<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q-SB
[X] QUARTERLY REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to________
Commission file number 000-24881
PENNACO ENERGY, INC.
(Name of small business issuer as specified in its charter)
NEVADA 88-0384598
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1050 17th Street, Suite 700, Denver, Colorado 80265
(Address of principal executive offices) (Zip Code)
(303) 629-6700
(Registrant's telephone number)
Not applicable
(Former address and former fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past twelve (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 ninety (90) days.
Yes X No
------- -------
As of August 10, 1999 there were 15,169,179 shares of the Company's common
stock, $.001 par value, outstanding.
Transitional Small Business Disclosure Format. (Check One):
Yes X No
------- -------
<PAGE>
PENNACO ENERGY, INC.
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets as of
June 30, 1999 and December 31, 1998........................................... 3
Statements of Operations for the three months ended June 30, 1999
and 1998, the six months ended June 30, 1999 and the period from
January 26, 1998 (inception) to June 30, 1998 ................................ 4
Statement of Stockholders' Equity for the six months ended
June 30, 1999................................................................. 5
Statements of Cash Flows for the six months
ended June 30, 1999 and the period from
January 26, 1998 (inception) to June 30,1998.................................. 6
Notes to Financial Statements (Unaudited)..................................... 7-11
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations.................................................. 12-16
PART II. OTHER INFORMATION.......................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES......................................................................... 19
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
PENNACO ENERGY, INC.
Balance Sheet
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------------- --------------
(unaudited)
(in thousands)
CURRENT ASSETS:
<S> <C> <C>
Cash $ 4,714 $ 5,623
Accounts receivable 1,628 375
Subscriptions receivable - 764
Assets held for sale 187 6,932
Drilling deposit 395 333
Inventory 691 231
Prepaid expenses and other current assets 92 152
-------------- --------------
Total current assets 7,707 14,410
-------------- --------------
PROPERTY AND EQUIPMENT, at cost:
Natural gas properties, using the successful
efforts method of accounting 16,533 6,016
Other property and equipment 443 296
-------------- --------------
16,976 6,312
Less accumulated depletion, depreciation and amortization (210) (62)
-------------- --------------
Net property and equipment 16,766 6,250
-------------- --------------
OTHER ASSETS:
Deferred income taxes - 1,266
Other 100 100
-------------- --------------
Total other assets 100 1,366
-------------- --------------
$ 24,573 $ 22,026
============== ==============
CURRENT LIABILITIES:
Bridge loan payable $ - $ 5,600
Lease acquisitions payable - 619
Accounts payable and accrued liabilities 2,431 1,964
Income taxes payable 1,211 -
-------------- --------------
Total current liabilities 3,642 8,183
-------------- --------------
DEFERRED INCOME TAXES 608 -
-------------- --------------
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value (Authorized 50,000,000
shares; issued and outstanding 15,169,000 at
June 30, 1999 and 14,795,000 shares at December 31,
1998) 15 15
Additional paid-in capital 18,014 17,641
Retained earnings (deficit) 2,294 (3,813)
-------------- --------------
Total stockholders' equity 20,323 13,843
-------------- --------------
COMMITMENTS
$ 24,573 $ 22,026
============== ==============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
PENNACO ENERGY, INC.
Statement of Operations
(unaudited)
<TABLE>
<CAPTION>
Period From
Three Months ended June 30, Six Months January 26, 1998
--------------------------------- ended (inception) to
1999 1998 June 30, 1999 June 30, 1998
-------------- -------------- ----------------- ------------------
(in thousands, except per share amounts)
Revenue:
<S> <C> <C> <C> <C>
Natural gas revenue $ 628 $ - $ 628 $ -
-------------- -------------- ----------------- ------------------
Total revenue 628 - 628 -
-------------- -------------- ----------------- ------------------
Operating expenses:
Production and lease operating 486 - 486 -
Production taxes 52 - 52 -
Exploration 57 855 108 860
Depletion, depreciation and
amortization 118 7 148 8
General and administrative 1,380 343 2,425 401
-------------- -------------- ----------------- ------------------
Total expenses 2,093 1,205 3,219 1,269
-------------- -------------- ----------------- ------------------
Loss from operations (1,465) (1,205) (2,591) (1,269)
Interest income 130 19 239 20
Interest expense - (475) - (475)
Gain on sale of properties 485 - 12,431 -
-------------- -------------- ----------------- ------------------
Income (loss) before income taxes (850) (1,661) 10,079 (1,724)
Income tax (expense) benefit 304 - (3,612) -
-------------- -------------- ----------------- ------------------
Net income (loss) $ (546) $ (1,661) $ 6,467 $ (1,724)
============== ============== ================= ==================
Basic earnings (loss) per share $ (.04) $ (.14) $ .43 $ (.19)
============== ============== ================= ==================
Diluted earnings (loss) per share $ (.04) $ (.14) $ .37 $ (.19)
============== ============== ================= ==================
Weighted average common shares
outstanding:
Basic 15,153 11,692 15,048 9,133
============== ============== ================= ==================
Diluted 15,153 11,692 17,369 9,133
============== ============== ================= ==================
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
PENNACO ENERGY, INC.
Statement of Stockholders' Equity
(unaudited)
Six Months ended June 30, 1999
<TABLE>
<CAPTION>
Common Stock
---------------------------- Additional Retained
Paid-in Earnings
Shares Amount Capital (Deficit) Total
---------------------------- ---------------- --------------- --------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998 15,152 $ 15 $ 17,641 $ (3,813) $ 13,843
Exercise of warrants 25 - 44 - 44
Issuance of additional units - - 360 (360) -
Stock option compensation - - 11 - 11
Refund of subscriptions receivable (14) - (41) - (41)
Issuance of units 6 - 20 - 20
Additional offering costs - - (21) - (21)
Net income - - - 6,467 6,467
----------- ------------ ---------------- --------------- --------------
Balance at June 30, 1999 15,169 $ 15 $ 18,014 $ 2,294 $ 20,323
=========== ============ ================ =============== ==============
</TABLE>
5
<PAGE>
PENNACO ENERGY, INC.
Statement of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Period from
January 26, 1998
Six Months ended (inception) to
June 30, 1999 June 30, 1998
----------------- ----------------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ 6,467 $ (1,724)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Gain on sale of properties (12,431) -
Depletion, depreciation and amortization 148 8
Compensation relating to common stock and
warrants issued 11 -
Deferred income tax expense (benefit) 1,874 -
Changes in operating assets and liabilities:
Increase in accounts receivable (1,253) -
Increase in inventory (460) -
(Increase) decrease in prepaid expenses and other current
assets 60 (51)
Increase in other assets - (67)
Increase in accounts payable and accrued
liabilities 467 736
Increase in income taxes payable 1,211 -
----------------- ----------------
Net cash used in operating activities (3,906) (1,098)
----------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (11,546) (12,856)
Proceeds from sale of properties 20,058 -
Drilling deposit, net (62) (250)
Increase (decrease) in lease acquisitions payable (619) 55
----------------- ----------------
Net cash provided by (used in) investing activities 7,831 (13,051)
----------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of bridge loan - 4,075
Repayment of bridge loan (5,600) -
Proceeds from issuance of common stock, net of offering costs 723 10,609
Proceeds from exercise of warrants 44 -
Proceeds from issuance of units 20 -
Additional offering costs (21) -
----------------- ----------------
Net cash provided by (used in) financing activities (4,834) 14,684
----------------- ----------------
NET INCREASE (DECREASE) IN CASH (909) 535
CASH AT BEGINNING OF PERIOD 5,623 -
----------------- ----------------
CASH AT END OF PERIOD $ 4,714 $ 535
================= ================
Supplemental disclosures of cash flow information:
Cash paid for interest $ - $ -
================= ================
Cash paid for income taxes $ 528 $ -
================= ================
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
PENNACO ENERGY, INC.
June 30, 1999
Notes to Financial Statements
(unaudited)
(1) ORGANIZATION AND BASIS OF PRESENTATION
Pennaco Energy, Inc. (the "Company") is an independent exploration and
production company. The Company's current operations are completely focused on
the acquisition and development of natural gas production from coal bed methane
properties in the Rocky Mountain region of the United States. The Company was
incorporated on January 26, 1998 under the laws of the state of Nevada and is
headquartered in Denver, Colorado.
From its inception through March 31, 1999, the Company's activities had
been limited to organizational activities, prospect development activities,
acquisition of leases and option rights, and commencement of its drilling
program. The Company has oil and gas lease rights in the Powder River Basin in
northeastern Wyoming and southeastern Montana. In April 1999 the Company began
gas production from certain of its gas properties in the South Gillette Area. As
a result, the Company is no longer considered a development stage company.
The accompanying financial statements are unaudited; however, in the
opinion of management, the accompanying financial statements reflect all
adjustments, consisting of normal recurring adjustments, necessary to present
fairly the Company's financial position as of June 30, 1999, and the results of
its operations for the three-month periods ended June 30, 1999 and 1998, the
six-month period ended June 30, 1999 and the period from January 26, 1998
(inception) to June 30, 1998. The results of operations for interim periods are
not indicative of the results of operations for the full fiscal year. The
accounting policies followed by the Company are included in Note 1 to the
Financial Statements in the Company's Annual Report on Form 10-KSB for the
period from January 26, 1998 (inception) to December 31, 1998. These financial
statements should be read in conjunction with the Form 10-KSB.
(2) OIL AND GAS ACTIVITIES
The Company follows the successful efforts method of accounting for its
natural gas activities. Accordingly, costs associated with the acquisition,
drilling and equipping of successful exploratory wells are capitalized.
Geological and geophysical costs, delay and surface rentals and drilling costs
of unsuccessful exploratory wells which would include uneconomical pilot
projects are charged to expense as incurred. Costs of drilling development
wells, both successful and unsuccessful, are capitalized. Upon the sale or
retirement of gas properties, the cost thereof and the accumulated depreciation
and depletion are removed from the accounts and any gain or loss is recorded to
operations. Upon the sale of a partial interest in an unproved property, the
proceeds are treated as a recovery of cost. If the proceeds exceed the carrying
amount of the property, a gain is
7
<PAGE>
Notes to Financial Statements
(continued)
recognized. Depletion of capitalized acquisition, exploration and development
costs is computed on the units-of-production method by individual fields as the
related proved reserves are produced.
Capitalized costs of unproved properties are assessed periodically and a
provision for impairment is recorded, if necessary, through a charge to
operations.
Proved gas properties are assessed for impairment on a field-by-
field basis. If the net capitalized costs of proved gas properties exceeds the
estimated undiscounted future net cash flows from the property, a provision for
impairment is recorded to reduce the carrying value of the property to the value
of its estimated undiscounted future net cash flows.
(3) CMS TRANSACTION
On October 23, 1998, the Company and CMS Oil and Gas Company ("CMS") signed
a definitive agreement (the "CMS Agreement") relating to the development of the
Company's Powder River Basin acreage (the "CMS Transaction"). Pursuant to the
terms of the CMS Agreement, CMS acquired an undivided 50% working interest in
approximately 492,000 net undeveloped acres of the Company's leasehold position
in the Powder River Basin for $28,000,000. The Company acquired the 50%
leasehold position which was conveyed to CMS in the CMS Transaction for
approximately $7,000,000. The purchase price provided for in the CMS Agreement
was the result of arm's length negotiations between the Company and CMS. The
joint operating agreement between the parties will be modeled after the 1989
AAPL Model Form of Joint Operating Agreement. The CMS Agreement provides that
the parties will in good faith negotiate a development agreement for the
exploration, development and production of coal bed methane from the leases. The
development agreement will provide that each party will operate approximately
50% of the wells drilled in the area of mutual interest. Pennaco and CMS have
divided the acreage in the area of mutual interest into project areas which will
be operated by one party or the other. Under the Company's accounting policies,
the proceeds from the sale are treated as a recovery of cost, with any
additional amounts recorded as a gain. The proceeds on the sale of these
undeveloped properties exceeded their cost. Accordingly, the Company has no
basis in its retained 50% ownership in such properties. As is customary in oil
and gas leasehold transactions, the agreement provides for the adjustment of the
purchase price for title defects discovered prior to closing and for the
opportunity for one party to participate in acquisitions made by the other party
in the area of mutual interest defined in the agreement. The agreement also
provides for a preferential purchase right to the other party in the event
either CMS or the Company attempts to sell a portion of its interest in the
acreage covered by the agreement. There is no preferential purchase right in the
event that either party enters into a merger, reorganization or consolidation.
All of the leases in the area of mutual interest are dedicated to CMS Gas
Transmission and Storage, an affiliate of CMS, for gathering, compression and
transportation.
Pursuant to the terms of the CMS Agreement in October 1998, CMS paid
Pennaco $5,600,000 of earnest money in the form of a non-interest bearing bridge
loan (the "CMS Bridge Loan") which was secured by substantially all of the
Company's gas leases.
8
<PAGE>
Notes to Financial Statements
(continued)
Approximately $3,200,000 of such amount was used to repay existing creditors of
the Company. The CMS Transaction was structured such that the conveyance of the
working interests occurred at two separate closings. The first closing occurred
on November 20, 1998, and the second occurred on January 15, 1999. The Company
received $7,600,000 at the first closing and received $18,600,000 at the second
closing. The remaining $1,800,000 was held in escrow subject to customary
closing adjustments. The CMS Bridge Loan was canceled at the second closing.
Subsequent to the second closing, the Company has received approximately
$1,458,000 from the escrow account leaving approximately $342,000 as of June 30,
1999, pending closing adjustments.
Under the terms of the CMS Agreement, CMS will pay the Company for its
share of the costs of acquiring any acreage in excess of the original 492,000
net acres in the area of mutual interest. The joint venture acreage in the area
of mutual interest includes approximately 580,000 net acres as of June 30, 1999.
(4) Stockholders' Equity
In September 1998, the Company issued 980,000 units at $3.25 per unit,
which includes proceeds received subsequent to December 31, 1998 of $20,000
relating to 6,250 of such units. The units consists of i) 980,000 shares of
common stock and ii) warrants to acquired an additional 490,000 shares of common
stock at an exercise price of $5.00 per share. The Company received proceeds of
approximately $3,165,000. The Company incurred offering costs of $325,000 which
were charged to additional paid-in capital.
Under the terms of the Company's September 1998 Stock Subscription
Agreement, 235,000 additional units were issued under the same terms as above
and placed in an escrow account. Subscription payments of $763,750 were
deposited into an escrow account, together with certificates representing the
units to be purchased, representing the aggregate purchase price of the 235,000
units. Under the terms of the escrow agreement, the common stock shares and the
shares of common stock underlying the warrants were to be registered under the
Securities Act of 1933 ("the Act") with the Securities and Exchange Commission
by December 31, 1998. The Company has also undertaken to have the shares
qualified by way of an exemption order provided by the respective Securities
Commissions in Canada.
Under the terms of the subscription agreement, if the registration
statement was not declared effective and the Canadian exemption order was not
obtained on or before December 31, 1998, the subscriber was entitled to
additional rights. The registration statement was not declared effective by this
date. Accordingly, as of December 31, 1998, the subscriber was entitled to elect
to either receive the units from the escrow account or receive a cash refund
from the escrow account plus interest thereon. Additionally, the Company was
required to issue to the subscribers an additional unit for each 10 units
purchased in the offering. On February 28, 1999, subscribers representing
222,500 units held in escrow elected to receive the escrowed units and the
Company received proceeds of $723,000 from the escrow account. One subscriber
representing 12,500 units elected not to receive the escrowed units
9
<PAGE>
Notes to Financial Statements
(continued)
and instead received a refund from escrow of $41,000. Therefore, the total
units issued in connection with the September 1998 Stock Subscription Agreement
included the original 1,202,500 units and the 120,250 additional units required
to be issued, as discussed above, for a total of 1,322,750 units. The warrants
issued in connection with the units expired unexercised on March 4, 1999. The
120,250 additional units have been reflected in the accompanying financial
statements as an increase to paid in capital and as a reduction to retained
earnings of $360,000.
On February 24, 1999, the Board of Directors adopted a stockholder rights
plan pursuant to which the Company distributed a dividend of one right (a
"Right") for each outstanding share of Common Stock. The Rights have anti-
takeover effects. The Rights will cause substantial dilution to a person or
group that attempts to acquire the Company on terms not approved by the Board of
Directors, except pursuant to an offer conditioned on a substantial number of
rights being acquired. Each Right entitles the registered holder to purchase
from the Company one half of a share of Common Stock at an exercise price of
$20, subject to adjustment. The description and terms of the Rights are set
forth in a Rights Agreement, dated as of February 24, 1999, between the Company
and Harris Trust and Savings Bank, as rights agent, a copy of which has been
filed with the Securities and Exchange Commission as an exhibit to a
Registration Statement on Form 8-A.
During the six months ended June 30, 1999 warrants for the purchase of
25,000 shares of common stock were exercised for $44,000.
