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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-KSB
[Mark One]
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[FEE REQUIRED] FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1996
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[ ] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[NO FEE REQUIRED] For the transition period from ________to________
Commission File Number 0-19753
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GOTHIC ENERGY CORPORATION
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(Name of small business issuer in its charter)
OKLAHOMA 22-2663839
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5727 SOUTH LEWIS AVENUE - SUITE 700
TULSA, OKLAHOMA 74105
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (918) 749-5666
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SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
Title of Each Class Name of each exchange on which registered
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None
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
Common Stock
(Title of class)
Redeemable Common Stock Purchase Warrants expiring January 24, 2001
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year $11,515,470
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of February 14, 1997 was $22,937,089.
Non-affiliates have been determined on the basis of holdings set forth under
Item 11 of this Annual Report on Form 10-KSB.
The number of shares outstanding of each of the issuer's classes of common
equity, as of February 14, 1997 was 12,381,857.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Issuer's Annual Meeting of
Stockholders to be held on April 22, 1997, are incorporated by reference
herein as portions of Part III of this Annual Report on Form 10-KSB.
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PART I
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ITEM 1 - DESCRIPTION OF BUSINESS:
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(a) The Company: Gothic Energy Corporation (the "Company") is an
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independent energy company primarily engaged in the acquisition, exploitation,
enhancement, development and operation of oil and gas producing properties. The
Company redirected its business efforts to the oil and gas business commencing
in the last quarter of 1994. At December 31, 1996, the Company owned working
interests in 587 wells, of which 327 were operated by the Company. The Company
estimates its net proved reserves at December 31, 1996 to be approximately 1.2
million barrels of oil and 64.5 billion cubic feet of natural gas. Approximately
90% of the Company's proved developed reserves at an equivalent Mcf. basis are
natural gas.
The Company's operations are conducted in Oklahoma, Texas, Arkansas
and Kansas. The majority of oil and gas wells in which the Company has an
interest have produced beyond the point in time where substantial production
declines are normally expected. Accordingly, production rates on a majority of
the Company's wells generally will be marked by a consistency of production
rates throughout the remaining production life.
In addition to its existing oil and gas producing properties, the
Company is seeking to acquire additional producing oil and gas wells and in that
connection is focusing primarily on properties with existing oil and gas
reserves rather than highly speculative exploration. The Company intends to
acquire these properties through merger, exchange of capital stock, stock or
asset acquisition, joint venture or other similar type of acquisition. There can
be no assurance that the Company will be successful in acquiring additional
properties or causing any properties acquired to be operated more profitably.
The Company is an Oklahoma corporation. It was incorporated on
November 19, 1985 under the laws of the State of New Jersey and was
reincorporated as a Delaware corporation on June 23, 1994. On December 4, 1996,
the Company was reincorporated as an Oklahoma corporation by merging the
Delaware corporation with and into a wholly owned subsidiary incorporated for
that purpose under the laws of the State of Oklahoma. Its principal office is at
5727 South Lewis Avenue, Suite 700, Tulsa, Oklahoma 74105, and its telephone
number is (918) 749-5666.
ACQUISITION PROGRAM
The Company's acquisition program is currently focused on the Mid-
Continent region of the United States in the Anadarko, Arkoma and Delaware
geological basins in Oklahoma, Texas and New Mexico. Management intends to
concentrate on these areas and drilling depths where its management and
employees have substantial experience. The Company believes these areas have
potential for exploitation through additional development and enhanced recovery
and
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improved operating techniques. The Company seeks to acquire properties that
are underdeveloped, overly burdened with expenses or owned by financially
troubled companies with the objective of maintaining a low cost operating
structure.
The Company's acquisition program is overseen by its management which
includes two officers each with more than twenty years experience in the oil and
gas production industry. It is anticipated that acquisition opportunities will
be brought to the attention of the Company's management by certain of its
officers, Directors and stockholders and their affiliates as well as by various
unaffiliated sources, including investment bankers, venture capitalists, and
other members of the financial community. The Company does not have any present
plans to engage on a formal basis professional firms or consultants that
specialize in acquisitions.
The Company considers the following factors in connection with each
acquisition: (1) current and historic production levels and reserve estimates;
(2) exploitation potential; (3) capital requirements; (4) proximity of product
markets and existing properties owned by the Company; (5) regulatory compliance;
(6) acreage potential; and (7) existing production transportation capabilities.
The Company also considers the historic financial operating results and cash
flow potential of each acquisition opportunity. Each acquisition involves
management's analysis of its ability to improve the operations of the acquired
properties. Any evaluation of the merits of a particular acquisition is based,
to the extent relevant, on all of the above factors as well as other factors
deemed relevant by the Company's management.
The Company's properties are reviewed by its technical personnel for
profitability enhancement opportunities through efforts such as operating cost
reductions, equipment additions, recompletions and the drilling of development
wells. The Company contemplates the drilling of low risk development wells to
achieve its objectives and plans to minimize its exploration activities.
Acquisitions Prior to Year-End 1996
Since 1994, the Company has acquired the following properties (excluding
the Egolf Acquisition and the Johnson Ranch Acquisition, such acquisitions are
referred to herein as the "1996 Acquisitions"):
Egolf Acquisition: On January 19, 1995, the Company completed the
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acquisition from the Egolf Company of working interests in 208 oil and gas wells
located in Western Oklahoma (the "Egolf Acquisition") for a total purchase price
of $1,584,000 plus one-year common stock purchase warrants to purchase 100,000
shares of the Company's common stock at an exercise price of $2.50 per share.
These warrants expired unexercised. All of the acreage acquired in the Egolf
Acquisition is held by production.
Johnson Ranch Acquisition: Effective May 31, 1995, the Company
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completed the acquisition from Johnson Ranch Partners of working interests in 69
oil and gas wells in Loving
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County, Texas (the "Johnson Ranch Acquisition"). The purchase price was
$7,250,000 plus 1,000,000 shares of Common Stock valued at $2.69 per share, the
closing market price on the date the acquisition was completed. Substantially
all of the acreage acquired in the Johnson Ranch Acquisition is held by
production.
Buttonwood Acquisition: Pursuant to an agreement dated September 27,
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1995 between the Company and Buttonwood Energy Corporation ("Buttonwood"), the
Company acquired on January 30, 1996, by merger of a subsidiary of the Company
into Buttonwood, all of the issued and outstanding shares of Buttonwood (the
"Buttonwood Acquisition"). The merger consideration was $18,912,500 payable in
cash. The Company paid to Buttonwood on November 15, 1995 $1,000,000 as
consideration for the grant of the option to be applied to the merger
consideration. The parties terminated without being exercised a similar option
purchased by the Company in March 1995 for $1,850,000. The remaining $17,912,500
was paid to Buttonwood on the closing of the transaction. Buttonwood, through
its wholly owned subsidiaries, owned interests in 750 oil and gas wells in
Oklahoma, Arkansas, Texas and Kansas and operated 140 of the wells. All of
Buttonwood's 61,897 net leasehold acres are held by production.
Comstock Acquisition: On May 16, 1996, the Company completed the
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acquisition, effective as of January 1, 1996, from Comstock Oil and Gas, Inc.
and Comstock Offshore Energy, Inc. (the "Comstock Acquisition"), of various
working interest in 145 producing oil and gas properties. The Company operates
70 of the wells. The purchase price for the properties acquired was $6.6
million, subject to certain post-closing adjustments which reduced the amount
paid to $6,430,195. Substantially all of the properties acquired are located in
the Anadarko Basin of western Oklahoma and the Arkoma Basin of eastern Oklahoma
and Arkansas.
Stratum Acquisition: On May 20, 1996, the Company acquired from
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Stratum Group Energy Capital, L.P. and Stratum Corp. (the "Stratum
Acquisition"), effective April 1, 1996, the overriding royalty interest of 7% of
the net revenues derived from the properties acquired in the Johnson Ranch
Acquisition. This royalty interest had been conveyed to Stratum as additional
consideration for financing provided by Stratum to the Company in May 1995 for
the Johnson Ranch Acquisition. The purchase price was $800,000.
Various Working Interest Acquisitions: On August 5, 1996, the Company
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completed the acquisition, from various sellers, of working interests in
approximately 120 wells in the Anadarko Basin of Western Oklahoma, and the
Arkoma Basin of Eastern Oklahoma and Arkansas (the "Working Interest
Acquisitions"). The effective date of the acquisition was May 1, 1996. The
Company operates 70 of the wells in which the interests were acquired. The
aggregate purchase price for these wells was $3,270,000.
Athena Acquisition: On December 27, 1996, the Company completed the
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acquisition, effective as of November 1, 1996, from Athena Energy, Inc. of
various working interests in 85 producing oil and gas properties (the "Athena
Acquisition"). The Company operates
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approximately 30 of the wells. The purchase price for the properties acquired
was $4,200,000, subject to certain adjustments. Substantially all the properties
acquired are located in western Oklahoma and the Texas Panhandle. Subsequent to
year end, substantially all of the non-operated well interests acquired from
Athena were sold for net proceeds of approximately $210,000.
Acquisitions Subsequent to Year-End 1996
The Norse Acquisition: On February 18, 1997, the Company acquired
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from Norse Exploration, Inc., and Norse Pipeline, Inc. (collectively, "Norse"),
various working interests in 11 oil and gas producing properties and, through
the acquisition of the outstanding capital stock of Norse Pipeline, Inc., its
40.09% general partnership interest in the Sycamore Gas System (the "Sycamore
System"), an Oklahoma gathering system, processing plant and storage facility.
The oil and gas wells and the gathering system are located in the Springer Field
in Carter County, Oklahoma. The total purchase price was $10,750,000, plus two-
year warrants to purchase 200,000 shares of the Company's Common Stock at a per
share exercise price of $2.50, of which the Company paid a deposit of $1,075,000
toward the purchase price in December 1996. The estimated fair value of such
warrants at the date of acquisition was approximately $254,000.
The Huffman Acquisition: The Company also on February 18, 1997,
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acquired from H. Huffman & Company ("Huffman"), an Oklahoma limited partnership,
various working interests in 13 oil and gas producing properties and an
additional 10.97% interest in the Sycamore System. The oil and gas wells are
located in the same producing area as the properties acquired from Norse. The
total purchase price for the assets acquired was $3,950,000, of which the
Company had paid a deposit of $287,500 toward the purchase price in December
1996.
Horizon Acquisition: The Company also acquired, on February 18, 1997,
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from Horizon Gas Partners, L.P. and HSRTW, Inc. (collectively, "Horizon"),
various working and royalty interests in approximately 100 oil and gas producing
properties. The producing properties are located in Major and Blaine counties of
Oklahoma. The purchase price was $10,000,000.
The effective date of all three acquisitions was January 1, 1997.
Property Disposition Program
Management of the Company reviews the properties acquired and from time to
time disposes of wells that are deemed to be unprofitable, fail to meet
management's operating requirements or, under certain circumstances, are
operated by other persons. From time to time, the Company disposes of wells
operated by the Company where the well does not meet operating requirements.
During the year ended December 31, 1996, the Company disposed of various
interests in an aggregate of 514 properties for a total sales price of
$3,111,298. Of such amount, $2,402,096 was applied to reduce outstanding
indebtedness and $709,202 was used for working capital purposes.
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FINANCING TRANSACTIONS
The Company financed its oil and gas acquisition activities completed
during the year ended December 31, 1996 through the completion of the
following transactions:
Bank One Credit Facility: On January 19, 1996, the Company entered
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into a Loan Agreement with Bank One, Texas, N.A., (the "January 1996 Loan
Agreement") which, reflecting subsequent amendments, enabled the Company to
borrow, as of December 31, 1996, and subject to meeting certain borrowing base
requirements and other conditions, a maximum aggregate of $25,000,000. On
January 30, 1996, $11 million was used to finance a portion of the purchase
price for the Buttonwood Acquisition and repay outstanding indebtedness.
Additional proceeds of $7,230,195 were used on May 16, 1996 to finance the
Comstock Acquisition and the Stratum Acquisition, and on July 31, 1996, proceeds
of $2,792,200 were used to finance the acquisition of well interests from
various sellers. In December 1996, additional proceeds of $5,505,701 were used
to finance the $4,214,406 purchase price for the Athena Acquisition, and
$1,291,295 of the down payments for the Norse and Huffman Acquisitions. The
Company has repaid principal in the amount of $4,784,096 under the borrowing
facility since January 30, 1996. The terms of the January 1996 Loan Agreement
provided for amortization payments, as of December 31, 1996, at the rate of
$240,000 per month commencing September 1, 1996, with all outstanding principal
and interest due and payable on January 30, 1999. Under the terms of the January
1996 Loan Agreement, as in effect at December 31, 1996, interest was payable, at
the option of the Company, either at the rate of 1% over the lending bank's base
rate or up to 3.75% (based on the principal balance outstanding) over the rate
for borrowed dollars by the lending bank in the London Interbank market and the
indebtedness was collateralized by first liens on all of the Company's oil and
gas properties. The January 1996 Loan Agreement included various affirmative and
negative covenants, including, among others, the requirements that the Company
(i), maintain a ratio of current assets to current liabilities, as defined, of
no less than 1.0 to 1.0, (ii) maintain a debt service coverage ratio of net cash
flow per quarter to required quarterly reduction of indebtedness of not less
than 1.10 to 1.0, (iii) maintain minimum tangible net worth at the end of each
fiscal quarter of $10,250,000, plus certain percentages of net income and
proceeds received from the sale of securities, and (iv) maintain selling,
general and administrative expenses per quarter not in excess of 25% of
consolidated net revenues. Material breaches of these or other covenants which
were not cured or waived could have resulted in a default under the loan
agreement resulting in the indebtedness becoming immediately due and payable and
empowering the lender to foreclose against the collateral for the loan. During
the year ended December 31, 1996 the Company requested and obtained a waiver of
the provision requiring a 1:1 ratio of current assets to current liabilities for
the year ended December 31, 1996 and for the quarter ended September 30, 1996,
the restriction on general and administrative expenses for the quarter ended
March 31, 1996, and a covenant violated as a result of the termination of a
former officer of the Company.
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On February 17, 1997, the Company and Bank One, Texas, N.A., entered into a
Restated Loan Agreement (the "Credit Facility") which currently enables the
Company to borrow, from time to time and, subject to meeting certain borrowing
base requirements and other conditions, a maximum aggregate of $75,000,000. As
of February 17, 1997, the aggregate available to be borrowed under the Credit
Facility is comprised of a $32,000,000 borrowing availability (the "borrowing
base") based on the Company's oil and gas reserve reports, a $10,000,000 special
advance facility (the "Special Advance Facility") and a $2,000,000 special
drilling facility (the "Special Drilling Facility").
On February 18, 1997, the Company drew down both the borrowing base and the
Special Advance Facility for a total of $41,668,000. These funds were used to
repay all existing indebtedness then outstanding owing to the bank in the amount
of $21,264,000, to finance the cash consideration paid for the three February
18, 1997 acquisitions discussed above which aggregated $19,404,000 and to pay a
$1,000,000 loan fee to Bank One. The terms of the Credit Facility currently
provide for amortization payments at the rate of $240,000 on March 1, 1997 and
increasing to $475,000 per month commencing April 1, 1997, with all outstanding
principal and interest due and payable on January 30, 1999. The $10,000,000
Special Advance Facility is due on September 1, 1997. Interest is payable, at
the option of the Company, either at the rate of 1% over the lending bank's base
rate or up to 3.75% (based on the principal balance outstanding) over the rate
for borrowed dollars by the lending bank in the London Interbank market. The
indebtedness is collateralized by first liens on all of the Company's oil and
gas properties. The Credit Facility includes various affirmative and negative
covenants, including, among others, the requirements that the Company (i),
maintain a ratio of current assets to current liabilities, as defined, of no
less than 1.0 to 1.0, (ii) maintain a debt service coverage ratio of net cash
flow per quarter to required quarterly reduction of indebtedness of not less
than 1.10 to 1.0, (iii) maintain minimum tangible net worth at the end of each
fiscal quarter of $10,250,000, plus certain percentages of net income and
proceeds received from the sale of securities, and (iv) maintain selling,
general and administrative expenses per quarter of not in excess of 25% of
consolidated net revenues for the quarter ended March 31, 1997 and 20% of
consolidated net revenues for all subsequent quarters. The Company is obligated
under the terms of its Credit Facility to enter into commodity hedges covering
not less than 75% of the Company's proved developed production of oil and
natural gas for a period of not less than twelve months with minimum floor
prices to be mutually agreed upon by the Company and Bank One, Texas, N.A., with
counterparties acceptable to the bank. These commodity hedges are required to be
in place no later than March 4, 1997. Material breaches of these or other
covenants which are not cured or waived could result in a default under the
Credit Facility resulting in this indebtedness becoming immediately due and
payable and empowering the lender to foreclose against the collateral for the
loan. In the event certain promissory notes owing to the bank by Messrs. Michael
Paulk and John Rainwater in the aggregate amount of $316,000 are not paid when
due on December 31, 1997, the Company has agreed that such amounts will be drawn
against the Company's Credit Facility and Messrs. Paulk and Rainwater will be
obligated to the Company for such sums.
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Bridge Financing. In order to provide the funds necessary to complete
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the Norse, Huffman, and Horizon acquisitions, on February 18, 1997 two
accredited investors, as defined by the Securities Act, loaned to the Company
the aggregate sum of $4,500,000 represented by the Company's promissory notes.
Of the aggregate amount, $2,500,000 bears interest at 5% per annum and matures
on April 18, 1997, with the remaining $2,000,000 bearing interest at 12% per
annum and maturing on October 31, 1997. In the event the principal and accrued
interest is not paid when due, such amount is automatically converted into a
number of shares of the Company's Common Stock determined by dividing such
amount by a sum equal to 75% of the closing bid price for the Company's Common
Stock on the five (5) days prior to the maturity date, with respect to the
$2,500,000 obligation, and on the maturity date with respect to the $2,000,000
obligation. As additional consideration for making the loan, the investors also
purchased at a price of $.01 per share a total of 250,000 shares of the
Company's common stock. The fair value of the Company's common stock was $2.63
per share on the date such shares were issued.
Public Offering. On January 30 and March 11, 1996, the Company sold
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for net proceeds aggregating approximately $12,966,000 an aggregate of 7,635,000
shares of Common Stock and 7,635,000 five-year redeemable common stock purchase
warrants. The warrants are exercisable at a price of $2.40 per share of Common
Stock. All of the proceeds of the sale of these securities were used in
conjunction with the Buttonwood Energy Acquisition.
Preferred Stock Financing. The Company issued and sold on January 30,
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1996 an aggregate of 5,540 shares of its 7-1/2% Cumulative Convertible Preferred
Stock for a total consideration of $5,540,000, of which $4,250,000 (net of
$252,570 in fees) was paid in cash, and $1,290,000 was paid by exchange of
$1,290,000 of outstanding principal amount of indebtedness for 1,290 shares of
7-1/2% Cumulative Preferred Stock. The shares are convertible, commencing
December 31, 1996, into shares of the Company's Common Stock at a conversion
price per share of Common Stock equal to the lesser of (i) $2.00 or (ii) a price
equal to the average of the closing prices of the Company's Common Stock during
the 30 business days prior to the day the shares are converted less a discount
of 12-1/2%. The number of shares of Common Stock to be issued on conversion is
determined by multiplying the number of shares of 7-1/2% Cumulative Convertible
Preferred Stock to be converted by $1,000 and dividing the result by the
conversion price in effect. The shares pay a cumulative preferred dividend of 7-
1/2% of the stated value per annum payable semi-annually. The shares of 7-1/2%
Cumulative Convertible Preferred Stock have no voting rights. The holders of 51%
of the shares issuable on conversion of the 7-1/2% Cumulative Convertible
Preferred Stock have the right to require the Company to file a registration
statement under the Securities Act of 1933, as amended, commencing December 31,
1996 to enable the public sale of those shares of Common Stock.
MARKETING OF PRODUCTION
The Company's production of oil and gas is marketed to third parties
consistent with industry practices. Typically, oil is sold at the wellhead
at field posted prices, and gas is sold under contract at negotiated prices
based upon factors normally considered in the industry, such
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as distance from the well to the pipeline, well pressure, estimated reserves,
quality of gas and prevailing supply/demand conditions.
Typically gas production is sold to various pipeline companies. The basic
terms of all the contracts are essentially the same in that the Company makes
gas production available to the pipeline companies at certain given points of
delivery on their pipelines and the pipeline company accepts such gas and
delivers it to the end user. The pipeline company then has the obligation to pay
the Company a price for the gas which is based on published indices of average
pipeline prices or upon a percentage of the pipeline resale value.
The Company's revenues, earnings and cash flows are highly dependent upon
current prices for oil and gas. In general, prices of oil and gas are dependent
upon numerous factors beyond the control of the Company, including supply and
demand, competition, imports and various economic, political, environmental and
regulatory developments, and accordingly, future prices of oil and gas may be
different from prices in effect at December 31, 1996.
At December 31, 1996, the Company was a party to contracts whereby it sells
approximately 48% of its gas production to Aurora Natural Gas, LLC, 11% of its
gas production to GPM Gas Corporation and 82% of its oil production to Sun
Refining and Marketing. These arrangements of the Company have varying
expiration dates and there can be no assurance that such arrangements will be
continued. The Company is obligated under the terms of its Credit Facility to
enter into commodity hedges covering not less than 75% of the Company's proved
developed production of oil and natural gas for a period of not less than twelve
months with minimum floor prices to be mutually agreed upon by the Company and
Bank One, Texas, N.A., for natural gas and oil, with counterparties acceptable
to the bank. These commodity hedges are required to be in place no later than
March 4, 1997.
The ability of the Company to market oil and gas from its wells is
dependent upon numerous factors beyond its control, including the extent of
domestic production and imports of oil and gas, the proximity of the Company's
gas production to gas pipelines, the availability of capacity in such pipelines,
the demand for oil and gas by utilities and other end users, the effects of
inclement weather, state and federal regulation of oil and gas production and
federal regulation of gas sold or transported in interstate commerce. There is
no assurance that the Company will be able to market all of the oil or gas
produced by it or that favorable prices can be obtained for the oil and gas it
produces. Other than under existing contractual commitments, the Company is not
contractually restricted from selling its gas production to alternative
pipelines. While alternative pipelines are available in Oklahoma where the
Company has gas production, the Company believes that alternative pipelines may
not be readily available for marketing its Texas gas production.
In view of the many uncertainties affecting the supply and demand for crude
oil, natural gas and refined petroleum products, the Company is unable to
accurately predict future oil and gas prices and demand or the overall effect
they will have on the Company.
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COMPETITION
The oil and gas industry is highly competitive in all of its phases. The
Company encounters competition from other oil and gas companies in all areas of
its operations, including the acquisition of producing properties and the
marketing of oil and gas. Many of these companies possess greater financial and
other resources than the Company. Competition for acquisition of producing
properties is affected by the amount of funds available to the Company,
information about producing properties available to the Company and any
standards established from time to time by the Company for the minimum projected
return on investment. Because gathering systems are the only practical method
for the intermediate transportation of natural gas, competition is presented by
other pipelines and gas gathering systems. Competition may also be presented by
alternative fuel sources, including heating oil and other fossil fuels. Because
the primary markets for natural gas liquids are refineries, petrochemical plants
and fuel distributors, prices are generally set by or in competition with the
prices for refined products in the petrochemical, fuel and motor gasoline
markets.
