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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1998.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 0-20125
BASIN EXPLORATION, INC.
(Exact name of registrant as specified in its charter)
Delaware 84-1143307
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
370 Seventeenth Street, Suite 3400, Denver, Colorado 80202
(Address of principal executive offices) (Zip Code)
(303) 685-8000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section
12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
----------------------------
(Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
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.
[X] Yes [ ] No
As of March 25, 1999, the aggregate market value of the approximate
10,747,700 shares of voting stock held by non-affiliates of the registrant
was approximately $139,720,000 based upon the closing sale price of the
Common Stock on the Nasdaq Stock Market on March 25, 1999 of $13.00 per share.
As of March 25 1999, the registrant had 13,977,000 shares of Common Stock
outstanding.
DOCUMENT INCORPORATED BY REFERENCE
Parts of the following document are incorporated by reference to Part III
of this Form 10-K Report: Proxy Statement for the registrant's 1999 Annual
Meeting of Shareholders.
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CROSS-REFERENCE SHEET
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PART I INTERNAL PAGE
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Item 1. Business 1
Item 2. Properties 12
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
PART II
Item 5. Market for the Registrant's Common Stock and 16
Related Shareholder Matters
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of 17
Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk 29
Item 8. Financial Statements and Supplementary Data 29
Item 9. Changes and Disagreements with Accountants 29
on Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant 29
Item 11. Executive Compensation 29
Item 12. Security Ownership of Certain 29
Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions 29
Item 14. Exhibits, Financial Statement Schedules 32
and Reports on Form 8-K
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For Certain Definitions of terms used herein, see page 30.
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CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, including information
incorporated by reference herein, contains statements that are not historical
facts but are forward-looking statements that involve risks and uncertainties
that could cause actual results to differ from projected results. Such
statements address activities, events or developments that the Company
expects, believes, projects, intends, estimates, plans or anticipates will,
should, could or may occur, including such matters as:
- amount and nature of capital expenditures,
- drilling of wells,
- estimated reserves,
- timing and amount of future production of oil and gas,
- business strategies,
- operating costs and other expenses,
- cash flow and anticipated liquidity,
- prospect development and property acquisitions,
- marketing of oil and gas, and
- Year 2000 compliance activities.
Although the Company believes that the expectations reflected in
the forward-looking statements are reasonable, we cannot assure you that any
of these expectations will prove correct or that we will take any actions
that may have been planned. Factors that could cause actual results to differ
materially ("Cautionary Disclosures") are described in the Marketing,
Competition, Regulation and Risk Factors portions of the "Business" section
of this report and under the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section of this report.
Without limiting the Cautionary Disclosures so described, Cautionary
Disclosures include, among others:
- general economic conditions,
- oil and gas price volatility,
- the Company's ability to find, acquire, market, develop and
produce new properties,
- the risks associated with acquisitions,
- the risks associated with exploration,
- operating hazards attendant to the oil and gas business,
- downhole drilling and completion risks that are generally not
recoverable from third parties or insurance,
- uncertainties in the estimation of proved reserves and in the
projection of future rates of production and timing of
development expenditures,
- potential mechanical failure or underperformance of individually
significant productive wells,
- the strength and financial resources of the Company's
competitors,
- the Company's ability to find and retain skilled personnel,
- climatic conditions,
- availability of capital,
- availability and cost of material and equipment,
- delays in anticipated start-up dates,
- environmental risks,
- actions or inactions of third-party operators of the Company's
properties,
- regulatory developments, and
- third-party Year 2000 compliance actions.
All written and oral forward-looking statements attributable to the Company
or persons acting on its behalf are qualified in their entirety by the
Cautionary Disclosures. The Company disclaims any obligation to update or
revise any forward-looking statement in light of actual results or future
events.
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PART I
ITEM 1. BUSINESS.
GENERAL
Basin Exploration, Inc. ("Basin" or the "Company") is engaged in
the exploration, acquisition, development and exploitation of oil and gas
properties. The Company's properties are located primarily offshore Louisiana
and Texas in the shallow waters of the Gulf of Mexico and in the Powder River
and Green River Basins of Wyoming. As of December 31, 1998, the Company's
estimated net proved reserves were 127.5 Bcf of natural gas and 8.7 MMBbl of
oil, or 179.5 Bcfe, with an aggregate pre-tax present value of future net
revenues of $164.5 million, using 1998 year-end prices held constant and a
10% discount rate.
In 1996, the Company changed its primary focus from the Rocky
Mountain region to the shallow waters of the Gulf of Mexico. To implement
this change in focus, between late-1995 and mid-1996 the Company added senior
management and technical personnel, including geoscientists and petroleum
engineers with extensive experience in the Gulf of Mexico, and strengthened
its balance sheet by selling its D-J Basin properties in Colorado for $123.5
million. The Company's divestment of its D-J Basin assets and its commitment
to Gulf of Mexico exploration significantly changed the character and risk
profile of its investment activities.
Since commencing operations in the Gulf of Mexico in 1996, through
the end of 1998, the Company has participated in drilling 31 Gulf of Mexico
wells, including 20 that found apparent commercial hydrocarbons. The Company
has operated 22 of the 31 wells in which it has participated and has retained
working interests averaging approximately 54% at the time of drilling. As of
year-end 1998, the Company had assembled a Gulf of Mexico leasehold position
totaling 218,718 gross acres, or 149,430 net acres, with more than 40
identified exploration prospects supported by the Company's interpretations
of three-dimensional ("3-D") seismic data. See "PROPERTIES - Present
Activities" for information about certain developments subsequent to December
31, 1998.
During 1998, the Company invested $106.7 million in oil and gas
properties, of which approximately 96% related to activities in the Gulf of
Mexico. Expenditures related to the Gulf of Mexico were primarily for
drilling 17 exploratory wells, 11 of which found apparent commercial
hydrocarbons, completion and development activities related to these
discoveries and discoveries made in the prior year, and for acquisitions of
seismic data and exploratory leaseholds. Other investments made in 1998 were
primarily for exploitation and development of the Company's Rocky Mountain
oil and gas properties, and for exploration activities in the Rocky Mountain
area. Capital expenditures in 1998, and in 1997 when oil and gas investments
totaled $105.6 million, were significantly greater than in prior years and
resulted in a 133% increase in estimated proved oil and gas reserve
quantities over the two-year period and a substantial increase in undeveloped
Gulf of Mexico leaseholds. As a result of the large portion of such capital
expenditures that related to Gulf of Mexico activities, Gulf of Mexico assets
accounted for 75% of the Company's proved reserves at the end of 1998,
compared to 9% at the beginning of 1997, and properties in the Gulf of Mexico
contributed 86% of fourth quarter 1998 average daily net production of 65.9
MMcfe, versus 0% of the Company's average daily net production of 11.2 MMcfe
as recently as the second quarter of 1997. Since initiating its Gulf of
Mexico production from a single property in August 1997, the Company had
expanded its production base in the area to 14 properties by the end of 1998.
Four additional properties with proved reserves were under development for
initial production at that date.
The Company's capital expenditures in 1998 were funded primarily
with cash flow from operations, which totaled $33.7 million before changes in
working capital, and bank debt, which increased from $11 million at the
beginning of 1998 to $80 million at the close of the year.
During 1998 the Company produced a total of 22.0 Bcfe, or 60.2
MMcfe per day, compared to 1997 production of 8.7 Bcfe, or 23.7 MMcfe per
day. This 154% increase in production combined with a 22% decline in
weighted-average prices received to generate a 99% increase in revenues. The
revenue increase resulted in a 120% increase in cash flow from operations
before changes in working capital, from $15.3 million in 1997 to $33.7
million in 1998. The Company's production in 1998 was comprised of 80%
natural gas and 20% oil.
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The increase in production from 1997 to 1998 was principally
attributable to reserves additions made in 1997. The Company did not make any
significant acquisitions of producing properties in 1998 and wells drilled
during 1998 did not account for a substantial portion of production during
the year, due to a typical time lag of several months between drilling a
discovery in the Gulf of Mexico and first production.
Reflecting low oil and gas prices at the end of 1998, Basin
recorded a $30.8 million after-tax, non-cash charge to reduce the carrying
value of its oil and gas properties. As a result, the Company reported a net
loss for the year of $28.5 million. Without the non-recurring charge, the
Company would have reported net income for the year of $2.3 million.
See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for additional discussion regarding the Company's
history, current business activities and financial performance.
BUSINESS STRATEGY
Basin's goals are to generate per-share growth in reserves,
production, earnings and cash flow through exploration, acquisition and
development of oil and gas properties. The Company seeks to implement these
goals through the following strategies:
EXPLORE IN THE SHALLOW WATERS OF THE GULF OF MEXICO. Basin's
exploration activities are currently focused primarily in the shallow waters
on the Outer Continental Shelf ("OCS") of the Gulf of Mexico. The Company
believes that this region has significant remaining undiscovered reserves and
that the combination of substantial existing infrastructure and the
effectiveness of 3-D seismic data will reduce exploration risk and enhance
project economics.
CAPITALIZE ON TECHNICAL EXPERTISE. Basin has assembled a team of
geoscientists and petroleum engineers with substantial experience and
expertise relating to operations in the Gulf of Mexico to generate prospects
and evaluate acquisition opportunities in that region. Basin has also added
senior management and technical personnel with substantial operating
experience outside of the Gulf of Mexico and intends to utilize this in-house
capability in conjunction with consultants to identify and evaluate growth
opportunities in selected onshore areas, and to pursue such opportunities
through acquisitions of properties or through exploration ventures.
UTILIZE ADVANCED TECHNOLOGY. Basin makes extensive use of advanced
technologies, including 3-D seismic and computer-aided exploration and
exploitation ("CAEX") performed on eight Landmark workstations, to better
define drilling prospects and exploitation opportunities. Basin has licensed
more than 375,000 miles of conventional 2-D seismic data and approximately
600 lease blocks of 3-D seismic data covering portions of the Gulf of Mexico.
BALANCE SIZE AND RISK PROFILE OF EXPLORATION TARGETS. Basin seeks
to conduct a drilling program that is balanced between large-target
exploration prospects relative to the Company's existing reserve base and
lower-risk, smaller exploration prospects, generally near existing
infrastructure, which reduces development costs and expedites commencement of
production. This balance is intended to mitigate risk while still gaining
exposure to meaningful growth in reserves and production.
GENERATE PROSPECTS INTERNALLY. Basin's team of geoscientists
internally generates prospects using the Company's technical data bases and
workstations. The Company believes that internally generating prospects will
enable it to retain large working interests and operating control and to
either bring in partners on a promoted basis or swap for interests in
third-party generated prospects. Although the Company primarily relies on
internal generating activities for prospect leads, the Company also evaluates
outside-generated opportunities. Several outside-generated prospects have
been obtained in conjunction with the originating party's participation in
prospects generated by the Company. Basin focuses its current prospect
generating activities primarily offshore Louisiana in the near-shore Miocene
trends, integrating subsurface geology with a regional grid of 3-D seismic
data. The Miocene trend is characterized by geologic structures with
favorable reservoir parameters and conditions where subtle hydrocarbon
indicators are sometimes apparent.
OPERATE CORE PROPERTIES. At December 31, 1998, Basin served as
operator for properties accounting for more than 65% of the Company's proved
reserve quantities. Serving as operator allows the Company to exert greater
control
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over the cost, timing and character of its exploration, development
and production activities. Although the Company favors acting as operator, it
does participate in outside-operated projects that it deems attractive.
PURSUE SELECTIVE ACQUISITIONS. Basin actively seeks to acquire
interests in proved oil and gas properties with exploration, exploitation or
development potential to augment operations in its core areas and to
establish positions in new areas. Generally, the Company focuses on
acquisition opportunities where it believes it can enhance the value of the
acquired assets through one or more of the following means: (i) exploratory
drilling; (ii) development drilling; (iii) workovers; (iv) recompletions; (v)
fracture stimulation; (vi) secondary recovery operations; and (vii) cost
reductions.
MAINTAIN FINANCIAL FLEXIBILITY. Basin seeks to maintain financial
flexibility in order to be able to take advantage of identified investment
opportunities. Since the Company anticipates that its capital expenditures
are likely to exceed cash flow from operations in the foreseeable future,
periodic sales of assets or securities may be required, in addition to
utilization of bank debt, in order to provide funds for such investments. At
times, preservation or restoration of financial flexibility may be dependent
on such sales of assets or securities.
MARKETING
The Company's gas and natural gas liquids from Gulf of Mexico
properties are sold under short-term contracts at market prices to various
gas purchasers. These sales may involve delivery of gas to onshore points
under the Company's firm and interruptible transportation agreements or sales
at the wellhead. Oil from the Company's Gulf of Mexico properties is sold
under short-term contracts at market prices. The Company enters into liquids
transportation and separation agreements to deliver its crude oil and
condensate onshore.
Because of the well-developed transportation infrastructure and
the relatively large number of active oil and gas purchasers in the Gulf
Coast area, including in the Gulf of Mexico where the Company conducts
exploration and acquisition activities, the Company does not anticipate that
it will have difficulty in marketing its production in this region at
prevailing spot market prices.
The majority of the Company's gas and natural gas liquids from
fields in the Rocky Mountain region are sold under marketing arrangements
where prices received are responsive to changes in regional spot markets.
These include short-term contracts under which gas is delivered and sold into
interstate pipelines at market-sensitive prices, and long-term (often for the
life of the lease) percentage-of-proceeds contracts with gas processors.
KN Gas Gathering ("KNGG") purchases virtually all of the Company's
Powder River Basin gas and natural gas liquids from the Company's operated
wells at netback prices similar to other percentage-of-proceeds contracts in
the area. The KNGG contract does not have minimum take provisions and thus
the Company's realization of proceeds depends on KNGG's ability to find a
market for the Company's gas and natural gas liquids. If KNGG were to cease
purchasing the Company's gas, the Company believes that it could sell its gas
and natural gas liquids to other purchasers and processors in the area,
although such sales would require capital expenditures for gathering system
modification and might not be on terms as favorable as those characterizing
the KNGG sales. The Company does not believe that the loss of KNGG as a
purchaser would have a material adverse effect on the Company.
Oil from the Company's Rocky Mountain properties is generally sold
under term contracts that yield a premium over local posted prices.
Demand for natural gas is highly seasonal, with demand generally
higher in the colder winter months and in hot summer months. As a result, the
price received for spot market natural gas may vary significantly between
seasonal periods. To date, the Company generally has been able to sell its
available spot market natural gas at prevailing spot market prices, and the
volumes sold have not materially fluctuated seasonally. There is no
assurance, however, that the Company will be able to continue to achieve this
result.
For much of the past decade, the markets for oil and natural gas
have been volatile. The Company anticipates that such markets will continue
to be volatile in the foreseeable future. Oil and gas price fluctuations have
a significant impact on the Company's business since virtually all of the
Company's operating revenues are ordinarily derived from sales of its oil and
gas production. The Company believes that the loss of one or more of its
current oil or natural gas spot purchasers would not have a material adverse
effect on the Company's business because any individual purchaser should be
readily replaceable by another purchaser who could be expected to pay
approximately the same sales price.
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Basin periodically enters into oil and gas price hedging
agreements as conditions are deemed to warrant. Such transactions affecting
the three year period ended December 31, 1998, or currently in effect with
respect to subsequent periods, are described below under "Management's
Discussion and Analysis of Financial Condition and Results Of Operations -
Liquidity and Capital Resources" and in the Notes to Consolidated Financial
Statements.
COMPETITION
Competition in the oil and gas industry is intense, particularly
with respect to the acquisition of producing properties and proved
undeveloped acreage and the acquisition of interests in offshore exploration
prospects in the Gulf of Mexico. Major and independent oil and gas companies,
as well as individuals and drilling programs, actively bid for desirable oil
and gas properties, as well as for the equipment and labor required to
operate and develop such properties. A number of Basin's competitors have
financial resources and exploration and development budgets that are
substantially greater than those of Basin, which may adversely affect the
Company's ability to compete successfully. In addition, many of the Company's
larger competitors may be better able to respond to factors that affect the
demand for oil and natural gas production such as changes in worldwide oil
and natural gas prices and levels of production, the cost and availability of
alternative fuels, and the application of government regulations. The Company
commenced operations in the Gulf of Mexico area during 1996, where it had not
previously been active. Competition from major and large independent oil and
gas companies is significantly greater in this area than in the Rocky
Mountain region, where the Company had conducted all of its previous
operations.
RISK FACTORS
In addition to the other information set forth elsewhere in this
Form 10-K, you should carefully consider the following factors relating to
Basin when evaluating the Company.
OIL AND GAS PRICES, AND HEDGING - OIL AND GAS PRICES ARE CURRENTLY LOW AND
DEPEND ON FACTORS OUT OF OUR CONTROL. LOW PRICES COULD HAVE A MATERIAL
ADVERSE IMPACT ON OUR BUSINESS. WE MAY HEDGE SOME OF OUR PRODUCTION TO REDUCE
PRICE RISK, BUT THAT MAY ALSO REDUCE OUR GAIN FROM PRICE INCREASES.
Prices for oil and natural gas fluctuate widely and have declined
significantly over the past year. The weighted average market prices being
received by Basin for natural gas decreased from approximately $2.32 per Mcf
at December 31, 1997 to $1.99 per Mcf at December 31, 1998. During the same
twelve-month period, average crude oil prices received by Basin decreased
from $16.34 per barrel to $10.31 per barrel.
Natural gas prices affect Basin more than oil prices, because most
of our production and reserves are natural gas. At December 31, 1998, 71% of
our estimated proved reserves consisted of natural gas on an Mcfe basis, and
in 1998 approximately 80% of our total production consisted of natural gas.
Basin's revenues, profitability and future rate of growth
substantially depend on prevailing prices for oil, gas and natural gas
liquids. Prices also affect the amount of cash flow available for capital
expenditures and our ability to borrow money or raise additional capital. The
amount we can borrow from banks is subject to re-determination based on
changing expectations of future prices. Lower prices may also reduce the
amount of oil and natural gas that Basin can produce economically. As an
example, our estimated proved reserves at December 31, 1998 were lower than
they would have been had prices not declined from year-end 1997.
We cannot predict future oil and natural gas prices and prices may
decline further. Among the factors that can cause this fluctuation are:
- relatively minor changes in the supply of and demand for oil and
natural gas;
- market uncertainty;
- the level of consumer product demand;
- weather;
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- domestic and foreign governmental regulations;
- the price and availability of alternative fuels;
- political conditions in the Middle East;
- the foreign supply of oil and natural gas;
- the price of oil and gas imports; and
- economic conditions in the United States and in other countries.
We periodically enter into energy price swap agreements and other
financial arrangements to attempt to mitigate the effects of oil and natural
gas price fluctuations. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and Note 1 of Notes to
Consolidated Financial Statements for a description of our recent hedging
activity. Such arrangements are subject to a number of risks. If our reserves
are not produced at the rates we estimated, we would be required to satisfy
our obligations under hedging contracts on potentially unfavorable terms
without the ability to offset the financial impact through sales of
comparable quantities of our own production. Further, the terms of our
hedging contracts are based on many assumptions and estimates such as costs
of transportation to delivery points. Under financial instrument contracts,
we may be at risk for basis differential, which is the difference in the
quoted financial price for contract settlement and the actual price received
at the physical point of delivery. Substantial variations between our
assumptions and estimates and actual results could materially adversely
affect our anticipated profit margins and our ability to manage price risk.
In addition, hedging contracts are subject to the risk that the other party
may prove unable or unwilling to perform its obligations. Any significant
nonperformance could have a material adverse financial effect on us.
Furthermore, hedging contracts limit the benefits we would realize if actual
prices rise above the contract prices.
REPLACEMENT OF RESERVES - WE MAY NOT BE ABLE TO REPLACE RESERVES AND THE
FAILURE TO DO SO WOULD ADVERSELY AFFECT THE COMPANY'S LIQUIDITY AND
OPERATIONS.
Unless Basin conducts successful development, exploitation or
exploration activities or acquires properties containing proved reserves, the
proved reserves of Basin will decline as reserves are produced. Decline rates
depend on a number of factors, including drilling density, completion
procedures, and reservoir characteristics. They vary from generally steep
declines of production from reservoirs in the Gulf of Mexico, where Basin has
most of its production, to relatively slow declines of long-lived fields in
the Rocky Mountain region, where our other properties are located. The market
for acquiring proved reserves is extremely competitive, and we may not be
able to buy reserves for development and exploitation at reasonable prices.
Basin's drilling operations may be unsuccessful or may be curtailed, delayed
or canceled for many reasons, such as title problems, weather conditions,
compliance with governmental requirements, cost overruns, shortages of
capital, mechanical difficulties, and shortages in drilling rigs or other
equipment. We may be unable to make the necessary capital investments to
maintain or expand our oil and gas reserves if cash flow from operations is
reduced and external sources of capital become limited or unavailable.
Because of low oil and gas prices, we have reduced our projected capital
expenditure budget from the level of the past two years. This may result in
drilling fewer wells and could reduce our reserves growth below that of prior
years. We cannot assure you that our future acquisition, development,
exploitation and exploration activities will result in reserves added at
acceptable costs.
ACQUISITION RISKS - ACQUIRED PROPERTIES MAY NOT PERFORM AS WE PROJECTED, AND
WE MAY NOT BE ABLE TO DISCOVER LIABILITIES CARRIED WITH THE PROPERTIES OR
OBTAIN PROTECTION FROM SELLERS AGAINST THEM. SUBSTANTIAL ACQUISITIONS COULD
REQUIRE SIGNIFICANT CAPITAL INFUSIONS AND COULD CHANGE BASIN'S RISK AND
PROPERTY PROFILE.
Our recent growth is due in part to acquisitions of producing
properties. The successful acquisition of producing properties requires
assessments of many factors. These include recoverable reserves, future oil
and gas
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prices, operating costs, future development costs, and potential
environmental and other liabilities. These assessments are inherently inexact
and their accuracy uncertain. In connection with such assessments, we review
the targeted properties in a manner we believe is prudent and consistent with
industry practice. However, such a review will not reveal all existing or
potential problems or permit a buyer to become familiar enough with the
properties to assess fully their deficiencies and capabilities. We may not
inspect every well, platform or pipeline. Structural and environmental
problems, such as pipeline corrosion or groundwater contamination, are not
necessarily observable even when an inspection is made. We may not be able to
obtain contractual indemnities from the seller for pre-closing liabilities.
We may be required to assume the risk of the physical condition of the
properties in addition to the risk that the properties may not perform in
accordance with our expectations.
Basin constantly evaluates acquisition and joint venture
opportunities and frequently engages in bidding and negotiation for
acquisitions, many of which are substantial. If successful in this process,
Basin may need to alter or increase its capitalization substantially to
finance these acquisitions or joint ventures through the issuance of debt or
equity securities, the sale of production payments or otherwise. These
changes in capitalization may significantly affect Basin's risk profile.
Additionally, significant acquisitions or joint ventures can change the
character of the operations and business of Basin depending upon the
character of the properties, which may be substantially different in
operating or geological characteristics or geographic location than existing
properties. We cannot assure you that Basin will be successful in the
acquisition or development of any material property interests.
EXPLORATION RISKS - BASIN'S GROWTH STRATEGY SUBSTANTIALLY DEPENDS ON THE
SUCCESS OF ITS EXPLORATION, A HIGH-RISK ACTIVITY. BASIN USES 3-D SEISMIC AND
OTHER ADVANCED TECHNOLOGIES TO MITIGATE EXPLORATION RISK, BUT SUCH
TECHNOLOGIES ARE EXPENSIVE, REQUIRE EXPERIENCED PERSONNEL, AND CANNOT
ELIMINATE EXPLORATION RISK.
Basin has spent a large portion of its capital budget on
exploration in recent years and anticipates continuing to do so in the
future. Exploration activities are substantially more risky than development
or exploitation activities. We use 3-D seismic data and other advanced
technologies to reduce our risk, but exploratory drilling remains a
speculative activity. Even when extensively utilized and properly
interpreted, 3-D seismic data and visualization techniques only assist
geoscientists in identifying subsurface structures and hydrocarbon
indicators. They do not conclusively allow the interpreter to know if
hydrocarbons are present or if they are economically producible. In addition,
the use of 3-D seismic data and certain other technologies requires greater
pre-drilling expenditures than traditional drilling strategies and Basin
could incur losses as a result of such expenditures. Poor results from our
exploration activities could have a material adverse effect on our future
results of operations and financial condition. Basin had conducted no
previous operations in the Gulf of Mexico prior to opening its regional
office in late 1995 in Houston, Texas. This operating area is highly
competitive and Basin's success there will depend on its ability to attract
and retain experienced geoscientists and other professional staff. Basin's
Houston office currently has ten geoscientists and petroleum engineers plus
two engineering consultants, all of whom are experienced in Gulf Coast
operations. Loss of these experienced personnel could have a material adverse
impact on Basin's ability to compete in this area.
FUTURE CAPITAL REQUIREMENTS - BASIN'S CAPITAL EXPENDITURES HAVE GENERALLY
EXCEEDED ITS CASH FLOW. IF WE CANNOT CONTINUE TO ACCESS CAPITAL FROM EXTERNAL
SOURCES, WE WILL HAVE LESS CAPABILITY TO GROW OUR RESERVES AND PRODUCTION.
We need substantial capital to develop and explore our properties and
acquire additional properties. We will use cash flows from operations to fund
these expenditures to the extent available. However, generally our capital
investments have exceeded our cash flows. Historically we have addressed our
long-term liquidity needs through bank borrowings and the issuance of equity
securities. We continue to examine the following alternate sources of
long-term capital:
- traditional reserve-base borrowings or the issuance of
long-term debt;
- the sale of common stock, preferred stock or other equity
securities;
- the issuance of nonrecourse production-based financing or net
profits interests;
- sales of non-strategic properties;
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- sales of interests in prospects and technical information; and
- joint ventures.
Basin's ability to access additional capital will depend on a
number of factors, some of which are beyond our control. These include our
operational success, the status of the capital markets, and oil and gas
prices. We may be unable to execute our operating strategy if we cannot
obtain capital from these sources. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources."
EFFECTS OF LEVERAGE - OUR DEBT COULD REDUCE OUR FINANCIAL FLEXIBILITY AND
UNDER CERTAIN CIRCUMSTANCES COULD REQUIRE PRINCIPAL REDUCTIONS THAT WE ARE
UNABLE TO MAKE.
We have significant indebtedness. At year-end 1998, the amount of
our long-term debt was $80 million, and we had $30 million available to draw
down under our credit agreement with our banks. Our working capital deficit
was $13.2 million at year-end 1998, leaving a net total of $16.8 million of
unutilized credit capacity. Under our credit agreement, our borrowing base is
re-determined at least semi-annually by our banks, and it is possible that
any such review could result in a reduction of our borrowing base. This could
occur as a result of weak oil and gas prices or unsuccessful exploration or
development activities.
There are several effects of this leverage on Basin:
- it may impair our ability to obtain additional financing in the
future for working capital, capital expenditures, acquisitions or general
corporate purposes;
- a portion of our cash flow from operations must be dedicated to the
payment of interest on our existing indebtedness, which will reduce the
availability of our cash flow to fund working capital, capital expenditures and
other corporate needs;
- our credit agreement contains restrictive covenants that limit
our ability to engage in certain transactions;
- our borrowings under our bank credit facility are at floating
rates, which may make us vulnerable to increases in interest rates;
- our credit agreement requires us to make regular interest
payments, and at the end of the revolving period to make scheduled principal
payments. In addition, we must make principal payments if our outstanding
borrowings exceed our borrowing base, as it may periodically be re-determined
by the banks. If we default in such payments, which may be made in
installments over six months, our lenders would be entitled to accelerate the
payment of all amounts owed under our credit facility. We cannot assure you
that future borrowings or debt or equity financing will be available to pay
or refinance such required obligations. Our failure to remedy such a default
could result in a foreclosure by the banks of their mortgages on the
properties containing our proved reserves.
CEILING LIMITATION WRITE-DOWNS
We use the full cost method of accounting to report our operations
for oil and gas properties. Basin capitalizes the costs to acquire, explore
for and develop oil and gas properties. Under full cost accounting rules, the
net capitalized costs of oil and gas properties may not exceed a "ceiling
limit" which is based upon the present value of estimated future net cash
flows from proved reserves, using constant oil and gas prices and a 10%
discount factor, plus the lower of cost or fair market value of unproved
properties. If net capitalized costs of oil and gas properties exceed the
ceiling limit, we must charge the amount of the excess to earnings. This is
called a "ceiling limitation write-down." This charge does not impact cash
flow from operating activities, but it does reduce the book value of our
shareholders' equity. The risk that we will be required to write down the
carrying value of our oil and gas properties increases when oil and gas
prices are low. In addition, write-downs may occur if Basin has substantial
downward adjustments to its estimated proved reserves. We review the carrying
value of our properties quarterly, based on prices in effect as of the end of
each fiscal quarter (or the time of reporting results). We may not reverse
7
<PAGE>
any such write-downs even if prices increase in subsequent periods, but such
write-downs do result in reduced subsequent charges for depreciation,
depletion and amortization. Primarily because of weak oil and gas prices,
Basin recorded a ceiling limitation write-down for the fourth quarter of 1998
in the amount of $30.8 million ($38.5 million pre-tax). We cannot assure you
that we will not have another ceiling limitation write-down in a future
period if commodity prices continue to weaken.
MARKETING OF PRODUCTION; SEASONALITY
The marketability of Basin's production depends in substantial
part on the availability and capacity of gathering systems, pipelines, and
processing facilities owned and operated by third parties. Federal and state
regulation of production and transportation, general economic conditions, and
changes in supply and demand all could adversely affect Basin's ability to
market its production. Demand for natural gas is highly seasonal, with demand
generally higher in the colder winter months and in the hot summer months. As
a result, the price and marketability of our spot market natural gas may vary
significantly between seasonal periods. If market factors dramatically
changed, the financial impact on Basin could be substantial. The availability
of markets is beyond our control.
CONCENTRATION OF VALUE
At December 31, 1998, over 80% of our daily production was from 12
wells on nine platforms in the Gulf of Mexico. If mechanical problems,
storms, or other events curtailed a substantial portion of this production,
Basin's cash flow would be materially adversely affected. UNCERTAINTY OF
ESTIMATES OF OIL AND GAS RESERVES - RESERVE ESTIMATES ARE INHERENTLY
UNCERTAIN AND DEPEND ON MANY ASSUMPTIONS WHICH MAY TURN OUT TO BE UNTRUE.
This Form 10-K contains estimates of our proved oil and gas reserves
and the estimated future net revenues from such reserves. Basin's historical
proved reserve information incorporated by reference in this Form 10-K
represents only estimates based on reports prepared in part by independent
petroleum engineers and in part by internal Basin engineers. The process of
estimating oil and gas reserves is complex and inherently uncertain. It
requires various assumptions, including assumptions required by the SEC
relating to oil and gas prices, drilling and operating expenses, capital
expenditures, taxes and availability of funds. Production rates and timing of
development expenditures must be projected. Available geological,
geophysical, production and engineering data must be analyzed, and the
extent, quality and reliability of this data can vary. Oil and gas reserve
engineering is a subjective process of estimating accumulations of oil and
gas that cannot be measured in an exact manner, and estimates of other
engineers might differ materially from those shown. The accuracy of any
reserve estimate is a function of the quality and quantity of available data,
engineering and geological interpretation and judgment.
Actual future production, oil and gas prices, revenues, taxes,
development expenditures, operating expenses and quantities of recoverable
oil and gas reserves most likely will vary from those estimated. Any
significant variance could materially affect the estimated quantities and
present value of reserves set forth in this Form 10-K. In addition, we may
adjust estimates of proved reserves to reflect production history, results of
exploration and development, prevailing oil and gas prices and other factors,
many of which are beyond our control. Our reserves at December 31, 1998 were
lower than they would have been if oil and gas prices in effect at year-end
1997 were still in effect.
At December 31, 1998, approximately 31% of our estimated proved
reserves were undeveloped. Recovery of undeveloped reserves generally
requires significant capital expenditures and successful drilling operations.
The reserve data assumes that we will make these expenditures. Although we
have estimated our reserves and the costs associated with developing them in
accordance with industry standards, we cannot assure you that the estimated
costs are accurate, that development will occur as scheduled or that the
results will be as estimated.
You should not assume that the present value of future net
revenues referred to in this Form 10-k is the current market value of our
estimated oil and gas reserves. In accordance with SEC requirements, the
estimated discounted future net cash flows from proved reserves are generally
based on prices and costs as of the date of the estimate. Actual future
prices and costs may be materially higher or lower than the prices and costs
as of the date
8
<PAGE>
of the estimate. Recent significant declines in oil and gas prices have
reduced Basin's present value of future net revenues. See "Oil and Gas
Prices; Hedging." Any material changes in aggregate consumption by gas
purchasers or in governmental regulations or taxation could also affect
actual future net cash flows. The timing of development of oil and gas
properties will affect both the production and the timing of actual future
net cash flows from proved reserves and their present value. In addition, the
10% discount factor, which is required by the SEC to be used in calculating
discounted future net cash flows for reporting purposes, is not necessarily
an appropriate discount factor for estimating the value of oil and gas
reserves. The effective interest rate at various times and the risk
associated with Basin, the properties, or the oil and gas industry in general
will affect the reasonableness of the 10% discount factor.
FLUCTUATIONS IN QUARTERLY RESULTS - THESE FLUCTUATIONS CAN CAUSE SUDDEN
CHANGES IN THE MARKET PRICE OF OUR COMMON STOCK.
Basin's quarterly results of operations may fluctuate
significantly as a result of variations in oil and gas prices, production
performance and changes in estimated proved reserves. The market price of our
common stock can be expected to decline when our quarterly results decline or
when announcements of adverse events regarding the Company or the industry
are made.
OPERATING HAZARDS - THE OIL AND GAS BUSINESS INVOLVES MANY OPERATING RISKS
WHICH CAN CAUSE SUBSTANTIAL LOSSES. INSURANCE MAY NOT BE ADEQUATE TO PROTECT
AGAINST ALL THESE RISKS.
The oil and gas business involves a variety of operating risks.
These include the risk of fire, explosion, blow-out, uncontrollable flows of
oil, gas, or well fluids, natural disasters, pipe failure, casing collapse,
stuck tools, abnormally pressured formations and environmental hazards such
as oil spills, gas leaks, pipeline ruptures and discharges of toxic gases.
The occurrence of any of these events could result in substantial losses to
Basin. Losses can occur from injury or loss of life, severe damage to and
destruction of property, natural resources and equipment, pollution and other
environmental damage, clean-up responsibilities, regulatory investigation and
penalties and suspension of operations. These problems can affect wellbores,
platforms, gathering systems and processing facilities, and any significant
problems related to those facilities could adversely affect Basin's ability
to conduct its operations. Moreover, offshore operations are subject to a
variety of operating risks peculiar to the marine environment, such as
hurricanes or other adverse weather conditions. These conditions can cause
substantial damage to facilities and possibly interrupt production. In
addition, Basin may be liable for environmental damages caused by previous
owners of properties it purchases. As a result, Basin could incur substantial
liabilities to third parties or governmental entities. Payment of these
liabilities could reduce or eliminate the funds available for exploration,
development or acquisitions, or result in loss of Basin's properties.
In accordance with industry practice, Basin maintains insurance
against some, but not all, potential risks. Basin's coverages include, but
are not limited to, operator's extra expense, physical damage on certain
assets, comprehensive general liability, automobile, and workers compensation
insurance. We cannot assure you that our insurance will be adequate to cover
losses or liabilities. For example, insurance may not cover downhole
operating risks, such as the costs of retrieving stuck equipment. Also, we
cannot predict whether insurance will continue to be available at premium
levels that justify its purchase.
ENVIRONMENTAL REGULATION - OIL AND GAS OPERATIONS ARE SUBJECT TO EXTENSIVE
ENVIRONMENTAL REGULATION WHICH CAN INCREASE COSTS, CREATE MAJOR LIABILITIES,
OR PRECLUDE OPERATIONS.
Oil and gas operations are subject to extensive regulation under
federal, state and local environmental laws. Generally, regulation relates to
water and air pollution control and solid waste management, permitting, or
restrictions on operations in environmentally sensitive areas, such as
coastal zones, wetlands, and wildlife habitat. We have not performed
environmental assessments on all of our acquired properties. To date, our
expenditures for environmental control facilities and for remediation have
not been significant in relation to our results of operations. We believe,
however, that the trend toward stricter standards in environmental
legislation and regulation is likely to continue. Offshore operations are
subject to more extensive governmental regulation, including regulation that
may impose absolute liability for environmental damage and allow interruption
or termination of business activities by government
9
<PAGE>
authorities. The Oil Pollution Act of 1990 also requires proof of financial
responsibility to cover costs of potential oil spills; the amount of such
required coverage ranges from $35 million to $150 million based on federal
risk assessment. From time to time, legislation has been introduced in
Congress which would reclassify oil and gas production wastes as "hazardous
waste" under the Resource Conservation and Recovery Act. If such legislation
were to pass, it could have a significant adverse impact on our operating
costs. Initiatives regulating the disposal of exploration and production
waste are also pending or have been enacted in states in which Basin conducts
operations, and these initiatives could have a similar impact on Basin.
GOVERNMENTAL REGULATION - OIL AND GAS OPERATIONS ARE SUBJECT TO EXTENSIVE
GOVERNMENTAL REGULATION WHICH CAN AFFECT THE COST, MANNER, OR FEASIBILITY OF
DOING BUSINESS.
Development, production and sale of oil and gas are subject to
extensive federal, state and local governmental regulation. Areas covered
include operations permits, drilling, plugging and reclamation bonds,
operational practices and reporting, the spacing of wells, unitization and
pooling of properties, taxation and environmental protection. The Minerals
Management Service of the United States Department of the Interior has
proposed regulations for valuation of crude oil and natural gas produced from
federal leases, including offshore leases, that could require payment of
royalties on the basis of indices or benchmarks that may not reflect actual
prices Basin receives for its production. The Federal Energy Regulatory
Commission has promulgated major regulatory initiatives over the past several
years which have had a significant impact on natural gas pricing and natural
gas pipeline operations, services and rates. Those changes have significantly
altered the marketing of natural gas. Although the purpose of these changes
is generally to enhance competition in natural gas marketing, the effect of
these changes on our ability to market our gas at reasonable prices is
uncertain. Regulatory agencies in the past have imposed price controls and
limitations on production by restricting the rate of flow of oil and gas
wells below actual production capacity in order to conserve supplies of oil
and gas. Under the Outer Continental Shelf Lands Act, the Minerals Management
Service regulates development and production of oil and gas in federal waters
in the Gulf of Mexico. The Minerals Management Service may suspend or
terminate operations for violation of its rules. Any such suspension or
termination could materially and adversely affect Basin's financial condition
and operations. There are many legislative proposals pending in Congress and
in the legislatures of various states that, if enacted, might significantly
affect the oil and gas industry. Basin is not able to predict what will be
enacted and thus what effect, if any, such proposals would have on Basin.
COMPETITION - WE ARE SMALLER AND LESS EXPERIENCED THAN MOST OF OUR
COMPETITORS IN THE GULF OF MEXICO.
Competition in the oil and gas industry is intense, particularly
in the Gulf of Mexico. We compete with major and independent oil and gas
companies for property acquisitions and for the equipment and labor required
to operate and develop such properties. Most of Basin's competitors have
financial and other resources substantially greater than ours. We commenced
operations in the Gulf of Mexico area during 1996, where we had not
previously been active. Competition from major and large independent oil and
gas companies is significantly greater in this area than in the Rocky
Mountain region, where Basin had conducted all of its previous operations.
PRINCIPAL STOCKHOLDER - HE IS IN A POSITION TO AFFECT CORPORATE TRANSACTIONS
AND OTHER MATTERS.
Basin's principal stockholder, Michael S. Smith, together with
members of his immediate family and trustees for their benefit, beneficially
own approximately 18% of Basin's outstanding shares. As a result, Mr. Smith
is in a position to substantially influence the outcome of stockholder votes
on the election of directors and other matters. In addition, if Mr. Smith
were to sell a significant number of his shares, the prevailing market price
of Basin's Common Stock could be adversely affected.
10
<PAGE>
DEPENDENCE ON KEY PERSONNEL
Basin depends to a large extent on the services of its founder and
CEO, Michael Smith, and certain other senior management personnel in Denver
and Houston. The loss of the services of Mr. Smith or other key personnel
could have a potential adverse effect on Basin's operations.
YEAR 2000 READINESS DISCLOSURE AND STATEMENT - BASIN OR ITS BUSINESS
PARTNERS MAY NOT BE YEAR 2000 COMPLIANT, WHICH COULD RESULT IN DISRUPTION OF
OUR OPERATIONS.
Basin expects to have completed its assessment, identification,
remediation and testing of the Year 2000 readiness of its critical
Information Technology ("IT") systems and its non-IT systems containing
embedded microprocessors before January 1, 2000, and to have received
satisfactory assurances by that date from its business partners that they
will be Year 2000 compliant insofar as their goods or services are material
to Basin's business. However, there is no assurance that Basin's Year 2000
readiness project will succeed in accurately and completely identifying all
potential problems or all potentially affected systems or in remedying all
problems in its systems. There is no assurance that Basin's business partners
will likewise succeed in their respective efforts to remedy their Year 2000
problems or that this will be apparent in time for Basin to formulate a
contingency plan.
Between now and 2000 there will be increased competition for
people with technical and managerial skills necessary to deal with the Year
2000 problem, and Basin or its business partners could face shortages of
skilled personnel or other resources, such as particular microprocessors or
components containing Year 2000-ready microprocessors. These shortages might
delay or otherwise impair Basin's ability to assure that its critical systems
or its partners systems are Year 2000 compliant.
It is particularly difficult to find and remediate all embedded
microprocessors in non-IT systems. Some of the embedded microprocessors that
fail to operate or that produce anomalous results may create system
disruptions or failures. Some of these disruptions or failures may spread
from the systems in which they are located to other systems causing adverse
effects upon Basin's ability to maintain production operations, conduct new
drilling operations, execute financial transactions, manage its reporting or
fulfill its legal obligations. The embedded microprocessor problem is widely
recognized as one of the more difficult aspects of the Year 2000 problems
across industries and throughout the world. The possible adverse impact of
the embedded microprocessor problem is not, and will not be, unique to Basin.
If there are Year 2000-related failures in critical systems of
Basin or its business partners that create substantial disruptions to Basin's
business, the adverse impact on Basin could be material. Additionally, Year
2000 costs are difficult to estimate accurately because of unanticipated
vendor delays, technical difficulties, the impact of tests of third-party
systems, and similar events. Moreover, despite Basin's belief that its costs
in becoming Year 2000 compliant will not be material, its cost assessments do
not take into account the costs, if any, that might be incurred as a result
of Year 2000-related failures that occur despite its compliance efforts.
ANTI-TAKEOVER PROVISIONS - THESE PROVISIONS COULD DETER CHANGE OF CONTROL
TRANSACTIONS.
Basin's Restated Certificate of Incorporation and Bylaws and the
provisions of the Delaware General Corporation Law make it more difficult to
change control of Basin and replace incumbent management. Basin adopted a
Stockholders' Rights Plan in 1996. Under this Plan, holders of Basin's Common
Stock received rights exercisable if a person or group of affiliated persons
acquires 15% of Basin's outstanding Common Stock or commences a tender or
exchange offer which would result in ownership of 15% or more of Basin's
outstanding Common Stock. In addition, Basin has entered into agreements with
certain of its executive officers which would require additional payments by
Basin if such officers' employment were terminated, or the terms of such
employment were materially altered, upon a change of control.
11
<PAGE>
ITEM 2. PROPERTIES.
Prior to 1996, the Company's oil and gas properties were all
located in the Rocky Mountain region, primarily in the D-J Basin, Powder
River Basin, and Green River Basin. During 1996, the Company sold its D-J
Basin assets and initiated operations in the Gulf of Mexico. As of December
31, 1998, the Company's estimated proved reserves totaled approximately 8.7
million barrels of oil and 127.5 Bcf of natural gas, or 179.5 Bcfe. The
estimated pre-tax present value of future net revenues from these proved
reserves, using December 31, 1998 product prices held constant and a discount
rate of 10%, totaled approximately $164.5 million. Gulf of Mexico properties
accounted for 75% of the Company's proved reserve quantities at December 31,
1998, and 92% of the related pre-tax present value of future net revenues
estimated as of that date. Weighted average price used for purposes of
estimating the Company's proved reserves at December 31, 1998 were $10.31 per
barrel of oil and $1.99 per Mcf of natural gas.