(5) Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Period from
June 30, Six Months January 26, 1998
--------------------- Ended (inception) to
1999 1998 June 30, 1999 June 30, 1998
-------- -------- --------------- ----------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Numerator for basic and diluted income (loss) per share--
Income (loss) available to common stockholders $ (546) $ (1,661) $ 6,467 $ (1,724)
Denominator:
Denominator for basic income (loss) per share--
Weighted average shares 15,153 11,692 15,048 9,133
Effect of dilutive securities:
Stock warrants - - 443 -
Stock Options - - 1,878 -
-------- -------- --------------- ----------------
Denominator for diluted income (loss) per share--
Adjusted weighted average shares diluted 15,153 11,692 17,369 9,133
======== ======== =============== ================
Basic income (loss) per share $ (.04) $ (.14) $ .43 $ (.19)
======== ======== =============== ================
Diluted income (loss) per share $ (.04) $ (.14) $ .37 $ (.19)
======== ======== =============== ================
</TABLE>
10
<PAGE>
Notes to Financial Statements
(continued)
Potentially dilutive common shares attributable to outstanding options and
warrants to purchase common shares of 4,501,000, 2,121,000, 97,000 and 2,121,000
were excluded from the calculation of diluted earnings (loss) per share for the
three month periods ended June 30, 1999 and 1998, the six month period ended
June 30, 1999 and the period from January 26, 1998 (inception) to June 30, 1998,
respectively, as their effect was antidilutive.
(6) EVENTS SUBSEQUENT TO JUNE 30, 1999
Bank Facility
-------------
On July 23, 1999 the Company entered into a revolving line of credit with
US Bank National Association ("USB"). The Credit Agreement provides for loans of
up to $25,000,000 based upon a borrowing base determined by USB. The borrowing
base has been determined to be $10,000,000 through September 30, 1999. The
Credit Agreement includes the following provisions: i) is secured by mortgages
on all of the Company's properties; ii) provides for a revolving period
generally ending on June 30, 2001 afterwhich the loan is to be repaid based upon
a 48 month amortization period; iii) provides that, on a quarterly basis, the
Company's working capital (including unused commitment amount, minus outstanding
letters of credit) not to be less than $0; the Company's tangible net worth,
beginning on or after December 31, 1999, not to be less than (a) $20,000,000,
plus (b) 50% of the Company's cumulative net income for all periods ending after
July 23, 1999, plus (c) 50% of all equity proceeds; and that, beginning on or
after December 31, 1999, the Company will not permit its fixed charge coverage
ratio to be less than 1.0:1.0; and iv) provides for an interest at either a
Libor or prime base rate.
As of August 10, 1999 the Company had no borrowings outstanding under the
revolving credit agreement.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
-------
This Quarterly Report on Form 10-QSB includes "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (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 fact included in this Form 10-QSB, including without limitation
statements regarding planned capital expenditures, 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 as that such expectations will prove to have been correct.
A number of risks and uncertainties could cause actual results to differ
materially from these statements, including, without limitation, fluctuations in
the price of natural gas, the success rate of drilling efforts, expected
production levels, operating expenses, capital expenditures, completion of
gathering and pipeline projects and availability of equipment and personnel, as
well as other risk factors described from time to time in the Company's
documents and reports filed with the SEC. 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.
The Company's stock is traded on the American Stock Exchange under the
symbol "PN". The Company's principal executive offices are located at 1050 17th
Street, Suite 700, Denver, Colorado 80265. The telephone number is (303) 629-
6700 and the facsimile number is (303) 629-6800. The Company also maintains a
field office at 4988 S. Highway 14-16, Suite 102, Gillette, Wyoming, 82716.
The Company is an independent, exploration and production company. The
Company's current operations are completely focused on the acquisition,
development and production of natural gas from coal bed methane ("CBM")
properties in the Rocky Mountain region of the United States. Pennaco is one of
the largest holders of oil and gas leases covering CBM properties in the Powder
River Basin in the northeastern Wyoming and southeastern Montana. As of July 29,
1999, the Company owned oil and gas lease rights with respect to approximately
330,000 net acres in the Powder River Basin.
From its inception on January 26, 1998, the Company has focused its
activities on the acquisition of leases and beginning in November 1998 began its
drilling program. The source of funds to finance these activities have been
obtained through the sale of securities and to a larger extent the CMS
Transaction where the Company sold a 50% undivided interest in certain of its
properties for $28,000,000
The Company entered into an agreement with Bear Paw Energy, Inc. ("Bear
Paw Energy"), a subsidiary of TransMontaigne, Inc., under which Bear Paw Energy
will construct, own and operate gas gathering systems as well as provide gas
gathering and compression services to the Company's in the Company's South
Gillette Area. The Company also entered into
12
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(continued)
an agreement with a transportation company to compress and transport 11 MMcf per
day of gas from the compressor station located southwest of the Company's South
Gillette Area to the interconnect with Williston Basin Interstate Pipeline
("WBI") at Recluse, Wyoming. This gas is being sold under two gas sales
contracts for 5,000 MMBtu per day each (approximately 11 MMcf per day of
wellhead production in total) for 12 months beginning April 1, 1999. The price
received for one contract is fixed at $1.55 per MMBtu for gas delivered at
Recluse, Wyoming. The other contract contains a floating price determined
monthly using published index prices which together with a fixed-for-floating
swap agreement which the Company has entered into for the same 12 month period,
results in a price received by the Company for such gas of $1.625 per MMBtu for
gas delivered at Recluse, Wyoming.
On March 30, 1999, the Company and CMS announced that the Company has
entered into a gas gathering agreement with CMS Continental Natural Gas, Inc.
("CMS Continental"), a wholly owned subsidiary of CMS Energy Corporation. Under
this agreement, CMS Continental will provide gas gathering services to the
Company and CMS Oil and Gas Company within the Pennaco/CMS area of mutual
interest, which excludes the South Gillette Area. CMS also announced plans to
construct a $190 million, 110 mile high pressure gathering pipeline through the
Pennaco/CMS jointly owned acreage located in the northern portion of the Powder
River Basin coal bed methane play, connecting at its southern terminus with the
Fort Union Gas Gathering Project discussed below.
In late April 1999 the Company began to sell its gas production. As of
July 29, 1999 the Company had drilled 280 gross (246 net) gas wells and had
gross production of approximately 11 MMcf per day from 96 gross (91 net) wells
located in its South Gillette Area. The Company had 146 gross (136 net) wells
which were waiting on pipeline connections or which were being completed. The
Company believes many of these wells will be put into production as soon as one
of the two new pipeline projects currently under construction is operating. The
Fort Union Gas Gathering Project, a 450 MMcf per day pipeline joint venture
involving CMS Energy, Enron, Western Gas Resources, Barrett Resources and
Colorado Interstate Gas, is expected to be operational on or about September 1,
1999. The Thunder Creek Gas Services Project, a 450 MMcf per day pipeline being
built by Devon Energy and KN Energy, is also expected to be operational in
September 1999. The Company expects to move its excess South Gillette area gas,
as well as additional deliverability which the Company is developing, through
these new pipelines. As a first step in this process, the Company has entered
into an agreement to sell approximately 6,000 Mcf per day of wellhead production
from September 1, 1999 through March 31, 2000 at a floating price determined
monthly using published index prices.
The Company and CMS have drilled 38 gross (19 net) wells in pilot areas
within the Pennaco/CMS area of mutual interest where the partners are in the
process of evaluating the reserve and production potential.
13
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(continued)
RESULTS OF OPERATIONS
Due to the fact that the Company's first gas sales occurred in late April
1999 and are currently limited by pipeline takeaway capacity, the Company does
not believe its results of operations for the quarter and six months ended June
30, 1999 are indicative of the expected future results of the Company.
The Company had a net loss of $546,000 and net income of $6,467,000 for the
quarter and six months ended June 30, 1999, respectively, compared to a net loss
of $1,661,000 and $1,724,000 for the quarter ended June 30, 1998 and the period
from inception, on January 26, 1998 ("Inception"), to June 30, 1998. Such
amounts include a gain on the sale of properties in connection with the CMS
Transaction of $485,000 and $12,431,000 for the quarter and six months ended
June 30, 1999. The Company had no revenues from operations until late April of
1999. The quarter ended June 30, 1999 reflects net production of 398,000
thousand cubic feet ("Mcf") at an average realized price of $1.58 per Mcf.
General and administrative expenses for 1999 increased over 1998 due to the
substantial increase in the scope of operations by the Company. The 1999
periods also show a reduction of interest expense and an increase in interest
income due to the repayment of debt and increase in short term investments
resulting from proceeds received in the CMS Transaction.
LIQUIDITY AND CAPITAL RESOURCES
The capital resources of the Company are limited. Until late April 1999,
the Company had not produced any revenues and its main source of funds has been
the sale of the Company's equity securities and, to a greater extent, the
proceeds from the CMS Transaction. The Company had approximately $4,714,000 in
cash as of June 30, 1999. The proceeds of the CMS Transaction have allowed the
Company to repay certain of its current liabilities and have funded its cash
used in operating activities of $3,906,000 and capital expenditures of
$11,546,000 for the six months ended June 30, 1999. During the period from
January 26, 1998 (inception) to June 30, 1998, the Company had net cash used in
operating activities of $1,098,000. This use of cash was less than the 1999
six-month period due to the start-up nature of the Company in early 1998, as it
did not begin its drilling operations until November 1998. The Company had
capital expenditures during the 1998 period of $12,856,000, which were funded by
loans and proceeds from the sale of the Company's equity securities.
The Company had capital expenditures of approximately $11,546,000 in the
six months ended June 30, 1999, including approximately $4,140,000 for lease
acquisitions and $7,406,000 for drilling activities. On June 16, 1999, the
Company announced a revised capital spending budget of $26,500,000 for 1999
which was an $8,100,000 increase from the Company's original capital budget, all
of which will be directed towards the Company's Powder River Basin CBM project.
The Company plans to spend approximately $18,000,000 to drill approximately 460
net wells in the Powder River Basin during 1999. The wells will be a combination
of joint Pennaco/CMS wells drilled in the area of mutual interest and Pennaco
wells drilled primarily on a 100% working interest basis located outside of the
CMS area of mutual interest in the South Gillette Area. The balance of the 1999
capital budget, approximately $8,500,000, is allocated to lease acquisition.
However, there can be no assurance that the Company will have sufficient funds
to execute its capital expenditure plan, that it will be economic to do so, that
the wells drilled will ultimately be productive or that any additional leasehold
acreage will be acquired.
14
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(continued)
On July 23, 1999 the Company entered into a revolving line of credit with
US Bank National Association ("USB"). The Credit Agreement provides for loans
of up to $25,000,000 based upon a borrowing base determined by USB. The
borrowing base has been determined to be $10,000,000 through September 30, 1999,
with the capacity for expansion as the Company's reserve base increases. As of
August 10, 1999 the Company had no borrowings outstanding under the revolving
credit facility. However, the Company expects to begin to utilize such facility
in the near future in connection with the above described capital expenditure
budget for 1999.
Should the Company's cash flow from operations or availability under its
revolving credit agreement be insufficient to satisfy its planned capital
expenditure requirements, there can be no assurance that additional debt or
equity financing will be available to meet these requirements.
The Company's future debt level will have several important effects on the
Company's future operations, including that a substantial portion of the
Company's cash flow could be dedicated to the payment of interest on its
indebtedness and would not be available for other purposes, and that the
Company's ability to obtain additional financing in the future may be impaired.
June 30, 1999 Reserve Update
- ----------------------------
Due to the Company's significant drilling program in 1999, the Company
updated its estimated net proved reserves as of June 30, 1999, to 42.7 billion
cubic feet (Bcf) of natural gas, a 24.6 Bcf increase from the 18.1 Bcf of
estimated net proved reserves reported as of December 31, 1998. All of the net
proved reserves were located in the South Gillette Area in the Company's Powder
River Basin CBM Project in Wyoming. Approximately 52%, or 22.3 Bcf, of the
reserves were classified as proved developed producing based upon 94 producing
wells and 17%, or 7.2 Bcf, were proved developed shut-in, representing 32 wells
which were drilled and completed but awaiting pipeline connection. The
remaining 31%, or 13.2 Bcf were classified as proved undeveloped.
The present value of estimated future net revenues from the 42.7 Bcf of
proved reserves, before income taxes, totaled approximately $28,300,000, using a
10% discount rate and a June 30, 1999 natural gas price of $2.00 per thousand
cubic feet (CIG Rocky Mountain index) held constant. The reserve evaluation was
performed by Ryder Scott Company.
15
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(continued)
Year 2000
- ---------
The Company has conducted a review of its computer systems to identify the
systems that could be affected by the "Year 2000" issue. The Year 2000 problem
is the result of computer programs being written using two digits rather than
four to define the applicable year.
Any of the Company's programs that have time-sensitive software may
recognize a date using '00' as the year 1900 rather than the year 2000. This
could result in a major system failure or miscalculations.
The Company believes that Year 2000 problem will not pose material
operational problems for the Company and that it is adequately prepared for the
Year 2000. The Company's computer software provider has assured the Company
that all of the Company's software is Year 2000 compliant (i.e. will function
properly in the year 2000 and beyond). To the Company's knowledge after
investigation, no "imbedded technology" (such as microchips in an electronic
control system) of the Company poses a material Year 2000 problem.
Because the Company believes that it has no material internal Year 2000
problems, the Company has not and does not expect to expend a material amount of
funds to address Year 2000 issues. It is Company policy to continue to review
the year 2000 compliance of its supplier's, gas purchasers and service
providers; however, such monitoring does not involve a significant cost to the
Company.
In addition to the foregoing, the Company has contacted its major vendors
and is in the process of obtaining either oral or written assurances from its
major vendors that they have no material Year 2000 problems.
In the event that one or more of the Company's vendor provided systems were
to have a material Year 2000 problem, the Company believes that the most
reasonably likely worst case scenario would be a temporary delay in revenue
collection caused by an interruption in computerized billing and not an
interruption in the actual flow of the Company's coal bed methane gas. The
Company believes that any such delays would have no substantial long-term impact
on the Company's ability to conduct operations.
16
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its annual meeting of stockholders in Denver, Colorado on June
15, 1999. The following sets forth matters submitted to a vote of the
stockholders:
(a) The following individuals were elected to the Board of Directors as
stated in the Company's Proxy Statement dated May 10, 1999, for terms
expiring as set forth below or until their successors have been elected and
qualified -Class I Director to serve until the 2000 Annual Meeting: Jeffrey
L. Taylor; Class II Directors to serve until the 2001 Annual Meeting: Glen
C. Warren, Jr. and David W. Lanza; Class III Directors to serve until the
2002 Annual Meeting: Paul M. Rady and Gregory V. Gibson.
Every Director was elected by a vote of 11,572,466 shares, being more than a
majority of the outstanding shares of Common Stock.
(b) The stockholders approved an amendment to the Articles of Incorporation
to provide for the classification of the Board of Directors into three
classes of directors with staggered terms of office by a vote of 9,318,646
shares, being more than a majority of the shares of Common Stock present,
in person or by proxy, at the annual meeting and entitled to vote with
69,785 shares voted against, 18,455 shares abstaining.
(c) The stockholders approved an amendment to the Articles of Incorporation
that requires that all stockholder action be taken at a stockholders'
meeting by a vote of 7,805,250 shares, being more than a majority of the
shares of Common Stock present, in person or by proxy, at the annual
meeting and entitled to vote, with 1,564, 431 shares voted against, 37,205
shares abstaining.
(d) The stockholders approved an amendment to the Articles of Incorporation
and the addition of a new article that requires a two-thirds vote of the
Board of Directors to amend or repeal the By-Laws of the Corporation and
requires a two-thirds stockholder vote to amend or repeal the By-Laws or
certain provisions of the Articles of Incorporation by a vote of 7,652,566
shares, being more than a majority of the shares of Common Stock present,
in person or by proxy, at the annual meeting and entitled to vote, with
1,579,152 shares voted against, 18,255 shares abstaining.
(e) The stockholders approved an amendment to the Articles of Incorporation
authorizing the Board of Directors to issue up to 10,000,000 shares of
Preferred Stock by a vote of 7,397,421 shares, being more than a majority
of the shares of Common Stock present, in person or by proxy, at the annual
meeting and entitled to vote, with 1,786,577 shares voted against, 65,975
shares abstaining.
(f) The stockholders ratified the appointment of KPMG LLP to audit the
financial statements of the Company and its subsidiaries for the year
ending December 31, 1999, by a vote of 11,105,309 shares, being more than a
majority of the shares of Common Stock present, in person or by proxy, at
the annual meeting and entitled to vote, with 4,875 shares voted against,
7,905 shares abstaining.
17
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
*4.1 Credit Agreement dated as of July 23, 1999 between the Company and
U.S. Bank National Association.
*27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended June 30,1999.
*Filed herewith
18
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized.
PENNACO ENERGY, INC.
August 10, 1999 By: /s/ Paul M. Rady
-----------------------------------
Paul M. Rady, President and Chief
Executive Officer
August 10, 1999 By: /s/ Glen C. Warren, Jr.
-----------------------------------
Glen C. Warren, Jr. Executive Vice President
and Chief Financial Officer
August 10, 1999 By: /s/ Charles E. Brammeier
-----------------------------------
Charles E. Brammeier, Controller
19
<PAGE>
CREDIT AGREEMENT
----------------
THIS CREDIT AGREEMENT, dated as of July 23, 1999, is by and between
PENNACO ENERGY, INC., a Nevada corporation ("Borrower"), and U.S. BANK NATIONAL
ASSOCIATION, a national banking association ("USB").
RECITAL
Borrower and USB wish to enter into this Credit Agreement in order to
set forth the terms upon which USB will make available to Borrower a revolving
line of credit, converting to an amortizing term loan and by which such line of
credit and term loan will be governed and repaid.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements contained herein, the parties hereto agree as follows:
ARTICLE I
Definitions and References
--------------------------
Section 1.1. Defined Terms. As used in this Agreement, each of the
-------------
following terms has the meaning given such term in this Section 1.1 or in the
sections and subsections referred to below:
"Advance" means an advance of funds by USB to or for the account of
-------
Borrower pursuant to Article II below.
