be able to reach
agreement on these proposals. Whether or not an acceptable agreement is reached,
it is likely that the Company will need to seek protection
28
<PAGE> 29
under the United States Bankruptcy Code. The Company does not intend to make any
further public comments about the restructuring process until either agreement
on a solution is reached with the holders of the 9 1/2% Notes or it becomes
apparent that no such agreement can be reached.
Subordinate Loans from Parent
Petsec Energy Ltd made an initial cash investment of $11.4 million in the
Company and subsequently increased this investment with advances of $18.5
million from an Australian offering of Ordinary Shares in September 1995 and
$31.0 million out of the net proceeds from a U.S. offering of ADRs in July 1996.
Funds advanced by the Parent historically have been provided substantially
in the form of subordinated loans denominated in Australian and US dollars.
These loans are subordinated to the payment of both the Foothill Credit Facility
and the 9 1/2% Notes. At December 31, 1999, the US dollar loans bear interest at
7.08% and in the case of Australian dollar borrowings, 6.48%. However the
Foothill Credit Facility currently restricts the payment of interest on the
subordinated loans to the Parent, and the biannual interest payment normally
paid in January was not paid in January 2000. The loans from the Parent do not
have mandatory principal payments due until December 31, 2007. Any payments or
distributions made by the Company to its Parent have been for reimbursement of
direct expenses incurred in connection with the Company's operations and
interest under the subordinated loans. The Parent has no commitments to make any
further advances to the Company.
HEDGING TRANSACTIONS
From time to time, the Company has utilized hedging transactions with
respect to a portion of its oil and gas production to achieve a more predictable
cash flow and to reduce its exposure to oil and gas price fluctuations. While
these hedging arrangements limit the downside risk of adverse price movements,
they may also limit future revenues from favorable price movements. The use of
hedging transactions also involves the risk that the counterparties will be
unable to meet the financial terms of such transactions. The credit worthiness
of counterparties is subject to continuing review and full performance is
anticipated. The Company limits the duration of the transactions and the
percentage of the Company's expected aggregate oil and gas production that may
be hedged.
The Company accounts for these transactions as hedging activities and,
accordingly, gains or losses are included in oil and gas revenues when the
hedged production is delivered.
The Company enters into forward swap contracts with major financial
institutions to reduce the price volatility on the sale of oil and gas
production. In swap agreements, the Company receives the difference between a
fixed price per unit of production and a floating price issued by a third party.
If the floating price is higher than the fixed price, the Company pays the
difference.
The Company also enters into collar agreements with third parties. A collar
agreement is similar to a swap agreement except that the Company receives the
difference between the floor price and the floating price if the floating price
is below the floor. The Company pays the difference between the ceiling price
and the floating price if the floating price is above the ceiling.
The Company has proved reserves sufficient to cover all of these contracts
and does not trade in derivatives without underlying forecasted production and
proved reserves.
For the year ended December 31, 1999, hedging activities increased revenues
by $0.3 million. For the year ended December 31, 1998, hedging activities
increased revenues by $7.7 million. For the year ended December 31, 1997,
hedging activities reduced revenues by $4.4 million.
29
<PAGE> 30
YEAR 2000
As of the date of this report, the Company has not experienced any
significant disruptions in its operations during the transition into the Year
2000 ("Y2K"). In the third quarter of 1999, the Company announced that it had
completed its assessment of Y2K risks and that it had formulated contingency
plans to mitigate potential adverse effects which might have arisen from
noncompliant systems or third parties who had not adequately addressed the Y2K
issue. To date, the Company has not incurred any significant costs related to
Y2K issues. The Company will continue to monitor its operations and systems and
address any date-related problems that may arise as the year progresses.
NEW ACCOUNTING PRONOUNCEMENTS
In June of 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 (Statement 133), "Accounting for
Derivative Instruments and Hedging Activities". Statement 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
Statement 133 requires that all derivatives be recognized as either assets or
liabilities in the balance sheet and measured at fair value. The accounting for
changes in the fair value of a derivative (that is, gains and losses) depends on
the intended use of the derivative and resulting designation. If certain
conditions are met, a derivative may be specifically designated as a "fair value
hedge," "cash flow hedge," or a hedge of the foreign currency exposure of a net
investment in a foreign operation. Statement 133 amends and supersedes a number
of existing Statements of Financial Accounting Standards, and nullifies or
modifies the consensus reached in a number of issues addressed by the Emerging
Issues Task Force. Statement 133, as amended, is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company is assessing
the impact of adoption of Statement 133, and at the present time, has not
quantified the effect of adoption or continuing impact of such adoption.
FORWARD-LOOKING STATEMENTS
This Annual Report includes "forward-looking statements" within the meaning
of Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). All statements other than
statements of historical facts included in this Annual Report, including without
limitation statements under "Item 7 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Item 1 -- Business"
regarding the planned capital expenditures, oil and gas production, the
Company's financial position, business strategy and other plans and objectives
for future operations, are forward-looking statements. Although the Company
believes that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct. There are numerous risks and uncertainties that can affect the
outcome of certain events including many factors beyond the control of the
Company. These factors include but are not limited to the matters that are
described below. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by such factors.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from adverse changes in commodity
prices and interest rates as discussed below.
30
<PAGE> 31
Commodity Price Risk. The Company produces and sells natural gas and crude
oil. As a result, the Company's financial results can be significantly affected
as these commodity prices fluctuate widely in response to changing market
forces. The Company has made use of derivative financial instruments such as
forward swap contracts and collars as a hedging strategy to manage commodity
prices associated with oil and gas sales and to reduce the impact of commodity
price fluctuations. The Company used the hedge or deferral method of accounting
for these instruments and, as a result, gains and losses on commodity derivative
financial instruments were generally offset by similar changes in the realized
prices of the commodities. See Note 11 to the Financial Statements.
31
<PAGE> 32
The Company uses a sensitivity analysis technique to evaluate the
hypothetical effect that changes in the market value of crude oil and natural
gas may have on the fair value of the Company's derivative instruments. At
December 31, 1999, the potential change in the fair value of commodity
derivative instruments assuming a 10 percent adverse movement in the underlying
commodity price is a $1.4 million increase in the deferred cost at December 31,
1999.
For purposes of calculating the hypothetical change in fair value, the
relevant variables are the type of commodity (crude oil or natural gas), the
commodities futures prices and volatility of commodity prices. The hypothetical
fair value is calculated by multiplying the difference between the hypothetical
price and the contractual price by the contractual volumes.
Interest Rate Risk. Currently, the Company has no open interest rate swap
or interest rate lock agreements.
Therefore, the Company's exposure to changes in interest rates primarily
results from its long-term debt with both fixed and floating interest rates. The
following table presents principal amounts (stated in thousands) and related
average interest rates by year for the Company's debt obligations at December
31, 1999:
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 THEREAFTER TOTAL FAIR VALUE
--------- --------- --------- --------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt, including
current maturities
Variable rates - bank(1) 7,875 -- -- -- -- -- 7,875 7,875
Average interest rates 8.2% -- -- -- -- -- 8.2%
Variable rates - shareholder loan -- -- -- -- -- 37,330 37,330 N/A
Average interest rates 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0%
Fixed rates(2) 100,000 -- -- -- -- -- 100,000 45,000
Average interest rates 9.5% -- -- -- -- -- 9.5%
</TABLE>
If market interest rates average 1% higher or lower in 2000 than in 1999,
interest expense on variable rate debt would increase (decrease), and loss
before income taxes would increase (decrease) by approximately $0.5 million
based on the total variable rate debt outstanding at December 31, 1999.
(1) Amount subsequently refinanced - See Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations -"Liquidity and
Capital Resources."
(2) Amount contractually due in 2007, however, the 9 1/2 % Notes are in default
at December 31, 1999.- See Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations -"Liquidity and Capital
Resources."
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial information in this form 10-K refers to Petsec Energy Inc., a
wholly owned subsidiary of Petsec Energy Ltd. The publicly listed Petsec Energy
Ltd files its annual consolidated financial statements separately under form
20-F and a summary of its quarterly consolidated financial statements under form
6-K. The response to this item begins on page 38.
32
<PAGE> 33
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT
DIRECTORS AND EXECUTIVES
The following table sets forth the name, age and position of each person
who is a director, executive officer, key employee, or who provides services to
the Company.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Terrence N. Fern 52 Chairman of the Board and Chief Executive Officer and President
Maynard V. Smith 49 General Manager--Exploration and Production
Ross A. Keogh 40 Director, Vice-President--Chief Financial Officer and Treasurer
James E. Slatten III 41 Director, Vice-President--Land and Legal and Secretary
John T. Bellatti 42 Vice-President--Exploration and Chief Geophysicist
William R. Sack 38 Vice-President--Exploration and Joint Ventures
Howard H. Wilson, Jr. 41 Vice-President--Operations
</TABLE>
Mr. Smith provides services to the Company through an arrangement with the
Company's parent.
The following biographies describe the business experience of the
directors, executive officers and those who provide services to the Company.
Directors serve annual terms.
TERRENCE N. FERN has served as Chairman and Chief Executive Officer of the
Company since 1990. Mr. Fern has over 25 years of extensive international
experience in petroleum and minerals exploration, development and financing. Mr.
Fern holds a Bachelor of Science degree from The University of Sydney and has
followed careers in both exploration geophysics and natural resource investment.
33
<PAGE> 34
MAYNARD V. SMITH has served as General Manager--Exploration and Production
since 1990. Mr. Smith has over 20 years of oil and gas exploration experience
and has served in various technical and executive positions with Gulf Oil
Corporation, Tenneco Oil Company, Natomas Oil Company, and Barcoo Petroleum
Company in the United States, Australia and Southeast Asia. Mr. Smith holds a
Bachelor of Science degree in Geology from the California State University at
San Diego.
ROSS A. KEOGH has served as Treasurer of the Company since 1990 and has 20
years experience in the oil and gas industry. Between 1979 and 1989, Mr. Keogh
worked in the financial accounting and budgeting divisions of Total Oil Company
and as Joint Venture Administrator for Bridge Oil Limited in Australia. Mr.
Keogh holds a Bachelor of Economics degree, with a major in Accounting, from
Macquarie University in Sydney. Mr. Keogh was appointed a Director in March 1998
and Chief Financial Officer in November 1998. Mr. Keogh is also Chief Financial
Officer of the Parent.
JAMES E. SLATTEN III who joined the Company in January 1998 is
Vice-President--Land and Legal. He has over 16 years experience in corporate and
energy law. Prior to joining the Company he was a partner in the Louisiana law
firm of Gordon, Arata, McCollam & Duplantis. Mr. Slatten holds a Bachelor of
Arts degree in political science and economics from the University of
Southwestern Louisiana and post-graduate degrees in law (J.D.) and business
management (M.H.A.) from Tulane University. Mr. Slatten was appointed Director
and Secretary in March 1998.
JOHN T. BELLATTI is Vice President--Exploration and Chief Geophysicist of
the Company. He joined the Company in January 1996. Mr. Bellatti worked for
Shell Oil Co. between 1981 and 1995 in various technical and supervisory
positions in the Michigan Basin and the shallow water Gulf of Mexico. He holds a
Bachelor of Arts degree in Physics from Hanover College, a Master of Science
degree in Geophysics from the Colorado School of Mines and a Master of Business
Administration in Finance from the University of Houston.
WILLIAM R. SACK is Vice President--Exploration and Joint Ventures for the
Company. Mr. Sack joined the Company in January 1996. Between 1988 and 1996 Mr.
Sack held various technical and supervisory positions with Shell Offshore Inc.,
involving exploration, development and business activities. Mr. Sack holds a
Bachelor of Science degree in Earth Science and Physics from St. Cloud State
University (MN), a Master of Science degree in Geology from Michigan State
University, and a Master's degree in Business Administration from Tulane
University.
HOWARD H. WILSON, JR. has served as Vice President--Operations of the
Company since 1993. Between 1981 and 1993, Mr. Wilson held various technical and
managerial positions with Placid Oil Company and Nerco Oil and Gas, Inc.
involving onshore and offshore oil and gas fields in Louisiana, Mississippi and
Texas. Mr. Wilson holds a Bachelor of Science degree in Petroleum Engineering
from the Louisiana Polytechnic Institute.
ITEM 11 - EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth certain information for the three years
ended December 31, 1999 with respect to the Chief Executive Officer of the
Company and the four other most highly compensated Executive Officers
(collectively, the "Named Executive Officers"). The Company has entered into
employment agreements with certain management and technical personnel.
34
<PAGE> 35
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------------------------------------
SECURITIES
NAME OTHER ANNUAL UNDERLYING ALL OTHER
AND PRINCIPAL SALARY BONUS COMPENSATION OPTIONS/ COMPENSATION
POSITION YEAR ($) ($) ($) (2) SARS (3) ($)
- ------------------------------- ---- ------- ------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Terrence N. Fern (1) .......... 1999 0 0 0 0 0
Chairman of the Board, 1998 0 0 0 0 0
Chief Executive Officer 1997 0 0 0 0 0
and President
Ross A. Keogh ................. 1999 172,114 20,000 0 450,000 0
Director, Vice President, 1998 154,066 0 0 0 0
Chief Financial Officer 1997 134,500 0 0 0 0
and Treasurer
Howard H. Wilson, Jr........... 1999 171,736 14,000 0 375,000 0
Vice President--Operations 1998 165,078 0 0 0 0
1997 150,000 32,007 0 0 0
John T. Bellatti............... 1999 157,733 23,500 0 450,000 0
Vice President--Exploration 1998 151,865 0 0 0 0
and Chief Geophysicist 1997 131,150 23,847 0 0 0
William R. Sack................ 1999 157,430 23,500 0 450,000 0
Vice President(Exploration 1998 151,593 0 0 0 0
and Joint Ventures 1997 131,150 23,717 28,334 0 0
</TABLE>
(1) Mr. Fern receives no compensation from the Company. A company controlled by
Mr. Fern's family provides management services to the Parent. The cost of
the services provided was $298,000, $437,000 and $290,000 in 1999, 1998 and
1997, respectively.
(2) "Other Annual Compensation" includes payments to Mr. Sack of $28,334 for
relocation costs.
(3) Options issued are in respect of ordinary shares in the Parent.
SHARE AND OPTION PLANS
The Parent maintains an Employee Share Plan (the "Share Plan") and an
Employee Share Option Plan (the "Option Plan"). Both plans were approved by the
Parent's shareholders at the Parent's 1994 Annual General Meeting and are
administered by a committee (the "Remuneration Committee") appointed by the
Board of Directors of the Parent. The total number of Ordinary Shares issued or
subject to option under all share and option plans during any five-year period
may not exceed 6.5% of the total number of issued Ordinary Shares at the
relevant date.
The Share Plan provides for the issue of Ordinary Shares to employees and
directors at prevailing market prices. Purchases pursuant to the Share Plan are
financed by interest-free loans from the Parent, subject to certain conditions
set by the Remuneration Committee. Grants are subject to a minimum six-month
vesting term and the vesting may also be contingent upon the market price of the
Ordinary Shares on the Australian Stock Exchange ("ASX") achieving certain
benchmarks. After the vesting of such shares, the grantee may either repay the
Parent loan or sell such shares and retain the difference. As of December 31,
1999, all employees and directors of the Company, in the aggregate, owned
1,525,000 Ordinary Shares subject to the terms of this Plan.
35
<PAGE> 36
The Option Plan provides for the issue of options to purchase Ordinary
Shares to employees and directors at prevailing market prices and subject to
certain conditions set by the Remuneration Committee. Grants are subject to a
minimum six-month vesting term and the vesting may also be contingent upon the
market price on the ASX of the Ordinary Shares achieving certain benchmarks.
Options granted under the Option Plan expire five years from the date of grant.
As of December 31, 1999, all directors and employees of the Company, in the
aggregate, held options to purchase an aggregate of 2,624,500 Ordinary Shares
pursuant to the Option Plan.
STOCK OPTION GRANTS AND EXERCISES
The following table sets forth the stock options granted by the Parent to
the Named Executive Officers of the Company in 1999.
OPTIONS GRANTED BY PARENT IN THE LAST FISCAL YEAR
<TABLE>
<CAPTION>
% OF
TOTAL
NUMBER OF OPTIONS
ORDINARY GRANTED TO POTENTIAL REALIZABLE VALUE
SHARES EMPLOYEES EXERCISE AT ASSUMED ANNUAL RATES OF
UNDERLYING IN 1999 OR BASE STOCK PRICE APPRECIATION
OPTIONS FISCAL PRICE EXPIRATION FOR OPTION TERM (1)(2)(3)
NAME GRANTED (#) YEAR ($/SH) (1) DATE 0% 5% 10%
- ---- ----------- ------ ---------- -------------- -- -- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Terrence N. Fern --
Ross A. Keogh 450,000 16.2% A$0.41 April 18, 2004 -- A$49,500 A$540,000
Howard H. Wilson, Jr. 375,000 13.5% A$0.41 April 18, 2004 -- A$41,250 A$450,000
John T. Bellatti 450,000 16.2% A$0.41 April 18, 2004 -- A$49,500 A$540,000
William R. Sack 450,000 16.2% A$0.41 April 18, 2004 -- A$49,500 A$540,000
</TABLE>
(1) The exercise prices and the potential realizable value for the options are
in Australian dollars ("A$"), being the currency of the ordinary shares
subject to the options. The exchange rate on March 24, 2000 was
US$0.6064=A$1.00, based on the noon buying rate in New York City for cable
transfers in Australian dollars as certified for customs purposes by the
Federal Reserve Bank of New York.
(2) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of the Parent's future
Ordinary Share prices. These amounts represent certain assumed rates of
appreciation only. Actual gains, if any, on stock option exercises are
dependent on the future performance of the Ordinary Shares and overall
stock market conditions. The amounts reflected in this table may not
necessarily be achieved.
(3) The options in this table are subject to vesting periods of one, two or
three year periods. Options with one year vesting are only exercisable if
the market price of the Parent's ordinary shares is at least A$0.50, those
options with two year vesting are only exercisable if the market price of
the Parent's ordinary shares is at least A$0.60 and those with three year
vesting are only exercisable if the market price of the Parent's ordinary
shares is at least A$0.70. The potentially realizable values reflect the
fact that the options have no value unless these targets are reached.
The following table sets forth the aggregated option exercises by each of
the Named Executive Officers during the year ended December 31, 1999.
36
<PAGE> 37
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTIONS VALUE
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS AT
OPTIONS AT FISCAL YEAR-END
SHARES VALUE FISCAL YEAR-END ($)
ACQUIRED ON REALIZED EXERCISABLE/ EXERCISABLE/
Name EXERCISE (#) ($) UNEXERCISABLE UNEXERCISABLE
---- ------------ ---------- -------------------- --------------------
<S> <C> <C> <C> <C>
Terrence N. Fern -- $ -- --/-- --/--
Ross A. Keogh -- $ -- --/450,000 --/--
Howard H. Wilson, Jr. -- $ -- --/375,000 --/--
John T. Bellatti -- $ -- --/450,000 --/--
William R. Sack -- $ -- --/450,000 --/--
</TABLE>
COMPENSATION OF DIRECTORS
Anthony J. Walton resigned as a director of the Company on December 15,
1998. Mr. Walton was not paid any director's fees in 1998. In 1997, Mr. Walton
was paid $20,000 for services as a director pursuant to an arrangement whereby
Mr. Walton provided financial advice to the Company. There were no other
arrangements pursuant to which directors of the Company received compensation
for their services as directors in 1999, 1998 or 1997.
EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Effective May 1, 1999, John T. Bellatti, Ross A. Keogh, William R. Sack,
James E. Slatten, and Howard H. Wilson entered into new employment agreements
with the Company. The agreements provide that they receive a base salary which
is reviewed annually, and are entitled to participate in any incentive
compensation programs established by the Parent for the Company's executive
officers. In addition should these employees be terminated without cause or
certain material conditions of their employment be altered, they are entitled to
receive a severance benefit equal to between two and three years' base salary
due under their contracts net of any benefit received under the Petsec Energy
Inc. Year 2000 Severance Plan described below.
Effective December 31, 1999 the Petsec Energy Inc. Year 2000 Severance Plan
was adopted whereby under certain conditions the employees of the Company are
entitled to receive a severance benefit if they are terminated without cause or
certain material conditions of their employment are altered prior to January 1,
2001. The severance benefit is an amount equal to base salary for three months
plus three weeks per year of service.
37
<PAGE> 38
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Common Stock of the Company is owned by Petsec USA Inc. which is a
wholly owned subsidiary of the ultimate Parent Company, Petsec Energy Ltd. See
"Notes to Financial Statements Note 1(a) Description of Business" on page 44.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has historically been financed in part with borrowings from its
immediate parent company, Petsec (U.S.A.), Inc., which is a wholly-owned
subsidiary of Petsec Energy Ltd. Outstanding borrowings (the "Subordinated
Shareholder Loan") are made by the Company under a subordinated note (the
"Subordinated Shareholder Note") in either or both U.S. or Australian dollars,
which effective as of June 1, 1997 bears interest at market rates, currently
LIBOR plus 1.5% or, in the case of Australian dollar borrowings, the Australian
bank bill rate plus 1.5%. The Subordinated Shareholder Note provides that the
Subordinated Shareholder Loan (i) is subordinated in right of payment to all
present and future Indebtedness of the Company for borrowed money and (ii) not
subject to any mandatory principal or sinking fund payment, or mandatory
repurchase obligation, until 91 days following the final Stated Maturity of the
Senior Subordinated Notes due 2007. The Company has agreed not to modify these
two terms of the Subordinated Shareholder Loan until all outstanding Notes have
been paid in full, retired or acquired in their entirety by Affiliates of the
Company. As of December 31, 1999, the amount of Subordinated Shareholder Loan
outstanding was $37.3 million.
One executive, Maynard Smith, owns overriding royalty interests on certain
leases held by the Company, which were issued prior to July 1994 as incentives.
As of July 1994, the granting of overriding royalty interests as an incentive
was replaced by grants under the Parent's Option Plan.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a). FINANCIAL STATEMENTS
38
<PAGE> 39
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report ........................................................................ 40
Balance Sheets as of December 31, 1998, and 1999 ..................................................... 41
Statements of Operations and Retained Earnings (Deficit) for the years ended
December 31, 1997, 1998 and 1999 .................................................................... 42
Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999 ......................... 43
Notes to Financial Statements ....................................................................... 44
</TABLE>
39
<PAGE> 40
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Petsec Energy Inc.
We have audited the accompanying balance sheets of Petsec Energy Inc. as of
December 31, 1999 and 1998, and the related statements of operations and
retained earnings (deficit), and cash flows for each of the years in the
three-year period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to report on
these financial statements based on the results of 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 report.
In our opinion, the 1998 and 1997 financial statements referred to above present
fairly, in all material respects, the financial position of Petsec Energy Inc.
as of December 31, 1998, and the results of its operations and its cash flows
for each of the years in the two-year period ended December 31, 1998, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that Petsec
Energy Inc. will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has suffered losses from operations and has
net capital deficiencies. During 1999, the Company defaulted on its $100 million
Senior Subordinated Notes due 2007 through the non-payment of interest
obligations. At December 31, 1999, these circumstances raise substantial doubt
about the entity's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 3. The 1999 financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Because of the significance of the uncertainty discussed in the preceding
paragraph, we are unable to express, and we do not express, an opinion on the
accompanying 1999 financial statements.
KPMG LLP
New Orleans, Louisiana
February 25, 2000
40
<PAGE> 41
PETSEC ENERGY INC.
A WHOLLY OWNED SUBSIDIARY OF PETSEC ENERGY LTD
BALANCE SHEETS
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31,
1998 1999
------------ ------------
<S> <C> <C>
Current Assets
Cash $ 1,024 $ 3,907
Accounts receivable 8,279 3,980
Other receivables 4,626 31
Inventories of crude oil 45 45
Prepaid expenses 274 1,363
Assets held for sale 68,300 --
------------ ------------
Total Current Assets 82,548 9,326
------------ ------------
Property, plant and equipment - at cost under the successful
efforts method of accounting for oil and gas properties 99,802 81,587
Other Assets 2,682 2,595
------------ ------------
Total Assets $ 185,032 $ 93,508
============ ============
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current Liabilities:
Trade accounts payable 8,572 2,531
Interest payable 2,214 6,497
Other accrued liabilities 3,381 8,011
Bank credit facility 67,250 7,875
Senior Subordinated notes (due 2007, in default) -- 99,684
------------ ------------
Total Current Liabilities 81,417 124,598
Senior Subordinated notes 99,656 --
Bank credit facility 6,750 --
Subordinated shareholder loan 36,792 37,330
Provision for dismantlement 2,488 2,893
------------ ------------
Total Liabilities $ 227,103 $ 164,821
------------ ------------
Shareholder's Deficit:
Common stock, $1 par value; authorized 1,000,000 shares;
issued and outstanding 1 share -- --
Additional paid-in-capital 21,572 21,818
Accumulated deficit (63,643) (93,131)
------------ ------------
Total Shareholder's Deficit (42,071) (71,313)
------------ ------------
$ 185,032 $ 93,508
============ ============
</TABLE>
See accompanying notes to financial statements.
41
<PAGE> 42
PETSEC ENERGY INC.
A WHOLLY OWNED SUBSIDIARY OF PETSEC ENERGY LTD
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
(Dollars in thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Revenue:
Oil and gas sales $ 125,139 $ 92,017 $ 31,000
Operating expenses:
Lease operating expenses 10,825 14,379 6,808
Production taxes 702 610 237
Exploration expenditures 7,328 7,427 2,750
Dry hole costs and abandonments 10,454 27,503 2,840
Impairments -- 72,916 7,480
General and administrative 6,054 7,868 5,287
Stock compensation 905 591 246
Depletion, depreciation and amortization 63,864 57,576 21,261
------------ ------------ ------------
Total operating expenses 100,132 188,870 46,909
------------ ------------ ------------
Income (loss) from operations 25,007 (96,853) (15,909)
Other income (expenses):
Interest expense (7,586) (11,721) (13,517)
Interest income 871 302 260
Other, principally foreign exchange gain (loss) 1,418 517 (322)
------------ ------------ ------------
(5,297) (10,902) (13,579)
------------ ------------ ------------
Income (loss) before income taxes 19,710 (107,755) (29,488)
Income taxes (6,610) 16,458 --
------------ ------------ ------------
Net income (loss) 13,100 (91,297) (29,488)
Retained earnings (deficit) at beginning of period 14,554 27,654 (63,643)
------------ ------------ ------------
Retained earnings (deficit) at end of period $ 27,654 $ (63,643) $ (93,131)
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
42
<PAGE> 43
PETSEC ENERGY INC.
A WHOLLY OWNED SUBSIDIARY OF PETSEC ENERGY LTD
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 13,100 $ (91,297) $ (29,488)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depletion, depreciation and amortization 63,864 57,576 21,261
Deferred income taxes 6,610 (16,458) --
Dry hole costs and abandonments 10,454 27,503 2,840
Impairments -- 72,916 7,480
Other (323) 1,112 570
Changes in operating assets and liabilities:
Decrease (increase) in receivables (2,123) 5,699 4,299
Decrease (increase) in inventories 2 (2) --
Increase in prepayments (90) (16) (1,089)
Decrease (increase) in other receivables 21 (4,546) 4,595
Increase (decrease) in trade accounts payable (1,494) 755 (3,588)
Increase (decrease) in other accrued liabilities 862 975 (26)
Increase in interest payable 1,518 494 4,283
------------ ------------ ------------
Net cash provided by operating activities 92,401 54,711 11,137
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale of oil and gas properties -- -- 71,730
Lease acquisitions (8,074) (8,771) (2,271)
Exploration and development expenditures (136,561) (125,871) (11,585)
Other asset additions (458) (476) (3)
------------ ------------ ------------
Net cash (used in) provided by investing activities (145,093) (135,118) 57,871
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from senior subordinated notes 96,446 -- --
Proceeds from bank credit facility 21,000 74,000 --
Repayment of bank credit facility (58,000) -- (66,125)
Proceeds from shareholder loan 1,500 -- --
Repayment of shareholder loan (1,165) -- --
------------ ------------ ------------
Net cash provided by (used in) financing activities 59,781 74,000 (66,125)
------------ ------------ ------------
Net increase (decrease) in cash 7,089 (6,407) 2,883
Cash at beginning of period 342 7,431 1,024
------------ ------------ ------------
Cash at end of period $ 7,431 $ 1,024 $ 3,907
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
43
<PAGE> 44
PETSEC ENERGY INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
Petsec Energy Inc. (the Company), located in Lafayette, Louisiana, is a
wholly-owned subsidiary of Petsec (U.S.A.) Inc., which is a wholly-owned
subsidiary of Petsec Energy Ltd (the Parent Company), incorporated in Australia.
The Company's business is comprised of one operating segment which is the
exploration, development and production of oil and gas; therefore, the Company
is directly affected by fluctuating economic conditions of the oil and gas
industry. The Company's activities are focused in the shallow waters of the Gulf
of Mexico, primarily offshore Louisiana and Texas.
(b) Income Taxes
The Company is included in the consolidated federal and state income tax
returns of Petsec (U.S.A.) Inc. The income tax provision has been prepared as if
the Company was a separate taxpayer.
The Company accounts for income taxes under the asset and liability method
which requires that 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. 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.
(c) Oil and Gas Properties
The Company uses the successful efforts method of accounting for oil and
gas producing activities. Costs to acquire mineral interests in oil and gas
properties, to drill and equip exploratory wells that find proved reserves, and
to drill and equip development wells are capitalized. Costs to drill exploratory
wells that do not find proved reserves, and geological and geophysical costs are
expensed.
Unproved oil and gas properties are periodically assessed on a
property-by-property basis, and a loss is recognized to the extent, if any, that
the cost of the property has been impaired. Capitalized costs of producing oil
and gas properties are depreciated and depleted by the units-of-production
method.
44
<PAGE> 45
The Company assesses the impairment of capitalized costs of proved oil and
gas properties on a field-by-field basis, utilizing its current estimate of
future revenues and operating expenses associated with proved reserves. In the
event net undiscounted cash flow is less than the carrying value, an impairment
loss is recorded based on estimated fair value, which would consider discounted
future net cash flows.
The estimated costs of dismantling and abandoning offshore oil and gas
properties are provided currently using the units-of-production method. Such
provision is included in depletion, depreciation and amortization in the
accompanying statement of operations.
On the sale or retirement of a complete unit of a proved property, the cost
and related accumulated depletion, depreciation and amortization are eliminated
from the property accounts, and the resultant gain or loss is recognized.
45
<PAGE> 46
PETSEC ENERGY INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(d) Other Property, Plant and Equipment
Depreciation is calculated using the straight-line method over the
estimated useful lives of the assets.
(e) Inventories
Inventories are stated at the lower of cost or market. Cost is determined
principally on the average cost method.
(f) Hedging Activities
The Company uses derivative commodity instruments to manage commodity price
risks associated with future natural gas and crude oil production but does not
use them for speculative purposes. The Company's commodity price hedging program
utilizes swap contracts and collars. To qualify as a hedge, these contracts must
correlate to anticipated future production such that the Company's exposure to
the effects of commodity price changes is reduced. The gains and losses related
to these hedging transactions are recognized as adjustments to the revenue
recorded for the related production. The Company uses the accrual method of
accounting for derivative commodity instruments. At inception, any contract
premiums paid are recorded as prepaid expenses and, upon settlement of the
hedged production month, are included with the gains and losses on the contracts
in oil and gas revenues.
In June of 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 (Statement 133), "Accounting for
Derivative Instruments and Hedging Activities". Statement 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
Statement 133 requires that all derivatives be recognized as either assets or
liabilities in the balance sheet and measured at fair value. The accounting for
changes in the fair value of a derivative (that is, gains and losses) depends on
the intended use of the derivative and resulting designation. If certain
conditions are met, a derivative may be specifically designated as a "fair value
hedge," "cash flow hedge," or a hedge of the foreign currency exposure of a net
investment in a foreign operation. Statement 133 amends and supersedes a number
of existing Statements of Financial Accounting Standards, and nullifies or
modifies the consensus reached in a number of issues addressed by the Emerging
Issues Task Force. Statement 133, as amended, is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company is assessing
the impact of adoption of Statement 133, and at the present time, has not
quantified the effect of adoption or continuing impact of such adoption.
(g) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(h) Reclassifications
Certain amounts in prior years' financial statements have been reclassified
to conform to the 1999 financial statement presentation.
46
<PAGE> 47
PETSEC ENERGY INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
1998 1999
------------ ------------
(dollars in thousands)
<S> <C> <C>
Oil and gas properties:
Proved $ 156,265 $ 163,398
Unproved 31,984 14,036
Production facilities 43,321 44,483
------------ ------------
231,570 221,917
Other 1,970 1,933
------------ ------------
233,540 223,850
Less accumulated depletion, depreciation and amortization (133,738) (142,263)
------------ ------------
$ 99,802 $ 81,587
============ ============
</TABLE>
The Company capitalized interest of $0.9 million, $3.5 million and $0 in
1997, 1998 and 1999, respectively, which is included in Property, Plant and
Equipment.
The non-cash impairment charges of approximately $72.9 million and $7.5
million in 1998 and 1999, respectively, were recorded in accordance with the
Statement of Financial Accounting Standards No.121 which requires that
long-lived assets held and used by the Company be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the asset may not be recoverable. In 1999, downward reserve adjustments based on
well performance resulted in the asset impairment. The carrying values for
assets determined to be impaired were adjusted to estimated fair value based on
projected future discounted net cash flow for such assets. In 1998, the
continued low prices received for the sale of oil and natural gas, along with
the sale of certain assets (See Note 14) resulted in the asset impairment. The
carrying values for assets determined to be impaired were adjusted to estimated
fair value based on projected future discounted net cash flow for such assets
and the value for the sale of certain assets sold in February 1999. The Company
has exposure to future impairments if oil and gas prices deteriorate from
December 1999 levels, which could have a material adverse effect on financial
condition, results of operations and liquidity in the near term.
3. BANK CREDIT FACILITY AND SENIOR SUBORDINATED NOTES
In 1999, the Company experienced liquidity problems. The Company has
suffered losses from operations and has net capital deficiencies. In order to
preserve available cash, the Company did not make principal payments due October
29, 1999 in the amount of $3.2 million under the Chase Credit Facility. The
Company was in default under the Chase Credit Facility, and this default caused
a cross default under the Company's Indenture governing its $100 million 9 1/2%
notes due 2007.
In January 2000, the Company refinanced its Chase Credit Facility with the
completion of a $30 million revolving credit facility with Foothill Capital
Corporation. Outstanding borrowings accrue interest at the prime rate plus a
margin of 2.5% per annum. The Company is also required to pay an unused line
fee of 0.5% of the unused line available for borrowing, and certain other fees
and expenses. The final maturity date of amounts due under the Foothill Credit
Facility is January 12, 2003. The Foothill Credit Facility is secured by a lien
on all the Company's assets and
47
<PAGE> 48
contains financial covenants that require the Company to maintain an increasing
level of debt coverage over the next twelve months. In addition, the Foothill
Credit Facility limits the amount that the Company can spend on capital and
developmental operations.
The Company's ability to borrow under the Foothill Credit Facility is
dependent upon the reserve value of its oil and gas properties, as determined
monthly by Foothill. If the reserve value of the Company's borrowing base
declines, the amount available to the Company under the Foothill Credit Facility
will be reduced and, to the extent that the borrowing base is less than the
amount then outstanding (including letters of credit) under the Foothill Credit
Facility, the Company will be obligated to repay such excess amount immediately
upon receipt of notice from Foothill. Additionally, Foothill also has broad
discretion to place reserves against the borrowing base.
The Company engaged a financial advisor in October 1999 to assist with the
restructure of its $100 million 9 1/2% Senior Subordinated Notes due 2007. The
Company did not make the interest payment due on the 9 1/2% Notes at December
15, 1999, and is in default under the indenture governing the 9 1/2% Notes.
Accordingly, at December 31, 1999 the 9 1/2% Notes are classified as current
obligations. The Company began discussions with a subcommittee of holders of the
9 1/2% Notes on January 18, 2000 to restructure the indebtedness due under the
9 1/2% Notes. While the Company is hopeful that a solution acceptable to both
the holders of the 9 1/2% Notes and the Company can be reached, there can be no
assurance that the Company will be able to reach agreement on a solution.
Whether or not a consensual resolution is reached, it is likely that the Company
will need to seek protection under the United States Bankruptcy Code.
The financial statements do not include any adjustments that might result
from the outcome of this uncertainty. At December 31, 1998 and 1999, the fair
value of the 9 1/2% Notes was $57 million and $45 million, respectively, based
on quoted market prices.
4. SUBORDINATED SHAREHOLDER LOAN
Petsec (U.S.A.) Inc. had advances outstanding to the Company of $36.8
million and $37.3 million at December 31, 1998 and 1999, respectively. A summary
(including foreign exchange gains and (losses)) of activity is as follows (in
thousands):
<TABLE>
<CAPTION>
Beginning Ending
Balance Additions Reductions Balance
<S> <C> <C> <C> <C>
1997 57,954 1,500 (22,156) 37,298
1998 37,298 -- (506) 36,792
1999 36,792 538 -- 37,330
</TABLE>
The average balance outstanding for the years ended 1997, 1998 and 1999 was
$47.0 million, $37.0 million, and $37.1 million, respectively.
48
<PAGE> 49
PETSEC ENERGY INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Prior to June 1, 1997, the advances were without interest charges or fixed
repayment terms. Effective June 1, 1997, Petsec (U.S.A.) Inc. began charging the
Company interest on the subordinated shareholder loan. At December 31, 1997, the
rates were 7.18% for the $29 million U.S. dollar loan and 6.83% for the
equivalent US$8.3 million Australian dollar denominated loan. In addition,
effective June 1, 1997, $20 million of the outstanding subordinated shareholder
loan was recapitalized as equity. At December 31, 1998 and 1999, the interest
rates were 6.83% and 7.08%, respectively, for the $29 million U.S. dollar loan
and 7.25% and 6.48%, respectively, for the equivalent US$7.8 million and US$8.3
million, respectively, Australian dollar denominated loan. The Company is unable
to determine the fair value of these loans because they are with a related
party. Petsec (U.S.A.) Inc. has confirmed that no repayments will be required
prior to December 31, 2007. The Foothill Credit Facility discussed in Note 3
currently restricts the payment of interest on the advances from the Parent.
Accordingly, no such payments have been made since July 1999.
5. SIGNIFICANT CUSTOMERS
Customers which account for 10% or more of revenue for the years ended
December 31, 1997, 1998 and 1999 follow:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Vision Resources, Inc. 46% 30% *
Duke Energy Trading & Marketing, L.L.C 22% 19% *
P G & E Energy Trading Corporation 16% * --
Natural Gas Clearinghouse 12% -- --
Enron North America Corp.** * 36% 49%
</TABLE>
* less than 10%
** formerly Columbia Energy Services Corporation
In 1999, the Company's joint venture partner, Apache Corporation, marketed
the Company's oil to various purchasers which accounted for 36% of the revenue
in 1999.
Based upon the current demand for oil and gas, the Company does not believe
the loss of any current purchasers would have a material adverse effect on the
Company. The Company continually evaluates the financial strength of its
customers but does not require collateral to support trade receivables.
6. STOCK COMPENSATION EXPENSE
The Parent has an Employee Option Plan and issues options to employees and
certain consultants of the Company to purchase stock in the Parent. The Parent's
equity securities are traded on both the Australian Stock Exchange and the OTC
Bulletin Board in the United States.
The Company is allocated stock compensation expense in respect to the
options in the Parent which are granted to the Company's employees and certain
consultants. The Parent accounts for its expense related to the stock option
plan in accordance with Statement of Financial Accounting Standards No. 123
(Statement 123), "Accounting for Stock-Based Compensation", under which it
recognizes as expense over the vesting period the fair value of all stock-based
awards on the date of grant. The amount is recorded as an increase to additional
paid-in-capital. The fair value was determined using the Black-Scholes valuation
49
<PAGE> 50
PETSEC ENERGY INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
method. The calculation takes into account the exercise price, expected life,
current price of underlying stock, expected volatility of the underlying stock,
expected dividend yield and the risk-free interest rate. The expected life,
volatility, dividend yield and risk-free interest rates used in determining the
fair value of options granted in 1997 were 1.5 to 2.5 years (weighted average
2.1 years); 30%; 0; and 5.8% to 6.5% per annum (weighted average 6.1% per
annum), respectively, and 2.4 to 4.5 years (weighted average 3.4 years); 37%; 0;
and 5.3%, respectively, in 1998. All employee options were cancelled in April
1999 and new employee options were issued. The expected life, volatility,
dividend yield and risk-free interest rates used in determining the fair value
of the new options granted in April 1999 were 1.5 to 3.5 years (weighted average
2.5 years); 76%; 0; and 5% respectively, in 1999.
7. INCOME TAXES
Although the Company is included in the consolidated federal and state
income tax returns of Petsec (U.S.A.) Inc., the income tax provision has been
prepared as if the Company was a separate taxpayer. Income tax attributable to
income or loss before income taxes was $6.6 million expense, $16.5 million
benefit and $0 for the years ended December 31, 1997, 1998, and 1999,
respectively, and differed from the amounts computed by applying the U.S.
federal income tax rate of 34% to income (loss) before income taxes as a result
of the following:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Computed "expected" tax expense (benefit) $ 6,701 $ (36,637) $ (10,026)
Increase (reduction) in income taxes resulting from:
Items not deductible for tax 30 481 448
State income tax expense (benefit) 368 (1,934) (564)
Other (489) -- --
Change in the balance of the valuation allowance for
deferred tax assets allocated to income tax expense -- 21,632 10,142
---------- ---------- ----------
$ 6,610 $ (16,458) $ --
========== ========== ==========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1998 and 1999 are presented below.
<TABLE>
<CAPTION>
1998 1999
---------- ----------
(dollars in thousands)
<S> <C> <C>
Deferred tax assets:
Financial provisions not currently deductible for tax purposes $ 851 $ 585
Net operating loss carryforwards 32,045 33,876
---------- ----------
Total gross deferred tax assets 32,896 34,461
Less valuation allowance (21,632) (31,774)
---------- ----------
Net deferred tax assets $ 11,264 $ 2,687
Deferred tax liabilities:
Differences in depreciation and depletion of oil and gas assets (11,264) (2,687)
---------- ----------
Net deferred tax liabilities $ -- $ --
========== ==========
</TABLE>
50
<PAGE> 51
PETSEC ENERGY INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The net change in the valuation allowance for the years ended December 31,
1998 and 1999, was an increase of $21.6 million and $10.1 million, respectively.
The increases were provided due to the uncertainties surrounding the realization
of net operating loss carryforwards. The remaining balance of deferred tax
assets are expected to be realized through the reversal of taxable temporary
differences.
At December 31, 1999, the Company has net operating loss carryforwards for
federal and state income tax purposes of $94.1 million which are available to
offset future taxable income, if any, from 2005 through 2019.
8. RELATED PARTY TRANSACTIONS
The Parent has advanced funds to Petsec Energy Inc. through Petsec
(U.S.A.) Inc. (Note 4). The funds were used to finance exploration and
development expenditures.
For the years ended December 31, 1997, 1998 and 1999, Petsec Energy Inc.
paid amounts of $540,000, $325,000 and $416,000, respectively, to the Parent
Company principally for reimbursement of direct expenses incurred in connection
with the Company's operations.
9. COMMITMENTS
Future minimum lease commitments at December 31, 1999, applicable to
noncancelable operating leases, are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
2000 $ 90
======
</TABLE>
Rent expense for the years ended December 31, 1997, 1998 and 1999 was
$264,000, $281,000 and $268,000, respectively.
The Company has entered into a seismic data purchase agreement through
November 2004 covering 100 lease blocks in the Outer Continental Shelf of the
Gulf of Mexico, which provides for payments of overriding interests to the
seismic provider on three of the Company's unproved leases and on wells drilled
on leases acquired as a result of the seismic data. The Company is committed to
a minimum payment of $1.6 million.
51
<PAGE> 52
PETSEC ENERGY INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. ADDITIONAL PAID-IN-CAPITAL
The following is a reconciliation of additional paid-in-capital (in
thousands):
<TABLE>
<S> <C>
Balance at December 31, 1996 $ 482
Recapitalization of loan 19,594
Stock Options (Note 6) 905
------------
Balance at December 31, 1997 $ 20,981
Stock Options (Note 6) 591
------------
Balance at December 31, 1998 $ 21,572
Stock Options (Note 6) 246
------------
Balance at December 31, 1999 $ 21,818
============
</TABLE>
11. HEDGING ACTIVITIES
The Company enters into forward swap contracts with major financial
institutions to reduce the price volatility on the sale of oil and gas
production. In swap agreements, the Company receives the difference between a
fixed price per unit of production and a floating price issued by a third party.
If the floating price is higher than the fixed price, the Company pays the
difference. At December 31, 1999, the Company had contracts maturing monthly
through May 2000 on the net sale of 152,000 barrels of oil at an average price
of $19.70 per barrel and on the net sale of 4.6 million MMbtu of gas at an
average price of $2.29 per MMbtu.
The effect to the Company to terminate these contracts at December 31, 1999
is estimated to be a loss of $0.8 million for oil and $0.5 million for gas.
For the years ended December 31, 1997, 1998 and 1999 hedging activities
reduced revenues by $4.4 million, and increased revenues by $7.7 million and
$0.3 million, respectively.
12. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest was $6.8 million, $10.9 million and $8.9 million for
the years ended December 31, 1997, 1998 and 1999, respectively. See Note 3. The
Company has not paid any cash for income taxes in these years.
52
<PAGE> 53
PETSEC ENERGY INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. LITIGATION
The Company is involved in certain lawsuits arising in the ordinary course
of business. While the outcome of any of these lawsuits cannot be predicted with
certainty, management expects these matters to have no material adverse effect
on the financial position, results of operations or liquidity of the Company.
14. SALE OF WORKING INTEREST
On February 1, 1999, the Company completed the sale of a 50% working
interest in certain of its oil and gas properties to an unrelated party for
$68.3 million. The transaction was effective January 1, 1999. As a result of the
sale, a non-cash impairment of approximately $27 million was recognized at
December 31, 1998, to properly value the assets at their fair value. This charge
is included in the $72.9 million impairment shown in the accompanying financial
statements. Revenues in 1998 attributed to the 50% working interest that was
sold were $41 million.
53
<PAGE> 54
PETSEC ENERGY INC.
SUPPLEMENTARY OIL AND GAS DISCLOSURES -- UNAUDITED
15. SUPPLEMENTARY OIL AND GAS DISCLOSURES -- UNAUDITED
Users of this information should be aware that the process of estimating
quantities of "proved" and "proved developed" natural gas and crude oil reserves
is very complex, requiring significant subjective decisions in the evaluation of
all available geological, engineering and economic data for each reservoir. The
data for a given reservoir may also change substantially over time as a result
of numerous factors including, but not limited to, additional development
activity, evolving production history and continual reassessment of the
viability of production under varying economic conditions. Consequently,
material revisions to existing reserve estimates occur from time to time.
Although every reasonable effort is made to ensure that reserve estimates
reported represent the most accurate assessments possible, the significance of
the subjective decisions required and variances in available data for various
reservoirs make these estimates generally less precise than other estimates
presented in connection with financial statement disclosures.
Proved reserves are estimated quantities of natural gas, crude oil and
condensate 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 reserves are proved reserves that can be expected to be
recovered through existing wells with existing equipment and operating methods.
Estimates of proved and proved developed reserves at December 31, 1997,
1998 and 1999 were based on studies performed by Ryder Scott Company, L.P.
No major discovery or other favorable or adverse event subsequent to
December 31, 1999 is believed to have caused a material change in the estimates
of proved or proved developed reserves as of that date.
54
<PAGE> 55
PETSEC ENERGY INC.
SUPPLEMENTARY OIL AND GAS DISCLOSURES -- UNAUDITED (CONTINUED)
ESTIMATED NET QUANTITIES OF OIL AND GAS RESERVES
The following table sets forth the Company's net proved reserves, including
the changes therein, and proved developed reserves (all within the United
States) as estimated by Ryder Scott Company, L.P:
<TABLE>
<CAPTION>
Crude Oil Natural Gas
(MBbl) (MMcf)
<S> <C> <C>
Proved developed and undeveloped reserves:
December 31, 1996 8,318 73,291
Revisions of previous estimates 2,220 12,194
Extensions, discoveries and other additions 3,181 64,604
Production (3,078) (27,940)
---------- ----------
December 31, 1997 10,641 122,149
Revisions of previous estimates (52) (12,974)
Extensions, discoveries and other additions 1,168 4,738
Sales of reserves in place* (4,067) (31,711)
Purchase of reserves in place -- 1,440
Production (2,353) (25,390)
---------- ----------
December 31, 1998 5,337 58,252
Revisions of previous estimates (432) (7,384)
Extensions, discoveries and other additions 376 14,162
Production (812) (8,247)
---------- ----------
December 31, 1999 4,469 56,783
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Crude Oil Natural Gas
(MBbl) (MMcf)
<S> <C> <C>
Proved developed reserves:
December 31, 1997 8,430 88,199
December 31, 1998 3,054 26,965
December 31, 1999 2,090 21,950
</TABLE>
* Relates to sale to Apache Corporation of a 50% working interest in certain
properties effective January 1, 1999.
Approximately 59% of the Company's total proved reserves at December 31,
1999 were undeveloped. Recovery of such reserves will require significant
capital expenditures and successful drilling operations. The Company's financial
resources are limited, and there can be no assurance that additional debt or
equity financing or cash generated by operations will be available to meet these
requirements. The Company's revolving credit facility has a borrowing base that
is determined by the value of its oil and gas properties reviewed monthly by the
creditor. The creditor has substantial discretion to place reserves against the
borrowing base. See Note 3 for additional explanation regarding the Company's
liquidity problems.
55
<PAGE> 56
PETSEC ENERGY INC.
SUPPLEMENTARY OIL AND GAS DISCLOSURES -- UNAUDITED (CONTINUED)
Capitalized costs for oil and gas producing activities consist of the
following:
<TABLE>
<CAPTION>
As of December 31,
1997 1998 1999
(in thousands)
<S> <C> <C> <C>
Proved properties $ 294,005 $ 199,586 $ 207,881
Unproved properties 20,759 31,984 14,036
----------- ----------- -----------
314,764 231,570 221,917
Accumulated depreciation, depletion and amortization (106,392) (132,739) (140,930)
----------- ----------- -----------
Net capitalized costs $ 208,372 $ 98,831 $ 80,987
=========== =========== ===========
</TABLE>
Costs incurred for oil and gas property acquisition, exploration and
development activities are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1998 1999
(in thousands)
<S> <C> <C> <C>
Lease acquisition $ 8,437 $ 7,836 $ 2,610
Exploration 115,523 107,111 14,745
Development 31,327 10,301 1,216
----------- ----------- -----------
Total costs incurred $ 155,287 $ 125,248 $ 18,571
=========== =========== ===========
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS RESERVES
The following information has been developed utilizing procedures
prescribed by Statement of Financial Accounting Standards No. 69 "Disclosures
about Oil and Gas Producing Activities" (SFAS No. 69) and based on natural gas
and crude oil reserve and production volumes estimated by Ryder Scott Company,
L.P. It may be useful for certain comparative purposes, but should not be solely
relied upon in evaluating the Company or its performance. Further, information
contained in the following table should not be considered as representative of
realistic assessments of future cash flows, nor should the Standardized Measure
of Discounted Future Net Cash Flows be viewed as representative of the current
value of the Company.
The Company believes that the following factors should be taken into
account in reviewing the following information: (1) future costs and selling
prices will probably differ from those required to be used in these
calculations; (2) due to future market conditions and governmental regulations,
actual rates of production achieved in future years may vary significantly from
the rate of production assumed in the calculations; (3) selection of a 10%
discount rate is arbitrary and may not be reasonable as a measure of the
relative risk inherent in realizing future net oil and gas revenues; and (4)
future net revenues may be subject to different rates of income taxation.
56
<PAGE> 57
PETSEC ENERGY INC.
SUPPLEMENTARY OIL AND GAS DISCLOSURES -- UNAUDITED (CONTINUED)
Under the Standardized Measure, future cash inflows were estimated by
applying period-end oil and gas prices adjusted for fixed and determinable
escalations including hedged prices to the estimated future production of
period-end proved reserves. As of December 31, 1999, approximately 4.6 million
MMbtu of the Company's future gas production and 152,000 barrels of oil were
subject to such positions. Future cash inflows were reduced by estimated future
development, abandonment and production costs based on period-end costs in order
to arrive at net cash flow before tax. Future income tax expense has been
computed by applying period-end statutory tax rates to aggregate future pretax
net cash flows, reduced by the tax basis of the properties involved and tax
carryforwards. Use of a 10% discount rate is required by SFAS No. 69.
Management does not rely solely upon the following information in making
investment and operating decisions. Such decisions are based upon a wide range
of factors, including estimates of probable as well as proved reserves and
varying price and cost assumptions considered more representative of a range of
possible economic conditions that may be anticipated.
The standardized measure of discounted future net cash flows relating to
proved oil and gas reserves is as follows. For the purpose of the disclosure
below, the effect of the sale of interest in certain oil and gas properties (see
Note 14) effective January 1, 1999 are reflected as if sold on December 31,
1998.
<TABLE>
<CAPTION>
As of December 31,
1997 1998 1999
(in thousands)
<S> <C> <C> <C>
Future cash inflows $ 472,470 $ 183,371 $ 252,284
Future production costs (101,765) (55,456) (46,752)
Future development and abandonment costs (53,851) (44,783) (54,704)
Future income tax expense (64,064) -- --
------------ ------------ ------------
Future net cash flows after income taxes 252,790 83,132 150,828
10% annual discount for estimated timing of cash flows (48,676) (16,079) (37,689)
------------ ------------ ------------
Standardized measure of discounted future net cash flows $ 204,114 $ 67,053 $ 113,139
============ ============ ============
</TABLE>
57
<PAGE> 58
PETSEC ENERGY INC.
SUPPLEMENTARY OIL AND GAS DISCLOSURES -- UNAUDITED (CONTINUED)
A summary of the changes in the standardized measure of discounted future
net cash flows applicable to proved oil and gas reserves is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1997 1998 1999
(in thousands)
<S> <C> <C> <C>
Beginning of the period $ 223,381 $ 204,114 $ 67,053
----------- ----------- -----------
Sales and transfers of oil and gas produced, net of (113,462) (77,028) (23,955)
production costs
Net changes in prices and production costs (142,243) (86,433) 71,653
Extensions, discoveries and improved recoveries, net of 134,467 13,422 30,284
future production costs
Net changes due to revisions in quantity estimates 40,994 (21,677) (18,204)
Development costs incurred during the period 1,050 2,251 160
Sales of reserves in place* -- (57,164) --
Purchase of reserves in place -- 1,646 --
Change in estimated future development costs (5,674) 5,499 (7,562)
Accretion of discount 32,481 30,749 6,705
Change in timing of production -- -- (12,995)
Net change in income taxes 33,120 51,674 --
----------- ----------- -----------
Net increase (decrease) (19,267) (137,061) 46,086
----------- ----------- -----------
End of period $ 204,114 $ 67,053 $ 113,139
=========== =========== ===========
</TABLE>
*Relates to sale to Apache Corporation of a 50% working interest in certain
properties effective January 1, 1999.
The computation of the standardized measure of discounted future net cash
flows relating to proved oil and gas reserves at December 31, 1999 was based on
average natural gas prices of approximately $2.43 per mcf and on average crude
oil prices of approximately $25.61 per barrel, before hedging effects.
(b) REPORTS ON FORM 8-K
No current reports on Form 8-K were filed during the Company's fourth
quarter 1999.
58
<PAGE> 59
(c) EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<S> <C>
4.1 Articles of Incorporation of the Company (filed with Registration
Statement on Form S-4 (No. 333-31625) and incorporated herein by
reference)
4.2 By-Laws of the Company (filed with Registration Statement on Form
S-4 (File No. 333-31625) and incorporated herein by reference)
4.3 Indenture dated as of June 13, 1997 among the Company, as issuer,
and the Bank of New York, as trustee (filed with Registration
Statement on Form S-4. (File No 333-31625) and is incorporated
herein by reference)
4.4 Registration Rights Agreement dated June 13, 1997 by and among
the Company and Merrill Lynch & Co., Merrill, Lynch, Pierce,
Fenner & Smith Incorporated, Donaldson, Lufkin & Jenrette
Securities Corporation and Salomon Brothers Inc. (filed with
Registration Statement on Form S-4 (File No. 333-31625) and
incorporated herein by reference)
10.1 Credit Agreement by and among Petsec Energy Inc. and Chase
Manhattan Bank and certain financial institutions named therein
as Lenders (filed with Registration Statement on Form S-4 filed
(File No. 333-31625) and incorporated herein by reference)
10.2* Amended and Restated Loan and Security Agreement by and between
Petsec Energy Inc., as Borrower, and The Financial Institutions
Named Therein, as lenders, and Foothill Capital Corporation, as
Agent, dated as of January 12, 2000
10.3* Executive Employment Agreement by and between Petsec Energy Inc.
and John T. Bellatti dated as of May 1, 1999
10.4* Executive Employment Agreement by and between Petsec Energy Inc.
and Ross A. Keogh dated as of May 1, 1999
10.5* Executive Employment Agreement by and between Petsec Energy Inc.
and William R. Sack dated as of May 1, 1999
10.6* Executive Employment Agreement by and between Petsec Energy Inc.
and James E. Slatten III dated as of May 1, 1999
10.7* Executive Employment Agreement by and between Petsec Energy Inc.
and Howard H. Wilson, Jr. dated as of May 1, 1999
10.8* Letter Agreement by and between Petsec Energy Inc. and Gordian
Group, L.P. dated October 15, 1999
10.9* Letter Agreement by and between Petsec Energy Inc. and Houlihan
Lokey Howard & Zukin Capital, L.P. dated as of February 15, 2000
10.10* Petsec Energy Inc. Year 2000 Severance Plan dated as of December
31, 1999
23.1* Consent of Ryder Scott Company
27* Financial Data Schedule
</TABLE>
* Filed herewith
<PAGE> 60
<TABLE>
<S> <C>
10.10* Petsec Energy Inc. Year 2000 Severance Plan dated as of December
31, 1999
23.1* Consent of Ryder Scott Company
27* Financial Data Schedule
</TABLE>
* Filed herewith
60
<PAGE> 61
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.
Petsec Energy Inc.
Date: March 30, 2000 By: /s/ Ross A. Keogh
----------------------------------
Name: Ross A. Keogh
Title: Chief Financial 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.
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Ross A. Keogh, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign on
his behalf individually and in each capacity stated below any and all amendments
to this annual report, and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his substitutes, may lawfully do or cause to be
done by virtue hereof.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Terrence N. Fern Chairman and Chief Executive Officer March 30, 2000
- --------------------------------------- (Principal Executive Officer)
Terrence N. Fern
/s/ Ross A. Keogh Director, Vice-President -- Chief Financial Officer March 30, 2000
- --------------------------------------- and Treasurer (Principal Financial and
Ross A. Keogh Accounting Officer)
/s/ James E. Slatten III Director, Vice-President -- Land and Legal March 30, 2000
- --------------------------------------- and Secretary
James E. Slatten III
</TABLE>
61
<PAGE> 62
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
4.1 Articles of Incorporation of the Company (filed with Registration
Statement on Form S-4 (No. 333-31625) and incorporated herein by
reference)
4.2 By-Laws of the Company (filed with Registration Statement on Form
S-4 (File No. 333-31625) and incorporated herein by reference)
4.3 Indenture dated as of June 13, 1997 among the Company, as issuer,
and the Bank of New York, as trustee (filed with Registration
Statement on Form S-4. (File No 333-31625) and is incorporated
herein by reference)
4.4 Registration Rights Agreement dated June 13, 1997 by and among
the Company and Merrill Lynch & Co., Merrill, Lynch, Pierce,
Fenner & Smith Incorporated, Donaldson, Lufkin & Jenrette
Securities Corporation and Salomon Brothers Inc. (filed with
Registration Statement on Form S-4 (File No. 333-31625) and
incorporated herein by reference)
10.1 Credit Agreement by and among Petsec Energy Inc. and Chase
Manhattan Bank and certain financial institutions named therein
as Lenders (filed with Registration Statement on Form S-4 filed
(File No. 333-31625) and incorporated herein by reference)
10.2* Amended and Restated Loan and Security Agreement by and between
Petsec Energy Inc., as Borrower, and The Financial Institutions
Named Therein, as lenders, and Foothill Capital Corporation, as
Agent, dated as of January 12, 2000
10.3* Executive Employment Agreement by and between Petsec Energy Inc.
and John T. Bellatti dated as of May 1, 1999
10.4* Executive Employment Agreement by and between Petsec Energy Inc.
and Ross A. Keogh dated as of May 1, 1999
10.5* Executive Employment Agreement by and between Petsec Energy Inc.
and William R. Sack dated as of May 1, 1999
10.6* Executive Employment Agreement by and between Petsec Energy Inc.
and James E. Slatten III dated as of May 1, 1999
10.7* Executive Employment Agreement by and between Petsec Energy Inc.
and Howard H. Wilson, Jr. dated as of May 1, 1999
10.8* Letter Agreement by and between Petsec Energy Inc. and Gordian
Group, L.P. dated October 15, 1999
10.9* Letter Agreement by and between Petsec Energy Inc. and Houlihan
Lokey Howard & Zukin Capital, L.P. dated as of February 15, 2000
10.10* Petsec Energy Inc. Year 2000 Severance Plan dated as of December
31, 1999
23.1* Consent of Ryder Scott Company
27* Financial Data Schedule
</TABLE>
* Filed herewith
<PAGE> 1
EXECUTION COPY
EXHIBIT 10.2
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
BY AND BETWEEN
PETSEC ENERGY INC.