In addition to its proved properties as of December 31, 1998, the
Company owned mineral rights under 255,141 gross undeveloped acres, or
180,816 net undeveloped acres, of which more than half is located in the Gulf
of Mexico. The Company had also licensed 3-D seismic data covering
approximately 600 lease blocks, and 2-D data covering approximately 375,000
miles, in the Gulf of Mexico. The Company's undeveloped acreage in the Gulf
of Mexico at the end of 1998 contained over 40 exploratory prospects
identified by the Company's geoscientists, based upon their interpretations
of 3-D seismic and other data.
The Company's Gulf of Mexico proved reserves as of December 31,
1998 were distributed among 18 fields. Production had been established from
14 of these fields at that date, and the other four fields were under
development for first production. The Company's working interests in the 18
fields ranged from approximately 8% to 100%, with an average of 54%. Basin
operates 11 of the 18 fields. These 11 properties account for approximately
two-thirds of the Company's total proved reserves in the Gulf of Mexico. Six
of the properties account for approximately 51% of the Company's proved
reserve quantities and 67% of its related pre-tax present value of future net
revenues from Gulf of Mexico assets as of December 31, 1998. These properties
include Eugene Island Block 65, High Island Block A-568, West Cameron Block
45, West Cameron Block 56, West Delta Block 61 and West Delta Blocks 121/122.
As is generally the case for Gulf of Mexico properties, the Company's
properties in this area are generally expected to exhibit a high initial
production rate followed by a steep decline in production after a relatively
short period.
Most of the Company's proved reserves value related to onshore
assets as of December 31, 1998 was concentrated in six fields in the Powder
River and Green River Basins. This value was broadly distributed among
approximately 200 producing wells, as well as a considerable number of
undeveloped locations. Most of the Company's producing wells in the Rocky
Mountain area have been on-line for several years and their respective
production declines are relatively moderate and well-established.
Additional information related to the Company's properties is set
forth below in the balance of this section.
OIL AND GAS RESERVES
Basin engaged Ryder Scott Company Petroleum Engineers, independent
petroleum engineers, to prepare estimates of proved reserves, projected
future production, and related future net revenues for certain of the
Company's properties as of December 31, 1998, and to audit Basin's estimates
of such data for the Company's remaining properties as of that date. The
estimates prepared by Ryder Scott Company Petroleum Engineers covered
properties that accounted for 53% of the Company's proved reserve quantities
in the Gulf of Mexico as of December 31, 1998, and audits conducted by Ryder
Scott Company covered the other properties. Estimates prepared by Ryder Scott
Company or the Company's engineers were based upon a review of production
histories and other geologic, economic, ownership, volumetric and engineering
data. In determining the estimates of the reserve quantities that are
economically recoverable, oil and gas prices and estimated development and
production costs as of December 31, 1998 were utilized.
The following table sets forth estimates as of December 31, 1998
derived from Basin's reserve reports. The present values (discounted at 10
percent) of estimated future net revenues before income taxes shown in the
table are not intended to represent the current market value of the estimated
oil and gas reserves owned by Basin. For further information concerning the
present value of future net revenue from these proved reserves, see Unaudited
Supplemental Oil and Gas Reserve Information in the Consolidated Financial
Statements.
12
<PAGE>
<TABLE>
<CAPTION>
PROVED RESERVES
--------------------------------------
DEVELOPED UNDEVELOPED TOTAL
<S> <C> <C> <C>
Oil (MBbls)................................................. 3,352 5,315 8,667
Gas (MMcf) ................................................. 103,271 24,231 127,502
Total (MMcfe) .............................................. 123,383 56,121 179,504
Future Net Revenue Before Income Taxes
(in thousands) ........................................... $ 170,691 $ 45,413 $ 216,104
Present Value of Future Net Revenue Before Income Taxes
(in thousands)............................................ $ 137,775 $ 26,710 $ 164,485
</TABLE>
The following table sets forth estimates of Basin's total proved
reserves at December 31, 1998 by geographic area of operations:
<TABLE>
<CAPTION>
PROVED RESERVES
------------------------------
OIL GAS TOTAL
(MBBLS) (MMCF) (MMCFE)
<S> <C> <C> <C>
Gulf of Mexico 4,281 109,626 135,312
Onshore 4,386 17,876 44,192
----- ------- -------
Total 8,667 127,502 179,504
----- ------- -------
----- ------- -------
</TABLE>
There are numerous uncertainties inherent in estimating quantities
of proved reserves and in projecting future rates of production and timing of
development expenditures, including many factors beyond the control of the
producer. The reserve data set forth herein represent only estimates. Reserve
engineering is a subjective process of estimating underground accumulations
of oil and gas that cannot be measured in an exact 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 and the existence of
development plans. In addition, results of drilling, testing and production
subsequent to the date of an estimate may justify revision of such estimates.
Accordingly, reserve estimates are often different from the quantities of oil
and gas that are ultimately recovered. Further, the estimated future net
revenues from proved reserves and the present value thereof are based upon
certain assumptions, including geologic success, prices, future production
levels and cost, that may not prove correct over time. Predictions about
prices and future production levels are subject to great uncertainty, and the
meaningfulness of such estimates is highly dependent upon the accuracy of the
assumptions upon which they are based. Oil and gas prices have fluctuated
widely in recent years. There is no assurance that prices will not be
materially higher or lower than the prices utilized in estimating Basin's
reserves.
The weighted average sales prices utilized for purposes of
estimating Basin's proved reserves and future net revenues therefrom as of
December 31, 1998 were $10.31 per Bbl for oil and $1.99 per Mcf for gas.
These prices are below the average prices prevailing during most of 1998,
when the Company realized average oil and gas prices of $11.80 per Bbl and
$2.07 per Mcf, respectively, before hedging effects.
As an operator of domestic oil and gas properties, the Company has
filed Department of Energy Form EIA-23, "Annual Survey of Oil and Gas
Reserves," as required by Public Law 93-275. There are differences between
the reserves as reported on Form EIA-23 and as reported herein. The
differences are attributable to the fact that Form EIA-23 requires that an
operator report on the total reserves attributable to wells that are operated
by it, without regard to ownership (I.E., reserves are reported on a gross
operated basis, rather than on a net interest basis).
13
<PAGE>
ACREAGE
The following table sets forth the gross and net acres of
developed and undeveloped oil and gas leases held by the Company as of
December 31, 1998. Undeveloped acreage includes leasehold interests which may
already have been classified as containing proved undeveloped reserves.
<TABLE>
<CAPTION>
DEVELOPED ACREAGE(1) UNDEVELOPED ACREAGE
-------------------- -------------------
GROSS NET GROSS NET
<S> <C> <C> <C> <C>
Louisiana Offshore..................... 71,428 40,624 125,333 97,131
Texas Offshore......................... 10,440 3,324 11,517 8,351
------- ------ ------- -------
Total Offshore...................... 81,868 43,948 136,850 105,482
------- ------ ------- -------
Montana ........................... - - 9,335 7,074
Utah ........................... 1,810 932 14,979 9,639
Wyoming ........................... 45,048 25,500 87,489 55,662
Other Onshore.......................... 1,910 883 6,488 2,959
------- ------ ------- -------
Total Onshore....................... 48,768 27,315 118,291 75,334
------- ------ ------- -------
Total...................... 130,636 71,263 255,141 180,816
------- ------ ------- -------
------- ------ ------- -------
</TABLE>
(1) Developed acreage is acreage assigned to producing wells for the
spacing unit of the producing formation. Developed acreage in certain
of Basin's properties that include multiple formations with different
well spacing requirements may be considered undeveloped for certain
formations, but have only been included as developed acreage in the
presentation above.
PRODUCTION
The following table sets forth Basin's net oil and gas production,
average sales prices, and costs and expenses associated with such production
during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1997 1998
<S> <C> <C> <C>
Production:
Oil (MBbls).................... 564 524 725
Gas (MMcf)..................... 4,776 5,509 17,616
Total (MMcfe).................. 8,160 8,653 21,966
Average Daily
Production:
Oil (Bbls)..................... 1,540 1,435 1,988
Gas (Mcf)...................... 13,050 15,094 48,262
Total (Mcfe)................... 22,290 23,704 60,190
Average Sales Price
Per Unit(1):
Oil (Bbl)..................... $ 20.88 $ 19.07 $ 11.80
Gas (Mcf)...................... $ 1.44 $ 2.71 $ 2.07
Total (Mcfe)................... $ 2.29 $ 2.88 $ 2.05
Production Costs Per Mcfe........... $ 0.81 $ 0.68 $ 0.41
</TABLE>
- -------------------
(1) excluding hedging effects
14
<PAGE>
Basin owned 306 gross (202 net) producing oil wells and 77 gross
(49 net) producing gas wells as of December 31, 1998. A well is categorized
under state reporting regulations as an oil well or a gas well based upon the
ratio of gas to oil produced when it first commenced production, and such
designation may not be indicative of current production.
DEVELOPMENT, EXPLORATION AND ACQUISITION EXPENDITURES
The following table sets forth certain information regarding the
costs incurred by Basin in its development, exploration and acquisition
activities during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1997 1998
(IN THOUSANDS)
<S> <C> <C> <C>
Development Costs ............................ $ 4,472 $ 17,901 $ 22,671
Exploration Costs............................. 10,250 27,995 58,063
Property Acquisition Costs:
Unproved(1) .............................. 5,056 11,057 22,920
Proved ................................... 3,067 48,680 3,018
-------- -------- --------
Total Costs Incurred.......................... $ 22,845 $105,633 $106,672
-------- -------- --------
-------- -------- --------
</TABLE>
(1) Excludes $4,914,000, $1,113,000 and $150,000 of costs recouped through
the resale of partial interests in prospects to industry partners in 1996,
1997 and 1998, respectively.
DRILLING ACTIVITY
The following table sets forth the wells drilled and completed by Basin
during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998
---- ---- ----
GROSS NET GROSS NET GROSS NET
<S> <C> <C> <C> <C> <C> <C>
Development:
Oil............................... 3 2.8 5 5.0 1 1.0
Gas............................... - - 1 0.6 - -
Non-productive.................... 1 .9 - - - -
--- --- --- --- --- ---
Total.......................... 4 3.7 6 5.6 1 1.0
--- --- --- --- --- ---
--- --- --- --- --- ---
Exploratory:
Oil............................... - - - - - -
Gas............................... - - 5 3.2 8 4.8
Non-productive.................... 3 1.4 3 1.5 5 2.2
--- --- --- --- --- ---
Total.......................... 3 1.4 8 4.7 13 7.0
--- --- --- --- --- ---
--- --- --- --- --- ---
</TABLE>
PRESENT ACTIVITIES
On March 17, 1999, the Company submitted apparent winning bids for
five tracts at the Central Gulf of Mexico lease sale held by the MMS. Such
tracts comprised 24,023 gross and net undeveloped acres offshore Louisiana.
If all five tracts are awarded by the MMS, which can choose to reject all
bids for a given lease, the Company's aggregate cost for the related
leasehold bonuses will total approximately $3.0 million.
During 1999, through March 17, the Company's Gulf of Mexico
activities have included completion of three (1.95 net) exploratory wells
that were successfully drilled in 1998, drilling of two (0.80 net)
exploratory wells, of which one (0.15 net) well was an apparent discovery,
and the drilling of one successful development (0.65 net) well. The
15
<PAGE>
Company also participated in one (0.60 net) exploratory well in Wyoming,
which was abandoned in February 1999 due to an apparent underground blowout,
but which is currently being re-drilled.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not currently involved in any material legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted for a vote of security holders during
the fourth quarter of 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS.
Basin's common stock began trading on the NASDAQ National Market
System on May 13, 1992 under the symbol "BSNX". As of December 31, 1998 there
were approximately 2,000 beneficial owners of the Company's common stock. The
following table sets forth, for the periods indicated, the range of high and
low sales prices, and the closing price at the end of the period, for the
Company's common stock as reported by the Nasdaq National Market for the last
two calendar years.
<TABLE>
<CAPTION>
HIGH LOW CLOSE
<S> <C> <C> <C>
1997
First Quarter $ 7.75 $ 5.88 $ 6.88
Second Quarter $ 8.75 $ 6.38 $ 7.75
Third Quarter $17.88 $ 7.63 $16.75
Fourth Quarter $23.25 $16.38 $17.75
1998
First Quarter $21.06 $13.88 $20.63
Second Quarter $23.25 $14.13 $17.63
Third Quarter $18.50 $ 9.00 $16.56
Fourth Quarter $18.25 $10.25 $12.56
</TABLE>
The Company's policy is to retain earnings to support the growth
of the Company's business. Accordingly, the Board of Directors of the Company
has never declared a cash dividend on its Common Stock and has no present
plan to do so. A credit agreement with the Company's bank group limits the
Company's ability to pay dividends, re-acquire shares of its common stock or
make certain other distributions.
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected consolidated financial
data for Basin as of the dates and for the periods indicated. The data set
forth in this table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and the related notes thereto that
follow.
<TABLE>
<CAPTION>
(In thousands, except per share data)
1994 1995 1996 1997 1998
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue:
Oil Sales $ 19,971 $ 19,632 $ 11,292 $ 9,844 $ 9,735
Gas Sales 24,255 20,013 6,890 14,557 38,885
Gain on Sale of Assets -- -- 22,472 -- -
Interest and Other 161 831 1,009 319 79
-------- -------- -------- -------- -------
44,387 40,476 41,663 24,720 48,699
-------- -------- -------- -------- -------
Costs and expenses:
Lease Operating Expenses 8,642 8,196 4,776 4,600 8,276
Production Taxes 3,432 3,478 1,829 1,260 770
Depreciation, Depletion and Amortization 18,163 17,202 7,606 10,622 29,775
General and Administrative, Net 4,641 5,498 3,850 3,694 4,380
Interest and Other 3,618 6,929 2,272 764 2,030
Property Impairment -- 26,500 -- -- 38,500
-------- -------- -------- -------- -------
38,496 67,803 20,333 20,940 83,731
-------- -------- -------- -------- -------
Income (Loss) Before Income Taxes 5,891 (27,327) 21,330 3,780 (35,032)
Income Tax (Provision) Benefit (2,236) 7,784 (5,760) (1,324) 6,532
-------- -------- -------- -------- -------
Net Income (Loss) $ 3,655 $(19,543) $ 15,570 $ 2,456 $(28,500)
-------- -------- -------- -------- -------
-------- -------- -------- -------- -------
Basic:
Earnings (Loss) Per Share $ .34 $ (1.82) $ 1.45 $ .22 $ (2.06)
Weighted Average Shares Outstanding 10,813 10,710 10,700 11,228 13,859
Diluted:
Earnings (Loss) Per Share $ .34 $ (1.82) $ 1.45 $ .22 $ (2.06)
Weighted Average Shares Outstanding 10,879 10,710 10,730 11,345 13,859
BALANCE SHEET DATA (AT END OF PERIOD):
Working Capital (Deficit) $ (5,646) $ (2,211) $ 19,178 $(10,036) $(13,224)
Net Property and Equipment 165,807 134,598 54,800 149,175 187,811
Total Assets 184,855 146,651 84,957 161,959 201,163
Long-term Debt 77,199 77,172 218 11,053 80,000
Total Stockholders' Equity 72,575 53,287 68,751 121,365 94,219
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion is intended to assist in an understanding
of the Company's results of operations for the three-year period ended
December 31, 1998 and its present financial condition. The Company's
consolidated financial statements and notes thereto, which are presented
elsewhere herewith, contain additional detailed information that should be
referred to in conjunction with a review of this material.
HISTORY AND OVERVIEW
Basin is a domestic independent oil and gas company that conducts
exploration, acquisition, exploitation and production activities in the
shallow waters of the Gulf of Mexico and selected areas onshore.
17
<PAGE>
The Company commenced operations in 1981 and completed an initial
public offering of its common stock in 1992. From its inception through 1991,
Basin primarily acquired, developed and exploited properties in the
Denver-Julesburg ("D-J") Basin in eastern Colorado. The Company subsequently
expanded into other areas within the Rocky Mountain region and initiated
exploration activities.
During 1995, the Company's capital expenditures on oil and gas
properties declined to $16 million, from $67 million the year before, due
primarily to fewer quality investment opportunities identified in the
Company's core operating areas and limited unutilized borrowing capacity
under the Company's revolving line of credit with its bank group (the "Credit
Facility"). Each of these factors was exacerbated by depressed regional gas
prices.
In response to these developments and management's assessment of
alternative investment opportunities, the Company implemented a significant
redirection of its business strategy and operations between late-1995 and
mid-1996, which included: (i) the addition of new financial, technical and
business development members to its senior management; (ii) the sale of its
D-J Basin properties for $123.5 million (the "D-J Sales"); (iii)
establishment of a Houston-based Gulf of Mexico exploration team through
hiring geoscientists and petroleum engineers with substantial experience
operating in the shallow waters of the Gulf of Mexico; and (iv) a substantial
reduction in corporate general and administrative overhead.
The D-J Sales, which occurred in two transactions closed in March
and June 1996, enabled the Company to eliminate its long-term debt and
establish cash reserves, thus providing considerable liquidity for
investments in new capital projects. However, the divestitures reduced the
Company's estimated proved oil and gas reserves and production rates at the
time by approximately 70%, resulting in a significant initial decline in
revenue and cash flow.
The Company began Gulf of Mexico activities in 1996 with no
initial property base in the region and early investments related primarily
to acquisitions of three-dimensional seismic data and exploratory leasehold
interests and overhead. The Company's first significant discovery in the Gulf
of Mexico was the Eugene Island Block 65 #1 well, which was drilling at the
end of 1996 and completed in 1997. The Company realized first production from
Gulf of Mexico assets in August 1997 when it brought two wells drilled on
Eugene Island Block 65 on-line, providing the first significant addition to
the Company's producing property base following the D-J Sales. The Company
added other proved properties in the Gulf of Mexico in 1997 and 1998 through
both exploratory drilling and acquisitions and as of December 31, 1998 owned
interests in 18 proved properties in the area, of which 14 were producing and
four were under development for first production. Several of the properties
producing at that date also had proved nonproducing reserves under
development. Through December 31, 1998, the Company had drilled a total of 31
wells in the Gulf of Mexico, of which 20, or 65%, had been successful. The
Company's estimated proved oil and gas reserves increased from 62.6 Bcfe as
of December 31, 1995, pro forma the D-J Sales, to 179.5 Bcfe at the end of
1998. As described below, Basin's net production has increased significantly
since mid-1997, as Gulf of Mexico properties have been brought on-line, and
the Company expects further increases in 1999.
During 1998, the Company's capital expenditures totaled
approximately $107 million. Approximately 96% of these investments related to
operations in the Gulf of Mexico, including costs incurred for exploratory
leaseholds, geological and geophysical data, exploratory drilling, and
completion and development activities. Capital expenditures in 1998 were
funded with a combination of cash flow, working capital, and borrowings under
the Credit Facility.
The Company closed 1998 with a working capital deficit of
approximately $13 million, long-term debt of $80 million, and stockholders'
equity of $94 million. Stockholders' equity at the end of the period
reflected the impact of a $38.5 million pre-tax non-cash impairment charge in
the fourth quarter of 1998 to reduce the carrying value of the Company's oil
and gas properties. This charge, which had no impact on the Company's cash
flow or its borrowing capacity under the Credit Facility, was precipitated by
low oil and gas prices in effect at year-end.
The Company's preliminary budget for 1999 provides for capital
investments of approximately $65 million, subject to potential increase
should proceeds be realized from asset sales. This budget provides for
exploratory drilling activities comparable to the level of such activities in
1998, and for continued expeditious development of drilling successes. The
1999 budget provides for a smaller current year investment in prospect
leaseholds than in 1998, and anticipates cost savings realizable from lower
rates for drilling rigs and other oilfield goods and services than were
18
<PAGE>
applicable during much of 1998. This budget may be revised up or down due to
a number of factors, including future developments that impact availability
of capital.
OPERATING ENVIRONMENT
Basin's results of operations are significantly impacted by oil
and gas price levels, which are volatile and largely beyond the Company's
control. Changes in oil and gas prices can also impact the amount and terms
of external capital resources available to the Company.
Gas prices generally respond to North American supply and demand
conditions, including the effects of weather, whereas oil prices reflect
global supply and demand conditions to a greater degree, including the impact
on supply of decisions by petroleum exporting countries. Despite temporary
periods of interrupted growth, oil and gas demand has generally increased
over time. Short-term fluctuations in demand can significantly impact prices,
however. During the past several months, the markets for both oil and gas
have generally reflected ample supply and price weakness due to a number of
factors, including a second consecutive unusually warm winter in North
America. There are well-developed futures markets for oil and gas that
provide indications of expected future prices for each product. These prices
are frequently substantially different than current prices reflected on the
spot market. Presently, these markets reflect expectations of a future
recovery of oil and gas prices, particularly for gas, which accounted for 80%
of the Company's total production in 1998. Expectations will change in
response to future developments and higher future prices may not actually
materialize.
Hedging transactions can be entered into based on prices reflected
in commodity futures markets. The Company periodically enters into fixed
price sales agreements or other hedging transactions to take advantage of
prices that it believes to be attractive and to reduce volatility of net
price realizations. The Company has executed various hedging transactions to
mitigate its exposure to further commodity price weakness, as described
herein under Liquidity and Capital Resources and in the Notes to Consolidated
Financial Statements. However, since its hedges cover only a portion of its
anticipated future production, the Company remains vulnerable to the
potential effects of low prices.
The decline in oil and gas prices during the past year has
negatively impacted access to capital resources for most energy companies,
including Basin. Besides unfavorably affecting cash flow, this weakness in
oil and gas prices has increased the cost of issuing long-term debt or equity
securities and made the ability to issue such securities, at any price, less
certain.
For oil and gas producers, these effects have been partially
mitigated by improvements in the environment for acquisition of proved and
unproved oil and gas properties, and costs of conducting exploration and
development activities. In the opinion of management, diminished capital
resources for energy companies, in the aggregate, has resulted in significant
overall improvement of the quality and terms of investment opportunities that
are currently available, compared to the period preceding the decline in oil
and gas prices that occurred during the past year. In addition to an enhanced
market for acquirors of exploratory prospects or producing properties, there
have been substantial reductions in the costs of oilfield goods and services.
At various times in the recent past, demand for oil and gas drilling rigs and
other oilfield products and services has strained available capacity, leading
to high cost levels, delays in obtaining materials and services, and
instances of decreased quality of goods and services. Such conditions do not
presently apply, and availability of and costs for such goods and services
have improved markedly since mid-1998. As an example, the day rate for a
typical shallow-water jack-up drilling rig used by the Company in the Gulf of
Mexico has declined from approximately $40,000 to $15,000. Other costs have
declined by smaller amounts, but still significantly. As noted, these
conditions reflect reduced demand for such goods and services in an
environment of relatively low oil and gas prices and, as such, some reversal
would be expected if oil and gas prices strengthen.
The Company's Gulf of Mexico exploration activities are dependent
on the Company's ability to continue to identify prospects and obtain
interests in prospect leaseholds. The Company generally utilizes speculative
three-dimensional seismic data as a tool in its prospect generation. This
data is not proprietary and is available to competitors, which tends to
increase the number of potential competitors for, and cost of, available
prospects. During 1998, the Company was successful in expanding its inventory
of potential exploratory drilling locations from approximately 30 to 40,
while drilling 16 test wells. The Company also participated in submitting
high bids for five leases with identified exploratory prospects at a Central
Gulf of Mexico lease sale held in March 1999. This inventory of prospects,
the majority of which are 100%-owned by the Company, represents more than a
two-year set of drilling opportunities for Basin, based on both historical
and anticipated drilling activity levels. However, the Company faces
19
<PAGE>
competition for prospects from many better-capitalized oil and gas companies
and there is no assurance that over the longer term, the Company will be able
to continue to acquire interests in prospects at acceptable costs to
replenish its inventory of prospects as these are drilled. The Company seeks
to mitigate this risk by pursuing prospect ownership through a number of
avenues, including lease sales, farm-ins, exchanges, and acquisitions. The
Company also plans to selectively evaluate and pursue other investment
opportunities, including onshore exploration and acquisitions of properties
with proved oil and gas reserves, to complement its core exploration
activities in the Gulf of Mexico.
RESULTS OF OPERATIONS
The following table sets forth certain operating information for
the three years ended December 31, 1998. Because a substantial portion of the
Company's operations was conducted in the D-J Basin through mid-1996 when the
D-J Sales were consummated, and because the Company initiated Gulf of Mexico
operations in 1996 and realized its first production from Gulf of Mexico
properties in August 1997, period-to-period comparisons of results of
operations may not be meaningful or indicative of future results.
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Production:
Oil (MBbl) 564 524 725
Gas (MMcf) 4,776 5,509 17,616
Total Gas Equivalents (MMcfe) 8,160 8,653 21,966
Average Sales Price:
Oil (per Bbl) $ 20.03 $ 18.80 $ 13.42
Gas (per Mcf) $ 1.44 $ 2.64 $ 2.21
Total Gas Equivalents (per Mcfe) $ 2.23 $ 2.82 $ 2.21
Revenue (in thousands):
Oil Sales $11,292 $ 9,844 $ 9,735
Gas Sales $ 6,890 $14,557 $38,885
Total Oil and Gas Sales $18,182 $24,401 $48,620
Expenses (per Mcfe):
Lease Operating Expenses $ 0.59 $ 0.53 $ 0.38
Production Taxes $ 0.22 $ 0.14 $ 0.03
Depreciation, Depletion, and Amortization $ 0.93 $ 1.23 $ 1.36
General and Administrative, Net $ 0.47 $ 0.43 $ 0.20
</TABLE>
20
<PAGE>
1998 COMPARED TO 1997
As noted, the Company established its first production from Gulf
of Mexico assets in the second half of 1997. This development, and production
subsequently added from other Gulf of Mexico properties, significantly
impacted the Company's results of operations. To assist in interpreting
year-to-year comparisons, the following quarterly data is provided for the
two-year period ended December 31, 1998.
<TABLE>
<CAPTION>
Quarter Ended March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
1997 1997 1997 1997 1998 1998 1998 1998
- ------------- -------- ------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Production:
Oil (MBbl) 106 103 147 168 183 189 173 180
Gas (MMcf) 403 399 1,688 3,019 3,400 3,936 5,296 4,984
Total Gas Equivalents (MMcfe) 1,039 1,017 2,570 4,027 4,498 5,070 6,334 6,064
Average Sales Price:
Oil (per Bbl) $ 20.41 $ 17.73 $ 18.59 $ 18.62 $ 14.69 $ 14.26 $ 14.74 $ 9.99
Gas (per Mcf) $ 2.69 $ 1.73 $ 2.45 $ 2.86 $ 2.22 $ 2.34 $ 2.18 $ 2.12
Total Gas Equivalents (per Mcfe) $ 3.12 $ 2.47 $ 2.67 $ 2.92 $ 2.27 $ 2.35 $ 2.23 $ 2.04
Sales Revenue (in thousands):
Oil $ 2,155 $ 1,828 $ 2,737 $ 3,124 $ 2,690 $ 2,697 $ 2,545 $ 1,803
Gas $ 1,082 $ 689 $ 4,139 $ 8,647 $ 7,545 $ 9,219 $11,553 $10,568
Oil and Gas $ 3,237 $ 2,517 $ 6,876 $11,771 $10,235 $11,916 $14,098 $12,371
Expenses (per Mcfe):
Lease Operating Expenses $ 1.02 $ 0.96 $ 0.40 $ 0.38 $ 0.48 $ 0.48 $ 0.31 $ 0.28
Production Taxes $ 0.35 $ 0.27 $ 0.10 $ 0.09 $ 0.05 $ 0.04 $ 0.03 $ 0.02
Depreciation, Depletion
and Amortization $ 1.12 $ 1.21 $ 1.16 $ 1.30 $ 1.33 $ 1.33 $ 1.33 $ 1.42
General and Administrative, Net $ 0.76 $ 0.80 $ 0.33 $ 0.31 $ 0.25 $ 0.20 $ 0.18 $ 0.19
</TABLE>
REVENUE. Oil and gas sales for 1998 increased by $24.2 million, or
99%, to $48.6 million. This increase resulted from a 154% increase in
combined oil and gas production volumes, partially offset by a 22% decrease
in revenue per net equivalent unit produced, from $2.82 per Mcfe in 1997 to
$2.21 per Mcfe in 1998. Hedging transactions had the effect of reducing oil
and gas sales by $0.5 million, or $0.06 per Mcfe, in 1997 and increasing
sales by $3.5 million, or $0.16 per Mcfe, in 1998.
The increase in production volumes from 8,653 MMcfe in 1997 to
21,966 MMcfe in 1998 was attributable to commencement of production at nine
offshore properties at various times during 1998, and greater contributions
from offshore properties acquired or brought on-line during the second half
of 1997, partially offset by natural depletion. The decline in production
between the third and fourth quarters of 1998 was largely due to the
temporary loss of production from a major well, which was placed back on-line
in the first quarter of 1999, after a re-completion operation.
LEASE OPERATING EXPENSES. Lease operating expenses ("LOE")
increased in 1998 from the prior year by $3.7 million, or 80%, but LOE per
Mcfe produced declined by 28% to $0.38, compared to $0.53 in 1997. As shown
in the above table of quarterly data, the Company's LOE per Mcfe has
generally improved as Gulf of Mexico production has increased, beginning with
the third quarter of 1997. An offset to this pattern in the first half of
1998 primarily reflects costs related to the absorption of properties
acquired in late-1997 from bankrupt Midcon Offshore, Inc. Typically, the
Company's Gulf of Mexico properties have significantly lower unit operating
costs than its Rocky Mountain assets. The relatively low per-unit operating
cost of the Company's Gulf of Mexico properties is attributable to higher
average production rates per well and a higher proportion of gas production,
which is generally less costly to produce than oil.
PRODUCTION TAXES. Production taxes for 1998 decreased by $0.5
million, or 39%, as the result of reduced sales revenue from onshore
properties. This reduction reflects both lower production from onshore assets
and lower price realizations on such production. Production from properties
in federal waters offshore is generally not subject to production taxes,
accounting for the decline in production taxes as a percentage of oil and gas
sales, from 5.2% in 1997 to 1.6% in 1998.
DEPRECIATION, DEPLETION AND AMORTIZATION. Depreciation, depletion
and amortization expense increased by $19.2 million, or 180%, in 1998 to
$29.8 million. Most of this increase was attributable to a 154% increase in
production volumes. The average depletion rate (which excludes depreciation
related to non-oil and gas assets) of $1.31
21
<PAGE>
per Mcfe of production in 1998 represents a 17% increase from the $1.12 per
Mcfe recorded in 1997. The higher rate is due to a reduction of estimated
proved reserves attributable to lower oil and gas prices at the end of 1998
than one year earlier, and to a cost for proved reserves added in 1998 that
was above the Company's historical average. The increased unit cost of
additions in 1998 reflects the substantial portion of the Company's capital
expenditures in 1998 related to the Gulf of Mexico, where higher unit costs
are associated with reserves that generally have a higher value per unit than
the Company's onshore properties, due to faster recoveries of reserves, lower
production costs, and higher average realizable gas prices.
GENERAL AND ADMINISTRATIVE EXPENSES, NET. General and
administrative expenses in 1998 increased by $0.7 million, or 19%, from 1997
levels, to $4.4 million. The increase in 1998 resulted primarily from
incremental costs incurred to manage expanded operations in the Gulf of
Mexico. On a per Mcfe basis, general and administrative expenses during the
two-year period generally declined as production volumes increased, as
reflected in the table above.
INTEREST AND OTHER EXPENSE. Interest and other expense for 1998
was $2.0 million, representing an increase of $1.3 million, or 166%, compared
to 1997. The variance was attributable to an increase in average borrowings
offset by a slight reduction in the Company's average effective interest
rate. Interest expense in 1998 excludes $1.5 million of interest capitalized
to unproved property costs in accordance with Statement of Financial
Accounting Standards No. 34. During 1998, the Company had average outstanding
debt of $53.4 million with an average effective interest rate of 6.6%,
compared to average borrowings of $10.2 million and an average interest rate
of 6.7% in 1997. Substantially all of the borrowings in both years were under
the Credit Facility.
PROPERTY IMPAIRMENT. During 1998, the Company recognized a
property impairment charge of $38.5 million, as the result of the capitalized
costs of its oil and gas properties exceeding a "ceiling" on such costs
computed in accordance with prescribed guidelines for companies utilizing the
full cost accounting method. The charge, which had no impact on the Company's
cash flows or its bank line of credit, was associated with unusually low oil
prices in effect at the end of 1998. Additional discussion of the charge,
including information regarding the methodology prescribed for computing the
full cost ceiling, is presented in Note 1 to the Consolidated Financial
Statements.
INCOME TAX PROVISION. The difference between the income tax
benefit recorded for 1998 and the amount that would be calculated by applying
statutory income tax rates to the loss before income taxes is due primarily
to establishment of a $5.7 million deferred tax asset valuation allowance.
The income tax provision for 1997 approximates the amount that would be
calculated by applying statutory income tax rates to income before income
taxes.
1997 COMPARED TO 1996
The sale of the Company's D-J Basin assets in the first half of
1996 and realization of first production from Gulf of Mexico assets in the
second half of 1997 result in year-to-year comparisons that obscure important
underlying trends. To assist in understanding such trends, the following
quarterly data is provided for the two-year period ended December 31, 1997.
<TABLE>
<CAPTION>
Quarter Ended March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
1996 1996 1996 1996 1997 1997 1997 1997
- ------------- -------- ------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Production:
Oil (MBbl) 216 152 98 98 106 103 147 168
Gas (MMcf) 2,458 1,465 429 424 403 399 1,688 3,019
Total Gas Equivalents (MMcfe) 3,754 2,377 1,017 1,012 1,039 1,017 2,570 4,027
Average Sales Price:
Oil (per Bbl) $ 17.94 $ 20.84 $ 21.10 $ 22.31 $ 20.41 $ 17.73 $ 18.59 $ 18.62
Gas (perMcf) $ 1.47 $ 1.32 $ 1.22 $ 1.95 $ 2.69 $ 1.73 $ 2.45 $ 2.86
Total Gas Equivalents (per Mcfe) $ 1.99 $ 2.14 $ 2.54 $ 2.98 $ 3.12 $ 2.47 $ 2.67 $ 2.92
Sales Revenue (in thousands):
Oil $ 3,875 $ 3,164 $ 2,064 $ 2,189 $ 2,155 $ 1,828 $ 2,737 $ 3,124
Gas $ 3,611 $ 1,932 $ 522 $ 825 $ 1,082 $ 689 $ 4,139 $ 8,647
Oil and Gas $ 7,486 $ 5,096 $ 2,586 $ 3,014 $ 3,237 $ 2,517 $ 6,876 $11,771
Expenses (per Mcfe):
Lease Operating Expenses $ 0.45 $ 0.56 $ 0.81 $ 0.94 $ 1.02 $ 0.96 $ 0.40 $ 0.38
Production Taxes $ 0.19 $ 0.20 $ 0.28 $ 0.34 $ 0.35 $ 0.27 $ 0.10 $ 0.09
Depreciation, Depletion
and Amortization $ 0.89 $ 0.89 $ 1.06 $ 1.04 $ 1.12 $ 1.21 $ 1.16 $ 1.30
General and Administrative, Net $ 0.32 $ 0.43 $ 0.79 $ 0.83 $ 0.76 $ 0.80 $ 0.33 $ 0.31
</TABLE>
22
<PAGE>
REVENUE. Oil and gas sales for 1997 increased by $6.2 million, or
34%, to $24.4 million, due largely to improved average price realizations. An
83% increase in gas prices, offset by a 6% decrease in oil prices, yielded a
26% increase in revenue per net equivalent unit produced, from $2.23 per Mcfe
in 1996 to $2.82 per Mcfe in 1997. Hedging transactions had the effect of
reducing oil and gas sales by $0.5 million in both years.
Production increased by 6% in net equivalent units, from 8,160
MMcfe in 1996 to 8,653 MMcfe in 1997. The relatively small change in
production volumes from year-to-year masks significant changes during each
year due to the D-J Sales in March and June 1996 and the commencement of Gulf
of Mexico production in August 1997.
In conjunction with the second D-J Sale transaction, which closed
in June 1996, the Company recognized a non-recurring $22.5 million gain.
Other revenue reported in both 1996 and 1997 primarily represented interest
income on cash equivalents held after the second D-J Sale transaction prior
to redeploying those proceeds into investments in oil and gas properties.
LEASE OPERATING EXPENSES. LOE declined in 1997 from the prior year
by $0.2 million, or 4%, and LOE per Mcfe produced declined by 10%, to $0.53
in 1997, compared to $0.59 in 1996. Again, the relatively small changes from
year-to-year do not reflect significant variances within each year. Average
LOE per Mcfe by quarter reflects that both the properties included in the D-J
Sales and the Gulf of Mexico properties that began contributing in the second
half of 1997 have significantly lower unit operating costs than the Company's
retained Rocky Mountain assets, which have high unit operating costs due to
relatively low average production rates per well and a high proportion of oil
production, which is generally more costly to produce than gas.
PRODUCTION TAXES. Production taxes for 1997 decreased by $0.6
million, or 31%, as the result of reduced sales from onshore properties in
1997, due to inclusion in 1996 of production from D-J Basin properties prior
to the D-J Sales. Production from properties in federal waters offshore is
generally not subject to production taxes and such taxes did not increase in
the second half of 1997 as the Company added Gulf of Mexico production.
Production taxes therefore declined as a percentage of oil and gas sales,
averaging 5.2% for all of 1997 and 3.3% in the second half of the year,
compared to 10.1% in 1996.
DEPRECIATION, DEPLETION AND AMORTIZATION. Depreciation, depletion
and amortization expense increased by $3.0 million, or 40%, in 1997 to $10.6
million. The average depletion rate of $1.12 per Mcfe of production in 1997
represents a 37% increase from the $0.82 per Mcfe recorded in 1996. The
higher rate is due to the addition of proved reserves in 1997 at a higher
average unit cost than the Company's historical average and to the
unfavorable impact on estimated proved reserve quantities of using lower
assumed future oil and gas prices at the end of 1997 than at the end of 1996.
The increased unit cost of additions in 1997 reflects the substantial portion
of the Company's capital expenditures in 1997 related to the Gulf of Mexico,
where higher unit costs are generally associated with reserves having a
higher value per unit than the Company's onshore properties, due to typically
faster recoveries of reserves, lower production costs, and higher average
realizable gas prices.
GENERAL AND ADMINISTRATIVE EXPENSES, NET. General and
administrative expenses in 1997 decreased by $0.2 million, or 4%, from 1996
levels, to $3.7 million. The decrease in 1997 resulted primarily from staff
reductions made in mid-1996 in conjunction with the D-J Sales and related
reductions in office rent expense attributable to the Company's relocation to
smaller space. These savings, which benefitted all of 1997 but only a portion
of 1996, were partially offset by higher bonus awards and stock-based
incentive compensation costs recorded in 1997. On a per Mcfe basis, general
and administrative expenses during the two-year period generally varied
inversely with production volumes.
INTEREST AND OTHER EXPENSE. Interest and other expense for 1997
was $0.8 million, representing a decrease of $1.5 million, or 66%, compared
to 1996. The variance was attributable to a decrease in average borrowings
after the D-J Sales and a reduction in the Company's average effective
interest rate, reflecting lower prevailing market interest rates and more
favorable borrowing terms obtained after the D-J Sales. During 1997, the
Company had average outstanding debt of $10.2 million with an average
effective interest rate of 6.7%, compared to average borrowings of $28.2
million and an average interest rate of 8.0% in 1996. Substantially all of
the borrowings in both years were under the Credit Facility.
23
<PAGE>
INCOME TAX PROVISION. The income tax provision for 1997
approximates the amount that would be calculated by applying statutory income
tax rates to income before income taxes. The 1997 current provision for
income taxes was decreased, and the deferred provision was increased, by
approximately $0.5 million due to a change in estimate of current taxes
payable for fiscal 1996. The difference between the income tax provision
recorded for 1996 and the amount that would be calculated by applying
statutory income tax rates to income before income taxes is due primarily to
reversal of a previously established $2.2 million deferred tax asset
valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's principal sources of capital have been
cash flow from operations, the Credit Facility, proceeds from asset sales,
and proceeds from sales of common stock. The Company's principal uses of
capital have been for the exploration, acquisition, development and
exploitation of oil and gas properties.
The Company's oil and gas capital expenditures during 1998 totaled
approximately $106.7 million. Net cash provided by operations before changes
in working capital totaled $33.7 million. The remainder of 1998 capital
expenditures was funded primarily through a $69.0 million increase in
borrowings under the Credit Facility and a $3.2 million reduction in net
working capital. The Company closed 1998 with a working capital deficit of
approximately $13.2 million and long-term debt of $80.0 million, all of which
was outstanding under the Credit Facility. The borrowing base established
under the Credit Facility as of January 1, 1999 was $110 million.
For 1999, the Company has established an initial budget for
exploration and development activities of approximately $65 million, subject
to potential increase for proceeds from asset sales, if any. The Company
plans to fund such investments with cash flow from operations, which is
expected to increase from 1998 levels because of projected production
increases, and additional borrowings under the Credit Facility. This budget
is subject to revision to reflect future developments. It may be impacted by
oil and gas price levels, future re-determinations of the borrowing base
under the Credit Facility, and other factors. Although this budget is not
predicated on a future sale of securities, the Company may choose to issue
securities in certain circumstances, in which case the level of the Company's
capital expenditures in 1999 would likely increase. Compared to actual
capital expenditures in 1998, the lower budget presently established for 1999
reflects a number of considerations including, but not limited to, lower
assumed oil and gas prices and higher initial debt levels. The impact on
drilling activity in the current year, compared to 1998, is expected to be
modest, as most of the decline in expenditures is expected to be offset by
lower service sector costs or reflected in reduced investments for
acquisitions of prospect leaseholds. The Company's investments in leaseholds
in 1998 significantly increased its inventory of exploratory prospects in the
Gulf of Mexico, to a level representing a multi-year set of drilling
opportunities. The Company's initial budget for 1999 anticipates investments
at a level to approximately maintain, rather than significantly expand, its
inventory of Gulf of Mexico prospects.
PRODUCTION AND CASH FLOW. The Company's cash flow from operations
is generally determined largely by its production level and oil and gas
prices. Since 1996, the Company has made significant investments to initiate
and then expand its operations in the Gulf of Mexico. These investments have
resulted in a production ramp-up that increased the Company's production from
an average rate of 11.2 MMcfe per day in the second quarter of 1997, prior to
commencement of Gulf of Mexico production, to 68.8 MMcfe per day in the third
quarter of 1998, before a decline to 65.9 MMcfe per day in the fourth quarter
of 1998 when a significant well was taken off-line for re-completion
operations. Based primarily on estimates reflected in the Company's year-end
1998 reserve reports, the Company anticipates that its net production in 1999
will be at least 50% greater than during 1998, when production totaled 21,966
MMcfe. The expected increase is attributable to projected production from
Gulf of Mexico properties with proved reserves at the end of 1998 that were
either on-line for only a portion of 1998 or had not yet commenced producing.
Partially offsetting these additions will be natural depletion-related
declines in production from existing producing wells. Actual realization of
the production increases projected for 1999 will be dependent upon meeting
scheduled dates for commencement of production from wells not yet on-line at
the end of 1998, and upon achieving projected performance from major wells,
including certain wells with little or no production history to-date.
Although management and the Company's independent engineering consultants
believe the projections are reasonable, there is no assurance that they will
be met.