REGULATION
The oil and gas business is regulated extensively by federal, state and
local authorities. Various governmental agencies, both federal and state, have
promulgated rules and regulations binding on the oil and gas industry and its
individual members, some of which carry substantial penalties for the failure to
comply. The regulatory burdens on the oil and gas industry increase its cost of
doing business and, consequently, affect its profitability. Because such laws
and regulations are frequently amended or reinterpreted, the Company is unable
to predict the future cost of complying with such regulations. The Company
believes that it is in material compliance with its regulatory obligations.
On October 24, 1992 extensive national energy legislation became law which
focuses on electric power, renewable energy sources and conservation. The
legislation guarantees equal treatment of domestic and imported natural gas
supplies, mandates expanded use of natural gas and other alternative fuel
vehicles, provides funding for natural gas development, permits continued
offshore drilling and use of natural gas for electric generation and adopts
various conservation measures to reduce consumption of imported oil.
Production and Development: The Company's oil and gas well
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development operations are subject to numerous types of regulation at federal,
state and local levels. Such regulation includes requiring permits for the
drilling of wells; maintaining bonding requirements to drill or operate wells;
and regulations of properties upon which wells are drilled and the plugging and
abandoning of wells. The Company's operations are also subject to various
conservation rules to protect the correlative rights of subsurface owners. These
include the regulation of the size of
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drilling and spacing units or proration units, the density of wells which
may be drilled and the unitization or pooling of oil and gas properties.
In May 1992, Oklahoma enacted legislation which limits the daily allowable
amount of natural gas production during periods of low demand for natural gas.
In Oklahoma, production of natural gas from a well is currently limited by
statute to (i) during March through October of each year, the greater of 750
Mcf. per day or 25% of total daily production capacity of the well, and (ii)
during November through February of each year, the greater of 1,000 Mcf. per day
or 40% of the total daily production capacity of the well, unless the Oklahoma
Corporation Commission ("OCC") sets different rules. The OCC sets market demands
quarterly and could change the production quotas for any upcoming quarter.
Effective July 1, 1992, the Texas Railroad Commission, which is the state agency
that regulates oil and gas production in Texas (the "TRC"), enacted new
regulations that may limit the rate at which oil and gas may be produced from
Texas properties. The TRC relies upon certain information filed monthly by well
operators, in addition to using historical production data for each well during
comparable past periods, to arrive at a production allowable. This is in
contrast to the TRC's previous historic reliance on forecasts of upcoming
months' takes filed by purchasers of natural gas in formulating allowables, a
procedure which had resulted in substantial excess allowables over volumes
actually produced. The Company cannot predict what effect, if any, the Texas and
Oklahoma regulations and legislation will have on its operations. However, the
effect of such legislation and regulations may be to decrease the allowable
daily production and the revenues from gas properties, including properties that
produce both oil and gas. It is also possible that such legislation and
regulations may result in a decrease in natural gas production in such states,
which could exert upward pressure on the price of natural gas.
Environmental and Occupational Health Safety Regulations: The
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Company's operations are subject to a number of laws and regulations governing
the discharge of materials into the environment or otherwise involving
environmental protection. These laws and regulations may require the acquisition
of a permit before drilling begins, limit or prohibit drilling activities on
certain lands lying within wilderness or wetlands and other protected areas and
impose substantial liabilities for pollution resulting from drilling operations.
Such laws and regulations may also restrict air or other pollution resulting
from the Company's operations. Management believes that compliance with current
applicable environmental laws and regulations will not have a material adverse
impact on the Company. However, many of these laws and regulations increase the
Company's overall operating expenses, and future changes to environmental laws
and regulations could have a material adverse impact on the Company.
The Company is also subject to laws and regulations concerning occupational
safety and health. While it is not anticipated that the Company will be required
in the near future to expend material amounts by reason of occupational safety
and health laws and regulations, the Company is unable to predict the ultimate
cost of compliance.
-11-
<PAGE>
Marketing and Transportation: In the past, the transportation and
----------------------------
sale for resale of natural gas in interstate commerce have been regulated
pursuant to the Natural Gas Act of 1938, the Natural Gas Policy Act of 1978 (the
"NGPA"), and the regulations promulgated thereunder by the Federal Energy
Regulatory Commission (the "FERC"). Since 1978, maximum selling prices of
certain categories of natural gas sold in the "first sales," whether sold in
interstate or intrastate commerce, have been regulated pursuant to the NGPA. The
term "first sales" means the first time gas is sold as a severed hydrocarbon
after it is produced from the ground. The NGPA established various categories of
natural gas and provided for graduated deregulation of price controls of several
categories of natural gas. There is currently no price regulation for "first
sales" of gas. On July 26, 1989, the Natural Gas Wellhead Decontrol Act was
enacted. This act amended the NGPA to remove both price and non-price controls
from natural gas sold in "first sales" as of January 1, 1993. Under current
market conditions, deregulated gas prices under new contracts tend to be
substantially lower than most regulated price ceilings prescribed by the NGPA.
The effect of termination of these price controls cannot be determined.
Several major regulatory changes have been implemented by the FERC from
1985 to the present that affect the economics of natural gas production,
transportation and sales. In addition, the FERC continues to promulgate
revisions to various aspects of the rules and regulations affecting those
segments of the natural gas industry, most notably interstate natural gas
transmission companies, which remain subject to the FERC's jurisdiction. These
initiatives may also affect the intrastate transportation of gas under certain
circumstances. The stated purposes of many of these regulatory changes is to
promote competition among the various sectors of the industry. The ultimate
impact of these complex and overlapping rules and regulations, many of which are
repeatedly subject to judicial challenge and interpretation, cannot be
predicted.
In April 1992, the FERC issued its restricting rule, known as Order No. 636
("Order No. 636"), the significant provisions of which (a) require that
interstate pipelines provide firm and interruptible transportation solely on an
"unbundled" basis, separate from, their sales service, and convert each
pipeline's bundled firm sales service into unbundled firm transportation
service; (b) provide for the issuance of blanket certificates to pipelines to
provide unbundled sales service, giving all utility customers a chance to
purchase their firm supplies from non-pipeline merchants; (c) require that
pipelines provide firm and interruptible transportation service on a basis that
is equal in quality for all gas supplied, whether purchased from the pipeline or
elsewhere; (d) require that pipelines provide a new, non-discriminatory "no-
price" transportation service; (e) establish two new general programs for the
reallocation of firm pipeline capacity; (f) require that all pipelines offer
access to their storage facilities on a firm and interruptible basis; (g)
provide for pregranted abandonment of pipeline sales agreements, interruptible
and short-term (defined as one year or less) transportation agreements and
condition pregranted abandonment of long-term transportation service; (h) modify
transportation rate design by requiring that all fixed costs related to
transportation be recovered through the reservation charge; and (i) provide
mechanisms for the recovery by pipelines of certain types of costs likely to
occur from implementation of Order No. 636. The term "firm transportation" means
the obligation of a pipeline company to transport gas except in a case of force
majeure and the term "interruptible transportation" means
-12-
<PAGE>
the obligation of a pipeline company to transport gas which obligation may
be interrupted if there is inadequate pipeline capacity.
The rules contained in Order No. 636, as amended by Order No. 636-A (issued
in August 1992) and Order No. 636-B (issued in November 1992), are far reaching
and complex. In addition, several provisions of Order No. 636 are currently
subject to court challenges. Although the ultimate outcome of these challenges
under Order No. 636 cannot be predicted with certainty, the Company does not
believe that these Orders will have an adverse effect on its operations.
Nevertheless, the Orders have resulted in a degree of uncertainty with respect
to interstate natural gas sales and transportation.
No Price Controls on Liquid Hydrocarbons: Although in the past there
----------------------------------------
have been regulations on the sales price of liquid hydrocarbons, there are
currently no price controls on crude oil, condensate or natural gas liquids and
sales thereof can be made at uncontrolled prices.
OPERATIONS HAZARDS AND INSURANCE
The Company maintains various types of insurance to cover its operations,
including $2,000,000 of general liability insurance and an additional $5,000,000
of excess liability insurance. The Company's insurance does not cover every
potential risk associated with the drilling and production of oil and gas.
Coverage is not obtainable for certain types of environmental hazards. The
occurrence of a significant adverse event, the risks of which are not fully
covered by the Company's insurance, could have a material adverse effect on the
Company's financial condition and results of operations. Moreover, no assurance
can be given that the Company will be able to maintain adequate insurance in the
future at reasonable rates.
EMPLOYEES
As of December 31, 1996, the Company had a total of 18 employees consisting
of 11 production and land personnel, one of whom is an executive officer, and
seven financial, accounting and administrative personnel, one of whom is an
executive officer.
-13-
<PAGE>
ITEM 2 - DESCRIPTION OF PROPERTY:
- --------------------------------
Productive Wells and Acreage: The following tables reflect the total
----------------------------
gross and net productive wells and total gross and net developed and undeveloped
acreage in which the Company owned a working interest as of December 31, 1996.
<TABLE>
<CAPTION>
Oil Gas
----------- -----------
Producing Wells Gross Net Gross Net
- ----------------- ----- --- ----- ---
<S> <C> <C> <C> <C>
Oklahoma......... 53 17 357 160
Texas............ 72 71 14 11
Arkansas......... - - 87 35
Kansas........... - - 4 3
Developed Undeveloped
-------------- -------------
Acreage Gross Net Gross Net
- ------- ----- --- ----- ---
Oklahoma......... 65,600 28,320 1,300 870
Texas............ 17,120 14,940 4,120 4,120
Arkansas......... 27,840 11,200 - -
Kansas........... 2,560 1,920 - -
</TABLE>
Substantially all the Company's producing properties are leased by the
Company for an indeterminate number of years, as long as commercial production
is maintained. All of the Company's undeveloped acreage is held under leases
with primary terms that expire at varying dates through June 1, 1998, unless
commercial production is commenced.
The Company completed the drilling of two development wells in each of
which it owns a 25% working interest in the Arkoma Basin of Southwestern
Arkansas during the year ended December 31, 1996. Both wells are now productive
wells. At December 31, 1996, the Company was not engaged in any material
drilling activities. The Company did not engage in any drilling activity prior
to 1996.
Reserve Information: The tables set forth below provide estimates of
-------------------
the Company's proved reserves and the estimated future net cash flows from such
reserves and the present value thereof based upon the standardized measure of
discounted future net cash flows relating to proved oil and gas reserves in
accordance with the provisions of Statement of Financial Accounting Standards
No. 69, "Disclosures about Oil and Gas Producing Activities." No deduction has
been made for depletion, depreciation or income taxes or for indirect costs,
such as general corporate overhead. Present values were computed by discounting
future net cash flows at 10% per annum. All properties are located in the area
known as the Mid-Continent Region and Delaware Basin. The tables have been
prepared by the Company.
-14-
<PAGE>
OIL AND GAS RESERVES
The following table sets forth certain information as to the estimated
net proved reserves of the Company as of the dates set forth below.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------
1996 1995
- -------------------------------------------------------------------
<S> <C> <C>
Proved Developed:
Oil (Bbls) 1,135,181 642,168
Gas (Mcf) 47,484,818 5,093,032
Proved Undeveloped:
Oil (Bbls) 22,557 68,988
Gas (Mcf) 17,049,340 13,605,221
Total Proved:
Oil (Bbls) 1,157,738 711,156
Gas (Mcf) 64,534,158 18,698,253
Estimated pre-tax future net cash flows $ 115,545 $ 16,148
(000's)
Estimated pre-tax net present value
(discounted at 10% per annum) (000's) $ 67,087 $ 8,213
</TABLE>
Proved Reserves are the estimated quantities of crude oil, natural gas and
other hydrocarbons which, based upon geological and engineering data, are
expected to be produced from known oil and gas reservoirs under existing
economic and operations conditions. Proved Developed Reserves are Proved
Reserves which are expected to be recovered through existing wells with existing
equipment and operating methods. Proved Undeveloped Reserves are Proved Reserves
which are expected to be recovered from new wells on Undeveloped Acreage or from
existing wells where a recompletion is required.
The quantities of the Company's Proved Reserves of oil and natural gas
presented above include only those amounts which the Company reasonably expects
to recover in the future from known oil and gas reservoirs under existing
economic and operating conditions. Proved Developed Reserves are limited to
those quantities which are recoverable commercially at current prices and costs,
under existing regulatory practices and with existing technology. Accordingly,
any changes in prices, operating and development costs, regulations, technology
or other factors, could significantly increase or decrease estimates of the
Company's Proved Developed Reserves. The Company's Proved Undeveloped Reserves
include only those quantities which the Company reasonably expects to recover
from the drilling of new wells based
-15-
<PAGE>
on geological evidence from directly offsetting wells. The risks of recovering
these reserves are higher from both geological and mechanical perspectives than
the risks of recovering Proved Developed Reserves. In addition, development of
these properties will be dependent upon the timely availability of capital to
the Company to finance the development expenses, all of which is not currently
available.
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 estimates only. Oil and
gas reserve engineering is a subjective process of estimating underground
accumulations of oil and gas that cannot be measured in an exact way, and
estimates by other engineers might differ from those included herein. The
accuracy of any reserve estimate is a function of the quality of available data
and of engineering and geological interpretation and judgment. This Report
contains estimates of the Company's proved oil and gas reserves and the
projected future net revenue therefrom. Actual future production, oil and gas
prices, revenue, capital expenditures, taxes and operating expenses may vary
substantially from those assumed in making estimates, and therefore, the
Company's reserves may be subject to material upward or downward revision at any
time. Further, the rate of production from oil and gas properties declines as
reserves are depleted. In addition, the Company's ability to develop its
reserves will be dependent upon the timely availability of financing for this
purpose without which the Company's ability to produce the projected amounts of
oil and gas will be adversely affected thereby adversely affecting the projected
future net cash flows. Information herein as to Proved Reserves, both Developed
and Undeveloped, Pre-Tax Future Net Cash Flows and Pre-Tax Net Present Value are
"forward-looking statements" as defined under the Securities Exchange Act of
1934, as amended. Set forth above are important factors that could cause actual
results to differ from the forward-looking statements contained herein.
There have been no estimates of total proved net oil or gas reserves of the
Company filed with or included in reports to any federal authority or agency.
GAS PRODUCTION INFORMATION
<TABLE>
<CAPTION>
Net Production Average Sales
Period (Mcf.) Price/Mcf.
- ------ -------------- -------------
<S> <C> <C>
Year Ended:
December 31, 1996 3,403,943 $2.03
December 31, 1995 434,153 $1.41
</TABLE>
-16-
<PAGE>
OIL PRODUCTION INFORMATION
<TABLE>
<CAPTION>
Net Production Average Sales
Period (Bbls.) Price/Bbl.
- ------ -------------- -------------
<S> <C> <C>
Year Ended:
December 31, 1996 163,978 $21.27
December 31, 1995 74,370 $17.25
</TABLE>
Average lifting costs per Mcfe. were $1.10 and $1.37 for the years ended
December 31, 1996 and December 31, 1995, respectively. Average sales price per
Mcfe were $2.37 and $2.15, respectively, for the same periods.
The Company estimates the capital required to develop its undeveloped oil
and gas reserves over the next three years to be approximately $9.65 million,
including $6.10 million during the year ended December 31, 1997. Bank One
established a special drilling advance fund of $2 million which the Company can
draw upon during 1997 to fund its drilling costs incurred. The Company does not
have any present arrangements to raise additional funds and there can be no
assurance that it will be able to do so on satisfactory terms.
OFFICE FACILITIES
The Company leases approximately 8,164 square feet of space at 5727 South
Lewis Avenue, Tulsa, Oklahoma where its corporate offices are located. The
annual rental is approximately $95,060 and the lease expires on December 31,
1999. The Company believes this facility is adequate for the present
requirements.
ITEM 3 - LEGAL PROCEEDINGS:
- --------------------------
A former officer and employee of the Company, Larry L. Terry, on May
6, 1996, commenced an arbitration proceeding under the Rules of the
American Arbitration Association against the Company seeking to recover
damages for an alleged breach of contract and intentional interference with
contract. The damages sought are approximately $384,000. The Company
believes that it has adequate basis to prove that the termination of Mr.
Terry for cause was appropriate. To the knowledge of the Company, neither
the Company nor any of the Company's properties are subject to any other
litigation the results of which, if determined adversely to the Company,
would have a material adverse effect on the Company's financial condition
or operations.
-17-
<PAGE>
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
- ------------------------------------------------------------
No matter was submitted during the fourth quarter of the fiscal year ended
December 31, 1996 to a vote of security holders.
-18-
<PAGE>
PART II
-------
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS:
- ---------------------------------------------------------------------
The Company's Common Stock is quoted on the NASDAQ SmallCap Market under
the symbol GOTH. The following table sets forth the high and low bid quotations
on the NASDAQ SmallCap Market for the Company's Common Stock by calendar quarter
for the period January 1, 1995 through February 29, 1997.
<TABLE>
<CAPTION>
Calendar Quarter Bid
- ---------------- ------------
High Low
---- ---
<S> <C> <C>
1995
- ----
First Quarter 2-3/8 1-7/8
Second Quarter 2-1/2 1-3/4
Third Quarter 2 1-3/8
Fourth Quarter 2 1-1/4
1996
- ----
First Quarter 2-3/4 1-9/16
Second Quarter 3 2-1/4
Third Quarter 2-3/4 2
Fourth Quarter 2-13/16 2-1/8
1997
- ----
First Quarter 3 2-3/8
(through February 14)
</TABLE>
The foregoing amounts, represent inter-dealer quotations without adjustment
for retail markups, markdowns or commissions and do not represent the prices of
actual transactions. On February 14, 1997, the closing bid quotations for the
Common Stock, as reported on the NASDAQ SmallCap Market, was $2.56.
As of February 14, 1997, the Company had approximately 69 shareholders of
record and believes that it has in excess of 500 beneficial holders. The Company
has never paid a cash dividend on its Common Stock and management has no present
intention of commencing to pay dividends on its Common Stock.
-19-
<PAGE>
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION:
- ------------------------------------------------------------------
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
Revenues were $11,515,470 for the year ended December 31, 1996, as compared
to $2,037,950 for the year ended December 31, 1995. This represents a 465%
increase in total revenue for the period. Oil and gas sales for the year ended
December 31, 1996 increased to $10,385,382, with $3,488,021 from oil sales and
$6,897,361 from gas sales, as compared to oil and gas sales of $1,893,717 for
the year ended December 31, 1995, with $1,282,787 from oil sales and $610,930
from gas sales. Of this $8,491,665 increase in oil and gas sales, approximately
$1,546,000 and $4,187,000 related to increases in volumes of oil and gas sold,
respectively, and $659,000 and $2,110,000 related to increases in the average
prices of oil and gas sold, respectively. The increase in volumes of oil and gas
sold resulted primarily from the 1996 Acquisitions. Oil sales in 1996 were based
on the sale of 163,978 barrels at an average price of $21.27 per barrel as
compared to 74,370 barrels at an average price of $17.25 per barrel in 1995. Gas
sales in 1996 were based on the sale of 3,403,943 mcf at an average price of
$2.03 per mcf compared to 434,153 mcf at an average price of $1.41 per mcf in
1995.
The Company incurred lease operating expenses for the year ended December
31, 1996 of $4,806,741 compared with lease operating expenses of $1,202,535 for
the year ended December 31, 1995. Lease operating expenses include approximately
$567,000 and $98,000 in production taxes which the Company incurred from its
share of production in 1996 and 1995, respectively. This increase in lease
operating expenses is a result of the 1996 Acquisitions. Lease operating
expenses as a percentage of oil and gas sales were 46.3% in 1996 as compared to
63.5% in 1995.
Depreciation, depletion and amortization expense was $2,856,000 for the
year ended December 31, 1996 as compared to $882,450 for the prior year. The
increase resulted primarily from the increased production associated with the
1996 Acquisitions.
Selling, general and administrative costs were $1,781,739 for the year
ended December 31, 1996, as compared to $1,009,539 for the year ended December
31, 1995. This increase was primarily the result of additional personnel and
other costs related to the 1996 Acquisitions. This increase also includes
certain non-recurring costs related to the completion of the Buttonwood
transaction.
During the first quarter of 1996, the Company recorded a $5,050,000 pre-tax
provision for impairment of oil and gas properties, primarily related to
properties acquired in the Buttonwood Acquisition. Such provision resulted from
a full cost ceiling write-down and was reflected in the balance sheet as a
reduction of the cost of oil and gas properties. The operating results for the
year ended December 31, 1995 reflect a similar provision for impairment of oil
-20-
<PAGE>
and gas properties in the amount of $2,247,083, including a full cost ceiling
write-down of oil and gas properties in the amount of $1,052,000 resulting from
lower oil and gas prices at December 31, 1995 and $1,195,083 relating to the
write-off of a $1,000,000 deposit for the Buttonwood Acquisition and related
deferred acquisition costs. The Buttonwood Acquisition deposit and the deferred
acquisition costs write-off was a result of the expected full cost ceiling
write-down related to the Buttonwood properties upon completion of the
acquisition. On September 27, 1995, the Company and Buttonwood entered into a
new option for the Company to acquire Buttonwood and terminated the prior option
for which the Company paid $1,850,000. Accordingly, the Company recognized a
loss on the termination of the option in the amount of $1,850,000 during the
year ended December 31, 1995. As a result of the $5,050,000 impairment provision
and the aggregate $2,850,000 of deposits written off, the Company recorded a tax
benefit of $2,992,547 which offset the deferred tax liability related to the
acquired Buttonwood oil and gas properties. The Company also recorded an
extraordinary loss of $1,432,973 on the early extinguishment of debt during the
quarter ended March 31, 1996, associated with the repayment of the Stratum loan.
During the third quarter of 1995, the Company determined that its
investment in Vista Technologies, Inc. common stock had a carrying value on its
books above the current estimated net realizable value. Accordingly, the Company
recorded a provision of $802,287 during the third quarter of 1995 for this
impairment in value.
Interest and financing costs were $1,528,598 for the year ended December
31, 1996 as compared to $1,627,402 for 1995. The decrease was the result of the
Company's debt restructuring during the year. The Company incurred interest
costs of $1,322,262 with Bank One, Texas, N.A., $55,100 with Stratum, $72,467
with Quest, $69,314 as amortization of loan costs and $9,455 with other parties.
During the year ended December 31, 1996, the Company spent $1,177,327 on
capital enhancements and $35,047,825 on acquiring additional producing
properties, as compared to $402,662 and $11,605,326 spent on capital
enhancements and property acquisitions, respectively, during 1995. The increase
in 1996 was primarily due to the Buttonwood, Comstock and Athena Acquisitions.
The Company also recognized $380,875 in preferred dividends on its 7-1/2%
Cumulative Convertible Preferred Stock during the year ended December 31, 1996.
The profitability and revenues of the Company are dependent, to a
significant extent, upon prevailing spot market prices for oil and gas. In the
past, oil and gas prices and markets have been volatile. Prices are subject to
wide fluctuations in response to changes in supply of and demand for oil and
gas, market uncertainty and a variety of additional factors that are beyond the
control of the Company. Such factors include supply and demand, political
conditions, weather conditions, government regulations, the price and
availability of alternative fuels and overall economic conditions. Gas prices
have fluctuated significantly over the past twelve months.
-21-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Commencing in the last quarter of 1994, the Company redirected its business
efforts toward acquiring natural gas and oil reserves and the production,
development and exploitation of those reserves. On January 19, 1995, the Company
completed its first acquisition of oil and gas reserves, the Egolf Acquisition,
and on May 31, 1995 completed a second acquisition of oil and gas properties,
the Johnson Ranch Acquisition.