AS BORROWER,
AND
THE FINANCIAL INSTITUTIONS NAMED HEREIN
AS THE LENDERS,
AND
FOOTHILL CAPITAL CORPORATION
AS AGENT
Dated as of January 12, 2000
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page(s)
<S> <C> <C>
1. DEFINITIONS AND CONSTRUCTION.............................................................................2
1.1 Definitions.....................................................................................2
1.2 Accounting Terms...............................................................................25
1.3 Code...........................................................................................26
1.4 Construction...................................................................................26
1.5 Schedules and Exhibits.........................................................................26
2. LOAN AND TERMS OF PAYMENT...............................................................................26
2.1 Revolving Advances.............................................................................26
2.2 Letter of Credit Subfacility...................................................................34
2.3 Hedging Arrangement Subfacility................................................................38
2.4 Payments.......................................................................................41
2.5 Overadvances...................................................................................42
2.6 Interest and Letter of Credit Fees: Rates, Payments, and Calculations.........................42
2.7 Collection of Proceeds of Collateral and Other Collections.....................................45
2.8 Crediting Payments; Application of Collections.................................................46
2.9 Designated Account.............................................................................46
2.10 Maintenance of Loan Account; Statements of Obligations.........................................47
2.11 Fees...........................................................................................47
2.12 Loan Under Prior Credit Agreement..............................................................48
3. CONDITIONS; TERM OF AGREEMENT...........................................................................48
3.1 Conditions Precedent to the Initial Advance, Letter of Credit and Hedging
Agreement Undertaking...................................................................................48
3.2 Conditions Precedent to all Advances, all Letters of Credit and all Hedging
Arrangements............................................................................................53
3.3 Condition Subsequent...........................................................................53
3.4 Term; Automatic Renewal........................................................................54
3.5 Effect of Termination..........................................................................54
3.6 Early Termination by Borrower..................................................................55
3.7 Termination Upon Event of Default..............................................................56
4. CREATION OF SECURITY INTEREST...........................................................................56
4.1 Grant of Security Interest.....................................................................56
4.2 Negotiable Collateral..........................................................................56
4.3 Collection of Accounts, General Intangibles, and Negotiable Collateral.........................56
4.4 Delivery of Additional Documentation Required..................................................57
4.5 Power of Attorney..............................................................................57
4.6 Right to Inspect...............................................................................57
4.7 Control Agreements.............................................................................58
5. REPRESENTATIONS AND WARRANTIES..........................................................................58
5.1 No Encumbrances................................................................................58
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
5.2 Eligible Proved Reserves; Ownership of Oil and Gas Properties..................................59
5.3 Operations of Oil and Gas Properties...........................................................60
5.4 Equipment......................................................................................61
5.5 Location of Inventory and Equipment............................................................61
5.6 Oil and Gas Property Collateral Records and Inventory Records..................................61
5.7 Location of Chief Executive Office; FEIN.......................................................61
5.8 Due Organization and Qualification; Subsidiaries...............................................61
5.9 Due Authorization; No Conflict.................................................................62
5.10 Claims, Disputes, and Litigation...............................................................63
5.11 No Material Adverse Change.....................................................................63
5.12 No Fraudulent Transfer.........................................................................63
5.13 Employee Benefits..............................................................................64
5.14 Environmental Condition........................................................................64
5.15 Compliance with the Law........................................................................65
5.16 Insurance......................................................................................65
5.17 Hedging Agreement..............................................................................66
5.18 Brokerage Fees.................................................................................66
5.19 Permits and other Intellectual Property........................................................66
5.20 Year 2000 Compatibility........................................................................66
5.21 Cash Flow Forecast.............................................................................67
5.22 Absence of Certain Changes.....................................................................67
5.23 Operating Costs................................................................................67
5.25 No Default.....................................................................................68
5.26 Leases.........................................................................................68
5.27 Marketing Agreements...........................................................................68
5.28 [Intentionally Omitted]........................................................................68
5.29 Condition of Equipment.........................................................................68
5.30 Wells..........................................................................................68
5.31 No Vessels.....................................................................................69
5.32 Subordinated Debt..............................................................................69
6. AFFIRMATIVE COVENANTS...................................................................................69
6.1 Accounting System..............................................................................69
6.2 Collateral Reporting...........................................................................69
6.3 Financial Statements, Reports, Certificates....................................................72
6.4 Tax Returns....................................................................................73
6.5 Guarantor Reports..............................................................................73
6.6 [Intentionally Omitted]........................................................................73
6.7 Title to Equipment.............................................................................73
6.8 Maintenance of Oil and Gas Property Collateral and Equipment; Operation of Business ..........74
6.9 Taxes..........................................................................................75
6.10 Insurance......................................................................................76
6.11 No Setoffs or Counterclaims....................................................................77
6.12 Location of Inventory and Equipment............................................................78
6.13 Compliance with Laws...........................................................................78
6.14 Employee Benefits..............................................................................79
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C> <C>
6.15 Leases.........................................................................................79
6.16 Broker Commissions.............................................................................80
6.17. Oil and Gas Property Title Information.........................................................80
6.18 Additional Collateral..........................................................................80
6.19 Hedging Agreements.............................................................................81
6.20 Further Assurances.............................................................................81
7. NEGATIVE COVENANTS......................................................................................82
7.1 Indebtedness...................................................................................82
7.2 Liens..........................................................................................83
7.3 Restrictions on Fundamental Changes............................................................83
7.4 Disposal of Assets.............................................................................83
7.5 Change Name....................................................................................84
7.6 Guarantee......................................................................................84
7.7 Nature of Business.............................................................................84
7.8 Prepayments and Amendments.....................................................................84
7.9 Change of Control..............................................................................85
7.10 Consignments...................................................................................85
7.11 Distributions; Repurchases of Capital Stock; Payments to PEL or Petsec USA.....................85
7.12 Accounting Methods.............................................................................85
7.13 Investments....................................................................................85
7.14 Transactions with Affiliates...................................................................85
7.15 Suspension.....................................................................................85
7.16 [Intentionally Omitted]........................................................................85
7.17 Use of Proceeds................................................................................85
7.18 Change in Location of Chief Executive Offices; Inventory and Equipment.........................86
7.19 No Prohibited Transactions Under ERISA.........................................................86
7.20 Financial Covenants............................................................................87
7.21 Capital Expenditures; Development Expenditures.................................................87
7.22 Securities Accounts............................................................................88
7.23 Gas Imbalances, Take-or-Pay or Other Prepayments...............................................88
7.24 Payments on the Parent Notes or the Unsecured Notes............................................88
7.25 Non-Consent Operations.........................................................................88
7.26 Waivers of Rights Relating to Oil and Gas Properties...........................................88
7.27 Contracts for Sale of Production...............................................................89
8. EVENTS OF DEFAULT.......................................................................................89
9. THE LENDER GROUP'S RIGHTS AND REMEDIES..................................................................91
9.1 Rights and Remedies............................................................................91
9.2 Remedies Cumulative............................................................................93
10. TAXES AND EXPENSES......................................................................................94
11. WAIVERS; INDEMNIFICATION................................................................................94
11.1 Demand; Protest; etc...........................................................................94
11.2 The Lender Group's Liability for Collateral....................................................94
11.3 Indemnification................................................................................94
</TABLE>
iii
<PAGE> 5
<TABLE>
<S> <C> <C>
12. NOTICES.................................................................................................95
13. Choice Of Law And Venue; Jury Trial Waiver..............................................................96
14. DESTRUCTION OF BORROWER'S DOCUMENTS.....................................................................97
15. ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS..............................................................97
15.1 Assignments and Participations.................................................................97
15.2 Successors....................................................................................100
16. AMENDMENTS; WAIVERS....................................................................................100
16.1 Amendments and Waivers........................................................................100
16.2 No Waivers; Cumulative Remedies...............................................................101
17. AGENT; THE LENDER GROUP................................................................................101
17.1 Appointment and Authorization of Agent........................................................101
17.2 Delegation of Duties..........................................................................102
17.3 Liability of Agent............................................................................102
17.4 Reliance by Agent.............................................................................103
17.5 Notice of Default or Event of Default.........................................................103
17.6 Credit Decision...............................................................................103
17.7 Costs and Expenses; Indemnification...........................................................104
17.8 Agent in Individual Capacity..................................................................105
17.9 Successor Agent...............................................................................105
17.10 Withholding Tax...............................................................................105
17.11 Collateral Matters............................................................................107
17.12 Restrictions on Actions by Lenders; Sharing of Payments.......................................107
17.13 Agency for Perfection.........................................................................108
17.14 Payments by Agent to the Lenders..............................................................108
17.15 Concerning the Collateral and Related Loan Documents..........................................109
17.16 Field Audits and Examination Reports; Confidentiality; Disclaimers by Lenders;
Other Reports and Information..........................................................................109
17.17 Several Obligations; No Liability.............................................................110
18. GENERAL PROVISIONS.....................................................................................111
18.1 Effectiveness.................................................................................111
18.2 Section Headings..............................................................................111
18.3 Interpretation................................................................................111
18.4 Severability of Provisions....................................................................111
18.5 Amendments in Writing.........................................................................111
18.6 Counterparts; Telefacsimile Execution.........................................................111
18.7 Revival and Reinstatement of Obligations......................................................111
18.8 Integration...................................................................................112
18.9 Amendment and Restatement; Release............................................................112
</TABLE>
iv
<PAGE> 6
SCHEDULES AND EXHIBITS
Schedule C-1 Commitments
Schedule P-1 Permitted Liens
Schedule 3.1(t) Certain Adverse Changes since September 30, 1999
Schedule 3.3(b) Properties to which Section 3.3(b) Conditions Subsequent Apply
Schedule 5.1(a) Certain Owned Oil and Gas Properties
Schedule 5.1(b) Working Interest/Net Revenue Interest/Operator
Schedule 5.1(c) Material Contract Rights & Obligations
Schedule 5.1(d) Non-Leasehold Asset Ownership
Schedule 5.1(e) Personal Property/Fixtures
Schedule 5.2(a) Outstanding Authorities For Expenditures/Non-Consent Wells
Schedule 5.2(e) Imbalances in Gas Production/"Take or Pay" Contracts
Schedule 5.2(h) Certain Additional Information Concerning Oil and Gas
Properties
Schedule 5.8 Capital Stock/Subsidiaries
Schedule 5.10 Litigation
Schedule 5.13 ERISA Benefit Plans
Schedule 5.16 Insurance
Schedule 5.17 Hedging Agreements
Schedule 5.18 Brokerage Fees
Schedule 5.19 Permits and Other Intellectual Property
Schedule 5.20 Y2K Compliance Timeline
Schedule 5.21 Cash Flow Forecast
Schedule 5.22(b) List of Oil and Gas Properties Disposed of Between September
30, 1999 and the Closing Date
Schedule 5.22(d) List of Contracts for Sale of Products Produced From Oil and
Gas Properties Entered Into Between September 30, 1999 and
the Closing Date
Schedule 5.23 Operating Costs
Schedule 5.26 Potential Defaults Under Certain Oil and Gas Leases
Schedule 5.27 Certain Marketing Agreements
Schedule 6.12 Certain Additional Locations of Collateral
Schedule 7.1 Permitted Other Indebtedness
Schedule 7.4 Certain Permitted Dispositions of Collateral
Schedule 7.17 Authorities For Expenditures Budget
Exhibit A-1 Form of Agreement and Acceptance
Exhibit B-1 Mortgages, Opinions, Certificates and Certain Other Required
Items and Information
Exhibit C-1 Form of Compliance Certificate
Exhibit P-1 Forms of Prior Lenders Assignment Agreements
Exhibit T-1 Form of Transfer Order Letters
Exhibit 6.2 Form of Borrowing Base Certificate
v
<PAGE> 7
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
THIS AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (this
"Agreement"), is entered into as of January 12, 2000, among the financial
institutions listed on the signature pages hereof (such financial institutions,
together with their respective successors and assigns, are referred to
hereinafter each individually as a "Lender" and collectively as the "Lenders"),
FOOTHILL CAPITAL CORPORATION, a California corporation, as agent for the Lenders
("Agent"), with a place of business located at 11111 Santa Monica Boulevard,
Suite 1500, Los Angeles, California 90025-3333; and PETSEC ENERGY INC., a Nevada
corporation ("Borrower"), with its chief executive office located at 143
Ridgeway Drive, Suite 113, Lafayette, Louisiana 70503.
RECITALS
A. Borrower, certain lenders (the "Prior Lenders"), and The Chase
Manhattan Bank, N.A., as Agent (the "Prior Agent"), are parties to that certain
Credit Agreement dated as of April 25, 1996, as amended by that certain
Amendment Agreement dated as of June 13, 1997, that certain Second Amendment
Agreement dated as of December 31, 1997, that certain Third Amendment Agreement
dated as of June 30, 1998, that certain Fourth Amendment Agreement dated as of
February 1, 1999, that certain Forbearance and Amendment Agreement dated as of
November 12, 1999, and that certain Forbearance Agreement No. 2 dated as of
December 14, 1999, each by and among Borrower, the Prior Lenders and the Prior
Agent (such credit agreement, as amended from time to time, the "Prior Credit
Agreement").
B. Borrower has requested that (i) the Lenders assume the obligations
of the Prior Lenders under the Prior Credit Agreement, (ii) Agent assume the
agency responsibilities of the Prior Agent under the Prior Credit Agreement, and
(iii) Agent and the Lenders amend and restate the Prior Credit Agreement and
make credit available to Borrower on the terms and conditions stated herein. It
is Borrower's intention that, for purposes of the Unsecured Notes Indenture (as
defined below), (i) this Agreement and the other Loan Documents (as defined
below) renew, refinance, replace and succeed, but not constitute an
extinguishment or a novation of, the Prior Credit Agreement, and (ii) that the
Indebtedness secured pursuant to this Agreement and the other Loan Documents
renew and refinance, but not constitute an extinguishment or a novation of, the
Indebtedness existing on the date hereof under the Prior Credit Agreement and
therefore, solely as among Borrower and the other parties to the Unsecured Notes
Indenture, the intent of Borrower is that the Obligations (as defined below)
incurred pursuant to this Agreement and the other Loan Documents shall
constitute "Permitted Indebtedness" (as defined in the Unsecured Notes
Indenture) for purposes of the Unsecured Notes Indenture. It is intended that
the Obligations incurred pursuant to this Agreement and the other Loan Documents
shall qualify as "Senior Indebtedness" (as such term is defined in the Unsecured
Notes Indenture) for purposes of the Unsecured Notes Indenture, and that Agent
and the Lenders shall be entitled to the additional rights and benefits relating
thereto and arising therefrom.
C. Contemporaneously with the above transactions, Agent is entering
into the Prior Lender Assignment Agreements (as defined below) wherein the
assignment of the rights of the
1
<PAGE> 8
Prior Lenders to the Agent, on behalf of the Lenders, is intended to be for the
ratable benefit of the Lenders.
D. Agent and the Lenders, subject to the terms and conditions stated
herein, are willing to amend and restate the Prior Credit Agreement and to make
such credit facilities available.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are acknowledged, the parties hereto agree as follows:
1. DEFINITIONS AND CONSTRUCTION.
1.1 DEFINITIONS. As used in this Agreement, the following
terms shall have the following definitions:
"Account Debtor" means any Person who is or who may
become obligated under, with respect to, or on account of, an Account.
"Accounts" means all currently existing and hereafter
arising accounts, contract rights, and all other forms of obligations owing to
Borrower or any of its Subsidiaries arising out of the sale or lease of goods,
Hydrocarbons or Oil and Gas Properties or the rendition of services by Borrower
or any of its Subsidiaries, irrespective of whether earned by performance, and
any and all credit insurance, guaranties, or security therefor.
"Advances" has the meaning set forth in Section
2.1(a).
"Affiliate" means, as applied to any Person, any
other Person who directly or indirectly controls, is controlled by, is under
common control with or is a director or officer of such Person. For purposes of
this definition, "control" means the possession, directly or indirectly, of the
power to vote 5% or more of the securities having ordinary voting power for the
election of directors or the direct or indirect power to direct the management
and policies of a Person.
"Agent" means Foothill, solely in its capacity as
agent for the Lenders, and shall include any successor agent.
"Agent Account" means an account at a bank designated
by Agent from time to time as the account into which Borrower shall make all
payments to Agent for the benefit of the Lender Group, and into which the Lender
Group shall make all payments to Agent, under this Agreement and the other Loan
Documents. Initially, unless and until Agent notifies Borrower and the Lender
Group to the contrary, the Agent Account shall be that certain deposit account
bearing account number 323-266193 and maintained by Agent with The Chase
Manhattan Bank, N.A., 4 New York Plaza, 15th Floor, New York, New York 10004,
ABA #021-000-021.
"Agent Advances" has the meaning set forth in Section
2.1(g).
"Agent's Liens" has the meaning set forth in Section
4.1.
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<PAGE> 9
"Agent-Related Persons" means Agent and any successor
agent, together with their respective Affiliates, and the officers, directors,
employees, counsel, agents, and attorneys-in-fact of such Persons and their
Affiliates.
"Agreement" has the meaning set forth in the preamble
hereto.
"Arranging Institution" has the meaning set forth in
Section 2.3(a).
"Assignee" has the meaning set forth in Section 15.1.
"Assignment and Acceptance" has the meaning set forth
in Section 15.1 and shall be in the form of Exhibit A-1 attached hereto.
"Australian Dollars" or the sign "AUS$" means dollars
which are lawful money of the country of Australia.
"Authorized Person" means any officer or other
employee of Borrower.
"Availability" means the amount that Borrower is
entitled to borrow as Advances under Section 2.1, such amount being the
difference derived when (a) the sum of the principal amount of Advances
(including Agent Advances and Foothill Loans) then outstanding (including any
amounts that the Lender Group may have paid for the account of Borrower pursuant
to any of the Loan Documents and that have not been reimbursed by Borrower) is
subtracted from (b) the least of (i) the Maximum Revolving Amount less the
aggregate amount of all Letter of Credit/Hedging Arrangement Usage, or (ii) the
Borrowing Base less (A) the aggregate amount of all Letter of Credit/Hedging
Arrangement Usage, less (B) the aggregate amount of the Reserves Against
Availability or (iii) the Unsecured Notes Indebtedness Limitation.
If the Revolving Facility Usage is equal to or greater than the least of the
Borrowing Base, the Maximum Revolving Amount or the Unsecured Notes Indebtedness
Limitation, then the Availability is zero (-0-).
"Average Unused Portion of Maximum Revolving Amount" means, as of any date of
determination, (a) the Maximum Revolving Amount, less (b) the sum of (i) the
average Daily Balance of Advances that were outstanding during the immediately
preceding month, plus (ii) the average Daily Balance of the Letter of
Credit/Hedging Arrangement Usage during the immediately preceding month, less
(c) during the period commencing on the Closing Date and ending on the date upon
which Borrower delivers to Agent the Reserve Report for March 31, 2000 from
Pollard, Gore & Harrison (or other qualified independent petroleum engineering
consultant approved by Agent) as required pursuant to subclause (II) of Section
6.2(g), $2,000,000.
"Bankruptcy Code" means the United States Bankruptcy
Code (11 U.S.C. Section 101 et seq.), as amended, and any successor statute.
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<PAGE> 10
"Benefit Plan" means a "defined benefit plan" (as
defined in Section 3(35) of ERISA) for which Borrower, any Subsidiary of
Borrower, or any ERISA Affiliate has been an "employer" (as defined in Section
3(5) of ERISA) within the past six years.
"Books" means all of Borrower's and its Subsidiaries'
books and records including: ledgers; records indicating, summarizing, or
evidencing Borrower's and its Subsidiaries' properties or assets (including the
Collateral) or liabilities, including but not limited to well logs and
seismographic reports; all information relating to Borrower's and its
Subsidiaries' business operations or financial condition; and all computer
programs, disk or tape files, printouts, runs, or other computer prepared
information.
"Borrower" has the meaning set forth in the preamble
to this Agreement.
"Borrowing" means a borrowing hereunder consisting of
Advances made on the same day by the Lenders to a Borrower, or by Foothill in
the case of a Foothill Loan, or by Agent in the case of an Agent Advance.
"Borrowing Base" has the meaning set forth in Section
2.1(a).
"Business Day" means any day that is not a Saturday,
Sunday, or other day on which national banks are authorized or required to
close.
"Change of Control" shall be deemed to have occurred
at such time as (a) a "person" or "group" (within the meaning of Sections 13(d)
and 14(d)(2) of the Securities Exchange Act of 1934) becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934),
directly or indirectly, of more than 30% of the total voting power of all
classes of stock then outstanding of PEL entitled to vote in the election of
directors or (b) a "person" or "group" (within the meaning of Sections 13(d) and
14(d)(2) of the Securities Exchange Act of 1934) other than PEL becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act
of 1934), directly or indirectly, of any voting power of any class of stock then
outstanding of Petsec USA entitled to vote in the election of directors or (c) a
"person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934) other than Petsec USA becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934),
directly or indirectly, of any voting power of any class of stock then
outstanding of Borrower entitled to vote in the election of directors or (d) a
"person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934) other than Borrower becomes a "beneficial
owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934),
directly or indirectly, of any voting power of any class of stock then
outstanding of any Subsidiary of Borrower entitled to vote in the election of
directors.
"Closing Date" means the date of the first to occur
of the making of the initial Advance or the issuance of the initial Letter of
Credit.
"Code" means the California Uniform Commercial Code.
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<PAGE> 11
"Collateral" means all of Borrower's right, title,
and interest in and to each of the following:
(a) the Accounts,
(b) the Books,
(c) the Equipment,
(d) the General Intangibles (other than (i) the
Hedging Agreements with The Chase Manhattan Bank, N.A. and Bank of America N.A.
(but not the general intangibles for money due or to become due thereunder), and
(ii) the Excluded Seismic License Rights),
(e) the Inventory,
(f) the Investment Property,
(g) the Negotiable Collateral,
(h) the Oil and Gas Properties (other than the
Excluded California Field Properties),
(i) the Real Property;
(j) any money, or other assets of Borrower that now
or hereafter come into the possession, custody, or control of any member of the
Lender Group, and
(k) the proceeds and products, whether tangible or
intangible, of any of the foregoing, including proceeds of insurance covering
any or all of the Collateral, and any and all Accounts, Books, Equipment,
General Intangibles, Inventory, Investment Property, Negotiable Collateral, Real
Property, Oil and Gas Properties, money, deposit accounts, or other tangible or
intangible property resulting from the sale, exchange, collection, or other
disposition of any of the foregoing, or any portion thereof or interest therein,
and the proceeds thereof.
"Collateral Access Agreement" means a landlord waiver
or consent, mortgagee waiver or consent, bailee letter, or a similar
acknowledgement agreement of any warehouseman, processor, lessor, consignee, or
other Person in possession of, having a Lien upon, or having rights or interests
in the Equipment, Inventory, or Oil and Gas Properties, in each case, in form
and substance satisfactory to Agent.
"Collections" means all cash, checks, notes,
instruments, and other items of payment (including, insurance proceeds, proceeds
of cash sales, rental proceeds, and tax refunds).
"Commitment" means, at any time with respect to a
Lender, the principal amount set forth beside such Lender's name under the
heading "Commitment" on Schedule C-1 attached hereto or on the signature page of
the Assignment and Acceptance pursuant to which
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<PAGE> 12
such Lender became a Lender hereunder in accordance with the provisions of
Section 15.1, as such Commitment may be adjusted from time to time in accordance
with the provisions of Section 15.1, and "Commitments" means, collectively, the
aggregate amount of the commitments of all of the Lenders.
"Compliance Certificate" means a certificate
substantially in the form of Exhibit C-1 and delivered by the chief accounting
officer of Borrower to Agent.
"Consolidated Net Income" shall mean with respect to
Borrower and its Subsidiaries, for any period, the aggregate of the net income
(or loss) of Borrower and its Subsidiaries after allowances for taxes for such
period, determined on a consolidated basis in accordance with GAAP; provided
that there shall be excluded from such net income (to the extent otherwise
included therein) the following: (i) the net income of any Person in which
Borrower or any of its Subsidiaries has an interest (which interest does not
cause the net income of such other Person to be consolidated with the net income
of Borrower and its Subsidiaries 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 Borrower or to any of its Subsidiaries, as the case may be; (ii)
the net income (but not loss) of any of Borrower's Subsidiaries to the extent
that the declaration or payment of dividends or similar distributions or
transfers or loans by that Subsidiary is not at the time permitted by operation
of the terms of its charter or any agreement, instrument or Legal Requirement
applicable to such Subsidiary, or is otherwise restricted or prohibited in each
case determined in accordance with GAAP; (iii) 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; (iv) any extraordinary gains, including gains
attributable to Property sales not in the ordinary course of business; (v) the
cumulative effect of a change in accounting principles and any gains or losses
attributable to writeups or writedowns of assets; and (vi) any writedowns of
non-current assets, provided however, that any ceiling limitation writedowns
under SEC guidelines shall be treated as capitalized costs, as if such
writedowns had not occurred.
"Control Agreement" means a control agreement, in
form and substance reasonably satisfactory to Agent, between Borrower, Agent,
and the applicable securities intermediary with respect to the applicable
Securities Account and related Investment Property.
"Daily Balance" means the amount of an Obligation
owed at the end of a given day.
"Default" means an event, condition, or default that,
with the giving of notice, the passage of time, or both, would be an Event of
Default.
"Defaulting Lender" means any Lender that fails to
make any Advance that it is required to make hereunder on any Funding Date and
that has not cured such failure by making such Advance within one (1) Business
Day after written demand upon it by Agent to do so.
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<PAGE> 13
"Defaulting Lenders Rate" means the Reference Rate
for the first three (3) days from and after the date the relevant payment is due
and, thereafter, at the interest rate then applicable to Advances.
"Defensible Title" means as to the Mineral Interests,
such title held by Borrower that (i) is free from reasonable doubt to the end
that a prudent purchaser engaged in the business of the ownership, development
and operation of producing oil and gas properties, with knowledge of all of the
facts and their legal bearing, would be willing to accept and pay full value
therefor; (ii) is deducible of record from the records of the applicable parish
or county, or, in the case of federal leases, from the records of the applicable
office of the Bureau of Lands Management or Minerals Management Service, or, in
the case of state leases, from the applicable records of the applicable state
land office; (iii) entitle Borrower to receive not less than the "Net Revenue
Interest" set forth in Schedule 5.1(b) with respect to each Mineral Interest
owned by Borrower as of the date of this Agreement, and not less than the "Net
Revenue Interest" set forth in the most recent Reserve Report with respect to
each Mineral Interest acquired by Borrower after the date of this Agreement, in
each case, without reduction, suspension or termination throughout the
productive life of such Mineral Interest; (iv) obligates Borrower to bear costs
and expenses relating to operations on and the maintenance and development of
each Mineral Interest in an amount not greater than the "Working Interest" set
forth in Schedule 5.1(b) with respect to each Mineral Interest owned by Borrower
as of the date of this Agreement, and not greater than the "Working Interest"
set forth in the most recent Reserve Report with respect to each Mineral
Interest acquired by Borrower after the date of this Agreement (except to the
extent that Borrower is obligated under an Operating Agreement to assume a
portion of a defaulting or non-consenting party's share of costs), in each case
without increase for the respective productive life of such Mineral Interest;
and (v) is free and clear of Liens and material encumbrances and defects, except
for Permitted Liens.
"Designated Account" means account number
910-2-772226 of Borrower maintained with Borrower's Designated Account Bank, or
such other deposit account of Borrower (located within the United States) which
has been designated, in writing and from time to time, by Borrower to Agent.
"Designated Account Bank" means The Chase Manhattan
Bank, N.A., whose office is located at 4 Chase MetroTech Center, 7th Floor,
Brooklyn, New York 11245, and whose ABA number is 021000021.
"Disbursement Letter" means an instructional letter
executed and delivered by Borrower to Agent regarding the extensions of credit
to be made on the Closing Date, the form and substance of which shall be
satisfactory to Agent.
"Disqualified Stock" means, any capital stock of
Borrower or any of its Subsidiaries thereof that, by its terms (or by the terms
of any security into which it is convertible or for which it is exercisable,
redeemable or exchangeable), or upon the happening of any event or with the
passage of time, matures, or is mandatorily redeemable, pursuant to a sinking
fund obligation or otherwise, or is redeemable at the option of the holder
thereof, in whole or in part, in each case on, or prior to, six months after the
Renewal Date, or is convertible into or is
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<PAGE> 14
exchangeable for debt securities of the Borrower or any of its Subsidiaries
thereof, except to the extent that such exchange or conversion rights cannot be
exercised prior to six months after the Renewal Date.
"Dollars" or the sign "$" means dollars which are
lawful money of the United States of America.
"Early Termination Premium" has the meaning set forth
in Section 3.6.
"EBITDA" shall mean, for any period, the sum,
determined (without duplication) for Borrower and its Subsidiaries, of (i)
Consolidated Net Income of Borrower and its Subsidiaries plus (ii) Interest
Expense of Borrower and its Subsidiaries for such period to the extent deducted
in the determination of Consolidated Net Income of Borrower and its Subsidiaries
for such period plus (iii) depreciation, amortization and other similar non-cash
items (with the exception of non-cash charges that require an accrual or reserve
for cash charges for any future period and normally recurring accruals) to the
extent deducted in the determination of Consolidated Net Income of Borrower and
its Subsidiaries for such period plus (iv) all taxes accrued for such period on
or measured by income to the extent deducted in the determination of
Consolidated Net Income of Borrower and its Subsidiaries for such period.
"Eligible Proved Developed Non-Producing Reserves"
means Eligible Proved Reserves of Borrower consisting of Proved Developed
Non-Producing Reserves.
"Eligible Proved Developed Producing Reserves" means
Eligible Proved Reserves consisting of Proved Developed Producing Reserves.
"Eligible Proved Reserves" means the NYMEX Value of
Proved Reserves consisting of Mineral Interests of Borrower that: (i) are
subject to a duly executed and recorded Oil and Gas Property Mortgage that
creates a perfected lien in such Mineral Interest which is of first priority
subject only to Permitted Liens; (ii) either are identified on Schedule 5.1(a)
or constitute Qualified Subsequent Oil and Gas Property; (iii) strictly comply
with each and all of the representations and warranties made by Borrower to
Agent in the Loan Documents; and (iv) are and at all times continue to be
acceptable to Agent in all respects; provided, however, the standards of
eligibility may be fixed and revised from time to time by Agent in Agent's
credit judgment. In determining the amount to be so included, Eligible Proved
Reserves shall be valued based upon the NYMEX Value of such Proved Reserves as
of the date of determination of Eligible Proved Reserves, with such adjustments
as Agent may deem appropriate in its sole discretion. An item of Proved Reserves
shall not be included in Eligible Proved Reserves if:
(a) it is not owned solely by Borrower or Borrower
does not have either good, valid, and marketable title thereto or Defensible
Title thereto acceptable to Agent, or the title information relating thereto is
not satisfactory to Agent (without limiting the foregoing, it is understood and
agreed by Borrower that no Mineral Interests of Borrower located in the Federal
Outer Continental Shelf shall be included in Eligible Proved Reserves prior to
the time that Borrower's Mineral Interest therein and Borrower's acquisition
thereof shall have been approved
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<PAGE> 15
in writing by the MMS and evidence of the same satisfactory to Agent shall have
been received by Agent);
(b) it is not subject to a valid and perfected first
priority Lien and security interest in favor of Agent for the benefit of the
Lender Group created by a duly recorded Oil and Gas Property Mortgage, except
for Permitted Liens with respect to which Agent has established a Reserve
Against Availability in the full amount (or such other amount as may be
determined by Agent in its sole discretion) that any holders of the Permitted
Liens could assert from time to time thereunder (whether upon the passage of
time, the satisfaction of conditions, or otherwise); or
(c) it is subject to a Lien in favor of any third
Person or any order, judgment, writ or decree, which either restricts or
purports to restrict Borrower or any of its Subsidiaries' ability to grant Liens
to other Persons on or in respect of its respective assets or properties.
"Eligible Proved Undeveloped Reserves" means Eligible
Proved Reserves consisting of Proved Undeveloped Reserves.
"Eligible Transferee" means: (a) a commercial bank
organized under the laws of the United States, or any state thereof, and having
total assets in excess of $150,000,000; (b) a commercial bank organized under
the laws of any other country which is a member of the Organization for Economic
Cooperation and Development or a political subdivision of any such country, and
having total assets in excess of $150,000,000; provided that such bank is acting
through a branch or agency located in the United States; (c) a finance company,
insurance company or other financial institution or fund that is engaged in
making, purchasing or otherwise investing in commercial loans in the ordinary
course of its business and having total assets in excess of $100,000,000; (d)
any Affiliate (other than individuals) of, or any fund, money market account,
investment account or other account managed by, a pre-existing Lender under this
Agreement; (e) so long as no Event of Default has occurred and is continuing,
any other Person approved by Agent and Borrower; and (f) during the continuation
of an Event of Default, any other Person approved by Agent.
"Environmental Laws" shall mean any and all Legal
Requirements pertaining to health or the environment in effect in any and all
jurisdictions in which the 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 term "release" (or "threatened release")
has the meaning specified in CERCLA, and the terms "solid waste" and "disposal"
(or
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<PAGE> 16
"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," "release," "solid waste" or "disposal" which is broader than
that specified in either OPA, CERCLA or RCRA, such broader meaning shall apply.
"Equipment" means all of Borrower's present and
hereafter acquired machinery, machine tools, motors, equipment, furniture,
furnishings, fixtures, drillsite equipment (including separators, dehydrators,
meters, etc.), compressors, gathering lines, pipelines, vehicles (including
motor vehicles and trailers), tools, parts, and other goods (other than consumer
goods, farm products, or Inventory), wherever located, including, (a) any
interest of Borrower in any of the foregoing, and (b) all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing.
"ERISA" means the Employee Retirement Income Security
Act of 1974, 29 U.S.C. Sections 1000 et seq., amendments thereto, successor
statutes, and regulations or guidance promulgated thereunder.
"ERISA Affiliate" means (a) any corporation subject
to ERISA whose employees are treated as employed by the same employer as the
employees of Borrower under IRC Section 414(b), (b) any trade or business
subject to ERISA whose employees are treated as employed by the same employer as
the employees of Borrower under IRC Section 414(c), (c) solely for purposes of
Section 302 of ERISA and Section 412 of the IRC, any organization subject to
ERISA that is a member of an affiliated service group of which Borrower is a
member under IRC Section 414(m), or (d) solely for purposes of Section 302 of
ERISA and Section 412 of the IRC, any party subject to ERISA that is a party to
an arrangement with Borrower and whose employees are aggregated with the
employees of Borrower under IRC Section 414(o).
"ERISA Event" means (a) a Reportable Event with
respect to any Benefit Plan or Multiemployer Plan, (b) the withdrawal of
Borrower, any of its Subsidiaries or ERISA Affiliates from a Benefit Plan during
a plan year in which it was a "substantial employer" (as defined in Section
4001(a)(2) of ERISA), (c) the providing of notice of intent to terminate a
Benefit Plan in a distress termination (as described in Section 4041(c) of
ERISA), (d) the institution by the PBGC of proceedings to terminate a Benefit
Plan or Multiemployer Plan, (e) any event or condition (i) that provides a basis
under Section 4042(a)(1), (2), or (3) of ERISA for the termination of, or the
appointment of a trustee to administer, any Benefit Plan or Multiemployer Plan,
or (ii) that may result in termination of a Multiemployer Plan pursuant to
Section 4041A of ERISA, (f) the partial or complete withdrawal within the
meaning of Sections 4203 and 4205 of ERISA, of Borrower, any of its Subsidiaries
or ERISA Affiliates from a Multiemployer Plan, or (g) providing any security to
any Plan under Section 401(a)(29) of the IRC by Borrower or its Subsidiaries or
any of their ERISA Affiliates.
"Event of Default" has the meaning set forth in
Section 8.
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"Exchange Act" means the Securities Exchange Act of
1934, as amended, and any successor statute thereto.
"Excluded California Field Properties" means only the
Mineral Interests of Borrower in Buckeye and Kirk Fields, Calusa County,
California and in the Mumma 1-1 well located in Yolo County, California, for as
long as such Mineral Interests have an aggregate NYMEX Value of less than
$150,000; provided, however, that such Mineral Interests shall cease to be
Excluded California Field Properties from and after the date upon which such
Mineral Interests have an aggregate NYMEX Value of $150,000 or more.
"Excluded Seismic License Rights" means only
Borrower's licensee rights to use seismic and geophysical data under Borrower's
seismic and geophysical license agreements which by their terms expressly
prohibit the grant of a security interest therein by Borrower or give the other
party thereto a right to terminate the same upon the grant of such a security
interest by Borrower.
"FEIN" means Federal Employer Identification Number.
"Foothill" means Foothill Capital Corporation, a
California corporation.
"Foothill Loans" has the meaning set forth in Section
2.1(f).
"Funding Date" means the date on which a Borrowing
occurs.
"GAAP" means generally accepted accounting principles
as in effect from time to time in the United States, consistently applied.
"General Intangibles" means all of Borrower's present
and future general intangibles and other personal property (including contract
rights, rights arising under common law, statutes, or regulations, choses or
things in action, goodwill, Permits, patents, trade names, trademarks,
servicemarks, copyrights, blueprints, drawings, purchase orders, customer lists,
monies due or recoverable from pension funds, route lists, rights to payment and
other rights under any royalty or licensing agreements, infringement claims,
computer programs, information contained on computer disks or tapes, literature,
reports, catalogs, deposit accounts, insurance premium rebates, tax refunds, and
tax refund claims), other than goods, Accounts, and Negotiable Collateral.
"Governing Documents" means, with respect to any
Person, the certificate or articles of incorporation, by-laws, or other
organizational or governing documents of such Person.
"Governmental Authority" means any nation or
government, any state, province, or other political subdivision thereof, any
central bank (or similar monetary or regulatory authority) thereof, any entity
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government, and any corporation or other entity
owned or controlled, through Stock or capital ownership or otherwise, by any of
the foregoing.
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"Guaranty Agreements" means, collectively, any and
all of the guaranty agreements with respect to the Obligations which are, or are
to be, executed by a Guarantor in favor of Agent for the benefit of the Lender
Group, as required from time to time by Agent, in form and substance
satisfactory to Agent, in each case as the same may be amended, modified,
restated, supplemented, increased, renewed, extended, substituted for or
replaced from time to time.
"Guarantor" means each Subsidiary of Borrower not a
signatory to this Agreement, and each other Person who may hereafter guarantee
payment or performance of the whole or any part of the Obligations.
"Hazardous Materials" means (a) substances that are
defined or listed in, or otherwise classified pursuant to, any applicable laws
or regulations as "hazardous substances," "hazardous materials," "hazardous
wastes," "toxic substances," or any other formulation intended to define, list,
or classify substances by reason of deleterious properties such as ignitability,
corrosivity, reactivity, carcinogenicity, reproductive toxicity, or "EP
toxicity", (b) oil, petroleum, or petroleum derived substances, natural gas,
natural gas liquids, synthetic gas, drilling fluids, produced waters, and other
wastes associated with the exploration, development, or production of crude oil,
natural gas, or geothermal resources, (c) any flammable substances or explosives
or any radioactive materials, and (d) asbestos in any form or electrical
equipment that contains any oil or dielectric fluid containing levels of
polychlorinated biphenyls in excess of 50 parts per million.
"Hedging Agreements" shall mean any swap agreement,
cap, floor, collar, exchange transaction, forward agreement or other exchange or
protection agreement relating to Hydrocarbons or any option with respect to any
such transaction.
"Hedging Agreement Undertaking" has the meaning set
forth in Section 2.3.
"Hedging Arrangements Usage" means the sum of (a) the
amount determined by Agent from time to time as Agent's reasonable good faith
estimate of the aggregate liability (contingent or otherwise) of the Lender
Group with respect to Hedging Agreements which are the subject of Hedging
Agreement Undertakings, plus (b) the amounts of unreimbursed payments made by
the Lender Group with respect to Hedging Agreement Undertakings.
"Hydrocarbons" shall mean oil, natural gas,
casinghead gas, drip gasoline, natural gasoline, condensate, distillate, liquid
hydrocarbons, gaseous hydrocarbons and all constituents, elements or compounds
thereof and products refined or separated therefrom.
"Indebtedness" means: (a) all obligations of Borrower
or any of its Subsidiaries for borrowed money, (b) all obligations of Borrower
or any of its Subsidiaries evidenced by bonds, debentures, notes, or other
similar instruments and all reimbursement or other obligations of Borrower or
any of its Subsidiaries in respect of letters of credit, bankers acceptances,
interest rate swaps, or other financial products, (c) all obligations of
Borrower or any of its Subsidiaries under capital leases, (d) all obligations or
liabilities of others secured by a Lien
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<PAGE> 19
on any property or asset of Borrower or any of its Subsidiaries, irrespective of
whether such obligation or liability is assumed, (e) any obligation of Borrower
or any of its Subsidiaries guaranteeing or intended to guarantee (whether
guaranteed, endorsed, co-made, discounted, or sold with recourse to Borrower or
any of its Subsidiaries) any indebtedness, lease, dividend, letter of credit, or
other obligation of any other Person other than the endorsement of checks for
deposit in the ordinary course of business, (f) the net mark to market value of
all obligations of Borrower or any of its Subsidiaries under any Hedging
Agreements and any Hedging Agreement Undertaking, (g) all obligations of
Borrower or any of its Subsidiaries to deliver goods or services including
Hydrocarbons in consideration of advance payments, (h) the undischarged balance
of any production payment, and (i) the undischarged balance of any net profits
interest or overriding royalty interest created by Borrower or any of its
Subsidiaries in favor of the grantee of such interest for the creation of which
Borrower or any of its Subsidiaries directly or indirectly received advance
payment of money from such grantee or any of its Affiliates (and not including
net profits interests and overriding royalty interests created by Borrower in
the ordinary course of business of Borrower and not in connection with the
advance payment of money to Borrower or its Subsidiaries or Affiliates by the
grantee of such interest or any of its Affiliates).
"Indemnified Liabilities" has the meaning set forth
in Section 11.3.
"Indemnified Person" has the meaning set forth in
Section 11.3.
"Insolvency Proceeding" means any proceeding
commenced by or against any Person under any provision of the Bankruptcy Code or
under any other bankruptcy or insolvency law, assignments for the benefit of
creditors, formal or informal moratoria, compositions, extensions generally with
creditors, or proceedings seeking reorganization, arrangement, or other similar
relief.
"Intangible Assets" means, with respect to any
Person, that portion of the book value of all of such Person's assets that would
be treated as intangibles under GAAP.
"Intellectual Property" has the meaning ascribed
thereto in Section 5.19.
"Interest Expense" shall mean, for any period, the
sum (determined without duplication) of the aggregate amount of interest expense
accruing during such period on Indebtedness of Borrower and its Subsidiaries,
including the interest portion of payments under capitalized leases and any
capitalized interest, but excluding amortization of debt discount and expense.
"Inventory" means all present and future inventory in
which Borrower or any of its Subsidiaries has any interest, including goods and
extracted Hydrocarbons held for sale or lease or to be furnished under a
contract of service and all of Borrower's present and future raw materials, work
in process, finished goods, and packing and shipping materials, wherever
located.
"Investment Property" means all of Borrower's present
and hereafter acquired "investment property" as that term is defined in Section
9-115 of the Code.
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"IRC" means the Internal Revenue Code of 1986, as
amended, and the regulations thereunder.
"L/C" has the meaning set forth in Section 2.2(a).
"L/C Guaranty" has the meaning set forth in Section
2.2(a).
"Legal Requirements" means all applicable
international, foreign, federal, state, and local laws, judgments, decrees,
orders, statutes, ordinances, rules, regulations, or Permits, including, without
limitation, all Environmental Laws.
"Lender" and "Lenders" have the respective meanings
set forth in the preamble to this Agreement, and shall include any other Person
made a party to this Agreement in accordance with the provisions of Section 15.1
hereof.
"Lender Group" means, individually and collectively,
each of the individual Lenders and Agent.
"Lender Group Expenses" means all: costs or expenses
(including taxes, and insurance premiums) required to be paid by Borrower under
any of the Loan Documents that are paid or incurred by the Lender Group; fees or
charges paid or incurred by the Lender Group in connection with the Lender
Group's transactions with Borrower, including, fees or charges for photocopying,
notarization, couriers and messengers, telecommunication, public record searches
(including tax lien, litigation, and UCC (or equivalent) searches and including
searches with the patent and trademark office, the copyright office, or the
department of motor vehicles), filing, recording, publication, appraisal
(including periodic Oil and Gas Property Collateral appraisals and engineer
reports), Reserve Reports and environmental audits; costs and expenses incurred
by Agent in the disbursement of funds to Borrower (by wire transfer or
otherwise); charges paid or incurred by Agent resulting from the dishonor of
checks; costs and expenses paid or incurred by the Lender Group to correct any
default or enforce any provision of the Loan Documents, or in gaining possession
of, maintaining, handling, preserving, storing, shipping, selling, preparing for
sale, or advertising to sell the Collateral, or any portion thereof,
irrespective of whether a sale is consummated; costs and expenses paid or
incurred by Agent in examining the Books; costs and expenses of third party
claims or any other suit paid or incurred by the Lender Group in enforcing or
defending the Loan Documents or in connection with the transactions contemplated
by the Loan Documents or the Lender Group's relationship with Borrower (or any
of its Subsidiaries party to one or more Loan Documents); and the Lender Group's
reasonable attorneys fees and expenses incurred in advising, structuring,
drafting, reviewing, administering, amending, terminating, enforcing (including
attorneys fees and expenses incurred in connection with a "workout," a
"restructuring," or an Insolvency Proceeding concerning Borrower), defending, or
concerning the Loan Documents, irrespective of whether suit is brought.
"Lender-Related Persons" means, with respect to any
Lender, such Lender, together with such Lender's Affiliates, and the officers,
directors, employees, counsel, agents, and attorneys-in-fact of such Lender and
such Lender's Affiliates.
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"Letter of Credit" means an L/C or an L/C Guaranty,
as the context requires.
"Letter of Credit/Hedging Arrangements Usage" means
the sum of (a) Letter of Credit Usage, plus (b) Hedging Arrangements Usage.
"Letter of Credit Usage" means the sum of (a) the
undrawn amount of uncancelled Letters of Credit, plus (b) the amount of
unreimbursed drawings under Letters of Credit, minus (c) the aggregate amount of
cash collateral securing outstanding Letters of Credit pursuant to Section
2.2(e).
"Lien" means any interest in Property securing an
obligation owed to, or a claim by, any Person other than the owner of the
Property, whether such interest shall be based on the common law, statute, or
contract, whether such interest shall be recorded or perfected, and whether such
interest shall be contingent upon the occurrence of some future event or events
or the existence of some future circumstance or circumstances, including (a) the
lien or security interest arising from a mortgage, deed of trust, encumbrance,
pledge, hypothecation, assignment, deposit arrangement, security agreement,
adverse claim or charge, conditional sale or trust receipt, or from a lease,
consignment, or bailment for security purposes and also including reservations,
exceptions, encroachments, easements, rights-of-way, covenants, conditions,
restrictions, leases, and other title exceptions and encumbrances affecting Oil
and Gas Property or Real Property and (b) production payments, overriding
royalty interests, net profits interests and the like payable out of Oil and Gas
Property. For purposes of this Agreement, Borrower or any of its Subsidiaries
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 financing.
"Loan Account" has the meaning set forth in Section
2.10.
"Loan Documents" means this Agreement, the
Disbursement Letter, the Letters of Credit, the Lockbox Agreements, the Oil and
Gas Property Mortgages, the Real Property Mortgages, the Guaranty Agreements,
the Security Agreements, the Prior Lender Assignment Agreements, the
Subordination Agreements, any note or notes executed by Borrower and payable to
the Lender Group, and any other agreement entered into, now or in the future, in
connection with this Agreement.
"Loan Party" means Borrower and each Guarantor.
"Lockbox Account" shall mean a depositary account
established pursuant to one of the Lockbox Agreements.
"Lockbox Agreements" means Lockbox Operating
Procedural Agreements and those certain Depository Account Agreements, in form
and substance satisfactory to Agent, each of which is among Borrower, Agent, and
one of the Lockbox Banks.
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<PAGE> 22
"Lockbox Banks" means such banks as may be agreed to
by Borrower and Foothill from time to time.
"Lockboxes" has the meaning set forth in Section 2.7.
"Material Adverse Change" means (a) a material
adverse change occurring on or after September 30, 1999 in the business,
prospects, operations, results of operations, assets, liabilities or condition
(financial or otherwise) of Borrower, (b) a material adverse effect on the
ability of Borrower to carry out its business as at the Closing Date or as
proposed as of the Closing Date, (c) the material impairment of Borrower's
ability to perform its obligations under the Loan Documents to which it is a
party or of the Lender Group to enforce the Obligations or realize upon the
Collateral, (d) any event or circumstance that in the credit judgment of the
Agent is likely to have a material adverse effect on the value of the Collateral
or the amount that the Lender Group would be likely to receive (after giving
consideration to delays in payment and costs of enforcement) in the liquidation
of the Collateral, or (e) a material impairment of the priority of the Agent's
Liens with respect to the Collateral.
"Material Contract" means, as to any Person, any
supply, purchase, service, employment, tax, indemnity, farmout, gas marketing,
gas imbalance, operating, unitization, communitization, partnership, joint
venture or other agreement of such Person or any of its Subsidiaries or by which
such Person or any of its Subsidiaries or any of their respective properties are
otherwise bound, which is material to the business, operations or properties of
such Person, as the same shall be amended, modified and supplemented and in
effect from time to time.
"Maximum Revolving Amount" means $30,000,000.
"Mineral Interests" shall mean all right, title,
interest and estates now owned 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
interests, reversionary interests, carried working interests, or residual
interests of whatever nature.
"MMS" means the Minerals Management Service of the
United States Department of the Interior.
"Moody's" means Moody's Investors Service, Inc. and
any successor thereto.
"Multiemployer Plan" means a "multiemployer plan" (as
defined in Section 4001(a)(3) of ERISA) to which Borrower, any of its
Subsidiaries, or any ERISA Affiliate has contributed, or was obligated to
contribute, within the past six years.
"Mustang Island 883S Leasehold" means the leasehold
and Mineral Interests covered by that certain Lease No. M-098671 effective April
1, 1997, by and between the State of Texas, as lessor, and Borrower, as lessee,
recorded in the records of the County Clerk of Nueces County, Texas, as Document
Number 1997037794, covering the South 1/2 of Tract 883S,
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Gulf of Mexico, Nueces County, Texas, containing approximately 320 acres as
shown on the official map of the Gulf of Mexico on file in the Texas General
Land Office, Austin, Texas.
"Negotiable Collateral" means all of a Person's
present and future letters of credit, notes, drafts, instruments, Investment
Property, documents, personal property leases (wherein such Person is the
lessor), chattel paper, and the Books relating to any of the foregoing.
"NYMEX Price" means, as of the date of the
determination thereof, the average of the 24 succeeding monthly futures contract
prices, commencing with the month during which the determination is to be made,
for each of the appropriate crude oil or natural gas categories included in the
most recent Reserve Report provided by Borrower to Agent pursuant to Section
6.2, as applicable, as quoted on the New York Mercantile Exchange ("NYMEX"), or,
if the NYMEX no longer provides futures contract price quotes for 24 month
periods, the longest period of quotes of less than 24 months shall be used, and,
if the NYMEX no longer provides such futures contract quotes or has ceased to
operate, the Agent shall designate another nationally recognized commodities
exchange to replace the NYMEX.
"NYMEX Value" means, at any date of determination
thereof as to any Proved Reserves of Borrower, the result of
(a) the discounted present value of future
net revenues (i.e., after deducting production and ad valorem taxes and less
future capital costs and operating expenses) from Proved Reserves of Borrower as
of such date utilizing the NYMEX Price for the appropriate category of oil or
gas as quoted in a nationally recognized publication for such pricing as
selected as of such date by Agent and assuming that production costs thereafter
remain constant, then discounted at a rate of 10% per year to obtain the present
value; minus
(b) to the extent not taken into account in
subparagraph (a) above, the discounted present value (discounted at a rate of
10% per year) of Borrower's future plugging and abandonment expenses; minus
(c) to the extent not taken into account in
subparagraph (a) above, minority interests and other interests of Persons other
than Borrower and any natural gas balancing liabilities of Borrower.
"Obligations" means all loans, Advances, debts,
principal, interest (including any interest that, but for the provisions of the
Bankruptcy Code, would have accrued), contingent reimbursement obligations under
any outstanding Letters of Credit, premiums (including Early Termination
Premiums), liabilities (including all amounts charged to Borrower's Loan Account
pursuant hereto), obligations, fees, charges, costs, or Lender Group Expenses
(including any fees or expenses that, but for the provisions of the Bankruptcy
Code, would have accrued), lease payments, guaranties, covenants, and duties
owing by Borrower to the Lender Group of any kind and description (whether
pursuant to or evidenced by the Loan Documents or pursuant to any other
agreement between the Lender Group and Borrower, and irrespective of whether for
the payment of money), whether direct or indirect, absolute or contingent, due
or to become due, now existing or hereafter arising, and including any debt,
liability, or obligation
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owing from Borrower to others that the Lender Group may have obtained by
assignment or otherwise, any debt, liability, or obligation owing to Agent or
any Lender arising from any Hedging Agreements under which Agent or any Lender
is a counterparty or any Hedging Agreement Undertaking, and further including
all interest not paid when due and all Lender Group Expenses that Borrower is
required to pay or reimburse by the Loan Documents, by law, or otherwise.
"Oil and Gas Properties" means all of the present and
future right, title and interest (real, personal, mixed, contractual or
otherwise) of Borrower and its Subsidiaries in, to and under or derived from the
following:
(a) All presently existing and hereafter arising
Mineral Interests and surface interests;
(b) All presently existing and hereafter arising
unitization, communitization and pooling declarations, orders,
and agreements (including all units formed by voluntary
agreement and those formed under the rules, regulations,
orders or other official acts of any governmental entity or
tribal authority having appropriate jurisdiction);
(c) All presently existing and arising oil sales
contracts, casinghead gas sales contracts, gas sales
contracts, processing contracts, gathering contracts,
transportation contracts, easements, rights-of-way,
servitudes, surface leases, subsurface leases, farm-out
contracts, farm-in contracts, operating agreements, areas of
mutual interest and other contracts, agreements and
instruments;
(d) All presently existing and hereafter arising
personal property, improvements, fixtures, wells (whether
producing, plugged and abandoned, shut-in, injection, disposal
or water supply), tanks, boilers, buildings, machinery,
vehicles, Equipment, gathering lines, pipelines, utility
lines, power lines, telephone lines, water rights, roads,
permits, licenses and other appurtenances, to the extent the
same are situated upon and used or held for use by Borrower or
any of its Subsidiaries in connection with the ownership,
operation, maintenance or repair of the Mineral Interests
and/or surface interests; and
(e) All reservoir, reserve, seismic, geologic or
geophysical information and data.
"Oil and Gas Property Collateral" means the Oil and
Gas Properties which are identified on Schedule 5.1(a) or Schedule 5.1(b), and
any other Oil and Gas Properties now owned or hereafter acquired by Borrower or
any of its Subsidiaries.
"Oil and Gas Property Mortgages" means one or more
mortgages, deeds of trust, or deeds to secure debt, executed by Borrower and
each of its Subsidiaries in favor of Agent, the form and substance of which
shall be satisfactory to Agent, that encumber the Oil and Gas
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<PAGE> 25
Property Collateral and the related improvements thereto (including the Prior
Lender Assignment Agreements).
"Overadvance" has the meaning set forth in Section
2.5.
"Parent Note" shall mean that certain promissory note
issued by the Borrower to Petsec USA in the original stated amounts of
$27,500,000 plus Australian Dollars AUS$12,739,029.88, dated on or about June
12, 1997, together with any extensions thereof, securities issued in exchange
therefore, or modifications or amendments thereto.
"Participant" has the meaning set forth in Section
15.1(e).
"PBGC" means the Pension Benefit Guaranty Corporation
as defined in Title IV of ERISA, or any successor thereto.
"PEL" means Petsec Energy Ltd., an Australian
corporation, the legal and beneficial owner of 100% of the issued and
outstanding capital stock of Petsec USA.
"Permits" of a Person shall mean all rights,
franchises, permits, authorities, licenses, certificates of approval or
authorizations, including licenses and other authorizations issuable by a
Governmental Authority, which pursuant to applicable Legal Requirements are
necessary to permit such Person lawfully to conduct and operate its business as
currently conducted and to own and use its assets.
"Permitted Liens" means (a) Liens held by Agent for
the benefit of the Lender Group, (b) Liens for unpaid taxes that either (I) are
not yet due and payable or (II) are the subject of Permitted Protests, (c) Liens
set forth on Schedule P-1, (d) the interests of lessors under operating leases
and purchase money Liens of lessors under capital leases to the extent that the
acquisition or lease of the underlying asset is permitted under Section 7.21 and
so long as the Lien only attaches to the asset purchased or acquired and only
secures the purchase price of the asset, (e) Liens arising by operation of law
in favor of warehousemen, landlords, carriers, mechanics, materialmen, laborers,
or suppliers, or other like Liens arising by operation of law incidental to the
exploration, development, operation and maintenance of Oil and Gas Properties,
in each case incurred in the ordinary course of business of Borrower and not in
connection with the borrowing of money, and which Liens either (I) are for sums
not yet due and payable, or (II) are the subject of Permitted Protests, (f)
Liens arising from deposits made in connection with obtaining worker's
compensation or other unemployment insurance, (g) Liens on deposits and escrowed
funds made to secure performance of bids, tenders and leases (to the extent
permitted under this Agreement) incurred in the ordinary course of business of
Borrower and not in connection with the borrowing of money, (h) Liens of or
resulting from any judgment or award that do not result in and reasonably could
not be expected to result in a Material Adverse Change and as to which the time
for the appeal or petition for rehearing of which has not yet expired, or in
respect of which Borrower is in good faith prosecuting an appeal or proceeding
for a review and in respect of which a stay of execution pending such appeal or
proceeding for review has been secured, (i) Liens with respect to the Oil and
Gas Property Collateral that are exceptions to the title opinions issued in
connection with the Oil and Gas Mortgages, as accepted by Agent, (j) with
respect to
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any Oil and Gas Property Collateral consisting of Mineral Interests, (I)
exceptions, encroachments, easements, rights of way, zoning, covenants,
conditions, and other similar restrictions, encumbrances, minor defects in title
and reservations in the terms of the oil and gas leases and other instruments
creating or evidencing the Mineral Interests which (A) do not affect Borrower's
Defensible Title thereto to an extent unacceptable to Agent in its reasonable
judgement or restrict the full use or other benefits of ownership by Borrower or
such Subsidiary, as the case may be, and (B) do not affect the ability of
Borrower or such Subsidiary, as the case may be, to receive a share of
production or proceeds from, allocated to, or attributable to such Mineral
Interests equal to the interest of Borrower or such Subsidiary, as the case may
be, therein as represented herein, in the other Loan Documents or in the initial
Reserve Report which includes such Mineral Interests, and (C) do not materially
interfere with the ordinary conduct of the business of Borrower or such
Subsidiary, as the case may be, and (D) do not interfere with or impair the
value of Agent's Lien therein for the benefit of the Lender Group, and (E) are
customarily waived by reasonable and prudent Mineral Interest owners, and (II)
Liens reserved in leases or farmout agreements for rent or royalties and for
compliance with the terms of the farmout agreements or leases 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 Mineral Interest covered by such Lien
for the purposes for which such Mineral Interest is held by the Borrower or any
Subsidiary, does not materially interfere with or impair the value of such
Mineral Interest subject thereto or Agent's Lien therein for the benefit of the
Lender Group, is customarily waived by reasonable and prudent operators, and is
consented to in writing by Agent, (k) farmout, carried working interests, joint
operating, unitization, royalty, overriding royalty, sales and similar
agreements relating to the exploration or development of, or production from,
Oil and Gas Properties or the sale of the hydrocarbons after they are produced
which are existing at the time of acquisition of such Oil and Gas Property, are
usual and customary for the industry, and are disclosed to and approved by Agent
in writing prior to any Proved Reserves attributable to such Oil and Gas
Property being included in Eligible Proved Reserves, and (l) operator liens
which are subordinated in priority and right to the Liens of Agent for the
benefit of the Lender Group securing the Obligations pursuant to a written
Subordination Agreement executed by the holders of such operator liens in favor
the Lender Group.
"Permitted Protest" means the right of Borrower to
protest any Lien other than any such Lien that secures the Obligations, tax
(other than payroll taxes or taxes that are the subject of a United States
federal tax lien), or rental payment, provided that (a) a reserve with respect
to such obligation is established on the books of Borrower in an amount that is
satisfactory to Agent, (b) any such protest is instituted and diligently
prosecuted by Borrower in good faith, and (c) Agent is satisfied that, while any
such protest is pending, there will be no impairment of the enforceability,
validity, or priority of any of the Agent's Liens in and to the Collateral.
"Person" means and includes natural persons,
corporations, limited liability companies, limited partnerships, general
partnerships, limited liability partnerships, joint ventures, trusts, land
trusts, business trusts, or other organizations, irrespective of whether they
are legal entities, and governments and agencies and political subdivisions
thereof.
"Personal Property Collateral" means all Collateral
other than the Oil and Gas Property Collateral and other than the Real Property
Collateral.
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"Petsec USA" means Petsec (U.S.A.) Inc., a Nevada
corporation, the legal and beneficial owner of 100% of the issued and
outstanding capital stock of Borrower.
"Plan" means any employee benefit plan, program, or
arrangement maintained or contributed to by Borrower or with respect to which it
may incur liability.
"Prior Credit Agreement" has the meaning set forth in
the recitals hereto.
"Prior Lender Assignment Agreements" means the
assignment agreements in the form and substance of Exhibit P-1 attached hereto.
"Prior Lenders" has the meaning set forth in the
recitals.
"Property" means any interest in any kind of property
or asset, whether real, personal or mixed, tangible or intangible.
"Pro Rata Share" means, with respect to a Lender, a
fraction (expressed as a percentage), the numerator of which is the amount of
such Lender's Commitment and the denominator of which is the aggregate amount of
the Commitments.
"Proved Developed Non-Producing Reserves" means
Proved Reserves of Borrower, other than Proved Developed Producing Reserves and
Proved Undeveloped Reserves, that can be expected to be recovered through
existing wells with existing equipment and operating methods.
"Proved Developed Producing Reserves" means Proved
Reserves of Borrower, other than Proved Developed Non-Producing Reserves and
Proved Undeveloped Reserves, that can be expected to be recovered from currently
producing zones under the continuation of present operating methods.
"Proved Reserves" means at any particular time, the
estimated quantities of Hydrocarbons which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs attributable to Mineral Interests included or to be included in
the Reserve Report under existing economic and operating conditions.
"Proved Undeveloped Reserves" means Proved Reserves
of Borrower, other than Proved Developed Producing Reserves and Proved Developed
Non-Producing Reserves, that are expected to be recovered from new wells on
undrilled acreage, or from existing wells where a relatively major expenditure
is required for recompletion.
"Qualified Subsequent Oil and Gas Property" means, as
at any date of determination thereof, Oil and Gas Properties acquired subsequent
to the date of this Agreement with respect to which all of the representations
specified in Section 5.2 are true and correct, and Borrower has delivered to
Agent the Oil and Gas Mortgages, opinions, certificates and other items and
information described in Exhibit B-1.
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"Real Property" means any estates or interests in
real property now owned or hereafter acquired by Borrower or any Subsidiary of
Borrower, excluding Oil and Gas Properties.
"Real Property Collateral" means the parcel or
parcels of real property and the related improvements thereto identified on
Schedule 5.1(d) and any Real Property hereafter acquired by Borrower.
"Real Property Mortgages" means one or more
mortgages, deeds of trust, or deeds to secure debt, executed by Borrower and
each of its Subsidiaries in favor of Agent, or to the Prior Agent and assigned
to Agent, the form and substance of which shall be satisfactory to Agent, that
encumber the Real Property Collateral and the related improvements thereto.
"Reference Rate" means the variable rate of interest,
per annum, most recently announced by Wells Fargo Bank, National Association, or
any successor thereto, as its "prime rate," irrespective of whether such
announced rate is the best rate available from such financial institution.
"Refinancing Letter" means a letter, in form and
substance reasonably satisfactory to Agent, from Prior Lender respecting the
amount necessary to purchase and refinance in full all of the obligations of
Borrower owing to Prior Lenders and obtain an assignment to Agent of all of the
Liens existing in favor of Prior Lenders in and to the properties or assets of
Borrower.
"Renewal Date" has the meaning set forth in Section
3.4.
"Reportable Event" means any of the events described
in Section 4043(c) of ERISA or the regulations thereunder other than a
Reportable Event as to which the provision of 30 days notice to the PBGC is
waived under applicable regulations.
"Required Lenders" means, at any time, Lenders whose
Pro Rata Shares aggregate 65% or more of the Commitments, or, if the Commitments
have been terminated irrevocably, 65% of the Obligations then outstanding.
"Reserve Report" means a report, in form and
substance satisfactory to Agent, prepared by Ryder Scott Company or another firm
of independent petroleum engineers acceptable to Agent evaluating the oil and
gas reserves attributable to the Mineral Interests of Borrower and its
Subsidiaries (as determined on an unconsolidated basis) which shall, among other
things, (a) identify the wells covered thereby, (b) specify said third party's
opinions with respect to the total volume of Proved Reserves (specifying with
such opinions the terms of categories Proved Developed Producing Reserves,
Proved Developed Non-Producing Reserves and Proved Undeveloped Reserves) which
Borrower has the right to produce (or cause to be produced) for its own account,
(c) set forth said firm's opinions with respect to the NYMEX Value of each of
the categories of the Proved Reserves as specified in subclause (b) above, (d)
set forth said firm's opinions with respect to the projected future rate of
production of the Proved
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<PAGE> 29
Reserves, (e) contain such other information as requested by Agent with respect
to the projected rate of production, gross revenues, operating expenses, net
income, taxes, capital expenditures and other capital costs, net revenues and
present value of future net revenues attributable to such reserves and
production therefrom, and (f) contain a statement of the price and escalation
parameters, procedures and assumptions upon which such determinations were
based.
"Reserves Against Availability" means such reserves
as Agent reasonably determines in Agent's discretion as being appropriate to
reflect impediments to Agent's ability to realize upon the Collateral or
impairments or reductions to the value of the Collateral. Without limiting the
generality of the foregoing, Reserves Against Availability may include (but are
not limited to) reserves based upon the following:
(a) accounts payable which are more than 45 days past
the original due date thereof;
(b) past due or accrued taxes or other governmental
charges, including ad valorem, personal property, production,
severance and other taxes which may have priority over the
Liens or security interests of Agent in the Collateral;
(c) Liens in favor of third Persons (whether or not
such Liens are Permitted Liens);
(d) deposits which are due or scheduled to become due
during the immediately following 180 day period under deposit
or escrow arrangement concerning costs, expenses and
liabilities relating to the plugging and abandonment of Oil
and Gas Properties;
(e) estimates of present and future costs, expenses,
deposits and liabilities related to the plugging and
abandonment of the Oil and Gas Properties net of the amount
thereof which has been taken into account in the most recent
Reserve Report or is fully secured by an escrow arrangement
acceptable to Agent;
(f) sums which Borrower may be required to pay which
are due or are scheduled to become due during such period as
shall be determined by Agent with respect to rental, delay
rental, lease and other amounts payable under leases or the
Oil and Gas Properties; and
(g) without duplication of the foregoing, amounts
owing by Borrower to any Person to the extent secured by a
Lien (whether or not such Lien is a Permitted Lien) on, or
trust (constructive or otherwise) over, any of the Collateral
(including proceeds thereof or collections from the sale of
Hydrocarbons or Mineral Interests which may from time to time
come into the possession of any of the Lender Group or its
agents), which Lien or trust, in the determination of Agent
(from the perspective of an asset-based lender), has a
reasonable possibility of having a priority superior to the
Agent's Liens (such as landlord liens, ad valorem taxes,
production taxes, severance taxes, sales taxes, Collections
attributable to
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Mineral Interests of Persons other than Borrower) in and to
such item of Collateral, proceeds or collection.
"Retiree Health Plan" means an "employee welfare
benefit plan" within the meaning of Section 3(1) of ERISA that provides benefits
to individuals after termination of their employment, other than as required by
Section 601 of ERISA.
"Revolving Facility Usage" means, as of any date of
determination, the sum of (a) the aggregate amount of Advances outstanding, plus
(b) the Letter of Credit/Hedging Arrangement Usage.
"SEC" means the United States Securities and Exchange
Commission and any successor Federal agency having similar powers.
"Securities Account" means a "securities account" as
that term is defined in Section 8-501 of the Code.