MARKETING AND HEDGING TRANSACTIONS. The Company's production is
generally sold under month-to-month contracts at prevailing prices. From
time-to-time, however, as conditions are deemed to warrant, Basin has entered
into
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hedging transactions or fixed price sales contracts for a portion of its oil
and gas production. The purposes of these transactions are to limit the
Company's exposure to future oil and gas price declines and achieve a more
predictable cash flow. However, such contracts also limit the benefits the
Company would realize if prices increase. Hedging contracts reduced the
Company's total revenue by $0.5 million in each of 1996 and 1997, and
increased revenue by $3.5 million in 1998.
As of February 24, 1999, the Company was a party to the following
fixed price swap arrangements (one MMBtu approximates one Mcf of natural gas):
<TABLE>
<CAPTION>
Oil Gas
----------------------- -------------------------
Average Daily Average Daily
Time Period Volume (Bbl) $/Bbl Volume (MMBtu) $/MMBtu
- ----------- ------------- ----- -------------- -------
<S> <C> <C> <C> <C>
1/1/99 - 3/31/99 1,000 17.00 30,167 2.15
4/1/99 - 6/30/99 1,000 17.00 33,297 2.18
7/1/99 - 9/30/99 30,000 2.20
10/1/99 - 12/31/99 25,000 2.16
1/1/00 - 12/31/01 10,000 2.15
</TABLE>
In addition, the Company periodically enters into spread trades or
options transactions related to oil or natural gas futures markets. Under a
spread trade, fixed prices under a hedging contract are determined in the
future by reference to the price of an underlying contract. Such positions
may enable the Company to lock in favorable fixed prices for future hedging
positions, but can also result in unfavorable fixed price contracts if the
reference price represented by the underlying contract declines. As of
February 24, 1999, the Company had entered into spread trades for natural gas
providing for a fixed price for 20,000 MMBtu per day for the period of March
2000 through September 2000 to be established in the future upon an election
by the Company by reference to the underlying NYMEX October 1999 contract
price less $0.28. The Company also had sold call options for 10,000 MMBtu of
natural gas per day for the period from March 1999 through April 1999 with a
strike price of $1.93 per MMBtu, and from January 1999 through December 2001
with an average strike price of $2.50 per MMBtu. Call options had also been
sold covering a quantity of 1,000 barrels of oil per day for the period from
July 1999 through December 1999, at a strike price of $16.75 per barrel. At
December 31, 1998, the estimated fair value of the open oil and gas price
hedging contracts was an unrealized gain of approximately $1,170,000.
CREDIT FACILITY. Effective January 1, 1999, the Company entered
into an Amended and Restated Credit Agreement (the "Credit Agreement") with
its existing bank group. The Credit Agreement provides for borrowings of up
to $110 million under two combined facilities. Facility A was initially
established at $90 million and represents the borrowing base that is
considered to be "conforming" based upon the bank's customary practices and
standards in making conventional borrowing base determinations for oil and
gas producers. Facility B, initially established at $20 million, is a
shorter-term supplemental line of credit. The Credit Agreement provides for
the interest rate on borrowings to be determined by reference to the prime
rate or LIBOR, at the Company's election. Facility A provides for a varying
spread of 0% to 0.25% to be added to the prime rate, or 0.75% to 1.5% to be
applied to LIBOR, based upon the Company's facility usage ratio. Facility B
provides for a spread of 3.5% to be added to the prime rate, or 4.75% to be
applied to LIBOR subject to a 0.25% increase in such spreads, effective June
1, 1999. The Credit Agreement provides for borrowings to be revolving loans
until November 30, 2001, at which time the outstanding balance will be
converted into a four-year amortizing term loan unless the Credit Agreement
is amended, and subject to the scheduled termination of Facility B effective
May 31, 2000. The borrowing base under the Credit Agreement is scheduled to
be re-determined at three-month intervals until Facility B is retired, and
then at six-month intervals until converted into a term loan. The Credit
Agreement contains various covenants, including ones that could limit the
Company's ability to incur other debt, dispose of assets, pay dividends, or
repurchase stock. Pursuant to the Credit Agreement, substantially all of the
Company's producing properties are subject to mortgages in favor of the banks
and the Company's remaining properties are subject to a negative pledge.
The weighted average interest rate on borrowings outstanding under
the Credit Agreement at December 31, 1998 was 6.2%. The Company's annual
interest costs will fluctuate based upon fluctuations in short-term interest
rates. Assuming debt outstanding during 1999 remained unchanged from the
amount outstanding at the end of 1998, the impact on interest expense, before
amounts capitalized, of a ten percent change in the average interest rate
would be
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<PAGE>
approximately $500,000. As the interest rate is variable and is reflective of
current market conditions, the carrying value of the Company's debt
approximates its fair value.
Borrowing base re-determinations conducted by the bank group
reflect a number of estimates and assumptions including, but not limited to,
future production from the Company's proved properties, risk factors for
proved reserves, projected oil and gas prices, future operating and
development costs, and interest rates. Changes in such estimates and
assumptions can significantly impact the size of the borrowing base
established by the banks. Because these factors will be influenced by future
events, which cannot be forecast with certitude, the Company cannot predict
what level of borrowing base will be established at any future determination
date. The provision for Facility B was intended, in part, to provide
short-term funds to develop the Company's proved undeveloped and proved
developed nonproducing reserves in the Gulf of Mexico. It is anticipated that
funds drawn under Facility B will be retired through expansion of Facility A,
if the Company's reserve values are sufficiently increased, or that Facility
B will be repaid from cash flows or proceeds from asset or security sales. At
March 19, 1999, $90 million was outstanding under Facility A and $2.5 million
was outstanding under Facility B.
Positive or negative changes in the borrowing base during 1999
would be likely to affect the Company's capital expenditures during the year.
Increases, supported by performance of the Company's properties, drilling
results, and/or higher oil and gas prices, could improve the Company's
ability to grow. Decreases would adversely affect the Company's liquidity and
capital resources, potentially resulting in a reduction of planned capital
expenditures or the sale of assets or securities.
CAPITAL EXPENDITURES. Since the beginning of 1996, Basin has
focused its exploration activities in the shallow waters of the Gulf of
Mexico, primarily off the coast of Louisiana. Recently, the Company began to
direct a small portion of its exploration budget toward onshore
opportunities, and it pursues acquisition, development, and exploitation
opportunities in the vicinity of the Company's Gulf of Mexico exploration
operations, in the Rocky Mountain region where Basin has an existing base of
proved reserves and producing wells, and in certain other major domestic
producing basins where the Company believes significant upside potential
exists. The Company's capital expenditures are generally discretionary and
activity levels are determined by a number of factors, including oil and gas
prices, availability of funds, quantity and character of identified
investment projects, availability of service providers, and competition.
The Company's capital expenditures in 1998 totaled approximately
$107 million, of which 96% related to operations in the Gulf of Mexico.
Approximately $28 million was invested in acquisitions of exploratory
leaseholds and geological and geophysical data in the Gulf of Mexico.
Approximately $68 million related to Gulf of Mexico drilling, completion, and
related development costs. The remainder related to small proved property
acquisitions and activities onshore. Gulf of Mexico operations in 1998
included ongoing development of nine productive wells drilled or acquired in
1997, participation in the drilling of 17 wells, of which 11 were successful,
and development costs related to the successful wells drilled during the year.
The Company currently estimates that its capital expenditures for
exploration and development in 1999 will be approximately $65 million,
subject to potential increase if proceeds are realized from asset sales. This
budget primarily provides for: development of seven properties with one or
more successful wells yet to commence sustained production as of the end of
1998; investments in seismic data and prospect leaseholds; participation in
approximately six net (13 to 15 gross) exploratory wells in the Gulf of
Mexico; participation in a small number of onshore exploration opportunities;
development of assumed 1999 prospect discoveries; and continued exploitation
of the Company's other offshore and onshore properties. Although several
locations for planned 1999 exploratory drilling have been identified, a
significant portion of the 1999 exploration budget is currently unallocated,
pending acquisition of drilling partners and formation of joint ventures to
conduct exploratory operations. The smaller budget in 1999, compared to
actual expenditures in 1998, is not expected to require a significant
reduction in drilling activity because of a planned substantial reduction in
acquisitions of exploratory leaseholds in 1999 and benefits expected to be
realized from the substantial decline in service sector costs during the past
year. The reduced budget for exploratory leaseholds reflects the unusually
large investment made by the Company in 1998 to initially establish a
multi-year inventory of drilling prospects. New investments planned for 1999
will seek to approximately maintain this inventory level rather than
significantly expand it.
The Company also intends to pursue acquisitions of properties with
proved and probable reserves as an integral part of its overall business
strategy, with the expectation that these efforts will result in significant
investment activity over time. At this time, no portion of the Company's 1999
budget has been specifically allocated for acquisitions of proved
26
<PAGE>
properties. If such a transaction is executed, it will likely require a
re-allocation of budget from other planned activities and/or external
financing.
The amount and allocation of future capital expenditures will
depend on a number of factors that are not entirely within the Company's
control or ability to forecast, including drilling results, scheduling of
activities by other operators, availability of service providers, success in
acquiring prospect leaseholds, and success in consummating acquisitions of
proved properties. The Company's planned capital expenditures are also based
on estimates regarding availability of capital that depend on assumptions and
estimates regarding production, oil and gas prices, and borrowing base
re-determinations under the Company's Credit Agreement. Due to these
uncertainties, actual capital expenditures may vary significantly from
current expectations.
Should the Company seek to increase its capital expenditure budget
for 1999 to respond to drilling opportunities that it deems exceptional, to
fund development of a greater number or larger-sized exploratory successes
than assumed, or for acquisitions of proved and probable reserves or prospect
leaseholds, the Company may consider raising additional capital through
issuance of debt and/or equity securities. The Company may also seek
additional debt or equity financing in the absence of a specific planned
increase in capital expenditures, in order to increase financial flexibility
to capitalize on future opportunities.
YEAR 2000 READINESS DISCLOSURE AND STATEMENT
Readers are cautioned that the forward-looking statements
contained in the following Year 2000 discussion should be read in conjunction
with the Company's disclosures under the headings "Forward Looking
Statements" and "Risk Factors" in this report.
Year 2000 issues result from the inability of many computer
programs to accurately calculate, store or use a date subsequent to December
31, 1999. The date can be erroneously interpreted in a number of different
ways; typically the year 2000 is interpreted as the year 1900. This could
result in a system failure or miscalculations causing disruptions of or
errors in operations. Systems potentially affected include not only
information technology ("IT") systems -- computer systems controlling a
company's accounting, land, operations, seismic processing, and other
specialized functions -- but also non-IT systems controlled by embedded
chips, which include many common and specialized machines and support
systems. The effects of the Year 2000 problem can be exacerbated by the
interdependence of computer and telecommunications systems in the United
States and throughout the world. This interdependence can affect the Company
and the parties with whom it does business.
STATE OF READINESS. The Company has created an internal committee
to assess the Company's Year 2000 readiness and to lead its remediation
efforts. The committee is composed of the general counsel, chief financial
officer, controller, and manager of information systems. The committee's
objective is to prevent loss or impairment of those functions material to the
Company's operations and business continuity or to avoid potential liability
to third parties. At the direction of the committee, department heads and
managers have assessed and remediated the Company's IT and non-IT systems,
and have communicated with the Company's business partners regarding the
status of their assessment and remediation efforts, with the results
summarized below.
The Company has completed an assessment of its IT systems to
determine whether they are Year 2000 compliant. The licensors of both the
Company's core financial, land and operations software system and its
underlying operating system have certified that such software is Year 2000
compliant. The Company's Gulf of Mexico seismic data interpretation software
system is not currently Year 2000 compliant, but the Company has begun an
upgrade of that system with software which the licensor has represented will
be compliant. The Company is also upgrading its reservoir economics software
to make it Year 2000 compliant. The Company expects the upgrade and testing
of these software systems to be completed by July 1999. Additionally, the
Company has assessed other less critical IT systems and believes them to be
compliant.
The Company also relies on non-IT systems, such as office
telephones, facsimile machines, HVAC systems and elevators in its leased
offices, security systems, and automated measuring equipment on platforms and
other production facilities, which may have embedded technology such as
micro-controllers. Department heads and managers have identified those non-IT
systems which may be susceptible to failure or impairment by reason of Year
2000 problems and which are potentially critical to the Company's operations
and business continuity. Based on that review, the Company
27
<PAGE>
has sent written inquiries to the suppliers of those systems to determine
their Year 2000 compliance. The vendors of the Company's communications
systems and the property managers of the buildings in which the Company's
Houston and Denver offices are situated have certified their systems to be
Year 2000 compliant. The Company is still receiving and analyzing responses
from vendors of those non-IT systems that may affect the Company's production
operations. The operations department will follow up those inquiries with
telephone interviews to assess the status of such systems. Assessment and
remediation of non-IT systems should be completed by September 1999.
The Company has sent written inquiries to its significant
suppliers, customers, banks, government agencies, benefit plan providers, and
others with whom the Company has significant business relationships to
determine the extent to which the Company is vulnerable to those third
parties' failure to correct their own Year 2000 issues. To date, the Company
has not received definitive responses from many of these entities and
therefore cannot assess whether they are Year 2000 compliant or how their
failure to be compliant would affect the Company. Those third parties who
have responded have generally indicated that they are either Year 2000
compliant or expect to be compliant. Department heads and managers have
compiled a list of critical third parties to whom telephone follow-up will be
made. For Gulf of Mexico operations, these include representative vendors and
suppliers who could supply necessary goods and services to maintain the
Company's production operations and continue any ongoing or planned drilling
activities. The Company expects to have this follow-up inquiry completed by
July 1999 and will utilize those vendors and suppliers providing adequate
assurances regarding their compliance.
ESTIMATED COMPLIANCE COSTS. The Company has relied primarily on
its internal staff to assess its current Year 2000 readiness and does not
anticipate extensive use of external resources to complete its assessment or
remediation. The Company has not separately quantified its costs of internal
resources on this project but does not expect that it will incur material
costs in remediating its IT systems to be Year 2000 compliant. Costs incurred
for the purchase of new software and hardware are capitalized and all other
costs are expensed as incurred. The Company has not incurred, and does not
anticipate that it will incur, costs for external resources in excess of
$100,000 relating to the assessment and remediation of Year 2000 issues. That
estimate does not include the cost of remediating problems caused by
third-party vendors, customers, or other business partners, which the Company
will not be able to estimate until the extent, if any, of their Year 2000
non-compliance is known.
RISKS OF NON-COMPLIANCE AND CONTINGENCY PLANS. As indicated above,
the only critical IT systems which the Company believes are not yet Year 2000
compliant are its seismic data interpretation and reservoir economics
systems, which should be compliant by July 1999. Accordingly, the Company
does not expect Year 2000 issues to cause its IT systems to have any material
adverse impact on its business, operations or financial condition. The
Company believes that the potential impact, if any, of its non-critical IT
systems not being Year 2000 compliant will at most require employees to
manually complete otherwise automated tasks or calculations and should not
impact the Company's ability to continue exploration, drilling, production or
sales activities. The Company is not able to predict at this time what the
impact could be of non-IT system failures but does not believe that there
will be a material disruption of the Company's operations.
Until the Company has completed its inquiries to third parties, it
will not be able to assess the potential impact of their failure to be Year
2000 compliant on the Company's operations, business, or financial condition.
The most reasonably likely "worst case" impacts could be impairment of the
Company's ability to deliver its production to, or receive payment from,
third parties gathering and/or purchasing the Company's production from
affected facilities, impairment of the ability of third-party suppliers or
service companies to provide needed materials or services to the Company's
planned or ongoing operations, thereby necessitating deferral or shut-in of
exploration, development or production operations, and the inability of the
Company to execute financial transactions with its banks or other third
parties whose systems fail or misfunction. The Company currently has no
reason to believe that any of these contingencies will occur or that its
principal vendors, customers, and business partners will not be Year 2000
compliant.
The Company does not currently have a contingency plan under
development or in place to address these potential problems. The Company does
intend to develop contingency plans in response to testing its IT and non-IT
systems and in response to the results of its third-party inquiries. These
contingency plans may include installing back-up computer systems or
equipment, temporarily replacing systems or equipment with manual processes,
and identifying alternate suppliers, service companies and purchasers. The
Company expects these plans to be complete by October 1999.
Basin's Year 2000 program is a continuing process that may result
in changes to cost estimates and schedules as testing and business partner
assessment progresses. Unexpected Year 2000 compliance problems of either the
Company
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or its vendors, customers, service providers, or other entities with whom it
does business could have a material adverse impact on the Company's business,
financial condition or operating results.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to interest rate risk and commodity price
risk is discussed in Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations under the headings "Operating
Environment", "Liquidity and Capital Resources - Marketing and hedging
transactions" and "Liquidity and Capital Resources - Credit facility". The
Company has no exposure to foreign currency exchange rate risks or to any
other market risks.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements that constitute Item 8 are
attached at the end of this report. An index to the Consolidated Financial
Statements appears in Item 14 of this report.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is incorporated by reference
from the sections entitled "Management" and "Disclosure of Filings by
Insiders" in the Company's definitive Proxy Statement for its 1999 Annual
Meeting of Stockholders (the "Proxy Statement") to be filed with the
Securities and Exchange Commission no later than April 30, 1999.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference
from the section entitled "Executive Compensation" in the Proxy Statement.
Nothing in this report shall be construed to incorporate by reference the
Board Compensation Committee Report on Executive Compensation or the
Performance Graph which are contained in the Proxy Statement, which are
expressly not incorporated herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference
from the section entitled "Security Ownership of Certain Beneficial Owners
and Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference
from the section entitled "Certain Relationships and Other Transactions" in
the Proxy Statement.
29
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CERTAIN DEFINITIONS
The terms defined in this section are used throughout this report.
ACREAGE HELD BY PRODUCTION. Acreage covered by an oil and gas
lease which has a producing well on it, or which is pooled with a lease or
leases having one or more producing wells on them, so the lease is maintained
in effect for the duration of such production.
BBL. One stock tank barrel, or 42 U.S. gallons liquid
volume, used herein in reference to crude oil or other liquid hydrocarbons.
BCF. Billion cubic feet (of gas).
BCFE. Billion cubic feet (of gas) equivalent.
BEHIND-PIPE RESERVES. Proved reserves in a formation in which
production casing has already been set in the wellbore, but from which
production has not commenced.
BTU. British thermal unit.
COMMINGLE. The combining of production from more than one zone in
the same well to produce from multiple zones at the same time.
DEVELOPMENT LOCATION. A location on which a development well can
be drilled.
DEVELOPMENT WELL. A well drilled within the proved area of an oil
or gas reservoir to the depth of a stratigraphic horizon known to be
productive in an attempt to recover proved undeveloped reserves.
DRILLING LOCATIONS. A site on which a well can be drilled
consistent with local spacing rules for the purpose of recovering possible,
probable or proved reserves.
DRY WELL. A well found to be incapable of producing either oil or
gas in sufficient quantities to justify completion as an oil or gas well.
EXPLOITATION. The conduct of a drilling or recompletion operation
intended to recover reserves from a formation known to be productive in the
area or on trend with existing production but not classifiable as proved.
EXPLORATORY WELL. A well drilled to find and produce oil or gas in
an unproved area, to find a new reservoir in a field previously found to be
productive of oil or gas in another reservoir, or to extend a known reservoir.
FARMOUT. An assignment of an interest in a drilling location and
related acreage conditional upon the drilling of a well on that location.
GROSS ACRES. An acre in which a working interest is owned.
GROSS WELL. A well in which a working interest is owned.
MBBL. One thousand barrels of crude oil or other liquid
hydrocarbons.
MBTU. One thousand Btus.
MCF. One thousand cubic feet (of gas).
30
<PAGE>
MCFE. One thousand cubic feet of natural gas equivalent. In
reference to crude oil or other liquid hydrocarbons, equivalents are
determined using the ratio of one Bbl of crude oil or other liquid
hydrocarbon to 6 Mcf of gas.
MMBBL. One million barrels of crude oil or other liquid
hydrocarbons.
MMBTU. One million Btus.
MMCF. One million cubic feet.
MMCFE. One million cubic feet (of gas) equivalent.
NET ACRES OR NET WELLS. The sum of the fractional working
interests owned in gross acres or gross wells.
OVERRIDING ROYALTY INTEREST. An interest in an oil and gas
property entitling the owner to a share of oil and gas production free of
costs of production.
PRESENT VALUE OF FUTURE NET REVENUES. Estimated future net
revenues discounted at a rate of ten percent per annum.
PRODUCTIVE WELL. A well that is producing oil or gas or that is
capable of production.
PROVED DEVELOPED RESERVES. Reserves that can be expected to be
recovered through existing wells with existing equipment and operating
methods.
PROVED RESERVES. 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.
PROVED UNDEVELOPED LOCATION. A site on which a development well
can be drilled consistent with local spacing rules for the purpose of
recovering proved reserves.
PROVED UNDEVELOPED RESERVES. Reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for recompletion.
RECOMPLETION. The completion for production of an existing
wellbore in another formation from that in which the well has previously
been completed.
UNDEVELOPED ACREAGE. Lease acreage on which wells have not been
drilled or completed to a point that would permit the production of
commercial quantities of oil and gas regardless of whether such acreage
contains proved reserves.
WORKING INTEREST. The operating interest which gives the owner the
right to drill, produce and conduct operating activities on the property and
a share of production.
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) and (a)(2) Financial Statements and Financial Statement Schedules
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Report of Independent Public Accountants............................... 33
Consolidated Balance Sheets as of December 31, 1997 and 1998........... 34
Consolidated Statements of Operations for the years ended
December 31, 1996, 1997, and 1998.................................... 35
Consolidated Statements of Cash Flow for the years
ended December 31, 1996, 1997 and 1998............................... 36
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1996, 1997 and 1998................. 37
Notes to Consolidated Financial Statements............................. 38
</TABLE>
All other schedules are omitted because the required information
is not applicable or is not present in amounts sufficient to require
submission of the schedule or because the information required is included in
the Consolidated Financial Statements and Notes thereto.
32
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Basin Exploration, Inc.:
We have audited the accompanying consolidated balance sheets of
Basin Exploration, Inc. and subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of operations, changes in
stockholders' equity and cash flow for each of the three years in the period
ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Basin Exploration, Inc. and subsidiaries as of December 31, 1998
and 1997, and the results of their operations and their cash flow for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 24, 1999.
33
<PAGE>
BASIN EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, (in thousands, except per share data) 1997 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Equivalents $ 531 $ 331
Accounts Receivable 8,348 10,036
Prepaids and Other 3,805 2,752
---------- ---------
12,684 13,119
---------- ---------
PROPERTY AND EQUIPMENT, at cost:
Oil and Gas Properties, Under the Full Cost Method of Accounting -
Proved 177,704 265,826
Unproved 15,669 34,039
Less Accumulated Depreciation, Depletion and Amortization (46,284) (113,462)
---------- ---------
147,089 186,403
Furniture and Equipment, Net 2,086 1,408
---------- ---------
149,175 187,811
OTHER ASSETS 100 233
---------- ---------
$ 161,959 $ 201,163
---------- ---------
---------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 8,087 $ 12,465
Accrued Liabilities 12,067 11,998
Accrued Ad Valorem Taxes 2,394 1,622
Income Taxes Payable 19 -
Current Portion of Long-Term Debt 153 258
---------- ---------
22,720 26,343
LONG-TERM DEBT, net of current portion 11,053 80,000
OTHER LONG-TERM OBLIGATIONS 266 601
DEFERRED INCOME TAXES 6,555 -
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY:
Preferred Stock, Par Value $.01 Per Share; 10,000,000 Shares
Authorized, No Shares Issued and Outstanding - -
Common Stock, $.01 Par Value, 50,000,000 Shares Authorized,
13,833,000 and 14,151,000 Shares Issued, Respectively 138 142
Additional Paid-In Capital 110,627 113,136
Retained Earnings (Accumulated Deficit) 12,012 (16,488)
Common Stock Held In Treasury, At Cost, 120,000 and 186,000
Shares, Respectively (1,412) (2,571)
---------- ---------
121,365 94,219
---------- ---------
$ 161,959 $ 201,163
---------- ---------
---------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
34
<PAGE>
BASIN EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the years ended December 31, (in thousands, except per share data) 1996 1997 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUE:
Oil Sales $ 11,292 $ 9,844 $ 9,735
Gas Sales 6,890 14,557 38,885
Gain On Sale of Assets 22,472 - -
Interest and Other 1,009 319 79
---------- --------- ---------
41,663 24,720 48,699
---------- --------- ---------
COSTS AND EXPENSES:
Lease Operating Expenses 4,776 4,600 8,276
Production Taxes 1,829 1,260 770
Depreciation, Depletion, and Amortization 7,606 10,622 29,775
General and Administrative, Net 3,850 3,694 4,380
Interest and Other 2,272 764 2,030
Property Impairment - - 38,500
---------- --------- ---------
20,333 20,940 83,731
---------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 21,330 3,780 (35,032)
INCOME TAX (PROVISION) BENEFIT (5,760) (1,324) 6,532
---------- --------- ---------
NET INCOME (LOSS) $ 15,570 $ 2,456 $ (28,500)
---------- --------- ---------
---------- --------- ---------
BASIC:
Earnings (Loss) Per Share $ 1.45 $ 0.22 $ (2.06)
Weighted Average Shares Outstanding 10,700 11,228 13,859
DILUTED:
Earnings (Loss) Per Share $ 1.45 $ 0.22 $ (2.06)
Weighted Average Shares Outstanding 10,730 11,345 13,859
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
35
<PAGE>
BASIN EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
For the years ended December 31, (in thousands) 1996 1997 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 15,570 $ 2,456 $ (28,500)
Adjustments To Reconcile Net Income (Loss)
To Net Cash Provided By Operating Activities -
Gain On Sale of Assets (22,472) -- --
Depreciation, Depletion and Amortization 7,606 10,622 29,775
Deferred Income Tax Expense (Benefit) 4,760 1,795 (6,555)
Property Impairment -- -- 38,500
Stock Compensation Expense 98 439 452
Amortization of Debt Issuance Costs 118 -- --
Other -- (15) (14)
Changes In Operating Assets and Liabilities -
Decrease (Increase) In -
Restricted Cash 578 -- --
Receivables 1,664 (3,188) (1,693)
Prepaids and Other (1,861) (1,438) 919
(Decrease) Increase In -
Accounts Payable and Accrued Liabilities 103 5,692 5.406
Ad Valorem Taxes and Other (2,255) 107 (437)
Income Taxes Payable 1,000 (981) (19)
---------- --------- ---------
Net Cash Provided By Operating Activities 4,909 15,489 37,834
---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Additions (27,741) (98,245) (107,716)
Proceeds From Sale of Property and Equipment 125,625 195 52
Asset Sale Transaction Costs (5,257) -- --
---------- --------- ---------
Net Cash Provided By (Used In) Investing Activities 92,627 (98,050) (107,664)
---------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds From Notes Payable and Long-Term Debt 8,594 53,000 85,245
Principal Payments On Notes Payable (85,517) (42,218) (16,193)
Proceeds From Sale of Stock, Net 84 50,320 629
Purchase of Treasury Stock and Options (287) (33) (51)
---------- --------- ---------
Net Cash Provided By (Used In) Financing Activities (77,126) 61,069 69,630
---------- --------- ---------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 20,410 (21,492) (200)
CASH AND EQUIVALENTS, Beginning of Year 1,613 22,023 531
---------- --------- ---------
CASH AND EQUIVALENTS, End of Year $ 22,023 $ 531 $ 331
---------- --------- ---------
---------- --------- ---------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash Paid For Interest $ 2,327 $ 637 $ 3,133
Cash Paid For Taxes $ -- $ 981 $ (23)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
36
<PAGE>
BASIN EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended December 31, 1996, 1997 and 1998 (in thousands)
- -------------------------------------------------------------------
<TABLE>
<CAPTION>
Retained
Common Stock Additional Treasury Stock Earnings
--------------- Paid-In ----------------- (Accumulated Stockholders'
Shares Amount Capital Shares Amount Deficit) Equity
------ ------ ---------- ------ ------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1995 10,724 $ 107 $ 59,288 (32) $ (94) $ (6,014) $ 53,287
Purchase of Treasury Stock
and Options -- -- (250) (24) (38) -- (288)
Issuance and Vesting of Restricted
Stock and Stock Options 33 1 181 -- -- -- 182
Net Income -- -- -- -- -- 15,570 15,570
------ ----- --------- ---- ------- --------- --------
BALANCES, December 31, 1996 10,757 108 59,219 (56) (132) 9,556 68,751
Issuance of Common Stock 3,001 30 51,340 -- -- -- 51,370
Common Stock Offering Costs -- -- (499) -- -- -- (499)
Purchase of Treasury Stock -- -- -- (64) (1,280) -- (1,280)
Issuance and Vesting of Restricted Stock 75 -- 567 -- -- -- 567
Net Income -- -- -- -- -- 2,456 2,456
------ ----- --------- ---- ------- --------- --------
BALANCES, December 31, 1997 13,833 138 110,627 (120) (1,412) 12,012 121,365
Issuance of Common Stock 130 2 627 -- -- -- 629
Exercise of warrants for Common Stock 79 1 1,107 (62) (1,108) -- --
Purchase of Treasury Stock -- -- -- (4) (51) -- (51)
Issuance and Vesting of Restricted Stock 109 1 775 -- -- -- 776
Net Income (Loss) -- -- -- -- -- (28,500) (28,500)
------ ----- --------- ---- ------- --------- --------
BALANCES, December 31, 1998 14,151 $ 142 $ 113,136 (186) $(2,571) $ (16,488) $ 94,219
------ ----- --------- ---- ------- --------- --------
------ ----- --------- ---- ------- --------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
37
<PAGE>
BASIN EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS - The consolidated financial
statements include the financial statements of Basin Exploration, Inc. and
its wholly owned subsidiaries (collectively referred to as "Basin" or the
"Company"). Basin operates its business and reports its operations as one
business segment. Basin is engaged in the exploration, development and
production of natural gas and crude oil. The Company's principal producing
area is offshore in the Gulf of Mexico. Basin, as operator of jointly-owned
oil and gas properties, sells a significant amount of such production to
certain major customers (see Note 8), and pays vendors for oil and gas
services. Joint interest receivables are subject to collection under terms of
operating agreements which generally provide lien rights.
The accompanying financial statements present the operations of
the Company on a consolidated basis. All significant intercompany accounts
and transactions have been eliminated in consolidation. 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.
CASH EQUIVALENTS - Cash equivalents are comprised of highly liquid
instruments with original maturities of three months or less. The total
carrying amount of cash and equivalents approximates the fair value of such
instruments.
OIL AND GAS PROPERTIES - The Company follows the full cost method
of accounting for oil and gas properties. Under this method, all costs
associated with the development, exploration and acquisition of oil and gas
properties are capitalized in the Company's one cost center (full cost pool),
which is the continental United States including the Gulf of Mexico. Payroll
and other internal costs capitalized include salaries and related fringe
benefits paid to employees directly engaged in the acquisition, exploration
and development of oil and gas properties as well as all other directly
identifiable, internal costs associated with these activities. Payroll and
other internal costs associated with production operations and general
corporate activities are expensed in the period incurred. Future development,
site restoration, dismantlement and abandonment costs, net of salvage values,
are estimated on a property-by-property basis based on prevailing prices and
are amortized to expense, along with the capitalized costs discussed above,
using the unit-of-production method based upon actual production and
estimates of proved reserve quantities. Accumulated depreciation, depletion
and amortization is recorded on the balance sheet as a reduction to property,
plant and equipment costs. The Company invests in unevaluated oil and gas
properties and related assets for the purpose of future exploration for
proved reserves. The costs of such assets are included in unproved oil and
gas properties at the lower of cost or estimated fair market value and are
not subject to amortization. Proceeds from sales of oil and gas properties
are credited to the full cost pool with no gain or loss recognized unless
such adjustments would significantly alter the relationship between
capitalized costs and proved reserves of oil and gas.
Under full cost accounting rules promulgated by the Securities and
Exchange Commission, if net capitalized costs of oil and gas properties, less
related deferred income taxes, exceed the full cost ceiling at the end of a
fiscal quarter, the excess is charged to expense in that period. The full
cost ceiling is calculated as the estimated present value of future net
revenues from proved oil and gas reserves using a 10% discount factor and
unescalated oil and gas prices as of the end of the period, or shortly
thereafter, plus the book value of unproved oil and gas properties.
Calculation of the full cost ceiling may be particularly sensitive to changes
in expected production rates or the level of oil and gas prices, which may be
volatile due to seasonal factors and other influences.
The Company recognized a $38,500,000 non-cash impairment charge
($30,750,000 after income tax) for the quarter ended December 31, 1998, based
on a ceiling test calculation that utilized average realized prices of $10.23
per barrel of oil and $1.87 per Mcf of natural gas. A decline in prices could
result in a requirement that the Company recognize additional impairment
expense in a future period.
FURNITURE AND EQUIPMENT - Furniture and equipment are depreciated
over estimated useful lives of four to seven years. Maintenance and repair
costs are expensed as incurred.
38
<PAGE>
INCOME TAXES - The Company computes income taxes in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes." SFAS 109 requires an asset and liability
approach which results in the recognition of deferred tax liabilities and
assets for the expected future tax consequences of temporary differences
between the carrying amounts and the tax bases of those assets and
liabilities. SFAS 109 also requires the recording of a valuation allowance if
it is more likely than not that some portion or all of a deferred tax asset
will not be realized.
HEDGING ACTIVITIES - The Company periodically enters into
commodity derivative contracts and fixed-price physical contracts to manage
its exposure to oil and gas price volatility. Commodity derivatives
contracts, which are placed with major financial institutions or other
counterparties of high credit quality that the Company believes are minimal
credit risks, may take the form of futures contracts, swaps or options. The
reference prices of these commodity derivatives contracts are based upon
crude oil and natural gas futures which have a high degree of historical
correlation with actual prices received by the Company. The Company accounts
for its commodity derivatives contracts using the hedge (deferral) method of
accounting. Under this method, realized gains and losses from the Company's
price risk management activities are recognized in oil and gas revenue when
the associated production occurs and the resulting cash flows are reported as
cash flows from operating activities. Gains and losses from commodity
derivatives contracts that are closed before the hedged production occurs are
deferred until the production month originally hedged. In the event of a loss
of correlation between changes in oil and gas reference prices under a
commodity derivatives contract and actual oil and gas prices, a gain or loss
would be recognized currently to the extent the commodity derivatives
contract did not offset changes in actual oil and gas prices.
The Company recognized a reduction in oil revenue of $480,000 and
$144,000 under hedging agreements in 1996 and 1997, respectively. The Company
recognized a reduction in gas revenue of $383,000 under hedging agreements in
1997. The Company recognized increases in oil and gas revenue of $1,175,000
and $2,357,000, respectively, under hedging agreements in 1998.
As of February 24, 1999, the Company was a party to the following
fixed price swap arrangements (one MMBtu approximates one Mcf of natural gas):
<TABLE>
<CAPTION>
Oil Gas
----------------------- --------------------------
Average Daily Average Daily
Time Period Volume (Bbl) $/Bbl Volume (MMbtu) $/MMbtu
- ----------- ------------- ----- -------------- -------
<S> <C> <C> <C> <C>
1/1/99 - 3/31/99 1,000 17.00 30,167 2.15
4/1/99 - 6/30/99 1,000 17.00 33,297 2.18
7/1/99 - 9/30/99 30,000 2.20
10/1/99 - 12/31/99 25,000 2.16
1/1/00 - 12/31/01 10,000 2.15
</TABLE>
In addition, the Company periodically enters into spread trades or
options transactions related to oil or natural gas futures markets. Under a
spread trade, fixed prices under a hedging contract are determined in the
future by reference to the price of an underlying contract. Such positions
may enable the Company to lock in favorable fixed prices for future hedging
positions, but can also result in unfavorable fixed price contracts if the
reference price represented by the underlying contract declines. As of
February 24, 1999, the Company had entered into spread trades for natural gas
providing for a fixed price for 20,000 MMBtu per day for the period of March
2000 through September 2000 to be established in the future upon an election
by the Company by reference to the underlying NYMEX October 1999 contract
price less $0.28. The Company also had sold call options for 10,000 MMBtu of
natural gas per day for the period from March 1999 through April 1999 with a
strike price of $1.93 per MMBtu, and from January 1999 through December 2001
with an average strike price of $2.50 per MMBtu. Call options had also been
sold covering a quantity of 1,000 barrels of oil per day for the period from
July 1999 through December 1999, at a strike price of $16.75 per barrel.
In accordance with SFAS 107, "Disclosures About Fair Value of
Financial Instruments," the Company has estimated the fair value of its
hedging arrangements at December 31, 1998, utilizing the then-applicable
crude oil and natural gas strips. While it is not the Company's intention to
terminate any of the arrangements, it is estimated that the Company would
have
39
<PAGE>
received approximately $1,170,000 to terminate the then-existing arrangements
on December 31, 1998. Due to the volatility of crude oil and natural gas
prices, the fair market value may not be representative of the actual gain or
loss that will ultimately be realized by the Company.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133
establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair market value and that changes in the
derivative's fair market value be recognized currently in earnings unless
specific hedge accounting criteria are met. SFAS 133 is effective for the
Company in 2000, but early adoption is allowed. The Company has not yet
quantified the impacts of adopting SFAS 133 or determined the timing or
method of adoption. However, SFAS 133 could increase volatility in earnings
and other comprehensive income.
EARNINGS (LOSS) PER SHARE - The Company adopted SFAS 128,
"Earnings Per Share," beginning with the fourth quarter of 1997. All prior
period earnings per share have been restated to conform to the provisions of
the statement. Basic earnings per share is computed based on the weighted
average number of common shares outstanding. Diluted earnings per share is
computed based on the weighted average number of common shares outstanding
adjusted for the incremental shares attributed to outstanding options and
warrants to purchase common stock. Options to purchase 171,500 and 30,000
shares in 1996 and 1997, respectively, were not included in the computation
of diluted earnings per share because the option exercise price was greater
than the average market price of the Company's common stock. All options and
warrants to purchase common shares were excluded from the computation of
diluted earnings per share in 1998 because they were antidilutive as a result
of the Company's net loss in that year.
In connection with the acquisition of Sterling Energy Corp. in
November 1994, the Company issued warrants to purchase 300,000 shares of the
Company's common stock at an exercise price of $14.00 per share. Such
warrants became exercisable on October 13, 1994 and have an expiration date
of December 31, 1999. During 1997 and 1998, 48,523 and 79,145 warrants were
exercised, respectively. The remaining 172,332 warrants were outstanding at
December 31, 1998.
COMPREHENSIVE INCOME - The Company adopted SFAS 130,
"Comprehensive Income," beginning with the fourth quarter of 1997. There are
no components of comprehensive income which have been excluded from net
income and, therefore, no separate statement of comprehensive income has been
presented.
(2) ACQUISITIONS AND DIVESTITURES OF OIL AND GAS PROPERTIES
In February 1996, the Company entered into agreements pursuant to
which it sold all of its assets in the D-J Basin in two transactions closed
in March and June 1996, respectively, for an aggregate sales price of
$123,500,000, effective January 1, 1996. Combined, these transactions
resulted in Basin selling its interests in approximately two-thirds of its
producing wells and 70% of its proved oil and gas reserves at December 31,
1995. The Company recognized a gain of $22,472,000 in conjunction with the
second transaction. Revenue and expenses associated with the sold properties
were included in the Company's results of operations through the respective
closing dates.
Basin consummated an acquisition of certain oil and gas properties
from Midcon Offshore, Inc. on November 26, 1997. The purchase price was
approximately $31,300,000, subject to normal post-closing adjustments. Basin
was the high bidder at a bankruptcy court proceeding conducted to sell such
assets, which were comprised principally of working interests in six federal
lease blocks on the outer-continental shelf in the Gulf of Mexico, and the
related platforms and production facilities. Approximately $5,000,000 of the
purchase price was attributed to prospective drilling locations. The
acquisition was accounted for as a purchase and, accordingly, the operating
results of the acquired assets have been included in the Company's
consolidated financial statements since the closing date.
40
<PAGE>
(3) LONG-TERM DEBT
<TABLE>
<CAPTION>
December 31,
-----------------------
(in thousands) 1997 1998
---- ----
<S> <C> <C>
Revolving Credit Facility $ 11,000 $ 80,000
Other Notes 206 258
-------- --------
11,206 80,258
Less: Current Portion (153) (258)
-------- --------
Long-Term Debt, Net of Current Portion $ 11,053 $ 80,000
-------- --------
-------- --------
</TABLE>
Effective January 1, 1999, the Company entered into an Amended and
Restated Credit Agreement (the "Credit Agreement") with its existing bank
group. The Credit Agreement provides for borrowings of up to $110,000,000
under two combined facilities. Facility A, initially established at
$90,000,000, represents the borrowing base that is considered to be
"conforming" , based upon the bank's then-current customary practices and
standards in making conventional borrowing base determinations for oil and
gas producers. Such practices and standards are intended to be substantially
similar to the bank group's present practices, except for market-induced
changes relating to pricing, costs and risk factors related to oil and gas
reserves. Facility B, initially established at $20,000,000, is a shorter-term
supplemental line of credit. The Credit Agreement provides for the interest
rate on borrowings to be determined by reference to the prime rate or LIBOR,
at the Company's election. Facility A provides for a varying spread of 0% to
0.25% to be added to the prime rate, or 0.75% to 1.5% to be applied to LIBOR,
based upon the Company's facility usage ratio at the time. Facility B
provides for a spread of 3.5% to be added to the prime rate or 4.75% to be
applied to LIBOR, subject to a 0.25% increase in such spreads effective June
1, 1999. The Credit Agreement provides for borrowings to be revolving loans
until November 30, 2001, at which time the outstanding balance will be
converted into a four-year amortizing term loan unless the Credit Agreement
has been amended to extend the revolving period, and subject to the scheduled
termination of Facility B effective May 31, 2000. The borrowing base under
the Credit Agreement is scheduled to be re-determined as of March l, 1999 and
generally at three-month intervals thereafter until Facility B is retired,
and then at six-month intervals until converted into a term loan. The Credit
Agreement contains various covenants, including ones that could limit the
Company's ability to incur other debt, dispose of assets, pay dividends, or
repurchase stock. Pursuant to the agreement governing the Credit Agreement,
substantially all of the Company's producing properties are subject to
mortgages in favor of the banks and the Company's remaining properties are
subject to a negative pledge. The weighted average interest rate on
borrowings outstanding under the Credit Agreement at December 31, 1998 was
6.2%.
Outstanding debt at December 31, 1998 is payable as follows (in thousands):
<TABLE>
<S> <C>
1999 $ 258
2000 --
2001 --
2002 20,000
2003 20,000
Thereafter 40,000
--------
$ 80,258
--------
--------
</TABLE>
(4) BENEFIT PLANS
401(k) SAVINGS - The Company has a 401(k) profit sharing plan (the
"Plan"). Eligible employees may make voluntary contributions to the Plan,
which may be matched by the Company, at its discretion, up to 6 percent of
the employee's eligible compensation. The Company has historically matched
the first three percent of employees' eligible compensation that is
contributed under the Plan. The amount of employee contributions is limited
as specified in the Plan. At its discretion, the Company may also make
additional contributions to the Plan. The Company expensed $96,000, $183,000
and $208,000, with respect to the Plan for the years ended December 31, 1996,
1997 and 1998, respectively.
STOCK PLAN - Under the Company's Equity Incentive Plan, officers,
key employees, consultants and directors of the Company are eligible to
receive incentive stock options, non-qualified stock options, restricted
stock and performance shares. The restricted stock and performance shares
awarded under the plan entitle the grantee to the rights of a shareholder,
including the right to receive any dividends and to vote such shares, but the
shares are restricted as to sale, transfer or encumbrance.
41
<PAGE>
At December 31, 1998, a total of approximately 1,758,000 shares were
available for grant under the plans. Options granted generally vest over
three to four years, and expire after ten years. A total of 1,175,000 shares
of the Company's common stock are subject to such plans as of December 31,
1998, including 186,000 non-vested shares of restricted stock and performance
shares and 989,000 outstanding stock options.
