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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
X THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File No. 0-16741
COMSTOCK RESOURCES, INC.
(Exact name of registrant as specified in its charter)
NEVADA 94-1667468
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5005 LBJ Freeway, Suite 1000, Dallas, Texas
75244 (Address of principal executive offices
including zip code)
(972) 701-2000
(Registrant's telephone number and area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.50 Par Value New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
(Title of class) (Name of exchange on
which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [ X ]
As of March 12, 1998, there were 24,218,874 shares of common stock
outstanding.
As of March 12, 1998, the aggregate market value of the voting stock held
by non-affiliates of the registrant was approximately $227,300,000.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this report is incorporated by
reference from registrant's definitive proxy statement for its 1998 annual
meeting of stockholders (to be filed with the Securities and Exchange Commission
not later than April 30, 1998).
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<PAGE>
COMSTOCK RESOURCES, INC.
FORM 10-K
For the Fiscal Year Ended December 31, 1997
CONTENTS
Page
Part I
Items 1 and 2. Business and Properties....................................... 5
Item 3. Legal Proceedings..............................................18
Item 4. Submission of Matters to a Vote of Security Holders............18
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters...................................19
Item 6. Selected Financial Data........................................20
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................21
Item 8. Financial Statements...........................................25
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................25
Part III
Item 10. Directors and Executive Officers of the Registrant.............26
Item 11. Executive Compensation.........................................26
Item 12. Security Ownership of Certain Beneficial Owners
and Management........................................26
Item 13. Certain Relationships and Related Transactions.................26
Part IV
Item 14. Exhibits and Reports on Form 8-K...............................27
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DEFINITIONS
The following are abbreviations of terms commonly used in the oil and gas
industry and in this report. Natural gas equivalents and crude oil equivalents
are determined using the ratio of six Mcf to one Bbl.
"Bbl" means a barrel of 42 U.S. gallons of oil.
"Bcf" means one billion cubic feet of natural gas.
"Bcfe" means one billion cubic feet of natural gas equivalent.
"Completion" means the installation of permanent equipment for the production of
oil or gas.
"Condensate" means a hydrocarbon mixture that becomes liquid and separates from
natural gas when the gas is produced and is similar to crude oil.
"Development well" means a well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive.
"Dry hole" means a well found to be incapable of producing hydrocarbons in
sufficient quantities such that proceeds from the sale of such production exceed
production expenses and taxes.
"Exploratory well" means a well drilled to find and produce oil or natural gas
reserves not classified as proved, to find a new productive reservoir in a field
previously found to be productive of oil or natural gas in another reservoir or
to extend a known reservoir.
"Gross" when used with respect to acres or wells, production or reserves refers
to the total acres or wells in which the Company or other specified person has a
working interest.
"MBbls" means one thousand barrels of oil.
"Mcf" means one thousand cubic feet of natural gas.
"Mcfe" means thousand cubic feet of natural gas equivalent.
"MMcf" means one million cubic feet of natural gas.
"MMcfe" means one million cubic feet of natural gas equivalent.
"Net" when used with respect to acres or wells, refers to gross acres of wells
multiplied, in each case, by the percentage working interest owned by the
Company.
"Net production" means production that is owned by the Company less royalties
and production due others.
"Oil" means crude oil or condensate.
"Operator" means the individual or company responsible for the exploration,
development, and production of an oil or gas well or lease.
"Present Value of Proved Reserves" means the present value of estimated future
revenues to be generated from the production of proved reserves calculated in
accordance with Commission guidelines, net of estimated production and future
development costs, using prices and costs as of the date of estimation without
future escalation, without giving effect to non-property related expenses such
as general and administrative expenses, debt service, future income tax expense
and depreciation, depletion and amortization, and discounted using an annual
discount rate of 10%.
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"Proved developed reserves" means reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods. Additional
oil and gas expected to be obtained through the application of fluid injection
or other improved recovery techniques for supplementing the natural forces and
mechanisms of primary recovery will be included as "proved developed reserves"
only after testing by a pilot project or after the operation of an installed
program has confirmed through production response that increased recovery will
be achieved.
"Proved reserves" means the estimated quantities of crude oil, natural gas, and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions, i.e., prices and costs as of
the date the estimate is made. Prices include consideration of changes in
existing prices provided only by contractual arrangements, but not on
escalations based upon future conditions.
(i) Reservoirs are considered proved if economic
producibility is supported by either actual production or conclusive
formation tests. The area of a reservoir considered proved includes (A)
that portion delineated by drilling and defined by gas-oil and/or
oil-water contacts, if any; and (B) the immediately adjoining portions
not yet drilled, but which can be reasonably judged as economically
productive on the basis of available geological and engineering data.
In the absence of information on fluid contacts, the lowest known
structural occurrence of hydrocarbons controls the lower proved limit
of the reservoir.
(ii) Reserves which can be produced economically through
application of improved recovery techniques (such as fluid injection)
are included in the "proved" classification when successful testing by
a pilot project, or the operation of an installed program in the
reservoir, provides support for the engineering analysis on which the
project or program was based.
(iii) Estimates of proved reserves do not include the
following: (A) oil that may become available from known reservoirs but
is classified separately as "indicated additional reserves"; (B) crude
oil, natural gas, and natural gas liquids, the recovery of which is
subject to reasonable doubt because of uncertainty as to geology,
reservoir characteristics, or economic factors; (C) crude oil, natural
gas, and natural gas liquids, that may occur in undrilled prospects;
and (D) crude oil, natural gas, and natural gas liquids, that may be
recovered from oil shales, coal, gilsonite and other such resources.
"Proved undeveloped reserves" means reserves that are expected to be recovered
from new wells on undrilled acreage, or from existing wells where a relatively
major expenditure is required for recompletion. Reserves on undrilled acreage
shall be limited to those drilling units offsetting productive units that are
reasonably certain of production when drilled. Proved reserves for other
undrilled units can be claimed only where it can be demonstrated with certainty
that there is continuity of production from the existing productive formation.
Under no circumstances should estimates for proved undeveloped reserves be
attributable to any acreage for which an application of fluid injection or other
improved recovery technique is contemplated, unless such techniques have been
proved effective by actual tests in the area and in the same reservoir.
"Recompletion" means the completion for production of an existing well bore in
another formation from that in which the well has been previously completed.
"Royalty" means an interest in an oil and gas lease that gives the owner of the
interest the right to receive a portion of the production from the leased
acreage (or of the proceeds of the sale thereof), but generally does not require
the owner to pay any portion of the costs of drilling or operating the wells on
the leased acreage. Royalties may be either landowner's royalties, which are
reserved by the owner of the leased acreage at the time the lease is granted, or
overriding royalties, which are usually reserved by an owner of the leasehold in
connection with a transfer to a subsequent owner.
"3-D seismic" means an advanced technology method of detecting accumulations of
hydrocarbons identified by the collection and measurement of the intensity and
timing of sound waves transmitted into the earth as they reflect back to the
surface.
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"Working interest" means an interest in an oil and gas lease that gives the
owner of the interest the right to drill for and produce oil and gas on the
leased acreage and requires the owner to pay a share of the costs of drilling
and production operations. The share of production to which a working interest
owner is entitled will always be smaller than the share of costs that the
working interest owner is required to bear, with the balance of the production
accruing to the owners of royalties. For example, the owner of a 100% working
interest in an lease burdened only by a landowner's royalty of 12.5% would be
required to pay 100% of the costs of a well but would be entitled to retain
87.5% of the production.
"Workover" means operations on a producing well to restore or increase
production.
FORWARD-LOOKING STATEMENTS
All statements other than statements of historical facts included in this
report, including without limitation, statements under "Business and Properties"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" regarding budgeted capital expenditures, increases in oil and
natural gas production, the Company's financial position, oil and natural gas
reserve estimates, business strategy and other plans and objectives for future
operations, are forward-looking statements. Although the Company believes that
the expectations reflected in such forward-looking statements are reasonable, it
can give no assurance that such expectations will prove to have been correct.
There are numerous uncertainties inherent in estimating quantities of proved oil
and natural gas reserves and in projecting future rates of production and timing
of development expenditures, including many factors beyond the control of the
Company. Reserve engineering is a subjective process of estimating underground
accumulations of oil and natural gas that cannot be measured in an exact way,
and the accuracy of any reserve estimate is a function of the quality of
available data and of engineering and geological interpretation and judgment. As
a result, estimates made by different engineers often vary from one another. In
addition, results of drilling, testing and production subsequent to the date of
an estimate may justify revisions of such estimate and such revision, if
significant, would change the schedule of any further production and development
drilling. Accordingly, reserve estimates are generally different from the
quantities of oil and gas that are ultimately recovered. All forward-looking
statements in this report are expressly qualified in their entirety by the
cautionary statements in this paragraph.
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PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
Comstock Resources, Inc. (together with its subsidiaries, the "Company" or
"Comstock") is an independent energy company engaged in the acquisition,
development, production and exploration of oil and natural gas properties. The
Company has an oil and gas reserve base which is entirely focused in the Gulf of
Mexico, Southeast Texas and East Texas/North Louisiana regions. Approximately
48% of the Company's oil and natural gas reserves are located in the Gulf of
Mexico, 29% in Southeast Texas and 23% in East Texas/North Louisiana. As a
result of this focus, Comstock has accumulated significant geologic knowledge,
technical expertise and industry relationships in these regions. Additionally,
the Company has significant operating control over its properties and operates
85% of its Present Value of Proved Reserves as of December 31, 1997. Comstock
has compiled a high quality reserve base that is 66% natural gas and 79% proved
developed on a Bcfe basis. The Company has estimated proved oil and natural gas
reserves of 365.7 Bcfe with an estimated Present Value of Proved Reserves of
$459.6 million as of December 31, 1997.
Comstock has achieved substantial growth in reserves, production, revenues
and EBITDA since 1993. The Company's estimated proved oil and natural gas
reserves have increased at a compounded annual growth rate of 35% from 111.0
Bcfe as of December 31, 1993 to 365.7 Bcfe as of December 31, 1997. Over this
period, average net daily production has increased from 27.9 MMcfe per day in
1993 to 135.7 MMcfe per day in 1997, on a pro forma basis. Similarly, the growth
in the Company's oil and natural gas revenues and EBITDA has been substantial,
increasing from $22.1 million and $13.6 million, respectively, for the year
ended December 31, 1993 to $143.5 million and $116.5 million, respectively, for
the year ended December 31, 1997 on a pro forma basis.
Over the past three years, the Company has been able to lower lifting costs
and general and administrative expenses per unit of production, concurrent with
increases in production, through strict control over operations and costs.
Comstock's lifting costs per Mcfe were $0.65 in 1995, $0.55 in 1996 and $0.51 in
1997 on a pro forma basis. Comstock's general and administrative expenses per
Mcfe were $0.11 in 1995, $0.09 in 1996 and $0.05 in 1997 on a pro forma basis.
The Company operates 342 of the 551 wells in which it has an interest. Operated
wells represent 85% of the Company's Present Value of Proved Reserves which
enables Comstock to effectively control costs and expenses and the timing and
method of exploration and development of its properties. Additionally,
Comstock's geographic focus allows it to manage its asset base with a relatively
small number of employees. As a result of the Company's low cost structure,
Comstock generated a cash margin per Mcfe of $1.17 in 1995, $2.10 in 1996 and
$2.34 in 1997 on a pro forma basis.
Comstock has increased its focus on the exploitation and development of its
properties through development drilling, workovers and recompletions.
Additionally, the Company has a multi-year inventory of exploration prospects.
The Company's spending on exploration and development activities has increased
by 1018% from $2.8 million in 1993 to $31.3 million in 1997. The Company has
budgeted to spend $55.0 million in 1998 for identified development and
exploration projects.
Recent Developments
In December 1997, the Company acquired offshore Gulf of Mexico properties
from Bois d' Arc Resources and certain of its affiliates and working interest
partners (the "Bois d' Arc Acquisition"). The properties are located offshore in
the Louisiana state and federal areas of Main Pass Block 21 and 25, Ship Shoal
Blocks 66, 67, 68 and 69, and South Pelto Block 1. The properties had estimated
proved oil and natural gas reserves of 14.3 MMBbls of oil and 29.4 Bcf of
natural gas, when acquired. The acquisition included 43 wells (29.6 net) and
eight production complexes producing 8,500 net barrels of oil equivalent per day
and seven undrilled prospects which have been delineated by 3-D seismic. The
Company allocated $30.2 million of the purchase price to the undrilled prospects
and $1.0 million to other assets. This acquisition increased the Company's
proved oil and natural gas reserves, daily oil and natural gas production and
EBITDA by 46%, 69% and 78%, respectively, based on pro forma 1997 operating
results.
Comstock recently entered into a joint exploration program with Bois d' Arc
Resources and its principals ("Bois d' Arc") pursuant to which the Company and
Bois d' Arc will jointly explore for prospects in defined parts of the Gulf of
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Mexico region (the "Bois d' Arc Exploration Venture"). Bois d' Arc will be
responsible for identifying potential prospects and the parties will jointly
acquire 3-D seismic data and leasehold to be shared 80% by the Company and 20%
by Bois d' Arc. Comstock and Bois d' Arc have committed to spend at least $5.0
million during the initial 24 months of the program to acquire seismic data.
With respect to any prospects in which the Company elects to participate in
drilling, the Company will acquire a 33% working interest. As part of the Bois
d' Arc Exploration Venture, the Company issued warrants to Bois d' Arc to
acquire up to 1,000,000 shares of the Company's common stock, at an exercise
price of $14.00 per share. The warrants vest in 50,000 share increments based on
the success of the initial test well on a prospect.
Business Strategy
The Company's strategy is to increase cash flow and net asset value by
acquiring oil and natural gas properties at attractive costs and developing its
reserves. In addition, the Company intends to pursue selective exploration
opportunities in its core operating areas. The key elements of the Company's
business strategy are to:
Acquire High Quality Properties at Attractive Costs
The Company has a successful track record of increasing its oil and natural
gas reserves through opportunistic acquisitions and for the three year period
ended December 31, 1997, Comstock has replaced 567% of its oil and natural gas
production through acquisitions. Since 1991, Comstock has added 482.4 Bcfe of
proved oil and natural gas reserves from 18 acquisitions at a total cost of
$411.9 million, or $0.85 per Mcfe. The acquisitions were acquired at 63% of
their Present Value of Proved Reserves in the year the acquisitions were
completed. The Company's three largest acquisitions to date have been the Bois
d' Arc Acquisition for $200.9 million, its acquisition of Black Stone Oil
Company and interests in the Double A Wells field in Southeast Texas in May 1996
for $100.4 million (the "Black Stone Acquisition") and its purchase of
properties from Sonat Inc. in July 1995 for $48.1 million (the "Sonat
Acquisition").
The Company applies strict economic and reserve risk criteria in evaluating
acquisitions and targets properties in its core operating areas with established
production and low operating costs that also have potential opportunities to
increase production and reserves through exploration and exploitation
activities.
Operate Properties
The Company prefers to operate the properties it acquires, allowing it to
exercise greater control over the timing and plans for future development, the
level of drilling and lifting costs, and the marketing of production. The
Company operates 342 of the 551 wells in which it owns an interest which
comprise approximately 85% of its Present Value of Proved Reserves as of
December 31, 1997.
Maintain Low Cost Structure
The Company seeks to increase cash flow by carefully controlling operating
costs and general and administrative expenses. The Company targets acquisitions
that possess, among other characteristics, low per unit operating costs. In
addition, the Company has been able to reduce per unit operating costs by
eliminating unnecessary field and corporate overhead costs and by divesting
properties that have high lifting costs with little future development
potential. Through these efforts, the Company's general and administrative
expenses and average oil and gas operating costs per Mcfe have decreased from
$0.11 and $0.65, respectively, for 1995 to $0.05 and $0.51, respectively, for
1997 on a pro forma basis.
Exploit Existing Reserves
The Company seeks to maximize the value of its properties by increasing
production and recoverable reserves through active workover, recompletion and
exploitation activities. The Company utilizes advanced industry technology,
including 3-D seismic data, improved logging tools and newly developed formation
stimulation techniques. During 1997, the Company spent $22.7 million to drill 40
development wells (19.0 net), of which 33 were successful. In 1998, the Company
has budgeted approximately $35.0 million to drill approximately 41 development
wells (25.0 net).
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Pursue Selective Exploration Opportunities
The Company pursues selective exploration activities to find additional
reserves on its undeveloped acreage. In 1997, the Company spent $6.0 million to
drill nine exploratory wells (3.2 net), five (1.6 net) of which were successful.
The Company plans to increase its spending for exploration activities to
approximately $20.0 million in 1998 to drill 15 wells (5.7 net). The Company's
exploration activities in 1998 are expected to be focused on the Gulf of Mexico
region and based on drilling 3-D seismic generated prospects, including the
prospects acquired in the Bois d' Arc Acquisition and prospects generated under
the Bois d' Arc Exploration Venture.
Primary Operating Areas
The Company's activities are concentrated in three primary operating areas:
Gulf of Mexico, Southeast Texas, and East Texas/North Louisiana. The following
table summarizes the Company's estimated proved oil and gas reserves by field as
of December 31, 1997.
Present Value
Net Oil Net Gas of Proved
Field Area (MBbls) (MMcf) Reserves Percentage
---------- ------- ------ -------- ----------
(In thousands)
Gulf of Mexico
Ship Shoal Blocks 66/67/68/69
and S. Pelto Block 1 12,721 26,423 $171,018
Main Pass Blocks 21/25 2,269 3,172 19,302
West Cameron Blocks 238/248/249 - 6,116 9,818
East White Point 887 6,288 8,640
El Campo 264 3,548 5,188
Mustang Island 77 1,991 2,252
Other 40 1,801 2,337
------ ------ -------
16,258 49,339 218,555 47.6%
------ ------ -------
Southeast Texas
Double A Wells 3,601 77,073 132,036
Redmond Creek 144 1,495 2,799
------ ------ -------
3,745 78,568 134,835 29.3%
------ ------ -------
East Texas/North Louisiana
Beckville 139 24,142 18,616
Logansport 73 18,820 18,257
Lisbon 132 9,920 15,775
Waskom 238 13,330 10,627
Blocker 46 11,319 8,692
Ada 9 5,085 7,976
Longwood 99 6,010 5,931
Sugar Creek 70 3,844 5,318
Box Church 2 9,880 3,449
Hico Knowles 36 1,994 2,481
Simsboro 3 2,669 2,111
Sligo 12 2,126 2,094
Other 33 2,378 3,869
------ ------- -------
892 111,517 105,196 22.9%
------ ------- -------
Other Areas 32 693 970 .2%
------ ------- ------- ----
Total 20,927 240,117 $459,556 100.0%
====== ======= ======== =====
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Gulf of Mexico
The Company's largest operating area includes properties located offshore
Louisiana in state and federal waters of the Gulf of Mexico, and in fields along
the Texas and Louisiana Gulf Coast. The Company owns interests in 119 producing
wells (68.9 net wells) in ten field areas, the largest of which are the Ship
Shoal area (Ship Shoal Blocks 66, 67, 68, 69 and South Pelto Block 1), the Main
Pass area (Main Pass Blocks 21 and 25) and West Cameron Blocks 238, 248 and 249.
The Company has 146.9 Bcfe of oil and natural gas reserves in the Gulf of Mexico
region with a Present Value of Proved Reserves of $218.6 million as of December
31, 1997. The Company operates 46 of the 118 producing wells (69.6 net) that it
owns in this region. The Company acquired a large percentage of its reserves in
the region in the Bois d' Arc Acquisition. December 1997 production rates net to
the Company's interests from the area were 20.5 MMcf of natural gas per day and
5,945 barrels of oil per day. The Company has budgeted $14.9 million for
development drilling in this region in 1998 to drill nine wells (5.6 net) and
anticipates spending all of its 1998 exploration budget of $20.0 million in this
region to drill 15 offshore exploratory wells (5.7 net).
Ship Shoal
The Ship Shoal area is located in Louisiana state waters and in federal
waters, offshore Terrebonne Parish and near the state/federal waters boundary.
The Company became the operator of its properties in this area as a result of
the Bois d' Arc Acquisition and owns a 99% to 100% working interest and operates
these properties except for its properties in Ship Shoal Block 69 where the
Company has a 25% working interest. The Company has estimated reserves of 102.7
Bcfe (28% of total proved reserves) with a Present Value of Proved Reserves of
$171.0 million as of December 31, 1997. The Company owns interests in 30 wells
(20.8 net) in the Ship Shoal area, which had net production rates of 16.8 MMcf
per day and 4,911 barrels of oil per day during December 1997.
In the Ship Shoal area, oil and natural gas are produced from numerous
Miocene sands occurring at depths from 5,800 feet to 13,500 feet, and in water
depths from 10 to 40 feet. These areas are primarily oil prone and contain
reservoirs that are typically less than 200 acres in areal extent and exhibit
very high porosity and permeability. The Company has initiated a development
plan on the properties that targets wells with multiple pay objectives. The
Company plans to drill five development wells (3.5 net) at an estimated cost of
$10.8 million in this area during 1998. The development wells, if successful,
would be connected to one of the six existing production platforms, five of
which are operated by the Company, thereby lowering its development and
operating costs.
The Company has identified six exploration prospects in the Ship Shoal area
that it plans to drill during the next three years. If successful, each of these
prospects can be tied into existing production platforms owned by the Company
which would enable the Company to maintain a low operating cost structure in
this area. Each of these prospects has been identified by the use of 3-D seismic
and the Company is currently utilizing 3-D seismic data to evaluate other
prospects in the Ship Shoal area.
Main Pass
Main Pass Blocks 21 and 25 are located in Louisiana state waters, offshore
of Plaquemines Parish in water with a depth of approximately 12 feet. The
Company's wells in this area produce from multiple Miocene sands at depths that
range from 4,400 feet to 7,700 feet and represent approximately 5% (16.8 Bcfe)
of the Company's proved reserves as of December 31, 1997. The Company is the
operator and owns interests in 14 wells at Main Pass Block 21 and 25 with an
average working interest of 96%. During December 1997, the average production
attributable to the Company's interest was approximately .3 MMcf of natural gas
and 730 barrels of oil per day. The Company has seven proved undeveloped
locations in the Main Pass area and has identified one exploration prospect that
it plans to drill in the future which, if successful, can all be tied into the
existing production platforms owned by the Company.
West Cameron
West Cameron Blocks 238, 248 and 249 are located in federal waters with a
depth of approximately 60 feet and produce from complex multi-pay Pliocene and
Miocene aged sands at depths ranging from 5,000 to 11,500 feet. The Company's
proved reserves in this field were 6.1 Bcfe (2% of total proved reserves) as of
December 31, 1997 and the average net daily production in December 1997 was 1.3
MMcf of natural gas per day and 4 barrels of oil per day. The Company has a
working interest of 45% in the West Cameron properties. The Company plans to
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drill two development wells in 1998 at a budgeted cost of $1.4 million at West
Cameron Block 248 that were identified as the result of a recent 3-D seismic
survey.
Southeast Texas
Approximately 28% (101.0 Bcfe) of the Company's reserves are located in
Southeast Texas where the Company owns interests in 33 producing wells (12.5 net
wells) and operates 25 of these wells. Reserves in Southeast Texas represent
29.3% of the Company's Present Value of Proved Reserves as of December 31, 1997.
December 1997 production rates, net to the Company's interests, from the area
are 31.6 MMcf of natural gas per day and 1,954 barrels of oil per day.
Substantially all of the reserves in this region are in the Double A Wells
field area in Polk County, Texas. The Double A Wells field is the Company's
second largest field area with total estimated proved reserves of 98.7 Bcfe (27%
of total proved reserves) which have a Present Value of Proved Reserves of
$132.0 million as of December 31, 1997. The Company acquired its interests in
the Double A Wells in May 1996 pursuant to the Black Stone Acquisition. Since
the acquisition, the Company has drilled seven successful development wells (2.0
net) and two successful exploratory wells (.6 net) and increased its net daily
production by 14% to 1,867 barrels of oil per day and 30.8 MMcf of natural gas
per day during December 1997. These wells typically produce from the Woodbine
formation at an average depth of 14,300 feet. The Company has an average working
interest in this area of 37% and its leasehold position at December 31, 1997
consisted of 28,231 gross acres (9,533 net).
In 1997 the Company spent $10.8 million on its development and exploratory
activities in the Double A Wells field and plans to spend $2.9 million to drill
four wells (.9 net) in 1998. The reservoir distribution within the field is
controlled primarily by stratigraphic factors, and the Company believes that the
analysis of 3-D seismic data which the Company plans to obtain in 1998 may lead
to the identification of additional development drilling opportunities as well
as deeper exploratory prospects in the Woodbine formation.
East Texas/North Louisiana
The Company has 116.9 Bcfe of proved reserves (32% of total proved
reserves) concentrated in East Texas and North Louisiana. The Company owns
interests in 374 producing wells (208.5 net wells) in 19 field areas and
operates 252 of these wells. The largest of the Company's field areas in this
region are the Beckville, Logansport, Lisbon and Waskom fields. Reserves in the
region represent 23% of the Company's Present Value of Proved Reserves as of
December 31, 1997. Current production rates, net to the Company's interests,
from the region are 27.2 MMcf of natural gas per day and 276 barrels of oil per
day. The Company's largest acquisition in this region was the Sonat Acquisition
in July 1995. Since this acquisition, the Company has focused on increasing
production through infill drilling. Most of the reserves in this area produce
from the Cretaceous aged Travis Peak/Hosston formation and the Jurassic aged
Cotton Valley formation. The total thickness of these formations range from
2,000 feet to 4,000 feet of sand and shale sequences in the East Texas Basin and
the North Louisiana Salt Basin, at depths ranging from 6,000 feet to 10,500
feet. The Company believes that success in these formations can be enhanced by
applying new hydraulic fracturing and completion techniques, magnetic resonance
imaging (MRI) logging tools and infill drilling. This area represents a
significant focus of the Company's development and exploitation activities. In
1997 the Company spent $15.0 million to drill 18 wells (10.1 net) and has
budgeted $17.2 million in 1998 to drill 28 development wells (18.5 net).
Beckville
The Company's properties in the Beckville field, located in Panola County,
Texas, represent approximately 7% (25.0 Bcfe) of the Company's proved reserves
as of December 31, 1997. The Company operates 48 wells in this field and owns
interests in 6 additional wells. The Company has an average working interest of
67% in this field. During December 1997, the average production attributable to
the Company's interest was approximately 2.1 MMcf of natural gas and 13 barrels
of oil per day. The Beckville field produces from the Cotton Valley formation at
depths ranging from 9,000 to 10,000 feet. The Company has identified 16 proved
undeveloped locations in the Beckville field and plans to drill nine wells in
1998 at a budgeted cost of $7.1 million.
9
<PAGE>
Logansport
The Logansport field produces from multiple pay zones in the Hosston
formation at an average depth of 8,000 feet and is located in DeSoto Parish,
Louisiana. The Company's proved reserves of 19.3 Bcfe in the Logansport field
represented approximately 5% of the Company's proved reserves as of December 31,
1997. The Company operates 67 wells in this field and owns interests in 30
additional wells. The Company's average working interest in this field is 48%.
During December 1997, the average production attributable to the Company's
interest was approximately 6.5 MMcf of natural gas and 29 barrels of oil per
day. The Company drilled seven development wells (3.2 net) in this field during
1997, of which all were successful. The Company has budgeted $4.5 million to
drill six wells (4.7 net) during 1998.
Lisbon
The Company acquired its interest in the Lisbon field in May 1997 for $20.1
million. The Lisbon field represented approximately 3% (10.7 Bcfe) of the
Company's proved reserves as of December 31, 1997. The Company operates 15 wells
and owns interests in three additional wells in this field. The Company's
average working interest in this field is 52%. During December 1997 the average
net daily production from the field was approximately 3.2 MMcf of natural gas
and 40 barrels of oil per day. The Lisbon field produces from the Cotton Valley
formation at an average depth of 8,000 feet. The Company drilled and completed
seven wells (4.8 net) during 1997 in the Lisbon field. The Company has budgeted
$2.5 million in 1998 to drill seven development wells (3.5 net).
Waskom
The Waskom field represented approximately 4% (14.8 Bcfe) of the Company's
proved reserves as of December 31, 1997. The Company operates 58 wells in this
field and owns interests in 37 additional wells. The Company's average working
interest in this field is 49%. During December 1997, the average production
attributable to the Company's interest was approximately 2.9 MMcf of natural gas
and 47 barrels of oil per day. The Waskom field produces from the Cotton Valley
formation at depths ranging from 9,000 to 10,000 feet. The Company has
identified 10 proved undeveloped locations in the Waskom field and plans to
drill one of these wells in 1998 at a budgeted cost of approximately $1.0
million.
Acquisition Activities
Acquisition Strategy
The Company has concentrated its acquisition activity in the Gulf of
Mexico, Southeast Texas, and East Texas/North Louisiana regions. Using a
strategy that capitalizes on management's strong knowledge of, and experience
in, these regions, the Company seeks to selectively pursue acquisition
opportunities where the Company can evaluate the assets to be acquired in detail
prior to transaction completion. The Company evaluates a large number of
prospective properties according to certain internal criteria, including
established production and the properties' future development and exploration
potential, low operating costs and the ability for the Company to obtain
operating control.
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<PAGE>
Major Property Acquisitions
As a result of its acquisitions, the Company has added 482.4 Bcfe of proved
oil and natural gas reserves since 1991 as summarized in the following table:
<TABLE>
<CAPTION>
Present Acquisition
Value of Cost as a
Proved Percentage
Reserves of Present
Acquisition Acquisition When Value of
Cost Proved Reserves When Acquired(1) Cost Per Acquired Proved
Year (000's) (MBbls) (MMcf) (MMcfe) Mcfe(1) (000's)(1) Reserves(1)
---- ------- ------- ------ ------- ------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1997(2) $ 189,904 14,473 39,970 126,808 $1.50 $ 205,583 92%
1996 100,446 5,930 100,446 136,027 0.74 282,150 36%
1995 56,081 1,859 108,432 119,585 0.47 85,706 65%
1994 12,970 388 12,744 15,074 0.86 14,050 92%
1993 26,928 2,250 28,349 41,848 0.64 33,502 80%
1992 4,730 44 8,821 9,086 0.52 8,474 56%
1991 20,862 689 29,868 34,002 0.61 27,298 76%
--------- ------ -------- ------- ----------
Total $ 411,921 25,633 328,630 482,430 0.85 $ 656,763 63%
========= ====== ======== ======= ==========
<FN>
(1) Based on reserve estimates and prices at the end of the year in which
the acquisition occurred, as adjusted to reflect actual production
from the closing date of the respective acquisition to such year end.
(2) The 1997 Acquisitions exclude acquisition costs allocated to
unevaluated properties of $30.2 million and other assets of $1.0
million.
</FN>
</TABLE>
Of the 18 property acquisitions completed by the Company since 1991, four
acquisitions described below account for 83% of the total acquisition cost and
total reserves acquired.
Bois d' Arc Acquisition. On December 9, 1997, the Company acquired working
interests in certain producing offshore Louisiana oil and gas properties as well
as interests in undeveloped offshore oil and gas leases for approximately $200.9
million from Bois d' Arc. The Company acquired interests in 43 wells (29.6 net
wells) and eight separate production complexes located in the Gulf of Mexico
offshore of Plaquemines and Terrebonne Parishes, Louisiana. The acquisition
included interests in the Louisiana state and federal offshore areas of Main
Pass Blocks 21 and 25, Ship Shoal Blocks 66, 67, 68 and 69 and South Pelto Block
1. The Company also acquired interests in seven undrilled prospects which have
been delineated by 3-D seismic data. The net proved reserves acquired were
estimated at 14.3 MMBbls of oil and 29.4 Bcf of natural gas. Approximately $30.2
million of the purchase price was attributed to the undrilled prospects and $1.0
million was attributed to other assets.
Black Stone Acquisition. In May 1996, the Company acquired 100% of the
capital stock of Black Stone Oil Company and interests in producing and
undeveloped oil and gas properties located in Southeast Texas for $100.4
million. The Company acquired interests in 19 wells (7.7 net) that are located
in the Double A Wells field in Polk County, Texas and is the operator of most of
the wells in the field. The net proved reserves acquired were estimated at 5.9
MMBbls of oil and 100.4 Bcf of natural gas.
Sonat Acquisition. In July 1995, the Company purchased interests in certain
producing oil and gas properties located in East Texas and North Louisiana from
Sonat Inc. for $48.1 million. The Company acquired interests in 319 producing
wells (188.0 net). The acquisition included interests in the Logansport, Waskom,
Beckville, Blocker, Longwood, Hico Knowles and Simsboro fields. The net proved
reserves acquired were estimated at 0.8 MMBbls of oil and 104.7 Bcf of natural
gas.
Stanford Acquisition. In November 1993, the Company acquired Stanford
Offshore Energy, Inc. ("Stanford") through a merger with a wholly owned
subsidiary. The Stanford stockholders were issued an aggregate of 1,760,000
shares of common stock of the Company in the merger with a total value of $6.2
million and the Company assumed approximately $16.5 million of indebtedness of
Stanford. Stanford had interests in 107 producing wells (58.8 net) located
primarily in the Gulf of Mexico region. Major properties acquired include
interests in the West Cameron Blocks 238, 248 and 249, East White Point, Redmond
11
<PAGE>
Creek and Mustang Island. The net proved reserves acquired were estimated at 1.0
MMBbls of oil and 17.8 Bcf of natural gas.
Oil and Natural Gas Reserves
The following tables set forth the estimated proved oil and natural gas
reserves of the Company and the Present Value of Proved Reserves as of December
31, 1997:
Present
Value of
Oil Gas Total Proved
Category (MBbls) (Mmcf) (Mmcfe) Reserves
-------- ------- ------ ------- --------
(000's)
Proved Developed Producing 12,500 141,178 216,178 $311,419
Proved Developed Non-producing 4,135 46,924 71,734 70,338
Proved Undeveloped 4,292 52,015 77,765 77,799
------ ------- ------- --------
Total Proved 20,927 240,117 365,677 $459,556
====== ======= ======= ========
There are numerous uncertainties inherent in estimating oil and natural gas
reserves and their values, including many factors beyond the control of the
producer. The reserve data set forth above represents estimates only. Reserve
engineering is a subjective process of estimating underground accumulations of
oil and natural gas that cannot be measured in an exact manner. The accuracy of
any reserve estimate is a function of the quality of available data and of
engineering and geological interpretation and judgment. As a result, estimates
of different engineers may vary. In addition, estimates of reserves are subject
to revision based on the results of drilling, testing and production subsequent
to the date of such estimate. Accordingly, reserve estimates are often different
from the quantities of oil and gas reserves that are ultimately recovered.
In general, the volume of production from oil and natural gas properties
declines as reserves are depleted. Except to the extent the Company acquires
properties containing proved reserves or conducts successful exploration and
development activities, the proved reserves of the Company will decline as
reserves are produced. The Company's future oil and natural gas production is,
therefore, highly dependent upon its level of success in acquiring or finding
additional reserves.
Drilling Activity Summary
During the three-year period ended December 31, 1997, the Company drilled
development and exploratory wells as set forth in the table below:
Year Ended December 31,
-----------------------
1995 1996 1997
---- ---- ----
Gross Net Gross Net Gross Net
----- --- ----- --- ----- ---
Development Wells:
Oil 2 0.5 2 1.0 2 0.6
Gas 9 2.4 16 8.4 31 16.1
Dry 2 0.7 1 1.0 7 2.3
--- ---- --- ---- --- ----
13 3.6 19 10.4 40 19.0
--- ---- --- ---- --- ----
Exploratory Wells:
Oil - - - - 1 0.3
Gas - - - - 4 1.3
Dry - - 1 0.2 4 1.6
--- ---- --- ---- --- ----
- - 1 0.2 9 3.2
--- ---- --- ---- --- ----
Total Wells 13 3.6 20 10.6 49 22.2
=== ==== === ==== === ====
12
<PAGE>
As of December 31, 1997, two development wells (1.0 net) were in the
process of being drilled. Both wells were successfully completed in March 1998.
Subsequent to December 31, 1997, the Company commenced drilling five development
wells (2.5 net). Four of the five wells were successful with the remaining well
still in the process of drilling.
Producing Well Summary
The following table sets forth the gross and net producing oil and natural
gas wells in which the Company owned an interest at December 31, 1997.
Oil Gas
--- ---
Gross Net Gross Net
----- --- ----- ---
Texas 17 10.5 263 139.0
Louisiana 9 5.8 192 93.4
State and Federal Offshore 29 23.4 38 21.5
Mississippi 1 0.1 2 0.3
--- ---- --- -----
Total wells 56 39.8 495 254.2
=== ==== === =====
The Company operates 342 of the 551 producing wells presented in the above
table.
Acreage
The following table summarizes the Company's developed and undeveloped
leasehold acreage at December 31, 1997. Excluded is acreage in which the
Company's interest is limited to royalty or similar interests.
Developed Undeveloped
--------- -----------
Gross Net Gross Net
----- --- ----- ---
Texas 165,172 118,747 42,925 17,271
Louisiana 78,851 58,400 1,896 1,100
State and Federal Offshore 20,284 10,055 754 754
Mississippi 1,360 210 - -
------- ------- ------ ------
Total 265,667 187,412 45,575 19,125
======= ======= ====== ======
Title to the Company's oil and natural gas properties is subject to
royalty, overriding royalty, carried and other similar interests and contractual
arrangements customary in the oil and gas industry, liens incident to operating
agreements and for current taxes not yet due, and other minor encumbrances. All
of the Company's oil and natural gas properties are pledged as collateral under
the Company's bank credit facility. As is customary in the oil and gas industry,
the Company is generally able to retain its ownership interest in undeveloped
acreage by production of existing wells, by drilling activity which establishes
commercial reserves sufficient to maintain the lease or by payment of delay
rentals.
Markets and Customers
The market for oil and natural gas produced by the Company depends on
factors beyond its control, including the extent of domestic production and
imports of oil and natural gas, the proximity and capacity of natural gas
pipelines and other transportation facilities, demand for oil and natural gas,
the marketing of competitive fuels and the effects of state and federal
regulation. The oil and gas industry also competes with other industries in
supplying the energy and fuel requirements of industrial, commercial and
individual consumers.
Substantially all of the Company's natural gas production is sold either on
the spot gas market on a month-to-month basis at prevailing spot market prices
or under long-term contracts based on current spot market gas prices. Gas
production from the Company's Double A Wells field is sold under a long-term
contract to HPL Resources Company, a subsidiary of Enron Corp. ("HPL"). The
agreement with HPL is for a term expiring on October 31, 2000 with pricing based
on a percentage of spot gas prices for natural gas delivered to the Houston Ship
Channel. Total gas sales in 1997 to HPL accounted for approximately 35% of the
Company's 1997 oil and gas sales.
13
<PAGE>
All of the Company's oil production is sold at the well site at posted
field prices tied to the spot oil markets. Sales of oil production to Scurlock
Permian Corporation, a subsidiary of Ashland Inc., accounted for approximately
17% of the Company's 1997 oil and gas sales.
Competition
The oil and gas industry is highly competitive. Competitors include major
oil companies, other independent energy companies, and individual producers and
operators, many of which have financial resources, personnel and facilities
substantially greater than those of the Company. The Company faces intense
competition for the acquisition of oil and natural gas properties.
Regulation
The Company's operations are regulated by certain federal and state
agencies. In particular, oil and natural gas production and related operations
are or have been subject to price controls, taxes and other laws relating to the
oil and natural gas industry. The Company cannot predict how existing laws and
regulations may be interpreted by enforcement agencies or court rulings, whether
additional laws and regulations will be adopted, or the effect such changes may
have on its business or financial condition.
The Company's oil and natural gas exploration, production and related
operations are subject to extensive rules and regulations promulgated by
federal, state and local agencies. Failure to comply with such rules and
regulations can result in substantial penalties. The regulatory burden on the
oil and gas industry increases the Company's cost of doing business and affects
its profitability. Because such rules and regulations are frequently amended or
reinterpreted, the Company is unable to predict the future cost or impact of
complying with such laws.