"Security Agreements" means, collectively, any and
all of the security agreement, pledges, mortgages, deeds of trust, assignments,
stock pledge agreements and such other agreements, documents and instruments, in
form and substance satisfactory to Agent, which are, or are to be, executed by
Borrower and/or any one or more of its Subsidiaries in favor of Agent and/or the
Lenders as may be required from time to time by Agent to provide Agent for the
benefit of the Lender Group with Liens upon all of the assets and properties of
Borrower and its Subsidiaries as security for the payment and performance in
full of the Obligations, in each case as the same may be amended, modified,
restated, supplemented, increased, renewed, extended, substituted for or
replaced from time to time, together with the Prior Lender Assignment Agreements
and the security agreements, pledges, mortgages, deeds of trust, assignments,
stock pledge agreements and other agreements, documents and instruments covered
thereby.
"Settlement" has the meaning set forth in Section
2.1(h)(i).
"Settlement Date" has the meaning set forth in
Section 2.1(h)(i).
"Standard & Poor's" means Standard & Poor's Ratings
Services, a division of The McGraw-Hill Companies, Inc., and any successor
thereto.
"Stock" means all shares, options, warrants,
interests, participations, or other equivalents (regardless of how designated)
of or in a corporation or equivalent entity, whether voting or nonvoting,
including common stock, preferred stock, or any other "equity security" (as such
term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated
by the SEC under the Exchange Act).
"Subordination Agreements" means, individually and
collectively, any and all subordination agreements and similar agreements,
documents and instruments in favor of or for the benefit of the Lender Group, in
form and substance satisfactory to Agent.
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"Subsidiary" of a Person means a corporation,
partnership, limited liability company, or other entity in which that Person
directly or indirectly owns or controls the shares of Stock or other ownership
interests having ordinary voting power to elect a majority of the board of
directors (or appoint other comparable managers) of such corporation,
partnership, limited liability company, or other entity.
"Tangible Net Worth" means, as of any date of
determination, the difference of (a) Borrower's total stockholders' equity,
minus (b) the sum of: (i) all Intangible Assets of Borrower, (ii) all of
Borrower's prepaid expenses, and (iii) all amounts due to Borrower from
Affiliates.
"Title Opinion" has the meaning set forth in Section
3.1(l).
"Transfer Order Letters" means transfer order letters
in the form of Exhibit T-1 attached hereto containing the information as
provided for therein.
"Unsecured Notes" means those certain 9 1/2%
unsecured notes in the aggregate original principal amount of $100,000,000 dated
as of June 13, 1997, and maturing on June 30, 2007, issued under the Unsecured
Notes Indenture, as amended, modified, renewed or restated from time to time.
"Unsecured Notes Indebtedness Limitation" means at
any particular date the maximum amount of Obligations which may at such time be
outstanding pursuant to this Agreement that constitute "Senior Indebtedness" (as
such term is defined in the Unsecured Notes Indenture) and "Permitted
Indebtedness" (as such term is defined in the Unsecured Notes Indenture) under
the Unsecured Notes Indenture and does not cause or result in a violation of the
Unsecured Notes Indenture or cause or result in any holders of the Unsecured
Notes (or any trustee or agent for the benefit thereof) having the right to
demand repayment, repurchase, retirement or redemption thereof or any similar
right with respect thereto.
"Unsecured Notes Indenture" means that certain
Indenture dated as of June 13, 1997 among Borrower and the Bank of New York,
pursuant to which the Unsecured Notes have been issued, as amended, modified,
renewed or restated from time to time.
"Voidable Transfer" has the meaning set forth in
Section 15.8.
"Working Interest" means that interest in an oil and
gas mineral lease which gives the owner the right to explore for, develop,
exploit, and/or produce the minerals and includes the obligation to pay the
expense of such activities.
"Year 2000 Compliant" means that Borrower's and each
of its Subsidiaries' computer software programs (whether used in Borrower's or
its Subsidiaries' business or licensed by or to Borrower or any of its
Subsidiaries to or from third parties) effectively processes data including data
fields requiring references to dates on and after January 1, 2000 and have been
designed not to experience or produce invalid or incorrect results or abnormal
software operation related to or as a result of the occurrence of such dates.
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1.2 ACCOUNTING TERMS. All accounting terms not specifically
defined herein shall be construed in accordance with GAAP. When used herein, the
term "financial statements" shall include the notes and schedules thereto.
Whenever the term "Borrower" is used in respect of a financial covenant or a
related definition, it shall be understood to mean Borrower on a consolidated
basis unless the context clearly requires otherwise.
1.3 CODE. Any terms used in this Agreement that are defined in
the Code shall be construed and defined as set forth in the Code unless
otherwise defined herein.
1.4 CONSTRUCTION. Unless the context of this Agreement or any
other Loan Document clearly requires otherwise, references to the plural include
the singular, references to the singular include the plural, the term
"including" is not limiting, and the term "or" has, except where otherwise
indicated, the inclusive meaning represented by the phrase "and/or." The words
"hereof," "herein," "hereby," "hereunder," and similar terms in this Agreement
or any other Loan Document refer to this Agreement or any other Loan Documents,
as the case may be, as a whole and not to any particular provision of this
Agreement or such other Loan Document, as the case may be. An Event of Default
shall "continue" or be "continuing" until such Event of Default has been waived
in writing by Agent. Section, subsection, clause, schedule, and exhibit
references herein are to this Agreement unless otherwise specified. Any
reference in this Agreement or in the Loan Documents to this Agreement or any of
the Loan Documents shall include all alterations, amendments, changes,
extensions, modifications, renewals, replacements, substitutions, joinders, and
supplements, thereto and thereof, as applicable.
1.5 SCHEDULES AND EXHIBITS. All of the schedules and exhibits
attached to this Agreement shall be deemed incorporated herein by reference.
2. LOAN AND TERMS OF PAYMENT
2.1 REVOLVING ADVANCES.
(a) Subject to the terms and conditions of this
Agreement and during the term of this Agreement, each Lender agrees to make
advances ("Advances") to Borrower in an amount at any one time outstanding not
to exceed such Lender's Pro Rata Share of an amount equal to the least of (i)
the Maximum Revolving Amount less (A) the aggregate amount of all Letter of
Credit/Hedging Arrangement Usage, less (B) the aggregate amount of the reserves,
if any, established by Agent under Section 2.1(b), or (ii) the Borrowing Base,
less (A) the aggregate amount of all Letter of Credit/Hedging Arrangement Usage,
less (B) the aggregate amount of the reserves, if any, established by Agent
under Section 2.1(b), or (iii) the Unsecured Notes Indebtedness Limitation, less
(A) the aggregate amount of all Letter of Credit/Hedging Agreement Usage less
(B) the aggregate amount of the reserves, if any, established by Agent under
Section 2.1(b). For purposes of this Agreement, the "Borrowing Base," as of any
date of determination (which, in the absence of the occurrence and continuation
of an Event of Default, shall be determined no less frequently than monthly),
shall mean:
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(1) during the period commencing on the date
of this Agreement and ending on the date upon which Borrower delivers
to Agent the Reserve Report for March 31, 2000 from Pollard, Gore &
Harrison (or other qualified independent petroleum engineering
consultant approved by Agent) as required pursuant to subclause (II) of
Section 6.2(g), the result of
(w) 55% of Borrower's Eligible
Proved Developed Producing Reserves, plus
(x) 25% of Borrower's Eligible
Proved Developed Non-Producing Reserves, plus
(y) 15% of Borrower's Eligible
Proved Undeveloped Reserves; and
(2) during the period after the date upon
which Borrower delivers to Agent the Reserve Report for March 31, 2000
from Pollard, Gore & Harrison (or other qualified independent petroleum
engineering consultant approved by Agent) as required pursuant to
subclause (II) of Section 6.2(g), the lesser of:
(x) the result of
(I) 55% of Borrower's
Eligible Proved Developed Producing Reserves, plus
(II) 25% of Borrower's
Eligible Proved Developed Non-Producing Reserves,
plus
(III) 15% of Borrower's
Eligible Proved Undeveloped Reserves; or
(y) 133% of the amount determined
under subclause (x)(I) of this subparagraph (2).
In determining the Borrowing Base as of any date of determination, the Proved
Reserves shall be based upon the volumetric quantity and production forecasts
and the related lease operating expenses of Proved Reserves estimated in the
most recently delivered Reserve Report minus the amount of Proved Reserves that
has been sold or produced since the date of the Reserve Report.
The Lenders shall have no obligation to make further Advances hereunder to the
extent they would cause the outstanding Revolving Facility Usage to exceed the
Maximum Revolving Amount.
Amounts borrowed pursuant to this Section 2.1 may be repaid and, subject to the
terms and conditions of this Agreement, reborrowed at any time during the term
of this Agreement.
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(b) Advance Rate Adjustments and Reserves; Proved
Reserves Reappraisals.
(i) Anything to the contrary in this
Section notwithstanding, Agent shall have the right to establish reserves in
such amounts as Foothill, in its reasonable credit judgment (from the
perspective of an asset-based lender) shall deem necessary or appropriate,
including reserves on account of (A) sums that Borrower is required to pay (such
as taxes, assessments, insurance premiums, or, in the case of leased assets,
rents or other amounts payable under such leases) and has failed to pay under
any Section of this Agreement or any other Loan Document, and (B) without
duplication of the foregoing, amounts owing by such Borrower to any Person to
the extent secured by a Lien on, or trust over, any of the Collateral, which
Lien or trust, in the reasonable determination of Foothill (from the perspective
of an asset-based lender), could have a priority superior to the Agent's Liens
(such as landlord liens, ad valorem taxes, or sales taxes where given priority
under applicable law) in and to such item of Collateral, (C) sums from time to
time owing by Borrower with respect to its insurance premium finance contracts
(including the indebtedness described in Schedule 7.1), whether or not the same
is then due or in default, and (D) without duplication of the foregoing,
Reserves Against Availability. Borrower agrees and acknowledges that at all
times during the period commencing on the date of this Agreement and ending on
the date upon which Borrower delivers to Agent the Reserve Report for March 31,
2000 from Pollard, Gore & Harrison (or other qualified independent petroleum
engineering consultant approved by Agent) as required pursuant to subclause (II)
of Section 6.2(g), the reserves established by Agent under this Section 2.1(b)
shall not be less than $2,000,000 and may exceed $2,000,000. Furthermore,
Borrower agrees and acknowledges that, at all times from and after the date that
Borrower sells, transfers or otherwise disposes of any of the platform and
jacket described in Schedule 5.2(e), there shall be an additional reserve that
Agent may establish in the amount of $1,000,000 without regard to any other
criteria for the establishment of reserves under this Agreement, which
$1,000,000 reserve shall remain in effect for as long as Agent, in its sole
discretion, may deem appropriate from time to time.
(ii) Agent shall have the right to require,
from time to time, Borrower to deliver updated Reserve Reports whereby the
volumetric quantity and production forecasts and related lease operating
expenses of Proved Reserves are redetermined from time to time by a qualified
petroleum engineer approved by Agent after the Closing Date for the purpose of
recalculating the NYMEX Value of the Proved Reserves located at the Oil and Gas
Property Collateral. In the absence of the occurrence and continuation of an
Event of Default, such updated Reserve Reports (A) shall be prepared as of March
31, 2000 and thereafter as of each June 30 and December 31 of each year by Ryder
Scott Company or other firm of independent petroleum engineers acceptable to
Agent, and delivered to Agent not later than 60 days after March 31, 2000 and
each such June 30 and December 31 date, and (B) shall be prepared as of the last
day of December 1999 and thereafter as of the last day of each month by Pollard,
Gore & Harrison or other petroleum engineering consultants to Agent acceptable
to Agent, and delivered to Agent not less than 10 days after the end of each
such month (15 days in the case of December 31, 1999), and such Reserve Reports
shall be based upon the most recently delivered Reserve Report described in
subclause (A) above and such other information as may be provided by Borrower,
as adjusted by Pollard, Gore & Harrison or such other petroleum engineering
consultant, as the case may be, in such manner and to such extent as such
consultant deems
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appropriate in its reasonable discretion. Borrower agrees to provide to Ryder
Scott Company, Pollard, Gore & Harrison and such other petroleum engineering
firms and consultants, as the case may be, with all information and data
requested by any of them or Agent so as to enable them to deliver such Reserve
Reports to Agent as and when required under this Agreement.
(c) Procedure for Borrowing. Each Borrowing shall be
made upon Borrower's irrevocable request therefor to Agent (which notice must be
received by Agent no later than 10:00 a.m. (California time) on the Business Day
preceding the requested Funding Date specifying (i) the amount of the Borrowing,
and (ii) the requested Funding Date, which shall be a Business Day, and each
such request for a Borrowing shall be accompanied by a Reserve Report with
respect to any Oil and Gas Properties which are to be acquired by Borrower.
(d) Agent's Election. Promptly after receipt of a
request for a Borrowing pursuant to Section 2.1(c), Agent shall elect, in its
discretion, (i) to have the terms of Section 2.1(e) apply to such requested
Borrowing, or (ii) to request Foothill to make a Foothill Loan pursuant to the
terms of Section 2.1(f) in the amount of the requested Borrowing; provided,
however, that if Foothill declines in its sole discretion to make a Foothill
Loan pursuant to Section 2.1(f), Agent shall elect to have the terms of Section
2.1(e) apply to such requested Borrowing.
(e) Making of Advances.
(i) In the event that Agent shall elect to
have the terms of this Section 2.1(e) apply to a requested Borrowing as
described in Section 2.1(d), then promptly after receipt of a request for a
Borrowing pursuant to Section 2.1(c), Agent shall notify the Lenders, not later
than 1:00 p.m. (California time) on the Business Day immediately preceding the
Funding Date applicable thereto, by telecopy, telephone, or other similar form
of transmission, of the requested Borrowing. Each Lender shall make the amount
of such Lender's Pro Rata Share of the requested Borrowing available to Agent in
immediately available funds, to such account of Agent as Agent may designate,
not later than 10:00 a.m. (California time) on the Funding Date applicable
thereto. After Agent's receipt of the proceeds of such Advances, upon
satisfaction of the applicable conditions precedent set forth in Section 3
hereof, Agent shall make the proceeds of such Advances available to Borrower on
the applicable Funding Date by transferring same day funds equal to the proceeds
of such Advances received by Agent to Borrower's Designated Account; provided,
however, that, subject to the provisions of Section 2.1(k), Agent shall not
request any Lender to make, and no Lender shall have the obligation to make, any
Advance if Agent shall have received written notice from any Lender, or
otherwise has actual knowledge, that (1) one or more of the applicable
conditions precedent set forth in Section 3 will not be satisfied on the
requested Funding Date for the applicable Borrowing unless such condition has
been waived, or (2) the requested Borrowing would exceed the Availability of the
Borrower.
(ii) Unless Agent receives notice from a
Lender on or prior to the Closing Date or, with respect to any Borrowing after
the Closing Date, at least one (1) Business Day prior to the date of such
Borrowing, that such Lender will not make available as and when required
hereunder to Agent for the account of Borrower the amount of that Lender's Pro
Rata Share of the Borrowing, Agent may assume that each Lender has made or will
make such
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amount available to Agent in immediately available funds on the Funding Date and
Agent may (but shall not be so required), in reliance upon such assumption, make
available to Borrower on such date a corresponding amount. If and to the extent
any Lender shall not have made its full amount available to Agent in immediately
available funds and Agent in such circumstances has made available to Borrower
such amount, that Lender shall on the Business Day following such Funding Date
make such amount available to Agent, together with interest at the Defaulting
Lenders Rate for each day during such period. A notice submitted by Agent to any
Lender with respect to amounts owing under this subsection shall be conclusive,
absent manifest error. If such amount is so made available, such payment to
Agent shall constitute such Lender's Advance on the date of Borrowing for all
purposes of this Agreement. If such amount is not made available to Agent on the
Business Day following the Funding Date, Agent will notify Borrower of such
failure to fund and, upon demand by Agent, Borrower shall pay such amount to
Agent for Agent's account, together with interest thereon for each day elapsed
since the date of such Borrowing, at a rate per annum equal to the interest rate
applicable at the time to the Advances composing such Borrowing. The failure of
any Lender to make any Advance on any Funding Date shall not relieve any other
Lender of any obligation hereunder to make an Advance on such Funding Date, but
no Lender shall be responsible for the failure of any other Lender to make the
Advance to be made by such other Lender on any Funding Date.
(iii) Agent shall not be obligated to
transfer to a Defaulting Lender any payments made by Borrower to Agent for the
Defaulting Lender's benefit; nor shall a Defaulting Lender be entitled to the
sharing of any payments hereunder. Amounts payable to a Defaulting Lender shall
instead be paid to or retained by Agent. Agent may hold and, in its discretion,
re-lend to Borrower the amount of all such payments received or retained by it
for the account of such Defaulting Lender. Solely for the purposes of voting or
consenting to matters with respect to the Loan Documents and determining Pro
Rata Shares, such Defaulting Lender shall be deemed not to be a "Lender" and
such Lender's Commitment shall be deemed to be zero (-0-). This section shall
remain effective with respect to such Lender until (x) the Obligations under
this Agreement shall have been declared or shall have become immediately due and
payable or (y) the requisite non-Defaulting Lenders and Agent shall have waived
such Lender's default in writing. The operation of this section shall not be
construed to increase or otherwise affect the Commitment of any Lender, or
relieve or excuse the performance by Borrower of its duties and obligations
hereunder.
(f) Making of Foothill Loans.
(i) In the event Agent shall elect, with the
consent of Foothill as a Lender, to have the terms of this Section 2.1(f) apply
to a requested Borrowing as described in Section 2.1(d), Foothill as a Lender
shall make an Advance in the amount of such Borrowing (any such Advance made
solely by Foothill as a Lender pursuant to this Section 2.1(f) being referred to
as a "Foothill Loan" and such Advances being referred to collectively as
"Foothill Loans") available to Borrower on the Funding Date applicable thereto
by transferring same day funds to Borrower's Designated Account. Each Foothill
Loan is an Advance hereunder and shall be subject to all the terms and
conditions applicable to other Advances, except that all payments thereon shall
be payable to Foothill as a Lender solely for its own account (and for the
account of the holder of any participation interest with respect to such
Advance). Subject to the provisions of
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Section 2.1(k), Agent shall not request Foothill as a Lender to make, and
Foothill as a Lender shall not make, any Foothill Loan if Agent shall have
received written notice from any Lender, or otherwise has actual knowledge, that
(i) one or more of the applicable conditions precedent set forth in Section 3
will not be satisfied on the requested Funding Date for the applicable Borrowing
unless such condition has been waived, or (ii) the requested Borrowing would
exceed the Availability of Borrower on such Funding Date. Foothill as a Lender
shall not otherwise be required to determine whether the applicable conditions
precedent set forth in Section 3 have been satisfied on the Funding Date
applicable thereto prior to making, in its sole discretion, any Foothill Loan.
(ii) The Foothill Loans shall be secured by
the Collateral and shall constitute Advances and Obligations hereunder, and
shall bear interest at the rate applicable from time to time to Advances
pursuant to Section 2.6 hereof.
(g) Agent Advances.
(i) Subject to the limitations set forth in
the proviso contained in this Section 2.1(g), Agent hereby is authorized by
Borrower and the Lenders, from time to time in Agent's sole discretion, (1)
after the occurrence and during the continuance of a Default or an Event of
Default, or (2) at any time that any of the other applicable conditions
precedent set forth in Section 3 have not been satisfied, to make Advances to
Borrower on behalf of the Lenders that Agent, in its reasonable business
judgment, deems necessary or desirable (A) to preserve or protect the
Collateral, or any portion thereof, (B) to enhance the likelihood of repayment
of the Obligations, or (C) to pay any other amount chargeable to Borrower
pursuant to the terms of this Agreement, including Lender Group Expenses and the
costs, fees, and expenses described in Section 10 (any of the Advances described
in this Section 2.1(g) being hereinafter referred to as "Agent Advances");
provided, that the Required Lenders may at any time revoke Agent's authorization
contained in this Section 2.1(g) to make Agent Advances, any such revocation to
be in writing and to become effective upon Agent's receipt thereof.
(ii) Agent Advances shall be repayable on
demand and secured by the Collateral, shall constitute Advances and Obligations
hereunder, and shall bear interest at the rate applicable from time to time to
the Advances pursuant to Section 2.6 hereof.
(h) Settlement. It is agreed that each Lender's
funded portion of the Advances is intended by the Lenders to equal, at all
times, such Lender's Pro Rata Share of the outstanding Advances. Such agreement
notwithstanding, Agent, Foothill, and the other Lenders agree (which agreement
shall not be for the benefit of or enforceable by Borrower) that in order to
facilitate the administration of this Agreement and the other Loan Documents,
settlement among them as to the Advances, the Foothill Loans, and the Agent
Advances shall take place on a periodic basis in accordance with the following
provisions:
(i) Agent shall request settlement
("Settlement") with the Lenders on a weekly basis, or on a more frequent basis
if so determined by Agent, (1) on behalf of Foothill, with respect to each
outstanding Foothill Loan, (2) for itself, with respect to each Agent Advance,
and (3) with respect to Collections received, as to each by notifying the
Lenders by
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telecopy, telephone, or other similar form of transmission, of such requested
Settlement, no later than 2:00 p.m. (California time) on the Business Day
immediately prior to the date of such requested Settlement (the date of such
requested Settlement being the "Settlement Date"). Such notice of a Settlement
Date shall include a summary statement of the amount of outstanding Advances,
Foothill Loans, and Agent Advances for the period since the prior Settlement
Date, the amount of repayments received in such period, and the amounts
allocated to each Lender of the interest, fees, and other charges for such
period. Subject to the terms and conditions contained herein (including Section
2.1(e)(iii)): (y) if a Lender's balance of the Advances, Foothill Loans, and
Agent Advances exceeds such Lender's Pro Rata Share of the Advances, Foothill
Loans, and Agent Advances as of a Settlement Date, then Agent shall by no later
than 12:00 p.m. (California time) on the Settlement Date transfer in immediately
available funds to the account of such Lender as such Lender may designate, an
amount such that each such Lender shall, upon receipt of such amount, have as of
the Settlement Date, its Pro Rata Share of the Advances, Foothill Loans, and
Agent Advances; and (z) if a Lender's balance of the Advances, Foothill Loans,
and Agent Advances is less than such Lender's Pro Rata Share of the Advances,
Foothill Loans, and Agent Advances as of a Settlement Date, such Lender shall no
later than 12:00 p.m. (California time) on the Settlement Date transfer in
immediately available funds to such account of Agent as Agent may designate, an
amount such that each such Lender shall, upon transfer of such amount, have as
of the Settlement Date, its Pro Rata Share of the Advances, Foothill Loans, and
Agent Advances. Such amounts made available to Agent under clause (z) of the
immediately preceding sentence shall be applied against the amounts of the
applicable Foothill Loan or Agent Advance and, together with the portion of such
Foothill Loan or Agent Advance representing Foothill's Pro Rata Share thereof,
shall constitute Advances of such Lenders. If any such amount is not made
available to Agent by any Lender on the Settlement Date applicable thereto to
the extent required by the terms hereof, Agent shall be entitled to recover for
its account such amount on demand from such Lender together with interest
thereon at the Defaulting Lenders Rate.
(ii) In determining whether a Lender's
balance of the Advances, Foothill Loans, and Agent Advances is less than, equal
to, or greater than such Lender's Pro Rata Share of the Advances, Foothill
Loans, and Agent Advances as of a Settlement Date, Agent shall, as part of the
relevant Settlement, apply to such balance the portion of payments actually
received in good funds by Agent or Foothill with respect to principal, interest,
fees payable by Borrower and allocable to the Lenders hereunder, and proceeds of
Collateral. To the extent that a net amount is owed to any such Lender after
such application, such net amount shall be distributed by Agent or Foothill to
that Lender as part of such next Settlement.
(iii) Between Settlement Dates, Agent, to
the extent no Agent Advances or Foothill Loans are outstanding, may pay over to
Foothill any payments received by Agent, that in accordance with the terms of
this Agreement would be applied to the reduction of the Advances, for
application to Foothill's Pro Rata Share of the Advances. If, as of any
Settlement Date, Collections received since the then immediately preceding
Settlement Date have been applied to Foothill's Pro Rata Share of the Advances
other than to Foothill Loans or Agent Advances, as provided for in the previous
sentence, Foothill shall pay to Agent for the accounts of the Lenders, and Agent
shall pay to the Lenders, to be applied to the outstanding Advances of such
Lenders, an amount such that each Lender shall, upon receipt of such amount,
have, as of such Settlement Date, its Pro Rata Share of the Advances. During the
period between Settlement
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Dates, Foothill with respect to Foothill Loans, Agent with respect to Agent
Advances, and each Lender with respect to the Advances other than Foothill Loans
and Agent Advances, shall be entitled to interest at the applicable rate or
rates payable under this Agreement on the daily amount of funds employed by
Foothill, Agent, or the Lenders, as applicable.
(i) Notation. Agent shall record on its books the
principal amount of the Advances owing to each Lender, including the Foothill
Loans owing to Foothill, and Agent Advances owing to Agent, and the interests
therein of each Lender, from time to time. In addition, each Lender is
authorized, at such Lender's option, to note the date and amount of each payment
or prepayment of principal of such Lender's Advances in its books and records,
including computer records, such books and records constituting rebuttably
presumptive evidence, absent manifest error, of the accuracy of the information
contained therein.
(j) Lenders' Failure to Perform. All Advances (other
than Foothill Loans and Agent Advances) shall be made by the Lenders
simultaneously and in accordance with their Pro Rata Shares. It is understood
that (i) no Lender shall be responsible for any failure by any other Lender to
perform its obligation to make any Advances hereunder, nor shall any Commitment
of any Lender be increased or decreased as a result of any failure by any other
Lender to perform its obligation to make any Advances hereunder, and (ii) no
failure by any Lender to perform its obligation to make any Advances hereunder
shall excuse any other Lender from its obligation to make any Advances
hereunder.
(k) Optional Overadvances. Any contrary provision of
this Agreement notwithstanding, if the condition for borrowing under Section
3.2(d) cannot be fulfilled, the Lenders nonetheless hereby authorize Agent or
Foothill, as applicable, and Agent or Foothill, as applicable, may, but is not
obligated to, knowingly and intentionally continue to make Advances (including
Foothill Loans) to Borrower such failure of condition notwithstanding, so long
as, at any time (i) the outstanding Revolving Facility Usage does not exceed the
Borrowing Base by more than five percent (5%) of the Borrowing Base, and (ii)
the outstanding Revolving Facility Usage (except for and excluding amounts
charged to the Loan Account for interest, fees, or Lender Group Expenses) does
not exceed the Maximum Revolving Amount. The foregoing provisions are for the
sole and exclusive benefit of Agent, Foothill, and the Lenders and are not
intended to benefit Borrower in any way. The Advances and Foothill Loans, as
applicable, that are made pursuant to this Section 2.1(k) shall be subject to
the same terms and conditions as any other Advance or Foothill Loan, as
applicable, except that the rate of interest applicable thereto shall be the
rates set forth in Section 2.6(b) hereof without regard to the presence or
absence of a Default or Event of Default; provided, that the Required Lenders
may, at any time during the continuance of an Event of Default or if Borrower
fails to satisfy any other material lending condition, revoke Agent's
authorization contained in this Section 2.1(k) to make Overadvances (except for
and excluding amounts charged to the Loan Account for interest, fees, or Lender
Group Expenses), any such revocation to be in writing and to become effective
upon Agent's receipt thereof.
In the event Agent obtains actual knowledge that
Revolving Facility Usage exceeds the amount permitted by the preceding
paragraph, regardless of the amount of or reason for such excess, Agent shall
notify Lenders as soon as practicable (and prior to making any, or any
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further, intentional Overadvances (except for and excluding amounts charged to
the Loan Account for interest, fees, or Lender Group Expenses)) unless Agent
determines that prior notice would result in imminent harm to the Collateral or
its value), and the Lenders thereupon shall, together with Agent, jointly
determine the terms of arrangements that shall be implemented with Borrower
intended to reduce, within a reasonable time, the outstanding principal amount
of the Advances to Borrower to an amount permitted by the preceding paragraph.
In the event any Lender disagrees over the terms of reduction and/or repayment
of any Overadvance, the terms of reduction and/or repayment thereof shall be
implemented according to the determination of the Required Lenders.
Each Lender shall be obligated to settle with Agent
as provided in Section 2.1(h) for the amount of such Lender's Pro Rata Share of
any unintentional Overadvances by Agent reported to such Lender, any intentional
Overadvances made as permitted under this Section 2.1(k), and any Overadvances
resulting from the charging to the Loan Account of interest, fees, or Lender
Group Expenses.
(l) Effect of Bankruptcy. If a case is commenced by
or against Borrower under the U.S. Bankruptcy Code, or other statute providing
for debtor relief, then, unless otherwise agreed by all Lenders, the Lender
Group shall not make additional loans or provide additional financial
accommodations under the Loan Documents to Borrower as debtor or
debtor-in-possession, or to any trustee for Borrower, nor consent to the use of
cash collateral (provided that the Loan Account shall continue to be charged, to
the fullest extent permitted by law, for accruing interest, fees, and Lender
Group Expenses).
2.2 LETTER OF CREDIT SUBFACILITY.
(a) Agreement to Cause Issuance; Amounts; Outside
Expiration Date. Subject to the terms and conditions of this Agreement, Agent
agrees to issue letters of credit for the account of Borrower (each, an "L/C")
or to issue guarantees of payment, indemnities, participations and/or
undertakings (each such guaranty, indemnity, participation or undertaking an
"L/C Guaranty") with respect to letters of credit issued by an issuing bank for
the account of Borrower. Agent shall have no obligation to issue an L/C or L/C
Guaranty if any of the following would result:
(i) the sum of 100% of the aggregate
amount of all Letter of Credit Usage would exceed the
Borrowing Base less the amount of outstanding Advances less
the aggregate amount of the Hedging Arrangement Usage, less
the aggregate amount of reserves established under Section
2.1(b); or
(ii) the aggregate amount of all
Letter of Credit Usage would exceed the lesser of: (x) the
Maximum Revolving Amount less the amount of outstanding
Advances less the aggregate amount of the Hedging Arrangement
Usage, less the aggregate amount of reserves established under
Section 2.1(b); or (y) the Unsecured Notes Indebtedness
Limitation less the amount of outstanding Advances less the
aggregate amount of Hedging Arrangements Usage, less the
aggregate amount of reserves established under Section 2.1(b);
or
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(iii) the outstanding Obligations
would exceed the Maximum Revolving Amount; or
(iv) the aggregate amount of all
Letter of Credit Usage would exceed $5,000,000; or
(v) the aggregate amount of all
Letter of Credit/Hedging Agreement Usage would exceed
$10,000,000.
Borrower expressly understands and agrees that Agent shall have no obligation to
arrange for the issuance by issuing banks of the letters of credit that are to
be the subject of L/C Guarantees. Borrower and the Lender Group acknowledge and
agree that certain of the letters of credit that are to be the subject of L/C
Guarantees may be outstanding on the Closing Date. Each Letter of Credit shall
have an expiry date no later than 45 days prior to the date on which this
Agreement is scheduled to terminate under Section 3.4 (without regard to any
potential renewal term) and all such Letters of Credit shall be in form and
substance acceptable to Agent in its sole discretion. If the Lender Group is
obligated to advance funds under a Letter of Credit, Borrower immediately shall
reimburse such amount to Agent and, in the absence of such reimbursement, the
amount so advanced immediately and automatically shall be deemed to be an
Advance hereunder and, thereafter, shall bear interest at the rate then
applicable to such Advances under Section 2.6.
(b) Indemnification. Borrower hereby agrees to
indemnify, save, defend, and hold the Lender Group harmless from any loss, cost,
expense, or liability, including payments made by the Lender Group, expenses,
and reasonable attorneys fees incurred by the Lender Group arising out of or in
connection with any Letter of Credit other than loss, costs, expenses or
liabilities arising out of or resulting from the gross negligence or willful
misconduct of Agent or Lenders. Borrower agrees to be bound by the issuing
bank's regulations and interpretations of any Letters of Credit guarantied by
the Lender Group and opened to or for Borrower's account or by Agent's
interpretations of any L/C issued by the Lender Group to or for Borrower's
account, even though this interpretation may be different from Borrower's own,
and Borrower understands and agrees that the Lender Group shall not be liable
for any error, ordinary negligence, or mistake, whether of omission or
commission, in following Borrower's instructions or those contained in the
Letter of Credit or any modifications, amendments, or supplements thereto.
Borrower understands that the L/C Guarantees may require the Lender Group to
indemnify the issuing bank for certain costs or liabilities arising out of
claims by Borrower against such issuing bank. Borrower hereby agrees to
indemnify, save, defend, and hold the Lender Group harmless with respect to any
loss, cost, expense (including reasonable attorneys fees), or liability incurred
by the Lender Group under any L/C Guaranty as a result of the Lender Group's
indemnification of any such issuing bank.
(c) Supporting Materials. Borrower hereby authorizes
and directs any bank that issues a letter of credit guaranteed by the Lender
Group to deliver to Agent all instruments, documents, and other writings and
property received by the issuing bank pursuant to such letter of credit, and to
accept and rely upon Agent's instructions and agreements with respect to all
matters arising in connection with such letter of credit and the related
application. Borrower may or may not be the "applicant" or "account party" with
respect to such letter of credit.
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(d) Compensation for Letters of Credit. Any and all
charges, commissions, fees, and costs incurred by Agent relating to the letters
of credit guaranteed by the Lender Group shall be considered Lender Group
Expenses for purposes of this Agreement and immediately shall be reimbursable by
Borrower to Agent.
(e) Cash Collateral. Immediately upon the termination
of this Agreement, Borrower agrees to either (i) provide cash collateral to be
held by Agent in an amount equal to 105% of the maximum amount of the Lender
Group's obligations under outstanding Letters of Credit, or (ii) cause to be
delivered to Agent releases of all of the Lender Group's obligations under
outstanding Letters of Credit. At Agent's discretion, any proceeds of Collateral
received by Agent after the occurrence and during the continuation of an Event
of Default may be held as the cash collateral required by this Section 2.2(e).
(f) Increased Costs. If by reason of (i) any change
in any applicable law, treaty, rule, or regulation or any change in the
interpretation or application by any governmental authority of any such
applicable law, treaty, rule, or regulation, or (ii) compliance by the issuing
bank or Agent with any direction, request, or requirement (irrespective of
whether having the force of law) of any governmental authority or monetary
authority including, without limitation, Regulation D of the Board of Governors
of the Federal Reserve System as from time to time in effect (and any successor
thereto):
a. any reserve, deposit, or similar
requirement is or shall be imposed or modified in respect of any Letters of
Credit issued hereunder, or
b. there shall be imposed on the issuing
bank or any other condition regarding any letter of credit, or Letter of Credit,
as applicable, issued pursuant hereto;
and the result of the foregoing is to increase, directly or indirectly, the cost
to the issuing bank or the Lender Group of issuing, making, guaranteeing, or
maintaining any letter of credit, or Letter of Credit, as applicable, or to
reduce the amount receivable in respect thereof by such issuing bank or the
Lender Group, then, and in any such case, the Lender Group may, at any time
within a reasonable period after the additional cost is incurred or the amount
received is reduced, notify Borrower, and Borrower shall pay on demand such
amounts as the issuing bank or Agent may specify to be necessary to compensate
the issuing bank or the Lender Group for such additional cost or reduced
receipt, together with interest on such amount from the date of such demand
until payment in full thereof at the rate set forth in Section 2.6(a)(i) or
(c)(i), as applicable. The determination by the issuing bank or Agent, as the
case may be, of any amount due pursuant to this Section 2.2(f), as set forth in
a certificate setting forth the calculation thereof in reasonable detail, shall,
in the absence of manifest or demonstrable error, be final and conclusive and
binding on all of the parties hereto.
(g) Participations.
(1) Purchase of Participations. Immediately
upon issuance of any Letter of Credit in accordance with this Section 2.2, each
Lender shall be deemed to have
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irrevocably and unconditionally purchased and received without recourse or
warranty, an undivided interest and participation in the credit support or
enhancement provided through Agent to such issuer in connection with the
issuance of such Letter of Credit, equal to such Lender's Pro Rata Share of the
face amount of such Letter of Credit (including, without limitation, all
obligations of Borrower with respect thereto, and any security therefor or
guaranty pertaining thereto).
(2) Documentation. Upon the request of any
Lender, Agent shall furnish to such Lender copies of any Letter of Credit,
reimbursement agreements executed in connection therewith, application for any
Letter of Credit and credit support or enhancement provided through Agent in
connection with the issuance of any Letter of Credit, and such other
documentation as may reasonably be requested by such Lender.
(3) Obligations Irrevocable. The obligations
of each Lender to make payments to Agent with respect to any Letter of Credit or
with respect to any credit support or enhancement provided through Agent with
respect to a Letter of Credit, and the obligations of Borrower to make payments
to Agent, for the account of the Lenders, shall be irrevocable, not subject to
any qualification or exception whatsoever, including any of the following
circumstances:
(i) any lack of validity or
enforceability of this Agreement or any of the other Loan Documents;
(ii) the existence of any claim,
setoff, defense or other right which Borrower may have at any time against a
beneficiary named in a Letter of Credit or any transferee of any Letter of
Credit (or any Person for whom any such transferee may be acting), any Lender,
Agent, the issuer of such Letter of Credit, or any other Person, whether in
connection with this Agreement, any Letter of Credit, the transactions
contemplated herein or any unrelated transactions (including any underlying
transactions between Borrower or any other Person and the beneficiary named in
any Letter of Credit);
(iii) any draft, certificate or any
other document presented under the Letter of Credit proving to be forged,
fraudulent, invalid or insufficient in any respect or any statement therein
being untrue or inaccurate in any respect;
(iv) the surrender or impairment of
any security for the performance or observance of any of the terms of any of the
Loan Documents; or
(v) the occurrence of any Default or
Event of Default.
(h) Recovery or Avoidance of Payments. In the event
any payment by or on behalf of Borrower received by Agent with respect to any
Letter of Credit (or any guaranty by Borrower or reimbursement obligation of
Borrower relating thereto) and distributed by the Agent to the Lenders on
account of their respective participations therein, is thereafter set aside,
avoided or recovered from Agent in connection with any receivership, liquidation
or bankruptcy proceeding, the Lenders shall, upon demand by Agent, pay to Agent
their respective Pro Rata
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Shares of such amount set aside, avoided or recovered, together with interest at
the rate required to be paid by Agent upon the amount required to be repaid by
it.
2.3 HEDGING ARRANGEMENT SUBFACILITY.
(a) Agreement to Cause Issuance; Amounts; Outside
Expiration Date. Subject to the terms and conditions of this Agreement, Agent
agrees to issue guarantees of payment, indemnities, participations and/or
undertakings related to Hedging Agreements (each such guaranty, indemnity,
participation or other undertaking, a "Hedging Agreement Undertaking") with
respect to Hedging Agreements entered into with, or arranged by or through,
directly or indirectly, one or more financial institutions acceptable to Agent
(each, an "Arranging Institution") for the account of Borrower. Agent shall have
no obligation to issue a Hedging Agreement Undertaking to Borrower if any of the
following would result:
(i) the sum of 100% of the aggregate
amount of all Hedging Arrangement Usage, would exceed the
Borrowing Base less the amount of outstanding Advances less
the aggregate amount of the Letter of Credit Usage, less the
aggregate amount of reserves established under Section 2.1(b);
or
(ii) the aggregate amount of all
Hedging Arrangement Usage would exceed the lesser of: (x) the
Maximum Revolving Amount less the amount of outstanding
Advances less the aggregate amount of the Letter of Credit
Usage, less the aggregate amount of reserves established under
Section 2.1(b); or (y) the Unsecured Notes Indebtedness
Limitation less the amount of outstanding Advances less the
aggregate amount of the Letter of Credit Usage less the
aggregate amount of reserves established under Section 2.1(b);
or
(iii) the aggregate amount of all
Letter of Credit/Hedging Arrangement Usage would exceed
$10,000,000.
Borrower expressly understands and agrees that Agent shall have no obligation to
arrange for any Arranging Institution to enter into or arrange any Hedging
Agreement that is to be the subject of Hedging Agreement Undertakings. Borrower
and the Lender Group acknowledge and agree that certain of the Hedging
Agreements that are to be the subject of Hedging Agreement Undertakings may be
outstanding on the Closing Date. Each Hedging Agreement that is to be subject of
a Hedging Agreement Undertaking shall have an expiry date no later than the date
on which this Agreement is scheduled to terminate under Section 3.4 (without
regard to any potential renewal term until such time as the renewal term has
been exercised and became effective) and all such Hedging Agreements and Hedging
Agreement Undertakings shall be in form and substance acceptable to Agent in its
sole discretion. If the Lender Group is obligated to advance funds under a
Hedging Agreement Undertaking, Borrower immediately shall reimburse such amount
to Agent and, in the absence of such reimbursement, the amount so advanced
immediately and automatically shall be deemed to be an Advance hereunder and,
thereafter, shall bear interest at the rate then applicable to such Advances
under Section 2.6.
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(b) Indemnification. Borrower hereby agrees to
indemnify, save, defend, and hold the Lender Group harmless from any loss, cost,
expense, or liability, including payments made by the Lender Group, expenses,
and reasonable attorneys fees incurred by the Lender Group arising out of or in
connection with any Hedging Agreement Undertaking other than loss, costs,
expenses or liabilities arising out of or resulting from the gross negligence or
willful misconduct of Agent or Lenders. Borrower agrees to be bound by the
Arranging Institution's regulations and interpretations of any Hedging
Agreements guarantied, indemnified, participated in or otherwise undertaken by
the Lender Group and opened to or for Borrower's account or by Agent's
interpretations of any Hedging Agreement Undertaking issued by the Lender Group
to or for Borrower's account, even though this interpretation may be different
from Borrower's own, and Borrower understands and agrees that the Lender Group
shall not be liable for any error, ordinary negligence, or mistake, whether of
omission or commission, in following Borrower's instructions or those contained
in the Hedging Agreements or any modifications, amendments, or supplements
thereto. Borrower understands that the Hedging Agreement Undertakings may
require the Lender Group to indemnify the Arranging Institution for certain
costs or liabilities arising out of claims by Borrower against any Arranging
Institution. Borrower hereby agrees to indemnify, save, defend, and hold the
Lender Group harmless with respect to any loss, cost, expense (including
reasonable attorneys fees), or liability incurred by the Lender Group under any
Hedging Agreement Undertaking as a result of the Lender Group's indemnification
of any Arranging Institution.
(c) Supporting Materials. Borrower hereby authorizes
and directs each Arranging Institution to deliver to Agent all instruments,
documents, and other writings and property received by such Arranging
Institution pursuant to any Hedging Agreements, and, following Agent's
notification to such Arranging Institution that an Event of Default has
occurred, to accept and rely upon Agent's instructions and agreements with
respect to all matters arising in connection with such Hedging Agreement and the
related application. Borrower may or may not be the "applicant" or "account
party" with respect to such letter of credit.
(d) Compensation for Hedging Agreement Undertakings.
Any and all charges, commissions, fees, and costs incurred by Agent relating to
the Hedging Agreements guaranteed by the Lender Group and the Hedging Agreement
Undertakings shall be considered Lender Group Expenses for purposes of this
Agreement and immediately shall be reimbursable by Borrower to Agent.
(e) Cash Collateral. Immediately upon the termination
of this Agreement, Borrower agrees to either (i) provide cash collateral to be
held by Agent in an amount equal to 110% of the maximum amount of the Lender
Group's obligations under outstanding Hedging Agreement Undertakings, or (ii)
cause to be delivered to Agent releases of all of the Lender Group's obligations
under outstanding Hedging Agreement Undertakings. At Agent's discretion, any
proceeds of Collateral received by Agent after the occurrence and during the
continuation of an Event of Default may be held as the cash collateral required
by this Section 2.3(e).
(f) Increased Costs. If by reason of (i) any change
in any applicable law, treaty, rule, or regulation or any change in the
interpretation or application by any
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governmental authority of any such applicable law, treaty, rule, or regulation,
or (ii) compliance by any Arranging Institution or Agent with any direction,
request, or requirement (irrespective of whether having the force of law) of any
governmental authority or monetary authority including, without limitation,
Regulation D of the Board of Governors of the Federal Reserve System as from
time to time in effect (and any successor thereto):
a. any reserve, deposit, or similar
requirement is or shall be imposed or modified in respect of any Hedging
Agreement Undertaking or Hedging Agreements guaranteed indemnified, participated
in or with respect to which there is any undertaking hereunder, or
b. there shall be imposed on any Arranging
Institution or any other condition regarding any Hedging Agreement or Hedging
Agreement Undertaking;
and the result of the foregoing is to increase, directly or indirectly, the cost
to an Arranging Institution or the Lender Group of issuing, making,
guaranteeing, or maintaining any Hedging Agreement or Hedging Agreement
Undertaking, as applicable, or to reduce the amount receivable in respect
thereof by any Arranging Institution or the Lender Group, then, and in any such
case, the Lender Group may, at any time within a reasonable period after the
additional cost is incurred or the amount received is reduced, notify Borrower,
and Borrower shall pay on demand such amounts as any Arranging Institution or
Agent may specify to be necessary to compensate the Arranging Institution or the
Lender Group for such additional cost or reduced receipt, together with interest
on such amount from the date of such demand until payment in full thereof at the
rate set forth in Section 2.6(a)(i) or (c)(i), as applicable. The determination
by any Arranging Institution or Agent, as the case may be, of any amount due
pursuant to this Section 2.3(f), as set forth in a certificate setting forth the
calculation thereof in reasonable detail, shall, in the absence of manifest or
demonstrable error, be final and conclusive and binding on all of the parties
hereto.
(g) Participations.
(1) Purchase of Participations. Immediately
upon issuance of any Hedging Agreement Undertaking in accordance with this
Section 2.3, each Lender shall be deemed to have irrevocably and unconditionally
purchased and received without recourse or warranty, an undivided interest and
participation in the credit support or enhancement provided through Agent to
such issuer in connection with the issuance of such Hedging Agreement
Undertaking, equal to such Lender's Pro Rata Share of the face amount of such
Hedging Agreement Undertaking (including, without limitation, all obligations of
Borrower with respect thereto, and any security therefor or Undertaking
pertaining thereto).
(2) Documentation. Upon the request of any
Lender, Agent shall furnish to such Lender copies of any Hedging Agreement,
reimbursement agreements executed in connection therewith, application for any
Hedging Agreement and credit support or enhancement provided through Agent in
connection with the entering into or arrangement of any Hedging Agreement
guaranteed hereunder or the issuance of any Hedging Agreement Undertaking, and
such other documentation as may reasonably be requested by such Lender.
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(3) Obligations Irrevocable. The obligations
of each Lender to make payments to Agent with respect to any Hedging Agreement,
Hedging Agreement Undertaking or with respect to any credit support or
enhancement provided through Agent with respect to any Hedging Agreement or
Hedging Agreement Undertaking, and the obligations of Borrower to make payments
to Agent, for the account of the Lenders, shall be irrevocable, not subject to
any qualification or exception whatsoever, including any of the following
circumstances:
(i) any lack of validity or
enforceability of this Agreement or any of the other Loan Documents;
(ii) the existence of any claim,
setoff, defense or other right which Borrower may have at any time against a
counterparty to any Hedging Agreement or any transferee of any Hedging Agreement
(or any Person for whom any such transferee may be acting), any Lender, Agent,
any Arranging Institution, or any other Person, whether in connection with this
Agreement, any Hedging Agreement, any Hedging Agreement Undertaking, the
transactions contemplated herein or any unrelated transactions (including any
underlying transactions between Borrower or any other Person and the
counterparty to the Hedging Agreement);
(iii) any draft, certificate or any
other document presented under any Hedging Agreement or Hedging Agreement
Undertaking proving to be forged, fraudulent, invalid or insufficient in any
respect or any statement therein being untrue or inaccurate in any respect;
(iv) the surrender or impairment of
any security for the performance or observance of any of the terms of any of the
Loan Documents; or
(v) the occurrence of any Default or
Event of Default.
(h) Recovery or Avoidance of Payments. In the event
any payment by or on behalf of Borrower received by Agent with respect to any
Hedging Agreement Undertaking (or any guaranty by Borrower or reimbursement
obligation of Borrower relating thereto) and distributed by the Agent to the
Lenders on account of their respective participations therein, is thereafter set
aside, avoided or recovered from Agent in connection with any receivership,
liquidation or bankruptcy proceeding, the Lenders shall, upon demand by Agent,
pay to Agent their respective Pro Rata Shares of such amount set aside, avoided
or recovered, together with interest at the rate required to be paid by Agent
upon the amount required to be repaid by it.
2.4 PAYMENTS.
(a) Payments by Borrower.
(i) All payments to be made by Borrower
shall be made without set-off, recoupment, deduction, or counterclaim, except as
otherwise required by law. Except as otherwise expressly provided herein, all
payments by Borrower shall be made to Agent for the
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account of the Lenders at Agent's address set forth in Section 12, and shall be
made in immediately available funds, no later than 11:00 a.m. (California time)
on the date specified herein. Any payment received by Agent later than 11:00
a.m. (California time), at the option of Agent, shall be deemed to have been
received on the following Business Day and any applicable interest or fee shall
continue to accrue until such following Business Day.
(ii) Whenever any payment is due on a day
other than a Business Day, such payment shall be made on the following Business
Day, and such extension of time shall in such case be included in the
computation of interest or fees, as the case may be.
(iii) Unless Agent receives notice from
Borrower prior to the date on which any payment is due to the Lenders that
Borrower will not make such payment in full as and when required, Agent may
assume that Borrower has made such payment in full to Agent on such date in
immediately available funds and Agent may (but shall not be so required), in
reliance upon such assumption, distribute to each Lender on such due date an
amount equal to the amount then due such Lender. If and to the extent Borrower
has not made such payment in full to Agent, each Lender shall repay to Agent on
demand such amount distributed to such Lender, together with interest thereon at
the Reference Rate for each day from the date such amount is distributed to such
Lender until the date repaid.
(b) Apportionment, Application, and Reversal of
Payments. Except as otherwise provided with respect to Defaulting Lenders and
except as may otherwise be agreed among the Lenders, aggregate principal and
interest payments shall be apportioned ratably among the Lenders (according to
the unpaid principal balance of the Advances to which such payments relate held
by each Lender) and payments of the fees (other than fees designated for Agent's
sole and separate account) shall, as applicable, be apportioned ratably among
the Lenders. All payments shall be remitted to Agent and all such payments not
relating to principal or interest of specific Advances, or not constituting
payment of specific fees, and all proceeds of Accounts or other Collateral
received by Agent, shall be applied, first, to pay any fees, or expense
reimbursements then due to Agent from Borrower; second, to pay any fees or
expense reimbursements then due to the Lenders from Borrower; third, to pay
interest due in respect of all Advances (including Foothill Loans and Agent
Advances); fourth, to pay or prepay principal of Foothill Loans and Agent
Advances; fifth, ratably to pay principal of the Advances (other than Foothill
Loans and Agent Advances); sixth, to be held by Agent as cash collateral in
accordance with Section 2.2(e) hereof with respect to unreimbursed obligations
in respect of Letters of Credit; and seventh, ratably to pay any other
Obligations due to Agent or any Lender by Borrower.
2.5 OVERADVANCES. If, at any time or for any reason, the
amount of Obligations pursuant to Sections 2.1 and 2.2 is greater than either
the Dollar or percentage limitations set forth in Sections 2.1 or 2.2 (an
"Overadvance"), Borrower immediately shall pay to Agent, in cash, the amount of
such excess, which amount shall be used by Agent to reduce the Obligations in
accordance with the priority set forth in Section 2.4(b).
2.6 INTEREST AND LETTER OF CREDIT FEES: RATES, PAYMENTS, AND
CALCULATIONS.
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(a) Interest Rate. Except as provided in clause (c)
and clause (d) below, all Obligations (except for amounts undrawn under Letters
of Credit and Hedging Arrangement Usage) shall bear interest on the Daily
Balance at a per annum rate equal to the sum of (i) two and one-half percent
(2.5%), plus (ii) the Reference Rate.
(b) Letter of Credit Fee; Hedging Agreement
Undertaking Fee. Borrower shall pay Agent, for the ratable benefit of the Lender
Group, a fee (in addition to the charges, commissions, fees, and costs set forth
in Section 2.2(d)) equal to 2% per annum times the amount of the undrawn Letters
of Credit. Borrower shall pay Agent, for the ratable benefit of the Lender
Group, a fee (in addition to the charges, commissions, fees, and costs set forth
in Section 2.3(d)) equal to 2% per annum times the amount of the Hedging
Arrangements Usage.
(c) Default Rate. Upon the occurrence and during the
continuation of an Event of Default, (i) all Obligations (except amounts undrawn
under Letters of Credit and Hedging Arrangement Usage) shall bear interest at a
per annum rate equal to the sum of (A) 6.5%, plus (B) the Reference Rate, (ii)
the Letter of Credit fee provided in Section 2.6(b) shall be increased to 6.5%
per annum times the amount of the undrawn Letters of Credit that were
outstanding during the immediately preceding month, and (iii) the Hedging
Agreement Undertaking fee provided in Section 2.6(b) shall be increased to 6%
per annum times the amount of the Hedging Arrangement Usage that was outstanding
during the immediately preceding month.
(d) Minimum Interest. In no event shall the rate of
interest chargeable under Section 2.6(a) for any day be less than 8% per annum.
To the extent that interest accrued hereunder at the rate set forth in such
section would be less than the foregoing minimum daily rate, the interest rate
chargeable hereunder for such day automatically shall be deemed increased to the
minimum rate.
(e) Payments. Interest and Letter of Credit fees
payable hereunder shall be due and payable, in arrears, on the first day of each
month during the term hereof. Borrower hereby authorizes Agent, at its option,
without prior notice to Borrower, to charge such interest and Letter of Credit
fees, all Lender Group Expenses (as and when incurred), the charges,
commissions, fees, and costs provided for in Section 2.2(d) (as and when accrued
or incurred), the fees and charges provided for in Section 2.11 (as and when
accrued or incurred), and all installments or other payments due under any Loan
Document to Borrower's Loan Account, which amounts thereafter shall accrue
interest at the rate then applicable to Advances hereunder. Any interest not
paid when due shall be compounded and shall thereafter accrue interest at the
rate then applicable to Advances hereunder.
(f) Computation. The Reference Rate as of the date of
this Agreement is 8.5% per annum. In the event the Reference Rate is changed
from time to time hereafter, the rate of interest provided for in Section 2.6(a)
and Section 2.6(c)(i) and (ii) automatically and immediately shall be increased
or decreased by an amount equal to such change in the Reference Rate. All
interest and fees chargeable under the Loan Documents shall be computed on the
basis of a 360 day year for the actual number of days elapsed.
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(g) Intent to Limit Charges to Maximum Lawful Rate.
It is the intention of the parties hereto that the Agent or each Lender shall
conform strictly to usury laws applicable to it. Accordingly, if the
transactions contemplated hereby or by any other Loan Document would be usurious
as to the Agent or any Lender under laws applicable to it (including the laws of
the United States of America and the State of California 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 any of the Loan Documents or any
agreement entered into in connection with or as security for the Indebtedness,
it is agreed as follows: (i) the aggregate of all consideration which
constitutes interest under law applicable to Agent or any Lender that is
contracted for, taken, reserved, charged or received by Agent or such Lender
under any of the Loan Documents or agreements or otherwise in connection with
the Indebtedness 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 the Agent or 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 the
Agent or such Lender, as applicable, to the Borrower); and (ii) in the event
that the maturity of the Indebtedness 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 Agent or 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 Agent or such Lender, as applicable, as of
the date of such acceleration or prepayment and, if theretofore paid, shall be
credited by Agent or such Lender, as applicable, 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 Agent or such
Lender to the Borrower). All sums paid or agreed to be paid to Agent or any
Lender for the use, forbearance or detention of sums due hereunder shall, to the
extent permitted by law applicable to Agent or such Lender, be amortized,
prorated, allocated and spread throughout the full term of the Obligations until
payment in full so that the rate or amount of interest on account of any
Obligations 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 Agent or any Lender on any date shall be computed at the Highest
Lawful Rate (as defined below) applicable to Agent or such Lender pursuant to
this Section 2.6(g) and (ii) in respect of any subsequent interest computation
period the amount of interest otherwise payable to Agent or such Lender would be
less than the amount of interest payable to Agent or such Lender computed at the
Highest Lawful Rate applicable to Agent or such Lender, then the amount of
interest payable to Agent or such Lender in respect of such subsequent interest
computation period shall continue to be computed at the Highest Lawful Rate
applicable to Agent or such Lender until the total amount of interest payable to
Agent or such Lender shall equal the total amount of interest which would have
been payable to Agent or such Lender if the total amount of interest had been
computed without giving effect to this Section 2.6(g). For purposes of this
Section 2.6(g), the term "applicable law" shall mean that law in effect from
time to time and applicable to the loan transaction between Borrower and the
Lender Group that lawfully permits the charging and collection of the highest
permissible, lawful non-usurious rate of interest on such loan transaction and
this Agreement, including laws of the State of California and, to the extent
controlling, laws of the United States of America. For purposes of this Section
2.6(g), "Highest Lawful Rate" means, with respect to Agent or any
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Lender, the maximum non-usurious interest rate, if any, that at any time or from
time to time may be contracted for, taken, reserved, charged or received on the
Obligations under the laws applicable to Agent or such Lender which are
currently 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 non-usurious
interest rate than applicable laws now allow.
2.7 COLLECTION OF PROCEEDS OF COLLATERAL AND OTHER
COLLECTIONS.
(a) Borrower shall at all times maintain lockboxes
(the "Lockboxes") at the Lockbox Banks and, immediately after the Closing Date
(i) shall and shall cause each of its Subsidiaries to instruct all Account
Debtors with respect to the Accounts, General Intangibles, and Negotiable
Collateral of Borrower or such Subsidiary, as the case may be, to remit all
Collections in respect thereof to such Lockboxes, and (ii) shall, and shall
cause each of its Subsidiaries to, deposit all other Collections received by
Borrower from any source immediately upon receipt into the Lockboxes, and (iii)
shall request in writing and otherwise take such steps as are necessary to
ensure that all Account Debtors forward payment directly to such Lockboxes.
Borrower, each of Borrower's Subsidiaries, Agent, and the Lockbox Banks shall
enter into the Lockbox Agreements, which among other things shall provide for
the opening of a Lockbox Account for the deposit of Collections at a Lockbox
Bank. Borrower agrees that all Collections and other amounts received by
Borrower or any of its Subsidiaries from any Account Debtor or any other source
(other than the Advances made under this Agreement) immediately upon receipt
shall be deposited into a Lockbox Account. No Lockbox Agreement or arrangement
contemplated thereby shall be modified by Borrower or any of its Subsidiaries
without the prior written consent of Agent. Upon the terms and subject to the
conditions set forth in the Lockbox Agreements, all amounts received in each
Lockbox Account shall be wired each Business Day into the Agent's Account;
provided, however, that Agent reserves the right, in its sole discretion, to
require that any amounts received in any Lockbox Account which may represent
amounts attributable to trust funds (i.e., production taxes, severance taxes, or
payroll taxes) or amounts attributable to Mineral Interests of third Persons be
segregated by the Lockbox Bank and held in a separate account or otherwise as
directed by Agent.
(b) From time to time as requested by Agent, Borrower
shall, and shall cause each of its Subsidiaries to, execute and deliver Transfer
Orders to Agent, in form and substance satisfactory to Agent, with respect to
all present and future rights to payment relating to or arising from Oil and Gas
Property Collateral.
(c) The Lockboxes and Designated Account shall be
cash collateral accounts, with all cash, checks and similar items of payment in
such accounts securing payment of the Obligations and all other Indebtedness,
and in which each Loan Party shall have granted a Lien to Agent hereunder and
pursuant to the other Loan Documents.
(d) Borrower shall and shall cause its Affiliates,
officers, employees, agents, directors or other Persons acting for or in concert
with such Borrower (each a "Related Person") to (i) hold in trust for Agent all
checks, cash and other items of payment received by Borrower or any such Related
Person, and (ii) immediately upon receipt by Borrower or any Related Person of
any checks, cash or other items of payment, deposit the same into a Lockbox
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Account of Borrower. Borrower and each Related Person thereof acknowledges and
agrees that all cash, checks or items of payment constituting proceeds of
Collateral are the property of Agent for the benefit of the Lenders. All
proceeds of the sale or other disposition of any Collateral, shall be deposited
directly into the applicable Lockbox Account.
2.8 CREDITING PAYMENTS; APPLICATION OF COLLECTIONS. The
receipt of any Collections by Agent (whether from transfers to Agent by the
Lockbox Banks pursuant to the Lockbox Agreements or otherwise) immediately shall
be applied provisionally to reduce the Obligations outstanding under Section
2.1, but shall not be considered a payment on account unless such Collection
item is a wire transfer of immediately available federal funds and is made to
the Agent Account or unless and until such Collection item is honored when
presented for payment; provided, however, that Agent reserves the right, in its
sole discretion, to exclude from such provisional reduction and payment the
amount of any such Collections that Agent determines may constitute trust funds
(e.g., production taxes, severance taxes, or payroll taxes) or amounts
attributable to Mineral Interests of third Persons. From and after the Closing
Date, Agent shall be entitled to charge Borrower for two Business Days of
`clearance' or `float' at the rate set forth in Section 2.6(a) or Section
2.6(c)(i), as applicable, on all Collections that are received by the Lockbox
Banks or Agent (regardless of whether forwarded by the Lockbox Banks to Agent,
whether provisionally applied to reduce the Obligations under Section 2.1,
whether wire transferred or otherwise paid to the Agent Account, or otherwise).
This across-the-board two Business Days clearance or float charge on all
Collections is acknowledged by the parties to constitute an integral aspect of
the pricing of the Lender Group's financing of Borrower, and shall apply
irrespective of the characterization of whether receipts are owned by Borrower
or Agent, and whether or not there are any outstanding Advances, the effect of
such clearance or float charge being the equivalent of charging two Business
Days of interest on such Collections. Should any Collection item not be honored
when presented for payment, then Borrower shall be deemed not to have made such
payment, and interest shall be recalculated accordingly. Anything to the
contrary contained herein notwithstanding, any Collection item shall be deemed
received by Agent only if it is received into the Agent Account on a Business
Day on or before 11:00 a.m. California time. If any Collection item is received
into the Agent Account on a non-Business Day or after 11:00 a.m. California time
on a Business Day, it shall be deemed to have been received by Agent as of the
opening of business on the immediately following Business Day. Anything
contained herein to the contrary notwithstanding, the economic benefit of the
two Business Days clearance or float charge provided for in this Section 2.8 is
not for the ratable benefit of the Lenders, but instead shall be for the sole
and separate account of Agent.
2.9 DESIGNATED ACCOUNT. Agent, Foothill, and the Lenders are
authorized to make the Advances, and the Letters of Credit under this Agreement
based upon telephonic or other instructions received from anyone purporting to
be an Authorized Person, or without instructions if pursuant to Section 2.6(e).
Borrower agrees to establish and maintain the Designated Account with the
Designated Account Bank for the purpose of receiving the proceeds of the
Advances requested by Borrower and made by Agent, Foothill or the Lenders
hereunder. Unless otherwise agreed by Agent and Borrower, any Advance requested
by Borrower and made hereunder shall be made to the Designated Account.
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2.10 MAINTENANCE OF LOAN ACCOUNT; STATEMENTS OF OBLIGATIONS.
Agent shall maintain an account on its books in the name of Borrower (the "Loan
Account") on which Borrower will be charged with all Advances made by Agent,
Foothill, or the Lenders to Borrower or for Borrower's account, including,
accrued interest, Lender Group Expenses, and any other payment Obligations of
Borrower. In accordance with Section 2.8, the Loan Account will be credited with
all payments received by Agent from Borrower or for Borrower's account,
including all amounts received in the Agent Account from any Lockbox Bank. Agent
shall render statements regarding the Loan Account to Borrower, including
principal, interest, fees, and including an itemization of all charges and
expenses constituting Lender Group Expenses owing, and such statements shall be
conclusively presumed to be correct and accurate and constitute an account
stated between Borrower and the Lender Group unless, within 30 days after
receipt thereof by Borrower, Borrower shall deliver to Agent written objection
thereto describing the error or errors contained in any such statements.
2.11 FEES. Borrower shall pay to Agent, for the ratable
benefit of the Lender Group (except as otherwise indicated), the following fees:
(a) Closing Fee. On the Closing Date, a closing fee
of $1,050,000, which amount shall be fully earned and nonrefundable as of the
Closing Date.
(b) Unused Line Fee. On the first day of each month
during the term of this Agreement, an unused line fee in an amount equal to
0.50% per annum times the Average Unused Portion of the Maximum Revolving Amount
during the immediately preceding month, payable in arrears.
(c) Financial Examination, Documentation, and
Appraisal Fees. For the sole and separate account of Agent: Agent's customary
fee of $750 per day per examiner, plus Agent's out-of-pocket expenses for each
financial analysis and examination (i.e., audits) of Borrower performed by
personnel employed by Agent; Agent's customary one-time electronic reporting
setup fee of $3,000, plus Agent's out-of-pocket expenses relating thereto;
Agent's customary appraisal fee of $1,500 per day per appraiser, plus Agent's
out-of-pocket expenses for each appraisal of the Collateral performed by
personnel employed by Agent; and, the actual charges paid or incurred by Agent
if it elects to employ the services of one or more third Persons to perform such
financial analyses and examinations (i.e., audits) of Borrower or to appraise
the Collateral.