"Affiliate" means, as to any Person, each other Person that directly or
---------
indirectly (through one or more intermediaries or otherwise) controls, is
controlled by, or is under common control with, such Person.
"Agreement" means this Credit Agreement.
---------
"Borrower" means Pennaco Energy, Inc., a Nevada corporation.
--------
"Borrowing Base" means, at any time prior to the Maturity Date, the
--------------
aggregate loan value of all Borrowing Base Properties, as determined by USB in
its sole and absolute discretion,
<PAGE>
using such assumptions as to pricing, discount factors, discount rates, expenses
and other factors as USB customarily uses as to borrowing-base oil and gas loans
at the time such determination is made; provided that the Borrowing Base for the
Borrowing Base Period from the date of this Agreement through September 30, 1999
shall be $10,000,000, unless
<PAGE>
Borrower and USB hereafter mutually agree upon a different amount or unless the
Borrowing Base is redetermined pursuant to Section 2.8 below prior to any such
date.
"Borrowing Base Notice" means a written notice sent to Borrower by USB
---------------------
notifying Borrower of the Borrowing Base determined by USB for the upcoming
Borrowing Base Period or other period.
"Borrowing Base Period" means: (a) the period from the date of this
---------------------
Agreement through September 30, 1999; (b) thereafter, each six-month (or, as to
the last such period during the Revolving Period, three-month) period beginning
on April 1 or October 1 of each year, until the end of the Revolving Period; (c)
thereafter, each twelve-month period beginning on July 1 of each year, until the
Maturity Date.
"Borrowing Base Properties" means any and all interests of Borrower,
-------------------------
whether now owned or hereafter acquired, in any and all oil and gas wells,
leases and other related rights and assets to which USB now or hereafter gives
value in determining the Borrowing Base.
"Borrowing Base Usage" means, as of the close of business on any
--------------------
Business Day, the ratio of: (a)(1) the aggregate amount of all Advances
outstanding hereunder, including any Advances made on that Business Day, plus
(2) the face amounts of all Letters of Credit outstanding hereunder, including
any Letters of Credit issued on that Business Day, to (b) the Commitment Amount
in effect at that time.
"Business Day" means: (a) with respect to the making, prepaying,
------------
repaying or issuance of, or otherwise relating to, any LIBOR Tranche, any day
which is not a Saturday, a Sunday or a legal holiday on which commercial banks
are authorized or required to be closed in Denver, Colorado and which is also a
day on which dealings are carried on in the London interbank eurocurrency
market, and (b) for all other purposes hereof, any day which is not a Saturday,
a Sunday or a legal holiday on which commercial banks are authorized or required
to be closed in Denver, Colorado.
"Collateral" means all tangible or intangible real or personal property
----------
which, under the terms of any Security Document, is or is purported to be
covered thereby or subject thereto.
"Commitment" means the agreement of USB to make Advances to Borrower of
----------
amounts up to the Commitment Amount on the terms and subject to the conditions
hereof.
"Commitment Amount" means, at any time, the lesser of: (a) the Maximum
-----------------
Loan Amount, or (b) the Borrowing Base at that time.
-3-
<PAGE>
"Consolidated" refers to the consolidation of any Person, in accordance
------------
with GAAP, with its properly consolidated Affiliates. References herein to a
Person's Consolidated financial statements, financial position, financial
condition, liabilities, etc. refer to the consolidated financial statements,
financial position, financial condition, liabilities, etc. of such Person and
its properly consolidated Affiliates.
"Conversion Date" means the Business Day immediately after the earlier
---------------
of: (a) the last day of the Revolving Period, or (b) the date of any termination
of the Commitment.
"Cumulative Net Income" means, with respect to any Person, the sum of
---------------------
such Person's net income, determined in accordance with GAAP, for each completed
Fiscal Quarter ending after the date from which the measurement is being made;
provided that if such Person's net income is negative for any such Fiscal
Quarter, in computing Cumulative Net Income, such Person's net income shall be
deemed to be zero for that Fiscal Quarter.
"Debt" means, as to any Person, all indebtedness, liabilities and
----
obligations of such Person, whether primary or secondary, direct or indirect,
absolute or contingent.
"Default" means any Event of Default and any default, event or
-------
condition which would, with the giving of any requisite notice and/or the
passage of time, constitute an Event of Default.
"Distribution" means any dividend payable in cash or property with
------------
respect to any shares of capital stock of any Person (other than dividends
payable in shares of the same class of common, preferred or other capital stock
as the shares upon which the dividend is being paid), any other distribution
made with respect to any shares of capital stock of any Person, or any purchase,
redemption or retirement of, or other payment with respect to, any shares of
capital stock of any Person.
"Equity Proceeds/Capital Contributions" means: (a) the amount of any
-------------------------------------
and all capital contributions made to Borrower after the date hereof; and (b)
the net proceeds of the sale by Borrower of any ownership interest in Borrower
or any note, debenture or other security issued by Borrower subsequent to the
date of this Agreement, net of reasonable brokerage, printing, accounting,
engineering, legal and other costs actually paid to third parties in connection
therewith.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended from time to time, together with all rules and regulations promulgated
with respect thereto.
-4-
<PAGE>
"ERISA Plan" means any pension benefit plan subject to Title IV of
----------
ERISA maintained by Borrower or any Affiliate of Borrower to which Borrower is
required to contribute.
"Event of Default" has the meaning given such term in Section 7.1
----------------
below.
"Fiscal Quarter" means a three-month period ending on the last day of
--------------
March, June, September or December of any year.
"Fiscal Year" means a twelve-month period ending on December 31 of any
-----------
year.
"Fixed Charge Coverage Ratio" means, as of the end of any Fiscal
---------------------------
Quarter, commencing with the Fiscal Quarter ending December 31, 1999, the ratio
of: (a) Borrower's cash flow (net income, determined in accordance with GAAP,
plus taxes, depreciation, depletion, amortization, and exploration expenses) for
the four consecutive Fiscal Quarters then ended, plus interest expenses for such
four consecutive Fiscal Quarters then ended; to (b) the aggregate amount of all
of Borrower's fixed charges (interest expenses and required principal payments,
whether under this Agreement or otherwise, Distributions and other fixed
charges) for such four consecutive Fiscal Quarters then ended, all determined in
accordance with GAAP.
"Fixed Rate Portion" means a portion of the Loan bearing interest at a
------------------
fixed interest rate (but excluding any LIBOR Tranche), upon such terms and
conditions as may be contained herein and such additional terms and conditions
as may be agreed upon between Borrower and USB at the time any such Fixed Rate
Portion is entered into between Borrower and USB.
"Fixed Rate Portion Interest Period" means, with respect to each Fixed
----------------------------------
Rate Portion, a time period of up to five years, as agreed by Borrower and USB
at the time of issuance of the Fixed Rate Portion; provided that each Fixed Rate
Portion Interest Period which would otherwise end on a day which is not a
Business Day shall end on the next succeeding Business Day. No Fixed Rate
Portion Interest Period may be elected which would end after the Maturity Date.
"Fixed Rate Spread" means, with respect to any Fixed Rate Portion, the
-----------------
following: (a) if the Borrowing Base Usage is less than 50 percent as of the
close of business on the first day of the Fixed Rate Portion Interest Period for
such Fixed Rate Portion, 2.0 percentage points per annum; (b) if the Borrowing
Base Usage is greater than or equal to 50 percent but less than 75 percent as of
the close of business on the first day of the Fixed Rate Portion Interest Period
for such Fixed Rate Portion, 2.25 percentage points per annum; and (c) if the
Borrowing Base Usage is greater than or equal to 75 percent as of the close of
business on the first day of the Fixed Rate
-5-
<PAGE>
Portion Interest Period for such Fixed Rate Portion, 2.5 percentage points per
annum.
"GAAP" means those generally accepted accounting principles and
----
practices which are recognized as such by the Financial Accounting Standards
Board (or any generally recognized successor) and which, in the case of
Borrower: (a) are applied for all periods in a consistent manner, and (b) are
consistently applied for all periods after the date hereof so as to properly
reflect the financial condition, and the results of operations and changes in
financial position, of Borrower.
"Grace Period" has the meaning given such term in Section 7.1 below.
------------
"Hedging Obligations" means, with respect to any Person, all
-------------------
liabilities of such Person under: (a) interest rate swap agreements, interest
rate cap agreements, interest rate collar agreements and all other agreements
and arrangements designed to protect such Person against fluctuations in
interest rates, or (b) commodity hedge, commodity swap, exchange, collar or cap
agreements, fixed price agreements and all other agreements and arrangements
designed to protect such Person against fluctuations in the price of oil, gas or
other hydrocarbons.
"Initial Advance" means the first Advance on the Loan, to be made on
---------------
the date hereof, in the amount requested by Borrower, up to, but not in excess
of, the Commitment Amount.
"Initial Engineering Report" means the report or reports covering the
--------------------------
Borrowing Base Properties, prepared by Borrower, a true and correct copy of
which has been furnished by Borrower to USB.
"Initial Financial Statements" means the annual financial statements of
----------------------------
Borrower dated as of December 31, 1998, and the quarterly financial statements
of Borrower dated as of March 31, 1999, copies of all of which Initial Financial
Statements have heretofore been delivered by Borrower to USB.
"Interest Rate Election" means an election delivered by Borrower to USB
----------------------
from time to time in the form of Exhibit D attached hereto and made a part
hereof.
"Letter of Credit" means a standby letter of credit issued by USB
----------------
pursuant to Article II below.
"LIBOR (Adjusted)" means, with respect to each LIBOR Tranche and the
----------------
related LIBOR Interest Period, the rate of interest per annum determined
pursuant to the following
-6-
<PAGE>
formula:
LIBOR (Unadjusted)
--------------------------------
LIBOR (Adjusted) = 1.00 - LIBOR Reserve Percentage
"LIBOR Interest Period" means, with respect to each LIBOR Tranche, a
---------------------
period of one, two, three or six months, as specified in the Interest Rate
Election submitted by Borrower pursuant to Section 2.2(b) below with respect
thereto, beginning on and including the date specified in such Interest Rate
Election (which must be a Business Day) and ending on (but not including, for
the purpose of computing the number of days in the LIBOR Interest Period) the
date which corresponds numerically to such beginning date one, two, three or six
months thereafter (or if such month has no numerically corresponding date, on
the last Business Day of such month); provided that each LIBOR Interest Period
which would otherwise end on a day which is not a Business Day shall end on the
next succeeding Business Day unless such next succeeding Business Day is the
first Business Day of a calendar month, in which case such LIBOR Interest Period
shall end on the Business Day next preceding such numerically corresponding day.
No LIBOR Interest Period may be elected which would end after the Maturity Date.
"LIBOR Reserve Percentage" means, with respect to any LIBOR Interest
------------------------
Period, the reserve percentage (expressed as a decimal) equal to the maximum
aggregate reserve requirements (including all basic, emergency, supplemental,
marginal and other reserves and taking into account any transitional adjustments
or other scheduled changes in reserve requirements) specified under regulations
issued from time to time by the Board of Governors of the Federal Reserve System
and then applicable to assets or liabilities consisting of and including
"Eurocurrency Liabilities", as currently defined in Regulation D of the Board of
Governors of the Federal Reserve System, having a term approximately equal or
comparable to such LIBOR Interest Period.
"LIBOR Spread" means, with respect to any LIBOR Tranche, the following:
------------
(a) if the Borrowing Base Usage is less than 50 percent as of the close of
business on the first day of the LIBOR Interest Period for such LIBOR Tranche,
2.0 percentage points per annum; (b) if the Borrowing Base Usage is greater than
or equal to 50 percent but less than 75 percent as of the close of business on
the first day of the LIBOR Interest Period for such LIBOR Tranche, 2.25
percentage points per annum; and (c) if the Borrowing Base Usage is greater than
or equal to 75 percent as of the close of business on the first day of the LIBOR
Interest Period for such LIBOR Tranche, 2.5 percentage points per annum.
"LIBOR Tranche" means a portion of the Loan outstanding for a specific
-------------
LIBOR
-7-
<PAGE>
Interest Period and bearing interest at a fixed rate based upon LIBOR
(Adjusted).
"LIBOR (Unadjusted)" means, with respect to each LIBOR Tranche and the
------------------
related LIBOR Interest Period, the rate of interest per annum determined by USB,
in accordance with its customary practices, to be representative of the rates at
which deposits of U.S. dollars are being offered in the London interbank
eurocurrency market for delivery on the first day of such LIBOR Interest Period
in an amount equal or comparable to the amount of such LIBOR Tranche and for a
period of time equal or comparable to the length of such LIBOR Interest Period.
LIBOR (Unadjusted), as determined by USB with respect to a particular LIBOR
Tranche, shall be fixed at such rate for the duration of the associated LIBOR
Interest Period. If USB is unable so to determine LIBOR (Unadjusted) for any
LIBOR Tranche, or if the associated LIBOR (Adjusted) would exceed the maximum
rate of interest, if any, then permitted to be charged on the Note under
applicable law, Borrower shall be deemed to have elected to have included in the
Reference Rate Portion the portion of the Loan that would otherwise have been
included in such LIBOR Tranche.
"Lien" means, with respect to any property or assets, any right or
----
interest therein of a creditor to secure Debt owed to him or any other
arrangement with such creditor which provides for the payment of such Debt out
of such property or assets or which allows him to have such Debt satisfied out
of such property or assets prior to the general creditors of any owner thereof,
including without limitation any lien, mortgage, security interest, pledge,
deposit, production payment, rights of a vendor under any title retention or
conditional sale agreement or lease substantially equivalent thereto, or any
other charge or encumbrance for security purposes, whether arising by law or
agreement or otherwise, but excluding any right of offset which arises without
agreement in the ordinary course of business.
"Loan" has the meaning given such term in Section 2.1 below.
----
"Loan Documents" means this Agreement, the Security Documents, the
--------------
Note, applications for Letters of Credit, Advance requests and all other
agreements, certificates, legal opinions and other documents, instruments and
writings heretofore or hereafter delivered in connection herewith or therewith.
"Maturity Date" means the earliest of: (a) the first day of the forty-
-------------
eighth month after the month in which the Conversion Date occurs (i.e., July 1,
2005, if the Conversion Date is July 1, 2001), (b) such date as may be
established pursuant to the amortization schedule determined by USB as described
in the definition "Principal Payment Amount" set forth in this Section 1.1, or
(c) such date on which the Loan is due and payable in full by reason of the
occurrence of an Event of Default, as established pursuant to Section 7.1 below.
-8-
<PAGE>
"Maximum Loan Amount" means $10,000,000; provided that, upon the
-------------------
request of Borrower, USB may, in its sole discretion, increase said amount to an
amount not greater than $25,000,000 by giving written notice of such increase to
Borrower, but nothing contained in this Agreement, the Note or any other Loan
Document shall be deemed to commit or require USB to grant any such increase.
"Minimum Principal Payment" means the product of: (a) 0.0208333, and
-------------------------
(b) the outstanding principal balance of the Loan as of the close of business on
the last day of the Revolving Period (or, if the last day of the Revolving
Period is not a Business Day, the Business Day immediately preceding the last
day of the Revolving Period).
"Note" means a Promissory Note in the form of Exhibit A attached hereto
----
and made a part hereof, duly executed and delivered by Borrower.
"Obligated Person" means Borrower or any other Person who hereafter
----------------
becomes liable for payment of the Loan or any part thereof, by guaranty or
otherwise.
"Obligations" means all Debt from time to time owing by Borrower to USB
-----------
under or pursuant to any of the Loan Documents. "Obligation" means any part of
----------
the Obligations.
"Oil and Gas Interests" means any and all oil or gas properties, gas
---------------------
gathering systems, and other related personal property and interests now or
hereafter owned by Borrower.
"Payment Date" means the first day of each calendar month, commencing
------------
September 1, 1999, and the Maturity Date.
"Person" means an individual, corporation, partnership, association,
------
joint-stock company, trust or trustee thereof, estate or executor thereof,
limited liability company, unincorporated organization or joint venture, court
or governmental unit or any agency or subdivision thereof, or any other legally
recognizable entity.
"Principal Payment Amount" means: (a) the amount, if any, provided for
------------------------
in an amortization schedule established by USB in its sole discretion, as of the
end of the Revolving Period (and thereafter adjusted, at USB's sole discretion,
at the time of any one or more subsequent redeterminations of the Borrowing
Base), in accordance with USB's then-current practices as to oil and gas loans
and in accordance with the most recent engineering data and other information
then available with respect to the Borrowing Base Properties, including without
limitation any appropriate revision of the Maturity Date if the Revenue Half-
Life of the Borrowing Base Properties would otherwise occur after the Maturity
Date, or (b) if no
-9-
<PAGE>
amortization schedule has been established by USB pursuant to clause (a) above,
the Minimum Principal Payment.
"Prohibited Lien" means any Lien not expressly allowed under Section
---------------
6.2(b) below.
"Reference Rate" means the fluctuating interest rate per annum
--------------
announced from time to time by USB as its reference rate, which may not be the
lowest interest rate charged by USB.
"Reference Rate Portion" means the portion of the Loan bearing interest
----------------------
based upon the Reference Rate.
"Revenue Half-Life" means, at any time, the point in time when one-half
-----------------
of the then-remaining undiscounted oil and gas sales from the Borrowing Base
Properties will have been produced, according to USB's engineering evaluation.
"Revolving Period" means the time period from the date of this
----------------
Agreement through June 30, 2001.