The states of Texas and Louisiana require permits for drilling operations,
drilling bonds and reports concerning operations and impose other requirements
relating to the exploration and production of oil and gas. Such states also have
statutes or regulations addressing conservation matters, including provisions
for the unitization or pooling of oil and natural gas properties, the
establishment of maximum rates of production from oil and gas wells and the
regulation of spacing, plugging and abandonment of such wells. The statutes and
regulations of certain states limit the rate at which oil and gas can be
produced from the Company's properties.
Sales of natural gas by the Company are not regulated and are made at
market prices. However, the Federal Energy Regulatory Commission ("FERC")
regulates interstate and certain intrastate natural gas transportation rates and
service conditions, which affect the marketing of natural gas produced by the
Company, as well as the revenues received by the Company for sales of such
production. Since the mid-1980s, FERC has issued a series of orders, culminating
in Order Nos. 636, 636-A and 636-B ("Order 636"), that have significantly
altered the marketing and transportation of gas. Order 636 mandates a
fundamental restructuring of interstate pipeline sales and transportation
service, including the unbundling by interstate pipelines of the sales,
transportation, storage and other components of the city-gate sales services
such pipelines previously performed. One of FERC's purposes in issuing the
orders was to increase competition within all phases of the natural gas
industry. Order 636 and subsequent FERC orders issued in individual pipeline
restructuring proceedings have been the subject of appeals, the results of which
have generally been supportive of the FERC's open-access policy. Earlier this
year the United States Court of Appeals for the District of Columbia Circuit
largely upheld Order No. 636, et seq. Because further review of certain of these
orders is still possible, and other appeals remain pending, it is difficult to
predict the ultimate impact of the orders on the Company and its gas marketing
efforts. Generally, Order 636 has eliminated or substantially reduced the
interstate pipelines' traditional role as wholesalers of natural gas, and has
substantially increased competition and volatility in natural gas markets. While
significant regulatory uncertainty remains, Order 636 may ultimately enhance the
Company's ability to market and transport its gas, although it may also subject
the Company to greater competition and the more restrictive pipeline imbalance
tolerances and greater associated penalties for violation of such tolerances.
Sales of oil and natural gas liquids by the Company are not regulated and
are made at market prices. The price the Company receives from the sale of these
products is affected by the cost of transporting the products to market.
Effective as of January 1, 1995, FERC implemented regulations establishing an
indexing system for transportation rates for interstate common carrier oil
pipelines, which, generally, would index such rates to inflation, subject to
14
<PAGE>
certain conditions and limitations. These regulations could increase the cost of
transporting oil and natural gas liquids by interstate pipelines, although the
most recent adjustment generally decreased rates. These regulations have
generally been approved on judicial review. The Company is not able to predict
with certainty what effect, if any, these regulations will have on it, but,
other factors being equal, the regulations may, over time, tend to increase
transportation costs or reduce wellhead prices for oil and natural liquids.
The Company is required to comply with various federal and state
regulations regarding plugging and abandonment of oil and natural gas wells. The
Company provides reserves for the estimated costs of plugging and abandoning its
wells, to the extent such costs exceed the estimated salvage value of the wells,
on a unit of production basis.
Environmental
Various federal, state and local laws and regulations governing the
discharge of materials into the environment, or otherwise relating to the
protection of the environment, health and safety, affect the Company's
operations and costs. These laws and regulations sometimes require governmental
authorization before certain activities, limit or prohibit other activities
because of protected areas or species, impose substantial liabilities for
pollution related to Company operations or properties, and provide penalties for
noncompliance. In particular, the Company's drilling and production operations,
its activities in connection with storage and transportation of crude oil and
other liquid hydrocarbons, and its use of facilities for treating, processing or
otherwise handling hydrocarbons and related exploration and production wastes
are subject to stringent environmental regulation. As with the industry
generally, compliance with existing and anticipated regulations increases the
Company's overall cost of business. While these regulations affect the Company's
capital expenditures and earnings, the Company believes that such regulations do
not affect its competitive position in the industry because its competitors are
similarly affected by environmental regulatory programs. Environmental
regulations have historically been subject to frequent change and, therefore,
the Company is potentially unable to predict the future costs or other future
impacts of environmental regulations on its future operations. A discharge of
hydrocarbons or hazardous substances into the environment could subject the
Company to substantial expense, including the cost to comply with applicable
regulations that require a response to the discharge, such as containment or
cleanup, claims by neighboring landowners or other third parties for personal
injury, property damage or their response costs and penalties assessed, or other
claims sought, by regulatory agencies for response cost or for natural resource
damages.
The following are examples of some environmental laws that potentially
impact the Company and its operations.
Water. The Oil Pollution Act ("OPA") was enacted in 1990 and amends
provisions of the Federal Water Pollution Control Act of 1972 ("FWPCA") and
other statutes as they pertain to prevention of and response to major oil
spills. The OPA subjects owners of facilities to strict, joint and potentially
unlimited liability for removal costs and certain other consequences of an oil
spill, where such spill is into navigable waters, or along shorelines. In the
event of an oil spill into such waters, substantial liabilities could be imposed
upon the Company. States in which the Company operates have also enacted similar
laws. Regulations are currently being developed under the OPA and similar state
laws that may also impose additional regulatory burdens on the Company.
The FWPCA imposes restrictions and strict controls regarding the discharge
of produced waters, other oil and gas wastes, any form of pollutant, and, in
some instances, storm water runoff, into waters of the United States. The FWPCA
provides for civil, criminal and administrative penalties for any unauthorized
discharges and, along with the OPA, imposes substantial potential liability for
the costs of removal, remediation or damages resulting from an unauthorized
discharge. State laws for the control of water pollution also provide civil,
criminal and administrative penalties and liabilities in the case of an
unauthorized discharge into state waters. The cost of compliance with the OPA
and the FWPCA have not historically been material to the Company's operations,
but there can be no assurance that changes in federal, state or local water
pollution control programs will not materially adversely effect the Company in
the future. Although no assurances can be given, the Company believes that
compliance with existing permits and compliance with foreseeable new permit
requirements will not have a material adverse effect on the Company's financial
condition or results of operations.
15
<PAGE>
Air Emissions. Amendments to the Federal Clean Air Act enacted in late 1990
(the "1990 CAA Amendments") require or will require most industrial operations
in the United States to incur capital expenditures in order to meet air
emissions control standards developed by the Environmental Protection Agency
("EPA") and state environmental agencies. The 1990 CAA Amendments impose a new
operating permit on major sources, and several of the Company's facilities may
require permits under this new program. Although no assurances can be given, the
Company believes implementation of the 1990 CAA Amendments will not have a
material adverse effect on the Company's financial condition or results of
operations.
Solid Waste. The Company generates non-hazardous solid wastes that are
subject to the requirements of the Federal Resource Conservation and Recovery
Act ("RCRA") and comparable state statutes. The EPA and the states in which the
Company operates are considering the adoption of stricter disposal standards for
the type of non-hazardous wastes generated by the Company. RCRA also governs the
generation, management, and disposal of hazardous wastes. At present, the
Company is not required to comply with a substantial portion of the RCRA
requirements because the Company's operations generate minimal quantities of
hazardous wastes. However, it is anticipated that additional wastes, which could
include wastes currently generated during the Company's operations, could in the
future be designated as "hazardous wastes." Hazardous wastes are subject to more
rigorous and costly disposal and management requirements than are non-hazardous
wastes. Such changes in the regulations may result in additional capital
expenditures or operating expenses by the Company.
Superfund. The Comprehensive Environmental Response, Compensation, and
Liability Act ("CERCLA"), also known as "Superfund", imposes liability, without
regard to fault or the legality of the original act, on certain classes of
persons in connection with the release of a "hazardous substance" into the
environment. These persons include the current owner or operator of any site
where a release historically occurred and companies that disposed or arranged
for the disposal of the hazardous substances found at the site. CERCLA also
authorizes the EPA and, in some instances, third parties to act in response to
threats to the public health or the environment and to seek to recover from the
responsible classes of persons the costs they incur. In the course of its
ordinary operations, the Company may have managed substances that may fall
within CERCLA's definition of a "hazardous substance." The Company may be
jointly and severally liable under CERCLA for all or part of the costs required
to clean up sites where the Company disposed of or arranged for the disposal of
these substances. This potential liability extends to properties that the
Company owned or operated, as well as to properties owned and operated by others
at which disposal of the Company's hazardous substances occurred.
The Company may also fall into the category of the "current owner or
operator." The Company currently owns or leases numerous properties that for
many years have been used for the exploration and production of oil and gas.
Although the Company believes it has utilized operating and disposal practices
that were standard in the industry at the time, hydrocarbons or other wastes may
have been disposed of or released by the Company on or under the properties
owned or leased by the Company. In addition, many of these properties have been
previously owned or operated by third parties who may have disposed of or
released hydrocarbons or other wastes at these properties. Under CERCLA, and
analogous state laws, the Company could be subject to certain liabilities and
obligations, such as being required to remove or remediate previously disposed
wastes (including wastes disposed of or released by prior owners or operators),
to clean up contaminated property (including contaminated groundwater) or to
perform remedial plugging operations to prevent future contamination.
Office and Operations Facilities
The Company's executive offices are located at 5005 LBJ Freeway, Suite
1000, Dallas, Texas 75244, and its telephone number is (972) 701-2000.
The Company leases office space in Dallas, Texas. The Dallas lease covers
13,525 square feet at a monthly rate of $19,682 during 1998. The lease expires
on September 30, 1999. In August 1997, the Company entered into a seven year
lease covering 20,046 square feet in a building under construction. The Company
plans to relocate its corporate headquarters to the building in late 1998. The
new lease begins when the space is occupied and is at an initial monthly rate of
$35,081. The Company also owns or leases four production offices and pipe yard
facilities near Marshall and Livingston, Texas and Logansport and Homer,
Louisiana.
16
<PAGE>
Employees
At December 31, 1997, the Company had 47 employees and utilized contract
employees for certain of its field operations. The Company considers its
employee relations to be satisfactory.
Directors, Executive Officers and Other Management
The following table sets forth certain information concerning the executive
officers and directors of the Company.
Name Age Position with Company
---- --- ---------------------
Directors and Executive
Officers
M. Jay Allison 42 President, Chief Executive Officer and
Chairman of the Board of Directors
Roland O. Burns 37 Senior Vice President, Chief Financial
Officer, Secretary and Treasurer
Richard S. Hickok 72 Director
Franklin B. Leonard 70 Director
Cecil E. Martin, Jr. 56 Director
James L. Menke 46 Vice President of Operations
Stephen E. Neukom 48 Vice President of Marketing
Richard G. Powers 43 Vice President of Land
Daniel K. Presley 37 Vice President of Accounting and Controller
David W. Sledge 41 Director
Michael W. Taylor 44 Vice President of Corporate Development
M. Jay Allison has been a director of the Company since 1987, and President
and Chief Executive Officer of the Company since 1988. Mr. Allison was elected
Chairman of the Board of Directors in 1997. From 1987 to 1988, Mr. Allison
served as Vice President and Secretary of the Company. From 1981 to 1987, he was
a practicing oil and gas attorney with the firm of Lynch, Chappell & Alsup in
Midland, Texas. In 1983, Mr. Allison co-founded a private independent oil and
gas company, Midwood Petroleum, Inc., which was active in the acquisition and
development of oil and gas properties from 1983 to 1987. He received B.B.A.,
M.S. and J.D. degrees from Baylor University in 1978, 1980 and 1981,
respectively.
Roland O. Burns has been Senior Vice President of the Company since 1994,
Chief Financial Officer and Treasurer since 1990 and Secretary since 1991. From
1982 to 1990, Mr. Burns was employed by the public accounting firm, Arthur
Andersen LLP. During his tenure with Arthur Andersen LLP, Mr. Burns worked
primarily in the firm's oil and gas audit practice. Mr. Burns received B.A. and
M.A. degrees from the University of Mississippi in 1982 and is a Certified
Public Accountant.
Richard S. Hickok has been a director of the Company since 1987. From 1948
to 1983, he was employed by the international accounting firm of Main Hurdman
where he retired as Chairman. From 1978 to 1980, Mr. Hickok served as a Trustee
of the Financial Accounting Foundation and has extensive involvement serving on
various committees of the American Institute of Certified Public Accountants. He
currently serves as a director of Marsh & McLennan Company, Inc. and
Projectavision, Inc. Mr. Hickok holds a B.S. degree from the Wharton School of
the University of Pennsylvania.
Franklin B. Leonard has been a director of the Company since 1960. From
1961 to 1994, Mr. Leonard served as President of Crossley Surveys, Inc., a New
York based company which conducted statistical surveys. Mr. Leonard's family's
involvement in the Company spans four generations dating back to the 1880's when
Mr. Leonard's great grandfather was a significant shareholder of the Company.
Mr. Leonard also served as a director of Glen Ridge Savings and Loan Association
from 1968 to 1990. Mr. Leonard holds a B.S. degree from Yale University.
17
<PAGE>
Cecil E. Martin, Jr. has been a director of the Company since 1988. Mr.
Martin has been a significant investor in the Company since 1987. From 1973 to
1991 he served as Chairman of a public accounting firm in Richmond, Virginia.
Mr. Martin also serves as a director for Ten-Key, Inc. Mr. Martin holds a B.B.A.
degree from Old Dominion University and is a Certified Public Accountant.
James L. Menke has been Vice President of Operations of the Company since
March 1994. From 1987 to 1994, Mr. Menke was Manager of Engineering for Atropos
Exploration Company. From 1973 to 1986, Mr. Menke held engineering positions
with Pennzoil Company, Gruy Management Services Company, Maynard Oil Company,
and Santa Fe Minerals. Mr. Menke received a B.S. degree in Petroleum Engineering
from Texas A & M University in 1973 and is a Registered Professional Engineer.
Stephen E. Neukom was elected Vice President of Marketing of the Company in
December 1997 and served as Manager of Crude Oil and Natural Gas Marketing since
December 1996. From October 1994 to 1996, Mr. Neukom served as Vice President of
Comstock Natural Gas, Inc., the Company's wholly owned gas marketing subsidiary.
Prior to joining the Company, Mr. Neukom was Senior Vice President of Victoria
Gas Corporation from 1987 to 1994. Mr. Neukom received a B.B.A. degree from the
University of Texas in 1972.
Richard G. Powers joined the Company as Land Manager in October 1994 and
was elected Vice President of Land in December 1997. Mr. Powers has over 20
years experience as a petroleum landman. Prior to joining the Company, Mr.
Powers was employed for 10 years as Land Manager for Bridge Oil (U.S.A.), Inc.
and its predecessor Pinoak Petroleum, Inc. Mr. Powers received a B.B.A. degree
in 1976 from Texas Christian University.
Daniel K. Presley was elected Vice President of Accounting in December 1997
and has been with the Company since December 1989 serving as Controller since
1991. Prior to joining the Company, Mr. Presley had six years of experience with
several independent oil and gas companies including AmBrit Energy, Inc. Prior
thereto, Mr. Presley spent two and one-half years with B.D.O. Seidman, a public
accounting firm. Mr. Presley has a B.B.A. from Texas A & M University.
David W. Sledge was elected to the Board of Directors of the Company in
1996. Mr. Sledge served as President of Gene Sledge Drilling Corporation, a
privately held contract drilling company based in Midland, Texas until its sale
in October 1996. Mr. Sledge served Gene Sledge Drilling Corporation in various
capacities from 1979 to 1996. Mr. Sledge is a past director of the International
Association of Drilling Contractors and is a past chairman of the Permian Basin
chapter of this association. He received a B.B.A. degree from Baylor University
in 1979.
Michael W. Taylor was elected Vice President of Corporate Development in
December 1997 and has served the Company in various capacities since September
1994. Prior to joining the Company, Mr. Taylor had been an independent oil and
gas producer and petroleum consultant for the previous fifteen years. Mr. Taylor
is a registered professional engineer in the state of Texas and he received a
B.S. degree in Petroleum Engineering from Texas A & M University in 1974.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings which management
believes will have a material adverse effect on the Company's consolidated
results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of 1997.
18
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock was listed for trading on the New York Stock
Exchange under the symbol "CRK" on December 17, 1996. Prior to December 17,
1996, the Company's common stock traded on the Nasdaq National Market tier of
the Nasdaq Stock Market. The following table sets forth, on a per share basis
for the periods indicated, the high and low sales prices by calendar quarter for
the periods indicated as reported by the Nasdaq Stock Market or the New York
Stock Exchange, as applicable.
High Low
---- ---
1996 - First Quarter $ 5.75 $ 4.56
Second Quarter 10.50 4.69
Third Quarter 12.13 8.63
Fourth Quarter 14.63 11.13
1997 - First Quarter 14.38 8.13
Second Quarter 10.88 6.63
Third Quarter 12.94 9.88
Fourth Quarter 17.50 10.63
As of March 12, 1997, the Company had 24,218,874 shares of common stock
outstanding, which were held by 893 holders of record and approximately 9,700
beneficial owners who maintain their shares in "street name" accounts.
The Company has never paid cash dividends on its common stock. The Company
presently intends to retain any earnings for the operation and expansion of its
business and does not anticipate paying cash dividends in the foreseeable
future. Any future determination as to the payment of dividends will depend upon
results of operations, capital requirements, the financial condition of the
Company and such other factors as the Board of Directors of the Company may deem
relevant. In addition, the Company is limited under the Company's bank credit
facility from paying or declaring cash dividends.
19
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
The historical financial data presented in the table below as of and for each of the years in the five-year period ended
December 31, 1997 are derived from the Consolidated Financial Statements of the Company. Significant acquisitions of producing oil
and gas properties affect the comparability of the historical financial and operating data for the periods presented. The pro forma
financial information for the year ended December 31, 1997 has been prepared as if the oil and gas property acquisitions which were
completed during 1997 had occurred at January 1, 1997. Neither the historical results nor the pro forma results are necessarily
indicative of the Company's future operations or financial results. The data presented below should be read in conjunction with the
Company's Consolidated Financial Statements and the notes thereto included elsewhere herein and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Year Ended December 31,
----------------------- Pro Forma
1993 1994 1995 1996 1997 1997
---- ---- ---- ---- ---- ----
($ in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Oil and gas sales ......................... $ 21,805 $ 16,855 $ 22,091 $ 68,915 $ 88,555 $ 143,524
Gain on sales of property ................. 26 328 19 1,447 85 85
Other income ................................. 430 416 264 593 704 704
--------- --------- --------- --------- --------- ---------
Total revenues ...................... 22,261 17,599 22,374 70,955 89,344 144,313
Expenses: --------- --------- --------- --------- --------- ---------
Oil and gas operating(1) ..................... 6,673 6,099 7,427 13,838 17,919 25,419
Exploration .................................. 423 - - 436 2,810 2,810
Depreciation, depletion and amortization .. 8,322 7,350 8,379 18,269 26,235 53,943
General and administrative, net ........... 1,834 1,569 1,301 2,239 2,668 2,373
Interest .................................. 2,184 2,869 5,542 10,086 5,934 17,404
Impairment of oil and gas properties ......... - - 29,150(2) - - -
--------- --------- --------- --------- --------- ---------
Total expenses ................... 19,436 17,887 51,799 44,868 55,566 101,949
--------- --------- --------- --------- --------- ---------
Income (loss) from continuing operations
before income taxes and extraordinary item . 2,825 (288) (29,425) 26,087 33,778 42,364
Provision for income taxes ................ - - - - (11,622) (14,627)
--------- --------- --------- --------- --------- ---------
Net income (loss) from continuing operations
before extraordinary item .................. 2,825 (288) (29,425) 26,087 22,156 27,737
Preferred stock dividends ................. (173) (818) (1,908) (2,021) (410) (410)
--------- --------- --------- --------- --------- ---------
Net income (loss) from continuing operations
attributable to common stock before
extraordinary item ......................... 2,652 (1,106) (31,333) 24,066 21,746 27,327
Income from discontinued operations ....... 89 229 3,264 1,866 - -
Extraordinary loss ........................ (417) (615) - - - -
--------- --------- --------- --------- --------- ---------
Net income (loss) attributable to common stock $ 2,324 $ (1,492) $ (28,069) $ 25,932 $ 21,746 $ 27,327
========= ========= ========= ========= ========= =========
Weighted average shares outstanding:
Basic ..................................... 10,402 12,065 12,546 15,449 24,186 24,186
========= ========= ========= ========= ========= =========
Diluted.................................... 11,616 21,199 26,008 26,008
Basic earnings per share: ========= ========= ========= =========
Net income (loss) from continuing operations
before extraordinary item................ $ 0.25 $ (0.09) $ (2.50) $ 1.56 $ 0.90 $ 1.13
Net income (loss) after extraordinary item 0.22 (0.12) (2.24) 1.68 0.90 1.13
Diluted earnings per share:
Net income (loss) from continuing operations
before extraordinary item................. $ 0.24 $ 1.23 $ 0.85 $ 1.07
Net income (loss) after extraordinary item.. 0.21 1.32 0.85 1.07
Other Financial Data:
EBITDA(3)...................................... $ 13,754 $ 9,931 $ 13,646 $ 54,878 $ 68,757 $ 116,521
Ratio of EBITDA to interest expense............ 6.3 3.5 2.5 5.4 11.3 6.1
As of December 31,
------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Balance Sheet Data: (In thousands)
Cash and cash equivalents.....................$ 755 $ 3,425 $ 1,917 $ 16,162 $ 14,504
Property and equipment, net................... 66,068 77,989 102,116 185,928 410,781
Total assets.................................. 74,095 91,571 120,099 222,002 456,800
Total debt.................................... 21,930 37,932 71,811 80,108 260,000
Stockholders' equity.......................... 27,646 41,205 30,128 118,216 124,594
(1)Includes lease operating costs and production and ad valorem taxes.
(2)Represents the impairment provision for the adoption of a new accounting standard regarding the carrying value of long-lived
assets.
(3) EBITDA means income (loss) from continuing operations before income taxes, plus interest, depreciation, depletion and
amortization, exploration expense and impairment of oil and gas properties. EBITDA is a financial measure commonly used in the
Company's industry and should not be considered in isolation or as a substitute for net income, cash flow provided by operating
activities or other income or cash flow data prepared in accordance with generally accepted accounting principles or as a measure of
a company's profitability or liquidity.
</TABLE>
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
General
The Company's results of operations have been significantly affected by its
success in acquiring producing oil and natural gas properties. Fluctuations in
oil and natural gas prices have also influenced the Company's financial results.
Relatively minor movements in oil and natural gas prices can lead to a change in
the Company's results of operations and cash flow and could have an impact on
the Company's borrowing base under the Company's bank credit facility. Based on
the 1997 operating results, a change in the average natural gas price realized
by the Company of $0.10 per Mcf would result in a change in net income
attributable to common stock of approximately $1.4 million, or $0.05 per share
(on an as diluted basis). A change in the average oil price realized by the
Company of $1.00 per barrel would result in a change in net income attributable
to common stock of approximately $831,000, or $ 0.03 per share (on an as diluted
basis).
The following table reflects certain summary operating data for the periods
presented:
<TABLE>
Year Ended December 31,
-----------------------
Pro Forma
1995 1996 1997 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Production Data:
Oil (MBbls) 356 952 1,343 3,097
Natural gas (MMcf) 9,297 19,427 22,860 30,956
Average Sales Price:
Oil (per Bbl) $16.81 $21.96 $19.47 $19.80
Natural gas (per Mcf) 1.73 2.47 2.73 2.66
Average equivalent price (per Mcfe) 1.93 2.74 2.87 2.90
Expenses ($ per Mcfe):
Oil and gas operating(1) $ 0.65 $ 0.55 $ 0.58 $ 0.51
General and administrative 0.11 0.09 0.09 0.05
Depreciation, depletion and
amortization(2) 0.72 0.72 0.84 1.09
Cash Margin ($ per Mcfe)(3) $ 1.17 $ 2.10 $ 2.20 $ 2.34
<FN>
(1) Includes lease operating costs and production and ad valorem taxes.
(2) Represents depreciation, depletion and amortization of oil and gas
properties only.
(3) Represents average equivalent price per Mcfe less oil and gas operating
expenses per Mcfe and general and administrative expenses per Mcfe.
</FN>
</TABLE>
Average oil and natural gas prices received by the Company generally
fluctuate with changes in the posted prices for oil and spot market prices for
natural gas. In prior years, the Company has entered into price swap agreements
to reduce its exposure to natural gas price fluctuations. In 1995, the Company
hedged approximately 25% of its natural gas production and realized a 5% higher
average gas price than it otherwise would have without hedging. In 1996, the
Company hedged approximately 15% of its natural gas production and realized a 2%
lower gas price than it otherwise would have without hedging. The Company did
not hedge any production in 1997. As of March 12, 1998, the Company does not
have any commodity price hedges in place.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Oil and gas sales increased $19.6 million (28%) to $88.6 million for 1997
from $68.9 million in 1996 due primarily to a 18% increase in natural gas
production and a 41% increase in oil production as well as higher natural gas
prices. The production increases related primarily to production from the Black
Stone Acquisition, which closed in May 1996 and the Bois d' Arc Acquisition
which closed in December 1997. The Company's average gas price increased 11% and
its average oil price decreased 11% during 1997 as compared to 1996.
21
<PAGE>
Other income increased $111,000 (19%) to $704,000 in 1997 from $593,000 in
1996 due primarily to additional interest income earned on an increased level of
short-term cash deposits in 1997.
Oil and gas operating expenses, including production taxes, increased $4.1
million (29%) to $17.9 million in 1997 from $13.8 million in 1996 due primarily
to the 23% increase in oil and natural gas production (on an Mcfe basis)
resulting primarily from the acquisitions in 1996 and 1997. Oil and gas
operating expenses per Mcfe produced increased 5% to $0.58 in 1997 from $0.55 in
1996 due primarily to increases in production taxes and ad valorem taxes which
were related to the higher gas prices received in 1997.
General and administrative expenses increased $429,000 (19%) to $2.7
million in 1997 from $2.2 million in 1996. The increase related to increased
general corporate expenses associated with the increased size of the Company's
operations.
Depreciation, depletion and amortization ("DD&A") increased $8.0 million
(44%) to $26.2 million in 1997 from $18.3 million in 1996 due to the 23%
increase in oil and natural gas production (on a Mcfe basis). Oil and gas
property DD&A per Mcfe produced of $0.84 in 1997 increased from $0.72 in 1996
due to the higher costs of the acquisitions closed in 1996 and 1997.
Interest expense decreased $4.2 million (41%) to $5.9 million for 1997 from
$10.1 million for 1996 due primarily to a decrease in the average outstanding
advances under the Company's bank credit facility. The average annual interest
rate paid under the Company's bank credit facility also decreased to 6.6% in
1997 as compared to 8.1% in 1996.
The Company provided for income taxes of $11.6 million for 1997 using an
estimated effective tax rate of 34%. No provision for income taxes was made in
1996 due to the availability of previously unrecognized tax assets relating to
net operating loss carryforwards.
The Company reported net income of $21.7 million, after preferred stock
dividends of $410,000, for the year ended December 31, 1997, as compared to a
net income of $24.1 million from continuing operations, after preferred stock
dividends of $2.0 million, for the year ended December 31, 1996.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Oil and gas sales increased $46.8 million (212%), to $68.9 million for 1996
from $22.1 million in 1995 due primarily to a 109% increase in natural gas
production and a 168% increase in oil production as well as higher oil and
natural gas prices. The production increases related primarily to production
from properties acquired in 1995 and the Black Stone Acquisition, which closed
in May 1996. The Company's average gas price increased 43% and its average oil
price increased 31% during 1996 as compared to 1995.
During 1996, the Company sold certain of its non-strategic oil and gas
properties for cash proceeds of $9.0 million. The sales resulted in a gain of
approximately $1.4 million.
Other income increased $329,000 (125%) to $593,000 in 1996 from $264,000 in
1995 due primarily to additional interest income earned on an increased level of
short-term cash deposits in 1996.
Oil and gas operating expenses, including production taxes, increased $6.4
million (86%) to $13.8 million in 1996 from $7.4 million in 1995 due primarily
to the 120% increase in oil and natural gas production (on an Mcfe basis)
resulting primarily from the acquisitions in 1995 and the Black Stone
Acquisition. Oil and gas operating expenses per Mcfe produced decreased 15% to
$0.55 in 1996 from $0.65 in 1995 due to the lower lifting costs associated with
the properties acquired in 1995 and 1996.
General and administrative expenses increased $938,000 (72%) to $2.2
million in 1996 from $1.3 million in 1995. The increase is attributable to a
$600,000 litigation settlement incurred by the Company in 1996 and an increase
in the number of employees of the Company in 1996.
22
<PAGE>
DD&A increased $9.9 million (118%) to $18.3 million in 1996 from $8.4
million in 1995 due to the 120% increase in oil and natural gas production (on
an Mcfe basis). Oil and gas property DD&A per Mcfe produced of $0.72 in 1996
remained unchanged from $0.72 in 1995.
Interest expense increased $4.5 million (82%) to $10.1 million for 1996
from $5.5 million for 1995 due primarily to an increase in the average
outstanding advances under the Company's bank credit facility. The average
annual interest rate paid under the Company's bank credit facility decreased to
8.1% in 1996 as compared to 10.5% in 1995.
The Company reported net income of $24.1 million from continuing
operations, after preferred stock dividends of $2.0 million, for the year ended
December 31, 1996, as compared to a net loss of $31.3 million from continuing
operations, after preferred stock dividends of $1.9 million, for the year ended
December 31, 1995.
In December 1996, the Company sold its third party natural gas marketing
operations and substantially all of its related gas gathering and gas processing
assets for cash of approximately $3.0 million and discontinued its gas
gathering, processing and marketing segment. Net income from this segment in
1996 was $1.9 million including a gain on the sale of $818,000.
Liquidity and Capital Resources
Funding for the Company's activities has historically been provided by
operating cash flows, debt and equity financings and asset dispositions. Net
cash flows provided by operating activities totaled $84.3 million for the year
ended December 31, 1997, a substantial increase from 1996 of $45.9 million. In
addition to operating cash flow, the primary sources of funds for the Company in
1997 were aggregate borrowings of $295.0 million and proceeds from the sale of
assets of $5.1 million.
The Company's primary needs for capital, in addition to funding of ongoing
operations, are for the acquisition, development and exploration of oil and gas
properties, and the repayment of principal and interest on debt. In 1997, the
Company repaid $115.1 million of indebtedness, repurchased common stock for
$16.1 million and made capital expenditures of $254.8 million.
During 1997, the Company completed three significant transactions which
were all funded by borrowings under the Company's bank credit facility. In May
and December 1997, the Company closed two acquisitions of producing oil and gas
properties for a total of $221.0 million. On August 20, 1997, the holders of the
Company's Series 1995 Convertible Preferred Stock converted all of the shares of
the Series 1995 Convertible Preferred Stock into 1,345,373 shares of the
Company's common stock. The conversion of the Series 1995 Convertible Preferred
Stock into common stock reduced the dividends which would have been paid on the
preferred stock by $645,000 per annum. On August 20, 1997, the Company
repurchased the 1,345,373 shares of common stock from the former preferred
stockholders at $12.00 per share for an aggregate purchase price of $16.1
million.
The Company's annual capital expenditure activity is summarized as follows:
Year Ended December 31,
1995 1996 1997
---- ---- ----
(In thousands)
Acquisition of oil and gas properties $56,081 $100,446 $220,054
Other leasehold costs 12 93 2,304
Workovers and recompletions 2,152 2,972 2,517
Development drilling 1,514 7,964 22,765
Exploratory drilling - 436 6,043
Other 2,050 51 1,160
------- -------- --------
Total $61,809 $111,962 $254,843
======= ======== ========
23
<PAGE>
The timing of most of the Company's capital expenditures is discretionary
with no material long-term capital expenditure commitments. Consequently, the
Company has a significant degree of flexibility to adjust the level of such
expenditures as circumstances warrant. The Company spent $3.6 million, $11.5
million and $33.6 million on development and exploration activities in 1995,
1996 and 1997, respectively. The Company currently anticipates spending
approximately $35.0 million on development projects in 1998 and $20.0 million
for exploration projects in 1998. The Company intends to primarily use
internally generated cash flow to fund capital expenditures other than
significant acquisitions. The Company anticipates that such sources will be
sufficient to fund the expected 1998 development and exploration expenditures.
The Company does not have a specific acquisition budget as a result of the
unpredictability of the timing and size of forthcoming acquisition activities.
The Company intends to use borrowings under the Company's bank credit facility
or other debt or equity financing to finance significant acquisitions. The
availability and attractiveness of these sources of financing will depend upon a
number of factors, some of which will relate to the financial condition and
performance of the Company, and some of which will be beyond the Company's
control, such as prevailing interest rates, oil and natural gas prices and other
market conditions.
The Company's bank credit facility consists of a $290.0 million revolving
credit commitment provided by a syndicate of ten banks for which The First
National Bank of Chicago serves as agent. Indebtedness under the credit facility
is secured by substantially all of the Company's assets. The Company's bank
credit facility is subject to borrowing base availability which is generally
redetermined semiannually based on the banks' estimates of the future net cash
flows of the Company's oil and gas properties. As of December 31, 1997, the
borrowing base was $290.0 million. Such borrowing base may be affected from time
to time by the performance of the Company's oil and natural gas properties and
changes in oil and natural gas prices. The revolving credit line bears interest
at the option of the Company at either (i) LIBOR plus 0.625% to 1.5% or (ii) the
"corporate base rate" plus 0% to 0.5%, depending in each case on the utilization
of the available borrowing base. The Company incurs a commitment fee of up to
0.2% to 0.375% per annum, depending on the utilization of the available
borrowing base, on the unused portion of the borrowing base. The average annual
interest rate as of December 31, 1997, of all outstanding indebtedness under the
Company's bank credit facility was approximately 7.3%. The revolving credit line
matures on December 9, 2002 or such earlier date as the Company may elect. The
credit facility contains covenants which, among other things, restrict the
payment of cash dividends, limit the amount of consolidated debt, and limit the
Company's ability to make certain loans and investments.
Federal Taxation
At December 31, 1997, the Company had federal income tax net operating loss
("NOL") carryforwards of approximately $6.3 million. The NOL carryforwards
expire from 2005 through 2010. The value of these carryforwards depends on the
ability of the Company to generate federal taxable income and to utilize the
carryforwards to reduce such income.
Inflation
In recent years inflation has not had a significant impact on the Company's
operations or financial condition.
ITEM 8. FINANCIAL STATEMENTS
The Consolidated Financial Statements for Comstock Resources, Inc. and
Subsidiaries are included on pages F-1 to F-19 of this report.
The financial statements have been prepared by the management of the
Company in conformity with generally accepted accounting principles. Management
is responsible for the fairness and reliability of the financial statements and
other financial data included in this report. In the preparation of the
financial statements, it is necessary to make informed estimates and judgments
based on currently available information on the effects of certain events and
transactions.
The Company maintains accounting and other controls which management
believes provide reasonable assurance that financial records are reliable,
24
<PAGE>
assets are safeguarded, and that transactions are properly recorded in
accordance with management's authorizations. However, limitations exist in any
system of internal control based upon the recognition that the cost of the
system should not exceed benefits derived.
The Company's independent public accountants, Arthur Andersen LLP, are
engaged to audit the financial statements of the Company and to express an
opinion thereon. Their audit is conducted in accordance with generally accepted
auditing standards to enable them to report whether the financial statements
present fairly, in all material respects, the financial position and results of
operations of the Company in accordance with generally accepted accounting
principles.
The Audit Committee of the Board of Directors of the Company, composed of
three directors who are not employees, meets periodically with the independent
public accountants and management. The independent public accountants have full
and free access to the Audit Committee to meet, with and without management
being present, to discuss the results of their audits and the quality of
financial reporting.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
25
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated herein by reference
to the Company's definitive proxy statement which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 1997.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference
to the Company's definitive proxy statement which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference
to the Company's definitive proxy statement which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference
to the Company's definitive proxy statement which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 1997.
26
<PAGE>
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
The following exhibits are included on pages E-1 to E-74 of this report.
Exhibit No. Description
- ------------ -----------------------------------------------------------------
3.1(a) Restated Articles of Incorporation of the Company (incorporated
by reference to Exhibit 3.1 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995 (the "1995 Form
10-K").
3.1(b) Certificate of Amendment to the Restated Articles of
Incorporation dated July 1, 1997 (incorporated herein by
reference to Exhibit 3.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997).
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2
to the Company's Registration Statement on Form S-3, dated
October 25, 1996).
4.2(a) Rights Agreement dated as of December 10, 1990, by and between
the Company and Society National Bank, as Rights Agent
(incorporated herein by reference to Exhibit 1 to the Company's
Registration Statement on Form 8-A, dated December 14, 1990).
4.2(b) First Amendment to the Rights Agreement, by and between the
Company and Society National Bank (successor to Ameritrust Texas,
N.A.), as Rights Agent, dated January 7, 1994 (incorporated
herein by reference to Exhibit 3.6 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1993).
4.2(c) Second Amendment to the Rights Agreement, by and between the
Company and Bank One, Texas N.A. (successor to Society National
Bank), as Rights Agent, dated April 1, 1995 (incorporated by
reference to Exhibit 4.7 to the Company's 1995 Form 10-K).
4.2(d) Third Amendment to the Rights Agreement, by and between the
Company and Bank One, Texas N.A. (successor to Society National
Bank), as Rights Agent, dated April 1, 1995 (incorporated by
reference to Exhibit 4.8 to the Company's 1995 Form 10-K).
4.2(e) Fourth Amendment to the Rights Agreement, by and between the
Company and Bank One, Texas N.A. (successor to Society National
Bank), as Rights Agent, dated April 1, 1995 (incorporated by
reference to Exhibit 4.9 to the Company's 1995 Form 10-K). 4.3
Certificate of Designation, Preferences and Rights of Series A
Junior Participating Preferred Stock dated December 6, 1990
(incorporated by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-3, dated October 25, 1996).
10.1(a)* Credit Agreement dated as of December 9, 1997, between the
Company, the Banks Party thereto and The First National Bank of
Chicago, as agent and Bank One, Texas, N.A., as Documentation
Agent.
10.2# Employment Agreement dated May 15, 1997, by and between the
Company and M. Jay Allison (incorporated herein by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997).
10.3# Employment Agreement dated May 15, 1997, by and between the
Company and Roland O. Burns (incorporated herein by reference to
Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997).
10.4# Change in Control Employment Agreement dated May 15, 1997 between
the Company and M. Jay Allison (incorporated herein by reference
to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997).
27
<PAGE>
Exhibit No. Description
- ---------- -----------------------------------------------------------------
10.5# Change in Control Employment Agreement dated May 15, 1997 between
the Company and Roland O. Burns (incorporated herein by reference
to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997).
10.6(a)# Comstock Resources, Inc. 1991 Long-term Incentive Plan, dated as
of April 1, 1991 (incorporated herein by reference to Exhibit
10.8 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1991).
10.6(b)# Amendment No. 1 to the Comstock Resources, Inc. 1991 Long-term
Incentive Plan (incorporated by reference to Exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996).
10.7# Form of Nonqualified Stock Option Agreement, dated April 2, 1991,
between the Company and certain officers and directors of the
Company (incorporated herein by reference to Exhibit 10.9 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1991).
10.8# Form of Restricted Stock Agreement, dated April 2, 1991, between
the Company and certain officers of the Company (incorporated
herein by reference to Exhibit 10.10 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1991).
10.9 Form of Stock Option Agreement, dated October 12, 1994 by and
between the Company and Christopher T. H. Pell, et al
(incorporated herein by reference to Exhibit 10.18 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1994).
10.10* Warrant Agreement dated December 9, 1997 by and between the
Company and Bois d' Arc Resources.
10.11* Joint Exploration Agreement dated December 8, 1997 by and between
the Company and Bois d' Arc Resources.
10.12 Lease Agreement, dated as of December 20, 1994, by and between
the Company and Occidental Tower Corporation (incorporated herein
by reference to Exhibit 10.19 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994).