(d) Engineering Consultant Fee. For the sole and
separate account of Agent: the actual charges paid or incurred by Agent to
Pollard, Gore & Harrison or other engineering consultant to Agent as may be
selected by Agent in its sole discretion to perform reviews and analyses from
time to time of Borrower's authorities for expenditures, cash flow budgets,
reserve reports, development expenditures (including proposed future development
expenditures) and such other matters as may be determined by Agent, and to
provide consultation to Agent regarding the same.
(e) Loan Servicing Fee. For the sole and separate
account of Agent, on the first day of each month during the term of this
Agreement, and thereafter so long as any
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Obligations are outstanding, a loan servicing fee in an amount equal to $10,000
per month, which amount shall be fully earned and nonrefundable and be payable
in arrears on the first day of each month.
2.12 LOAN UNDER PRIOR CREDIT AGREEMENT. On the Closing Date:
(a) Borrower shall pay all accrued and unpaid
commitment fees outstanding under the Prior Credit Agreement for the account of
each Prior Lender under the Prior Credit Agreement (except to the extent that
such fees are included in the unpaid balance of the Prior Credit Agreement as
set forth in the Refinancing Letter);
(b) each loan, advance or other extension of credit
under the Prior Loan Agreement shall be deemed to be an Advance under this
Agreement; and
(c) the Prior Credit Agreement and the commitments
thereunder shall be superceded by this Agreement and such commitments shall
terminate.
3. CONDITIONS; TERM OF AGREEMENT.
3.1 CONDITIONS PRECEDENT TO THE INITIAL ADVANCE, LETTER OF
CREDIT AND HEDGING AGREEMENT UNDERTAKING. The obligation of the Lender Group (or
any member thereof) to make the initial Advance, to issue the initial Letter of
Credit, or to enter into the initial Hedging Undertaking is subject to the
fulfillment, to the satisfaction of Agent and its counsel, of each of the
following conditions on or before the Closing Date:
(a) the Closing Date shall occur on or before January
18, 2000;
(b) Agent shall have received all financing
statements and fixture filings required by Agent, duly executed by Borrower, and
Agent shall have received searches of all recording offices requested by Agent
reflecting the filing of all such financing statements and fixture filings,
together with searches of such other offices as Agent may require (including
those of Borrower and the Subsidiaries of Borrower), each such search dated a
date within 15 days of the Closing Date;
(c) Agent shall have received each of the following
documents, in form and substance satisfactory to Agent, duly executed (and
acknowledged, as the case may be) by all parties and formalities contemplated
thereunder, and each such document shall be in full force and effect:
i. the Lockbox Agreements;
ii. the Disbursement Letter;
iii. the Refinancing Letter, together with
the Prior Lender Assignment Agreements, UCC assignment
statements, UCC termination statements and other documentation
evidencing the assignment and/or termination
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(as determined by Agent) by the Prior Lenders (and all other
holders, if any, of the indebtedness, liabilities and other
obligations under or relating to the Prior Credit Agreement)
and each other holder of Liens against the properties or
assets of Borrower or any of its Subsidiaries (other than
Permitted Liens), of its Liens in and to the properties and
assets of Borrower and its Subsidiaries;
iv. the Oil and Gas Property Mortgages,
dated as of the Closing Date, covering each of the Oil and Gas
Properties;
v. Security Agreements, in form and
substance acceptable to Agent, executed by Borrower and each
of Borrower's Subsidiaries, with respect to all of the assets
and properties of any and all of them;
vi. the governmental permits, approvals and
orders for each well and each unit pertaining to the Oil and
Gas Properties described in the Oil and Gas Property
Mortgages, which shall be in form and substance satisfactory
to Agent;
vii. the Transfer Order Letters for each
well on the Oil and Gas Properties, which shall be in form and
substance satisfactory to Agent;
viii. assignments in form and substance
acceptable to Agent of each Material Contract pertaining to
the Oil and Gas Property Collateral which either (i) affects
Borrower's or any of its Subsidiaries', as the case may be,
title to the Oil and Gas Property Collateral or otherwise
affects the value, use or operation of the Oil and Gas
Property Collateral in any material respect or (ii) creates or
evidences a material obligation or liability on the part of
Borrower or any or its Subsidiaries, together with copies of
each such Material Contract attached thereto;
ix. the Real Property Mortgages, dated as of
the Closing Date;
x. the Subordination Agreements, in form and
substance acceptable to Agent executed by Petsec USA, PEL and
Borrower; and
xi. such other documents as shall be
required by Agent.
(d) Agent shall have received a certificate from the
Secretary of Borrower attesting to the resolutions of Borrower's Board of
Directors authorizing its execution, delivery, and performance of this Agreement
and the other Loan Documents to which Borrower is a party and authorizing
specific officers of Borrower to execute the same;
(e) Agent shall have received copies of Borrower's
Governing Documents, as amended, modified, or supplemented by the Closing Date,
certified by the Secretary of Borrower;
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(f) Agent shall have received a certificate of status
with respect to Borrower, dated within 10 days of the Closing Date, such
certificate to be issued by the appropriate officer of the jurisdiction of
organization of Borrower, which certificate shall indicate that Borrower is in
good standing in such jurisdiction;
(g) Agent shall have received certificates of status
with respect to Borrower, each dated within 15 days of the Closing Date, such
certificates to be issued by the appropriate officer of the jurisdictions in
which its failure to be duly qualified or licensed would constitute a Material
Adverse Change, which certificates shall indicate that Borrower is in good
standing in such jurisdictions;
(h) Agent shall have received a certificate of
insurance, which names Agent for the benefit of the Lender Group as loss payee
and additional insured on all of Borrower's policies of insurance (other than
worker's compensation insurance) as are required by Section 6.10, the form and
substance of which shall be satisfactory to Agent and its counsel;
(i) Agent shall have received such Collateral Access
Agreements from lessors, warehousemen, bailees, and other third persons with
respect to (i) Borrower's leased premises at which its chief executive offices,
(ii) all location at which Borrower's Books are located from time to time, and
(iii) each other location of Borrower except the Oil and Gas Properties;
(j) Agent shall have received copies of all contracts
set forth on Schedule 5.1(c), and such contracts shall be in form and substance
satisfactory to Agent;
(k) Agent shall have received an opinion of
Borrower's counsel in form and substance satisfactory to Agent in its sole
discretion, and opinions of Borrower's Louisiana counsel, Nevada counsel and
counsel in such other states and jurisdictions as may be requested by Agent in
form and substance satisfactory to Agent in its sole discretion;
(l) Agent shall have received (i) appraisals of the
Oil and Gas Properties in the form of Reserve Reports prepared by a third party
petroleum engineering firm (including, but not limited to, appraisals,
verifications and liquidation analyses of Borrower's and each of its
Subsidiaries' Proved Reserves) covering the Borrower's Mineral Interests listed
on Schedule 5.1(a) in each case satisfactory to Agent, (ii) confirmations for
such of the Oil and Gas Properties as shall be required by Agent, in its sole
discretion, issued to Agent for the benefit of the Lender Group, by abstractors
satisfactory to Agent who record the Oil and Gas Property Mortgages, that there
have been no intervening Liens, transfers or conveyances pertaining to such Oil
and Gas Properties since the date of the updated title opinions described in
subparagraph (A) below of this subparagraph (l), and (iii) title reports and/or
opinions for such of the Oil and Gas Properties as shall be required by Agent,
in its sole discretion, issued to Agent for the benefit of the Lender Group by a
legal counsel to Borrower or such other person that is experienced in the
examination of title to such Oil and Gas Properties and is satisfactory to Agent
(each a "Title Opinion" and, collectively, the "Title Opinions"), each of which
Title Opinions (and other legal opinions supplemental thereto) shall be in form
and substance satisfactory to Agent and shall:
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(A) as to the Oil and Gas Properties as shall be required by
Agent, in its sole discretion, covered by a mortgage, deed of trust, or
deed to secure debt executed by Borrower in favor of or for the benefit
of the Prior Agent and/or a Prior Lender, be updated to a date within
45 days prior to the Closing Date to confirm the priority of the Lien
created under such mortgage, deed of trust or deed to secure debt, as
the case may be (together with a confirmation by an abstractor
satisfactory to Agent who records the Prior Lender Assignment
Agreements with respect to such Oil and Gas Properties that there has
been no intervening Liens, transfers or conveyances pertaining to such
Oil and Gas Properties since the date of the most recent Title Opinion
covering the same),
(B) opine as to such matters incident to such Oil and Gas
Properties as Agent may reasonably request including the following with
respect to the Mineral Interests in the particular Oil and Gas Property
Collateral being reviewed:
(I) Borrower or its Subsidiary, as the case may be,
that is the grantor under the Oil and Gas Property Mortgage
covering the Oil and Gas Properties has good and marketable
title to such Oil and Gas Properties to the extent of the
Mineral Interests as specified therein, free and clear of all
Liens and defects except Permitted Liens.
(II) Borrower or its Subsidiary, as the case may be,
that is the grantor under the Oil and Gas Property Mortgage
covering the Oil and Gas Properties is entitled to receive,
after giving effect to all royalties, overriding royalties and
other burdens payable out of production, a decimal share of
all Hydrocarbons produced and sold from such Oil and Gas
Properties, before and after payout, not less than set forth
in the opinion.
(III) The operating interest in such Oil and Gas
Properties of Borrower or its Subsidiary, as the case may be,
that is the grantor under the Oil and Gas Property Mortgage
covering the Oil and Gas Properties, is not obligated to bear
a decimal share of all costs and expenses from the operation
thereof in excess of that set forth therein.
(IV) The Liens created by the Oil and Gas Property
Mortgage are valid and enforceable first priority mortgage
Liens which are first in right and prior in time and superior
to all other Liens against such Mineral Interests and other
Oil and Gas Properties other than Permitted Liens.
(m) The Mineral Interests in the Oil and Gas Property
Collateral shall not be less than the Mineral Interests for such properties
furnished by Borrower to Agent in connection with Agent's credit evaluation in
connection with this Agreement;
(n) Borrower shall have delivered to Agent evidence
satisfactory to Agent confirming that each of the producing wells that are
included in the most recent Reserve Report delivered to Agent covering the Oil
and Gas Properties listed on Schedule 5.1(b) is located on an Oil and Gas
Property (i) covered by the Title Opinions to the extent required by Agent and
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(ii) described in the legal description contained in an Oil and Gas Property
Mortgage which has been duly executed and delivered to Agent;
(o) Agent shall have received certified copies of the
policies of insurance, as are required by Section 6.10, the form and substance
of which shall be satisfactory to Agent and its counsel;
(p) Agent shall have received satisfactory evidence
that all tax returns required to be filed by Borrower have been timely filed and
all taxes upon Borrower or its properties, assets, income, and franchises
(including real property taxes and payroll taxes) have been paid prior to
delinquency, except such taxes that are the subject of a Permitted Protest;
(q) Agent shall have received satisfactory reference
investigation reports of key officers and employees;
(r) On the Closing Date, Borrower shall have not less
than $10,000,000 of Availability and unrestricted immediately available cash on
hand after making the payments described in Section 7.17(a)(i) and the
$1,050,000 due on the Closing Date pursuant to Section 2.11(a) and after
reserving as an additional deduction from Availability an amount determined by
Agent in its sole discretion that would be sufficient to maintain Borrower's and
its Subsidiaries' accounts payable and other current liabilities within
reasonable terms;
(s) Agent shall reviewed Borrower's and each of its
Subsidiaries' Hedging Agreements and other hedging arrangements (with respect to
its present and future Hydrocarbon production and otherwise), and all of such
Hedging Agreements and other hedging arrangements shall be acceptable to Agent;
(t) Agent shall have received evidence satisfactory
to Agent including, without limitation, a certificate executed by the Vice
President - Land and Legal of Borrower, to such effect, that, except as
disclosed in Schedule 3.1(t), no Material Adverse Change has occurred in the
business, assets, operations, prospects or financial or other condition of
Borrower or any of its Subsidiaries since September 30, 1999;
(u) Agent shall have received evidence satisfactory
to Agent in its sole discretion that all indebtedness for borrowed money of
Borrower to PEL or any Affiliate of PEL is subordinated to prior payment in full
of the Obligations in a manner and pursuant to documentation satisfactory to
Agent, in its sole discretion;
(w) Agent and counsel to Agent shall have received
and reviewed all documentation relating to the Parent Notes and the Unsecured
Notes, including, without limitation, the Unsecured Notes Indenture, and all of
such documentation, and the terms and provisions of such documentation,
including, without limitation, the Parent Notes, the Unsecured Notes and the
Unsecured Notes Indenture, shall be acceptable to Agent and its counsel; and
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(x) all other documents and legal matters in
connection with the transactions contemplated by this Agreement shall have been
delivered, executed, or recorded and shall be in form and substance satisfactory
to Agent and its counsel.
3.2 CONDITIONS PRECEDENT TO ALL ADVANCES, ALL LETTERS OF
CREDIT AND ALL HEDGING AGREEMENT GUARANTEES. The following shall be conditions
precedent to all Advances, all Letters of Credit and all Hedging Agreement
Guarantees hereunder:
(a) the representations and warranties contained in
this Agreement and the other Loan Documents shall be true and correct in all
respects on and as of the date of such extension of credit, as though made on
and as of such date (except to the extent that such representations and
warranties relate solely to an earlier date);
(b) no Default or Event of Default shall have
occurred and be continuing on the date of such extension of credit, nor shall
either result from the making thereof;
(c) no injunction, writ, restraining order, or other
order of any nature prohibiting, directly or indirectly, the extending of such
credit shall have been issued and remain in force by any governmental authority
against any Borrower, Agent, the Lender Group, or any of their Designated
Affiliates; and
(d) the amount of the Revolving Facility Usage, after
giving effect to the requested Advance, Letter of Credit or Hedging Arrangement,
shall not exceed the Availability.
The foregoing conditions precedent are not conditions to each Lender (i)
participating in or reimbursing Agent for such Lenders' Pro Rata Share of any
drawings under or any other amounts payable with respect to Letters of Credit
and Hedging Agreement Guarantees as provided herein, or (ii) participating in or
reimbursing Foothill or the Agent for such Lenders' Pro Rata Share of any
Foothill Loan or Agent Advance as provided herein.
3.3 CONDITION SUBSEQUENT. As conditions subsequent to initial
closing hereunder, Borrower shall perform or cause to be performed the following
(the failure by Borrower to so perform or cause to be performed constituting an
Event of Default):
(a) within thirty (30) days immediately following the
date of this Agreement, Borrower shall deliver to Agent certified copies of the
endorsements and agreements as are required by Section 6.10 to the policies of
insurance required by Section 6.10, or otherwise as is reasonably satisfactory
to Agent, the form and substance of which shall be reasonably satisfactory to
Agent and its counsel;
(b) within seven (7) days immediately following the
Closing Date, Borrower shall cause to be issued to Agent for the benefit of the
Lender Group updated Title Opinions and other legal opinions supplemental
thereto in form and substance satisfactory to Agent which conform to the
requirements described in subparagraph (B) of Section 3.1(l)
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covering such of the Oil and Gas Properties and Oil and Gas Property Mortgages
as shall be required by Agent;
(c) within seven (7) days immediately following the
date of recordation of the Prior Lender Assignment Agreements, Borrower shall
cause to be issued to Agent for the benefit of the Lender Group updated Title
Opinions and other legal opinions supplemental thereto in form and substance
satisfactory to Agent which conform to the requirements described in
subparagraph (B) of Section 3.1(l) covering such of the Oil and Gas Properties
and Prior Lender Assignment Agreements as shall be required by Agent;
(d) within fifteen (15) days immediately following
the date of this Agreement, Borrower shall cause to be issued to Agent for the
benefit of the Lender Group updated Title Opinions and other legal opinions
supplemental thereto in form and substance satisfactory to Agent which conform
to the requirements described in subparagraph (B) of Section 3.1(l) covering the
Oil and Gas Properties of Borrower located on the Mustang Island 8835 Lease; and
(e) within seven (7) days immediately following the
date of this Agreement, Borrower shall cause the Prior Agent and the Prior
Lenders to deliver to Agent for the benefit of the Lender Group the originals of
all promissory notes which evidenced the indebtedness, liabilities and
obligations of Borrower to the Prior Agent and the Prior Lender which arose
under the Prior Credit Agreement , duly executed and endorsed by them to Agent
for the benefit of the Lender Group, in form and substance satisfactory to
Agent.
3.4 TERM; AUTOMATIC RENEWAL.
(a) This Agreement shall become effective upon the
execution and delivery hereof by Borrower and the Lender Group and shall
continue in full force and effect for a term ending on the date (the "Renewal
Date") that is three years from the Closing Date and automatically shall be
renewed for successive one year periods thereafter.
(b) Either party may terminate this Agreement on the
Renewal Date or on any one year anniversary of the Renewal Date by giving the
other party at least ninety (90) days prior written notice. The foregoing
notwithstanding, the Lender Group shall have the right to terminate its
obligations under this Agreement immediately and without notice upon the
occurrence and during the continuation of an Event of Default.
3.5 EFFECT OF TERMINATION.
(a) On the date of termination of this Agreement, all
Obligations (including contingent reimbursement obligations of Borrower with
respect to any outstanding Letters of Credit) immediately shall become due and
payable without notice or demand. No termination of this Agreement, however,
shall relieve or discharge Borrower of Borrower's duties, Obligations, or
covenants hereunder or under the other Loan Documents, and Agent's continuing
security interests in the Collateral, for the benefit of the Lender Group, shall
remain in effect until
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all Obligations have been fully and finally discharged and the Lender Group's
obligations to provide additional credit hereunder have been terminated.
(b) If Borrower has sent a notice of termination
pursuant to the provisions of Section 3.4 but fails to pay the Obligations in
full on the date set forth in such notice, then the Lenders may, but shall not
be required to, renew this Agreement for an additional term of one year.
3.6 EARLY TERMINATION BY BORROWER. The provisions of Section
3.4 that allow termination of this Agreement by Borrower on the Renewal Date and
certain anniversaries thereof notwithstanding, Borrower has the option, at any
time upon 90 days prior written notice to Agent, to terminate this Agreement by
paying to Agent, for the ratable benefit of the Lender Group, in cash, the
Obligations (including an amount equal to 105% of the undrawn amount of the
Letters of Credit and the Hedging Arrangement Usage), in full, together with a
premium (the "Early Termination Premium") equal to (a) if the termination occurs
on or before the first anniversary of the Closing Date, an amount equal to 3% of
the Maximum Revolving Amount, and (b) if the termination occurs after the first
anniversary of the Closing Date but on or before the second anniversary of the
Closing Date an amount equal to 2% of the Maximum Revolving Amount, and (c) if
the termination occurs at any time after the second anniversary of the Closing
Date (other than the Renewal Date or on the last day of any successive renewal
period), an amount equal to 1% of the Maximum Revolving Amount; provided,
however, that (i) no Early Termination Premium arising from the termination this
Agreement shall be payable hereunder in the event Foothill Capital Corporation
during the three year period immediately following the Closing Date provides a
debtor in possession credit facility pursuant to the provisions of 11 U.S.C.
Section 364(c)(i) and Section 364(d) to Borrower (in its capacity as a debtor in
possession) in any Insolvency Proceeding on terms acceptable to Foothill Capital
Corporation in its sole discretion pursuant to an order entered by a United
States Bankruptcy Court after final hearing based upon the standards prescribed
by Bankruptcy Rule 4001(c) and other applicable law and (ii) the Early
Termination Fee shall be reduced by fifty percent (50%) if it arises from
Borrower's termination of this Agreement and repayment of the Obligations solely
with the proceeds of a Qualified Restructuring Refinancing Transaction (as such
term is defined below). As used in this Section 3.6, the term "Qualified
Restructuring Refinancing Transaction" means an out-of-court restructuring of
substantially all of Borrower's Indebtedness (other than in connection with an
Insolvency Proceeding) pursuant to which at least $15,000,000 of the principal
amount of the Unsecured Notes is extinguished without payment of any cash,
assets or other Property of Borrower or any of its Subsidiaries (including as a
result of a conversion of such Indebtedness to equity, a cancellation thereof,
or other compromise or settlement thereof), provided that such extinguishment is
not as a direct or indirect result or consequence of the creation, incurrence or
issuance of any evidence of Indebtedness or Disqualified Stock by Borrower or
any of its Subsidiaries in exchange for or in substitution, replacement or
consideration of such extinguishment, and with respect to which restructuring
Foothill Capital Corporation has had a right of last refusal to provide a credit
facility to Borrower on terms and conditions substantially similar to those
which have been committed to Borrower in connection with such restructuring by
another financial institution pursuant to a bona fide written commitment letter
issued by such financial institution to Borrower.
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3.7 TERMINATION UPON EVENT OF DEFAULT. If the Lender Group
terminates this Agreement upon the occurrence of an Event of Default, in view of
the impracticability and extreme difficulty of ascertaining actual damages and
by mutual agreement of the parties as to a reasonable calculation of the Lender
Group's lost profits as a result thereof, Borrower shall pay to Agent, for the
ratable benefit of the Lender Group, upon the effective date of such
termination, a premium in an amount equal to the Early Termination Premium. The
Early Termination Premium shall be presumed to be the amount of damages
sustained by the Lender Group as the result of the early termination and
Borrower agrees that it is reasonable under the circumstances currently
existing. The Early Termination Premium provided for in this Section 3.7 shall
be deemed included in the Obligations.
4. CREATION OF SECURITY INTEREST.
4.1 GRANT OF SECURITY INTEREST. Borrower hereby grants to
Agent, for the benefit of the Lender Group, continuing Liens on all right,
title, and interest of Borrower in and to all currently existing and hereafter
acquired or arising Collateral in order to secure prompt repayment of any and
all Obligations and in order to secure prompt performance by Borrower of each of
its covenants and duties under the Loan Documents (the "Agent's Liens"). The
Agent's Liens in and to the Collateral shall attach to all Collateral without
further act on the part of the Lender Group or Borrower. Anything contained in
this Agreement or any other Loan Document to the contrary notwithstanding,
except for the sale of Inventory to buyers in the ordinary course of business
and except as specifically permitted under Section 7.4, Borrower has no
authority, express or implied, to dispose of any item or portion of the
Collateral. Subject to Section 2.4(b), the secured claims of the Lender Group
secured by the Collateral shall be of equal priority, and ratable according to
the respective Obligations due each member of the Lender Group.
4.2 NEGOTIABLE COLLATERAL. In the event that any Collateral,
including proceeds, is evidenced by or consists of Negotiable Collateral,
Borrower promptly shall, and shall cause each of its Subsidiaries to, endorse
and deliver physical possession of such Negotiable Collateral to Agent.
4.3 COLLECTION OF ACCOUNTS, GENERAL INTANGIBLES, AND
NEGOTIABLE COLLATERAL. At any time, Agent or Agent's designee may (a) notify
customers or Account Debtors that the Accounts, General Intangibles, or
Negotiable Collateral have been assigned to Agent for the benefit of the Lender
Group, or that Agent, for the benefit of the Lender Group, has a security
interest therein and (b) collect the Accounts, General Intangibles, and
Negotiable Collateral directly and charge the collection costs and expenses to
the Loan Account. Borrower agrees that it will, and will cause each of its
Subsidiaries to, hold in trust for the Lender Group, as the Lender Group's
trustee, any Collections that it receives and immediately will deliver said
Collections to Agent in their original form as received by Borrower or any of
its Subsidiaries, as the case may be.
4.4 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. At any time
upon the request of Agent, Borrower shall, and shall cause each of its
Subsidiaries to, execute and deliver to Agent all financing statements,
collateral assignments, continuation financing statements, fixture filings,
security agreements, pledges, assignments, mortgages, leasehold mortgages, deeds
of trust, leasehold deeds of trust, endorsements of certificates of title,
applications for title,
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affidavits, reports, notices, schedules of accounts, letters of authority, and
all other documents that Agent reasonably may request, in form satisfactory to
Agent, to perfect and continue perfected the Agent's Liens on the Collateral
(whether now owned or hereafter arising or acquired), and in order to consummate
fully all of the transactions contemplated hereby and under the other the Loan
Documents. Without limiting the foregoing, in the event that any of the
Inventory, Equipment or other Property of Borrower (including, without
limitation, any of the Property described on Schedule 5.1(e)) from time to time
constitutes a "vessel" as defined in the Ship Mortgage Laws as codified in
Chapter 313 of Title 46 of the United States Code, Borrower shall, and shall
cause each of its Subsidiaries to, execute and deliver to Agent all preferred
ship mortgages as may be necessary to create, to perfect and to continue
perfected a preferred ship mortgages Lien of Agent for the benefit of the
Lenders thereon.
4.5 POWER OF ATTORNEY. Borrower hereby irrevocably makes,
constitutes, and appoints Agent (and any of Agent's officers, employees, or
agents designated by Agent) as Borrower's true and lawful attorney, with power
to (a) if Borrower refuses to, or fails timely to execute and deliver any of the
documents described in Section 4.4, sign the name of Borrower on any of the
documents described in Section 4.4, (b) at any time that an Event of Default has
occurred and is continuing, sign Borrower's name on any invoice or bill of
lading relating to any Account, drafts against Account Debtors, schedules and
assignments of Accounts, verifications of Accounts, and notices to Account
Debtors, (c) send requests for verification of Accounts, (d) endorse Borrower's
name on any Collection item that may come into the Lender Group's possession,
(e) at any time that an Event of Default has occurred and is continuing, notify
the post office authorities to change the address for delivery of Borrower's
mail to an address designated by Agent, to receive and open all mail addressed
to Borrower, and to retain all mail relating to the Collateral and forward all
other mail to Borrower, (f) at any time that an Event of Default has occurred
and is continuing, make, settle, and adjust all claims under Borrower's policies
of insurance and make all determinations and decisions with respect to such
policies of insurance, and (g) at any time that an Event of Default has occurred
and is continuing, settle and adjust disputes and claims respecting the Accounts
directly with Account Debtors, for amounts and upon terms that Agent determines
to be reasonable, and Agent may cause to be executed and delivered any documents
and releases that Agent determines to be necessary. The appointment of Agent as
Borrower's attorney, and each and every one of Agent's rights and powers, being
coupled with an interest, is irrevocable until all of the Obligations have been
fully and finally repaid and performed and the Lender Groups' obligations to
extend credit hereunder are terminated.
4.6 RIGHT TO INSPECT. Agent (through any of its officers,
employees, or agents) shall have the right, from time to time hereafter to
inspect the Books and to check, test, audit and appraise the Collateral in order
to verify Borrower's and its Subsidiaries' financial condition or the amount,
quality, value, condition of, or any other matter relating to, the Collateral
(including checks, tests and audits by a qualified engineer selected by Agent of
Borrower's and each of its Subsidiaries' onshore and offshore wells, rigs,
pipeline distribution systems and operations).
4.7 CONTROL AGREEMENTS. Borrower agrees that it will not, and
that it will cause each of its Subsidiaries not to, transfer assets out of any
Securities Accounts other than as permitted under Section 7.22 and, if to
another securities intermediary, unless each of Borrower, such Subsidiary,
Agent, and the substitute securities intermediary have entered into a Control
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Agreement. No arrangement contemplated hereby or by any Control Agreement in
respect of any Securities Accounts or other investment property shall be
modified by Borrower or any of its Subsidiaries without the prior written
consent of Agent. Upon the occurrence and during the continuance of a Default or
Event of Default, Agent may notify any securities intermediary to liquidate or
transfer the applicable Securities Account or any related investment property
maintained or held thereby and remit the proceeds thereof to the Agent Account.
5. REPRESENTATIONS AND WARRANTIES.
In order to induce the Lender Group to enter into this
Agreement, Borrower makes the following representations and warranties to the
Lender Group which shall be true, correct, and complete in all respects as of
the date hereof, and shall be true, correct, and complete in all respects as of
the Closing Date, and at and as of the date of the making of each Advance or
Letter of Credit made thereafter, as though made on and as of the date of the
making of such Advance or Letter of Credit (except to the extent that such
representations and warranties relate solely to an earlier date) and such
representations and warranties shall survive the execution and delivery of this
Agreement:
5.1 NO ENCUMBRANCES. Borrower has good, valid and Defensible
Title to the Collateral, free and clear of all Liens (except for Permitted
Liens), including but not limited to:
(a) Ownership of the Oil and Gas Properties listed on
Schedule 5.1(a);
(b) The amount of the Working Interest and Net
Revenue Interest of the Oil and Gas Properties, as set forth on Schedule 5.1(b);
(c) All rights under the Material Contracts listed on
Schedule 5.1(c);
(d) Ownership of the Real Property listed on Schedule
5.1(d); and
(e) Ownership of the Property listed on Schedule
5.1(e).
5.2 ELIGIBLE PROVED RESERVES; OWNERSHIP OF OIL AND GAS
PROPERTIES.
(a) All Eligible Proved Reserves are Proved Reserves
of which Borrower has fee simple legal title to or valid leasehold interest in
(in each case, either good, marketable and indefeasible, or Defensible Title,
except for Permitted Liens), and of which Borrower is the beneficial owner of,
to the full extent of the quantity of interest specified in the most recent
Reserve Report delivered to Agent by Borrower, and all of the information with
respect thereto contained on Schedules 5.1(a), 5.1(b), 5.1(c) and 5.2(e) is true
and correct. All Mineral Interests of which the Eligible Proved Reserves are a
part are in full force and effect and Borrower is in full compliance with its
obligations thereunder. All wells drilled and Hydrocarbons produced with respect
to such Eligible Proved Reserves were drilled and produced in compliance in all
material respects with all applicable regulations. Schedule 5.2(a) attached
hereto and made a part hereof sets forth all authorities for expenditures
outstanding as of the date of this Agreement. There are no outstanding
authorities for expenditures which are not reflected in the
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most recent weekly cash flow forecast delivered by Borrower to Agent pursuant to
Section 6.21 hereof that have been received by Borrower on or before the date of
such weekly cash flow forecast. Except as set forth on Schedule 5.2(a), there
are no proposed, current or completed operations under any operating agreement,
unit agreement, governmental order or otherwise associated with any Oil and Gas
Properties with respect to which Borrower has become or intends to become a
non-consenting party other than those operations commencing after the Closing
Date as to which Borrower shall have given to Agent prior written notice of
Borrower's intention to non-consent within the time periods specified in Section
7.25. All of such Eligible Proved Reserves are a part of the Oil and Gas
Properties described in Schedule 5.1(a), are covered by the engineering reports
which Borrower has previously delivered to and which have been relied upon by
Agent in connection with this Agreement, are part of the Oil and Gas Property
Collateral covered by the Oil and Gas Property Mortgages, and are covered by
Title Opinions and other legal opinions supplemental thereto in form and
substance satisfactory to Agent which conform to the requirements described in
subparagraph (B) of Section 3(l), Section 6.17 and Section 6.18 (except as
otherwise provided in Section 3.3(b) and Section 3.3(c)). All bills (except for
those which are less than 60 days past original invoice date, are not past due
and do not give rise to a Lien other than a Permitted Lien) and taxes have been
paid with respect to all Eligible Proved Reserves, other than those which are
the subject of a bona fide dispute which is being contested in good faith by
Borrower by appropriate proceedings as to which a reserve is established on the
books of Borrower in an amount that is satisfactory to Agent (and if a Lien
secures the same or may secure the same, such Lien is subject to a Permitted
Protest).
(b) All Eligible Proved Developed Producing Reserves
are Proved Developed Producing Reserves of which Borrower has fee simple legal
title to or valid leasehold interest in (in each case, either good, marketable
and indefeasible, or Defensible Title, except for Permitted Liens), and of which
Borrower is the beneficial owner of, to the full extent of the quantity of
interest specified in the most recent Reserve Report delivered to Agent by
Borrower, and all of the information with respect thereto contained on Schedules
5.1(a), 5.1(b), 5.1(c), 5.2(e) and 5.3 is true and correct.
(c) All Eligible Proved Developed Non-Producing
Reserves are Proved Developed Non-Producing Reserves of which Borrower has fee
simple legal title to or valid leasehold interest in (in each case, either good,
marketable and indefeasible, or Defensible Title, except for Permitted Liens),
and of which Borrower is the beneficial owner of, to the full extent of the
quantity of interest specified in the most recent Reserve Report delivered to
Agent by Borrower, and all of the information with respect thereto contained on
Schedules 5.1(a), 5.1(b), 5.1(c), 5.2(e) and 5.3 attached hereto is true and
correct.
(d) All Eligible Proved Undeveloped Reserves are
Proved Undeveloped Reserves of which Borrower has fee simple legal title to or
valid leasehold interest in (in each case, either good, marketable and
indefeasible, or Defensible Title, except for Permitted Liens), and of which
Borrower is the beneficial owner of, to the full extent of the quantity of
interest specified in the most recent Reserve Report delivered to Agent by
Borrower, and all of the information with respect thereto contained on Schedules
5.1(a), 5.1(b), 5.1(c), 5.2(e) and 5.3 attached hereto is true and correct.
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(e) All of Borrower's marketing arrangements with
respect to its Proved Reserves are valid, enforceable and in full force and
effect. As of the date of this Agreement and thereafter through the Closing
Date, there do not exist any cumulative imbalances in gas production or receipt
of "take or pay" payments except as disclosed (as to both existence and extent)
on Schedule 5.2(e) attached hereto.
(f) Without limiting the foregoing, after giving full
effect to the Permitted Liens, Borrower owns the net revenue interests in
production attributable to the Oil and Gas Properties covered by the Oil and Gas
Property Mortgages as is reflected in the most recently delivered Reserve Report
and the ownership of such Properties shall not in any material respect obligate
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 such Property set forth in the most recently delivered Reserve
Report. All information contained in the most recently delivered Reserve Report
is true and correct in all material respects as of the date thereof.
(g) There has not been any Material Adverse Change in
the Oil and Gas Properties since the date of the most recent Reserve Report.
(h) Schedule 5.2(h) attached hereto and made a part
hereof sets forth as to each Oil and Gas Property owned by Borrower as of the
date of this Agreement and each Oil and Gas Property owned by Borrower as of the
Closing Date the name, location, lease description, bonus, effective date,
primary term expiration date (including whether or not the lease covering such
Oil and Gas Property is held by production), minimum rental, rental due date,
other lease payments and due dates thereof and exploration and production status
thereof.
5.3 OPERATIONS OF OIL AND GAS PROPERTIES. With respect to each
Mineral Interest which is a working interest, Borrower is the operator except as
set forth in Schedule 5.1(b) attached hereto.
5.4 EQUIPMENT. All of the Equipment is used or held for use in
Borrower's business and is fit for such purposes, subject to (a) normal wear and
tear and (b) dispositions permitted under Section 7.4.
5.5 LOCATION OF INVENTORY AND EQUIPMENT.
(a) The Inventory and Equipment are located on the
Oil and Gas Property Collateral or otherwise are located in Texas or Louisiana
(or in the Federal Outer Continental Shelf adjacent to such state). From time to
time upon the request of Agent, Borrower shall provide to Agent a list of the
specific locations of the Inventory and Equipment and the names and addresses of
any bailee, warehouseman or similar party with whom such Inventory or Equipment
is stored (and upon the reasonable request of Agent, Borrower shall obtain and
deliver to Agent a Collateral Access Agreement executed by each such bailee,
warehouseman or similar party with respect to such Inventory and Equipment).
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(b) The primary accounting and business books,
records and papers of Borrower (including those pertaining to the Collateral)
are kept and maintained solely at Borrower's chief executive office set forth in
the beginning of this Agreement. The name and address of Borrower's landlord for
the premises of Borrower's chief executive office set forth in the beginning of
this Agreement is set forth in Schedule 6.21 attached to this Agreement and made
a part hereof.
5.6 OIL AND GAS PROPERTY COLLATERAL RECORDS AND INVENTORY
RECORDS. Borrower keeps records that are correct and accurate in all material
respects itemizing and describing the kind, type, quality, and quantity of the
Oil and Gas Property Collateral and the Inventory, and Borrower's cost therefor.
5.7 LOCATION OF CHIEF EXECUTIVE OFFICE; FEIN. The chief
executive office of Borrower is located at the address indicated in the preamble
to this Agreement and Borrower's FEIN is 84-1157209.
5.8 DUE ORGANIZATION AND QUALIFICATION; SUBSIDIARIES.
(a) Borrower is duly organized and existing and in
good standing under the laws of the jurisdiction of its incorporation and
qualified and licensed to do business in, and in good standing in, any state
where the failure to be so licensed or qualified could reasonably be expected to
constitute a Material Adverse Change. Each of Borrower's Subsidiaries is duly
organized and existing and in good standing under the laws of the jurisdiction
of its incorporation and qualified and licensed to do business in, and in good
standing in, any state where the failure to be so licensed or qualified could
reasonably be expected to constitute a Material Adverse Change.
(b) Set forth on Schedule 5.8, is a complete and
accurate description of the authorized capital Stock of Borrower, by class, and,
as of the Closing Date, a description of the number of shares of each such class
that are issued and outstanding and the number of such shares that are held in
Borrower's treasury. All such outstanding shares have been validly issued and,
as of the Closing Date, are fully paid, nonassessable shares free of contractual
preemptive rights. The issuance and sale of all such shares have been in
compliance with all applicable federal and state securities laws. Other than as
described on Schedule 5.8, there are no subscriptions, options, warrants, or
calls relating to any shares of Borrower's capital Stock, including any right of
conversion or exchange under any outstanding security or other instrument.
Neither Borrower nor any of its Subsidiaries is subject to any obligation
(contingent or otherwise) to repurchase or otherwise acquire or retire any
shares of its capital Stock or any security convertible into or exchangeable for
any of its capital Stock.
(c) Borrower has no direct or indirect Subsidiaries.
5.9 DUE AUTHORIZATION; NO CONFLICT.
(a) The execution, delivery, and performance by
Borrower of this Agreement and the Loan Documents to which it is a party have
been duly authorized by all necessary corporate action.
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(b) The execution, delivery, and performance by
Borrower of this Agreement and the Loan Documents to which it is a party do not
and will not (i) violate any provision of federal, state, or local law or
regulation (including Regulations U and X of the Federal Reserve Board)
applicable to Borrower, the Governing Documents of Borrower, or any order,
judgment, or decree of any court or other Governmental Authority binding on
Borrower, (ii) conflict with, result in a breach of, or constitute (with due
notice or lapse of time or both) a default under any Material Contract or other
material contractual obligation or material lease of Borrower other than
defaults under the Unsecured Notes Indenture, (iii) result in or require the
creation or imposition of any Lien of any nature whatsoever upon any properties
or assets of Borrower, other than Permitted Liens, or (iv) require any approval
of stockholders or any approval or consent of any Person not previously obtained
under any Material Contract or other material contractual obligation of
Borrower.
(c) Other than the taking of any action expressly
required under this Agreement and the Loan Documents, the execution, delivery,
and performance by Borrower of this Agreement and the Loan Documents to which
Borrower is a party do not and will not require any registration with, consent,
or approval of, or notice to, or other action with or by, any federal, state,
foreign, or other Governmental Authority or other Person.
(d) This Agreement and the Loan Documents to which
Borrower is a party, and all other documents contemplated hereby and thereby,
when executed and delivered by Borrower will be the legally valid and binding
obligations of Borrower, enforceable against Borrower in accordance with their
respective terms, except as enforcement may be limited by equitable principles
or by bankruptcy, insolvency, reorganization, moratorium, or similar laws
relating to or limiting creditors' rights generally.
(e) The Agent's Liens granted by Borrower to Agent,
for the benefit of the Lender Group, in and to its properties and assets
pursuant to this Agreement and the other Loan Documents are validly created,
perfected, and first priority Liens, subject only to Permitted Liens.
(f) Neither the Borrower nor any of its Subsidiaries
has violated, and neither the Borrower, nor any Subsidiary will be in violation
of, any provisions of the Natural Gas Act or the Natural Gas Policy Act of 1978
or any other Federal or State law or any of the regulations thereunder
(including those of the respective Conservation Commissions and Land Offices of
the various jurisdictions having authority over its Oil and Gas Properties) with
respect to its Oil and Gas Properties which would create a Material Adverse
Change, and the Borrower and each Subsidiary have or will have made all
necessary rate filings, certificate applications, well category filings, interim
collection filings and notices, and any other filings or certifications, and has
or will have received all necessary regulatory authorizations (including without
limitation necessary authorizations, if any, with respect to any processing
arrangements conducted by it or others respecting its Oil and Gas Properties or
production therefrom) required under said laws and regulations with respect to
all of its Oil and Gas Properties or production therefrom so as not to create a
Material Adverse Change. Said material rate filings, certificate applications,
well category filings, interim collection filings and notices, and other filings
and certifications contain no untrue
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statements of material facts nor do they omit any statements of material facts
necessary in said filings.
5.10 CLAIMS, DISPUTES, AND LITIGATION. There are no actions or
proceedings pending by or against Borrower before any court or administrative
agency and Borrower does not have knowledge or belief of any pending or
threatened litigation, governmental investigations, or claims, complaints,
actions, or prosecutions involving Borrower or any guarantor of the Obligations,
except for: (a) ongoing collection matters in which Borrower is the claimant,
petitioner or plaintiff; (b) matters disclosed on Schedule 5.10; and (c) matters
arising after the date hereof that, if decided adversely to Borrower, do not
result in and reasonably could not be expected to result in a Material Adverse
Change.
5.11 NO MATERIAL ADVERSE CHANGE. All financial statements
relating to Borrower or any guarantor of the Obligations that have been
delivered by Borrower to the Lender Group have been prepared in accordance with
GAAP (except, in the case of unaudited financial statements, for the lack of
footnotes and being subject to year-end audit adjustments) and fairly present
Borrower's (or such guarantor's, as applicable) financial condition as of the
date thereof and Borrower's results of operations for the period then ended.
Except as described on Schedule 3.1(t), there has not been a Material Adverse
Change with respect to Borrower (or such guarantor, as applicable) since the
date of the latest financial statements submitted to the Lender Group on or
before the Closing Date.
5.12 NO FRAUDULENT TRANSFER. No transfer of property is being
made by Borrower and no obligation is being incurred by Borrower in connection
with the transactions contemplated by this Agreement or the other Loan Documents
(a) with the intent to hinder, delay, or defraud either present or future
creditors of Borrower or (b) that constitutes a fraudulent conveyance or
fraudulent transfer under applicable law.
5.13 EMPLOYEE BENEFITS. None of Borrower, any of its
Subsidiaries, or any of their ERISA Affiliates maintains or contributes to any
Benefit Plan, other than those listed on Schedule 5.13. Borrower, each of its
Subsidiaries and each ERISA Affiliate have satisfied the minimum funding
standards of ERISA and the IRC with respect to each Benefit Plan to which it is
obligated to contribute. No ERISA Event has occurred nor has any other event
occurred that may result in an ERISA Event that reasonably could be expected to
result in a Material Adverse Change. None of Borrower or its Subsidiaries, any
ERISA Affiliate, or any fiduciary of any Plan is subject to any direct or
indirect liability with respect to any Plan under any applicable law, treaty,
rule, regulation, or agreement. None of Borrower or its Subsidiaries or any
ERISA Affiliate is required to provide security to any Plan under Section
401(a)(29) of the IRC.
5.14 ENVIRONMENTAL CONDITION. None of the Oil and Gas
Properties or the Real Property has ever been designated or identified in any
manner pursuant to any Environmental Laws as a Hazardous Materials disposal
site, or a candidate for closure pursuant to any environmental protection
statute. No Lien arising under any Environmental Laws has attached to any
revenues or to any real or personal property owned or operated by Borrower or by
any Subsidiary of Borrower. Neither Borrower nor any Subsidiary of Borrower has
received a summons, citation, notice, or directive from the Environmental
Protection Agency or any other
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federal or state governmental agency concerning any action or omission by
Borrower resulting in the releasing or disposing of Hazardous Materials into the
environment in quantities which could reasonably be expected to result in fines
or penalties in excess of $50,000 in the aggregate, or in an injunction,
restraining order or similar action restricting or prohibiting production at any
Oil and Gas Property, or in a material loss of or decline in production from any
Oil and Gas Property, or in a Material Adverse Change. Each of Borrower and each
Subsidiary of Borrower has taken all steps reasonably necessary to determine
and, except as disclosed on Schedule 5.14 has determined that no Hazardous
Materials, 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 Materials on or to any Property of Borrower or any of its
Subsidiaries except in compliance with Environmental Laws and so as not to pose
an imminent and substantial endangerment to public health or welfare or the
environment or only in quantities which could not reasonably be expected to
result in fines or penalties in excess of $50,000 in the aggregate, or in an
injunction, restraining order or similar action restricting or prohibiting
production at any Oil and Gas Property, or in a material loss of or decline in
production from any Oil and Gas Property, or in a Material Adverse Change. To
the extent applicable, all Property of Borrower and each of its Subsidiaries
currently satisfies, in all material respects, all design, operation, except as
disclosed on Schedule 5.14 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 Borrower does not have any reason to believe that such Property,
to the extent subject to OPA, will not be able to maintain compliance, in all
material respects, with the OPA requirements during the term of this Agreement.
Other than as disclosed on Schedule 5.14, neither Borrower nor any of its
Subsidiaries has any known material contingent liability in connection with any
release or threatened release of any oil, Hazardous Material or solid waste into
the environment. All Hazardous Materials, solid waste, and oil and gas
exploration and production wastes, if any, generated at any and all Property of
Borrower or any of its Subsidiaries have in the past been transported, treated
and disposed of in all material respects 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 all such transport carriers and treatment and
disposal facilities have been and are operating in material 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.
5.15 COMPLIANCE WITH THE LAW. Neither Borrower nor any of its
Subsidiaries has violated any requirement of a Governmental Authority or failed
to obtain any license, permit, franchise or other governmental authorization
necessary for the ownership of the Property or the conduct of its business,
which violation or failure could reasonably be expected to result in (in the
event such violation or failure were asserted by any Person through appropriate
action) a Material Adverse Change. Except for such acts or failures to act as do
not result in and could not reasonably be expected to result in a Material
Adverse Change, the Oil and Gas Properties 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 Mineral 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
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Properties are subject to having allowable production reduced in any material
respect below the full and regular allowable (including the maximum permissible
tolerance) because of any overproduction (whether or not the same was
permissible at the time) prior to the Closing Date and (ii) none of the wells
comprising a part of the Oil and Gas Properties 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 (subject
to the exceptions provided in Section 5.30 with respect to production) from the
Oil and Gas Properties. Neither Borrower nor any of its Subsidiaries has entered
into, and the Oil and Gas Properties are not subject to, any agreements, consent
orders, administrative orders or similar obligations based on a violation or
alleged violation of Legal Requirements. Additionally, neither Borrower nor any
of its Subsidiaries has entered into, and the Oil and Gas Properties are not
subject to, any agreements, consent orders, administrative orders or similar
obligations based on a violation or alleged violation of Legal Requirements.
5.16 INSURANCE. Schedule 5.16 attached hereto contains an
accurate and complete description of all material policies of insurance owned or
held by Borrower and each Subsidiary. Except as set forth on Schedule 5.16, all
such policies are in full force and effect, all premiums with respect thereto
covering all periods up to and including the Closing Date 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 Borrower or any of its Subsidiaries 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 Borrower and each of its Subsidiaries; will remain in
full force and effect through the respective dates set forth in Schedule 5.16
without the payment of additional premiums except as set forth on Schedule 5.16;
and will not in any way be affected by, or terminate or lapse by reason of, the
transactions contemplated by this agreement. Neither Borrower nor any of its
Subsidiaries 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.
5.17 HEDGING AGREEMENT. Schedule 5.17 sets forth, as of the
Closing Date, a true and complete list of all Hedging Agreements (including
commodity price swap agreements, forward agreements or contracts of sale which
provide for prepayment for deferred shipment or delivery of oil, gas or other
commodities) of the Borrower and each of its Subsidiaries, the material terms
thereof (including the type, term, effective date, termination date and notional
amounts or volumes), the net mark to market value thereof, all credit support
agreements relating thereto (including any margin required or supplied), and the
counterparty to each such agreement. Borrower has delivered true and correct
copies of each of the Hedging Agreements to Agent prior to the date of this
Agreement.
5.18 BROKERAGE FEES. No brokerage commission or finders fees
has or shall be incurred or payable in connection with or as a result of
Borrower's obtaining financing from the Lender Group under this Agreement other
than as contemplated in Borrower's letter agreement
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with The Gordian Group (the "Gordian Group Agreement"), and, except as
contemplated in the Gordian Group Agreement, neither Borrower nor any of its
Subsidiaries has utilized the services of any broker or finder in connection
with Borrower's obtaining financing from the Lender Group under this Agreement,
and Borrower acknowledges that neither Agent nor any Lender is in any way liable
for the payment of any fees or expenses contemplated in the Gordian Group
Agreement.
5.19 PERMITS AND OTHER INTELLECTUAL PROPERTY. Except as set
forth on Schedule 5.19, Borrower owns or possesses adequate licenses or other
rights to use all Permits, patents, patent applications, trademarks, trademark
applications, service marks, service mark applications, trade names, copyrights,
trade secrets and know-how (collectively, the "Intellectual Property") that are
necessary for the operation of its business as currently conducted. No claim is
pending or threatened to the effect that Borrower infringes upon, or conflicts
with, the asserted rights of any other Person under any Intellectual Property,
and to the best of Borrower's knowledge there is no basis for any such claim
(whether pending or threatened). To the best of Borrower's knowledge, no claim
is pending or threatened to the effect that any such Intellectual Property owned
or licensed by Borrower, or in which Borrower otherwise has the right to use is
invalid or unenforceable by Borrower, and to the best of Borrower's knowledge
there is no basis for any such claim (whether or not pending or threatened). All
licenses and rights described on Schedule 5.19 pertain solely to the use or
exploitation of seismic data.
5.20 YEAR 2000 COMPATIBILITY.
(a) On the basis of a comprehensive inventory, review
and assessment currently being undertaken by Borrower of Borrower's and each of
its Subsidiaries' computer applications utilized by Borrower and any of its
Subsidiaries or contained in goods, products or services produced or sold by
Borrower or any of its Subsidiaries, and upon inquiry made of each of Borrower's
and each of its Subsidiaries' material suppliers and vendors, Borrower's
management is of the considered view that Borrower and each of its Subsidiaries,
and its respective goods, products and services and all such suppliers and
vendors are presently Year 2000 Compliant.
(b) Borrower (i) has undertaken a detailed inventory,
review and assessment of all areas within its business and operations that could
be adversely affected by the failure of Borrower or any of its Subsidiaries or
its respective goods, products or services to be Year 2000 Compliant on a timely
basis, (ii) has developed the plan and timeline for becoming Year 2000 Compliant
attached hereto as Schedule 5.20; and (iii) to date, is implementing that plan
in accordance with that timetable in all material respects. Borrower will be
Year 2000 Compliant on a timely basis.
5.21 CASH FLOW FORECAST. Borrower's reasonable best estimate
of Borrower's weekly cash flow forecast for the ten-week period commencing on
January 7, 2000, is attached hereto as Schedule 5.21 and made a part hereof.
5.22 ABSENCE OF CERTAIN CHANGES. During the period from
September 30, 1999 through the Closing Date, there has not been without Agent's
prior written consent:
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(a) A waiver of any right relating to any of the Oil
and Gas Properties;
(b) Except as set forth in Schedule 5.22(b) attached
hereto and made a part hereof, a sale, lease or other disposition of any of the
Oil and Gas Properties;
(c) A mortgage, pledge or grant of a lien or security
interest in any of the Oil and Gas Properties other than Permitted Liens;
(d) Except as set forth in Schedule 5.22(d) attached
hereto and made a part hereof, a contract for the sale of products produced from
any of the Oil and Gas Properties;
(e) A contract between Borrower and any of its
Subsidiaries; or
(f) A contract or commitment to do any of the
foregoing.
5.23 OPERATING COSTS. As of the date of this Agreement and as
of the Closing Date, all costs and expenses incurred in connection with the
operation of the Properties have been fully paid and discharged by Borrower,
except (a) normal costs and expenses incurred in operating the Oil and Gas
Properties for which Borrower has not yet been billed, (b) costs and expenses
which are the subject of a bona fide dispute which is being contested in good
faith by Borrower by appropriate proceedings as to which a reserve is
established on the books of Borrower in an amount that is satisfactory to Agent
(and if a Lien secures or may secure such obligation, such Lien is subject to a
Permitted Protest), and (c) as disclosed on Schedule 5.23 attached hereto and
made a part hereof.
5.24 [INTENTIONALLY OMITTED.]
5.25 NO DEFAULT. Except for the Material Contracts set forth
on Schedule 5.1(c), no Material Contracts exist which pertain to the Oil and Gas
Properties of Borrower. The Material Contracts pertaining to the Oil and Gas
Properties are in full force and effect in accordance with their respective
terms. Additionally, Borrower is not aware of any event that with notice or
lapse of time, or both, would constitute a material violation or default under
any Material Contracts.
5.26 LEASES. The oil and gas leases associated with the Oil
and Gas Properties are in full force and effect in accordance with their
respective terms, and there exist no material violations or defaults in the
performance of any obligation thereunder. Additionally, Borrower is not aware of
any event that with notice or lapse of time, or both, would constitute a
material violation or default under any such oil and gas leases except as set
forth on Schedule 5.26 attached hereto and made a part hereof.
5.27 MARKETING AGREEMENTS. Except as set forth in Schedule
5.27, the Oil and Gas Properties (and the production therefrom) are not subject
to any purchase agreement, sale agreement or similar marketing arrangement not
cancelable by Borrower on forty-five (45) days notice from the first day of the
next succeeding month, nor are any of the Properties subject to any
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agreements with any companies affiliated with Borrower that cannot be terminated
immediately upon Closing without penalty, cost or liability to Borrower.
5.28 [INTENTIONALLY OMITTED.]
5.29 CONDITION OF EQUIPMENT. All of the wells, facilities and
equipment associated with the Oil and Gas Properties are: (a) structurally sound
with no material defects known to Borrower, (b) in good operating condition, and
(c) have been and are maintained in accordance with prudent business standards.
5.30 WELLS. Each oil or gas well located on the Oil and Gas
Properties is: (a) capable of producing in commercial quantities (except for up
to 5 primary take-point wells which otherwise would be producing Hydrocarbons in
commercial quantities that have been off production for routine maintenance,
testing or repairs, temporary pipeline interruption, minor reworking operations
or minor production enhancement operations and are reasonably expected to return
to producing in commercial quantities within a reasonable time and Borrower will
use its best efforts to return them to production in commercial quantities as
soon as reasonably possible), (b) properly permitted, (c) to the best of
Borrower's knowledge, in compliance with all applicable Laws, and (d) within the
production tolerances allocated by the governmental entity or tribal authority
having appropriate jurisdiction. All of the leaseholds in which there are
located Mineral Interests of Borrower are producing Hydrocarbons in commercial
quantities except for those leaseholds which are in their primary term and have
had all rentals, delay rentals and other lease payments due under the leases and
other agreements relating thereto paid in full. Each of Borrower's producing
wells listed on Schedule 5.1(b) is located on an Oil and Gas Property (i)
covered by title opinions and (ii) described in the legal description contained
in an Oil and Gas Property Mortgage which has been duly executed and delivered
to Agent.
5.31 NO VESSELS. None of the Inventory, Equipment or other
Property of Borrower or its Subsidiaries (including, but not limited to, any of
the Property described in Schedule 5.1(e)) constitutes a "vessel" as defined in
the Ship Mortgage Laws as codified in Chapter 313 of Title 46 of the United
States Code.
5.32 SUBORDINATED DEBT. The outstanding balance owing under
the Parent Note on the date of this Agreement is a total of $30,049,412.33 plus
Australian Dollars AUS$13,155,166.87, plus interest which has accrued thereon
since January 4, 2000. The outstanding balance owing under the Unsecured Notes
and the Unsecured Notes Indenture is a total of $104,750,000, plus interest
which has accrued thereon since December 15, 1999 at the rate of 9 1/2% per
year.
6. AFFIRMATIVE COVENANTS.
Borrower covenants and agrees that, so long as any credit
hereunder shall be available and until full and final payment of the
Obligations, each Borrower shall, and shall cause each of its Subsidiaries to,
do all of the following:
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6.1 ACCOUNTING SYSTEM. Maintain a standard and modern system
of accounting that enables Borrower to produce financial statements in
accordance with GAAP and maintain records pertaining to the Collateral that
contain information as from time to time may be requested by Agent. Borrower
also shall keep a modern joint interest billing and remittance system with
respect to each of the Oil and Gas Properties on which it is the operator and a
modern reporting system that shows, among other things, the value, revenues and
profits/losses of the Oil and Gas Properties, volume of production and value of
sales of Hydrocarbon production, the location and condition of the Equipment and
Borrower's positions and liability exposure under the Hedging Agreements.
6.2 COLLATERAL REPORTING. Provide Agent with the following
documents at the following times in form satisfactory to Agent during the term
of this Agreement:
(a) By no later than the tenth day following the last
day of each month, a detailed update, for the previous month, of the Borrowing
Base on the form of the Borrowing Base Certificate which is attached hereto as
Exhibit 6.2, (which update shall be subject to review at Borrower's expense by
Pollard, Gore & Harrison or such other petroleum engineering consultant to Agent
as may be selected by Agent in its sole discretion) or on such other form as
Agent in its sole discretion may require, including as of the end of the
previous month, (i) a detailed calculation of the NYMEX Value of each of the Oil
and Gas Properties (categorized by Proved Developed Producing Reserves, Proved
Developed Non-Producing Reserves and Proved Undeveloped Reserves, subcategories
of Eligible Proved Developed Producing Reserves, Eligible Proved Developed
Non-Producing Reserves and Eligible Proved Undeveloped Reserves, and "other"),
(ii) historical production data of the oil and gas reserves included in the Oil
and Gas Property Collateral since the date of the most recent Reserve Report,
(iii) the Oil and Gas Property Collateral prices received for production, lease
operating expenses and such other information as Agent may deem necessary or
appropriate, in Agent's sole discretion, (iv) any changes in the Oil and Gas
Property Collateral since the date of the most recent Reserve Report in
Borrower's (or such Subsidiaries', as the case may be) working interest or net
revenue interest, (v) any changes since the date of the most recent Reserve
Report in the categorization of any or all of the Oil and Gas Properties among
Proved Developed Producing Reserves, Proved Developed Non-Producing Reserves and
Proved Undeveloped Reserves, subcategories of Eligible Proved Developed
Producing Reserves, Eligible Proved Developed Non-Producing Reserves and
Eligible Proved Undeveloped Reserves, and "other", (vi) a reconciliation and
explanation of the changes of categorization of any Oil and Gas Properties among
Proved Developed Producing Reserves, Proved Developed Non-Producing Reserves and
Proved Undeveloped Reserves, subcategories of Eligible Proved Developed
Producing Reserves, Eligible Proved Developed Non-Producing Reserves and
Eligible Proved Undeveloped Reserves, and "other", since the date of the
immediately preceding Borrowing Base Certificate, (vii) any changes in the
Borrower's working interest or net revenue interest in the Oil and Gas Property
Collateral since the date of the previous month's Borrowing Base Certificate,
(viii) an updated schedule, in substantially the form of Schedule 5.2(h) or such
other form as may be requested by Agent, setting forth as to each Oil and Gas
Property owned by Borrower the name, location, lease description, bonus,
effective date (including whether or not the lease covering such Oil and Gas
Property is held by production), primary term expiration date, minimum rental,
rental due date, other lease payments and due dates
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thereof and exploration and production status thereof, and (ix) a detailed
calculation of the Unsecured Notes Indebtedness Limitation;
(b) By no later than the last day of each month, a
detailed statement of sales and revenues derived from all products produced from
the Oil and Gas Properties, for the previous month, including purchasers, prices
received, prior period adjustments to such revenues and prices, and any Material
Adverse Change affecting the sales or marketing agreements or arrangements with
the purchasers of such products;
(c) By no later than the last day of each month, a
written report to Agent, in form and substance reasonable acceptable to Agent,
detailing and aging Borrower's and each of its Subsidiaries' unpaid lease
operating expenses and unpaid other liabilities, for the previous month, with
respect to which a mineral lien, subcontractor's lien, mechanic's lien,
materialmen's lien or other Lien against any of the Collateral may arise which
may have a priority superior to Agent's Lien on such Collateral;
(d) By no later than the last day of each month,
notice of all claims, disputes, and litigation that have arisen since the date
of the most recent statement to Agent pursuant to this Section 6.2; except (i)
ongoing collection matters in which Borrower is the claimant or plaintiff; and
(ii) matters that, if decided adversely to Borrower, do not result in and
reasonably could not be expected to result in a Material Adverse Change;
(e) By no later than the last day of each month, a
written report to Agent, in form and substance acceptable to Agent, detailing
the costs incurred and revenues received by Borrower under its Hedging
Agreements for oil and gas production;
(f) By the last day of the month following each
calendar quarter (i.e., the last day of April, July, October and January), a
report, which report is to be reviewed by Pollard, Gore & Harrison or such other
independent petroleum engineer consultant as designated by Agent in its sole
discretion: (i) listing the total amount actually paid by Borrower during the
preceding quarter for: (A) plugging and abandonment costs for previous or
ongoing plugging and abandonment operations pertaining to the Oil and Gas
Properties, and (B) general bond and supplemental bond payments pertaining to
plugging and abandonment costs; and (ii) estimating the future payments for (A)
and (B), above, for each of the succeeding two quarters;
(g) Reserve Reports (I) prepared as of March 31, 2000
and thereafter on each June 30 and December 31 (with such Reserve Reports to be
delivered on or before the 60th day following each such date), by Ryder Scott
Company or other qualified independent petroleum engineering firm approved by
Agent, and (II) prepared as of the last day of December 1999 and thereafter as
of the last day of each month (with such Reserve Reports to be delivered on or
before the 10th day following each such date), by Pollard, Gore & Harrison or
such other petroleum engineering consultant to Agent as may be selected by Agent
(which Reserve Reports described in this subclause (II) shall be based upon the
most recently delivered Reserve Report described in subclause (I) above and such
other information as may be provided by Borrower, as adjusted by Pollard, Gore &
Harrison or such other petroleum engineering consultant, as the case may be, in
such manner and to such extent as such consultant deems appropriate in its
reasonable discretion).
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Each Reserve Report shall be in form and substance satisfactory to Agent, and
shall: (i) be accompanied by a certification of Borrower to the effect that
nothing has occurred since the date of the last Reserve Report that could
reasonably be expected to result in a Material Adverse Change, except that which
has previously been disclosed to Agent in writing; and (ii) contain such other
information as may be reasonably requested by Agent;
Each delivery of a Reserve Report or a Borrowing Base
Certificate by Borrower to Agent shall constitute a representation and warranty
by Borrower to Agent that, unless otherwise disclosed to Agent in writing on or
prior to the date of such delivery, Borrower (or its Subsidiary, as the case may
be) owns the Oil and Gas Properties described in the Reserve Report free and
clear of any Liens (except Permitted Liens);
(h) Upon request by Agent from time to time, copies
of Borrower's lease files, well files and contract files (including production
reports on each well, marketing contracts, and information regarding locations
of and equipment located on each well);
(i) By no later than the first Business Day of each
week, a ten week cash flow forecast for Borrower, accompanied by copies of any
authorities for expenditures reflected in such cash flow forecast, together with
a comparison for each week during the immediately preceding five week period of
Borrower's actual results to the cash flow forecasted by Borrower for such week
(which cash flow budgets, authorities for expenditures, actual results and
comparisons shall be subject to review at Borrower's expense for Agent by
Pollard, Gore & Harrison or such other petroleum engineering consultant to Agent
as may be selected by Agent);
(j) Such other information, reports, statements,
materials, and data as to the wells operated by Borrower or in which Borrower
otherwise has an interest and the accounting and billing procedures utilized by
Borrower in connection with such wells as shall be reasonably requested by
Agent, including, without limitation, relevant computer programs, disks and
tapes; and
(k) Such other reports as to the Collateral or the
business or financial condition of Borrower as Agent may reasonably request from
time to time.
6.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. Deliver to
Agent, with copies to each Lender: (a) as soon as available, but in any event
within 30 days after the end of each month during each of Borrower's fiscal
years, a company prepared balance sheet, income statement, and statement of cash
flow covering Borrower's operations during such period; and (b) as soon as
available, but in any event within 90 days after the end of each of Borrower's
fiscal years, financial statements of Borrower for each such fiscal year,
audited by independent certified public accountants reasonably acceptable to
Agent and certified, without any qualifications other than a qualification as to
Borrower's ability to continue as a going concern, by such accountants to have
been prepared in accordance with GAAP, together with a certificate of such
accountants addressed to Agent stating that such accountants do not have
knowledge of the existence of any Default or Event of Default. Such audited
financial statements shall include a balance sheet, profit and loss statement,
and statement of cash flow and, if prepared, such accountants' letter to
management. Borrower also agrees to deliver quarterly unaudited and annual
audited financial
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statements prepared on a consolidated basis for Parent, Borrower and Parent's
other Subsidiaries. Upon request, Borrower agrees to deliver to Agent the detail
of all amounts paid to Parent or any of Borrower's other Affiliates from time to
time.
Together with the above, Borrower also shall deliver to Agent,
with copies to each Lender, Borrower's Form 10-Q Quarterly Reports, Form 10-K
Annual Reports, and Form 8-K Current Reports, and any other filings made by
Borrower with the SEC, if any, as soon as the same are filed, or any other
information that is provided by Borrower to its shareholders, and any other
information reasonably requested by the Lender Group relating to the financial
condition of Borrower.