On January 30, 1996, the Company completed the following transactions: (i)
it completed the Buttonwood Acquisition; (ii) it borrowed approximately $11
million pursuant to a Credit Facility; (iii) it completed the Public Offering
yielding net proceeds, including net proceeds from a subsequently exercised
over-allotment option, of approximately $12,966,000; and (iv) it completed the
Preferred Stock Financing for aggregate consideration of $5,540,000 inclusive of
$1,290,000 principal amount of a note of the Company exchanged for such shares.
Herein, the Buttonwood Acquisition, the Credit Facility, the Public Offering and
the Preferred Stock Financing are referred to as the "January 1996
Transactions."
Thereafter, throughout 1996, the Company completed the acquisition of
various working interests in additional producing oil and gas properties. On May
16, 1996, the Company completed the Comstock Acquisition which included various
working interests in 145 producing oil and gas properties for a consideration of
$6,430,195 and on May 20, 1996 it completed the Stratum Acquisition including
the 7% overriding royalty interest in the Johnson Ranch Acquisition properties
for $800,000. It expended $3,270,000 for the acquisition of various working
interests in approximately 120 wells from various sellers on August 5, 1996 and
on December 27, 1996 it completed the Athena Acquisition for $4,200,000.
During the year the Company realized net proceeds of approximately $3.11
million from the sale of oil and gas producing properties.
Financing to complete the acquisitions completed subsequent to the January
1996 Transactions was provided under the terms of the Credit Facility, as
amended. At December 31, 1996, the Company's borrowing availability under the
Credit Facility was $25,000,000, of which the Company had borrowed $21,744,000.
On February 18, 1997, the Company completed the following acquisitions:
The Company acquired from Norse, various working interests in 11 oil and
gas producing properties and, through the acquisition of the outstanding capital
stock of Norse Pipeline, Inc., its 40.09% general partnership interest in the
Sycamore System, an Oklahoma gathering system, processing plant and storage
facility. The oil and gas wells and the gathering system are located in the
Springer Field in Carter County, Oklahoma. The purchase price was $10,750,000,
plus two-year warrants to purchase 200,000 shares of the Company's Common Stock
at a per share exercise price of $2.50, of which the Company had paid a deposit
of $1,075,000 toward the
-22-
<PAGE>
purchase price in December 1996. Such warrants were valued at $254,000 (the
estimated fair value of the warrants on the date of acquisition).
The Company acquired from Huffman, various working interests in 13 oil and
gas producing properties and an additional 10.97% interest in the Sycamore
System. The oil and gas wells are located in the same producing area as the
properties acquired from Norse. The total purchase price for the assets acquired
was $3,950,000, of which the Company had paid a deposit of $287,500 toward the
purchase price in December 1996.
The Company also acquired, on February 18, 1997, from Horizon, various
working and royalty interests in approximately 100 oil and gas producing
properties. The producing properties are located in Major and Blaine counties of
Oklahoma. The purchase price was $10,000,000.
The effective date of all three acquisitions was January 1, 1997.
Of the deposits paid to the sellers under these agreements, aggregating
$1,362,500, $1,291,295, were paid out of the proceeds from borrowings in
December 1996 from Bank One, Texas, N.A., and the financing to complete these
transactions was provided by the Credit Facility and the bridge financing
described below.
The Company's capital requirements relate to the acquisition, exploration,
enhancement, development and operation of oil and gas producing properties. In
general, because the oil and gas reserves the Company has acquired and intends
to acquire are depleted by production over time, the success of its business
strategy is dependent upon a continuous acquisition, exploitation, enhancement,
development and operation program. In order to achieve continuing profitability
and generate cash flow, the Company will be dependent upon acquiring or
developing additional oil and gas properties or entering into joint oil and gas
well development arrangements. The Company will continue to require access to
debt and equity capital or the availability of joint venture development
arrangements, among other possible sources, to pursue its business strategy of
additional property acquisition and development. The Company has no present
arrangements to raise additional capital from the sale of its securities or to
enter into joint development arrangements and no assurance can be given that the
Company will be able to obtain additional capital or enter into joint venture
development arrangements on satisfactory terms to implement the Company's
business strategy. The Company has funded its recent capital needs through the
issuance of capital stock and borrowings, principally under the Credit Facility.
Without raising additional capital or entering into joint oil and gas well
development arrangements, the Company will be unable to acquire additional
producing oil and gas properties and its ability to develop its existing oil and
gas properties will be limited to the extent of the available cash flow. No
assurance can be given as to the availability or terms of any such additional
capital or joint development arrangements or that such terms as are available
may not be dilutive to the interests of the Company's stockholders.
-23-
<PAGE>
The Company estimates that it will need approximately $6.10 million of
capital to develop its undeveloped oil and gas reserves during the year ending
December 31, 1997 and an additional $3.40 million to develop such reserves
during the following two years. The Company expects to obtain a portion of these
funds from the Special Drilling Advance of $2 million established under the
terms of the Credit Facility. The Company is permitted to draw upon this advance
for certain drilling costs to be incurred during 1997. Additional funds may be
obtained from cash flow and the possible public or private sale of equity or
debt securities. The Company has no present arrangements for future borrowings,
other than possible borrowing availability under the Credit Facility, or other
sales of securities and its cash flow from operations is not expected to be
adequate to provide all the funds needed for drilling purposes. There can be no
assurance that these sources will provide funds in sufficient amounts to allow
the Company to successfully implement its present business strategy of
additional property acquisition or the development of its oil and gas reserves.
There can be no assurance that the Company will be able to identify and
acquire additional producing oil and gas properties or that any properties that
are acquired will prove to be profitable to the Company. The process of
integrating acquired properties into the Company's operations may result in
unforeseen difficulties and may require a disproportionate amount of
management's attention and the Company's resources. In connection with
acquisitions, the Company could become subject to significant contingent
liabilities arising from the activities of the acquired properties to the extent
the Company assumes, or an acquired entity becomes liable for, unknown or
contingent liability or in the event that such liabilities are imposed on the
Company under theories of successor liability.
At December 31, 1996, the Company had total current assets of $3,349,246
including cash of $206,648 and total current liabilities of $9,755,135 including
current portions of long-term debt of $5,927,660. As a result of amending the
Credit Facility in February 1997, the Company's debt service requirements under
this Credit Facility for April through December , 1997 will be $14,275,000.
While management expects the acquisitions in late 1996 and in early 1997 to
increase cash flows from oil and gas production, such cash flows are not
expected to be adequate to meet debt service requirements and to pay other
current obligations. Accordingly, the Company will be required to either modify
the terms of the restated Credit Facility or obtain other financing.
Under the terms of the Credit Facility, the Company is prohibited from
paying dividends on its Common Stock. In addition, so long as 3,145 shares of 7-
1/2% Cumulative Preferred Stock are outstanding, the Company is restricted from
paying any dividends on its Common Stock.
Terms of the Credit Facility: The Company's Credit Facility enables
----------------------------
the Company to borrow up to a maximum aggregate of $75,000,000, subject to
meeting certain conditions. As of February 17, 1997, the aggregate available to
be borrowed under the Credit Facility is comprised of the $32,000,000 borrowing
base, the $10,000,000 Special Advance Facility, and a $2,000,000
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<PAGE>
Special Drilling Facility. The Credit Facility currently provides for
amortization payments at the rate of $240,000 on March 1, 1997 and increasing to
$475,000 per month commencing April 1, 1997, related to the $32,000,000
borrowing base with all outstanding principal and interest due and payable on
January 30, 1999. The $10,000,000 Special Advance Facility must be repaid by
September 1, 1997. Interest is payable, at the option of the Company, either at
the rate of 1% over the lending bank's base rate or up to 3.75% (based on the
principal balance outstanding) over the rate for borrowed dollars by the lending
bank in the London Interbank market. The indebtedness is collateralized by first
liens on all of the Company's oil and gas properties. The Credit Facility
includes various affirmative and negative covenants, including, among others,
the requirements that the Company (i), maintain a ratio of current assets to
current liabilities, as defined, of no less than 1.0 to 1.0, (ii) maintain a
debt service coverage ratio of net cash flow per quarter to required quarterly
reduction of indebtedness of not less than 1.10 to 1.0, (iii) maintain minimum
tangible net worth at the end of each fiscal quarter of $10,250,000, plus
certain percentages of net income and proceeds received from the sale of
securities, and (iv) maintain selling, general and administrative expenses per
quarter of not in excess of 25% of consolidated net revenues for the quarter
ended March 31, 1997 and 20% of consolidated net revenues for all subsequent
quarters. The Company is obligated under the terms of its Credit Facility to
enter into commodity hedges covering not less than 75% of the Company's proved
developed production of oil and natural gas for a period of not less than twelve
months with minimum floor prices to be mutually agreed upon by the Company and
Bank One, Texas, N.A., for natural gas and oil, with counterparties acceptable
to the bank. These commodity hedges are required to be in place no later than
March 4, 1997. Material breaches of these or other covenants which are not cured
or waived could result in a default under the Credit Facility resulting in this
indebtedness becoming immediately due and payable and empowering the lender to
foreclose against the collateral for the loan.
During the year ended December 31, 1996 the Company requested and obtained
waivers of the provisions, under the January 1996 Loan Agreement requiring a 1:1
ratio of current assets to current liabilities for the year ended December 31,
1996, and for the quarter ended September 30, 1996, the restriction on general
and administrative expenses for the quarter ended March 31, 1996, and a covenant
violated as a result of the termination of a former officer of the Company.
In order to provide the funds necessary to complete the Norse, Huffman and
Horizon acquisitions, on February 18, 1997 two investors loaned to the Company
the aggregate sum of $4,500,000 represented by the Company's promissory notes.
Of the aggregate amount, $2,500,000 bears interest at 5% per annum and matures
on April 18, 1997, with the remaining $2,000,000 bearing interest at 12% per
annum and maturing on October 31, 1997. In the event the principal and accrued
interest is not paid when due, such amount is automatically converted into a
number of shares of the Company's Common Stock determined by dividing such
amount by a sum equal to 75% of the closing bid price for the Company's Common
Stock on the five (5) days prior to the maturity date, with respect to the
$2,500,000 obligation, and on the maturity date with respect to the $2,000,000
obligation. As additional consideration for making the loan,
-25-
<PAGE>
the investors also purchased at a price of $.01 per share a total of 250,000
shares of the Company's common stock. The fair market value of the Company's
common stock was $2.63 per share on the date such shares were issued.
INFLATION
The price the Company receives for its oil and gas has been impacted
primarily by the world oil market and the domestic market for natural gas,
respectively, rather than by any measure of general inflation. Because of the
relatively low rates of inflation experienced in the United States in recent
years, the Company's production costs and general and administrative expenses
have not been impacted significantly by inflation.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
With the exception of historical matters, the matters discussed in this
commentary and elsewhere in this Report are "forward-looking statements" as
defined under the Securities Exchange Act of 1934, as amended, that involve
risks and uncertainties. Forward-looking statements include, but are not limited
to, statements under the following headings: (i) under "Year Ended December 31,
1996 Compared with Year Ended December 31, 1995" relating to the Company's
dependence for profits and revenues on prevailing spot market prices for oil and
gas, (ii) under "Inflation" as to the impact of inflation on the Company, (iii)
under "Liquidity and Capital Resources" as to the Company's capital
requirements, business strategy, ability to attain and maintain profitability
and cash flow, dependence upon the acquisition of and ability to acquire
additional oil and gas properties or entering into joint oil and gas well
development arrangements, access to debt and equity capital and availability of
joint venture development arrangements, estimates as to its needs for additional
capital and the times at which such additional capital will be required,
expectations as to the sources of this capital and funds, ability to
successfully implement its business strategy, ability to identify and integrate
successfully any additional producing oil and gas properties it acquires and
whether such properties can be operated profitably, ability to maintain
compliance with covenants of its various loan documents and other agreements
pursuant to which securities have been issued, ability to borrow funds or
maintain levels of borrowing availability under credit arrangements, statements
about Proved Reserves or borrowing availability based on Proved Reserves and
future net cash flows and the present value thereof and Supplementary Oil and
Gas Information in Note 10 to Notes to Consolidated Financial Statements.
The Company wishes to caution readers that the following important factors,
and those described elsewhere in this commentary and Report, or in other
Securities and Exchange Commission filings, among others, in some cases have
affected, and in the future could affect, the Company's actual results and could
cause the Company's actual consolidated results during 1997 and beyond, to
differ materially from those expressed in any forward-looking statements made
by, or on behalf of, the Company:
-26-
<PAGE>
. The Company has a short operating history in the oil and gas industry,
having entered that business in November 1994 after being engaged in an
entirely different business prior thereto. The Company achieved losses
through mid-1996 during the time it has been engaged in oil and gas
operations and also during all other periods prior thereto since its
organization in 1985. In order for the Company to attain and maintain
profitability and generate cash flow, it will be dependent upon acquiring
or developing additional oil and gas properties. There can be no
assurance that it will be able to do so.
. Without raising additional capital, the Company will be unable to acquire
additional producing oil and gas properties and its ability to develop
its existing oil and gas properties will be limited to the extent of its
available cash flow. Accordingly, in order for the Company to achieve its
business objective and achieve continuing profitable operations, it will
be necessary to generate additional cash flow from operations, raise
additional capital or enter into joint oil and gas well development
arrangements.
. Management intends to fund future acquisitions and develop its oil and
gas reserves using cash flow from operations as well as public and
private sales of debt and equity securities and joint oil and gas well
development arrangements, among other possible sources. The Company's
cash flow from operations is not expected to be adequate to provide the
funds needed for these purposes. There can be no assurance that these
other sources will provide funds in sufficient amounts to allow the
Company to successfully implement its present business strategy of
additional property acquisition or the development of its oil and gas
reserves. The Company has no definitive present arrangements to raise
additional capital from the sale of its securities or joint development
arrangements. No assurance can be given as to the availability or terms
of any such additional financing or joint development arrangements or
that such terms as are available may not be dilutive to the interests of
the Company's stockholders.
. The profitability and revenues of the Company are dependent, to a
significant extent, upon prevailing spot market prices for oil and gas.
In the past, oil and gas prices and markets have been volatile. Prices
are subject to wide fluctuations in response to changes in supply of and
demand for oil and gas, market uncertainty and a variety of additional
factors that are beyond the control of the Company. Such factors include
supply and demand, political conditions, weather conditions, government
regulations, the price and availability of alternative fuels and overall
economic conditions. Gas prices have fluctuated significantly over the
past twelve months.
. The Company is engaged in seeking to identify and acquire additional oil
and gas producing properties. There can be no assurance that the Company
will be able to identify and acquire additional producing oil and gas
properties or that any properties
-27-
<PAGE>
that are acquired will prove to be profitable for the Company. The
process of integrating acquired properties into the Company's operations
may result in unforeseen difficulties and may require a disproportionate
amount of management's attention and the Company's resources. In
connection with acquisitions, the Company could become subject to
significant contingent liabilities arising from the activities of the
acquired properties to the extent the Company assumes, or an acquired
entity becomes liable for, unknown or contingent liabilities or in the
event that such liabilities are imposed on the Company under theories of
successor liability.
. The outstanding principal under the Company's Credit Facility must be
amortized at the rate of $240,000 on March 1, 1997 and increasing to
$475,000 per month, commencing April 1, 1997, with the entire outstanding
balance due January 30, 1999. The Credit Facility includes a $10,000,000
Advance Facility which is due on September 1, 1997. The Credit Facility
is secured by first mortgages on all of the Company's oil and gas
properties. The loan agreement relating to the Credit Facility contains
various affirmative and negative covenants including, among others, the
requirements that the Company maintain certain ratios of current assets
to current liabilities, debt service coverage ratio, minimum tangible net
worth, restrictions on selling, general and administrative expenses and
the payment of dividends. Material breaches of these or other covenants
which are not cured or waived could result in a default under the loan
agreement resulting in this indebtedness becoming immediately due and
payable and empowering the lender to foreclose against the collateral for
the loan. Under such circumstances, the Company's stockholders could lose
their entire investment. There can be no assurance that the Company will
remain in compliance with all of its covenants and agreements in the
Credit Facility. The Company's borrowings under the Credit Facility as
well as its projected borrowing are, to a large extent, a function of the
value of the Company's oil and gas reserves, which fluctuate from time to
time, which are the primary component used in determining the amount of
borrowing available to the Company. Changes in the Company's cash needs
or borrowing availability could negatively impact the Company's reserve
development plans or its ability to meet its obligations as they come
due. Negative revisions in oil and gas reserves could require reductions
in the principal amounts or otherwise reduce funds available to be
borrowed under the Credit Facility.
. 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 in this
Report represent estimates only. Oil and gas reserve engineering is
a subjective process of estimating underground accumulations of oil
and gas that cannot be measured in an exact way, and estimates by
other engineers might differ from those included in this Report.
The accuracy of any reserve estimate is a function of the quality of
available data and of engineering and geological interpretation and
judgment. This Report contains estimates of the Company's proved
oil and gas
-28-
<PAGE>
reserves and the projected future net cash flows therefrom, which have
been prepared by an independent petroleum engineering firm. Actual future
production, oil and gas prices, revenue, capital expenditures, taxes and
operating expenses may vary substantially from those assumed in making
estimates, and the Company's reserves may be subject to material upward
or downward revision and the rate of production from oil and gas
properties declines as reserves are depleted. In addition, the Company's
ability to develop its reserves will be dependent upon the timely
availability of financing for this purpose without which the Company's
ability to produce the projected amounts of oil and gas will be adversely
affected thereby adversely affecting the projected future net cash flows.
. With respect to wells not operated by the Company in which it has a
working interest, the independent operators are, in some cases,
privately-held companies who may have limited financial resources.
If a third party operator experiences financial difficulty and fails
to pay for materials and services in a timely manner, the wells
operated by such third party operators could be subject to material
and workmen's liens. In such event, the Company would incur costs
in discharging such liens.
. The Company is dependent upon the services of its President, Michael
Paulk, and Vice-President, John Rainwater. The loss of their
services could have a material adverse effect upon the Company.
-29-
<PAGE>
ITEM 7 - FINANCIAL STATEMENTS:
- -----------------------------
The response to this Item is included in a separate section of this report.
See page F-1.
ITEM 8 - CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE:
- ----------------------------------------------------------------------------
During the two fiscal years ended December 31, 1996, the Company has not
filed any Current Report on Form 8-K reporting any change in accountants in
which there was a reported disagreement on any matter of accounting principles
or practices, financial statement disclosure or auditing scope or procedure.
-30-
<PAGE>
PART III
--------
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
- ----------------------------------------------------------------------
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT:
- -------------------------------------------------
Information pertaining to directors and executive officers of the
Company is set forth under "Election of Directors" in the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 22, 1997,
and is incorporated herein by reference.
ITEM 10 - EXECUTIVE COMPENSATION:
- --------------------------------
Information pertaining to executive compensation is set forth under
"Election of Directors - Compensation of Executive Officers" in the Company's
Proxy Statement for the Annual Meeting of Stockholders to be held on April 22,
1997, and is incorporated herein by reference.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
- ------------------------------------------------------------------------
Information pertaining to security ownership of management and certain
beneficial owners of the Company's common stock is set forth under "Principal
and Other Stockholders" in the Registrant's Proxy Statement for the Annual
Meeting of Stockholders to be held on April 22, 1997, and is incorporated herein
by reference.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
- --------------------------------------------------------
Information pertaining to certain relationships and related transactions is
set forth under "Election of Directors - Certain Transactions" in the Company's
Proxy Statement for the Annual Meeting of Stockholders to be held on April 22,
1997, and is incorporated herein by reference.
-31-
<PAGE>
PART IV
-------
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K:
- ------------------------------------------
Exhibit Description
- ------- -----------
3.1 Certificate of Incorporation of the Registrant filed June 15,
1994/(1)/
3.2 Certificate of Ownership and Merger of the Registrant filed June
23, 1994/(1)/
3.3 Certificate of Amendment to Certificate of Incorporation of the
Registrant filed September 18, 1995
3.4 By-Laws of the Registrant
4.1 Specimen Stock Certificate
4.2 Warrant Agreement between Registrant and American Stock Transfer &
Trust Company, as Warrant Agent, including form of Redeemable
Warrant/(11)/
4.3 Form of Representative's Unit Purchase Option/(11)/
10 (i) 1989 Incentive Stock Option and Non-Statutory Plan/(2)/
10 (ii) Employment Agreement dated as of November 1, 1994 between the
Registrant and Michael Paulk/(1)/
10 (iii) Employment Agreement dated as of November 1, 1994 between the
Registrant and John Rainwater/(1)/
(iv) Employment Agreement dated as of August 1, 1995 between the
Registrant and Larry L. Terry/(11)/
(v) Letter Agreement dated November 18, 1994 between the
Registrant and The Egolf Company and affiliated entities/(4)/
(vi) Letter Agreement dated November 18, 1994 between the
Registrant and Petroleum Property Management Co. /(4)/
(a) Amendment dated January 11, 1995 to letter agreements
dated November 18, 1994 with The Egolf Company and
affiliated entities and Petroleum Property Management
Co./(6)/
-32-
<PAGE>
(b) One-year Common Stock Purchase Warrant to purchase
100,000 shares of Common Stock/(6)/
(vii) Stock Purchase Agreement dated November 30, 1994 between
the Registrant and Sue Doty-Lloyd/(5)/
(viii) Stock Pledge Agreement dated November 30, 1994 between
the Registrant and Sue Doty-Lloyd/(5)/
(ix) Promissory Note dated November 30, 1995/(5)/
(x) Option Agreement dated March 21, 1995 between the Registrant
and Buttonwood Energy Corporation/(7)/
(xi) Form of Agreement and Plan of Merger to be entered into upon
exercise of the Option Agreement dated March 21, 1995/(7)/
(xii) Purchase and Sale Agreement between Johnson Ranch Partners
and JRP Resources L.C., Sellers, and Registrant dated April
17, 1995/(8)/
(xiii) Term Loan and Security Master Agreement between Gothic
Energy of Texas, Inc., and Stratum Group, L.L.C. ("Stratum")
dated as of June 2, 1995/(9)/
(xiv) Schedule to Term Loan and Security Master Agreement
between the Registrant and Stratum/(9)/
(xv) Stock Pledge, Security and Registration Rights Agreement
between Registrant and Stratum/(9)/
(xvi) Warrant Certificate to purchase 500,000 shares of
Registrant's Common Stock at $3.50 per share issued to
Stratum/(9)/
(xvii) Warrant Certificate to purchase 500,000 shares of
Registrant's Common Stock at $4.00 per share issued to
Stratum/(9)/
(xviii) Crude Oil Purchase and Sale Master Agreement dated as of
June 2, 1995 between Gothic Energy of Texas, Inc. and
Stratum Group, L.L.C.
(xix) ISDA Master Agreement dated as of June 2, 1995 between
Gothic Energy of Texas, Inc. and Stratum Group, L.L.C.