10.13 Office Lease Agreement dated August 12, 1997 between the Company
and Briar Center LLC (incorporated by reference to Exhibit 10.2
to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997).
21* Subsidiaries of the Company.
23* Consent of Arthur Andersen LLP.
27* Financial Data Schedule for the twelve months ended December 31,
1997.
*Filed herewith.
# Management contract or compensatory plan document.
Reports on Form 8-K:
The following Form 8-K Reports filed subsequent to September 30, 1997 to
the date of this report:
Date Filed Item Description
---------- ---- -----------
December 12, 1997 2 Acquisition of Bois d' Arc Resources properties.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COMSTOCK RESOURCES, INC.
By:/s/M. JAY ALLISON
----------------------
M. Jay Allison
President and Chief Executive Officer
(Principal Executive Officer)
Date: March 12, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/M. JAY ALLISON President, Chief Executive Officer and March 12, 1998
- ----------------------
M. Jay Allison Chairman of the Board of Directors
(Principal Executive Officer)
/s/ROLAND O. BURNS Senior Vice President, Chief Financial March 12, 1998
- ----------------------
Roland O. Burns Officer, Secretary and Treasurer
(Principal Financial and
Accounting Officer)
/s/RICHARD S. HICKOK Director March 12, 1998
- ----------------------
Richard S. Hickok
/s/FRANKLIN B. LEONARD Director March 12, 1998
- ----------------------
Franklin B. Leonard
/s/CECIL E. MARTIN, JR. Director March 12, 1998
- ----------------------
Cecil E. Martin, Jr.
/s/DAVID W. SLEDGE Director March 12, 1998
- ----------------------
David W. Sledge
29
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS OF
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
INDEX
Report of Independent Public Accountants.....................................F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997.................F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997.....................................F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1995, 1996 and 1997.....................................F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997.....................................F-6
Notes to Consolidated Financial Statements...................................F-7
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Comstock Resources, Inc.:
We have audited the accompanying consolidated balance sheets of Comstock
Resources, Inc. (a Nevada corporation) and subsidiaries as of December 31, 1996
and 1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Comstock Resources, Inc. and
subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, the Company changed its
method of accounting for the impairment of long-lived assets in the fourth
quarter of 1995.
ARTHUR ANDERSEN LLP
Dallas, Texas,
February 19, 1998
F-2
<PAGE>
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 1996 and 1997
ASSETS
December 31,
------------
1996 1997
---- ----
(In thousands)
Cash and Cash Equivalents...............................$ 16,162 $ 14,504
Accounts Receivable:
Oil and gas sales .................................... 17,309 24,509
Joint interest operations ............................ 2,188 6,732
Other Current Assets ................................... 174 172
--------- ---------
Total current assets ......................... 35,833 45,917
Property and Equipment:
Unevaluated oil and gas properties ................... - 30,291
Oil and gas properties, successful
efforts method ..................................... 239,671 456,606
Other ................................................ 401 1,561
Accumulated depreciation, depletion
and amortization ................................... (54,144) (77,677)
--------- ---------
Net property and equipment ................... 185,928 410,781
Other Assets ........................................... 241 102
--------- ---------
$ 222,002 $ 456,800
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Portion of Long-Term Debt.......................$ 108 $ -
Accounts Payable and Accrued Expenses .................. 22,773 56,184
--------- ---------
Total current liabilities .................... 22,881 56,184
Long-Term Debt, less current portion ................... 80,000 260,000
Deferred Taxes Payable ................................. - 11,207
Reserve for Future Abandonment Costs ................... 905 4,815
Stockholders' Equity:
Preferred stock--$10.00 par, 5,000,000 shares
authorized,706,323 shares outstanding
at December 31, 1996 ............................... 7,063 -
Common stock--$0.50 par, 50,000,000 shares
authorized, 24,101,430 and 24,208,785
shares outstanding at December 31, 1996
and 1997, respectively ............................. 12,051 12,104
Additional paid-in capital ........................... 118,647 110,273
Retained earnings (deficit) .......................... (19,512) 2,234
Less: Deferred compensation-restricted
stock grants ....................................... (33) (17)
--------- ---------
Total stockholders' equity ................... 118,216 124,594
--------- ---------
$ 222,002 $ 456,800
========= =========
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
(In thousands, except
per share amounts)
Revenues:
<S> <C> <C> <C>
Oil and gas sales.................................$ 22,091 $ 68,915 $ 88,555
Gain on sales of property ........................ 19 1,447 85
Other income ..................................... 264 593 704
--------- -------- --------
Total revenues ........................... 22,374 70,955 89,344
--------- -------- --------
Expenses:
Oil and gas operating ............................ 7,427 13,838 17,919
Exploration ...................................... - 436 2,810
Depreciation, depletion and amortization ......... 8,379 18,269 26,235
General and administrative, net .................. 1,301 2,239 2,668
Interest ......................................... 5,542 10,086 5,934
Impairment of oil and gas properties ............. 29,150 - -
--------- -------- --------
Total expenses ........................... 51,799 44,868 55,566
--------- -------- --------
Income (loss) from continuing operations
before income taxes ........................... (29,425) 26,087 33,778
Provision for income taxes ......................... - - (11,622)
--------- -------- --------
Net income (loss) from continuing operations ....... (29,425) 26,087 22,156
Preferred stock dividends .......................... (1,908) (2,021) (410)
--------- -------- --------
Net income (loss) from continuing operations
attributable to common stock .................. (31,333) 24,066 21,746
Income from discontinued gas gathering,
processing and marketing operations
including gain on disposal .................... 3,264 1,866 -
--------- -------- --------
Net income (loss) attributable to common stock......$ (28,069) $ 25,932 $ 21,746
========= ======== ========
Net income (loss) per share:
Basic -
Net income (loss) per share from
continuing operations....................$ (2.50) $ 1.56 $ 0.90
======== ======== ========
Net income (loss) per share....................$ (2.24) $ 1.68 $ 0.90
======== ======== ========
Diluted -
Net income (loss) per share from
continuing operations................... $ 1.23 $ 0.85
======== ========
Net income (loss) per share................... $ 1.32 $ 0.85
======== ========
Weighted average shares outstanding:
Basic.................................... 12,546 15,449 24,186
====== ====== ======
Diluted.................................. 21,199 26,008
====== ======
The accompanying notes are an integral part of these statements.
</TABLE>
F-4
<PAGE>
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
Deferred
Additional Retained Compensation-
Preferred Common Paid-In Earnings Restricted
Stock Stock Capital (Deficit) Stock Grants Total
----- ----- ------- --------- ------------ -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 ... $ 16,000 $ 6,171 $ 36,524 $ (17,375) $ (115) $ 41,205
Issuance of preferred stock . 15,000 - - - - 15,000
Issuance of common stock .... - 292 1,659 - - 1,951
Restricted stock grants ..... - - - - 41 41
Net loss attributable to
common stock .............. - - - (28,069) - (28,069)
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1995 ... 31,000 6,463 38,183 (45,444) (74) 30,128
--------- --------- --------- --------- --------- ---------
Conversion of preferred stock (23,937) 2,506 21,431 - - -
Issuance of common stock .... - 3,082 59,033 - - 62,115
Restricted stock grants ..... - - - - 41 41
Net income attributable to
common stock .............. - - - 25,932 - 25,932
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1996 ... 7,063 12,051 118,647 (19,512) (33) 118,216
--------- --------- --------- --------- --------- ---------
Conversion of preferred stock (7,063) 673 6,390 - - -
Issuance of common stock .... - 53 708 - - 761
Repurchase of common stock .. - (673) (15,472) - - (16,145)
Restricted stock grants ..... - - - - 16 16
Net income attributable to
common stock .............. - - - 21,746 - 21,746
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1997 ... $ - $ 12,104 $ 110,273 $ 2,234 $ (17) $ 124,594
========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these statements.
</TABLE>
F-5
<PAGE>
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS For
the Years Ended December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ........................................$ (26,161) $ 27,953 $ 22,156
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Compensation paid in common stock ...................... 154 196 129
Depreciation, depletion and amortization ............... 8,613 18,642 26,235
Impairment of oil and gas properties ................... 29,150 - -
Deferred income taxes .................................. - - 11,363
Deferred revenue ....................................... 430 (430) -
Exploration ............................................ - 436 2,810
Gain on sales of property .............................. (2,608) (2,265) (85)
--------- --------- ---------
Working capital provided by operations ............... 9,578 44,532 62,608
Increase in accounts receivable ........................ (6,272) (4,764) (11,744)
Decrease in other current assets ....................... 79 86 2
Increase in accounts payable and accrued expenses ...... 5,022 6,065 33,411
--------- --------- ---------
Net cash provided by operating activities ............ 8,407 45,919 84,277
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of properties ...................... 3,085 9,016 5,079
Proceeds from sale of discontinued operations .......... - 3,036 -
Capital expenditures and acquisitions .................. (61,809) (111,962) (254,843)
--------- --------- ---------
Net cash used for investing activities ............... (58,724) (99,910) (249,764)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings ............................................. 58,404 172,150 295,000
Proceeds from preferred stock issuances ................ 15,000 - -
Proceeds from common stock issuances ................... 25 61,503 507
Repurchase of common stock ............................. - - (16,145)
Stock issuance costs ................................... (95) (863) (15)
Principal payments on debt ............................. (24,525) (163,853) (115,108)
Dividends paid on preferred stock ...................... - (701) (410)
--------- --------- ---------
Net cash provided by financing activities ............ 48,809 68,236 163,829
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (1,508) 14,245 (1,658)
Cash and cash equivalents, beginning of year ....... 3,425 1,917 16,162
--------- --------- ---------
Cash and cash equivalents, end of year .............$ 1,917 $ 16,162 $ 14,504
========= ========= =========
The accompanying notes are an integral part of these statements.
</TABLE>
F-6
<PAGE>
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Business and Organization
Comstock Resources, Inc., a Nevada corporation (together with its
subsidiaries, the "Company"), was formed in 1919 as Comstock Tunnel and Drainage
Company. In 1987, the Company's name was changed to Comstock Resources, Inc. The
Company is primarily engaged in the acquisition, development, production and
exploration of oil and natural gas properties in the United States.
(2) Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Concentrations of Credit Risk
Although the Company's cash equivalents and accounts receivable are exposed
to credit loss, the Company does not believe such risk to be significant. Cash
equivalents are high-grade, short-term securities, placed with highly rated
financial institutions. Most of the Company's accounts receivable are from a
broad and diverse group of oil and gas companies and, accordingly, do not
represent a significant credit risk.
Oil and Gas Properties
The Company follows the successful efforts method of accounting for its oil
and gas operations. Under this method, costs of productive wells, development
dry holes and productive leases are capitalized and amortized on a
unit-of-production basis over the life of the remaining related oil and gas
reserves. Cost centers for amortization purposes are determined on a field area
basis. The estimated future costs of dismantlement, restoration and abandonment
are accrued as part of depreciation, depletion and amortization expense and
included in the accompanying Consolidated Balance Sheets as Reserve for Future
Abandonment Costs.
Oil and gas leasehold costs are capitalized. Unproved oil and gas
properties with significant acquisition costs are periodically assessed and any
impairment in value is charged to expense. The costs of unproved properties
which are determined to be productive are transferred to proved oil and gas
properties. Exploratory expenses, including geological and geophysical expenses
and delay rentals for unevaluated oil and gas properties, are charged to expense
as incurred. Exploratory drilling costs are initially capitalized as unproved
property but charged to expense if and when the well is determined not to have
found proved oil and gas reserves.
F-7
<PAGE>
Prior to 1995, the Company periodically reviewed the carrying value of its
proved oil and gas properties for impairment in value on a company-wide basis by
comparing the capitalized costs of proved oil and gas properties with the
undiscounted future cash flows after income taxes attributable to proved oil and
gas properties. In 1995, the Company adopted the Statement of Financial
Accounting Standards No. 121 ("SFAS 121") "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed Of." SFAS 121 requires
the Company to assess the need for an impairment of capitalized costs of oil and
gas properties on a property by property basis. If an impairment is indicated
based on undiscounted expected future cash flows, then an impairment is
recognized to the extent that net capitalized costs exceed discounted expected
future cash flows. In connection with the adoption of SFAS 121, the Company
provided an impairment of $29,150,000 in 1995. No impairment was required in
1996 or 1997.
Other Property and Equipment
Other property and equipment of the Company consists primarily of work
boats, a gas gathering system, computer equipment, and furniture and fixtures
which are depreciated over estimated useful lives on a straight-line basis.
Income Taxes
Deferred income taxes are provided to reflect the future tax consequences
of differences between the tax basis of assets and liabilities and their
reported amounts in the financial statements using enacted tax rates.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share".
This new standard simplifies the method for computing earnings per share whereby
the Company will report basic earnings per share without the effect of any
outstanding potentially dilutive stock options or other convertible securities
and diluted earning per share with the effect of outstanding stock options and
other convertible securities that are potentially dilutive. Basic and diluted
earnings per share for 1995, 1996 and 1997 were determined as follows:
<TABLE>
<CAPTION>
For the Year Ended December 31,
1995 1996 1997
--------------------------- --------------------------- ---------------------------
Per Per Per
Income Shares Share Income Shares Share Income Shares Share
------- ------ ------ ------- ------ ------ ------- ------ ------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic Earnings Per Share:
Income (Loss) from
Continuing Operations $(29,425) 12,546 $ 26,087 15,449 $ 22,156 24,186
Less Preferred Stock
Dividends (1,908) - (2,021) - (410) -
-------- ------ -------- ------ -------- ------
Net Income Available
to Common Stockholders $(31,333) 12,546 $(2.50) 24,066 15,449 $ 1.56 21,746 24,186 $ 0.90
======== ====== ====== ====== ======
Diluted Earnings Per Share:
Effect of Dilutive Securities:
Stock Options - 922 - 967
Convertible Preferred Stock 2,021 4,828 410 855
-------- ------ -------- ------
Net Income Available to
Common Stockholders and
Assumed Conversions $ 26,087 21,199 $ 1.23 $ 22,156 26,008 $ 0.85
======== ====== ====== ======== ====== ======
</TABLE>
F-8
<PAGE>
Statements of Cash Flows
For the purpose of the consolidated statements of cash flows, the Company
considers all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents.
The following is a summary of all significant noncash investing and
financing activities:
For the Year Ended December 31,
-------------------------------
1995 1996 1997
---- ---- ----
(In thousands)
Common stock issued in payment of
preferred stock dividends $1,908 $1,320 $ -
Common stock issued for compensation 113 154 113
The Company made cash payments for interest of $5,836,000, $9,934,000 and
$5,112,000 in 1995, 1996 and 1997, respectively. The Company made cash payments
for income taxes of $300,000 in 1997.
(3) Acquisitions of Oil and Gas Properties
On May 1 and May 2, 1996, the Company purchased working interests in the
Double A Wells field in Polk County, Texas for a net purchase price of $100.4
million. The Company acquired 100% of the capital stock of Black Stone Oil
Company, the operator of the field, together with additional interests held by
other working interest owners in 19 producing oil and gas properties as well as
interests in adjacent undeveloped oil and gas leases.
On May 7, 1997, the Company purchased certain producing oil and gas
properties located in the Lisbon field in Claiborne Parish, Louisiana for a net
purchase price of $20.1 million. The acquisition included interests in 13 wells
(7.1 net wells) and approximately 6,400 gross acres.
On December 9, 1997, the Company acquired interests in certain offshore
Louisiana oil and gas properties as well as interests in undeveloped oil and gas
leases for $200.9 million from Bois d' Arc Resources ("Bois d' Arc") and certain
affiliates and working interest partners of Bois d' Arc. The Company acquired
interests in 43 wells (29.6 net wells) and eight separate production complexes
located in the Gulf of Mexico offshore of Plaquemines and Terrebonne Parishes,
Louisiana. The acquisition includes interests in the Louisiana state and federal
offshore areas of Main Pass Blocks 21 and 25, Ship Shoal Blocks 66, 67, 68 and
69 and South Pelto Block 1. Approximately $30.2 million of the purchase price is
attributed to the undrilled prospects and $1.0 million of the purchase price is
attributed to other assets.
The 1996 and 1997 acquisitions were accounted for utilizing the purchase
method of accounting. The accompanying consolidated statements of operations
include the results of operations from the acquired properties beginning on the
dates that the acquisitions were closed. The following table summarizes the
unaudited pro forma effect on the Company's consolidated statements of
operations as if the acquisitions consummated in 1996 and in 1997 had been
closed on January 1, 1996. Future results may differ substantially from pro
forma results due to changes in prices received for oil and gas sold, production
declines and other factors. Therefore, the pro forma amounts should not be
considered indicative of future operations.
F-9
<PAGE>
Unaudited
1996 1997
Pro Forma Pro Forma
--------- ---------
(In thousands, except per share amounts)
Total Revenues $ 126,896 $ 144,313
Net income from continuing operations
attributable to common stock 31,271 27,327
Net income from continuing operations
per share:
Basic 2.02 1.13
Diluted 1.57 1.07
(4) Sale of Oil and Gas Properties
The Company sold certain oil and gas properties for approximately $9.0
million and $5.1 million in 1996 and 1997, respectively. The properties sold
were non-strategic assets to the Company. Gains from the property sales of $1.4
million and $85,000 are included in the accompanying Consolidated Statements of
Operations for 1996 and 1997, respectively.
(5) Oil and Gas Producing Activities
Set forth below is certain information regarding the aggregate capitalized
costs of oil and gas properties and costs incurred in oil and gas property
acquisition, development and exploration activities:
Capitalized Costs As of December 31,
1996 1997
---- ----
(In thousands)
Proved properties $ 239,671 $ 456,606
Unproved properties - 30,291
Accumulated depreciation, depletion and amortization (53,953) (77,414)
--------- ---------
$ 185,718 $ 409,483
========= =========
Costs Incurred
Year Ended December 31,
-----------------------
1995 1996 1997
---- ---- ----
(In thousands)
Property acquisitions:
Proved properties $ 56,093 $ 100,539 $ 190,708
Unproved properties - - 31,650
Development costs 3,666 10,936 25,282
Exploration costs - 436 6,043
--------- --------- ---------
$ 59,759 $ 111,911 $ 253,683
========= ========= =========
F-10
<PAGE>
The following presents the results of operations of oil and gas producing
activities for the three years in the period ended December 31, 1997:
1995 1996 1997
---- ---- ----
(In thousands)
Oil and gas sales $ 22,091 $ 68,915 $ 88,555
Production costs (7,427) (13,838) (17,919)
Exploration - (436) (2,810)
Depreciation, depletion and amortization (8,277) (18,162) (26,111)
Impairment of oil and gas properties (29,150) - -
-------- -------- --------
Operating income (loss) (22,763) 36,479 41,715
Income tax expense - - (14,353)
-------- -------- --------
Results of operations (excluding general
and administrative and interest expenses) $(22,763) $ 36,479 $ 27,362
======== ======== ========
(6) Long-Term Debt
Total debt at December 31, 1996 and 1997 consists of the following:
1996 1997
---- ----
(In thousands)
Bank Credit Facility $ 80,000 $ 260,000
Other 108 -
80,108 260,000
Less current portion (108) -
--------- ---------
$ 80,000 $ 260,000
========= =========
In connection with the oil and gas property acquisition closed in December
1997, the Company entered into a $290.0 million revolving credit facility with a
syndication of ten banks in which The First National Bank of Chicago serves as
agent, (the "Bank Credit Facility"). The Company financed the acquisition and
refinanced $77.0 million outstanding under its existing credit facility with
borrowings under the Bank Credit Facility. The Bank Credit Facility matures on
December 9, 2002.
As of December 31, 1997, the Company had $260.0 million outstanding under
the Bank Credit Facility. Borrowings under the Bank Credit Facility cannot
exceed a borrowing base determined semiannually by the banks. The borrowing base
at December 31, 1997 was $290.0 million. Amounts outstanding under the Bank
Credit Facility bear interest at a floating rate based on The First National
Bank of Chicago's base rate (as defined) plus 0% to 0.5% or, at the Company's
option, at a fixed rate for up to six months based on the London Interbank
Offered Rate ("LIBOR") plus 0.625% to 1.5% depending upon the utilization of the
available borrowing base. As of December 31, 1997, the Company had placed the
outstanding advances under the revolving credit facility under fixed rate loans
based on LIBOR at an average rate of approximately 7.3% per annum. In addition,
the Company incurs a commitment fee of 0.2% to 0.375% on the unused portion of
the borrowing base depending upon the utilization of the available borrowing
base.
F-11
<PAGE>
(7) Lease Commitments
The Company rents office space under certain noncancellable leases. Minimum
future payments under the leases are as follows:
(In thousands)
1998 $350
1999 598
2000 421
2001 421
2002 421
(8) Stockholders' Equity
Preferred Stock
On January 7, 1994, the Company sold 600,000 shares of its Series 1994
Convertible Preferred Stock, $10 par value per share (the "Series 1994
Preferred"), in a private placement for $6.0 million. Dividends were payable at
the quarterly rate of $0.225 on each outstanding share of the Series 1994
Preferred (9% per annum of the par value). On September 16, 1996, the holders of
the Series 1994 Preferred converted all of the shares of the Series 1994
Preferred into 1,500,000 shares of common stock of the Company.
On July 22, 1994, the Company issued 1,000,000 shares of its 1994 Series B
Convertible Preferred Stock, $10 par value per share (the "1994 Series B
Preferred"), in connection with the repurchase of certain production payments
previously conveyed by the Company to a major natural gas company. Dividends
were payable at the quarterly rate of $0.15625 on each outstanding share (6.25%
per annum of the par value). On July 11, 1996, the Company redeemed the
1,000,000 shares of the 1994 Series B Preferred by issuing 2,000,000 shares of
common stock of the Company.
On June 19, 1995, the Company sold 1,500,000 shares of its Series 1995
Convertible Preferred Stock, $10 par value per share (the "Series 1995
Preferred"), in a private placement for $15.0 million. Dividends were payable at
the quarterly rate of $0.225 on each outstanding share (9% per annum of the par
value). On December 2, 1996, holders of 793,677 shares of the Series 1995
Preferred converted their preferred shares into 1,511,761 shares of common stock
of the Company. On August 20, 1997, the holders of the Series 1995 Preferred
converted all of the remaining shares of the Series 1995 Preferred, $10 par
value, into 1,345,373 shares of common stock of the Company.
Common Stock
Under a plan adopted by the Board of Directors, non-employee directors can
elect to receive shares of common stock valued at the then current market price
in payment of annual director and consulting fees. Under this plan, the Company
issued 27,815, 37,117, and 9,256 shares of common stock in 1995, 1996 and 1997,
respectively, in payment of fees aggregating $113,000, $154,000, and $113,000
for 1995, 1996 and 1997, respectively.
Each of the Company's formerly outstanding preferred stock series provided
that the Company could issue common stock in lieu of cash for payment of
quarterly dividends. The Company issued 546,046 and 249,453 shares of common
stock in 1995 and 1996, respectively, in payment of dividends on its preferred
stock of $1,908,000 and $1,320,000 in 1995 and 1996, respectively. No shares
were issued in lieu of cash dividends in 1997.
F-12
<PAGE>
On December 2, 1996, the Company completed a public offering of 5,795,000
shares of common stock of which 4,000,000 (4,869,250 including the
over-allotment option which was exercised on December 12, 1996) shares were sold
by the Company and 1,795,000 shares were sold by certain stockholders. Net
proceeds to the Company, after the underwriting discount and other expenses,
were approximately $57.0 million and were used to reduce indebtedness under the
Company's bank credit facility.
On August 20, 1997, the Company repurchased the 1,345,373 shares of common
stock held by former Series 1995 Preferred stockholders at $12.00 per share for
an aggregate purchase price of $16.1 million.
During 1996, options and warrants to purchase common stock of the Company
were exercised at prices ranging from $2.00 to $5.75 per share for 1,007,177
shares of common stock yielding net proceeds to the Company of approximately
$3.6 million. During 1997, options to purchase common stock of the Company were
exercised at prices ranging from $3.00 to $6.56 per share for 98,100 shares of
common stock yielding net proceeds to the Company of $507,000.
Stock Options and Warrants
On July 16, 1991, the Company's stockholders approved the 1991 Long-Term
Incentive Plan (the "Incentive Plan") for the Company's management including
officers, directors and managerial employees. The Incentive Plan authorizes the
grant of non-qualified stock options and incentive stock options and the grant
of restricted stock to key executives of the Company. On May 15, 1996, the
Company's stockholders approved an amendment to the Incentive Plan increasing
the shares to be awarded by 1,240,000. As of December 31, 1997, the Incentive
Plan provided for future awards of stock options or restricted stock grants of
up to 454,963 shares of common stock plus 10% of any future issuances of common
stock.
The following table summarizes stock option activity during 1995, 1996 and
1997 under the Incentive Plan:
Weighted
Average
Number of Exercise Exercise
Shares Price Price
------ ----- -----
Outstanding at January 1, 1995 704,250 $2.00 to $3.00 $2.18
Granted 97,500 $3.00 $3.00
Exercised (10,000) $2.50 $2.50
---------
Outstanding at December 31, 1995 791,750 $2.00 to $3.00 $2.27
Granted 1,933,000 $4.81 to $11.00 $9.31
Exercised (113,250) $2.00 to $4.81 $3.06
Forfeited (10,000) $6.56 $6.56
---------
Outstanding at December 31, 1996 2,601,500 $2.00 to $11.00 $7.45
Granted 667,000 $9.63 to $12.38 $12.00
Exercised (50,000) $3.00 to $6.56 $5.33
---------
Outstanding at December 31, 1997 3,218,500 $2.00 to $12.38 $8.43
=========
Exercisable at December 31, 1997 1,408,500 $2.00 to $11.00 $4.77
=========
F-13
<PAGE>
The following table summarizes information about Incentive Plan stock
options outstanding at December 31, 1997:
Number of Weighted Average Number of
Shares Remaining Life Shares
Exercise Price Outstanding (Years) Exercisable
-------------- ----------- ------- -----------
$2.00 471,000 3.2 447,000
$2.50 85,000 1.5 76,000
$3.00 155,000 2.1 155,000
$4.81 264,000 3.6 264,000
$6.56 250,000 4.1 250,000
$9.63 90,000 4.6 90,000
$11.00 1,326,500 7.6 126,500
$12.38 577,000 7.4 -
--------- --- ---------
3,218,500 5.8 1,408,500
========= === =========
The Company accounts for the stock options issued under the Incentive Plan
under APB Opinion No. 25, under which no compensation cost has been recognized.
Had compensation cost for this plan been determined consistent with Statement of
Financial Accounting Standards No. 123 ("SFAS 123") "Accounting for Stock-Based
Compensation," the Company's net income and earnings per share from continuing
operations would have been reduced to the following pro forma amounts:
1995 1996 1997
---- ---- ----
(In thousands, except per share amounts)
Net income (loss) from
continuing operations: As Reported $(31,333) $ 24,066 $ 21,746
Pro Forma $(31,498) $ 20,296 $ 18,633
Basic earnings per share: As Reported $ (2.50) $ 1.56 $ 0.90
Pro Forma $ (2.51) $ 1.31 $ 0.77
Diluted earnings per share: As Reported $ 1.23 $ 0.85
Pro Forma $ 0.96 $ 0.72
Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1995, 1996, and 1997, respectively: average
risk-free interest rates of 6.38, 6.34, and 6.33 percent; average expected lives
of 5.2, 7.7, and 7.3 years; average expected volatility factors of 55.7, 54.5,
and 51.9; and no dividend yield. The estimated weighted average fair value of
options to purchase one share of common stock issued under the Company's
Incentive Plan was $1.69 in 1995, $6.20 in 1996 and $7.45 in 1997.
The Company also has options to purchase 237,530 common shares at $5.00 per
share outstanding at December 31, 1997 that were issued in connection with an
oil and gas property acquisition in 1994. These options expire in 1999.
On December 8, 1997, the Company awarded warrants to purchase up to
1,000,000 shares of the Company's common stock at $14.00 per share to Bois d'
Arc in connection with a five-year joint exploration venture. The warrants
become exercisable in increments of 50,000 shares upon the election by the
F-14
<PAGE>
Company to complete a successful exploration well on a prospect generated by
Bois d' Arc under the joint exploration venture. Warrants which become
exercisable under the exploration venture expire on December 31, 2007. The fair
value of each warrant to purchase one share of common stock is estimated at the
date of grant at $9.97 using the Black-Scholes option pricing model with the
assumptions: risk-free interest rate of 6.35 percent; expected life of 10.1
years; expected volatility factor of 51.9 percent; and no dividend yield. The
estimated value of the warrants will be included as exploration costs for wells
that are discovered under the exploration venture.
Restricted Stock Grants
Under the Incentive Plan, officers and managerial employees of the Company
may be granted a right to receive shares of the Company's common stock without
cost to the employee. The shares vest over a ten-year period with credit given
for past service rendered to the Company. Restricted stock grants for 330,000
shares have been awarded under the Incentive Plan. As of December 31, 1997,
317,500 shares of such awards are vested. A provision for the restricted stock
grants is made ratably over the vesting period. Compensation expense recognized
for restricted stock grants for the years ended December 31, 1995, 1996 and 1997
was $41,000, $41,000, and $15,000, respectively.
(9) Significant Customers
During 1996 and 1997, sales to one purchaser of crude oil accounted for 17%
of the Company's oil and gas sales and one purchaser of natural gas accounted
for 31% and 35%, respectively, of the Company's oil and gas sales. No single
purchaser accounted for more than 10% of the Company's total oil and gas sales
in 1995.
(10) Income Taxes
The tax effects of significant temporary differences representing the net
deferred tax liability at December 31, 1996 and 1997 were as follows:
1996 1997
---- ----
(In thousands)
Net deferred tax assets (liabilities):
Property and equipment $ (6,399) $(13,965)
Net operating loss carryforwards
6,255 2,193
Other carryforwards 320 565
Valuation allowance (176) -
-------- --------
$ - $(11,207)
======== ========
The following is an analysis of the consolidated income tax provisions for
the year ended December 31, 1997:
(In thousands)
Current $ 259
Deferred 11,363
---------
$ 11,622
=========
No income tax provision was recognized in 1995 and 1996 due to the
availability of net operating loss carryforwards to offset any current or
deferred income tax liabilities.
F-15
<PAGE>
The difference between income taxes computed using the statutory rate of
35% and the Company effective tax rate of 34% for 1997 is as follows:
(In thousands)
Income taxes computed at federal statutory rate $ 11,822
Reduction in valuation allowance
for net operating loss carryforward (176)
Other (24)
--------
$ 11,622
========
The Company has net operating loss carryforwards of approximately $6.3
million as of December 31, 1997 for income tax reporting purposes which expire
in varying amounts from 2005 to 2010.
(11) Related Party Transactions
The Company served as general partner of Comstock DR-II Oil & Gas
Acquisition Limited Partnership ("Comstock DR-II") until December 29, 1997. For
1995, 1996 and 1997 the Company received management fees from Comstock DR-II of
$87,000, $87,000 and $40,000, respectively.
From August 1, 1995 to December 1, 1996, the Company was the managing
general partner and owned a 20.31% limited partner interest in Crosstex Pipeline
Partners, Ltd. ("Crosstex"). The Company sold its interest in connection with
the sale of its third party natural gas marketing operations (see Note 13
"Discontinued Operations"). The Company received $39,000 and $82,000 in fees for
management and construction services provided to Crosstex in 1995 and 1996,
respectively. In addition, Crosstex reimbursed the Company $104,000 and $228,000
for direct expenses incurred in connection with managing Crosstex in 1995 and
1996, respectively. The Company paid $158,000 and $477,000 to Crosstex for
transportation of its natural gas production in 1995 and 1996, respectively.
(12) Price Risk Management
The Company periodically uses derivative financial instruments to manage
natural gas price risk. The Company's realized gains and losses attributable to
its price risk management activities are as follows:
1995 1996 1997
---- ---- ----
(In thousands)
Realized Gains $ 913 $ 509 $ -
Realized Losses 28 1,643 -
As of December 31, 1996 and 1997, the Company had no open derivative
financial instruments held for price risk management.
(13) Discontinued Operations
In December 1996, the Company sold its third party natural gas marketing
operations and substantially all of its related gas gathering and gas processing
assets for approximately $3.0 million. The Company realized a $818,000 gain from
the sale. The Company's gas gathering, processing and marketing segment is
accounted for as discontinued operations in the accompanying financial
statements, and accordingly, the results of the gas gathering, processing and
marketing operations as well as the gain on disposal are segregated in the
accompanying Consolidated Statements of Operations.
F-16
<PAGE>
Income for discontinued gas gathering, processing and marketing operations
included in the Consolidated Statements of Operations is comprised of the
following:
Year Ended December 31,
1995 1996
---- ----
(In thousands)
Revenues $ 50,713 $ 85,398
Operating costs (49,118) (83,168)
Depreciation, depletion and amortization (234) (373)
General and administrative, net (686) (809)
Gain on sales of property 2,589 -
Gain on disposal of segment - 818
Provision for income taxes - -
-------- --------
Income from discontinued operations $ 3,264 $ 1,866
======== ========
(14) Supplementary Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth Total
----- ------ ----- ------ -----
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
1997 -
Total revenues............................. $ 23,727 $ 18,279 $ 18,285 $ 29,053 $ 89,344
========= ========= ========= ========= ========
Net income attributable to common stock.... $ 7,764 $ 3,973 $ 4,190 $ 5,819 $ 21,746
========= ========= ========= ========= ========
Net income per share:
Basic ................................... $ 0.32 $ 0.16 $ 0.17 $ 0.24 $ 0.90
========= ========= ========= ========= ========
Diluted ................................. $ 0.30 $ 0.16 $ 0.17 $ 0.23 $ 0.85
========= ========= ========= ========= ========
1996 -
Total revenues............................. $ 9,628 $ 17,890 $ 19,943 $ 23,494 $ 70,955
========= ========= ========= ========= ========
Net income attributable to common stock
from continuing operations............... $ 1,922 $ 6,258 $ 6,590 $ 9,296 $ 24,066
Net income from discontinued operations.... 454 135 253 1,024 1,866
--------- --------- --------- --------- --------
Net income attributable to common stock.... $ 2,376 $ 6,393 $ 6,843 $ 10,320 $ 25,932
========= ========= ========= ========= ========
Basic net income per share:
Continuing operations.................... $ 0.15 $ 0.46 $ 0.42 $ 0.48 $ 1.56
Discontinued operations.................. 0.03 0.01 0.01 0.05 0.12
--------- --------- --------- --------- --------
Net income per share..................... $ 0.18 $ 0.47 $ 0.43 $ 0.53 $ 1.68
========= ========= ========= ========= ========
Diluted net income per share:
Continuing operations.................... $ 0.13 $ 0.33 $ 0.33 $ 0.42 $ 1.23
Discontinued operations.................. 0.02 0.01 0.02 0.04 0.09
--------- --------- --------- --------- --------
Net income per share..................... $ 0.15 $ 0.34 $ 0.35 $ 0.46 $ 1.32
========= ========= ========= ========= ========
</TABLE>
F-17
<PAGE>
(15) Oil and Gas Reserves Information (Unaudited)
The estimates of proved oil and gas reserves utilized in the preparation of
the financial statements were estimated by independent petroleum engineers in
accordance with guidelines established by the Securities and Exchange Commission
and the Financial Accounting Standards Board, which require that reserve reports
be prepared under existing economic and operating conditions with no provision
for price and cost escalation except by contractual agreement. All of the
Company's reserves are located onshore in or offshore to the continental United
States.
Future prices received for production and future production costs may vary,
perhaps significantly, from the prices and costs assumed for purposes of these
estimates. There can be no assurance that the proved reserves will be developed
within the periods indicated or that prices and costs will remain constant.
There can be no assurance that actual production will equal the estimated
amounts used in the preparation of reserve projections. In accordance with the
Securities and Exchange Commission's guidelines, the Company's independent
petroleum engineers' estimates of future net cash flows from the Company's
proved properties and the present value thereof are made using oil and natural
gas sales prices in effect as of the dates of such estimates and are held
constant throughout the life of the properties. Average prices used in
estimating the future net cash flows at December 31, 1996 and 1997 were as
follows: $24.61 and $17.24 per barrel for oil in 1996 and 1997, respectively,
and $3.84 and $2.64 per Mcf for natural gas in 1996 and 1997, respectively.
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting future rates of production and timing of
development expenditures. Oil and gas reserve engineering must be recognized as
a subjective process of estimating underground accumulations of oil and gas that
cannot be measured in an exact way, and estimates of other engineers might
differ materially from those shown below. The accuracy of any reserve estimate
is a function of the quality of available data and engineering and geological
interpretation and judgment. Results of drilling, testing and production after
the date of the estimate may justify revisions. Accordingly, reserve estimates
are often materially different from the quantities of oil and gas that are
ultimately recovered. Reserve estimates are integral in management's analysis of
impairments of oil and gas properties and the calculation of depreciation,
depletion and amortization on those properties.
The following unaudited table sets forth proved oil and gas reserves at
December 31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
Oil Gas Oil Gas Oil Gas
(MBbls) (MMcf) (MBbls) (MMcf) (MBbls) (MMcf)
------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Proved Reserves:
Beginning of year 5,119 92,840 3,779 173,165 8,994 234,444
Revisions of previous
estimates (2,843) (18,810) 243 (5,926) (1,202) (7,398)
Extensions and discoveries - - 613 551 263 5,566
Purchases of minerals
in place 1,859 108,432 5,930 100,446 14,473 39,970
Sales of minerals in place - - (619) (14,365) (258) (9,605)
Production (356) (9,297) (952) (19,427) (1,343) (22,860)
------- ------- ------- ------- ------- -------
End of year 3,779 173,165 8,994 234,444 20,927 240,117
======= ======= ======= ======= ======= =======
Proved Developed Reserves:
Beginning of year 1,504 62,827 2,562 130,375 6,953 187,247
======= ======= ======= ======= ======= =======
End of year 2,562 130,375 6,953 187,247 16,635 188,102
======= ======= ======= ======= ======= =======
</TABLE>
F-18
<PAGE>
The following table sets forth the standardized measure of discounted
future net cash flows relating to proved reserves at December 31, 1996 and 1997:
1996 1997
---- ----
(In thousands)
Cash Flows Relating to Proved Reserves:
Future Cash Flows $ 1,120,601 $ 993,812
Future Costs:
Production (202,722) (217,637)
Development (47,548) (66,418)
Future Net Cash Flows Before Income Taxes 870,331 709,757
Future Income Taxes (239,065) (128,983)
Future Net Cash Flows 631,266 580,774
10% Discount Factor (240,844) (162,498)
----------- -----------
Standardized Measure of Discounted
Future Net Cash Flows $ 390,422 $ 418,276
=========== ===========
The following table sets forth the changes in the standardized measure of
discounted future net cash flows relating to proved reserves for the years ended
December 31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Standardized Measure, Beginning of Year $ 78,481 $ 146,506 $ 390,422
Net Change in Sales Price, Net of Production Costs 9,450 132,094 (188,079)
Development Costs Incurred During the Year Which
Were Previously Estimated 822 5,934 10,740
Revisions of Quantity Estimates (30,298) (7,612) (16,779)
Accretion of Discount 7,874 14,829 50,292
Changes in Future Development Costs 13,248 (5,801) (3,919)
Changes in Timing and Other (2,590) (13,165) (20,347)
Extensions and Discoveries - 9,216 6,233
Purchases of Reserves In Place 85,706 282,150 205,583
Sales of Reserves In Place - (10,342) (16,450)
Sales, Net of Production Costs (14,664) (55,077) (70,636)
Net Changes in Income Taxes (1,523) (108,310) 71,216
--------- --------- ---------
Standardized Measure, End of Year $ 146,506 $ 390,422 $ 418,276
========= ========= =========
</TABLE>
F-19
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description Page
- ----------- ------------------------------------------------------- -------
3.1(a) Restated Articles of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1995 (the "1995 Form 10-K").
3.1(b) Certificate of Amendment to the Restated Articles of
Incorporation dated July 1, 1997 (incorporated herein
by reference to Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1997).