Each month, together with the financial statements provided
pursuant to Section 6.3(a), Borrower shall deliver to Agent, with copies to each
Lender, a certificate signed by its chief financial officer to the effect that:
(i) all financial statements delivered or caused to be delivered to any one or
more members of the Lender Group hereunder have been prepared in accordance with
GAAP (except, in the case of unaudited financial statements, for the lack of
footnotes and being subject to year-end audit adjustments) and fairly present
the financial condition of Borrower, (ii) the representations and warranties of
Borrower contained in this Agreement and the other Loan Documents are true and
correct in all material respects on and as of the date of such certificate, as
though made on and as of such date (except to the extent that such
representations and warranties relate solely to an earlier date), (iii) for each
month that also is the date on which a financial covenant in Section 7.20 is to
be tested, a Compliance Certificate demonstrating in reasonable detail
compliance at the end of such period with the applicable financial covenants
contained in Section 7.20, and (iv) on the date of delivery of such certificate
to Agent there does not exist any condition or event that constitutes a Default
or Event of Default (or, in the case of clauses (i), (ii), or (iii), to the
extent of any non-compliance, describing such non-compliance as to which he or
she may have knowledge and what action Borrower has taken, is taking, or
proposes to take with respect thereto).
As soon as available and in any event within forty-five (45)
days after the last day of each calendar quarter, a report, in form and
substance reasonably satisfactory to the Agent, setting forth as of the last
Business Day of such calendar quarter, a true and complete list of all Hedging
Agreements (including commodity price swap agreements, forward agreements or
contracts of sale which provide for prepayment for deferred shipment or delivery
of oil, gas or other commodities) of the Borrower and each Subsidiary, the
material terms thereof (including the type, term, effective date, termination
date and notional amounts or volumes), the net mark to market values therefor,
any new credit support agreements relating thereto, any margin required or
supplied under any credit support document, and the counterparty to each such
agreement.
Borrower shall have issued written instructions to its
independent certified public accountants authorizing them to communicate with
Agent and to release to Agent whatever financial information concerning Borrower
that Agent may request. Borrower hereby irrevocably authorizes and directs all
auditors, accountants, or other third parties to deliver to Agent, at Borrower's
expense, copies of Borrower's financial statements, papers related thereto, and
other accounting records of any nature in their possession, and to disclose to
Agent any information they may have regarding Borrower's business affairs and
financial conditions.
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6.4 TAX RETURNS. Deliver to Agent copies of each of Borrower's
future federal income tax returns, and any amendments thereto, within 30 days of
the filing thereof with the Internal Revenue Service.
6.5 GUARANTOR REPORTS. Cause any Guarantor of any of the
Obligations to deliver its annual financial statements at the time when Borrower
provides its audited financial statements to Agent and copies of all federal
income tax returns as soon as the same are available and in any event no later
than 30 days after the same are required to be filed by law.
6.6 [INTENTIONALLY OMITTED].
6.7 TITLE TO EQUIPMENT. Upon Agent's request, Borrower
promptly shall deliver to Agent, properly endorsed, any and all evidences of
ownership of, certificates of title, or applications for title to any items of
Equipment.
6.8 MAINTENANCE OF OIL AND GAS PROPERTY COLLATERAL AND
EQUIPMENT; OPERATION OF BUSINESS.
(a) At its expense, do or cause to be done all things
necessary to preserve and keep in good repair, working order and efficiency
(except for normal wear and tear) all of its Oil and Gas Property Collateral and
other material Properties relating to Borrower's business including, without
limitation, all equipment, machinery and facilities used in the operation of the
Borrower's business, and from time to time make all the necessary repairs,
renewals and replacements so that at all times the state and condition of its
Oil and Gas Property Collateral and other such material Property will be fully
preserved and maintained, allowing for depletion in the ordinary course of
business, except to the extent a portion of such Oil and Gas Property Collateral
is no longer capable of producing Hydrocarbons in commercial quantities (in
which case Borrower shall fully comply with all of its obligations and Legal
Requirements pertaining to plugging and abandoning its wells related to such
portion). Borrower shall, and shall cause each of its Subsidiaries to, 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 its Oil
and Gas Property Collateral; (ii) perform or make reasonable and customary
efforts to cause to be performed, in accordance with industry standards, all
obligations required by each and all of the assignments, deeds, leases,
sub-leases, contracts and agreements affecting its interests in its Oil and Gas
Property Collateral and other material Properties necessary or desirable to
maintain its interests therein in full force and effect, and all other material
obligations required under such assignments, deeds, leases, subleases, contracts
and agreements; (iii) shall, and shall cause each of its Subsidiaries to, do all
other things necessary to keep unimpaired, except for Permitted Liens, 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
Property Collateral and other material Property and prevent any forfeiture
thereof or a default thereunder, except (A) to the extent a portion of such Oil
and Gas Property Collateral is no longer capable of producing Hydrocarbons in
economically reasonable amounts and (B) for dispositions permitted by Section
7.4 hereof. Borrower shall, and shall cause each of its Subsidiaries, to operate
its Oil and Gas Property
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Collateral and other material Property or cause or make reasonable and customary
efforts to cause such Oil and Gas Property Collateral and other material
Properties to be operated in a reasonably prudent 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 Legal Requirements.
(b) At its expense, maintain the Equipment in good
operating condition and repair (ordinary wear and tear excepted), and make all
necessary replacements thereto, so that the value and operating efficiency
thereof shall at all times be maintained and preserved. Other than those items
of Equipment that constitute fixtures attached to the lands covered by Mineral
Interests subject to the Oil and Gas Mortgages, Borrower shall not permit any
item of Equipment to become a fixture to real estate or an accession to other
property, and such Equipment shall at all times remain personal property.
(c) At its expense, (i) explore, develop and maintain
the leases, wells, units and acreage to which the Oil and Gas Property
Collateral pertains in a prudent and economical manner, (ii) act prudently and
in accordance with customary industry standards in managing or operating the Oil
and Gas Property Collateral, (iii) subject to Permitted Protests, pay and
promptly discharge all rentals, delay rentals, royalties, overriding royalties,
payments of production and other indebtedness or obligations accruing under the
leases comprising the Oil and Gas Property Collateral, and perform every act
required to keep such leases in full force and effect, (iv) deliver to Agent all
operating agreements, pooling or unitization agreements, sales or processing
contracts, drilling and/or development agreements, pipeline transportation
agreements and other material agreements which pertain to the Oil and Gas
Property Collateral, (v) deliver to Agent production information on a monthly
basis, (vi) deliver to Agent contemporaneous notices of all reports, forms and
other documents and data submitted by Borrower or any of its Subsidiaries to the
Federal Energy Regulatory Commission, the applicable state conservation agencies
and any other applicable Governmental Authorities pertaining to any event,
occurrence or circumstance which could reasonably be expected to result in fines
or penalties in excess of $50,000 in the aggregate, or in an injunction,
restraining order or similar action restricting or prohibiting production at any
Oil and Gas Property, or in a material loss or decline in production from any
Oil and Gas Property, or is adverse to any of the Lender Group, or has the
potential to impair or otherwise adversely affect any of the Liens held by Agent
for the benefit of the Lender Group or could reasonably be expected to result in
a Material Adverse Change (and, upon request by Agent, Borrower shall deliver to
Agent copies of all such reports, forms and other documents and data as are
requested by Agent), (vii) not mortgage, pledge or otherwise encumber or sell
the Oil and Gas Property Collateral except to the limited extent specifically
permitted under this Agreement, (viii) not alter any Material Contract relating
to the Oil and Gas Property Collateral except to the limited extent specifically
permitted under this Agreement, (ix) subject to Permitted Protests, pay on or
before the due date thereof all of Borrower's and each of its Subsidiaries'
lease operating expenses and other liabilities with respect to which a mineral
lien, subcontractor's lien, mechanic's lien, materialmen's lien or other Lien
against any of the Collateral may arise which may have a priority superior to
Agent's Lien on such Collateral, and (x) perform all acts and execute such
documents as Agent may require in order to maintain the existence, perfection
and first priority of Agent's Lien on the Oil and Gas Property Collateral and
the other Collateral subject to Permitted Liens.
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6.9 TAXES.
(a) Cause all assessments and taxes, whether real,
personal, or otherwise, due or payable by, or imposed, levied, or assessed
against Borrower or any of its property or assets to be paid in full, before
delinquency or before the expiration of any extension period, except to the
extent that the validity of such assessment or tax (other than production taxes,
severance taxes, payroll taxes or taxes that are the subject of a United States
federal tax lien) shall be the subject of a Permitted Protest.
(b) Make due and timely payment or deposit of all
such federal, state, and local taxes, assessments, or contributions required of
it by law, and will execute and deliver to Agent, on demand, appropriate
certificates attesting to the payment thereof or deposit with respect thereto.
(c) Make timely payment or deposit of all tax
payments and withholding taxes required of it by applicable laws, including
those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state,
and federal income taxes, and will, upon request, furnish Agent with proof
satisfactory to Agent indicating that Borrower has made such payments or
deposits.
6.10 INSURANCE.
(a) At its expense, keep the Collateral insured
against loss or damage by fire, theft, explosion, sprinklers, and all other
hazards and risks, and in such amounts as are ordinarily insured against by
other owners in similar businesses. Borrower shall also maintain business
interruption, public liability and property damage insurance relating to
Borrower's ownership and use of Collateral. In addition to and not in limitation
of the foregoing, Borrower shall at its expense maintain the insurance policies
described in Schedule 5.16 in full force and effect.
(b) At its expense, obtain and maintain (i) insurance
of the type necessary to insure the Improvements and Chattels (as such terms are
respectively defined in the Oil and Gas Mortgages and in the Real Property
Mortgages), for the full replacement cost thereof against any loss by fire,
lightning, windstorm, hail, explosion, aircraft, smoke damage, vehicle damage,
earthquakes, elevator collision, property damage by blowout and cratering,
completed operations and broad form contractual liability as respects any
contract in which Borrower or any of its Subsidiaries may enter into under the
terms of a joint operating agreement, and other risks from time to time included
under "extended coverage" policies in such amounts and against such risks as
Agent may require, but in any event in amounts sufficient to prevent Borrower
from becoming a co-insurer under such policies; (ii) combined single limit
bodily injury and property damage insurance against any loss, liability or
damages on, about, or relating to each parcel of Oil and Gas Property Collateral
and Real Property Collateral, in an amount of not less than $50,000,000; (iii)
operator's extra expense insurance covering the costs of controlling a blowout,
the expenses involved in re-drilling or restoring the wells, certain other
related costs and seepage and pollution liability (the limits of this insurance
may vary according to the depth and location of
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the well, all as is usual and customary in the energy business); and (iv)
insurance for such other risks as Agent may require. Replacement costs, at
Agent's option, may from time to time be redetermined by an insurance appraiser,
satisfactory to Agent.
(c) All such policies of insurance shall be in such
form, with such companies, and in such amounts as may be satisfactory to Agent.
All insurance required herein shall be written by companies which have a Best's
rating of A for capital and X for financial stability. All hazard insurance and
such other insurance as Agent shall specify, shall contain a mortgagee
endorsement satisfactory to Agent, showing Agent as sole loss payee thereof, and
shall contain a waiver of warranties. Every policy of insurance referred to in
this Section 6.10 shall contain an agreement by the insurer that it will not
cancel such policy except after 30 days prior written notice to Agent and that
any loss payable thereunder shall be payable notwithstanding any act or
negligence of Borrower or the Lender Group which might, absent such agreement,
result in a forfeiture of all or a part of such insurance payment and
notwithstanding (i) occupancy or use of the Collateral for purposes more
hazardous than permitted by the terms of such policy, (ii) any foreclosure or
other action or proceeding taken by the Lender Group pursuant to the Oil and Gas
Mortgages or the Real Property Mortgages upon the happening of an Event of
Default, or (iii) any change in title or ownership of the Collateral. Borrower
shall deliver to Agent certified copies of such policies of insurance and
evidence of the payment of all premiums therefor.
(d) Original policies or certificates thereof
satisfactory to Agent evidencing such insurance shall be delivered to Agent at
least 30 days prior to the expiration of the existing or preceding policies.
Borrower shall give Agent prompt notice of any loss covered by such insurance,
and Borrower shall have the right to adjust losses of up to $5,000,000 in the
aggregate as long as no Event of Default has occurred. Agent shall have the
exclusive right upon the occurrence and during the continuance of any Event of
Default to adjust all losses payable under any such insurance policies and in
any event shall have the right to adjust all losses of greater than $5,000,000
in the aggregate regardless of the occurrence or existence of an Event of
Default, in each case without any liability to Borrower whatsoever in respect of
such adjustments. Any monies received as payment for any loss under any
insurance policy including the insurance policies mentioned above, shall be paid
over to Agent to be applied at the option of the Required Lenders either to the
prepayment of the Obligations without premium, in such order or manner as Agent
may elect, or shall be disbursed to Borrower under stage payment terms
satisfactory to Agent for application to the cost of repairs, replacements, or
restorations. All repairs, replacements, or restorations shall be effected with
reasonable promptness and shall be of a value at least equal to the value of the
items or property destroyed prior to such damage or destruction. Upon the
occurrence of an Event of Default, the Lender Group shall have the right to
apply all prepaid premiums to the payment of the Obligations in such order or
form as Agent shall determine.
(e) Borrower shall not take out separate insurance
concurrent in form or contributing in the event of loss with that required to be
maintained under this Section 6.10, unless Agent is included thereon as named
insured with the loss payable to Agent under a standard mortgagee endorsement
acceptable to Agent. Borrower immediately shall notify Agent whenever such
separate insurance is taken out, specifying the insurer thereunder and full
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particulars as to the policies evidencing the same, and originals of such
policies immediately shall be provided to Agent.
(f) Unless Borrower is responsible for, and is
maintaining its own insurance pursuant to the terms of the applicable operating
agreement, Borrower shall, and shall cause each of its Subsidiaries to, use its
best efforts to cause the operator of each Oil and Gas Property Collateral in
which Borrower or any of its Subsidiaries owns a non-operating working interest
to maintain for the benefit of all working interest owners insurance of the
types and in the coverage amounts and with reasonable deductibles as is usual
and customary, including those specified in Section 6.10(b), to name the
non-operating working interest owners, including Borrower and its Subsidiaries,
as an additional insured on the liabilities, and to otherwise have the such
insurance comply with the requirements specified in Section 6.10(c). Borrower
shall, and shall cause each of its Subsidiaries to, use its best efforts to
obtain from its operators certificates of insurance evidencing coverage of the
Oil and Gas Property Collateral as set forth above as and when requested by
Agent.
6.11 NO SETOFFS OR COUNTERCLAIMS. Make payments hereunder and
under the other Loan Documents by or on behalf of Borrower without setoff or
counterclaim and free and clear of, and without deduction or withholding for or
on account of, any federal, state, or local taxes.
6.12 LOCATION OF INVENTORY AND EQUIPMENT. Except to dispose of
Collateral to the extent permitted under Section 7.4, keep the Inventory and
Equipment only at the locations identified in Schedule 6.12, in the Oil and Gas
Property Mortgages and in other locations in Texas or Louisiana (or in the
Federal Outer Continental Shelf adjacent to such state); provided, however, that
Borrower may amend Schedule 6.12 so long as such amendment occurs by written
notice to Agent not less than 30 days prior to the date on which the Inventory
or Equipment is moved to such new location, so long as such new location is
within the continental United States, and so long as, at the time of such
written notification, Borrower provides any financing statements or fixture
filings necessary or advisable to perfect and continue perfected the Agent's
Liens on such assets and also provides to Agent a Collateral Access Agreement to
the extent requested by Agent.
6.13 COMPLIANCE WITH LAWS.
(a) Comply with the requirements of all applicable
laws, rules, regulations, and orders of any Governmental Authority, including
all Environmental Laws, the Fair Labor Standards Act and the Americans With
Disabilities Act, other than laws, rules, regulations, and orders the
non-compliance with which, individually or in the aggregate, would not result in
and reasonably could not be expected to result in a Material Adverse Change.
(b) Establish and implement such procedures as may be
reasonably necessary to continuously determine and assure that any failure of
the following would not result in and reasonably could not be expected to result
in a Material Adverse Change: (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 Materials or
solid wastes are disposed of or otherwise
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released on or to any Property owned by any such party except in compliance with
Environmental Laws, (iii) no Hazardous Materials 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 of CERCLA, and (iv) no oil, oil and gas
exploration and production wastes, or Hazardous Materials 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.
(c) Promptly notify Agent in writing of any
threatened action, investigation or inquiry by any Governmental Authority of
which Borrower or any of its Subsidiaries has knowledge in connection with any
Environmental Laws, excluding routine testing and minor corrective action.
(d) Provide environmental audits and tests in
accordance with American Society for Testing and Materials standards, as
requested by Agent (such request to be based upon Agent's good faith belief that
a release of Hazardous Materials has occurred or other violation of any
Environmental Laws has occurred that could reasonably be expected to result in
fines or penalties in excess of $50,000 in the aggregate, or in an injunction,
restraining order or similar action restricting or prohibiting production at any
Oil and Gas Property, or in a material loss of or decline in production from any
Oil and Gas Properties, or in a Material Adverse Change) or as otherwise
required to be obtained by Agent or by any Governmental Authority in connection
with Borrower's existing and hereafter acquired Oil and Gas Properties or other
material Properties.
6.14 EMPLOYEE BENEFITS.
(a) Cause to be delivered to Agent: (i) promptly, and
in any event within 10 Business Days after Borrower or any of its Subsidiaries
knows or has reason to know that an ERISA Event has occurred that has resulted
in or reasonably could be expected to result in a Material Adverse Change, a
written statement of the chief financial officer of Borrower describing such
ERISA Event and any action that is being taking with respect thereto by
Borrower, any such Subsidiary or ERISA Affiliate, and any action taken or
threatened by the IRS, Department of Labor, or PBGC. Borrower or such
Subsidiary, as applicable, shall be deemed to know all facts known by the
administrator of any Benefit Plan of which it is the plan sponsor, (ii)
promptly, and in any event within 3 Business Days after the filing thereof with
the IRS, a copy of each funding waiver request filed with respect to any Benefit
Plan and all communications received by Borrower, any of its Subsidiaries or, to
the knowledge of Borrower, any ERISA Affiliate with respect to such request, and
(iii) promptly, and in any event within 3 Business Days after receipt by
Borrower, any of its Subsidiaries or, to the knowledge of Borrower, any ERISA
Affiliate, of the PBGC's intention to terminate a Benefit Plan or to have a
trustee appointed to administer a Benefit Plan, copies of each such notice.
(b) Cause to be delivered to Agent, upon Agent's
request, each of the following: (i) a copy of each Plan (or, where any such plan
is not in writing, complete description thereof) (and if applicable, related
trust agreements or other funding instruments) and all amendments thereto, all
written interpretations thereof and written descriptions thereof that have been
distributed to employees or former employees of Borrower or its Subsidiaries;
(ii) the most
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recent determination letter issued by the IRS with respect to each Benefit Plan;
(iii) for the three most recent plan years, annual reports on Form 5500 Series
required to be filed with any governmental agency for each Benefit Plan; (iv)
all actuarial reports prepared for the last three plan years for each Benefit
Plan; (v) a listing of all Multiemployer Plans, with the aggregate amount of the
most recent annual contributions required to be made by Borrower or any ERISA
Affiliate to each such plan and copies of the collective bargaining agreements
requiring such contributions; (vi) any information that has been provided to
Borrower or any ERISA Affiliate regarding withdrawal liability under any
Multiemployer Plan; and (vii) the aggregate amount of the most recent annual
payments made to former employees of Borrower or its Subsidiaries under any
Retiree Health Plan.
6.15 LEASES. Pay when due all rents and other amounts payable
under any leases to which Borrower is a party or by which Borrower's properties
and assets are bound, unless such payments are the subject of a Permitted
Protest. To the extent that Borrower fails timely to make payment of such rents
and other amounts payable when due under its leases, Agent shall be entitled, in
its discretion, to reserve an amount equal to such unpaid amounts against the
Borrowing Base.
6.16 BROKER COMMISSIONS. Pay any and all brokerage commission
or finders fees incurred or payable in connection with or as a result of
Borrower's obtaining financing from the Lender Group under this Agreement.
6.17. OIL AND GAS PROPERTY TITLE INFORMATION.
(a) On or before the delivery to Agent of each
Reserve Report required by Section 2.1(b) or Section 6.2, Borrower will provide
Agent with current Title Opinions covering such of the Oil and Gas Property
Collateral acquired after the Closing Date as shall be required by Agent for
which Title Opinions have not previously been provided to Agent and such other
Oil and Gas Property Collateral as Agent may from time to time require so that
at all times the value of the Eligible Proved Reserves for which Title Opinions
are or have been provided to Agent shall equal or exceed ninety-five percent
(95%) of the NYMEX Value of all of the Oil and Gas Property Collateral (on an
MMCF equivalent basis based upon the industry standard 6:1 conversion ratio) as
set forth in the most recently delivered Reserve Report of Proved Reserves.
(b) Borrower shall cure all title defects or
exceptions which are not Permitted Liens, or substitute acceptable Oil and Gas
Property Collateral with no title defects or exceptions except for Permitted
Liens covering Oil and Gas Property Collateral of an equivalent value, within 30
days after a request by Agent to cure such defects or exceptions. If the
Borrower is unable to cure any title defect requested by Agent to be cured
within the 30 day period, such failure to cure shall not be a Default or an
Event of Default, but instead such Property shall remain excluded from the
Borrowing Base as provided in Section 2.1 until such time as title is
satisfactory to Agent. Upon the discovery of any title defect or exception which
is not a Permitted Lien, Agent shall have the right to exercise the right to
remedy such title defect or exception in its 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 Agent).
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6.18 ADDITIONAL COLLATERAL.
(a) (i) Should Borrower or any of its Subsidiaries
purchase, otherwise acquire or own any Oil and Gas Property that is not already
included in the Oil and Gas Property Collateral and the subject of an Oil and
Gas Property Mortgage in favor of Agent for the benefit of the Lender Group,
Borrower will grant or cause to be granted to Agent as security for the
Obligations a first-priority Lien (subject only to Permitted Liens) on all of
Borrower's or such Subsidiary's, as the case may be, interest in such Oil and
Gas Properties not already subject to a Lien of such an Oil and Gas Property
Mortgage simultaneously with Borrower's or such Subsidiary's purchase,
acquisition or ownership of such Oil and Gas Property which Lien will be created
and perfected by and in accordance with the provisions of an Oil and Gas
Property Mortgage and other security agreements and financing statements, or
other security instruments, all in form and substance satisfactory to Agent in
its sole discretion and in sufficient executed (and acknowledged where necessary
or appropriate) counterparts for recording purposes; and (ii) should Borrower or
any of its Subsidiaries purchase, otherwise acquire or own any Real Property
that is not already included in the Real Property Collateral and the subject of
a Real Property Mortgage in favor of Agent for the benefit of the Lender Group,
Borrower will grant or cause to be granted to Agent as security for the
Obligations a first-priority Lien (subject only to Permitted Liens) on all of
Borrower's or such Subsidiary's, as the case may be, interest in such Real
Property not already subject to a Lien of such a Real Property Mortgage
simultaneously with Borrower's or such Subsidiary's purchase, acquisition or
ownership of such Real Property which Lien will be created and perfected by and
in accordance with the provisions of a Real Property Mortgage and other security
agreements and financing statements, or other security instruments, all in form
and substance satisfactory to 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 6.18(a) above as to Oil and Gas Property,
Borrower will provide to Agent title information and a title opinion in form and
substance satisfactory to Agent in its sole discretion with respect to
Borrower's or such Subsidiary's, as the case may be, interests in such Oil and
Gas Properties, and concurrently with the granting of the Lien or other action
referred to in Section 6.18(a) above as to Real Property, Borrower will provide
to Agent title information and a mortgagee title insurance commitment in form
and substance satisfactory to Agent in its sole discretion with respect to
Borrower's or such Subsidiary's, as the case may be, interests in such Real
Property.
(c) Borrower shall cause all of its present and
future Subsidiaries that are 50% or more owned directly or indirectly by
Borrower to execute a Guaranty Agreement and Security Agreements.
6.19 HEDGING AGREEMENTS. Borrower shall maintain in effect one
or more Hedging Agreements with respect to its Hydrocarbon production with one
or more investment grade counterparties, rated Aa1 or better by Moody's, A- or
better according to Standard & Poor's, or the equivalent by a rating agency
acceptable to Agent, the aggregate notional volumes of Hydrocarbons the subject
of such Hedging Agreements for the period ending not less than 12 months from
the date of determination of any compliance with this Section 6.19 shall
constitute,
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at all times, not less than 25% and not more than 75% of Borrower's forecasted
Hydrocarbon production (on an MMCF equivalent basis based upon the industry
standard 6:1 conversion ratio) for such period from Oil and Gas Properties
classified as Proved Developed Producing Reserves as of the date of the most
recent Reserve Report. Borrower shall use such Hedging Agreements solely as a
part of its normal business operations as a risk management strategy and/or
hedge against changes resulting from market conditions related to Borrower's and
its Subsidiaries' oil and gas operations and not as a means to speculate for
investment purposes on trends and shifts in financial or commodities markets.
Borrower shall notify Agent immediately upon becoming aware (in any event not
later than the close of business on the same Business Day) that its production
of Hydrocarbons could reasonably be expected to be insufficient to meet its
obligations under any Hedging Agreements.
6.20 FURTHER ASSURANCES. Cure promptly any defects in the
creation or issuance of the Obligations or the execution or delivery of the
Obligations and/or Loan Documents, including this Agreement. Borrower at its
expense shall, and shall cause each or its Subsidiaries to promptly execute and
deliver to Agent upon request all such other documents, agreements and
instruments to comply with or accomplish the covenants and agreements of
Borrower or any of its Subsidiaries in the Loan Documents, including this
Agreement, or to further evidence and more fully describe the collateral
intended as security for the Obligations, or to correct any omissions in the
Loan Documents, or to state more fully the security obligations set out herein
or in any of the Loan Documents, or to perfect, protect or preserve any Liens
created pursuant to any of the Loan Documents, or to make any recordings, to
file any notices or obtain any consents, all as may be reasonably necessary or
appropriate in connection therewith.
7. NEGATIVE COVENANTS.
Borrower covenants and agrees that, so long as any credit
hereunder shall be available and until full and final payment of the
Obligations, Borrower will not, and will not permit any of its Subsidiaries to,
do any of the following without the Required Lenders' prior written consent:
7.1 INDEBTEDNESS. Create, incur, assume, permit, guarantee, or
otherwise become or remain, directly or indirectly, liable with respect to any
Indebtedness, except:
(a) Indebtedness evidenced by this Agreement,
together with Indebtedness to issuers of letters of credit that are the subject
of L/C Guarantees;
(b) Indebtedness set forth on Schedule 7.1;
(c) Indebtedness secured by Permitted Liens;
(d) Indebtedness evidenced by the Unsecured Notes
which is subordinated in right of payment and otherwise to the Obligations in a
manner satisfactory to Agent;
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(e) Indebtedness evidenced by the Parent Note which
is subordinated in right of payment and otherwise to the Obligations pursuant to
a written Subordination Agreement;
(f) 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
the subject of a bona fide dispute which is being contested in good faith by
Borrower by appropriate proceedings as to which a reserve is established on the
books of Borrower in an amount that is satisfactory to Agent (and if a Lien
secures the same or may secure the same, such Lien is subject to a Permitted
Protest);
(g) Indebtedness associated with bonds or surety
obligations required by Legal Requirements in connection with the operation of
Borrower's and its Subsidiaries' Oil and Gas Properties;
(h) Indebtedness under Hedging Agreements covering
oil or gas with Arranging Institutions, Agent or any Lender as a counterparty or
with such other investment grade counterparties, rated Aa1 or better by Moody's,
A- or better according to Standard & Poor's, or the equivalent by a rating
agency acceptable to Agent, entered into as a part of its normal business
operations as a risk management strategy and/or hedge against changes resulting
from market conditions related to Borrower's and its Subsidiaries' oil and gas
operations (but not as a means to speculate for investment purposes on trends
and shifts in financial or commodities markets) but only to the extent that the
total volumes hedged for any 12 month period are neither less than 25% nor
greater than 75% of Borrower's forecasted Hydrocarbon production for such period
from Oil and Gas Properties classified as Proved Developed Producing Reserves as
indicated in the most recent Reserve Report; and
(i) refinancings, renewals, or extensions of
Indebtedness permitted under clauses (b) and (c) of this Section 7.1 (and
continuance or renewal of any Permitted Liens associated therewith) and under
clauses (d) and (e) of this Section 7.1, in each such case so long as: (i) the
terms and conditions of such refinancings, renewals, or extensions do not
materially impair the prospects of repayment of the Obligations by Borrower,
(ii) the net cash proceeds of such refinancings, renewals, or extensions do not
result in an increase in the aggregate principal amount of the Indebtedness so
refinanced, renewed, or extended, (iii) such refinancings, renewals, refundings,
or extensions do not result in a shortening of the average weighted maturity of
the Indebtedness so refinanced, renewed, or extended, and (iv) to the extent
that Indebtedness that is refinanced was subordinated in right of payment to the
Obligations, then the subordination terms and conditions of the refinancing
Indebtedness must be at least as favorable to the Lender Group as those
applicable to the refinanced Indebtedness.
7.2 LIENS. Create, incur, assume, or permit to exist, directly
or indirectly, any Lien on or with respect to any of its property or assets, of
any kind, whether now owned or hereafter acquired, or any income or profits
therefrom, except for Permitted Liens (including Liens that are replacements of
Permitted Liens to the extent that the original Indebtedness is refinanced under
Section 7.1(h) and so long as the replacement Liens only encumber those assets
or property that secured the original Indebtedness).
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7.3 RESTRICTIONS ON FUNDAMENTAL CHANGES.
(a) Enter into any merger, consolidation,
reorganization, or recapitalization, or reclassify its capital Stock.
(b) Liquidate, wind up, or dissolve itself (or suffer
any liquidation or dissolution).
(c) Convey, sell, assign, lease, transfer, or
otherwise dispose of, in one transaction or a series of transactions, all or any
substantial part of its property or assets.
7.4 DISPOSAL OF ASSETS. Sell, lease, assign, farm-out, convey,
transfer, or otherwise dispose of by any means (including creation of overriding
royalty interests and net profits interests) any of Borrower's or any of its
Subsidiaries' Properties or assets other than (a) sales of Inventory to buyers
in the ordinary course of Borrower's business as currently conducted, (b) as
long as no Default or Event of Default has occurred and could not reasonably be
expected to result therefrom, the sale or transfer of Equipment and Inventory
having a fair saleable value of not more than $40,000 in any single sale or
transfer or series of related sales or transfers or $500,000 in the aggregate
for Borrower and its Subsidiaries during the term of this Agreement that is no
longer necessary for the business of Borrower or such Subsidiary or is replaced
by Equipment of at least comparable value and use, (c) as long as no Default or
Event of Default has occurred and could not reasonably be expected to result
therefrom, the sale of Borrower's platform and jacket described in Schedule
5.1(e) for a cash sale price therefor of not less than $1,500,000 and (d) the
specific dispositions described in Schedule 7.4 attached hereto and made a part
hereof (within a reasonable time following written request by Borrower in
connection with Borrower's sale, transfer or other disposition of Property under
the circumstances in which Borrower at such time is permitted to do so under the
terms of subclauses (b), (c) and (d) of this Section 7.4 (a "Permitted
Disposition"), Agent will execute and deliver for filing, at Borrower's sole
cost and expense, such releases of Lien covering only such Property which is the
subject of the Permitted Disposition in form and substance reasonably acceptable
to Agent (but not covering any other Property).
7.5 CHANGE NAME. Change any Borrower's or any of its
Subsidiaries' name, FEIN, corporate structure (within the meaning of Section
9402(7) of the Code), or identity, or add any new fictitious name.
7.6 GUARANTEE. Guarantee or otherwise become in any way liable
with respect to the obligations of any third Person except by endorsement of
instruments or items of payment for deposit to the account of Borrower or which
are transmitted or turned over to Agent.
7.7 NATURE OF BUSINESS. Make any change in the principal
nature of Borrower's or any of its Subsidiaries' business as an independent oil
and gas exploration and production company.
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7.8 PREPAYMENTS AND AMENDMENTS.
(a) Except in connection with a refinancing permitted
by Section 7.1(d), prepay, redeem, retire, defease, purchase, or otherwise
acquire any Indebtedness owing to any Person (including, but not limited to, the
Parent Notes and the Unsecured Notes), prior to the original scheduled maturity
date thereof, other than the Obligations in accordance with this Agreement; and
(b) Directly or indirectly, amend, modify, alter,
increase, or change any of the terms or conditions of any agreement, instrument,
document, indenture (including, but not limited to, the Parent Notes, the
Unsecured Notes and the Unsecured Notes Indenture), or other writing evidencing
or concerning Indebtedness permitted under Sections 7.1(b), (c), or (d).
7.9 CHANGE OF CONTROL. Cause, permit, or suffer, directly or
indirectly, any Change of Control.
7.10 CONSIGNMENTS. Consign any Inventory or sell any Inventory
on bill and hold, sale or return, sale on approval, or other conditional terms
of sale.
7.11 DISTRIBUTIONS; REPURCHASES OF CAPITAL STOCK; PAYMENTS TO
PEL OR PETSEC USA. Make (i) any distribution or declare or pay any dividends (in
cash or other property, other than capital Stock) on, or purchase, acquire,
redeem, or retire any of Borrower's capital Stock, of any class, whether now or
hereafter outstanding; or (ii) any distribution, loan, advance or any payment of
money to PEL and/or any Affiliate of PEL, including, without limitation, Petsec
USA other than distributions to Petsec USA or PEL in an aggregate amount of
$500,000 annually to reimburse Petsec USA and PEL for Borrower's budgeted
operating expenses incurred by them on behalf of Borrower.
7.12 ACCOUNTING METHODS. Modify or change its method of
accounting or enter into, modify, or terminate any agreement currently existing,
or at any time hereafter entered into with any third party accounting firm or
service bureau for the preparation or storage of Borrower's accounting records
without said accounting firm or service bureau agreeing to provide Agent
information regarding the Collateral or Borrower's financial condition. Borrower
waives the right to assert a confidential relationship, if any, it may have with
any accounting firm or service bureau in connection with any information
requested by Agent pursuant to or in accordance with this Agreement, and agrees
that Agent may contact directly any such accounting firm or service bureau in
order to obtain such information.
7.13 INVESTMENTS. Directly or indirectly make, acquire, or
incur any liabilities (including contingent obligations) for or in connection
with (a) the acquisition of the securities (whether debt or equity) of, or other
interests in, a Person, (b) loans, advances, capital contributions, or transfers
of property to a Person, or (c) the acquisition of all or substantially all of
the properties or assets of a Person.
7.14 TRANSACTIONS WITH AFFILIATES. Directly or indirectly
enter into or permit to exist any material transaction with any Affiliate of
Borrower except for transactions that are in the
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ordinary course of Borrower's business, upon fair and reasonable terms, that are
fully disclosed to Agent, and that are no less favorable to Borrower than would
be obtained in an arm's length transaction with a non-Affiliate.
7.15 SUSPENSION. Suspend or go out of a substantial portion of
its business.
7.16 [INTENTIONALLY OMITTED.]
7.17 USE OF PROCEEDS. Use the proceeds of the Advances made
hereunder for any purpose other than (a) on the Closing Date, (i) to refinance
in full the outstanding principal, accrued interest, and accrued fees and
expenses owing to Prior Lenders, and (ii) to pay transactional fees, costs, and
expenses incurred in connection with this Agreement, and (b) thereafter,
consistent with the terms and conditions hereof, for its lawful and permitted
corporate purposes; provided, however, at all times during the term of this
Agreement, proceeds of the Advances that are used for development expenditures
shall be limited to expenditures for the conversion of Eligible Proved
Undeveloped Producing Reserves to Eligible Proved Developed Producing Reserves
or the conversion of Eligible Proved Developed Non-Producing Reserves to
Eligible Proved Developed Producing Reserves and such expenditures shall in no
event exceed one hundred twenty percent (120%) of the budget for such
expenditures attached hereto as Schedule 7.17 and made a part hereof or such
updated supplement to such schedule which is prepared and delivered by Borrower
to Agent and is approved by Agent.
7.18 CHANGE IN LOCATION OF CHIEF EXECUTIVE OFFICES; INVENTORY
AND EQUIPMENT. Relocate its chief executive office to a new location without
providing 30 days prior written notification thereof to Agent and so long as, at
the time of such written notification, Borrower provides any financing
statements or fixture filings necessary to perfect and continue perfected the
Agent's Liens and also provides to Agent a Collateral Access Agreement to the
extent so requested by Agent with respect to such new location.
7.19 NO PROHIBITED TRANSACTIONS UNDER ERISA. Directly or
indirectly:
(a) engage, or permit any Subsidiary of Borrower to
engage, in any prohibited transaction which is reasonably likely to result in a
civil penalty or excise tax described in Sections 406 of ERISA or 4975 of the
IRC for which a statutory or class exemption is not available or a private
exemption has not been previously obtained from the Department of Labor;
(b) permit to exist with respect to any Benefit Plan
any accumulated funding deficiency (as defined in Sections 302 of ERISA and 412
of the IRC), whether or not waived;
(c) fail, or permit any Subsidiary of Borrower to
fail, to pay timely required contributions or annual installments due with
respect to any waived funding deficiency to any Benefit Plan;
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(d) terminate, or permit any Subsidiary of Borrower
to terminate, any Benefit Plan where such event would result in any liability of
Borrower, any of its Subsidiaries or any ERISA Affiliate under Title IV of
ERISA;
(e) fail, or permit any Subsidiary of Borrower to
fail, to make any required contribution or payment to any Multiemployer Plan;
(f) fail, or permit any Subsidiary of Borrower to
fail, to pay any required installment or any other payment required under
Section 412 of the IRC on or before the due date for such installment or other
payment;
(g) amend, or permit any Subsidiary of Borrower to
amend, a Plan resulting in an increase in current liability for the plan year
such that either of Borrower, any Subsidiary of Borrower or any ERISA Affiliate
is required to provide security to such Plan under Section 401(a)(29) of the
IRC; or
(h) withdraw, or permit any Subsidiary of Borrower to
withdraw, from any Multiemployer Plan where such withdrawal is reasonably likely
to result in any liability of any such entity under Title IV of ERISA;
which, individually or in the aggregate, results in or reasonably would be
expected to result in a claim against or liability of Borrower, any of its
Subsidiaries or any ERISA Affiliate in excess of $50,000.
7.20 FINANCIAL COVENANTS. Fail to maintain, as of the last day
of each period set forth below, Borrower's consolidated EBITDA for the period
then ended of not less than the amount set forth below corresponding to such
period:
<TABLE>
<CAPTION>
Period Amount
- ------------------------------------------------------------- -----------
<S> <C>
Three month period ending March 31, 2000 $ 1,900,000
Six month period ending June 30, 2000 $ 6,700,000
Nine month period ending September 30, 2000 $12,000,000
Twelve month period ending December 31, 2000 and each twelve $16,500,000
month period ending each March 31, June 30, September 30
and December 31 thereafter
</TABLE>
7.21 CAPITAL EXPENDITURES; DEVELOPMENT EXPENDITURES. Make: (a)
capital expenditures (i) during the three month period ending on March 31, 2000,
in excess of $19,000,000 in the aggregate (ii) during the three month period
ending on June 30, 2000, in excess of $3,800,000 in the aggregate, (iii) during
the three month period ending on September 30, 2000, in excess of $5,600,000 in
the aggregate, (iv) during the three month period ending December 31, 2000, in
excess of $7,200,000 in the aggregate, on (v) during any three month period
ending or each March 31, June 30, September 30 and December 31 thereafter, in
excess of $5,000,000 in the aggregate; or (b) any development expenditures other
than those used solely to
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convert Eligible Proved Undeveloped Reserves to Eligible Proved Developed
Producing Reserves or to convert Eligible Proved Developed Non-Producing
Reserves to Eligible Proved Developed Producing Reserves (but in no event shall
any development expenditure exceed one hundred twenty percent (120%) of the
budget for such expenditures on Schedule 7.17 attached hereto and made a part
hereof or such updated supplement to such schedule which is prepared and
delivered by Borrower to Agent and is approved by Agent).
7.22 SECURITIES ACCOUNTS. Borrower shall not establish or
maintain any Securities Account unless Agent shall have received a Control
Agreement, duly executed and in full force and effect, in respect of such
Securities Account. Borrower agrees that it will not transfer assets out of any
Securities Accounts; provided, however, that, so long as no Event of Default has
occurred and is continuing or would result therefrom, Borrower may use such
assets to the extent permitted by this Agreement.
7.23 GAS IMBALANCES, TAKE-OR-PAY OR OTHER PREPAYMENTS.
Borrower shall not, and shall not permit any of its Subsidiaries to, enter into
any contracts or agreements which warrant production of Hydrocarbons (other than
Hedging Agreements otherwise permitted hereunder) and will not hereafter allow
or accept gas imbalances, take-or-pay or other prepayments with respect to its
Oil and Gas Properties which would require such Person to deliver Hydrocarbons
produced from such Oil and Gas at some future time without then or thereafter
receiving full payment therefor to exceed, in the aggregate, five percent (5%)
of the current aggregate monthly gas production for such monthly period from the
Oil and Gas Properties.
7.24 PAYMENTS ON THE PARENT NOTES AND THE UNSECURED NOTES.
(a) Make any payment of interest, principal, premium or other
amount on the Parent Notes; or
(b) use, or permit to be used, any proceeds of any Advance, or
any Collateral or proceeds thereof, to make any payment of interest, principal,
premium or other amounts on the Unsecured Notes or under the Unsecured Notes
Indenture.
7.25 NON-CONSENT OPERATIONS. Become a non-consenting party
with respect to any operations under any operating agreement, unit agreement,
governmental order or otherwise associated with any Oil and Gas Property unless
Borrower shall have provided reasonable prior written notice to Agent of
Borrower's intention to become a non-consenting party with respect thereto, such
notice to be not less than 5 days prior to Borrower becoming a non-consenting
party (except in cases in which the period for notice of non-consent under the
applicable agreement, order or other arrangement pertaining to the operation is
less than 5 days, in which case Borrower shall provide prior notice to Agent
which is not less than the period for notice of non-consent thereunder).
7.26 WAIVERS OF RIGHTS RELATING TO OIL AND GAS PROPERTIES.
Waive any right relating to any of the Oil and Gas Properties other than waivers
and consents relating to immaterial easements, rights of way and other similar
rights which the waiver thereof does not have an adverse effect on the value of
such Oil and Gas Property to which it pertains, does not
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impair or adversely affect any Lien held by the Agent for the benefit of the
Lender Group, and could not reasonably be expected to result in a Material
Adverse Change.
7.27 CONTRACTS FOR SALE OF PRODUCTION. Enter into, renew,
extend or continue beyond its original scheduled maturing date any contract for
the sale of Hydrocarbons or other products produced from the Oil and Gas
Properties (a) for a period of one month or more at a fixed price or (b) for a
period of one year or more at (i) for gas, the applicable floating monthly index
price for gas as published Gas Daily Report or other similar publication, or
(ii) for oil, the applicable floating monthly price for West Texas Intermediate
crude oil quoted on the New York Mercantile Exchange.
8. EVENTS OF DEFAULT.
Any one or more of the following events shall constitute an
event of default (each, an "Event of Default") under this Agreement:
8.1 If Borrower or any other Loan Party fails to pay when due
and payable or when declared due and payable, any portion of the Obligations
(whether of principal, interest (including any interest which, but for the
provisions of the Bankruptcy Code, would have accrued on such amounts), fees and
charges due the Lender Group, reimbursement of Lender Group Expenses, or other
amounts constituting Obligations) provided, however, that in the case of
Overadvances that are caused by charging of interest, fees or Lender Group
Expenses, to such event shall not constitute an Event of Default if, within
three (3) Business Days of incurring such Overadvances, Borrower repays or
otherwise eliminates such Overadvances;
8.2 (a) If Borrower fails or neglects to perform, keep, or
observe any term, provision, condition, covenant, or agreement contained in
Section 6.2 (Collateral Reporting), 6.3 (Financial Statements, Reports,
Certificates), 6.4 (Tax Returns), 6.7 (Title to Equipment), 6.12 (Location of
Inventory and Equipment), 6.13 (Compliance with Laws), 6.14 (Employee Benefits),
or 6.15 (Leases) of this Agreement and such failure continues for a period of 5
Business Days; (b) If Borrower fails or neglects to perform, keep, or observe
any term, provision, condition, covenant, or agreement contained in Section 6.1
(Accounting System) or 6.8 (Maintenance of Oil and Gas Property Collateral and
Equipment) of this Agreement and such failure continues for a period of 15
Business Days; or (c) If Borrower or any other Loan Party fails or neglects to
perform, keep, or observe any other term, provision, condition, covenant, or
agreement contained in this Agreement, or in any of the other Loan Documents
(giving effect to any grace periods, cure periods, or required notices, if any,
expressly provided for in such Loan Documents); in each case, other than any
such term, provision, condition, covenant, or agreement that is the subject of
another provision of this Section 8, in which event such other provision of this
Section 8 shall govern; provided that, during any period of time that any such
failure or neglect of Borrower or such other Loan Party referred to in this
paragraph exists, even if such failure or neglect is not yet an Event of Default
by virtue of the existence of a grace or cure period or the pre-condition of the
giving of a notice, neither Agent nor any Lender shall be required during such
period to make Advances to Borrower;
8.3 If there is a Material Adverse Change;
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8.4 If any material portion of Borrower's or any other Loan
Party's properties or assets is attached, seized, subjected to a writ or
distress warrant, or is levied upon, or comes into the possession of any third
Person;
8.5 If an Insolvency Proceeding is commenced by Borrower or
any other Loan Party;
8.6 If an Insolvency Proceeding is commenced against Borrower
or any other Loan Party and any of the following events occur: (a) Borrower or
such Loan Party, as the case may be, consents to the institution of the
Insolvency Proceeding against it; (b) the petition commencing the Insolvency
Proceeding is not timely controverted; (c) the petition commencing the
Insolvency Proceeding is not dismissed within 45 calendar days of the date of
the filing thereof; provided, however, that, during the pendency of such period,
Agent, Foothill, and any other member of the Lender Group shall be relieved of
its obligation to extend credit hereunder; (d) an interim trustee is appointed
to take possession of all or a substantial portion of the properties or assets
of, or to operate all or any substantial portion of the business of, Borrower or
such Loan Party, as the case may be; or (e) an order for relief shall have been
issued or entered therein;
8.7 If Borrower or any other Loan Party is enjoined,
restrained, or in any way prevented by court order from continuing to conduct
all or any material part of its business affairs;
8.8 If a notice of Lien, levy, or assessment is filed of
record with respect to any of Borrower's or any other Loan Party's properties or
assets by the United States Government, or any department, agency, or
instrumentality thereof, or by any state, county, municipal, or governmental
agency, or if any taxes or debts owing at any time hereafter to any one or more
of such entities becomes a Lien, whether choate or otherwise, upon any of
Borrower's or any other Loan Party's properties or assets and the same is not
paid on the payment date thereof;
8.9 If a judgment, in excess of $125,000 individually or in
the aggregate for all judgments, becomes a Lien or encumbrance upon any material
portion of Borrower's or any other Loan Party's properties or assets;
8.10 If a claim (other than a judgement), in excess of
$125,000 individually or in the aggregate for all claims (other than
judgements), becomes a Lien or encumbrance (other than a Permitted Lien) upon
any material portion of Borrower's or any other Loan Party's properties or
assets;
8.11 If there is a default in any material agreement
(excluding the Unsecured Notes or the Unsecured Notes Indenture) to which
Borrower or any other Loan Party is a party with one or more third Persons and
such default (a) occurs at the final maturity of the obligations thereunder, or
(b) results in a right by such third Person(s), irrespective of whether
exercised, to accelerate the maturity of Borrower's or any other Loan Party's
obligations thereunder, to terminate such agreement, or to refuse to renew such
agreement pursuant to an automatic renewal right therein;
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8.12 If there is a default in any of the Unsecured Notes or
the Unsecured Notes Indenture and such default results in any holder thereof or
trustee thereunder accelerating the maturity of Borrower's or any other Loan
Party's obligations thereunder;
8.13 If Borrower or any other Loan Party makes any payment on
account of Indebtedness that has been contractually subordinated in right of
payment to the payment of the Obligations, or on account of any interest,
principal, premium or other amounts on the Unsecured Notes or the Unsecured
Notes Indenture;
8.14 If any material misstatement or misrepresentation exists
now or hereafter in any warranty, representation, statement, or report made to
the Lender Group by Borrower or any other Loan Party or any officer, employee,
agent, or director of Borrower or any other Loan Party, or if any such warranty
or representation is withdrawn; or
8.15 If the obligation of any guarantor under its guaranty or
other third Person under any Loan Document is limited or terminated by operation
of law or by the guarantor or other third Person thereunder, or any such
guarantor or other third Person becomes the subject of an Insolvency Proceeding.
9. THE LENDER GROUP'S RIGHTS AND REMEDIES.
9.1 RIGHTS AND REMEDIES. Upon the occurrence, and during the
continuation, of an Event of Default, the Required Lenders (at their election
but without notice of their election and without demand) may, except to the
extent otherwise expressly provided or required below, authorize and instruct
Agent to do any one or more of the following on behalf of the Lender Group (and
Agent, acting upon the instructions of the Required Lenders, shall do the same
on behalf of the Lender Group), all of which are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by
this Agreement, by any of the other Loan Documents, or otherwise, immediately
due and payable;
(b) Cease advancing money or extending credit to or
for the benefit of Borrower under this Agreement, under any of the Loan
Documents, or under any other agreement between Borrower and the Lender Group;
(c) Terminate this Agreement and any of the other
Loan Documents as to any future liability or obligation of the Lender Group, but
without affecting Agent's rights and security interests, for the benefit of the
Lender Group, in the Collateral and without affecting the Obligations;
(d) Settle or adjust disputes and claims directly
with Account Debtors for amounts and upon terms which Agent considers advisable,
and in such cases, Agent will credit Borrower's Loan Account with only the net
amounts received by Agent in payment of such disputed Accounts after deducting
all Lender Group Expenses incurred or expended in connection therewith;
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(e) Cause Borrower to hold all returned Inventory in
trust for the Lender Group, segregate all returned Inventory from all other
property of Borrower or in Borrower's possession and conspicuously label said
returned Inventory as the property of the Lender Group;
(f) Without notice to or demand upon Borrower or any
guarantor, make such payments and do such acts as Agent considers necessary or
reasonable to protect its security interests in the Collateral. Borrower agrees
to assemble the Personal Property Collateral if Agent so requires, and to make
the Personal Property Collateral available to Agent as Agent may designate.
Borrower authorizes Agent to enter the premises where the Personal Property
Collateral is located, to take and maintain possession of the Personal Property
Collateral, or any part of it, and to pay, purchase, contest, or compromise any
encumbrance, charge, or Lien that in Agent's determination appears to conflict
with the Agent's Liens and to pay all expenses incurred in connection therewith.
With respect to any of Borrower's owned or leased premises, Borrower hereby
grants Agent a license to enter into possession of such premises and to occupy
the same, without charge, for up to 120 days in order to exercise any of the
Lender Group's rights or remedies provided herein, at law, in equity, or
otherwise;
(g) Without notice to Borrower (such notice being
expressly waived), and without constituting a retention of any collateral in
satisfaction of an obligation (within the meaning of Section 9505 of the Code),
set off and apply to the Obligations any and all (i) balances and deposits of
Borrower held by the Lender Group (including any amounts received in the Lockbox
Accounts), or (ii) indebtedness at any time owing to or for the credit or the
account of Borrower held by the Lender Group;
(h) Hold, as cash collateral, any and all balances
and deposits of Borrower held by the Lender Group, and any amounts received in
the Lockbox Accounts, to secure the full and final repayment of all of the
Obligations;
(i) Ship, reclaim, recover, store, finish, maintain,
repair, prepare for sale, advertise for sale, and sell (in the manner provided
for herein) the Personal Property Collateral. Borrower hereby grants to Agent a
license or other right to use, without charge, Borrower's labels, patents,
copyrights, rights of use of any name, trade secrets, trade names, trademarks,
service marks, and advertising matter, or any property of a similar nature, as
it pertains to the Personal Property Collateral, in completing production of,
advertising for sale, and selling any Personal Property Collateral and
Borrower's rights under all licenses and all franchise agreements shall inure to
the Lender Group's benefit;
(j) Sell the Personal Property Collateral at either a
public or private sale, or both, by way of one or more contracts or
transactions, for cash or on terms, in such manner and at such places (including
Borrower's premises) as Agent determines is commercially reasonable. It is not
necessary that the Personal Property Collateral be present at any such sale;
(k) Agent shall give notice of the disposition of the
Personal Property Collateral as follows:
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(1) Agent shall give Borrower and each
holder of a security interest in the Personal Property Collateral who has filed
with Agent a written request for notice, a notice in writing of the time and
place of public sale, or, if the sale is a private sale or some other
disposition other than a public sale is to be made of the Personal Property
Collateral, then the time on or after which the private sale or other
disposition is to be made;
(2) The notice shall be personally delivered
or mailed, postage prepaid, to Borrower as provided in Section 12, at least 5
days before the date fixed for the sale, or at least 5 days before the date on
or after which the private sale or other disposition is to be made; no notice
needs to be given prior to the disposition of any portion of the Personal
Property Collateral that is perishable or threatens to decline speedily in value
or that is of a type customarily sold on a recognized market. Notice to Persons
other than Borrower claiming an interest in the Personal Property Collateral
shall be sent to such addresses as they have furnished to Agent;
(3) If the sale is to be a public sale,
Agent also shall give notice of the time and place by publishing a notice one
time at least 5 days before the date of the sale in a newspaper of general
circulation in the county in which the sale is to be held;
(l) The Lender Group may credit bid and purchase at
any public sale;
(m) The Lender Group shall have all other rights and
remedies available to it at law or in equity pursuant to any other Loan
Documents; and
(n) Any deficiency that exists after disposition of
the Personal Property Collateral as provided above will be paid immediately by
Borrower. Any excess will be returned, without interest and subject to the
rights of third Persons, by Agent to Borrower;
provided, however, that the rights and remedies described in this Section 9.1
and in each other provision of this Agreement and the other Loan Documents which
would otherwise be exercisable solely on the basis of the occurrence or
continuation of an Event of Default described in Section 8.12 (hereinafter
referred to as a "Section 8.12 Default") may not be exercised solely on the
basis of the occurrence or continuation of such Section 8.12 Default until such
time as 180 days shall have elapsed since the date of the initial occurrence of
such Section 8.12 Default; provided further, however, that nothing in the
immediately preceding proviso clause shall in any way limit, impair, restrict,
delay or otherwise diminish any of the rights and remedies of Agent and the
Lenders, howsoever existing or arising, which are based upon or arise out of or
are a consequence of the occurrence or continuation of any Event of Default
other than a Section 8.12 Default.
9.2 REMEDIES CUMULATIVE. The rights and remedies of the Lender
Group under this Agreement, the other Loan Documents, and all other agreements
shall be cumulative. The Lender Group shall have all other rights and remedies
not inconsistent herewith as provided under the Code, by law, or in equity. No
exercise by the Lender Group of one right or remedy shall be deemed an election,
and no waiver by the Lender Group of any Event of Default shall be
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deemed a continuing waiver. No delay by the Lender Group shall constitute a
waiver, election, or acquiescence by it. Nothing in this Agreement in any way
limits, impairs or reduces any rights of the Lender Group under the Oil and Gas
Property Mortgages or any of the other Loan Documents.
10. TAXES AND EXPENSES.
If Borrower fails to pay any monies (whether taxes,
assessments, insurance premiums, or, in the case of leased properties or assets,
rents or other amounts payable under such leases) due to third Persons, or fails
to make any deposits or furnish any required proof of payment or deposit, all as
required under the terms of this Agreement, then, to the extent that Agent
determines that such failure by Borrower could result in a Material Adverse
Change, in its discretion and without prior notice to Borrower, Agent may do any
or all of the following: (a) make payment of the same or any part thereof; (b)
set up such reserves in Borrower's Loan Account as Agent deems necessary to
protect the Lender Group from the exposure created by such failure; or (c)
obtain and maintain insurance policies of the type described in Section 6.10,
and take any action with respect to such policies as Agent deems prudent. Any
such amounts paid by Agent shall constitute Lender Group Expenses. Any such
payments made by Agent shall not constitute an agreement by the Lender Group to
make similar payments in the future or a waiver by the Lender Group of any Event
of Default under this Agreement. Agent need not inquire as to, or contest the
validity of, any such expense, tax, or Lien and the receipt of the usual
official notice for the payment thereof shall be conclusive evidence that the
same was validly due and owing.
11. WAIVERS; INDEMNIFICATION.
11.1 DEMAND; PROTEST; ETC. Borrower waives demand, protest,
notice of protest, notice of default or dishonor, notice of payment and
nonpayment, nonpayment at maturity, release, compromise, settlement, extension,
or renewal of accounts, documents, instruments, chattel paper, and guarantees at
any time held by the Lender Group on which Borrower may in any way be liable.
11.2 THE LENDER GROUP'S LIABILITY FOR COLLATERAL. Borrower
hereby agrees that: (a) so long as the Lender Group complies with its
obligations, if any, under Section 9207 of the Code, the Lender Group shall not
in any way or manner be liable or responsible for: (i) the safekeeping of the
Collateral; (ii) any loss or damage thereto occurring or arising in any manner
or fashion from any cause; (iii) any diminution in the value thereof; or (iv)
any act or default of any carrier, warehouseman, bailee, forwarding agency, or
other Person; and (b) all risk of loss, damage, or destruction of the Collateral
shall be borne by Borrower.
11.3 INDEMNIFICATION. Borrower shall pay, indemnify, defend,
and hold the Agent-Related Persons, the Lender-Related Persons with respect to
each Lender, each Participant, and each of their respective officers, directors,
employees, counsel, agents, and attorneys-in-fact (each, an "Indemnified
Person") harmless (to the fullest extent permitted by law) from and against any
and all claims, demands, suits, actions, investigations, proceedings, and
damages, and all reasonable attorneys fees and disbursements and other costs and
expenses actually incurred in connection therewith (as and when they are
incurred and irrespective of whether suit is brought), at any time asserted
against, imposed upon, or incurred by any of them in connection with or as a
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result of or related to the execution, delivery, enforcement, performance, and
administration of this Agreement and any other Loan Documents or the
transactions contemplated herein, and with respect to any investigation,
litigation, or proceeding related to this Agreement, any other Loan Document, or
the use of the proceeds of the credit provided hereunder (irrespective of
whether any Indemnified Person is a party thereto), or any act, omission, event
or circumstance in any manner related thereto (all the foregoing, collectively,
the "Indemnified Liabilities"). Borrower shall have no obligation to any
Indemnified Person under this Section 11.3 with respect to any Indemnified
Liability that a court of competent jurisdiction finally determines to have
resulted from the gross negligence or willful misconduct of such Indemnified
Person. This provision shall survive the termination of this Agreement and the
repayment of the other Obligations.
12. NOTICES.
Unless otherwise provided in this Agreement, all notices or
demands by any party relating to this Agreement or any other Loan Document shall
be in writing and (except for financial statements and other informational
documents which may be sent by first-class mail, postage prepaid) shall be
personally delivered or sent by registered or certified mail (postage prepaid,
return receipt requested), overnight courier, or telefacsimile to the relevant
party at its address set forth below:
<TABLE>
<S> <C>
IF TO BORROWER: PETSEC ENERGY INC.
143 Ridgeway Drive, Suite 113
Lafayette, Louisiana 70503-3402
Attn: Chief Financial Officer
Fax No. 337.989.7271
WITH COPIES TO: Vinson & Elkins
2001 Ross Avenue, Suite 3700
Dallas, Texas 75201
Attn: William D. Young
Fax No. 214.999.7994
IF TO AGENT OR
THE LENDER GROUP
IN CARE OF AGENT: FOOTHILL CAPITAL CORPORATION
11111 Santa Monica Boulevard, Suite 1500
Los Angeles, California 90025-3333
Attn: Business Finance Division Manager
Fax No. 310.478.9788
WITH COPIES TO: PATTON BOGGS LLP
2001 Ross Avenue, Suite 3000
Dallas, Texas 75201
Attn: James C. Chadwick, Esq.
Fax No. 214.758.1550
</TABLE>
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The parties hereto may change the address at which they are to
receive notices hereunder, by notice in writing in the foregoing manner given to
all other parties. All notices or demands sent in accordance with this Section
12, other than notices by the Lender Group in connection with Sections 9504 or
9505 of the Code, shall be deemed received on the earlier of the date of actual
receipt or 3 days after the deposit thereof in the mail. Borrower acknowledges
and agrees that notices sent by the Lender Group in connection with Sections
9504 or 9505 of the Code shall be deemed sent when deposited in the mail or
personally delivered, or, where permitted by law, transmitted telefacsimile or
other similar method set forth above.
13. CHOICE OF LAW AND VENUE; SERVICE OF PROCESS; JURY TRIAL WAIVER.
THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS
(UNLESS EXPRESSLY PROVIDED TO THE CONTRARY IN ANOTHER LOAN DOCUMENT IN RESPECT
OF SUCH OTHER LOAN DOCUMENT), THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT
HEREOF AND THEREOF, AND THE RIGHTS OF THE PARTIES HERETO AND THERETO WITH
RESPECT TO ALL MATTERS ARISING HEREUNDER OR THEREUNDER OR RELATED HERETO OR
THERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF CALIFORNIA.
THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN
CONNECTION WITH THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE TRIED AND
LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF LOS
ANGELES, STATE OF CALIFORNIA, PROVIDED, HOWEVER, THAT ANY SUIT SEEKING
ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT AGENT'S
OPTION, IN THE COURTS OF ANY JURISDICTION WHERE AGENT ELECTS TO BRING SUCH
ACTION OR WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. BORROWER AND THE
LENDER GROUP WAIVE, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH
MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO
THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 13.
BORROWER HEREBY IRREVOCABLY DESIGNATES CT CORPORATION SYSTEM, WITH OFFICES AT 49
STEVENSON STREET, SUITE 900, SAN FRANCISCO, CALIFORNIA, AS THE DESIGNEE,
APPOINTEE AND AGENT OF BORROWER TO RECEIVE, FOR AND ON BEHALF OF BORROWER,
SERVICE OF PROCESS IN SUCH RESPECTIVE JURISDICTIONS IN ANY LEGAL ACTION OR
PROCEEDING WITH RESPECT TO THE LOAN DOCUMENTS. IT IS UNDERSTOOD THAT A COPY OF
SUCH PROCESS SERVED ON SUCH AGENT WILL BE PROMPTLY FORWARDED BY OVERNIGHT
COURIER TO BORROWER AT ITS ADDRESS SET FORTH IN THE PREAMBLE TO THIS AGREEMENT,
BUT THE FAILURE OF BORROWER TO RECEIVE SUCH COPY SHALL NOT AFFECT IN ANY WAY THE
SERVICE OF SUCH PROCESS. IN THE EVENT THAT CT CORPORATION SYSTEM RESIGNS OR
CEASES TO SERVE AS
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THE BORROWER'S AGENT FOR SERVICE OF PROCESS HEREUNDER, BORROWER AGREES FORTHWITH
(i) TO DESIGNATE ANOTHER AGENT FOR SERVICE OF PROCESS IN LOS ANGELES,
CALIFORNIA, AND (ii) TO GIVE PROMPT WRITTEN NOTICE TO THE LENDER GROUP OF THE
NAME AND ADDRESS OF SUCH AGENT. BORROWER FURTHER IRREVOCABLY CONSENTS TO THE
SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR
PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL,
POSTAGE REPAID, TO BORROWER AT ITS SAID ADDRESS, SUCH SERVICE TO BECOME
EFFECTIVE THIRTY (30) DAYS AFTER SUCH MAILING. BORROWER AND THE LENDER GROUP
HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF
ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE
TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS,
BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. BORROWER
AND THE LENDER GROUP REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND EACH
KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION
WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE
FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
14. DESTRUCTION OF BORROWER'S DOCUMENTS.
All documents, schedules, invoices, agings, or other papers
delivered to any one or more members of the Lender Group may be destroyed or
otherwise disposed of by such member of the Lender Group 4 months after they are
delivered to or received by such member of the Lender Group, unless Borrower
requests, in writing, the return of said documents, schedules, or other papers
and makes arrangements, at Borrower's expense, for their return.
15. ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS.
15.1 ASSIGNMENTS AND PARTICIPATIONS.
(a) Any Lender may, with the written consent of
Agent, assign and delegate to one or more assignees (provided that no written
consent of Agent shall be required in connection with any assignment and
delegation by a Lender to an Eligible Transferee) (each an "Assignee") all, or
any ratable part of all, of the Obligations, the Commitments and the other
rights and obligations of such Lender hereunder and under the other Loan
Documents, in a minimum amount of $5,000,000 (except that such minimum amount
shall not apply in connection with any assignment and delegation by a Lender (x)
to any Affiliate (other than individuals) of, or any fund, money market account,
investment account or other account managed by, a pre-existing Lender under this
Agreement or (y) of the entire Obligations, Commitments and other rights and
obligations of such Lender hereunder and under the other Loan Documents);
provided, however, that Borrower and Agent may continue to deal solely and
directly with such Lender in connection with the interest so assigned to an
Assignee until (i) written notice of such assignment, together with payment
instructions, addresses and related information with respect to the Assignee,
shall
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have been given to Borrower and Agent by such Lender and the Assignee;
(ii) such Lender and its Assignee shall have delivered to Borrower and Agent an
Assignment and Acceptance ("Assignment and Acceptance") in form and substance
satisfactory to Agent; and (iii) the assignor Lender or Assignee has paid to
Agent for Agent's sole and separate account a processing fee in the amount of
$5,000. Anything contained herein to the contrary notwithstanding, the consent
of Agent shall not be required (and payment of any fees shall not be required)
if such assignment is in connection with any merger, consolidation, sale,
transfer, or other disposition of all or any substantial portion of the business
or loan portfolio of such Lender.