-33-
<PAGE>
(xx) Option Agreement dated September 27, 1995 between Buttonwood
Energy Corporation and the Registrant/(11)/
(a) Amendment No. 1 to Option Agreement dated November 7,
1995/(11)/
(xxi) Form of Agreement and Plan of Merger to be entered into
upon exercise of the Option Agreement dated September 27,
1995/(11)/
(xxii) Loan Agreement dated November 14, 1995 among Registrant,
Quest Capital Corporation, Epoch Capital Corporation, and
Murray M. Sinclair/(10)/
(a) Promissory Note of Registrant dated November 14, 1995
payable to Quest Capital Corporation/(10)/
(b) Promissory Note of Registrant dated November 14, 1995
payable to Epoch Capital Corporation/(10)/
(c) Promissory Note of Registrant dated November 14, 1995
payable to Murray M. Sinclair/(10)/
(xxiii) Purchase Agreement dated December 20, 1995 among Registrant,
Quest Capital Corporation and Epoch Capital Corporation/(11)/
(a) Amendment No. 1 dated January 10, 1996 to Purchase
Agreement dated December 20, 1995/(11)/
(xxiv) * Restated Loan Agreement between Gothic Energy Corporation,
Gothic Energy of Texas, Inc. and Gothic Gas Corporation and
Bank One dated February 17, 1997
(xxv) * Bridge Financing Agreement between Gothic Energy Corporation
and Clarion Capital Corporation and Loire Sextant, S.A.
21 Subsidiaries of the Registrant (as of January 30, 1996):
Name State of Incorporation
---- ----------------------
Gothic Energy of Texas, Inc. Oklahoma
Buttonwood Energy Corporation Oklahoma
Buttonwood Petroleum, Inc. Oklahoma
Dakota Services Corp. Oklahoma
Gothic Gas Corporation Oklahoma
__________________________
* Filed herewith.
-34-
<PAGE>
(1) Filed as an exhibit to Annual Report on Form 10-KSB for the year
ended December 31, 1994
(2) Filed with Registration Statement on Form S-1 (File No. 33-42335)
(3) Filed with Annual Report on Form 10-KSB for the year ended
December 31, 1992
(4) Filed as an exhibit to Current Report on Form 8-K for November
18, 1994
(5) Filed as an exhibit to Current Report on Form 8-K for November
30, 1994
(6) Filed as an exhibit to Current Report on Form 8-K for January 19,
1995
(7) Filed as an exhibit to Current Report on Form 8-K for March 21,
1995
(8) Filed as an exhibit to Current Report on Form 8-K for April 17,
1995
(9) Filed as an exhibit to Current Report on Form 8-K for May 31,
1995
(10) Filed as an exhibit to Current Report on Form 8-K for November
14, 1995
(11) Filed as an exhibit to Registration Statement on Form SB-2 (File
No. 33-99190)
-35-
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GOTHIC ENERGY CORPORATION
BY: /s/ Michael K. Paulk
---------------------------------------------
MICHAEL K. PAULK, PRESIDENT
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Michael K. Paulk President (Principal February 28, 1997
- -------------------------------- Executive Officer
Michael K. Paulk and Director)
/s/ John J. Fleming Director February 28, 1997
- --------------------------------
John J. Fleming
/s/ John Rainwater Vice President and February 28, 1997
- -------------------------------- Director
John Rainwater
/s/ Morton A. Cohen Director February 28, 1997
- --------------------------------
Morton A. Cohen
/s/ Brian E. Bayley Director February 28, 1997
- --------------------------------
Brian E. Bayley
-36-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants.......................................... F-2
Consolidated Balance Sheet, December 31, 1996.............................. F-3
Consolidated Statements of Operations,
Years ended December 31, 1996 and 1995................................... F-4
Consolidated Statements of Changes in Stockholders Equity,
Years ended December 31, 1996 and 1995................................... F-5
Consolidated Statements of Cash Flows,
Years ended December 31, 1996 and 1995................................... F-6
Notes to Consolidated Financial Statements................................. F-7
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Gothic Energy Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheet of Gothic
Energy Corporation and subsidiaries as of December 31, 1996 and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for the years ended December 31, 1996 and 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Gothic
Energy Corporation and subsidiaries as of December 31, 1996, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1996 and 1995, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Tulsa, Oklahoma
February 24, 1997
F-2
<PAGE>
GOTHIC ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
<S> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 206,648
Oil and gas receivable 2,802,140
Receivable from officers and employees 51,932
Assets held for sale 209,740
Other 78,786
------------
TOTAL CURRENT ASSETS 3,349,246
PROPERTY AND EQUIPMENT:
Oil and gas properties on full cost method 39,857,665
Equipment, furniture and fixtures 328,492
Accumulated depreciation, depletion and amortization (3,636,414)
------------
PROPERTY AND EQUIPMENT, NET 36,549,743
OTHER ASSETS, NET 1,566,894
------------
TOTAL ASSETS $ 41,465,883
============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable trade $ 1,336,854
Revenues payable 1,978,221
Accrued liabilities 512,400
Current portion long-term debt 5,927,660
------------
TOTAL CURRENT LIABILITIES 9,755,135
LONG-TERM DEBT 15,854,000
GAS IMBALANCE LIABILITY 1,025,266
COMMITMENTS AND CONTINGENCIES (NOTES 7 AND 8)
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.05,
authorized 500,000 shares;
issued and outstanding 5,540 shares 277
Common stock, par value $.01,
authorized 100,000,000 shares;
issued and outstanding 12,381,857 shares 123,819
Additional paid in capital 32,530,561
Accumulated deficit (17,823,175)
------------
TOTAL STOCKHOLDERS' EQUITY 14,831,482
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 41,465,883
============
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
GOTHIC ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
REVENUES:
Oil and gas sales $10,385,382 $ 1,893,717
Well operations 1,061,804 62,937
Interest and other income 68,284 81,296
----------- -----------
TOTAL REVENUES 11,515,470 2,037,950
COSTS AND EXPENSES:
Lease operating expenses 4,806,741 1,202,535
Depreciation, depletion and amortization 2,856,000 882,450
Selling, general and administrative expense 1,781,739 1,009,539
Provision for impairment of oil and
gas properties 5,050,000 2,247,083
Provision for impairment of investment - 802,287
Loss on termination of option - 1,850,000
----------- -----------
Operating loss (2,979,010) (5,955,944)
Interest expense 1,528,598 1,627,402
----------- -----------
LOSS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM (4,507,608) (7,583,346)
INCOME TAX BENEFIT 2,992,547 -
----------- -----------
LOSS BEFORE EXTRAORDINARY ITEM (1,515,061) (7,583,346)
LOSS ON EARLY EXTINGUISHMENT OF DEBT (NOTE 3) 1,432,973 -
----------- -----------
NET LOSS (2,948,034) (7,583,346)
PREFERRED DIVIDENDS ($68.75 PER PREFERRED SHARE) 380,875 -
----------- -----------
NET LOSS AVAILABLE FOR COMMON SHARES $(3,328,909) $(7,583,346)
=========== ===========
LOSS PER COMMON SHARE BEFORE EXTRAORDINARY ITEM $ (.13) $ (1.73)
=========== ===========
LOSS PER COMMON SHARE $ (.29) $ (1.73)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES 11,663,117 4,375,417
OUTSTANDING =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
GOTHIC ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
COMMON PREFERRED ADDITIONAL TOTAL
SHARES SHARES COMMON PREFERRED PAID-IN ACCUMULATED SUBSCRIPTION STOCKHOLDERS'
OUTSTANDING OUTSTANDING STOCK STOCK CAPITAL DEFICIT RECEIVABLE EQUITY
------------ ----------- ------- ---------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
DECEMBER 31, 1994 3,045,777 - $ 30,458 $ - $10,034,078 $ (6,910,920) $(270,000) $ 2,883,616
Issuance of common stock on
conversion of debt 98,000 - 980 - 195,020 - - 196,000
Issuance of common stock in
Private Placement 123,880 - 1,239 - 188,313 - 270,000 459,552
Issuance of common stock
with Quest financing 280,000 - 2,800 - 870,325 - - 873,125
Issuance of common stock
with Stratum financing 954,128 - 9,541 - - - - 9,541
Issuance of common stock in
connection with Johnson
Ranch acquisition 1,000,000 10,000 - 2,677,500 - - 2,687,500
Net loss - - - - - (7,583,346) - (7,583,346)
---------- ----- -------- ---- ----------- ------------ --------- -----------
BALANCE,
AT DECEMBER 31, 1995 5,501,785 - $ 55,018 $ - $13,965,236 $(14,494,266) - $ (474,012)
Issuance of common stock in
public offering 7,635,000 - 76,350 - 12,890,032 - - 12,966,382
Return of stock with
Stratum repayment (954,128) - (9,541) - - - - (9,541)
Issuance of preferred stock - 5,540 - 277 5,287,153 - - 5,287,430
Preferred fee 28,667 - 287 - (287) - - -
Issuance of common stock
with Quest financing 40,000 - 400 - 62,100 - - 62,500
Issuance of common stock on
conversion of debt 14,000 - 140 - 27,860 - - 28,000
Issuance of common stock in
connection with property
acquisition 116,533 - 1,165 - 298,467 - - 299,632
Preferred stock dividends - - - - - (380,875) - (380,875)
Net loss - - - - - (2,948,034) - (2,948,034)
---------- ----- -------- ---- ----------- ------------ --------- -----------
BALANCE,
AT DECEMBER 31, 1996 12,381,857 5,540 $123,819 $277 $32,530,561 $(17,823,175) $ - $14,831,482
========== ===== ======== ==== =========== ============ ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
GOTHIC ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,948,034) $( 7,583,346)
ADJUSTMENTS TO RECONCILE NET LOSS TO
NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Depreciation, depletion and amortization 2,856,000 882,450
Amortization of discount and loan costs 69,314 1,033,125
Provision for impairment of oil and
gas properties 5,050,000 2,247,083
Provision for impairment of investment - 802,287
Loss on termination of option - 1,850,000
Deferred income tax benefit (2,992,547) -
Loss on early extinguishment of debt 1,432,973 -
CHANGES IN ASSETS AND LIABILITIES:
Increase in accounts receivable (1,552,481) (82,272)
Decrease (increase) in other current
assets 12,971 (65,432)
Increase in accounts and revenues
payable 894,098 812,716
Increase(decrease) in accrued
liabilities (565,562) 216,018
Decrease in other assets 339,013 -
------------ ------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 2,595,745 $ 112,629
NET CASH USED BY INVESTING ACTIVITIES:
Proceeds from sale of investment 200,000 -
Proceeds from collection of note
receivable 123,000 -
Proceeds from sale of property 3,111,298 627,459
Purchase of property and equipment (17,454,852) (11,605,326)
Property development (1,177,327) (402,662)
Acquisition of business, net of cash
acquired (17,592,973) -
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES $(32,790,854) $(11,380,529)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term debt - 3,000,000
Payment of short-term debt (1,560,000) (150,000)
Proceeds from long-term debt 26,528,096 7,275,998
Payment of long-term debt (11,257,815) (785,632)
Proceeds from sale of common stock, net 13,141,368 1,777,552
Proceeds from sale of preferred stock, net 3,997,430 -
Payment of Dividends (173,125) -
Other (431,756) (517,437)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 30,244,198 $ 10,600,481
NET CHANGE IN CASH AND CASH EQUIVALENTS 49,089 (667,419)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 157,559 824,978
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 206,648 $ 157,559
============ ============
SUPPLEMENTAL DISCLOSURE OF INTEREST PAID $ 1,386,817 $ 456,309
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
GOTHIC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. GENERAL AND ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS - The consolidated financial
statements include the accounts of Gothic Energy Corporation, (the
"Company"), and its subsidiaries, Gothic Energy of Texas, Inc. ("Gothic
Texas"), since its inception in 1995 and Buttonwood Energy Corporation and
its subsidiaries, Buttonwood Petroleum, Inc. and Dakota Services, Inc.
("Buttonwood") since their acquisition on January 30, 1996. Since November
1994, the Company has been primarily engaged in the business of acquiring,
developing and exploiting oil and gas reserves in Oklahoma, Texas, Arkansas
and Kansas. Substantially all of the Company's oil and gas reserves are
being sold regionally in the "spot market" or under short-term contracts,
not extending beyond twelve months.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates. In addition, accrued and deferred lease operating
expenses, gas imbalance liabilities, oil and gas reserves (see note 10) and
the valuation of stock based compensation (see note 5) also include
significant estimates which could materially differ from the amounts
ultimately realized.
CASH EQUIVALENTS - Cash and Cash Equivalents include cash on hand, amounts
held in banks and highly liquid investments with a maturity of three months
or less at date of purchase.
FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK - Financial
instruments which potentially subject the Company to concentrations of
credit risk consist primarily of trade receivables with a variety of
national and international oil and natural gas companies. The Company does
not generally require collateral related to receivables. Such credit risk
is considered by management to be limited due to the large number of
customers comprising the Company's customer base. In addition, at December
31, 1996, the Company had a concentration of cash of $713,000, with one
bank.
OIL AND GAS PROPERTIES - The Company accounts for its oil and gas
exploration and development activities using the full cost method of
accounting prescribed by the Securities and Exchange Commission ("SEC").
Accordingly, all productive and non-productive costs incurred in connection
with the acquisition, exploration and development of oil and gas reserves
are capitalized and depleted using the units-of-production method based on
proved oil and gas reserves. The Company capitalizes costs including:
salaries and related fringe benefits of employees directly engaged in the
acquisition, exploration and development of oil and gas properties, as well
as other directly identifiable general and administrative costs
F-7
<PAGE>
NOTE 1. GENERAL AND ACCOUNTING POLICIES (CONTINUED)
associated with such activities. Such costs do not include any costs
related to production, general corporate overhead, or similar activities.
The Company's oil and gas reserves are estimated annually by petroleum
engineers. The Company's calculation of depreciation, depletion and
amortization ("DD&A") includes estimated future expenditures to be
incurred in developing proved reserves and estimated dismantlement and
abandonment costs, net of salvage values. The average composite rate used
for DD&A on oil and gas properties was $.64 and $.80 per Mcfe in 1996 and
1995, respectively. DD&A on oil and gas properties amounted to $2,820,000
and $747,000 in 1996 and 1995, respectively.
In the event the unamortized cost of oil and gas properties being
amortized exceeds the full cost ceiling as defined by the SEC, the excess
is charged to expense in the period during which such excess occurs. The
full cost ceiling is based principally on the estimated future discounted
net cash flows from the Company's oil and gas properties. The Company
recorded a $5,050,000 provision for impairment of oil and gas properties at
March 31, 1996. As a result of the $5,050,000 impairment provision and an
aggregate of $2,850,000 of Buttonwood deposits written off, the Company
recorded a tax benefit of $2,992,547 which offset the deferred tax
liability related to the acquired Buttonwood oil and gas properties. A
similar provision of $2,247,083 was recorded during the year ended December
31, 1995. As discussed in Note 10, estimates of oil and gas reserves are
imprecise. Changes in the estimates or declines in oil and natural gas
prices could cause the Company in the near-term to reduce the carrying
value of its oil and natural gas properties further.
Sales and abandonments of properties are accounted for as adjustments of
capitalized costs with no gain or loss recognized unless a significant
amount of reserves is involved. Since all of the Company's oil and gas
properties are located in the United States, a single cost center is used.
With respect to wells operated by the Company, but in which it has a
working interest, the independent operators are, in some cases, privately-
held companies who may have limited financial resources. If a third party
operator experiences financial difficulty and fails to pay for material and
services in a timely manner, the wells operated by the third party operator
could be subject to material and workmen's liens. The Company has no
reason to believe that its current operators are experiencing significant
financial difficulties.
EQUIPMENT, FURNITURE AND FIXTURES - Equipment, furniture and fixtures are
stated at cost and are depreciated on the straight-line method over their
estimated useful lives which range from three to seven years.
DEBT ISSUANCE COSTS - The unamortized portion of debt issuance costs
included in other assets, which includes the estimated fair value of
warrants, stock or other interests given to obtain financing, is amortized
and included in interest expense using the straight-line
F-8
<PAGE>
NOTE 1. GENERAL AND ACCOUNTING POLICIES (CONTINUED)
method over the term of the related debt. Amortization of debt issuance
costs for the years ended December 31, 1996 and 1995 amounted to $69,314
and $1,033,125, respectively.
NATURAL GAS BALANCING - The Company uses the sales method for recording
natural gas sales. The Company's oil and condensate production is sold,
title passed, and revenue recognized at or near its wells under short-term
purchase contracts at prevailing prices in accordance with arrangements
which are customary in the oil industry. Sales of gas applicable to the
Company's interest in producing oil and gas leases are recorded as revenues
when the gas is metered and title transferred pursuant to the gas sales
contracts covering its interest in gas reserves. During such times as the
Company's sales of gas exceed its pro rata ownership in a well, such sales
are recorded as revenues unless total sales from the well have exceeded the
Company's share of estimated total gas reserves underlying the property at
which time such excess is recorded as a gas balancing liability. At
December 31, 1996, total sales exceeded the Company's share of estimated
total gas reserves on eleven wells by $381,755 (128,468 Mcf), based on the
year end "spot market" price of natural gas. The gas balancing liability
has been classified in the balance sheet as non-current, as the Company
does not expect to settle the liability during the next twelve months.
The Company has recorded deferred charges for estimated lease operating
expenses incurred in connection with its underproduced gas imbalance
position. At December 31, 1996, cumulative total gas sales volumes for
underproduced wells were less than the Company's pro-rata share of total
gas production from these wells by 1,214,208 Mcf, resulting in prepaid
lease operating expenses of $1,250,634, which are included in other assets
in the accompanying balance sheet.
In addition, the Company has recorded accrued charges for estimated lease
operating expenses incurred in connection with its overproduced gas
imbalance position. At December 31, 1996, cumulative total gas sales
volumes for overproduced wells exceeded the Company's pro-rata share of
total gas production from these wells by 624,768 Mcf, resulting in accrued
lease operating expenses of $643,511, which are included in the gas
balancing liability in the accompanying balance sheet.
INCOME TAXES - The Company applies the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). Under SFAS No. 109, deferred tax liabilities or assets arise from
the temporary differences between the tax basis of assets and liabilities,
and their basis for financial reporting, and are subject to tests of
realizability in the case of deferred tax assets.
LOSS PER COMMON SHARE - Loss per common share is computed on the basis of
the weighted average shares of common stock outstanding, including the
effect of dilutive common stock equivalents. Primary and fully diluted
earnings per share are the same for all periods presented.
STOCK BASED COMPENSATION - The Company applies Accounting Principles Board
Opinion No. 25 in accounting for its stock option plans. Under this
standard, no compensation expense is recognized for grants of options which
include an exercise price equal to or
F-9
<PAGE>
NOTE 1. GENERAL AND ACCOUNTING POLICIES (CONTINUED)
greater than the market price of the stock on the date of grant.
Accordingly, based on the Company's grants in 1996 and 1995, no
compensation expense has been recognized.
HEDGING ACTIVITIES - During 1996, the Company entered into an agreement
with a gas purchaser to hedge a portion of its monthly gas production.
Under the agreement, the difference between the current value of the
Company's gas, based upon the spot market price, and a fixed price was
received or paid by the Company. The Company hedged 5,000 Mcf per day for
the period of July 1, 1996 through December 31, 1996 at a price of $2.06
per Mcf. The Company recorded payments received or made under this
agreement in its oil and gas sales. The Company has a new hedging
agreement in place with the same gas purchaser to hedge 5,000 Mcf per day
for the period January 1, 1997 through March 31, 1997 at a price of $2.65
per Mcf.
NOTE 2. OIL AND GAS PROPERTY ACQUISITIONS AND DISPOSITIONS
ACQUISITIONS SUBSEQUENT TO YEAR-END 1996
NORSE ACQUISITION - On February 18, 1997, the Company acquired from Norse
Exploration, Inc., and Norse Pipeline, Inc. (collectively, "Norse"),
various working interests in 11 oil and gas producing properties and,
through the acquisition of the outstanding capital stock of Norse Pipeline,
Inc., its 40.09% general partnership interest in the Sycamore Gas System
(the "Sycamore System"), an Oklahoma gathering system, processing plant and
storage facility. The oil and gas wells and the gathering system are
located in the Springer Field in Carter County, Oklahoma. The total
purchase price was $10,750,000, plus two-year warrants to purchase 200,000
shares of the Company's Common Stock at a per share exercise price of $2.50
of which the Company paid a deposit of $1,075,000 toward the purchase price
in December 1996. The estimated fair value of such warrants at the date of
acquisition was approximately $254,000.
HUFFMAN ACQUISITION - The Company also on February 18, 1997, acquired from
H. Huffman & Company ("Huffman"), an Oklahoma limited partnership, various
working interests in 13 oil and gas producing properties and an additional
10.97% interest in the Sycamore System. The oil and gas wells are located
in the same producing area as the properties acquired from Norse. The
total purchase price for the assets acquired was $3,950,000 of which the
Company paid a deposit of $287,500 toward the purchase price in December
1996.
HORIZON ACQUISITION - The Company also acquired, on February 18, 1997, from
Horizon Gas Partners, L.P. and HSRTW, Inc. (collectively, "Horizon"),
various working and royalty interests in approximately 100 oil and gas
producing properties. The producing properties are located in Major and
Blaine counties of Oklahoma. The purchase price was $10,000,000.
F-10
<PAGE>
NOTE 2. OIL AND GAS PROPERTY ACQUISITIONS AND DISPOSITIONS
(CONTINUED)
ACQUISITIONS DURING YEAR-END 1996
ATHENA ACQUISITION - On December 27, 1996, the Company completed an
acquisition from Athena Energy, Inc. of various working interest in 85
producing oil and gas properties (the "Athena Acquisition"). The Company
operates approximately 30 of the wells. The purchase price for the
properties acquired was approximately $4,200,000. Substantially all the
properties acquired are located in western Oklahoma and the Texas
Panhandle. Subsequent to year end, substantially all of the non-operated
well interests acquired from Athena were sold for net proceeds of
approximately $210,000.
VARIOUS WORKING INTEREST ACQUISITIONS - On August 5, 1996, the Company
completed the acquisition, from various sellers, of working interests in
approximately 120 wells in the Anadarko Basin of Western Oklahoma, and the
Arkoma Basin of Eastern Oklahoma and Arkansas (the "Working Interest
Acquisitions"). The Company operates 70 of the wells in which the
interests were acquired. The aggregate purchase price for these wells was
$3,270,000.
STRATUM ACQUISITION - On May 20, 1996, the Company acquired from Stratum
Group Energy Capital, L.P. and Stratum Corp. (the "Stratum Acquisition"),
the overriding royalty interest of 7% of the net revenues derived from the
properties acquired in the Johnson Ranch financing provided by Stratum to
the Company in May 1995 for the Johnson Ranch Acquisition. The purchase
price was $800,000.
COMSTOCK ACQUISITION - On May 16, 1996, the Company completed the
acquisition, from Comstock Oil and Gas, Inc. and Comstock Offshore Energy,
Inc. (the "Comstock Acquisition"), of various working interest in 145
producing oil and gas properties. The Company operates 70 of the wells.
The purchase price for the properties acquired was $6,430,195.
Substantially all of the properties acquired are located in the Anadarko
Basin of western Oklahoma and the Arkoma Basin of eastern Oklahoma and
Arkansas.