3.2 Bylaws of the Company (incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on
Form S-3, dated October 25, 1996).
4.2(a) Rights Agreement dated as of December 10, 1990, by and
between the Company and Society National Bank, as
Rights Agent (incorporated herein by reference to
Exhibit 1 to the Company's Registration Statement on
Form 8-A, dated December 14, 1990).
4.2(b) First Amendment to the Rights Agreement, by and between
the Company and Society National Bank (successor to
Ameritrust Texas, N.A.), as Rights Agent, dated January
7, 1994 (incorporated herein by reference to Exhibit
3.6 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1993).
4.2(c) Second Amendment to the Rights Agreement, by and
between the Company and Bank One, Texas N.A. (successor
to Society National Bank), as Rights Agent, dated April
1, 1995 (incorporated by reference to Exhibit 4.7 to
the Company's 1995 Form 10-K).
4.2(d) Third Amendment to the Rights Agreement, by and between
the Company and Bank One, Texas N.A. (successor to
Society National Bank), as Rights Agent, dated April 1,
1995 (incorporated by reference to Exhibit 4.8 to the
Company's 1995 Form 10-K).
4.2(e) Fourth Amendment to the Rights Agreement, by and
between the Company and Bank One, Texas N.A. (successor
to Society National Bank), as Rights Agent, dated April
1, 1995 (incorporated by reference to Exhibit 4.9 to
the Company's 1995 Form 10-K).
4.3 Certificate of Designation, Preferences and Rights of
Series A Junior Participating Preferred Stock, dated
December 6, 1990 (incorporated by reference to Exhibit
4.3 to the Company's Registration Statement on Form
S-3, dated October 25, 1996).
E-1
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description Page
- ----------- ------------------------------------------------------- -------
10.1(a)* Credit Agreement dated as of December 9, 1997, between E-4
the Company, the Banks Party thereto and The First
National Bank of Chicago, as agent and Bank One, Texas,
N.A., as Documentation Agent.
10.2# Employment Agreement dated May 15, 1997, by and between
the Company and M. Jay Allison (incorporated herein by
reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1997).
10.3# Employment Agreement dated May 15, 1997, by and between
the Company and Roland O. Burns (incorporated herein by
reference to Exhibit 10.3 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1997).
10.4# Change in Control Employment Agreement dated May 15,
1997 between the Company and M. Jay Allison
(incorporated herein by reference to Exhibit 10.4 to
the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997).
10.5# Change in Control Employment Agreement dated May 15,
1997 between the Company and Roland O. Burns
(incorporated herein by reference to Exhibit 10.5 to
the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997).
10.6(a)# Comstock Resources, Inc. 1991 Long-term Incentive Plan,
dated as of April 1, 1991 (incorporated herein by
reference to Exhibit 10.8 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1991).
10.6(b)# Amendment No. 1 to the Comstock Resources, Inc. 1991
Long- term Incentive Plan (incorporated by reference to
Exhibit 10.4 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996).
10.7# Form of Nonqualified Stock Option Agreement, dated
April 2, 1991, between the Company and certain officers
and directors of the Company (incorporated herein by
reference to Exhibit 10.9 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1991).
E-2
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description Page
- ----------- -------------------------------------------------------- -------
10.8# Form of Restricted Stock Agreement, dated April 2,
1991, between the Company and certain officers of the
Company (incorporated herein by reference to Exhibit
10.10 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1991).
10.9 Form of Stock Option Agreement, dated October 12, 1994
by and between the Company and Christopher T. H. Pell,
et al (incorporated herein by reference to Exhibit
10.18 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994).
10.10* Warrant Agreement, dated December 9, 1997 by and E-57
between the Company and Bois d' Arc Resources.
10.11* Joint Exploration Agreement, dated December 8, 1997 by E-67
and between the Company and Bois d' Arc Resources.
10.12 Lease Agreement, dated as of December 20, 1994, by and
between the Company and Occidental Tower Corporation
(incorporated herein by reference to Exhibit 10.19 to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1994).
10.13 Office Lease Agreement, dated August 12, 1997 between
the Company and Briar Center LLC (incorporated by
reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1997).
21* Subsidiaries of the Company. E-72
23* Consent of Arthur Andersen LLP. E-73
27* Financial Data Schedule for the twelve months ended E-74
December 31, 1997.
*Filed herewith.
# Management contract or compensatory plan document.
E-3
EXHIBIT 10.1(a)
CREDIT AGREEMENT
dated as of December 9, 1997
between
COMSTOCK RESOURCES, INC.,
COMSTOCK OIL & GAS, INC.,
COMSTOCK OIL & GAS - LOUISIANA, INC.,
COMSTOCK OFFSHORE, LLC,
and
THE BANKS PARTY HERETO,
THE FIRST NATIONAL BANK OF CHICAGO, AS AGENT
AND
BANK ONE, TEXAS, N.A., AS DOCUMENTATION AGENT
E-4
<PAGE>
CREDIT AGREEMENT
THIS AGREEMENT, dated as of December 9, 1997, is among COMSTOCK RESOURCES,
INC. a Nevada corporation ("CRI"), COMSTOCK OIL & GAS, INC., a Nevada
corporation ("COG"), COMSTOCK OIL & GAS - LOUISIANA, INC., a Nevada corporation
("COGL"), COMSTOCK OFFSHORE, LLC, a Nevada limited liability company
("Offshore") (CRI, COG, COGL and Offshore may hereinafter collectively be
referred to as the "Borrowers"), the lenders party hereto from time to time
(collectively, the "Banks" and individually, a "Bank"), BANK ONE, TEXAS, N.A.,
as documentation agent for the Banks (in such capacity, the "Documentation
Agent") and THE FIRST NATIONAL BANK OF CHICAGO, as agent for the Banks (in such
capacity, the "Agent").
RECITALS
A. CRI, COG, COGL, Comstock Offshore Energy, Inc. (now merged into COG),
Comstock Natural Gas, Inc. (now merged into COG) and Black Stone Oil Company
(now merged into COG), as borrowers, the banks party thereto, Bank One, Texas,
N.A., as co-agent for such banks and The First National Bank of Chicago, as
agent for such banks, executed a Credit Agreement dated as of August 13, 1996,
as amended (the "Existing Credit Agreement"), which amended and restated a
Credit Agreement dated as of May 1, 1996, which in turn amended and restated a
Credit Agreement dated as of July 31, 1995, which in turn amended and restated a
Credit Agreement dated as of September 30, 1994, as amended, and which in turn
amended and restated a Credit Agreement dated as of November 15, 1993, as
amended.
B. The Borrowers have requested that the Banks amend and restate the
Existing Credit Agreement as herein provided, replacing and refinancing the
indebtedness thereunder with a five year secured revolving credit facility
providing for revolving credit loans in the aggregate principal amount of
$290,000,000, including a $5,000,000 letter of credit subfacility participated
in by all the Banks, and the Banks are willing to establish such a credit
facility in favor of the Borrowers and amend and restate the Existing Credit
Agreement on the terms and conditions herein set forth.
AGREEMENT
In consideration of the premises and of the mutual agreements herein
contained, the parties hereto agree that the Existing Credit Agreement shall be
amended and restated as follows:
SECTION 1. Definitions
1.1 Certain Definitions. As used herein, the following terms shall have the
following respective meanings:
"Advances" shall mean any Loan or any Letter of Credit Advance.
"Advance Date" shall mean each date for the making, continuation or
conversion of an Advance as specified in the notice delivered by the Borrowers,
or any of them, permitted by this Agreement.
"Affiliate", when used with respect to any Person shall mean any other
Person which, directly or indirectly, controls or is controlled by or is under
common control with such Person or any other Person which is owned 5% or more by
such Person or any Subsidiary or other Affiliate of such Person. For purposes of
this definition "control" (including the correlative meanings of the terms
"controlled by" and
E-5
<PAGE>
"under common control with"), with respect to any Person, shall mean possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of such Person, whether through the ownership of voting
securities or otherwise.
"Applicable Margin" shall mean, with respect to any Eurodollar Loan,
Floating Rate Loan and Commitment Fee, as the case may be, the applicable
percentage set forth in the table below based upon a fraction, expressed as a
percentage, determined as of the last day of each calendar month of CRI, the
numerator of which is the daily average of the Advances outstanding during such
calendar month and the denominator of which is the daily average of the
Borrowing Base during such calendar month (the "Utilization Percentage"):
Utilization Percentage Eurodollar Rate Floating Commitment
"UP" Loan and Letter Rate Loan Fee under
of Credit Fee Section 4.3(a)
UP>=95% 1.50% 0.50% .375%
UP>=90% and <95% 1.375% 0.375% .25%
UP>=75% and <90% 1.125% 0.125% .25%
UP>=55% and <75% 0.875% 0.00% .225%
UP<55% 0.625% 0.00% .20%
The Utilization Percentage shall be determined by the Agent at the end of each
calendar month and shall remain in effect for the following calendar month of
CRI, and the Agent shall adjust the Applicable Margin upon such determination,
provided that (a) the Agent shall also determine the Utilization Percentage
promptly after any public offering of common stock or offering under Rule 144A
pursuant to the Securities Act of 1933 of subordinated debt (if allowed
hereunder) of CRI and adjust the Applicable Margin upon such determination, and
(b) as of the Effective Date and until the first time the Applicable Margin is
to be adjusted, the Applicable Margin will be based on a Utilization Percentage
of >= 90% and <95%. Notwithstanding the above or anything else in this
Agreement, upon and during the continuance of any Event of Default, the
Applicable Margin shall be based on the highest possible Applicable Margin
described in the table above, regardless of the Utilization Percentage.
"Bank Obligations" shall mean all indebtedness, obligations and
liabilities, whether now or hereafter arising, of the Borrowers to the Agent or
any Bank pursuant to any of the Loan Documents.
"Borrowing Base" shall mean an amount equal to the value of the Collateral
determined by the Documentation Agent and the Agent (or by each of the Banks as
described in Section 9.14) in their sole discretion, based on the Documentation
Agent's, the Agent's or each Bank's, as the case may be, customary and standard
practices in lending to oil and gas companies generally, including without
limitation their standard engineering criteria and oil and gas lending criteria
(and it is acknowledged and agreed that such customary and standard practices,
including without limitation such engineering criteria and oil and gas lending
criteria, shall be determined by the Documentation Agent, the Agent and each
Bank, as the case may be, in their sole discretion, and such determination shall
be conclusive and binding).
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"Borrowing Base Deficiency" is defined in Section 4.1(c).
"Business Day" shall mean (i) with respect to any borrowing, payment or
rate selection of Eurodollar Loans, a day (other than a Saturday or Sunday) on
which banks generally are open in Chicago and New York for the conduct of
substantially all of their commercial lending activities and on which dealings
in United States dollars are carried on in the London interbank market and (ii)
for all other purposes, a day (other than a Saturday or Sunday) on which banks
generally are open in Chicago for the conduct of substantially all of their
commercial lending activities.
"Change in Control" shall mean the acquisition by any Person, or two or
more Persons acting in concert, of beneficial ownership (within the meaning of
Rule 13d-3 of the Securities and Exchange Commission under the Securities
Exchange Act of 1934) of more than 50% of the outstanding shares of voting stock
of CRI.
"Code" shall mean the Internal Revenue Code of 1986, as amended from time
to time, and the regulations thereunder.
"Collateral" shall have the meaning ascribed thereto in Section 5.1(a)
hereof.
"Commitments" shall mean, with respect to each Bank, the commitment of each
such Bank to make Loans and assume a risk participation in Letter of Credit
Advances pursuant to Sections 2.1(a) and (b), in amounts not exceeding in
aggregate principal amount outstanding at any time the respective Commitment
amount for each Bank set forth next to the name of each such Bank on the
signature pages hereof or established pursuant to Section 10.6, as the case may
be, as such amount may be reduced from time to time.
"Consent and Amendment of Security Documents" shall mean the consent and
amendment of security documents entered into by the Borrowers and the Agent
pursuant to this Agreement in substantially the form of Exhibit A, as amended or
modified from time to time.
"Consolidated" or "consolidated" shall mean, when used with reference to
any financial term in this Agreement, the aggregate for two or more Persons of
the amount signified by such term for all such Persons determined on a
consolidated basis and in accordance with GAAP.
"Consolidated Interest Expense" shall mean, for any period, total interest
and related expense (including, without limitation, that portion of any
capitalized lease obligation attributable to interest expense in conformity with
GAAP, amortization of debt discount, all capitalized interest, the interest
portion of any deferred payment obligations, all commissions, discounts and
other fees and charges owed with respect to letters of credit and bankers
acceptance financing, the net costs and net payments under any interest rate
hedging, cap or similar agreement or arrangement, prepayment charges, agency
fees, administrative fees, commitment fees and capitalized transaction costs
allocated to interest expense) paid, payable or accrued during such period,
without duplication for any period, with respect to all outstanding Indebtedness
of CRI and its Subsidiaries, all as determined for CRI and its Subsidiaries on a
consolidated basis for such period in accordance with GAAP.
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"Consolidated Net Income" shall mean, for any period, the net income of CRI
and its Subsidiaries for such period, determined in accordance with GAAP.
"Contingent Liabilities" of any Person shall mean, as of any date, all
obligations of such Person or of others for which such Person is contingently
liable, as obligor, guarantor, surety or in any other capacity, or in respect of
which obligations such Person assures a creditor against loss or agrees to take
any action to prevent any such loss (other than endorsements of negotiable
instruments for collection in the ordinary course of business and
indemnifications typical and customary in the ordinary course of such Person's
oil and gas business in connection with operating agreements and other
agreements executed in the ordinary course of such Person's oil and gas
business), including without limitation all reimbursement obligations of such
Person in respect of any letters of credit, surety bonds or similar obligations
and all obligations of such Person to advance funds to, or to purchase assets,
property or services from, any other Person in order to maintain the financial
condition of such other Person.
"Continuing Directors" of any Person shall mean the directors of such
Person on the Effective Date and each other director of such Person if such
other director's nomination for election to the Board of Directors of such
Person is recommended by a majority of the then Continuing Directors of such
Board of Directors.
"Current Assets" and "Current Liabilities" shall mean all assets or
liabilities of CRI and its Subsidiaries, on a consolidated basis respectively,
which should be classified as current assets and current liabilities in
accordance with GAAP; provided that the calculation of Current Assets shall not
include receivables of the Borrowers owing by any Affiliate in excess of 120
days or subject to any dispute or offset or otherwise unacceptable, advances by
the Borrowers to any Affiliate or any asset classified as a Current Asset solely
because it is held for sale, and Current Liabilities shall not include the
current maturities of any Indebtedness of any Borrower for borrowed money which
by its terms has a final maturity more than one year from the date of any
calculation of Current Liabilities.
"Default" shall mean any Event of Default or any event or condition which
might become an Event of Default with notice or lapse of time or both.
"Dollars" and "$" shall mean the lawful money of the United States of
America.
"EBITDA" shall mean, for any period, the Consolidated Net Income for such
period taken as a single accounting period, plus, to the extent deducted in
determining such Consolidated Net Income, all depreciation, amortization and
depletion expense, and other non cash charges, Consolidated Interest Expense and
income taxes, provided that in determining Consolidated Net Income as used in
this definition the following shall be excluded, without duplication: (a) the
income of any Person accrued prior to the date such Person is merged into or
consolidated with a Borrower or such Person's assets are acquired by a Borrower,
(b) the proceeds of any insurance policy, (c) gains or losses from the sale,
exchange, transfer or other disposition of property or assets of any Borrower or
any of their Subsidiaries and related tax effects in accordance with GAAP and
(d) any extraordinary or non-recurring gains of any Borrower or any of their
Subsidiaries, and related tax effects in accordance with GAAP.
"Effective Date" shall mean the effective date specified in the final
paragraph of this Agreement.
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"Environmental Laws" at any date shall mean all provisions of law, statute,
ordinances, rules, regulations, judgments, writs, injunctions, decrees, orders,
awards and standards promulgated by the government of the United States of
America or any foreign government or by any state, province, municipality or
other political subdivision thereof or therein or by any court, agency,
instrumentality, regulatory authority or commission of any of the foregoing
concerning the protection of, or regulating the discharge of substances into,
the environment.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended from time to time, together with any successor statute thereto and the
regulations thereunder.
"ERISA Affiliate" shall mean any trade or business (whether or not
incorporated) which (i) together with the Borrowers or any Subsidiary, would be
treated as a single employer under Section 414(b) or (c) of the Code or (ii) for
purposes of liability under Section 412(C)(11) of the Code, the lien created
under Section 412(n) of the Code or for a tax imposed for failure to meet
minimum funding standards under Section 4971 of the Code, a member of the same
affiliated service group (within the meaning of Section 401(m) of the Code) as
the Borrowers or any Subsidiary, or any other trade or business described in
clause (i) above.
"Eurodollar Base Rate" shall mean, with respect to a Eurodollar Loan for
the relevant Eurodollar Interest Period, the rate determined by the Agent to be
the rate at which First Chicago offers to place deposits in Dollars with
first-class banks in the London interbank market at approximately 11 a.m.
(London time) two Business Days prior to the first day of such Eurodollar
Interest Period, in the approximate amount of First Chicago's relevant
Eurodollar Loan and having a maturity approximately equal to such Eurodollar
Interest Period.
"Eurodollar Interest Period" or "Interest Period" shall mean, with respect
to a Eurodollar Loan, a period of one, two, three or six months commencing on a
Business Day selected by the Borrowers pursuant to this Agreement. Such
Eurodollar Interest Period shall end on the day which corresponds numerically to
such date one, two, three or six months thereafter, provided, however, that if
there is no such numerically corresponding day in such next, second, third or
sixth succeeding month, such Eurodollar Interest Period shall end on the last
Business Day of such next, second, third or sixth succeeding month. If a
Eurodollar Interest Period would otherwise end on a day which is not a Business
Day, such Eurodollar Interest Period shall end on the next succeeding Business
Day, provided, however, that if said next succeeding Business Day falls in a new
calendar month, such Eurodollar Interest Period shall end on the immediately
preceding Business Day.
"Eurodollar Loan" shall mean a Loan which bears interest at a Eurodollar
Rate.
"Eurodollar Rate" shall mean, with respect to a Eurodollar Loan for the
relevant Eurodollar Interest Period, the sum of (i) the quotient of (a) the
Eurodollar Base Rate applicable to such Eurodollar Interest Period, divided by
(b) one minus the Reserve Requirement (expressed as a decimal) applicable to
such Eurodollar Interest Period, plus (ii) the Applicable Margin.
"Event of Default" shall mean any of the events or conditions described in
Section 8.1.
"Federal Funds Rate" shall mean, for any day, an interest rate per annum
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equal to the weighted average of the rates on overnight Federal funds
transactions with members of the Federal Reserve System arranged by Federal
funds brokers on such day, as published for such day (or, if such day is not a
Business Day, for the immediately preceding Business Day) by the Federal Reserve
Bank of New York, or, if such rate is not so published for any day which is a
Business Day, the average of the quotations at approximately 10 a.m. (Chicago
time) on such day on such transactions received by the Agent from three Federal
funds brokers of recognized standing selected by the Agent in its sole
discretion.
"First Chicago" shall mean The First National Bank of Chicago, a national
banking association, as a Bank under this Agreement.
"Floating Rate" shall mean the per annum rate equal to the sum of (a) with
respect to Loans and any other amounts owing hereunder, the Applicable Margin,
plus (b) the greater of (i) the per annum rate announced by the Agent from time
to time as its "corporate base rate", and (ii) the sum of one-half percent
(1/2%) per annum plus the Federal Funds Rate, such Floating Rate to change
simultaneously with any change in such "corporate base rate" or Federal Funds
Rate, as the case may be;
all as conclusively determined in good faith by the Agent, such sum to be
rounded up, if necessary, to the nearest whole multiple of 1/16 of 1%.
"Floating Rate Loan" shall mean any Loan bearing interest at the Floating
Rate.
"GAAP" shall mean generally accepted accounting principles applied on a
basis consistent with that reflected in the financial statements referred to in
Section 6.7 hereof.
"Hydrocarbons" shall mean oil, gas casinghead, gas, drip gasoline, natural
gas and condensates and all other liquid or gaseous hydrocarbons.
"Indebtedness" of any Person shall mean, as of any date, (a) all
obligations of such Person for borrowed money, (b) all obligations which are
secured by any lien or encumbrance existing on property owned by such Person
whether or not the obligation secured thereby shall have been assumed by such
Person, other than those obligations which are incurred in the ordinary course
of business and are not required to be shown as a liability on a balance sheet
in accordance with GAAP, (c) all obligations as lessee under any lease which, in
accordance with GAAP, is or should be capitalized on the books of the lessee,
(d) the deferred purchase price for goods, property or services acquired by such
Person, and all obligations of such Person to purchase such goods, property or
services where payment therefor is required regardless of whether or not
delivery of such goods or property or the performance of such services is ever
made or tendered, other than unsecured trade payables incurred in the ordinary
course of business, (e) all obligations of such Person to advance funds to, or
to purchase property or services from, any other Person in order to maintain the
financial condition of such Person, (f) all obligations of such Person in
respect of any interest rate or currency swap, rate cap or other similar
transaction (valued in an amount equal to the highest termination payment, if
any, that would be payable by such Person upon termination for any reason on the
date of termination), and (g) all obligations of such Person or of others for
which such Person is contingently liable, as guarantor, surety or in any other
similar capacity, or in respect of which obligations such Person assures a
creditor against loss or agrees to take any action to prevent any such loss
(other than endorsements of negotiable instruments for collection in the
ordinary course of business), including without limitation all reimbursement
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obligations of such Person in respect of any letters of credit, surety bonds or
similar obligations and all obligations of such Person to advance funds to, or
to purchase assets, property or services from, any other Person in order to
maintain the condition, financial or otherwise, of such other Person.
"Interest Payment Date" shall mean (a) with respect to each Eurodollar
Loan, the last day of each Eurodollar Interest Period with respect to such
Eurodollar Loan and, in the case of any Eurodollar Interest Period exceeding
three months, those days that occurred during such Eurodollar Interest Period at
intervals of three months after the first day of such Eurodollar Interest
Period, (b) in all other cases, the last Business Day of each month, commencing
with the first such day after the Effective Date, and (c) the Termination Date
with respect to Loans.
"Lending Installation" shall mean, with respect to a Bank or the Agent, any
office, branch, subsidiary or affiliate of such Bank or the Agent.
"Letter of Credit" shall mean a standby letter of credit having a stated
expiry date not later than twelve months after the date of issuance and not
later than the fifth Business Day before the Termination Date, issued by the
Agent on behalf of the Banks for the account of any Borrower under an
application and related documentation acceptable to the Agent requiring, among
other things, immediate reimbursement by the Borrowers to the Agent in respect
of all drafts or other demand for payment honored thereunder and all expenses
paid or incurred by the Agent relative thereto. Standby letters of credit which
are automatically renewed annually unless revoked shall be considered standby
letters of credit which have a stated expiry date not later than twelve months
after their date of issuance for purposes of this definition.
"Letter of Credit Advance" shall mean any issuance of a Letter of Credit
under Section 3.1 made pursuant to Section 2.1 in which each Bank acquires a
risk participation equal to its Pro Rata Share.
"Letter of Credit Documents" shall have the meaning ascribed thereto in
Section 3.3(b)(i).
"Lien" shall mean any pledge, assignment, hypothecation, mortgage, security
interest, deposit arrangement, option, conditional sale or title retaining
contract, sale and leaseback transaction, financing statement filing, lessor's
or lessee's interest under any lease, subordination of any claim or right, or
any other type of lien, charge, encumbrance, preferential arrangement or other
claim or right.
"Loan" means any loan under Section 3.1 evidenced by the Notes and made
pursuant to Section 2.1(a).
"Loan Documents" shall mean this Agreement, the Notes, the Security
Documents, the environmental certificate and any other agreement, instrument or
document executed at any time pursuant to, in connection with, or otherwise
relating to this Agreement.
"Material Adverse Effect" shall mean a material adverse effect on or change
in (a) the business, property (including without limitation the Collateral),
operations or condition, financial or otherwise, of the Borrowers on a
consolidated basis, (b) the ability of any Borrower to perform its obligations
under any Loan Document or (c) the validity or enforceability or the rights and
remedies of the Agent or any Bank under any Loan Document.
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"Mortgages" shall have the meaning ascribed thereto in Section 5.1.
"Multiemployer Plan" shall mean any "multiemployer plan" as defined in
Section 4001(a)(3) of ERISA or Section 414(f) of the Code.
"Note" shall mean any promissory note of the Borrowers evidencing the
Loans, in substantially the form annexed hereto as Exhibit B, as amended or
modified from time to time and together with any promissory note or notes issued
in exchange or replacement thereof.
"Oil and Gas Interests" shall mean all leasehold interests, mineral fee
interest, overriding royalty and royalty interests, net revenue and net working
interest and all other rights and interests relating to Hydrocarbons, including
without limitation any reserves thereof.
"Overdue Rate" shall mean (a) in respect of principal of Floating Rate
Loans, a rate per annum that is equal to the sum of three percent (3%) per annum
plus the Floating Rate, (b) in respect of principal of Eurodollar Loans, a rate
per annum that is equal to the sum of three percent (3%) per annum plus the per
annum rate in effect thereon until the end of the then current Eurodollar
Interest Period for such Loan and, thereafter, a rate per annum that is equal to
the sum of three percent (3%) per annum plus the Floating Rate, and (c) in
respect of other amounts payable by the Borrowers hereunder (other than
interest), a per annum rate that is equal to the sum of three percent (3%) per
annum plus the Floating Rate.
"PBGC" shall mean the Pension Benefit Guaranty Corporation and any entity
succeeding to any or all of its functions under ERISA.
"Permitted Liens" shall mean the Liens permitted by Section 7.2(e) hereof.
"Person" shall include an individual, a corporation, an association, a
partnership, a trust or estate, a joint stock company, an unincorporated
organization, a joint venture, a government (foreign or domestic), and any
agency or political subdivision thereof, or any other entity.
"Plan" shall mean, with respect to any Person, any employee benefit or
other plan (other than a Multiemployer Plan) maintained by such Person for its
employees and covered by Title IV of ERISA or to which Section 412 of the Code
applies.
"Pro Rata Share" shall mean, as to obligations of the Banks, the loan
percentage set forth opposite its name on the signature pages hereof or
otherwise established pursuant to Section 10.6, and as to obligations owing to
the Banks, shall mean: (a) in the case of payments of principal and interest on
the Loans, an amount with respect to each Bank equal to the product of such
amount received multiplied by the ratio which the outstanding principal balance
of its Note bears to the outstanding principal balance of all Notes, and (b) in
the case of all other amounts payable hereunder (other than as otherwise noted
with respect to fees) and other amounts, an amount with respect to each Bank
equal to the product of such amount received multiplied by the ratio which the
Commitment of such Bank bears to the Commitments of all Banks.
"Proved Developed Reserves" shall mean all Oil and Gas Interests which, to
the satisfaction of the Agent, are estimated, with reasonable certainty, and
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as demonstrated by geological and engineering data acceptable to the Agent, to
be economically recoverable from existing wells requiring no more than minor
workover operations from existing completion intervals open for production and
which are producing, and have proven reserves of, Hydrocarbons.
"Purchase Documents" shall mean all purchase and sale agreements dated
October 31, 1997 and all other agreements and documents between COGL, as
purchaser, and the sellers party thereto for the purchase by COGL of the Bois
D'Arc and other properties described therein (to be assigned to Offshore),
together with all other agreements and documents delivered pursuant to Section
3.2(a)(xi).
"Purchased Bois D'Arc Assets" shall mean all oil and gas interests and all
other assets being purchased pursuant to the Purchase Documents.
"Reportable Event" shall mean a reportable event as described in Section
4043(b) of ERISA including those events as to which the thirty (30) day notice
period is waived under Part 2615 of the regulations promulgated by the PBGC
under ERISA.
"Required Banks" shall mean Banks holding not less than 66-2/3% of the
aggregate principal amount of the Advances then outstanding (or 66-2/3% of the
Commitments if no Advances are then outstanding).
"Reserve Requirement" means, with respect to a Eurodollar Interest Period,
the maximum aggregate reserve requirement (including all basic, supplemental,
marginal and other reserves) which is imposed under Regulation D on Eurocurrency
liabilities.
"Security Agreements" shall have the meaning ascribed thereto in Section
5.1.
"Security Documents" shall have the meaning ascribed thereto in Section
5.1.
"Subsidiary" of any Person shall mean any other Person (whether now
existing or hereafter organized or acquired) in which (other than directors
qualifying shares required by law) at least a majority of the securities or
other ownership interests of each class having ordinary voting power or
analogous right (other than securities or other ownership interests which have
such power or right only by reason of the happening of a contingency), at the
time as of which any determination is being made, are owned, beneficially and of
record, by such Person or by one or more of the other Subsidiaries of such
Person or by any combination thereof. Unless otherwise specified, reference to
"Subsidiary" shall mean a Subsidiary of CRI.
"Swap Agreement" shall mean any interest rate or oil and gas commodity swap
agreement, interest cap or collar agreement or other financial agreement or
arrangement designed to protect the Borrowers against fluctuations in interest
rates or oil and gas prices.
"Tangible Net Worth" of any Person shall mean, as of any date, (a) the
amount of any capital stock or similar ownership liability plus (or minus in the
case of a deficit) the capital surplus and retained earnings of such Person and
the amount of any foreign currency translation adjustment account shown as a
capital account of such Person, less (b) the net book value of all items of the
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following character which are included in the assets of such Person:(i)
goodwill, including without limitation, the excess of cost over book value of
any asset, (ii) organization or experimental expenses, (iii) unamortized debt
discount and expense, (iv) stock discount and expense, (v) patents, trademarks,
trade names and copyrights, (vi) treasury stock, (vii) deferred taxes and
deferred charges, (viii) franchises, licenses and permits, and (ix) all other
assets which are deemed intangible assets under GAAP; provided, that such
calculation of Tangible Net Worth under this definition shall not include
receivables of such Person which are owing by any Affiliate or advances by such
Person to any Affiliate.
"Termination Date" shall mean the earlier to occur of (a) the fifth
anniversary of the Effective Date and (b) the date on which the Commitments
shall be terminated pursuant to Section 2.1(c) or 8.2.
"Total Liabilities" of any Person shall mean, as of any date, all
obligations which, in accordance with GAAP, are or should be classified as
liabilities on a balance sheet of such Person.
"Type" shall mean, with respect to any Advance, its nature as a Floating
Rate Loan, Eurodollar Loan or Letter of Credit Advance.
1.2 Other Definitions; Rules of Construction. As used herein, the terms
"Agent", "Banks", "CRI", "COG", "COGL", "Borrowers" and "this Agreement" shall
have the respective meanings ascribed thereto in the introductory paragraph of
this Agreement. Such terms, together with the other terms defined in Section
1.1, shall include both the singular and the plural forms thereof and shall be
construed accordingly. All computations required hereunder and all financial
terms used herein shall be made or construed in accordance with GAAP unless such
principles are inconsistent with the express requirements of this Agreement.
SECTION 2. The Commitments.
2.1 Advances. (a) Each Bank agrees, for itself only, to lend and to relend,
and to participate in Letter of Credit Advances pursuant to Section 3.1, in each
case subject to the terms and conditions of this Agreement, to the Borrowers at
any time and from time to time from the Effective Date until the Termination
Date amounts equal to such Bank's Pro Rata Share of such aggregate Advances as
any Borrower may from time to time request, provided that no Advances may be
made if the aggregate outstanding amount of all Advances to all Borrowers would
exceed the lesser of the Commitments or the Borrowing Base; provided, however,
that the aggregate principal amount of Letters of Credit outstanding at any time
shall not exceed $5,000,000. Each Loan made hereunder shall be evidenced by the
Notes, which shall mature and bear interest as set forth in Section 4 hereof and
in such Notes. On the Effective Date, the Borrowers shall issue and deliver to
each Bank a Note in the principal amount of such Banks' Commitment for the
period beginning on the Effective Date. Each Loan which is a Floating Rate Loan
shall be in a minimum amount of $500,000 and in integral multiples of $100,000
and each Loan which is a Eurodollar Loan shall be in a minimum amount of
$3,000,000 and in integral multiples of $1,000,000. No more than ten Eurodollar
Interest Periods shall be permitted to exist at any one time. Subject to the
terms and conditions of this Agreement, the Borrowers may borrow, prepay
pursuant to Section 4.1(b) and reborrow under this Section 2.1(a).
(b) For purposes of this Agreement, a Letter of Credit Advance (i)
shall be deemed outstanding in an amount equal to the sum of the maximum amount
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available to be drawn under the related Letter of Credit on or after the date of
determination and on or before the stated expiry date thereof plus the amount of
any draws under such Letter of Credit that have not been reimbursed as provided
in Section 3.3 and (ii) shall be deemed outstanding at all times on and before
such stated expiry date or such earlier date on which all amounts available to
be drawn under such Letter of Credit have been fully drawn, and thereafter until
all related reimbursement obligations have been paid pursuant to Section 3.3. As
provided in Section 3.3, upon each payment made by the Agent in respect of any
draft or other demand for payment under any Letter of Credit, the amount of any
Letter of Credit Advance outstanding immediately prior to such payment shall be
automatically reduced by the amount of each Loan deemed advanced in respect of
the related reimbursement obligation of the Borrowers.
(c) The Borrowers shall have the right to terminate or reduce the
Commitments at any time and from time to time, provided that (i) the Borrowers
shall give notice of such termination or reduction to the Agent specifying the
amount and effective date thereof, (ii) each partial reduction of the
Commitments shall be in a minimum amount of $1,000,000 and in integral multiples
of $1,000,000 and shall reduce the Commitments of all of the Banks
proportionally in accordance with the respective Commitment amounts of each such
Bank, (iii) no such termination or reduction, either in whole or part and
including without limitation any termination, shall be permitted with respect to
any portion of the Commitments as to which a request for Advances is then
pending, and (iv) the Commitments may not be terminated if any Advances are then
outstanding and may not be reduced below the principal amount of Advances then
outstanding. The Commitments or any portion thereof so terminated or reduced may
not be reinstated. Any Borrower may request Advances without the consent of any
other Borrower, and each Borrower consents to and approves any Advances
requested by any other Borrower. The Advances hereunder replace the revolving
credit loans and letters of credit outstanding pursuant to Section 2.1(a) of the
Existing Credit Agreement and provide additional credit as described above.
SECTION 3. The Advances.
3.1 Disbursement of Advances. (a) Borrowers shall give notice to the Agent
of each requested Advance in substantially the form of Exhibit C hereto, which
notice given shall be received by the Agent not later than 10:00 a.m. (Chicago
time), (i) three Business Days prior to the date such Advance is requested to be
made if such Advance is to be made as a Eurodollar Loan, (ii) one Business Day
prior to the date such Advance is requested to be made if such Advance is to be
made as a Floating Rate Loan and (iii) three Business Days prior to the date
such Advance is to be made if such Advance is to be made as a Letter of Credit
Advance. Each such notice given shall be irrevocable and binding on the
Borrowers, any such notice must specify the Advance Date, which shall be a
Business Day, the aggregate amount of such Advance, the Type of Advance
selected, in the case of any Eurodollar Loan, the Eurodollar Interest Period
applicable thereto, and in the case of any Letter of Credit Advance such other
information and documents with respect thereto as may be required by the Agent.
The Agent shall provide notice of such requested Advance to each Bank on the
same Business Day such notice is received from the Borrowers. Subject to the
terms and conditions of this Agreement, the Agent shall, on the date any Letter
of Credit Advance is requested to be made, issue the related Letter of Credit on
behalf of the Banks for the account of the designated Borrower. Notwithstanding
anything herein to the contrary, the Agent may decline to issue any requested
Letter of Credit on the basis that the beneficiary, the purpose of issuance or
the terms or the conditions of drawing are illegal or contrary to a policy of
the Agent.
(b) Floating Rate Loans shall continue as Floating Rate Loans unless
and until such Floating Rate Loans are converted into Eurodollar Loans.
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Each Eurodollar Loan of any Type shall continue as a Eurodollar Loan of such
Type until the end of the then applicable Interest Period therefor, at which
time such Eurodollar Loan shall be automatically converted into a Floating Rate
Loan unless the Borrower shall have given the Agent a Conversion/Continuation
Notice requesting that, at the end of such Interest Period, such Eurodollar Loan
either continue as a Eurodollar Loan of such Type for the same or another
Interest Period or be converted into a Loan of another Type. Subject to the
terms of Section 2.1, the Borrower may elect from time to time to convert all or
any part of a Loan of any Type into any other Type or Types of a Loan; provided
that any conversion of any Eurodollar Loan shall be made on, and only on, the
last day of the Interest Period applicable thereto. The Borrowers shall give the
Agent irrevocable notice (a "Conversion/Continuation Notice") of each conversion
of a Loan or continuation of a Eurodollar Loan not later than 10:00 a.m.
(Chicago time) at least one Business Day, in the case of a conversion into a
Floating Rate Loan, or three Business Days, in the case of a conversion into or
continuation of a Eurodollar Loan, prior to the date of the requested conversion
or continuation, specifying:
(i) the requested date, which shall be a Business Day, of such
conversion or continuation,
(ii) the aggregate amount and Type of the Loan which is to be
converted or continued, and
(iii) the amount and Type(s) of Loan(s) into which such Loan is
to be converted or continued and, in the case of a conversion into or
continuation of a Eurodollar Loan, the duration of the Interest Period
applicable thereto.
(c) Subject to the terms and conditions of this Agreement, the
proceeds of such requested Loan shall be made available to the Borrowers by
depositing the proceeds thereof, in immediately available funds, on the Advance
Date for such Loan in an account maintained and designated by the Borrowers at
the principal office of the Agent. Each Bank, on the Advance Date of each such
Loan shall make its Pro Rata Share of such Loan available in immediately
available funds at the principal office of the Agent for disbursement to the
Borrowers. Unless the Agent shall have received notice from any Bank prior to
the date of any requested Loan under this Section 3.1 that such Bank will not
make available to the Agent such Bank's Pro Rata Share, the Agent may assume
that such Bank has made such share available to the Agent on the Advance Date of
such Loan in accordance with this Section 3.1(b). If and to the extent such Bank
shall not have so made such Pro Rata Share available to the Agent, the Agent may
(but shall not be obligated to) make such amount available to the Borrowers on
the relevant Advance Date, and such Bank agrees to pay to the Agent forthwith on
demand such amount together with interest thereon, for each day from the date
such amount is made available to the Borrowers by the Agent until the date such
amount is paid to the Agent, at the Federal Funds Rate. If such Bank shall pay
to the Agent such amount, such amount so paid shall constitute a Loan by such
Bank as a part of such borrowing for purposes of this Agreement. The failure of
any Bank to make its Pro Rata Share of any such Loan available to the Agent
shall not relieve any other Bank of its obligations to make available its Pro
Rata Share of such Loan on the Advance Date of such Loan, but no Bank shall be
responsible for failure of any other Bank to make such Pro Rata Share available
to the Agent on the Advance Date of any such Loan.
(d) Each Bank may book its Loans at any Lending Installation selected
by such Bank and may change its Lending Installation from time to time. All
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terms of this Agreement shall apply to any such Lending Installation and the
Notes shall be deemed held by each Bank for the benefit of such Lending
Installation. Each Bank may, by written or telex notice to the Agent and the
Borrowers, designate a Lending Installation through which Loans will be made by
it and for whose account Loan payments are to be made.
(e) Nothing in this Agreement shall be construed to require or
authorize any Bank to issue any Letter of Credit, it being recognized that the
Agent has the sole obligation under this Agreement to issue Letters of Credit on
behalf of the Banks, and the Commitment of each Lender with respect to Letter of
Credit Advances is expressly conditioned upon the Agent's performance of such
obligations. Upon such issuance by the Agent, each Bank shall automatically and
unconditionally acquire a risk participation interest to the extent of its Pro
Rata Share in such Letter of Credit Advance based on its respective Commitment.