(b) From and after the date that Agent notifies the
assignor Lender that it has received an executed Assignment and Acceptance and
payment of the above-referenced processing fee, (i) the Assignee thereunder
shall be a party hereto and, to the extent that rights and obligations hereunder
have been assigned to it pursuant to such Assignment and Acceptance, shall have
the rights and obligations of a Lender under the Loan Documents, and (ii) the
assignor Lender shall, to the extent that rights and obligations hereunder and
under the other Loan Documents have been assigned by it pursuant to such
Assignment and Acceptance, relinquish its rights (except with respect to Section
11.3 hereof) and be released from its obligations under this Agreement (and in
the case of an Assignment and Acceptance covering all or the remaining portion
of an assigning Lender's rights and obligations under this Agreement and the
other Loan Documents, such Lender shall cease to be a party hereto and thereto),
and such assignment shall effect a novation between Borrower and the Assignee.
(c) By executing and delivering an Assignment and
Acceptance, the assigning Lender thereunder and the Assignee thereunder confirm
to and agree with each other and the other parties hereto as follows: (1) other
than as provided in such Assignment and Acceptance, such assigning Lender makes
no representation or warranty and assumes no responsibility with respect to any
statements, warranties or representations made in or in connection with this
Agreement or the execution, legality, validity, enforceability, genuineness,
sufficiency or value of this Agreement or any other Loan Document furnished
pursuant hereto; (2) such assigning Lender makes no representation or warranty
and assumes no responsibility with respect to the financial condition of
Borrower or the performance or observance by Borrower of any of its obligations
under this Agreement or any other Loan Document furnished pursuant hereto; (3)
such Assignee confirms that it has received a copy of this Agreement, together
with such other documents and information as it has deemed appropriate to make
its own credit analysis and decision to enter into such Assignment and
Acceptance; (4) such Assignee will, independently and without reliance upon
Agent, such assigning Lender or any other Lender, and based on such documents
and information as it shall deem appropriate at the time, continue to make its
own credit decisions in taking or not taking action under this Agreement; (5)
such Assignee appoints and authorizes Agent to take such action as agent on its
behalf and to exercise such powers under this Agreement as are delegated to
Agent by the terms hereof, together with such powers as are reasonably
incidental thereto; and (6) such Assignee agrees that it will perform in
accordance with their terms all of the obligations which by the terms of this
Agreement are required to be performed by it as a Lender.
(d) Immediately upon each Assignee's making its
processing fee payment under the Assignment and Acceptance, this Agreement shall
be deemed to be amended
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to the extent, but only to the extent, necessary to reflect the addition of the
Assignee and the resulting adjustment of the Commitments arising therefrom. The
Commitment allocated to each Assignee shall reduce such Commitments of the
assigning Lender pro tanto.
(e) Any Lender may at any time, with the written
consent of Agent, sell to one or more commercial banks, financial institutions,
or other Persons not Affiliates of such Lender (a "Participant") participating
interests in the Obligations, the Commitment, and the other rights and interests
of that Lender (the "originating Lender") hereunder and under the other Loan
Documents (provided that no written consent of Agent shall be required in
connection with any sale of any such participating interests by a Lender to an
Eligible Transferee); provided, however, that (i) the originating Lender's
obligations under this Agreement shall remain unchanged, (ii) the originating
Lender shall remain solely responsible for the performance of such obligations,
(iii) Borrower and Agent shall continue to deal solely and directly with the
originating Lender in connection with the originating Lender's rights and
obligations under this Agreement and the other Loan Documents, (iv) no Lender
shall transfer or grant any participating interest under which the Participant
has the sole and exclusive right to approve any amendment to, or any consent or
waiver with respect to, this Agreement or any other Loan Document, except to the
extent such amendment to, or consent or waiver with respect to this Agreement or
of any other Loan Document would (A) extend the final maturity date of the
Obligations hereunder in which such Participant is participating; (B) reduce the
interest rate applicable to the Obligations hereunder in which such Participant
is participating; (C) release all or a material portion of the Collateral or
guaranties (except to the extent expressly provided herein or in any of the Loan
Documents) supporting the Obligations hereunder in which such Participant is
participating; (D) postpone the payment of, or reduce the amount of, the
interest or fees payable to such Participant through such Lender; or (E) change
the amount or due dates of scheduled principal repayments or prepayments or
premiums; and (v) all amounts payable by Borrower hereunder shall be determined
as if such Lender had not sold such participation; except that, if amounts
outstanding under this Agreement are due and unpaid, or shall have been declared
or shall have become due and payable upon the occurrence of an Event of Default,
each Participant shall be deemed to have the right of set-off in respect of its
participating interest in amounts owing under this Agreement to the same extent
as if the amount of its participating interest were owing directly to it as a
Lender under this Agreement. The rights of any Participant only shall be
derivative through the originating Lender with whom such Participant
participates and no Participant shall have any direct rights as to the other
Lenders, Agent, Borrower, the Collections, the Collateral, or otherwise in
respect of the Obligations. No Participant shall have the right to participate
directly in the making of decisions by the Lenders among themselves.
(f) In connection with any such assignment or
participation or proposed assignment or participation, a Lender may disclose all
documents and information which it now or hereafter may have relating to
Borrower or Borrower's business.
(g) Any other provision in this Agreement
notwithstanding, any Lender may at any time create a security interest in, or
pledge, all or any portion of its rights under and interest in this Agreement in
favor of any Federal Reserve Bank in accordance with Regulation A of the Federal
Reserve Bank or U.S. Treasury Regulation 31 CFR Section 203.14, and such Federal
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Reserve Bank may enforce such pledge or security interest in any manner
permitted under applicable law.
15.2 SUCCESSORS. This Agreement shall bind and inure to the
benefit of the respective successors and assigns of each of the parties;
provided, however, that Borrower may not assign this Agreement or any rights or
duties hereunder without the Lenders' prior written consent and any prohibited
assignment shall be absolutely void ab initio. No consent to assignment by the
Lenders shall release Borrower from its Obligations. A Lender may assign this
Agreement and the other Loan Documents and its rights and duties hereunder and
thereunder pursuant to Section 15.1 hereof and, except as expressly required
pursuant to Section 15.1 hereof, no consent or approval by Borrower is required
in connection with any such assignment.
16. AMENDMENTS; WAIVERS
16.1 AMENDMENTS AND WAIVERS. No amendment or waiver of any
provision of this Agreement or any other Loan Document, and no consent with
respect to any departure by Borrower therefrom, shall be effective unless the
same shall be in writing and signed by the Required Lenders (or by Agent at the
written request of the Required Lenders) and Borrower and then any such waiver
or consent shall be effective only in the specific instance and for the specific
purpose for which given; provided, however, that no such waiver, amendment, or
consent shall, unless in writing and signed by all the Lenders and Borrower and
acknowledged by Agent, do any of the following:
(a) increase or extend the Commitment of any Lender;
(b) postpone or delay any date fixed by this
Agreement or any other Loan Document for any payment of principal, interest,
fees or other amounts due to the Lenders (or any of them) hereunder or under any
other Loan Document;
(c) reduce the principal of, or the rate of interest
specified herein on any Loan, or any fees or other amounts payable hereunder or
under any other Loan Document;
(d) change the percentage of the Commitments or
Obligations, as the case may be, that is required for the Lenders or any of them
to take any action hereunder;
(f) amend this Section or any provision of the
Agreement providing for consent or other action by all Lenders;
(g) release Collateral other than as permitted by
Section 17.11;
(h) change the definition of "Required Lenders";
(i) release Borrower or Guarantor from any Obligation
for the payment of money; or
(j) amend any of the provisions of Article 17.
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and, provided further, however, that no amendment, waiver or consent shall,
unless in writing and signed by Agent, affect the rights or duties of Agent
under this Agreement or any other Loan Document; and, provided further, however,
that no amendment, waiver or consent shall, unless in writing and signed by
Foothill in its individual capacity as a Lender, affect the specific rights or
duties of Foothill in its individual capacity as a Lender (as contrasted with
rights or duties of Foothill as a member of the Lender Group) under this
Agreement or any other Loan Document. The foregoing notwithstanding, any
amendment, modification, waiver, consent, termination, or release of or with
respect to any provision of this Agreement or any other Loan Document that
relates only to the relationship of the Lender Group among themselves, and that
does not affect the rights or obligations of Borrower, shall not require consent
by or the agreement of Borrower.
16.2 NO WAIVERS; CUMULATIVE REMEDIES. No failure by Agent or
any Lender to exercise any right, remedy, or option under this Agreement, any
other Loan Document, or any present or future supplement hereto or thereto, or
in any other agreement between or among Borrower and Agent or any Lender, or
delay by Agent or any Lender in exercising the same, will operate as a waiver
thereof. No waiver by Agent or any Lender will be effective unless it is in
writing, and then only to the extent specifically stated. No waiver by Agent or
the Lenders on any occasion shall affect or diminish Agent's and each Lender's
rights thereafter to require strict performance by Borrower of any provision of
this Agreement. Agent's and each Lender's rights under this Agreement and the
other Loan Documents will be cumulative and not exclusive of any other right or
remedy which Agent or any Lender may have.
17. AGENT; THE LENDER GROUP.
17.1 APPOINTMENT AND AUTHORIZATION OF AGENT. Each Lender
hereby designates and appoints Foothill as its agent under this Agreement and
the other Loan Documents and each Lender hereby irrevocably authorizes Agent to
take such action on its behalf under the provisions of this Agreement and each
other Loan Document and to exercise such powers and perform such duties as are
expressly delegated to it by the terms of this Agreement or any other Loan
Document, together with such powers as are reasonably incidental thereto. Agent
agrees to act as such on the express conditions contained in this Article 17.
The provisions of this Article 17 are solely for the benefit of Agent and the
Lenders, and Borrower shall have no rights as a third party beneficiary of any
of the provisions contained herein; provided, however, that certain of the
provisions of Section 17.10 hereof also shall be for the benefit of Borrower.
Any provision to the contrary contained elsewhere in this Agreement or in any
other Loan Document notwithstanding, Agent shall not have any duties or
responsibilities, except those expressly set forth herein, nor shall Agent have
or be deemed to have any fiduciary relationship with any Lender, and no implied
covenants, functions, responsibilities, duties, obligations or liabilities shall
be read into this Agreement or any other Loan Document or otherwise exist
against Agent; it being expressly understood and agreed that the use of the word
"Agent" is for convenience only, that Foothill is merely the representative of
the Lenders, and has only the contractual duties set forth herein. Except as
expressly otherwise provided in this Agreement, Agent shall have and may use its
sole discretion with respect to exercising or refraining from exercising any
discretionary rights or taking or refraining from taking any actions which Agent
is expressly entitled to take or assert under or pursuant to this Agreement and
the other Loan Documents. Without limiting the
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generality of the foregoing, or of any other provision of the Loan Documents
that provides rights or powers to Agent, Lenders agree that Agent shall have the
right to exercise the following powers as long as this Agreement remains in
effect: (a) maintain, in accordance with its customary business practices,
ledgers and records reflecting the status of the Advances, the Letters of
Credit, the Collateral, the Collections, and related matters; (b) execute or
file any and all financing or similar statements or notices, amendments,
renewals, supplements, documents, instruments, proofs of claim, notices and
other written agreements with respect to the Loan Documents; (c) make Advances,
and the Letters of Credit, for itself or on behalf of Lenders as provided in the
Loan Documents; (d) exclusively receive, apply, and distribute the Collections
as provided in the Loan Documents; (e) open and maintain such bank accounts and
lock boxes as Agent deems necessary and appropriate in accordance with the Loan
Documents for the foregoing purposes with respect to the Collateral and the
Collections; (f) perform, exercise, and enforce any and all other rights and
remedies of the Lender Group with respect to Borrower, the Obligations, the
Collateral, the Collections, or otherwise related to any of same as provided in
the Loan Documents; and (g) incur and pay such Lender Group Expenses as Agent
may deem necessary or appropriate for the performance and fulfillment of its
functions and powers pursuant to the Loan Documents.
17.2 DELEGATION OF DUTIES. Except as otherwise provided in
this section, Agent may execute any of its duties under this Agreement or any
other Loan Document by or through agents, employees or attorneys-in-fact and
shall be entitled to advice of counsel concerning all matters pertaining to such
duties. Agent shall not be responsible for the negligence or misconduct of any
agent or attorney-in-fact that it selects as long as such selection was made in
compliance with this section and without gross negligence or willful misconduct.
17.3 LIABILITY OF AGENT. None of the Agent-Related Persons
shall (i) be liable for any action taken or omitted to be taken by any of them
under or in connection with this Agreement or any other Loan Document or the
transactions contemplated hereby (except for its own gross negligence or willful
misconduct), or (ii) be responsible in any manner to any of the Lenders for any
recital, statement, representation or warranty made by Borrower or any
Subsidiary or Affiliate of Borrower, or any officer or director thereof,
contained in this Agreement or in any other Loan Document, or in any
certificate, report, statement or other document referred to or provided for in,
or received by Agent under or in connection with, this Agreement or any other
Loan Document, or the validity, effectiveness, genuineness, enforceability or
sufficiency of this Agreement or any other Loan Document, or for any failure of
Borrower or any other party to any Loan Document to perform its obligations
hereunder or thereunder. No Agent-Related Person shall be under any obligation
to any Lender to ascertain or to inquire as to the observance or performance of
any of the agreements contained in, or conditions of, this Agreement or any
other Loan Document, or to inspect the properties, books or records of Borrower
or any of Borrower's Subsidiaries or Affiliates.
17.4 RELIANCE BY AGENT. Agent shall be entitled to rely, and
shall be fully protected in relying, upon any writing, resolution, notice,
consent, certificate, affidavit, letter, telegraph, facsimile, telex or
telephone message, statement or other document or conversation believed by it to
be genuine and correct and to have been signed, sent, or made by the proper
Person or Persons, and upon advice and statements of legal counsel (including
counsel to
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Borrower or counsel to any Lender), independent accountants and other experts
selected by Agent. Agent shall be fully justified in failing or refusing to take
any action under this Agreement or any other Loan Document unless it shall first
receive such advice or concurrence of the Lenders as it deems appropriate and
until such instructions are received, Agent shall act, or refrain from acting,
as it deems advisable. If Agent so requests, it shall first be indemnified to
its reasonable satisfaction by Lenders against any and all liability and expense
that may be incurred by it by reason of taking or continuing to take any such
action. Agent shall in all cases be fully protected in acting, or in refraining
from acting, under this Agreement or any other Loan Document in accordance with
a request or consent of the Lenders and such request and any action taken or
failure to act pursuant thereto shall be binding upon all of the Lenders.
17.5 NOTICE OF DEFAULT OR EVENT OF DEFAULT. Agent shall not be
deemed to have knowledge or notice of the occurrence of any Default or Event of
Default, except with respect to defaults in the payment of principal, interest,
fees, and expenses required to be paid to Agent for the account of the Lenders,
except with respect to Events of Default of which Agent has actual knowledge,
unless Agent shall have received written notice from a Lender or Borrower
referring to this Agreement, describing such Default or Event of Default, and
stating that such notice is a "notice of default." Agent promptly will notify
the Lenders of its receipt of any such notice or of any Event of Default of
which Agent has actual knowledge. If any Lender obtains actual knowledge of any
Event of Default, such Lender promptly shall notify the other Lenders and Agent
of such Event of Default. Each Lender shall be solely responsible for giving any
notices to its Participants, if any. Subject to Section 17.4, Agent shall take
such action with respect to such Default or Event of Default as may be requested
by the Required Lenders in accordance with Section 9; provided, however, that
unless and until Agent has received any such request, Agent may (but shall not
be obligated to) take such action, or refrain from taking such action, with
respect to such Default or Event of Default as it shall deem advisable.
17.6 CREDIT DECISION. Each Lender acknowledges that none of
the Agent-Related Persons has made any representation or warranty to it, and
that no act by Agent hereinafter taken, including any review of the affairs of
Borrower and its Subsidiaries or Affiliates, shall be deemed to constitute any
representation or warranty by any Agent-Related Person to any Lender. Each
Lender represents to Agent that it has, independently and without reliance upon
any Agent-Related Person and based on such documents and information as it has
deemed appropriate, made its own appraisal of and investigation into the
business, prospects, operations, property, financial and other condition and
creditworthiness of Borrower and any other Person (other than the Lender Group)
party to a Loan Document, and all applicable bank regulatory laws relating to
the transactions contemplated hereby, and made its own decision to enter into
this Agreement and to extend credit to Borrower. Each Lender also represents
that it will, independently and without reliance upon any Agent-Related Person
and based on such documents and information as it shall deem appropriate at the
time, continue to make its own credit analysis, appraisals and decisions in
taking or not taking action under this Agreement and the other Loan Documents,
and to make such investigations as it deems necessary to inform itself as to the
business, prospects, operations, property, financial and other condition and
creditworthiness of Borrower and any other Person (other than the Lender Group)
party to a Loan Document. Except for notices, reports and other documents
expressly herein required to be furnished to the Lenders by Agent, Agent shall
not have any duty or responsibility to provide any
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Lender with any credit or other information concerning the business, prospects,
operations, property, financial and other condition or creditworthiness of
Borrower and any other Person party to a Loan Document that may come into the
possession of any of the Agent-Related Persons.
17.7 COSTS AND EXPENSES; INDEMNIFICATION. Agent may incur and
pay Lender Group Expenses to the extent Agent deems reasonably necessary or
appropriate for the performance and fulfillment of its functions, powers, and
obligations pursuant to the Loan Documents, including without limiting the
generality of the foregoing, court costs, reasonable attorneys fees and
expenses, costs of collection by outside collection agencies and auctioneer fees
and costs of security guards or insurance premiums paid to maintain the
Collateral, whether or not Borrower is obligated to reimburse Agent or Lenders
for such expenses pursuant to the Loan Agreement or otherwise. Agent is
authorized and directed to deduct and retain sufficient amounts from Collections
to reimburse Agent for such out-of-pocket costs and expenses prior to the
distribution of any amounts to Lenders. In the event Agent is not reimbursed for
such costs and expenses from Collections, each Lender hereby agrees that it is
and shall be obligated to pay to or reimburse Agent for the amount of such
Lender's Pro Rata Share thereof. Whether or not the transactions contemplated
hereby are consummated, the Lenders shall indemnify upon demand the
Agent-Related Persons (to the extent not reimbursed by or on behalf of Borrower
and without limiting the obligation of Borrower to do so), according to their
Pro Rata Shares, from and against any and all Indemnified Liabilities; provided,
however, that no Lender shall be liable for the payment to the Agent-Related
Persons of any portion of such Indemnified Liabilities resulting solely from
such Person's gross negligence or willful misconduct. Without limitation of the
foregoing, each Lender shall reimburse Agent upon demand for its ratable share
of any costs or out-of-pocket expenses (including attorneys fees and expenses)
incurred by Agent in connection with the preparation, execution, delivery,
administration, modification, amendment or enforcement (whether through
negotiations, legal proceedings or otherwise) of, or legal advice in respect of
rights or responsibilities under, this Agreement, any other Loan Document, or
any document contemplated by or referred to herein, to the extent that Agent is
not reimbursed for such expenses by or on behalf of Borrower. The undertaking in
this section shall survive the payment of all Obligations hereunder and the
resignation or replacement of Agent.
17.8 AGENT IN INDIVIDUAL CAPACITY. Foothill and its Affiliates
may make loans to, issue letters of credit for the account of, accept deposits
from, acquire equity interests in and generally engage in any kind of banking,
trust, financial advisory, underwriting or other business with Borrower and its
Subsidiaries and Affiliates and any other Person (other than the Lender Group)
party to any Loan Documents as though Foothill were not Agent hereunder and
without notice to or consent of the Lenders. The Lenders acknowledge that,
pursuant to such activities, Foothill or its Affiliates may receive information
regarding Borrower or its Affiliates and any other Person (other than the Lender
Group) party to any Loan Documents that is subject to confidentiality
obligations in favor of Borrower or such other Person and that prohibit the
disclosure of such information to the Lenders, and the Lenders acknowledge that,
in such circumstances (and in the absence of a waiver of such confidentiality
obligations, which waiver Agent will use its reasonable best efforts to obtain),
Agent shall be under no obligation to provide such information to them. With
respect to the Foothill Loans and Agent Advances, Foothill shall have the same
rights and powers under this Agreement as any other Lender and may exercise the
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same as though it were not Agent, and the terms "Lender" and "Lenders" include
Foothill in its individual capacity.
17.9 SUCCESSOR AGENT. Agent may resign as Agent upon 45 days
notice to the Lenders. If Agent resigns under this Agreement, the Required
Lenders shall appoint a successor Agent for the Lenders. If no successor Agent
is appointed prior to the effective date of the resignation of Agent, Agent
shall appoint, after consulting with the Lenders, a successor Agent and such
appointed successor Agent shall be deemed acceptable to the Lenders. If Agent
has materially breached or failed to perform any material provision of this
Agreement or of applicable law, the Required Lenders may agree in writing to
remove and replace Agent with a successor Agent from among the Lenders. In any
such event, upon the acceptance of its appointment as successor Agent hereunder,
such successor Agent shall succeed to all the rights, powers and duties of the
retiring Agent and the term "Agent" shall mean such successor Agent and the
retiring Agent's appointment, powers and duties as Agent shall be terminated.
After any retiring Agent's resignation hereunder as Agent, the provisions of
this Section 17 shall inure to its benefit as to any actions taken or omitted to
be taken by it while it was Agent under this Agreement. If no successor Agent
has accepted appointment as Agent by the date which is 45 days following a
retiring Agent's notice of resignation, the retiring Agent's resignation shall
nevertheless thereupon become effective and the Lenders shall perform all of the
duties of Agent hereunder until such time, if any, as the Lenders appoint a
successor Agent as provided for above.
17.10 WITHHOLDING TAX. (a) If any Lender is a "foreign
corporation, partnership or trust" within the meaning of the IRC and such Lender
claims exemption from, or a reduction of, U.S. withholding tax under Sections
1441 or 1442 of the IRC, such Lender agrees with and in favor of Agent and
Borrower, to deliver to Agent and Borrower:
(i) if such Lender claims an exemption from,
or a reduction of, withholding tax under a United States tax treaty, properly
completed IRS Forms 1001 and W-8 before the payment of any interest in the first
calendar year and before the payment of any interest in each third succeeding
calendar year during which interest may be paid under this Agreement;
(ii) if such Lender claims that interest
paid under this Agreement is exempt from United States withholding tax because
it is effectively connected with a United States trade or business of such
Lender, two properly completed and executed copies of IRS Form 4224 before the
payment of any interest is due in the first taxable year of such Lender and in
each succeeding taxable year of such Lender during which interest may be paid
under this Agreement, and IRS Form W-9; and
(iii) such other form or forms as may be
required under the IRC or other laws of the United States as a condition to
exemption from, or reduction of, United States withholding tax.
Such Lender agrees promptly to notify Agent and Borrower of any change in
circumstances which would modify or render invalid any claimed exemption or
reduction.
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(b) If any Lender claims exemption from, or reduction
of, withholding tax under a United States tax treaty by providing IRS Form 1001
and such Lender sells, assigns, grants a participation in, or otherwise
transfers all or part of the Obligations of Borrower to such Lender, such Lender
agrees to notify Agent of the percentage amount in which it is no longer the
beneficial owner of Obligations of Borrower to such Lender. To the extent of
such percentage amount, Agent will treat such Lender's IRS Form 1001 as no
longer valid.
(c) If any Lender claiming exemption from United
States withholding tax by filing IRS Form 4224 with Agent sells, assigns, grants
a participation in, or otherwise transfers all or part of the Obligations of
Borrower to such Lender, such Lender agrees to undertake sole responsibility for
complying with the withholding tax requirements imposed by Sections 1441 and
1442 of the IRC.
(d) If any Lender is entitled to a reduction in the
applicable withholding tax, Agent may withhold from any interest payment to such
Lender an amount equivalent to the applicable withholding tax after taking into
account such reduction. If the forms or other documentation required by
subsection (a) of this Section are not delivered to Agent, then Agent may
withhold from any interest payment to such Lender not providing such forms or
other documentation an amount equivalent to the applicable withholding tax.
(e) If the IRS or any other Governmental Authority of
the United States or other jurisdiction asserts a claim that Agent did not
properly withhold tax from amounts paid to or for the account of any Lender
(because the appropriate form was not delivered, was not properly executed, or
because such Lender failed to notify Agent of a change in circumstances which
rendered the exemption from, or reduction of, withholding tax ineffective, or
for any other reason) such Lender shall indemnify Agent fully for all amounts
paid, directly or indirectly, by Agent as tax or otherwise, including penalties
and interest, and including any taxes imposed by any jurisdiction on the amounts
payable to Agent under this Section, together with all costs and expenses
(including attorneys fees and expenses). The obligation of the Lenders under
this subsection shall survive the payment of all Obligations and the resignation
or replacement of Agent.
17.11 COLLATERAL MATTERS.
(a) The Lenders hereby irrevocably authorize Agent,
at its option and in its sole discretion, to release any Lien on any Collateral
(i) upon the termination of the Commitments and payment and satisfaction in full
by Borrower of all Obligations; (ii) constituting property being sold or
disposed of if a release is required or desirable in connection therewith and if
Borrower certifies to Agent that the sale or disposition is permitted under
Section 7.4 of this Agreement or the other Loan Documents (and Agent may rely
conclusively on any such certificate, without further inquiry); (iii)
constituting property in which Borrower owned no interest at the time the
security interest was granted or at any time thereafter; or (iv) constituting
property leased to Borrower under a lease that has expired or is terminated in a
transaction permitted under this Agreement. Except as provided above, Agent will
not execute and deliver a release of any Lien on any Collateral without the
prior written authorization of (y) if the release is of all or substantially all
of the Collateral, of all of the Lenders, or (z) otherwise, all
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of the Lenders. Upon request by Agent or Borrower at any time, the Lenders will
confirm in writing Agent's authority to release any such Liens on particular
types or items of Collateral pursuant to this Section 17.11; provided, however,
that (1) Agent shall not be required to execute any document necessary to
evidence such release on terms that, in Agent's opinion, would expose Agent to
liability or create any obligation or entail any consequence other than the
release of such Lien without recourse, representation, or warranty, and (2) such
release shall not in any manner discharge, affect, or impair the Obligations or
any Liens (other than those expressly being released) upon (or obligations of
Borrower in respect of) all interests retained by Borrower, including, the
proceeds of any sale, all of which shall continue to constitute part of the
Collateral.
(c) Agent shall have no obligation whatsoever to any
of the Lenders to assure that the Collateral exists or is owned by Borrower or
is cared for, protected, or insured or has been encumbered, or that the Agent's
Liens have been properly or sufficiently or lawfully created, perfected,
protected, or enforced or are entitled to any particular priority, or to
exercise at all or in any particular manner or under any duty of care,
disclosure or fidelity, or to continue exercising, any of the rights,
authorities and powers granted or available to Agent pursuant to any of the Loan
Documents, it being understood and agreed that in respect of the Collateral, or
any act, omission or event related thereto, subject to the terms and conditions
contained herein, Agent may act in any manner it may deem appropriate, in its
sole discretion given Agent's own interest in the Collateral in its capacity as
one of the Lenders and that Agent shall have no other duty or liability
whatsoever to any Lender as to any of the foregoing, except as otherwise
provided herein.
17.12 RESTRICTIONS ON ACTIONS BY LENDERS; SHARING OF PAYMENTS.
(a) Each of the Lenders agrees that it shall not, without the express consent of
Agent, and that it shall, to the extent it is lawfully entitled to do so, upon
the request of Agent, set off against the Obligations, any amounts owing by such
Lender to Borrower or any accounts of Borrower now or hereafter maintained with
such Lender. Each of the Lenders further agrees that it shall not, unless
specifically requested to do so by Agent, take or cause to be taken any action,
including, the commencement of any legal or equitable proceedings, to foreclose
any Lien on, or otherwise enforce any security interest in, any of the
Collateral the purpose of which is, or could be, to give such Lender any
preference or priority against the other Lenders with respect to the Collateral.
(b) Subject to Section 17.8, if, at any time or times
any Lender shall receive (i) by payment, foreclosure, setoff or otherwise, any
proceeds of Collateral or any payments with respect to the Obligations arising
under, or relating to, this Agreement or the other Loan Documents, except for
any such proceeds or payments received by such Lender from Agent pursuant to the
terms of this Agreement, or (ii) payments from Agent in excess of such Lender's
ratable portion of all such distributions by Agent, such Lender promptly shall
(1) turn the same over to Agent, in kind, and with such endorsements as may be
required to negotiate the same to Agent, or in same day funds, as applicable,
for the account of all of the Lenders and for application to the Obligations in
accordance with the applicable provisions of this Agreement, or (2) purchase,
without recourse or warranty, an undivided interest and participation in the
Obligations owed to the other Lenders so that such excess payment received shall
be applied ratably as among the Lenders in accordance with their Pro Rata
Shares; provided, however, that if all or part of such excess payment received
by the purchasing party is thereafter recovered from it, those purchases of
participations shall be rescinded in whole or in part, as applicable, and the
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applicable portion of the purchase price paid therefor shall be returned to such
purchasing party, but without interest except to the extent that such purchasing
party is required to pay interest in connection with the recovery of the excess
payment.
17.13 AGENCY FOR PERFECTION. Agent and each Lender hereby
appoints each other Lender as agent for the purpose of perfecting the Agent's
Liens in assets which, in accordance with Article 9 of the UCC can be perfected
only by possession. Should any Lender obtain possession of any such Collateral,
such Lender shall notify Agent thereof, and, promptly upon Agent's request
therefor shall deliver such Collateral to Agent or in accordance with Agent's
instructions.
17.14 PAYMENTS BY AGENT TO THE LENDERS. All payments to be
made by Agent to the Lenders shall be made by bank wire transfer or internal
transfer of immediately available funds to:
If to Foothill: The Chase Manhattan Bank
New York, New York
ABA # 021-000-021
Credit: Foothill Capital Corporation
Account No. 323-266193
Re: Petsec Energy
or pursuant to such other wire transfer instructions as each party may designate
for itself by written notice to Agent. Concurrently with each such payment,
Agent shall identify whether such payment (or any portion thereof) represents
principal, premium or interest on revolving advances or otherwise.
17.15 CONCERNING THE COLLATERAL AND RELATED LOAN DOCUMENTS.
Each member of the Lender Group authorizes and directs Agent to enter into this
Agreement and the other Loan Documents relating to the Collateral, for the
benefit of the Lender Group. Each member of the Lender Group agrees that any
action taken by Agent or all Lenders, as applicable, in accordance with the
terms of this Agreement or the other Loan Documents relating to the Collateral
and the exercise by Agent or all Lenders, as applicable, of their respective
powers set forth therein or herein, together with such other powers that are
reasonably incidental thereto, shall be binding upon all of the Lenders.
17.16 FIELD AUDITS AND EXAMINATION REPORTS; CONFIDENTIALITY;
DISCLAIMERS BY LENDERS; OTHER REPORTS AND INFORMATION. By signing this
Agreement, each Lender:
(a) is deemed to have requested that Agent furnish
such Lender, promptly after it becomes available, a copy of each field audit or
examination report (each a "Report" and collectively, "Reports") prepared by
Agent, and Agent shall so furnish each Lender with such Reports;
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(b) expressly agrees and acknowledges that neither
Foothill nor Agent (i) makes any representation or warranty as to the accuracy
of any Report, or (ii) shall be liable for any information contained in any
Report;
(c) expressly agrees and acknowledges that the
Reports are not comprehensive audits or examinations, that Agent or other party
performing any audit or examination will inspect only specific information
regarding Borrower and will rely significantly upon Borrower's books and
records, as well as on representations of Borrower's personnel;
(d) agrees to keep all Reports and other material,
non-public information regarding Borrower and its Subsidiaries and their
operations, assets, and existing and contemplated business plans in a
confidential manner; it being understood and agreed by Borrower that in any
event such Lender may make disclosures (a) to counsel for and other advisors,
accountants, and auditors to such Lender, (b) reasonably required by any bona
fide potential or actual Assignee, transferee, or Participant in connection with
any contemplated or actual assignment or transfer by such Lender of an interest
herein or any participation interest in such Lender's rights hereunder, (c) of
information that has become public by disclosures made by Persons other than
such Lender, its Affiliates, assignees, transferees, or participants, or (d) as
required or requested by any court, governmental or administrative agency,
pursuant to any subpoena or other legal process, or by any law, statute,
regulation, or court order; provided, however, that, unless prohibited by
applicable law, statute, regulation, or court order, such Lender shall notify
Borrower of any request by any court, governmental or administrative agency, or
pursuant to any subpoena or other legal process for disclosure of any such
non-public material information concurrent with, or where practicable, prior to
the disclosure thereof; and
(e) without limiting the generality of any other
indemnification provision contained in this Agreement, agrees: (i) to hold Agent
and any such other Lender preparing a Report harmless from any action the
indemnifying Lender may take or conclusion the indemnifying Lender may reach or
draw from any Report in connection with any loans or other credit accommodations
that the indemnifying Lender has made or may make to Borrower, or the
indemnifying Lender's participation in, or the indemnifying Lender's purchase
of, a loan or loans of Borrower; and (ii) to pay and protect, and indemnify,
defend and hold Agent and any such other Lender preparing a Report harmless from
and against, the claims, actions, proceedings, damages, costs, expenses and
other amounts (including, attorney costs) incurred by Agent and any such other
Lender preparing a Report as the direct or indirect result of any third parties
who might obtain all or part of any Report through the indemnifying Lender.
In addition to the foregoing: (x) Any Lender may from time to time request of
Agent in writing that Agent provide to such Lender a copy of any report or
document provided by Borrower to Agent that has not been contemporaneously
provided by Borrower to such Lender, and, upon receipt of such request, Agent
shall provide a copy of same to such Lender promptly upon receipt thereof from
Borrower; (y) To the extent that Agent is entitled, under any provision of the
Loan Documents, to request additional reports or information from Borrower, any
Lender may, from time to time, reasonably request Agent to exercise such right
as specified in such Lender's notice to Agent, whereupon Agent promptly shall
request of Borrower the additional reports or information specified by such
Lender, and, upon receipt thereof from Borrower, Agent promptly
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shall provide a copy of same to such Lender; and (z) Any time that Agent renders
to Borrower a statement regarding the Loan Account, Agent shall send a copy of
such statement to each Lender.
17.17 SEVERAL OBLIGATIONS; NO LIABILITY. Notwithstanding that
certain of the Loan Documents now or hereafter may have been or will be executed
only by or in favor of Agent in its capacity as such, and not by or in favor of
the Lenders, any and all obligations on the part of Agent (if any) to make any
credit available hereunder shall constitute the several (and not joint)
obligations of the respective Lenders on a ratable basis, according to their
respective Commitments, to make an amount of such credit not to exceed, in
principal amount, at any one time outstanding, the amount of their respective
Commitments. Nothing contained herein shall confer upon any Lender any interest
in, or subject any Lender to any liability for, or in respect of, the business,
assets, profits, losses, or liabilities of any other Lender. Each Lender shall
be solely responsible for notifying its Participants of any matters relating to
the Loan Documents to the extent any such notice may be required, and no Lender
shall have any obligation, duty, or liability to any Participant of any other
Lender. Except as provided in Section 17.7, no member of the Lender Group shall
have any liability for the acts or any other member of the Lender Group. No
Lender shall be responsible to Borrower or any other Person for any failure by
any other Lender to fulfill its obligations to make credit available hereunder,
nor to advance for it or on its behalf in connection with its Commitment, nor to
take any other action on its behalf hereunder or in connection with the
financing contemplated herein.
18. GENERAL PROVISIONS.
18.1 EFFECTIVENESS. This Agreement shall be binding and deemed
effective when executed by Borrower and each member of the Lender Group whose
signature is provided for on the signature pages hereof.
18.2 SECTION HEADINGS. Headings and numbers have been set
forth herein for convenience only. Unless the contrary is compelled by the
context, everything contained in each section applies equally to this entire
Agreement.
18.3 INTERPRETATION. Neither this Agreement nor any
uncertainty or ambiguity herein shall be construed or resolved against the
Lender Group or Borrower, whether under any rule of construction or otherwise.
On the contrary, this Agreement has been reviewed by all parties and shall be
construed and interpreted according to the ordinary meaning of the words used so
as to fairly accomplish the purposes and intentions of all parties hereto.
18.4 SEVERABILITY OF PROVISIONS. Each provision of this
Agreement shall be severable from every other provision of this Agreement for
the purpose of determining the legal enforceability of any specific provision.
18.5 AMENDMENTS IN WRITING. This Agreement can only be amended
by a writing signed by Agent, the requisite Lenders, and Borrower.
18.6 COUNTERPARTS; TELEFACSIMILE EXECUTION. This Agreement may
be executed in any number of counterparts and by different parties on separate
counterparts, each of
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which, when executed and delivered, shall be deemed to be an original, and all
of which, when taken together, shall constitute but one and the same Agreement.
Delivery of an executed counterpart of this Agreement by telefacsimile shall be
equally as effective as delivery of an original executed counterpart of this
Agreement. Any party delivering an executed counterpart of this Agreement by
telefacsimile also shall deliver an original executed counterpart of this
Agreement but the failure to deliver an original executed counterpart shall not
affect the validity, enforceability, and binding effect of this Agreement. The
forgoing shall apply to each other Loan Document mutatis mutandis.
18.7 REVIVAL AND REINSTATEMENT OF OBLIGATIONS. If the
incurrence or payment of the Obligations by Borrower or any guarantor of the
Obligations or the transfer by either or both of such parties to the Lender
Group of any property of either or both of such parties should for any reason
subsequently be declared to be void or voidable under any state or federal law
relating to creditors' rights, including provisions of the Bankruptcy Code
relating to fraudulent conveyances, preferences, and other voidable or
recoverable payments of money or transfers of property (collectively, a
"Voidable Transfer"), and if the Lender Group is required to repay or restore,
in whole or in part, any such Voidable Transfer, or elects to do so upon the
reasonable advice of its counsel, then, as to any such Voidable Transfer, or the
amount thereof that the Lender Group is required or elects to repay or restore,
and as to all reasonable costs, expenses, and attorneys fees of the Lender Group
related thereto, the liability of Borrower or such guarantor automatically shall
be revived, reinstated, and restored and shall exist as though such Voidable
Transfer had never been made.
18.8 INTEGRATION. This Agreement, together with the other Loan
Documents, reflects the entire understanding of the parties with respect to the
transactions contemplated hereby and shall not be contradicted or qualified by
any other agreement, oral or written, before the date hereof.
18.9 AMENDMENT AND RESTATEMENT; RELEASE. This Agreement and
the obligations of Borrower set forth herein constitute an amendment,
modification and restatement, but not an extinguishment or novation, of
obligations of the Borrower originally owed to the Prior Lenders and/or the
predecessors in interest to Prior Lenders (the "Prior Obligations"), the Prior
Lenders having assigned all of such Prior Obligations (together with all Liens
and security documents securing the same) to Agent and the Lender Group pursuant
to the Prior Lender Assignment Agreements. This Agreement and the other Loan
Documents are not intended as, and shall not be construed as, a release,
impairment or novation of the Prior Obligations or the other indebtedness,
liabilities and obligations of Borrower or any of the other Loan Parties under
the agreements, documents and instruments executed in connection therewith or
relating thereto or the Liens granted therein, all of which Liens are hereby
modified and affirmed. BORROWER AND EACH OTHER LOAN PARTY HEREBY VOLUNTARILY AND
KNOWINGLY RELEASE AND FOREVER DISCHARGE AGENT AND EACH OF THE LENDERS, ITS
PREDECESSORS, AGENTS, EMPLOYEES, ATTORNEYS, SUCCESSORS AND ASSIGNS, FROM ALL
POSSIBLE CLAIMS, DEMANDS, ACTIONS, CAUSES OF ACTION, DAMAGES, COSTS, EXPENSES,
AND LIABILITIES WHATSOEVER, KNOWN OR UNKNOWN, ANTICIPATED OR UNANTICIPATED,
SUSPECTED OR UNSUSPECTED, FIXED, CONTINGENT, OR CONDITIONAL, AT LAW OR IN
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EQUITY, ORIGINATING IN WHOLE OR IN PART ON OR BEFORE THE DATE THIS AGREEMENT IS
EXECUTED, WHICH BORROWER AND SUCH OTHER LOAN PARTIES, INDIVIDUALLY OR
COLLECTIVELY, MAY NOW OR HEREAFTER HAVE AGAINST AGENT, ANY OF THE LENDERS, ITS
PREDECESSORS, AGENTS, EMPLOYEES, ATTORNEYS, SUCCESSORS AND ASSIGNS, IF ANY, AND
IRRESPECTIVE OF WHETHER ANY SUCH CLAIMS ARISE OUT OF CONTRACT, TORT, VIOLATION
OF LAW OR REGULATIONS, OR OTHERWISE, AND ARISING FROM ANY ADVANCES, LETTERS OF
CREDIT OR OTHER INDEBTEDNESS, INCLUDING, WITHOUT LIMITATION, ANY CONTRACTING
FOR, CHARGING, TAKING, RESERVING, COLLECTING OR RECEIVING INTEREST IN EXCESS OF
THE HIGHEST LAWFUL RATE APPLICABLE, THE EXERCISE OF ANY RIGHTS AND REMEDIES
UNDER THE AGREEMENT OR OTHER TRANSACTION DOCUMENTS, AND NEGOTIATION FOR AND
EXECUTION OF THIS AGREEMENT.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed.
BORROWER:
PETSEC ENERGY INC.,
a Nevada corporation
By:
-------------------------------------------------
James E. Slatten III
Vice President - Land & Legal
AGENT:
FOOTHILL CAPITAL CORPORATION,
a California corporation, as Agent for the Lenders
By: /s/ Randy Harvey
-------------------------------------------------
Randy Harvey
Senior Vice President
LENDERS:
FOOTHILL CAPITAL CORPORATION,
a California corporation, as a Lender
By: /s/ Randy Harvey
-------------------------------------------------
Randy Harvey
Senior Vice President
Schedule 5.20
<PAGE> 1
EXHIBIT 10.3
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") dated effective
as of May 1, 1999, (the "Start Date") is between Petsec Energy Inc., a
corporation formed under the laws of Nevada (the "Company"), and John T.
Bellatti, an individual resident of the State of Louisiana (the "Executive").
W I T N E S S E T H:
WHEREAS, Company and Executive desire to enter into a written agreement
providing for the continued employment of Executive by Company upon the terms
and subject to the conditions set forth herein;
WHEREAS, Executive will report to the Chief Executive Officer (the
"CEO") of the Company or his designee, and he shall have the right, under the
terms and conditions specified in this Agreement, to recommend to Company's
Board of Directors (the "Company Board") any determination made under the
Agreement;
NOW, THEREFORE, in consideration of the premises, the mutual covenants
and agreements herein contained, and other good and valuable consideration, the
receipt, adequacy and sufficiency of which hereby are acknowledged, the parties
agree as follows:
1. EMPLOYMENT. Subject to the provisions of this Agreement,
Company hereby agrees to employ Executive and Executive hereby
agrees to accept such employment with, and to provide to
Company the services described in Section 3 below.
2. TERM. Executive shall be employed by Company for a period
commencing on the Start Date and, except as otherwise provided
herein, ending on the third anniversary of the Start Date. The
term of this Agreement shall be extended annually without the
necessity of any affirmative action by any party for an
additional one year term (to make an aggregate three year
commitment on the part of Company and Executive) on May 1 of
each year that Executive is employed by Company, unless prior
to May 1 of each such year Company terminates this Agreement
by sending written notice to Executive (in which case, the
provisions of Section 8.1 shall apply). The period during
which Company employs Executive shall hereinafter be referred
to as the "Term of Employment."
3. NATURE OF SERVICE. During the Term of Employment, Executive
agrees to perform such services as are consistent with his
position as Vice-President--Exploration and Chief Geophysicist
or as from time to time shall be assigned to him by the CEO or
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his designee. Executive shall devote so much of his time,
attention and skills to the business of Company as is
necessary to properly perform his duties and responsibilities.
Executive shall not, during the Term of Employment, be engaged
in, or represent any party other than Company in connection
with the provision of any services whatsoever without the
prior written consent of the CEO or his designee. Executive
shall perform his duties under this Agreement diligently with
fidelity and loyalty and in a competent manner consistent with
the level of his responsibilities.
4. COMPENSATION.
4.1. BASE SALARY. During the Term of Employment, Company
shall pay to Executive a base salary payable in equal
periodic installments in accordance with the
established payroll practices of Company. Initially,
the Executive's base salary shall be $156,875 per
year. Executive's base salary shall be reviewed
annually on or before July 1 by the Remuneration
Committee (the "Committee") of the Petsec Energy
Ltd's (the "Parent") Board of Directors (the " Parent
Board"). (If the Parent no longer has beneficial
ownership of at least a majority of the outstanding
voting stock of the Company, then the
responsibilities of the Committee shall be performed
by the Company Board.) The Committee may recommend
increases to the Executive's base salary, which if
accepted by the Company Board, shall become effective
in the manner determined by the Company Board. ("Base
Salary," as used hereinafter, shall mean at any
particular time the periodic payment last paid to
Executive pursuant to this Section 4.1, multiplied by
the appropriate factor to arrive at an annualized
number.)
4.2. CASH INCENTIVE COMPENSATION. On or before April 1 of
each year, the Committee shall recommend to the
Company Board the amount, if any, that shall be
awarded to all senior executives (including
Executive) of the Company who are eligible to
participate in the cash incentive compensation
program. The Committee shall recommend to the Company
Board the cash award, if any, to be paid to Executive
up to a maximum of 100% of Executive's Base Salary.
The amounts available for distribution under the
Company's cash incentive compensation program shall
take into account Company financial and operating
results. The incentive compensation amount awarded to
Executive shall be weighted evenly between Company
performance and individual performance to reward both
cooperative management efforts to attain Company
objectives and individual achievement. Fifty percent
of the cash incentive compensation available to
Executive shall be based on Company performance and
50% shall be based on the individual performance of
Executive. Company performance shall be measured
subjectively by the Committee with input from the
CEO. The Committee shall evaluate individual
performance of the Executive with input
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from the CEO. The cash incentive compensation, if
paid, will be paid to Executive in a lump sum in
April of each year.
4.3. TAXES. All taxes and governmentally required
withholdings shall be deducted in conformity with
applicable laws.
5. STOCK OPTIONS.
5.1. GRANT OF OPTION. As additional compensation to
Executive, Parent has issued to Executive as of the
Start Date options to purchase 450,000 ordinary
shares of Parent, and from time to time the Parent
may issue additional options (collectively, the
"Options"). The Options are governed by the Petsec
Energy Ltd Employee Option Plan, as may be amended
from time to time and one or more times (the "Option
Plan"). Executive agrees that the issue and exercise
of the Options are governed by the rules of the Plan,
and by the additional terms and conditions set by the
Committee and described in the Option Certificates
delivered to Executive with respect to the Options.
Copies of the Option Certificates are attached hereto
as Exhibit A. Award of additional Options to
Executive shall be considered annually on or before
May 1 of each year by the Committee, and a
recommendation with respect thereto made to the
Parent Board.
5.2. TAX CONSEQUENCES. Executive shall be responsible for
the payment of all income taxes, alternative minimum
taxes or other taxes or governmental charges that may
accrue on account of the issuance or exercise of the
Options or the acquisition or sale by Executive of
Parent stock acquired with respect to the Options.
Executive should consult his own tax advisor
regarding the specific tax consequences of
participation in the Plan, including the application
of any federal, state and local tax laws and the
effect of other state and local laws, including
community property laws. Executive agrees to defend
and indemnify Company and Parent for any claims made
against Company, Parent or Executive by any taxing
authority for income or alternative minimum taxes
that may be owed by Executive on account of the
issuance, exercise or sale of the options or the
acquisition or sale by Executive of any Parent stock
acquired with respect to any Options.
6. BENEFITS. Executive shall receive the employee benefits as may
be provided by Company from time to time to employees of
Company holding executive offices and positions, all as
approved by the Company Board. These benefits shall include:
6.1. VACATION TIME. Executive will be eligible for twenty
working days of vacation time per year together with
all public holidays recognized by Company. The use
and accrual of such vacation time shall be governed
by the
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Company's vacation policy, as the same may be amended
from time to time and one or more times.
6.2. DEATH BENEFIT. The Company shall maintain life
insurance for the benefit of the beneficiary(ies) of
Executive that shall pay to Executive's
beneficiary(ies) a death benefit in an amount equal
to at least three times the lowest Base Salary in
effect during the twelve months preceding Executive's
death.
6.3. DISABILITY BENEFIT. The Company shall maintain
disability insurance for the benefit of Executive
that is commensurate with the disability policy in
place as of the Start Date.
6.4. SEVERANCE BENEFIT. Executive shall receive the
severance benefit provided for in Section 8.4.2.
7. REIMBURSEMENT OF BUSINESS EXPENSES. Company shall reimburse
Executive for all reasonable and proper travel and
out-of-pocket expenses (including but not limited to industry
association fees and industry entertainment expenses) incurred
by him for the purpose of and in connection with the
performance of his duties pursuant to this Agreement during
the Term of Employment, all in accordance with the policies
relating to the allowable amount of such expenses and the
provision of itemized reports and receipts with respect
thereto that may from time to time be adopted by Company.
8. TERMINATION.
8.1. TERMINATION BY COMPANY.
8.1.1. FOR CAUSE. Executive's employment under this
Agreement may be terminated for cause at any
time, effective immediately, after formal
action by the CEO acting at the direction of
the Company Board following a meeting of the
Company Board, duly called for the purpose
of considering the termination of Executive
for "cause," as defined herein. As used in
this Section 8.1.1, "cause" shall mean that
the Company Board in good faith either
determines or has reasonable suspicions that
one or more of the following has occurred:
(1) Executive has engaged in gross
negligence or willful misconduct in the
performance of his duties; (2) Executive has
willfully refused without proper legal
reason to perform his duties and
responsibilities; (3) Executive has
materially breached any material provision
of any agreement between Executive and
Company; (4) Executive has materially
breached any material corporate policy of
the Company; or (5) Executive has engaged in
illegal conduct, or has violated any
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statute, rule or regulation under federal
securities laws, or has engaged in any act
of serious dishonesty which adversely
affects, or reasonably could in the future
adversely affect, Executive's value,
reliability or performance in a material
manner or the business reputation of the
Company. In the event that Company acts to
terminate Executive for cause in accordance
with this Section 8.1.1, Executive shall be
entitled to receive only the compensation
provided for in Section 8.4.1 and any rights
provided under the Option Plan with respect
to the Options.
8.1.2. WITHOUT CAUSE. Company may terminate
Executive's employment under this Agreement
at any time, in which case Executive will be
entitled to receive only the compensation
provided for in Section 8.4.1, the severance
benefit provided for in Section 8.4.2 and
any rights provided under the Option Plan
with respect to the Options.
8.2. TERMINATION BY EXECUTIVE.
8.2.1. FOR CAUSE. Executive may terminate his
employment under this Agreement if Company
does any one or more of the following: (1)
Company makes a material reduction in
Executive's job duties, authority or
responsibilities with the Company from that
exercised by him immediately prior to such
change (however, a reduction in the size of
Company and/or in the number of employees
working under the supervision of Executive,
shall not constitute a material reduction
hereunder); (2) a reduction of more than 10%
in any twelve month period from the Base
Salary paid by the Company to Executive
during the twelve months immediately
preceding such Base Salary reduction; (3) a
change in location of Executive's primary
place of employment by the Company by more
than 30 miles from the location where he was
primarily employed prior to such change; (4)
a material reduction in the value of or
change in the scope or terms of the benefits
to which the Executive, taken as a whole,
was entitled prior to such reduction or
change; or (5) Company otherwise fails to
comply with any material provision of this
Agreement. Before terminating his employment
for cause under this Section 8.2.1,
Executive shall first provide the Company
with written notice specifying in detail the
reasons why Executive believes he has the
right to terminate his employment for cause
and allowing Company ten (10) days to cure
any such default. If Executive provides such
a notice to Company and then fails to
terminate his employment for cause within
five days after the expiration of the (10)
day cure period (because Company has cured
such default, because Executive decides
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he no longer wants to terminate this
Agreement or for any other reason),
Executive shall be deemed to have waived his
right to terminate this Agreement for the
reasons specified in the notice. If
Executive does terminate his employment for
cause under this Section 8.2.1, Executive
will be entitled to receive only the
compensation provided for in Section 8.4.1,
the severance benefit provided for in
Section 8.4.2 and any rights provided under
the Option Plan with respect to the Options.
8.2.2. WITHOUT CAUSE. Executive may terminate his
employment under this Agreement without
cause by giving Company at least sixty (60)
days' prior written notice of the effective
date of his termination of employment. In
the event that Executive terminates his
employment under this Section 8.2.2,
Executive shall be entitled to receive only
the compensation provided for in Section
8.4.1 and any rights provided under the
Option Plan with respect to the Options.
Provided that Executive complies with this
Section, Executive shall not be liable for
any damages to Company on account of such
termination.
8.3. TERMINATION UPON DEATH OR DISABILITY.
8.3.1. If Executive becomes permanently disabled so
as to become eligible for permanent
disability insurance benefits under a long
term disability policy maintained by the
Company for the benefit of Executive, at
such time as Executive is determined to be
permanently disabled, Executive's employment
shall be deemed terminated. In the event
that Executive's employment is terminated
under this Section 8.3.1, Executive shall be
entitled to receive only the compensation
provided for in Section 8.4.1, the benefit
provided under Section 6.3, and any rights
provided under the Option Plan with respect
to the Options.
8.3.2. If Executive dies, his employment shall be
deemed to be terminated as of the date of
his death. In such a case, Executive's heirs
or successors shall be entitled to receive
only the benefit provided for in Section
6.2, the compensation provided for in
Section 8.4.1 and any rights provided under
the Option Plan with respect to the Options.
8.4. DAMAGES TO EXECUTIVE IN THE EVENT OF TERMINATION.
8.4.1. COMPENSATION IN THE EVENT OF TERMINATION.
Upon the termination of Executive's
employment with Company, Company shall pay
to Executive (or Executive's heirs or
successors) all unpaid Base Salary
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for the period through the date of
termination and reimbursement for allowable
expenses incurred by Executive through such
date. Company shall not be obligated to pay
Executive any Base Salary for periods beyond
the date of termination.
8.4.2. SEVERANCE BENEFIT. Upon the termination of
Executive's employment with Company under
circumstances set forth in Sections 8.1.2 or
8.2.1, Company shall pay to Executive in a
lump sum an amount equal to the product of
(a) the number of months (prorated for a
partial month) remaining on the term of this
Agreement (which number shall be greater
than or equal to 24 and less than or equal
to 36) times (b) the quotient of the Base
Salary divided by 12. This lump sum payment
shall be made within five days of the
termination of Executive's employment. The
severance benefit provided for under this
Section 8.4.2 shall be reduced dollar for
dollar by any amount to which Executive is
or may become entitled pursuant to the
Petsec Energy Inc. Change in Control Bonus
and Severance Plan or any similar plan.
8.4.3. OPTIONS. Upon Executive's termination of
employment for any reason, Executive's
rights and Company's obligations with
respect to the Options shall be governed by
the Employee Option Plan.
9. CERTAIN COVENANTS OF EXECUTIVE.
9.1. Executive agrees that during the Term of Employment,
he will not (a) directly or indirectly engage or
invest in any business other than Company's business
without the prior approval of the CEO or his designee
or (b) otherwise act as a director, officer,
employee, agent, owner, partner or consultant to any
such business. It is understood and agreed that
Executive shall not be deemed to be in default with
respect to this Section 9.1 as a result of any
investment he may make in not more than five percent
of the outstanding shares or other units of any
security registered pursuant to Section 12 of the
Securities Exchange Act of 1934, as amended (the
"1934 Act") or in not more than fifty percent of the
outstanding shares or other units of any security not
registered pursuant to Section 12 of the 1934 Act.
9.2. Executive will not during his employment or
thereafter (except in the course of his duties as
authorized by Company or as required by law) use or
disclose to any person any confidential information
or trade secrets belonging or relating to Company or
any person or entity with whom Executive have come
into contact as a result of his employment. Upon
termination of this Agreement, Executive promptly
shall return all originals and copies of such
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papers, lists, documents and records that are in his
possession, custody or control.
9.3. If the provisions contained in this Section 9 are
more restrictive than permitted by applicable law,
the parties agree that the covenants contained in
this Section 9 shall be enforceable and in force to
the extent permitted by law.
10. AMENDMENT. This Agreement may not be modified or amended
except by a written instrument executed by or on behalf of
both Company and Executive.
11. WAIVERS. The observance of any term of this Agreement may be
waived (either generally or in a particular instance and
either retroactively or prospectively) by the party entitled
to enforce such term, but except as otherwise expressly
provided herein, such waiver shall be effective only if in a
writing signed by the party or parties against which such
waiver is to be asserted. Except as otherwise expressly
provided herein, no delay or omission on the part of any party
in exercising any right, power or privilege hereunder shall
operate as a waiver thereof, nor shall any waiver on the part
of any party of any right, power or privilege hereunder
operate as a waiver of any other right, power or privilege
hereunder, nor shall any single or partial exercise of any
right, power or privilege hereunder preclude any other or
further exercise thereof or the exercise of any other right,
power or privilege hereunder. All remedies, either under this
Agreement or by law or otherwise afforded to any party, shall
be cumulative and not alternative.
12. ENTIRE AGREEMENT. This Agreement and the documents expressly
referred to herein constitute the entire agreement between the
parties with respect to the matters covered hereby, and any
other prior or contemporaneous oral or written understandings
or agreements with respect to the matters covered hereby are
expressly superseded by this Agreement. There are no unwritten
or oral agreements between the parties.
13. SEVERABILITY. If any provision of this Agreement, or the
application of such provision to any person or circumstance,
shall be declared judicially to be invalid, unenforceable or
void, such decision will not have the effect of invalidating
or voiding the remainder of this Agreement or affect the
application of such provision to other persons or
circumstances, and the parties agree that the part or parts of
this Agreement so held to be invalid, unenforceable or void
will be deemed to have been stricken here from and the
remainder of this Agreement will have the same force and
effect as if such part or parts had never been included
herein. Any such finding of invalidity or unenforceability
shall not prevent the enforcement of such provision in any
other jurisdiction to the maximum extent permitted by
applicable law.
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14. NOTICES. Unless otherwise expressly provided herein, all
notices, requests, demands, consents, waivers, instructions,
approvals and other communications hereunder shall be in
writing and shall be deemed to have been duly given if
personally delivered to or mailed, certified mail, return
receipt requested, first-class postage paid, or delivered by
messenger service with receipt acknowledged, addressed as
follows:
If to Company:
Level 13, 1 Alfred Street
Sydney, NSW 1225, Australia
Attn: Terrence N. Fern
If to Executive:
John T. Bellatti
609 River Oak Circle
Lafayette, LA 70508
or to such other address or to such other individuals as any
party shall have last designated by notice to the other party.
All notices and other communications given to any party in
accordance with the provisions of this Agreement shall be
deemed to have been given when delivered to the intended
recipient thereof in accordance with the provisions of this
Section 14.
15. GOVERNING LAW; FORUM; CONSENT TO JURISDICTION. This Agreement
shall be construed in accordance with, and the rights of the
parties governed by, the laws of the State of Louisiana
without regard to the principles of conflict of laws. The
parties agree that all disputes in any way relating to,
arising under, connected with, or incident to this Agreement,
and over which the federal courts have subject matter
jurisdiction, shall be litigated exclusively in the United
States District Court for the Western District of Louisiana,
Lafayette Division, and, if necessary, the corresponding
appellate courts. The parties further agree that all disputes
in any way relating to, arising under, connected with, or
incident to this Agreement, and over which the federal courts
do not have subject matter jurisdiction, shall be litigated,
if at all, exclusively in the Courts of the State of
Louisiana, in Lafayette Parish, and, if necessary, the
corresponding appellate courts. The parties expressly submit
themselves to the personal jurisdiction of the State of
Louisiana.
16. SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, Executive agrees on behalf of himself and his
executors and administrators, heirs, legatees, distributees
and any other person or persons claiming any benefits under
him by virtue of this Agreement, that this Agreement and the
rights, interests and benefits
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hereunder shall not be assigned, transferred, pledged or
hypothecated in any way by Executive or any executor,
administrator, heir, legatee, distributee or person claiming
under Executive by virtue of this Agreement and shall not be
subject to execution, attachment or similar process. Except as
otherwise expressly provided herein, Company agrees that this
Agreement shall not be assigned or transferred to any other
party; provided, however, a merger or consolidation of Company
into a successor entity other than Company shall not be
considered a transfer or assignment. Any attempt at
assignment, transfer, pledge or hypothecation or other
disposition of this Agreement or of such rights, interest and
benefits contrary to the foregoing provisions, or the levy of
any attachment or similar process thereupon, shall be null and
void and without effect.
17. THIRD PARTY BENEFICIARIES. This Agreement does not create, and
shall not be construed as creating, any rights enforceable by
any person or entity not a party to this Agreement (except as
otherwise provided in Section 8.3.2 or in Section 16).
18. HEADINGS. The section headings in this Agreement are for
convenience of reference only and shall not be deemed to alter
or affect the meaning or interpretation of any provisions
hereof.
19. ARBITRATION. Any controversy or claim arising out of or
relating to this contract, or the breach thereof, shall be
settled by arbitration in Lafayette, Louisiana, in accordance
with the applicable Rules of the American Arbitration
Association using three (3) impartial arbitrators and judgment
upon the award rendered by the arbitrators may be entered in
any court having jurisdiction thereof. Each party shall select
one arbitrator and the selected arbitrator shall designate a
third arbitrator. If unable to agree to a third arbitrator,
the presiding judge in the United States District Court for
the Western District of Louisiana shall designate the third
arbitrator. This Section 19 shall take precedence over the
provisions of Section 15.
20. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original
and all of which together shall be deemed to be one and the
same instrument.
21. CURRENCY REFERENCES. All references to "$" are to United
States currency unless otherwise specifically stated in the
Agreement.
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IN WITNESS WHEREOF, this Agreement has been duly executed and delivered
to be effective as of the date first above written.
WITNESSES: COMPANY:
PETSEC ENERGY INC.
Printed Name:
-----------------------
Printed Name: By: /s/ Terrence N. Fern
----------------------- ----------------------------
Terrence N. Fern
Chief Executive Officer
EXECUTIVE:
Printed Name:
-----------------------
/s/ John T. Bellatti
------------------------------
Printed Name: John T. Bellatti
-----------------------
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EXHIBIT 10.4
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") dated effective as of May
1, 1999, (the "Start Date") is between Petsec Energy Inc., a corporation formed
under the laws of Nevada (the "Company"), and Ross A. Keogh, an individual
resident of the State of Louisiana (the "Executive").
W I T N E S S E T H:
WHEREAS, Company and Executive desire to enter into a written agreement
providing for the continued employment of Executive by Company upon the terms
and subject to the conditions set forth herein;
WHEREAS, Executive will report to the Chief Executive Officer (the
"CEO") of the Company or his designee, and he shall have the right, under the
terms and conditions specified in this Agreement, to recommend to Company's
Board of Directors (the "Company Board") any determination made under the
Agreement;
NOW, THEREFORE, in consideration of the premises, the mutual covenants
and agreements herein contained, and other good and valuable consideration, the
receipt, adequacy and sufficiency of which hereby are acknowledged, the parties
agree as follows:
1. EMPLOYMENT. Subject to the provisions of this Agreement,
Company hereby agrees to employ Executive and Executive hereby
agrees to accept such employment with, and to provide to
Company the services described in Section 3 below.
2. TERM. Executive shall be employed by Company for a period
commencing on the Start Date and, except as otherwise provided
herein, ending on the third anniversary of the Start Date. The
term of this Agreement shall be extended annually without the
necessity of any affirmative action by any party for an
additional one year term (to make an aggregate three year
commitment on the part of Company and Executive) on May 1 of
each year that Executive is employed by Company, unless prior
to May 1 of each such year Company terminates this Agreement
by sending written notice to Executive (in which case, the
provisions of Section 8.1 shall apply). The period during
which Company employs Executive shall hereinafter be referred
to as the "Term of Employment."
3. NATURE OF SERVICE. During the Term of Employment, Executive
agrees to perform such services as are consistent with his
position as Vice-President--Chief Financial Officer, Treasurer
and Director or as from time to time shall be assigned to him
by
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the CEO or his designee. Executive shall devote so much of his
time, attention and skills to the business of Company as is
necessary to properly perform his duties and responsibilities.
Executive shall not, during the Term of Employment, be engaged
in, or represent any party other than Company in connection
with the provision of any services whatsoever without the
prior written consent of the CEO or his designee. Executive
shall perform his duties under this Agreement diligently with
fidelity and loyalty and in a competent manner consistent with
the level of his responsibilities.