"Security Documents" means all security agreements, deeds of trust,
------------------
mortgages, chattel mortgages, pledges, guaranties, financing statements,
continuation statements, extension agreements and other agreements or
instruments now, heretofore, or hereafter delivered by any or all of the
Obligated Persons or any other person to USB in connection with this Agreement
or any transaction contemplated hereby, to secure or guaranty the payment of any
part of the Obligations or the performance of any other duties and obligations
of any or all of the Obligated Persons under the Loan Documents, whenever made
or delivered.
"Subordinated Debt" means any indebtedness or other obligations of
-----------------
Borrower, to the extent that the rights of the holders thereof to enforce the
indebtedness and other obligations of Borrower thereunder have been subordinated
to the rights of USB hereunder or in connection herewith by subordination
agreements executed by the holders of the Subordinated Debt and satisfactory in
form and substance to USB.
"Tangible Net Worth" means, as to any Person: (a) the equity in such
------------------
Person owned by the shareholders, partners, members or other owners of such
Person, determined in accordance with GAAP, plus (b) any and all Subordinated
Debt of such Person, less (c) goodwill and any and all other intangible assets
of such Person, determined in accordance with GAAP.
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<PAGE>
"Taxes" has the meaning given such term in Section 3.7 below.
-----
"Termination Event" means: (a) the occurrence with respect to any ERISA
-----------------
Plan of (1) a reportable event described in Section 4043(b)(5) of ERISA or (2)
any other reportable event described in Section 4043 of ERISA other than a
reportable event not subject to the provision for 30-day notice to the Pension
Benefit Guaranty Corporation under such regulations, or (b) the withdrawal of
Borrower or of any Affiliate of Borrower from an ERISA Plan during a plan year
in which it was a "substantial employer" as defined in Section 4001(a)(2) of
ERISA, or (c) the filing of a notice of intent to terminate any ERISA Plan or
the treatment of any ERISA Plan amendment as a termination under Section 4041 of
ERISA, or (d) the institution of proceedings to terminate any ERISA Plan by the
Pension Benefit Guaranty Corporation under Section 4042 of ERISA, or (e) any
other event or condition which might constitute grounds under Section 4042 of
ERISA for the termination of, or the appointment of a trustee to administer, any
ERISA Plan.
"Working Capital" means: (a) the aggregate current assets of Borrower
---------------
(including, during the Revolving Period, the excess, if any, of the Commitment
Amount over: (1) the aggregate amount of all Advances outstanding hereunder,
plus (2) the face amounts of all Letters of Credit outstanding hereunder), minus
(b) the aggregate current liabilities of Borrower (excluding current maturities
of the Loan), all determined in accordance with GAAP.
"Zero-Value Properties" means any properties covered by the Security
---------------------
Documents but containing no proved reserves and no reserves to which USB has
given value in determining the Borrowing Base.
Section 1.2. Incorporation of Exhibits. All Exhibits attached to this
-------------------------
Agreement are a part hereof for all purposes.
Section 1.3. Amendment of Defined Instruments. Unless the context
--------------------------------
otherwise requires or unless otherwise provided herein, the terms defined in
this Agreement which refer to a particular agreement, instrument or document
also refer to and include all renewals, extensions and modifications of such
agreement, instrument or document, provided that nothing contained in this
section shall be construed to authorize any such renewal, extension or
modification.
Section 1.4. References and Titles. All references in this Agreement
---------------------
to Exhibits, Schedules, articles, sections, subsections and other subdivisions
refer to the Exhibits, Schedules, articles, sections, subsections and other
subdivisions of this Agreement unless expressly provided otherwise. Titles
appearing at the beginning of any subdivisions are for convenience only and do
not constitute any part of such subdivisions and shall be disregarded in
construing the language
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<PAGE>
contained in such subdivisions. The words "this Agreement", "this instrument",
"herein", "hereof", "hereby", "hereunder" and words of similar import refer to
this Agreement as a whole and not to any particular subdivision unless expressly
so limited. The phrases "this section" and "this subsection" and similar phrases
refer only to the sections or subsections hereof in which such phrases occur.
The word "or" has the inclusive meaning frequently identified by the phrase
"and/or". Pronouns in masculine, feminine and neuter genders shall be construed
to include any other gender, and words in the singular form shall be construed
to include the plural and vice versa, unless the context otherwise requires.
Section 1.5. Calculations and Determinations. All interest accruing
-------------------------------
under the Loan Documents shall be calculated on the basis of actual days elapsed
(including the first day but excluding the last) and a year of 360 days. Unless
otherwise expressly provided herein or unless USB otherwise consents, all
financial statements and reports furnished to USB hereunder shall be prepared
and all financial computations and determinations pursuant hereto shall be made
in accordance with GAAP.
ARTICLE II
The Loan
--------
Section 2.1. The Loan. (a) Subject to the other terms and conditions
--------
of this Agreement, USB agrees to: (1) make Advances to Borrower from time to
time requested upon written notice to USB from Borrower no later than noon,
Denver time, at least one Business Day prior to any Advance, and (2) issue
Letters of Credit from time to time requested upon written notice to USB from
Borrower no later than five Business Days prior to the date of issuance of such
Letter of Credit or at such earlier time as may be agreed to by the parties.
(b) Each request by Borrower for an Advance shall be in the form
of Exhibit B attached hereto and made a part hereof. Each request by Borrower
for the issuance of a Letter of Credit shall be in the form of Exhibit C
attached hereto and made a part hereof, and shall be accompanied by an
application for issuance of a letter of credit on USB's then-standard form, duly
executed by Borrower.
(c) USB shall not have any obligation to: (1) make an Advance on
or after the Conversion Date, (2) issue or renew a Letter of Credit which does
not expire prior to the Conversion Date, (3) issue a LIBOR Tranche as to which
the LIBOR Interest Period does not expire prior to the Maturity Date, (4) issue
a Fixed Rate Portion as to which the Fixed Rate Portion Interest Period does not
expire prior to the Maturity Date, (5) issue a LIBOR Tranche at
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<PAGE>
any time when five or more prior LIBOR Tranches remain outstanding, (6) issue a
Fixed Rate Portion at any time when two or more prior Fixed Rate Portions remain
outstanding, (7) make an Advance in an amount less than $10,000, (8) issue a
LIBOR Tranche in an amount less than $500,000, (9) issue a Fixed Rate Portion in
an amount other than an integral multiple of $1,000,000, or (10) make an Advance
or issue a Letter of Credit if, after such Advance is made or such Letter of
Credit is issued, the aggregate amount of all Advances outstanding hereunder
plus the face amounts of all Letters of Credit outstanding hereunder would
exceed the Commitment Amount.
(d) Each payment by USB under a Letter of Credit shall be deemed
to be an Advance included in the Reference Rate Portion, bearing interest from
the date of such payment, shall be entitled to all benefits of the Security
Documents and shall be subject to all terms of this Agreement and any and all
other applicable Loan Documents.
(e) Within the limitation of the Commitment Amount and subject
to the other terms and provisions hereof, Borrower may borrow, repay and
reborrow hereunder. The Advances and Letters of Credit described above shall be
herein collectively referred to as the "Loan". Borrower hereby expressly
requests and irrevocably authorizes USB to make the Loan.
Section 2.2. The Note; Interest. (a) Borrower's obligation to repay
------------------
the Loan, with interest thereon, shall be evidenced by the Note. In the event
any provision contained in the Note conflicts with a provision contained in this
Agreement, the provisions of this Agreement shall control.
(b) At any time and from time to time hereafter, if Borrower
desires to include in a LIBOR Tranche all or any portion of the Loan which is
not already included in a LIBOR Tranche or a Fixed Rate Portion, Borrower shall
deliver an Interest Rate Election to USB at least one Business Day prior to the
first day of the requested LIBOR Interest Period, specifying the dollar amount
it desires to have included in the LIBOR Tranche, the first day of the LIBOR
Interest Period and the duration of the LIBOR Interest Period. Not later than
one Business Day prior to the first day of the requested LIBOR Interest Period,
USB shall provide to Borrower a quote of LIBOR (Adjusted) for the dollar amount
and time period requested by Borrower. Not later than one Business Day prior to
the first day of the requested LIBOR Interest Period, Borrower shall give notice
to USB of whether Borrower elects to include the requested portion of the Loan
in the requested LIBOR Tranche at the LIBOR (Adjusted) rate quoted by USB plus
the applicable LIBOR Spread; provided that any failure by Borrower to give
notice as set forth herein shall be deemed an election to include the requested
portion of the Loan in the requested LIBOR Tranche. If Borrower elects to
include the requested portion of the Loan in the requested LIBOR Tranche, the
LIBOR Tranche shall become effective for the requested dollar
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<PAGE>
amount and the applicable LIBOR Interest Period at the rate quoted by USB. Any
portion of the Loan which is not included in a LIBOR Tranche shall be included
in the Reference Rate Portion, unless Borrower and USB hereafter agree to
include any portion thereof in a Fixed Rate Portion upon terms and conditions
mutually acceptable to Borrower and USB.
(c)(1) Except as otherwise provided in (4) below, interest on
each LIBOR Tranche shall accrue at a fixed annual rate equal to LIBOR (Adjusted)
with respect to such LIBOR Tranche plus the LIBOR Spread. (2) Except as
otherwise provided in (4) below, interest on the Reference Rate Portion shall
accrue at a fluctuating annual rate equal to the Reference Rate. (3) Except as
otherwise provided in (4) below, interest on any Fixed Rate Portion shall accrue
at the fixed annual rate agreed upon between Borrower and USB plus the Fixed
Rate Spread. (4) From and after the occurrence, and during the continuance, of
any Event of Default hereunder (including without limitation any failure by
Borrower to pay the entire outstanding principal balance of the Loan, together
with all accrued interest, fees and other amounts payable in connection
therewith on or before the Maturity Date), interest on the Loan shall accrue,
from the date of occurrence of the Event of Default until the date the Event of
Default is cured, at a fluctuating annual rate equal to the Reference Rate plus
five percentage points per annum.
(d) Interest accrued on the Reference Rate Portion shall be due
and payable on each Payment Date. Interest accrued on the Fixed Rate Portion
shall be due and payable on each Payment Date which occurs in January, April,
July or October. Interest accrued on each LIBOR Tranche shall be due and payable
on the last day of the LIBOR Interest Period for such LIBOR Tranche (and also,
as to any LIBOR Tranche having a LIBOR Interest Period of six months, on the
ninetieth day of such LIBOR Interest Period). All accrued and unpaid interest
shall be due and payable not later than the Maturity Date.
Section 2.3. Mandatory Principal Payments. (a) Borrower shall make
----------------------------
a principal payment on each Payment Date, commencing with the Payment Date in
the calendar month immediately after the calendar month in which the Conversion
Date occurs, each such payment to be in an amount equal to the Principal Payment
Amount; provided that any such payments shall be in addition to any amounts due
and payable by Borrower pursuant to the other provisions of this Section 2.3 and
any interest payments due and payable pursuant to Section 2.2 above.
(b) If for any reason the aggregate outstanding principal
balance of all Advances plus the aggregate face amount of all outstanding
Letters of Credit shall exceed the Commitment Amount, Borrower shall, not later
than 10 days after written notice thereof from USB: (1) pay the excess to USB in
a lump sum; or (2) commence (and thereafter continue) an amortization schedule
under which Borrower repays the Loan in an amount at least equal to the excess
in six equal monthly principal installments on the first Business Day of each
calendar
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<PAGE>
month, which amounts shall be in addition to the monthly interest payments and
any other principal payments otherwise due, such that the entire excess is paid
within six months; or (3) execute and deliver to USB additional mortgages,
supplements to mortgages or other instruments in form and substance satisfactory
to USB, by which Borrower mortgages, pledges or hypothecates to USB, or creates
a security interest in for the benefit of USB, sufficient additional Oil and Gas
Interests to induce USB to make a redetermination of the Borrowing Base such
that the Commitment Amount is increased to an amount no less than the aggregate
outstanding principal balance of all Advances plus the aggregate face amount of
all outstanding Letters of Credit.
(c) The outstanding principal balance of all Advances, together
with all unpaid fees and expenses, shall be due and payable not later than the
Maturity Date.
Section 2.4. Voluntary Prepayments. Borrower shall have the right to
---------------------
prepay any or all Advances at any time, in whole or in part, without penalty or
premium (except as otherwise described in Section 3.5 below or as otherwise
agreed between Borrower and USB as to any Fixed Rate Portion); provided that,
prior to the Conversion Date, Borrower shall not at any time reduce the
aggregate outstanding principal amount of all Advances to less than $1,000.
Section 2.5. Termination of Commitment. Borrower shall have the
-------------------------
right at any time and from time to time, upon not less than three Business Days'
prior written notice to USB, to terminate the Commitment. Upon any termination
of the Commitment, Borrower shall, at the time of such termination, prepay the
Note in full. Any such prepayment shall be without penalty or premium (except
as otherwise described in Section 3.5 below or as otherwise agreed between
Borrower and USB as to any Fixed Rate Portion).
Section 2.6. Payments to USB. Borrower will pay to USB each payment
---------------
which Borrower owes under the Loan Documents not later than 12:00 noon, Denver
time, on the due date, in lawful money of the United States of America and in
immediately available funds. Any payment received after such time will be
deemed to have been made on the next following Business Day. Except as
otherwise provided in this Agreement as to LIBOR Tranches, should any such
payment become due and payable on a day other than a Business Day, the maturity
of such payment shall be extended to the next succeeding Business Day, and, in
the case of a payment of principal or past due interest, interest shall accrue
and be due and payable thereon for the period of such extension. Each payment
under a Loan Document shall be due and payable at the place provided therein or,
if no specific place of payment is provided, shall be due and payable at the
place of payment of the Note.
Section 2.7. Use of Proceeds. In no event shall the Loan proceeds be
---------------
used directly
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<PAGE>
or indirectly for the purpose, whether immediate, incidental or ultimate, of
purchasing, acquiring or carrying any "margin stock" (as such term is defined in
Regulation U promulgated by the Board of Governors of the Federal Reserve
System) or to extend credit to others directly or indirectly for the purpose of
purchasing or carrying any such margin stock or margin securities. Borrower
represents and warrants to USB that Borrower is not engaged principally, or as
one of its important activities, in the business of extending credit to others
for the purpose of purchasing or carrying such margin stock. Borrower will use
the Loan proceeds solely for the funding of capital expenditures relating to oil
and gas properties, acquisitions of other oil and gas properties, general
working capital purposes and, to the extent permitted pursuant to Section 6.2(i)
below, re-purchasing the capital stock of Borrower, including the repurchase of
stock which was obtained by the seller thereof through the exercise of stock
options.
Section 2.8. Borrowing Base Procedures. The Borrowing Base will be
-------------------------
redetermined by USB as of the first day of each Borrowing Base Period, up to one
additional time during each calendar year upon the request of USB, and up to one
additional time during each calendar year upon the request of Borrower, based
upon the engineering reports and other information submitted by Borrower
pursuant to Section 6.1 below and upon such other information and data as USB
deems relevant. USB shall advise Borrower of each redetermination of the
Borrowing Base by providing to Borrower a Borrowing Base Notice approximately
three days prior to the effectiveness of the redetermined Borrowing Base;
provided that if, due to any failure by Borrower to submit in a timely manner
any engineering report or other information required to be submitted by Borrower
hereunder or, if requested in writing by USB, any additional information or data
needed in connection with a redetermination of the Borrowing Base or due to any
other reason beyond the control of USB, USB does not provide a Borrowing Base
Notice at the time described above, then, unless USB gives notice to the
contrary to Borrower, the Borrowing Base from the previous period shall be
carried over into the new period until a Borrowing Base Notice has been sent to
Borrower by USB.
ARTICLE III
Security; Fees; Taxes; Increased Capital
----------------------------------------
Section 3.1. The Security. The Obligations will be secured by the
------------
Security Documents and any additional Security Documents hereafter delivered by
any Obligated Person and accepted by USB.
Section 3.2. Perfection and Protection of Security Interests and
---------------------------------------------------
Liens. Borrower will from time to time deliver to USB any amendments, financing
- -----
statements, continuation statements, extension agreements and other documents,
properly completed and executed (and
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<PAGE>
acknowledged when required) by Borrower in form and substance reasonably
satisfactory to USB, which USB may reasonably request for the purpose of
perfecting, confirming or protecting USB's Liens and other rights in the
Collateral.
Section 3.3. Bank Accounts and Offset. To secure the repayment of the
------------------------
Obligations, Borrower hereby grants to USB a security interest, a lien, and a
right of offset, each of which shall be upon and against: (a) any and all
moneys, securities or other property (and the proceeds therefrom) of Borrower
now or hereafter held or received by or in transit to USB from or for the
account of such Borrower, whether for safekeeping, custody, pledge,
transmission, collection or otherwise, (b) any and all deposits (general or
special, time or demand, provisional or final) of Borrower with USB, and (c) any
other credits and claims of Borrower at any time existing against USB, including
without limitation claims under certificates of deposit. Upon the occurrence of
any Event of Default, USB is hereby authorized to foreclose upon, offset,
appropriate, and apply, at any time and from time to time, without notice to
Borrower, any and all items hereinabove referred to against the Obligations
(whether or not such Obligations are then due and payable).
Section 3.4. Fees. (a) Borrower shall pay to USB, within 30 days
----
after the end of each calendar quarter, commencing with the date of the Initial
Advance and ending on the last day of the Revolving Period, a commitment fee in
an amount equal to: (1) one-quarter of one percent per annum, times (2) the
excess of the Commitment Amount over the sum of the aggregate outstanding
principal balance of all Advances plus the face amount of all outstanding
Letters of Credit, computed on a daily basis for such calendar quarter.