The following table summarizes stock options activity for the years presented:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1996 1997 1998
--------- -------- ---------
<S> <C> <C> <C>
Balance, Beginning of Period 702,500 649,000 773,500
Granted 252,500 202,500 345,000
Exercised (33,500) (78,000) (129,500)
Forfeited/Canceled (272,500) -- --
-------- ------- --------
Balance, End of Period 649,000 773,500 989,000
-------- ------- --------
-------- ------- --------
</TABLE>
Additional information regarding outstanding options at December 31, 1998 is
as follows:
<TABLE>
<CAPTION>
Range of Number of Weighted Weighted Average Number of Weighted
Exercise Prices Options Average Remaining Life Options Average
Per Share Outstanding Exercise Price in Years Exercisable Exercise Price
- ----------------- ----------- -------------- ---------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 13.25 - $ 20.38 464,000 $ 15.48 8.0 109,000 $ 16.13
$ 7.63 - $ 11.00 165,000 $ 9.64 4.4 131,667 $ 9.52
$ 5.13 - $ 7.00 215,000 $ 6.32 7.6 138,333 $ 6.15
$ 3.88 - $ 4.94 145,000 $ 4.27 7.1 100,833 $ 4.21
------- ------- --- ------- -------
989,000 $ 10.87 7.0 479,833 $ 8.94
------- ------- --- ------- -------
------- ------- --- ------- -------
</TABLE>
The Company granted 25,000, 23,000 and 59,000 shares of restricted
stock during 1996, 1997 and 1998, respectively. Related compensation expense
was recognized in the amounts of approximately $98,000, $120,000 and $409,000
for the years ended December 31, 1996, 1997, and 1998, respectively.
Cumulatively through December 31, 1998, 73,000 shares of restricted stock had
been forfeited, 53,000 shares were no longer subject to restriction, and
81,000 shares of restricted stock remained subject to forfeiture.
The Company granted 55,000 and 50,000 performance shares during
1997 and 1998, respectively. In order for the performance shares to be
released to the grantee, the Company must attain certain performance goals by
the end of a three-year performance cycle which begins with the year of
award. Related compensation expense was recognized in the amount of $447,000
and $367,000 for the years ended December 31, 1997 and 1998, respectively.
In October 1995, the Financial Accounting Standards Board issued
SFAS 123, "Accounting for Stock-Based Compensation." SFAS 123 is effective
for 1996 and after and recommends a fair value based method of accounting for
employee stock compensation, including stock options. However, companies may
choose to account for stock compensation using the intrinsic value based
method as prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and provide pro forma disclosures
of net income and earnings per share as if the fair value based method had
been applied. The Company has elected to continue to account for stock
compensation using the intrinsic value based method.
42
<PAGE>
Had the Company elected to follow SFAS 123, the fair value of each
option grant would have been estimated on the date of grant using the
Black-Sholes option-pricing model with the following weighted-average
assumptions and effects:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1996 1997 1998
-------- -------- ---------
<S> <C> <C> <C>
Assumptions:
Risk Free Interest Rate 6.75% 5.75% 5.75%
Expected Dividend Yield 0% 0% 0%
Expected Life in Years 5 5 5
Expected Volatility 55% 58% 58%
Weighted Average
Fair Value Per Share $ 2.73 $ 5.66 $ 8.40
Pro Forma Net Income
(Loss)(in thousands) $15,468 $ 2,285 $(29,315)
Pro Forma Diluted Earnings
(Loss) Per Share $ 1.44 $ 0.20 $ (2.12)
</TABLE>
(5) COMMITMENTS AND CONTINGENCIES
LEASES - The Company is the primary obligor under various
noncancelable office space operating lease arrangements. The Company also
subleases certain office space to and from third parties under various
noncancelable lease arrangements. The following is a schedule of future
minimum lease payments under these leases at December 31, 1998:
<TABLE>
<CAPTION>
Future minimum Future minimum
lease obligations lease receipts
----------------- --------------
(in thousands)
<S> <C> <C>
1999 $ 596 $ 186
2000 136 --
------ -----
$ 732 $ 186
------ -----
------ -----
</TABLE>
Payments related to these lease obligations were approximately
$707,000, $990,000 and $1,096,000 for the years ended December 31, 1996, 1997
and 1998, respectively. Related receipts were $89,000, $502,000 and $506,000
in the years ended December 31, 1996, 1997 and 1998.
LEGAL PROCEEDINGS - The Company, from time to time, is involved in
various legal and administrative proceedings and claims of various types
which arise in the ordinary course of its business. While any litigation
contains an element of uncertainty, in the opinion of management, none of
these actions, either individually or in the aggregate, are likely to have a
material adverse effect on the Company's financial condition, liquidity or
results of operations.
43
<PAGE>
(6) INCOME TAXES
The components of the provision (benefit) for income taxes are as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
(in thousands) 1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Current Provision (Benefit):
Federal $ 950 $ (434) $ (58)
State 50 (37) 81
------- ------- --------
1,000 (471) 23
------- ------- --------
Deferred Provision (Benefit):
Federal 4,760 1,795 (6,555)
State -- -- --
------- ------- --------
4,760 1,795 (6,555)
------- ------- --------
Provision (Benefit)
For Income Taxes $ 5,760 $ 1,324 $ (6,532)
------- ------- --------
------- ------- --------
</TABLE>
Reconciliations of income tax provisions (benefit) computed at the
federal statutory rate with income tax provisions recorded by the Company for
each of the past three years are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
(in thousands) 1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Income (Loss) Before Income Taxes $21,330 $ 3,780 $(35,032)
Computed Tax (Benefit) at The
Applicable Federal Statutory Rate $ 7,252 $ 1,285 $(11,911)
State Income Tax (Benefit),
Net of Federal Tax Effect 704 39 (350)
Deferred Tax
Assets Valuation Allowance (2,196) - 5,729
------- ------- --------
Income Tax Provision (Benefit) $ 5,760 $ 1,324 $ (6,532)
------- ------- --------
------- ------- --------
</TABLE>
The tax effects of significant temporary differences representing
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------
(in thousands) 1997 1998
-------- --------
<S> <C> <C>
Deferred Tax (Assets) Liabilities:
Oil and Gas Properties
and Equipment $ 7,581 $ (2,357)
Net Operating Loss Carryforward - (2,505)
Percentage Depletion Carryforward - (589)
Alternative Minimum Tax
Credit Carryforward (1,026) (278)
Valuation Allowance - 5,729
-------- --------
Net Deferred Tax Liability $ 6,555 $ -
-------- --------
-------- --------
</TABLE>
(7) RELATED PARTY TRANSACTIONS
Prior to its initial public offering, the Company advanced
$559,000 to its principal stockholder at an annual interest rate of 9
percent. Pursuant to the terms of the note, the principal stockholder elected
to surrender 28,217 shares of Basin's common stock to the Company in the
fourth quarter of 1997 to settle the note. The surrendered shares are
reflected as treasury stock in the accompanying statement of changes in
stockholders' equity.
44
<PAGE>
(8) OIL AND GAS ACTIVITIES
The Company's oil and gas operations are conducted solely in the
United States. Certain information concerning these activities follows:
MAJOR PURCHASERS - The following parties purchased ten percent or
more of the Company's oil and gas production:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
Purchaser 1996 1997 1998
- --------- ------ ------ ------
<S> <C> <C> <C>
Texaco (a) 46% 28%
Dynegy (a) (a) 26%
Eighty-Eight Oil 26% 21% (a)
PanEnergy 43% (a) (a)
</TABLE>
(a) less than ten percent
COSTS INCURRED - Costs incurred in oil and gas operations and
related depletion per equivalent unit-of- production were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
(in thousands, except for gas equivalent data) 1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Property Acquisition-
Unproved(1) $ 5,056 $ 11,057 $ 22,920
Proved 3,067 48,680 3,018
Exploration Costs 10,250 27,995 58,063
Development Costs 4,472 17,901 22,671
------- -------- -------
Gross Expenditures $22,845 $105,633 $106,672
------- -------- -------
------- -------- -------
Depletion Per One Thousand
Cubic Feet of Gas Equivalent $ 0.82 $ 1.12 $ 1.31
------- -------- -------
------- -------- -------
</TABLE>
(1) Excludes $4,914,000, $1,113,000 and $150,000 of costs recouped through
the resale of partial interests in prospects to industry partners in 1996,
1997 and 1998, respectively.
COSTS NOT BEING AMORTIZED - Oil and gas property costs not being
amortized at December 31, 1998, consisted of $34,039,000 of leasehold and
seismic costs, of which $2,669,000, $3,312,000 and $28,058,000 were incurred
in 1996, 1997 and 1998, respectively. The Company anticipates that
substantially all unevaluated costs will be classified as evaluated costs
within three years.
UNAUDITED SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION
There are numerous uncertainties inherent in estimating quantities
of proved reserves and projected future rates of production and timing of
development expenditures, including many factors beyond the control of the
producer. The reserve data and standardized measures set forth herein
represent only estimates. Reserve engineering is a subjective process of
estimating underground accumulations of oil and gas that cannot be measured
in an exact 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 of different engineers
often vary. In addition, results of drilling, testing and production
subsequent to the date of an estimate may justify revision of such estimate.
Accordingly, reserve estimates will vary from the quantities of oil and gas
that are ultimately recovered. Further, the estimated future net revenues
from proved reserves and the present value thereof are based upon certain
assumptions, including geologic success, and future prices, production levels
and costs, that may not prove correct over time. Predictions of future
production levels are subject to great uncertainty, and the meaningfulness of
such estimates is highly dependent upon the accuracy of the assumptions upon
which they are based. Oil and gas prices have fluctuated widely in recent
years. The calculated weighted average sales prices utilized for the purposes
of estimating the
45
<PAGE>
Company's proved reserves and future net revenue were: $25.35 per barrel of
oil and $3.02 per Mcf of gas at December 31, 1996; $16.34 per barrel of oil
and $2.32 per Mcf of gas at December 31, 1997 and $10.31 per barrel of oil
and $1.99 per Mcf of gas at December 31, 1998. Estimated reserve quantities
and standardized measures set forth herein utilize such prices (which were
based on prevailing sales prices at the time) held constant in future periods
and a 10% discount rate.
All of the Company's reserves are located onshore or offshore in
the United States. The following tables include estimates for the Company's
onshore and offshore reserves combined. Estimates of onshore reserves were
prepared by the Company's engineers and audited by Netherland, Sewell &
Associates, Inc. at December 31, 1995, 1996 and 1997 and by Ryder Scott
Company Petroleum Engineers at December 31, 1998. Estimates of offshore
reserves were either prepared by Ryder Scott Company Petroleum Engineers, or
prepared by the Company's engineers and audited by Ryder Scott Company
Petroleum Engineers.
46
<PAGE>
ANALYSES OF CHANGES IN PROVED RESERVES
The following table sets forth information regarding the Company's
estimated net total proved and proved developed oil and gas reserve
quantities:
<TABLE>
<CAPTION>
OIL GAS
(MBbls) (MMcf)
------ ---------
<S> <C> <C>
Balance, December 31, 1995 12,606 131,436
Revisions 52 (451)
Extensions, Discoveries and Additions 49 6,391
Production (564) (4,776)
Sales of Reserves In-place (6,559) (104,140)
Purchases of Reserves In-place 2,286 1,253
------ ---------
Balance, December 31, 1996 7,870 29,713
Revisions (1,439) (6,488)
Extensions, Discoveries and Additions 1,458 32,911
Production (524) (5,509)
Sales of Reserves In-place (56) (1,015)
Purchases of Reserves In-place 845 39,922
------ ---------
Balance, December 31, 1997 8,154 89,534
Revisions (1,486) (6,136)
Extensions, Discoveries and Additions 2,057 57,888
Production (725) (17,616)
Purchases of Reserves In-place 667 3,832
------ ---------
Balance, December 31, 1998 8,667 127,502
------ ---------
------ ---------
Proved Developed Reserves -
December 31, 1996 4,046 19,182
December 31, 1997 4,863 82,571
December 31, 1998 3,352 103,271
</TABLE>
STANDARDIZED MEASURE
The following table presents the standardized measure of discounted future
net cash flows related to proved oil and gas reserves:
<TABLE>
<CAPTION>
December 31,
-------------------------------
(in thousands) 1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Future Production Revenues $ 289,105 $ 341,310 $342,618
Future Production Costs (108,522) (79,550) (71,609)
Future Development Costs (20,583) (40,829) (54,905)
Future Income Taxes (39,101) (31,723) (17,894)
--------- --------- --------
Future Net Cash Flows 120,899 189,208 198,210
Discount Factor at 10% Per Annum (57,593) (53,726) (48,255)
--------- --------- --------
Standardized Measure
of Discounted Future
Net Cash Flows(1) $ 63,306 $ 135,482 $149,955
--------- --------- --------
--------- --------- --------
</TABLE>
(1) Total future net cash flows before income taxes discounted at 10% per
annum are $83,656,000, $160,230,000 and $164,485,000 as of December 31,
1996, 1997 and 1998, respectively.
The estimate of future income taxes is based on the future net
cash flows from proved reserves adjusted for the tax basis of the oil and gas
properties but without consideration of general and administrative and
interest expenses. For standardized measure purposes the Company estimates
future income taxes using the "year-by-year" method. For ceiling test
purposes the Company estimates future income taxes using the "short-cut"
method.
47
<PAGE>
A summary of changes in the standardized measure of discounted
future net cash flows is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
(in thousands) 1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Standardized Measure of Discounted Future
Net Cash Flows, Beginning of Year $117,248 $ 63,306 $135,482
Changes in Sales Prices and Production Costs 17,693 (34,217) (51,857)
Changes in Estimated Future
Development Costs (1,819) 6,973 3,061
Sales of Minerals-in-place (83,530) (1,019) --
Purchase of Minerals-in-place 10,887 65,644 7,537
Revisions of Previous Quantity Estimates (169) (11,065) (9,015)
Costs Incurred That Reduced Future
Development Costs -- 2,253 474
Extensions, Discoveries and Improved Recovery 16,286 67,973 91,660
Sales of Oil and Gas, Net of Production
Costs and Taxes (11,577) (18,541) (39,574)
Accretion of Discount 12,907 8,366 16,023
Net Change in Future Income Taxes (8,530) (4,398) 10,218
Changes in Timing Of Production and Other (6,090) (9,793) (14,054)
--------- --------- --------
Standardized Measure of Discounted Future
Net Cash Flows, End of Year $ 63,306 $135,482 $149,955
--------- --------- --------
--------- --------- --------
</TABLE>
UNAUDITED SUPPLEMENTAL QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
First Second Third Fourth Total
----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
1997
Revenue $ 3,412 $ 2,566 $ 6,906 $ 11,836 $ 24,720
Gross Profit From Operations 1,814 1,269 5,589 9,869 18,541
Net Income (Loss) 9 (570) 966 2,051 2,456
Earnings (Loss) Per Share:
Basic -- (0.05) 0.09 0.16 0.22
Diluted -- (0.05) 0.09 0.16 0.22
1998
Revenue $10,256 $11,908 $14,144 $12,391 $48,699
Gross Profit From Operations 7,858 9,262 11,932 10,522 39,574
Net Income (Loss) 239 746 1,242 (30,727) (28,500)
Earnings (Loss) Per Share:
Basic 0.02 0.05 0.09 (2.21) (2.06)
Diluted 0.02 0.05 0.09 (2.21) (2.06)
</TABLE>
Gross profit from operations is comprised of oil and gas sales less lease
operating expenses and production taxes. The net loss for the fourth quarter
of 1998 includes a property impairment of $38,500,000. Earnings (loss) per
share is computed independently for each of the quarters presented and,
therefore, may not sum to the totals for the year.
48
<PAGE>
(a)(3) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------ -----------------------
<S> <C>
2.1 -- Agreement and Plan of Merger between Sterling Energy Corporation,
Basin Energy, Inc. and Basin Exploration, Inc. dated October 13, 1994(5)
2.2 -- Plan of Merger between Basin Sterling, Inc. and Basin Exploration, Inc.
dated November 22, 1994(5)
2.3 -- Plan of Merger between Basin Operating Company and Basin Exploration, Inc.
dated December 14, 1994(7)
3.1 -- Restated Certificate of Incorporation of Basin.(2)
3.2 -- Restated Bylaws of Basin.(2)
4.1 -- Common Stock Certificate of Basin.(2)
10.1 -- Equity Incentive Plan as amended May 5, 1998.(14)
10.3 -- Key Employee Participation Plan.(2)
10.4 -- Employment Agreement dated March 31, 1992 by and between Basin and Michael S. Smith.(3)
10.5 -- Gulf Coast Geoscientist Overriding Royalty Interest Plan dated November 30, 1995.(9)
10.6 -- Form of Rights Agreement dated as of February 24, 1996, between Basin
Exploration, Inc. and Corporate Stock Transfer, Inc. as Rights Agent.(8)
10.7 -- Performance Shares Plan approved February 4, 1997.(10)
10.8 -- Change of Control Employment Agreement dated October 13, 1995 between Basin
Exploration, Inc. and Howard L. Boigon.(9)
10.9 -- Employment Agreement dated August 28, 1995 between Basin Exploration, Inc.
and Samuel D. Winegrad.(9)
10.10 -- Employment Agreement dated June 28, 1995 between Basin Exploration, Inc.
and Neil L. Stenbuck.(9)
10.11 -- Employment Agreement dated November 10, 1995 between Basin Exploration, Inc.
and David A. Pustka.(9)
10.12 -- Employment Agreement dated February 23, 1996 between Basin Exploration, Inc.
and Thomas J. Corley.(10)
10.13 -- Assignment and Assumption of Lease dated December 18, 1995 by and between
Team, Inc., as original Tenant, Basin Exploration, Inc., as New Tenant, and
FC Tower Property Partners, L.P., as Landlord.(8)
10.16 -- Lease of Office Space dated September 25, 1992, between Brookfield Republic Inc.
and Basin Operating Company, as amended(4)+
10.17 -- First Lease of Additional Office Space dated as of December 1, 1994, between
Brookfield Republic, Inc. and Basin Operating Company.(6)+
10.18 -- Purchase and Sale Agreement dated February 13, 1997, between Hall-Houston Oil
Company et al as Sellers and Basin Exploration, Inc. as Buyer.(10)+
10.19 -- First Amendment of Amended and Restated Credit Agreement dated August 6, 1996
between the Company and Colorado National Bank, Union Bank of California, N.A.
and NationsBank of Texas, N.A. dated June 11, 1997.(11)
10.20 -- Order of the United States Bankruptcy Court for the Southern District of Texas
Corpus Christi Division, dated November 18, 1997, with exhibits, including the
Agreement of Purchase and Sale.(12)
10.21 -- Second Amendment of Amended and Restated Credit Agreement dated August 6, 1996
between the Company and Colorado National Bank, Union Bank of California, N.A.
and NationsBank of Texas, N.A. dated November 1, 1997.(13)
10.22 -- Third Amendment of Amended and Restated Credit Agreement dated August 6, 1996
between the Company and U.S. Bank National Association, Union Bank of
California, N.A. and NationsBank of Texas, N.A. dated April 30, 1998.(14)
10.23 -- Fourth Amendment of Amended and Restated Credit Agreement dated August 6, 1996
between the Company and U.S. Bank National Association, Union Bank of
California, N.A. and Nationsbank, N.A., dated August 20, 1998.(15)
10.24 -- Amended and Restated Credit Agreement dated January 1, 1999 among the Company and
Nationsbank, N.A., U.S. National Association and Union Bank of California, N.A.(1)
10.25 -- Employment Agreement dated January 28, 1999, between Basin Exploration, Inc. and Patrick A. Jackson.(1)
10.26 -- Employment Agreement dated February 1, 1999, between Basin Exploration, Inc. and David A. Pustka.(1)
</TABLE>
49
<PAGE>
<TABLE>
<S> <C>
21 -- Subsidiaries.(1)
23.1 -- Consent of Arthur Andersen LLP.(1)
23.2 -- Consent of Ryder Scott Company.(1)
27 -- Financial Data Schedule.(1)
</TABLE>
- -------------------
(1) Filed herewith.
(2) Filed as an Exhibit to Basin's Registration Statement on Form S-1 as
filed on March 17, 1992, Registration No. 33-46486, and incorporated
herein by reference.
(3) Filed as an Exhibit to Amendment No. 1 to Basin's Registration
Statement on Form S-1 as filed on April 21, 1992, Registration No.
33-46486, and incorporated herein by reference.
(4) Filed as an Exhibit to Basin's Registration Statement on Form S-1 as
filed on October 25, 1993, Registration No. 33-70802, and incorporated
herein by reference.
(5) Filed as an Exhibit to Form 8-K filed on December 10, 1994, and
incorporated herein by reference.
(6) Filed as an Exhibit to Form 10-K/A-1 filed on June 26, 1995 and
incorporated herein by reference.
(7) Filed as an Exhibit to Form 10-K filed on March 28, 1995, and
incorporated herein by reference.
(8) Filed as an Exhibit to Form 8-K filed on February 26, 1996, and
incorporated herein by reference.
(9) Filed as an Exhibit to Form 10-K filed on March 28, 1996, and
incorporated herein by reference.
(10) Filed as an Exhibit to Form 10-K filed on March 31, 1997, and
incorporated herein by reference.
(11) Filed as an Exhibit to Form 10-Q filed on August 12, 1997, and
incorporated herein by reference.
(12) Filed as an Exhibit to Form 8-K filed on December 11, 1997, and
incorporated herein by reference.
(13) Filed as an Exhibit to Form 10-K filed on March 31, 1998, and
incorporated herein by reference.
(14) Filed as an Exhibit to Form 10-Q filed on May 14, 1998, and
incorporated herein by reference.
(15) Filed as an Exhibit to Form 10-Q filed on November 13, 1998, and
incorporated herein by reference.
+ Confidential treatment has been granted for portions of these Exhibits.
(b) Reports on Form 8-K
None.
50
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
BASIN EXPLORATION, INC.
By: /s/ MICHAEL S. SMITH
---------------------------
Date: March 29, 1999 Michael S. Smith
PRESIDENT, CHIEF EXECUTIVE OFFICER
AND CHAIRMAN OF THE BOARD
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and
on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ MICHAEL S. SMITH President, Chief Executive March 29, 1999
- ------------------------ Officer and Chairman of the
Michael S. Smith Board (Principal Executive Officer)
/s/ HOWARD L. BOIGON Vice President - General Counsel, March 29, 1999
- ------------------------ Secretary and Director
Howard L. Boigon
/s/ NEIL L. STENBUCK Vice President, Chief Financial March 29, 1999
- ------------------------ Officer and Director
Neil L. Stenbuck
/s/ JAMES A. TUELL Controller, Principal Accounting March 29, 1999
- ------------------------ Officer
James A. Tuell
/s/ DONALD H. ANDERSON Director March 29, 1999
- ------------------------
Donald H. Anderson
/s/ JOHN F. GREENE Director March 29, 1999
- ------------------------
John F. Greene
/s/ J. PAUL HELLSTROM Director March 29, 1999
- ------------------------
J. Paul Hellstrom
/s/ MICHAEL A. NICOLAIS Director March 29, 1999
- ------------------------
Michael A. Nicolais
/s/ LARRY D. UNRUH Director March 29, 1999
- ------------------------
Larry D. Unruh
51
<PAGE>
AMENDED AND RESTATED CREDIT AGREEMENT
THIS AMENDED AND RESTATED CREDIT AGREEMENT, dated as of January 1,
1999, is by and among BASIN EXPLORATION, INC., a Delaware corporation
("Borrower"), NATIONSBANK, N.A. ("NBNA"), a national banking association,
U.S. BANK NATIONAL ASSOCIATION ("USB"), a national banking association, and
UNION BANK OF CALIFORNIA, N.A., a national banking association ("Union").
Each of NBNA, USB and Union shall act hereunder as a lender with respect to
the Loan, as more fully described below; NBNA shall act hereunder as agent,
on behalf of NBNA, USB and Union, with respect to the Loan, as more fully
described below; and NBNA shall act as collateral agent, on behalf of NBNA,
USB and Union, with respect to the Security Documents and any other
collateral for the Loan, as more fully described below.
RECITALS
A. Borrower, NBNA's predecessor, USB and Union entered into an
Amended and Restated Credit Agreement dated as of August 6, 1996, as the same
has heretofore been amended (the "Prior Credit Agreement"), in order to set
forth the terms upon which USB, Union and NBNA's predecessor would make loans
to Borrower and issue letters of credit at the request of Borrower and by
which such loans and letters of credit would be governed.
B. Borrower, NBNA, USB and Union wish to enter into this Amended
and Restated Credit Agreement in order to amend and restate in their entirety
the terms and provisions of the Prior Credit Agreement and to provide for the
terms upon which NBNA, USB and Union will make loans to Borrower and issue
letters of credit at the request of Borrower and by which such loans and
letters of credit will be governed.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements contained herein, the parties hereto agree as
follows:
ARTICLE I
DEFINITIONS AND REFERENCES
Section 1.1. DEFINED TERMS. As used in this Agreement, each of the
following terms has the meaning given
<PAGE>
it in this Section 1.1 or in the recitals, sections and subsections referred
to below:
"ADVANCE" means any advance to be made to Borrower pursuant to
Article II hereof.
"AFFILIATE" means, as to any Person, each other Person that
directly or indirectly (through one or more intermediaries or otherwise)
controls, is controlled by, or is under common control with, such Person.
"AGENT" means NBNA, in its capacity as agent for Lenders hereunder
and any successor Agent appointed and accepting such appointment as described
in Article VIII below.
"AGREEMENT" means this Amended and Restated Credit Agreement.
"ALTERNATE BASE RATE" means: (a) for any Business Day, the greater
of: (1) the Federal Funds Rate for such Business Day, plus 0.50 percentage
points per annum, or (2) the Base Rate in effect as of the close of business
on such Business Day; and (b) for any day which is not a Business Day, the
"Alternate Base Rate" for the immediately preceding Business Day.
"AMORTIZATION PERIOD" means the time period commencing upon the
termination of the Revolving Period and ending four years thereafter.
"AUTHORIZED OFFICER" means, with respect to any act to be performed
or duty to be discharged by or on behalf of any Person who is not an
individual, any partner, officer, agent or representative thereof who is at
the time in question authorized to perform such act or discharge such duty on
behalf of such Person.
"BASE RATE" means the rate of interest established by Agent from
time to time as its "prime rate". Such rate is set by Agent as a general
reference rate of interest, taking into account such factors as it may deem
appropriate, it being understood that many of Agent's commercial or other
loans are priced in relation to such rate, that it is not necessarily the
lowest or the best rate actually charged to any customer, that it may not
correspond with further increases and decreases in interest rates charged by
other lenders or market rates in general and that Agent may make various
commercial or other loans at rates of interest having no relationship to such
rate.
2
<PAGE>
"BASE RATE PORTION" means any portion of the unpaid principal
balance of the Loan which is not a Fixed Rate Portion.
"BASE RATE SPREAD" means: (a) as to that portion of the Loan
included in Facility A: (1) for any and all days as to which the Usage Ratio
is less than or equal to 90 percent, 0.00 percentage points per annum; and
(2) for any and all days as to which the Usage Ratio is greater than 90
percent, 0.25 percentage points per annum; (b) as to that portion of the Loan
included in Facility B: (1) for any and all times through and including May
31, 1999, 3.50 percentage points per annum; and (2) for any and all times
after May 31, 1999, 3.75 percentage points per annum.
"BORROWER" means Basin Exploration, Inc., a Delaware corporation.
"BORROWING BASE" means, at any time, the sum of the Borrowing Base
(Conforming) at that time and the Borrowing Base (Supplemental) at that time.
"BORROWING BASE (CONFORMING)" means, at any time prior to the
Maturity Date, that portion of the Borrowing Base attributable to Facility A,
which shall be the aggregate loan value of all Borrowing Base Properties, as
determined by Lenders in their sole and absolute discretion, in accordance
with the procedures for conforming oil and gas borrowing base loans set forth
in Section 3.2 below; provided that the Borrowing Base (Conforming) for the
time period from January 1, 1999 through the next determination of the
Borrowing Base (Conforming) by Lenders shall be $90,000,000.
"BORROWING BASE (SUPPLEMENTAL)" means that portion of the Borrowing
Base attributable to Facility B, which shall be: (a) at any time prior to
June 1, 2000, the supplemental loan value attributable to the Borrowing Base
Properties, as determined by Lenders in their sole and absolute discretion,
in accordance with the procedures for supplemental oil and gas borrowing base
loans set forth in Section 3.2 below; and (b) at any time on or after June 1,
2000, zero; provided that, the Borrowing Base (Supplemental) for the time
period from January 1, 1999 through the next determination of the Borrowing
Base (Supplemental) by Lenders shall be $40,000,000.
"BORROWING BASE PROPERTIES" means, at any time, the properties of
Borrower which have been reflected as containing proved developed reserves or
proved undeveloped reserves in the most recent engineering report submitted
by Borrower to Lenders pursuant to Section 6.1(b)(5) below and which have
been evaluated by Lenders in making the then-most-recent determination of the
Borrowing Base (Conforming) or the Borrowing Base (Supplemental).
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<PAGE>
"BUSINESS DAY" means a day on which commercial banks are open for
business with the public in Denver, Colorado, in Los Angeles, California and
in Dallas, Texas. Any Business Day in any way relating to Fixed Rate
Portions (such as the day on which an Interest Period begins or ends) must
also be a day on which, in the judgment of Lenders, significant transactions
in dollars are carried out in the interbank eurocurrency market.
"CLOSING DATE" means January 5, 1999.
"COLLATERAL" means all tangible or intangible real or personal
property which, under the terms of any Security Document, is or is purported
to be covered thereby or subject thereto.
"COLLATERAL AGENT" means NBNA, in its capacity as the holder of
Lenders' Liens on the Collateral on behalf of Lenders and any successor
Collateral Agent appointed and accepting such appointment as described in
Article VIII below.
"COMMITMENT" means the agreement of each Lender to make Advances to
Borrower of amounts up to its Proportionate Share of the Commitment Amount on
the terms and subject to the conditions hereof.
"COMMITMENT AMOUNT" means, at any time, the lesser of: (a) the
Borrowing Base, or (b) the Maximum Loan Amount.
"COMMITMENT AMOUNT (FACILITY A)" means, at any time, the lesser of:
(a) the Borrowing Base (Conforming), or (b) the Maximum Loan Amount.
"COMMITMENT AMOUNT (FACILITY B)" means, at any time, the lesser of:
(a) the Borrowing Base (Supplemental), or (b)(1) the Maximum Loan Amount,
minus (2) the Commitment Amount (Facility A).
"COMMITMENT EXPIRATION DATE (FACILITY A)" means the date after
which no further Advances under Facility A are to be made hereunder, which
shall be the close of business on the earlier of: (a) the last day of the
Revolving Period, or (b) the date of any termination of the Commitment
insofar as it relates to Facility A.
"COMMITMENT EXPIRATION DATE (FACILITY B)" means the date after
which no further Advances under Facility B are to be made hereunder, which
shall be the close of business on the earlier of: (a) May 31, 2000, or (b)
the date of any termination of the Commitment insofar as it relates to
Facility B.
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<PAGE>
"COMMITMENT FEE RATE" means: (a) as to that portion of the Loan
included in Facility A: (1) for any and all days as to which the Usage Ratio
is less than or equal to 50 percent, 0.25 percentage points per annum; (2)
for any and all days as to which the Usage Ratio is greater than 50 percent
but less than or equal to 75 percent, 0.30 percentage points per annum; (3)
for any and all days as to which the Usage Ratio is greater than 75 percent
but less than or equal to 90 percent, 0.35 percentage points per annum; and
(4) for any and all days as to which the Usage Ratio is greater than 90
percent, 0.375 percentage points per annum; and (b) as to that portion of the
Loan included in Facility B, 0.50 percentage points per annum.
"CONSOLIDATED" refers to the consolidation of any Person, in
accordance with GAAP, with its properly consolidated Affiliates. References
herein to a Person's Consolidated financial statements, financial position,
financial condition, liabilities, etc. refer to the consolidated financial
statements, financial position, financial condition, liabilities, etc. of
such Person and its properly consolidated Affiliates.
"CUMULATIVE NET INCOME" means, with respect to any Person, the sum
of such Person's net income, determined in accordance with GAAP, on a
Consolidated basis, for each completed fiscal quarter after January 1, 1999.
"CURRENT RATIO" means, at any time and from time to time, the ratio
of: (a) Borrower's current assets, including without limitation any and all
undrawn amounts then available for borrowing hereunder by Borrower; to (b)
Borrower's current liabilities (excluding current maturities of long-term
debt), all determined on a Consolidated basis and in accordance with GAAP.
"DEBT" means, as to any Person, all indebtedness, liabilities and
obligations of such Person, whether primary or secondary, direct or indirect,
absolute or contingent.
"DEFAULT" means any Event of Default and any default, event or
condition which would, with the giving of any requisite Default Notice and/or
the passage of any requisite Grace Period, constitute an Event of Default.
"DEFAULT NOTICE" has the meaning given such term in Section 7.1
below.
"DISCLOSURE SCHEDULE" means: (a) Schedule 1 attached hereto, and
(b) any documents listed on such Schedule 1 and expressly incorporated
therein by reference, so long as
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<PAGE>
Borrower has heretofore delivered true and correct copies of such documents
to Lenders. Insofar as any representations and warranties made herein are
incorporated by reference or otherwise remade in Loan Documents delivered as
of a date after the date hereof, the term "Disclosure Schedule" shall in such
representations and warranties be deemed to refer to all documents,
instruments or other writings which have at the time in question been
delivered to Lenders in connection with the transactions contemplated herein.
"DISTRIBUTION" means any dividend payable in cash or property with
respect to any shares of capital stock of any Person (other than dividends
payable in shares of the same class of common, preferred or other capital
stock as the shares upon which the dividend is being paid), any other
distribution made with respect to any shares of capital stock of any Person,
or any purchase, redemption or retirement of, or other payment with respect
to, any shares of capital stock of any Person.
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended from time to time, together with all rules and regulations
promulgated with respect thereto.
"ERISA PLAN" means any pension benefit plan subject to Title IV of
ERISA maintained by Borrower or any Affiliate of Borrower to which Borrower
is required to contribute.
"EURODOLLAR RATE" means, with respect to each particular Fixed Rate
Portion and the related Interest Period, the rate of interest per annum
(expressed as a percentage) determined by Lenders, in accordance with their
customary practices, to be representative of the rates at which deposits of
U.S. dollars are offered to Agent at approximately 9:00 a.m., Dallas, Texas
time, two Business Days prior to the first day of such Interest Period (by
prime banks in the interbank eurocurrency market which have been selected by
Agent in accordance with their customary practices) for delivery on the first
day of such Interest Period in an amount equal or comparable to the amount of
such Fixed Rate Portion and for a period of time equal or comparable to the
length of such Interest Period. The Eurodollar Rate determined by Agent with
respect to a particular Fixed Rate Portion shall be fixed at such rate for
the duration of the associated Interest Period. If Agent is unable so to
determine the Eurodollar Rate for any Fixed Rate Portion, or if the
associated Fixed Rate would cause the interest limitations set forth in
Section 9.6 below to be applicable, Borrower shall be deemed not to have
elected such Fixed Rate Portion.
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<PAGE>
"EVENT OF DEFAULT" has the meaning given such term in Section 7.1
below.
"FACILITY A" means, at any time, that portion of the Loan which has
been identified as being part of Facility A at the times that the Advances or
Letters of Credit comprising such portion of the Loan were requested.
"FACILITY B" means, at any time, that portion of the Loan which has
been identified as being part of Facility B at the times that the Advances or
Letters of Credit comprising such portion of the Loan were requested.
"FEDERAL FUNDS RATE" means, for any day, the rate per annum
(rounded upwards, if necessary, to the nearest 0.01 of one percent) 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 by the Federal Reserve Bank of Dallas, Texas on the
Business Day next succeeding such day, provided that: (a) if the day for
which such rate is to be determined is not a Business Day, the Federal Funds
Rate for such day shall be such rate on such transactions on the next
preceding Business Day as so published on the next succeeding Business Day,
and (b) if such rate is not so published for any day, the Federal Funds Rate
for such day shall be the average rate quoted to Agent on such day on such
transactions, as determined by Agent.
"FISCAL QUARTER" means a three-month period ending on the last day
of March, June, September or December of any year.
"FISCAL YEAR" means a twelve-month period ending on December 31 of
any year.
"FIXED RATE" means, with respect to each particular Fixed Rate
Portion and the associated Eurodollar Rate and Reserve Requirement, the rate
of interest per annum calculated by Agent (rounded upward, if necessary, to
the next higher 0.01 percent) determined pursuant to the following formula:
EURODOLLAR RATE
Fixed = ---------------------------- + Fixed Rate
Rate 1.00 - Reserve Requirement Spread
If the Reserve Requirement changes during the Interest Period for a Fixed
Rate Portion, Agent may, at its option, either change the Fixed Rate for such
Fixed Rate Portion or leave it unchanged for the duration of such Interest
Period. The Fixed Rate for any Fixed Rate Portion (other than Fixed Rate
Portions in outstanding and unexpired Interest Periods) shall
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<PAGE>
change only if Lenders receive notice from Borrower that the Usage Ratio has
increased or decreased pursuant to Section 6.1(p) below; provided, however,
that Lenders may make such change without receiving notice from Borrower
based on information then available to Lenders, but Lenders will have no
obligation to do so.
"FIXED RATE PORTION" means any portion of the unpaid principal
balance of the Loan which Borrower designates as such in a Rate Election.
"FIXED RATE SPREAD" means: (a) as to that portion of the Loan
included in Facility A: (1) for any and all days as to which the Usage Ratio
is less than or equal to 50 percent, 0.75 percentage points per annum; (2)
for any and all days as to which the Usage Ratio is greater than 50 percent
but less than or equal to 75 percent, 1.00 percentage points per annum; (3)
for any and all days as to which the Usage Ratio is greater than 75 percent
but less than or equal to 90 percent, 1.25 percentage points per annum; and
(4) for any and all days as to which the Usage Ratio is greater than 90
percent, 1.50 percentage points per annum; and (b) as to that portion of the
Loan included in Facility B: (1) for any and all times through and including
May 31, 1999, 4.75 percentage points per annum; and (2) for any and all times
after May 31, 1999, 5.00 percentage points per annum.
"GAAP" means those generally accepted accounting principles and
practices which are recognized as such by the Financial Accounting Standards
Board (or any generally recognized successor) and which, in the case of
Borrower and its Consolidated Affiliates, (a) are applied for all periods
after the date hereof in a manner consistent with the manner in which such
principles and practices were applied to the Initial Financial Statements,
and (b) are consistently applied for all periods after the date hereof so as
to properly reflect the financial condition, and the results of operations
and changes in financial position, of Borrower and, on a Consolidated basis,
of Borrower and its Consolidated Affiliates.
"GRACE PERIOD" shall have the meaning given such term in Section
7.1 below.
"HEDGING OBLIGATIONS" means, with respect to any Person, all
liabilities of such Person under: (a) interest rate swap agreements, interest
rate cap agreements, interest rate collar agreements and all other agreements
and arrangements designed to protect such Person against fluctuations in
interest rates, or (b) commodity hedge, commodity swap, exchange, collar or
cap agreements, fixed
8
<PAGE>
price agreements and all other agreements and arrangements designed to
protect such Person against fluctuations in the price of oil, gas or other
hydrocarbons.
"INITIAL ENGINEERING REPORT" means a report prepared as of December
1, 1998, prepared by Borrower, true and correct copies of which have been
furnished to Lenders.
"INITIAL FINANCIAL STATEMENTS" means (a) the audited annual
Consolidated financial statements of Borrower, dated as of December 31, 1997,
and (b) the quarterly Consolidated financial statements of Borrower dated as
of March 31, 1998, June 30, 1998 and September 30, 1998, copies of all of
which Initial Financial Statements have heretofore been delivered by Borrower
to Lenders.
"INTEREST PERIOD" means, with respect to each particular Fixed Rate
Portion, a period of one, two, three, six or twelve months, as specified in
the Rate Election applicable thereto, beginning on and including the date
specified in such Rate Election (which must be a Business Day) and ending on
but not including the date which corresponds numerically to such beginning
date one, two, three, six or twelve months thereafter (or if such month has
no numerically corresponding date, on the last Business Day of such month);
provided that each Interest Period which would otherwise end on a day which
is not a Business Day shall end on the next succeeding Business Day unless
such next succeeding Business Day is the first Business Day of a calendar
month, in which case such Interest Period shall end on the Business Day next
preceding such numerically corresponding day. No Interest Period may be
elected which would end after the date on which the Loan is due and payable
in full.
"LATE PAYMENT RATE" means, at the option of Lenders in each
particular instance and as to any particular portion of the Loan: (a) the
interest rate that would otherwise have been applicable to that portion of
the Loan plus two percentage points per annum, or (b) any other rate of
interest which may, with respect to the Obligation in question, be provided
for in any other applicable Loan Document.
"LENDERS" means NBNA, USB and Union and their respective permitted
successors and assigns, in their respective capacities as lenders of the Loan.
"LETTER OF CREDIT" means a standby or commercial letter of credit
requested by Borrower and agreed to be issued by Lenders pursuant to Article
II below. Any and all Letters of Credit shall actually be issued in the name
of Agent, but
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any such issuance shall be on behalf of all Lenders, and each Lender shall
participate in the risks and benefits relating to each such Letter of Credit
to the extent of such Lender's Proportionate Share.
"LIEN" means, with respect to any property or assets, any right or
interest therein of a creditor to secure Debt owed to him or any other
arrangement with such creditor which provides for the payment of such Debt
out of such property or assets or which allows him to have such Debt
satisfied out of such property or assets prior to the general creditors of
any owner thereof, including without limitation any lien, mortgage, security
interest, pledge, deposit, production payment, rights of a vendor under any
title retention or conditional sale agreement or lease substantially
equivalent thereto, or any other charge or encumbrance for security purposes,
whether arising by law or agreement or otherwise, but excluding any right of
offset which arises without agreement in the ordinary course of business.
"LOAN" has the meaning given such term in Section 2.1 below.
"LOAN DOCUMENTS" means this Agreement, the Security Documents, the
Notes, Letters of Credit, applications for Letters of Credit, the Transfer
Orders and all other agreements, certificates, legal opinions and other
documents, instruments and writings heretofore or hereafter delivered in
connection herewith or therewith.
"MAJORITY LENDERS" means any two or more Lenders whose aggregate
Proportionate Shares are not less than two-thirds.
"MATURITY DATE" means the last day of the Amortization Period.
"MAXIMUM LOAN AMOUNT" means, at any time, $110,000,000; provided
that, upon the request of Borrower, Lenders may, in their sole discretion,
increase said amount to an amount not greater than $200,000,000 by giving
written notice of such increase to Borrower, but nothing contained in this
Agreement, the Notes or any other Loan Document shall be deemed to commit or
require Lenders to grant any such increase; provided further that, at any
time prior to the end of the Revolving Period, Borrower may irrevocably
elect, by giving written notice to Lenders, to decrease the Maximum Loan
Amount to an amount less than the Maximum Loan Amount theretofore in effect.
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<PAGE>
"NON-RECOURSE DEBT" means any and all indebtedness and other
obligations of Borrower, to the extent that the rights of the holders thereof
to enforce the indebtedness and other obligations of Borrower thereunder are
limited to certain specific assets of Borrower and such holders have no
recourse beyond such specific assets to the general credit of Borrower, all
upon terms which are satisfactory in form and substance to Lenders.
"NOTES" means: (a) the Promissory Note of even date herewith, made
by Borrower, payable to the order of NBNA, substantially in the form of
Exhibit A-1 attached hereto and made a part hereof, (b) the Promissory Note
of even date herewith, made by Borrower, payable to the order of USB,
substantially in the form of Exhibit A-2 attached hereto and made a part
hereof, and (c) the Promissory Note of even date herewith, made by Borrower,
payable to the order of Union, substantially in the form of Exhibit A-3
attached hereto and made a part hereof, all as now in effect or as hereafter
amended, modified, extended, restated or replaced.
"OBLIGATIONS" means all Debt from time to time owing by Borrower to
any Lender under or pursuant to any of the Loan Documents. "OBLIGATION"
means any part of the Obligations.