If the Agent shall honor a draft or other demand for payment presented or made
under any Letter of Credit, the Agent shall provide notice thereof to each Bank
on the date such draft or demand is honored unless the Borrowers shall have
satisfied their reimbursement obligation under Section 3.3 by payment to the
Agent on such date. Each Bank, not later than the Business Day after the Agent
shall have given the notice specified in the previous sentence, shall make its
Pro Rata Share of the amount paid by the Agent available in immediately
available funds at the principal office of the Agent for the account of the
Agent. If and to the extent such Bank shall not have made any required Pro Rata
Share amount available to the Agent or made its portion of Loan available
pursuant to Section 3.3(a)(i), such Bank and the Borrowers severally agree to
pay to the Agent forthwith on demand such amount together with interest thereon,
for each day from the date such amount was paid by the Agent until such amount
is so made available to the Agent at (i) the interest rate then applicable to
Floating Rate Loans for such day in the case of the Borrowers and (ii) the rate
per annum equal to the Federal Funds Rate for the first five days, and
thereafter at the interest rate applicable to Floating Rate Loans, in the case
of any Bank. If such Bank shall pay such amount to the Agent together with such
interest, such amount so paid shall constitute a Loan by such Bank as part of
the Loans disbursed in respect of the reimbursement obligation of the Borrowers
under Section 3.3 for purposes of this Agreement. The failure of any Bank to
make its Pro Rata Share of any such amount paid by the Agent available to the
Agent shall not relieve any other Bank of its obligation to make available its
Pro Rata Share of such amount, but no Bank shall be responsible for failure of
any other Bank to make such Pro Rata Share available to the Agent.
3.2 Conditions of Advances. The Banks and the Agent shall not be obligated
to make any Advance hereunder at any time unless:
(a) Prior to or simultaneously with the first Advance hereunder, there
shall have been delivered to each Bank the following documents, in form and
substance satisfactory to the Agent and the following additional conditions
shall have been satisfied:
(i) The favorable opinion of such counsel for the Borrowers as
shall be approved by the Required Banks, with respect to the matters as
requested by the Banks, all in form and substance satisfactory to the Required
Banks;
(ii) certified copies of such corporate documents of each
Borrower, including each Borrower's articles of incorporation, by-laws and a
good standing certificate, and such documents evidencing necessary corporate
action with respect to this Agreement, the Loans, the Notes and the Security
Documents, and certifying to the incumbency of, and attesting to the genuineness
of the signatures of, those officers authorized to act on behalf of each
Borrower, as the Banks shall request;
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(iii) the Security Documents required as of the Effective Date
under Section 5.1 duly executed on behalf of the Borrowers, together with
evidence of the recordation, filing and other action in such jurisdictions as
the Banks may deem necessary or appropriate with respect to the Security
Documents and evidence of the first-priority of the Banks' liens and security
interests under the Security Documents, subject only to Permitted Liens,
including without limitation such additional mortgages, security agreements,
pledge agreements, other documents and opinions of counsel required by the Banks
and original stock certificates and assignments separate from certificate of
each Person whose stock is required to be pledged;
(iv) the Notes duly executed on behalf of the Borrowers, and it
is acknowledged and agreed that the Notes: (A) are issued in exchange and
replacement for the promissory notes issued pursuant to the Existing Credit
Agreement, (B) shall not be deemed a novation or to have satisfied such
promissory notes and (C) evidence the same indebtedness evidenced by such
promissory notes plus additional indebtedness;
(v) the Consent and Amendment of Security Documents duly executed
by the Borrowers;
(vi) Payment of such fees agreed to among the Borrowers and the
Agent;
(vii) the execution by the Borrowers of the Agent's standard
environmental certificate;
(viii) the Banks shall have determined that the Loans to be made
are equal to or less than the Borrowing Base;
(ix) copies of all agreements relating to any material
Indebtedness for borrowed money, any outstanding preferred stock, any joint
ventures or partnerships or any other material documents requested by the Banks;
(x) the originals of all promissory notes payable to any
Borrower, other than promissory notes in an aggregate amount less than
$1,000,000; and
(xi) such other agreements, documents, conditions and
certificates as reasonably requested by the Banks, including without limitation,
releases and terminations of all other Liens which are not permitted hereunder,
amendments of existing Security Documents, all Purchase Documents and other
agreements and documents related to the Borrowers' acquisition of additional oil
and gas properties and other assets described therein, all in form and substance
satisfactory to the Banks.
(b) The aggregate outstanding principal amount of all Advances after
giving effect to the proposed Advance, does not exceed the lesser of the
Commitments or the Borrowing Base.
(c) On and as of the date of each such Advance, the representations
and warranties contained in Section 6 hereof shall be true and correct in all
material respects as if made on such date; provided, however, that for purposes
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of this Section 3.2(c) the representations and warranties contained in Section
6.7 hereof shall be deemed made with respect to both the financial statements
referred to therein and the most recent financial statements delivered pursuant
to Section 7.1(d)(ii) and (iii).
(d) No Default or event or condition which could cause a Material
Adverse Effect has occurred and is continuing or will exist upon the
disbursement of such Advance.
Acceptance of the proceeds of any Advance hereunder by the Borrowers shall be
deemed to be a certification by the Borrowers at such time with respect to the
matters set forth in subparagraphs (b), (c) and (d) of this Section 3.2.
3.3 Letter of Credit Reimbursement Payments. (a)(i) The Borrowers agree to
pay to the Agent, on the day on which the Agent shall honor a draft or other
demand for payment presented or made under any Letter of Credit, an amount equal
to the amount paid by the Agent in respect of such draft or other demand under
such Letter of Credit and all expenses paid or incurred by the Agent relative
thereto. Unless the Borrowers shall have made such payment to the Agent on such
day, upon each such payment by the Agent, the Agent shall be deemed to have
disbursed to the Borrowers, and the Borrowers shall be deemed to have elected to
satisfy the reimbursement obligation by borrowing, a Loan bearing interest at
the Floating Rate for the account of the Banks in an amount equal to the amount
so paid by the Agent in respect of such draft or other demand under such Letter
of Credit. Such Loan shall be disbursed, and each Bank shall advance its Pro
Rata Share thereof, notwithstanding any failure to satisfy any conditions for
disbursement of any Loan set forth in Article III or any other condition and, to
the extent of the Loan so disbursed, the reimbursement obligation of the
Borrowers under this Section 3.3 shall be deemed satisfied; provided, however,
that such disbursement shall not be deemed to be a waiver of any Event of
Default or Default, if any.
(ii) If for any reason (including without limitation as a result
of the occurrence of an Event of Default pursuant to Section 6.1(h)), Floating
Rate Loans may not be made by the Banks as described in Section 3.3(a)(i), then
(A) the Borrowers agree that each reimbursement amount not paid pursuant to the
first sentence of Section 3.3(a)(i) shall bear interest, payable on demand by
the Agent, at the interest rate then applicable to Floating Rate Loans, and (B)
effective on the date each such Floating Rate Loan would otherwise have been
made, each Bank severally agrees that it shall unconditionally and irrevocably,
without regard to the occurrence of any Default or Event of Default, in lieu of
a deemed disbursement of Loans, to the extent of such Bank's Pro Rata Share,
purchase a participating interest in each reimbursement amount. Each Bank will
immediately transfer to the Agent, in same day funds, the amount of its
participation. Each Bank shall share in accordance with its Pro Rata Share
(calculated by reference to the Commitments) in any interest which accrues
thereon and in all repayments thereof. If and to the extent that any Bank shall
not have so made the amount of such participating interest available to the
Agent, such Bank and the Borrowers agree to pay to the Agent forthwith on demand
such amount together with interest thereon, for each day from the date of demand
by the Agent until the date such amount is paid to the Agent, at (x) in the case
of the Borrowers, the interest rate then applicable to Floating Rate Loans and
(y) in the case of such Bank, the Federal Funds Rate for the first five days,
and thereafter the interest rate applicable to Floating Rate Loans.
(b) The reimbursement obligations of the Borrowers under this Section
3.3 shall be absolute, unconditional and irrevocable and shall remain in full
force and effect until all obligations of the Borrowers to the Agent and the
Banks hereunder shall have been satisfied, and such obligations of the Borrowers
shall not be affected, modified or impaired upon the happening of any event,
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including without limitation, any of the following, whether or not with notice
to, or the consent of, the Borrowers:
(i) Any lack of validity or enforceability of any Letter of
Credit or any documentation relating to any Letter of Credit or to any
transaction related in any way to such Letter of Credit (the "Letter of Credit
Documents");
(ii) Any amendment, modification, waiver or consent, or any
substitution, exchange or release of or failure to perfect any interest in
collateral or security, with respect to any of the Letter of Credit Documents.
(iii) The existence of any claim, setoff, defense or other right
which the Borrowers may have at any time against any beneficiary or any
transferee of any Letter of Credit (or any persons or entities for whom any such
beneficiary or any such transferee may be acting), the Agent or any Bank or any
other person or entity, whether in connection with any of the Letter of Credit
Documents, the transactions contemplated herein or therein or any unrelated
transactions;
(iv) Any draft or other statement or 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;
(v) Payment by the Agent to the beneficiary under any Letter of
Credit against presentation of documents which do not comply with the terms of
the Letter of Credit, including failure of any documents to bear any reference
or adequate reference to such Letter of Credit;
(vi) Any failure, omission, delay or lack on the part of the
Agent or any Bank or any party to any of the Letter of Credit Documents to
enforce, assert or exercise any right, power or remedy conferred upon the Agent,
any Bank or any such party under this Agreement or any of the Letter of Credit
Documents, or any other acts or omissions on the part of the Agent, any Bank or
any such party; or
(vii) Any other event or circumstance that would, in the absence
of this clause, result in the release or discharge by operation of law or
otherwise the Borrowers from the performance or observance of any obligation,
covenant or agreement contained in this Section 3.3. No setoff, counterclaim,
reduction or diminution of any obligation or any defense of any kind or nature
which the Borrowers have or may have against the beneficiary of any Letter of
Credit shall be available hereunder to the Borrowers against the Agent or any
Bank. Nothing in this Section 3.3 shall limit the liability, if any, of the
Borrowers to the Banks pursuant to Section 10.5(b).
3.4. Withholding Tax Exemption. At least five Business Days prior to
the first date on which interest or fees are payable hereunder for the account
of any Bank, each Bank that is not incorporated under the laws of the United
States of America, or a state thereof, agrees that it will deliver to each of
the Borrowers and the Agent two duly completed copies of United States Internal
Revenue Service Form 1001 or 4224, certifying in either case that such Bank is
entitled to receive payments under this Agreement and the Notes without
deduction or withholding of any United States federal income taxes. Each Bank
which so delivers a Form 1001 or 4224 further undertakes to deliver to each of
the Borrowers and the Agent two additional copies of such form (or a successor
form) on or before the date that such form expires (currently, three successive
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calendar years for Form 1001 and one calendar year for Form 4224) or becomes
obsolete or after the occurrence of any event requiring a change in the most
recent forms so delivered by it, and such amendments thereto or extensions or
renewals thereof as may be reasonably requested by the Borrowers or the Agent,
in each case certifying that such Bank is entitled to receive payments under
this Agreement and the Notes without deduction or withholding of any United
States federal income taxes, unless an event (including without limitation any
change in treaty, law or regulation) has occurred prior to the date on which any
such delivery would otherwise be required which renders all such forms
inapplicable or which would prevent such Bank from duly completing and
delivering any such form with respect to it and such Bank advises the Borrowers
and the Agent that it is not capable of receiving payments without any deduction
or withholding of United States federal income tax.
SECTION 4. Payment and Prepayment; Fees; Change in Circumstances.
4.1 Principal Payments.
(a) Unless earlier payment is required under this Agreement, the
Borrowers shall pay the entire outstanding principal amount of the Revolving
Credit Advances on the Termination Date.
(b) The Borrowers may from time to time prepay all or a portion of the
Advances without premium or penalty, provided, however, that (i) the Borrowers
shall have given not less than one Business Day's prior written notice thereof
to the Agent, (ii) other than mandatory payments, each such prepayment, in the
case of prepayment of Floating Rate Loans, shall be in the minimum amount of
$500,000 and in integral multiples of $100,000 and, in the case of prepayment of
Eurodollar Loans, shall be in the minimum amount of $1,000,000 and in integral
multiples thereof, (iii) any prepayment of any Eurodollar Loan shall be
accompanied by any amount required pursuant to Section 4.10.
(c) If it should be determined by the Agent at any time and from time
to time that the principal amount of the Advances exceed the lesser of the then
Borrowing Base or the Commitments (such condition defined herein as a "Borrowing
Base Deficiency"), the Borrowers shall promptly do one of the following:
(i) In addition to all other payments of principal and interest
required to be paid on the Advances, prepay upon demand and without premium or
penalty the Advances in an amount by which, in the determination of the Agent,
such aggregate principal amount outstanding exceeds the lesser of the then
Borrowing Base or the Commitments, provided that such prepayment shall be made
first on the Loans and if the Loans are paid in full and such excess still
exists, the Borrowers shall provide cash collateral for any outstanding Letters
of Credit to the extent of such remaining excess; or
(ii) Grant a lien and security interest to the Agent, for the
benefit of the Banks, in form and substance satisfactory to the Required Banks,
in additional interests in Proved Developed Reserves of the Borrowers which, in
the determination of the Required Banks, will increase the Borrowing Base by an
amount such that the then aggregate principal amount of the Loans does not
exceed the lesser of the then Borrowing Base or the Commitments; or
(iii) Any combination of the foregoing acceptable to the Required
Banks.
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(d) In addition to all other payments required hereunder, upon any
sale or other disposition of any assets when a Default exists, or if such sale
or other disposition would cause a Default, the Borrowers shall prepay the
Advances by an amount equal to 100% of the net proceeds (net only of reasonable
and customary costs of such sale or other disposition) of such sale or
disposition, which prepayment is due upon receipt of such net proceeds.
(e) In addition to all other payments required hereunder, upon any
sale or other disposition of any assets when a Borrowing Base Deficiency exists,
or if such sale or other disposition would cause a Borrowing Base Deficiency,
the Borrower shall prepay the Advances by the amount of the Borrowing Base
Deficiency from the net proceeds (net only of any reasonable and customary costs
of such sale or other disposition) of such sale or disposition, which prepayment
is due upon receipt of such net proceeds.
All determinations made pursuant to this Section 4.1 shall be made by the
Agent or the Required Banks, as the case may be, and shall be conclusively
binding on the parties absent manifest error.
4.2 Interest Payment. (a) The Borrowers shall pay interest to the Banks on
the unpaid principal amount of each Loan for the period commencing on the date
such Loan is made until such Loan is paid in full, on each Interest Payment Date
and at maturity (whether at stated maturity, by acceleration or otherwise), and
thereafter on demand, at the following rates per annum: (i) during such periods
that such Loan is a Floating Rate Loan, the Floating Rate, and (ii) during such
periods that such Loan is a Eurodollar Loan, the Eurodollar Rate applicable to
such Loan for each related Eurodollar Interest Period.
(b) Notwithstanding the foregoing paragraph (a), the Borrowers hereby
agree, if requested by the Required Banks, to pay interest on demand at the
Overdue Rate on the outstanding principal amount of any Loan and any other
amount payable by the Borrowers hereunder (other than interest) upon and during
the continuance of any Default.
4.3 Fees. (a) The Borrowers agree to pay to the Agent, for the pro rata
account of the Banks in accordance with their Pro Rata Shares, a commitment fee
computed at the per annum rate equal to the Applicable Margin on the amount by
which the Commitments exceed the aggregate outstanding principal amount of the
Advances, for the period from the Effective Date until the Termination Date.
Such fees shall be paid quarterly in arrears, on the last Business Day of each
March, June, September and December, commencing on the first such date after the
Effective Date, and on the Termination Date.
(b) The Borrowers agree (i) to pay to the Agent, for the benefit of
the Banks, a fee computed at the Applicable Margin on the maximum amount
available to be drawn under each Letter of Credit at the time such fee is to be
paid for the period from and including the date of issuance of such Letter of
Credit to and including the stated expiry date of such Letter of Credit, and
(ii) to pay an additional fee to the Agent for its own account computed at the
rate of 0.25% per annum on such maximum amount for such period. Such fees shall
be payable each month in advance, payable on the date of the issuance of any
Letter of Credit and each month thereafter. Such fees are nonrefundable and the
Borrowers shall not be entitled to any rebate of any portion thereof if such
Letter of Credit does not remain outstanding through the date for which such
fees have been paid. The Borrowers further agree to pay to the Agent, on demand,
such other customary administrative fees, charges and expenses of the Agent in
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respect of the issuance, negotiation, acceptance, amendment, transfer and
payment of each Letter of Credit or otherwise payable pursuant to the
application and related documentation under which such Letter of Credit is
issued.
(c) The Borrowers agree to pay to the Agent agency and servicing fees
for its services under this Agreement in such amounts as it may from time to
time be agreed upon between the Borrowers and the Agent, which fee shall be
retained solely by the Agent.
4.4 Payment Method. All payments to be made by the Borrowers hereunder will
be made in Dollars and in immediately available funds to the Agent at its
address set forth in Section 10.2 not later than 11:00 a.m. Chicago time on the
date on which such payment shall become due. Payments received after 11:00 a.m.
Chicago time shall be deemed to be payments made prior to 11:00 a.m. Chicago
time on the next succeeding Business Day. At the time of making each such
payment, the Borrowers shall specify to the Agent that obligation of the
Borrowers hereunder to which such payment is to be applied, or, in the event
that the Borrowers fail to so specify or if an Event of Default shall have
occurred and be continuing, the Agent may apply such payments as it may
determine in its sole discretion. On the day such payments are received, the
Agent shall remit to the Banks their respective Pro Rata Shares of such
payments, in immediately available funds.
4.5 No Setoff or Deduction. All payments of principal of and interest on
the Advances and other amounts payable by the Borrowers hereunder shall be made
by the Borrowers without setoff or counterclaim, and free and clear of, and
without deduction or withholding for, or on account of, any present or future
taxes, levies, imposts, duties, fees, assessments, or other charges of whatever
nature, imposed by any governmental authority, or by any department, agency or
other political subdivision or taxing authority.
4.6 Payment on Non-Business Day; Payment Computations. Except as otherwise
provided in this Agreement to the contrary, whenever any installment of
principal of, or interest on, any Advances outstanding hereunder or any other
amount due hereunder, becomes due and payable on a day which is not a Business
Day, the maturity thereof shall be extended to the next succeeding Business Day
and, in the case of any installment of principal, interest shall be payable
thereon at the rate per annum determined in accordance with this Agreement
during such extension. Computations of interest and other amounts due under this
Agreement shall be made on the basis of a year of 360 days for the actual number
of days elapsed, including the first day but excluding the last day of the
relevant period.
4.7. Yield Protection. If any law or any governmental or quasi-governmental
rule, regulation, policy, guideline or directive (whether or not having the
force of law), or any interpretation thereof, or the compliance of any Bank
therewith,
(i) subjects any Bank or any applicable Lending Installation to
any tax, duty, charge or withholding on or from payments due from the Borrowers
(excluding federal taxation of the overall net income of any Bank or applicable
Lending Installation), or changes the basis of taxation of payments to any Bank
in respect of its Loans or other amounts due it hereunder, or
(ii) imposes or increases or deems applicable any reserve,
assessment, insurance charge, special deposit or similar requirement against
assets of, deposits with or for the account of, or credit extended by, any Bank
or any applicable Lending Installation (other than reserves and assessments
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<PAGE>
taken into account in determining the interest rate applicable to Eurodollar
Loans), or
(iii) imposes any other condition the result of which is to
increase the cost to any Bank or any applicable Lending Installation of making,
funding or maintaining loans or reduces any amount receivable by any Bank or any
applicable Lending Installation in connection with loans, or requires any Bank
or any applicable Lending Installation to make any payment calculated by
reference to the amount of loans held or interest received by it, by an amount
deemed material by such Bank,
then, within 30 days of demand by such Bank, the Borrowers shall pay such Bank
that portion of such increased expense incurred or reduction in an amount
received which such Bank determines is attributable to making, funding and
maintaining its Loans and its Commitment.
4.8. Changes in Capital Adequacy Regulations. If a Bank determines the
amount of capital required or expected to be maintained by such Bank, any
Lending Installation of such Bank or any corporation controlling such Bank is
increased as a result of a Change, then, within 15 days of demand by such Bank,
the Borrowers shall pay such Bank the amount necessary to compensate for any
shortfall in the rate of return on the portion of such increased capital which
such Bank determines is attributable to this Agreement, its Advances or its
Commitment (after taking into account such Bank's policies as to capital
adequacy). "Change" means (i) any change after the date of this Agreement in the
Risk-Based Capital Guidelines or (ii) any adoption of or change in any other
law, governmental or quasi-governmental rule, regulation, policy, guideline,
interpretation, or directive (whether or not having the force of law) after the
date of this Agreement which affects the amount of capital required or expected
to be maintained by any Bank or any Lending Installation or any corporation
controlling any Bank. "Risk-Based Capital Guidelines" means (i) the risk-based
capital guidelines in effect in the United States on the date of this Agreement,
including transition rules, and (ii) the corresponding capital regulations
promulgated by regulatory authorities outside the United States implementing the
July 1988 report of the Basle Committee on Banking Regulation and Supervisory
Practices Entitled "International Convergence of Capital Measurements and
Capital Standards," including transition rules, and any amendments to such
regulations adopted prior to the date of this Agreement.
4.9. Availability of Types of Advances. If any Bank determines that
maintenance of its Eurodollar Loans at a suitable Lending Installation would
violate any applicable law, rule, regulation, or directive, whether or not
having the force of law, or if the Required Banks determine that (i) deposits of
a type and maturity appropriate to match fund Eurodollar Loans are not available
or (ii) the interest rate applicable to a Type of Advance does not accurately
reflect the cost of making or maintaining such Advance, then the Agent shall
suspend the availability of the affected Type of Advance and require any
Eurodollar Loans of the affected Type to be repaid.
4.10. Funding Indemnification. If any payment of a Eurodollar Loan occurs
on a date which is not the last day of the applicable Interest Period, whether
because of acceleration, prepayment or otherwise, or a Eurodollar Loan is not
made on the date specified by the Borrowers for any reason other than default by
the Banks, the Borrowers will indemnify each Bank for any loss or cost incurred
by it resulting therefrom, including, without limitation, any loss or cost in
liquidating or employing deposits acquired to fund or maintain the Eurodollar
Loan.
4.11. Bank Statements; Survival of Indemnity. To the extent reasonably
possible, each Bank shall designate an alternate Lending Installation with
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respect to its Eurodollar Loans to reduce any liability of the Borrowers to such
Bank under Sections 4.7 and 4.8 or to avoid the unavailability of a Type of
Advance under Section 4.9, so long as such designation is not disadvantageous to
such Bank. Each Bank shall deliver a written statement of such Bank to the
Borrowers (with a copy to the Agent) as to the amount due, if any, under
Sections 4.7, 4.8 or 4.10. Such written statement shall set forth in reasonable
detail the calculations upon which such Bank determined such amount and shall be
final, conclusive and binding on the Borrowers in the absence of manifest error.
Determination of amounts payable under such Sections in connection with a
Eurodollar Loan shall be calculated as though each Bank funded its Eurodollar
Loan through the purchase of a deposit of the type and maturity corresponding to
the deposit used as a reference in determining the Eurodollar Rate applicable to
such Loan, whether in fact that is the case or not. Unless otherwise provided
herein, the amount specified in the written statement of any Bank shall be
payable on demand after receipt by the Borrowers of such written statement. The
obligations of the Borrowers under Sections 4.7, 4.8 and 4.10 shall survive
payment of the Bank Obligations and termination of this Agreement.
SECTION 5. Security
5.1 Security Documents. To secure all indebtedness, obligations and
liabilities under this Agreement, the Notes, the Security Documents, the
Advances, any Swap Agreements among any Borrower and any Lender and to secure
all other Indebtedness and obligations of the Borrowers to the Agent and the
Banks pursuant thereto, whether direct or indirect, absolute or contingent, due
or to become due, now existing or hereafter arising, the Borrowers shall:
(a) Execute and deliver to the Agent, promptly upon the request of the
Agent or the Required Banks, such indentures of mortgage, deeds of trust,
security agreements, financing statements and assignment of production and other
agreements, including without limitation any amendments to any such documents
previously executed and delivered in favor of the Agent or any Bank (as amended
or modified from time to time, the "Mortgages" and together with the Security
Agreements, and all agreements and documents described in this Section 5.1(a) or
in 5.1(b) or 5.2 and all other agreements and documents securing any of the Bank
Obligations at any time or otherwise executed by any Borrower with or in favor
of the Agent and the Banks, and including without limitation the Letter of
Credit Documents, as amended or modified from time to time, the "Security
Documents"), in form and substance satisfactory to the Required Banks, granting
the Agent, for the benefit of the Banks, a first-priority, perfected and
enforceable lien and security interest, subject only to the Permitted Liens, in
the following (collectively, with all other assets described in Section 5.1(b),
the "Collateral"): all oil, gas and mineral properties and all other assets of
the Borrowers as requested at any time by the Required Banks, including without
limitation all leasehold and royalty interests and all other rights in
connection therewith, and all interests in machinery, equipment, materials,
improvements, hereditaments, appurtenances and other property, real, Personal
and/or mixed, now or hereafter a part of or obtained in or used in connection
with such properties and all interests in and to any and all oil, gas and other
minerals now in storage or now or hereafter located in, under, on or produced
from, such properties and an assignment of production from such properties to
the Agent;
(b) Execute and deliver to the Agent, on or before the Effective Date,
such security agreements, pledge agreements, financing statements and other
agreements, including without limitation the Consent and Amendment of Security
Documents confirming the continuing effectiveness of Security Documents
previously executed and delivered to the Agent or any Bank (as amended or
modified from time to time, the "Security Agreements"), in form and substance
satisfactory to the Required Banks, granting to the Agent, for the benefit of
the Banks, a first-priority, perfected and enforceable lien and security
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interest, subject only to the Permitted Liens, in all other assets, whether
real, personal or mixed, and whether now owned or hereafter existing and
wherever located, of the Borrowers.
5.2 Additional Security Documents. If at any time requested by the Agent or
the Required Banks, the Borrowers shall execute and deliver such additional
documents, and shall take such other action, as the Agent or the Required Banks
may reasonably consider necessary or proper to evidence or perfect the liens and
security interests described in Section 5.1 hereof.
SECTION 6. Representations and Warranties.
Each of the Borrowers represents and warrants that:
6.1 Corporate Existence and Power. It is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation, and is duly qualified to do business and in good standing in each
additional jurisdiction where failure to so qualify would have a Material
Adverse Effect. It has all requisite corporate power to own its properties and
to carry on its business as now being conducted and as proposed to be conducted,
and to execute and deliver this Agreement, the Notes and the Security Documents
and to engage in the transactions contemplated by this Agreement, the Notes and
the Security Documents.
6.2 Corporate Authority. The execution, delivery and performance by it of
this Agreement, the Notes and the Security Documents are within its corporate
powers, have been duly authorized by all necessary corporate action and are not
in contravention of any law, rule or regulation, or any judgment, decree, writ,
injunction, order or award of any arbitrator, court or governmental authority,
or of the terms of its charter or by-laws, or of any contract or undertaking to
which it is a party or by which it or its property may be bound or affected.
6.3 Binding Effect. This Agreement is, and the Notes and the Security
Documents to which it is a party when delivered hereunder will be, legal, valid
and binding obligations of each Borrower, enforceable against each in accordance
with their respective terms.
6.4 Subsidiaries. All Subsidiaries of CRI are duly organized, validly
existing and in good standing under the laws of their jurisdictions of
organization and are duly qualified to do business in each jurisdiction where
failure to so qualify would have a Material Adverse Effect. All outstanding
shares of capital stock of each class of each Subsidiary of CRI have been and
will be validly issued and are and will be fully paid and nonassessable and are
and will be owned, beneficially and of record, by CRI, free and clear of any
Liens. Schedule 6.4 is a complete list of all Subsidiaries of CRI. COG is and
will remain a wholly owned subsidiary of CRI and COGL is and will remain a
wholly owned subsidiary of COG, and Offshore is and will remain a wholly owned
subsidiary of COGL. Comstock Management Corporation, a Nevada corporation, does
not have material assets and the Borrowers agree that it will not have any
material assets at any time.
6.5 Liens. The properties of each Borrower and each Subsidiary of any
Borrower (including without limitation the Collateral) are not subject to any
Lien except Permitted Liens.
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6.6 Litigation. There is no action, suit or proceeding pending or, to the
best of its knowledge, threatened against or affecting it before or by any
court, governmental authority, or arbitrator which would be reasonably likely to
result in, either individually or collectively, a Material Adverse Effect and,
to the best of the Borrowers' knowledge, there is no basis for any such action,
suit or proceeding.
6.7 Financial Condition. The consolidated balance sheet of CRI and its
Subsidiaries and the consolidated statements of income and cash flow of CRI and
its Subsidiaries for the fiscal year ended December 31, 1996 and reported on by
Arthur Andersen, LLP, and the interim consolidated balance sheet of CRI and its
Subsidiaries and the interim consolidated statements of income and cash flow of
CRI and its Subsidiaries for the fiscal quarter of CRI ended September 30, 1997,
copies of which have been furnished to the Banks, fairly present, and the
financial statements of CRI and its Subsidiaries to be delivered pursuant to
Section 7.1(d) will fairly present, the consolidated financial position of CRI
and its Subsidiaries as of the respective dates thereof, and the consolidated
results of operations of CRI and its Subsidiaries for their respective periods
indicated, all in accordance with generally accepted accounting principles
consistently applied. There has been no event or development which has had or
would be reasonably likely to have a Material Adverse Effect since December 31,
1996. There is no material Contingent Liability of CRI or any of its
Subsidiaries that is not reflected in such financial statements or in the notes
thereto.
6.8 Use of Advances. The Advances will be used for working capital and
general corporate purposes, including acquisitions. No Borrower extends or
maintains, in the ordinary course of business, credit for the purpose, whether
immediate, incidental, or ultimate, of buying or carrying margin stock (within
the meaning of Regulation U of the Board of Governors of the Federal Reserve
System), and no part of the proceeds of each Advance will be used for the
purpose, whether immediate, incidental, or ultimate, of buying or carrying any
such margin stock or maintaining or extending credit to others for such purpose.
After applying the proceeds of the Advances, such margin stock will not
constitute more than 25% of the value of the assets that are subject to any
provisions of this Agreement or any Security Document that may cause the
Advances to be secured, directly or indirectly by margin stock.
6.9 Security Documents. The Security Documents create a valid and
enforceable first-priority lien on and perfected security interest in all right,
title and interest of each Borrower in and to the Collateral described therein,
securing all amounts intended to be secured thereby (including without
limitation all principal of and interest on the Notes) subject only to the
Permitted Liens. The respective net revenue interests of each Borrower in and to
the Oil and Gas Interests as set forth in the Security Documents are true and
correct and accurately reflect the interests to which each Borrower is legally
entitled, subject only to the Permitted Liens.
6.10 Consents, Etc. No consent, approval or authorization of or
declaration, registration or filing with any governmental authority or any
nongovernmental Person or entity, including without limitation any creditor or
stockholder of it, is required on the part of it in connection with the
execution, delivery and performance of this Agreement, the Notes, the Security
Documents or the transactions contemplated hereby or as a condition to the
legality, validity or enforceability of this Agreement, the Notes or any of the
Security Documents.
6.11 Taxes. It has filed all tax returns (federal, state and local)
required to be filed and has paid all taxes shown thereon to be due, including
interest and penalties, or has established adequate financial reserves on its
books and records for payment thereof, except where the failure to do so would
not have a Material Adverse Effect.
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6.12 Title to Properties. It has good and defensible title to, and a valid
indefeasible ownership interest in, all of its properties and assets (including,
without limitation, the Collateral subject to the Security Documents) free and
clear of any Lien except the Permitted Liens, and it is the owner of all the
Collateral described in the Security Documents to which it is a party. All wells
on any of the mortgaged premises have been drilled, operated, shut-in, abandoned
or suspended in accordance with good oil and gas field practices and in
compliance with all applicable laws, permits, statutes, orders, licenses, rules
and regulations. All leases with respect to any Oil and Gas Interests owned by
any Borrower are in good standing and are in full force and effect, all
royalties, rents, taxes, assessments and other payments thereunder or with
respect thereto have been properly and timely paid and all conditions necessary
to keep such leases in full force have been fully performed, including without
limitation any condition to maintain continuous production or other activity
with respect thereto. The Borrowers have delivered to the Agent title opinions
with respect to at least 80% of the value of the assets included in the
Borrowing Base. All transactions contemplated pursuant to the Purchase Documents
have been completed, including without limitation the acquisition by COGL (to be
assigned to Offshore) of the Purchased Bois D'Arc Assets (other than certain
assets not substantial in amount in the aggregate which will be transferred to
Offshore in January, 1998) and have been completed in accordance with all
applicable laws and regulations. Offshore owns the Purchased Bois D'Arc Assets
free and clear of all Liens other than under the Security Documents, and the
Security Documents delivered on the Effective Date create a first priority,
perfected and enforceable lien and security interest in favor of the Agent for
the benefit of the Banks on all Purchased Bois D'Arc Assets owned by any of the
Borrowers.
6.13 ERISA. CRI and its Subsidiaries and their Plans are in compliance in
all material respects with those provisions of ERISA and of the Code which are
applicable with respect to any Plan. No prohibited transaction (as defined in
Section 406 of ERISA and Section 9975 of the Code) and no reportable event (as
defined in ERISA) has occurred with respect to any Plan. Neither CRI, any of its
Subsidiaries nor any of its ERISA Affiliates is an employer with respect to any
multiemployer plan (as defined in Section 4001(a)(3) of ERISA). CRI, its
Subsidiaries and the ERISA Affiliates have met the minimum funding requirements
under ERISA and the Code with respect to each of the respective Plans, if any,
and have not incurred any liability to the PBGC or any Plan. There is no
unfunded benefit liability with respect to any Plan.
6.14 Environmental and Safety Matters. It is in compliance in all material
respects with all federal, state and local laws, ordinances and regulations
relating to safety and industrial hygiene or to the environmental condition,
including without limitation all Environmental Laws in jurisdictions in which it
owns any interest in or operates, a well, a facility or site, or arranges for
disposal or treatment of hazardous substances, solid waste, or other wastes,
accepts for transporting any hazardous substances, solid waste, or other wastes,
or holds any interest in real property or otherwise, except where any such
noncompliance would not have a Material Adverse Effect. No demand, claim,
notice, suit, suit in equity, action, administrative action, investigation or
inquiry whether brought by any governmental authority, private Person or entity
or otherwise, arising under, relating to or in connection with any Environmental
Laws is pending or, to the best of any Borrower's knowledge, threatened against
it, any real property in which it holds or has held an interest or any past or
present operation of it. It (a) does not know of any federal or state
investigation evaluating whether any remedial action is needed to respond to a
release of any toxic substances, radioactive materials, hazardous wastes or
related materials into the environment, (b) has not received any notice of any
toxic substances, radioactive materials, hazardous waste or related materials
in, or upon any of its properties in violation of any Environmental Laws, and
(c) does not know of any basis for any such investigation, notice or violation.
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No material release, threatened release or disposal of hazardous waste, solid
waste or other wastes is occurring or has occurred on, under or to any real
property in which it holds any interest or performs any of its operations, in
violation of any Environmental Law which would have a Material Adverse Effect.
6.15 Direct Benefit. The initial Advances hereunder and all additional
Advances are for the direct benefit of each of the Borrowers, and the initial
Advances hereunder are used to refinance and replace indebtedness owing,
directly or indirectly, by the Borrowers to the Banks under the Existing Credit
Agreement. The Borrowers are engaged as an integrated group in the business of
oil and gas exploration and related fields, and any benefits to any Borrower is
a benefit to all of them, both directly or indirectly, inasmuch as the
successful operation and condition of the Borrowers is dependent upon the
continued successful performance of the functions of the integrated group as a
whole.
6.16 Solvency. Each of the following is true for each Borrower and the
Borrowers on a consolidated basis: (a) the fair saleable value of its property
is (i) greater than the total amount of its liabilities (including contingent
liabilities), and (ii) greater than the amount that would be required to pay its
probable aggregate liability on its then existing debts as they become absolute
and matured; (b) its property is not unreasonable in relation to its business or
any contemplated or undertaken transaction; and (c) it does not intend to incur,
or believe that it will incur, debts beyond its ability to pay such debts as
they become due.
6.17 Disclosure. This Agreement and all other documents, certificates,
reports or statements or other information furnished to any Bank or the Agent in
writing by or on behalf of any Borrower in connection with the negotiation or
administration of this Agreement or any transactions contemplated hereby when
read together do not contain any untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements contained herein
and therein not misleading. There is no fact known to any Borrower which has
caused, or which likely would in the future in the reasonable judgment of the
Borrowers cause, a Material Adverse Effect (except for any economic conditions
which affect generally the industry in which the Borrowers and their
Subsidiaries conduct business), which has not been set forth in this Agreement
or in the other documents, certificates, statements, reports and other
information furnished in writing to the Banks by or on behalf of any Borrower in
connection with the transactions contemplated hereby.
SECTION 7. Covenants.
7.1 Affirmative Covenants. Each Borrower covenants and agrees that, until
the payment in full of the principal of and accrued interest on the Notes, the
expiration of this Agreement and all Letters of Credit and the payment and
performance of all other obligations of the Borrowers under this Agreement, the
Notes and the Security Documents, unless the Required Banks shall otherwise
consent in writing, each of the Borrowers shall:
(a) Preservation of Corporate Existence, Etc. Preserve and maintain
its corporate existence, rights and privileges and its material licenses,
franchises and permits, and qualify and remain qualified as a validly existing
corporation in good standing in each jurisdiction in which such qualification is
necessary under applicable law.
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(b) Compliance with Laws, Etc. Comply in all material respects with
all applicable laws, rules, regulations and orders of any governmental
authority, whether federal, state, local or foreign (including without
limitation ERISA, the Code and Environmental Laws), in effect from time to time;
and pay and discharge promptly when due all taxes, assessments and governmental
charges or levies imposed upon it or upon its income, revenues or property,
before the same shall become delinquent or in default, as well as all lawful
claims for labor, materials and supplies or otherwise, which, if unpaid, might
give rise to Liens upon such properties or any portion thereof, except to the
extent that payment of any of the foregoing is then being contested in good
faith by appropriate legal proceedings and with respect to which adequate
financial reserves have been established on its books and records.
(c) Maintenance of Properties; Insurance. Maintain, preserve and
protect all property that is material to the conduct of its business and keep
such property in good repair, working order and condition and from time to time
make, or cause to be made, all needful and proper repairs, renewals, additions,
improvements and replacements thereto necessary in order that the business
carried on in connection therewith may be properly conducted at all times in
accordance with customary and prudent business practices for similar businesses;
comply with all applicable permits, statutes, laws, orders, licenses, rules and
regulations relating to the Oil and Gas Interests owned by it, unless any non
compliance would not cause a Material Adverse Effect, and ensure that all wells
and other properties operated by it, either in its own name or as a partner, are
operated in accordance with prudent oil and gas field practices; comply with all
of its duties and obligations under, and take all actions to maintain,
consistent with prudent oil and gas practices, all leases and other rights in
full force and effect; and, in addition to that insurance required under the
Security Documents, maintain in full force and effect insurance with responsible
and reputable insurance companies or associations in such amounts, on such terms
and covering such risks, including fire and other risks insured against by
extended coverage, as is usually carried by companies engaged in similar
businesses and owning similar properties similarly situated and maintain in full
force and effect public liability insurance, insurance against claims for
personal injury or death or property damage occurring in connection with any of
its activities or any of any properties owned, occupied or controlled by it, in
such amount as it shall reasonably deem necessary, and maintain such other
insurance as may be required by law or as may be reasonably requested by the
Banks for purposes of assuring compliance with this Section 7.1(c).