(b) Borrower shall pay to USB with respect to each Letter of
Credit a fee in an amount equal to the greater of: (1) $500.00 per annum, or (2)
five-eighths of one percent per annum times the face amount of such Letter of
Credit, which fee shall be due and payable at the time of issuance (and again at
the time of any renewal) of such Letter of Credit.
(c) Borrower shall pay to USB, at the time of the Initial
Advance, a facility fee in the amount of $25,000.
Section 3.5. Special LIBOR and Fixed Rate Provisions. (a) If USB
---------------------------------------
shall reasonably determine (which determination shall, upon notice thereof to
Borrower, be conclusive and binding on Borrower and USB) that the introduction
of or any change in or in the interpretation of any law makes it unlawful, or
any central bank or other governmental authority having jurisdiction asserts
that it is unlawful, for USB to fund, continue or maintain any LIBOR Tranche or
Fixed Rate Portion, the obligation of USB to fund, continue or maintain any
such LIBOR Tranche or Fixed Rate Portion shall, upon such determination,
forthwith be suspended
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<PAGE>
until USB shall notify Borrower that the circumstances causing such suspension
no longer exist, and all LIBOR Tranches and Fixed Rate Portions shall
automatically be converted into the Reference Rate Portion at the end of the
then-current LIBOR Interest Periods or Fixed Rate Portion Interest Periods with
respect thereto or sooner, if required by such law or assertion.
(b) If USB shall reasonably determine that:
(1) U.S. Dollar deposits in the relevant amount and for the
relevant LIBOR Interest Period or Fixed Rate Portion Interest Period are not
available to USB in its relevant market; or
(2) By reason of circumstances affecting USB's relevant
market, adequate means do not exist for ascertaining the interest rate
applicable hereunder to LIBOR Tranches or the Fixed Rate Portion; then, upon
notice from USB to Borrower, the obligation of USB to include any portion of the
Loan in a LIBOR Tranche or in the Fixed Rate Portion shall forthwith be
suspended until USB shall notify Borrower that the circumstances causing such
suspension no longer exist.
(c) Borrower agrees to reimburse USB for any increase in the
cost to USB of, or any reduction in the amount of any sum receivable by USB in
respect of, funding, continuing or maintaining (or of its obligation to fund,
continue or maintain) any LIBOR Tranche or any Fixed Rate Portion; provided that
the foregoing shall not apply to increases resulting from general increases in
interest rates or general increases in USB's administrative expenses or overhead
costs. USB shall promptly notify Borrower in writing of the occurrence of any
such event, such notice to state, in reasonable detail, the reasons therefor and
the additional amount required fully to compensate USB for such increased cost
or reduced amount. Such additional amount shall be due and payable by Borrower
to USB within fifteen days of Borrower's receipt of such notice, and such notice
shall, in the absence of clear error, be conclusive and binding on Borrower.
(d) In the event USB shall incur any loss or expense (including
any loss or expense incurred by reason of the liquidation or reemployment of
deposits or other funds acquired by USB to fund, continue or maintain any
portion of the principal amount of any LIBOR Tranche or any Fixed Rate Portion)
as a result of:
(1) Any conversion, repayment or prepayment (whether
voluntary or mandatory) of the principal amount of any LIBOR Tranche or any
Fixed Rate Portion on a date other than the scheduled last day of the LIBOR
Interest Period or Fixed Rate Portion Interest
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<PAGE>
Period applicable thereto;
(2) Any requested LIBOR Tranche or Fixed Rate Portion not
being funded as a LIBOR Tranche or a Fixed Rate Portion in accordance with the
provisions of this Agreement, the Interest Rate Election therefor or any other
request therefor that has been agreed to between Borrower and USB; or
(3) Any LIBOR Tranche or Fixed Rate Portion not being
continued as a LIBOR Tranche or Fixed Rate Portion in accordance with the
provisions of this Agreement, the Interest Rate Election therefor or any other
request therefor that has been agreed to between Borrower and USB;
then, upon the written notice by USB to Borrower, Borrower shall, within fifteen
days of receipt thereof, pay USB such amount as will (in the reasonable
determination of USB) reimburse USB for such loss or expense. Such written
notice (which shall include calculations in reasonable detail) shall, in the
absence of clear error, be conclusive and binding on Borrower.
Section 3.6. Increased Capital Costs. If any change in, or the
-----------------------
introduction, adoption, effectiveness, interpretation, reinterpretation or
phase-in of, any law or regulation, directive, guideline, decision or request
(whether or not having the force of law) of any court, central bank, regulator
or other governmental authority affects or would affect the amount of capital
required or expected to be maintained by USB or any Person controlling USB, and
USB reasonably determines that the rate or return on its or such controlling
Person's capital as a consequence of the Loan is reduced to a level below that
which USB or such controlling Person could have achieved but for the occurrence
of any such circumstance, then, in any such case upon notice from time to time
by USB to Borrower, Borrower hereby agree to pas to USB, within fifteen days of
the effective date of such notice, such additional amount (as may be reasonably
determined by USB) sufficient to compensate USB or such controlling Person for
such reduction in rate of return. A statement to Borrower by USB as to any such
additional amount or amounts (including calculations thereof in reasonable
detail) shall, in the absence of clear error, be conclusive and binding on
Borrower.
Section 3.7. Taxes. All payments by Borrower of principal of, and
-----
interest on, the Loan and all other amounts payable hereunder shall be made free
and clear of and without deduction for any present or future income, excise,
stamp or franchise taxes and other taxes, fees, duties, withholdings or other
charges of any nature whatsoever imposed by any taxing authority, but excluding
franchise taxes and taxes imposed on or measured by USB's net income or receipts
(such non-excluded items being called "Taxes"). In the event that any
withholding or deduction from any payment to be made by Borrower hereunder is
required in respect of any Taxes
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<PAGE>
pursuant to any applicable law, rule or regulation, Borrower will:
(a) Pay directly to the relevant authority the full amount
required to be so withheld or deducted;
(b) Promptly forward to USB an official receipt or other
documentation reasonably evidencing such payment to such authority; and
(c) Pay USB such additional amount or amounts as may be
necessary to ensure that the net amount actually received by USB will equal the
full amount USB would have received had no such withholding or deduction been
required.
Moreover, if any Taxes are directly asserted against USB with respect to any
payment received by USB hereunder, USB may pay such Taxes and Borrower will
promptly pay such additional amounts (including any penalties, interest or
expenses) as may be necessary in order that the net amount received by USB after
the payment of such Taxes (including any Taxes on such additional amount) shall
equal the amount USB would have received had not such Taxes been asserted.
If Borrower fails to pay any Taxes when due to the appropriate taxing
authority or fails to remit to USB the required receipts or other required
documentary evidence, then Borrower shall indemnify, save and hold harmless USB
from and against any incremental Taxes, interest or penalties that may become
payable by USB as a result of any such failure.
Section 3.8. Letter of Credit Obligations Absolute. The obligation of
-------------------------------------
Borrower to repay any amount drawn on USB pursuant to the terms of a Letter of
Credit shall be absolute, unconditional and irrevocable, and shall be performed
strictly in accordance with the terms of this Agreement, under all circumstances
whatsoever, including without limitation the following circumstances:
(a) The existence of any claim, set-off, defense or other right
which Borrower may have at any time against any beneficiary of a Letter of
Credit (or any Person for whom any such beneficiary may be acting) or any other
Person, whether in connection with this Agreement, the transactions contemplated
hereby or any unrelated transactions;
(b) Any statement or any other document presented under any
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
whatsoever; or
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(c) Payment by USB under any Letter of Credit against
presentation of a draft or certificate which does not comply in all material
respects with the terms of such Letter of Credit.
Payment by Borrower of a reimbursement obligation in connection with a Letter of
Credit issued pursuant to this Agreement shall not be deemed a waiver of any
rights of Borrower against USB under Section 3.10(d) below.
Section 3.9. Indemnification regarding Letters of Credit. Borrower
-------------------------------------------
hereby indemnifies and holds harmless USB from and against any and all claims,
damages, losses, liabilities, costs or expenses whatsoever which USB may incur
(or which may be claimed against USB by any Person) by reason of or in
connection with the execution and delivery or transfer of or payment or failure
to pay under any Letter of Credit; provided, however, that Borrower shall not be
required to indemnify USB for any claims, damages, losses, liabilities, costs or
expenses to the extent, but only to the extent, caused by the willful misconduct
or gross negligence of USB in connection with paying a draft presented under a
Letter of Credit. Nothing in this Section 3.9 is intended to limit the
obligation of Borrower to repay any amount drawn on USB pursuant to the terms of
a Letter of Credit.
Section 3.10. Liability of USB regarding Letters of Credit. Borrower
--------------------------------------------
assumes all risks of the acts or omissions of any beneficiary or permitted
transferee of any Letter of Credit with respect to its use of such Letter of
Credit. Neither USB nor any of its employees, officers or directors shall be
liable or responsible for:
(a) The use which may be made of any Letter of Credit or for any
acts or omissions of any beneficiary or transferee thereof in connection
therewith;
(b) The validity, sufficiency or genuineness of documents, or of
any endorsements thereon, even if such documents should in fact prove to be in
any or all respects invalid, insufficient, fraudulent or forged;
(c) Payment by USB against presentation of documents which do
not comply with the terms of the applicable Letter of Credit, including failure
of any documents to bear any reference or adequate reference to the applicable
Letter of Credit; or
(d) Any other circumstance whatsoever in making or failing to
make payment under the Letter of Credit, except only that Borrower shall have a
claim against USB, and USB shall be liable to Borrower, to the extent, but only
to the extent, of any direct (as opposed to consequential) damages suffered by
Borrower which were caused by:
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(1) USB's willful or intentional misconduct, bad faith or
gross negligence in connection with the Letter of Credit; or
(2) USB's willful, bad-faith or negligent failure to pay
under any Letter of Credit after the presentation to it by the beneficiary of a
draft and certificate strictly complying with the terms and conditions of such
Letter of Credit.
ARTICLE IV
Conditions Precedent to Loan
----------------------------
Section 4.1. Conditions Precedent to Initial Advance. USB shall have
---------------------------------------
no obligation to make the Initial Advance or to issue any Letter of Credit
unless USB shall have received all of the following at its office in Denver,
Colorado, duly executed and delivered and in form, substance and date
satisfactory to USB:
(a) The Note.
(b) An "Omnibus Certificate" of the Secretary or an Assistant
Secretary of Borrower, which shall contain the names and
signatures of the officers of Borrower authorized to execute Loan
Documents and which shall certify to the truth, correctness and
completeness of the following exhibits attached thereto: (1) a
copy of the articles of incorporation of Borrower and all
amendments thereto, (2) a copy of the bylaws of Borrower and all
amendments thereto, and (3) a copy of the resolutions of the
Board of Directors of Borrower authorizing this Agreement and the
transactions contemplated hereby.
(c) A "Compliance Certificate" of an officer of Borrower in which
such person certifies to the satisfaction of the conditions set
out in subsections (a), (b), and (c) of Section 4.2 below.
(d) The Security Documents.
(e) Such title opinions, supplemental title opinions, UCC searches
and other title information concerning Borrower's title to the
Borrowing Base Properties or any portions thereof as may be
satisfactory to USB.
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<PAGE>
(f) Any and all other Loan Documents.
Section 4.2. Additional Conditions Precedent. USB shall have no
-------------------------------
obligation to make the Initial Advance or any subsequent Advance or to issue any
Letter of Credit unless the following conditions precedent have been satisfied:
(a) All representations and warranties made by any Obligated Person
in any Loan Document shall be true on and as of the date of the
Advance or the date of issuance of the Letter of Credit as if
such representations and warranties had been made as of the date
hereof.
(b) No Default shall exist as of the date of the Advance or the date
of issuance of the Letter of Credit.
(c) Each Obligated Person shall have performed and complied with all
agreements and conditions herein required to be performed or
complied with by it on or prior to the date of the Advance or the
date of issuance of the Letter of Credit.
(d) The making of the Advance or the issuance of the Letter of Credit
shall not be prohibited by any law or any regulation or order of
any court or governmental agency or authority and shall not
subject USB to any penalty or other onerous condition under or
pursuant to any such law, regulation or order.
ARTICLE V
Representations and Warranties
------------------------------
Section 5.1. Borrower's Representations and Warranties. To induce
-----------------------------------------
USB to enter into this Agreement and to make the Loan, Borrower represents and
warrants to USB (which representations and warranties shall survive the delivery
of the Note and shall be deemed to be continuing representations and warranties
until repayment in full of the Note) that:
(a) No Default. Borrower is not in default in any material respect in
----------
the performance of any of the covenants and agreements contained
herein. No event has occurred and is continuing which constitutes
a Default.
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<PAGE>
(b) Organization and Good Standing. Borrower is a corporation duly
------------------------------
organized, validly existing and in good standing under the laws
of the State of Nevada, having all powers required to carry on
its business and enter into and carry out the transactions
contemplated hereby. Borrower is duly qualified, in good
standing, and authorized to do business in all other
jurisdictions wherein the character of the properties owned or
held by it or the nature of the business transacted by it makes
such qualification necessary.
(c) Authorization. Borrower has duly taken all action necessary to
-------------
authorize the execution and delivery by it of the Loan Documents
and to authorize the consummation of the transactions
contemplated thereby and the performance of its obligations
thereunder.
(d) No Conflicts or Consents. The execution and delivery by the
------------------------
various Obligated Persons of the Loan Documents to which each is
a party, the performance by each of its obligations under such
Loan Documents, and the consummation of the transactions
contemplated by the various Loan Documents, do not and will not
(1) conflict with any provision of (A) any domestic or foreign
law, statute, rule or regulation, (B) the governing documents of
Borrower, or (C) any agreement, judgment, license, order or
permit applicable to or binding upon any Obligated Person, (2)
result in the acceleration of any Debt owed by any Obligated
Person, or (3) result in or require the creation of any Lien upon
any assets or properties of any Obligated Person except as
expressly contemplated in the Loan Documents. Except as expressly
contemplated in the Loan Documents, no consent, approval,
authorization or order of, and no notice to or filing with, any
court or governmental authority or third party is required in
connection with the execution, delivery or performance by any
Obligated Person of any Loan Document or to consummate any
transactions contemplated by the Loan Documents.
(e) Enforceable Obligations. This Agreement is, and the other Loan
-----------------------
Documents when duly executed and delivered will be, legal and
binding obligations of each Obligated Person which is a party
hereto or thereto, enforceable in accordance with their
respective terms, except as limited by bankruptcy, insolvency or
similar laws of general application relating to the enforcement
of creditors' rights and as limited by general
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<PAGE>
equitable principles.
(f) Initial Financial Statements. The Initial Financial Statements
----------------------------
fairly present Borrower's financial positions at the dates
thereof. Since the latest date of any of the Initial Financial
Statements, no material adverse change has occurred in Borrower's
financial condition or business. All Initial Financial Statements
were prepared in accordance with GAAP.
(g) Other Obligations. Borrower has no outstanding Debt of any kind
-----------------
(including contingent obligations, tax assessments, and unusual
forward or long-term commitments) which is not shown in the
Initial Financial Statements.
(h) Full Disclosure. No certificate, statement or other information
---------------
delivered herewith or heretofore by Borrower to USB in connection
with the negotiation of this Agreement or in connection with any
transaction contemplated hereby contains any untrue statement of
a material fact or omits to state any material fact known to
Borrower necessary to make the statements contained herein or
therein not misleading in any material respect as of the date
made or deemed made. At the date of this Agreement, Borrower is
not aware of any material fact that has not been disclosed to USB
in writing which could materially and adversely affect Borrower's
properties, businesses, prospects or condition (financial or
otherwise). To the best of Borrower's knowledge, the Initial
Engineering Report is based upon complete and accurate factual
information in all material respects, it being understood that
the Initial Engineering Report is necessarily based upon
professional opinions, estimates and projections and that
Borrower does not warrant that such opinions, estimates and
projections will ultimately prove to have been accurate.
(i) Litigation. Except as disclosed in the Initial Financial
----------
Statements: (1) there are no actions, suits or legal, equitable,
arbitrative or administrative proceedings pending, or to the
knowledge of Borrower threatened, against any Obligated Person
before any federal, state, municipal or other court, department,
commission, body, board, bureau, agency, or instrumentality,
domestic or foreign, which do or may materially and adversely
affect any Obligated Person, any Affiliate
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<PAGE>
controlled by Borrower, any Obligated Person's ownership or use
of any of its assets or properties, its business or financial
condition or prospects, or the right or ability of any Obligated
Person to enter into the Loan Documents or perform its
obligations thereunder and (2) there are no outstanding
judgments, injunctions, writs, rulings or orders by any such
governmental entity against any Obligated Person which have or
may have any such effect.
(j) Title to Properties. To the best of Borrower's knowledge and
-------------------
subject to typical oil-industry operating agreements and product-
purchase contracts, Borrower has good and defensible title to the
Borrowing Base Properties, free and clear of all liens,
encumbrances and defects of title, except for covenants,
restrictions, rights, easements, liens, encumbrances and minor
irregularities in title which do not materially interfere with
the occupation, use and enjoyment of such Borrowing Base
Properties in the normal course of business as presently
conducted or materially impair the value thereof for such
business. Borrower enjoys peaceful and undisturbed possession
under all material leases under which it operates, and all such
leases are valid and subsisting, with no material default
existing thereunder.