BUTTONWOOD ACQUISITION - On January 30, 1996 the Company completed the
acquisition of Buttonwood Energy Corporation ("Buttonwood"). Concurrently
with entering into an option agreement with Buttonwood on September 27,
1995 for $1,000,000, the parties terminated without being exercised a
similar option purchased by the Company in March 1995 for $1,850,000. The
Company recorded a loss on termination of these options in 1995, with the
$1,000,000 recorded as an impairment of oil and gas properties. The
aggregate purchase price of $18,008,712 including acquisition costs of
$389,212, was allocated to the assets acquired and liabilities assumed as
follows:
F-11
<PAGE>
NOTE 2. OIL AND GAS PROPERTY ACQUISITIONS AND DISPOSITIONS
(CONTINUED)
<TABLE>
<CAPTION>
<S> <C>
Current assets $ 1,632,327
Property and equipment 20,784,016
Other assets 1,435,500
Current liabilities (1,660,628)
Gas imbalance liability (1,189,956)
Deferred income taxes (2,992,547)
-----------
Aggregate purchase price 18,008,712
Less: Cash acquired (415,739)
-----------
Net cash paid $17,592,973
===========
</TABLE>
The transaction was financed with proceeds from a public offering of the
Company's common stock, the sale of preferred stock, a bridge financing and
the establishment of a credit facility with Bank One, Texas. The public
offering and the preferred financing (Note 4), generated net proceeds of
$17,216,000. The remaining purchase price was paid out of the proceeds
from the Bank One, Texas Credit Facility (Note 3).
ACQUISITIONS DURING YEAR-END 1995
JOHNSON RANCH ACQUISITION - On June 2, 1995 the Company completed the
acquisition of working interests in approximately 69 oil and gas wells in
Loving County Texas, through its wholly owned subsidiary, Gothic Texas,
from Johnson Ranch Partners ("Johnson Ranch"). The purchase price was
$7,250,000, plus 1,000,000 shares of the Company's common stock valued at
$2.69 per share, the closing market price on the date the acquisition was
completed.
The transaction was financed with proceeds of a loan from Stratum Group,
L.L.C. ("Stratum"), to Gothic Texas in the maximum aggregate amount of
$8,131,500, of which only $6,756,500 was drawn and used to finance the
acquisition.
As consideration for making the loan, Gothic Texas conveyed to Stratum an
overriding royalty interest of 7% of Gothic's net interest in each of the
properties acquired. As additional consideration for making the loan,
Stratum was issued five-year common stock purchase warrants to purchase an
aggregate of 1,000,000 shares of the Company's Common Stock, exercisable,
at $3.25 per share. The shares issuable upon exercise of the warrants have
certain demand and "piggyback" registration rights.
Stratum also received a security interest in and the right to sell
additional shares of the Company's Common Stock exercisable in the event of
a default under the loan agreement. An aggregate of 954,128 shares were
issued to Stratum, pursuant to this arrangement. On January 30, 1996,
through its new credit facility, the Company paid Stratum all outstanding
amounts due them and received back all common stock held by Stratum as
collateral for the loan.
F-12
<PAGE>
NOTE 2. OIL AND GAS PROPERTY ACQUISITIONS AND DISPOSITIONS
(CONTINUED)
EGOLF ACQUISITION - On January 19, 1995, the Company completed the
acquisition of working interests in approximately 208 oil and gas wells
located primarily in western Oklahoma, for a total purchase price of
$1,584,000 plus one-year common stock purchase warrants to purchase 100,000
shares of the Company's common stock at an exercise price of $2.50 per
share. These warrants expired without being exercised.
All of the above noted acquisitions were accounted for under the purchase
method and, accordingly, results of operations of the acquired properties
are included in the Company's results of operations since the respective
dates of the acquisitions.
The following reflects the unaudited proforma results of operations
assuming the 1995 and 1996 acquisitions had all been consummated on
January 1, 1995.
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Revenues 14,266 12,592
Operating loss (1,906) (4,443)
Net loss (2,800) (5,337)
Loss per common share (.24) (.46)
</TABLE>
PROPERTY DISPOSITION - Management of the Company reviews the properties
acquired and from time to time disposes of wells that are deemed to be
unprofitable, fail to meet management's operating requirements or, under
certain circumstances, are operated by other persons. From time to time,
the Company disposes of wells operated by the Company where the well does
not meet operating requirements. During the year ended December 31, 1996,
the Company disposed of various interests in an aggregate of 514
properties for a total sales price of $3,111,298. Of such amount,
$2,402,096 was applied to reduce outstanding indebtedness and $709,202 was
used for working capital purposes.
NOTE 3. LONG-TERM DEBT AND NOTES PAYABLE
LONG-TERM DEBT
Long-term debt at December 31, 1996 consists of the following:
<TABLE>
<S> <C>
Bank One Credit Facility $21,744,000
Others 37,660
Less: Current Portion (5,927,660)
-----------
Total Long-Term Debt $15,854,000
===========
</TABLE>
On January 19, 1996, the Company entered into a Loan Agreement with Bank
One, Texas, N.A. (the "Credit Facility"), which reflecting subsequent
amendments, enabled the Company to borrow, from time to time and, subject
to meeting certain borrowing base
F-13
<PAGE>
NOTE 3. LONG-TERM DEBT AND NOTES PAYABLE (CONTINUED)
requirements and other conditions, a maximum aggregate of $25,000,000,
consisting of a $20,000,000 revolving loan and a $5,000,000 acquisition
note. On January 30, 1996, $11,000,000 of the Credit Facility was used to
finance a portion of the purchase price for the Buttonwood Acquisition and
repay outstanding indebtedness. Additional proceeds of $7,230,195 were
used on May 16, 1996 to finance the Comstock Acquisition and the Stratum
Acquisition, and on July 31, 1996, proceeds of $2,792,200 were used to
finance the acquisition of well interests from various sellers. In
December 1996, additional proceeds of $5,505,701 were used to finance the
$4,214,406 purchase price for the Athena Acquisition, and $1,291,295 of the
down payments for the Norse and Huffman Acquisitions. The Company has
repaid principal in the amount of $4,784,096 under the Credit Facility
since January 30, 1996. The terms of the Credit Facility provided for
amortization payments at the rate of $240,000 per month under the revolving
loan commencing September 1, 1996, with all outstanding principal and
interest due and payable on January 30, 1999. Of the $5,000,000
acquisition note, $3,010,000 was outstanding at year end and was due on
March 31, 1997. Interest was payable, at the option of the Company,
either at the rate of 1% over the lending bank's rate or up to 3.75%
(based on the principal balance outstanding) over the rate for borrowed
dollars by the lending bank in the London Interbank market. The
indebtedness was collateralized by first liens on all of the Company's oil
and gas properties. The Credit Facility included various affirmative and
negative covenants, including, among others, the requirements that the
Company (i), maintain a ratio of current assets to current liabilities, as
defined, of no less than 1.0 to 1.0, (ii) maintain a debt service coverage
ratio of net cash flow per quarter to required quarterly reduction of
indebtedness of not less than 1.10 to 1.0, (iii) maintain minimum tangible
net worth at the end of each fiscal quarter of $10,250,000, plus certain
percentages of net income and proceeds received from the sale of
securities, and (iv) maintain selling, general and administrative expenses
per quarter not in excess of 25% of consolidated net revenues. Material
breaches of these or other covenants which were not cured or waived could
have resulted in a default under the Credit Facility resulting in the
indebtedness becoming immediately due and payable and empowering the lender
to foreclose against the collateral for the loan. During the year ended
December 31, 1996, the Company requested and obtained a waiver of the
provision requiring a 1:1 ratio of current assets to current liabilities
for the year ended December 31, 1996 and for the quarter ended September
30, 1996, the restriction on general and administrative expenses for the
quarter ended March 31, 1996, and a covenant violated as a result of the
termination of a former officer of the Company.
On February 17, 1997, the Company and Bank One, Texas, N.A., entered into
a Restated Loan Agreement (the "Credit Facility") which currently enables
the Company to borrow, from time to time and, subject to meeting certain
borrowing base requirements and other conditions, a maximum aggregate of
$75,000,000. As of February 17, 1997, the aggregate available to be
borrowed under the Credit Facility is comprised of a $32,000,000 borrowing
availability (the "borrowing base") based on the Company's oil and gas
reserve reports, a $10,000,000 special advance facility (the "Special
Advance Facility") and a $2,000,000 special drilling facility (the "Special
Drilling Facility").
F-14
<PAGE>
NOTE 3. LONG-TERM DEBT AND NOTES PAYABLE (CONTINUED)
On February 18, 1997, the Company drew down the borrowing base and the
Special Advance Facility for a total of $41,668,000. These funds were used
to repay all existing Bank One debt outstanding in the amount of
$21,264,000, to partially finance the February 18, 1997 Huffman, Norse and
Horizon acquisitions in the amount of $19,404,000 and to pay a $1,000,000
loan fee to Bank One. The terms of the Credit Facility currently provide
for amortization payments at the rate of $240,000 on March 1, 1997 and
increasing to $475,000 per month commencing April 1, 1997, with all
outstanding principal and interest due and payable on January 30, 1999.
The Special Advance Facility of $10,000,000 is due on September 1, 1997.
Interest is payable, at the option of the Company, either at the rate of 1%
over the lending bank's base rate (9.25% at December 31, 1996) or up to
3.75% (based on the principal balance outstanding) over the rate for
borrowed dollars by the lending bank in the London Interbank market. The
indebtedness is collateralized by first liens on all of the Company's oil
and gas properties. The Credit Facility includes various affirmative and
negative covenants, including, among others, the requirements that the
Company (i), maintain a ratio of current assets to current liabilities, as
defined, of no less than 1.0 to 1.0, (ii) maintain a debt service coverage
ratio of net cash flow per quarter to required quarterly reduction of
indebtedness of not less than 1.10 to 1.0, (iii) maintain minimum tangible
net worth at the end of each fiscal quarter of $10,250,000, plus certain
percentages of net income and proceeds received from the sale of
securities, (iv) maintain selling, general and administrative expenses per
quarter not in excess of 25% of consolidated net revenues for the quarter
ended March 31, 1997 and 20% of consolidated net revenues for all
subsequent quarters and (v) and to arrange for hedges covering not less
than 75% of the Company's proved developed production of oil and natural
gas for a period of not less than twelve months with minimum floor prices
to be mutually agreed upon by the Company and Bank One. Material breaches
of these or other covenants which are not cured or waived could result in a
default under the Credit Facility resulting in the indebtedness becoming
immediately due and payable and empowering the lender to foreclose against
the collateral for the loan.
In the event certain promissory notes owing to the bank by two officers
of the Company in the aggregate amount of $316,000 are not paid when due on
December 31, 1997, the Company has agreed that such amounts will be drawn
against the Company's Credit Facility and the officers will be obligated to
the Company for such sums.
Future maturities of long-term debt, as of December 31, 1996, based on
the terms of the original Bank One loan agreement, or the Bridge Financing
described below are as follows:
<TABLE>
<S> <C>
1997 $ 5,927,660
1998 2,880,000
1999 12,974,000
-----------
$21,781,660
===========
</TABLE>
F-15
<PAGE>
NOTE 3. LONG-TERM DEBT AND NOTES PAYABLE (CONTINUED)
As noted above, on February 17, 1997, the Company and Bank One amended
the Credit Facility to provide for additional borrowings and, accordingly,
the monthly payments were increased from $240,000 per month to $475,000 per
month under the revolving loan. Additionally, the $10,000,000 Special
Advance Facility is due on September 1, 1997.
On June 2, 1995, Gothic Texas entered into an agreement with Stratum
Group, LLC ("Stratum") in which Stratum agreed to loan Gothic Texas a
maximum aggregate of $8,131,500, of which only $6,756,500 was drawn and was
used to complete the Johnson Ranch Acquisition. At December 31, 1995, the
amount outstanding was $6,622,815. On January 30, 1996, the Company, with
proceeds from its new credit facility, paid Stratum in full and terminated
its loan agreement with them. The transaction resulted in a loss on
extinquishment of debt of $1,432,973 and is shown as an extraordinary item
in the statement of operations.
Based on the borrowing rates currently available to the Company for debt
with similar terms and maturities, long-term debt at December 31, 1996
approximates its fair value.
NOTES PAYABLE
In order to provide the funds necessary to complete the Norse, Huffman,
and Horizon acquisitions, on February 18, 1997 two accredited investors, as
defined by the Securities Act, loaned to the Company the aggregate sum of
$4,500,000 represented by the Company's promissory notes ("Bridge
Financing"). Of the aggregate amount, $2,500,000 bears interest at 5% per
annum and matures on April 18, 1997, with the remaining $2,000,000 bearing
interest at 12% per annum and maturing on October 31, 1997. In the event
the principal and accrued interest is not paid when due, such amount is
automatically converted into a number of shares of the Company's Common
Stock determined by dividing such amount by a sum equal to 75% of the
closing bid price for the Company's Common Stock on the five (5) days prior
to the maturity date, with respect to the $2,500,000 obligation, and on the
maturity date with respect to the $2,000,000 obligation. As additional
consideration for making the loan, the investors also purchased at a price
of $.01 per share a total of 250,000 shares of the Company's common stock.
The fair market value of the Company's common stock was $2.63 per share on
the date such shares were issued.
NOTE 4. STOCKHOLDERS' EQUITY
COMMON STOCK AND PREFERRED STOCK OFFERING - On January 30, 1996, the
Company completed a public offering of 2,545,000 Units at a price of $6.00
per Unit. Each Unit consisted of three shares of the Company's common
stock and three five year redeemable common stock purchase warrants, each
redeemable for one share of common stock at $2.40 per share. The offering
netted the Company approximately $12,970,000, all of which was applied to
the purchase of Buttonwood Energy Corporation. In connection with the
offering, the Underwriter was granted an option to acquire 230,000
Underwriter Units exercisable at a price of $9.90 per Unit.
F-16
<PAGE>
NOTE 4. STOCKHOLDERS' EQUITY (CONTINUED)
Also on January 30, 1996, the Company completed a preferred stock
financing of 5,540 shares of the Company's 7 1/2% Cumulative Convertible
Preferred Stock. Additionally, 28,667 shares of common stock were issued
as a placement fee on the preferred stock offering. The financing included
1,290 shares issued to Quest Capital Corporation in exchange for $1,290,000
principal amount of the Quest Note, and the sale for cash of 4,250 shares,
for an aggregate cash price of $4,250,000 (net of fees of $252,570). The
5,540 shares of 7 1/2% Cumulative Convertible Preferred Stock are
convertible commencing December 31, 1996, into shares of the Company's
Common Stock at a conversion price per share of Common Stock equal to the
lessor of (i) $2.00 or (ii) a price equal to the average of the closing
prices of the Company's common stock during the 30 business days prior to
the day the shares are converted less a discount of 12%. On the basis of
the above mentioned conversion price, an aggregate of 2,770,000 shares of
Common Stock are issuable on conversion. The Company has the right to
redeem the shares of Preferred Stock at their liquidation value of $1,000
per share, plus any accrued and unpaid dividends at any time after January
30, 1998, upon giving 30 days prior written notice.
In June 1996, the Company issued 116,533 shares of its common stock to
two separate parties as consideration for their interest in oil and gas
properties located on the Johnson Ranch. The fair value assigned to these
oil and gas properties was $299,600, based on the trading price of the
Company's stock on the date of the acquisition.
In June 1995, the Company issued 1,000,000 shares of its common stock to
Merrill Lynch Capital Corporation as partial consideration for the Johnson
Ranch Acquisition (Note 2). The stock was trading at a value of $2.69 per
share on the date of issuance.
Also in June 1995, the Company issued 650,000 shares of common stock to
the Stratum Group as collateral for financing provided by Stratum to
complete the Johnson Ranch Acquisition (Note 2). Through September 1995,
an additional 304,128 shares of common stock were issued to Stratum as
collateral pursuant to the financing agreement. On January 30, 1996 the
Company repaid Stratum and the 954,128 shares of common stock held by
Stratum as collateral were returned to the Company.
In March 1995 the Company entered into an agreement with Quest Capital
Corporation ("Quest"), at which time Quest loaned the Company $1,850,000.
Pursuant to the agreement the Company issued 100,000 shares of common stock
to Quest in March 1995. Additionally, the Company was obligated to issue
an additional 25,000 shares of common stock for each of the four months of
July through October and 40,000 shares of common stock each month from
November forward, or until the debt was repaid. The Company issued 180,000
additional shares of common stock to Quest, bringing the total shares
issued to Quest at December 31, 1995, to 280,000. An additional 40,000
shares of common stock were issued in January 1996, prior to the time the
loan was repaid.
During the period January 1995 through June 1995, Noteholders converted a
total of $656,800 in principal and interest into 325,600 shares of the
Company's common stock while retaining 52,500 of $1.00 common stock
warrants.
F-17
<PAGE>
NOTE 4. STOCKHOLDERS' EQUITY (CONTINUED)
The following tables reflect the Company's outstanding warrants and
options at December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
NO. OF
EXERCISE OPTIONS
PRICE ($) EXPIRATION OUTSTANDING EXPIRED/ OUTSTANDING EXERCISABLE
PER SHARE DATE 12/31/94 GRANTED EXERCISED CANCELED 12/31/95 12/31/95
--------- ---------- ----------- ------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1991 Public Offering 5.50 06/30/96 800,000 - - - 800,000 800,000
1991 Underwriter Warrants 6.00 11/08/96 160,000 - - - 160,000 160,000
Employee Stock Options 1.50-3.38 (Note 5) 1,109 125,000 - 1,109 125,000 -
Officers & Dir. Options 1.50-2.50 (Note 5) 500,000 250,000 - - 750,000 250,000
Private Placement Warrants 3.00 02/28/95 48,013 - - 48,013 - -
Former Dir./Officer Options 1.50-2.65 (Note 5) 60,000 - - 10,000 50,000 50,000
Quest Warrants 1.00 04/17/97 - 300,000 - - 300,000 300,000
Egolf Warrants 2.50 01/19/96 - 100,000 - - 100,000 100,000
Stratum Warrants 3.25 06/02/2000 - 1,000,000 - - 1,000,000 1,000,000
Bridge Warrants 2.40 01/30/2001 - 250,000 - - 250,000 -
Note Ext. Warrants 1.00 08/31/97 72,500 - - 20,000 52,500 52,500
--------- ---------- --------- --------- ---------- ----------
1,641,622 2,025,000 - 79,122 3,587,500 2,712,500
NO. OF
EXERCISE OPTIONS
PRICE ($) EXPIRATION OUTSTANDING EXPIRED/ OUTSTANDING EXERCISABLE
PER SHARE DATE 12/31/95 GRANTED EXERCISED CANCELED 12/31/96 12/31/96
--------- ---------- ----------- ------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1991 Public Offering 5.50 06/30/96 800,000 - - 800,000 - -
1991 Underwriter Warrants 6.00 11/08/96 160,000 - - 160,000 - -
1996 Public Offering (1) 2.40 01/30/2001 - 7,635,000 - - 7,635,000 7,635,000
1996 Underwriter Warrants 2.40 01/30/2001 - 690,000 - - 690,000 690,000
1996 Underwriter Option Shares 3.30 01/30/2001 - 690,000 - - 690,000 690,000
Employee Stock Options 1.50-2.50 (Note 5) 125,000 180,000 - - 305,000 62,500
Officers & Dir. Options 1.50-2.56 (Note 5) 750,000 600,000 - 150,000 1,200,000 550,000
Former Dir./Officer Options 1.50-2.00 (Note 5) 50,000 - - - 50,000 50,000
Quest Warrants 1.00 04/17/97 300,000 - - - 300,000 300,000
Egolf Warrants 2.50 01/19/96 100,000 - - 100,000 - -
Stratum Warrants 3.25 06/02/2000 1,000,000 - - - 1,000,000 1,000,000
Bridge Warrants 2.40 01/30/2001 250,000 - - - 250,000 250,000
Note Ext. Warrants 1.00 08/31/97 52,500 - - - 52,500 52,500
Underwriter Warrants 2.25 08/19/2001 - 200,000 - - 200,000 200,000
Consultant Warrants 2.38 03/14/2001 - 29,531 - - 29,531 29,531
--------- ---------- --------- --------- ---------- ----------
3,587,500 10,024,531 - 1,210,000 12,402,031 11,509,531
</TABLE>
(1) Warrants are redeemable at the option of the Company at a per warrant
price of $.01 per warrant at any time after the Warrants become
exercisable, upon not less than 15 business days prior written
notice, if the last sale price of the Common Stock has been at least
200% of the then exercise price of the Warrants for the 20
consecutive trading days prior to date of notice. Warrant holders are
entitled to exercise their warrants up to the date of redemption.
F-18
<PAGE>
NOTE 5. STOCK OPTIONS
INCENTIVE STOCK OPTION PLAN - The Company has an incentive stock option and
non-statutory option plan (the "Plan"), which provides for the issuance of
options to purchase up to 2,500,000 shares of Common Stock to key employees
and Directors. The incentive stock options granted under the Plan are
generally exercisable for a period of ten years from the date of the grant,
except that the term of an incentive stock option granted under the Plan to
a stockholder owning more than 10% of the outstanding common stock must not
exceed five years and the exercise price of an incentive stock option
granted to such a stockholder must not be less than 110% of the fair market
value of the common stock on the date of grant. The exercise price of a
non-qualified option granted under the Plan may not be less than 40% of the
fair market value of the common stock at the time the option is granted.
No non-qualified options have been issued under the Plan.
As of December 31, 1996 and 1995, options to purchase 1,005,000 and
376,109 shares of common stock had been granted under the plan,
respectively. Options to employees to purchase an aggregate of 305,000
common shares are exercisable, with 125,000 shares exercisable at $1.50 per
share through November 1, 1999, 45,000 shares exercisable at $1.75 per
share, through February 1, 2001, and 135,000 shares exercisable at $2.50
per share, through December 18, 2001. Options to officers and directors to
purchase an aggregate of 700,000 common shares are outstanding, with
100,000 shares exercisable at $1.50 per share, through November 1, 1999 and
600,000 shares exercisable at $2.56 per share, through July 16, 2001. Half
of the options are exercisable after the completion of one year of future
service as an employee or director with the remaining options being
exercisable upon the completion of the second year of future service.
OTHER OPTIONS - On October 4, 1994 the Company granted 250,000 options to
each of two officers of the Company to purchase common stock of the Company
at $2.50 per share. Half of the options are exercisable after the
completion of one year of future service as an employee or director with
the remaining options being exercisable upon the completion of the second
year of future service.
On September 15, 1994, the Company granted 10,000 options to each of two
directors and a former consultant. The options are currently exercisable
at $2.00 per share until September 15, 2004, at which time the options
expire.
On July 15, 1992, the Company granted an option to a director/officer to
purchase 20,000 shares of common stock with an exercise price of $2.50 per
share, exercisable through July 15, 1997. On September 15, 1994, the
exercise price of these options was decreased to $1.50 per share.
OMNIBUS INCENTIVE PLAN - On August 13, 1996 at the Annual Shareholders'
Meeting, the shareholders approved the 1996 Omnibus Incentive Plan and the
1996 Non-Employees Stock Option Plan. The 1996 Omnibus Incentive Plan
provides for compensatory awards representing or corresponding up to an
aggregate of 1,000,000 shares of Common Stock of the Company to officers,
directors and certain other key employees. Awards may be granted
F-19
<PAGE>
NOTE 5. STOCK OPTIONS (CONTINUED)
for no consideration and consist of stock options, stock awards, stock
appreciation rights, dividend equivalents, other stock-based awards (such
as phantom stock) and performance awards consisting of any combination of
the foregoing. Generally, options will be granted at an exercise price
equal to the lower of ( i )100% of fair market value of the shares of
Common Stock on the date of grant or (ii) 85% of the fair market value of
the shares of Common Stock on the date of exercise. Each option will be
exercisable for the period or periods specified in the option agreement,
which will generally not exceed 10 years from the date of grant. No
options have been issued under the Omnibus Incentive Plan.