"PAYMENT AMOUNT" means: (a) with respect to any Payment Date during
the Revolving Period, the amount of interest accrued on the Base Rate Portion
through such Payment Date; and (b) with respect to any Payment Date during
the Amortization Period, 6.25 percent of the outstanding principal balance of
the Loan as of the end of the Revolving Period plus interest accrued on the
Base Rate Portion through such Payment Date.
"PAYMENT DATE" means: (a) the last day of each February, May,
August and November, commencing February 28, 1999, and (b) if all Obligations
due and payable on any such date are not then paid, each succeeding day until
all due and payable Obligations are paid in full.
"PERMITTED INVESTMENT" means:
(a) Any evidence of indebtedness issued or guaranteed by the
United States Government, maturing not more than one year after the date of
acquisition by Borrower; or
(b) Commercial paper, maturing not more than nine months from the
date of issuance thereof, which is issued by: (1) a corporation (other than
an Affiliate of Borrower) organized under the laws of any state of the United
States or of the District of Columbia and rated A-1 by Standard & Poor's
Corporation or P-1 by Moody's Investors Service, Inc., or (2) any Lender (or
its holding company); or
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<PAGE>
(c) Any certificate of deposit, maturing not more than one year
from the date of issuance thereof, which is issued by a commercial banking
institution that is a member of the Federal Reserve System and has a combined
capital and surplus and undivided profits of not less than U.S. $500,000,000;
or
(d) Any repurchase agreement entered into with a commercial
banking institution that is a member of the Federal Reserve System and has a
combined capital and surplus and undivided profits of not less than U.S.
$500,000,000, which: (1) is secured by a fully perfected security interest in
any obligation of the type described in any of clauses (a) through (c) above,
and (2) has a market value at the time such repurchase agreement is entered
into of not less than 100 percent of the repurchase obligation of such
commercial banking institution thereunder; or
(e) Any deposit account at a commercial banking institution that
is a member of the Federal Reserve System and has a combined capital and
surplus and undivided profits of not less than U.S. $500,000,000; or
(f) Hedging Obligations of Borrower;
(g) Any other investment owned by Borrower as of the date of this
Agreement, so long as Borrower does not increase such investment after the
date hereof; or
(h) Other short-term investments of durations and involving credit
risks comparable to the investments described above.
"PERSON" means an individual, corporation, partnership,
association, joint-stock company, trust or trustee thereof, estate or
executor thereof, unincorporated organization or joint venture, court or
governmental unit or any agency or subdivision thereof, or any other legally
recognizable entity.
"PRIOR CREDIT AGREEMENT" has the meaning given such term in Recital
A above.
"PROHIBITED LIEN" means any Lien not expressly allowed under
Section 6.2(b) below.
"PROPORTIONATE SHARE" means, for any Lender, the fractional share
equal to that Lender's share of all of the rights and obligations of Lenders
hereunder, including without
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limitation the obligations of Lenders to make Advances hereunder and the
rights of Lenders to receive payments hereunder. Unless hereafter amended,
the Proportionate Share of each Lender shall be as follows:
<TABLE>
<S> <C>
NBNA: 36.363636%
USB: 36.363636%
Union: 27.272728%
</TABLE>
"RATE ELECTION" has the meaning given such term in Section 2.8
below.
"REGULATION D" means Regulation D of the Board of Governors of the
Federal Reserve System, as from time to time in effect.
"RESERVE REQUIREMENT" means, on any day with respect to each
particular Fixed Rate Portion, the maximum reserve requirement, as determined
by Lenders (including without limitation any basic, emergency, supplemental,
marginal or similar reserves), expressed as a decimal and rounded to the next
higher 0.0001, which would then apply to Lenders under Regulation D with
respect to "Eurocurrency liabilities" (as such term is defined in Regulation
D) equal in amount to such Fixed Rate Portion, were Lenders to have any such
"Eurocurrency liabilities". If such reserve requirement shall change after
the date hereof, the Reserve Requirement shall be automatically increased or
decreased, as the case may be, from time to time as of the effective time of
each such change in such reserve requirement.
"REVOLVING PERIOD" means the time period from the date of this
Agreement through November 30, 2001; provided that, upon the request of
Borrower, Lenders may, in their sole discretion, extend such time period at
any time and from time to time to a date not later than December 31, 2006 by
giving written notice of such extension to Borrower, but nothing contained in
this Agreement, the Notes or any other Loan Document shall be deemed to
commit or require Lenders to grant any such increase.
"SECURITY DOCUMENTS" means any and all security agreements, deeds
of trust, mortgages, chattel mortgages, pledges, guaranties, financing
statements, continuation statements, extension agreements and other
agreements or instruments now, heretofore, or hereafter delivered by Borrower
to, or for the benefit of, Lenders, or any of them, in connection with the
Prior Credit Agreement or this Agreement or any transaction contemplated
hereby or thereby to secure or guarantee the payment of any part of the
Obligations or the performance of any other duties and obligations of
Borrower under the Loan Documents, whenever made or delivered.
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<PAGE>
"SUBORDINATED DEBT" means any indebtedness or other obligations of
Borrower, to the extent that the rights of the holders thereof to enforce the
indebtedness and other obligations of Borrower thereunder have been
subordinated to the rights of Lenders hereunder or in connection herewith by
subordination agreements executed by the holders of the Subordinated Debt and
satisfactory in form and substance to Lenders.
"TERMINATION EVENT" means: (a) the occurrence with respect to any
ERISA Plan of (1) a reportable event described in Section 4043(b)(5) of ERISA
or (2) any other reportable event described in Section 4043 of ERISA other
than a reportable event not subject to the provision for 30-day notice to the
Pension Benefit Guaranty Corporation under such regulations, or (b) the
withdrawal of Borrower or of any Affiliate of Borrower from an ERISA Plan
during a plan year in which it was a "substantial employer" as defined in
Section 4001(a)(2) of ERISA, or (c) the filing of a notice of intent to
terminate any ERISA Plan or the treatment of any ERISA Plan amendment as a
termination under Section 4041 of ERISA, or (d) the institution of
proceedings to terminate any ERISA Plan by the Pension Benefit Guaranty
Corporation under Section 4042 of ERISA, or (e) any other event or condition
which might constitute grounds under Section 4042 of ERISA for the
termination of, or the appointment of a trustee to administer, any ERISA Plan.
"TRANSFER ORDERS" means transfer orders in proper form acceptable
to Lenders and to the purchasers of production, covering the properties
included in the Collateral, directing the purchasers of production to pay
proceeds of such properties to Collateral Agent for the account of Borrower.
"USAGE RATIO" means: (a) for any Business Day, the ratio of: (1)
the outstanding principal balance of the Loan as of the close of business on
such day plus the face amount of any and all outstanding Letters of Credit as
of the close of business on such day, to (2) the Borrowing Base (Conforming)
as of the close of business on such day; and (b) for any day which is not a
Business Day, the "Usage Ratio" for the immediately preceding Business Day.
"YEAR 2000 COMPLIANT" has the meaning given such term in Section
5.1(n) below.
"YEAR 2000 PROBLEM" has the meaning given such term in Section
5.1(n) below.
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Section 1.2. INCORPORATION OF EXHIBITS AND SCHEDULES. All
Exhibits and Schedules attached to this Agreement are a part hereof for all
purposes. Reference is hereby made to such Schedules for the meaning of
certain terms defined therein and used but not defined herein, which
definitions are incorporated herein by reference.
Section 1.3. AMENDMENT OF DEFINED INSTRUMENTS. Unless the context
otherwise requires or unless otherwise provided herein the terms defined in
this Agreement which refer to a particular agreement, instrument or document
also refer to and include all renewals, extensions and modifications of such
agreement, instrument or document, provided that nothing contained in this
section shall be construed to authorize any such renewal, extension or
modification.
Section 1.4. REFERENCES AND TITLES. All references in this
Agreement to Exhibits, Schedules, articles, sections, subsections and other
subdivisions refer to the Exhibits, Schedules, articles, sections,
subsections and other subdivisions of this Agreement unless expressly
provided otherwise. Titles appearing at the beginning of any subdivisions
are for convenience only and do not constitute any part of such subdivisions
and shall be disregarded in construing the language contained in such
subdivisions. The words "this Agreement", "this instrument", "herein",
"hereof", "hereby", "hereunder" and words of similar import refer to this
Agreement as a whole and not to any particular subdivision unless expressly
so limited. The phrases "this section" and "this subsection" and similar
phrases refer only to the sections or subsections hereof in which such
phrases occur. Pronouns in masculine, feminine and neuter genders shall be
construed to include any other gender, and words in the singular form shall
be construed to include the plural and vice versa, unless the context
otherwise requires.
Section 1.5. CALCULATIONS AND DETERMINATIONS. All interest
accruing under the Loan Documents shall be calculated on the basis of actual
days elapsed (including the first day but excluding the last) and a year of
360 days. Unless otherwise expressly provided herein or unless Lenders
otherwise consent, all financial statements and reports furnished to Lenders
hereunder shall be prepared and all financial computations and determinations
pursuant hereto shall be made in accordance with GAAP. Each determination by
Lenders of amounts to be paid under Sections 2.9 through 2.12 below or any
other matters which are to be determined hereunder by Lenders (such as any
Eurodollar Rate, Fixed Rate, Business Day, Interest Period or Reserve
Requirement) shall, in the absence of manifest error, be conclusive and
binding.
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ARTICLE II
THE LOAN
Section 2.1. THE LOAN. (a) Subject to the terms and conditions
hereof, each Lender agrees to:
(1) make its Proportionate Share of advances ("Advances") to
Borrower from time to time requested by notice from Borrower to Agent, on
behalf of Lenders (as to each of which notices Agent shall give prompt notice
to Lenders), not later than 10:00 a.m., Denver, Colorado time on the Business
Day on which any such Advance is requested; and
(2) participate, to the extent of its Proportionate Share, in the
issuance of Letters of Credit from time to time requested upon written notice
to Agent, on behalf of Lenders (as to each of which notices Agent shall give
prompt notice to Lenders), from Borrower no later than five days prior to the
requested date of issuance of each such Letter of Credit (any request by
Borrower for an Advance or for the issuance of a Letter of Credit being
deemed to be a certification that the conditions precedent contained in
Sections 4.1 and 4.2 below have been satisfied);
provided that within the limitation of the Commitment Amount and subject to
the other terms and provisions hereof, Borrower may borrow, repay and
reborrow hereunder; provided further that Lenders shall have no obligation to:
(A) make any Advance which has been requested by Borrower
to be included in Facility A or issue any Letter of Credit which has
been requested by Borrower to be included in Facility A after the
Commitment Expiration Date (Facility A);
(B) make any Advance which has been requested by Borrower
to be included in Facility B or issue any Letter of Credit which has
been requested by Borrower to be included in Facility B after the
Commitment Expiration Date (Facility B);
(C) issue or renew a Letter of Credit which has been
requested by Borrower to be included in Facility A if such Letter of
Credit would not expire prior to the Commitment Expiration Date
(Facility A);
(D) issue or renew a Letter of Credit which has been
requested by Borrower to be included in Facility B if such Letter of
Credit would not expire prior to the Commitment Expiration Date
(Facility B);
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(E) issue or renew a Letter of Credit if, after the
issuance or renewal of such Letter of Credit, the aggregate amount of
all Letters of Credit outstanding hereunder would exceed $10,000,000;
(F) make an Advance which has been requested by Borrower to
be included in Facility A or issue or renew a Letter of Credit which
has been requested by Borrower to be included in Facility A, if, after
the making of such Advance or the issuance or renewal of such Letter
of Credit, the aggregate amount of all Advances outstanding hereunder
which have been requested by Borrower to be included in Facility A
plus the face amount of all Letters of Credit outstanding hereunder
which have been requested by Borrower to be included in Facility A
would exceed the Borrowing Base (Conforming); or
(G) make an Advance which has been requested by Borrower to
be included in Facility B or issue or renew a Letter of Credit which
has been requested by Borrower to be included in Facility B, if, after
the making of such Advance or the issuance or renewal of such Letter
of Credit, the aggregate amount of all Advances outstanding hereunder
which have been requested by Borrower to be included in Facility B
plus the face amount of all Letters of Credit outstanding hereunder
which have been requested by Borrower to be included in Facility B
would exceed the Borrowing Base (Supplemental).
(b) Subject to the satisfaction (or waiver by Lenders) of all of
the conditions precedent to the initial Advance, as more fully set forth in
Article IV below, Borrower shall be deemed to have requested, and each Lender
shall be deemed to have made its Proportionate Share of, the initial Advance
on the Closing Date, in an aggregate amount equal to the entire balance of
principal, interest, fees and other amounts outstanding in connection with
the Prior Credit Agreement. The intent of Lenders is that each Lender will
participate in accordance with its Proportionate Share and with equal
priority in the extension and refinancing of the indebtedness outstanding
under the Prior Credit Agreement, and Lenders hereby assign and cross-assign
to one another all rights and interests with respect to the indebtedness
under the Prior Credit Agreement in order to accomplish such result.
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On the Closing Date, Lenders will make such payments by wire transfer among
themselves as Agent may determine to be necessary so that each Lender has
made its Proportionate Share of the outstanding principal balance of the Loan
as of that date.
(c) Each request by Borrower for an Advance shall be in the form
of Exhibit B attached hereto and made a part hereof and shall be sent by
Borrower to Agent, on behalf of Lenders (as to each of which notices Agent
shall give prompt notice to Lenders). Each request by Borrower for the
issuance of a Letter of Credit shall be in the form of Exhibit C attached
hereto and made a part hereof, shall be sent by Borrower to Agent, on behalf
of Lenders (as to each of which notices Agent shall give prompt notice to
Lenders), and shall be accompanied by an application for issuance of a letter
of credit on Agent's then-standard form, duly executed by Borrower.
(d) Each payment by any Lender under or in connection with a
Letter of Credit issued under: (1) Facility A shall be deemed to be an
Advance under Facility A, or (2) Facility B shall be deemed to be an Advance
under Facility B. Each such Advance shall bear interest from the date of such
Advance, shall be entitled to all benefits of the Security Documents and
shall be subject to all terms of this Agreement and any and all other
applicable Loan Documents.
(e) The above-described Advances and Letters of Credit, in the
aggregate, shall be herein referred to as the "Loan". Borrower hereby
expressly requests and irrevocably authorizes each Lender to make its
Proportionate Share of the Loan.
Section 2.2. THE NOTES. Borrower's obligation to repay the
Advances, with interest thereon, shall be evidenced by the Notes. In the
event any provision contained in the Notes conflicts with a provision
contained in this Agreement, the provisions of this Agreement will control.
The Notes shall bear interest at the rates per annum provided in the Notes.
Borrower shall pay all accrued and unpaid interest due on the Notes on each
Payment Date.
Section 2.3. MANDATORY PAYMENTS.
(a) Borrower shall make a payment of principal and/or
interest on each Payment Date, commencing February 28, 1999, each such
payment to be in an amount equal to the Payment Amount in effect for such
Payment Date; provided that any and all such payments shall be in addition to
any amount
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payable by Borrower pursuant to the other provisions of this Section 2.3 or
pursuant to the provisions of Section 3.2 below. Interest accrued on each
Fixed Rate Portion shall be due and payable on the last day of the Interest
Period for such Fixed Rate Portion (and, in the case of any Fixed Rate
Portion having an Interest Period in excess of three months, on each
three-month anniversary of the first day of such Interest Period). On the
last day of the Amortization Period, the entire unpaid principal balance of
the Loan and all accrued and unpaid interest thereon shall be due and payable
unless Lenders have extended the term of the Loan.
(b) In the event that, on or before the Commitment Expiration
Date (Facility B), Borrower sells, farms-out or otherwise transfers any oil
or gas property or any interest therein and receives cash or cash-equivalents
in exchange therefor, and if in connection therewith Lenders have the right
to redetermine the Borrowing Base pursuant to Section 3.2(b) below, Borrower
shall, within one Business Day after receipt of such cash or
cash-equivalents, make a mandatory prepayment on the Loan (or, if necessary
to avoid a breakage fee on a Fixed Rate Portion, a temporary deposit to be
held by Agent in an interest-bearing account either until the expiration of
such Fixed Rate Portion or, if there is availability for additional Advances
to be made in accordance with the terms of this Agreement, until redrawn by
Borrower) to Agent, on behalf of Lenders, in the amount of the net proceeds
of any such transfer (gross proceeds minus reasonable brokers' fees and other
reasonable expenses incurred by Borrower in connection with such transfer).
Any such mandatory prepayment shall be applied to the repayment of the Loan
as follows: first, to Facility B, to the extent that any amount remains
outstanding under Facility B, and second, to Facility A.
(c) In the event that, on or before the Commitment Expiration
Date (Facility B), Borrower issues additional equity after the date hereof in
exchange for cash, cash-equivalents or any other consideration, Borrower
shall, within one Business Day after receipt of such consideration, make a
mandatory prepayment on the Loan to Agent, on behalf of Lenders, in an amount
equal to the lesser of: (1) the net value of the consideration received by
Borrower for such equity issuance (gross proceeds minus reasonable
underwriters' fees and other reasonable expenses incurred by Borrower in
connection with such equity issuance), or (2) the amount required to repay
Facility B in its entirety. In addition, the Borrowing Base (Supplemental)
will be permanently reduced (but not below zero) by the amount of any such
mandatory prepayment which is applied to the repayment of Facility B.
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(d) In the event that, on or before the Commitment Expiration
Date (Facility B), Borrower issues Subordinated Debt after the date hereof in
exchange for cash, cash-equivalents or any other consideration, Borrower
shall, within one Business Day after receipt of such consideration, make a
mandatory prepayment on the Loan to Agent, on behalf of Lenders, in an amount
equal to the lesser of: (1) the net value of the consideration received by
Borrower for such Subordinated Debt issuance (gross proceeds minus reasonable
underwriters' fees and other reasonable expenses incurred by Borrower in
connection with such Subordinated Debt issuance), (2) the amount required to
repay Facility B in its entirety. In addition, the Borrowing Base
(Supplemental) will be permanently reduced (but not below zero) by the amount
of any such mandatory prepayment which is applied to the repayment of
Facility B.
Section 2.4. VOLUNTARY PREPAYMENTS. Borrower shall have the
right to prepay the Notes at any time, in whole or in part, without penalty
or premium, except that Borrower shall be required to pay any amount payable
pursuant to Section 2.12 below.
Section 2.5. TERMINATION OF COMMITMENT. Borrower shall have the
right at any time and from time to time, upon not less than three business
days' prior written or telegraphic notice to Lenders, to terminate the
Commitment. Upon any termination of the Commitment, Borrower shall, at the
time of such termination, prepay the Notes in full. Any such prepayment
shall be without penalty or premium, except that Borrower shall be required
to pay any amount payable pursuant to Section 2.12 below.
Section 2.6. PAYMENTS TO LENDERS.
(a) REQUIRED PAYMENTS. Borrower will pay to Agent, on behalf
of Lenders (and Agent shall pay each Lender its respective Proportionate
Share thereof on the Business Day that any such payment is deemed to be
received from Borrower), each payment which Borrower owes under the Loan
Documents, not later than 11:00 a.m., Denver, Colorado time, in lawful money
of the United States of America and in immediately available funds. Any
payment received after such time will be deemed to have been made on the next
following Business Day. Except as otherwise provided in this Agreement with
respect to Fixed Rate Portions, should any such payment become due and
payable on a day other than a Business Day, the maturity of such payment
shall be extended to the next succeeding Business Day, and, in the case of a
payment of principal or past due interest, interest shall accrue and be
payable thereon for the
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period of such extension. Each payment under a Loan Document shall be due
and payable at the place provided therein and, if no specific place of
payment is provided, shall be due and payable at the respective places of
payment of the Notes.
(b) OPTIONAL PREPAYMENTS. All prepayments made by Borrower
pursuant to Section 2.4 above or Section 2.5 above shall be paid by Borrower
to Agent, on behalf of Lenders (and Agent shall pay each Lender its
respective Proportionate Share thereof on the Business Day that any such
payment is deemed to be received from Borrower). Any such payment received
after 11:00 a.m. Denver, Colorado time will be deemed to have been made on
the next following Business Day. Lenders shall apply any such prepayment:
(1) as Borrower specifies at the time the prepayment is made, or (2) if
Borrower does not so specify, as Agent may elect on behalf of Lenders.
Section 2.7. REGULATION U. In no event shall the funds from the
Loan be used directly or indirectly for the purpose, whether immediate,
incidental or ultimate, of purchasing, acquiring or carrying any "margin
stock" (as such term is defined in Regulation U promulgated by the Board of
Governors of the Federal Reserve System) or to extend credit to others
directly or indirectly for the purpose of purchasing or carrying any such
margin stock. Borrower represents and warrants to Lenders that Borrower is
not engaged principally, or as one of Borrower's important activities, in the
business of extending credit to others for the purpose of purchasing or
carrying such margin stock.
Section 2.8. RATE ELECTIONS. Borrower may from time to time
designate all or any portion of the Loan (including any yet-to-be-made
Advances which are to be made prior to or at the beginning of the designated
Interest Period but excluding any portion of the Loan which is required to be
repaid prior to the end of the designated Interest Period) as a Fixed Rate
Portion; provided that, without the consent of Lenders, Borrower may make no
such election during the continuance of a Default and Borrower may make such
an election with respect to an already existing Fixed Rate Portion only if
such election will take effect at or after the termination of the Interest
Period applicable to such already existing Fixed Rate Portion. Each election
by Borrower of a Fixed Rate Portion shall:
(a) Be made in writing in the form and substance of the "Rate
Election" attached hereto as Exhibit D, duly completed;
(b) Specify the amount of the Loan which Borrower desires to
designate as a Fixed Rate Portion, the first day of the Interest Period
which is to apply thereto, and the length of such Interest Period; and
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(c) Be received by Lenders not later than 10:00 a.m., Denver,
Colorado time, on the third Business Day preceding the first day of the
specified Interest Period.
Each election which meets the requirements of this Section 2.8 (herein called
a "Rate Election") shall be irrevocable. Borrower may make no Rate Election
which does not specify an Interest Period complying with the definition of
"Interest Period" in Section 1.1 above, and the amount of the Fixed Rate
Portion elected in any Rate Election must be an amount greater than or equal
to $4,000,000 and an integral multiple of $1,000,000. Upon the termination
of each Interest Period, the portion of the Loan theretofore constituting the
related Fixed Rate Portion shall, unless the subject of a new Rate Election
then taking effect, automatically become a part of the Base Rate Portion and
become subject to all provisions of the Loan Documents governing the Base
Rate Portion. Borrower shall have no more than eight Fixed Rate Portions in
effect at any time.
Section 2.9. INCREASED COST OF FIXED RATE PORTIONS. If any
applicable domestic or foreign law, treaty, rule or regulation (whether now
in effect or hereafter enacted or promulgated, including Regulation D) or any
interpretation or administration thereof by any governmental authority
charged with the interpretation or administration thereof (whether or not
having the force of law):
(a) Shall change the basis of taxation of payments to Lenders of
any principal, interest, or other amounts attributable to any Fixed Rate
Portion or otherwise due under this Agreement in respect of any Fixed Rate
Portion (other than taxes imposed on the overall net income of any Lender
or any lending office of any Lender by any jurisdiction in which any Lender
or any such lending office is located); or
(b) Shall change, impose, modify, apply or deem applicable any
reserve, special deposit or similar requirements in respect of any Fixed
Rate Portion (excluding those for which Lenders are fully compensated
pursuant to adjustments made in the definition of Fixed Rate) or against
assets of, deposits with or for the account of, or credit extended by, any
Lender to the extent the same relate to a Fixed Rate Portion; or
(c) Shall impose on any Lender or the interbank eurocurrency
deposit market any other condition affecting any Fixed Rate Portion, the
result of which is to increase the cost to any Lender of funding or
maintaining any Fixed Rate Portion or to reduce the amount of any sum
receivable by any Lender in respect of any Fixed Rate Portion by an amount
deemed by such Lender to be material;
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then: (x) Lenders shall promptly notify Borrower in writing of the happening
of such event, (y) Borrower shall upon demand pay to Lenders such additional
amount or amounts as will compensate Lenders for any such event (on an
after-tax basis), and (z) Borrower may elect, by giving to Lenders not less
than three Business Days' notice, to convert all (but not less than all) of
any such Fixed Rate Portion into a part of the Base Rate Portion.
Section 2.10. AVAILABILITY. If Lenders shall determine, in a
manner consistent with determinations with respect to other borrowers (which
determination shall, upon notice thereof to Borrower, be conclusive and
binding on Borrower and Lenders), that: (a) the introduction of or any change
in or in the interpretation of any law, treaty, rule or regulation makes it
unlawful or impracticable, or any central bank or other governmental
authority asserts that it is unlawful, for Lenders to make, continue or
maintain any Fixed Rate Portion or shall materially restrict the authority of
Lenders to purchase or take offshore deposits of dollars (i.e.,
"eurodollars"), or (b) matching deposits appropriate to fund or maintain any
Fixed Rate Portion are not available to them, or (c) the formula for
calculating the Eurodollar Rate does not fairly reflect the cost to Lenders
of making or maintaining loans based on such rate, then Borrower's right to
elect Fixed Rate Portions shall be suspended to the extent and for the
duration of such illegality, impracticability or restriction and all Fixed
Rate Portions (or portions thereof) which are then outstanding or are then
the subject of any Rate Election and which cannot lawfully or practicably be
maintained or funded shall immediately become or remain part of the Base Rate
Portion. Borrower agrees to indemnify Lenders and hold them harmless against
all costs, expenses, claims, penalties, liabilities and damages which may
result from any such change in law, treaty, rule, regulation, interpretation
or administration.
Section 2.11. REIMBURSABLE TAXES. Borrower covenants and agrees
that:
(a) Borrower will indemnify Lenders against, and reimburse
Lenders for, all present and future income, excise, stamp or franchise taxes
and other taxes, fees, duties, withholdings or other charges of any nature
whatsoever imposed, assessed, levied or collected on or in respect of this
Agreement insofar as it pertains to a Fixed Rate Portion or any Fixed Rate
Portions (whether or not legally imposed, assessed, levied or collected), but
excluding taxes imposed on or measured by any Lender's net income or receipts
(such non-excluded items being called "Reimbursable Taxes"). Such
indemnification shall be on an after-tax basis, taking into account any
income taxes imposed on the amounts paid as indemnity.
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(b) All payments by Borrower on account of principal of, and
interest on, the Loan and all other amounts payable by Borrower to Lenders
hereunder shall be made in full without set-off or counterclaim and shall be
made free and clear of and without deduction or withholding for any
Reimbursable Taxes, all of which shall be for the account of Borrower. In
the event that any withholding or deduction from any payment to be made by
Borrower hereunder is required in respect of any Reimbursable Taxes pursuant
to any applicable law, rule or regulation, Borrower shall pay on the due date
of such payment, by way of additional interest, such additional amounts as
are needed to ensure that the amount actually received by Lenders will equal
the full amount Lenders would have received had no such withholding or
deduction been required. If Borrower shall make any deduction or withholding
as aforesaid, Borrower shall within 60 days thereafter forward to Lenders an
official receipt or other official document evidencing payment of such
deduction or withholding.
(c) If Borrower is ever required to pay any Reimbursable Tax
with respect to any Fixed Rate Portion, Borrower may elect, by giving to
Lenders not less than three Business Days' notice, to convert all (but not
less than all) of any such Fixed Rate Portion into a part of the Base Rate
Portion, but such election shall not diminish Borrower's obligation to pay
all Reimbursable Taxes.
Section 2.12. FUNDING LOSSES. In addition to its other
obligations hereunder, Borrower will indemnify Lenders against, and reimburse
Lenders on demand for, any loss or expense (including any loss or expense
incurred by reason of the liquidation or reemployment of deposits or other
funds acquired by Lenders to make, continue or maintain any Fixed Rate
Portion or any Advance) as a result of: (a) any payment or prepayment
(whether authorized or required hereunder or otherwise) of all or any portion
of a Fixed Rate Portion on a date other than the scheduled last day of the
Interest Period applicable thereto; (b) any payment or prepayment, whether
required hereunder or otherwise, of the Loan made after the delivery, but
before the effective date, of a Rate Election, if such payment or prepayment
prevents such Rate Election from becoming fully effective; (c) the failure of
any Advance to be made or of any Rate Election to become effective due to any
condition precedent not being satisfied or due to any other action or
inaction of Borrower; or (d) any conversion (whether authorized or required
hereunder or otherwise) of all or any portion of any Fixed Rate Portion into
the Base Rate Portion or into a different Fixed Rate Portion on a day other
than the day on which the applicable Interest Period ends.
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Section 2.13. CAPITAL REIMBURSEMENT. If either: (a) the
introduction or implementation of or the compliance with or any change in or
in the interpretation of any law, rule or regulation, or (b) the introduction
or implementation of or the compliance with any request, directive or
guideline from any central bank or other governmental authority (whether or
not having the force of law) affects or would affect the amount of capital
required or expected to be maintained by any Lender or any corporation
controlling any Lender, then, upon demand by such Lender, Borrower will pay
to such Lender, from time to time as specified by such Lender, such
additional amount or amounts which such Lender shall determine to be
appropriate to compensate such Lender or any corporation controlling such
Lender in light of such circumstances, to the extent that such Lender
reasonably determines that the amount of any such capital would be increased
or the rate of return on any such capital would be reduced by or in whole or
in part based on the existence of the face amount of such Lender's
Proportionate Share of the Loan or such Lender's commitments under this
Agreement or the existence of the Letters of Credit issued hereunder.
ARTICLE III
SECURITY; BORROWING BASE DETERMINATIONS; FEES
Section 3.1. THE SECURITY. The Obligations will be secured by the
Security Documents delivered by Borrower to, or for the benefit of Lenders,
or any of them, contemporaneously herewith or at any time prior hereto, and
any additional Security Documents hereafter delivered by Borrower and
accepted by, or on behalf of, Lenders.
Section 3.2. BORROWING BASE PROCEDURES. At the times described
below, Lenders will perform a review of the Borrowing Base Properties and
will determine the Borrowing Base (Conforming) and, if applicable, the
Borrowing Base (Supplemental), based upon their then-current customary
practices and standards in making conforming and supplemental borrowing base
determinations applied generally to their substantial energy credits (which
will be substantially similar to their present practices, except for
market-induced changes relating to pricing, costs and risk factors relating
to types of oil and gas reserves) and taking into account such other factors
as Lenders in their reasonable discretion deem appropriate. The timing of
Borrowing Base determinations will be as follows:
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(a) regular quarterly or semi-annual determinations: (1) on or
before the Commitment Expiration Date (Facility B), as of approximately March
1, June 1, September 1 and December 1 of each year, commencing in March,
1999, and (2) after the Commitment Expiration Date (Facility B), as of
approximately June 1 and December 1 of each year;
(b) at the option of Lenders, at any time that Borrower has sold
properties having an aggregate value in excess of $5,000,000 since the
previous determination of the Borrowing Base;
(c) at the option of Lenders, at any time that Borrower issues
Subordinated Debt;
(d) at the option of Lenders, up to one additional time per
calendar year; and
(e) at the option of Borrower, up to one additional time per
calendar year.
Promptly after each such determination of the Borrowing Base (Conforming)
and/or the Borrowing Base (Supplemental), Lenders shall advise Borrower of
the new Borrowing Base (Conforming) and/or the new Borrowing Base
(Supplemental). If, at the time of any such determination or at any other
time:
(y) the then-outstanding principal balance of all Advances plus the
face amount of all Letters of Credit outstanding hereunder exceeds the
Commitment Amount, Borrower shall:
(1) within 30 days of any such determination, mortgage, by
instruments satisfactory in form and substance to Lenders, sufficient
additional available collateral owned by Borrower and satisfactory to
Lenders to increase the Commitment Amount by an amount sufficient to
eliminate such excess; or
(2) within 90 days of any such determination, prepay the
principal of the Loan in an amount at least equal to the amount of
such excess; or
(3) within 30 days of any such determination, commence (and
thereafter continue) an amortization schedule under which Borrower
repays the Loan in an amount at least equal to the excess in six equal
monthly principal installments on the last Business Day of each
calendar month,
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which amounts shall be in addition to the monthly interest payments
and any other principal payments otherwise due, such that the entire
excess is paid within six months;
(z) clause (y) above does not apply, but either: (1) the
then-outstanding principal balance of all Advances under Facility A plus the
face amount of all Letters of Credit outstanding under Facility A exceeds the
Borrowing Base (Conforming), or the then-outstanding principal balance of all
Advances under Facility B plus the face amount of all Letters of Credit
outstanding under Facility B exceeds the Borrowing Base (Supplemental), Agent
shall reallocate the Loan between Facility A and Facility B so as to
eliminate any such excess.
Failure by Borrower to comply with the provisions of clause (y) above shall
be deemed an Event of Default hereunder.
Section 3.3. PERFECTION AND PROTECTION OF SECURITY INTERESTS AND
LIENS. Borrower will from time to time deliver to Lenders any financing
statements, continuation statements, extension agreements and other
documents, properly completed and executed (and acknowledged when required)
by Borrower, in form and substance reasonably satisfactory to Lenders, which
Lenders may request for the purpose of perfecting, confirming or protecting
Lenders' Liens and other rights in the Collateral.
Section 3.4. BANK ACCOUNTS AND OFFSET. To secure the repayment of
the Obligations, Borrower hereby grants to Lenders a security interest, a
lien, and a right of offset, each of which shall be upon and against (a) any
and all moneys, securities or other property (and the proceeds therefrom) of
Borrower now or hereafter held or received by or in transit to any Lender
from or for the account of Borrower, whether for safekeeping, custody,
pledge, transmission, collection or otherwise, (b) any and all deposits
(general or special, time or demand, provisional or final) of Borrower with
any Lender, and (c) any other credits and claims of Borrower at any time
existing against any Lender, including without limitation claims under
certificates of deposit; provided that the foregoing security interest, lien
and right of offset shall not apply to amounts held by Borrower in trust for
the benefit of Persons other than Borrower. Upon the occurrence of any Event
of Default, Lenders are hereby authorized to foreclose upon, offset,
appropriate, and apply, at any time and from time to time, without notice to
Borrower, any and all items hereinabove referred to against the Obligations
(whether or not such Obligations are then due and payable).
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Section 3.5. PROCEEDS OF RUNS. By the terms of the Security
Documents, Borrower is and will be assigning to Collateral Agent, for the
benefit of Lenders, all of the proceeds of production accruing to the
property covered thereby. Until and unless an Event of Default has occurred
and is continuing, Collateral Agent, on behalf of Lenders, shall permit
Borrower to continue to receive such proceeds of production.
Section 3.6. FEES. (a) Borrower shall pay to Agent, on behalf of
Lenders (and Agent shall pay each Lender its respective Proportionate Share
thereof on the Business Day that any such payment is deemed to be received
from Borrower), within 30 days after the end of each three-month period
ending on the last day of February, May, August or November during the
Revolving Period, commencing with the period from the Closing Date through
February 28, 1999, a commitment fee, computed on a daily basis for such time
period, in an amount equal to:
(1) for Facility A: (A) the Commitment Fee Rate applicable
to Facility A, times (B)(i)the Commitment Amount (Facility A), less
(ii) the principal balance of all Advances outstanding under
Facility A, less (iii) the face amount of all Letters of Credit
outstanding under Facility A; and
(2) for Facility B: (A) the Commitment Fee Rate applicable
to Facility B, times (B)(i) the Commitment Amount (Facility B), less
(ii) the principal balance of all Advances outstanding under
Facility B, less (iii) the face amount of all Letters of Credit
outstanding under Facility B.
(b) Borrower shall pay to Agent, on behalf of Lenders (and,
as to the fee described in (1) below, Agent shall pay each Lender its
respective Proportionate Share thereof on the Business Day that any such
payment is deemed to be received from Borrower), with respect to each Letter
of Credit the following fees:
(1) for the account of all Lenders, an amount equal to the
greater of: (A) $250.00, or (B)(i) the applicable Fixed Rate Spread in
effect at the time of issuance of such Letter of Credit (which shall
be the Fixed Rate Spread applicable to Facility A, if the Letter of
Credit is to be included in Facility A, or the Fixed Rate Spread
applicable to Facility B, if the Letter of Credit is to be included in
Facility B), times (ii) the face amount of such Letter of Credit,
times (iii) the term of such Letter of Credit, expressed in years; and
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(2) for the account of the Lender issuing such Letter of
Credit: (A) one-eighth of one percentage point per annum, times
(B) the face amount of such Letter of Credit, times (C) the term of
such Letter of Credit, expressed in years.
Such Letter of Credit fees shall be payable at the time of issuance (and
again at the time of any renewal) of such Letter of Credit.
(c) As of March 1 and September 1 of each year, commencing
March 1, 1999, through the Commitment Expiration Date (Facility B), Borrower
shall pay to Agent, on behalf of Lenders (and Agent shall pay each Lender its
respective Proportionate Share thereof on the Business Day that any such
payment is deemed to be received from Borrower), an engineering fee in an
amount equal to $2,500 per Lender.
ARTICLE IV
CONDITIONS PRECEDENT TO LOAN
Section 4.1. CONDITIONS PRECEDENT TO LOAN. Lenders shall have no
obligation to extend and refinance (as more fully described in Section 2.1(b)
above) the loan made pursuant to the Prior Credit Agreement unless Lenders
shall have received all of the following in Denver, Colorado, duly executed
and delivered and in form, substance and date satisfactory to Lenders:
(a) An "Omnibus Certificate" of the Secretary of Borrower, which
shall contain the names and signatures of the officers of Borrower authorized
to execute Loan Documents and which shall certify to the truth, correctness
and completeness of the following exhibits attached thereto: (1) a copy of
resolutions duly adopted by the Board of Directors of Borrower and in full
force and effect at the time this Agreement is entered into, authorizing the
execution of this Agreement and any and all other Loan Documents delivered or
to be delivered by Borrower in connection herewith and with the consummation
of the transactions contemplated herein and therein, (2) a copy of the
articles of incorporation of Borrower and all amendments thereto, and (3) a
copy of the bylaws of Borrower and all amendments thereto.
(b) A "Compliance Certificate" of an officer of Borrower in which
such officer certifies to the satisfaction of the conditions set out in
subsections (a), (b), and (c) of Section 4.2 below.
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(c) Each Security Document required by Lenders.
(d) An opinion of Borrower's counsel in form and substance
satisfactory to Lenders, relating to authority, enforceability and other
related matters.
(e) Such title opinions, supplemental title opinions, UCC searches
and other title information concerning the Borrowing Base Properties or any
portions thereof as may be requested by Lenders.
(f) All fees owing to any Lender and, if available, legal fees
incurred by any Lender through the date hereof in connection with the
negotiation and preparation of this Agreement.
(g) Any and all other Loan Documents.
Section 4.2. ADDITIONAL CONDITIONS PRECEDENT. No Lender shall
have any obligation to make its Proportionate Share of the initial Advance or
any subsequent Advance hereunder unless the following conditions precedent
have been satisfied:
(a) All representations and warranties made by Borrower in any
Loan Document shall be true on and as of the date of such Advance as if such
representations and warranties had been made as of the date hereof.
(b) No Default shall exist as of the date of such Advance.
(c) Borrower shall have performed and complied with all agreements
and conditions herein required to be performed or complied with by it on or
prior to the date of such Advance.
(d) The Loan shall not be prohibited by any law or any regulation
or order of any court or governmental agency or authority and shall not
subject any Lender to any penalty or other onerous condition under or
pursuant to any such law, regulation or order.
(e) Lenders shall have received all documents and instruments
which any Lender has then reasonably requested, in addition to those
described in Section 4.1 above (including without limitation opinions of
legal counsel for Borrower; corporate documents and records; documents
evidencing governmental authorizations, consents, approvals, licenses and
exemptions; and certificates of public officials and of officers and
representatives of Borrower and other persons),
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as to: (1) the accuracy and validity of or compliance with all
representations, warranties and covenants made by Borrower in this Agreement
and the other Loan Documents, (2) the satisfaction of all conditions
contained herein or therein, and (3) all other matters pertaining hereto and
thereto. All such additional documents and instruments shall be reasonably
satisfactory to Lenders in form, substance and date.
(f) All legal matters relating to the Loan Documents and the
consummation of the transactions contemplated thereby shall be reasonably
satisfactory to Lenders and their counsel.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
Section 5.1. BORROWER'S REPRESENTATIONS AND WARRANTIES. To
induce Lenders to enter into this Agreement and to make the Loan, Borrower
represents and warrants to Lenders that:
(a) NO DEFAULT. Borrower is not in default in any material
respect in the performance of any of the covenants and agreements contained
herein. No event has occurred and is continuing which constitutes a Default.
(b) ORGANIZATION AND GOOD STANDING. Borrower is duly organized,
validly existing and in good standing under the laws of its state of
organization, having all corporate powers required to carry on its business
and enter into and carry out the transactions contemplated hereby. Borrower
is duly qualified, in good standing, and authorized to do business in all
other jurisdictions wherein the character of the properties owned or held by
it or the nature of the business transacted by it makes such qualification
necessary.
(c) AUTHORIZATION. Borrower has duly taken all corporate action
necessary to authorize the execution and delivery by it of the Loan Documents
to which it is a party and to authorize the consummation of the transactions
contemplated thereby and the performance of its obligations thereunder.
(d) NO CONFLICTS OR CONSENTS. The execution and delivery by
Borrower of the Loan Documents, the performance by Borrower of its
obligations under such Loan Documents and the consummation of the
transactions contemplated by the various Loan Documents, do not and will not:
(1) conflict with any provision of: (A) any domestic or foreign law, statute,
rule or regulation, (B) the articles or certificate of incorporation, bylaws
or other governing documents of
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Borrower, or (C) any agreement, judgment, license, order or permit applicable
to or binding upon Borrower; (2) result in the acceleration of any Debt owed
by Borrower; or (3) result in or require the creation of any Lien upon any
assets or properties of Borrower except as expressly contemplated in the Loan
Documents. Except as expressly contemplated in the Loan Documents, no
consent, approval, authorization or order of, and no notice to or filing
with, any court or governmental authority or third party is required in
connection with the execution, delivery or performance by Borrower of any
Loan Document or to consummate any transactions contemplated by the Loan
Documents.
(e) ENFORCEABLE OBLIGATIONS. This Agreement is, and the other
Loan Documents when duly executed and delivered will be, legal and binding
obligations of Borrower, enforceable in accordance with their respective
terms, except as limited by bankruptcy, insolvency or similar laws of general
application relating to the enforcement of creditors' rights and as limited
by general equitable principles.
(f) INITIAL FINANCIAL STATEMENTS. The Initial Financial
Statements fairly present Borrower's Consolidated financial position at the
respective dates thereof and the results of Borrower's Consolidated
operations and the changes in Borrower's Consolidated cash flows for the
respective periods thereof. Since the date of the annual Initial Financial
Statements no material adverse change has occurred in Borrower's Consolidated
financial condition or businesses, except as reflected in the quarterly
Initial Financial Statements or in the Disclosure Schedule. All Initial
Financial Statements were prepared in accordance with GAAP.
(g) OTHER OBLIGATIONS. Except as consented to by Lenders pursuant
to the terms of this Agreement, Borrower has no outstanding Debt of any kind
(including contingent obligations, tax assessments, and unusual forward or
long-term commitments) which is, in the aggregate, material to Borrower or
material with respect to Borrower's financial condition and not shown in the
Initial Financial Statements or disclosed in the Disclosure Schedule.