(k) Place of Business. The chief executive office and principal place
-----------------
of business of Borrower are located at the address of Borrower
set out in Section 8.3 below.
(l) Taxes. All tax returns required to be filed by Borrower in any
-----
jurisdiction prior to the date hereof have been filed; all taxes,
assessments, fees and other governmental charges upon Borrower or
upon any of its properties, income or franchises, which are due
and payable have been paid, or adequate reserves have been
provided for payment thereof.
(m) Use of Proceeds. Borrower is not engaged principally, or as one
---------------
of its important activities, in the business of extending credit
for the purpose of purchasing or carrying margin stock (within
the meaning of Regulation U or X of the Board of Governors of the
Federal Reserve System), and no part of the proceeds of the Loan
will be used to purchase or carry any such margin stock or to
extend credit to any Person for the purpose of purchasing or
carrying any such margin
-26-
<PAGE>
stock. Neither Borrower nor any Person acting on Borrower's
behalf has taken or will take any action which might cause this
Agreement or the Note or the application of the proceeds of the
Loan to violate either of said Regulations U or X or any other
regulation of the Board of Governors of the Federal Reserve
System or to violate the Securities Exchange Act of 1934, in each
case as now in effect or as the same may hereafter be in effect.
(n) ERISA Liabilities. No Termination Event has occurred with respect
-----------------
to any ERISA Plan, and Borrower is in compliance with ERISA in
all material respects. Borrower is not required to contribute to,
or has any other absolute or contingent liability in respect of,
any "multiemployer plan" as defined in Section 4001 of ERISA.
(o) Investment Company Act Not Applicable. Borrower is not an
-------------------------------------
"investment company" or a person "controlled" by an "investment
company" within the meaning of the Investment Company Act of
1940, as amended.
(p) Public Utility Holding Company Act Not Applicable. Borrower is
-------------------------------------------------
not a "holding company," or a "subsidiary company" of a "holding
company," or an "affiliate" of a "holding company," or of a
"subsidiary company" of a "holding company" as such terms are
defined in the Public Utility Holding Company Act of 1935, as
amended.
Section 5.2. Representations by USB. USB hereby represents that it
----------------------
will acquire the Note for its own account in the ordinary course of its
commercial banking business; however, the disposition of USB's property shall at
all times be and remain within its control and this section does not prohibit
USB's sale of the Note or of any participation in the Note to any bank,
financial institution or similar purchaser.
ARTICLE VI
Covenants of Borrower
---------------------
Section 6.1. Affirmative Covenants. Borrower warrants, covenants and
---------------------
agrees that until the full and final payment of the Obligations and the
termination of this Agreement, unless USB has previously agreed otherwise in
writing:
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<PAGE>
(a) Payment and Performance. Borrower will pay all amounts due under
-----------------------
the Loan Documents in accordance with the terms thereof and will
in all material respects observe, perform and comply with every
covenant, term and condition express or implied in the Loan
Documents.
(b) Books, Financial Statements and Records. Borrower will at all
---------------------------------------
times maintain full and accurate books of account and records,
will maintain a standard system of accounting and will furnish
the following statements and reports to USB at Borrower's
expense:
(1) As soon as available, and in any event within 120 days after the
end of each Fiscal Year, complete audited Consolidated financial statements of
Borrower, prepared by a firm of independent certified public accountants chosen
by Borrower and reasonably acceptable to USB, in reasonable detail and in
accordance with GAAP. These financial statements shall contain at least a
balance sheet as of the end of such Fiscal Year and a statement of earnings and
cash flow, setting forth in comparative form the corresponding figures for the
preceding Fiscal Year;
(2) As soon as available and in any event within 60 days after the
end of each Fiscal Quarter (except the last Fiscal Quarter of each Fiscal Year),
complete Consolidated financial statements of Borrower for such Fiscal Quarter
and for the then-current Fiscal Year, prepared by Borrower in reasonable detail
and in accordance with GAAP;
(3) At the time of submission of the financial statements described
in (1) and (2) above, a report signed by the chief financial officer of
Borrower: (A) attesting to the authenticity of such financial statements, (B)
stating that he has read this Agreement and the Security Documents, (C) stating
that after reviewing the financial statements described above he has concluded
that there did not exist any condition or event as of the date of such financial
statements or at the time of his report which constituted an Event of Default or
a Default, or, if he did conclude that such condition or event existed,
specifying the nature and period of existence of any such condition or event,
and (D) showing the calculation of, and Borrower's compliance with, all of the
financial covenants contained herein;
(4) Promptly upon their becoming available, copies of all financial
statements, reports, notices and proxy statements sent by Borrower to its
stockholders and all registration statements, periodic reports and other
statements and schedules filed by Borrower with any securities exchange, the
Securities and Exchange Commission or any similar governmental authority;
(5) By: (A) February 1 of each year, an engineering report and
economic evaluation prepared by one
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<PAGE>
or more independent petroleum engineers chosen by Borrower and acceptable to
USB, covering all oil and gas properties and interests included in the Borrowing
Base Properties, and (B) August 1 of each year until the end of the Revolving
Period, an engineering report and economic evaluation prepared by Borrower,
covering all oil and gas properties and interests included in the Borrowing Base
Properties. These engineering reports shall be in form and substance
satisfactory to USB and shall contain information and analysis comparable in
scope to that contained in the Initial Engineering Report; and
(6) As soon as available, and in any event within 60 days
after the end of each Fiscal Quarter, commencing with the Fiscal Quarter
ending June 30, 1999, a report describing, for each calendar month during
such Fiscal Quarter, the gross volume of production and sales attributable
to production (and the prices at which such sales were made and the
revenues derived from such sales) for each such calendar month from the
Borrowing Base Properties, and describing the related ad valorem, severance
and production taxes and lease operating expenses attributable thereto and
incurred for each such calendar month.
(c) Other Information and Inspections. Each Obligated Person
---------------------------------
will furnish to USB any information which USB may from time to time request
concerning any covenant, provision or condition of the Loan Documents or
any matter in connection with the Obligated Persons' businesses and
operations. Each Obligated Person will permit representatives appointed by
USB, including independent accountants, agents, attorneys, appraisers and
any other persons, to visit and inspect, at their sole risk, any of such
Obligated Person's property, including its books of account, other books
and records, and any facilities or other business assets, and to make extra
copies therefrom and photocopies and photographs thereof, and to write down
and record any information such representatives obtain, and each Obligated
Person shall permit USB or its representatives to investigate and verify
the accuracy of the information furnished to USB in connection with the
Loan Documents and to discuss all such matters with its officers, managers,
employees and representatives.
(d) Notice of Material Events. Borrower will promptly notify
-------------------------
USB: (1) of any material adverse change in Borrower's financial condition
or Borrower's Consolidated financial condition, (2) of the occurrence of
any Default, (3) of the acceleration of the maturity of any Debt owed by
Borrower or of any default by Borrower under any indenture, mortgage,
agreement, contract or other instrument to which any of them is a party or
by which any of them or any of their properties is bound, if such
acceleration or default might reasonably be expected to have a material
adverse effect upon Borrower's Consolidated financial condition, (4) of any
uninsured claim of $100,000 or more asserted against Borrower or its
properties, (5) of the occurrence of any Termination Event, (6) of the
filing
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<PAGE>
of any suit or proceeding against Borrower in which an adverse decision
could have a material adverse effect upon Borrower's financial condition,
business or operations (or could result in a judgment not covered by
insurance of $100,000 or more against Borrower), (7) of the merger or
consolidation of Borrower or any of its Affiliates with any other business
entity not previously affiliated with Borrower, and (8) of the sale,
transfer, lease, exchange or disposal by Borrower of any material assets or
properties or any assets or properties with a value in excess of $200,000,
except sales of already-severed hydrocarbons and other products in the
ordinary course of Borrower's business. Upon the occurrence of any of the
foregoing, Borrower will take all necessary or appropriate steps to remedy
promptly any such material adverse change, Default, or default, to protect
against any such adverse claim, to defend any such suit or proceeding, and
to resolve all controversies on account of any of the foregoing. Borrower
will also notify USB in writing at least twenty Business Days prior to the
date that Borrower changes its name or the location of its chief executive
office or principal place of business or the place where it keeps its books
and records concerning the Collateral, furnishing with such notice any
necessary financing statement amendments or requesting USB and its counsel
to prepare the same.
(e) Maintenance of Existence and Qualifications. Borrower will
-------------------------------------------
maintain and preserve its existence and its rights and franchises in full
force and effect and will qualify to do business in all states or
jurisdictions where required by applicable law, except where the failure so
to qualify will not have any material adverse effect on Borrower.
(f) Maintenance of Properties. Borrower will in all material
-------------------------
respects maintain, preserve, protect and keep all property used or useful
in the conduct of its business in accordance with the standards of a
reasonable and prudent operator.
(g) Payment of Trade Debt, Taxes, etc. Each Obligated Person
---------------------------------
will (1) timely file all required tax returns; (2) timely pay all taxes,
assessments, and other governmental charges or levies imposed upon it or
upon its income, profits or property; (3) pay all Debt owed by it on
ordinary trade terms to vendors, suppliers and other Persons providing
goods and services used by it in the ordinary course of its business; and
(4) maintain appropriate accruals and reserves for all of the foregoing
Debt in accordance with its present system of accounting. Each Obligated
Person will pay and discharge in all material respects, when due, all other
Debt, taxes or assessments now or hereafter owed by it. Each Obligated
Person may, however, delay paying or discharging any such Debt so long as
it is in good faith contesting the validity thereof by appropriate
proceedings and has set aside on its books adequate reserves therefor.
(h) Insurance. Borrower will maintain with financially sound
---------
and
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<PAGE>
reputable insurance companies, insurance with respect to its business,
operations and properties in at least such amounts and against at least
such risks as are usually insured against in the same general area by
companies of established repute engaged in the same or a similar business.
(i) Payment of Expenses. Borrower will promptly (and in any
-------------------
event within 30 days after any invoice or other statement or notice) pay
all reasonable costs and expenses incurred by or on behalf of USB
(including attorneys' fees) in connection with: (1) the preparation,
execution and delivery of the Loan Documents (including without limitation
any and all future amendments or supplements thereto or restatements
thereof), and any and all consents, waivers or other documents or
instruments relating thereto, (2) the filing, recording, refiling and re-
recording of any Security Documents and any other documents or instruments
or further assurances required to be filed or recorded or refiled or re-
recorded by the terms of any Loan Document, (3) the examination of
Borrower's title to the Collateral, and (4) the enforcement, after the
occurrence of a Default or an Event of Default, of the Loan Documents.
(j) Performance on Borrower's Behalf. If any Obligated Person
--------------------------------
fails to pay any taxes, insurance premiums or other amounts it is required
to pay under any Loan Document, USB may pay the same. Borrower shall
immediately reimburse USB for any such payments and each amount paid shall
constitute a part of the Obligations, shall be secured by the Security
Documents and shall bear interest at the Late Payment Rate, from the date
such amount is paid by USB until the date such amount is repaid to USB.
(k) Compliance with Agreements and Law. Borrower will perform
----------------------------------
all material obligations it is required to perform under the terms of each
indenture, mortgage, deed of trust, security agreement, lease, franchise,
agreement, contract or other instrument or obligation to which it is a
party or by which it or any of its properties is bound in such a way that
they result in no material adverse effect upon the Borrowing Base
Properties or Borrower's ability to perform its obligations under this
Agreement. Borrower will in all material respects conduct its business and
affairs in compliance with all laws, regulations, and orders applicable
thereto (including those relating to pollution and other environmental
matters).
(l) Certifications of Compliance. Each Obligated Person will
----------------------------
furnish to USB at such Obligated Person's or Borrower's expense all
certifications which USB from time to time reasonably requests, as to the
accuracy and validity of or compliance with all representations, warranties
and covenants made by any Obligated Person in the Loan Documents, the
satisfaction of all conditions contained therein, and all other matters
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<PAGE>
pertaining thereto.
(m) Additional Security Documents. Promptly after a request
-----------------------------
therefor by USB at any time and from time to time, Borrower will execute
and deliver to USB such additional Security Documents and/or amendments to
existing Security Documents as USB may deem necessary or appropriate in
order to grant to USB a perfected lien on and security interest in any or
all oil and/or gas interests owned by Borrower.
Section 6.2. Negative Covenants. Borrower warrants, covenants
------------------
and agrees that until the full and final payment of the Obligations and the
termination of this Agreement, unless USB has previously agreed otherwise
in writing:
(a) Financial Covenants. (1) Borrower will not permit its
-------------------
Working Capital to be less than $0.00 as of the end of any Fiscal Quarter
after the date hereof. (2) Borrower will not permit its Tangible Net Worth,
as of the end of any Fiscal Quarter ending on or after December 31, 1999,
to be less than: (A) $20,000,000, plus (B) 50 percent of Borrower's
Cumulative Net Income for all Fiscal Quarters ending after the date hereof,
plus (C) 50 percent of any and all Equity Proceeds/Capital Contributions
received by Borrower after the date hereof. (3) Borrower will not permit
its Fixed Charge Coverage Ratio to be less than 1.0:1.0 as of the end of
any Fiscal Quarter ending on or after December 31, 1999.
(b) Limitation on Liens. Borrower will not create, assume or
-------------------
permit texist any mortgage, deed of trust, pledge, encumbrance, lien or
charge of any kind (including any security interest in or vendor's lien on
property purchased under conditional sales or other title retention
agreements and including any lease intended as security or in the nature of
a title retention agreement) upon any of Borrower's properties or assets,
whether now owned or hereafter acquired except:
(1) Liens at any time existing in favor of USB;
(2) statutory Liens for taxes, statutory or contractual
mechanics' and materialmen's Liens incurred in the ordinary course of
business, and other similar Liens incurred in the ordinary course of
business, provided such Liens secure only Debt which is not delinquent or
which is being contested as provided in Section 6.1(g) above; and
(3) purchase-money security interests granted by Borrower
on office equipment, vehicles and other personal property acquired by
Borrower in the ordinary course of business; provided that the aggregate
amount secured by all such security interests outstanding at any one time
shall not exceed $25,000.
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<PAGE>
(c) Additional Debt. Borrower will not create, incur, assume or
---------------
permit to exist Debt except: (1) the Loan, (2) trade debt owed to
suppliers, pumpers, mechanics, materialmen and others furnishing goods or
services to Borrower in the ordinary course of such Borrower's business,
(3) existing Debt heretofore disclosed to USB in writing, excluding any
extensions or renewals thereof and any draws of additional amounts
thereunder, (4) Hedging Obligations of Borrower, (5) Subordinated Debt, and
(6) Debt of the types permitted to be secured by the security interests
described in Section 6.2(b)(3) above; provided that the amount of such Debt
does not exceed the limits set forth in said Section.
(d) Limitation on Sales of Property. Borrower will not sell,
-------------------------------
transfer, lease, exchange, alienate or dispose of any of the assets of
Borrower except as follows (and the following exceptions shall be subject
to any limitations contained in the Security Documents):
(1) equipment which is worthless or obsolete, which is
replaced by equipment of equal suitability and value or which is salvaged from
wells which have been plugged and abandoned by or on behalf of Borrower;
(2) inventory (including oil and gas sold as produced)
which is sold in the ordinary course of business;
(3) personal property located on oil and gas properties
operated by third parties, the sale of which personal property cannot be
prevented by Borrower; and
(4) any sale or sales of one or more oil and/or gas
properties which are not subject to the Security Documents and which have an
aggregate value of less than $1,000,000 during any Fiscal Year.
(e) Limitation on Credit Extensions. Borrower will not extend
-------------------------------
credit, make advances or make loans other than: (1) normal and prudent
extensions of credit to customers buying goods and services in the ordinary
course of business, which extensions shall not be for longer periods than
those extended by similar businesses operated in a normal and prudent
manner, and (2) with the prior approval of the Board of Directors of
Borrower, and upon not less than five Business Days' prior notice to USB
stating the amount and maturity date of each such loan, loans to senior
officers of Borrower for the purpose of permitting such officers to
exercise options or warrants on Borrower's stock; provided that the
aggregate amount of all such loans outstanding at any time shall not exceed
$1,000,000 and in no even shall any such loan (including all renewals,
extensions and refinancings thereof) remain outstanding for a period in
excess of one year.
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<PAGE>
(f) Fiscal Year. Borrower will not change its fiscal year.
-----------
(g) Amendment of Contracts. Borrower will not amend or permit
----------------------
any amendment to any contract which could reasonably be foreseen to
release, qualify, limit, make contingent or otherwise detrimentally affect,
in any material way, the rights and benefits of USB under or acquired
pursuant to any of the Security Documents.
(h) Limitation on Guaranties. Borrower will not assume,
------------------------
guaranty, endorse or be or become secondarily liable for any Debt which is
the primary obligation of any other Person.
(i) Distributions. Borrower will not make any Distributions,
-------------
except that Borrower may repurchase shares of the outstanding capital stock
of Borrower in an amount aggregating not more than $1,000,000 for all times
after the date hereof.
(j) ERISA Plans. Borrower will not incur any obligation to
-----------
contribute to any "multiemployer plan" as defined in Section 4001 of ERISA.
(k) Reorganizations; Combinations. Borrower will not change
-----------------------------
its name or the nature of its business, reorganize, liquidate, dissolve or
enter into any merger, joint venture, partnership or other combination.