NON-EMPLOYEE STOCK OPTION PLAN - The 1996 Non-Employee Stock Option Plan
provides a means by which non-employee Directors of the Company and
consultants to the Company can be given an opportunity to purchase stock in
the Company. The Plan provides that a total of 1,000,000 shares of the
Company's Common Stock may be issued pursuant to options granted under the
Non-Employee Plan, subject to certain adjustments. The exercise price for
each option granted under the Non-Employee Plan will be not less than the
fair market value of the Common Stock underlying the option on the date of
grant. Each option granted under the Non-Employee Plan is exercisable 10
years after the date of grant. Options granted to Directors will terminate
to the extent such options have not been previously exercised thirty (30)
days after the date the Director is no longer a Director of the Company.
No options have been issued under the Non-Employee Plan.
The Company applies Accounting Principles Board Opinion No. 25 in
accounting for its Incentive Stock Option Plan and other stock options
issued. Accordingly, no compensation cost has been recognized in 1996 and
1995. Had compensation been determined on the basis of fair value pursuant
to Statement of Financial Accounting Standards No. 123, net loss and loss
per share would have been increased as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Net loss available
for common shares:
As reported $(3,328,909) $(7,583,346)
========== ==========
Proforma $(3,772,571) $(7,646,628)
========== ==========
Loss per Share:
As reported $ (.29) $ (1.73)
========== ==========
Proforma $ (.32) $ (1.75)
========== ==========
</TABLE>
The fair value of each option granted is estimated using the Black Scholes
model. The Company's volatility of stock was 0.90 based on previous stock
performance. Dividend yield was estimated to remain at zero with a risk
free interest rate of 6.0 percent in both 1996 and 1995. Expected life was
3 years based on prior experience, the vesting periods involved and the
make up of participating employees within each grant. Fair value of
options granted during 1996 and 1995 under the Stock Option Plan were
$1,175,000 and $202,500, respectively.
F-20
<PAGE>
NOTE 6. INCOME TAXES
Deferred tax assets and liabilities are comprised of the following at
December 31, 1996:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets:
Gas balancing liability $ 390,000
Net operating loss carryforwards 4,889,000
Depletion carryforwards 257,000
-----------
Gross deferred tax assets 5,536,000
Deferred tax liabilities:
Prepaid lease operating expenses (475,000)
Book over tax basis of oil and gas
properties (4,761,000)
-----------
Gross deferred tax liabilities (5,236,000)
Net deferred tax assets 300,000
Valuation allowance (300,000)
-----------
$ 0
===========
</TABLE>
As a result of a change in control of the Company in 1994, approximately
$4,901,000 of net operating loss carryforwards generated prior to the
change in control are unavailable for future use. Net operating losses
generated subsequent to the change in control of approximately $6,970,000
are available for future use against taxable income. These net operating
loss carryforwards expire in the year 2010.
In addition, the acquisition of Buttonwood Energy Corporation in January,
1996 made available approximately $5,900,000 of net operating loss
carryforwards and $675,000 of depletion carryforwards generated prior to
the acquisition. However, the loss carryforwards and depletion
carryforwards are limited annually under Internal Revenue Code Section 382
due to a change in ownership. The net operating loss carryforwards expire
in the year 2010 and the depletion carryforwards can be carried forward
indefinitely.
Due to the uncertainty of the Company's ability to utilize the net
operating loss carryforwards and depletion carryforwards and the limitation
under Section 382, a 100% valuation allowance has been recorded.
NOTE 7. COMMITMENTS
The Company has entered into five-year employment agreements with its
President and Vice-President. Under the agreements, as amended in November
1996, each receives a base salary of $121,000 per year plus additional
amounts as may be determined from time to time by the Company's Board of
Directors. In addition, such persons are to receive a cash bonus as may
be determined by the Company's Board of Directors. The Company has the
right to terminate the employment agreements at any time upon 45 days
notice. Unless the agreement has been terminated for cause, as defined,
the Company is obligated to pay each of the officers the sum of $200,000,
together with any sums unpaid under the terms of the
F-21
<PAGE>
NOTE 7. COMMITMENTS (CONTINUED)
employment agreement, and continue their medical insurance in effect for a
period of one year after such termination. In the event of a change of
control in the Company, as defined, each of the officers has the right to
terminate their employment agreements with the Company within 60 days
thereafter and the Company is obligated to pay the same sums and other
benefits described above as if such agreements had been terminated by the
Company without cause.
In the event certain promissory notes owing to the bank by two officers
of the Company in the aggregate amount of $316,000 are not paid when due on
December 31, 1997, the Company has agreed that such amounts will be drawn
against the Company's Credit Facility and the officers will be obligated to
the Company for such sums.
The Company leases its corporate offices and certain office equipment and
automobiles under non-cancelable operating leases. Rental expense under
non-cancelable operating leases was $110,347 and $95,846 for the years
ended December 31, 1996 and 1995, respectively.
Remaining minimum annual rentals under non-cancelable lease agreements
subsequent to December 31, 1996 are as follows:
1997 $131,013
1998 120,022
1999 114,476
2000 9,000
2001 8,250
NOTE 8. CONTINGENCIES
A former officer and employee of the Company, on May 6, 1996, commenced
an arbitration proceeding under the Rules of the American Arbitration
Association against the Company seeking to recover damages for an alleged
breach of contract and intentional interference with the contract. The
damages sought are approximately $384,000. The Company believes that it
has adequate basis to prove that the termination for cause was appropriate,
and accordingly, no amount has been accrued in the financial statements.
NOTE 9. MAJOR CUSTOMERS
During the year ended December 31, 1996, the Company was a party to
contracts whereby its sold approximately 48% of its gas production to
Aurora Natural Gas, LLC, 11% of its gas production to GPM Gas Corporation
and 82% of its oil production to Sun Refining and Marketing. During the
year ended December 31, 1995, the Company was a party to contracts whereby
it sold approximately 53% of its gas production to GPM Gas Corporation and
24% to Enron Capital and Trade Resources, and 95% of its oil production to
Stratum Group Energy Capital, L.P.
F-22
<PAGE>
NOTE 10. SUPPLEMENTARY OIL AND GAS INFORMATION
FINANCIAL DATA
The following supplemental historical and reserve information is
presented in accordance with Financial Accounting Standards Board Statement
No. 69, "Disclosures About Oil and Gas Producing Activities".
CAPITALIZED COSTS - The aggregate amounts of capitalized costs relating
to oil and gas producing activities, net of valuation allowances, and the
aggregate amounts of the related accumulated depreciation, depletion, and
amortization at December 31, 1996 were as follows:
<TABLE>
<CAPTION>
1996
-------------
<S> <C>
Proved properties $ 39,858,000
Less: Accumulated depreciation,
depletion, and amortization (3,567,000)
-------------
Net oil and gas properties $ 36,291,000
=============
</TABLE>
COSTS INCURRED - Costs, capitalized and expensed, incurred in oil and gas
property acquisition, exploration and development activities for the year
ended December 31, 1996 were as follows:
<TABLE>
<CAPTION>
1996
-------------
<S> <C>
Property acquisition $ 35,347,425
Development costs 1,177,327
----------
Total costs incurred $ 36,524,752
==========
</TABLE>
OIL AND GAS RESERVES DATA (UNAUDITED)
ESTIMATED QUANTITIES - Oil and natural gas reserves cannot be measured
exactly. Estimates of oil and natural gas reserves require extensive
judgments of reservoir engineering data and are generally less precise than
other estimates made in connection with financial disclosures.
Proved reserves are those quantities which, upon analysis of geological
and engineering data, appear with reasonable certainty to be recoverable in
the future from known oil and natural gas reservoirs under existing
economic and operating conditions. Proved developed reserves are those
reserves which can be expected to be recovered through existing wells with
existing equipment and operating methods. Proved undeveloped reserves are
those reserves which are expected to be recovered from new wells on
undrilled acreage or from existing wells where a relatively major
expenditure is required.
Estimates of oil and natural gas reserves require extensive judgments of
reservoir engineering data as explained above. Assigning monetary values
to such estimates does
F-23
<PAGE>
NOTE 10. SUPPLEMENTARY OIL AND GAS INFORMATION (CONTINUED)
reduce the subjectivity and changing nature of such reserve estimates.
Indeed, the uncertainties inherent in the disclosure are compounded by
applying additional estimates of the rates and timing of production and the
costs that will be incurred in developing and producing the reserves. The
information set forth herein is therefore subjective and, since judgments
are involved, may not be comparable to estimates submitted by other oil and
natural gas producers. In addition, since prices and costs do not remain
static and no price or cost escalations or de-escalations have been
considered, the results are not necessarily indicative of the estimated
fair market value of estimated proved reserves nor of estimated future cash
flows. Accordingly, these estimates are expected to change as future
information becomes available. All of the Company's reserves are located
onshore in the states of Oklahoma, Texas, Arkansas and Kansas.
The following unaudited table sets forth proved oil and gas reserves at
December 31, 1996:
<TABLE>
<CAPTION>
1996
---------------------
Bbls Mcf
-------- ----------
<S> <C> <C>
Proved Reserves:
Beginning of year 711,000 18,698,000
Revisions of previous estimates 222,000 10,276,000
Purchases of reserves in place 639,000 42,633,000
Production (164,000) (3,404,000)
Sales of reserves in place (250,000) (3,669,000)
--------- ----------
End of year 1,158,000 64,534,000
========= ==========
Proved Developed:
Beginning of year 642,000 5,093,000
End of year 1,135,000 47,485,000
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS - Future net
cash inflows are based on the future production of proved reserves of crude
oil and natural gas as estimated by petroleum engineers by applying current
prices of oil and gas to estimated future production of proved reserves.
Prices used in determining future cash inflows for oil and natural gas as
of December 31, 1996, were $24.20 per barrel and $2.65 per mcf,
respectively. Future net cash flows are then calculated by reducing such
estimated cash inflows by the estimated future expenditures (based on
current costs) to be incurred in developing and producing the proved
reserves and by the estimated future income taxes. Subsequent to December
31, 1996, the "spot market" price of natural gas decreased to below $2.00
per mcf which would have a significant impact on the SMOG values.
Estimated future income taxes are computed by applying the appropriate
year-end tax rate to the future pretax net cash flows relating to the
Company's estimated proved oil and gas reserves. The estimated future
income taxes give effect to permanent differences and tax credits and
allowances.
The standardized measure of discounted future net cash flows is based on
criteria established by Financial Accounting Standards Statement No. 69,
"Accounting for Oil and
F-24
<PAGE>
NOTE 10. SUPPLEMENTARY OIL AND GAS INFORMATION (CONTINUED)
Gas Producing Activities" and is not intended to be a "best estimate" of
the fair value of the Company's oil and gas properties. For this to be the
case, forecasts of future economic conditions, varying price and cost
estimates, varying discount rates and consideration of other than proved
reserves (i.e., probable reserves), would have to be incorporated into the
valuations.
Included in the estimated standardized measure of future cash flows are
certain capital projects. The Company estimates the capital required to
develop its undeveloped oil and gas reserves over the next three years to
be approximately $9.65 million, including $6.10 million during the year
ended December 31, 1997. Bank One established a special drilling advance
fund of $2 million which the Company can draw upon during 1997 to fund its
drilling costs. The Company does not have any present arrangements to
raise additional funds and there can be no assurance that it will be able
to do so on satisfactory terms. If such capital is not employed, the
estimated future cash flows will be impacted.
The following table sets forth the Company's unaudited estimated
standardized measure of discounted future net cash flows, (in thousands).
Proved reserves for the year ended December 31, 1996 were estimated by an
independent petroleum engineering firm and for the year ended December 31,
1995 were estimated by petroleum engineers employed by the Company.
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
Cash Flows Relating to Proved
Reserves:
Future cash inflows $199,166 $ 43,824
Future production costs (73,976) (16,646)
Future development costs (9,645) (11,030)
Future income tax expense (30,919) (68)
-------- ----------
84,626 16,080
Ten percent annual discount factor (35,543) (7,901)
-------- ----------
Standardized Measure of Discounted
Future Net Cash Flows $ 49,083 $ 8,179
======== ==========
</TABLE>
The following table sets forth changes in the standardized measure of
discounted future net cash flows (in thousands):
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
Standardized measure of discounted
future cash flows-beginning of
period $ 8,179 $ -
Sales of oil and gas produced, net of
operating expenses (5,579) (691)
Purchases of reserves-in-place 30,930 16,007
Sales of reserves-in-place (3,598) (496)
Revisions of previous quantity
estimates and changes in sales prices
and production costs 18,333 (7,381)
Accretion of discount 818 740
-------- --------
Standardized measure of discounted
future cash flows-end of period $ 49,083 $ 8,179
======== ========
</TABLE>
F-25
<PAGE>
EXHIBIT 10.XXIV
RESTATED
LOAN AGREEMENT
AMONG
GOTHIC ENERGY CORPORATION,
GOTHIC ENERGY OF TEXAS, INC.
AND
GOTHIC GAS CORPORATION,
AS BORROWERS
AND
BANK ONE, TEXAS, N.A.
AND THE BANKS NAMED HEREIN
AS BANKS
AND
BANK ONE, TEXAS, N.A.,
AS AGENT
FEBRUARY 17, 1997
<PAGE>
TABLE OF CONTENTS
Page No.
--------
1. Definitions........................................................... 2
2. Commitments of the Bank............................................... 12
(a) Terms of Revolving Commitment.................................. 12
(b) Bridge Loan.................................................... 13
(c) Procedure for Borrowing........................................ 13
(d) Letters of Credit.............................................. 13
(e) Procedure for Obtaining Letters of Credit...................... 14
(f) Voluntary Reduction of Revolving Commitment.................... 15
(g) Monthly Commitment Reduction................................... 15
(h) Special Advance Facility....................................... 15
(i) Special Drilling Facility...................................... 15
(j) Additional Reduction of Availability Under Revolving
Commitment................................................... 16
(k) Several Obligations............................................ 16
(l) Limited Liability of Gas....................................... 16
3. Notes Evidencing Loans................................................ 17
(a) Form of Revolving Notes........................................ 17
(b) Form of Bridge Notes........................................... 17
(c) Issuance of Additional Notes................................... 17
(d) Interest Rate.................................................. 17
(e) Payment of Interest............................................ 18
(f) Payment of Principal........................................... 18
(g) Payment to Banks............................................... 18
(h) Sharing of Payments, Etc....................................... 18
(i) Non-Receipt of Funds by the Agent.............................. 19
(j) Capital Adequacy............................................... 19
4. Interest Rates........................................................ 20
(a) Options........................................................ 20
(b) Interest Rate Determination.................................... 21
(c) Conversion Option.............................................. 21
(d) Recoupment..................................................... 21
5. Special Provisions Relating to Eurodollar Loans....................... 21
(a) Unavailability of Funds or Inadequacy of Pricing............... 21
(b) Reserve Requirements........................................... 22
-i-
<PAGE>
(c) Taxes.......................................................... 22
(d) Change in Laws................................................. 23
(e) Option to Fund................................................. 23
(f) Indemnity...................................................... 23
(g) Payments Not at End of Interest Period......................... 23
6. Collateral Securities................................................. 24
7. Borrowing Base........................................................ 25
(a) Initial Borrowing Base......................................... 25
(b) Subsequent Determinations of Borrowing Base.................... 25
8. Fees.................................................................. 26
(a) Unused Commitment Fee.......................................... 26
(b) Borrowing Base Increase Fee.................................... 27
(c) The Letter of Credit Fee....................................... 27
(d) Agency Fees.................................................... 27
(e) Special Advance Fee............................................ 27
9. Prepayments........................................................... 27
(a) Voluntary Prepayments.......................................... 27
(b) Mandatory Prepayment For Borrowing Base Deficiency............. 27
10. Representations and Warranties........................................ 28
(a) Creation and Existence......................................... 28
(b) Power and Authority............................................ 28
(c) Binding Obligations............................................ 28
(d) No Legal Bar or Resultant Lien................................. 28
(e) No Consent..................................................... 28
(f) Financial Condition............................................ 29
(g) Liabilities.................................................... 29
(h) Litigation..................................................... 29
(i) Taxes; Governmental Charges.................................... 29
(j) Titles, Etc.................................................... 29
(k) Defaults....................................................... 29
(l) Casualties; Taking of Properties............................... 30
(m) Use of Proceeds; Margin Stock.................................. 30
(n) Location of Business and Offices............................... 30
(o) Compliance with the Law........................................ 30
(p) No Material Misstatements...................................... 31
(q) Not A Utility.................................................. 31
-ii-
<PAGE>
(r) ERISA.......................................................... 31
(s) Public Utility Holding Company Act............................. 31
(t) Subsidiaries................................................... 31
(u) Environmental Matters.......................................... 31
(v) Liens.......................................................... 32
11. Conditions of Lending................................................. 32
12. Affirmative Covenants................................................. 34
(a) Financial Statements and Reports............................... 34
(b) Certificates of Compliance..................................... 36
(c) Accountants' Certificate....................................... 36
(d) Taxes and Other Liens.......................................... 36
(e) Compliance with Laws........................................... 36
(f) Further Assurances............................................. 37
(g) Performance of Obligations..................................... 37
(h) Insurance...................................................... 37
(i) Accounts and Records........................................... 38
(j) Right of Inspection............................................ 38
(k) Notice of Certain Events....................................... 38
(l) ERISA Information and Compliance............................... 38
(m) Environmental Reports and Notices.............................. 39
(n) Compliance and Maintenance..................................... 39
(o) Operation of Properties........................................ 39
(p) Compliance with Leases and Other Instruments................... 40
(q) Certain Additional Assurances Regarding
Maintenance and Operations of Properties....................... 40
(r) Sale of Certain Assets/Prepayment of Proceeds.................. 40
(s) Title Matters.................................................. 41
(t) Curative Matters............................................... 41
(u) Change of Principal Place of Business.......................... 41
(v) Cash Collateral Accounts....................................... 41
(w) Hedging........................................................ 42
13. Negative Covenants.................................................... 42
(a) Negative Pledge................................................ 42
(b) Current Ratio.................................................. 42
(c) Debt Service Coverage Ratio.................................... 42
(d) Minimum Tangible Net Worth..................................... 42
(e) General and Administrative Expenses............................ 43
(f) Consolidations and Mergers..................................... 43
-iii-
<PAGE>
(g) Debts, Guaranties and Other Obligations........................ 43
(h) Dividends...................................................... 44
(i) Loans and Advances............................................. 44
(j) Sale or Discount of Receivables................................ 44
(k) Nature of Business............................................. 44
(l) Transactions with Affiliates................................... 44
(m) Hedging Transactions........................................... 45
(n) Investment..................................................... 45
(o) Amendment to Articles of Incorporation or Bylaws............... 45
(p) Sale of Assets................................................. 45
(q) Proceeds of Production......................................... 46
(r) Amendments to Preferred Stock and Convertible
Promissory Notes............................................... 46
15. The Agent and the Banks............................................... 48
(a) Appointment and Authorization.................................. 48
(b) Note Holders................................................... 49
(c) Consultation with Counsel...................................... 49
(d) Documents...................................................... 49
(e) Resignation or Removal of Agent................................ 49
(f) Responsibility of Agent........................................ 50
(g) Independent Investigation...................................... 51
(h) Indemnification................................................ 52
(i) Benefit of Section 15.......................................... 52
(j) Pro Rata Treatment............................................. 52
(k) Assumption as to Payments...................................... 53
(l) Other Financings............................................... 53
(m) Interests of Banks............................................. 53
(n) Investments.................................................... 53
16. Exercise of Rights.................................................... 54
17. Notices............................................................... 54
18. Expenses.............................................................. 54
19. Indemnity............................................................. 55
20. Governing Law......................................................... 56
21. Invalid Provisions.................................................... 56
-iv-
<PAGE>
22. Maximum Interest Rate................................................. 56
23. Amendments............................................................ 57
24. Multiple Counterparts................................................. 57
25. Conflict.............................................................. 57
26. Survival.............................................................. 57
27. Parties Bound......................................................... 57
28. Assignments and Participations........................................ 57
29. Other Agreements...................................................... 59
30. Financial Terms....................................................... 59
EXHIBITS
- --------
Exhibit "A" - Notice of Borrowing
Exhibit "B" - Revolving Note
Exhibit "C" - Bridge Note
Exhibit "D" - Certificate of Compliance
Exhibit "E" - Form of Assignment and Acceptance Agreement
SCHEDULES
- ---------
Schedule 1 - Liens
Schedule 2 - List of Wells to be Drilled with Special Drilling Facility
Schedule 3 - Financial Condition
Schedule 4 - Liabilities
Schedule 5 - Litigation
Schedule 6 - Subsidiaries
Schedule 7 - Environmental Matters
Schedule 8 - Title Matters
Schedule 9 - Curative Matters
-v-
<PAGE>
RESTATED LOAN AGREEMENT
THIS RESTATED LOAN AGREEMENT (hereinafter referred to as the "Agreement")
executed as of the 17th day of February, 1997, by and between GOTHIC ENERGY
CORPORATION, an Oklahoma corporation ("Energy") and GOTHIC ENERGY OF TEXAS,
INC., an Oklahoma corporation ("Texas") GOTHIC GAS CORPORATION, an Oklahoma
corporation ("Gas") (Energy, Gas and Texas are hereinafter collectively referred
to as "Borrowers" and individually as a "Borrower") and BANK ONE, TEXAS, N.A., a
national banking association ("Bank One") and each of the financial institutions
which is a party hereto (as evidenced by the signature pages to this Agreement)
or which may from time to time become a party hereto pursuant to the provisions
of Section 28 hereof or any successor or assignee thereof (hereinafter
collectively referred to as "Banks", and individually, "Bank") and Bank One, as
Agent.
W I T N E S S E T H:
WHEREAS, Borrowers and Bank One entered into a Loan Agreement dated as of
January 19, 1996 (the "Loan Agreement") under the terms of which Bank One
agreed, subject to the satisfaction of certain conditions precedent set forth
therein, to provide Borrowers, Buttonwood Energy Corporation ("Buttonwood") and
Buttonwood Petroleum, Inc., ("Petroleum") with a revolving loan facility in
amounts of up to $20,000,000.00; and
WHEREAS, pursuant to a First Amendment to Loan Agreement dated as of
January 30, 1996, Buttonwood and Petroleum were joined as Borrowers under the
Loan Agreement and assumed any and all obligations due Bank One under the Loan
Agreement; and
WHEREAS, the Loan Agreement was thereafter amended pursuant to a Second
Amendment to Loan Agreement dated as of May 14, 1996, and a Third Amendment to
Loan Agreement dated July 31, 1996; and
WHEREAS, on the 9th day of May, 1996 Buttonwood merged into Petroleum with
Petroleum being the survivor; and
WHEREAS, on the 22nd day of October, 1996, Energy merged into a newly
formed, wholly-owned, subsidiary called Gothic Energy Newco, Inc., an Oklahoma
corporation ("Newco") with Newco being the survivor and on the same date Newco
changed its name to Gothic Energy Corporation; and
WHEREAS, the Loan Agreement was further amended pursuant to a Fourth
Amendment to Loan Agreement dated as of November 26, 1996; and
WHEREAS, on the 4th day of December, 1996, Petroleum merged into Energy
with Energy being the survivor; and
<PAGE>
WHEREAS, the Loan Agreement was further amended pursuant to a Fifth
Amendment to Loan Agreement dated December 27, 1996; and
WHEREAS, the Borrowers and Bank One have agreed to restate the Loan
Agreement to increase the amount of the reducing revolver, add a new bridge loan
facility, add a new Special Drilling Facility, add Gas as a Borrower, and make
certain other changes thereto.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereby agree to restate the Loan Agreement as
follows:
1. DEFINITIONS. When used herein the terms "Agent," "Agreement," "Bank",
"Banks", "Bank One," "Borrower," "Borrowers", "Energy", "Gas" and "Texas" shall
have the meanings indicated above. When used herein the following terms shall
have the following meanings:
(a) Acquisitions - The term "Acquisitions" is used herein as defined
------------
in Section 11(a)(vii) hereof.