(h) FULL DISCLOSURE. To the best of Borrower's knowledge after
due inquiry, no certificate, statement or other information delivered
herewith or heretofore by Borrower to any Lender in connection with the
negotiation of this Agreement or in connection with any transaction
contemplated hereby contains any untrue statement of a material fact or omits
to state any material fact known to Borrower (other than industry-wide risks
normally associated with the type of business conducted by Borrower)
necessary to make the
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statements contained herein or therein not misleading in any material respect
as of the date made or deemed made. At the date of this Agreement, Borrower
is not aware of any material fact (other than industry-wide risks normally
associated with the type of business conducted by Borrower) of which Lenders
should not reasonably be otherwise aware that has not been disclosed to
Lenders in writing which could materially and adversely affect Borrower's
properties, business, prospects or condition (financial or otherwise) or
Borrower's Consolidated properties, businesses, prospects or condition
(financial or otherwise). In connection with the preparation of the Initial
Engineering Report, to the best of Borrower's knowledge, Borrower furnished
to the preparer thereof factual information that was complete and accurate in
all material respects, it being understood that the Initial Engineering
Report is necessarily based upon professional opinions, estimates and
projections and that Borrower does not warrant that such opinions, estimates
and projections will ultimately prove to have been accurate. Borrower has
heretofore delivered to Lenders true, correct and complete copies of any
letters and documents listed in the Disclosure Schedule.
(i) LITIGATION. Except as disclosed in the Initial Financial
Statements or in the Disclosure Schedule: (1) there are no actions, suits or
legal, equitable, arbitrative or administrative proceedings pending, or to
the knowledge of Borrower threatened, against Borrower before any federal,
state, municipal or other court, department, commission, body, board, bureau,
agency, or instrumentality, domestic or foreign, which do or may materially
and adversely affect Borrower, Affiliates of Borrower, their ownership or use
of any of their assets or properties, their businesses or financial condition
or prospects, or the right or ability of Borrower to enter into the Loan
Documents to which it is a party or perform its obligations thereunder and
(2) there are no outstanding judgments, injunctions, writs, rulings or orders
by any such governmental entity against Borrower which have or may have any
such effect.
(j) ERISA LIABILITIES. Except as disclosed in the Initial
Financial Statements or in the Disclosure Schedule, no Termination Event has
occurred with respect to any ERISA Plan, and Borrower is in compliance with
ERISA in all material respects. Borrower is not required to contribute to,
or has any other absolute or contingent liability in respect of, any
"multiemployer plan" as defined in Section 4001 of ERISA.
(k) TITLE TO PROPERTIES. Subject to, and not in limitation of,
any representations or covenants on title contained in the Security
Documents, to the best of Borrower's knowledge and subject to typical
oil-industry operating
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agreements and product-purchase contracts and other matters listed on the
Disclosure Schedule, Borrower has good and defensible title to the Borrowing
Base Properties, free and clear of all Prohibited Liens, except that no
representation or warranty is made with respect to any gas or mineral
property or interest which does not have proved oil or gas reserves
attributed to it in any information or report prepared for Borrower or
submitted to Lenders.
(l) BORROWER'S AFFILIATES. Borrower is not a member of any
general or limited partnership, joint venture or association of any type
whatsoever except those listed in the Disclosure Schedule and except for
associations, joint ventures or other relationships: (1) which are
established pursuant to a standard form oil and gas operating agreement, (2)
which are not corporations or partnerships (or subject to the Uniform
Partnership Act) under applicable state law, and (3) whose businesses are
limited to the exploration, development and operation of oil, gas or mineral
properties and interests owned directly by the parties in such associations,
joint ventures or relationships. Borrower has no subsidiaries other than
Basin Offshore Oil & Gas, Inc., a wholly-owned subsidiary. As of the date
hereof Borrower owns, directly or indirectly, the interest identified in the
Disclosure Schedule in each entity listed in the Disclosure Schedule.
(m) NAMES AND PLACES OF BUSINESS. Borrower has not, during the
preceding five years, been known by or used any other partnership or
fictitious name, except as disclosed in the Disclosure Schedule. Except as
otherwise indicated in the Disclosure Schedule, the chief executive office
and principal place of business of Borrower are (and for the preceding five
years have been) located at the address of Borrower set out in Section 8.3
below. Except as indicated in the Disclosure Schedule, Borrower has no other
office or place of business.
(n) YEAR 2000 COMPLIANCE. Borrower has: (1) initiated a review
and assessment of all areas within its business and operations (including
those affected by suppliers and vendors) that could be adversely affected by
the "Year 2000 Problem" (that is, the risk that computer applications used by
Borrower (or its suppliers or vendors) may be unable to recognize and
properly perform date-sensitive functions involving certain dates prior to
and any date after December 31, 1999), (b) developed a plan and a time line
for addressing the Year 2000 Problem on a timely basis, and (c) to date,
implemented that plan in accordance with that time line. Borrower reasonably
believes that all computer applications that are material to its business and
operations will on a timely basis be able to perform properly date-sensitive
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functions for all dates before and after January 1, 2000 (that is, be "Year
2000 Compliant"), except to the extent that a failure to do so would not
present a material risk of having a material adverse effect upon Borrower,
and Borrower is making all reasonable efforts to assure that its suppliers
and vendors will be Year 2000 Compliant on a timely basis, except to the
extent that a failure to do so would not present a material risk of having a
material adverse effect upon Borrower.
Section 5.2. REPRESENTATIONS BY LENDERS. Each Lender hereby
represents that it will acquire its Note for its own account in the ordinary
course of its commercial banking business; however, the disposition of each
Lender's property shall at all times be and remain within its control and
this section does not prohibit any Lender's sale of its Note or of any
participation in its Note to any bank, financial institution or similar
purchaser.
ARTICLE VI
COVENANTS OF BORROWER
Section 6.1. AFFIRMATIVE COVENANTS. Borrower warrants, covenants
and agrees that until the full and final payment of the Obligations and the
termination of this Agreement, unless Lenders have previously agreed
otherwise in writing:
(a) PAYMENT AND PERFORMANCE. Borrower will pay all amounts due
under the Loan Documents in accordance with the terms thereof and will in all
material respects observe, perform and comply with every covenant, term and
condition express or implied in the Loan Documents.
(b) BOOKS, FINANCIAL STATEMENTS AND RECORDS. Borrower will at all
times maintain full and accurate books of account and records. Borrower will
maintain a standard system of accounting and will furnish the following
statements and reports to Lenders at Borrower's expense:
(1) As soon as available, and in any event within 90 days after the
end of each Fiscal Year, complete Consolidated financial
statements of Borrower, together with all notes thereto, prepared
in reasonable detail in accordance with GAAP, together with an
opinion, based on an audit using generally accepted auditing
standards, by Arthur Andersen
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LLP or other independent certified public accountants
reasonably acceptable to Lenders, stating that such
Consolidated financial statements have been so prepared.
Borrower shall also submit a report signed by the chief
financial officer or the chief accounting officer of Borrower
stating that he has read this Agreement and the Security
Documents and further stating that in making the examination
and reporting on the Consolidated financial statements
described above he has concluded that there did not exist any
condition or event at the end of such Fiscal Year or at the
time of his report which constituted an Event of Default or a
Default, or, if he did conclude that such condition or event
existed, specifying the nature and period of existence of any
such condition or event. These Consolidated financial
statements shall contain a Consolidated balance sheet as of
the end of such Fiscal Year and Consolidated statements of
earnings, cash flows and changes in stockholders' equity,
setting forth in comparative form the corresponding figures
for the preceding Fiscal Year.
(2) As soon as available and in any event within 45 days after the
end of each Fiscal Quarter, complete Consolidated financial
statements of Borrower, including at least a balance sheet and a
statement of the earnings and cash flow of Borrower from the
beginning of the then-current Fiscal Year to the end of such
Fiscal Quarter, prepared in reasonable detail and in accordance
with GAAP, together with a report showing the calculation of all
applicable financial covenants and signed by the chief financial
officer or the chief accounting officer of Borrower stating that
he has read this Agreement and the Security Documents and further
stating that in making the examination and reporting on the
financial statements described above, he concluded that there did
not exist any condition or event at the end of such
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Fiscal Quarter or at the time of his report which constituted
an Event of Default or Default, or, if he did conclude that
such condition or event existed, specifying the nature and
period of existence of any such condition or event.
(3) As soon as available and in any event within 90 days after the
end of each Fiscal Year, an estimate of the Consolidated cash
flow of Borrower for the then-current Fiscal Year in a form
substantially similar to the form of such estimates heretofore
provided by Borrower to Lenders.
(4) Promptly upon their becoming available, copies of all financial
statements, reports, notices and proxy statements sent by
Borrower to its stockholders and all registration statements,
periodic reports and other statements and schedules filed by
Borrower with any securities exchange, the Securities and
Exchange Commission or any similar governmental authority.
(5) By: (A) April 1 of each year, an engineering report and economic
evaluation prepared by Ryder-Scott Company, Netherland, Sewell &
Associates, Inc. or one or more other independent petroleum
engineers chosen by Borrower and reasonably acceptable to
Lenders, concerning all oil and gas properties and interests
included in the Borrowing Base Properties, and (B) October 1 of
each year, an engineering report and economic evaluation prepared
by Borrower, concerning all oil and gas properties and interests
included in the Borrowing Base Properties. These engineering
reports shall be in form and substance satisfactory to Lenders
and shall contain information and analysis comparable in scope to
that contained in the Initial Engineering Report.
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(6) At least 30 days prior to the date of any regularly-scheduled
determination of the Borrowing Base pursuant to Section 3.2 above
and at any other time requested by Lenders, a report describing:
(A) by lease or unit, the gross volume of production and sales
attributable to production (and the prices at which such sales
were made and the revenues derived from such sales) during each
of the three most recent calendar months for which data is
available from the Borrowing Base Properties and from all other
properties owned by Borrower, (B) the related severance taxes,
other taxes and leasehold operating expenses attributable thereto
and incurred during each such calendar month, (C) the status of
any and all drilling and development activities being carried out
by Borrower during each such calendar month, and (D) Borrower's
financial forecast for the ensuing four Fiscal Quarters of
Borrower, including Borrower's estimates of production revenues,
capital expenditures, operating expenses, other expenses, capital
requirements and such other information as may be requested by
Lenders.
(c) OTHER INFORMATION AND INSPECTIONS. Borrower will furnish to
Lenders any information which any Lender may from time to time reasonably
request concerning any covenant, provision or condition of the Loan Documents
or any matter in connection with Borrower's business and operations that
could reasonably be deemed to materially and adversely affect the Loan.
Borrower will permit representatives appointed by any Lender, including
independent accountants, agents, attorneys, appraisers and any other persons,
to visit and inspect, at their sole risk, any of Borrower's property,
including its books of account, other books and records, and any facilities
or other business assets, and to make extra copies therefrom and photocopies
and photographs thereof, and to write down and record any information such
representatives obtain, and Borrower shall permit any Lender or its
representatives to investigate and verify the accuracy of the information
furnished to any Lender in connection with the Loan Documents and to discuss
all such matters with its officers, employees and representatives. Each
Lender agrees that, until the occurrence of a Default, it will take all
reasonable steps to keep confidential any such proprietary information,
provided, however, that this restriction shall not apply to information
which: (1) has at the time in question entered the public
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domain, (2) is required to be disclosed by law or by any order, rule or
regulation (whether valid or invalid) of any court or governmental agency, or
(3) is furnished to purchasers or prospective purchasers of participations or
interests in the Loan or the Notes so long as such purchasers and prospective
purchasers have agreed to be subject to restrictions identical to those
imposed upon Lenders under this sentence.
(d) NOTICE OF MATERIAL EVENTS. Borrower will promptly notify
Lenders: (1) of any material adverse change in Borrower's financial condition
or Borrower's Consolidated financial condition, (2) of the occurrence of any
Default, (3) of the acceleration of the maturity of any Debt owed by Borrower
or of any default by Borrower under any indenture, mortgage, agreement,
contract or other instrument to which any of them is a party or by which any
of them or any of their properties is bound, if such acceleration or default
might reasonably be expected to have a material adverse effect upon
Borrower's Consolidated financial condition, (4) of any uninsured claim of
$250,000 or more asserted against Borrower or its properties, (5) of the
occurrence of any Termination Event, (6) of the filing of any suit or
proceeding against Borrower in which an adverse decision could have a
material adverse effect upon Borrower's financial condition, business or
operations (or could result in a judgment not covered by insurance of
$250,000 or more against Borrower), (7) of the merger or consolidation of
Borrower or any of its Affiliates with any other business entity not
previously affiliated with Borrower, and (8) of the sale, transfer, lease,
exchange or disposal by Borrower of any material assets or properties or any
assets or properties with a value in excess of $500,000, except sales of
already-severed hydrocarbons and other products in the ordinary course of
Borrower's business and except any transaction of a type described in Section
6.2(d)(1), (2), (3) or (4) below (regardless of whether any such transaction
involves Borrowing Base Properties or other properties owned by Borrower).
Upon the occurrence of any of the foregoing Borrower will take all necessary
or appropriate steps to remedy promptly any such material adverse change,
Default, or default, to protect against any such adverse claim, to defend any
such suit or proceeding, and to resolve all controversies on account of any
of the foregoing. Borrower will also notify Lenders in writing at least
twenty Business Days prior to the date that Borrower changes its name or the
location of its chief executive office or principal place of business or the
place where it keeps its books and records concerning the Collateral,
furnishing with such notice any necessary financing statement amendments or
requesting Lenders and their counsel to prepare the same.
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(e) MAINTENANCE OF EXISTENCE AND QUALIFICATIONS. Borrower will
maintain and preserve its corporate existence and its rights and franchises
in full force and effect and will qualify to do business as a foreign
corporation in all states or jurisdictions where required by applicable law,
except where the failure so to qualify will not have any material adverse
effect on Borrower.
(f) MAINTENANCE OF PROPERTIES. Borrower will in all material
respects maintain, preserve, protect, and keep all property used or useful in
the conduct of its business in accordance with the standards of a reasonable
and prudent operator.
(g) PAYMENT OF TRADE DEBT, TAXES, ETC. Borrower will: (1) timely
file all required tax returns; (2) timely pay all taxes, assessments, and
other governmental charges or levies imposed upon it or upon its income,
profits or property; (3) pay all Debt owed by it on ordinary trade terms to
vendors, suppliers and other Persons providing goods and services used by it
in the ordinary course of its business; and (4) maintain appropriate accruals
and reserves for all of the foregoing Debt in accordance with GAAP. Borrower
will pay and discharge in all material respects, when due, all other Debt,
taxes or assessments now or hereafter owed by it. Borrower may, however,
delay paying or discharging any such Debt so long as it is in good faith
contesting the validity thereof by appropriate proceedings and has set aside
on its books adequate reserves therefor.
(h) INSURANCE. Borrower will maintain with financially sound and
reputable insurance companies, insurance with respect to its business,
operations and properties in at least such amounts and against at least such
risks as are usually insured against in the same general area by companies of
established repute engaged in the same or a similar business, including
property insurance, public liability insurance for bodily injury and property
damage, well-control coverage insurance, workmen's compensation insurance and
insurance against loss or damage by employee dishonesty, theft, fire,
lightning, hail, windstorm, explosion, hazards, casualties and other
contingencies; will apply the proceeds of any such insurance to pay for, or
to reimburse itself for, the cost of repairing or replacing property covered
by such insurance; and will furnish to Lenders, upon any Lender's written
request, full information as to the insurance carried.
(i) PAYMENT OF EXPENSES. Whether or not the transactions
contemplated by this Agreement are consummated, Borrower will promptly (and
in any event within 30 days after any invoice or other statement or notice)
pay all reasonable costs and expenses incurred by or on behalf of any Lender
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(including attorneys' fees) in connection with: (1) the preparation,
execution and delivery of the Loan Documents, and any and all consents,
waivers or other documents or instruments relating thereto, (2) the filing,
recording, refiling and re-recording of any Security Documents and any other
documents or instruments or further assurances required to be filed or
recorded or refiled or re-recorded by the terms of any Loan Document, and/or
(3) the enforcement, after the occurrence of a Default or an Event of
Default, of the Loan Documents.
(j) PERFORMANCE ON BORROWER'S BEHALF. If Borrower fails to pay
any taxes, insurance premiums or other amounts it is required to pay under
any Loan Document, Lenders may pay the same. Borrower shall immediately
reimburse Lenders for any such payments and each amount paid shall constitute
a part of the Obligations, shall be secured by the Security Documents and
shall bear interest at the Late Payment Rate from the date such amount is
paid by Lenders until the date such amount is repaid to Lenders.
(k) COMPLIANCE WITH AGREEMENTS AND LAW. Borrower will perform all
material obligations it is required to perform under the terms of each
indenture, mortgage, deed of trust, security agreement, lease, franchise,
agreement, contract or other instrument or obligation to which it is a party
or by which it or any of its properties is bound in such a way that they
result in no material adverse effect upon the Borrowing Base Properties or
Borrower's ability to perform its obligations under this Agreement. Borrower
will in all material respects conduct its business and affairs in compliance
with all laws, regulations, and orders applicable thereto (including those
relating to pollution and other environmental matters).
(l) CERTIFICATIONS OF COMPLIANCE. Borrower will furnish to
Lenders at Borrower's expense all certifications which any Lender from time
to time reasonably requests, including but not limited to the forms of
evidence and assurance described in Section 4.2(e) above, as to the accuracy
and validity of or compliance with all representations, warranties and
covenants made by Borrower in the Loan Documents, the satisfaction of all
conditions contained therein, and all other matters pertaining thereto.
(m) ADDITIONAL SECURITY DOCUMENTS. Promptly after a request
therefor by Lenders at any time and from time to time, Borrower will execute
and deliver to Collateral Agent, for the benefit of Lenders, such additional
Security Documents and/or amendments to existing Security Documents as
Lenders may reasonably deem necessary or appropriate in order to grant to
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Collateral Agent, for the benefit of Lenders, a perfected lien on and
security interest (subject to any other then-existing Liens, except
Prohibited Liens) in any or all Borrowing Base Properties not previously
mortgaged to Collateral Agent, for the benefit of Lenders.
(n) USE OF PROCEEDS. Borrower will use the proceeds of the Loan
initially to refinance the amounts payable under or in connection with the
Prior Credit Agreement and thereafter for the exploration, acquisition and/or
the improvement of oil and gas properties and for general working capital
purposes.
(o) ENVIRONMENTAL MATTERS. Borrower will not in any material
respect cause or permit the Borrowing Base Properties, the Associated
Collateral or Borrower to be in violation of, or do anything or permit
anything to be done which will subject the Borrowing Base Properties or the
Associated Collateral to, any remedial obligations under any applicable
Environmental Laws, assuming disclosure to the applicable governmental
authorities of all relevant facts, conditions and circumstances, if any,
pertaining to the Borrowing Base Properties or the Associated Collateral, and
Borrower will promptly notify Lenders in writing of any existing, pending or,
to the best knowledge of Borrower, threatened investigation or inquiry by any
governmental authority in connection with any Applicable Environmental Laws.
Borrower will take all reasonable steps necessary to determine that no
hazardous substances or solid wastes have been disposed of or otherwise
released on or to the Borrowing Base Properties or the Associated Collateral.
Borrower will not cause or permit the disposal or other release of any
hazardous substance or solid waste (as defined in the Applicable
Environmental Laws) on or to the Borrowing Base Properties or the Associated
Collateral and covenants and agrees to keep or cause the Borrowing Base
Properties or the Associated Collateral to be kept free of any hazardous
substance or solid waste and to remove the same (or if removal is prohibited
by law, to take whatever actions is required by law) promptly upon discovery
at its sole expense. Upon any Lender's reasonable request, at any time and
from time to time during the existence of this Agreement, Borrower will
provide at Borrower's sole expenses, an inspection or audit of the Borrowing
Base Properties and the Associated Collateral from an engineering or
consulting firm approved by Lenders, indicating the presence or absence of
hazardous substances and solid waste on the Borrowing Base Properties and/or
the Associated Collateral. Insofar and only insofar as Borrower's obligations
under this Section 6.1(o) relate to Associated Collateral which is not owned
or controlled by Borrower, Borrower shall not be deemed to be in default
hereunder if
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Borrower has taken any and all reasonable and practical actions available to
it in attempting to comply with the provisions of this Section 6.1(o).
"Associated Collateral" as used in this Section and in Section 7.3
below shall mean any and all interest in and to (and or carved out of) the
lands which are described or referred to in the Security Documents in
connection with the Borrowing Base Properties, or which are otherwise
described in any of the oil, gas and/or mineral leases or other instruments
described in or referred to in the Security Documents whether or not such
collateral interests are owned by Borrower.
"Applicable Environmental Laws" as used in this Section and in
Section 7.3 below means any laws, orders, rules, or regulations pertaining to
health of the environment (as the same now exist or are hereafter enacted
and/or amended), including without limitation the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended by the
Superfund Amendments and Reauthorization Act of 1986 (as amended, hereinafter
called "CERCLA"), the Resource Conservation and Recovery Act of 1976, as
amended by the Used Oil Recycling Act of 1980, the solid Waste Disposal Act
Amendments of 1980, and the Hazardous and Solid Waste Amendments on 1984 (as
amended, hereinafter called "RCRA") and applicable state law.
(p) USAGE RATIO. Borrower will notify Lenders of any change in
the Usage Ratio that would cause a change in the applicable Base Rate Spread
or Fixed Rate Spread, such notice to be received by Lenders not later than
five Business Days after such change.
(q) YEAR 2000 COMPLIANCE. Borrower will promptly notify Agent in
the event Borrower discovers or determines that any computer application
(including those of its suppliers and vendors) that is material to its
business and operations will not be Year 2000 Compliant on a timely basis,
except to the extent that such failure would not present a material risk of
having a material adverse effect upon Borrower.
Section 6.2. NEGATIVE COVENANTS. Borrower warrants, covenants and
agrees that until the full and final payment of the Obligations and the
termination of this Agreement, unless Lenders have previously agreed
otherwise in writing:
(a) CURRENT RATIO. The Current Ratio of Borrower shall not at any
time be less than 1.0:1.0.
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(b) LIMITATION ON LIENS. Borrower will not create, assume or
permit to exist any mortgage, deed of trust, pledge, encumbrance, lien or
charge of any kind (including any security interest in or vendor's lien on
property purchased under conditional sales or other title retention
agreements and including any lease intended as security or in the nature of a
title retention agreement) upon any of its properties or assets, whether now
owned or hereafter acquired except:
(1) Liens at any time existing in favor of Collateral Agent, for
the benefit of Lenders;
(2) statutory Liens for taxes, statutory or contractual
mechanics' and materialmen's Liens incurred in the ordinary
course of business, and other similar Liens incurred in the
ordinary course of business, provided such Liens secure only
Debt which is not delinquent or which is being contested as
provided in Section 6.1(g) above;
(3) any Liens expressly permitted under the terms of any
Security Documents hereafter accepted by Lenders; and
(4) Liens securing Debt owing by Borrower to any third party, if
the existence of such Debt does not violate this Agreement;
provided that no such Lien (except any Lien for the benefit
of Lenders) shall cover or affect any of the Borrowing Base
Properties.
(c) ADDITIONAL DEBT. Borrower will not create, incur, assume or
permit to exist Debt not existing on the date of this Agreement, except: (1)
trade debt owed to suppliers, pumpers, mechanics, materialmen and others
furnishing goods or services to Borrower in the ordinary course of Borrower's
business, (2) Hedging Obligations of Borrower in an amount not to exceed: (A)
85 percent of the proved developed producing reserves projected to be
produced within 120 days of the date thereof, as shown in the most recent
engineering report delivered to Lenders pursuant to Section 6.1(b)(5) above,
and (B) 75 percent of the proved developed producing reserves projected to be
produced after 120 days from the date thereof, as shown in the most recent
engineering report delivered to Lenders pursuant to Section 6.1(b)(5) above,
(3) other Debt in the aggregate outstanding amount of not more than
$1,000,000 at any time, (4) Subordinated Debt, and (5) Non-Recourse Debt.
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(d) LIMITATION ON SALES OF PROPERTY. Borrower will not sell,
transfer, lease, exchange, alienate or dispose of any Borrowing Base
Properties except as follows (and the following exceptions shall be subject
to any limitations contained in the Security Documents):
(1) equipment which is worthless or obsolete, which is replaced by
equipment of equal suitability and value or which is salvaged
from wells which have been plugged and abandoned by or on behalf
of Borrower;
(2) inventory (including oil and gas sold as produced and seismic
data) which is sold in the ordinary course of business;
(3) personal property located on oil and gas properties operated
by third parties, the sale of which personal property cannot
be prevented by Borrower;
(4) farmouts, promotions, acreage swaps, acreage sales and similar
oil-industry arrangements for exploration or development of
undeveloped reserves included in the Borrowing Base
Properties; provided that no such arrangement shall affect in
any way any developed reserves included in the Borrowing Base
Properties; and
(5) properties having an aggregate value of not more than
$5,000,000 during any period subsequent to the then
most-recent determination of the Borrowing Base pursuant to
Section 3.2 above.
(e) ERISA PLANS. Borrower will not incur any obligation to
contribute to any "multiemployer plan" as defined in Section 4001 of ERISA.
(f) LIMITATION ON CREDIT EXTENSIONS. Borrower will not extend
credit, make advances or make loans other than: (1) normal and prudent
extensions of credit to customers buying goods and services in the ordinary
course of business, which extensions shall not be for longer periods than
those extended by similar businesses operated in a normal and prudent manner,
and (2) advances to employees of Borrower in an aggregate amount of not more
than $15,000 outstanding at any time.
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(g) FISCAL YEAR. Borrower will not change its fiscal year without
Lenders' consent, which will not be unreasonably withheld.
(h) AMENDMENT OF CONTRACTS. Borrower will not amend or permit any
amendment to any contract which could reasonably be foreseen to release,
qualify, limit, make contingent or otherwise detrimentally affect, in any
material way, the rights and benefits of Collateral Agent or any Lender under
or acquired pursuant to any of the Security Documents.
(i) LIMITATION ON GUARANTIES. Borrower will not guaranty or be or
become secondarily liable for any Debt which is the primary obligation of any
other Person.
(j) DISTRIBUTIONS. Borrower will not make any Distributions;
provided that the foregoing shall not be deemed to prevent Borrower from
granting stock options or making restricted stock awards to the extent that
the foregoing actions are taken in connection with Borrower's presently
existing Equity Incentive Plan, Borrower's presently-existing Non-Employee
Directors Stock Option Plan or any similar employee or director incentive
program granting reasonable incentives to Borrower's employees and/or
directors; provided further that, after the Commitment Expiration Date
(Facility B) has occurred and Facility B has been repaid in full, Borrower
may pay dividends and/or purchase outstanding stock of Borrower so long as,
immediately after any such purchase or payment, the aggregate amount expended
for such purchases and payments after the date hereof does not exceed the
lesser of: (1) $5,000,000, or (2) 50 percent of Borrower's Cumulative Net
Income, except that no such dividend payment or stock purchase shall be made
at any time that a Default has occurred and is continuing or would result
from any such payment or purchase.
(k) REORGANIZATIONS; COMBINATIONS. Borrower will not change its
name or the nature of its business, reorganize, liquidate, dissolve or enter
into any merger, joint venture, partnership or other combination.
(l) INVESTMENTS. Borrower will not purchase, acquire, hold or
otherwise invest in, or deposit any money into, any stock, bond, evidence of
indebtedness, deposit account or other security or investment other than any
Permitted Investment.
ARTICLE VII
EVENTS OF DEFAULT AND REMEDIES
Section 7.1. EVENTS OF DEFAULT. Each of the following events
constitutes an Event of Default under this Agreement:
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(a) Borrower fails to pay any Obligation when due and payable,
whether at a date for the payment of a fixed installment or contingent or
other payment to any Lender or as a result of acceleration or otherwise, and
such failure is not remedied within the applicable Grace Period; or
(b) Any "default" or "event of default" occurs under any Loan
Document which defines either term, and the same is not remedied within the
applicable period of grace (if any) provided in such Loan Document; or
(c) Borrower fails (other than as referred to in subsections (a)
and (b) above) to duly observe, perform or comply with any covenant,
agreement, condition or provision (other than those referred to in
subsections (a) and (b) above) of any Loan Document, and such failure is not
remedied within the applicable Grace Period; or
(d) Any representation or warranty previously, presently or
hereafter made in writing by or on behalf of Borrower in connection with any
Loan Document shall prove to have been false or incorrect in any material
respect on any date on or as of which made, and the represented or warranted
state of affairs does not become true within the applicable Grace Period; or
(e) Either: (1) any "accumulated funding deficiency" (as defined
in Section 412(a) of the Internal Revenue Code of 1986, as amended) in excess
of $10,000 exists with respect to any ERISA Plan, whether or not waived by
the Secretary of the Treasury or his delegate, or (2) any Termination Event
occurs with respect to any ERISA Plan and the then current value of such
ERISA Plan's benefits guaranteed under Title IV of ERISA exceeds the then
current value of such ERISA Plan's assets available for the payment of such
benefits by more than $10,000 (or in the case of a Termination Event
involving the withdrawal of a substantial employer, the withdrawing
employer's proportionate share of such excess exceeds such amount); or
(f) Borrower:
(1) suffers the entry against it of a judgment, decree or order
for relief by a court of competent jurisdiction in an
involuntary proceeding commenced under any applicable
bankruptcy, insolvency or other similar law of any
jurisdiction now or hereafter in effect, including the
federal Bankruptcy
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Code, as from time to time amended, or has any such
proceeding commenced against it which remains undismissed
for a period of 120 days (or, if applicable, such longer
or shorter period as may be necessary to ensure that
Borrower has a reasonable opportunity to respond to such
proceeding and request that it be dismissed); or
(2) suffers the appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official for a
substantial part of its assets or for any part of the
Borrowing Base Properties in a proceeding brought against or
initiated by it, and such appointment is neither made
ineffective nor discharged within 30 days after the making
thereof, or such appointment is consented to, requested by,
or acquiesced to by it (or, if applicable, such longer or
shorter period as may be necessary to ensure that Borrower
has a reasonable opportunity to respond to such proceeding
and request that it be dismissed); or
(3) commences a voluntary case under any applicable bankruptcy,
insolvency or similar law now or hereafter in effect,
including the federal Bankruptcy Code, as from time to time
amended; or applies for or consents to the entry of an order
for relief in an involuntary case under any such law or to
the appointment of or taking possession by a receiver,
liquidator, assignee, custodian, trustee, sequestrator or
other similar official of any substantial part of its assets
or any part of the Borrowing Base Properties; or makes a
general assignment for the benefit of creditors; or fails
generally to pay (or admits in writing its inability to pay)
its debts as such debts become due; or takes corporate or
other action in furtherance of any of the foregoing; or
(4) suffers the entry against it of a final judgment for the
payment of money in excess of $1,000,000 (not covered by
insurance), unless the same is discharged within 30
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days after the date of entry thereof or an appeal or
appropriate proceeding for review thereof is taken within
such period and a stay of execution pending such appeal
is obtained; or
(5) suffers the entry of an order issued by any court or
tribunal taking, seizing or apprehending all or any
substantial part of its property or any part of the
Borrowing Base Properties having a present worth, determined
using a 10-percent discount factor, of $2,000,000 or more
and bringing the same into the custody of such Court or
tribunal, and such order is not stayed or released within
thirty days after the entry thereof; or
(g) Any Person or Persons acting in concert (other than Michael S.
Smith and his immediate family and entities controlled by Michael S. Smith or
his immediate family) acquire 35 percent or more of Borrower's common stock;
or
(h) Changes occur in the membership of the Board of Directors of
Borrower (except for any change arising by reason of the death of any
director) such that a majority of the members of the Board of Directors of
Borrower is changed within any 12-month period; or
(i) Borrower fails to comply with the provisions of Section 3.2
above within the time periods for compliance specified in Section 3.2 above.
Upon the occurrence of an Event of Default described in subsection (f)(1),
(f)(2) or (f)(3) of this section, all of the Obligations shall thereupon be
immediately due and payable, without presentment, demand, protest, notice of
protest, declaration or notice of acceleration or intention to accelerate, or
any other notice or declaration of any kind, all of which are hereby
expressly waived by Borrower. During the continuance of any other Event of
Default, Lenders may declare any or all of the Obligations immediately due
and payable, and all such Obligations shall thereupon be immediately due and
payable. The term "Grace Period," as used herein with respect to an Event of
Default for which a Grace Period is expressly provided, means the period
beginning on the date of the related Default and ending the number of days
provided below after written notice of such Default (a "Default Notice") is
given by any Lender to Borrower: (x) in the case of a Default described in
Section 7.1(a) above
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involving a principal payment, one Business Day; (y) in the case of any
Default described in Section 7.1(a) above not involving a principal payment,
five Business Days; and (z) in the case of any other Default for which a
Grace Period is expressly provided, 30 days.
Section 7.2. REMEDIES. If any Default shall occur and be
continuing, the obligation of Lenders to make Advances under this Agreement
shall terminate immediately. If any Event of Default shall occur, Lenders may
protect and enforce their rights under the Loan Documents by any appropriate
proceedings, including proceedings for specific performance of any covenant
or agreement contained in any Loan Document, and Lenders may enforce the
payment of any Obligations due or enforce any other legal or equitable right.
All rights, remedies and powers conferred upon Lenders under the Loan
Documents shall be deemed cumulative and not exclusive of any other rights,
remedies or powers available under the Loan Documents or at law or in equity.
Section 7.3. INDEMNITY. Borrower hereby agrees to indemnify,
defend and hold harmless Lenders and their agents, affiliates, officers,
directors, and employees from and against any and all claims, losses,
demands, actions, causes of action, and liabilities whatsoever (including
without limitation reasonable attorney's fees and expenses, and costs and
expenses reasonably incurred in investigating, preparing or defending against
any litigation or claim, action, suit, proceeding or demand of any kind or
character) arising out of or resulting from: (a) the Loan Documents
(including without limitation the enforcement thereof), except to the extent
such claims, losses, and liabilities are proximately caused by a Lender's
gross negligence or willful misconduct, (b) any violation on or prior to the
Release Date (as hereinafter defined) of any Applicable Environmental Law,
(c) any act, omission, event or circumstance existing or occurring on or
prior to the Release Date (including without limitation the presence on the
Borrowing Base Properties or the Associated Collateral or release from the
Borrowing Base Properties or the Associated Collateral of hazardous
substances or solid wastes disposed of or otherwise released, resulting from
or in connection with the ownership, construction, occupancy, operation, use
and/or maintenance of the Borrowing Base Properties or the Associated
Collateral, regardless of whether the act, omission, event or circumstance
constituted a violation of any Applicable Environmental Law at the time of
its existence of occurrence, and (d) any and all claims or proceedings
(whether brought by a private party or governmental agencies) for bodily
injury, property damage, abatement or remediation, environmental damage or
impairment
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or any other injury or damage resulting from or relating to any hazardous or
toxic substance, solid waste or contaminated material located upon or
migrating into, from or through the Borrowing Base Properties or Associated
Collateral (whether or not the release of such materials was caused by
Borrower, a tenant or subtenant or a prior owner or tenant, or subtenant on
the Borrowing Base Properties or the Associated Collateral and whether or not
the alleged liability is attributable to the handling, storage, generation,
transportation, removal or disposal of such substance, waste or material or
the mere presence of such substance, waste or material on the Borrowing Base
Properties or the Associated Collateral), which the any Lender may have
liability with respect to due to the making of the Loan, the granting of the
Security Documents, the exercise of its rights under the Loan Documents, or
otherwise. The "Release Date" as used herein shall mean the earlier of the
following two dates: (1) the date on which the Obligations have been paid and
performed in full and the Security Documents have been released of record, or
(2) the date on which the liens of the Security Documents are foreclosed or a
deed in lieu of such foreclosure is fully effective and recorded. WITHOUT
LIMITATION, IT IS THE INTENTION OF BORROWER, AND BORROWER AGREES, THAT THE
FOREGOING INDEMNITIES SHALL APPLY TO EACH INDEMNIFIED PARTY WITH RESPECT TO
CLAIMS, DEMANDS, LIABILITIES, LOSSES, DAMAGES, CAUSES OF ACTION, JUDGMENTS,
PENALTIES, COSTS AND EXPENSES (INCLUDING WITHOUT LIMITATION REASONABLE
ATTORNEYS' FEES) WHICH IN WHOLE OR IN PART ARE CAUSED BY OR ARISE OUT OF THE
NEGLIGENCE OF SUCH (AND/OR ANY OTHER) INDEMNIFIED PARTY. However, such
indemnities shall not apply to any particular indemnified party (but shall
apply to the other indemnified parties) to the extent the subject of the
indemnification is caused by or arises out of the gross negligence or willful
misconduct of such particular indemnified party. The foregoing indemnities
shall not terminate upon the Release Date or upon the release, foreclosure or
other termination of the Security Documents, but will survive the Release
Date, foreclosure of the Security Documents or conveyances in lieu of
foreclosure, and the repayment of the Loan and the discharge and release of
the Security Documents and the other documents evidencing and/or securing the
Loan.
ARTICLE VIII
AGENT; COLLATERAL AGENT
Section 8.1. ACTIONS. Each Lender hereby irrevocably appoints
Agent to act as agent for Lenders under and for purposes of this Agreement
and each other Loan Document (other than the Security Documents), to the
extent
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provided herein. Each Lender hereby irrevocably appoints Collateral Agent to
act as collateral agent under the Security Documents. Each Lender authorizes
Agent to act on behalf of such Lender hereunder and under the other Loan
Documents (other than the Security Documents) and to exercise such powers
hereunder and thereunder as are specifically delegated to or required of
Agent by the terms hereof and thereof, together with such other powers as may
be reasonably incidental thereto. Each Lender authorizes Collateral Agent to
act on behalf of such Lender under the Security Documents and to exercise
such powers thereunder as are specifically delegated to or required of
Collateral Agent by the terms hereof and thereof, together with such other
powers as may be reasonably incidental thereto. Without limiting the
generality of the foregoing, each Lender authorizes Collateral Agent to act
on behalf of such Lender to execute and accept on its behalf any and all of
the Security Documents. Each Lender hereby indemnifies (which indemnity shall
survive any termination of this Agreement) Agent and Collateral Agent (and
agrees to make payment thereof to Agent within 10 days after demand is made
by Agent), pro rata according to such Lender's Proportionate Share, from and
against any and all liabilities, obligations, losses, damages, claims, costs
or expenses of any kind or nature whatsoever which may at any time be imposed
upon, incurred by, or asserted against, Agent or Collateral Agent in any way
relating to or arising out of this Agreement or any other Loan Document,
including reasonable attorneys' fees, and as to which Agent or Collateral
Agent is not reimbursed by Borrower or either of them; provided, however,
that no Lender shall be liable to Agent or Collateral Agent for the payment
of any portion of such liabilities, obligations, losses, damages, claims,
costs or expenses which are determined by a court of competent jurisdiction
in a final proceeding to have resulted solely from Agent's or Collateral
Agent's gross negligence or wilful misconduct. Agent or Collateral Agent
shall not be required to take any action hereunder or under any other Loan
Document, or to prosecute or defend any suit in respect of this Agreement or
any other Loan Documents, unless it is indemnified hereunder to its
satisfaction. If any indemnity in favor of Agent or Collateral Agent shall be
or become, in Agent's or Collateral Agent's determination, inadequate, Agent
or Collateral Agent may call for additional indemnification from Lenders and
cease to do the acts indemnified against hereunder until such additional
indemnity is given. The relationship of Agent to Lenders is only that of one
commercial bank acting as administrative agent for others, and nothing in the
Loan Documents shall be construed to constitute Agent a trustee or other
fiduciary for any holder of any of the Notes or of any participation therein
nor to impose on Agent duties and obligations other than those expressly
provided for in the
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Loan Documents. With respect to any matters not expressly provided for in the
Loan Documents and any matters which the Loan Documents place within the
discretion of Agent, Agent shall not be required to exercise any discretion
or take any action, and it may request instructions from Lenders with respect
to any such matter, in which case it shall be required to act or to refrain
from acting (and shall be fully protected and free from liability to all
Lenders in so acting or refraining from acting) upon the instructions of
Majority Lenders (including itself); provided, however, that Agent shall not
be required to take any action which exposes it to a risk of personal
liability that it considers unreasonable or which is contrary to the Loan
Documents or to applicable law.
Section 8.2. EXCULPATION. None of Agent, Collateral Agent or any
Lender, nor any of their respective directors, officers, employees or agents,
shall be liable to any Lender for any action taken or omitted to be taken by
it under this Agreement or any other Loan Document, or in connection herewith
or therewith, except for its own wilful misconduct or gross negligence, nor
responsible for any recitals or warranties herein or therein, nor for the
effectiveness, enforceability, validity or due execution of this Agreement or
any other Loan Document, nor for the creation, perfection or priority of any
Liens purported to be created by any of the Loan Documents, or the validity,
genuineness, enforceability, existence, value or sufficiency of any
collateral security, nor to make any inquiry respecting the performance by
Borrower of its obligations hereunder or under any other Loan Document. Any
such inquiry which may be made by any Lender, Agent or Collateral Agent shall
not obligate it to make any further inquiry or to take any action. Each
Lender, Agent and Collateral Agent shall be entitled to rely upon advice of
counsel concerning legal matters and upon any notice, consent, certificate,
statement or writing which such Lender, Agent or Collateral Agent believes to
be genuine and to have been presented by a proper Person.
Section 8.3. SUCCESSOR. Agent or Collateral Agent may resign as
such at any time upon at least 30 days' prior notice to Borrower and all
Lenders. If Agent or Collateral Agent at any time shall resign, Lenders may
appoint another Lender as a successor Agent or Collateral Agent which shall
thereupon become Agent or Collateral Agent hereunder. If no successor Agent
or Collateral Agent shall have been so appointed by Lenders, and shall have
accepted such appointment, within 30 days after the retiring Agent or
Collateral Agent's giving notice of resignation, then the retiring Agent or
Collateral Agent may, on behalf of Lenders, appoint a successor Agent or
Collateral Agent, which shall be one of Lenders or a commercial banking
institution organized
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under the laws of the U.S. or Canada (or any State or Province thereof) or a
U.S. or Canadian branch or agency of a commercial banking institution, and
having a combined capital and surplus of at least $200,000,000. Upon the
acceptance of any appointment as Agent or Collateral Agent hereunder by a
successor Agent or Collateral Agent, such successor Agent or Collateral Agent
shall be entitled to receive from the retiring Agent or Collateral Agent such
documents of transfer and assignment as such successor Agent or Collateral
Agent may reasonably request, and shall thereupon succeed to and become
vested with all rights, powers, privileges and duties of the retiring Agent
or Collateral Agent, and the retiring Agent or Collateral Agent shall be
discharged from its duties and obligations under this Agreement. After any
retiring Agent's or Collateral Agent's resignation hereunder as Agent or
Collateral Agent, the provisions of (a) this Article VIII shall inure to its
benefit as to any actions taken or omitted to be taken by it while it was
Agent or Collateral Agent under this Agreement; and (b) Section 8.2 above
shall continue to inure to its benefit.
Section 8.4. OTHER LOANS BY LENDERS. Each Lender and its
Affiliates may accept deposits from, lend money to, and generally engage in
any kind of business with Borrower or any Affiliate of Borrower.
Section 8.5. CREDIT DECISIONS. Each Lender acknowledges that it
has, independently of Agent, Collateral Agent and each other Lender, and
based on such Lender's review of the financial information of Borrower, this
Agreement, the Security Documents, the other Loan Documents (the terms and
provisions of which being satisfactory to such Lender) and such other
documents, information and investigations as such Lender has deemed
appropriate, made its own credit decision to extend its Proportionate Share
of the Commitment. Each Lender also acknowledges that it will, independently
of Agent, Collateral Agent and each other Lender, and based on such other
documents, information and investigations as it shall deem appropriate at any
time, continue to make its own credit decisions as to exercising or not
exercising from time to time any rights and privileges available to it under
this Agreement, the Security Documents or any other Loan Document.
Section 8.6. PAYMENT OF COLLECTED AMOUNTS. (a) If any Lender
receives any payment or other amount on account of the Loan (whether by
exercise of such Lender's rights of setoff or banker's lien or by any other
method) other than such Lender's Proportionate Share of any payment made by
or on behalf of Borrower, such Lender shall, no later than the next Business
Day after such Lender's receipt of any such payment
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or other amount, pay over to the other Lenders, their respective
Proportionate Shares of the payment or other amount received by such Lender.