ARTICLE VII
Events of Default and Remedies
------------------------------
Section 7.1. Events of Default. Any of the following events
-----------------
constitutes an Event of Default under this Agreement:
(a) Borrower fails to pay any Obligation when due and payable,
whether at a date for the payment of a fixed installment or contingent or
other payment to USB or as a result of acceleration or otherwise, and such
failure is not remedied within the applicable Grace Period; or
(b) Any "default" or "event of default" occurs under any Loan
Document which defines either term, and the same is not remedied within the
applicable period of grace (if any) provided in such Loan Document; or
(c) Borrower fails (other than as referred to in subsections (a)
and (b)
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<PAGE>
above) to duly observe, perform or comply with any covenant, agreement,
condition or provision (other than those referred to in subsections (a) and
(b) above) of any Loan Document, and such failure is not remedied within
the applicable Grace Period; or
(d) Any representation or warranty previously, presently or
hereafter made in writing by or on behalf of Borrower in connection with
any Loan Document shall prove to have been false or incorrect in any
material respect on any date on or as of which made, and the represented or
warranted state of affairs does not become true within the applicable Grace
Period; or
(e) Either: (1) any "accumulated funding deficiency" (as defined
in Section 412(a) of the Internal Revenue Code of 1986, as amended) in
excess of $25,000 exists with respect to any ERISA Plan, whether or not
waived by the Secretary of the Treasury or his delegate, or (2) any
Termination Event occurs with respect to any ERISA Plan and the then
current value of such ERISA Plan's benefits guaranteed under Title IV of
ERISA exceeds the then current value of such ERISA Plan's assets available
for the payment of such benefits by more than $25,000 (or in the case of a
Termination Event involving the withdrawal of a substantial employer, the
withdrawing employer's proportionate share of such excess exceeds such
amount); or
(f) Borrower:
(1) suffers the entry against it of a judgment, decree or
order for relief by a court of competent jurisdiction
in an involuntary proceeding commenced under any
applicable bankruptcy, insolvency or other similar law
of any jurisdiction now or hereafter in effect,
including the federal Bankruptcy Code, as from time to
time amended, or has any such proceeding commenced
against it which remains undismissed for a period of 90
days; or
(2) suffers the appointment of a receiver, liquidator,
assignee, custodian, trustee, sequestrator or similar
official for a substantial part of its assets or for
any part of the Borrowing Base Properties in a
proceeding brought against or initiated by it, and such
appointment is neither made ineffective nor discharged
within 30 days after the making thereof, or such
appointment is consented to, requested by, or
acquiesced to by it; or
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<PAGE>
(3) commences a voluntary case under any applicable
bankruptcy, insolvency or similar law now or hereafter
in effect, including the federal Bankruptcy Code, as
from time to time amended; or applies for or consents
to the entry of an order for relief in an involuntary
case under any such law or to the appointment of or
taking possession by a receiver, liquidator, assignee,
custodian, trustee, sequestrator or other similar
official of any substantial part of its assets or any
part of the Borrowing Base Properties; or makes a
general assignment for the benefit of creditors; or
fails generally to pay (or admits in writing its
inability to pay) its debts as such debts become due;
or takes corporate or other action in furtherance of
any of the foregoing; or
(4) suffers the entry against it of a final judgment for
the payment of money in excess of $200,000 (not covered
by insurance), unless the same is discharged within 30
days after the date of entry thereof or an appeal or
appropriate proceeding for review thereof is taken
within such period and a stay of execution pending such
appeal is obtained; or
(5) suffers the entry of an order issued by any court or
tribunal taking, seizing or apprehending all or any
substantial part of its property or any part of the
Borrowing Base Properties having a present worth,
determined using a 10-percent discount factor, of
$200,000 or more and bringing the same into the custody
of such Court or tribunal, and such order is not stayed
or released within thirty days after the entry thereof;
or
(g) Borrower fails to comply with the provisions of Section 2.3
above within the time periods for compliance specified in Section 2.3
above.
Upon the occurrence of an Event of Default described in subsection (f)(1),
(f)(2) or (f)(3) of this section, all of the Obligations shall thereupon be
immediately due and payable, without presentment, demand, protest, notice
of protest, declaration or notice of acceleration or intention to
accelerate, or any other notice or declaration of any kind, all of which
are hereby expressly waived by Borrower. During the continuance of any
other Event of Default, USB may declare any or all of the Obligations
immediately due and payable, and all such Obligations shall thereupon be
immediately due and payable. The term "Grace Period," as used herein with
respect to an Event of Default for which a Grace Period is expressly
-36-
<PAGE>
provided, means the period beginning on the date of the related Default and
ending the number of days provided below after written notice of such
Default (a "Default Notice") is given by USB to Borrower: (x) in the case
of a Default described in Section 7.1(a) above involving a principal
payment, one Business Day; (y) in the case of any Default described in
Section 7.1(a) above not involving a principal payment, five Business Days;
and (z) in the case of any other Default for which a Grace Period is
expressly provided, 30 days.
Section 7.2. Remedies. If any Default or Event of Default
--------
shall occur and be continuing, the obligation of USB to make Advances under
this Agreement shall terminate immediately. If any Event of Default shall
occur, USB may protect and enforce its rights under the Loan Documents by
any appropriate proceedings, including proceedings for specific performance
of any covenant or agreement contained in any Loan Document, and USB may
enforce the payment of any Obligations due or enforce any other legal or
equitable right. All rights, remedies and powers conferred upon USB under
the Loan Documents shall be deemed cumulative and not exclusive of any
other rights, remedies or powers available under the Loan Documents or at
law or in equity.
Section 7.3. Indemnity. Borrower hereby agrees to indemnify,
--------
defend and hold harmless USB and its agents, affiliates, officers,
directors, and employees from and against any and all claims, losses,
demands, actions, causes of action, and liabilities whatsoever (including
without limitation reasonable attorney's fees and expenses, and costs and
expenses reasonably incurred in investigating, preparing or defending
against any litigation or claim, action, suit, proceeding or demand of any
kind or character) arising out of or resulting from: (a) the Loan Documents
(including without limitation the enforcement thereof), except to the
extent such claims, losses, and liabilities are proximately caused by a
USB's gross negligence or willful misconduct, (b) the contamination of any
of the Borrowing Base Properties by any hazardous substance or
environmental pollutant, or (c) the violation of any federal, state or
local environmental statute, rule, regulation or ordinance, including
without limitation violation of the Comprehensive Environmental Response,
Compensation and Liability Act, as amended from time to time, or of the
Resource Conservation and Recovery Act, as amended from time to time.
ARTICLE VIII
Miscellaneous
-------------
Section 8.1. Waiver and Amendment. No failure or delay by USB
--------------------
in exercising any right, power or remedy which it may have under any of the
Loan Documents shall operate as a waiver thereof or of any other right,
power or remedy, nor shall any single
-37-
<PAGE>
or partial exercise by USB of any such right, power or remedy preclude any
other or further exercise thereof or of any other right, power or remedy.
No waiver of any provision of any Loan Document and no consent to any
departure therefrom shall ever be effective unless it is in writing and
signed by USB, and then such waiver or consent shall be effective only in
the specific instances and for the purposes for which given and to the
extent specified in such writing. No notice to or demand on any Obligated
Person shall in any case of itself entitle any Obligated Person to any
other or further notice or demand in similar or other circumstances. This
Agreement and the other Loan Documents set forth the entire understanding
between the parties hereto, and no modification or amendment of or
supplement to this Agreement or the other Loan Documents shall be valid or
effective unless the same is in writing and signed by the party against
whom it is sought to be enforced.
Section 8.2. Survival of Agreements; Cumulative Nature. All of
-----------------------------------------
the Obligated Persons' various representations, warranties, covenants and
agreements in the Loan Documents shall survive the execution and delivery
of this Agreement and the other Loan Documents and the performance hereof
and thereof, including without limitation the making or granting of the
Loan and the delivery of the Note and the other Loan Documents, and shall
further survive until all of the Obligations are paid in full to USB and
all of USB's obligations to Borrower are terminated. All statements and
agreements contained in any certificate or other instrument delivered to
USB under any Loan Document shall be deemed representations and warranties
by Borrower to USB and/or agreements and covenants of Borrower under this
Agreement. The representations, warranties, and covenants made by the
Obligated Persons in the Loan Documents, and the rights, powers, and
privileges granted to USB in the Loan Documents, are cumulative, and no
Loan Document shall be construed in the context of another to diminish,
nullify, or otherwise reduce the benefit to USB of any such representation,
warranty, covenant, right, power or privilege. In particular and without
limitation, no exception set out in this Agreement to any representation,
warranty or covenant herein contained shall apply to any similar
representation, warranty or covenant contained in any other Loan Document,
and each such similar representation, warranty or covenant shall be subject
only to those exceptions which are expressly made applicable to it by the
terms of the various Loan Documents.
Section 8.3. Notices. All notices, requests, consents, demands
-------
and other communications required or permitted under any Loan Document
shall be in writing and, unless otherwise specifically provided in such
Loan Document, shall be deemed sufficiently given or furnished if delivered
by personal delivery, by expedited delivery service with proof of delivery,
or by registered or certified United States mail, return receipt requested,
postage prepaid, at the addresses specified below (unless changed by
similar notice in writing given by the particular Person whose address is
to be changed). Any such notice or
-38-
<PAGE>
communication shall be deemed to have been given upon receipt:
Borrower's address: 1050 Seventeenth Street
Suite 700
Denver, Colorado 80202
Attention: Glen C. Warren, Jr.
USB's address: 918 Seventeenth Street
Denver, Colorado 80202
Attention: Charles S. Searle
Section 8.4. Joint and Several Liability; Parties in
---------------------------------------
Interest. All obligations of the Obligated Persons hereunder shall be the
---------
joint and several, and not merely joint, obligations of each Obligated
Person. All grants, covenants and agreements contained in the Loan
Documents shall bind and inure to the benefit of the parties thereto and
their respective successors and assigns; provided, however, that no
Obligated Person may assign or transfer any of its rights or delegate any
of its duties or obligations under any Loan Document without the prior
consent of USB.
Section 8.5. Governing Law. The Loan Documents
-------------
shall be deemed contracts and instruments made under the laws of the State
of Colorado and shall be construed and enforced in accordance with and
governed by the laws of the State of Colorado and the laws of the United
States of America, except (a) to the extent that the law of another
jurisdiction is expressly elected in a Loan Document, and (b) with respect
to specific Liens, or the perfection thereof, evidenced by Security
Documents covering real or personal property which by the laws applicable
thereto are required to be construed under the laws of another
jurisdiction. Borrower hereby irrevocably submits itself to the non-
exclusive jurisdiction of the state and federal courts of the State of
Colorado.
Section 8.6. Limitation on Interest. USB and the
----------------------
Obligated Persons intend to contract in strict compliance with applicable
usury law from time to time in effect. In furtherance thereof such persons
stipulate and agree that none of the terms and provisions contained in the
Loan Documents shall ever be construed to create a contract to pay, for the
use, forbearance or detention of money, interest in excess of the maximum
amount of interest permitted to be charged by applicable law from time to
time in effect. Neither any Obligated Person nor any present or future
guarantors, endorsers, or other Persons hereafter becoming liable for
payment of any Obligation shall ever be liable for unearned interest
thereon or shall ever be required to pay interest thereon in excess of the
maximum amount that may be lawfully charged under applicable law from time
to time in effect, and the
-39-
<PAGE>
provisions of this section shall control over all other provisions of the
Loan Documents which may be in conflict or apparent conflict herewith. USB
expressly disavows any intention to charge or collect excessive unearned
interest or finance charges in the event the maturity of any Obligation is
accelerated. If (a) the maturity of any Obligation is accelerated for any
reason, (b) any Obligation is prepaid and as a result any amounts held to
constitute interest are determined to be in excess of the legal maximum, or
(c) USB or any other holder of any or all of the Obligations shall
otherwise collect moneys which are determined to constitute interest which
would otherwise increase the interest on any or all of the Obligations to
an amount in excess of that permitted to be charged by applicable law then
in effect, then all such sums determined to constitute interest in excess
of such legal limit shall, without penalty, be promptly applied to reduce
the then outstanding principal of the related Obligations or, at USB's
option, promptly returned to Borrower or the other payor thereof upon such
determination.
Section 8.7. Severability. If any term or provision of any Loan
------------
Document shall be determined to be illegal or unenforceable all other terms
and provisions of the Loan Documents shall nevertheless remain effective
and shall be enforced to the fullest extent permitted by applicable law.
Section 8.8. Counterparts. This Agreement may be separately
------------
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed shall be deemed to
constitute one and the same Agreement.
Section 8.9. Conflicts. To the extent of any irreconcilable
---------
conflicts between the provisions of this Agreement and the provisions of
any of the Loan Documents, the provisions of this Agreement shall prevail.
Section 8.10. Entire Agreement. This Agreement, the Note, the
----------------
Security Documents and the other Loan Documents from time to time executed
in connection herewith state the entire agreement between the parties with
respect to the subject matter hereof.
Section 8.11. Arbitration. Subject to the provisions of the next
-----------
paragraph below, USB and Borrower agree to submit to binding arbitration
any and all claims, disputes and controversies between or among them (and
their respective employees, officers, directors, attorneys and other
agents) relating to the Loan and its negotiation, execution,
collateralization, administration, repayment, modification, extension or
collection. Such arbitration shall proceed in Denver, Colorado, shall be
governed by Colorado law (including without limitation the provisions of
CRS 13-21-102(5)) and shall be conducted in
-40-
<PAGE>
accordance with the Commercial Arbitration Rules of the American
Arbitration Association (the "AAA"). Any award entered in an arbitration,
whether on motions or at a hearing, with or without testimony from
witnesses, shall be made by a written opinion stating the reasons for the
award made. The decision of any arbitration pursuant to this Agreement
shall be made based on Colorado law without reference to any choice of law
rules. Judgment on any award hereunder may be entered in any court having
jurisdiction.
Nothing in the preceding paragraph, nor the exercise of any right
to arbitrate thereunder, shall limit the right of any party hereto: (a) to
foreclose against any real or personal property collateral by the exercise
of the power of sale under a deed of trust, mortgage, or other security
agreement or instrument or applicable law; (b) to exercise self-help
remedies such as setoff or repossession; or (c) to obtain provisional or
ancillary remedies such as replevin, injunctive relief, attachment or
appointment of a receiver from a court having jurisdiction, before, during
or after the pendency of any arbitration proceeding. The institution and
maintenance of any action for such judicial relief, or pursuit of
provisional or ancillary remedies, or exercise of self-help remedies shall
not constitute a waiver of the right or obligation of any party to submit
any claim or dispute to arbitration, including those claims or disputes
arising from exercise of any judicial relief, or pursuit of provisional or
ancillary remedies or exercise of self-help remedies.
Arbitration hereunder shall be before a three-person panel of
neutral arbitrators, consisting of one person from each of the following
categories: (1) an attorney who has practiced in the area of commercial law
for at least 10 years or a retired judge at the Colorado or United States
District Court or an appellate court level: (2) a person with at least 10
years experience in commercial lending: and (3) a person with at least 10
years experience in the petroleum industry. The AAA shall submit a list of
persons meeting the criteria outlined above for each category of
arbitrator, and the parties shall select one person from each category in
the manner established by the AAA.
Section 8.12. Release. Upon full payment and satisfaction of
-------
the Loan and all other amounts due in connection therewith as provided
herein, the parties shall thereupon automatically each be fully, finally,
and forever released and discharged from any further claim, liability or
obligation in connection with the Loan, and upon such release USB agrees to
promptly release all applicable Security Documents.
Section 8.13. Special Release Procedure. Notwithstanding the
-------------------------
provisions of Section 6.2(d) above or any provisions of the Security
Documents to the contrary, Borrower shall have the right to enter into
acreage-swap agreements as to Zero-Value Properties, so long as such
acreage-swap agreements provide for Borrower to receive good and defensible
-41-
<PAGE>
title to at least 0.75 net mineral acre in return for each net mineral acre
of Zero-Value Properties swapped by Borrower. Borrower will give USB at
least 10 days' notice prior to the closing of any such acreage-swap
agreement, and Borrower and USB will make mutually satisfactory
arrangements by which the Zero-Value Properties are released from the
Security Documents and the properties received by Borrower are subjected to
the Security Documents.
IN WITNESS WHEREOF, this Agreement is executed as of the date
first written above.
PENNACO ENERGY, INC.
By: __________________________
Glen C. Warren, Jr.,
Executive Vice President
U.S. BANK NATIONAL ASSOCIATION
By: __________________________
Charles S. Searle,
Senior Vice President
-42-
<PAGE>
EXHIBIT A
---------
PROMISSORY NOTE
---------------
$25,000,000 July 23, 1999
Denver, Colorado
FOR VALUE RECEIVED, PENNACO ENERGY, INC., a Nevada corporation
("Borrower"), promises to pay to the order of U.S. BANK NATIONAL ASSOCIATION
("Payee"), the principal sum of $25,000,000 (or so much thereof as may be
borrowed hereunder), together with interest on the outstanding unpaid balance of
such principal amount at the rates provided below.
This Note is issued pursuant to, and is subject to the terms and
provisions of, the Credit Agreement dated as of July 23, 1999, between Borrower
and Payee, as now in effect or as the same may hereafter be amended, restated,
extended, renewed or otherwise modified (the "Credit Agreement"). Except as
otherwise defined herein, terms defined in the Credit Agreement shall have the
same meanings when used herein.