(d) Reporting Requirements. Furnish to each Bank, in form and
substance satisfactory to the Required Banks, the following:
(i) Promptly and in any event within three calendar days after
becoming aware of the occurrence of (A) any Default, (B) the commencement of any
material litigation against, by or affecting the Borrowers and, upon request by
any Bank, any material developments therein, or (C) any development in the
business or affairs of the Borrowers which has resulted in, or which is likely
in the reasonable judgment of the Borrowers to result in (including without
limitation the entering into of any material contract and/or undertaking by the
Borrowers) a Material Adverse Effect or (D) any "reportable event" (as defined
in ERISA) under, or the institution of steps by the Borrowers or any Subsidiary
to withdraw from, or the institution of any steps to terminate, any Plan, a
statement of the chief financial officer of the Borrowers setting forth details
of such Default or such event or condition or such litigation and the action
which CRI or any Subsidiary has taken and proposes to take with respect thereto;
(ii) As soon as available and in any event within 45 days after
the end of each fiscal quarter of CRI, the consolidated balance sheets of CRI
and its Subsidiaries as of the end of such quarter, and the related consolidated
statements of income and cash flow for the period commencing at the end of the
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previous fiscal year and ending with the end of such quarter, setting forth in
each case in comparative form the corresponding figures for the corresponding
date or period of the preceding fiscal year, all in reasonable detail and duly
certified (subject to year-end audit adjustments) by an appropriate officer of
the Borrowers as having been prepared in accordance with generally accepted
accounting principles, together with a certificate of an appropriate officer of
the Borrowers with a computation in reasonable detail calculating the covenants
contained in Sections 7.2(a), (b), (c), (i) and (j);
(iii) As soon as available and in any event within 120 days after
the end of each fiscal year, a copy of the consolidated balance sheet of CRI and
its Subsidiaries for such fiscal year and related statements of income and cash
flow with a customary audit report thereon by Arthur Andersen LLP or other
independent certified public accountants selected by CRI and acceptable to the
Banks, without qualifications unacceptable to the Banks, together with a
certificate of such accountants stating that they have reviewed this Agreement
and stating further that in making their review in accordance with generally
accepted accounting principles nothing came to their attention that made them
believe that any Default exists, or if their examination has disclosed the
existence of any Default, specifying the nature, period of existence and status
thereof, together with a certificate of an appropriate officer of the Borrowers
with a computation in reasonable detail calculating the covenants contained in
Sections 7.2(a), (b), (c), (i) and (j) hereof;
(iv) Upon the request of the Required Banks or the Agent, a
schedule of all oil, gas, and other mineral production attributable to all
material Oil and Gas Interests of the Borrowers, and in any event all such Oil
and Gas Interests included in the Borrowing Base; (v) Promptly, all title or
other information received after the Effective Date by any Borrower which
discloses any material defect in the title to any material asset included in the
Borrowing Base;
(v) Promptly, all title or other information received after the
Effective Date by any Borrower which disclosed any material defect in the title
to any material asset included in the Borrowing Base;
(vi) As soon as practicable and in any event within 30 days after
the sending or filing thereof, copies of all such financial statements and
reports as it shall send to its security holders and of all final prospectuses
under the Securities Act of 1933 (other than Form S-8), reports on Forms 10-Q,
10- K and 8-K and all similar regular and periodic reports filed by it (i) with
any federal department, bureau, commission or agency from time to time having
jurisdiction with respect to the sale of securities or (ii) with any securities
exchange;
(vii) (A) As soon as available and in any event within 90 days
after each January 1, commencing with January 1, 1998, an annual reserve report
as of each such January 1 with respect to all Hydrocarbon reserves of the
Borrowers prepared by an independent engineering firm of recognized standing
acceptable to the Required Banks in accordance with accepted industry practices
and otherwise acceptable and in form and substance satisfactory to the Required
Banks, and including without limitation all assets included in the Borrowing
Base, and (B) within 90 days after each July 1 thereafter, a reserve report as
of such July 1, with respect to all Hydrocarbon reserves of the Borrowers
prepared by the Borrowers in accordance with accepted industry practices and
otherwise acceptable and in form and substance satisfactory to the Required
Banks, and including without limitation all assets included in the Borrowing
Base;
(viii) On or within 30 days after the request of the Agent or the
Required Banks, in connection with a redetermination of the Borrowing Base
permitted under Section 9.14 an updated reserve report with respect to all
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Hydrocarbon reserves of the Borrowers prepared by an independent engineering
firm of recognized standing acceptable to the Required Banks in accordance with
accepted industry practices and otherwise acceptable and in form and substance
satisfactory to the Required Banks, and including without limitation all assets
included in the Borrowing Base;
(ix) Promptly, any management letter from the auditors for any
Borrower and all other information respecting the business, properties or the
condition or operations, financial or otherwise, including, without limitation,
geological and engineering data of any Borrower and any title work with respect
to any Oil and Gas Interests of any Borrower as any Bank may from time to time
reasonably request;
(x) At all times after the date ninety (90) days after the
Effective Date, if requested by the Required Banks, title opinions and other
opinions of counsel, in each case in form and substance acceptable to the
Required Banks, with respect to at least eighty (80%) percent of the value of
the assets included in the Borrowing Base; and
(e) Access to Records, Books, Etc. At any reasonable time and from
time to time, permit any Bank or any agents or representatives thereof, at the
Borrowers' own expense, to examine and make copies of and abstracts from the
records and books of account of, and visit the properties of, the Borrowers, and
to discuss the affairs, finances and accounts of the Borrowers with their
respective officers and employees. Without limiting the foregoing, the Borrowers
agree that at any reasonable time and from time to time, the Borrowers will
permit any Bank or any agents or representatives thereof to inspect, at the
office of the Borrowers listed on its signature page hereto, all opinions with
respect to title and other material work received by the Borrowers with respect
to any asset included in the Borrowing Base.
7.2 Negative Covenants. Until payment in full of the principal of and
accrued interest on the Notes, the expiration of this Agreement and all Letters
of Credit and the payment and performance of all other obligations of the
Borrowers and each Guarantor under this Agreement, the Notes and the Security
Documents, each Borrower agrees that, unless the Required Banks shall otherwise
consent in writing, none of them shall:
(a) Current Ratio. Permit or suffer the ratio of (i) the sum of
Current Assets plus the unused availability under the revolving credit facility
established by Section 2.1(a), to (ii) Current Liabilities at any time to be
less than 1.0 to 1.0.
(b) Tangible Net Worth. Permit or suffer Consolidated Tangible Net
Worth of CRI and its Subsidiaries, at any time, to be less than the sum of (i)
$95,000,000, plus (ii) 50% of Consolidated Net Income for the fiscal quarter
ending December 31, 1997 and for each fiscal year, commencing with the fiscal
year ending December 31, 1998, and to be added as of the last day of such fiscal
quarter and each such fiscal year, provided that if such Consolidated Net Income
is negative in such fiscal quarter or in any fiscal year, the amount added
pursuant to this clause (ii) shall be zero and shall not reduce the amount added
pursuant to this clause (ii) for any other fiscal year, plus (iii) 75% of the
net cash proceeds of any equity offering or other sale of equity of CRI or any
of its Subsidiaries.
(c) Interest Coverage Ratio. Permit or suffer, as of the last day of
any fiscal quarter of CRI, the ratio of (i) EBITDA, as calculated for the four
fiscal quarters then ending, to (ii) Consolidated Interest Expense, as
calculated for the four fiscal quarters then ending, to be less than 2.5 to 1.0.
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(d) Indebtedness. Create, incur, assume, guaranty or in any manner
become liable in respect of, or suffer to exist, any Indebtedness other than:
(i) The Advances;
(ii) Other Indebtedness in aggregate outstanding amount not to
exceed $5,000,000;
(iii) Unsecured insurance premium financing incurred in the
ordinary course of business;
(iv) Indebtedness pursuant to any Swap Agreement with any Bank,
any Person with an investment grade debt rating acceptable to the Agent and any
other Person acceptable to the Agent; and
(v) Indebtedness permitted pursuant to Section 7.2(i).
(e) Liens. Create, incur or suffer to exist, any Lien to exist on any
assets, rights, revenues or property, real, personal or mixed, tangible or
intangible, other than:
(i) Liens for taxes not delinquent or for taxes being contested
in good faith by appropriate proceedings and as to which adequate financial
reserves have been established on its books and records;
(ii) Liens (other than any Lien imposed by ERISA) created and
maintained in the ordinary course of business which are not material in the
aggregate, and which would not have a Material Adverse Effect and which
constitute (A) pledges or deposits under worker's compensation laws,
unemployment insurance laws or similar legislation, (B) good faith deposits in
connection with bids, tenders, contracts or leases to which any Borrower is a
party for a purpose other than borrowing money or obtaining credit, including
rent security deposits, (C) liens imposed by law, such as those of carriers,
warehousemen, operators and mechanics, if payment of the obligation secured
thereby is not yet due, (D) Liens securing taxes, assessments or other
governmental charges or levies not yet subject to penalties for nonpayment, and
(E) pledges or deposits to secure public or statutory obligations of any
Borrower, or surety, customs or appeal bonds to which such Borrower is a party;
(iii) Liens created pursuant to the Security Documents and Liens
expressly permitted by the Security Documents, including without limitation
liens securing any reimbursement and other obligations pursuant to any Letters
of Credit issued by any Bank for the account of any Borrower, and it is
acknowledged and agreed that, without limiting the indebtedness secured by the
Security Documents, each Security Document secures all reimbursement and other
obligations incurred at any time by any Borrower pursuant to any Letter of
Credit issued by any Bank for the account of any Borrower;
(iv) Liens securing Indebtedness permitted pursuant to Section
7.2(d)(iii) created to secure payment of a portion of the purchase price of, or
existing at the time of acquisition of, any tangible fixed asset acquired by any
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Borrower if the outstanding principal amount of the Indebtedness secured by such
Lien does not at any time exceed the purchase price paid by such Borrower for
such assets, provided that such Lien does not encumber any other asset at any
time owned by such Borrower.
(f) Merger; Acquisitions; Etc. Purchase or otherwise acquire, whether
in one or a series of transactions, unless the Required Banks shall otherwise
consent in writing, all or any substantial portion of the business assets,
rights, revenues or property, real, personal or mixed, tangible or intangible,
of any Person, or all or any substantial portion of the capital stock of or
other ownership interest in any other Person, nor merge or consolidate or
amalgamate with any other Person or take any other action having a similar
effect, unless in each of the foregoing cases, each of the following conditions
is satisfied: (i) no Default or Event of Default exists either before or after
such acquisition, merger, consolidation, amalgamation or other action have a
similar effect, (ii) if such transaction is a merger, consolidation,
amalgamation or other action having a similar effect, a Borrower is the
surviving entity and (iii) in the case of any take-over bid or offer to acquire
all or substantially all of the outstanding voting or equity securities of a
corporation or an acquisition of all or substantially all of the assets of any
Person, the board of directors of the target corporation or management of the
target Person(if the target is not a corporation) has recommended acceptance of
such bid or offer.
(g) Disposition of Assets; Etc. Without the prior written consent of
the Required Banks, sell, lease, license, transfer, assign or otherwise dispose
of any Collateral or any of its other business, assets, rights, revenues or
property, real, personal or mixed, tangible or intangible, whether in one or a
series of transactions, other than (i) inventory sold in the ordinary course of
business upon customary credit terms, and (ii) if no Default has occurred and is
continuing or would be caused thereby, other sales of assets in aggregate amount
not to exceed $15,000,000 in any twelve-month period, provided that in
connection with any such sales in excess of $5,000,000 in aggregate amount since
the date of the most recent redetermination of the Borrowing Base all the net
proceeds (net only of reasonable and customary fees actually incurred in
connection with such sales and of taxes paid or reasonably estimated to be
payable as a result thereof), will simultaneously reduce the Borrowing Base by a
like amount.
(h) Nature of Business. Make any substantial change in the nature of
its business from that engaged in on the date of this Agreement or engage in any
other businesses other than those in which it is engaged on the date of this
Agreement.
(i) Investments and Advances. Purchase or otherwise acquire any
capital stock of or other ownership interest in, or debt securities of or other
evidences of Indebtedness of, any other Person; nor make any loan or advance of
any of its funds or property or make any other extension of credit to, or make
any investment or acquire any interest whatsoever in, any other Person, except
(i) loans and advances to officers of the Borrowers, provided that the aggregate
amount of all such loans and advances does not exceed $25,000, (ii) loans and
advances among the Borrowers or any Subsidiary of any Borrower guaranteeing all
indebtedness, obligations and liabilities of the Borrowers to the Banks and the
Agent pursuant to a guaranty and other agreements satisfactory to the Agent, and
(iii) other loans and advances, provided that the aggregate amount of all such
loans and advances, together with Indebtedness allowed under Section
7.2(d)(iii), shall not exceed $5,000,000.
(j) Dividends. With respect to CRI only, make, pay, declare or
authorize any dividend, payment or other distribution in respect of any class of
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its capital stock or any dividend, payment or distribution in connection with
the redemption, repurchase, defeasance, conversion, retirement or other
acquisition, directly or indirectly, of any shares of its capital stock, (all of
the foregoing defined herein as "Restricted Payments"), except (i) Restricted
Payments payable solely in shares of capital stock of CRI, and (ii) cash
dividends (exclusive of those described in (i) above) paid on, and redemptions
or repurchases of capital stock of, CRI, provided that the aggregate amount paid
for all such dividends, redemptions or repurchases after the Effective Date
shall not exceed 25% of Consolidated Net Income of CRI and its Subsidiaries for
the fiscal year ended immediately prior to such payments, and provided further,
that both before each such dividend, redemption or repurchase and after giving
effect to the payment in connection with each such dividend, redemption or
repurchase (A) no Default or Event of Default shall have occurred and be
continuing and (B) all representations and warranties contained in Section 6
hereof (including without limitation Section 6.8) shall be true and correct in
all material respects as if made at such times. For purposes of this Agreement,
"capital stock" shall include capital stock (preferred, common or other) and any
securities exchangeable for or convertible into capital stock and any warrants,
rights or other options to purchase or otherwise acquire capital stock or such
securities.
(k) Transactions with Affiliates. Enter into or be a party to any
transaction or arrangement with any Affiliate (including, without limitation,
the purchase from, sale to or exchange of property with, or the rendering of any
service by or for, any Affiliate), except in the ordinary course of and pursuant
to the reasonable requirements of the Borrowers' business and upon fair and
reasonable terms no less favorable to such Borrower than would be obtained in a
comparable arms-length transaction with a Person other than an Affiliate and
except the loans and advances described in Section 7.2(i).
(l) Additional Covenants. If at any time any Borrower shall enter into
or be a party to any instrument or agreement, including all such instruments or
agreements in existence as of the date hereof and all such instruments or
agreements entered into after the date hereof, relating to or amending any terms
or conditions applicable to any of its Indebtedness which includes covenants,
terms, conditions or defaults not substantially provided for in this Agreement
or more favorable to the lender or lenders thereunder than those provided for in
this Agreement, then the Borrowers shall promptly so advise the Agent and the
Banks. Thereupon, if the Agent shall request, upon notice to the Borrowers, the
Agent and the Banks shall enter into an amendment to this Agreement or an
additional agreement (as the Agent may request), providing for substantially the
same covenants, terms, conditions and defaults as those provided for in such
instrument or agreement to the extent required and as may be selected by the
Agent. In addition to the foregoing, any covenants, terms, conditions or
defaults in any existing agreements or other documents evidencing or relating to
any Indebtedness of any Borrower not substantially provided for in this
Agreement or more favorable to the holders of such Indebtedness, are hereby
incorporated by reference into this Agreement to the same extent as if set forth
fully herein, and no subsequent amendment, waiver or modification thereof shall
effect any such covenants, terms, conditions or defaults as incorporated herein.
(m) Financial Contracts. Enter into any Swap Agreement (or any other
agreement, device or arrangement providing for payments relating to fluctuations
of interest rates, exchange rates or commodity prices) for purposes of financial
speculation or otherwise not in the ordinary course of business of the
Borrowers, and any Swap Agreement with respect to fluctuations in interest rates
shall be entered into by the Borrowers only with respect to Indebtedness for
borrowed money of the Borrowers.
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SECTION 8. Default
8.1 Events of Default. The occurrence of any one of the following events or
conditions shall be deemed an "Event of Default" hereunder unless waived by the
Required Banks pursuant to Section 10.1:
(a) Any Borrower shall fail to pay within 2 Business Days of when due
any principal of or interest on the Notes (whether pursuant to Section 4.1 or
otherwise), any fees or any other amount payable hereunder or under any Security
Document; or
(b) Any representation or warranty made by any Borrower in Section 6
hereof, in any Security Document or in any other document or certificate
furnished by or on behalf of any Borrower in connection with this Agreement,
shall prove to have been incorrect in any material respect when made; or
(c) (i) Any Borrower shall fail to perform or observe any term,
covenant or agreement contained in Sections 7.1(b), 7.1(c) (other than the
agreement to maintain continuous insurance coverage), 7.1(d), 7.2(a), 7.2(b) or
7.2(c) hereof or in any Security Document, any other Loan Document or any other
agreement among the Borrowers, the Banks and the Agent, or any of them, and such
failure shall remain unremedied for 30 calendar days after the earlier of the
date notice thereof shall have been given to Borrowers by the Agent or any Bank
or any Borrower knows of such failure, or (ii) any Borrower shall fail to
perform or observe any other term, covenant, or agreement contained in this
Agreement; or
(d) Any Borrower shall fail to pay any part of the principal of, the
premium, if any, or the interest on, or any other payment of money due under any
of its Indebtedness (other than Indebtedness hereunder), beyond any period of
grace provided with respect thereto, which individually or together with other
such Indebtedness as to which any such failure exists has an aggregate
outstanding principal amount in excess of $10,000,000; or if any Borrower fails
to perform or observe any other term, covenant or agreement contained in any
agreement, document or instrument evidencing or securing any such Indebtedness,
or under which any such Indebtedness was issued or created, beyond any period of
grace, if any, provided with respect thereto if the effect of such failure is
either (i) to cause, or permit the holders of such Indebtedness (or a trustee on
behalf of such holders) to cause, any payment in respect of such Indebtedness to
become due prior to its due date or (ii) to permit the holders of such
Indebtedness (or a trustee on behalf of such holder) to elect a majority of the
board of directors of any Borrower; or
(e) A judgment or order for the payment of money, which together with
other such judgments or orders exceeds the aggregate amount of $10,000,000,
shall be rendered against any Borrower and either (i) enforcement proceedings
shall have been commenced by any creditor upon such judgment or order and such
judgment or order shall have remained unsatisfied and such proceedings shall
have remained unstayed for a period of 30 consecutive days, or (ii) for a period
of 30 consecutive days, such judgment or order shall have remained unsatisfied
and a stay of enforcement thereof, by reason of pending appeal or otherwise,
shall not have been in effect; or
(f) The occurrence or existence with respect to any Borrower or any
Guarantor or any of their ERISA Affiliates of any of the following: (i) any
"prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of
the Code) involving any Plan, (ii) any Reportable Event shall occur with respect
to any Plan, (iii) the filing under ERISA of a notice of intent to terminate any
Plan or the termination of any Plan, (iv) any event or circumstance exists which
might constitute grounds entitling the PBGC to institute proceedings under ERISA
for the termination of, or the appointment of a trustee to administer, any Plan,
or the institution of the PBGC of any such proceedings, or (v) complete or
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partial withdrawal under ERISA from any Multiemployer Plan or the
reorganization, insolvency, or termination of any Multiemployer Plan, and in
each of the foregoing cases, such event or condition, together with all other
events or conditions, if any, could in the opinion of the Banks subject any
Borrower to any tax, penalty, or other liability to a Plan, the PBGC, or
otherwise (or any combination thereof); or
(g) Any Borrower shall generally not pay its debts as they become due,
or shall admit in writing its inability to pay its debts generally, or shall
make a general assignment for the benefit of creditors, or shall institute, or
there shall be instituted against any Borrower, any proceeding or case seeking
to adjudicate it a bankrupt or insolvent or seeking liquidation, winding up,
reorganization, arrangement, adjustment, protection, relief or composition of it
or its debts under any law relating to bankruptcy, insolvency or reorganization
or relief or protection of debtors or seeking the entry of an order for relief
or the appointment of a receiver, trustee, custodian or other similar official
for it or for any substantial part of its property, and, if such proceeding is
instituted against any Borrower and is being contested by such Borrower in good
faith by appropriate proceedings, such proceedings shall remain undismissed or
unstayed for a period of 30 days; or any Borrower shall take any action
(corporate or other) to authorize or further any of the actions described above
in this subsection; or
(h) Any event of default described in any Security Document shall have
occurred and be continuing, or any material provision of any Security Document
shall at any time for any reason cease to be valid and binding and enforceable
against any obligor thereunder, or the validity, binding effect or
enforceability thereof shall be contested or repudiated by any Person, or any
obligor, shall deny that it has any or further liability or obligation
thereunder, or any Security Document shall be terminated, invalidated or set
aside, or be declared ineffective or inoperative or in any way cease to give or
provide to the Agent and the Banks the benefits purported to be created thereby;
or
(i) (A) COG shall fail to be a wholly-owned Subsidiary of CRI, (B)
COGL shall fail to be a wholly-owned subsidiary of COG or (C) the Board of
Directors of CRI shall not consist of a majority of the Continuing Directors of
CRI; or
(j) Any Change in Control shall occur.
8.2 Remedies.
(a) Upon the occurrence and during the continuance of any Event of
Default, the Agent may, and upon being directed to do so by the Required Banks,
shall, by notice to the Borrowers terminate the Commitments or declare the
outstanding principal of, and accrued interest on, the Notes and all other
amounts due under this Agreement and all other Loan Documents, to be immediately
due and payable, or demand immediate delivery of cash collateral, and the
Borrowers agree to deliver such cash collateral upon such demand, in an amount
equal to the maximum amount that may be available to be drawn at any time prior
to the stated expiry of all outstanding Letters of Credit, or all of the above,
whereupon the Commitments shall terminate forthwith and all such amounts shall
become immediately due and payable, or both, as the case may be, provided that
in the case of any event or condition described in Section 8.1(g), the
Commitments shall automatically terminate forthwith and all such amounts shall
automatically become immediately due and payable without notice; in each case
without demand, presentment, protest, diligence, notice of dishonor or other
formality, all of which are hereby expressly waived.
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(b) Upon the occurrence and during the continuance of such Event of
Default, the Agent may, and upon being directed to do so by the Required Banks,
shall, in addition to the remedies provided in Section 8.2(a), enforce its
rights either by suit in equity, or by action at law, or by other appropriate
proceedings, whether for the specific performance (to the extent permitted by
law) of any covenant or agreement contained in this Agreement or in any then
outstanding Note or any Security Document or in aid of the exercise of any power
granted in this Agreement, any then outstanding Notes or any Security Document,
and may enforce the payment of any then outstanding Notes and any of the other
rights of the Agent and the Banks in any other agreement or available at law or
in equity.
(c) Upon the occurrence and during the continuance of any Event of
Default hereunder, each Bank may at any time and from time to time, without
notice to the Borrowers (any requirement for such notice being expressly waived
by the Borrowers) set off and apply against any and all of the obligations of
any Borrower now or hereafter existing under this Agreement, any of the Notes or
the Security Documents, any and all deposits (general or special, time or
demand, provisional or final) at any time held and other indebtedness at any
time owing by such Bank to or for the credit or the account of any Borrower and
any property of any Borrower from time to time in possession of such Bank,
irrespective of whether or not any Bank shall have made any demand hereunder and
although such obligations may be contingent and unmatured. The rights of the
Banks under this Section 8.2(c) are in addition to other rights and remedies
(including, without limitation, other rights of setoff) which the Banks may
have.
8.3 Distribution of Proceeds. All proceeds of any realization on the
Collateral received by the Agent pursuant to the Security Documents or any
payments on any of the liabilities secured by the Security Documents received by
the Agent or any Bank upon and during the continuance of any Event of Default
shall be allocated and distributed as follows:
(a) First, to the payment of all costs and expenses, including without
limitation all attorneys' fees, of the Agent in connection with the enforcement
of the Security Documents and otherwise administering this Agreement;
(b) Second, to the payment of all costs, expenses and fees, including
without limitation, commitment fees and attorneys' fees, owing to the Banks
pursuant to the Bank Obligations on a pro rata basis in accordance with the Bank
Obligations consisting of fees, costs and expenses owing to the Banks under the
Bank Obligations for application to payment of such liabilities;
(c) Third, to the Banks on a pro rata basis in accordance with the
Bank Obligations consisting of interest and principal owing to the Banks under
the Bank Obligations, with any obligations owing to any Bank pursuant to any
Swap Agreement to which it is a party (whether pursuant to a termination thereof
or otherwise) and with any reimbursement obligations or other liabilities owing
to any Bank pursuant to any Letter of Credit, for application to payment of such
liabilities;
(c) Fourth, to the payment of any and all other amounts owing to the
Banks on a pro rata basis in accordance with the total amount of such
Indebtedness owing to each of the Banks, for application to payment of such
liabilities; and
(d) Fifth, to the Borrowers or such other Person as may be legally
entitled thereto.
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8.4 Letter of Credit Liabilities. For the purposes of payments and
distributions under Section 8.3, the full amount of Bank Obligations on account
of any Letter of Credit then outstanding but not drawn upon shall be deemed to
be then due and owing. Amounts distributable to the any of the Banks on account
of such Bank Obligations under such Letter of Credit shall be deposited in a
separate interest bearing collateral account in the name of and under the
control of the Agent and held by the Agent first as security for such Letter of
Credit Bank Obligations and then as security for all other Bank Obligations and
the amount so deposited shall be applied to the Letter of Credit Bank
Obligations at such times and to the extent that such Letter of Credit Bank
Obligations become absolute liabilities. If and to the extent that the Letter of
Credit Bank Obligations fail to become absolute Bank Obligations because of the
expiration or termination of the underlying Letters of Credit without being
drawn upon, then such amounts shall be applied to the remaining Bank Obligations
in the order provided in Section 8.3. Each Borrower hereby grants to the Agent,
for the benefit of the Banks, a lien and security interest in all such funds
deposited in such separate interest bearing collateral account, as security for
all the Bank Obligations as set forth above. The Borrowers acknowledge and agree
that all reimbursement and other obligations and liabilities pursuant to any
Letters of Credit issued by the Agent for the account of any Borrower are
secured by all Collateral and the Security Documents.
SECTION 9. The Agent, the Documentation Agent and the Banks.
9.1 Appointment; Nature of Relationship. The First National Bank of Chicago
is hereby appointed by the Banks as the Agent hereunder and under each other
Loan Document, and each of the Banks irrevocably authorizes the Agent to act as
the contractual representative of such Bank with the rights and duties expressly
set forth herein and in the other Loan Documents. The Agent agrees to act as
such contractual representative upon the express conditions contained in this
Section 9. Notwithstanding the use of the defined term "Agent," it is expressly
understood and agreed that the Agent shall not have any fiduciary
responsibilities to any Bank by reason of this Agreement or any other Loan
Document and that the Agent is merely acting as the representative of the Banks
with only those duties as are expressly set forth in this Agreement and the
other Loan Documents. In its capacity as the Banks' contractual representative,
the Agent (i) does not hereby assume any fiduciary duties to any of the Banks,
(ii) is a "representative" of the Banks within the meaning of Section 9-105 of
the Uniform Commercial Code and (iii) is acting as an independent contractor,
the rights and duties of which are limited to those expressly set forth in this
Agreement and the other Loan Documents. Each of the Banks hereby agrees to
assert no claim against the Agent on any agency theory or any other theory of
liability for breach of fiduciary duty, all of which claims each Bank hereby
waives.
9.2 Powers. The Agent shall have and may exercise such powers under the
Loan Documents as are specifically delegated to the Agent by the terms of each
thereof, together with such powers as are reasonably incidental thereto. The
Agent shall have no implied duties to the Banks, or any obligation to the Banks
to take any action thereunder except any action specifically provided by the
Loan Documents to be taken by the Agent.
9.3 General Immunity. Neither the Agentnor any of its directors, officers,
agents or employees shall be liable to the Borrowers, any Borrower, the Banks or
any Bank for any action taken or omitted to be taken by it or them hereunder or
under any other Loan Document or in connection herewith or therewith except for
its or their own gross negligence or willful misconduct.
9.4 No Responsibility for Loans, Recitals, etc. Neither the Agent nor any
of its directors, officers, agents or employees shall be responsible for or have
any duty to ascertain, inquire into, or verify (i) any statement, warranty or
representation made in connection with any Loan Document or any borrowing
hereunder; (ii) the performance or observance of any of the covenants or
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agreements of any obligor under any Loan Document, including, without
limitation, any agreement by an obligor to furnish information directly to each
Bank; (iii) the satisfaction of any condition specified in Section 3.2 or
otherwise hereunder; (iv) the validity, enforceability, effectiveness,
sufficiency or genuineness of any Loan Document or any other instrument or
writing furnished in connection therewith; or (v) the value, sufficiency,
creation, perfection or priority of any interest in any collateral security. The
Agent shall have no duty to disclose to the Banks information that is not
required to be furnished by the Borrowers to the Agent at such time, but is
voluntarily furnished by the Borrowers to the Agent (either in its capacity as
Agent or in its individual capacity).
9.5 Action on Instructions of Banks. The Agent shall in all cases be fully
protected in acting, or in refraining from acting, hereunder and under any other
Loan Document in accordance with written instructions signed by the Required
Banks, and such instructions and any action taken or failure to act pursuant
thereto shall be binding on all of the Banks and on all holders of Notes. The
Banks hereby acknowledge that the Agent shall be under no duty to take any
discretionary action permitted to be taken by it pursuant to the provisions of
this Agreement or any other Loan Document unless it shall be requested in
writing to do so by the Required Banks. The Agent shall be fully justified in
failing or refusing to take any action hereunder and under any other Loan
Document unless it shall first be indemnified to its satisfaction by the Banks
pro rata against any and all liability, cost and expense that it may incur by
reason of taking or continuing to take any such action.
9.6 Employment of Agents and Counsel. The Agent may execute any of its
duties as Agent hereunder and under any other Loan Document by or through
employees, agents, and attorneys-in-fact and shall not be answerable to the
Banks, except as to money or securities received by it or its authorized agents,
for the default or misconduct of any such agents or attorneys-in-fact selected
by it with reasonable care. The Agent shall be entitled to advice of counsel
concerning all matters pertaining to the agency hereby created and its duties
hereunder and under any other Loan Document.
9.7 Reliance on Documents; Counsel. The Agent shall be entitled to rely
upon any Note, notice, consent, certificate, affidavit, letter, telegram,
statement, paper or document believed by it to be genuine and correct and to
have been signed or sent by the proper Person or Persons, and, in respect to
legal matters, upon the opinion of counsel selected by the Agent, which counsel
may be employees of the Agent.
9.8 Agent's Reimbursement and Indemnification. The Banks agree to reimburse
and indemnify the Agent ratably in proportion to their respective Commitments
(or, if the Commitments have been terminated, in proportion to their Commitments
immediately prior to such termination) (i) for any amounts not reimbursed by the
Borrowers for which the Agent is entitled to reimbursement by the Borrowers
under the Loan Documents, (ii) for any other expenses incurred by the Agent on
behalf of the Banks, in connection with the preparation, execution, delivery,
administration and enforcement of the Loan Documents and (iii) for any
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements of any kind and nature whatsoever which may be
imposed on, incurred by or asserted against the Agent in any way relating to or
arising out of the Loan Documents or any other document delivered in connection
therewith or the transactions contemplated thereby, or the enforcement of any of
the terms thereof or of any such other documents, provided that no Bank shall be
liable for any of the foregoing to the extent they arise from the gross
negligence or willful misconduct of the Agent. The obligations of the Banks
under this Section 9.8 shall survive payment of the Bank Obligations and
termination of this Agreement.
9.9 Notice of Default. The Agent shall not be deemed to have knowledge or
notice of the occurrence of any Default or Event of Default hereunder unless the
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Agent has received written notice from a Bank or a Borrower referring to this
Agreement describing such Default or Event of Default and stating that such
notice is a "notice of default". In the event that the Agent receives such a
notice, the Agent shall give prompt notice thereof to the Banks.
9.10 Rights as a Bank. In the event the Agent is a Bank, the Agent shall
have the same rights and powers hereunder and under any other Loan Document as
any Bank and may exercise the same as though it were not the Agent, and the term
"Bank" or "Banks" shall, at any time when the Agent is a Bank, unless the
context otherwise indicates, include the Agent in its individual capacity. The
Agent may accept deposits from, lend money to, and generally engage in any kind
of trust, debt, equity or other transaction, in addition to those contemplated
by this Agreement or any other Loan Document, with any Borrower or any of their
respective Subsidiaries in which any Borrower or such Subsidiary is not
restricted hereby from engaging with any other Person. The Agent, in its
individual capacity, is not obligated to remain a Bank.
9.11 Bank Credit Decision. Each Bank acknowledges that it has,
independently and without reliance upon the Agent or any other Bank and based on
the financial statements prepared by the Borrowers and such other documents and
information as it has deemed appropriate, made its own credit analysis and
decision to enter into this Agreement and the other Loan Documents. Each Bank
also acknowledges that it will, independently and without reliance upon the
Agent or any other Bank and based on such documents and information as it shall
deem appropriate at the time, continue to make its own credit decisions in
taking or not taking action under this Agreement and the other Loan Documents.
9.12 Successor Agent. The Agent may resign at any time by giving written
notice thereof to the Banks and the Borrowers, such resignation to be effective
upon the appointment of a successor Agent or, if no successor Agent has been
appointed, forty-five days after the retiring Agent gives notice of its
intention to resign. Upon any such resignation, the Required Banks shall have
the right to appoint, on behalf of the Borrowers and the Banks, a successor
Agent. If no successor Agent shall have been so appointed by the Required Banks
within thirty days after the resigning Agent's giving notice of its intention to
resign, then the resigning Agent may appoint, on behalf of the Borrowers, and
the Banks, a successor Agent. If the Agent has resigned and no successor Agent
has been appointed, the Banks may perform all the duties of the Agent hereunder
and the Borrowers shall make all payments in respect of the Bank Obligations to
the applicable Bank and for all other purposes shall deal directly with the
Banks. No successor Agent shall be deemed to be appointed hereunder until such
successor Agent has accepted the appointment. Any such successor Agent shall be
a commercial bank having capital and retained earnings of at least $50,000,000.
Upon the acceptance of any appointment as Agent hereunder by a successor Agent,
such successor Agent shall thereupon succeed to and become vested with all the
rights, powers, privileges and duties of the resigning Agent. Upon the
effectiveness of the resignation of the Agent, the resigning Agent shall be
discharged from its duties and obligations hereunder and under the Loan
Documents. After the effectiveness of the resignation of an Agent, the
provisions of this Section 9 shall continue in effect for the benefit of such
Agent in respect of any actions taken or omitted to be taken by it while it was
acting as the Agent hereunder and under the other Loan Documents.
9.13 Pro Rata Sharing by Banks. Each Bank agrees with every other Bank
that, in the event that it shall receive and retain any payment on account of
the Borrower's obligations under this Agreement, the Notes or the Security
Documents in a greater proportion than that received by any other Bank, whether
such payment be voluntary, involuntary or by operation of law, by application of
set-off of any indebtedness or otherwise, then such Bank shall promptly purchase
a participation interest from the other Banks, without recourse, for cash and at
face value, ratably in accordance with its Pro Rata Share, in such an amount
that each Bank shall have received payment in respect of such obligations in
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accordance with its Pro Rata Share; provided, that if any such purchase be made
by any Bank and if any such excess payment relating thereto or any part thereof
is thereafter recovered from such Bank, appropriate adjustment in the related
purchase from the other Banks shall be made by rescission and restoration of the
purchase price as to the portion of such excess payment so recovered. It is
further agreed that, to the extent there is then owing by the Borrowers to any
Bank indebtedness other than that evidenced by this Agreement, the Notes and the
Security Documents to which such Bank may apply any involuntary payments of
indebtedness by the Borrowers, including those resulting from exercise of rights
of set-off or similar rights, such Bank shall apply all such involuntary
payments first to obligations of the Borrowers to the Banks hereunder and under
the Notes and the Security Documents and then to such other indebtedness owed to
it by the Borrowers. In addition, it is further agreed that any and all proceeds
resulting from a sale or other disposition of any collateral which may be
hereafter granted for the benefit of the Banks to secure the obligations of the
Borrowers hereunder, shall be applied first to obligations of the Borrowers to
the Banks hereunder and under the Notes and the Security Documents, and then
ratably to any other indebtedness owed by the Borrowers to the Banks which is
secured by such collateral.
9.14 Determination of Borrowing Base, Etc. Any redetermination of the
Borrowing Base shall be made mutually by the Agent and the Documentation Agent
and submitted to the Banks. The redetermined Borrowing Base shall then be
effective when approved by the Required Banks, provided that if such
redetermined Borrowing Base is not approved by the Required Banks within 10 days
after it is submitted to the Banks, each Bank shall submit to the Agent, on or
within 10 days after the Agent notifies the Banks that the Required Banks have
not approved such redetermined Borrowing Base, its determination of the
Borrowing Base, and the redetermined Borrowing Base will be based on the
weighted average of the redetermined Borrowing Base of each Bank which properly
submits such redetermination to the Agent, weighted according to each Bank's
Commitment. The Borrowing Base may be redetermined from time to time as
requested by the Required Banks, and will be redetermined upon the request of
the Borrowers (provided that the Borrowers cannot request a redetermination of
the Borrowing Base more than once between the mandatory redeterminations
hereinafter provided for), and, in addition, at least twice each year as
follows: upon receipt of the reserve reports referred to in Section 7.1(d)(vii)
hereof (and in connection with such twice per year redeterminations of the
Borrowing Base, the Agent and the Documentation Agent shall submit the
redetermined Borrowing Base as required under the first sentence of this Section
9.14 on or prior to 30 days after the receipt of each (a) reserve report
referred to in Section 7.1(d)(vii) (A) hereof and (b) reserve report referred to
in Section 7.1(d)(vii)(B). Except for the scheduled redeterminations of the
Borrowing Base, each Bank requesting a redetermination of the Borrowing Base
agrees to give notice to the Agent, the Documentation Agent and the Borrowers of
such request. All parties hereto acknowledge that as of the Effective Date the
Borrowing Base is equal to $275,000,000; provided that the Borrowing Base will
be increased by (i) $10,000,000 when the Borrowers complete (as determined by
the Agent) the acquisition of the Purchased Bois D'Arc Assets to be sold by
Richard Price pursuant to the Purchase Documents, (ii) $2,000,000 when the
Borrowers complete (as determined by the Agent) the acquisition of the Purchased
Bois D'Arc Assets to be sold by Sage Oil, Inc. pursuant to the Purchase
Documents, and (iii) $3,000,000 when the Borrowers complete (as determined by
the Agent) the acquisition of the Purchased Bois D'Arc Assets to be sold by
Metrow Energy, LLC pursuant to the Purchase Documents.
9.15 Documentation Agent. Other than as specified in Section 9.14, Bank
One, Texas, N.A., as Documentation Agent hereunder, shall have no duties or
liabilities.
SECTION 10. Miscellaneous.
10.1 Amendments; Etc. (a) This Agreement and any term or provision hereof
may be amended, waived or terminated by an instrument in writing executed by the
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Borrowers and the Required Banks, and (i) to the extent any rights or duties of
the Agent may be affected thereby, the Agent, and (ii) to the extent any of the
rights or duties of the Documentation Agent may be affected thereby, the
Documentation Agent, provided, that, notwithstanding anything in this Agreement
to the contrary, except by an instrument in writing executed by the Borrowers
and all of the Banks, no such amendment, waiver or termination shall authorize
or permit the extension of the time or times of payment of the principal of, or
interest on, the Notes or the reduction in principal amount thereof or the rate
of interest thereon, or any fees payable hereunder, or increase or extend the
respective Commitments of any Bank, or release any Borrower from any of its
obligations hereunder or under any other Loan Document, or release any material
amount of the Collateral from the Liens granted pursuant hereto, or amend this
Section 10.1.