(b) Subject to the rights of any other persons in the Borrowing
Base Properties, in the event of the acquisition of title to any portion of
the Borrowing Base Properties, either through foreclosure or otherwise, this
Agreement shall continue in full force and effect and (1) each Lender shall
pay its Proportionate Share (determined as of the date such expenses are
incurred) of expenses for maintenance and taxes and any and all other
expenses necessary in connection with the acquisition, holding, sale or other
disposition of the Borrowing Base Properties and (2) each Lender shall be
deemed to have an undivided interest in the Borrowing Base Properties (as
tenants-in-common) equal to such Lender's Proportionate Share.
Section 8.7. APPLICATION OF COLLATERAL PROCEEDS. The Security
Documents secure: (a) obligations of Borrower to Lenders, or any of them, or
Collateral Agent under or in connection with this Agreement, and (b) other
obligations of Borrower to Lenders, or any of them. The parties agree that,
from and after the occurrence of an Event of Default and upon the election of
Lenders to foreclose against or otherwise realize upon the Collateral, any
amounts collected as proceeds of the Collateral shall be applied as follows:
first, to the repayment of the obligations described in (a) above until such
obligations have been repaid in full (with any amount collected by any Lender
or Collateral Agent being divided pro rata among Lenders according to their
respective Proportionate Shares of the obligations described in (a) above and
applied by each Lender at its discretion to the principal, interest, fees and
other amounts due under or in connection with any or all of such
obligations); and second, to the repayment of the obligations described in
(b) above (with any amount collected by any Lender or Collateral Agent being
applied pro rata among all obligations owed to any Lender pursuant to (b)
above) until such obligations have been repaid in full.
Section 8.8. ASSIGNMENTS; PARTICIPATIONS. Each Lender shall have
the right to assign all or any portion of its Proportionate Share of the Loan
to another Person (including without limitation to another Lender) only with
the prior written consent of Agent and Borrower, which consent shall not be
unreasonably withheld. Each Lender shall have the right to sell limited
participations in its Proportionate Share to another Person (including
without limitation to another Lender), with the voting rights of any such
transferred share being limited to those matters requiring unanimous consent
of Lenders pursuant to Section 8.9 below.
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Prior to the time that any such assignment shall be made or participation
shall be sold, the assigning or selling Lender shall pay to Agent a transfer
fee in the amount of $3,500.
Section 8.9. MAJORITY LENDERS. Any and all decisions to be made
and actions to be taken by Lenders hereunder or under any of the Loan
Documents (including without limitation any determination or re-determination
of the Borrowing Base (Conforming) or the Borrowing Base (Supplemental), any
consent or waiver of, or amendment to, any covenant, or any acceleration of
the maturity of the Loan) may be made or taken by Majority Lenders on behalf
of all Lenders; provided that Agent shall have the authority to release from
the Security Documents properties being transferred by Borrower in accordance
with the provisions of Section 6.2(d)(4) above (other than transfers of
reserves to which Lenders have attributed value in determining the Borrowing
Base); provided further that the agreement of all Lenders shall be required
in order to: (a) waive or consent to any default in the timely payment of
principal or interest, (b) approve any release of all or substantially all of
the Collateral, (c) change any interest rate or fee payable with respect to
the Loan, (d) change the Maximum Loan Amount, (e) extend the Amortization
Period or the Revolving Period, (f) on or before the Commitment Expiration
Date (Facility B), determine the Borrowing Base (Conforming) or the Borrowing
Base (Supplemental), and (g) after the Commitment Expiration Date (Facility
B), increase the Borrowing Base (Conforming) from the Borrowing Base
(Conforming) previously in effect.
ARTICLE IX
MISCELLANEOUS
Section 9.1. WAIVER AND AMENDMENT. No failure or delay by any
Lender in exercising any right, power or remedy which it may have under any
of the Loan Documents shall operate as a waiver thereof or of any other
right, power or remedy, nor shall any single or partial exercise by any
Lender of any such right, power or remedy preclude any other or further
exercise thereof or of any other right, power or remedy. No waiver of any
provision of any Loan Document and no consent to any departure therefrom
shall ever be effective unless it is in writing and signed by all Lenders,
and then such waiver or consent shall be effective only in the specific
instances and for the purposes for which given and to the extent specified in
such writing. No notice to or demand on Borrower shall in any case of itself
entitle Borrower to any other or further notice or demand in similar or other
circumstances. This Agreement and the other Loan Documents
56
<PAGE>
set forth the entire understanding between the parties hereto, and no
modification or amendment of or supplement to this Agreement or the other
Loan Documents shall be valid or effective unless the same is in writing and
signed by the party against whom it is sought to be enforced.
Section 9.2. SURVIVAL OF AGREEMENTS; CUMULATIVE NATURE. All of
Borrower's various representations, warranties, covenants and agreements in
the Loan Documents shall survive the execution and delivery of this Agreement
and the other Loan Documents and the performance hereof and thereof,
including without limitation the making or granting of the Loan and the
delivery of the Notes and the other Loan Documents, and shall further survive
until all of the Obligations are paid in full to Lenders and all of Lenders'
obligations to Borrower are terminated. All statements and agreements
contained in any certificate or other instrument delivered by Borrower to any
Lender under any Loan Document shall be deemed representations and warranties
by Borrower to Lenders and/or agreements and covenants of Borrower under this
Agreement. The representations, warranties, and covenants made by Borrower in
the Loan Documents, and the rights, powers, and privileges granted to Lenders
in the Loan Documents, are cumulative, and no Loan Document shall be
construed in the context of another to diminish, nullify, or otherwise reduce
the benefit to any Lender of any such representation, warranty, covenant,
right, power or privilege. In particular and without limitation, no exception
set out in this Agreement to any representation, warranty or covenant herein
contained shall apply to any similar representation, warranty or covenant
contained in any other Loan Document, and each such similar representation,
warranty or covenant shall be subject only to those exceptions which are
expressly made applicable to it by the terms of the various Loan Documents.
Section 9.3. NOTICES. All notices, requests, consents, demands
and other communications required or permitted under any Loan Document shall
be in writing and, unless otherwise specifically provided in such Loan
Document, shall be deemed sufficiently given or furnished if delivered by
personal delivery, by expedited delivery service with proof of delivery, or
by registered or certified United States mail, return receipt requested,
postage prepaid, at the addresses specified below (unless changed by similar
notice in writing given by the particular Person whose address is to be
changed). Any such notice or communication shall be deemed to have been given
either at the time of personal delivery or, in the case of delivery service
or mail, as of the date of first attempted delivery at the address and in the
manner provided herein (provided that the notifying party promptly takes
reasonable steps to effect actual delivery if the first attempted delivery is
unsuccessful):
57
<PAGE>
Borrower's address: 370 Seventeenth Street
Suite 3400
Denver, Colorado 80202
Attention: Neil Stenbuck
NBNA's address: 901 Main Street, 64th Floor
Dallas, Texas 75283
Attention: Energy Banking Group
with an additional
copy to NBNA at: 370 Seventeenth Street
Suite 3250
Denver, Colorado 80202
Attention: David C. Rubenking
USB's address: 918 Seventeenth Street, 3rd Floor
Denver, Colorado 80202
Attention: Kathryn A. Gaiter
Union's address: 500 North Akard Street
Suite 4200
Dallas, Texas 75201
Attention: Randall L. Osterberg
Section 9.4. PARTIES IN INTEREST. All grants, covenants and
agreements contained in the Loan Documents shall bind and inure to the
benefit of the parties thereto and their respective successors and assigns;
provided, however, that Borrower may not assign or transfer any of its rights
or delegate any of its duties or obligations under any Loan Document without
the prior consent of Lenders.
Section 9.5. GOVERNING LAW. The Loan Documents shall be deemed
contracts and instruments made under the laws of the State of Colorado and
shall be construed and enforced in accordance with and governed by the laws
of the State of Colorado and the laws of the United States of America,
except: (1) to the extent that the law of another jurisdiction is expressly
elected in a Loan Document, and (2) with respect to specific Liens, or the
perfection thereof, evidenced by Security Documents covering real or personal
property which by the laws applicable thereto are required to be construed
under the laws of another jurisdiction. Borrower hereby irrevocably submits
itself to the non-exclusive jurisdiction of the state and federal courts of
the State of Colorado.
Section 9.6. LIMITATION ON INTEREST. Lenders and Borrower intend
to contract in strict compliance with applicable usury law from time to time
in effect. In furtherance thereof such persons stipulate and agree that none
58
<PAGE>
of the terms and provisions contained in the Loan Documents shall ever be
construed to create a contract to pay, for the use, forbearance or detention
of money, interest in excess of the maximum amount of interest permitted to
be charged by applicable law from time to time in effect. Neither Borrower
nor any present or future guarantors, endorsers, or other Persons hereafter
becoming liable for payment of any Obligation shall ever be liable for
unearned interest thereon or shall ever be required to pay interest thereon
in excess of the maximum amount that may be lawfully charged under applicable
law from time to time in effect, and the provisions of this section shall
control over all other provisions of the Loan Documents which may be in
conflict or apparent conflict herewith. Lenders expressly disavow any
intention to charge or collect excessive unearned interest or finance charges
in the event the maturity of any Obligation is accelerated. If: (a) the
maturity of any Obligation is accelerated for any reason, (b) any Obligation
is prepaid and as a result any amounts held to constitute interest are
determined to be in excess of the legal maximum, or (c) any Lender or any
other holder of any or all of the Obligations shall otherwise collect moneys
which are determined to constitute interest which would otherwise increase
the interest on any or all of the Obligations to an amount in excess of that
permitted to be charged by applicable law then in effect, then all such sums
determined to constitute interest in excess of such legal limit shall,
without penalty, be promptly applied to reduce the then outstanding principal
of the related Obligations or, at Lenders' option, promptly returned to
Borrower or the other payor thereof upon such determination.
Section 9.7. SEVERABILITY. If any term or provision of any Loan
Document shall be determined to be illegal or unenforceable all other terms
and provisions of the Loan Documents shall nevertheless remain effective and
shall be enforced to the fullest extent permitted by applicable law.
Section 9.8. COUNTERPARTS. This Agreement may be separately
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed shall be deemed to
constitute one and the same Agreement.
Section 9.9. CONFLICTS. To the extent of any irreconcilable
conflicts between the provisions of this Agreement and the provisions of any
of the Loan Documents, the provisions of this Agreement shall prevail.
Section 9.10. WAIVER OF JURY TRIAL, PUNITIVE DAMAGES, ETC. EACH OF
BORROWER, AGENT AND LENDERS HEREBY KNOWINGLY, VOLUNTARILY, INTENTIONALLY, AND
IRREVOCABLY:
59
<PAGE>
(a) WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY
HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR
DIRECTLY OR INDIRECTLY AT ANY TIME ARISING OUT OF, UNDER OR IN CONNECTION
WITH THE LOAN DOCUMENTS OR ANY TRANSACTION CONTEMPLATED THEREBY OR ASSOCIATED
THEREWITH, BEFORE OR AFTER MATURITY; (b) WAIVES, TO THE MAXIMUM EXTENT NOT
PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY SUCH
LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES, OR
DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES; (c) CERTIFIES THAT NO
PARTY HERETO NOR ANY REPRESENTATIVE OR AGENT OR COUNSEL FOR ANY PARTY HERETO
HAS REPRESENTED, EXPRESSLY OR OTHERWISE, OR IMPLIED THAT SUCH PARTY WOULD
NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS, AND
(d) ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT, THE
OTHER LOAN DOCUMENTS AND THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY BY,
AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS CONTAINED IN THIS
SECTION.
Section 9.11. SUPERSESSION. Upon the repayment of all amounts due
under or in connection with the Prior Credit Agreement, the terms of this
Agreement shall supersede the terms of the Prior Credit Agreement in their
entirety.
IN WITNESS WHEREOF, this Agreement is executed as of the date first
above written.
BASIN EXPLORATION, INC.
By: /s/ Michael S. Smith
---------------------------
Michael S. Smith,
President
NATIONSBANK, N.A., as a LENDER,
AGENT and COLLATERAL AGENT
By: /s/ David C. Rubenking
---------------------------
David C. Rubenking,
Senior Vice President
U.S. BANK NATIONAL ASSOCIATION
By: /s/ Kathryn A. Gaiter
---------------------------
Kathryn A. Gaiter,
Vice President
60
<PAGE>
UNION BANK OF CALIFORNIA, N.A.
By: /s/ Randall L. Osterberg
---------------------------
Randall L. Osterberg,
Vice President
By: [Illegible]
---------------------------
---------------------------,
Senior Vice President
61
<PAGE>
SCHEDULE 1
DISCLOSURE SCHEDULE
1. Section 5.1(f). Changes in Financial Position.
Borrower follows the full-cost method of accounting for oil and gas
properties. Under this method, all costs associated with the development,
exploration and acquisition of oil and gas properties are capitalized. If
capitalized costs, net of amortization and related deferred taxes, exceed
the full-cost ceiling, the excess would be expensed in the period such
excess occurs. Calculation of the full-cost ceiling includes an estimate
of the discounted value of future net revenue attributable to proved
reserves using various assumptions and parameters consistent with
promulgations of the Securities and Exchange Commission, and such
calculation is sensitive to changes in prevailing oil and gas prices.
Oil and natural gas prices are volatile and reflect seasonal factors,
as well as other supply and demand conditions. Declines in prices at
December 31, 1998, or in the future, could result in a requirement that
Borrower recognize an impairment expense at December 31, 1998 or in a
future period.
2. Section 5.1(g). Other Obligations. NONE
3. Section 5.1(i). Litigation. NONE
4. Section 5.1(j). ERISA Liabilities.
In connection with reductions in Borrower's staff during 1996,
Borrower voluntarily treated some departing staff members as having been
vested in Borrower's pension plan, even though such staff members may not
have qualified for such vesting under the express provisions of the plan.
On or about August 31, 1996, a partial plan termination relating to
accelerated vesting occurred with respect to Borrower's 401(k) plan.
5. Section 5.1(m). Names and Places of Business.
Other names: Basin Operating Company
Former address of chief executive office:
633 Seventeenth Street
Denver, Colorado 80202
Address of Borrower's Houston office:
1001 Fannin Street
Houston, Texas 77002
1-1
<PAGE>
EXHIBIT A-1
PROMISSORY NOTE
$40,000,000 January 1, 1999
Denver, Colorado
FOR VALUE RECEIVED, BASIN EXPLORATION, INC., a Delaware corporation
("Borrower"), promises to pay to the order of NATIONSBANK, N.A. ("Payee"),
the principal sum of $40,000,000, or so much thereof as may be advanced
hereunder, together with interest on the outstanding balance of such
principal amount at the rates provided below.
This Note in part represents a refinancing and a continuation of
the indebtedness evidenced by a Promissory Note dated November 22, 1994, as
amended, made by Borrower, payable to the order of Payee's predecessor, in
the face amount of $34,000,000. This Note is issued pursuant to, and is
subject to the terms and provisions of, the Amended and Restated Credit
Agreement dated as of January 1, 1999, among Borrower, Payee, U.S. Bank
National Association, and Union Bank of California, N.A., as heretofore or
hereafter amended, modified, extended, restated or replaced (the "Credit
Agreement"). Except as otherwise defined herein, terms defined in the Credit
Agreement shall have the same meanings when used herein.
The outstanding principal amount of this Note shall be due and
payable as provided in the Credit Agreement, in monthly installments due on
the last day of each calendar month, as described in the Credit Agreement.
The entire outstanding principal balance of this Note shall be due and
payable on December 31, 2010 (unless due and payable sooner pursuant to the
terms of the Credit Agreement) and shall bear interest as provided in the
Credit Agreement.
Interest shall accrue daily and shall be due and payable as
provided in the Credit Agreement.
All payments of principal and interest hereon shall be made at
Payee's offices at 901 Main Street, 64th Floor, Dallas, Texas 75283,
Attention: Energy Banking Group, or at such other place as Payee shall have
designated to Borrower in writing by 10:00 A.M. Denver time on the date due
or the date of prepayment (as the case may be) in immediately available funds
and without set-off or counterclaim or deduction of any kind. All payments
received hereunder shall be applied first to costs of collection, second to
accrued interest as of the date of payment and third to the outstanding
principal balance of this Note.
A-1-1
<PAGE>
Notwithstanding anything to the contrary contained in this Note,
from and after the expiration of any applicable period of grace provided for
in the Credit Agreement, overdue principal, and (to the extent permitted
under applicable law) overdue interest, whether caused by acceleration of
maturity or otherwise, shall bear interest at a fluctuating rate, adjustable
the day of any change in such rate, equal to five percentage points above the
Base Rate, until paid, and shall be payable monthly or, at the option of the
holder hereof, on demand.
It is not intended hereby to charge interest at a rate in excess of
the maximum rate of interest that Payee may charge to Borrower under
applicable usury and other laws, but if, notwithstanding, interest in excess
of such rate shall be paid hereunder, the interest rate on this Note shall be
adjusted to the maximum permitted under applicable law during the period or
periods that the interest rate otherwise provided herein would exceed such
rate and any excess amount applied at Payee's option to reduce the
outstanding principal balance of this Note or to be returned to Borrower.
This Note is secured by, and the holder of this Note is entitled to
the benefits of, the documents described in the Credit Agreement (the
"Security Documents"). Reference is made to the Security Documents for a
description of the property covered thereby and the rights, remedies and
obligations of the holder hereof in respect thereto.
Subject to the expiration of any applicable period of grace
provided for in the Credit Agreement, in the event of: (a) any default in any
payment of the principal of or interest on this Note when due and payable, or
(b) any other "Event of Default" (as such term is defined in the Credit
Agreement), then the whole principal sum of this Note plus accrued interest
and all other obligations of Borrower to holder, direct or indirect, absolute
or contingent, now existing or hereafter arising, shall, at the option of
Payee, become immediately due and payable, and any or all of the rights and
remedies provided herein and in the Credit Agreement and the Security
Documents, as they may be amended, modified or supplemented from time to
time, may be exercised by Payee.
If Borrower fails to pay any amount due under this Note and Payee
has to take any action to collect the amount due or to exercise its rights
under the Security Documents, including without limitation retaining
attorneys for collection of this Note, or if any suit or proceeding is
brought for the recovery of all or any part of or for protection of the
indebtedness or to foreclose the Security Documents or to enforce Payee's
rights under the Security Documents, then Borrower agrees to pay on demand
all reasonable costs and expenses of any such action to collect, suit or
proceeding, or any appeal of any such suit or
A-1-2
<PAGE>
proceeding, incurred by Payee, including without limitation the reasonable
fees and disbursements of Payee's attorneys and their staff.
Borrower waives presentment, notice of dishonor and protest, and
assents to any extension of time with respect to any payment due under this
Note, to any substitution or release of collateral and to the addition or
release of any party, except as provided in the Credit Agreement. No waiver
of any payment or other right under this Note shall operate as a waiver of
any other payment or right.
If any provision in this Note shall be held invalid, illegal or
unenforceable in any jurisdiction, the validity, legality or enforceability
of any defective provisions shall not be in any way affected or impaired in
any other jurisdiction.
No delay or failure of the holder of this Note in the exercise of
any right or remedy provided for hereunder shall be deemed a waiver of such
right by the holder hereof, and no exercise of any right or remedy shall be
deemed a waiver of any other right or remedy that the holder may have.
All notices given hereunder shall be given as provided in the
Credit Agreement.
At the option of the holder hereof, an action may be brought to
enforce this Note in the District Court in and for the City and County of
Denver, State of Colorado, in the United States District Court for the
District of Colorado or in any other court in which venue and jurisdiction
are proper. Borrower and all signers or endorsers hereof consent to venue and
jurisdiction in the District Court in and for the City and County of Denver,
State of Colorado and in the United States District Court for the District of
Colorado and to service of process under Sections 13-1-124(1)(a) and
13-1-125, Colorado Revised Statutes (1992), as amended, in any action
commenced to enforce this Note.
This Note is to be governed by and construed according to the laws
of the State of Colorado.
BASIN EXPLORATION, INC.
By:
---------------------------
Michael S. Smith,
President
A-1-3
<PAGE>
EXHIBIT A-2
PROMISSORY NOTE
$40,000,000 January 1, 1999
Denver, Colorado
FOR VALUE RECEIVED, BASIN EXPLORATION, INC., a Delaware corporation
("Borrower"), promises to pay to the order of U.S. BANK NATIONAL ASSOCIATION
("Payee"), the principal sum of $40,000,000, or so much thereof as may be
advanced hereunder, together with interest on the outstanding balance of such
principal amount at the rates provided below.
This Note in part represents a refinancing and a continuation of
the indebtedness evidenced by a Promissory Note dated November 22, 1994, as
amended, made by Borrower, payable to the order of Payee's predecessor, in
the face amount of $34,000,000. This Note is issued pursuant to, and is
subject to the terms and provisions of, the Amended and Restated Credit
Agreement dated as of January 1, 1999, among Borrower, Payee, Nationsbank,
N.A., and Union Bank of California, N.A., as heretofore or hereafter amended,
modified, extended, restated or replaced (the "Credit Agreement"). Except as
otherwise defined herein, terms defined in the Credit Agreement shall have
the same meanings when used herein.
The outstanding principal amount of this Note shall be due and
payable as provided in the Credit Agreement, in monthly installments due on
the last day of each calendar month, as described in the Credit Agreement.
The entire outstanding principal balance of this Note shall be due and
payable on December 31, 2010 (unless due and payable sooner pursuant to the
terms of the Credit Agreement) and shall bear interest as provided in the
Credit Agreement.
Interest shall accrue daily and shall be due and payable as
provided in the Credit Agreement.
All payments of principal and interest hereon shall be made at
Payee's offices at 918 Seventeenth Street, Denver, Colorado 80202, or at such
other place as Payee shall have designated to Borrower in writing by 10:00
A.M. Denver time on the date due or the date of prepayment (as the case may
be) in immediately available funds and without set-off or counterclaim or
deduction of any kind. All payments received hereunder shall be applied first
to costs of collection, second to accrued interest as of the date of payment
and third to the outstanding principal balance of this Note.
A-2-1
<PAGE>
Notwithstanding anything to the contrary contained in this Note,
from and after the expiration of any applicable period of grace provided for
in the Credit Agreement, overdue principal, and (to the extent permitted
under applicable law) overdue interest, whether caused by acceleration of
maturity or otherwise, shall bear interest at a fluctuating rate, adjustable
the day of any change in such rate, equal to five percentage points above the
Base Rate, until paid, and shall be payable monthly or, at the option of the
holder hereof, on demand.
It is not intended hereby to charge interest at a rate in excess of
the maximum rate of interest that Payee may charge to Borrower under
applicable usury and other laws, but if, notwithstanding, interest in excess
of such rate shall be paid hereunder, the interest rate on this Note shall be
adjusted to the maximum permitted under applicable law during the period or
periods that the interest rate otherwise provided herein would exceed such
rate and any excess amount applied at Payee's option to reduce the
outstanding principal balance of this Note or to be returned to Borrower.
This Note is secured by, and the holder of this Note is entitled to
the benefits of, the documents described in the Credit Agreement (the
"Security Documents"). Reference is made to the Security Documents for a
description of the property covered thereby and the rights, remedies and
obligations of the holder hereof in respect thereto.
Subject to the expiration of any applicable period of grace
provided for in the Credit Agreement, in the event of: (a) any default in any
payment of the principal of or interest on this Note when due and payable, or
(b) any other "Event of Default" (as such term is defined in the Credit
Agreement), then the whole principal sum of this Note plus accrued interest
and all other obligations of Borrower to holder, direct or indirect, absolute
or contingent, now existing or hereafter arising, shall, at the option of
Payee, become immediately due and payable, and any or all of the rights and
remedies provided herein and in the Credit Agreement and the Security
Documents, as they may be amended, modified or supplemented from time to
time, may be exercised by Payee.
If Borrower fails to pay any amount due under this Note and Payee
has to take any action to collect the amount due or to exercise its rights
under the Security Documents, including without limitation retaining
attorneys for collection of this Note, or if any suit or proceeding is
brought for the recovery of all or any part of or for protection of the
indebtedness or to foreclose the Security Documents or to enforce Payee's
rights under the Security Documents, then Borrower agrees to pay on demand
all reasonable costs and expenses of any such action to collect, suit or
proceeding, or any appeal of any such suit or
A-2-2
<PAGE>
proceeding, incurred by Payee, including without limitation the reasonable
fees and disbursements of Payee's attorneys and their staff.
Borrower waives presentment, notice of dishonor and protest, and
assents to any extension of time with respect to any payment due under this
Note, to any substitution or release of collateral and to the addition or
release of any party, except as provided in the Credit Agreement. No waiver
of any payment or other right under this Note shall operate as a waiver of
any other payment or right.
If any provision in this Note shall be held invalid, illegal or
unenforceable in any jurisdiction, the validity, legality or enforceability
of any defective provisions shall not be in any way affected or impaired in
any other jurisdiction.
No delay or failure of the holder of this Note in the exercise of
any right or remedy provided for hereunder shall be deemed a waiver of such
right by the holder hereof, and no exercise of any right or remedy shall be
deemed a waiver of any other right or remedy that the holder may have.
All notices given hereunder shall be given as provided in the
Credit Agreement.
At the option of the holder hereof, an action may be brought to
enforce this Note in the District Court in and for the City and County of
Denver, State of Colorado, in the United States District Court for the
District of Colorado or in any other court in which venue and jurisdiction
are proper. Borrower and all signers or endorsers hereof consent to venue and
jurisdiction in the District Court in and for the City and County of Denver,
State of Colorado and in the United States District Court for the District of
Colorado and to service of process under Sections 13-1-124(1)(a) and
13-1-125, Colorado Revised Statutes (1992), as amended, in any action
commenced to enforce this Note.
This Note is to be governed by and construed according to the laws
of the State of Colorado.
BASIN EXPLORATION, INC.
By:
---------------------------
Michael S. Smith,
President
A-2-3
<PAGE>
EXHIBIT A-3
PROMISSORY NOTE
$30,000,000 January 1, 1999
Denver, Colorado
FOR VALUE RECEIVED, BASIN EXPLORATION, INC., a Delaware corporation
("Borrower"), promises to pay to the order of UNION BANK OF CALIFORNIA, N.A.
("Payee"), the principal sum of $30,000,000, or so much thereof as may be
advanced hereunder, together with interest on the outstanding balance of such
principal amount at the rates provided below.
This Note in part represents a refinancing and a continuation of
the indebtedness evidenced by a Promissory Note dated November 22, 1994, as
amended, made by Borrower, payable to the order of Payee's predecessor, in
the face amount of $34,000,000. This Note is issued pursuant to, and is
subject to the terms and provisions of, the Amended and Restated Credit
Agreement dated as of January 1, 1999, among Borrower, Payee, Nationsbank,
N.A. and U.S. Bank National Association, as heretofore or hereafter amended,
modified, extended, restated or replaced (the "Credit Agreement"). Except as
otherwise defined herein, terms defined in the Credit Agreement shall have
the same meanings when used herein.
The outstanding principal amount of this Note shall be due and
payable as provided in the Credit Agreement, in monthly installments due on
the last day of each calendar month, as described in the Credit Agreement.
The entire outstanding principal balance of this Note shall be due and
payable on December 31, 2010 (unless due and payable sooner pursuant to the
terms of the Credit Agreement) and shall bear interest as provided in the
Credit Agreement.
Interest shall accrue daily and shall be due and payable as
provided in the Credit Agreement.
All payments of principal and interest hereon shall be made at
Payee's offices at 500 North Akard Street, Suite 4200, Dallas, Texas 75201,
or at such other place as Payee shall have designated to Borrower in writing
by 10:00 A.M. Denver time on the date due or the date of prepayment (as the
case may be) in immediately available funds and without set-off or
counterclaim or deduction of any kind. All payments received hereunder shall
be applied first to costs of collection, second to accrued interest as of the
date of payment and third to the outstanding principal balance of this Note.
A-3-1
<PAGE>
Notwithstanding anything to the contrary contained in this Note,
from and after the expiration of any applicable period of grace provided for
in the Credit Agreement, overdue principal, and (to the extent permitted
under applicable law) overdue interest, whether caused by acceleration of
maturity or otherwise, shall bear interest at a fluctuating rate, adjustable
the day of any change in such rate, equal to five percentage points above the
Base Rate, until paid, and shall be payable monthly or, at the option of the
holder hereof, on demand.
It is not intended hereby to charge interest at a rate in excess of
the maximum rate of interest that Payee may charge to Borrower under
applicable usury and other laws, but if, notwithstanding, interest in excess
of such rate shall be paid hereunder, the interest rate on this Note shall be
adjusted to the maximum permitted under applicable law during the period or
periods that the interest rate otherwise provided herein would exceed such
rate and any excess amount applied at Payee's option to reduce the
outstanding principal balance of this Note or to be returned to Borrower.
This Note is secured by, and the holder of this Note is entitled to
the benefits of, the documents described in the Credit Agreement (the
"Security Documents"). Reference is made to the Security Documents for a
description of the property covered thereby and the rights, remedies and
obligations of the holder hereof in respect thereto.
Subject to the expiration of any applicable period of grace
provided for in the Credit Agreement, in the event of: (a) any default in any
payment of the principal of or interest on this Note when due and payable, or
(b) any other "Event of Default" (as such term is defined in the Credit
Agreement), then the whole principal sum of this Note plus accrued interest
and all other obligations of Borrower to holder, direct or indirect, absolute
or contingent, now existing or hereafter arising, shall, at the option of
Payee, become immediately due and payable, and any or all of the rights and
remedies provided herein and in the Credit Agreement and the Security
Documents, as they may be amended, modified or supplemented from time to
time, may be exercised by Payee.
If Borrower fails to pay any amount due under this Note and Payee
has to take any action to collect the amount due or to exercise its rights
under the Security Documents, including without limitation retaining
attorneys for collection of this Note, or if any suit or proceeding is
brought for the recovery of all or any part of or for protection of the
indebtedness or to foreclose the Security Documents or to enforce Payee's
rights under the Security Documents, then Borrower agrees to pay on demand
all reasonable costs and expenses of any such action to collect, suit or
proceeding, or any appeal of any such suit or
A-3-2
<PAGE>
proceeding, incurred by Payee, including without limitation the reasonable
fees and disbursements of Payee's attorneys and their staff.
Borrower waives presentment, notice of dishonor and protest, and
assents to any extension of time with respect to any payment due under this
Note, to any substitution or release of collateral and to the addition or
release of any party, except as provided in the Credit Agreement. No waiver
of any payment or other right under this Note shall operate as a waiver of
any other payment or right.
If any provision in this Note shall be held invalid, illegal or
unenforceable in any jurisdiction, the validity, legality or enforceability
of any defective provisions shall not be in any way affected or impaired in
any other jurisdiction.
No delay or failure of the holder of this Note in the exercise of
any right or remedy provided for hereunder shall be deemed a waiver of such
right by the holder hereof, and no exercise of any right or remedy shall be
deemed a waiver of any other right or remedy that the holder may have.
All notices given hereunder shall be given as provided in the
Credit Agreement.
At the option of the holder hereof, an action may be brought to
enforce this Note in the District Court in and for the City and County of
Denver, State of Colorado, in the United States District Court for the
District of Colorado or in any other court in which venue and jurisdiction
are proper. Borrower and all signers or endorsers hereof consent to venue and
jurisdiction in the District Court in and for the City and County of Denver,
State of Colorado and in the United States District Court for the District of
Colorado and to service of process under Sections 13-1-124(1)(a) and
13-1-125, Colorado Revised Statutes (1992), as amended, in any action
commenced to enforce this Note.
This Note is to be governed by and construed according to the laws
of the State of Colorado.
BASIN EXPLORATION, INC.
By:
---------------------------
Michael S. Smith,
President
A-3-3
<PAGE>
EXHIBIT B
ADVANCE REQUEST
_______, 199_
Nationsbank, N.A.
Gentlemen:
1. This Advance Request is delivered to you pursuant to Section
2.1(c) of the Amended and Restated Credit Agreement dated as of January 1,
1999, as amended (the "Credit Agreement"), among Basin Exploration, Inc.
("Borrower") and the Lenders named therein (collectively, "Lenders"). Except
as otherwise defined herein, terms defined in the Credit Agreement shall have
the same meanings when used herein.
2. Borrower hereby requests an Advance as follows:
(a) Proposed Date of Advance:
(b) Amount of Advance:
(c) Facility A or Facility B:
3. Borrower hereby represents and warrants that as of the date
hereof and as of the date of the Advance requested hereunder, all statements
contained in Section 4.2 of the Credit Agreement are and will be true and
correct in all material respects.
4. Borrower agrees that if, at any time prior to the date of the
Advance requested by Borrower hereunder, any representation or warranty of
Borrower contained herein is not true and correct as of such time, Borrower
will immediately so notify Lenders. Except to the extent of any such
notification by Borrower, the acceptance by Borrower of any Advance requested
hereunder shall be deemed a re-certification by Borrower as of the date of
such Advance of the representations and warranties made by Borrower herein.
BASIN EXPLORATION, INC.
By:
---------------------------
Title:
B-1
<PAGE>
EXHIBIT C
REQUEST FOR ISSUANCE OF LETTER OF CREDIT
________, 199_
Nationsbank, N.A.
Gentlemen:
1. This Request for Issuance of Letter of Credit is delivered to
you pursuant to Section 2.1(c) of the Amended and Restated Credit Agreement
dated as of January 1, 1999, as amended (the "Credit Agreement"), among Basin
Exploration, Inc. ("Borrower") and the Lenders named therein (collectively,
"Lenders"). Except as otherwise defined herein, terms defined in the Credit
Agreement shall have the same meanings when used herein.
2. Borrower hereby requests that Lenders issue a Letter of Credit
as follows:
(a) Name of Beneficiary:
(b) Proposed Issuance Date:
(c) Expiration Date:
(d) Face Amount:
(e) Payment Instructions (if any):
(f) Facility A or Facility B:
3. Borrower hereby represents and warrants that as of the date
hereof and as of the date of issuance of the requested Letter of Credit, all
statements contained in Section 4.2 of the Credit Agreement are and will be
true and correct in all material respects.
4. Borrower agrees that if, at any time prior to the date of
issuance of the Letter of Credit requested by Borrower hereunder, any
representation or warranty of Borrower contained herein is not true and
correct as of such time, Borrower will immediately so notify Lenders. Except
to the extent of any such notification by Borrower, the acceptance by
Borrower of any Letter of Credit requested hereunder shall be deemed a
re-certification by Borrower as of the date of such Advance of the
representations and warranties made by Borrower herein.
BASIN EXPLORATION, INC.
By:
---------------------------
Title:
C-1
<PAGE>
EXHIBIT D
RATE ELECTION
________, 199_
Nationsbank, N.A.
Gentlemen:
1. This Rate Election is delivered to you pursuant to Section
2.8(a) of the Amended and Restated Credit Agreement dated as of January 1,
1999, as amended (the "Credit Agreement"), among Basin Exploration, Inc.
("Borrower") and the Lenders named therein (collectively, "Lenders"). Except
as otherwise defined herein, terms defined in the Credit Agreement shall have
the same meanings when used herein.
2. Borrower hereby elects a Fixed Rate Portion as follows:
(a) Amount of Fixed Rate Portion:
(b) Beginning Date of Interest Period:
(c) Length of Interest Period (Months):
(d) Facility A or Facility B:
3. Borrower hereby represents and warrants that as of the date
hereof and as of the requested beginning date of the Interest Period, all
statements contained in Section 4.2 of the Credit Agreement are and will be
true and correct in all material respects.
4. Borrower agrees that if, at any time prior to the beginning
date of the Interest Period requested by Borrower hereunder, any
representation or warranty of Borrower contained herein is not true and
correct as of such time, Borrower will immediately so notify Lenders. Except
to the extent of any such notification by Borrower, the beginning of any
Interest Period as to any Fixed Rate Portion requested hereunder shall be
deemed a re-certification by Borrower as of such date of the representations
and warranties made by Borrower herein.
5. On the date hereof, the Usage Ratio is _________.
BASIN EXPLORATION, INC.
By:
---------------------------
Title:
D-1
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is entered into this 28th day of January,
1999, between BASIN EXPLORATION, INC., a Delaware corporation (the
"Corporation"), and PATRICK A. JACKSON (the "Officer").
RECITAL
The Officer has accepted the Corporation's appointment as the
Corporation's Vice President of Onshore Exploration, and the Corporation and
the Officer desire to set forth herein the terms and conditions of his
employment.
AGREEMENT
The parties hereto agree as follows:
1. AGREEMENT TO SERVE.
1.1 TITLE. The Corporation shall employ the Officer and the
Officer shall serve in the employ of the Corporation as its Vice President of
Onshore Exploration to establish, implement and direct an exploration and
development program in the onshore areas of the United States and such other
areas as may from time to time be directed or requested by the Corporation
acting through its President.
1.2 DUTIES. The Officer shall assume and discharge the
responsibilities of Vice President (as set forth in the Bylaws of the
Corporation), as well as such other responsibilities as may be assigned to
him by the Board of Directors (the "Board") of the Corporation and as are
appropriate to the offices he holds. Such responsibilities shall include,
without limitation, those activities allocated to the position in an Onshore
Business Plan to be developed by the Officer in conjunction with other
executives of the Corporation (the "Plan") including the hiring and direction
of geoscientists and support personnel consistent with the Plan. The Officer
shall perform his responsibilities to the best of his abilities and shall
devote his entire business time and attention to the good faith performance
of his responsibilities. The Officer shall report to the Corporation's Chief
Executive Officer. The Officer shall maintain his offices at both the
Corporation's offices in Houston, Texas and in Denver, Colorado until the
first to occur of (i) the Officer determines to relocate to Denver full time
or (ii) the Corporation determines, no sooner than September 2000, to assign
a primary location to the Officer in either Houston or Denver. This decision
will integrate such factors as relative activity levels between the Houston
and Denver offices and continuity of senior management decision-making and
communication. Attached as Exhibit A are the terms and conditions governing
the Officer's commuting and relocation.
<PAGE>
1.3 TERMINATION OF PRESENT EMPLOYMENT. No later than January 31,
1999, the Officer will give notice of termination of his Employment Agreement
with Amoco Production Company ("Amoco"). The Officer represents to the
Corporation that he is under no contractual or other restriction with Amoco
that would prevent him from terminating his employment with that company or
from accepting employment with the Corporation or that would subject the
Corporation to liability for negotiating and executing this Agreement with
the Officer.
2. TERMS OF EMPLOYMENT.
2.1 BASIC TERM. The term of the Officer's employment under this
Agreement (the "Term") shall commence on February 1, 1999, and end three
years from the commencement date. After the Term, if the Officer continues
as the Vice President of Onshore Exploration of the Corporation, the
Corporation will enter into a separate agreement to provide protection
against Termination Upon a Change of Control, with compensation no less
favorable to the Officer than the compensation provided for in Sections 2.7,
4.1(a), 4.1(c), 4.1(d) and 4.1(e) of this Agreement or the compensation
provided for in the change of control agreements accorded other vice
presidents of the Corporation. The Officer has the right to elect which
arrangement shall apply.
2.2 TERMINATION FOR CAUSE. The Corporation shall have the right to
terminate the Officer for cause and said termination shall be effected by
written notification to Officer. Grounds for termination for cause shall
include only, (i) the Officer's material breach of any terms of this
Agreement, if such material breach has not been substantially cured within
thirty (30) days following written notice to the Officer from the Corporation
of such breach setting forth with specificity the nature of the breach or, if
cure cannot reasonably be effected within such 30-day period, if the Officer
does not commence such cure within such 30-day period and thereafter pursue
such cure continuously and with due diligence until cure has been effected;
(ii) willful and continual failure or refusal to (a) follow written policies
or directives established by the Board of Directors of the Corporation or (b)
perform Officer's duties set forth in Section 1.2 of this Agreement (other
than failure resulting from the Officer's incapacity due to physical or
mental illness); (iii) the Officer's willful dishonesty towards, fraud upon,
felony crime against, deliberate material injury or material bad faith action
with respect to, or deliberate or attempted injury to the Corporation; or
(iv) the Officer's conviction for any felony crime (whether in connection
with the Corporation's affairs or otherwise). Upon the date of termination
of his employment, the Corporation shall immediately pay all Accrued
Compensation to the date of termination, but no other compensation or
reimbursement of any kind, including, without limitation, the compensation
contemplated by Article 4, and all of the Officer's stock options and other
incentive compensation shall be void to the extent not previously exercised
or vested.
2.3 TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. The Corporation
shall have the right, upon 30 days written notification to the Officer, to
terminate the Officer's employment without cause. The Officer shall have the
right, upon 30 days written notification to the Corporation, to terminate the
Officer's employment for Good Reason (as defined in Section 2.7(a)). Upon
any termination by the Corporation without cause or termination by the
Officer for Good Reason in the absence of a Change in Control, (i) the
Officer shall be paid all accrued salary, vested deferred
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<PAGE>
compensation (other than pension plan or profit-sharing plan benefits, which
will be paid in accordance with the applicable plan), any benefits then due
under any plans of the Corporation in which the Officer is a participant,
and any appropriate business expenses incurred by the Officer in connection
with his duties hereunder, all to the effective date of termination ("Accrued
Compensation"), and all compensation provided for in Section 4.1(b) and (ii)
and all of the Officer's options shall be deemed fully vested and exercisable.
2.4 DISABILITY. If, during the Term of this Agreement, the
Officer, in the reasonable judgment of the Chief Executive Officer of the
Corporation, has failed to perform his duties under this Agreement on account
of illness or physical or mental disability, which condition renders the
Officer incapable of performing the duties of his office, and such condition
continues for a period of more than six (6) consecutive months or for a total
of six months during any 12-month period, the Corporation shall have the
right to terminate the Officer's employment hereunder by written notification
to the Officer and payment to the Officer of all Accrued Compensation to the
date of termination, but no other compensation or reimbursement of any kind,
without prejudice to his claims for payments from any benefit plans.
2.5 DEATH. In the event of the Officer's death during the Term of
this Agreement, the Officer's employment shall be deemed to have terminated
as of the last day of the month during which his death occurs, and the
Corporation shall pay to his estate all Accrued Compensation to the date of
termination, but no other compensation or reimbursement of any kind, unless
provided by a welfare benefit plan for which the Officer is eligible as an
employee of the Corporation or as otherwise provided by law (i.e. workers
compensation law).
2.6 VOLUNTARY TERMINATION. In the event Sections 2.2, 2.3, and 2.7
are not applicable, the Officer may, upon 30 days written notification to
the Corporation, voluntarily terminate his employment hereunder. Upon the
date of termination of his employment, the Corporation shall immediately pay
all Accrued Compensation to the date of termination, but no other
compensation or reimbursement of any kind, including, without limitation, the
compensation contemplated by Article 4.
2.7 TERMINATION UPON A CHANGE IN CONTROL. In the event of a
Termination Upon a Change in Control, the Officer shall immediately be paid
all Accrued Compensation and the severance compensation provided for in
Section 4.1(c). "Termination Upon a Change in Control" shall mean a
termination by the Corporation without Cause or a termination by the Officer
for Good Reason (as defined below) of the Officer's employment with the
Corporation, in each case following a "Change in Control" (as defined below).
(a) For purposes of this Agreement "Good Reason" shall
include any of the following (without the Officer's express written consent):
(i) the assignment to the Officer by the
Corporation of any duties materially inconsistent with, or a substantial
alteration in the nature or status of, the Officer's responsibilities as
contemplated by this Agreement;
3
<PAGE>
(ii) a reduction by the Corporation in the
Officer's compensation, benefits or perquisites as in effect during the
Term of this Agreement;
(iii) a relocation of the Corporation's principal
offices to a location outside Denver, Colorado, or Houston, Texas, or
the Corporation's relocation of the Officer to any place other than the
offices of the Corporation located in Houston, Texas, or Denver,
Colorado, it being understood that such relocation shall not be deemed
to have occurred on the basis of reasonably required travel by the
Officer on the Corporation's business to an extent substantially
consistent with the Plan;
(iv) any material breach by the Corporation of any
provision of this Agreement, if such material breach has not been cured
within thirty (30) days following written notice by the Officer to the
Corporation of such breach setting forth with specificity the nature of
the breach; or
(v) any failure by the Corporation to obtain the
assumption and performance of this Agreement by any successor (by
merger, consolidation or otherwise) or assign of the Corporation.