4. COMPENSATION.
4.1. BASE SALARY. During the Term of Employment, Company
shall pay to Executive a base salary payable in equal
periodic installments in accordance with the
established payroll practices of Company. Initially,
the Executive's base salary shall be $175,000 per
year. Executive's base salary shall be reviewed
annually on or before July 1 by the Remuneration
Committee (the "Committee") of the Petsec Energy
Ltd's (the "Parent") Board of Directors (the " Parent
Board"). (If the Parent no longer has beneficial
ownership of at least a majority of the outstanding
voting stock of the Company, then the
responsibilities of the Committee shall be performed
by the Company Board.) The Committee may recommend
increases to the Executive's base salary, which if
accepted by the Company Board, shall become effective
in the manner determined by the Company Board. ("Base
Salary," as used hereinafter, shall mean at any
particular time the periodic payment last paid to
Executive pursuant to this Section 4.1, multiplied by
the appropriate factor to arrive at an annualized
number.)
4.2. CASH INCENTIVE COMPENSATION. On or before April 1 of
each year, the Committee shall recommend to the
Company Board the amount, if any, that shall be
awarded to all senior executives (including
Executive) of the Company who are eligible to
participate in the cash incentive compensation
program. The Committee shall recommend to the Company
Board the cash award, if any, to be paid to Executive
up to a maximum of 100% of Executive's Base Salary.
The amounts available for distribution under the
Company's cash incentive compensation program shall
take into account Company financial and operating
results. The incentive compensation amount awarded to
Executive shall be weighted evenly between Company
performance and individual performance to reward both
cooperative management efforts to attain Company
objectives and individual achievement. Fifty percent
of the cash incentive compensation available to
Executive shall be based on Company performance and
50% shall be based on the individual performance of
Executive. Company performance shall be measured
subjectively by the Committee with input from the
CEO. The Committee shall evaluate individual
performance of the Executive with input
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from the CEO. The cash incentive compensation, if
paid, will be paid to Executive in a lump sum in
April of each year.
4.3. TAXES. All taxes and governmentally required
withholdings shall be deducted in conformity with
applicable laws.
5. STOCK OPTIONS.
5.1. GRANT OF OPTION. As additional compensation to
Executive, Parent has issued to Executive as of the
Start Date options to purchase 450,000 ordinary
shares of Parent, and from time to time the Parent
may issue additional options (collectively, the
"Options"). The Options are governed by the Petsec
Energy Ltd Employee Option Plan, as may be amended
from time to time and one or more times (the "Option
Plan"). Executive agrees that the issue and exercise
of the Options are governed by the rules of the Plan,
and by the additional terms and conditions set by the
Committee and described in the Option Certificates
delivered to Executive with respect to the Options.
Copies of the Option Certificates are attached hereto
as Exhibit A. Award of additional Options to
Executive shall be considered annually on or before
May 1 of each year by the Committee, and a
recommendation with respect thereto made to the
Parent Board.
5.2. TAX CONSEQUENCES. Executive shall be responsible for
the payment of all income taxes, alternative minimum
taxes or other taxes or governmental charges that may
accrue on account of the issuance or exercise of the
Options or the acquisition or sale by Executive of
Parent stock acquired with respect to the Options.
Executive should consult his own tax advisor
regarding the specific tax consequences of
participation in the Plan, including the application
of any federal, state and local tax laws and the
effect of other state and local laws, including
community property laws. Executive agrees to defend
and indemnify Company and Parent for any claims made
against Company, Parent or Executive by any taxing
authority for income or alternative minimum taxes
that may be owed by Executive on account of the
issuance, exercise or sale of the options or the
acquisition or sale by Executive of any Parent stock
acquired with respect to any Options.
6. BENEFITS. Executive shall receive the employee benefits as may
be provided by Company from time to time to employees of
Company holding executive offices and positions, all as
approved by the Company Board. These benefits shall include:
6.1. VACATION TIME. Executive will be eligible for twenty
working days of vacation time per year together with
all public holidays recognized by Company. The use
and accrual of such vacation time shall be governed
by the
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Company's vacation policy, as the same may be amended
from time to time and one or more times.
6.2. DEATH BENEFIT. The Company shall maintain life
insurance for the benefit of the beneficiary(ies) of
Executive that shall pay to Executive's
beneficiary(ies) a death benefit in an amount equal
to at least three times the lowest Base Salary in
effect during the twelve months preceding Executive's
death.
6.3. DISABILITY BENEFIT. The Company shall maintain
disability insurance for the benefit of Executive
that is commensurate with the disability policy in
place as of the Start Date.
6.4. SEVERANCE BENEFIT. Executive shall receive the
severance benefit provided for in Section 8.4.2.
7. REIMBURSEMENT OF BUSINESS EXPENSES. Company shall reimburse
Executive for all reasonable and proper travel and
out-of-pocket expenses (including but not limited to industry
association fees and industry entertainment expenses) incurred
by him for the purpose of and in connection with the
performance of his duties pursuant to this Agreement during
the Term of Employment, all in accordance with the policies
relating to the allowable amount of such expenses and the
provision of itemized reports and receipts with respect
thereto that may from time to time be adopted by Company.
8. TERMINATION.
8.1. TERMINATION BY COMPANY.
8.1.1. FOR CAUSE. Executive's employment under this
Agreement may be terminated for cause at any
time, effective immediately, after formal
action by the CEO acting at the direction of
the Company Board following a meeting of the
Company Board, duly called for the purpose
of considering the termination of Executive
for "cause," as defined herein. As used in
this Section 8.1.1, "cause" shall mean that
the Company Board in good faith either
determines or has reasonable suspicions that
one or more of the following has occurred:
(1) Executive has engaged in gross
negligence or willful misconduct in the
performance of his duties; (2) Executive has
willfully refused without proper legal
reason to perform his duties and
responsibilities; (3) Executive has
materially breached any material provision
of any agreement between Executive and
Company; (4) Executive has materially
breached any material corporate policy of
the Company; or (5) Executive has engaged in
illegal conduct, or has violated any
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statute, rule or regulation under federal
securities laws, or has engaged in any act
of serious dishonesty which adversely
affects, or reasonably could in the future
adversely affect, Executive's value,
reliability or performance in a material
manner or the business reputation of the
Company. In the event that Company acts to
terminate Executive for cause in accordance
with this Section 8.1.1, Executive shall be
entitled to receive only the compensation
provided for in Section 8.4.1 and any rights
provided under the Option Plan with respect
to the Options.
8.1.2. WITHOUT CAUSE. Company may terminate
Executive's employment under this Agreement
at any time, in which case Executive will be
entitled to receive only the compensation
provided for in Section 8.4.1, the severance
benefit provided for in Section 8.4.2 and
any rights provided under the Option Plan
with respect to the Options.
8.2. TERMINATION BY EXECUTIVE.
8.2.1. FOR CAUSE. Executive may terminate his
employment under this Agreement if Company
does any one or more of the following: (1)
Company makes a material reduction in
Executive's job duties, authority or
responsibilities with the Company from that
exercised by him immediately prior to such
change (however, a reduction in the size of
Company and/or in the number of employees
working under the supervision of Executive,
shall not constitute a material reduction
hereunder); (2) a reduction of more than 10%
in any twelve month period from the Base
Salary paid by the Company to Executive
during the twelve months immediately
preceding such Base Salary reduction; (3) a
change in location of Executive's primary
place of employment by the Company by more
than 30 miles from the location where he was
primarily employed prior to such change; (4)
a material reduction in the value of or
change in the scope or terms of the benefits
to which the Executive, taken as a whole,
was entitled prior to such reduction or
change; or (5) Company otherwise fails to
comply with any material provision of this
Agreement. Before terminating his employment
for cause under this Section 8.2.1,
Executive shall first provide the Company
with written notice specifying in detail the
reasons why Executive believes he has the
right to terminate his employment for cause
and allowing Company ten (10) days to cure
any such default. If Executive provides such
a notice to Company and then fails to
terminate his employment for cause within
five days after the expiration of the (10)
day cure period (because Company has cured
such default, because Executive decides
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he no longer wants to terminate this
Agreement or for any other reason),
Executive shall be deemed to have waived his
right to terminate this Agreement for the
reasons specified in the notice. If
Executive does terminate his employment for
cause under this Section 8.2.1, Executive
will be entitled to receive only the
compensation provided for in Section 8.4.1,
the severance benefit provided for in
Section 8.4.2 and any rights provided under
the Option Plan with respect to the Options.
8.2.2. WITHOUT CAUSE. Executive may terminate his
employment under this Agreement without
cause by giving Company at least sixty (60)
days' prior written notice of the effective
date of his termination of employment. In
the event that Executive terminates his
employment under this Section 8.2.2,
Executive shall be entitled to receive only
the compensation provided for in Section
8.4.1 and any rights provided under the
Option Plan with respect to the Options.
Provided that Executive complies with this
Section, Executive shall not be liable for
any damages to Company on account of such
termination.
8.3. TERMINATION UPON DEATH OR DISABILITY.
8.3.1. If Executive becomes permanently disabled so
as to become eligible for permanent
disability insurance benefits under a long
term disability policy maintained by the
Company for the benefit of Executive, at
such time as Executive is determined to be
permanently disabled, Executive's employment
shall be deemed terminated. In the event
that Executive's employment is terminated
under this Section 8.3.1, Executive shall be
entitled to receive only the compensation
provided for in Section 8.4.1, the benefit
provided under Section 6.3, and any rights
provided under the Option Plan with respect
to the Options.
8.3.2. If Executive dies, his employment shall be
deemed to be terminated as of the date of
his death. In such a case, Executive's heirs
or successors shall be entitled to receive
only the benefit provided for in Section
6.2, the compensation provided for in
Section 8.4.1 and any rights provided under
the Option Plan with respect to the Options.
8.4. DAMAGES TO EXECUTIVE IN THE EVENT OF TERMINATION.
8.4.1. COMPENSATION IN THE EVENT OF TERMINATION.
Upon the termination of Executive's
employment with Company, Company shall pay
to Executive (or Executive's heirs or
successors) all unpaid Base Salary
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for the period through the date of
termination and reimbursement for allowable
expenses incurred by Executive through such
date. Company shall not be obligated to pay
Executive any Base Salary for periods beyond
the date of termination.
8.4.2. SEVERANCE BENEFIT. Upon the termination of
Executive's employment with Company under
circumstances set forth in Sections 8.1.2 or
8.2.1, Company shall pay to Executive in a
lump sum an amount equal to the product of
(a) the number of months (prorated for a
partial month) remaining on the term of this
Agreement (which number shall be greater
than or equal to 24 and less than or equal
to 36) times (b) the quotient of the Base
Salary divided by 12. This lump sum payment
shall be made within five days of the
termination of Executive's employment. The
severance benefit provided for under this
Section 8.4.2 shall be reduced dollar for
dollar by any amount to which Executive is
or may become entitled pursuant to the
Petsec Energy Inc. Change in Control Bonus
and Severance Plan or any similar plan.
8.4.3. OPTIONS. Upon Executive's termination of
employment for any reason, Executive's
rights and Company's obligations with
respect to the Options shall be governed by
the Employee Option Plan.
9. CERTAIN COVENANTS OF EXECUTIVE.
9.1. Executive agrees that during the Term of Employment,
he will not (a) directly or indirectly engage or
invest in any business other than Company's business
without the prior approval of the CEO or his designee
or (b) otherwise act as a director, officer,
employee, agent, owner, partner or consultant to any
such business. It is understood and agreed that
Executive shall not be deemed to be in default with
respect to this Section 9.1 as a result of any
investment he may make in not more than five percent
of the outstanding shares or other units of any
security registered pursuant to Section 12 of the
Securities Exchange Act of 1934, as amended (the
"1934 Act") or in not more than fifty percent of the
outstanding shares or other units of any security not
registered pursuant to Section 12 of the 1934 Act.
9.2. Executive will not during his employment or
thereafter (except in the course of his duties as
authorized by Company or as required by law) use or
disclose to any person any confidential information
or trade secrets belonging or relating to Company or
any person or entity with whom Executive have come
into contact as a result of his employment. Upon
termination of this Agreement, Executive promptly
shall return all originals and copies of such
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papers, lists, documents and records that are in his
possession, custody or control.
9.3. If the provisions contained in this Section 9 are
more restrictive than permitted by applicable law,
the parties agree that the covenants contained in
this Section 9 shall be enforceable and in force to
the extent permitted by law.
10. AMENDMENT. This Agreement may not be modified or amended
except by a written instrument executed by or on behalf of
both Company and Executive.
11. WAIVERS. The observance of any term of this Agreement may be
waived (either generally or in a particular instance and
either retroactively or prospectively) by the party entitled
to enforce such term, but except as otherwise expressly
provided herein, such waiver shall be effective only if in a
writing signed by the party or parties against which such
waiver is to be asserted. Except as otherwise expressly
provided herein, no delay or omission on the part of any party
in exercising any right, power or privilege hereunder shall
operate as a waiver thereof, nor shall any waiver on the part
of any party of any right, power or privilege hereunder
operate as a waiver of any other right, power or privilege
hereunder, nor shall any single or partial exercise of any
right, power or privilege hereunder preclude any other or
further exercise thereof or the exercise of any other right,
power or privilege hereunder. All remedies, either under this
Agreement or by law or otherwise afforded to any party, shall
be cumulative and not alternative.
12. ENTIRE AGREEMENT. This Agreement and the documents expressly
referred to herein constitute the entire agreement between the
parties with respect to the matters covered hereby, and any
other prior or contemporaneous oral or written understandings
or agreements with respect to the matters covered hereby are
expressly superseded by this Agreement. There are no unwritten
or oral agreements between the parties.
13. SEVERABILITY. If any provision of this Agreement, or the
application of such provision to any person or circumstance,
shall be declared judicially to be invalid, unenforceable or
void, such decision will not have the effect of invalidating
or voiding the remainder of this Agreement or affect the
application of such provision to other persons or
circumstances, and the parties agree that the part or parts of
this Agreement so held to be invalid, unenforceable or void
will be deemed to have been stricken here from and the
remainder of this Agreement will have the same force and
effect as if such part or parts had never been included
herein. Any such finding of invalidity or unenforceability
shall not prevent the enforcement of such provision in any
other jurisdiction to the maximum extent permitted by
applicable law.
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14. NOTICES. Unless otherwise expressly provided herein, all
notices, requests, demands, consents, waivers, instructions,
approvals and other communications hereunder shall be in
writing and shall be deemed to have been duly given if
personally delivered to or mailed, certified mail, return
receipt requested, first-class postage paid, or delivered by
messenger service with receipt acknowledged, addressed as
follows:
If to Company:
Level 13, 1 Alfred Street
Sydney, NSW 1225, Australia
Attn: Terrence N. Fern
If to Executive:
Ross A. Keogh
112 Water Oaks Drive
Lafayette, LA 70503
or to such other address or to such other individuals as any
party shall have last designated by notice to the other party.
All notices and other communications given to any party in
accordance with the provisions of this Agreement shall be
deemed to have been given when delivered to the intended
recipient thereof in accordance with the provisions of this
Section 14.
15. GOVERNING LAW; FORUM; CONSENT TO JURISDICTION. This Agreement
shall be construed in accordance with, and the rights of the
parties governed by, the laws of the State of Louisiana
without regard to the principles of conflict of laws. The
parties agree that all disputes in any way relating to,
arising under, connected with, or incident to this Agreement,
and over which the federal courts have subject matter
jurisdiction, shall be litigated exclusively in the United
States District Court for the Western District of Louisiana,
Lafayette Division, and, if necessary, the corresponding
appellate courts. The parties further agree that all disputes
in any way relating to, arising under, connected with, or
incident to this Agreement, and over which the federal courts
do not have subject matter jurisdiction, shall be litigated,
if at all, exclusively in the Courts of the State of
Louisiana, in Lafayette Parish, and, if necessary, the
corresponding appellate courts. The parties expressly submit
themselves to the personal jurisdiction of the State of
Louisiana.
16. SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, Executive agrees on behalf of himself and his
executors and administrators, heirs, legatees, distributees
and any other person or persons claiming any benefits under
him by virtue of this Agreement, that this Agreement and the
rights, interests and benefits
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<PAGE> 10
hereunder shall not be assigned, transferred, pledged or
hypothecated in any way by Executive or any executor,
administrator, heir, legatee, distributee or person claiming
under Executive by virtue of this Agreement and shall not be
subject to execution, attachment or similar process. Except as
otherwise expressly provided herein, Company agrees that this
Agreement shall not be assigned or transferred to any other
party; provided, however, a merger or consolidation of Company
into a successor entity other than Company shall not be
considered a transfer or assignment. Any attempt at
assignment, transfer, pledge or hypothecation or other
disposition of this Agreement or of such rights, interest and
benefits contrary to the foregoing provisions, or the levy of
any attachment or similar process thereupon, shall be null and
void and without effect.
17. THIRD PARTY BENEFICIARIES. This Agreement does not create, and
shall not be construed as creating, any rights enforceable by
any person or entity not a party to this Agreement (except as
otherwise provided in Section 8.3.2 or in Section 16).
18. HEADINGS. The section headings in this Agreement are for
convenience of reference only and shall not be deemed to alter
or affect the meaning or interpretation of any provisions
hereof.
19. ARBITRATION. Any controversy or claim arising out of or
relating to this contract, or the breach thereof, shall be
settled by arbitration in Lafayette, Louisiana, in accordance
with the applicable Rules of the American Arbitration
Association using three (3) impartial arbitrators and judgment
upon the award rendered by the arbitrators may be entered in
any court having jurisdiction thereof. Each party shall select
one arbitrator and the selected arbitrator shall designate a
third arbitrator. If unable to agree to a third arbitrator,
the presiding judge in the United States District Court for
the Western District of Louisiana shall designate the third
arbitrator. This Section 19 shall take precedence over the
provisions of Section 15.
20. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original
and all of which together shall be deemed to be one and the
same instrument.
21. CURRENCY REFERENCES. All references to "$" are to United
States currency unless otherwise specifically stated in the
Agreement.
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IN WITNESS WHEREOF, this Agreement has been duly executed and delivered
to be effective as of the date first above written.
WITNESSES: COMPANY:
PETSEC ENERGY INC.
Printed Name:
------------------------
Printed Name: By: /s/ Terrence N. Fern
------------------------ ----------------------------
Terrence N. Fern
Chief Executive Officer
EXECUTIVE:
Printed Name:
------------------------
/s/ Ross A. Keogh
-------------------
Printed Name: Ross A. Keogh
------------------------
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EXHIBIT 10.5
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") dated effective as of May
1, 1999, (the "Start Date") is between Petsec Energy Inc., a corporation formed
under the laws of Nevada (the "Company"), and William R. Sack, an individual
resident of the State of Louisiana (the "Executive").
W I T N E S S E T H:
WHEREAS, Company and Executive desire to enter into a written agreement
providing for the continued employment of Executive by Company upon the terms
and subject to the conditions set forth herein;
WHEREAS, Executive will report to the Chief Executive Officer (the
"CEO") of the Company or his designee, and he shall have the right, under the
terms and conditions specified in this Agreement, to recommend to Company's
Board of Directors (the "Company Board") any determination made under the
Agreement;
NOW, THEREFORE, in consideration of the premises, the mutual covenants
and agreements herein contained, and other good and valuable consideration, the
receipt, adequacy and sufficiency of which hereby are acknowledged, the parties
agree as follows:
1. EMPLOYMENT. Subject to the provisions of this Agreement,
Company hereby agrees to employ Executive and Executive hereby
agrees to accept such employment with, and to provide to
Company the services described in Section 3 below.
2. TERM. Executive shall be employed by Company for a period
commencing on the Start Date and, except as otherwise provided
herein, ending on the third anniversary of the Start Date. The
term of this Agreement shall be extended annually without the
necessity of any affirmative action by any party for an
additional one year term (to make an aggregate three year
commitment on the part of Company and Executive) on May 1 of
each year that Executive is employed by Company, unless prior
to May 1 of each such year Company terminates this Agreement
by sending written notice to Executive (in which case, the
provisions of Section 8.1 shall apply). The period during
which Company employs Executive shall hereinafter be referred
to as the "Term of Employment."
3. NATURE OF SERVICE. During the Term of Employment, Executive
agrees to perform such services as are consistent with his
position as Vice-President--Exploration and Joint Ventures or
as from time to time shall be assigned to him by the CEO or
his
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designee. Executive shall devote so much of his time,
attention and skills to the business of Company as is
necessary to properly perform his duties and responsibilities.
Executive shall not, during the Term of Employment, be engaged
in, or represent any party other than Company in connection
with the provision of any services whatsoever without the
prior written consent of the CEO or his designee. Executive
shall perform his duties under this Agreement diligently with
fidelity and loyalty and in a competent manner consistent with
the level of his responsibilities.
4. COMPENSATION.
4.1. BASE SALARY. During the Term of Employment, Company
shall pay to Executive a base salary payable in equal
periodic installments in accordance with the
established payroll practices of Company. Initially,
the Executive's base salary shall be $156,875 per
year. Executive's base salary shall be reviewed
annually on or before July 1 by the Remuneration
Committee (the "Committee") of the Petsec Energy
Ltd's (the "Parent") Board of Directors (the " Parent
Board"). (If the Parent no longer has beneficial
ownership of at least a majority of the outstanding
voting stock of the Company, then the
responsibilities of the Committee shall be performed
by the Company Board.) The Committee may recommend
increases to the Executive's base salary, which if
accepted by the Company Board, shall become effective
in the manner determined by the Company Board. ("Base
Salary," as used hereinafter, shall mean at any
particular time the periodic payment last paid to
Executive pursuant to this Section 4.1, multiplied by
the appropriate factor to arrive at an annualized
number.)
4.2. CASH INCENTIVE COMPENSATION. On or before April 1 of
each year, the Committee shall recommend to the
Company Board the amount, if any, that shall be
awarded to all senior executives (including
Executive) of the Company who are eligible to
participate in the cash incentive compensation
program. The Committee shall recommend to the Company
Board the cash award, if any, to be paid to Executive
up to a maximum of 100% of Executive's Base Salary.
The amounts available for distribution under the
Company's cash incentive compensation program shall
take into account Company financial and operating
results. The incentive compensation amount awarded to
Executive shall be weighted evenly between Company
performance and individual performance to reward both
cooperative management efforts to attain Company
objectives and individual achievement. Fifty percent
of the cash incentive compensation available to
Executive shall be based on Company performance and
50% shall be based on the individual performance of
Executive. Company performance shall be measured
subjectively by the Committee with input from the
CEO. The Committee shall evaluate individual
performance of the Executive with input
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from the CEO. The cash incentive compensation, if
paid, will be paid to Executive in a lump sum in
April of each year.
4.3. TAXES. All taxes and governmentally required
withholdings shall be deducted in conformity with
applicable laws.
5. STOCK OPTIONS.
5.1. GRANT OF OPTION. As additional compensation to
Executive, Parent has issued to Executive as of the
Start Date options to purchase 450,000 ordinary
shares of Parent, and from time to time the Parent
may issue additional options (collectively, the
"Options"). The Options are governed by the Petsec
Energy Ltd Employee Option Plan, as may be amended
from time to time and one or more times (the "Option
Plan"). Executive agrees that the issue and exercise
of the Options are governed by the rules of the Plan,
and by the additional terms and conditions set by the
Committee and described in the Option Certificates
delivered to Executive with respect to the Options.
Copies of the Option Certificates are attached hereto
as Exhibit A. Award of additional Options to
Executive shall be considered annually on or before
May 1 of each year by the Committee, and a
recommendation with respect thereto made to the
Parent Board.
5.2. TAX CONSEQUENCES. Executive shall be responsible for
the payment of all income taxes, alternative minimum
taxes or other taxes or governmental charges that may
accrue on account of the issuance or exercise of the
Options or the acquisition or sale by Executive of
Parent stock acquired with respect to the Options.
Executive should consult his own tax advisor
regarding the specific tax consequences of
participation in the Plan, including the application
of any federal, state and local tax laws and the
effect of other state and local laws, including
community property laws. Executive agrees to defend
and indemnify Company and Parent for any claims made
against Company, Parent or Executive by any taxing
authority for income or alternative minimum taxes
that may be owed by Executive on account of the
issuance, exercise or sale of the options or the
acquisition or sale by Executive of any Parent stock
acquired with respect to any Options.
6. BENEFITS. Executive shall receive the employee benefits as may
be provided by Company from time to time to employees of
Company holding executive offices and positions, all as
approved by the Company Board. These benefits shall include:
6.1. VACATION TIME. Executive will be eligible for twenty
working days of vacation time per year together with
all public holidays recognized by Company. The use
and accrual of such vacation time shall be governed
by the
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Company's vacation policy, as the same may be amended
from time to time and one or more times.
6.2. DEATH BENEFIT. The Company shall maintain life
insurance for the benefit of the beneficiary(ies) of
Executive that shall pay to Executive's
beneficiary(ies) a death benefit in an amount equal
to at least three times the lowest Base Salary in
effect during the twelve months preceding Executive's
death.
6.3. DISABILITY BENEFIT. The Company shall maintain
disability insurance for the benefit of Executive
that is commensurate with the disability policy in
place as of the Start Date.
6.4. SEVERANCE BENEFIT. Executive shall receive the
severance benefit provided for in Section 8.4.2.
7. REIMBURSEMENT OF BUSINESS EXPENSES. Company shall reimburse
Executive for all reasonable and proper travel and
out-of-pocket expenses (including but not limited to industry
association fees and industry entertainment expenses) incurred
by him for the purpose of and in connection with the
performance of his duties pursuant to this Agreement during
the Term of Employment, all in accordance with the policies
relating to the allowable amount of such expenses and the
provision of itemized reports and receipts with respect
thereto that may from time to time be adopted by Company.
8. TERMINATION.
8.1. TERMINATION BY COMPANY.
8.1.1. FOR CAUSE. Executive's employment under this
Agreement may be terminated for cause at any
time, effective immediately, after formal
action by the CEO acting at the direction of
the Company Board following a meeting of the
Company Board, duly called for the purpose
of considering the termination of Executive
for "cause," as defined herein. As used in
this Section 8.1.1, "cause" shall mean that
the Company Board in good faith either
determines or has reasonable suspicions that
one or more of the following has occurred:
(1) Executive has engaged in gross
negligence or willful misconduct in the
performance of his duties; (2) Executive has
willfully refused without proper legal
reason to perform his duties and
responsibilities; (3) Executive has
materially breached any material provision
of any agreement between Executive and
Company; (4) Executive has materially
breached any material corporate policy of
the Company; or (5) Executive has engaged in
illegal conduct, or has violated any
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statute, rule or regulation under federal
securities laws, or has engaged in any act
of serious dishonesty which adversely
affects, or reasonably could in the future
adversely affect, Executive's value,
reliability or performance in a material
manner or the business reputation of the
Company. In the event that Company acts to
terminate Executive for cause in accordance
with this Section 8.1.1, Executive shall be
entitled to receive only the compensation
provided for in Section 8.4.1 and any rights
provided under the Option Plan with respect
to the Options.
8.1.2. WITHOUT CAUSE. Company may terminate
Executive's employment under this Agreement
at any time, in which case Executive will be
entitled to receive only the compensation
provided for in Section 8.4.1, the severance
benefit provided for in Section 8.4.2 and
any rights provided under the Option Plan
with respect to the Options.
8.2. TERMINATION BY EXECUTIVE.
8.2.1. FOR CAUSE. Executive may terminate his
employment under this Agreement if Company
does any one or more of the following: (1)
Company makes a material reduction in
Executive's job duties, authority or
responsibilities with the Company from that
exercised by him immediately prior to such
change (however, a reduction in the size of
Company and/or in the number of employees
working under the supervision of Executive,
shall not constitute a material reduction
hereunder); (2) a reduction of more than 10%
in any twelve month period from the Base
Salary paid by the Company to Executive
during the twelve months immediately
preceding such Base Salary reduction; (3) a
change in location of Executive's primary
place of employment by the Company by more
than 30 miles from the location where he was
primarily employed prior to such change; (4)
a material reduction in the value of or
change in the scope or terms of the benefits
to which the Executive, taken as a whole,
was entitled prior to such reduction or
change; or (5) Company otherwise fails to
comply with any material provision of this
Agreement. Before terminating his employment
for cause under this Section 8.2.1,
Executive shall first provide the Company
with written notice specifying in detail the
reasons why Executive believes he has the
right to terminate his employment for cause
and allowing Company ten (10) days to cure
any such default. If Executive provides such
a notice to Company and then fails to
terminate his employment for cause within
five days after the expiration of the (10)
day cure period (because Company has cured
such default, because Executive decides
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he no longer wants to terminate this
Agreement or for any other reason),
Executive shall be deemed to have waived his
right to terminate this Agreement for the
reasons specified in the notice. If
Executive does terminate his employment for
cause under this Section 8.2.1, Executive
will be entitled to receive only the
compensation provided for in Section 8.4.1,
the severance benefit provided for in
Section 8.4.2 and any rights provided under
the Option Plan with respect to the Options.
8.2.2. WITHOUT CAUSE. Executive may terminate his
employment under this Agreement without
cause by giving Company at least sixty (60)
days' prior written notice of the effective
date of his termination of employment. In
the event that Executive terminates his
employment under this Section 8.2.2,
Executive shall be entitled to receive only
the compensation provided for in Section
8.4.1 and any rights provided under the
Option Plan with respect to the Options.
Provided that Executive complies with this
Section, Executive shall not be liable for
any damages to Company on account of such
termination.
8.3. TERMINATION UPON DEATH OR DISABILITY.
8.3.1. If Executive becomes permanently disabled so
as to become eligible for permanent
disability insurance benefits under a long
term disability policy maintained by the
Company for the benefit of Executive, at
such time as Executive is determined to be
permanently disabled, Executive's employment
shall be deemed terminated. In the event
that Executive's employment is terminated
under this Section 8.3.1, Executive shall be
entitled to receive only the compensation
provided for in Section 8.4.1, the benefit
provided under Section 6.3, and any rights
provided under the Option Plan with respect
to the Options.
8.3.2. If Executive dies, his employment shall be
deemed to be terminated as of the date of
his death. In such a case, Executive's heirs
or successors shall be entitled to receive
only the benefit provided for in Section
6.2, the compensation provided for in
Section 8.4.1 and any rights provided under
the Option Plan with respect to the Options.
8.4. DAMAGES TO EXECUTIVE IN THE EVENT OF TERMINATION.
8.4.1. COMPENSATION IN THE EVENT OF TERMINATION.
Upon the termination of Executive's
employment with Company, Company shall pay
to Executive (or Executive's heirs or
successors) all unpaid Base Salary
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for the period through the date of
termination and reimbursement for allowable
expenses incurred by Executive through such
date. Company shall not be obligated to pay
Executive any Base Salary for periods beyond
the date of termination.
8.4.2. SEVERANCE BENEFIT. Upon the termination of
Executive's employment with Company under
circumstances set forth in Sections 8.1.2 or
8.2.1, Company shall pay to Executive in a
lump sum an amount equal to the product of
(a) the number of months (prorated for a
partial month) remaining on the term of this
Agreement (which number shall be greater
than or equal to 24 and less than or equal
to 36) times (b) the quotient of the Base
Salary divided by 12. This lump sum payment
shall be made within five days of the
termination of Executive's employment. The
severance benefit provided for under this
Section 8.4.2 shall be reduced dollar for
dollar by any amount to which Executive is
or may become entitled pursuant to the
Petsec Energy Inc. Change in Control Bonus
and Severance Plan or any similar plan.
8.4.3. OPTIONS. Upon Executive's termination of
employment for any reason, Executive's
rights and Company's obligations with
respect to the Options shall be governed by
the Employee Option Plan.
9. CERTAIN COVENANTS OF EXECUTIVE.
9.1. Executive agrees that during the Term of Employment,
he will not (a) directly or indirectly engage or
invest in any business other than Company's business
without the prior approval of the CEO or his designee
or (b) otherwise act as a director, officer,
employee, agent, owner, partner or consultant to any
such business. It is understood and agreed that
Executive shall not be deemed to be in default with
respect to this Section 9.1 as a result of any
investment he may make in not more than five percent
of the outstanding shares or other units of any
security registered pursuant to Section 12 of the
Securities Exchange Act of 1934, as amended (the
"1934 Act") or in not more than fifty percent of the
outstanding shares or other units of any security not
registered pursuant to Section 12 of the 1934 Act.
9.2. Executive will not during his employment or
thereafter (except in the course of his duties as
authorized by Company or as required by law) use or
disclose to any person any confidential information
or trade secrets belonging or relating to Company or
any person or entity with whom Executive have come
into contact as a result of his employment. Upon
termination of this Agreement, Executive promptly
shall return all originals and copies of such
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papers, lists, documents and records that are in his
possession, custody or control.
9.3. If the provisions contained in this Section 9 are
more restrictive than permitted by applicable law,
the parties agree that the covenants contained in
this Section 9 shall be enforceable and in force to
the extent permitted by law.
10. AMENDMENT. This Agreement may not be modified or amended
except by a written instrument executed by or on behalf of
both Company and Executive.
11. WAIVERS. The observance of any term of this Agreement may be
waived (either generally or in a particular instance and
either retroactively or prospectively) by the party entitled
to enforce such term, but except as otherwise expressly
provided herein, such waiver shall be effective only if in a
writing signed by the party or parties against which such
waiver is to be asserted. Except as otherwise expressly
provided herein, no delay or omission on the part of any party
in exercising any right, power or privilege hereunder shall
operate as a waiver thereof, nor shall any waiver on the part
of any party of any right, power or privilege hereunder
operate as a waiver of any other right, power or privilege
hereunder, nor shall any single or partial exercise of any
right, power or privilege hereunder preclude any other or
further exercise thereof or the exercise of any other right,
power or privilege hereunder. All remedies, either under this
Agreement or by law or otherwise afforded to any party, shall
be cumulative and not alternative.
12. ENTIRE AGREEMENT. This Agreement and the documents expressly
referred to herein constitute the entire agreement between the
parties with respect to the matters covered hereby, and any
other prior or contemporaneous oral or written understandings
or agreements with respect to the matters covered hereby are
expressly superseded by this Agreement. There are no unwritten
or oral agreements between the parties.
13. SEVERABILITY. If any provision of this Agreement, or the
application of such provision to any person or circumstance,
shall be declared judicially to be invalid, unenforceable or
void, such decision will not have the effect of invalidating
or voiding the remainder of this Agreement or affect the
application of such provision to other persons or
circumstances, and the parties agree that the part or parts of
this Agreement so held to be invalid, unenforceable or void
will be deemed to have been stricken here from and the
remainder of this Agreement will have the same force and
effect as if such part or parts had never been included
herein. Any such finding of invalidity or unenforceability
shall not prevent the enforcement of such provision in any
other jurisdiction to the maximum extent permitted by
applicable law.
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14. NOTICES. Unless otherwise expressly provided herein, all
notices, requests, demands, consents, waivers, instructions,
approvals and other communications hereunder shall be in
writing and shall be deemed to have been duly given if
personally delivered to or mailed, certified mail, return
receipt requested, first-class postage paid, or delivered by
messenger service with receipt acknowledged, addressed as
follows:
If to Company:
Level 13, 1 Alfred Street
Sydney, NSW 1225, Australia
Attn: Terrence N. Fern
If to Executive:
William R. Sack
108 Llansfair Drive
Lafayette, LA 70503
or to such other address or to such other individuals as any
party shall have last designated by notice to the other party.
All notices and other communications given to any party in
accordance with the provisions of this Agreement shall be
deemed to have been given when delivered to the intended
recipient thereof in accordance with the provisions of this
Section 14.
15. GOVERNING LAW; FORUM; CONSENT TO JURISDICTION. This Agreement
shall be construed in accordance with, and the rights of the
parties governed by, the laws of the State of Louisiana
without regard to the principles of conflict of laws. The
parties agree that all disputes in any way relating to,
arising under, connected with, or incident to this Agreement,
and over which the federal courts have subject matter
jurisdiction, shall be litigated exclusively in the United
States District Court for the Western District of Louisiana,
Lafayette Division, and, if necessary, the corresponding
appellate courts. The parties further agree that all disputes
in any way relating to, arising under, connected with, or
incident to this Agreement, and over which the federal courts
do not have subject matter jurisdiction, shall be litigated,
if at all, exclusively in the Courts of the State of
Louisiana, in Lafayette Parish, and, if necessary, the
corresponding appellate courts. The parties expressly submit
themselves to the personal jurisdiction of the State of
Louisiana.
16. SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, Executive agrees on behalf of himself and his
executors and administrators, heirs, legatees, distributees
and any other person or persons claiming any benefits under
him by virtue of this Agreement, that this Agreement and the
rights, interests and benefits
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hereunder shall not be assigned, transferred, pledged or
hypothecated in any way by Executive or any executor,
administrator, heir, legatee, distributee or person claiming
under Executive by virtue of this Agreement and shall not be
subject to execution, attachment or similar process. Except as
otherwise expressly provided herein, Company agrees that this
Agreement shall not be assigned or transferred to any other
party; provided, however, a merger or consolidation of Company
into a successor entity other than Company shall not be
considered a transfer or assignment. Any attempt at
assignment, transfer, pledge or hypothecation or other
disposition of this Agreement or of such rights, interest and
benefits contrary to the foregoing provisions, or the levy of
any attachment or similar process thereupon, shall be null and
void and without effect.
17. THIRD PARTY BENEFICIARIES. This Agreement does not create, and
shall not be construed as creating, any rights enforceable by
any person or entity not a party to this Agreement (except as
otherwise provided in Section 8.3.2 or in Section 16).
18. HEADINGS. The section headings in this Agreement are for
convenience of reference only and shall not be deemed to alter
or affect the meaning or interpretation of any provisions
hereof.
19. ARBITRATION. Any controversy or claim arising out of or
relating to this contract, or the breach thereof, shall be
settled by arbitration in Lafayette, Louisiana, in accordance
with the applicable Rules of the American Arbitration
Association using three (3) impartial arbitrators and judgment
upon the award rendered by the arbitrators may be entered in
any court having jurisdiction thereof. Each party shall select
one arbitrator and the selected arbitrator shall designate a
third arbitrator. If unable to agree to a third arbitrator,
the presiding judge in the United States District Court for
the Western District of Louisiana shall designate the third
arbitrator. This Section 19 shall take precedence over the
provisions of Section 15.
20. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original
and all of which together shall be deemed to be one and the
same instrument.
21. CURRENCY REFERENCES. All references to "$" are to United
States currency unless otherwise specifically stated in the
Agreement.
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IN WITNESS WHEREOF, this Agreement has been duly executed and delivered
to be effective as of the date first above written.
WITNESSES: COMPANY:
PETSEC ENERGY INC.
Printed Name:
------------------------
Printed Name: By: /s/ Terrence N. Fern
------------------------ ----------------------------
Terrence N. Fern
Chief Executive Officer
EXECUTIVE:
Printed Name:
------------------------
/s/ William R. Sack
--------------------------------
Printed Name: William R. Sack
------------------------
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EXHIBIT 10.6
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") dated effective as of May
1, 1999, (the "Start Date") is between Petsec Energy Inc., a corporation formed
under the laws of Nevada (the "Company"), and James E. Slatten III, an
individual resident of the State of Louisiana (the "Executive").
W I T N E S S E T H:
WHEREAS, Company and Executive desire to enter into a written agreement
providing for the continued employment of Executive by Company upon the terms
and subject to the conditions set forth herein;
WHEREAS, Executive will report to the Chief Executive Officer (the
"CEO") of the Company or his designee, and he shall have the right, under the
terms and conditions specified in this Agreement, to recommend to Company's
Board of Directors (the "Company Board") any determination made under the
Agreement;
NOW, THEREFORE, in consideration of the premises, the mutual covenants
and agreements herein contained, and other good and valuable consideration, the
receipt, adequacy and sufficiency of which hereby are acknowledged, the parties
agree as follows:
1. EMPLOYMENT. Subject to the provisions of this Agreement,
Company hereby agrees to employ Executive and Executive hereby
agrees to accept such employment with, and to provide to
Company the services described in Section 3 below.
2. TERM. Executive shall be employed by Company for a period
commencing on the Start Date and, except as otherwise provided
herein, ending on the third anniversary of the Start Date. The
term of this Agreement shall be extended annually without the
necessity of any affirmative action by any party for an
additional one year term (to make an aggregate three year
commitment on the part of Company and Executive) on May 1 of
each year that Executive is employed by Company, unless prior
to May 1 of each such year Company terminates this Agreement
by sending written notice to Executive (in which case, the
provisions of Section 8.1 shall apply). The period during
which Company employs Executive shall hereinafter be referred
to as the "Term of Employment."
3. NATURE OF SERVICE. During the Term of Employment, Executive
agrees to perform such services as are consistent with his
position as Vice-President--Land and Legal, Secretary and
Director or as from time to time shall be assigned to him by
the CEO
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or his designee. Executive shall devote so much of his time,
attention and skills to the business of Company as is
necessary to properly perform his duties and responsibilities.
Executive shall not, during the Term of Employment, be engaged
in, or represent any party other than Company in connection
with the provision of any services whatsoever without the
prior written consent of the CEO or his designee. Executive
shall perform his duties under this Agreement diligently with
fidelity and loyalty and in a competent manner consistent with
the level of his responsibilities.
4. COMPENSATION.
4.1. BASE SALARY. During the Term of Employment, Company
shall pay to Executive a base salary payable in equal
periodic installments in accordance with the
established payroll practices of Company. Initially,
the Executive's base salary shall be $157,600 per
year. Executive's base salary shall be reviewed
annually on or before July 1 by the Remuneration
Committee (the "Committee") of the Petsec Energy
Ltd's (the "Parent") Board of Directors (the " Parent
Board"). (If the Parent no longer has beneficial
ownership of at least a majority of the outstanding
voting stock of the Company, then the
responsibilities of the Committee shall be performed
by the Company Board.) The Committee may recommend
increases to the Executive's base salary, which if
accepted by the Company Board, shall become effective
in the manner determined by the Company Board. ("Base
Salary," as used hereinafter, shall mean at any
particular time the periodic payment last paid to
Executive pursuant to this Section 4.1, multiplied by
the appropriate factor to arrive at an annualized
number.)
4.2. CASH INCENTIVE COMPENSATION. On or before April 1 of
each year, the Committee shall recommend to the
Company Board the amount, if any, that shall be
awarded to all senior executives (including
Executive) of the Company who are eligible to
participate in the cash incentive compensation
program. The Committee shall recommend to the Company
Board the cash award, if any, to be paid to Executive
up to a maximum of 100% of Executive's Base Salary.
The amounts available for distribution under the
Company's cash incentive compensation program shall
take into account Company financial and operating
results. The incentive compensation amount awarded to
Executive shall be weighted evenly between Company
performance and individual performance to reward both
cooperative management efforts to attain Company
objectives and individual achievement. Fifty percent
of the cash incentive compensation available to
Executive shall be based on Company performance and
50% shall be based on the individual performance of
Executive. Company performance shall be measured
subjectively by the Committee with input from the
CEO. The Committee shall evaluate individual
performance of the Executive with input
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from the CEO. The cash incentive compensation, if
paid, will be paid to Executive in a lump sum in
April of each year.
4.3. TAXES. All taxes and governmentally required
withholdings shall be deducted in conformity with
applicable laws.
5. STOCK OPTIONS.
5.1. GRANT OF OPTION. As additional compensation to
Executive, Parent has issued to Executive as of the
Start Date options to purchase 300,000 ordinary
shares of Parent, and from time to time the Parent
may issue additional options (collectively, the
"Options"). The Options are governed by the Petsec
Energy Ltd Employee Option Plan, as may be amended
from time to time and one or more times (the "Option
Plan"). Executive agrees that the issue and exercise
of the Options are governed by the rules of the Plan,
and by the additional terms and conditions set by the
Committee and described in the Option Certificates
delivered to Executive with respect to the Options.
Copies of the Option Certificates are attached hereto
as Exhibit A. Award of additional Options to
Executive shall be considered annually on or before
May 1 of each year by the Committee, and a
recommendation with respect thereto made to the
Parent Board.
5.2. TAX CONSEQUENCES. Executive shall be responsible for
the payment of all income taxes, alternative minimum
taxes or other taxes or governmental charges that may
accrue on account of the issuance or exercise of the
Options or the acquisition or sale by Executive of
Parent stock acquired with respect to the Options.
Executive should consult his own tax advisor
regarding the specific tax consequences of
participation in the Plan, including the application
of any federal, state and local tax laws and the
effect of other state and local laws, including
community property laws. Executive agrees to defend
and indemnify Company and Parent for any claims made
against Company, Parent or Executive by any taxing
authority for income or alternative minimum taxes
that may be owed by Executive on account of the
issuance, exercise or sale of the options or the
acquisition or sale by Executive of any Parent stock
acquired with respect to any Options.
6. BENEFITS. Executive shall receive the employee benefits as may
be provided by Company from time to time to employees of
Company holding executive offices and positions, all as
approved by the Company Board. These benefits shall include:
6.1. VACATION TIME. Executive will be eligible for twenty
working days of vacation time per year together with
all public holidays recognized by Company. The use
and accrual of such vacation time shall be governed
by the
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Company's vacation policy, as the same may be amended
from time to time and one or more times.
6.2. DEATH BENEFIT. The Company shall maintain life
insurance for the benefit of the beneficiary(ies) of
Executive that shall pay to Executive's
beneficiary(ies) a death benefit in an amount equal
to at least three times the lowest Base Salary in
effect during the twelve months preceding Executive's
death.
6.3. DISABILITY BENEFIT. The Company shall maintain
disability insurance for the benefit of Executive
that is commensurate with the disability policy in
place as of the Start Date.
6.4. SEVERANCE BENEFIT. Executive shall receive the
severance benefit provided for in Section 8.4.2.
7. REIMBURSEMENT OF BUSINESS EXPENSES. Company shall reimburse
Executive for all reasonable and proper travel and
out-of-pocket expenses (including but not limited to industry
association fees and industry entertainment expenses) incurred
by him for the purpose of and in connection with the
performance of his duties pursuant to this Agreement during
the Term of Employment, all in accordance with the policies
relating to the allowable amount of such expenses and the
provision of itemized reports and receipts with respect
thereto that may from time to time be adopted by Company.
8. TERMINATION.
8.1. TERMINATION BY COMPANY.
8.1.1. FOR CAUSE. Executive's employment under this
Agreement may be terminated for cause at any
time, effective immediately, after formal
action by the CEO acting at the direction of
the Company Board following a meeting of the
Company Board, duly called for the purpose
of considering the termination of Executive
for "cause," as defined herein. As used in
this Section 8.1.1, "cause" shall mean that
the Company Board in good faith either
determines or has reasonable suspicions that
one or more of the following has occurred:
(1) Executive has engaged in gross
negligence or willful misconduct in the
performance of his duties; (2) Executive has
willfully refused without proper legal
reason to perform his duties and
responsibilities; (3) Executive has
materially breached any material provision
of any agreement between Executive and
Company; (4) Executive has materially
breached any material corporate policy of
the Company; or (5) Executive has engaged in
illegal conduct, or has violated any
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statute, rule or regulation under federal
securities laws, or has engaged in any act
of serious dishonesty which adversely
affects, or reasonably could in the future
adversely affect, Executive's value,
reliability or performance in a material
manner or the business reputation of the
Company. In the event that Company acts to
terminate Executive for cause in accordance
with this Section 8.1.1, Executive shall be
entitled to receive only the compensation
provided for in Section 8.4.1 and any rights
provided under the Option Plan with respect
to the Options.
8.1.2. WITHOUT CAUSE. Company may terminate
Executive's employment under this Agreement
at any time, in which case Executive will be
entitled to receive only the compensation
provided for in Section 8.4.1, the severance
benefit provided for in Section 8.4.2 and
any rights provided under the Option Plan
with respect to the Options.
8.2. TERMINATION BY EXECUTIVE.
8.2.1. FOR CAUSE. Executive may terminate his
employment under this Agreement if Company
does any one or more of the following: (1)
Company makes a material reduction in
Executive's job duties, authority or
responsibilities with the Company from that
exercised by him immediately prior to such
change (however, a reduction in the size of
Company and/or in the number of employees
working under the supervision of Executive,
shall not constitute a material reduction
hereunder); (2) a reduction of more than 10%
in any twelve month period from the Base
Salary paid by the Company to Executive
during the twelve months immediately
preceding such Base Salary reduction; (3) a
change in location of Executive's primary
place of employment by the Company by more
than 30 miles from the location where he was
primarily employed prior to such change; (4)
a material reduction in the value of or
change in the scope or terms of the benefits
to which the Executive, taken as a whole,
was entitled prior to such reduction or
change; or (5) Company otherwise fails to
comply with any material provision of this
Agreement. Before terminating his employment
for cause under this Section 8.2.1,
Executive shall first provide the Company
with written notice specifying in detail the
reasons why Executive believes he has the
right to terminate his employment for cause
and allowing Company ten (10) days to cure
any such default. If Executive provides such
a notice to Company and then fails to
terminate his employment for cause within
five days after the expiration of the (10)
day cure period (because Company has cured
such default, because Executive decides
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he no longer wants to terminate this
Agreement or for any other reason),
Executive shall be deemed to have waived his
right to terminate this Agreement for the
reasons specified in the notice. If
Executive does terminate his employment for
cause under this Section 8.2.1, Executive
will be entitled to receive only the
compensation provided for in Section 8.4.1,
the severance benefit provided for in
Section 8.4.2 and any rights provided under
the Option Plan with respect to the Options.
8.2.2. WITHOUT CAUSE. Executive may terminate his
employment under this Agreement without
cause by giving Company at least sixty (60)
days' prior written notice of the effective
date of his termination of employment. In
the event that Executive terminates his
employment under this Section 8.2.2,
Executive shall be entitled to receive only
the compensation provided for in Section
8.4.1 and any rights provided under the
Option Plan with respect to the Options.
Provided that Executive complies with this
Section, Executive shall not be liable for
any damages to Company on account of such
termination.
8.3. TERMINATION UPON DEATH OR DISABILITY.
8.3.1. If Executive becomes permanently disabled so
as to become eligible for permanent
disability insurance benefits under a long
term disability policy maintained by the
Company for the benefit of Executive, at
such time as Executive is determined to be
permanently disabled, Executive's employment
shall be deemed terminated. In the event
that Executive's employment is terminated
under this Section 8.3.1, Executive shall be
entitled to receive only the compensation
provided for in Section 8.4.1, the benefit
provided under Section 6.3, and any rights
provided under the Option Plan with respect
to the Options.
8.3.2. If Executive dies, his employment shall be
deemed to be terminated as of the date of
his death. In such a case, Executive's heirs
or successors shall be entitled to receive
only the benefit provided for in Section
6.2, the compensation provided for in
Section 8.4.1 and any rights provided under
the Option Plan with respect to the Options.
8.4. DAMAGES TO EXECUTIVE IN THE EVENT OF TERMINATION.
8.4.1. COMPENSATION IN THE EVENT OF TERMINATION.
Upon the termination of Executive's
employment with Company, Company shall pay
to Executive (or Executive's heirs or
successors) all unpaid Base Salary
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for the period through the date of
termination and reimbursement for allowable
expenses incurred by Executive through such
date. Company shall not be obligated to pay
Executive any Base Salary for periods beyond
the date of termination.
8.4.2. SEVERANCE BENEFIT. Upon the termination of
Executive's employment with Company under
circumstances set forth in Sections 8.1.2 or
8.2.1, Company shall pay to Executive in a
lump sum an amount equal to the product of
(a) the number of months (prorated for a
partial month) remaining on the term of this
Agreement (which number shall be greater
than or equal to 24 and less than or equal
to 36) times (b) the quotient of the Base
Salary divided by 12. This lump sum payment
shall be made within five days of the
termination of Executive's employment. The
severance benefit provided for under this
Section 8.4.2 shall be reduced dollar for
dollar by any amount to which Executive is
or may become entitled pursuant to the
Petsec Energy Inc. Change in Control Bonus
and Severance Plan or any similar plan.
8.4.3. OPTIONS. Upon Executive's termination of
employment for any reason, Executive's
rights and Company's obligations with
respect to the Options shall be governed by
the Employee Option Plan.
9. CERTAIN COVENANTS OF EXECUTIVE.
9.1. Executive agrees that during the Term of Employment,
he will not (a) directly or indirectly engage or
invest in any business other than Company's business
without the prior approval of the CEO or his designee
or (b) otherwise act as a director, officer,
employee, agent, owner, partner or consultant to any
such business. It is understood and agreed that
Executive shall not be deemed to be in default with
respect to this Section 9.1 as a result of any
investment he may make in not more than five percent
of the outstanding shares or other units of any
security registered pursuant to Section 12 of the
Securities Exchange Act of 1934, as amended (the
"1934 Act") or in not more than fifty percent of the
outstanding shares or other units of any security not
registered pursuant to Section 12 of the 1934 Act.
9.2. Executive will not during his employment or
thereafter (except in the course of his duties as
authorized by Company or as required by law) use or
disclose to any person any confidential information
or trade secrets belonging or relating to Company or
any person or entity with whom Executive have come
into contact as a result of his employment. Upon
termination of this Agreement, Executive promptly
shall return all originals and copies of such
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papers, lists, documents and records that are in his
possession, custody or control.
9.3. If the provisions contained in this Section 9 are
more restrictive than permitted by applicable law,
the parties agree that the covenants contained in
this Section 9 shall be enforceable and in force to
the extent permitted by law.
10. AMENDMENT. This Agreement may not be modified or amended
except by a written instrument executed by or on behalf of
both Company and Executive.
11. WAIVERS. The observance of any term of this Agreement may be
waived (either generally or in a particular instance and
either retroactively or prospectively) by the party entitled
to enforce such term, but except as otherwise expressly
provided herein, such waiver shall be effective only if in a
writing signed by the party or parties against which such
waiver is to be asserted. Except as otherwise expressly
provided herein, no delay or omission on the part of any party
in exercising any right, power or privilege hereunder shall
operate as a waiver thereof, nor shall any waiver on the part
of any party of any right, power or privilege hereunder
operate as a waiver of any other right, power or privilege
hereunder, nor shall any single or partial exercise of any
right, power or privilege hereunder preclude any other or
further exercise thereof or the exercise of any other right,
power or privilege hereunder. All remedies, either under this
Agreement or by law or otherwise afforded to any party, shall
be cumulative and not alternative.
12. ENTIRE AGREEMENT. This Agreement and the documents expressly
referred to herein constitute the entire agreement between the
parties with respect to the matters covered hereby, and any
other prior or contemporaneous oral or written understandings
or agreements with respect to the matters covered hereby are
expressly superseded by this Agreement. There are no unwritten
or oral agreements between the parties.
13. SEVERABILITY. If any provision of this Agreement, or the
application of such provision to any person or circumstance,
shall be declared judicially to be invalid, unenforceable or
void, such decision will not have the effect of invalidating
or voiding the remainder of this Agreement or affect the
application of such provision to other persons or
circumstances, and the parties agree that the part or parts of
this Agreement so held to be invalid, unenforceable or void
will be deemed to have been stricken here from and the
remainder of this Agreement will have the same force and
effect as if such part or parts had never been included
herein. Any such finding of invalidity or unenforceability
shall not prevent the enforcement of such provision in any
other jurisdiction to the maximum extent permitted by
applicable law.
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14. NOTICES. Unless otherwise expressly provided herein, all
notices, requests, demands, consents, waivers, instructions,
approvals and other communications hereunder shall be in
writing and shall be deemed to have been duly given if
personally delivered to or mailed, certified mail, return
receipt requested, first-class postage paid, or delivered by
messenger service with receipt acknowledged, addressed as
follows:
If to Company:
Level 13, 1 Alfred Street
Sydney, NSW 1225, Australia
Attn: Terrence N. Fern
If to Executive:
James E. Slatten III
10 Courtyard Circle
Lafayette, LA 70508
or to such other address or to such other individuals as any
party shall have last designated by notice to the other party.
All notices and other communications given to any party in
accordance with the provisions of this Agreement shall be
deemed to have been given when delivered to the intended
recipient thereof in accordance with the provisions of this
Section 14.
15. GOVERNING LAW; FORUM; CONSENT TO JURISDICTION. This Agreement
shall be construed in accordance with, and the rights of the
parties governed by, the laws of the State of Louisiana
without regard to the principles of conflict of laws. The
parties agree that all disputes in any way relating to,
arising under, connected with, or incident to this Agreement,
and over which the federal courts have subject matter
jurisdiction, shall be litigated exclusively in the United
States District Court for the Western District of Louisiana,
Lafayette Division, and, if necessary, the corresponding
appellate courts. The parties further agree that all disputes
in any way relating to, arising under, connected with, or
incident to this Agreement, and over which the federal courts
do not have subject matter jurisdiction, shall be litigated,
if at all, exclusively in the Courts of the State of
Louisiana, in Lafayette Parish, and, if necessary, the
corresponding appellate courts. The parties expressly submit
themselves to the personal jurisdiction of the State of
Louisiana.
16. SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, Executive agrees on behalf of himself and his
executors and administrators, heirs, legatees, distributees
and any other person or persons claiming any benefits under
him by virtue of this Agreement, that this Agreement and the
rights, interests and benefits
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hereunder shall not be assigned, transferred, pledged or
hypothecated in any way by Executive or any executor,
administrator, heir, legatee, distributee or person claiming
under Executive by virtue of this Agreement and shall not be
subject to execution, attachment or similar process. Except as
otherwise expressly provided herein, Company agrees that this
Agreement shall not be assigned or transferred to any other
party; provided, however, a merger or consolidation of Company
into a successor entity other than Company shall not be
considered a transfer or assignment. Any attempt at
assignment, transfer, pledge or hypothecation or other
disposition of this Agreement or of such rights, interest and
benefits contrary to the foregoing provisions, or the levy of
any attachment or similar process thereupon, shall be null and
void and without effect.
17. THIRD PARTY BENEFICIARIES. This Agreement does not create, and
shall not be construed as creating, any rights enforceable by
any person or entity not a party to this Agreement (except as
otherwise provided in Section 8.3.2 or in Section 16).
18. HEADINGS. The section headings in this Agreement are for
convenience of reference only and shall not be deemed to alter
or affect the meaning or interpretation of any provisions
hereof.
19. ARBITRATION. Any controversy or claim arising out of or
relating to this contract, or the breach thereof, shall be
settled by arbitration in Lafayette, Louisiana, in accordance
with the applicable Rules of the American Arbitration
Association using three (3) impartial arbitrators and judgment
upon the award rendered by the arbitrators may be entered in
any court having jurisdiction thereof. Each party shall select
one arbitrator and the selected arbitrator shall designate a
third arbitrator. If unable to agree to a third arbitrator,
the presiding judge in the United States District Court for
the Western District of Louisiana shall designate the third
arbitrator. This Section 19 shall take precedence over the
provisions of Section 15.
20. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original
and all of which together shall be deemed to be one and the
same instrument.
21. CURRENCY REFERENCES. All references to "$" are to United
States currency unless otherwise specifically stated in the
Agreement.
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IN WITNESS WHEREOF, this Agreement has been duly executed and delivered
to be effective as of the date first above written.
WITNESSES: COMPANY:
PETSEC ENERGY INC.
Printed Name:
------------------------
Printed Name: By: /s/ Terrence N. Fern
------------------------ -------------------------------
Terrence N. Fern
Chief Executive Officer
EXECUTIVE:
Printed Name:
------------------------
/s/ James E. Slatten III
----------------------------------
Printed Name: James E. Slatten III
------------------------
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EXHIBIT 10.7
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") dated effective as of May
1, 1999, (the "Start Date") is between Petsec Energy Inc., a corporation formed
under the laws of Nevada (the "Company"), and Howard H. Wilson, an individual
resident of the State of Louisiana (the "Executive").
W I T N E S S E T H:
WHEREAS, Company and Executive desire to enter into a written agreement
providing for the continued employment of Executive by Company upon the terms
and subject to the conditions set forth herein;
WHEREAS, Executive will report to the Chief Executive Officer (the
"CEO") of the Company or his designee, and he shall have the right, under the
terms and conditions specified in this Agreement, to recommend to Company's
Board of Directors (the "Company Board") any determination made under the
Agreement;
NOW, THEREFORE, in consideration of the premises, the mutual covenants
and agreements herein contained, and other good and valuable consideration, the
receipt, adequacy and sufficiency of which hereby are acknowledged, the parties
agree as follows:
1. EMPLOYMENT. Subject to the provisions of this Agreement,
Company hereby agrees to employ Executive and Executive hereby
agrees to accept such employment with, and to provide to
Company the services described in Section 3 below.
2. TERM. Executive shall be employed by Company for a period
commencing on the Start Date and, except as otherwise provided
herein, ending on the third anniversary of the Start Date. The
term of this Agreement shall be extended annually without the
necessity of any affirmative action by any party for an
additional one year term (to make an aggregate three year
commitment on the part of Company and Executive) on May 1 of
each year that Executive is employed by Company, unless prior
to May 1 of each such year Company terminates this Agreement
by sending written notice to Executive (in which case, the
provisions of Section 8.1 shall apply). The period during
which Company employs Executive shall hereinafter be referred
to as the "Term of Employment."
3. NATURE OF SERVICE. During the Term of Employment, Executive
agrees to perform such services as are consistent with his
position as Vice-President--Operations or as from time to
time shall be assigned to him by the CEO or his designee.
Executive
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shall devote so much of his time, attention and skills to the
business of Company as is necessary to properly perform his
duties and responsibilities. Executive shall not, during the
Term of Employment, be engaged in, or represent any party
other than Company in connection with the provision of any
services whatsoever without the prior written consent of the
CEO or his designee. Executive shall perform his duties under
this Agreement diligently with fidelity and loyalty and in a
competent manner consistent with the level of his
responsibilities.
4. COMPENSATION.
4.1. BASE SALARY. During the Term of Employment, Company
shall pay to Executive a base salary payable in equal
periodic installments in accordance with the
established payroll practices of Company. Initially,
the Executive's base salary shall be $170,000 per
year. Executive's base salary shall be reviewed
annually on or before July 1 by the Remuneration
Committee (the "Committee") of the Petsec Energy
Ltd's (the "Parent") Board of Directors (the " Parent
Board"). (If the Parent no longer has beneficial
ownership of at least a majority of the outstanding
voting stock of the Company, then the
responsibilities of the Committee shall be performed
by the Company Board.) The Committee may recommend
increases to the Executive's base salary, which if
accepted by the Company Board, shall become effective
in the manner determined by the Company Board. ("Base
Salary," as used hereinafter, shall mean at any
particular time the periodic payment last paid to
Executive pursuant to this Section 4.1, multiplied by
the appropriate factor to arrive at an annualized
number.)
4.2. CASH INCENTIVE COMPENSATION. On or before April 1 of
each year, the Committee shall recommend to the
Company Board the amount, if any, that shall be
awarded to all senior executives (including
Executive) of the Company who are eligible to
participate in the cash incentive compensation
program. The Committee shall recommend to the Company
Board the cash award, if any, to be paid to Executive
up to a maximum of 100% of Executive's Base Salary.
The amounts available for distribution under the
Company's cash incentive compensation program shall
take into account Company financial and operating
results. The incentive compensation amount awarded to
Executive shall be weighted evenly between Company
performance and individual performance to reward both
cooperative management efforts to attain Company
objectives and individual achievement. Fifty percent
of the cash incentive compensation available to
Executive shall be based on Company performance and
50% shall be based on the individual performance of
Executive. Company performance shall be measured
subjectively by the Committee with input from the
CEO. The Committee shall evaluate individual
performance of the Executive with input
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from the CEO. The cash incentive compensation, if
paid, will be paid to Executive in a lump sum in
April of each year.
4.3. TAXES. All taxes and governmentally required
withholdings shall be deducted in conformity with
applicable laws.
5. STOCK OPTIONS.
5.1. GRANT OF OPTION. As additional compensation to
Executive, Parent has issued to Executive as of the
Start Date options to purchase 375,000 ordinary
shares of Parent, and from time to time the Parent
may issue additional options (collectively, the
"Options"). The Options are governed by the Petsec
Energy Ltd Employee Option Plan, as may be amended
from time to time and one or more times (the "Option
Plan"). Executive agrees that the issue and exercise
of the Options are governed by the rules of the Plan,
and by the additional terms and conditions set by the
Committee and described in the Option Certificates
delivered to Executive with respect to the Options.
Copies of the Option Certificates are attached hereto
as Exhibit A. Award of additional Options to
Executive shall be considered annually on or before
May 1 of each year by the Committee, and a
recommendation with respect thereto made to the
Parent Board.
5.2. TAX CONSEQUENCES. Executive shall be responsible for
the payment of all income taxes, alternative minimum
taxes or other taxes or governmental charges that may
accrue on account of the issuance or exercise of the
Options or the acquisition or sale by Executive of
Parent stock acquired with respect to the Options.
Executive should consult his own tax advisor
regarding the specific tax consequences of
participation in the Plan, including the application
of any federal, state and local tax laws and the
effect of other state and local laws, including
community property laws. Executive agrees to defend
and indemnify Company and Parent for any claims made
against Company, Parent or Executive by any taxing
authority for income or alternative minimum taxes
that may be owed by Executive on account of the
issuance, exercise or sale of the options or the
acquisition or sale by Executive of any Parent stock
acquired with respect to any Options.
6. BENEFITS. Executive shall receive the employee benefits as may
be provided by Company from time to time to employees of
Company holding executive offices and positions, all as
approved by the Company Board. These benefits shall include:
6.1. VACATION TIME. Executive will be eligible for twenty
working days of vacation time per year together with
all public holidays recognized by Company. The use
and accrual of such vacation time shall be governed
by the
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Company's vacation policy, as the same may be amended
from time to time and one or more times.