(b) Any such amendment, waiver or termination shall be effective only
in the specific instance and for the specific purpose for which given.
(c) Notwithstanding anything herein to the contrary, any Bank that has
failed to fund any Advance or other amount required to be funded by such Bank
hereunder shall not be entitled to vote (whether to consent or to withhold its
consent) with respect to any amendment, modification, termination or waiver of
any provision of any Loan Document or a departure therefrom or any direction
from the Banks to the Agent and, for purposes of determining the Required Banks,
the Commitments and Advances of such Bank shall be disregarded.
10.2 Notices. (a) Except as otherwise provided in Section 10.2(c) hereof,
all notices, requests, consents and other communications hereunder shall be in
writing and shall be delivered or sent to the Borrowers, the Banks and the Agent
at the respective addresses for notices set forth on the signature pages hereof,
or to such other address as may be designated by the Borrowers, the Agent or any
Bank by notice to the other parties hereto. All notices shall be deemed to have
been given at the time of actual delivery thereof to such address, or if sent by
the Agent or any Bank to the Borrowers by certified or registered mail, postage
prepaid, to such address, on the fifth day after the date of mailing.
(b) Notices by the Borrowers to the Agent with respect to requests for
Advances pursuant to Section 3.1 and notices of prepayment pursuant to Section
4.1(c) shall be irrevocable and binding on the Borrowers.
(c) Any notice to be given by the Borrowers to the Agent pursuant to
Section 4.1(c) or Section 3.1 and any notice to be given by the Agent or any
Bank hereunder, may be given by telephone, by telex or by facsimile transmission
and must be immediately confirmed in writing in the manner provided in Section
10.2(a). Any such notice given by telephone, telex or facsimile transmission
shall be deemed effective upon receipt thereof by the party to whom such notice
is given.
10.3 Conduct No Waiver; Remedies Cumulative. No course of dealing on the
part of the Agent or the Banks, nor any delay or failure on the part of the
Agent or any Bank in exercising any right, power or privilege hereunder shall
operate as a waiver of such right, power or privilege or otherwise prejudice the
Agent's or the Banks' rights and remedies hereunder; nor shall any single or
partial exercise thereof preclude any further exercise thereof or the exercise
of any other right, power or privilege. No right or remedy conferred upon or
reserved to the Agent or the Banks under this Agreement is intended to be
exclusive of any other right or remedy, and every right and remedy shall be
cumulative and in addition to every other right or remedy given hereunder or now
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or hereafter existing under any applicable law. Every right and remedy given by
this Agreement or by applicable law to the Agent or the Banks may be exercised
from time to time and as often as may be deemed expedient by them.
10.4 Reliance on and Survival of Various Provisions. All terms, covenants,
agreements, representations and warranties of the Borrowers made herein or in
any certificate or other document delivered pursuant hereto shall be deemed to
be material and to have been relied upon by the Banks, notwithstanding any
investigation heretofore or hereafter made by any Bank or on any Bank's behalf,
and those covenants and agreements of the Borrowers set forth in Section 10.5
hereof shall survive the repayment in full of the Advances and other obligations
of the Borrowers hereunder and under Security Documents and the termination of
the Commitments.
10.5 Expenses; Indemnification. (a) The Borrowers agree to pay and save the
Agent harmless from liability for the payment of the reasonable fees and
expenses of any counsel the Agent shall employ, in connection with the
preparation, execution and delivery of this Agreement, the Notes and the
Security Documents and the consummation of the transactions contemplated hereby
and in connection with any amendments, waivers or consents and other matters in
connection therewith, and all reasonable costs and expenses of the Agent and the
Banks (including reasonable fees and expenses of counsel) in connection with any
enforcement of this Agreement, the Notes or the Security Documents.
(b) Each of the Borrowers hereby indemnifies and agrees to hold
harmless the Banks and the Agent, and their respective officers, directors,
employees and agents, from and against any and all claims, damages, losses,
liabilities, costs or expenses of any kind or nature whatsoever which the Banks
or the Agent or any such Person may incur or which may be claimed against any of
them by reason of or in connection with any Letter of Credit, and neither any
Bank nor the Agent or any of their respective officers, directors, employees or
agents shall be liable or responsible for: (i) the use which may be made of any
Letter of Credit or for any acts or omissions of any beneficiary in connection
therewith; (ii) the validity, sufficiency or genuineness of documents or of any
endorsement thereon, even if such documents should in fact prove to be in any or
all respects invalid, insufficient, fraudulent or forged; (iii) payment by the
Agent to the beneficiary under any Letter of Credit against presentation of
documents which do not comply with the terms of any Letter of Credit, including
failure of any documents to bear any reference or adequate reference to such
Letter of Credit; (iv) any error, omission, interruption or delay in
transmission, dispatch or delivery of any message or advice, however
transmitted, in connection with any Letter of Credit; or (v) any other event or
circumstance whatsoever arising in connection with any Letter of Credit;
provided, however, that the Borrowers shall not be required to indemnify the
Agent and such other Persons, and the Agent shall be liable to the Borrowers to
the extent, but only to the extent, of any direct, as opposed to consequential
or incidental, damages suffered by any Borrower which were caused by (A) the
Agent's wrongful dishonor of any Letter of Credit after the presentation to it
by the beneficiary thereunder of a draft or other demand for payment and other
documentation strictly complying with the terms and conditions of such Letter of
Credit, or (B) the payment by the Agent to the beneficiary under any Letter of
Credit against presentation of documents which do not comply with the terms of
the Letter of Credit to the extent, but only to the extent, that such payment
constitutes gross negligence or wilful misconduct of the Agent. It is understood
that in making any payment under a Letter of Credit the Agent will rely on
documents presented to it under such Letter of Credit as to any and all matters
set forth therein without further investigation and regardless of any notice or
information to the contrary, and such reliance and payment against documents
presented under a Letter of Credit substantially complying with the terms
thereof shall not be deemed gross negligence or wilful misconduct of the Agent
in connection with such payment. It is further acknowledged and agreed that a
Borrower may have rights against the beneficiary or others in connection with
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any Letter of Credit with respect to which the Agent is alleged to be liable and
it shall be a precondition of the assertion of any liability of the Agent under
this Section that such Borrower shall first have taken reasonable steps to
enforce remedies in respect of the alleged loss against such beneficiary and any
other parties obligated or liable in connection with such Letter of Credit and
any related transactions.
(c) In consideration of the execution and delivery of this Agreement
by each Bank and the extension of the Commitments, the Borrowers hereby
indemnify, exonerate and hold the Agent, each Bank and each of their respective
officers, directors, employees and agents (collectively, the "Indemnified
Parties") free and harmless from and against any and all actions, causes of
action, suits, losses, costs, liabilities and damages, and expenses incurred in
connection therewith (irrespective of whether any such Indemnified Party is a
party to the action for which indemnification hereunder is sought), including
reasonable attorneys' fees and disbursements (collectively, the "Indemnified
Liabilities"), incurred by the Indemnified Parties or any of them as a result
of, or arising out of, or relating to:
(i) any transaction financed or to be financed in whole or in
part, directly or indirectly, with the proceeds of any Advance;
(ii) the entering into and performance of this Agreement and any
other agreement or instrument executed in connection herewith by any of the
Indemnified Parties (including any action brought by or on behalf of the
Borrowers as the result of any determination by the Required Banks not to fund
any Advance in compliance with this Agreement);
(iii) any investigation, litigation or proceeding related to any
acquisition or proposed acquisition by the Borrowers or any of their
Subsidiaries of any portion of the stock or assets of any Person, whether or not
the Agent or such Bank is party thereto;
(iv) any investigation, litigation or proceeding related to any
environmental cleanup, audit, compliance or other matter relating to any release
by the Borrowers or any of their Subsidiaries of any hazardous material or any
violations of Environmental Laws; or
(v) the presence on or under, or the escape, seepage, leakage,
spillage, discharge, emission, discharging or releases from, any real property
owned or operated by the Borrowers or any Subsidiary thereof of any Hazardous
Material (including any losses, liabilities, damages, injuries, costs, expenses
or claims asserted or arising under any Environmental Law), regardless of
whether caused by, or within the control of, the Borrowers or such Subsidiary,
except for any such Indemnified Liabilities arising for the account of a
particular Indemnified Party by reason of the activities of the Indemnified
Party on the property of the Borrowers conducted subsequent to a foreclosure on
such property by the Banks or by reason of the relevant Indemnified Party's
gross negligence or wilful misconduct or breach of this Agreement, and if and to
the extent that the foregoing undertaking may be unenforceable for any reason,
the Borrowers hereby agree to make the maximum contribution to the payment and
satisfaction of each of the Indemnified Liabilities which is permissible under
applicable law. The Borrowers shall be obligated to indemnify the Indemnified
Parties for all Indemnified Liabilities subject to and pursuant to the foregoing
provisions, regardless of whether the Borrowers or any of their Subsidiaries had
knowledge of the facts and circumstances giving rise to such Indemnified
Liability.
10.6 Successors and Assigns. (a) This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
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assigns, provided that the Borrowers may not, without the prior consent of the
Banks, assign their rights or obligations hereunder or under the Notes and the
Banks shall not be obligated to make any Advance hereunder to any entity other
than the Borrowers.
(b) Any Bank may sell a participation interest to any financial
institution or institutions, and such financial institution or institutions may
further sell, a participation interest (undivided or divided) in, the Advances
and such Bank's rights and benefits under this Agreement, the Notes and the
Security Documents and to the extent of that participation, such participant or
participants shall have the same rights and benefits against the Borrowers under
Section 6.2(c) as it or they would have had if participation of such participant
or participants were the Bank making the Advances to the Borrowers hereunder,
provided, however, that (i) such Bank's obligations under this Agreement shall
remain unmodified and fully effective and enforceable against such Bank, (ii)
such Bank shall remain solely responsible to the other parties hereto for the
performance of such obligations, (iii) such Bank shall remain the holder of its
Note for all purposes of this Agreement, (iv) the Borrowers, the Agent and the
other Banks shall continue to deal solely and directly with such Bank in
connection with such Bank's rights and obligations under this Agreement, and (v)
such Bank shall not grant to its participant any rights to consent or withhold
consent to any action taken by such Bank or the Agent under this Agreement other
than action requiring the consent of all of the Banks hereunder. The Agent from
time to time in its sole discretion may appoint agents for the purpose of
servicing and administering this Agreement and the transactions contemplated
hereby and enforcing or exercising any rights or remedies of the Agent provided
under this Agreement, the Notes, or otherwise. In furtherance of such agency,
the Agent may from time to time direct that the Borrowers provide notices,
reports and other documents contemplated by this Agreement (or duplicates
thereof) to such agent. The Borrowers hereby consent to the appointment of such
agent and agree to provide all such notices, reports and other documents and to
otherwise deal with such agent acting on behalf of the Agent in the same manner
as would be required if dealing with the Agent itself.
(c) Each Bank may, with the prior consent of the Borrowers (which
consent shall not be unreasonably withheld and may not be withheld upon the
occurrence and during the continuance of any Event of Default which is not cured
or waived within 30 days after the occurrence of such Event of Default) and the
Agent, assign to one or more banks or other entities all or a portion of its
rights and obligations under this Agreement (including, without limitation, all
or a portion of its Commitment, the Advances owing to it and the Note or Notes
and the Security Documents held by it); provided, however, that (i) each such
assignment shall be of a uniform, and not a varying, percentage of all rights
and obligations, (ii) except in the case of an assignment of all of a Bank's
rights and obligations under this Agreement, (A) the amount of the Commitment of
the assigning Bank being assigned pursuant to each such assignment (determined
as of the date of the Assignment and Acceptance with respect to such assignment)
shall in no event be less than $5,000,000, and in integral multiples of
$1,000,000 thereafter, or such lesser amount as the Borrowers and the Agent may
consent to and (B) after giving effect to each such assignment, the amount of
the Commitment of the assigning Bank shall in no event be less than $5,000,000,
and (iii) the parties to each such assignment shall execute and deliver to the
Agent, for its acceptance and recording in the Register, an Assignment and
Acceptance in the form of Exhibit D hereto (an "Assignment and Acceptance"),
together with any Note or Notes subject to such assignment and a processing and
recordation fee of $3,500. Upon such execution, delivery, acceptance and
recording, from and after the effective date specified in such Assignment and
Acceptance, (x) the assignee thereunder shall be a party hereto and, to the
extent that rights and obligations hereunder have been assigned to it pursuant
to such Assignment and Acceptance, have the rights and obligations of a Bank
hereunder and (y) the Bank assignor thereunder shall, to the extent that rights
and obligations hereunder have been assigned by it pursuant to such Assignment
and Acceptance, relinquish its rights and be released from its obligations under
this Agreement (and, in the case of an Assignment and Acceptance covering all of
the remaining portion of an assigning Bank's rights and obligations under this
Agreement, such Bank shall cease to be a party hereto).
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(d) By executing and delivering an Assignment and Acceptance, the Bank
assignor thereunder and the assignee thereunder confirm to and agree with each
other and the other parties hereto as follows: (i) other than as provided in
such Assignment and Acceptance, such assigning Bank makes no representation or
warranty and assumes no responsibility with respect to any statements,
warranties or representations made in or in connection with this Agreement or
the execution, legality, validity, enforceability, genuineness, sufficiency or
value of this Agreement or any other instrument or document furnished pursuant
hereto; (ii) such assigning Bank makes no representation or warranty and assumes
no responsibility with respect to the financial condition of the Borrowers or
the performance or observance by the Borrowers of any of their obligations under
this Agreement or any other instrument or document furnished pursuant hereto;
(iii) such assignee confirms that it has received a copy of this Agreement,
together with copies of the financial statements referred to in Section 6.7 and
such other documents and information as it has deemed appropriate to make its
own credit analysis and decision to enter into such Assignment and Acceptance;
(iv) such assignee will, independently and without reliance on the Agent, such
assigning Bank or any other Bank and based on such documents and information as
it shall deem appropriate at the time, continue to make its own credit decisions
in taking or not taking action under this Agreement; (v) such assignee appoints
and authorizes the Agent to take such action as agent on its behalf and to
exercise such powers and discretion under this Agreement as are delegated to the
Agent by the terms hereof, together with such powers and discretion as are
reasonably incidental thereto; and (vi) such assignee agrees that it will
perform in accordance with their terms all of the obligations that by the terms
of this Agreement are required to be performed by it as a Bank.
(e) The Agent shall maintain at its address designated on the
signature pages hereof a copy of each Assignment and Acceptance delivered to and
accepted by it and a register for the recordation of the names and addresses of
the Banks and the Commitment of, and principal amount of the Advances owing to,
each Bank from time to time (the "Register"). The entries in the Register shall
be conclusive and binding for all purposes, absent manifest error, and the
Borrowers, the Agent and the Banks may treat each Person whose name is recorded
in the Register as a Bank hereunder for all purposes of this Agreement. The
Register shall be available for inspection by the Borrowers or any Bank at any
reasonable time and from time to time upon reasonable prior notice.
(f) Upon its receipt of an Assignment and Acceptance executed by an
assigning Bank and an assignee, together with any Note or Notes subject to such
assignment, the Agent shall, if such Assignment and Acceptance has been
completed, (i) accept such Assignment and Acceptance, (ii) record the
information contained therein in the Register and (iii) give prompt notice
thereof to the Borrowers. Within five Business Days after its receipt of such
notice, the Borrowers, at their own expense, shall execute and deliver to the
Agent in exchange for the surrendered Note or Notes a new Note to the order of
such assignee in an amount equal to the Commitment assumed by it pursuant to
such Assignment and Acceptance and, if the assigning Bank has retained a
Commitment hereunder, a new Note to the order of the assigning Bank in an amount
equal to the Commitment retained by it hereunder. Such new Note or Notes shall
be in an aggregate principal amount equal to the aggregate principal amount of
such surrendered Note or Notes, shall be dated the effective date of such
Assignment and Acceptance and shall otherwise be in substantially the form of
Exhibit B hereto.
(g) The Banks may, in connection with any assignment or participation
or proposed assignment or participation pursuant to this Section 10.6, disclose
to the assignee or participant or proposed assignee or participant, any
information relating to the Borrowers, provided that such proposed assignee or
participant has agreed to hold such information confidential under the terms
described in Section 10.20.
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(h) Notwithstanding any other provisions set forth in this Agreement,
any Bank may at any time create a security interest in, or assign, all or any
portion of its rights under this Agreement (including, without limitation, the
Advances owing to it and the Note or Notes held by it) in favor of any Federal
Reserve Bank in accordance with Regulation A of the Board of Governors of the
Federal Reserve System; provided that such creation of a security interest or
assignment shall not release such Bank from its obligations under this
Agreement.
10.7 Subsidiaries as Borrowers. In the event that CRI, COG, COGL or
Offshore shall create or acquire a Subsidiary, such Subsidiary shall execute a
joinder agreement in form and substance satisfactory to the Agent, together with
such Security Documents, other documents and opinions as the Agent may
reasonably require, and shall become a Borrower hereunder.
10.8 CHOICE OF LAW. THE LOAN DOCUMENTS (OTHER THAN THOSE CONTAINING A
CONTRARY EXPRESS CHOICE OF LAW PROVISION) SHALL BE CONSTRUED IN ACCORDANCE WITH
THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OF ILLINOIS, BUT
GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS.
10.9 Table of Contents and Headings. The table of contents and the headings
of the various subdivisions hereof are for the convenience of reference only and
shall in no way modify any of the terms or provisions hereof.
10.10 Construction of Certain Provisions. All computations required
hereunder and all financial terms used herein shall be made or construed in
accordance with GAAP unless such principles are inconsistent with the express
requirements of this Agreement. If any provision of this Agreement refers to any
action to be taken by any Person, or which such Person is prohibited from
taking, such provision shall be applicable whether such action is taken directly
or indirectly by such Person, whether or not expressly specified in such
provision.
10.11 Integration and Severability. This Agreement embodies the entire
agreement and understanding between the Borrowers and the Banks, and supersedes
all prior agreements and understandings, relating to the subject matter hereof.
In case any one or more of the obligations of the Borrowers under this
Agreement, the Notes or any Security Documents shall be invalid, illegal or
unenforceable in any jurisdiction, the validity, legality and enforceability of
the remaining obligations of the Borrowers shall not in any way be affected or
impaired thereby, and such invalidity, illegality or unenforceability in one
jurisdiction shall not affect the validity, legality or enforceability of the
obligations of the Borrowers under this Agreement, the Notes or any Security
Documents in any other jurisdiction.
10.12 Interest Rate Limitation. Notwithstanding any provisions of this
Agreement, the Notes or any Security Documents, in no event shall the amount of
interest paid or agreed to be paid by the Borrowers exceed an amount computed at
the highest rate of interest permissible under applicable law. If, from any
circumstances whatsoever, fulfillment of any provision of this Agreement, the
Notes or any Security Documents at the time performance of such provision shall
be due, shall involve exceeding the interest rate limitation validly prescribed
by law which a court of competent jurisdiction may deem applicable hereto, then,
ipso facto, the obligations to be fulfilled shall be reduced to an amount
computed at the highest rate of interest permissible under applicable law, and
if for any reason whatsoever the Banks shall ever receive as interest an amount
which would be deemed unlawful under such applicable law such interest shall be
automatically applied to the payment of principal of the Advances outstanding
and other obligations of the Borrowers hereunder (whether or not then due and
payable)and not to the payment of interest, or shall be refunded to the
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Borrowers if such principal has been paid in full. Anything herein to the
contrary notwithstanding, the obligations of the Borrowers under this Agreement
shall be subject to the limitation that payments of interest shall not be
required to the extent that receipt of any such payment by the Banks would be
contrary to provisions of law applicable to the Banks which limits the maximum
rate of interest which may be charged or collected by the Banks.
10.13 Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties hereto may execute this Agreement by signing
any such counterpart.
10.14 Independence of Covenants. All covenants hereunder shall be given
independent effect so that if a particular action or condition is not permitted
by any such covenant, the fact that it would be permitted by an exception to, or
would be otherwise within the limitations of, another covenant shall not avoid
the occurrence of an Event of Default or any event or condition which with
notice or lapse of time, or both, could become such an Event of Default if such
action is taken or such condition exists.
10.15 Consent to Jurisdiction. Notwithstanding the place where any
liability originates or arises, or is to be repaid, any suit, action or
proceeding arising out of or relating to this Agreement, any Security Documents,
or the Notes may be instituted in any court of competent jurisdiction in the
State of Illinois, each Borrower hereby irrevocably waives any objection which
it may have or hereafter has to the laying of such venue of any such suit,
action or proceeding and any claim that any such suit, action or proceeding has
been brought in an inconvenient forum, and each Borrower hereby irrevocably
submits its Person and property to the jurisdiction of any such court in any
such suit, action or proceedings. Nothing in this Section 10.15 shall affect the
right of the Bank to bring proceedings against the Borrowers or any of their
property in the courts of any other court of competent jurisdiction.
10.16 JURY TRIAL WAIVER. THE AGENT, THE BANKS AND EACH BORROWER, AFTER
CONSULTING OR HAVING HAD THE OPPORTUNITY TO CONSULT WITH COUNSEL, KNOWINGLY,
VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT ANY OF THEM MAY HAVE TO A TRIAL BY
JURY IN ANY LITIGATION BASED UPON OR ARISING OUT OF THIS AGREEMENT, THE NOTES,
THE SECURITY DOCUMENTS, OR ANY RELATED INSTRUMENT OR AGREEMENT OR ANY OF THE
TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT, THE NOTES OR THE SECURITY DOCUMENTS
OR ANY COURSE OF CONDUCT, DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR
ACTIONS OF ANY OF THEM. NEITHER THE AGENT, THE BANKS NOR ANY BORROWER SHALL SEEK
TO CONSOLIDATE, BY COUNTERCLAIM OR OTHERWISE, ANY SUCH ACTION IN WHICH A JURY
TRIAL HAS BEEN WAIVED WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR
HAS NOT BEEN WAIVED. THESE PROVISIONS SHALL NOT BE DEEMED TO HAVE BEEN MODIFIED
IN ANY RESPECT OR RELINQUISHED BY EITHER THE AGENT AND THE BANKS OR THE
BORROWERS EXCEPT BY A WRITTEN INSTRUMENT EXECUTED BY ALL OF THEM.
10.17 Joint and Several Obligations; Contribution Rights; Savings Clause.
(a) Notwithstanding anything to the contrary set forth herein or in
any Note or in any other Loan Document, the obligations of the Borrowers
hereunder and under the Notes and the other Loan Documents are joint and
several.
(b) If any Borrower makes a payment in respect of the Bank
Obligations, it shall have the rights of contribution set forth below against
the other Borrowers; provided that such Borrower shall not exercise its right of
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contribution until all the Bank Obligations shall have been finally paid in full
in cash. If any Borrower makes a payment in respect of the Bank Obligations that
is smaller in proportion to its Payment Share (as hereinafter defined) than such
payments made by the other Borrowers are in proportion to the amounts of their
respective Payment Shares, the Borrower making such proportionately smaller
payment shall, when permitted by the preceding sentence, pay to the other
Borrowers an amount such that the net payments made by the Borrower in respect
of the Bank Obligations shall be shared among the Borrowers pro rata in
proportion to their respective Payment Shares. If any Borrower receives any
payment that is greater in proportion to the amount of its Payment Shares than
the payments received by the other Borrowers are in proportion to the amounts of
their respective Payment Shares, the Borrower receiving such proportionately
greater payment shall, when permitted by the second preceding sentence, pay to
the other Borrowers an amount such that the payments received by the Borrowers
shall be shared among the Borrowers pro rata in proportion to their respective
Payment Shares. Notwithstanding anything to the contrary contained in this
paragraph or in this Agreement, no liability or obligation of any Borrower that
shall accrue pursuant to this paragraph shall be paid nor shall it be deemed
owed pursuant to this paragraph until all of the Bank Obligations shall be
finally paid in full in cash.
For purposes hereof, the "Payment Share" of each Borrower shall be the sum
of (a) the aggregate proceeds of the Bank Obligations received by such Borrower
plus (b) the product of (i) the aggregate Bank Obligations remaining unpaid on
the date such Bank Obligations become due and payable in full, whether by stated
maturity, acceleration, or otherwise (the "Determination Date") reduced by the
amount of such Bank Obligations attributed to all or such Borrowers pursuant to
clause (a) above, times (ii) a fraction, the numerator of which is such
Borrower's net worth on the effective date of this Agreement (determined as of
the end of the immediately preceding fiscal reporting period of such Borrower),
and the denominator of which is the aggregate net worth of all Borrowers on such
effective date.
(c) It is the intent of each Borrower, the Agent and the Banks that
each Borrower's maximum Bank Obligations shall be in, but not in excess of:
(i) in a case or proceeding commenced by or against such Borrower
under the Bankruptcy Code on or within one year from the date on which any of
the Bank Obligations are incurred, the maximum amount that would not otherwise
cause the Bank Obligations (or any other obligations of such Borrower to the
Agent and the Banks) to be avoidable or unenforceable against such Borrower
under (A) Section 548 of the Bankruptcy Code or (B) any state fraudulent
transfer or fraudulent conveyance act or statute applied in such case or
proceeding by virtue of Section 544 of the Bankruptcy Code; or
(ii) in a case or proceeding commenced by or against such
Borrower under the Bankruptcy Code subsequent to one year from the date on which
any of the Bank Obligations are incurred, the maximum amount that would not
otherwise cause the Bank Obligations (or any other obligations of such Borrower
to the Agent and the Banks) to be avoidable or unenforceable against such
Borrower under any state fraudulent transfer or fraudulent conveyance act or
statute applied in any such case or proceeding by virtue of Section 544 of the
Bankruptcy Code; or
(iii) in a case or proceeding commenced by or against such
Borrower under any law, statute or regulation other than the Bankruptcy Code
(including, without limitation, any other bankruptcy, reorganization,
arrangement, moratorium, readjustment of debt, dissolution, liquidation or
similar debtor relief laws), the maximum amount that would not otherwise cause
the Bank Obligations (or any other obligations of such Borrower to the Agent and
the Banks)to be avoidable or unenforceable against such Borrower under such law,
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<PAGE>
statute or regulation including, without limitation, any state fraudulent
transfer or fraudulent conveyance act or statute applied in any such case or
proceeding.
(d) The Borrowers acknowledge and agree that they have requested that
the Banks make credit available to the Borrowers with each Borrower expecting to
derive benefit, directly and indirectly, from the Advances and other credit
extended by the Banks to the Borrowers.
10.18 Consents to Renewals, Modifications and Other Actions and Events.
This Agreement and all of the obligations of the Borrowers hereunder shall
remain in full force and effect without regard to and shall not be released,
affected or impaired by: (a) any amendment, assignment, transfer, modification
of or addition or supplement to the Bank Obligations, this Agreement, any Note
or any other Loan Document; (b) any extension, indulgence, increase in the Bank
Obligations or other action or inaction in respect of any of the Loan Documents
or otherwise with respect to the Bank Obligations, or any acceptance of security
for, or guaranties of, any of the Bank Obligations or Loan Documents, or any
surrender, release, exchange, impairment or alteration of any such security or
guaranties including without limitation the failing to perfect a security
interest in any such security or abstaining from taking advantage or of
realizing upon any guaranties or upon any security interest in any such
security; (c) any default by any Borrower under, or any lack of due execution,
invalidity or unenforceability of, or any irregularity or other defect in, any
of the Loan Documents; (d) any waiver by the Banks or any other Person of any
required performance or otherwise of any condition precedent or waiver of any
requirement imposed by any of the Loan Documents, any guaranties or otherwise
with respect to the Bank Obligations; (e) any exercise or non-exercise of any
right, remedy, power or privilege in respect of this Agreement or any of the
other Loan Documents; (f) any sale, lease, transfer or other disposition of the
assets of any Borrower or any consolidation or merger of any Borrower with or
into any other Person, corporation, or entity, or any transfer or other
disposition by any Borrower or any other holder of any shares of capital stock
of any Borrower; (g) any bankruptcy, insolvency, reorganization or similar
proceedings involving or affecting any Borrower; (h) the release or discharge of
any Borrower from the performance or observance of any agreement, covenant, term
or condition under any of the Bank Obligations or contained in any of the Loan
Documents by operation of law; or (i) any other cause whether similar or
dissimilar to the foregoing which, in the absence of this provision, would
release, affect or impair the obligations, covenants, agreements and duties of
any Borrower hereunder, including without limitation any act or omission by the
Agent, or the Bank or any other any Person which increases the scope of such
Borrower's risk; and in each case described in this paragraph whether or not any
Borrower shall have notice or knowledge of any of the foregoing, each of which
is specifically waived by each Borrower. Each Borrower warrants to the Agent and
the Banks that it has adequate means to obtain from each other Borrower on a
continuing basis information concerning the financial condition and other
matters with respect to the Borrowers and that it is not relying on the Agent or
the Banks to provide such information either now or in the future.
10.19 Waivers, Etc. Each Borrower unconditionally waives: (a) notice of any
of the matters referred to in Section 10.18 above; (b) all notices which may be
required by statute, rule or law or otherwise to preserve any rights of the
Agent or the Banks including, without limitation, presentment to and demand of
payment or performance from the other Borrowers and protect for non-payment or
dishonor; (c) any right to the exercise by the Agent or the Banks of any right,
remedy, power or privilege in connection with any of the Loan Documents; (d) any
requirement that the Agent or the Banks in the event of any default by any
Borrower, first make demand upon or seek to enforce remedies against, such
Borrower or any other Borrower before demanding payment under or seeking to
enforce this Agreement against any other Borrower; (f) any right to notice of
the disposition of any security which the Agent or the Banks may hold from any
Borrower or otherwise and any right to object to the commercial reasonableness
of the disposition of any such security; and (g) all errors and omissions in
connection with the Agent's or any Bank's administration of any of the Bank
Obligations, any of the Loan Documents,or any other act or omission of the Agent
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or any Bank which changes the scope of the Borrower's risk, except as a result
of the gross negligence or willful misconduct of the Agent or any Bank. The
obligations of each Borrower hereunder shall be complete and binding forthwith
upon the execution of this Agreement and subject to no condition whatsoever,
precedent or otherwise, and notice of acceptance hereof or action in reliance
hereon shall not be required.
10.20 Confidentiality. The Banks and the Agent shall hold all confidential
information obtained pursuant to the requirements of this Agreement which has
been identified as such by any Borrower in accordance with their customary
procedures for handling confidential information of this nature and in
accordance with safe and sound banking practices and in any event may make
disclosure to its examiners, affiliates, outside auditors, counsel and other
professional advisors in connection with this Agreement or as reasonably
required by any bona fide transferee or participant in connection with the
contemplated transfer of any Note or participation therein or as required or
requested by any governmental agency or representative thereof or pursuant to
legal process. Without limiting the foregoing, it is expressly understood that
such confidential information shall not include information which, at the time
of disclosure is in the public domain or, which after disclosure, becomes part
of the public domain or information which any Bank or the Agent had obtained
prior to the time of disclosure and identification by any Borrower under this
Section 10.20, or information received by any Bank or the Agent from a third
party. Nothing in this Section 10.20 or otherwise shall prohibit any Bank or the
Agent from disclosing any confidential information to the other Banks or the
Agent or render any of them liable in connection with any such disclosure.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of this 9th day of December, 1997, which shall be
the Effective Date of this Agreement.
Address for Notices:
COMSTOCK RESOURCES, INC.
5005 LBJ Freeway, Suite 1000 By:/s/M. JAY ALLISON
-----------------
Dallas, Texas 75244 M. Jay Allison, its chairman,
Attention: M. Jay Allison president and chief executive officer
Telephone: (972) 701-2000
Telecopy: (972) 701-2111
COMSTOCK OIL & GAS, INC.
5005 LBJ Freeway, Suite 1000 By:/s/M. JAY ALLISON
-----------------
Dallas, Texas 75244 M. Jay Allison, its chairman,
Attention: M. Jay Allison president and chief executive officer
Telephone: (972) 701-2000
Telecopy: (972) 701-2111
COMSTOCK OIL & GAS, LOUISIANA, INC.
5005 LBJ Freeway, Suite 1000 By:/s/M. JAY ALLISON
-----------------
Dallas, Texas 75244 M. Jay Allison, its chairman,
Attention: M. Jay Allison president and chief executive officer
Telephone: (972) 701-2000
Telecopy: (972) 701-2111
COMSTOCK OFFSHORE, LLC
5005 LBJ Freeway, Suite 1000 By:/s/M. JAY ALLISON
-----------------
Dallas, Texas 75244 M. Jay Allison, its chairman,
Attention: M. Jay Allison president and chief executive officer
Telephone: (972) 701-2000
Telecopy: (972) 701-2111
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<PAGE>
One First National Plaza THE FIRST NATIONAL BANK OF CHICAGO,
Suite 0362 as a Bank and as Agent
Chicago, Illinois 60670
Attention: Carl Skoog By:/s/GEORGE SCHANZ
----------------
Telephone No: (312) 732-8011 Its: Authorized Agent
Facsimile No: (312) 732-3055
Commitment Amount: $40,000,000
Pro Rata Share: 13.793103%
1717 Main Street BANK ONE, TEXAS, NA,
Dallas, Texas 75201 as a Bank and as Documentation Agent
Attention: Mark Cranmer
Telephone No: (214) 290-2212 By:/s/WM. MARK CRAMER
------------------
Facsimile No: (214) 290-2627 Its: Vice President
Commitment Amount: $40,000,000
Pro Rata Share: 13.793103%
1200 Smith Street, Ste. 3100 BANQUE PARIBAS
Houston, Texas 77002
Attention: Mike Fiuzat By:/s/MARIAN LIVINGSTON
--------------------
Telephone No: (713) 659-4811 Its Group Vice President
Facsimile No: (713) 659-6915
Commitment Amount: $35,000,000 By:/s/MIKE FIUZAT
---------------------
Pro Rata Share: 12.068966% Its: Vice President
909 Fannin Street, Ste. 1700 TORONTO DOMINION (TEXAS), INC.
Houston, Texas 77010
Attention: Manager, Credit Administration By:/s/ DARLENE RIEDEL
---------------------
Telephone No: (713) 653-8200 Its: Vice President
Facsimile No: (713) 652-2647
Commitment Amount: $35,000,000
Pro Rata Share: 12.068966%
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<PAGE>
Three Riverway, Suite 1770 ABN-AMRO BANK N.V.
Houston, Texas 77056 By: ABN AMRO NORTH
Attention: Chuck Randall AMERICA INC., as agent
Telephone No. (713) 953-9305 By:/s/H. GENE SHIELS
-----------------
Facsimile No: (713) 629-7533 Its: Vice President
Commitment Amount: $25,000,000
Pro Rata Share: 8.620690% By: /s/W.BRYAN CHAPMAN
------------------
Its: Group Vice President
100 Federal Street BANKBOSTON, N.A.
Boston, MA 02110
Attention: Allison Rossi By:/s/ALLISON ROSSI
---------------------
Telephone No: (617) 434-4067 Its: Director
Facsimile No: (617) 434-3652
Commitment Amount: $25,000,000
Pro Rata Share: 8.620690%
11 West 42nd Street, 7th Floor CHRISTIANIA BANK OG KREDITKASSE, ASA
New York, New York 10036
Attention: Steve Phillips By:/s/WILLIAM S. PHILLIPS
----------------------
Telephone No: (212) 827-4836 Its First Vice President
Facsimile No: (212) 827-4888
Commitment Amount: $25,000,000 By:/s/CARL-PETER SVENDSEN
----------------------
Pro Rata Share: 8.620690% Its: First Vice President
1000 Louisiana Street, Ste. 5360 CREDIT LYONNAIS NEW YORK BRANCH
Houston, Texas 77002
Attention: Christine Smith Byerley By:/s/CHRISTINE SMITH BYERLEY
--------------------------
Telephone No: (713) 751-0500 Its: Senior Vice President
Facsimile No: (713) 751-0307
Commitment Amount: $25,000,000
Pro Rata Share: 8.620690%
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<PAGE>
Commitment Amount: $25,000,000 MEESPIERSON CAPITAL CORP.
Pro Rata Share: 8.620690%
Address for Operational Notices: By:/s/KAREL LOUMAN
---------------
MeesPierson Capital Corp. Its: Managing Director
300 Crescent Court, Suite 1750
By:/s/DEIRDRE SANBORN
------------------
Dallas, Texas 75201 Its. Assistant Vice President
Yolanda Dittmar
Telephone: (214) 754-0009
Telefax: (214) 754-5981
ADDRESSES FOR OTHER NOTICES:
MeesPierson Capital Corp.
300 Crescent Court, Suite 1750
Dallas, Texas 75201
Attn: Karel Louman
Telephone: (214) 754-0009
Telefax: (214) 754-5981
2121 San Jacinto, Ste. 1850 NATIONAL BANK OF CANADA
Dallas, Texas 75201
Attention: Doug Clark By:/s/DOUG CLARK
-------------
Telephone No: (214) 871-1265 Its: Group Vice President
Facsimile No: (214) 871-2015
Commitment Amount: $15,000,000
Pro Rata Share: 5.172414% By:/s/LARRY SEARS
--------------
Its: Vice President
Lending Office for Floating Rate Loans
125 West 55th Street, 23rd Floor
New York, New York 10019
Facsimile No: (212) 632-8736
Lending Office for Eurodollar Loans
125 West 55th Street, 23rd Floor
New York, New York 10019
Facsimile No: (212) 632-8736
E-56
EXHIBIT 10.10
WARRANT AGREEMENT
December 9, 1997
Bois d'Arc Resources
13105 Northwest Freeway, Suite 520
Houston, Texas 77040
Gentlemen:
Comstock Resources, Inc., a Nevada corporation (the "Company"), for value
received, hereby agrees to issue a stock purchase warrant entitling Bois d'Arc
Resources, a Louisiana partnership of Wayne L. Laufer and Gary W. Blackie
("Original Owner"), to purchase up to an aggregate of 1,000,000 shares of the
Company's common stock, par value $.50 per share (the "Common Stock"). Such
warrant shall be evidenced by a warrant certificate in the form attached hereto
as Exhibit A (such instrument being hereinafter referred to as the "Warrant,"
and such Warrant and all instruments hereafter issued in replacement,
substitution, combination or subdivision thereof being hereinafter collectively
referred to as the "Warrants"). Subject to Section 1(a) below, the Warrants will
be exercisable by Original Owner or any other Warrantholder (as defined below)
as to all or any lesser number of shares of Common Stock covered thereby, at an
initial exercise price of $14.00 per share, subject to adjustment as provided in
Section 5 below (as adjusted, the "Exercise Price "), for the exercise period
defined in Section 1(a) below. The number of shares of Common Stock purchasable
upon exercise of the Warrants is subject to adjustment as provided in Section 5
below.
The term "Warrantholder" refers to Original Owner and any of its
transferees permitted by Section 3 below. Such term, when used in this Warrant
Agreement in reference to or in the context of a person who holds or owns shares
of Common Stock issued upon exercise of a Warrant, refers where appropriate to
such person who holds or owns such shares of Common Stock. The term "Shares"
refers to the shares of Common Stock issuable upon exercise of the Warrants.
SECTION 1. EXERCISE OF WARRANTS; PARTIAL EXERCISE
(a) Exercise Period; Vesting Requirement. The Warrants will be
exercisable by any Warrantholder as to all or any lesser number of shares of
Common Stock covered thereby, at the Exercise Price, at any time and from time
to time on and after the date hereof and ending at 5:00 p.m., Dallas time, on
December 31, 2007. The Warrants (i) are being issued pursuant to the Joint
Exploration Agreement dated as of December 8, 1997 ("Joint Exploration
Agreement") between the Original Owner and Comstock Offshore, LLC, a Nevada
limited liability company, and (ii) shall vest and become exercisable as set
forth in Section 9 of the Joint Exploration Agreement. Any Warrants that have
not vested and become exercisable by January 1, 2005, as provided in the Joint
Exploration Agreement, shall terminate on such date.