(b) For purposes of this Agreement, "Change in Control" shall
mean the following:
(i) Any "person" or "group" (within the meaning
of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "1934 Act")), other than a trustee or other fiduciary
holding securities under an employee benefit plan of the Corporation
or Mr. Michael Smith (or his affiliates or associates) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the 1934 Act),
directly or indirectly, of more than thirty-three and one-third
percent (33-1/3%) of the then outstanding voting stock of the
Corporation; or
(ii) Individuals who, as of the date hereof,
constitute the Board (and any new director whose election by the Board
or whose nomination for election by the Corporation's stockholders is
approved by a vote of at least two-thirds of the directors then still
in office who either were directors as of the date hereof or whose
election or nomination for election is subsequently so approved) cease
for any reason to constitute a majority thereof; or
4
<PAGE>
(iii) The stockholders of the Corporation
approve a merger or consolidation of the Corporation with any other
corporation, other than a merger or consolidation which would result
in the voting securities of the Corporation outstanding immediately
prior thereto continuing to represent (either by remaining outstanding
or by being converted into voting securities of the surviving entity)
at least 51% of the combined voting power of the voting securities of
the Corporation or such surviving entity outstanding immediately after
such merger or consolidation, or the stockholders approve a plan of
complete liquidation of the Corporation or an agreement for the sale
or disposition by the Corporation of all or substantially all of the
Corporation's assets; provided, however, that if the merger, plan of
liquidation or sale of substantially all assets is not consummated
following such stockholder approval and the transaction is abandoned,
then the Change of Control shall be deemed not to have occurred; or
(iv) Michael Smith voluntarily terminates his
employment as Chief Executive Officer or his employment as Chief
Executive Officer is terminated following any of the events described
in subsections (i), (ii) or (iii) above, if the Officer elects to
treat such occurrence as a Change of Control by written notice to the
Corporation no later than 120 days from the date of termination of Mr.
Smith's employment as Chief Executive Officer.
(c) Notwithstanding anything else in this Agreement, solely
in the event of a Termination Upon a Change in Control pursuant to Section
2.7, the aggregate of the amount of severance compensation paid to the
Officer under this Agreement or otherwise shall not include any amount that
the Corporation is prohibited from deducting for federal income tax purposes
by virtue of Section 280G of the Internal Revenue Code or any successor
provision.
3. COMPENSATION.
3.1 BASE SALARY. The Corporation agrees to pay the Officer for his
services hereunder a salary at the rate of $14,166.67 per month ("Base
Salary") payable in equal semimonthly installments in arrears during the term
of this Agreement. Such amount may be increased, but not decreased below the
amount stated in this section 3.1, during the term of this Agreement.
3.2 BENEFITS. The Officer shall be entitled to participate in any
of the Corporation's benefit and deferred compensation plans as are from time
to time available to the officers of the Corporation, including the
Corporation's 401(k) plan, medical and dental plans, and life and disability
insurance plans (provided, however, that the Officer's benefits may be
modified or the Officer may be denied participation in any such plan because
of a condition or restriction imposed by law or regulation or third-party
insurer or other provider relating to participation of officers).
5
<PAGE>
3.3 BONUS. The Officer shall be entitled to participate in the
Corporation's bonus program applicable to other officers and employees of the
Corporation, provided, however, that in determining the appropriate amount of
the Officer's bonus for any period, the Board of Directors will take into
account the amount, if any, of proceeds received by the Officer from the
onshore overriding royalty plan described in Section 3.6. In addition, on
February 15, 1999 the Corporation will pay to the Officer a bonus of $65,000
(subject to required withholding taxes and other deductions required by law),
subject to reduction or refund by the Officer to the Corporation when and to
the extent, if any, (i) the Officer voluntarily terminates his employment
with the Corporation pursuant to Section 2.6 within two years from the
commencement of his employment hereunder, (ii) is terminated for cause as
provided in Section 2.2, or (iii) receives prior to or during the term of
this Agreement a severance payment from Amoco in connection with termination
of his employment with Amoco. The Officer agrees to attempt to use
reasonable diligence to attempt to collect such severance payment from Amoco
but shall not be obligated to pursue legal action.
3.4 STOCK OPTIONS. The Officer shall be granted an option under
the Corporation's Equity Incentive Plan to purchase 60,000 shares of the
Corporation's common stock, at a purchase price equal to the fair market
value of the common stock at the close of business on November 30, 1998, such
options to be incentive stock options to the extent permissible under Section
422 of the Internal Revenue Code of 1986 or, at the Officer's election,
non-qualified stock options if the Officer does not elect to meet the tests
required under Section 422. The options will vest in three equal
installments over the three-year period commencing February 1, 1999, will be
exercisable for the Term of this Agreement and for any additional period
during the Officer is employed by the Corporation (to the extent vested at
termination) and will have a term of ten years. The exercise price may be
paid by delivery to the Corporation of a properly executed notice of exercise
together with irrevocable instructions to a broker to deliver to the
Corporation the amount of the proceeds of the sale of all or a portion of the
shares of stock or of a loan from the broker to the Officer necessary to pay
the exercise price. The grant of stock options hereunder shall be
memorialized by a written Stock Option Agreement on the Corporation's
standard form, a copy of which is attached hereto as Exhibit B. The Officer
shall be eligible to receive additional grants of incentive compensation
under the Equity Incentive Plan at the discretion of the Compensation and
Incentive Committee of the Board of Directors; provided, however, that the
Officer shall receive a guaranteed minimum grant of 5,000 performance shares
during the Performance Cycle beginning in 1999 under the Corporation's
Performance Shares Plan.
3.5 OTHER PERQUISITES. The Officer shall be entitled to expense
reimbursements, vacation and other benefits in accordance with the practices
of the Corporation.
3.6 OVERRIDING ROYALTY. The Officer shall be entitled to
participate in an onshore overriding royalty plan to be established by the
Corporation for the Officer, geoscientists hired by the Officer and other
personnel on terms to be approved by the Compensation and Incentive Committee
of the Board of Directors but providing for a total amount of available
overriding royalty in the amount of 2.5% of the working interest acquired by
the Corporation and its investors and program participants, an allocation to
individual participants of no greater than .625%, and other
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<PAGE>
terms and conditions comparable to the Gulf Coast Geoscientists Overriding
Royalty Plan currently in effect for the Corporation's offshore activities.
4. COMPENSATION UPON TERMINATION.
4.1 CALCULATION AND PAYMENT OF COMPENSATION.
(a) In the event the Officer's employment is terminated under
Sections 2.3 or 2.7, the parties acknowledge that the Officer will sustain
actual damages, the amount of which is indefinite, uncertain and difficult of
exact ascertainment because of the uncertainties of successfully relocating
and seeking a comparable position. In order to avoid dispute as to the
amount of such damages and the mutual expense and inconvenience such dispute
would entail, the Corporation and the Officer have agreed hereby that the
Corporation shall pay to the Officer compensation as provided in Sections
4.1(b) or 4.1(c), as applicable. It is hereby agreed that in the event of
any such termination, the Officer shall receive such amounts as herein
provided, not as a penalty, but as the Officer's agreed compensation and sole
damages for the termination of this Agreement, in lieu of the Officer's proof
of his actual damages on that account. All such compensation shall be
without prejudice to the Officer's right to receive all Accrued Compensation
(as defined in Section 2.3) earned and unpaid up to the time of termination.
(b) In the event the Corporation or the Officer terminates the
Officer's employment at any time prior to the end of the Term pursuant to
Section 2.3, then the Corporation shall pay compensation in an amount equal
to the Officer's Base Salary (at the rate payable at the time of such
termination) for the balance of the Term on the dates specified in Section
3.1, plus a bonus for each year (or pro rata part thereof) remaining in the
Term equal to the average annualized bonus received by the Officer prior to
termination.
(c) In the event the Officer's employment is terminated at any
time prior to the end of the Term pursuant to Section 2.7, then the
Corporation (i) shall pay to the Officer in a lump sum in cash within five
(5) days of the date of termination an amount equal to three times the sum of
(x) the Officer's Base Salary (calculated at the rate of his Base Salary for
the 12 months preceding the date of termination) plus (y) a bonus equal to
the average annualized bonus received by the Officer prior to termination,
and (ii) shall make all of the Officer's options fully vested and
exercisable.
(d) Following a termination under Section 2.3, the Officer may
in the Officer's sole discretion, by delivery of a notice to the Corporation
within thirty (30) days following such termination, elect to receive from the
Corporation a lump sum payment by bank cashier's check equal to the present
value of the flow of cash payments that would otherwise be paid to the
Officer pursuant to Section 4.1. Such present value shall be determined as
of the date of delivery of the notice of election of the Officer and shall be
based on a discount rate equal to the interest rate on 90-day U.S. Treasury
Bills, as reported in the Wall Street Journal (or similar publication) on the
date of delivery of the election notice. If the Officer elects to receive a
lump sum payment pursuant to this Section 4.1(d), the Corporation shall make
such payment to the Officer
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within sixty (60) days following the date on which the Officer notifies the
Corporation of the Officer's election.
(e) No deduction shall be made by the Corporation under this
Section 4.1 for any compensation earned by the Officer from any other
employment or for any other monies otherwise received by the Officer from any
third parties subsequent to termination of employment hereunder.
5. PROTECTION OF CORPORATION INTERESTS.
5.1. CONFIDENTIALITY. The Officer acknowledges that in the course
of his employment by the Corporation he will receive, obtain or develop
certain trade secrets, programs, geologic, geophysical, engineering and
exploration data, and other confidential information relating to the
Corporation's business. The Officer understands that such information is
confidential and agrees not to reveal such information and knowledge to
anyone outside the Corporation or use the information in competing with the
Corporation for his own benefit while he is employed by the Corporation
hereunder or for a period of three years following the termination of his
employment with the Corporation, subject to Section 5.2(c) below with respect
to the Officer's right to compete with the Corporation after termination of
employment. Upon termination of employment, the Officer shall surrender to
the Corporation all papers, documents, writings, work product and other
property produced by him or coming into his possession during such
employment. The Officer agrees that all such material will at all times
remain the property of the Corporation.
5.2. NONCOMPETE. The Officer further understands and agrees that:
(a) During his employment hereunder the Officer shall not
directly or indirectly, unless the Corporation gives its prior written
consent:
(i) consult with, act as agent for, or otherwise
intentionally assist any Competitor to compete or prepare to compete
with the Corporation in any of the Corporation's then businesses;
(ii) own any interest (other than a passive
investment interest of not more than 5% of the voting securities) in any
Competitor; or
(iii) take any action specifically intended to divert
from the Corporation to any Competitor or to the Officer or any person
directly or indirectly related thereto any opportunity which would be
within the scope of the Corporation's existing or planned or
contemplated business.
For purposes of this Agreement, a "Competitor" means any entity which at
relevant times engages or is making plans to engage, in whole or in part, in
the oil and gas exploration and production business.
8
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(b) Prior to the effective date of termination of this
Agreement, except in the performance of his duties for the Corporation, the
Officer will not directly or indirectly, individually or as an agent, officer
or employee of another, participate in or otherwise be involved in (i) the
review, interpretation or evaluation of geological or geophysical data
pertaining to, (ii) the negotiation, acquisition, or disposition of, or (iii)
the supervision of the development of, in each case, "Prospects," which for
purposes hereof are defined as those leads, opportunities, projects and other
ideas identified or generated by the Corporation's employees or consultants
or other parties during the Officer's employment under this Agreement; and
(c) After the effective date of termination of this
Agreement, the Officer shall be released of the foregoing covenant in Section
5.2(b) as to all areas of the United States or any other country not
designated by the parties as "Reserved Prospects" in the following manner.
The Officer shall submit to the Corporation a list of all Prospects
identified or generated by the Corporation's employees or consultants during
the Officer's employment under this Agreement which the Corporation intends
to evaluate or is actively evaluating or in which the Corporation is
conducting or planning to conduct exploration, acquisition, or development
activities ("Reserved Prospects"). The Corporation will either approve such
list within 30 days of submittal or 30 days after the date of termination of
this Agreement, whichever last occurs, or within such period notify the
Officer of any additions to, subtractions from, or other proposed changes to
such list. As to those Reserved Prospects to which the parties agree, the
Officer will not directly or indirectly, individually or as an agent, officer
or employee of or advisor to another undertake any action for a period of two
years from the effective date of termination of this Agreement. As to those
Prospects over which the parties disagree regarding their designation as
Reserved Prospects, the parties shall resolve such dispute pursuant to
binding arbitration under the Rules of the American Arbitration Association
("AAA") in effect on the date of the demand for arbitration, and until such
resolution the covenant contained in subparagraph (b) above shall continue to
apply to all potentially affected Reserved Prospects designated by either
party. Any party desiring arbitration shall give written notice to the other
party setting forth those disputed Reserved Prospects to be subject to
arbitration. The party receiving the demand shall have ten days to either
(i) resolve the dispute as to the disputed Reserved Prospects or (ii) provide
written notice of acceptance of arbitration as to those disputed Reserved
Prospects which remain unresolved; failure to respond shall be deemed an
election to arbitrate all matters specified in the notice. Following
acceptance of arbitration, each party shall have thirty days to select an
arbitrator. Those arbitrators will then, in turn, have 14 days to select a
third arbitrator. Notwithstanding any rule of the AAA to the contrary, any
disinterested adult can serve as an arbitrator and need not be listed or
provided by the AAA. Once selected, the arbitrators will schedule and
conduct arbitration as soon as practicable. The costs of arbitration shall
be allocated to the parties as determined by the arbitrators. Section 6.4 of
this Agreement shall apply to any arbitration hereunder to the extent not in
conflict with the specific provisions hereof.
(d) The Officer shall (i) review the written policies of the
Corporation regarding the dealing in securities of the Corporation and (ii)
comply where relevant with every rule of law or regulation of the Nasdaq
Stock Market or other stock exchange on which the Corporation's securities
are or may be traded, all applicable regulatory authority and every rule or
code of conduct of the Corporation in relation to dealings in securities of
the Corporation or any associated company.
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6. MISCELLANEOUS.
6.1 SEVERABILITY. Should a court or other body of competent
jurisdiction determine that any provision of this Agreement is excessive in
scope or otherwise invalid or unenforceable, such provision shall be adjusted
rather than voided, if possible, so that it is enforceable to the maximum
extent possible, and all other provisions of the Agreement shall be deemed
valid and enforceable to the extent possible.
6.2 WITHHOLDINGS. All compensation and benefits to the
Officer hereunder, including, without limitation, those payments contemplated
by Article 4, shall be reduced by all federal, state, local and other
withholdings and similar taxes and payments required by applicable law.
6.3 INDEMNIFICATION. Subject to the Officer's representation
under Section 1.3, the Corporation hereby agrees to indemnify the Officer
from and against any and all liability, loss, or expense (including
reasonable attorneys' fees) that the Officer may suffer as a result of any
claims, suits, actions, or proceedings arising out of any allegation that the
Officer's duties and responsibilities hereunder conflict with the Officer's
obligations to a former employer.
6.4 ARBITRATION. In addition to the matters to be resolved under
Section 5.2, the parties hereby submit all controversies, claims and matters
of difference in any way related to this Agreement or the performance or
breach of the whole or any part hereof to arbitration by three arbitrators in
Denver, Colorado, according to the rules and practices of the American
Arbitration Association from time to time in force. If such rules and
practices shall conflict with the Colorado Rules of Civil Procedure or any
other provisions of Colorado law then in force, such Colorado rules and
provisions shall govern. Arbitration of any such controversy, claim or matter
of difference shall be a condition precedent to any legal action thereon.
This submission and agreement to arbitration shall be specifically
enforceable.
Within 30 days of the receipt by one party of a written notice to
arbitrate delivered by the other party, each party shall select one
arbitrator by written notice to the other party. Within 30 days of the
delivery of both notices, the two arbitrators will select a third arbitrator.
If the two cannot agree on such third arbitrator, the selection of a third
arbitrator shall be made by the Chief Judge of the U.S. District Court for
the District of Colorado or, if such judge refuses to act, such selection
shall be made in accordance with the procedures of the American Arbitration
Association.
Awards shall be final and binding on all parties to the extent and in
the manner provided by Colorado law. Each award shall expressly entitle the
prevailing party to recover such party's attorneys' fees and costs, and the
award shall specifically allocate such fees and costs between the parties.
All awards may be filed by any party with the Clerk of the District Court in
the City and County of Denver, Colorado, and an appropriate judgment entered
thereon and execution issued therefor. At the election of any party, said
award may also be filed, and judgment entered thereon and execution issued
therefor, with the clerk of one or more other courts, state or federal,
having jurisdiction over the party against whom such an award is rendered or
its property.
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6.5 ENTIRE AGREEMENT; MODIFICATIONS. This Agreement represents
the entire agreement between the parties and may be amended, modified,
superseded, or cancelled, and any of the terms hereof may be waived, only by
a written instrument executed by each party hereto or, in the case of a
waiver, by the party waiving compliance. The failure of any party at any
time or times to require performance of any provisions hereof shall not
affect the right at a latter time to enforce the same. No waiver by any
party of the breach of any provision contained in this Agreement, whether by
conduct or otherwise, in any one or more instances, shall be deemed to be or
construed as a further or continuing waiver of any such breach or of any
other term of this Agreement.
6.6 APPLICABLE LAW. This Agreement shall be construed under and
governed by the laws of the State of Colorado.
6.7 SURVIVAL. Termination of this Agreement shall not terminate
any right or obligation accrued prior to the date of termination, except as
otherwise provided herein. Article 5 shall survive the termination of this
Agreement for the period of the Officer's employment with the Corporation.
6.8 ASSIGNMENT. Except in connection with a transfer of this
Agreement to a successor of the Corporation by reason of a Change of Control,
the Corporation shall not assign this Agreement other than to an affiliate of
the Corporation without the consent of the Officer, which consent may be
withheld in the Officer's sole discretion. The Officer shall not assign his
rights or obligations under this Agreement without the consent of the
Corporation, which consent may be withheld in the Corporation's sole
discretion.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year first above entered.
BASIN EXPLORATION, INC.
By
-------------------------------
President
---------------------------------
PATRICK A. JACKSON
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EMPLOYMENT AGREEMENT
This Agreement is made as of February 1, 1999 (the "Effective Date"), between
BASIN EXPLORATION, INC., a Delaware corporation (the "Company"), whose
mailing address is 370 17th Street, Suite 3400, Denver, Colorado 80202, and
DAVID A. PUSTKA, a resident of Houston, Texas (the "Officer"), whose mailing
address is 2504 Brentwood Drive, Houston, Texas 77019.
RECITALS
A. The Officer and the Company are parties to an Employment Agreement dated
as of November 10, 1995 (the "Original Agreement"), whereby the Officer
agreed to serve as the Company's Vice President of Gulf Coast Exploration and
Division General Manager.
B. The Officer and the Company desire to renew, extend and modify the
Original Agreement on the terms set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein, the Company and the Officer agree as follows:
1. EMPLOYMENT: The Company hereby employs the Officer to direct an
exploration and development program in the offshore areas of the Gulf Coast
region of the continental United States, and to perform such other duties for
the benefit of the Company as may from time to time be directed or requested
by the Company acting through the Company's Chief Executive Officer.
Officer's primary responsibility will be to continue to head the Gulf Coast
Division of the Company in its Houston, Texas office and to continue to
implement the Business Plan executed by the Officer and the Company as of
November 10, 1995 (the "Business Plan"), with such modifications as the
Officer and the Company through its Chief Executive Officer have agreed to or
will in the future agree to in order to reflect the results and evolution of
the Company's offshore program. The Officer's title will remain Vice
President of Gulf Coast Exploration and Division General Manager and Officer
will continue to report directly to the Company's Chief Executive Officer.
The Officer will not have responsibility for overseeing the Company's onshore
Gulf of Mexico activities but will coordinate the administrative integration
(e.g., office and sytems utilization) of the Gulf Coast Division with any
onshore division that may be established by the Company in Houston.
2. TERM. The employment provided for herein shall commence on the
Effective Date and end on February 1, 2002 (the "Term"), provided that the
Term will be automatically extended for one year on each anniversary of the
Effective Date beginning on February 1, 2002 unless either party gives
written notice to the other no later than 60 days prior to the end of the
Term (as extended) that the notifying party does not elect to extend the
Term. Upon expiration of the Term, the Officer's employment with the Company
will terminate unless the parties agree for the
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Officer to remain employed as an employee at will of the Company or unless
the parties enter into an additional written agreement governing their
relationship.
3. EXTENT OF SERVICES. The Officer shall devote his best efforts and full
business time and attention to furthering the business of the Company and
shall not during the Term hereof be engaged in other activities either
directly or indirectly that require similar services or that require such
substantial services on the part of the Officer that the Officer is unable to
perform the duties assigned to him by the Company. The foregoing shall not
be construed as preventing the Officer from maintaining or making investments
in any class of securities of a company or from holding working interests,
overriding royalty interests or royalty interests in any oil and gas
property, or from owning interests in partnerships engaged in the oil and gas
business, provided that such investments do not require services on the part
of the Officer that would impair the performance of his duties under this
Agreement or would create a conflict of interest for the Officer with the
Company.
4. COMPENSATION.
(a) SALARY. Officer shall be compensated by a salary in the amount of
$170,000 per annum payable in substantially equal monthly installments during
the term hereof. The Officer's salary shall be subject to review annually
and any variation resulting from such review shall take effect thereafter as
if such salary amount was specifically provided for herein; provided,
however, that the Officer's salary during the Term shall never be reduced and
shall be raised annually beginning in 2000 no less than the percentage equal
to the annual rate of inflation for the prior full calendar year as measured
by the U.S. Consumer Price Index or an alternative comparable national index
if that index is not published..
(b) BENEFITS. Officer shall be entitled to participate in any of the
Company's benefit and deferred compensation plans as are from time to time
generally available to the officers of the Company, including the Company's
401(k) plan, medical and dental plans, and life and disability insurance
plans (provided, however, that the Officer's benefits may be modified or the
Officer may be denied participation in any such plan because of a condition
or restriction imposed by the plan, applicable law or regulation of a
third-party insurer or other provider in relation to participation of
officers; and provided further that the Officer's benefits may be modified as
reasonably necessary in order to account for differences in plans available
in Houston). The current employee benefit plans of the Company are described
in Exhibit A attached hereto.
(c) BONUS. Officer shall be entitled to participate in the Company's bonus
program applicable to other officers of the Company. The parties intend and
anticipate that the Company will have a bonus program based on the success of
the Company in meeting its goals for each year and on the success of
individual officers in meeting their individual goals; however, nothing in
this paragraph shall be construed as obligating the Company to award bonuses
in any given year to Company officers in general or to Officer provided that
the Company does not discriminate against Officer in failing to award a bonus
to him under circumstances in which it is awarding bonuses to other officers.
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(d) STOCK OPTIONS. Officer shall be granted an option under the Company's
Equity Incentive Plan to purchase 75,000 shares of the Company's common
stock, at a purchase price equal to the fair market value of the common stock
on the Effective Date, such options to be incentive stock options to the
extent permissible under Section 422 of the Internal Revenue Code of 1986, to
vest in three equal installments over the three year-period commencing on the
Effective Date, to be exercisable during Officer's employment with the
Company to a maximum term of 10 years, and to be subject to such other terms
as are contained in the Company's standard stock option agreement, a copy of
which has previously been executed by the Officer. During the first three
years of the Term, the Officer shall not be eligible to receive additional
grants of options to purchase common stock under the Equity Incentive Plan
but shall continue to be eligible to receive performance shares, restricted
stock and other incentive compensation at the discretion of the Compensation
and Incentive Committee of the Board of Directors (the "Committee"), and
during any subsequent one-year extensions of the Term the Officer shall be
eligible to receive additional stock option grants at the discretion of the
Committee.
(e) OTHER PERQUISITES. Officer shall be entitled to expense reimbursements,
vacation (including no less than four weeks per year), athletic club
membership and other benefits in accordance with the practices of the Company
but in no event less than available to other officers of the Company..
5. OVERRIDING ROYALTY PLAN. The Company has established effective November
30, 1995 and will continue to maintain during the Term hereof a Gulf Coast
Geoscientist Overriding Royalty Interest Plan for the benefit of the gulf
coast exploration team (the "Override Plan"). The Override Plan will
continue to provide, among other terms, for an award to the participants,
including the Officer, of an overriding royalty interest on properties
acquired by the Company for exploration as a result of the efforts of the
Officer's Gulf Coast team. A copy of the Override Plan is attached hereto as
Exhibit B.
6. PROTECTION OF COMPANY INTERESTS.
(a) The Officer acknowledges that in the course of his employment by the
Company he will receive, obtain or develop certain trade secrets, programs,
geologic, geophysical, engineering and exploration data, lists of investors,
customers and business contacts and other confidential information relating
to the Company's business. The Officer understands that such information is
confidential and agrees not to reveal such information and knowledge to
anyone outside the Company or use the information in competing with the
Company for his own benefit for the term of such employment. Upon
termination of employment, the Officer shall surrender to the Company all
papers, documents, writings, work product and other property produced by him
or coming into his possession during the Term of such employment. The
Officer agrees that all such material will at all times remain the property
of the Company.
(b) The Officer further understands and agrees that:
(i) Prior to the Date of Termination, except in the performance of his
duties for the Company, the Officer will not directly or indirectly,
individually or as an agent, officer or
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employee of another, participate in or otherwise be involved in (aa) the
review, interpretation or evaluation of geological or geophysical data
pertaining to, (bb) the negotiation, acquisition, or disposition of, or
(cc) the supervision of the development of, in each case, Prospects
identified or generated by the Company's Gulf Coast exploration team
during the Term of this Agreement; and
(ii) After the Date of Termination, the Officer shall be released of the
foregoing covenant as to all areas, including but not limited to the Gulf
region, of the continental United States which are not designated by the
parties as "Reserved Prospects" in the following manner. The Officer shall
submit to the Company a list of all Prospects identified or generated by
the Company's Gulf Coast team during the Term of this Agreement which have
not been either acquired or rejected for acquisition by the Company, and
the Company will either approve such list within 30 days of submittal or 30
days after the Date of Termination, whichever last occurs, or within such
period notify the Officer of any additions to, subtractions from, or other
proposed changes to such list. As to those Reserved Prospects to which the
parties agree, the Officer will not directly or indirectly, individually or
as an agent, officer or employee of or advisor to another undertake any
action for a period of one year from the Date of Termination, and the
Officer will continue to be entitled to his share (determined as of the
date on which notice of termination is delivered to or by the Company) of
any overriding royalty burdening interests in such Reserved Prospects that
become vested in the Company's Gulf Coast exploration team within one year
from the Date of Termination. As to those Prospects over which the parties
disagree regarding their designation as Reserved Prospects, the parties
shall resolve such dispute pursuant to binding arbitration under the Rules
of the American Arbitration Association ("AAA") in effect on the date of
the demand for arbitration, and until such resolution the covenant
contained in subparagraph (i) above shall continue to apply to all
potentially affected Reserved Prospects designated by either party. Any
party desiring arbitration shall give written notice to the other party
setting forth those disputed Reserved Prospects to be subject to
arbitration. The party receiving the demand shall have ten days to either
(i) resolve the dispute as to the disputed Reserved Prospects or (ii)
provide written notice of acceptance of arbitration as to those disputed
Reserved Prospects which remain unresolved; failure to respond shall be
deemed an election to arbitrate all matters specified in the notice.
Following acceptance of arbitration, each party shall have thirty days to
select an arbitrator. Those arbitrators will then, in turn, have 14 days
to select a third arbitrator. Notwithstanding any rule of the AAA to the
contrary, any disinterested adult can serve as an arbitrator and need not
be listed or provided by the AAA. Once selected, the arbitrators will
schedule and conduct arbitration as soon as practicable. The costs of
arbitration shall be allocated to the parties as determined by the
arbitrators.
(iii) The Officer shall (aa) review the written policies of the Company
regarding the dealing in securities of the Company and (bb) comply where
relevant with every rule of law or regulation of the Nasdaq Stock Market or
other stock exchange on which the Company's securities are or may be
traded, all applicable regulatory authority and every rule or code of
conduct of the Company in relation to dealings in securities of the
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Company or any associated company.
7. TERMINATION OF EMPLOYMENT.
(a) The employment provided for herein will terminate as provided in
paragraph 2 hereof unless earlier terminated by any of the following:
(i) Upon the death of the Officer; or
(ii) Upon the disability of the Officer, which for purposes of this
Agreement shall be the physical or mental inability of the Officer to carry
out the normal and usual duties of his employment on a full time basis for
the entire period of ninety (90) continuous days with the reasonable
likelihood as determined by the Company, upon the advice of a qualified
physician, that the Officer will be unable to carry out the normal and
usual duties of his employment on a full time basis for the following
continuous period of ninety (90) days, and within thirty (30) days after
notice of termination is given by the Company to the Officer, the Officer
shall not have returned to the performance of his duties on a full time
basis; or
(iii) "For cause" (as defined in clause (b) of this Paragraph 7) upon
written notice of such termination given by the Company to the Officer or
by the Officer to the Company, as applicable.
(b) As used herein, "for cause" with respect to the Officer shall mean:
(i) The commission of acts amounting to willful misconduct, gross
negligence, or intentional and continual neglect of duties to the detriment
of the Company which in the business judgment of the Board of Directors of
the Company has adversely affected the Company; or
(ii) Theft or conviction of a felony or any other crime involving
dishonesty or moral turpitude; or
(iii) Willful and continual failure or refusal to follow written policies
or directives established by the Board of Directors of the Company or
substantially perform duties in accordance with this Agreement (other than
failure resulting from the Officer's incapacity due to physical or mental
illness); or
(iv) A material breach by the Officer of this Agreement including a
material failure to achieve the standards, objectives or performance
required or contemplated to be achieved by the Officer in the Business Plan
approved by the parties.
As used herein "for cause" with respect to the Company shall mean:
(v) A material breach by the Company of the Override Plan, or a material
alteration or
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termination of the Override Plan by the Company; or
(vi) The Company should permit the termination of the Insurance (as
defined in Paragraph 9 hereof), or the material modification of the
indemnity established in Article VI, Section 1 of the Company's bylaws or
of the Insurance which results in the reduction or restriction as to
amounts or coverages provided for Officer's benefit by the Company; or
(vii) A material breach by the Company of this Agreement including a
material failure to achieve the standards, objectives or performance
required or contemplated to be achieved by the Company in the Business Plan
approved by the parties; or
(viii) The assignment to the Officer by the Company of any duties
materially inconsistent with, or a substantial alteration in the nature or
status of, the Officer's responsibilities or title from those described in
this Agreement; or the reduction of the Officer's compensation, benefits or
perquisites as in effect during the Term of this Agreement; or the
relocation of the Company's Gulf Coast Division office away from downtown
Houston, Texas; or the Company's relocation of the Officer to any place
other than the offices of the Company located in Houston, Texas, it being
understood that such relocation shall not be deemed to have occurred on the
basis of reasonably required travel by the Officer on the Company's
business to an extent substantially consistent with the Business Plan; or
(ix) The occurrence of a Change of Control of the Company. For purposes of
this Agreement, "Change of Control" is defined as follows:
(i) Any "person" or "group" (within the meaning of Sections
13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "1934 Act")), other than a trustee or other
fiduciary holding securities under an employee benefit plan of
the Company or Mr. Michael Smith is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the 1934 Act), directly or
indirectly, of more than thirty-three and one-third percent
(33-1/3%) of the then outstanding voting stock of the Company; or
(ii) Individuals who, as of the date hereof, constitute the Board
of Directors of the Company (and any new director whose election
by the Board or whose nomination for election by the Company's
stockholders is approved by a vote of at least two-thirds of the
directors then still in office who either were directors as of
the date hereof or whose election or nomination for election is
subsequently so approved) cease for any reason to constitute a
majority thereof; or
(iii) The stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other
than a
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merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity)
at least 51% of the combined voting power of the voting
securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation; or the
stockholders approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets;
provided, however, that if the merger, plan of liquidation or
sale of all or substantially all assets is not consummated
following such stockholder approval and the transaction is
abandoned, then the Change of Control shall be deemed not to have
occurred; or
(iv) Michael Smith voluntarily terminates his employment as Chief
Executive Officer or his employment as Chief Executive Officer is
terminated following any of the events described in subsections
(i), (ii) or (iii) above, if the Officer elects to treat such
occurrence as a Change of Control by written notice to the
Company no later than 120 days from the date of termination of
Mr. Smith's employment as Chief Executive Officer.
(c) Termination of employment by the Company or by the Officer (other than
termination resulting from death) shall be communicated by written notice to
the other party hereto. For purposes of this Agreement, any such notice of
termination shall indicate the specific termination provision in this
Agreement relied upon and shall set forth in reasonable detail the facts and
circumstances being the basis for termination. Any such written notice shall
be conclusively presumed to have been given if signed by the Company or the
Officer, as applicable and deposited in the United States mail with adequate
postage affixed, return receipt requested, and addressed to the Officer or
to the Company as applicable, at the respective mailing addresses shown in
the initial recitals of this Agreement. Actual delivery of any such written
notice shall also constitute satisfaction of the requirement for written
notice hereunder.
(d) The Date of Termination shall mean (i) if the employment is terminated
by the death of the Officer, the date of death, (ii) if the employment is
terminated by the disability of the Officer, thirty (30) days after notice of
termination is given, provided the Officer shall not have returned to the
performance of his duties on a full time basis during such thirty (30) day
period, or (iii) if the employment is terminated "for cause" pursuant to
clause (a) (iii) or for any other reason, 30 days after the date on which the
notice of termination is given if the basis for termination stated in the
termination notice is not cured by the end of such 30-day period.
8. COMPENSATION UPON TERMINATION OR DURING DISABILITY.
(a) During any period that the Officer fails to perform his duties hereunder
as a result of incapacity due to physical or mental illness (a "disability"),
the Officer shall continue to receive a
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salary and other benefits in effect for such period until the Officer's
employment is terminated as in Paragraph 7(a) (ii) hereof, provided that
payments so made to the Officer during the disability period shall be reduced
by the amounts, if any, paid to the Officer under any disability benefits
plans maintained by the Company.
(b) If the Officer's employment is terminated pursuant to Paragraph 7(a)
(ii) hereof because of his disability, the Company shall pay to the Officer
the Officer's salary through the end of the month during which such
termination occurs, and shall deliver any assignments, correction of
assignments, or other instruments reasonable or necessary in order to provide
the Officer with record title to the interests earned by the Officer prior to
the date of termination pursuant to the Override Plan. If the Officer should
die prior to the time that he has received all payments provided for pursuant
to this Paragraph 8(b), the balance of such payments shall be made to the
Officer's estate.
(c) If the Officer's employment is terminated pursuant to Paragraph 7(a) (i)
hereof because of his death, the Company shall pay to the Officer's estate
that portion of the Officer's salary that would have accrued through the end
of the month during which the Officer's death occurred, and the Company
shall deliver or cause to deliver any assignments, correction of assignments,
or other instruments reasonable or necessary in order to provide the
Officer's estate with record title to the interests earned by the Officer
prior to the date of termination pursuant to the Override Plan.
(d) If the employment is terminated pursuant to Paragraph 7 hereof and for
any cause other than the Officer's death or disability, the Company shall pay
or otherwise account to the Officer for all compensation and benefits
provided for herein and in the Override Plan through the Date of Termination
provided for in Paragraph 7 (d) hereof; provided, however, that subject to
Paragraph 8(e), if the Company terminates the Officer's employment for any
reason other than specifically provided in Paragraph 7(a) or if the Officer
terminates his employment for cause as defined in Paragraph 7(b), the Company
shall pay to the Officer the amount of salary that would otherwise have
accrued from the Date of Termination through the balance of the Term and
shall deliver or cause to deliver any assignments, correction of assignments
or other instruments reasonable or necessary in order to provide the Officer
with record title to (i) the overriding royalty interests vested in the
Officer prior to the Date of Termination pursuant to the Override Plan and
(ii) overriding royalty interests burdening interests acquired by the Company
in Reserved Prospects within one year after the Date of Termination that
would have been vested in the Officer pursuant to the Override Plan
(determined as of the date on which notice of termination is delivered to or
by the Company) if he had been employed with the Company at the time of such
acquisition.
(e) If the employment is terminated by the Officer following a Change of
Control, then in lieu of the salary for the balance of the Term payable as
provided in Paragraph 8(d), and subject to paragraph 8(g), then the Company
(i) shall pay to the Officer in a lump sum in cash within five (5) days of
the Date of Termination an amount equal to three times the sum of (x) the
Officer's salary (calculated at the rate of his salary for the 12 months
preceding the date of termination) plus (y) a bonus equal to the average
annualized bonus received by the Officer prior to
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termination, and (ii) shall make all of the Officer's options, performance
shares, and restricted stock fully vested and exercisable.
(f) Following a termination "for cause" under paragraph 7(b) other than in
connection with a Change of Control, the Officer may in the Officer's sole
discretion, by delivery of a notice to the Company within thirty (30) days
following such termination, elect to receive from the Company a lump sum
payment by bank cashier's check equal to the present value of the flow of
cash payments that would otherwise be paid to the Officer pursuant to
paragraph 8(d) (not including any payments attributable to overriding
royalties granted under the Override Plan). Such present value shall be
determined as of the date of delivery of the notice of election of the
Officer and shall be based on a discount rate equal to the interest rate on
90-day U.S. Treasury Bills, as reported in the Wall Street Journal (or
similar publication) on the date of delivery of the election notice. If the
Officer elects to receive a lump sum payment pursuant to this paragraph 8(f),
the Company shall make such payment to the Officer within sixty (60) days
following the date on which the Officer notifies the Company of the Officer's
election.
(g) Notwithstanding any other provision of this Agreement, and except as
provided in paragraph (i). below, the payments or benefits to which the
Officer will be entitled under paragraph 8(e) will be reduced to the extent
necessary so that the Officer will not be liable for the federal excise tax
levied on certain "excess parachute payments" under section 4999 of the
Internal Revenue Code.
(i) The limitation of paragraph 8(g) will not apply if the
difference between (w) the present value of all payments to which the
Officer is entitled under paragraph 8(e) determined without regard to
paragraph 8(g) less (x) the present value of all federal, state and
other income and excise taxes for which the Officer is liable as a
result of such payments exceeds the difference between (y) the present
value of all payments to which the Officer is entitled under paragraph
8(e) calculated as if the limitation of paragraph 8(g) applies less
(z) the present value of all federal, state and other income and
excise taxes for which the Officer is liable as a result of such
reduced payments. Present values will be determined using the
interest rate specified in section 280G of the Internal Revenue Code
and will be the present values as of the date on which the Officer's
employment terminates (unless it is necessary to use a different date
in order to avoid adverse consequences under section 280G).
(ii) Whether payments to the Officer are to be reduced pursuant to
paragraph 8(g), and the extent to which they are to be so reduced,
will be determined by the Officer. The Officer may, at the expense of
the Company, hire an accounting firm, law firm or employment
consulting firm selected by the Officer to assist him in such
determination. If a reduction is made pursuant to paragraph 8(g), the
Officer will have the right to determine which payments and benefits
will be reduced.
(iii) The Officer shall receive the benefit of any change made by
the Company in
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the calculation or entitlement of severance compensation following a
Change of Control for any other officer of the Company, such as an
agreement by the Company to "gross up" the compensation paid to an
officer by paying the excise tax imposed by Section 280G of the
Internal Revenue Code .
9. INDEMNIFICATION AND RELATED INSURANCE. As an inducement to Officer's
acceptance of this Agreement, the Company hereby represents, warrants and
covenants as follows:
(a) Article VI, Section 1 of the Company's bylaws (i) establishes an
indemnity in favor of the Company's officers for acts undertaken in
connection with performance of the business of the Company, (ii) has not
previously been amended, modified, rescinded or revoked, in whole or in part
and (iii) is applicable to the Officer, in accordance with its terms;
(b) The Company maintains directors and officers insurance summarized in
Exhibit attached hereto that is applicable to Officer and will acquire and
maintain during the Term of this Agreement general liability, employers'
liability and other insurance required by law or otherwise customary in
connection with the operations to be undertaken by the Company in
implementation of the Business Plan ("Insurance").
(c) The Company will maintain a true and correct copy of its bylaws and
copies of the policies or cover notes evidencing the Insurance as are in
effect, from time to time, during the term of this Agreement at the Company's
principal place of business. The Officer may inspect and copy any of these
materials during the Company's normal business hours at the Company's
principal place of business, or otherwise as the Company and the Officer may
reasonably agree.
(d) During the term of this Agreement, the Company will use reasonable
efforts to maintain the bylaws and the Insurance to provide substantially the
same indemnity and substantially the same or greater insurance coverages and
policy amounts as result from the bylaws as they currently exist and the
Insurance as currently existing or obtained by the Company following the date
hereof. Nevertheless, in the event the Company decides to alter the bylaws or
the Insurance, or the Company is no longer able to obtain the Insurance
coverage and policy amounts presently in effect, the Company shall provide
written notice, as soon as reasonably practicable (and advance notice if
possible) if the terms of the indemnity or if the insurance coverages are (i)
reduced or restricted as to the policy amount or coverage of risks or (ii)
otherwise modified in any material respect.
10. GOVERNING LAW. This agreement shall be governed, construed and enforced
in accordance with the laws of the State of Colorado.
11. WAIVER. Waiver by either party of a breach of any provision of this
Agreement shall not operate or be construed as a waiver of any subsequent
breach thereof or of any other provision.
12. ENTIRE AGREEMENT. This Agreement (and the Exhibits attached hereto)
constitute
10
<PAGE>
the entire agreement between the parties hereto with respect to the subject
matter hereof and the same supersedes any and all prior or contemporaneous
promises or agreements and representations not set forth herein. This
Agreement may not be amended except by written agreement executed by both the
Company and the Officer.
13. SEVERABILITY. Should any one or more provision hereof be determined to
be illegal or unenforceable, all other provisions hereof shall be given
effect separately therefrom and should not be affected thereby.
IN WITNESS WHEREOF, the Company and the Officer have executed and delivered
this Agreement as of the Effective Date.
BASIN EXPLORATION, INC.
----------------------------------
Title:
----------------------------
----------------------------------
David A. Pustka
11
<PAGE>
Exhibit 21
SUBSIDIARIES OF BASIN EXPLORATION, INC. AT 12/31/97
Basin Drilling, Inc.
Basin Offshore Oil & Gas, Inc.
<PAGE>
Exhibit 23.1
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 Basin
Exploration, Inc.'s previously filed registration statements
File Nos. 33-63528 and 333-36143.
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado
March 29, 1999.
<PAGE>
Exhibit 23.2
Basin Exploration, Inc.
370 Seventeenth Street, Suite 3400
Denver, Colorado 80202
Ladies and Gentlemen:
We hereby authorize the reference to the following report prepared
by Ryder Scott Company in a Registration Statement on Forms S-3 and S-8 and
in any prospectus contained therein of filed by Basin Exploration, Inc. with
the United States Securities and Exchange Commission:
1. Estimated Future Reserves and Income Attributable to
Certain Leasehold and Royalty Interests (SEC
Parameters) as of January 1, 1999.
We further consent to the reference to our firm under the caption
"Experts" in such Registration Statement and prospectuses, as such
Registration Statement may be amended.
/s/ RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
Houston, Texas
March 26, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1998
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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 331
<SECURITIES> 0
<RECEIVABLES> 10,036
<ALLOWANCES> 0
<INVENTORY> 206
<CURRENT-ASSETS> 13,119
<PP&E> 306,180
<DEPRECIATION> 118,369
<TOTAL-ASSETS> 201,163
<CURRENT-LIABILITIES> 26,343
<BONDS> 80,000
0
0
<COMMON> 142
<OTHER-SE> 94,077
<TOTAL-LIABILITY-AND-EQUITY> 201,163
<SALES> 48,620
<TOTAL-REVENUES> 48,699
<CGS> 9,046
<TOTAL-COSTS> 81,701
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,030
<INCOME-PRETAX> (35,032)
<INCOME-TAX> (6,532)
<INCOME-CONTINUING> (28,500)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (28,500)
<EPS-PRIMARY> (2.06)
<EPS-DILUTED> (2.06)
</TABLE>