6.2. DEATH BENEFIT. The Company shall maintain life
insurance for the benefit of the beneficiary(ies) of
Executive that shall pay to Executive's
beneficiary(ies) a death benefit in an amount equal
to at least three times the lowest Base Salary in
effect during the twelve months preceding Executive's
death.
6.3. DISABILITY BENEFIT. The Company shall maintain
disability insurance for the benefit of Executive
that is commensurate with the disability policy in
place as of the Start Date.
6.4. SEVERANCE BENEFIT. Executive shall receive the
severance benefit provided for in Section 8.4.2.
7. REIMBURSEMENT OF BUSINESS EXPENSES. Company shall reimburse
Executive for all reasonable and proper travel and
out-of-pocket expenses (including but not limited to industry
association fees and industry entertainment expenses) incurred
by him for the purpose of and in connection with the
performance of his duties pursuant to this Agreement during
the Term of Employment, all in accordance with the policies
relating to the allowable amount of such expenses and the
provision of itemized reports and receipts with respect
thereto that may from time to time be adopted by Company.
8. TERMINATION.
8.1. TERMINATION BY COMPANY.
8.1.1. FOR CAUSE. Executive's employment under this
Agreement may be terminated for cause at any
time, effective immediately, after formal
action by the CEO acting at the direction of
the Company Board following a meeting of the
Company Board, duly called for the purpose
of considering the termination of Executive
for "cause," as defined herein. As used in
this Section 8.1.1, "cause" shall mean that
the Company Board in good faith either
determines or has reasonable suspicions that
one or more of the following has occurred:
(1) Executive has engaged in gross
negligence or willful misconduct in the
performance of his duties; (2) Executive has
willfully refused without proper legal
reason to perform his duties and
responsibilities; (3) Executive has
materially breached any material provision
of any agreement between Executive and
Company; (4) Executive has materially
breached any material corporate policy of
the Company; or (5) Executive has engaged in
illegal conduct, or has violated any
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<PAGE> 5
statute, rule or regulation under federal
securities laws, or has engaged in any act
of serious dishonesty which adversely
affects, or reasonably could in the future
adversely affect, Executive's value,
reliability or performance in a material
manner or the business reputation of the
Company. In the event that Company acts to
terminate Executive for cause in accordance
with this Section 8.1.1, Executive shall be
entitled to receive only the compensation
provided for in Section 8.4.1 and any rights
provided under the Option Plan with respect
to the Options.
8.1.2. WITHOUT CAUSE. Company may terminate
Executive's employment under this Agreement
at any time, in which case Executive will be
entitled to receive only the compensation
provided for in Section 8.4.1, the severance
benefit provided for in Section 8.4.2 and
any rights provided under the Option Plan
with respect to the Options.
8.2. TERMINATION BY EXECUTIVE.
8.2.1. FOR CAUSE. Executive may terminate his
employment under this Agreement if Company
does any one or more of the following: (1)
Company makes a material reduction in
Executive's job duties, authority or
responsibilities with the Company from that
exercised by him immediately prior to such
change (however, a reduction in the size of
Company and/or in the number of employees
working under the supervision of Executive,
shall not constitute a material reduction
hereunder); (2) a reduction of more than 10%
in any twelve month period from the Base
Salary paid by the Company to Executive
during the twelve months immediately
preceding such Base Salary reduction; (3) a
change in location of Executive's primary
place of employment by the Company by more
than 30 miles from the location where he was
primarily employed prior to such change; (4)
a material reduction in the value of or
change in the scope or terms of the benefits
to which the Executive, taken as a whole,
was entitled prior to such reduction or
change; or (5) Company otherwise fails to
comply with any material provision of this
Agreement. Before terminating his employment
for cause under this Section 8.2.1,
Executive shall first provide the Company
with written notice specifying in detail the
reasons why Executive believes he has the
right to terminate his employment for cause
and allowing Company ten (10) days to cure
any such default. If Executive provides such
a notice to Company and then fails to
terminate his employment for cause within
five days after the expiration of the (10)
day cure period (because Company has cured
such default, because Executive decides
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<PAGE> 6
he no longer wants to terminate this
Agreement or for any other reason),
Executive shall be deemed to have waived his
right to terminate this Agreement for the
reasons specified in the notice. If
Executive does terminate his employment for
cause under this Section 8.2.1, Executive
will be entitled to receive only the
compensation provided for in Section 8.4.1,
the severance benefit provided for in
Section 8.4.2 and any rights provided under
the Option Plan with respect to the Options.
8.2.2. WITHOUT CAUSE. Executive may terminate his
employment under this Agreement without
cause by giving Company at least sixty (60)
days' prior written notice of the effective
date of his termination of employment. In
the event that Executive terminates his
employment under this Section 8.2.2,
Executive shall be entitled to receive only
the compensation provided for in Section
8.4.1 and any rights provided under the
Option Plan with respect to the Options.
Provided that Executive complies with this
Section, Executive shall not be liable for
any damages to Company on account of such
termination.
8.3. TERMINATION UPON DEATH OR DISABILITY.
8.3.1. If Executive becomes permanently disabled so
as to become eligible for permanent
disability insurance benefits under a long
term disability policy maintained by the
Company for the benefit of Executive, at
such time as Executive is determined to be
permanently disabled, Executive's employment
shall be deemed terminated. In the event
that Executive's employment is terminated
under this Section 8.3.1, Executive shall be
entitled to receive only the compensation
provided for in Section 8.4.1, the benefit
provided under Section 6.3, and any rights
provided under the Option Plan with respect
to the Options.
8.3.2. If Executive dies, his employment shall be
deemed to be terminated as of the date of
his death. In such a case, Executive's heirs
or successors shall be entitled to receive
only the benefit provided for in Section
6.2, the compensation provided for in
Section 8.4.1 and any rights provided under
the Option Plan with respect to the Options.
8.4. DAMAGES TO EXECUTIVE IN THE EVENT OF TERMINATION.
8.4.1. COMPENSATION IN THE EVENT OF TERMINATION.
Upon the termination of Executive's
employment with Company, Company shall pay
to Executive (or Executive's heirs or
successors) all unpaid Base Salary
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for the period through the date of
termination and reimbursement for allowable
expenses incurred by Executive through such
date. Company shall not be obligated to pay
Executive any Base Salary for periods beyond
the date of termination.
8.4.2. SEVERANCE BENEFIT. Upon the termination of
Executive's employment with Company under
circumstances set forth in Sections 8.1.2 or
8.2.1, Company shall pay to Executive in a
lump sum an amount equal to the product of
(a) the number of months (prorated for a
partial month) remaining on the term of this
Agreement (which number shall be greater
than or equal to 24 and less than or equal
to 36) times (b) the quotient of the Base
Salary divided by 12. This lump sum payment
shall be made within five days of the
termination of Executive's employment. The
severance benefit provided for under this
Section 8.4.2 shall be reduced dollar for
dollar by any amount to which Executive is
or may become entitled pursuant to the
Petsec Energy Inc. Change in Control Bonus
and Severance Plan or any similar plan.
8.4.3. OPTIONS. Upon Executive's termination of
employment for any reason, Executive's
rights and Company's obligations with
respect to the Options shall be governed by
the Employee Option Plan.
9. CERTAIN COVENANTS OF EXECUTIVE.
9.1. Executive agrees that during the Term of
Employment, he will not (a) directly or
indirectly engage or invest in any business
other than Company's business without the
prior approval of the CEO or his designee or
(b) otherwise act as a director, officer,
employee, agent, owner, partner or
consultant to any such business. It is
understood and agreed that Executive shall
not be deemed to be in default with respect
to this Section 9.1 as a result of any
investment he may make in not more than five
percent of the outstanding shares or other
units of any security registered pursuant to
Section 12 of the Securities Exchange Act of
1934, as amended (the "1934 Act") or in not
more than fifty percent of the outstanding
shares or other units of any security not
registered pursuant to Section 12 of the
1934 Act.
9.2. Executive will not during his employment or
thereafter (except in the course of his duties as
authorized by Company or as required by law) use or
disclose to any person any confidential information
or trade secrets belonging or relating to Company or
any person or entity with whom Executive have come
into contact as a result of his employment. Upon
termination of this Agreement, Executive promptly
shall return all originals and copies of such
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papers, lists, documents and records that are in his
possession, custody or control.
9.3. If the provisions contained in this Section 9 are
more restrictive than permitted by applicable law,
the parties agree that the covenants contained in
this Section 9 shall be enforceable and in force to
the extent permitted by law.
10. AMENDMENT. This Agreement may not be modified or amended
except by a written instrument executed by or on behalf of
both Company and Executive.
11. WAIVERS. The observance of any term of this Agreement may be
waived (either generally or in a particular instance and
either retroactively or prospectively) by the party entitled
to enforce such term, but except as otherwise expressly
provided herein, such waiver shall be effective only if in a
writing signed by the party or parties against which such
waiver is to be asserted. Except as otherwise expressly
provided herein, no delay or omission on the part of any party
in exercising any right, power or privilege hereunder shall
operate as a waiver thereof, nor shall any waiver on the part
of any party of any right, power or privilege hereunder
operate as a waiver of any other right, power or privilege
hereunder, nor shall any single or partial exercise of any
right, power or privilege hereunder preclude any other or
further exercise thereof or the exercise of any other right,
power or privilege hereunder. All remedies, either under this
Agreement or by law or otherwise afforded to any party, shall
be cumulative and not alternative.
12. ENTIRE AGREEMENT. This Agreement and the documents expressly
referred to herein constitute the entire agreement between the
parties with respect to the matters covered hereby, and any
other prior or contemporaneous oral or written understandings
or agreements with respect to the matters covered hereby are
expressly superseded by this Agreement, including without
limitation, that certain employment agreement dated June 1,
1995 as amended from time to time (including without
limitation amendments dated July 18, 1996 and April 15, 1998).
There are no unwritten or oral agreements between the parties.
13. SEVERABILITY. If any provision of this Agreement, or the
application of such provision to any person or circumstance,
shall be declared judicially to be invalid, unenforceable or
void, such decision will not have the effect of invalidating
or voiding the remainder of this Agreement or affect the
application of such provision to other persons or
circumstances, and the parties agree that the part or parts of
this Agreement so held to be invalid, unenforceable or void
will be deemed to have been stricken here from and the
remainder of this Agreement will have the same force and
effect as if such part or parts had never been included
herein. Any such finding of invalidity or unenforceability
shall not prevent the enforcement of such provision in any
other jurisdiction to the maximum extent permitted by
applicable law.
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14. NOTICES. Unless otherwise expressly provided herein, all
notices, requests, demands, consents, waivers, instructions,
approvals and other communications hereunder shall be in
writing and shall be deemed to have been duly given if
personally delivered to or mailed, certified mail, return
receipt requested, first-class postage paid, or delivered by
messenger service with receipt acknowledged, addressed as
follows:
If to Company:
Level 13, 1 Alfred Street
Sydney, NSW 1225, Australia
Attn: Terrence N. Fern
If to Executive:
Howard H. Wilson
201 Rue Massie
Broussard, LA 70518
or to such other address or to such other individuals as any
party shall have last designated by notice to the other party.
All notices and other communications given to any party in
accordance with the provisions of this Agreement shall be
deemed to have been given when delivered to the intended
recipient thereof in accordance with the provisions of this
Section 14.
15. GOVERNING LAW; FORUM; CONSENT TO JURISDICTION. This Agreement
shall be construed in accordance with, and the rights of the
parties governed by, the laws of the State of Louisiana
without regard to the principles of conflict of laws. The
parties agree that all disputes in any way relating to,
arising under, connected with, or incident to this Agreement,
and over which the federal courts have subject matter
jurisdiction, shall be litigated exclusively in the United
States District Court for the Western District of Louisiana,
Lafayette Division, and, if necessary, the corresponding
appellate courts. The parties further agree that all disputes
in any way relating to, arising under, connected with, or
incident to this Agreement, and over which the federal courts
do not have subject matter jurisdiction, shall be litigated,
if at all, exclusively in the Courts of the State of
Louisiana, in Lafayette Parish, and, if necessary, the
corresponding appellate courts. The parties expressly submit
themselves to the personal jurisdiction of the State of
Louisiana.
16. SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, Executive agrees on behalf of himself and his
executors and administrators, heirs, legatees, distributees
and any other person or persons claiming any benefits under
him by virtue of this Agreement, that this Agreement and the
rights, interests and benefits
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<PAGE> 10
hereunder shall not be assigned, transferred, pledged or
hypothecated in any way by Executive or any executor,
administrator, heir, legatee, distributee or person claiming
under Executive by virtue of this Agreement and shall not be
subject to execution, attachment or similar process. Except as
otherwise expressly provided herein, Company agrees that this
Agreement shall not be assigned or transferred to any other
party; provided, however, a merger or consolidation of Company
into a successor entity other than Company shall not be
considered a transfer or assignment. Any attempt at
assignment, transfer, pledge or hypothecation or other
disposition of this Agreement or of such rights, interest and
benefits contrary to the foregoing provisions, or the levy of
any attachment or similar process thereupon, shall be null and
void and without effect.
17. THIRD PARTY BENEFICIARIES. This Agreement does not create, and
shall not be construed as creating, any rights enforceable by
any person or entity not a party to this Agreement (except as
otherwise provided in Section 8.3.2 or in Section 16).
18. HEADINGS. The section headings in this Agreement are for
convenience of reference only and shall not be deemed to alter
or affect the meaning or interpretation of any provisions
hereof.
19. ARBITRATION. Any controversy or claim arising out of or
relating to this contract, or the breach thereof, shall be
settled by arbitration in Lafayette, Louisiana, in accordance
with the applicable Rules of the American Arbitration
Association using three (3) impartial arbitrators and judgment
upon the award rendered by the arbitrators may be entered in
any court having jurisdiction thereof. Each party shall select
one arbitrator and the selected arbitrator shall designate a
third arbitrator. If unable to agree to a third arbitrator,
the presiding judge in the United States District Court for
the Western District of Louisiana shall designate the third
arbitrator. This Section 19 shall take precedence over the
provisions of Section 15.
20. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original
and all of which together shall be deemed to be one and the
same instrument.
21. CURRENCY REFERENCES. All references to "$" are to United
States currency unless otherwise specifically stated in the
Agreement.
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IN WITNESS WHEREOF, this Agreement has been duly executed and delivered
to be effective as of the date first above written.
WITNESSES: COMPANY:
PETSEC ENERGY INC.
Printed Name:
---------------------
Printed Name: By: /s/ Terrence N. Fern
--------------------- -----------------------------------
Terrence N. Fern
Chief Executive Officer
EXECUTIVE:
Printed Name:
---------------------
/s/ Howard H. Wilson
--------------------------------------
Printed Name: Howard H. Wilson
---------------------
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EXHIBIT 10.8
PERSONAL AND CONFIDENTIAL
October 15, 1999
Board of Directors of Petsec Energy Inc.
143 Ridgeway Drive, Suite 113
Lafayette, Louisiana 70503-3402
Attn: Mr. James E. Slatten III
Dear Mr Slatten:
This letter (the "Agreement") confirms the terms of the engagement of Gordian
Group, L.P. ("Gordian"), by Petsec Energy Inc. (the "Company") to provide
certain financial advisory services, as described below.
Gordian's services hereunder shall be the traditional investment banking
services relating to a capital restructuring including, without limitation, (i)
advising and making oral and written recommendations to the Board of Directors
of the Company, which the Company, in the exercise of its sole discretion, may
make available (subject to the following paragraph) to its direct parent, Petsec
(U.S.A.) Inc. ("PUSA"), and its indirect parent, Petsec Energy Ltd ("PEL", and
together with PUSA, singularly an "Affiliate," and collectively the
"Affiliates") in connection with a potential financial restructuring of the
Company and possibly one or more affiliates, or in connection with one or more
financial transactions (each a "Financial Transaction") with another entity or
entities (a "Financial Partner"); (ii) assisting in the development, negotiation
and implementation of potential financial restructurings, (iii) assisting in
valuing the Company (or as necessary in connection with a restructuring of
Company, Affiliates) and/or, as appropriate, the Company's (and, as necessary to
effect a restructuring of Company, PEL's) assets or operations; (iv) providing
expert advice and testimony in any legal proceeding relating to financial
matters involving the restructuring, including the feasibility of any potential
Financial Transaction, the valuation of any securities issued in connection with
a potential Financial Transaction, and any other matters with respect to which
Gordian is rendering services hereunder; (v) advising the Company as to
potential mergers or acquisitions and the sale or other disposition of any of
the Company's assets and businesses; (vi) preparing proposals to and assisting
the Company in negotiation with creditors, employees, shareholders and other
parties-in-interest in connection with any potential Financial Transaction;
(vii) providing, if requested, a single opinion (fairness, valuation or
solvency), in connection with the services provided by Gordian hereunder (which
opinion shall, when requested by the Company, be addressed also to Affiliates
and on which Affiliates shall have the right to fully rely, subject to the
following paragraph, and the nature, scope, substance and form of any such
opinion shall be such as we consider appropriate); and (viii) assisting in the
determination of an appropriate capital structure for the Company. Financial
<PAGE> 2
Partners shall include, without limitation, the existing creditors of the
Company. A Financial Transaction includes a restructuring of, or other
transaction involving, some or all of the financial obligations of the Company
(possibly in connection with a joint venture or other business association and
possibly involving one or more affiliates), the sale or other distribution by
the Company or PEL of any debt or equity securities of the Company, any other
financing for the Company, the sale of all or a portion of the assets or
securities of the Company (by way of merger or otherwise), or other transaction
of such nature involving the Company; provided, however, that notwithstanding
the foregoing a Financial Transaction shall exclude (i) any transaction entered
into solely with an Affiliate; (ii) any transfer of a partial interest in a
field when a substantial portion of the consideration given by the Financial
Partner is a commitment to drill one or more wells in order to earn an interest
in such field; and (iii) the sale of securities owned by PEL in Climax Mining
Ltd.
The Company acknowledges that a conflict of interest may exist or arise between
the Company and its Board of Directors, on the one hand, and one or more of the
Affiliates, on the other hand, with respect to matters covered by this
engagement. The Company acknowledges that, unless expressly stated otherwise in
writing, all services, advice, and opinions rendered by Gordian pursuant to this
engagement, regardless of to whom addressed, shall be rendered exclusively with
the objective of assisting the Company and the Company's Board of Directors in
carrying out its responsibilities with respect to the Company. Any Affiliate to
whom services, advice, or opinions are rendered or made available by Gordian
shall not rely on such services, advice, or opinions as reflecting the interests
of any Affiliate to the extent such interests are in actual or potential
conflict with the interests of the Company.
In the event the Company, its Affiliates or their management receive or initiate
an inquiry or other contact concerning a Financial Transaction, the Company will
promptly inform Gordian of such inquiry or contact with such prospective
Financial Partner, in order that Gordian can assist the Company in any resulting
negotiations in such manner as directed by the Company.
For Gordian's services in connection with the engagement, the Company shall pay,
or cause to be paid in cash to Gordian, the monthly fees stated below, payable
on the 15th day of each month of Gordian's engagement hereunder (the "Monthly
Fee"):
First month: $100,000
Second month: $75,000
Third month: $75,000
Subsequent months $65,000
In addition to the Monthly Fee, the Company shall pay Additional Fees, as
defined below. One-half (50%) of all Monthly Fees received by Gordian shall be
creditable against any Additional Fees. The Company shall pay, or cause to be
paid in cash, to Gordian the following Additional Fees: 1% of the Aggregate
Consideration (as defined below) that is paid or payable in connection with any
Financial Transaction, except for any equity or equity-related (such as
convertible securities or partnership interests) securities issued or new debt
procured (including new debt to replace existing debt), in which case the
applicable percentage shall be 3% in respect of such securities.
2
<PAGE> 3
The aggregate total of all fees paid to Gordian (both Monthly Fees and
Additional Fees) for services rendered hereunder shall be limited to $1,500,000.
For purposes of this letter agreement, Aggregate Consideration, for purposes of
calculating the Additional Fees, shall be deemed to be the total amounts paid to
or for the benefit of the Company, its security holders and/or its creditors in
connection with a Financial Transaction (and any transactions related thereto),
after netting out customary transaction costs other than the Additional Fees
with respect to such Financial Transaction (and any transactions related
thereto). Aggregate Consideration shall include without limitation, the
principal amount of any debt or obligations directly or indirectly assumed,
repaid, restructured (including but not limited to, any alteration of the terms
of the Company's public debt), renegotiated, refinanced or retired (as set forth
on the most recent balance sheet of the Company in connection with a sale or
sales thereof), the amount of any new debt and/or equity financing raised (or
the value realized from a sale of all or a part of the Company) in connection
with any Financial Transaction, any amounts paid into escrow and any amounts
paid in connection with the retirement or cancellation of any outstanding
options, stock appreciation rights or other derivative securities of the
Company. The Additional Fees shall be paid in full simultaneously with the
closing of a Financial Transaction (and in no event later than the receipt of
any portion of the Aggregate Consideration); provided that if the Aggregate
Consideration may be increased, pursuant to the terms of the Financial
Transaction, by contingent or deferred payments related to future earnings or
operations or other matters, the portion of the Additional Fees relating thereto
shall be calculated and paid to Gordian when and as such contingent or deferred
payments are made.
In the event that the Aggregate Consideration comprises securities, in whole or
in part, the value of such securities, for purposes of calculating the
Additional Fees, shall be the fair market value thereof, as the parties hereto
shall mutually agree, on the day prior to the public announcement of such
Financial Transaction; provided, however, that if such securities consist of
securities with an existing public trading market, the value thereof shall be
determined by the average of the last sales prices for such securities on the
five (5) trading days ending five (5) days prior to the consummation of the
Financial Transaction in question.
Gordian does not represent or guarantee any specific result from this
engagement. Further, Gordian does not make any representation regarding or
guaranty of the accuracy of any projection, other view or advice Gordian
provides regarding the Company's future. The Company acknowledges that all
future matters are subject to certain risks and uncertainties that could cause
actual results to differ materially from those projected or otherwise addressed
by Gordian.
Gordian's role shall be solely as financial advisor to the Company's management
and the Board of Directors (except that any opinion rendered by Gordian shall,
if requested, also be addressed to Affiliates, who shall have the right to rely
on same, again subject to the third paragraph of this letter); the Company's
management and Board of Directors shall remain fully responsible for all
decisions and matters as to which Gordian's advice is sought. Gordian's
obligations to you and the Company are contractual in nature as expressly set
forth in this letter agreement and neither Gordian nor any of its affiliates nor
the respective partners, directors, officers, employees and agents of Gordian or
its affiliates have any fiduciary obligations to the Company or any other person
in respect hereof. Gordian's obligations hereunder are advisory in nature, and
Gordian is assuming no management responsibility with respect to the Company of
any nature whatsoever.
3
<PAGE> 4
The Company understands that Gordian does not represent that any particular
Gordian professional will be solely responsible for Gordian's work product
completed pursuant to Gordian's engagement and that junior Gordian professionals
likely will be working on this engagement with senior Gordian professionals.
Notwithstanding the foregoing, Gordian represents that Peter Kaufman and Henry
Owsley will be primarily responsible to provide the services described hereunder
and will devote such time and effort as is customarily required to perform all
material obligations of Gordian hereunder.
Any advice, written or oral, provided by Gordian pursuant to this letter will be
solely for the information and assistance of the Company (and, to the extent
expressly provided for herein, the Affiliates, subject to the third paragraph
of this letter) in connection with its consideration of its financial
restructuring. Except to the extent legally required, none of: (i) the name of
Gordian; (ii) any advice rendered by Gordian to the Company or the fact that
Gordian is rendering advice to the Company; or (iii) any communication from
Gordian to the Company or from the Company to Gordian in connection with the
services performed by Gordian pursuant to this Agreement will be quoted or
referred to orally or in writing in any public form or forum or document by
either Gordian or Company, or their agents, without the other party's prior
written authorization, which shall not be unreasonably withheld. In this
connection, it is expressly agreed that except to the extent expressly set forth
in writing by Gordian, no third party shall be entitled to rely upon Gordian's
advice for any purpose whatsoever (other than the Affiliates and the Boards of
Directors of the Affiliates in accordance with the provisions expressly set
forth herein, including the third paragraph of this letter). Moreover, Gordian
shall bear no responsibility whatsoever for the accuracy or completeness of the
Company's disclosure of Gordian's advice to any third parties.
Gordian shall have the right to rely on the accuracy and completeness of all
information provided by the Company or any of its officers, directors,
affiliates, employees, counsel and auditors without independent verification
thereof. The Company understands that in Gordian's rendering of services
hereunder, Gordian will be relying, without independent verification, on the
accuracy and completeness of all information that is or will be furnished to
Gordian by or on behalf of the Company or any other party or potential party to
any transaction contemplated by this Agreement, and Gordian will not in any
respect be responsible for the accuracy or completeness thereof;
The Company represents and warrants to Gordian that all information it furnishes
to Gordian in connection with this engagement will be true and accurate in all
material respects, and, to the best of the Company's knowledge, complete and not
misleading.
In addition to the fees described above, Gordian shall be reimbursed upon
invoice for all of its reasonable out-of-pocket expenses (including travel,
telephone,facsimile and counsel fees) incurred in connection with our engagement
hereunder; reimbursement of counsel fees shall be subject to a $10,000 cap, and
Gordian must receive the Company's permission, which shall not be unreasonably
withheld, to exceed the cap, and in any event Gordian shall provide notice to
the Company when counsel fees are incurred. The obligations of the Company
pursuant to this letter shall survive any completion or termination of this
engagement (with respect to expenses incurred prior to such completion or
termination).
4
<PAGE> 5
The Company agrees to indemnify Gordian and its partners, officers, directors
and employees (each an "Indemnified Party") to the full extent lawful from and
against, and that each Indemnified Person shall have no liability to the Company
or its affiliates, creditors or security holders for, any losses, claims,
expenses, damages or liabilities related to or arising out of Gordian's
engagement under this letter, or any conduct in connection therewith, except to
the extent that any such loss, claim, expense, damage or liability is finally
judicially determined to have resulted solely from the gross negligence or
willful misconduct of Gordian in performing the services that are the subject of
this letter. If for any reason the foregoing indemnification is unavailable to
any Indemnified Party or insufficient to hold it harmless, then the Company
shall contribute to the amount paid or payable by each Indemnified Party as a
result of such loss, claim, expense, damage or liability in such proportion as
is appropriate to reflect not only the relative benefits received by the Company
on the one hand and the Indemnified Party on the other hand, but also the
relative fault of the Company and the Indemnified Party, as well as any other
relevant equitable considerations. The Company agrees to reimburse each
Indemnified Party periodically for its reasonable legal and other out-of-pocket
expenses (including the cost of any investigation, preparation or provision of
evidence) incurred in connection with any pending or threatened action, claim or
proceeding (regardless of whether Gordian is a party thereto) in respect of
which indemnification or contribution may be sought hereunder or in enforcing
this agreement. The reimbursement, indemnity, and contribution agreements of the
Company under this paragraph shall be in addition to any liability which the
Company otherwise may have and to any rights that Gordian may otherwise have,
and shall extend upon the same terms and conditions to any affiliate of Gordian
and the partners, directors, employees and controlling persons (if any) of
Gordian and shall be binding upon and inure to the benefit of any successors,
assigns, heirs and personal representatives of the Company, Gordian, and such
affiliate and any such person. The provisions of this and the following four
paragraphs shall survive the completion or termination of Gordian's services
pursuant to this letter.
The Company acknowledges and agrees that its engagement of Gordian hereunder is
not intended to confer rights upon any person not a party hereto (including any
security holders or creditors of the Company) other than the Affiliates to the
extent provided for herein, as against Gordian, its affiliates, or the
respective partners, directors, officers, employees and agents of Gordian or its
affiliates. THIS LETTER AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE
WITH THE LAW OF THE STATE OF NEW YORK (WITHOUT REFERENCE TO ITS PRINCIPLES OF
CONFLICT OF LAW). THE PARTIES HERETO HEREBY WAIVE ANY RIGHT TO TRIAL BY JURY IN
CONNECTION WITH ANY DISPUTES ARISING HEREUNDER. Solely for the purposes of the
indemnification provisions above, the Company hereby consents to venue and
jurisdiction in any court in which Gordian (or other Indemnified Person
hereunder) is sued or otherwise found or brought. Except as provided in the
foregoing sentence, any dispute arising under this letter or in connection with
this engagement shall be finally settled by arbitration conducted in Houston,
Texas by one arbitrator in accordance with the Commercial Arbitration Rules of
the American Arbitration Association. The arbitration award entered in
accordance with this Agreement shall be in writing and shall be final and
binding on the parties, except to the extent it may be appealed to a court of
competent jurisdiction in accordance with applicable laws governing
appealability of arbitration awards. The award may include an award of costs,
including reasonable attorneys' fees and disbursements. Judgment upon the award
may be entered by any court having jurisdiction over the parties or their
assets.
5
<PAGE> 6
Gordian will not during the term of this engagement or thereafter (except as
required by law after prior notice to Company) use or disclose to any person any
confidential information or trade or business secrets relating to the Company,
its affiliates, or any other person of which Gordian becomes possessed in
connection with its services hereunder except when authorized to do so by the
Company in writing to a person bound by a confidentiality obligation.
This engagement may be terminated by the Company or Gordian at any time with or
without cause, effective upon receipt of written notice to that effect by the
other party; provided, however, that Gordian shall be entitled to Additional
Fees (subject to the $1,500,000 maximum limitation on all fees) on a Financial
Transaction consummated after the termination of this agreement by the Company
provided that both: (a) at the date of termination less than 70% of the
Company's bonds have been restructured and (b) within nine months from the date
of such termination definitive documentation is entered into so long as, with
respect to any such Financial Transaction, Gordian interacted during the
pendency of its engagement hereunder with any Financial Partner participating in
any such Financial Transaction. In any event, the Company shall remain liable
for any Monthly Fees and/or expenses owed to Gordian prior to termination
pursuant to its engagement hereunder.
Neither party may assign this Agreement.
Please confirm that the foregoing is in accordance with your understanding by
signing and returning to us the duplicate of this letter attached hereto, which
shall thereupon constitute a binding agreement.
Sincerely yours,
GORDIAN GROUP, L.P.
By: Blue Claw Capital, Inc.,
General Partner of
Gordian Group, L.P.
By: /s/ Peter Kaufman
------------------------------------
Peter S. Kaufman
Managing Director of
the General Partner
AGREED TO AND ACCEPTED:
PETSEC ENERGY INC.
By: /s/ James E. Slatten III
------------------------------------
James E. Slatten III
Vice-President, Land & Legal, and Director
6
<PAGE> 1
EXHIBIT 10.9
PETSEC ENERGY INC.
143 Ridgeway Drive, Suite 113
Lafayette, Louisiana 70503
Attn: Mr. James E. Slatten III
Vice President, Land & Legal
Dear Mr. Slatten:
The purpose of this letter is to confirm the understanding and agreement (the
"Agreement") with Petsec Energy Inc. (the "Company") concerning the engagement
of Houlihan Lokey Howard & Zukin Capital, L.P. ("Houlihan Lokey") by Akin, Gump,
Strauss, Hauer & Feld, L.L.P. ("Bondholders' Counsel"), as counsel to the
Subcommittee (as herein defined), to assist it in its representation of an
informal negotiating subcommittee (the "Subcommittee") of beneficial holders
(the "Bondholders") of $100 million 9.5% senior subordinated bonds due 2007 (the
"Bonds") issued by the Company. Houlihan Lokey has been retained by Bondholders'
Counsel to provide financial advisory services in connection with the analysis,
consideration and possible formulation of potential financial restructuring
options for the Company's discussions with the Subcommittee.
The Company has notified the Subcommittee that it wishes to discuss the possible
formulation of a financial restructuring of the Bonds, which will benefit the
Company. In consideration of the Subcommittee's participation in such
discussions, and to allow Bondholders' Counsel to analyze restructuring concepts
and proposals (to the extent presented) and discuss them with the Subcommittee,
the Company has agreed to compensate Houlihan Lokey and to undertake the
indemnification obligations to Houlihan Lokey pursuant to the terms of this
Agreement. Neither the Subcommittee, their constituents, nor any of their
advisors or professionals (including, but not limited to, Bondholders' Counsel)
shall be liable for the fees and expenses payable to Houlihan Lokey hereunder.
Notwithstanding such arrangement, Houlihan Lokey's duties hereunder run solely
to Bondholders' Counsel on behalf of the Subcommittee and Houlihan Lokey is not
authorized to be, and will not purport to be, an agent of the Company for any
purpose. All communication and correspondence between Houlihan Lokey and
Bondholders' Counsel and the Subcommittee, and all work product and analyses
prepared by Houlihan Lokey for Bondholders' Counsel in connection with this
matter, are subject to the attorney-client privilege and work-product privilege.
Upon execution of this Agreement, the Company shall pay Houlihan Lokey a fee of
$75,000 per month (the "Monthly Fee") (for a minimum of three months, or
$225,000 (the "Minimum Fee")), plus additional fees (the "Transaction Fee")
payable in accordance with the terms set forth in Exhibit A, plus reasonable
out-of-pocket expenses that are incurred by Houlihan Lokey on behalf of
Bondholders' Counsel. The Company shall pay the Monthly Fee by the 15th day of
each month, in advance for the month, plus reimbursement for reasonable and
documented out-of-pocket expenses for each month. Payment shall be made to
Houlihan Lokey at the address above, Attention: Andrew B. Miller. Out-of-pocket
expenses shall include, but not be limited to, all documented and reasonable
travel expenses, duplicating charges, computer charges, messenger services and
long-distance telephone calls incurred by Houlihan Lokey.
<PAGE> 2
Petsec Energy Inc.
Page 2
This Agreement is terminable upon thirty (30) days' written notice by the
Company, Houlihan Lokey or Bondholders' Counsel (as instructed by a majority of
the Subcommittee); provided, however, that, (a) if the Agreement is so
terminated during the first three months, the Company shall immediately upon
such termination pay Houlihan Lokey the unpaid portion of its Minimum Fee, and
(b) if the Agreement is so terminated during or after the fourth month, Houlihan
Lokey shall be paid all previously earned Monthly Fees (if unpaid) and the
prorata portion of its Monthly Fee for the month of final termination. This
Agreement will automatically terminate upon the closing of a consensual
restructuring transaction supported by the relevant majority of the holders of
outstanding Bonds.
In the event the Company becomes a debtor-in-possession in a case under Title 11
of the United States Code (the "Bankruptcy Code"), the Company shall use its
best efforts to (a) assume this Agreement as an executory contract as part of a
confirmed plan of reorganization, or (b) otherwise fulfill its obligations under
this Agreement in a manner mutually agreeable to both the Company and Houlihan
Lokey. The form of documentation to satisfy the forgoing commitment shall be
acceptable to Houlihan Lokey in its sole discretion. After a bankruptcy filing,
Houlihan Lokey shall not be required to perform any services under this
Agreement until the entry of an Order (as defined herein). The Subcommittee, by
acknowledging below, hereby requires the payment of Houlihan Lokey's fees
hereunder as a condition to their consent to any restructuring transaction.
Notwithstanding the preceding, in the event the Company commences a case under
the Bankruptcy Code, Houlihan Lokey's further performance hereunder is subject
to the entry of an order (an "Order") of the United States Bankruptcy Court
having jurisdiction over such case approving the retention of Houlihan Lokey
pursuant to the terms hereof. The Company shall use its best efforts to obtain
prompt authorization of the retention of Houlihan Lokey pursuant to section
328(a) of the Bankruptcy Code on the terms and provisions in this Agreement. The
Order approving the Agreement and authorizing the retention shall be acceptable
to Houlihan Lokey in its sole discretion.
The Company understands that Houlihan Lokey will not be responsible for
independently verifying the accuracy of the information provided by the Company
(the "Information") and shall not be liable for inaccuracies in any Information
provided by the Company to Houlihan Lokey. The Company will use reasonable
efforts to assure that all Information provided to Houlihan Lokey by the Company
will, as of its respective dates, be the most accurate and complete information
that is available. Furthermore, the Company will use reasonable efforts to
cooperate with Houlihan Lokey in connection with the performance of Houlihan
Lokey's obligations under this Agreement.
As a material part of the consideration for Houlihan Lokey to furnish its
services under this Agreement, the Company agrees to indemnify and hold harmless
Houlihan Lokey and its affiliates, and their respective past, present and future
directors, officers, shareholders, employees, agents and controlling persons
within the meaning of either Section 15 of the Securities Act of 1933, as
amended, or Section 20 of the Securities Exchange Act of 1934, as amended
(collectively, the "Indemnified Parties"), to the fullest extent lawful, from
and against any and all losses, claims, damages or liabilities (or actions in
respect thereof), joint or several, arising out of or related to the Agreement,
any actions taken or omitted to be taken by an Indemnified Party in connection
with Houlihan Lokey's provision of services to the Subcommittee and/or
Bondholders' Counsel, or any Transaction (as defined herein) or proposed
Transaction contemplated thereby. In addition, the
<PAGE> 3
Petsec Energy Inc.
Page 3
Company agrees to reimburse the Indemnified Parties for any legal or other
expenses reasonably incurred by them in respect thereof at the time such
expenses are incurred; provided, however, the Company shall not be liable under
the foregoing indemnity and reimbursement agreement for any loss, claim, damage
or liability which is finally judicially determined to have resulted primarily
from the willful misconduct or gross negligence of any Indemnified Party.
If for any reason the foregoing indemnification is unavailable to any
Indemnified Party or insufficient to hold it harmless, the Company shall
contribute to the amount paid or payable by the Indemnified Party as a result of
such losses, claims, damages, liabilities or expenses in such proportion as is
appropriate to reflect the relative benefits received (or anticipated to be
received) by the Company, on the one hand, and Houlihan Lokey, on the other
hand, in connection with the actual or potential Transaction and/or the services
rendered by Houlihan Lokey. If, however, the allocation provided by the
immediately preceding sentence is not permitted by applicable law or otherwise,
then the Company shall contribute to such amount paid or payable by any
Indemnified Party in such proportion as is appropriate to reflect not only such
relative benefits, but also the relative fault of the Company, on the one hand,
and Houlihan Lokey, on the other hand, in connection therewith, as well as any
other relevant equitable considerations. Notwithstanding the foregoing, the
aggregate contribution of all Indemnified Parties to any such losses, claims,
damages, liabilities and expenses shall not exceed the amount of fees actually
received by Houlihan Lokey pursuant to the Agreement.
The Company shall not affect any settlement or release from liability in
connection with any matter for which an Indemnified Party would be entitled to
indemnification from the Company, unless such settlement or release contains a
release of the Indemnified Parties reasonably satisfactory in form and substance
to Houlihan Lokey. The Company shall not be required to indemnify any
Indemnified Party for any amount paid or payable by such party in the settlement
or compromise of any claim or action without the Company's prior written
consent.
The Company further agrees that neither Houlihan Lokey nor any other Indemnified
Party shall have any liability, regardless of the legal theory advanced, to the
Company or any other person or entity (including the Company's equity holders
and creditors) related to or arising out of Houlihan Lokey's engagement, except
for any liability for losses, claims, damages, liabilities or expenses incurred
by the Company which are finally judicially determined to have resulted
primarily from the willful misconduct or gross negligence of any Indemnified
Party. The indemnity, reimbursement, contribution and other obligations and
agreements of the Company set forth herein shall apply to any modifications of
this Agreement, shall be in addition to any liability which the Company may
otherwise have, and shall be binding upon and inure to the benefit of any
successors, assigns, heirs and personal representatives of the Company and each
Indemnified Party. The foregoing indemnification provisions shall survive the
consummation of any Transaction and/or any termination of the relationship
established by this Agreement.
The obligations of Houlihan Lokey are solely corporate obligations, and no
officer, director, employee, agent, shareholder or controlling person of
Houlihan Lokey shall be subjected to any personal liability whatsoever to any
person, nor will any such claim be asserted by or on behalf of any other party
to this Agreement or any person relying on the services provided hereunder. The
Company's obligations with respect to any and all
<PAGE> 4
Petsec Energy Inc.
Page 4
payments owing to Houlihan Lokey and the indemnification, reimbursement,
contribution and other similar obligations of the Company under this Agreement
shall survive any termination of this Agreement.
Dated as of the 15th day of February 2000.
PETSEC ENERGY INC.
By: /s/ R. A. Keogh
-------------------------------
Name: R. A. Keogh
-------------------------------
Title: V. P. & Chief Financial Officer
-------------------------------
HOULIHAN LOKEY HOWARD & ZUKIN CAPITAL, L.P.
By: /s/ Andrew B. Miller
-------------------------------
Andrew B. Miller
Managing Director
<PAGE> 5
Petsec Energy Inc.
Page 5
ACKNOWLEDGED AS OF THE DATE SET FORTH ABOVE:
INFORMAL NEGOTIATING SUBCOMMITTEE OF PETSEC ENERGY INC.
By: /s/ William Wall
-------------------------------
Name: William Wall
-------------------------------
Title: Assistant General Counsel
-------------------------------
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
By: /s/ Michael S. Stamer
-------------------------------
Name: Michael S. Stamer
-------------------------------
Title: Partner
-------------------------------
<PAGE> 6
Petsec Energy Inc.
Page 6
EXHIBIT A
This Exhibit A is part of and incorporated into the attached Agreement.
1. Monthly Fees. The Company shall pay Houlihan Lokey a Monthly
Fee of $75,000.00 per month. The Monthly Fees shall terminate
after the earlier of (x) the date this Agreement is
terminated; or (y) the closing of a Transaction (defined
below).
2. Transaction Fee. If a Transaction is proposed, which the
Subcommittee supports, and which is consummated either in or
out of court, Houlihan Lokey shall be entitled to a
Transaction Fee in the amounts set forth on the following
Schedule upon the consummation of any Subcommittee-approved
Transaction, including, without limitation, a Transaction
which is completed pursuant to an exchange offer, consent
solicitation, or case under the Bankruptcy Code (collectively,
a "Transaction"). Upon the completion of a Transaction , the
Transaction Fee shall be payable in cash or, at the election
of the Subcommittee, in such consideration and proportions as
is received or to be received by the Bondholders.
If a Transaction is consummated, Houlihan Lokey shall be
entitled to a Transaction Fee based on the Bondholders'
Recovery as per the following schedule:
<TABLE>
<CAPTION>
BONDHOLDERS RECOVERY TRANSACTION FEE
-------------------- ---------------
<S> <C>
Less than $60 Million $0
Over $60 Million to $70 Million 2% of aggregate Bondholders Recovery over $60 Million
Over $70 Million to $80 Million Above plus 3% of aggregate Bondholders Recovery over $70 Million
Over $80 Million to $90 Million Above plus 4% of aggregate Bondholders Recovery over $80 Million
Over $90 Million Above plus 5% of aggregate Bondholders Recovery over $90 Million
</TABLE>
As used herein, the term "Transaction" shall include the
consummation of any agreement or series of agreements, or
transaction or series of transactions and the receipt of
consideration by the Bondholders, which in each case may
include, but are not limited to, the following:
(a) Reinstatement or material credit enhancement of the
existing Bonds in conjunction with a broader transaction
involving the Company;
(b) The consummation of an out-of-court
restructuring/recapitalization through an exchange offer,
consent solicitation or other mechanism which has been
accepted by such number and
<PAGE> 7
Petsec Energy Inc.
Page 7
amount of Bonds and Bondholders as may be required to
effectuate such Transaction;
(c) The completion of a tender offer for, or acquisition of,
the Bonds which has been accepted by such number and amount of
Bonds and Bondholders as may be required to effectuate such
Transaction;
(d) The closing of any sale, transfer or assumption of all or
substantially all of the assets, liabilities or stock of the
Company (including without limitation any consolidation or
merger involving the Company); or
(e) The effective date of a confirmed Chapter 11 plan of
reorganization, the terms of which have been substantially
agreed to by the Subcommittee.
"Bondholders Recovery" shall be defined as any consideration
received by the Bondholders in respect of the Bonds,
including, without limitation, cash, securities (debt or
equity), property or other interests or consideration. In the
event that the consideration received in a Transaction is paid
in whole or in part in some form of equity securities of
another company (or a reorganized Petsec), the value of such
securities, for purposes of calculating the Contingent Fee,
shall be the fair market value thereof, as the parties hereto
shall mutually agree, on the day prior to the consummation of
such Transaction; provided, however, that if such securities
consist of securities with an existing public trading market,
the value thereof shall be determined by the last sales price
for such securities on the last trading day thereof prior to
such consummation. Any debt securities shall be valued at
their face amount.
3. Offset of Monthly Fees. If a Transaction Fee is payable to
Houlihan Lokey, then, one-third of all Monthly Fees earned
during the fourth through sixth months; two-thirds of all
Monthly Fees earned during the seventh through ninth months
and all of the Monthly Fees earned from the tenth month on
shall be applied as an offset against the Transaction Fee,
provided however that in no event will such adjusted
Transaction Fee be reduced to less than $0.
For illustrative purposes, if a Transaction generating $75
million in Bondholders Recovery is closed in the fifth month,
then the Transaction Fee would equal $350,000 (i.e., .02 x $10
million, plus .03 x $5 million), which shall be offset by
$50,000 (i.e., 1/3 of the $75,000 Monthly Fee for each of the
fourth and fifth months), resulting in a total Transaction Fee
of $300,000.
<PAGE> 1
EXHIBIT 10.10
PETSEC ENERGY INC.
YEAR 2000 SEVERANCE PLAN
The PETSEC ENERGY INC. YEAR 2000 SEVERANCE PLAN (the "Plan") is hereby
adopted effective as of January 1, 2000 pursuant to the authorization of the
Board of Directors of PETSEC ENERGY INC. (the "Company") for its eligible
employees as follows:
I.
DEFINITIONS AND CONSTRUCTION
1.1 DEFINITIONS. Where the following words and phrases appear in the
Plan, they shall have the respective meanings set forth below, unless their
context clearly indicates to the contrary.
(a) "BASE SALARY" shall mean, as of a given date and with
respect to a particular Covered Employee, the aggregate base salary
received by such Covered Employee from the Company during the 12-month
period preceding such date; provided, however, that if a Covered
Employee has not been employed by the Company during such entire
12-month period, then such Covered Employee's Base Salary shall equal
his or her annual base salary at the rate in effect immediately prior
to such date.
(b) "BOARD" shall mean the Board of Directors of the Company.
(c) "CHANGE IN TERMS OF EMPLOYMENT" shall mean the occurrence,
at any time during the period beginning on January 1, 2000 and ending
on December 31, 2000, of any of the following:
(1) a reduction of more than 10% in the annual rate
of base salary paid by the Company to a Covered Employee from
that provided to him immediately prior to January 1, 2000;
(2) a change in the location of a Covered Employee's
primary place of employment by the Company by more than 30
miles from the location where he was primarily employed
immediately prior to January 1, 2000; or
(3) a material reduction (as determined by the
Committee in its reasonable discretion) of a Covered
Employee's job responsibilities, duties or authority with the
Company from that exercised by him immediately prior to
January 1, 2000.
<PAGE> 2
(d) "CODE" shall mean the Internal Revenue Code of 1986, as
amended.
(e) "COMMITTEE" shall mean the administrative committee
appointed in accordance with Section 3.2 to administer the Plan.
(e) "COMPANY" shall mean Petsec Energy Inc., a Nevada
corporation.
(f) "COVERED EMPLOYEE" shall mean any individual who on
December 31, 1999, is a regular, full-time salaried employee of the
Company or an hourly employee of the Company who is normally scheduled
to work 1,750 or more hours per year, other than (1) any individual
whose terms of employment are governed by a collective bargaining
agreement between a collective bargaining unit and the Company unless
such agreement provides for coverage of such individual under the Plan,
and (2) any individual who is classified, designated, compensated, or
otherwise treated by the Company as a temporary employee, a casual
employee, or an independent contractor.
(h) "ERISA" shall mean the Employee Retirement Income Security
Act of 1974, as amended.
(i) "INVOLUNTARY TERMINATION" shall mean any termination of a
Covered Employee's employment with the Company which:
(1) does not result from a voluntary resignation by
the Covered Employee (other than a resignation pursuant to
Clause (2) of this Section 1.1(i); or
(2) results from a resignation by a Covered Employee
on or before the date which is 60 days after the date the
Covered Employee receives notice of a Change in Terms of
Employment;
provided, however, that the term "Involuntary Termination" shall not
include a Termination for Cause or any termination as a result of a
Covered Employee's death, disability under circumstances entitling him
to benefits under the Company's long-term disability plan or
Retirement.
(j) "RETIREMENT" shall mean the Covered Employee's resignation
on or after the date he reaches age sixty-five.
(k) "TERMINATION FOR CAUSE" shall mean any termination of a
Covered Employee's employment with the Company by reason of such
Covered Employee's (1) engaging in gross negligence or willful
misconduct in the performance of his duties, (2) willfully refusing
without proper legal reason to perform his duties and responsibilities,
(3) materially breaching any material provision of any agreement
between such Covered Employee and the Company, (4) materially breaching
any material corporate policy
-2-
<PAGE> 3
maintained and established by the Company that is of general
applicability to the Company's employees, (5) willfully engaging in
conduct that such Covered Employee knows or should know is materially
injurious to the Company, or (6) engaging in illegal conduct or any act
of serious dishonesty which adversely affects, or reasonably could in
the future adversely affect, such Covered Employee's value,
reliability, or performance in a material manner.
(l) "WARN ACT" shall mean the United States Worker Adjustment
and Retraining Notification Act, as amended.
(m) "YEARS OF SERVICE" shall mean, with respect to a
particular Covered Employee, the sum of (1) each full year of such
Covered Employee's continuous employment by the Company, an affiliate
of the Company and Climax Mining Limited (which was, but is no longer
an affiliate of the Company) from his most recent date of hire (the
"Most Recent Date of Hire") to the date his employment is subject to an
Involuntary Termination (the "Termination Date") and (2) the quotient
obtained by dividing (i) the number of such Covered Employee's full
weeks of continuous employment by the Company or an affiliate of the
Company from the Anniversary Date (as hereinafter defined) to the
Termination Date by (ii) 52. For purposes of the preceding sentence,
the term "Anniversary Date" shall mean (A) with respect to a Covered
Employee who has zero Years of Service pursuant to clause (1) of the
preceding sentence, such Covered Employee's Most Recent Date of Hire,
and (B) with respect to a Covered Employee who has one or more Years of
Service pursuant to clause (1) of the preceding sentence, the
anniversary of such Covered Employee's Most Recent Date of Hire that is
coincident with or next preceding the Termination Date.
1.2 NUMBER AND GENDER. Wherever appropriate herein, any word used in
the singular shall be considered to include the plural and the plural to include
the singular. The masculine gender, where appearing in this Plan, shall be
deemed to include the feminine gender.
1.3 HEADINGS. The headings of Articles and Sections herein are included
solely for convenience and if there is any conflict between such headings and
the text of the Plan, the text shall control.
II.
SEVERANCE BENEFITS
2.1 SEVERANCE PAYMENT. Subject to the remaining Sections of this
Article II, if a Covered Employee's employment by the Company shall be subject
to an Involuntary Termination at any time during the period beginning on January
1, 2000 and ending on December 31, 2000, then such Covered Employee shall be
entitled to a severance payment in an amount equal to the sum of (a) 3/52 of
such Covered Employee's Base Salary multiplied by his Years of Service, plus (b)
1/4 of such Covered Employee's Base Salary (which Base Salary, for purposes of
clauses (a) and (b) of
-3-
<PAGE> 4
this sentence, shall be determined as of the date of such Involuntary
Termination). Any severance payment payable pursuant to this Section 2.1 shall
be paid to the Covered Employee in a lump sum cash payment (less any required
tax withholding) within five days after his Involuntary Termination, subject to
the remaining Sections of this Article II.
2.2 RELEASE AND FULL SETTLEMENT. Anything to the contrary herein
notwithstanding, as a condition to the receipt of any payment under Section 2.1,
a Covered Employee whose employment by the Company has been subject to an
Involuntary Termination shall first execute a release, in the form established
by the Committee, releasing the Committee, the Board, the Company, and the
Company's shareholders, partners, officers, directors, employees, affiliates,
and agents from any and all claims and from any and all causes of action of any
kind or character, including but not limited to all claims or causes of action
arising out of such Covered Employee's employment with the Company, the
termination of such employment, and the performance of the Company's obligations
hereunder, and the receipt of any benefits provided under Section 2.1 by such
Covered Employee shall constitute full settlement of all such claims and causes
of action.
2.3 MITIGATION. A Covered Employee shall not be required to mitigate
the amount of any payment provided for in this Article II by seeking other
employment or otherwise, nor shall the amount of any payment provided for in
this Article II be reduced by any compensation or benefit earned by the Covered
Employee as the result of employment by another Company or by retirement
benefits. Except as provided in Section 2.5, the benefits under the Plan are in
addition to any other benefits to which a Covered Employee is otherwise
entitled.
2.4 EFFECT ON OTHER COMPANY BENEFITS. Except as provided in Section
2.5, any payment provided for in this Article II shall not be reduced by, but
shall be in addition to, any other benefits provided by the Company to which a
Covered Employee is otherwise entitled.
2.5 OFFSET FOR OTHER SEVERANCE BENEFITS. A severance payment calculated
pursuant to Section 2.1 for a Covered Employee shall be reduced by any other
severance benefits, pay in lieu of notice, or other similar benefits payable to
such Covered Employee from or on behalf of the Company, which becomes payable on
account of such Covered Employee's Involuntary Termination pursuant to any
applicable law, statute, regulation, court order, contractual undertaking of the
Company or other legal requirement, including without limitation, the WARN Act;
provided, however, that if a severance payment calculated pursuant to Section
2.1 is reduced pursuant to the terms of this Section 2.5 as a result of payments
to a Covered Employee pursuant to the WARN Act, then the minimum severance
payment payable under the Plan to such Covered Employee shall not be less than
1/13 of such Covered Employee's Base Salary (determined as of the date of such
Covered Employee's Involuntary Termination).
-4-
<PAGE> 5
2.6 SEVERANCE PAY PLAN LIMITATION. The Plan is intended to be an
employee welfare benefit plan within the meaning of section 3(1) of ERISA and
the Labor Department regulations promulgated thereunder. Therefore, anything to
the contrary herein notwithstanding, in no event shall any Covered Employee
receive total severance payments under the Plan that exceed the equivalent of
twice such Covered Employee's "annual compensation" (as such term is defined in
29 CFR ss.2510.3-2(b)(2)) during the year immediately preceding his Involuntary
Termination. If total severance payments under the Plan to a Covered Employee
would otherwise exceed the limitation in the preceding sentence, then the amount
payable to such Covered Employee pursuant to Section 2.1 shall be reduced in
order to satisfy such limitation.
2.7 PARACHUTE PAYMENTS. Anything to the contrary herein
notwithstanding, if the Covered Employee is a "disqualified individual" (as
defined in Section 280G(c) of the Code), and the benefits provided for in
Section 2.1, together with any other payments or benefits which the Covered
Employee has the right to receive from the Company and its affiliates, would
constitute a "parachute payment" (as defined in Section 280G(b)(2) of the Code),
the severance benefits provided hereunder shall be either (a) reduced (but not
below zero) so that the present value of such total amounts received by the
Covered Employee will be one dollar ($1.00) less than three times the Covered
Employee's "base amount" (as defined in Section 280G of the Code) and so that no
portion of such amounts received by the Covered Employee shall be subject to the
excise tax imposed by Section 4999 of the Code or (b) paid in full, whichever
produces the better net after-tax position to the Covered Employee (taking into
account any applicable excise tax under Section 4999 of the Code and any
applicable income tax). The determination as to whether any such reduction in
the amount of the severance benefit is necessary shall be made by the Company in
good faith, and such determination shall be conclusive and binding on the
Covered Employee. If a reduced payment is made and through error or otherwise
that payment, when aggregated with other payments or benefits from the Company
(or its affiliates) used in determining if a "parachute payment" exists, exceeds
one dollar ($1.00) less than three times the Covered Employee's base amount, the
Covered Employee shall immediately repay such excess to the Company upon
notification that an overpayment has been made.
III.
ADMINISTRATION OF PLAN
3.1 APPOINTMENT OF COMMITTEE. The Plan shall be administered by the
Committee comprised initially of Ross A. Keogh and James E. Slatten III. The
Committee shall consist of at least two members. The members of the Committee
shall serve at the pleasure (and may be removed and replaced in the sole
discretion) of the Board and shall administer the Plan on behalf of the Company.
At any time during the term of his office, a member of the Committee may resign
by giving written notice to the Board and the Committee, such resignation to
become effective upon the appointment of a substitute member or, if earlier, the
lapse of thirty days after such notice is given as herein provided.
-5-
<PAGE> 6
3.2 COMMITTEE PROCEDURE. A majority of the members of the Committee
shall constitute a quorum. Action by the Committee may be taken at a meeting by
a vote of a majority of those present or without a meeting by unanimous consent
in writing of all members. If a majority of Committee members may not decide a
particular issue or take action with respect to the Plan because of the
application of Section 3.4, the Board shall take such action or decide such
matter. The Committee shall also designate the person or persons who shall be
authorized to sign for the Committee and, upon such designation, the signature
of such person or persons shall bind the Committee.
3.3 COMMITTEE'S POWERS AND DUTIES. It shall be a principal duty of the
Committee to see that the Plan is carried out, in accordance with its terms, for
the exclusive benefit of persons entitled to participate in the Plan. The
Committee shall be the named fiduciary and shall have full power to administer
the Plan in all of its details, subject to applicable requirements of law. For
this purpose, the Committee's powers shall include, but not be limited to, the
following authority, in addition to all other powers provided by this Plan:
(a) to make and enforce such rules and regulations as it deems
necessary or proper for the efficient administration of the Plan;
(b) to interpret the Plan, its interpretation thereof to be
final and conclusive on all persons claiming benefits under the Plan;
(c) to decide all questions concerning the Plan and the
eligibility of any person to participate in the Plan;
(d) to make a determination as to the right of any person to a
benefit under the Plan (including, without limitation, to determine
whether and when there has been a termination of a Covered Employee's
employment and the cause of such termination);
(e) to appoint such agents, counsel, accountants, consultants,
claims administrator and other persons as may be required to assist in
administering the Plan;
(f) to allocate and delegate its responsibilities under the
Plan and to designate other persons to carry out any of its
responsibilities under the Plan, any such allocation, delegation or
designation to be in writing;
(g) to sue or cause suit to be brought in the name of the
Plan; and
(h) to obtain from the Company and from Covered Employees such
information as is necessary for the proper administration of the Plan.
-6-
<PAGE> 7
3.4 MEMBER'S OWN PARTICIPATION. No Covered Employee or agent of the
Committee may act, vote, or otherwise influence a decision of the Committee
specifically relating to himself as a participant in the Plan.
3.5 INDEMNIFICATION. The Company shall indemnify and hold harmless each
member of the Committee against any and all expenses and liabilities arising out
of his administrative functions or fiduciary responsibilities, including any
expenses and liabilities that are caused by or result from an act or omission
constituting the negligence of such member in the performance of such functions
or responsibilities, but excluding expenses and liabilities that are caused by
or result from such member's own gross negligence or willful misconduct.
Expenses against which such member shall be indemnified hereunder shall include,
without limitation, the amounts of any settlement or judgment, costs, counsel
fees, and related charges reasonably incurred in connection with a claim
asserted or a proceeding brought or settlement thereof.
3.6 COMPENSATION, BOND AND EXPENSES. The members of the Committee shall
not receive compensation with respect to their services for the Committee. To
the extent required by applicable law, but not otherwise, Committee members
shall furnish bond or security for the performance of their duties hereunder.
Any expenses properly incurred by the Committee incident to the administration,
termination or protection of the Plan, including the cost of furnishing bond,
shall be paid by the Company.
3.7 CLAIMS PROCEDURE. Any employee that the Committee determines is
entitled to a benefit under the Plan is not required to file a claim for
benefits. Any employee who is not paid a benefit and who believes that he is
entitled to a benefit or who has been paid a benefit and who believes that he is
entitled to a greater benefit may file a claim for benefits under the Plan in
writing with the Committee. In any case in which a claim for Plan benefits by a
Covered Employee is denied or modified, the Committee shall furnish written
notice to the claimant within 90 days (or within 180 days if additional
information requested by the Committee necessitates an extension of the 90-day
period), which notice shall:
(a) state the specific reason or reasons for the denial or
modification;
(b) provide specific reference to pertinent Plan provisions on
which the denial or modification is based;
(c) provide a description of any additional material or
information necessary for the Covered Employee or his representative to
perfect the claim, and an explanation of why such material or
information is necessary; and
(d) explain the Plan's claim review procedure as contained
herein.
In the event a claim for Plan benefits is denied or modified, if the Covered
Employee or his representative desires to have such denial or modification
reviewed, he must, within 60 days
-7-
<PAGE> 8
following receipt of the notice of such denial or modification, submit a written
request for review by the Committee of its initial decision. In connection with
such request, the Covered Employee or his representative may review any
pertinent documents upon which such denial or modification was based and may
submit issues and comments in writing. Within 60 days following such request for
review the Committee shall, after providing a full and fair review, render its
final decision in writing to the Covered Employee and his representative, if
any, stating specific reasons for such decision and making specific references
to pertinent Plan provisions upon which the decision is based. If special
circumstances require an extension of such 60-day period, the Committee's
decision shall be rendered as soon as possible, but not later than 120 days
after receipt of the request for review. If an extension of time for review is
required, written notice of the extension shall be furnished to the Covered
Employee and his representative, if any, prior to the commencement of the
extension period.
IV.
GENERAL PROVISIONS
4.1 FUNDING. The benefits provided herein shall be unfunded and shall
be provided from the Company's general assets.
4.2 COST OF PLAN. The entire cost of the Plan shall be borne by the
Company and no contributions shall be required of the Covered Employees.
4.3 PLAN YEAR. The Plan shall operate on a plan year consisting of the
twelve consecutive month period commencing on January 1 of each year with a
short plan year commencing on the Effective Date and ending on December 31,
2000.
4.4 AMENDMENT AND TERMINATION. The Plan may be amended from time to
time, or terminated and discontinued, at any time, in each case at the
discretion of the Board. Notwithstanding the foregoing, the Plan may not be
amended to reduce benefits or rights to benefits or terminated with respect to
benefits under Section 2.1, at any time during the period beginning on January
1, 2000 and ending on December 31, 2000. The Plan shall automatically terminate
without any action of the Board on December 31, 2000.
4.5 NOT CONTRACT OF EMPLOYMENT. The adoption and maintenance of the
Plan shall not be deemed to be a contract of employment between the Company and
any person or to be consideration for the employment of any person. Nothing
herein contained shall be deemed to give any person the right to be retained in
the employ of the Company or to restrict the right of the Company to discharge
any person at any time nor shall the Plan be deemed to give the Company the
right to require any person to remain in the employ of the Company or to
restrict any person's right to terminate his employment at any time.
4.6 SEVERABILITY. Any provision in the Plan that is prohibited or
unenforceable in any
-8-
<PAGE> 9
jurisdiction by reason of applicable law shall, as to such jurisdiction, be
ineffective only to the extent of such prohibition or unenforceability without
invalidating or affecting the remaining provisions hereof, and any such
prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
4.7 NONALIENATION. Covered Employees shall not have any right to
pledge, hypothecate, anticipate or assign benefits or rights under the Plan,
except by will or the laws of descent and distribution.
4.8 EFFECT OF PLAN. The Plan is intended to supersede all prior oral or
written policies of the Company and all prior oral or written communications to
Covered Employees with respect to the subject matter hereof, and all such prior
policies or communications are hereby null and void and of no further force and
effect. Further, the Plan shall be binding upon the Company and any successor of
the Company, by merger or otherwise, and shall inure to the benefit of and be
enforceable by the Company's Covered Employees.
4.9 GOVERNING LAW. The Plan shall be interpreted and construed in
accordance with the laws of the State of Louisiana, except to the extent
preempted by federal law.
EXECUTED this 31st day of December, 1999.
----
PETSEC ENERGY INC.
BY: /s/ T. N. FERN
--------------------------------------------
NAME: T.N. Fern
------------------------------------------
TITLE: C.E.O.
-----------------------------------------
-9-
<PAGE> 1
[RYDER SCOTT COMPANY PETROLEUM CONSULTANTS LETTERHEAD]
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
As independent petroleum engineers, we hereby consent to the use of our
name in the Annual Report and Form 10K of Petsec Energy Inc., for the period
ended December 31, 1999. We further consent to the inclusion of our estimate of
reserves and present value of future net reserves in such Annual Report.
/s/ RYDER SCOTT COMPANY, L.P.
RYDER SCOTT COMPANY, L.P.
Houston, Texas
March 27, 2000
<TABLE> <S> <C>
<ARTICLE> 5
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,907
<SECURITIES> 0
<RECEIVABLES> 4,011
<ALLOWANCES> 0
<INVENTORY> 45
<CURRENT-ASSETS> 9,326
<PP&E> 223,850
<DEPRECIATION> 142,263
<TOTAL-ASSETS> 93,508
<CURRENT-LIABILITIES> 124,598
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (71,313)
<TOTAL-LIABILITY-AND-EQUITY> 93,508
<SALES> 31,000
<TOTAL-REVENUES> 31,000
<CGS> 0
<TOTAL-COSTS> 46,909
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,517
<INCOME-PRETAX> (29,488)
<INCOME-TAX> 0
<INCOME-CONTINUING> (29,488)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (29,488)
<EPS-BASIC> 0
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</TABLE>