(b) Advance or Advances - A loan or loans hereunder.
-------------------
(c) Affiliate - Any Person which, directly or indirectly, controls, is
---------
controlled by or is under common control with the relevant Person. For the
purposes of this definition, "control" (including, with correlative
meanings, the terms "controlled by" and "under common control with"), as
used with respect to any Person, shall mean a member of the board of
directors, a partner or an officer of such Person, or any other Person with
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, through the
ownership (of record, as trustee, or by proxy) of voting shares,
partnership interests or voting rights, through a management contract or
otherwise. Any Person owning or controlling directly or indirectly ten
percent or more of the voting shares, partnership interests or voting
rights, or other equity interest of another Person shall be deemed to be an
Affiliate of such Person.
(d) Assignment and Acceptance - A document substantially in the form
-------------------------
of Exhibit "E" hereto.
(e) Base Rate - As of any date, the fluctuating rate of interest per
---------
annum established from time to time by Agent as its Base Rate (which rate
of interest may not be the lowest, best or most favorable rate of interest
which Agent may charge on loans to its customers). Each change in the Base
Rate shall become effective without prior notice to Borrowers automatically
as of the opening of business on the date of such change in the Base Rate.
-2-
<PAGE>
(f) Base Rate Interest Period - With respect to any Base Rate Loan,
-------------------------
the period ending on the first day of each month, provided, however, that
(i) if any Base Rate Interest Period would end on a day which is not a
Business Day, such Interest Period shall be extended to the next succeeding
Business Day, and (ii) if any Base Rate Interest Period would otherwise end
after the Maturity Date such Interest Period shall end on the Maturity
Date.
(g) Base Rate Loans - Any loan during any period which bears interest
---------------
based upon the Base Rate or which would bear interest based upon the Base
Rate if the Maximum Rate ceiling was not in effect at that particular time.
(h) Base Rate Margin -
----------------
(i) For Revolving Loans the Base Rate Margin will be one
percent (1%) when any amount is outstanding on the Special Advance
Facility, the Special Drilling Facility or the Bridge Loan; at any
other time, the Base Rate Margin shall be zero percent (0%);
(ii) For the Bridge Loans the Base Rate Margin will be three
percent (3%) from the Effective Date through May 31, 1997, and
thereafter the Base Rate Margin shall be five percent (5%);
(iii) For the Special Advance Facility and the Special Drilling
Facility, the Base Rate Margin will be three percent (3%).
(i) Borrowing Base - The value assigned by the Banks from time to time
--------------
to the Oil and Gas Properties pursuant to Section 7 hereof. Until the next
determination of the Borrowing Base pursuant to Section 7(b) hereof the
Borrowing Base shall be $32,000,000.
(j) Borrowing Date - The date elected by Borrowers pursuant to Section
--------------
2(b) hereof for an Advance on the Revolving Loan.
(k) Bridge Loan - The $10,000,000 Loan made pursuant to Section 2(b)
-----------
hereof.
(l) Bridge Loan Commitment - As to all Banks, $10,000,000 and as to
----------------------
any Bank, its obligation with regard to the Bridge Loan in the amount set
forth opposite the name of such Bank on the signature pages hereto under
the heading "Bridge Loan Commitment".
(m) Bridge Loan Commitment Percentage - For each Bank, the percentage
---------------------------------
derived by dividing its Bridge Loan Commitment at the time of determination
by the Bridge
-3-
<PAGE>
Loan Commitment of all Banks at the time of determination. At Effective
Date, Bank One's Bridge Loan Commitment Percentage is 100%.
(n) Bridge Loan Maturity Date - September 1, 1997.
-------------------------
(o) Bridge Notes - The Bridge Notes described in Section 3 hereof.
------------
(p) Business Day - The normal banking hours during any day (other than
------------
Saturdays or Sundays) that banks are legally open for business in Dallas,
Texas.
(q) Change of Control - A Change of Control shall occur if any Person
-----------------
(or syndicate or group of Persons which is deemed a Person for the purposes
of Sections 13(d) or 14(d)(ii) of the Securities Act of 1934, as amended)
shall acquire, directly or indirectly an amount of issued and outstanding
voting stock of any Borrower (including the acquisition of newly-issued
stock) sufficient to change the control of such Borrower by causing the
election or change of a majority of the directors of such Borrower.
(r) Change of Management - A Change of Management shall occur if
--------------------
Michael Paulk ever ceases to act as President of Energy and a replacement
for such officer, acceptable to Agent, is not appointed within thirty (30)
days thereafter .
(s) Commitments - The Revolving Commitment and the Bridge Loan
-----------
Commitment.
(t) Current Assets - The total of the Borrowers' consolidated current
--------------
assets determined in accordance with GAAP, plus, as of any date, the
current unused availability on the Revolving Commitment.
(u) Current Liabilities - The total of Borrowers' consolidated current
-------------------
obligations as determined in accordance with GAAP, excluding therefrom
current maturities due on the Revolving Loan.
(v) Defaulting Bank - The term "Defaulting Bank" is used herein as
---------------
defined in Section 3(g) hereof.
(w) Effective Date - The date of this Agreement.
--------------
(x) Eligible Assignee - Any of (i) a Bank or any Affiliate of a Bank;
-----------------
(ii) a commercial bank organized under the laws of the United States, or
any state thereof, and having a combined capital and surplus of at least
$100,000,000; (iii) a commercial bank organized under the laws of any other
country which is a member of the Organization for
-4-
<PAGE>
Economic Cooperation and Development, or a political subdivision of any
such country, and having a combined capital and surplus of at least
$100,000,000.00, provided that such bank is acting through a branch or
agency located in the United States; and (iv) a Person that is primarily
engaged in the business of commercial banking and that (A) is a subsidiary
of a Bank, (B) a subsidiary of a Person of which a Bank is a subsidiary, or
(C) a Person of which a Bank is a subsidiary.
(y) Environmental Laws - The Comprehensive Environmental Response,
------------------
Compensation and Liability Act of 1980, as amended by the Super Fund
Amendments and Reauthorization Act of 1986, 42 U.S.C.A. (S)9601, et seq.,
-- ---
the Resource Conservation and Recovery Act, as amended by the Hazardous
Solid Waste Amendment of 1984, 42 U.S.C.A. (S)6901, et seq., the Clean Air
-- ---
Act, 42 U.S.C.A. (S)1251, et seq., the Toxic Substances Control Act, 15
-- ---
U.S.C.A. (S)2601, et seq., The Oil Pollution Act of 1990, 33 U.S.G.
-- ---
(S)2701, et seq., and all other laws, statutes, codes, acts, ordinances,
-- ---
orders, judgments, decrees, injunctions, rules, regulations, order and
restrictions of any federal, state, county, municipal and other
governments, departments, commissions, boards, agencies, courts,
authorities, officials and officers, domestic or foreign, relating to air
pollution, water pollution, noise control and/or the handling, discharge,
disposal or recovery of on-site or off-site asbestos or "hazardous
substances" as defined by 42 U.S.C. (S) 9601, et seq., as amended, as each
-- ---
of the foregoing may be amended from time to time.
(z) Environmental Liability - Any claim, demand, obligation, cause
-----------------------
of action, order, violation, damage, injury, judgment, penalty or fine,
cost of enforcement, cost of remedial action or any other costs or expense
whatsoever, including reasonable attorneys' fees and disbursements,
resulting from the violation or alleged violation of any Environmental Law
or the imposition of any Environmental Lien (as hereinafter defined) which
could reasonably be expected to individually or in the aggregate have a
Material Adverse Effect.
(aa) Environmental Lien - A Lien in favor of any court, governmental
------------------
agency or instrumentality or any other Person (i) for any Environmental
Liability or (ii) for damages arising from or cost incurred by such court
or governmental agency or instrumentality or other person in response to a
release or threatened release of asbestos or "hazardous substance" into the
environment, the imposition of which Lien could reasonably be expected to
have a Material Adverse Effect.
(bb) ERISA - The Employee Retirement Income Security Act of 1974, as
-----
amended.
(cc) Eurodollar Business Day - A Business Day on which dealings in
-----------------------
U.S. Dollar deposits are carried on in the London interbank market.
-5-
<PAGE>
(dd) Eurodollar Interest Period - With respect to any Eurodollar Loan
--------------------------
(i) initially, the period commencing on the date such Eurodollar Loan is
made and ending one (1), two (2) or three (3) months thereafter as selected
by the Borrowers pursuant to Section 4(a)(ii), and (ii) thereafter, each
period commencing on the day following the last day of the next preceding
Interest Period applicable to such Eurodollar Loan and ending one (1), two
(2) or three (3) months thereafter, as selected by the Borrowers pursuant
to Section 4(a)(ii); provided, however, that (i) if any Eurodollar Interest
Period would otherwise expire on a day which is not a Eurodollar Business
Day, such Interest Period shall expire on the next succeeding Eurodollar
Business Day unless the result of such extension would be to extend such
Interest Period into the next calendar month, in which case such Interest
Period shall end on the immediately preceding Eurodollar Business Day, (ii)
if any Eurodollar Interest Period begins on the last Eurodollar Business
Day of a calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such Interest Period)
such Interest Period shall end on the last Eurodollar Business Day of a
calendar month, and (iii) any Eurodollar Interest Period which would
otherwise expire after the Maturity Date shall end on such Maturity Date.
(ee) Eurodollar Loan - Any loan during any period which bears interest
---------------
at the Eurodollar Rate, or which would bear interest at such rate if the
Maximum Rate ceiling was not in effect at a particular time.
(ff) Eurodollar Margin - The fluctuating Eurodollar Margin in effect
-----------------
from day to day shall be:
(i) At any time any amount is outstanding on the Special Advance
Facility, the Special Drilling Facility or the Bridge Loan:
(A) three and three-quarters percent (3.75%) per annum
whenever the Total Outstandings are greater than 75% of the
Borrowing Base in effect at the time in question;
(B) three and one-half percent (3.50%) per annum whenever
the Total Outstandings are greater than 50%, but less than or
equal to 75%, of the Borrowing Base in effect at the time in
question; or
(C) three and one-quarter percent (3.25%) per annum whenever
the Total Outstandings are 50% or less of the Borrowing Base in
effect at the time in question.
-6-
<PAGE>
(ii) When there is no outstanding balance due on the Special
Advance Facility, the Special Drilling Facility or the Bridge Loan:
(A) two and one-half percent (2.50%) per annum whenever the
Total Outstandings are greater than 75% of the Borrowing Base in
effect at the time in question;
(B) two and one-quarter percent (2.25%) per annum whenever
the Total Outstandings are greater than 50%, but less than or
equal to 75%, of the Borrowing Base in effect at the time in
question; or
(C) two percent (2.00%) per annum whenever the Total
Outstandings are 50% or less of the Borrowing Base in effect at
the time in question.
(gg) Eurodollar Rate - With respect to each Eurodollar Interest
---------------
Period, the rate of interest per annum at which deposits in immediately
available and freely transferable funds in U.S. Dollars are offered to the
Agent (at approximately 10:00 a.m., Dallas, Texas time three Eurodollar
Business Days prior to the first day of each Eurodollar Interest Period) in
the London interbank market for delivery on the first day of such
Eurodollar Interest Period in an amount equal to or comparable to the
principal amount of the Eurodollar Loan to which such Eurodollar Interest
Period relates. Each determination of the Eurodollar Rate by the Agent
shall, in the absence of error, be conclusive and binding.
(hh) Financial Statements - Balance sheets, income statements,
--------------------
statements of cash flow and appropriate footnotes and schedules, prepared
in accordance with GAAP.
(ii) GAAP - Generally accepted accounting principles, consistently
----
applied.
(jj) General and Administrative Expenses - Expenses of providing
-----------------------------------
corporate, management, supervisory and engineering services and other
corporate services with respect to the management and assets of the
Borrowers, determined in accordance with GAAP.
(kk) Interest Payment Date - The earlier of (i) the last day of each
---------------------
Interest Period or (ii) the last day of each calendar month.
(ll) Interest Period - Any Base Rate Interest Period, or Eurodollar
---------------
Interest Period.
-7-
<PAGE>
(mm) Letters of Credit - The term "Letters of Credit" is used herein
-----------------
as defined in Section 2(d) hereof.
(nn) Lien - Any mortgage, deed of trust, pledge, security interest,
----
assignment, encumbrance or lien (statutory or otherwise) of every kind and
character.
(oo) Loans - The Revolving Loan and the Bridge Loan.
-----
(pp) Loan Documents - This Agreement, the Notes, the Security
--------------
Instruments and all other documents executed in connection with the
transaction described in this Agreement.
(qq) Majority Banks - Banks holding 100% or more of the Commitments.
--------------
(rr) Material Adverse Effect - Any circumstance or event which could
-----------------------
have a material adverse effect on (i) the assets or properties,
liabilities, financial condition, business, operations, affairs or
circumstances of the Borrowers from the facts represented or warranted in
this Agreement or any other Security Instrument, or (ii) the ability of the
Borrowers to carry out their respective businesses as of the date of this
Agreement or as proposed at the date of this Agreement to be conducted or
to meet their obligations under the Note, this Agreement or the other Loan
Documents on a timely basis.
(ss) Maximum Rate - At any particular time in question, the maximum
------------
non-usurious rate of interest which under applicable law may then be
charged on the Note. If such Maximum Rate changes after the date hereof,
the Maximum Rate shall be automatically increased or decreased, as the case
may be, without notice to Borrowers from time to time as the effective date
of each change in such Maximum Rate.
(tt) Monthly Commitment Reduction - The term "Monthly Commitment
----------------------------
Reduction" is used herein, as defined in Section 2(g) hereof.
(uu) Net Cash Flow - Net Income plus non-cash charges (such as
------------- ----
depreciation, depletion or amortization) excluding gains or losses from the
sale of capital assets minus preferred stock cash dividends, calculated on
-----
a consolidated basis in accordance with GAAP.
(vv) Net Income - Borrowers' consolidated net income after income
----------
taxes calculated in accordance with GAAP.
(ww) Net Revenues - The sum of (i) revenue received by or on behalf of
------------
Borrowers with respect to the Oil and Gas Properties during any period plus
----
(ii) Overhead
-8-
<PAGE>
Reimbursement Revenue, less the sum of (i) production taxes attributable to
----
the Oil and Gas Properties and (ii) lease operating expenses attributable
to the Oil and Gas Properties, to the extent that such production taxes and
lease operating expenses are actually paid during the period, all as
calculated in accordance with GAAP.
(xx) Notes - The Revolving Notes and the Bridge Notes, substantially
-----
in the form of Exhibit "B" and "C" hereto issued or to be issued hereunder
to each Bank, respectively, to evidence the indebtedness to such Bank
arising by reason of the Advances on the Revolving Loan and the Bridge
Loan, together with all modifications, renewals and extensions thereof or
any part thereof.
(yy) Oil and Gas Properties - All oil, gas and mineral properties
----------------------
and interests, related personal properties, in which Borrowers grant to the
Banks either a first and prior lien and security interest pursuant to
Section 6 hereof or negative pledge pursuant to Section 13 hereof.
(zz) Other Financing - The term "Other Financing" is used herein as
---------------
defined in Section 15(l) hereof.
(aaa) Overhead Reimbursement Revenue - Revenue received by one or
------------------------------
more Borrowers to reimburse such Borrower or Borrowers for overhead
expenses incurred in connection with the operation of oil and gas
properties by such Borrower or Borrowers.
(bbb) Payor - The term "Payor" is used herein as defined in Section
-----
3(i)hereof.
(ccc) Paulk Note - That certain Promissory Note in the original
----------
principal amount of $158,000 dated as of November 26, 1996 executed by
Michael Paulk payable to the order of Bank One.
(ddd) Permitted Liens - The term Permitted Lien shall mean (i)
---------------
royalties, overriding royalties, reversionary interests, production
payments and similar burdens; (ii) sales contracts or other arrangements
for the sale of production of oil, gas or associated liquid or gaseous
hydrocarbons which would not (when considered cumulatively with the matters
discussed in clause (i) above) deprive any Borrower of any material right
in respect of any such Borrower's assets or properties (except for rights
customarily granted with respect to such contracts and arrangements); (iii)
statutory Liens for taxes or other assessments that are not yet delinquent
(or that, if delinquent, are being contested in good faith by appropriate
proceedings, levy and execution thereon having been stayed and continue to
be stayed and for which such Borrower has set aside on its books adequate
reserves in accordance with GAAP); (iv) easements, rights of way,
servitudes, permits, surface leases and other rights in respect to surface
operations, pipelines, grazing, logging,
-9-
<PAGE>
canals, ditches, reservoirs or the like, conditions, covenants and other
restrictions, and easements of streets, alleys, highways, pipelines,
telephone lines, power lines, railways and other easements and rights of
way on, over or in respect of any Borrower's assets or properties and that
do not individually or in the aggregate, cause a Material Adverse Effect;
(v) materialmen's, mechanic's, repairman's, employee's, warehousemen's,
landlord's, carrier's, pipeline's, contractor's, sub-contractor's,
operator's, non-operator's (arising under operating or joint operating
agreements), and other Liens (including any financing statements filed in
respect thereof) incidental to obligations incurred by any Borrower in
connection with the construction, maintenance, development, transportation,
storage or operation of such Borrower's assets or properties to the extent
not delinquent (or which, if delinquent, are being contested in good faith
by appropriate proceedings and for which such Borrower has set aside on its
books adequate reserves in accordance with GAAP); (vi) all contracts,
agreements and instruments, and all defects and irregularities and other
matters affecting such Borrower's assets and properties which were in
existence at the time such Borrower's assets and properties were originally
acquired by such Borrower and all routine operational agreements entered
into in the ordinary course of business, which contracts, agreements,
instruments, defects, irregularities and other matters and routine
operational agreements are not such as to, individually or in the
aggregate, interfere materially with the operation, value or use of such
Borrower's assets and properties, considered in the aggregate; (vii) liens
in connection with workmen's compensation, unemployment insurance or other
social security, old age pension or public liability obligations; (viii)
legal or equitable encumbrances deemed to exist by reason of the existence
of any litigation or other legal proceeding or arising out of a judgment or
award with respect to which an appeal is being prosecuted in good faith and
levy and execution thereon have been stayed and continue to be stayed; (ix)
rights reserved to or vested in any municipality, governmental, statutory
or other public authority to control or regulate such Borrower's assets and
properties in any manner, and all applicable laws, rules and orders from
any governmental authority; (x) landlord's liens; (xi) Liens incurred
pursuant to the Security Instruments; and (xii) Liens existing at the date
of this Agreement which have been disclosed to Banks in the Borrowers'
September 30, 1996 Financial Statements or identified in Schedule "1"
hereto.
(eee) Person - An individual, a corporation, a partnership, an
------
association, a trust or any other entity or organization, including a
government or political subdivision or an agency or instrumentality
thereof.
(fff) Plan - Any plan subject to Title IV of ERISA and maintained by
----
any Borrower, or any such plan to which a Borrower is required to
contribute on behalf of its employees.
(ggg) Pro Rata or Pro Rata Part - For each Bank, (i) for all purposes
-------------------------
where no Loan is outstanding, such Bank's Revolving Commitment Percentage
for matters relating to
-10-
<PAGE>
the Revolving Commitment and its Bridge Loan Commitment Percentage for
matters relating to the Bridge Loan Commitment and (ii) otherwise, the
proportion which the portion of the outstanding Loans owed to such Bank
bears to the aggregate outstanding Loans owed to all Banks at the time in
question (calculated separately for each Bank for the Revolving Loan and
the Bridge Loan).
(hhh) Rainwater Note - That certain Promissory Note in the original
--------------
principal amount of $158,000 dated as of November 26, 1996 executed by John
L. Rainwater payable to the order of Bank One.
(iii) Reimbursement Obligations - At any time, the obligations of the
-------------------------
Borrowers in respect of all Letters of Credit then outstanding to reimburse
amounts paid by any Bank in respect of any drawing or drawings under a
Letter of Credit.
(jjj) Required Payment - The term "Required Payment" is used herein
----------------
as defined in Section 3(i) hereof.
(kkk) Revolving Commitment - (A) For all Banks, the lesser of (i)
-------------------- ------
$75,000,000 or (ii) the Borrowing Base, as reduced from time to time
pursuant to Sections 2 and 7 hereof, plus the Special Advance Facility and
----
the Special Drilling Facility, and (B) as to any Bank, its obligation to
make Advances hereunder on the Revolving Loan and purchase participations
in Letters of Credit issued hereunder by the Agent in amounts not
exceeding, in the aggregate, the amount set forth opposite the name of such
Bank on the signature pages hereto under the heading "Revolving
Commitment".
(lll) Revolving Commitment Percentage - For each Bank the percentage
-------------------------------
derived by dividing its Revolving Commitment at the time of the termination
by the Revolving Commitments of all Banks at the time of determination. At
the Effective Date, Bank One's Revolving Commitment Percentage is 100%.
(mmm) Revolving Loan - Loan or loans made under the Revolving
--------------
Commitment pursuant to Section 2 hereof.
(nnn) Revolving Maturity Date - January 30, 1999.
-----------------------
(ooo) Security Instruments - The term Security Instruments is used
--------------------
collectively herein to mean this Agreement, all Deeds of Trust, Mortgages,
Security Agreements, Assignments of Production and Financing Statements,
all Pledge Agreements, Security Agreements and other collateral documents
covering the Oil and Gas Properties and related personal property,
equipment, oil and gas inventory, stock and partnership interest and
-11-
<PAGE>
proceeds of the foregoing, all such documents to be in form and substance
satisfactory to Agent.
(ppp) Special Advance Facility - An Advance under the Revolving
------------------------
Commitment made to Borrowers pursuant to the provisions of Section 2(h)
hereof.
(qqq) Special Drilling Facility - An Advance under the Revolving
-------------------------
Commitment made to Borrowers pursuant to the provisions of Section 2(i)
hereof.
(rrr) Subsidiary - Any corporation or other entity of which
----------
securities or other ownership interests having ordinary voting power to
elect a majority of the board of directors or other persons performing
similar functions are at the time directly or indirectly owned by any
Borrower or another subsidiary.
(sss) Tangible Net Worth - An amount equal to the Borrowers'
------------------
consolidated stockholders equity, as determined in accordance with GAAP.
(ttt) Total Outstandings - As of any date, the sum of (i) the total
------------------
principal balance outstanding on the Notes, plus (ii) the total face amount
of all outstanding Letters of Credit plus (iii) the total amount of all
unpaid Reimbursement Obligations.
(uuu) Tranche - A Eurodollar Loan or a Base Rate Loan.
-------
(vvv) Unscheduled Redeterminations - A redetermination of the
----------------------------
Borrowing Base made at any time other than on the dates set for the regular
semi-annual redetermination of the Borrowing Base which are made (A) at the
reasonable request of Borrowers, (B) at any time it appears to Agent or
Majority Banks, in the exercise of their reasonable discretion, that either
(i) there has been a decrease in the value of the Oil and Gas Properties,
or (ii) an event has occurred which is reasonably expected to have a
Material Adverse Effect.