(b) Exercise in Full. Subject to Section 1(a), the Warrants may be
exercised in full by the Warrantholder by surrender of the Warrants, with the
form of subscription on the Warrant duly executed by such Warrantholder, to the
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Company at its principal office at 5005 LBJ Freeway, Suite 1000, Dallas, Texas
75244, Attention: Chief Financial Officer, accompanied by payment, in cash or by
certified or bank cashier's check payable to the order of the Company, or by
delivery of previously owned shares of Common Stock (valued at the Market Price
Per Share), in the amount obtained by multiplying the number of shares of the
Common Stock represented by the respective Warrant or Warrants by the Exercise
Price per share (after giving effect to any adjustments as provided in Section 5
below). The Market Price Per Share of Common Stock at any date shall be deemed
to be the average of the daily closing prices for the five consecutive trading
days immediately prior to the day in question, as reported on the principal
national securities exchange on which the Common Stock is then listed or
admitted to trading.
(c) Partial Exercise. Subject to Section 1(a), each Warrant may be
exercised in part by a Warrantholder by surrender of the Warrant, with the form
of subscription at the end thereof duly executed by such Warrantholder, in the
manner and at the place provided in Section 1(b) above, accompanied by payment,
in cash or by certified or bank cashier's check payable to the order of the
Company, or by delivery of previously owned shares of Common Stock (valued at
the Market Price Per Share), in the amount obtained by multiplying the number of
shares of the Common Stock designated by the Warrantholder in the form of
subscription attached to the Warrant by the Exercise Price per share (after
giving effect to any adjustments as provided in Section 5 below). Upon any such
partial exercise, the Company at its expense will issue and deliver to or upon
the order of the Warrantholder a new Warrant of like tenor, in the name of the
Warrantholder or as the Warrantholder (upon payment by such Warrantholder of any
applicable transfer taxes) may request, subject to Section 3, calling in the
aggregate for the purchase of the number of shares of the Common Stock equal to
the number of such shares called for on the face of the respective Warrant
(after giving effect to any adjustment herein as provided in Section 5 below)
minus the number of such shares designated by the Warrantholder in the
aforementioned form of subscription.
(d) Alternate Payment Right. The Warrantholder shall also have the
right (the "Alternate Payment Right") to convert those Warrants which have
vested and become exercisable as set forth in Section 1(a) above into shares of
Common Stock as provided for herein. Upon exercise of the Alternate Payment
Right (by delivery of the Warrants and a written notice at the place provided in
Section 1(b) above), the Company shall deliver to the Warrantholder (without
payment of any Exercise Price) that number of shares of Common Stock equal to
the quotient obtained by dividing (x) the value of the Warrant at the time the
Alternate Payment Right is exercised (determined by subtracting the aggregate
Exercise Price for the shares of Common Stock which the Warrantholder is
entitled to purchase under this Warrant on such date from the aggregate Market
Price Per Share for such shares on such date) by (y) the Market Price Per Share
on such date. If additional Warrants remain outstanding after exercise of the
Alternate Payment Right, then the Company shall also deliver a new Warrant for
the remaining balance of Warrants in accordance with Section 1(c) above.
(e) Delivery of Stock Certificates on Exercise. Any exercise of the
Warrants pursuant to Section 1 shall be deemed to have been effected immediately
prior to the close of business on the date on which the Warrants together with
the subscription form and the payment for the aggregate Exercise Price shall
have been received by the Company. At such time, the person or persons in whose
name or names any certificate or certificates representing the Shares or Other
Securities (as defined below) shall be issuable upon such exercise shall be
deemed to have become the holder or holders of record of the Shares or Other
Securities so purchased. As soon as practicable after the exercise of any
Warrant in full or in part, and in any event within 10 days thereafter, the
Company at its expense (including the payment by it of any applicable issue
taxes but excluding any income taxes resulting from the exercise) will cause to
be issued in the name of, and delivered to the purchasing Warrantholder, a
certificate or certificates representing the number of fully paid and
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nonassessable shares of Common Stock or Other Securities to which such
Warrantholder shall be entitled upon such exercise. The term "Other Securities"
refers to any stock (other than Common Stock), other securities or assets
(including cash) of the Company or any other person (corporate or otherwise)
which the holders of the Warrants at any time shall be entitled to receive, or
shall have received, upon the exercise of the Warrants, in lieu of or in
addition to Common Stock, or which at any time shall be issuable or shall have
been issued in exchange for or in replacement of Common Stock or Other
Securities pursuant to Section 5 below or otherwise.
(f) Fractional Shares. In lieu of any fractional shares of Common
Stock which would otherwise be issuable upon exercise of this Warrant, the
Company shall issue a certificate for the next higher number of whole shares of
Common Stock for any fraction of a share which is one-half or greater. No shares
will be issued for less than one-half a share.
(g) Warrantholder to Reaffirm Intent. At the request of the Company,
the Warrantholder will, at the time of exercise of any Warrant, reaffirm its
agreement set out in Section 3(a) hereof and further will represent and warrant
that it is acquiring the Shares as an investment and not with a view to
distribution thereof unless the Warrant is exercised simultaneously with the
registration of the Shares to be issued.
SECTION 2. REPRESENTATIONS AND WARRANTIES. The Company represents and
warrants to the Warrantholders as follows:
(a) Corporate and Other Action. The Company has all requisite power
and authority (corporate and other), and has taken all necessary corporate
action, to authorize, execute, deliver and perform this Warrant Agreement, to
execute, issue, sell and deliver the Warrants and a certificate or certificates
evidencing the Warrants, to authorize and reserve for issue and, upon payment
from time to time of the Exercise Price, to issue, sell and deliver, the Shares,
and to perform all of its obligations under this Warrant Agreement and the
Warrants. The Shares, when issued in accordance with this Agreement, will be
duly authorized and validly issued and outstanding, fully paid and nonassessable
and free of all liens, claims, encumbrances and preemptive rights (other than
any liens that may be created by Warrantholder). This Warrant Agreement and,
when issued, each Warrant issued pursuant hereto, has been or will be duly
executed and delivered by the Company and is or will be a legal, valid and
binding agreement of the Company, enforceable in accordance with its terms. No
authorization, approval, consent or other order of any governmental entity,
regulatory authority or other third party is required for such authorization,
execution, delivery, performance, issue or sale.
(b) No Violation. The execution and delivery of this Warrant
Agreement, the consummation of the transactions herein contemplated and the
compliance with the terms and provisions of this Warrant Agreement and of the
Warrants will not conflict with, or result in a breach of, or constitute a
default or an event permitting acceleration under, any statute, the Restated
Articles of Incorporation or Bylaws of the Company or any indenture, mortgage,
deed of trust, note, bank loan, credit agreement, franchise, license, lease,
permit, or any other agreement, understanding, instrument, judgment, decree,
order, statute, rule or regulation to which the Company is a party or by which
it is or may be bound.
SECTION 3. TRANSFER RESTRICTIONS
(a) Compliance with Securities Law. Each Warrantholder agrees that the
Warrants are being acquired as an investment and not with a view to distribution
thereof and that the Warrants may not be transferred, sold, assigned or
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<PAGE>
hypothecated except as provided herein and in compliance with all applicable
securities and other laws. Each Warrantholder agrees not to make any sale or
other disposition of the Shares except pursuant to a registration statement
which has become effective under the Securities Act of 1933, as amended (the
"Act"), setting forth the terms of such offering, the underwriting discount and
commissions and any other pertinent data with respect thereto, unless the
Company has been provided with an opinion of counsel reasonably acceptable to
the Company that such registration is not required. Certificates representing
the Shares, which are not registered as provided in Section 4 below, shall bear
an appropriate legend and be subject to a "stop-transfer" order.
(b) Transfer Restrictions. Prior to the Warrants vesting and becoming
exercisable in accordance with Section 9 of the Joint Exploration Agreement, the
Warrants may not be assigned or transferred by the Original Owner without the
prior written consent of the Company. Notwithstanding the foregoing, the
Original Owner may transfer all or any part of such Original Owner's interest in
the Warrants to the partners of such Original Owner or to family members of such
Original Owner's partners, trusts, corporations, partnerships or other entities
in which a family member of Original Owner or its partners owns a majority of
the beneficial interest provided that the transferee agrees in a writing
delivered to the Company to accept the terms and conditions hereof, and assume
all of the obligations of the transferring Original Owner under this Warrant
Agreement. A "family member" for purposes of this paragraph shall include only
the spouse, parents, siblings, children and descendants of the partners of
Original Owner. "Descendants" for purposes of this paragraph shall include
descendants through all generations and shall include blood descendant,
descendants of stepchildren and persons adopted by their parent prior to
attaining eighteen (18) years of age. After the Warrants or any portion thereof
shall have vested and become exercisable in accordance with Section 9 of the
Joint Exploration Agreement, such Warrants that have vested and become
exercisable may be assigned to any person, subject to compliance with the terms
of this Warrant Agreement and all applicable securities laws.
(c) Tax Matters. To the extent that the exercise of the Warrants or
the disposition of shares of Common Stock acquired by exercise of the Warrants
results in income subject to federal or state income tax withholding,
Warrantholder shall deliver to the Company at the time of such exercise or
disposition such amount of money or shares of Common Stock as the Company may
require to meet its obligations under applicable tax laws or regulations, and,
if Warrantholder fails to do so, the Company is authorized to withhold from any
cash or Common Stock remuneration then or thereafter payable to Warrantholder
any tax required to be withheld by reason of such resulting income. Upon an
exercise of the Warrants, the Company is further authorized in its discretion to
satisfy any such withholding requirement out of any cash or shares of Common
Stock distributable to Warrantholder upon such exercise.
SECTION 4. REGISTRATION RIGHTS
(a) Required Registration. If the Warrantholder shall request the
Company to effect the registration under the Securities Act of Shares acquired
upon exercise of the Warrants or to be acquired no later than five business days
after the registration hereunder shall have become effective, the Company shall
use its best efforts to effect, as expeditiously as possible, the registration
under the Securities Act of such Shares on Form S-3 or such similar form;
provided, however, that the Company shall not be obligated to effect any such
registration if the Company's counsel delivers to the Warrantholder a written
opinion to the effect that the Shares may be sold or distributed without
registration; and provided further, that if the Company is engaged in
negotiations in respect of a merger, acquisition, combination or other
transaction and in the good faith judgment of the Board of Directors of the
Company disclosure of such transaction would not be in the best interest of the
Company, the Company shall be entitled to postpone the filing of such
registration statement until such time as the Board of Directors deems that
disclosure of the transaction would not adversely affect the Company, but in no
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<PAGE>
event for more than six months. All expenses incident to the Company's
performance with its obligations under this paragraph shall be paid by the
Company; provided, however, the Warrantholder shall be responsible for and shall
pay any underwriting, brokerage or selling agent's fees, discounts or
commissions, and shall be responsible for all legal fees or counsel to the
Warrantholder.
(b) Company Indemnification. In the event of any registration under
the Securities Act of any securities pursuant to this Section 4, the Company
will indemnify and hold harmless each Warrantholder and each other individual,
corporation, partnership, trust, organization, association or other entity or
individual ("Person"), if any, which controls (within the meaning of the
Securities Act) such holder, against any losses, claims, damages or liabilities,
joint or several, to which such holder or controlling Person may become subject
under the Securities Act or otherwise, to the extent that such losses, claims,
damages or liabilities (or proceedings in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of any material fact
contained, on the effective date thereof, in any registration statement under
which such securities were registered under the Securities Act, in any
preliminary prospectus or final prospectus contained therein, or in any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and will
reimburse such holder and each such controlling Person for any legal or any
other expenses reasonably incurred by such holder or such controlling person in
connection with investigating or defending any loss, claim, damage, liability or
proceeding, except insofar as any such losses, claims, damages, liabilities or
expenses result from an untrue statement or omission contained in information
furnished in writing to the Company by such holder expressly for use therein.
(c) Indemnification by Warrantholder. In the event of any registration
of any securities under the Securities Act pursuant to this Section 4, the
Warrantholder will (or will furnish the written undertaking of such other Person
or Persons as shall be acceptable to the Company to) indemnify and hold harmless
the Company and each other Person, if any, who controls the Company within the
meaning of the Securities Act, against any losses, claims, damages, or
liabilities, joint or several, to which the Company or such controlling Person
may become subject under the Securities Act or otherwise, insofar as such
losses, claims, damages, or liabilities (or actions in respect thereof) arise
out of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in any registration statement under which such
securities were registered under the Securities Act, any preliminary prospectus
or final prospectus contained therein, or any amendment or supplement thereto,
or arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent that any such
loss, claim, damage, or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
said registration statement, said preliminary prospectus, or said prospectus or
said amendment or supplement in reliance upon and in conformity within written
information furnished to the Company through an instrument duly executed by such
Warrantholder or any underwriter of such holder's securities specifically for
use in the preparation thereof, and such Warrantholder will (or will furnish the
written undertaking of such other Person or Persons as shall be acceptable to
the Company to) reimburse the Company and each such controlling Person for any
legal and any other expenses reasonably incurred by the Company or such
controlling Person in connection with investigation or defending any such loss,
claim, damage, liability, or action.
(d) Acknowledgment of Rights. The Company will, at the time of the
exercise of this Warrant in accordance with the terms hereof, upon the request
of the Warrantholder hereof, acknowledge in writing its continuing obligation to
afford to such holder any rights (including without limitation, any right to
registration of the Shares) to which such holder shall continue to be entitled
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after such exercise in accordance with the provisions of this Warrant, provided
that if the holder of this Warrant shall fail to make any such request, such
failure shall not affect the continuing obligation of the Company to afford to
such holder any such rights.
SECTION 5. ANTI-DILUTION PROVISIONS. The Exercise Price and the number of
Shares purchasable upon the exercise of each Warrant are subject to adjustment
from time to time as set forth in this Section 5.
(a) Adjustment of Exercise Price and Number of Shares Purchasable. In
case the Company shall at any time after the date of this Agreement (i) declare
a dividend on the Common Stock in shares of its capital stock, (ii) subdivide
the outstanding Common Stock, (iii) combine the outstanding Common Stock into a
smaller number of shares of Common Stock, or (iv) issue any shares of its
capital stock by reclassification of the Common Stock (including any such
reclassification in connection with a consolidation or merger in which the
Company is the surviving corporation), then in each case the Exercise Price, in
effect at the time of the record date for such dividend or of the effective date
of such subdivision, combination, or reclassification shall be adjusted so that
the holder of any Warrant exercised after such time shall be entitled to receive
the number of shares of Common Stock or other capital stock of the Company
which, if such Warrant had been exercised immediately prior to such time, he
would have owned upon such exercise and been entitled to receive by virtue of
such dividend, subdivision, combination, or reclassification. Such adjustment
shall be made successively whenever any event listed above shall occur. If as a
result of an adjustment made pursuant to this Section 5(a), the holder of any
Warrant thereafter exercised shall become entitled to receive shares of two or
more classes of capital stock or shares of Common Stock and other capital stock
of the Company, the Board of Directors of the Company (whose determination shall
be conclusive) shall determine the allocation of the adjusted Exercise Price
between or among shares of such classes of capital stock or shares of Common
Stock and other capital stock. Upon each adjustment of the Exercise Price or the
number of Shares as a result of the calculations made in this Section 5(a), each
Warrant outstanding prior to the making of the adjustment in the Exercise Price
or number of Shares shall thereafter evidence the right to purchase, at the
adjusted Exercise Price, the adjusted number of Shares, without the necessity
for issuing a replacement Warrant.
(b) Minimum Adjustment. No adjustment in the Exercise Price shall be
required if such adjustment is less than $.05; provided, however, that any
adjustments which by reason of this subsection (b) are not required to be made
shall be carried forward and taken into account in any subsequent adjustment.
All calculations under this Section 5 shall be made to the nearest cent or to
the nearest one-hundredth of a share, as the case may be.
(c) Reorganization, etc. In case of any capital reorganization of the
Company, or of any reclassification of the Common Stock (other than a
reclassification of the Common Stock referred to in Section 5(a) above), or in
the case of the consolidation of the Company with or the merger of the Company
into any other corporation or of the sale or transfer of the properties and
assets of the Company as, or substantially as, an entirety to any other
corporation, each Warrant shall after such capital reorganization,
reclassification of the Common Stock, consolidation, merger, sale or transfer be
exercisable, upon the terms and conditions specified in this Agreement, for the
number of shares of stock or other securities, assets, or cash to which a holder
of the number of shares of Common Stock purchasable (at the time of such capital
reorganization, reclassification of shares, consolidation, merger, sale or
transfer) upon exercise of such Warrant would have been entitled upon such
capital reorganization, reclassification of the Common Stock, consolidation,
merger, sale or transfer; and in any such case, if necessary, the provisions set
forth in this Section 5(c) with respect to the rights and interests thereafter
of the holders of the Warrants shall be appropriately adjusted so as to be
applicable, as nearly as may reasonably be, to any shares of stock or other
securities, assets, or cash thereafter deliverable upon the exercise of the
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Warrants. The subdivision or combination of the Common Stock at any time
outstanding into a greater or lesser number of shares shall not be deemed to be
a reclassification of the Common Stock for the purposes of this paragraph. The
Company shall not effect any such consolidation, merger, transfer, or sale,
unless prior to or simultaneously with the consummation thereof, the successor
corporation (if other than the Company) resulting from such consolidation or
merger or the corporation purchasing or receiving, such assets or other
appropriate corporation or entity shall assume, by written instrument executed
and delivered to the holders of the Warrants, the obligation to deliver to the
holder of each Warrant such shares of stock, securities, or assets as, in
accordance with the foregoing provisions, such holders may be entitled to
purchase, and to perform the other obligations of the Company under this Warrant
Agreement. This Section 5(c) shall not apply to any sale, transfer or lease as
an entirety, or substantially as an entirety, of the properties and assets of
the Company as collateral security for obligations of the Company.
(d) Distributions to All Shareholders Below Market Price. If the
Company shall distribute to all holders of Common Stock any rights, options,
warrants or convertible or exchangeable securities entitling such holders to
subscribe for or purchase Common Stock at a price per share that is, at the
record date for such distribution, lower than the market price per share of
Common Stock on such date, then the Exercise Price to be in effect after such
record date shall be determined by multiplying the Exercise Price in effect
immediately before such record date by a fraction, of which the numerator shall
be the sum of (i) the number of shares of Common Stock that the aggregate
offering price of the total number of shares of Common Stock so offered for
subscription or purchase would purchase at the Market Price Per Share of Common
Stock (as defined in Section 1(b) above) on such date, and the denominator shall
be the sum of (x) the number of shares of Common Stock outstanding at the close
of business on such record date and (y) the number of shares so offered for
subscription or purchase.
(e) Other Distributions to All Shareholders. If the Company shall
distribute to all holders of Common Stock (i) any rights, options, warrants or
convertible or exchangeable securities entitling the holder to subscribe for or
purchase any equty securities of the Company (other than any rights, options,
warrants or exchangeable securities referred to in Section 5 (d), (ii) any
evidences of indebtedness or other securities of the Company (other than Common
Stock) or (iii) assets (other than cash dividends paid out of the earned surplus
of the Company), then in each such case the Exercise Price to be in effect
immediately prior to such record date by a fraction, of which the numerator
shall be the Market Price Per Share of Common Stock (as defined in Section 1(b)
above) on such record date, less the fair market value (as determined by the
Board of Directors, whose determination shall be conclusive, and described in a
statement sent to the Warrantholder, of the portion of the rights, warrants,
evidences of indebtedness, other securities or assets so distributed applicable
to one share of Common Stock and of which the denominator shall be such Market
Price Per Share of Common Stock. Such adjustment shall be made whenever any such
distribution is made and shall become effective retroactively immediately after
the record date for the determination of stockholders entitled to receive such
distribution.
(f) Statement Regarding Adjustments. Whenever the Exercise Price shall
be adjusted as provided in this Section, and upon each change in the number of
shares of the Common Stock issuable upon exercise of the Warrants, the Company
shall send notice to the Warrantholder, a statement showing in detail the facts
requiring such adjustment and the Exercise Price and new number of shares
issuable that shall be in effect after such adjustment. Each such statement
shall be signed by the Company's chief financial or accounting officer. Where
appropriate, such copy may be given in advance and may be included as part of a
notice required to be mailed under the provisions of Section 5(g) below.
(g) Notice to Warrantholders. In the event the Company shall propose
to take any action of the type described in Sections 5(a), (c), (d) or (e), the
Company shall give notice to the holder of this Warrant, in the manner set forth
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in Section 8, which notice shall specify the record date, if any, with respect
to any such action and the approximate date on which such action is to take
place. Such notice shall also set forth such facts with respect thereto as shall
be reasonably necessary to indicate the effect of such action (to the extent
such effect may be known at the date of such notice) on the Exercise Price and
the number, kind or class of shares or other securities or property which shall
be deliverable upon exercise of this Warrant. In the case of any action which
would require the fixing of a record date, such notice shall be given at least
10 days prior to the date so fixed, and in case of all other action, such notice
shall be given at least 15 days prior to the taking of such proposed action.
Failure to give such notice, or any defect therein, shall not affect the
legality or validity of any such action.
SECTION 6. FURTHER COVENANTS OF THE COMPANY.
(a) Dilution or Impairments. The Company will not, by amendment of its
Articles of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms of the Warrants or of this Warrant Agreement, but will at all times in
good faith assist in the carrying out of all such terms and in the taking of all
such action as may be necessary or appropriate in order to protect the rights of
the Warrantholders against dilution or other impairment. Without limiting the
generality of the foregoing, the Company:
(i) shall at all times reserve and keep available, solely
for issuance and delivery upon the exercise of the Warrants, all
shares of Common Stock (or Other Securities) from time to time
issuable upon the exercise of the Warrants and shall take all
necessary actions to ensure that the par value per share, if any, of
the Common Stock (or Other Securities) is at all times equal to or
less than the then effective Exercise Price per share;
(ii) will take all such action as may be necessary or
appropriate in order that the Company may validly and legally issue
fully paid and nonassessable shares of Common Stock or Other
Securities upon the exercise of the Warrants from time to time
outstanding; and
(iii) will not consolidate with or merge into any other
person or permit any such person to consolidate with or merge into the
Company (if the Company is not the surviving corporation), unless such
other person shall expressly assume in writing and will be bound by
all the terms of this Warrant Agreement and the Warrants.
(b) Title to Stock. All shares of Common Stock delivered upon the
exercise of the Warrants shall be validly issued, fully paid and nonassessable;
each Warrantholder shall, upon such delivery, receive good and marketable title
to the Shares, free and clear of all voting and other trust arrangements, liens,
encumbrances, equities and claims whatsoever created by the Company; and the
Company shall have paid all taxes, if any, in respect of the issuance thereof.
(c) Listing on Securities Exchanges; Registration. If the Company at
any time shall list any Common Stock on any national securities exchange, the
Company will, at its expense, simultaneously list on such exchange, upon the
exercise of the Warrants, and maintain such listing of, all shares of Common
Stock from time to time issuable upon the exercise of the Warrants, and the
Company will so list on any national securities exchange, will so register and
will maintain such listing of, any Other Securities if and at the time that any
securities of like class or similar type shall be listed on such national
securities exchange by the Company. The Company currently lists its Common Stock
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on the New York Stock Exchange and so long as so listed, will list all shares of
Common Stock issued on the exercise of the Warrant on such exchange.
(d) Exchange of Warrants. Subject to Section 3 hereof, upon surrender
for exchange of any Warrant to the Company, the Company at its expense will
promptly issue and deliver to or upon the order of the holder thereof a new
Warrant of like tenor, in the name of such holder or as such holder (upon
payment by such Warrantholder of any applicable transfer taxes) may direct,
calling in the aggregate for the purchase of the number of shares of the Common
Stock called for on the face or faces of the Warrant or Warrants so surrendered.
The Warrants and all rights thereunder are transferable in whole or in part upon
the books of the Company by the registered holder thereof, subject to the
provisions of Section 3, in person or by duly authorized attorney, upon
surrender of the Warrant, duly endorsed, at the principal office of the Company.
(e) Replacement of Warrants. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of any
Warrant and, in the case of any such loss, theft or destruction, upon delivery
of an indemnity agreement and bond reasonably satisfactory in form and amount to
the Company or, in the case of any such mutilation, upon surrender and
cancellation of such Warrant, the Company, at the expense of the Warrantholder,
will execute and deliver, in lieu thereof, a new Warrant of like tenor.
(f) Reporting by the Company. The Company agrees that during the term
of the Warrants it will use commercially reasonable efforts to keep current in
the filing of all forms and other materials, if any, which it may be required to
file with the appropriate regulatory authority pursuant to the Securities and
Exchange Act of 1934, as amended (the "Exchange Act"), and all other forms and
reports required to be filed with any regulatory authority having jurisdiction
over the Company.
SECTION 7. OTHER WARRANTHOLDERS; HOLDERS OF SHARES. The Warrants are issued
upon the following terms, to all of which each Warrantholder by the taking
thereof consents and agrees: (a) any person who shall become a transferee,
within the limitations on transfer imposed by Section 3 hereof, of a Warrant
properly endorsed shall take such Warrant subject to the provisions of Section 3
hereof and thereupon shall be authorized to represent himself as absolute owner
thereof and, subject to the restrictions contained in this Warrant Agreement,
shall be empowered to transfer absolute title by endorsement and delivery
thereof to a permitted bona fide purchaser for value; (b) any person who shall
become a holder or owner of Shares shall take such shares subject to the
provisions of Section 3 hereof; (c) until such time as the respective Warrant is
transferred on the books of the Company, the Company may treat the registered
holder thereof as the absolute owner thereof for all purposes, notwithstanding
any notice to the contrary. At the request of the Company, before registration
of any transfer of a Warrant, the transferee will make the representation and
warranties contained in Section 2(a); and (d) Warrantholders shall not have any
rights as a shareholder of the Company until exercise of the Warrants, except as
otherwise provided herein.
SECTION 8. MISCELLANEOUS.
(i) All notices, certificates and other communications from
or at the request of the Company to any Warrantholder shall be mailed
by first class, registered or certified mail, postage prepaid, to such
address as may have been furnished to the Company in writing by such
Warrantholder, or, until an address is so furnished, to the address of
the last holder of such Warrant who has so furnished an address to the
Company, except as otherwise provided herein. The initial address of
the Original Owner shall be as set forth at the beginning of this
Agreement, and the initial address of the Company shall be as set
forth in Section 1(b) hereof.
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(ii) This Warrant Agreement and any of the terms hereof may
be changed, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement of such change,
waiver, discharge or termination is sought.
(iii) This Warrant Agreement shall be construed and enforced
in accordance with and governed by the laws of the State of Texas.
(iv) The headings in this Warrant Agreement are for purposes
of reference only and shall not limit or otherwise affect any of the
terms hereof. This Warrant Agreement, together with the forms of
instruments annexed hereto as exhibits, and the Joint Exploration
Agreement, constitute the full and complete agreement of the parties
hereto with respect to the subject matter hereof.
IN WITNESS WHEREOF, the Company has caused this Warrant Agreement to be
executed effective as of the 9th day of December, 1997, in Dallas, Texas by its
proper corporate officers, hereunto duly authorized.
COMSTOCK RESOURCES, INC.
By:/s/M. JAY ALLISON
-----------------
M. JAY ALLISON, President and
Chief Executive Officer
This Warrant Agreement is confirmed and agreed to effective as of December 9,
1997:
BOIS D'ARC RESOURCES
By:/s/WAYNE L. LAUFER
------------------
WAYNE L. LAUFER, Partner
By:/s/GARY BLACKIE
----------------
GARY BLACKIE, Partner
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EXHIBIT 10.11
JOINT EXPLORATION AGREEMENT
This Joint Exploration Agreement (the "Agreement") is made as of the 8th
day of December, 1997 by and between Comstock Offshore, LLC, a Nevada limited
liability company ("Comstock") and Bois d'Arc Resources, a Louisiana partnership
("Bois d'Arc") of Wayne L. Laufer ("Laufer") and Gary W. Blackie ("Blackie").
WHEREAS, Comstock and Bois d'Arc desire to enter into a joint exploration
program with respect to certain oil and gas prospects identified by Bois d'Arc.
NOW, THEREFORE, in consideration of the mutual agreements herein contained,
and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereby agree as follows:
1. With respect to the three prospect areas identified on Exhibit A
attached hereto (collectively, the "Phase I Areas"), Comstock shall have the
right to review and participate therein. In the event Comstock elects to
participate in any such prospect within the Phase I Areas (a "Phase I
Prospect"), it shall notify Bois d'Arc of its intent to participate therein no
later than January 15, 1998. Comstock shall reimburse Bois d'Arc for 50% of
seismic data acquisition and geological/geophysical data and leasehold
acquisition costs (collectively, the "Exploration Costs") incurred by Bois d'Arc
with respect to each Phase I Area in which it elects to participate and Bois
d'Arc shall assign to Comstock a 40% interest in each Phase I Prospect within
such Phase I Area; provided that Bois d'Arc shall have the right to retain a 2%
of 8/8ths overriding royalty interest therein. Comstock shall be responsible for
50% of the drilling costs before casing point relating to the initial test well
for each such Phase I Prospect it elects to participate in and thereafter, 40%
of all further costs. With respect to the three prospect areas identified on
Exhibit A, Comstock agrees to participate in either all or none of the Phase I
Prospects within each of the Phase I Areas.
2. For a period of five (5) years, commencing on January 1, 1998 (the
"Development Period"), Bois d'Arc shall be responsible for identifying ideas for
oil and gas prospects within the state coastal waters of Louisiana and Texas and
corresponding federal offshore waters (the "Region"); provided, however the
Region shall exclude the existing areas of mutual interest previously entered
into by Bois d'Arc and identified on Exhibit B attached hereto. Bois d'Arc shall
present such ideas, together with recommendations on 3-D seismic testing, to
Comstock for review and consideration. In the event Comstock elects to further
pursue a prospect idea presented to it, Comstock and Bois d'Arc shall agree upon
an area of mutual interest ("AMI") to further develop the prospect ideas.
Comstock shall have a period of 30 days following presentation to either elect
to further pursue such prospect idea or to decline participation. Comstock's
decision shall be delivered to Bois d'Arc in writing. If Comstock declines to
participate in an idea presented to it, Bois d'Arc shall have the right to
pursue such idea on its own and shall have no further obligation to Comstock
under this Agreement with respect to such matter.
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3. With respect to any particular AMI, the parties shall acquire seismic
data relating thereto, with Comstock being responsible for 80% and Bois d'Arc
20% of the costs therefor. Bois d'Arc shall assign the seismic data acquisition
and other upfront costs to each Phase II Prospect. Based upon the seismic data,
Bois d'Arc shall present to Comstock in writing identified prospects within the
AMI ("Phase II Prospects") and Comstock shall have a period of 30 days to elect
in writing to participate in each such Phase II Prospect so identified. If
Comstock does not elect to participate in a Phase II Prospect and Bois d'Arc
elects to pursue such Phase II Prospect, Bois d'Arc shall pay to Comstock an
amount equal to Comstock's share of the Exploration Costs incurred with respect
to such Phase II Prospect. The parties agree that during the first 24 months of
the Development Period they will use their best efforts to spend not less than
$5,000,000 on seismic data (the "Seismic Cost Commitment"). In the event the
parties elect to pursue a Phase II Prospect, Comstock shall be responsible for
80% and Bois d'Arc 20% of the leasehold acquisition costs and any additional
Exploration Costs.
4. With respect to any Phase II Prospects generated within the AMI,
Comstock shall be assigned a 33% interest and Bois d'Arc a 67% interest therein.
Bois d'Arc shall have the right to retain a 2% of 8/8ths overriding royalty
interest in each such Phase II Prospect. If Comstock elects not to participate
in the drilling of the initial test well on a Phase II Prospect, Bois d'Arc will
have the right, but not the obligation, to acquire Comstock's interest in such
Phase II Prospect for its own account for an amount equal to Comstock's share of
the seismic and up front costs assigned to such Phase II Prospect.
5. All drilling and related costs with respect to development of the Phase
II Prospect shall be shared by Comstock and Bois d'Arc proportionately based on
their respective interest in such Phase II Prospects. If a party elects not to
participate in the completion of the initial test well for a Phase II Prospect,
it shall have no further rights or interest in such Phase II Prospect. Bois
d'Arc Operating Corporation, or any other entity selected and controlled by
Laufer and Blackie, will be named operator of each Phase II Prospect, which will
be governed by an AAPL 610 Joint Operating Agreement similar to the Joint
Operating Agreement dated December 4, 1995 for the Snapper Prospect, except that
operating fees will be at current industry rates.
6. Bois d'Arc agrees to provide Comstock with full access, in Bois d'Arc's
offices, to all seismic data relating to the prospects hereunder or, if not
permitted to do so, shall share with Comstock on the basis provided in Section 3
above the cost for Comstock to obtain a partner's license in order to evaluate
the prospects.
7. Bois d'Arc shall give Comstock a right of first refusal on the sale to a
third party of any of its 67% interest in a Phase II Prospect; provided that
such right shall be limited such that Comstock may not own more than a 45%
interest in any Phase II Prospect; provided, further, that such right of first
refusal shall not apply to the extent the sale is to parties that participated
with Bois d'Arc prior to the date of this Agreement in the area of mutual
interest identified on Exhibit B. Comstock shall acquire any such additional
interest on the same terms as such interest is offered to a third party. Bois
d'Arc agrees that it will retain not less than a 25% interest in each such Phase
II Prospect in which Comstock has retained a 33% or greater interest. In
connection with a sale to a third party of an interest in a Phase II Prospect,
all proceeds received as reimbursement of Exploration Costs shall be distributed
80% to Comstock and 20% to Bois d'Arc. Such proceeds will consist of cash
reimbursement only and will not include (i) any overriding royalty interest,
(ii) carried working interest retained by Bois d'Arc or (iii) any prospect
generation fee charged to third parties, which prospect fee shall not exceed
$200,000 per prospect (on an 8/8ths basis).
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8. At the time the first well on a Phase II Prospect is either spudded or
the Phase II Prospect is sold to a third party, any Exploration Costs previously
incurred which have been allocated to such Phase II Prospect that have not been
recovered in connection with a sale of an interest therein to a third party, as
provided in Section 7 above, will be reallocated based on the ratio of
Comstock's and Bois d'Arc's respective working interests to each others retained
working interest in the Phase II Prospect.
9. Comstock shall cause Comstock Resources, Inc. ("CRI") to issue to Bois
d'Arc warrants entitling it to acquire up to 1,000,000 shares of common stock,
$.50 par value ("Common Stock"), of CRI (the "Warrants"). The exercise price for
shares of Common Stock shall be the closing price of the Common Stock, as
reported by the New York Stock Exchange, on the date of this Agreement. The
Warrants shall vest (and the number of shares of Common Stock that may be
acquired pursuant to exercise of the Warrants) as follows: 50,000 shares shall
vest each such time that Comstock agrees to set production casing on the initial
test well or a substitute therefor with respect to a Phase II Prospect;
provided, however, that in no event shall the number of shares that may be
acquired hereunder exceed 1,000,000. All Warrants that vest shall terminate on
December 31, 2007. Any Warrants that have not vested by January 1, 2005 shall
terminate on such date. CRI shall deliver to Bois d'Arc a warrant agreement and
certificate evidencing the Warrants issued hereunder in a form satisfactory to
the parties.
10. Bois d'Arc, Wayne L. Laufer and Gary W. Blackie each agree that they
will not, directly or indirectly, develop any properties in the Region during
the Development Period other than pursuant to the terms of this Agreement,
unless Comstock elects not to participate with Bois d'Arc as provided herein.
11. In the event that Comstock fails to fund its share of expenditures
hereunder within 45 days of the receipt of an invoice for such expenditures, in
addition to any other remedies available to Bois d'Arc hereunder, Bois d'Arc
shall have the right to terminate this Agreement with respect to future
development in the Region. Upon termination of this Agreement, the AMI will
consist solely of that area over which 3-D seismic data has been acquired under
the terms of Section 3 above. Except as otherwise provided herein, this
Agreement shall terminate at the expiration of the five year period set forth in
Section 2 above. Each AMI created hereunder will terminate two years after
termination of this Agreement.
12. This Agreement is not intended to create a partnership or similar
relationship between Comstock and Bois d'Arc. Except as specifically provided
herein, neither party shall have the authority to enter into any agreement on
behalf of the other party without such other party's prior written approval.
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<PAGE>
13. If any provision of this Agreement is held to be illegal, invalid or
unenforceable, the legality, validity and enforceability of the remaining
provisions hereof shall not be affected thereby.
14. Neither party shall disclose the terms of this Agreement without the
written consent of the other party hereto; provided, however, that Comstock may
make such public disclosures as may be required in the opinion of counsel to
comply with applicable federal and state securities laws. Comstock agrees to
provide to Bois d'Arc written notice of and copies of any press releases prior
to making any such public announcement.
15. This Agreement and the transactions contemplated hereby shall be
governed by and construed in accordance with the laws of the State of Texas.
16. This Agreement embodies the entire agreement between Bois d'Arc and
Comstock relating to the subject matter hereof and supersedes all prior
agreements, written or oral.
17. This Agreement shall not be amended unless in writing signed by both
parties.
18. This Agreement shall be binding upon and inure to the benefit of Bois
d'Arc and Comstock and their respective successors, assigns and legal
representatives. Neither party shall assign this Agreement or any rights
hereunder without the prior written consent of the other party. Notwithstanding
the foregoing, Bois d'Arc shall have the right to assign this Agreement and all
rights and obligations hereunder to an entity controlled by Laufer and Blackie.
For purposes hereof, an entity shall be controlled by Laufer and Blackie if
Laufer and Blackie own, directly or indirectly, in the aggregate 100% of the
ownership interest in such entity.
19. This Agreement may be executed in counterparts, each of which shall be
deemed an original and together shall constitute one instrument.
20. Each party agrees to perform, execute and deliver any such additional
documents as may reasonably be requested to consummate or effect the
transactions contemplated hereby.
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IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date written above.
COMSTOCK OFFSHORE, LLC
By:/s/M.JAY ALLISON
-------------------------
M. Jay Allison, President
BOIS D'ARC RESOURCES
By:/s/WAYNE L. LAUFER
---------------------
Wayne L. Laufer
Partner
By:/s/GARY W. BLACKIE
---------------------
Gary W. Blackie
Partner
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EXHIBIT 21
<TABLE>
SUBSIDIARIES OF COMSTOCK RESOURCES, INC.
Name State of Business Name
Incorporation
- ------------------------------------------------ -------------------- -------------------------------------
<S> <C> <C>
Comstock Oil & Gas, Inc. Nevada Comstock Oil & Gas, Inc.
Comstock Oil & Gas - Louisiana, Inc. (1) Nevada Comstock Oil & Gas - Louisiana, Inc.
Comstock Management Corporation Nevada Comstock Management Corporation
Comstock Offshore, LLC (2) Nevada Comstock Offshore, LLC
(1) Subsidiary of Comstock Oil & Gas, Inc.
(2) Subsidiary of Comstock Oil & Gas - Louisiana, Inc.
</TABLE>
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EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into Comstock Resources, Inc.'s previously
filed registration statements (numbers 33-73452, 33-88962 and 333-13675).
ARTHUR ANDERSEN LLP
E-73
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial data extracted from the Consolidated
Financial Statements of Comstock Resources, Inc. and Subsidiaries for the year
ended December 31, 1997 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 14,504
<SECURITIES> 0
<RECEIVABLES> 31,241
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 45,917
<PP&E> 488,458
<DEPRECIATION> (77,677)
<TOTAL-ASSETS> 456,800
<CURRENT-LIABILITIES> 56,184
<BONDS> 260,000
0
0
<COMMON> 12,104
<OTHER-SE> 112,490
<TOTAL-LIABILITY-AND-EQUITY> 456,800
<SALES> 88,555
<TOTAL-REVENUES> 89,344
<CGS> 0
<TOTAL-COSTS> 46,964
<OTHER-EXPENSES> 2,668
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,934
<INCOME-PRETAX> 33,778
<INCOME-TAX> 11,622
<INCOME-CONTINUING> 22,156
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,156
<EPS-PRIMARY> 0.90
<EPS-DILUTED> 0.85
</TABLE>