The outstanding principal amount of this Note shall be due and payable
as provided in the Credit Agreement. Any then-unpaid principal balance of this
Note shall be due and payable on the Maturity Date (as defined in the Credit
Agreement) (unless due and payable sooner pursuant to the terms of the Credit
Agreement) and shall bear interest: (1) as to the Reference Rate Portion, at the
fluctuating rate, adjustable the day of any change, equal to the annual rate
publicly announced or published from time to time by Payee as its reference
rate, which may not be the lowest interest rate charged by Payee (the "Reference
Rate"); (2) as to each LIBOR Tranche, at LIBOR (Adjusted) for such LIBOR Tranche
plus the LIBOR Spread; and (3) as to each Fixed Rate Portion, at the applicable
fixed rate for such Fixed Rate Portion, as mutually agreed upon between Borrower
and Payee, plus the Fixed Rate Spread.
Interest shall accrue daily on the unpaid principal balance of this
Note, shall be due and payable on the first day of each calendar month,
commencing September 1, 1999 (or, for any LIBOR Tranche or Fixed Rate Portion,
at such times as may be provided in the Credit Agreement), and at the maturity
of this Note, and shall be calculated on the basis of a 360-day year, and the
actual number of days elapsed.
All payments of principal and interest hereon shall be made at Payee's
offices at 918 Seventeenth Street, Denver, Colorado 80202 (or at such other
place as Payee shall have designated to Borrower in writing) on the date due in
immediately available funds and without
-43-
<PAGE>
set-off or counterclaim or deduction of any kind. All payments received
hereunder shall b e applied first to costs of collection, second to accrued
interest as of the date of payment and third to the outstanding principal
balance of this Note, in accordance with the terms of the Credit Agreement.
Notwithstanding anything to the contrary contained in this Note, from
and after the expiration of any applicable period of grace provided for in the
Credit Agreement, overdue principal, and (to the extent permitted under
applicable law) overdue interest, whether caused by acceleration of maturity or
otherwise, shall bear interest at a fluctuating rate, adjustable the day of any
change in such rate, equal to five percentage points above the Reference Rate,
until paid, and shall be due and payable monthly or, at the option of the holder
hereof, on demand.
This Note is secured by, and the holder of this Note is entitled to
the benefits of, the documents described in the Credit Agreement (the "Security
Documents"). Reference is made to the Security Documents for a description of
the property covered thereby and the rights, remedies and obligations of the
holder hereof in respect thereto.
Subject to the expiration of any applicable period of grace provided
for in the Credit Agreement, in the event of: (a) any default in any payment of
the principal of or interest on this Note when due and payable, or (b) any other
Event of Default (as defined in the Credit Agreement), then the whole principal
sum of this Note plus accrued interest and all other obligations of Borrower to
holder, direct or indirect, absolute or contingent, now existing or hereafter
arising, shall, at the option of Payee, become immediately due and payable, and
any or all of the rights and remedies provided herein and in the Credit
Agreement and the Security Documents, as they may be amended, modified or
supplemented from time to time may be exercised by Payee.
If Borrower fails to pay any amount due under this Note and Payee has
to take any action to collect the amount due or to exercise its rights under the
Security Documents, including without limitation retaining attorneys for
collection of this Note, or if any suit or proceeding is brought for the
recovery of all or any part of or for protection of the indebtedness or to
foreclose the Security Documents or to enforce Payee's rights under the Security
Documents, then Borrower agrees to pay on demand all reasonable costs and
expenses of any such action to collect, suit or proceeding, or any appeal of any
such suit or proceeding, incurred by Payee, including without limitation the
reasonable fees and disbursements of Payee's attorneys and their staff.
Borrower waives presentment, notice of dishonor and protest, and
assents to any extension of time with respect to any payment due under this
Note, to any substitution or release
A-44
<PAGE>
of collateral and to the addition or release of any party, except as provided in
the Credit Agreement. No waiver of any payment or other right under this Note
shall operate as a waiver of any other payment or right.
If any provision in this Note shall be held invalid, illegal or
unenforceable in any jurisdiction, the validity, legality or enforceability of
any defective provisions shall not be in any way affected or impaired in any
other jurisdiction.
No delay or failure of the holder of this Note in the exercise of any
right or remedy provided for hereunder shall be deemed a waiver of such right by
the holder hereof, and no exercise of any right or remedy shall be deemed a
waiver of any other right or remedy that the holder may have.
All notices given hereunder shall be given as provided in the Credit
Agreement.
At the option of the holder hereof, an action may be brought to
enforce this Note in the District Court in and for the City and County of
Denver, State of Colorado, in the United States District Court for the District
of Colorado or in any other court in which venue and jurisdiction are proper.
Borrower and all signers or endorsers hereof consent to venue and jurisdiction
in the District Court in and for the City and County of Denver, State of
Colorado and in the United States District Court for the District of Colorado
and to service of process under Sections 13-1-124(1)(a) and 13-1-125, Colorado
Revised Statutes (1992), as amended, in any action commenced to enforce this
Note.
This Note is to be governed by and construed according to the laws of
the State of Colorado.
PENNACO ENERGY, INC.
By: __________________________
Glen C. Warren, Jr.,
Executive Vice President
A-45
<PAGE>
EXHIBIT B
---------
ADVANCE REQUEST
---------------
_______, ____
U.S. Bank National Association
918 Seventeenth Street
Denver, Colorado 80202
Attention: Charles S. Searle
Gentlemen:
1. This Advance Request is delivered to you pursuant to Section 2.1
of the Credit Agreement dated as of July 23, 1999 (the "Credit Agreement"),
between Pennaco Energy, Inc. and U.S. Bank National Association. Except as
otherwise defined herein, terms defined in the Credit Agreement shall have the
same meanings when used herein.
2. Borrower hereby requests an Advance as follows:
(a) Proposed Date of Advance:
(b) Amount of Advance:
3. Borrower hereby represents and warrants that as of the date
hereof and as of the date of the Advance requested hereunder, all statements
contained in Section 4.2(a), (b) and (c) of the Credit Agreement are and will be
true and correct in all material respects.
4. Borrower agrees that if, at any time prior to the date of the
Advance requested by Borrower hereunder, any representation or warranty of
Borrower contained herein is not true and correct as of such time, Borrower will
immediately so notify USB. Except to the extent of any such notification by
Borrower, the acceptance by Borrower of any Advance requested hereunder shall be
deemed a re-certification by Borrower as of the date of such Advance of the
representations and warranties made by Borrower herein.
PENNACO ENERGY, INC.
By: __________________________
A-46
<PAGE>
_______________________________,
__________ President
B-47
<PAGE>
EXHIBIT C
---------
REQUEST FOR ISSUANCE OF LETTER OF CREDIT
----------------------------------------
________, ____
U.S. Bank National Association
918 Seventeenth Street
Denver, Colorado 80202
Attention: Charles S. Searle
Gentlemen:
1. This Request for Issuance of Letter of Credit is delivered to you
pursuant to Section 2.1 of the Credit Agreement dated as of July 23, 1999 (the
"Credit Agreement"), between Pennaco Energy, Inc. and U.S. Bank National
Association. Except as otherwise defined herein, terms defined in the Credit
Agreement shall have the same meanings when used herein.
2. Borrower hereby requests that USB issue a Letter of Credit as
follows:
(a) Name of Beneficiary:
(b) Proposed Issuance Date:
(c) Expiration Date:
(d) Face Amount:
(e) Payment Instructions (if any):
3. Borrower hereby represents and warrants that as of the date
hereof and as of the date of issuance of the Letter of Credit requested
hereunder, all statements contained in Section 4.2(a), (b) and (c) of the Credit
Agreement are and will be true and correct in all material respects.
4. Borrower agrees that if, at any time prior to the date of
issuance of the Letter of Credit requested by Borrower hereunder, any
representation or warranty of Borrower contained herein is not true and correct
as of such time, Borrower will immediately so notify USB. Except to the extent
of any such notification by Borrower, the acceptance by Borrower of any Letter
of Credit requested hereunder shall be deemed a re-certification by Borrower as
of the date of such Advance of the representations and warranties made by
Borrower herein.
B-48
<PAGE>
PENNACO ENERGY, INC.
By:__________________________
____________________,
__________ President
C-49
<PAGE>
EXHIBIT D
---------
INTEREST RATE ELECTION
----------------------
________, ____
U.S. Bank National Association
918 Seventeenth Street
Denver, Colorado 80202
Attention: Charles S. Searle
Gentlemen:
1. This Interest Rate Election is delivered to you pursuant to
Section 2.2 of the Credit Agreement dated as of July 23, 1999 (the "Credit
Agreement"), between Pennaco Energy, Inc. and U.S. Bank National Association.
Except as otherwise defined herein, terms defined in the Credit Agreement shall
have the same meanings when used herein.
2. Borrower hereby requests a LIBOR Tranche as follows:
(a) Dollar Amount:
(b) First Day of LIBOR Interest Period:
(c) Duration (month(s)):
PENNACO ENERGY, INC.
By: __________________________
____________________,
__________ President
C-50
<PAGE>
PROMISSORY NOTE
---------------
$25,000,000 July 23, 1999
Denver, Colorado
FOR VALUE RECEIVED, PENNACO ENERGY, INC., a Nevada corporation
("Borrower"), promises to pay to the order of U.S. BANK NATIONAL ASSOCIATION
("Payee"), the principal sum of $25,000,000 (or so much thereof as may be
borrowed hereunder), together with interest on the outstanding unpaid balance of
such principal amount at the rates provided below.
This Note is issued pursuant to, and is subject to the terms and
provisions of, the Credit Agreement dated as of July 23, 1999, between Borrower
and Payee, as now in effect or as the same may hereafter be amended, restated,
extended, renewed or otherwise modified (the "Credit Agreement"). Except as
otherwise defined herein, terms defined in the Credit Agreement shall have the
same meanings when used herein.
The outstanding principal amount of this Note shall be due and payable
as provided in the Credit Agreement. Any then-unpaid principal balance of this
Note shall be due and payable on the Maturity Date (as defined in the Credit
Agreement) (unless due and payable sooner pursuant to the terms of the Credit
Agreement) and shall bear interest: (1) as to the Reference Rate Portion, at the
fluctuating rate, adjustable the day of any change, equal to the annual rate
publicly announced or published from time to time by Payee as its reference
rate, which may not be the lowest interest rate charged by Payee (the "Reference
Rate"); (2) as to each LIBOR Tranche, at LIBOR (Adjusted) for such LIBOR Tranche
plus the LIBOR Spread; and (3) as to each Fixed Rate Portion, at the applicable
fixed rate for such Fixed Rate Portion, as mutually agreed upon between Borrower
and Payee, plus the Fixed Rate Spread.
Interest shall accrue daily on the unpaid principal balance of this
Note, shall be due and payable on the first day of each calendar month,
commencing September 1, 1999 (or, for any LIBOR Tranche or Fixed Rate Portion,
at such times as may be provided in the Credit Agreement), and at the maturity
of this Note, and shall be calculated on the basis of a 360-day year, and the
actual number of days elapsed.
All payments of principal and interest hereon shall be made at Payee's
offices at 918 Seventeenth Street, Denver, Colorado 80202 (or at such other
place as Payee shall have designated to Borrower in writing) on the date due in
immediately available funds and without set-off or counterclaim or deduction of
any kind. All payments received hereunder shall be
<PAGE>
applied first to costs of collection, second to accrued interest as of
<PAGE>
the date of payment and third to the outstanding principal balance of this Note,
in accordance with the terms of the Credit Agreement.
Notwithstanding anything to the contrary contained in this Note, from
and after the expiration of any applicable period of grace provided for in the
Credit Agreement, overdue principal, and (to the extent permitted under
applicable law) overdue interest, whether caused by acceleration of maturity or
otherwise, shall bear interest at a fluctuating rate, adjustable the day of any
change in such rate, equal to five percentage points above the Reference Rate,
until paid, and shall be due and payable monthly or, at the option of the holder
hereof, on demand.
This Note is secured by, and the holder of this Note is entitled to
the benefits of, the documents described in the Credit Agreement (the "Security
Documents"). Reference is made to the Security Documents for a description of
the property covered thereby and the rights, remedies and obligations of the
holder hereof in respect thereto.
Subject to the expiration of any applicable period of grace provided
for in the Credit Agreement, in the event of: (a) any default in any payment of
the principal of or interest on this Note when due and payable, or (b) any other
Event of Default (as defined in the Credit Agreement), then the whole principal
sum of this Note plus accrued interest and all other obligations of Borrower to
holder, direct or indirect, absolute or contingent, now existing or hereafter
arising, shall, at the option of Payee, become immediately due and payable, and
any or all of the rights and remedies provided herein and in the Credit
Agreement and the Security Documents, as they may be amended, modified or
supplemented from time to time may be exercised by Payee.
If Borrower fails to pay any amount due under this Note and Payee has
to take any action to collect the amount due or to exercise its rights under the
Security Documents, including without limitation retaining attorneys for
collection of this Note, or if any suit or proceeding is brought for the
recovery of all or any part of or for protection of the indebtedness or to
foreclose the Security Documents or to enforce Payee's rights under the Security
Documents, then Borrower agrees to pay on demand all reasonable costs and
expenses of any such action to collect, suit or proceeding, or any appeal of any
such suit or proceeding, incurred by Payee, including without limitation the
reasonable fees and disbursements of Payee's attorneys and their staff.
Borrower waives presentment, notice of dishonor and protest, and
assents to any extension of time with respect to any payment due under this
Note, to any substitution or release of collateral and to the addition or
release of any party, except as provided in the Credit Agreement. No waiver of
any payment or other right under this Note shall operate as a waiver of
-53-
<PAGE>
any other payment or right.
If any provision in this Note shall be held invalid, illegal or
unenforceable in any jurisdiction, the validity, legality or enforceability of
any defective provisions shall not be in any way affected or impaired in any
other jurisdiction.
No delay or failure of the holder of this Note in the exercise of any
right or remedy provided for hereunder shall be deemed a waiver of such right by
the holder hereof, and no exercise of any right or remedy shall be deemed a
waiver of any other right or remedy that the holder may have.
All notices given hereunder shall be given as provided in the Credit
Agreement.
At the option of the holder hereof, an action may be brought to
enforce this Note in the District Court in and for the City and County of
Denver, State of Colorado, in the United States District Court for the District
of Colorado or in any other court in which venue and jurisdiction are proper.
Borrower and all signers or endorsers hereof consent to venue and jurisdiction
in the District Court in and for the City and County of Denver, State of
Colorado and in the United States District Court for the District of Colorado
and to service of process under Sections 13-1-124(1)(a) and 13-1-125, Colorado
Revised Statutes (1992), as amended, in any action commenced to enforce this
Note.
This Note is to be governed by and construed according to the laws of
the State of Colorado.
PENNACO ENERGY, INC.
By: __________________________
Glen C. Warren, Jr.,
Executive Vice President
-54-
<PAGE>
CERTIFICATE
-----------
The undersigned, ________________, the ____________ Secretary of
PENNACO ENERGY, INC., a Nevada corporation (the "Company"), hereby certifies
that:
1. Attached hereto is a true and complete copy of certain
resolutions duly adopted by the Board of Directors of the Company as in effect
on the date hereof.
2. The copies of the articles of incorporation and bylaws
attached hereto are true and complete copies of said documents (and all
amendments thereto) as in effect on the date hereof.
3. The following person is duly authorized to execute Loan
Documents (as defined in the Credit Agreement dated as of July 23, 1999, between
the Company and U.S. Bank National Association) on behalf of the Company:
Name and Specimen
Capacity Signature
-------- ---------
Glen C. Warren, Jr. ___________________
Executive Vice President Glen C. Warren, Jr.
Executed by the undersigned as of the 23rd day of July, 1999.
_________________________
_______________
<PAGE>
COMPLIANCE CERTIFICATE
----------------------
The undersigned, Glen C. Warren, Jr., hereby certifies as follows in
connection with the execution and delivery of the Credit Agreement dated as of
July 23, 1999 (the "Credit Agreement"), between Pennaco Energy, Inc.
("Borrower") and U.S. Bank National Association (all terms defined in the Credit
Agreement having the same meanings when used herein):
1. He is a duly elected, authorized and acting Executive Vice
President of Borrower.
2. Each of the representations and warranties made by Borrower in
the Credit Agreement and/or any document delivered in connection with the Credit
Agreement is true and correct as of this date.
3. No Default exists as of this date.
4. Borrower has performed and complied with all agreements and
conditions required to be performed or complied with by it under the Credit
Agreement and/or any document delivered in connection with the Credit Agreement
on or prior to this date.
Dated as of July 23, 1999.
______________________________
Glen C. Warren, Jr.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10Q-SB
FOR THE QUARTER ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 4,714,000
<SECURITIES> 0
<RECEIVABLES> 1,628,000
<ALLOWANCES> 0
<INVENTORY> 691,000
<CURRENT-ASSETS> 7,707,000
<PP&E> 16,976,000
<DEPRECIATION> 210,000
<TOTAL-ASSETS> 24,573,000
<CURRENT-LIABILITIES> 3,642,000
<BONDS> 0
0
0
<COMMON> 15,000
<OTHER-SE> 20,308,000
<TOTAL-LIABILITY-AND-EQUITY> 24,573,000
<SALES> 628,000
<TOTAL-REVENUES> 628,000
<CGS> 538,000
<TOTAL-COSTS> 3,219,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 10,079,000
<INCOME-TAX> 3,612,000
<INCOME-CONTINUING> 6,467,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,467,000
<EPS-BASIC> .43
<EPS-DILUTED> .37
</TABLE>