-12-
<PAGE>
2. COMMITMENTS OF THE BANK.
(a) Terms of Revolving Commitment. On the terms and conditions
-----------------------------
hereinafter set forth, each Bank agrees severally to make Advances to the
Borrowers from time to time during the period beginning on the Effective
Date and ending on the Maturity Date in such amounts as the Borrowers may
request up to an amount not to exceed, in the aggregate principal amount
outstanding at any time, the Revolving Commitment. The obligation of the
Borrowers hereunder shall be evidenced by this Agreement and the Note
issued in connection herewith, said Note to be as described in Section 3
hereof. Notwithstanding any other provision of this Agreement, no Advance
shall be required to be made hereunder if any Event of Default (as
hereinafter defined) has occurred and is continuing or if any event or
condition has occurred or failed to occur which with the passage of time or
service of notice, or both, would constitute an Event of Default. Each
Advance under the Revolving Commitment shall be an aggregate amount of at
least $100,000 or a whole number multiple thereof. Irrespective of the
face amount of the Revolving Note or Notes, the Banks shall never have the
obligation to Advance any amount or amounts in excess of the Revolving
Commitment or to increase the Revolving Commitment. The total number of
Tranches under the Revolving Commitment (exclusive of Tranches under the
Special Advance Facility or the Special Drilling Facility) which may be
outstanding at any time hereunder shall never exceed three (3), whether
such Tranches are Base Rate Loans, Eurodollar Loans, or a combination
thereof.
(b) Bridge Loan. On the terms and conditions hereinafter set forth,
-----------
Bank One agrees to make an advance to the Borrowers on the Effective Date
equal to $10,000,000. No portion of the Bridge Loan, once repaid, may be
reborrowed by Borrowers.
(c) Procedure for Borrowing. Whenever the Borrowers desire an Advance
-----------------------
hereunder, they shall give Agent telegraphic, telex, facsimile or
telephonic notice ("Notice of Borrowing") of such requested Advance, which
in the case of telephonic notice, shall be promptly confirmed in writing.
Each Notice of Borrowing shall be in the form of Exhibit "A" attached
hereto and shall be received by Agent not later than 11:00 a.m. Dallas,
Texas time, (i) one Business Day prior to the Borrowing Date in the case of
the Base Rate Loan, or (ii) three Business Days prior to any proposed
Borrowing Date in the case of Eurodollar Loans. Each Notice of Borrowing
shall specify (i) the Borrowing Date (which, if at Base Rate Loan, shall be
a Business Day and if a Eurodollar Loan, a Eurodollar Business Day), (ii)
the principal amount to be borrowed, (iii) the portion of the Advance
constituting Base Rate Loans and/or Eurodollar Loans, (iv) if any portion
of the proposed Advance is to constitute Eurodollar Loans, the initial
Interest Period selected by Borrower pursuant to Section 4 hereof to be
applicable thereto, and (v) the date upon which such Advance is required.
Upon receipt of such Notice, Agent shall advise each Bank thereof;
provided, that if the Banks have received at least one (1) day's notice of
such Advance prior
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<PAGE>
to funding of a Base Rate Loan, or at least three (3) days' notice of each
Advance prior to funding in the case of a Eurodollar Loan, each Bank shall
provide Agent at its office at 1717 Main Street, Dallas, Texas 75201, not
later than 1:00 p.m., Dallas, Texas time, on the Borrowing Date, in
immediately available funds, its pro rata share of the requested Advance,
but the aggregate of all such fundings by each Bank shall never exceed such
Bank's Revolving Commitment. Not later than 2:00 p.m., Dallas, Texas time,
on the Borrowing Date, Agent shall make available to the Borrowers at the
same office, in like funds, the aggregate amount of such requested Advance.
Neither Agent nor any Bank shall incur any liability to the Borrowers in
acting upon any Notice referred to above which Agent or such Bank believes
in good faith to have been given by a duly authorized officer or other
person authorized to borrow on behalf of Borrowers or for otherwise acting
in good faith under this Section 2(b). Upon funding of Advances by Banks in
accordance with this Agreement, pursuant to any such Notice, the Borrowers
shall have effected Advances hereunder.
(d) Letters of Credit. On the terms and conditions hereinafter set
-----------------
forth, the Agent shall from time to time during the period beginning on the
Effective Date and ending on the Maturity Date upon request of Borrowers
issue standby and/or commercial Letters of Credit for the account of
Borrowers (the "Letters of Credit") in such face amounts as Borrowers may
request, but not to exceed in the aggregate face amount at any time
outstanding the sum of One Million Dollars ($1,000,000.00). The face amount
of all Letters of Credit issued and outstanding hereunder shall be
considered as Advances for Borrowing Base purposes and all payments made by
the Agent on such Letters of Credit shall be considered as Advances under
the Note. Each Letter of Credit issued for the account of Borrowers
hereunder shall (i) be in favor of such beneficiaries as specifically
requested by Borrowers, (ii) have an expiration date not exceeding the
Maturity Date, and (iii) contain such other terms and provisions as may be
required by Bank. Each Bank (other than Agent) agrees that, upon issuance
of any Letter of Credit hereunder, it shall automatically acquire a
participation in the Agent's liability under such Letter of Credit in an
amount equal to such Bank's Revolving Commitment Percentage of such
liability, and each Bank (other than Agent) thereby shall absolutely,
unconditionally and irrevocably assume, as primary obligor and not as
surety, and shall be unconditionally obligated to Agent to pay and
discharge when due, its Revolving Commitment Percentage of Agent's
liability under such Letter of Credit. The Borrowers, and each of them,
hereby unconditionally agree to pay and reimburse the Agent for the amount
of each demand for payment under any Letter of Credit that is in
substantial compliance with the provisions of any such Letter of Credit at
or prior to the date on which payment is to be made by the Agent to the
beneficiary thereunder, without presentment, demand, protest or other
formalities of any kind. Upon receipt from any beneficiary of any Letter of
Credit of any demand for payment under such Letter of Credit, the Agent
shall promptly notify the Borrowers of the demand and the date upon which
such payment is to be made by the
-14-
<PAGE>
Agent to such beneficiary in respect of such demand. Forthwith upon receipt
of such notice from the Agent, Borrowers shall advise the Agent whether or
not they intend to borrow hereunder to finance their obligations to
reimburse the Agent, and if so, submit a Notice of Borrowing as provided in
Section 2(b) hereof.
(e) Procedure for Obtaining Letters of Credit. The amount and date of
-----------------------------------------
issuance, renewal, extension or reissuance of a Letter of Credit pursuant
to the Banks' commitment above in Section 2(c) shall be designated by
Borrowers' written request delivered to Agent at least three (3) Business
Days prior to the date of such issuance, renewal, extension or reissuance.
Concurrently with or promptly following the delivery of the request for a
Letter of Credit, Borrowers shall execute and deliver to the Agent an
application and agreement with respect to the Letters of Credit, said
application and agreement to be in the form used by the Agent. The Agent
shall not be obligated to issue, renew, extend or reissue such Letters of
Credit if (A) the amount thereon when added to the amount of the
outstanding Letters of Credit exceeds One Million Dollars ($1,000,000.00)
or (B) the amount thereof when added to the Total Outstandings would exceed
the Revolving Commitment. Borrowers agree to pay the Agent for the benefit
of the Banks commissions for issuing the Letters of Credit (calculated
separately for each Letter of Credit) in an amount equal to the greater of
(i) one percent (1%) per annum on the maximum face amount of the Letter of
Credit or (ii) $400.00. Such commissions shall be payable prior to the
issuance of each Letter of Credit and thereafter on each anniversary date
of such issuance while such Letter of Credit is outstanding.
(f) Voluntary Reduction of Revolving Commitment. The Borrowers may at
-------------------------------------------
any time, or from time to time, upon not less than three (3) Business Days
prior written notice to Agent, reduce or terminate the Revolving
Commitment; provided, however, that (i) each reduction in the Revolving
Commitment must be in the amount of $100,000 or more, in increments of
$100,000 and (ii) each reduction must be accompanied by a prepayment of the
Notes in the amount by which the outstanding principal balance of the Note
exceeds the Revolving Commitment as reduced pursuant to this Section 2.
(g) Monthly Commitment Reduction. The Revolving Commitment shall be
----------------------------
reduced as of the first day of each month beginning on the first day of the
first month after the Effective Date by an amount determined by the Banks
pursuant to Section 7(b) hereof (the "Monthly Commitment Reduction"). The
Monthly Commitment Reduction shall be $240,000 on March 1, 1997, and
thereafter, beginning April 1, 1997, $475,000.00 per month until
redetermined pursuant to Section 7(b) hereof.
(h) Special Advance Facility. On the terms and conditions hereinafter
------------------------
set forth, each Bank agrees severally from time to time to make available
to Borrowers upon their written request certain amounts in the form of a
Special Advance Facility to be used for the
-15-
<PAGE>
sole purpose of acquisition of oil and gas properties. Within a reasonable
time after the receipt of a written request for a Special Advance Facility,
Agent shall notify Borrowers of the amount and the maturity of any such
Special Advance Facility. It is expressly understood that the Banks have no
obligation to designate the Special Advance Facility at any particular
amount, except in their discretion. Any Advance on the Special Advance
Facility shall be an Advance or Advances under the Revolving Commitment and
such Special Advance Facility shall be available to Borrowers in one or
more Advances, but all amounts, once repaid, in whole or in part, may not
be reborrowed. At the Effective Date the amount available as a Special
Advance Facility shall be $0.
(i) Special Drilling Facility. On the terms and conditions
-------------------------
hereinafter set forth, each Bank agrees severally from time to time to make
available to Borrowers upon their written request certain amounts in the
form of a Special Drilling Facility to be used for the sole purpose of
development drilling on the Oil and Gas Properties. Within a reasonable
time after the receipt of a written request for a Special Drilling
Facility, Agent shall notify Borrowers of the amount, maturity and purpose
for which the funds shall be used for such Special Drilling Facility. It
is expressly understood that the Banks have no obligation to designate the
Special Drilling Facility at any particular amount, except in their
discretion. After designation of a Special Drilling Facility, any request
for an Advance under the Special Drilling Facility shall be accompanied by
an AFE or completion information or other information covering the well or
wells to be drilled in connection with the Advance, such information to be
in form and substance satisfactory to Agent. At the Agent's discretion and
based on the Agent's assessment of the information provided, Agent shall
notify Borrowers of the amount, if any, of any such Advance. It is
expressly understood that the Agent has no obligation to designate an
Advance under the Special Drilling Facility at any particular amount,
except in its discretion. Any Advance on the Special Drilling Facility
shall be a Advance or Advances under the Revolving Commitment and such
Special Drilling Facility shall be available to Borrowers, at the Agent's
discretion, in one or more Advances, but all amounts, once repaid, in whole
or in part, may not be reborrowed. At the Effective Date, there shall be
available to Borrowers a Special Drilling Facility of $2,000,000, with a
maturity of September 1, 1997, such Special Drilling Facility to be used to
drill the oil and gas wells designated on Schedule 2 hereto.
(j) Additional Reduction of Availability Under Revolving Commitment.
---------------------------------------------------------------
The availability under the Revolving Commitment shall be reduced dollar for
dollar by the face amount of the Paulk Note and the Rainwater Note. If a
default occurs on either the Paulk Note or the Rainwater Note, or both,
whether as a result of failure to pay on maturity or upon acceleration or
otherwise, and such Note or Notes are guaranteed by Energy, Bank One shall
give the Agent notice thereof and the Agent shall give Energy written
notice of such default pursuant to the provisions of Energy's Guaranty. If
such defaulted Note or Notes are not paid within five (5) days of such
written notice, the Banks shall make an
-16-
<PAGE>
Advance against the Revolving Commitment to pay the total amount due to
Bank One on the defaulted Note or Notes which are guaranteed by Energy,
including principal, interest and expense without further action being
required by the Borrowers, Bank One or the Banks hereunder. The Borrowers
specifically grant to the Banks the authority to make such Advance or
Advances on the Revolving Commitment to pay amounts due Bank One on any
such defaulted Note or Notes. Within five (5) Business Days after such
Advance, the Agent shall give written notice thereof to the Borrowers.
However, failure to give such notice will not affect the validity of such
Advance.
(k) Several Obligations. The obligations of the Banks under the
-------------------
Revolving Commitment are several and not joint. The failure of any Bank to
make an Advance required to be made by it shall not relieve any other Bank
of its obligation to make its Advance, and no Bank shall be responsible for
the failure of any other Bank to make the Advance to be made by such other
Bank. No Bank shall be required to lend hereunder any amount in excess of
its legal lending limit.
(l) Limited Liability of Gas. While the obligations of the Borrowers
------------------------
under this Agreement and the Notes shall be joint and several obligations
of Energy, Texas and Gas, the liability of Gas thereunder shall be limited
to the maximum amount of liability that can be incurred without rendering
the obligations of Gas under the Loan Documents voidable under applicable
law relating to fraudulent conveyance or fraudulent transfer, and not for
any greater amount.
3. NOTES EVIDENCING LOANS. The loans described above in Section 2 shall
be evidenced by a promissory notes of Borrowers as follows:
(a) Form of Revolving Notes - The Revolving Loan shall be evidenced by
-----------------------
a Note or Notes in the aggregate face amount of $75,000,000, and shall be
in the form of Exhibit "B" hereto with appropriate insertions, which Note
or Notes shall replace the $20,000,000 Revolving Note dated January 19,
1996 and the $5,000,000 Acquisition Note dated December 27, 1996.
Notwithstanding the face amount of the Notes, the actual principal amount
due from the Borrowers to Banks on account of the Notes, as of any date of
computation, shall be the sum of Advances then and theretofore made on
account thereof, less all principal payments actually received by Banks in
collected funds with respect thereto. Although the Notes may be dated as
of the Effective Date, interest in respect thereof shall be payable only
for the period during which the loans evidenced thereby are outstanding
and, although the stated amount of the Notes may be higher, the Notes shall
be enforceable, with respect to Borrowers' obligation to pay the principal
amount thereof, only to the extent of the unpaid principal amount of the
loans.
-17-
<PAGE>
(b) Form of Bridge Notes - The Bridge Loan shall be evidenced by a
--------------------
Bridge Note or Notes in the aggregate face amount of $10,000,000, and shall
be in the form of Exhibit "C" hereto with appropriate insertions.
(c) Issuance of Additional Notes - At the Effective Date there shall
----------------------------
be outstanding (i) one Revolving Note in the aggregate face amount of
$75,000,000 payable to the order of Bank One, and (ii) one Bridge Note, in
the aggregate face amount of $10,000,000 payable to Bank One. From time to
time new Notes may issued to other Banks as such Banks become parties to
this Agreement. Upon request from Agent, the Borrowers shall execute and
deliver to Agent any such new or additional Notes. From time to time as
new Notes are issued the Agent shall require that each Bank exchange their
Notes for newly issued Notes to better reflect the extent of each Bank's
Commitments hereunder.
(d) Interest Rates - The unpaid principal balance of the Notes shall
--------------
bear interest from time to time as follows:
(i) Revolving Notes. Interest on the Revolving Notes shall bear
---------------
interest from time to time as set forth in Section 4 hereof;
(ii) Bridge Notes. The unpaid principal balance of the Bridge
------------
Notes shall bear interest from time to time as set forth in Sections
4(a) and (d) hereof.
(e) Payment of Interest - Interest on the Notes shall be payable on
-------------------
each Interest Payment Date.
(f) Payment of Principal -
--------------------
(i) Revolving Notes. Principal of the Revolving Note or Notes
---------------
shall be due and payable to the Agent for the ratable benefit of the
Banks on the Revolving Maturity Date unless earlier due in whole or in
part as a result of an acceleration of the amount due or pursuant to
the mandatory prepayment provisions of Section 9(b) hereof or as
required under Sections 2(h) and 2(i) hereof;
(ii) Bridge Notes. Principal of the Bridge Note or Notes shall
------------
be due and payable to the Agent for the ratable benefit of the Banks
on the Bridge Loan Maturity Date unless earlier due in whole or in
part as a result of an acceleration of the amount due or pursuant to
the mandatory prepayment provisions of Section 9(b) hereof;
-18-
<PAGE>
(g) Payment to Banks - Each Bank's Pro Rata Part of payment or
----------------
prepayment of the Loans shall be directed by wire transfer to such Bank by
the Agent at the address provided to the Agent for such Bank for payments
no later than 2:00 p.m., Dallas, Texas, time on the Business Day such
payments or prepayments are deemed hereunder to have been received by
Agent; provided, however, in the event that any Bank shall have failed to
make an Advance as contemplated under Section 2 hereof (a "Defaulting
Bank") and the Agent or another Bank or Banks shall have made such Advance,
payment received by Agent for the account of such Defaulting Bank or Banks
shall not be distributed to such Defaulting Bank or Banks until such
Advance or Advances shall have been repaid in full to the Bank or Banks who
funded such Advance or Advances. Any payment or prepayment received by
Agent at any time after 12:00 noon, Dallas, Texas, time on a Business Day
shall be deemed to have been received on the next Business Day. Interest
shall cease to accrue on any principal as of the end of the day preceding
the Business Day on which any such payment or prepayment is deemed
hereunder to have been received by Agent. If Agent fails to transfer any
principal amount to any Bank as provided above, then Agent shall promptly
direct such principal amount by wire transfer to such Bank.
(h) Sharing of Payments, Etc. - If any Bank shall obtain any payment
-------------------------
(whether voluntary, involuntary, or otherwise) on account of the Loans,
(including, without limitation, any set-off) which is in excess of its Pro
Rata Part of payments on either of the Loans, as the case may be, obtained
by all Banks, such Bank shall purchase from the other Banks such
participation as shall be necessary to cause such purchasing Bank to share
the excess payment pro rata with each of them; provided that, if all or any
portion of such excess payment is thereafter recovered from such purchasing
Bank, the purchase shall be rescinded and the purchase price restored to
the extent of the recovery. The Borrowers agree that any Bank so purchasing
a participation from another Bank pursuant to this Section may, to the
fullest extent permitted by law, exercise all of its rights of payment
(including the right of offset) with respect to such participation as fully
as if such Bank were the direct creditor of the Borrowers in the amount of
such participation.
(i) Non-Receipt of Funds by the Agent - Unless the Agent shall have
---------------------------------
been notified by a Bank or the Borrowers (the "Payor") prior to the date on
which such Bank is to make payment to the Agent of the proceeds of a Loan
to be made by it hereunder or the Borrowers is to make a payment to the
Agent for the account of one or more of the Banks, as the case may be (such
payment being herein called the "Required Payment"), which notice shall be
effective upon receipt, that the Payor does not intend to make the Required
Payment to the Agent, the Agent may assume that the Required Payment has
been made and may, in reliance upon such assumption (but shall not be
required to), make the amount thereof available to the intended recipient
on such date and, if the Payor has not in fact made the Required Payment to
the Agent, the recipient of such payment shall, on demand, pay to the Agent
the amount made available to it together with interest thereon in respect
of
-19-
<PAGE>
the period commencing on the date such amount was made available by the
Agent until the date the Agent recovers such amount at the rate applicable
to such portion of the applicable Loan.
(j) Capital Adequacy - If either (i) the introduction or
----------------
implementation of or the compliance with or any change in or in the
interpretation of any law, rule or regulation or (ii) the introduction or
implementation of or the compliance with any mandatory 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 Bank or any
corporation controlling any Bank as a result of maintaining the Loans, then
within fifteen (15) days after demand by such Bank, the Borrowers will pay
to such Bank, from time to time as specified by such Bank, such additional
amount or amounts which such Bank shall reasonably determine to be
appropriate to compensate such Bank or any corporation controlling such
Bank in light of such circumstances, to the extent that such Bank
reasonably determines that the amount of any such capital would be
increased, or the rate of return on any such capital would be reduced in
whole or in part, based on the existence of the amount of the Loans or such
Bank's Commitment under this Agreement.
4. INTEREST RATES.
(a) Options.
-------
(i) Base Rate Loans. Borrowers agree to pay interest on the
---------------
Notes calculated on the basis of the actual days elapsed in a year
consisting of 365 or, if appropriate, 366 days with respect to the
unpaid principal amount of each Base Rate Loan from the date the
proceeds thereof are made available to Borrowers until maturity
(whether by acceleration or otherwise), at a varying rate per annum
equal to the lesser of (i) the Maximum Rate (defined herein), or (ii)
the sum of the Base Rate plus the Base Rate Margin. Subject to the
provisions of this Agreement as to prepayment, the principal of the
Notes representing Base Rate Loans shall be payable as specified in
Section 3(d) hereof and the interest in respect of each Base Rate Loan
shall be payable on each Interest Payment Date. Past due principal
and, to the extent permitted by law, past due interest in respect to
each Base Rate Loan, shall bear interest, payable on demand, at a rate
per annum equal to the Maximum Rate.
(ii) Eurodollar Loans. Borrowers agree to pay interest
----------------
calculated on the basis of a year consisting of 360 days with respect
to the unpaid principal amount of each Eurodollar Loan from the date
the proceeds thereof
-20-
<PAGE>
are made available to Borrowers until maturity (whether by
acceleration or otherwise), at a varying rate per annum equal to the
lesser of (i) the Maximum Rate, or (ii) the Eurodollar Rate plus the
Eurodollar Margin. Subject to the provisions of this Agreement with
respect to prepayment, the principal of the Notes shall be payable as
specified in Section 3(d) hereof and the interest with respect to each
Eurodollar Loan shall be payable on each Interest Payment Date. Past
due principal and, to the extent permitted by law, past due interest
shall bear interest, payable on demand, at a rate per annum equal to
the Maximum Rate. Upon three (3) Eurodollar Business Days' written
notice prior to the making by the Banks of any Eurodollar Loan (in the
case of the initial Interest Period therefor) or the expiration date
of each succeeding Interest Period (in the case of subsequent Interest
Periods therefor), Borrowers shall have the option, subject to
compliance by Borrowers with all of the provisions of this Agreement,
as long as no Event of Default exists, to specify whether the Interest
Period commencing on any such date shall be a one (1), two (2) or
three (3) month period. If Agent shall not have received timely notice
of a designation of such Interest Period as herein provided, Borrowers
shall be deemed to have elected to convert all maturing Eurodollar
Loans to Base Rate Loans.
(b) Interest Rate Determination. The Agent shall determine each
---------------------------
interest rate applicable to the Loans hereunder. The Agent shall give
prompt notice to the Borrowers of each rate of interest so determined and
its determination thereof shall be conclusive absent error.
(c) Conversion Option. Borrowers may elect from time to time (i) to
-----------------
convert all or any part of its Eurodollar Loans to Base Rate Loans by
giving Agent irrevocable notice of such election in writing prior to 10:00
a.m. (Dallas, Texas time) on the conversion date and such conversion shall
be made on the requested conversion date, provided that any such conversion
of Eurodollar Loan shall only be made on the last day of the Eurodollar
Interest Period with respect thereof, (ii) to convert all or any part of
its Base Rate Loans to Eurodollar Loans by giving the Agent irrevocable
written notice of such election three (3) Eurodollar Business Days prior to
the proposed conversion and such conversion shall be made on the requested
conversion date or, if such requested conversion date is not a Eurodollar
Business Day or a Business Day, as the case may be, on the next succeeding
Eurodollar Business Day or Business Day, as the case may be. Any such
conversion shall not be deemed to be a prepayment of any of the loans for
purposes of this Agreement on the Notes.
(d) Recoupment. If at any time the applicable rate of interest
----------
selected pursuant to Sections 4(a)(i) or 4(a)(ii) above shall exceed the
Maximum Rate, thereby causing the
-21-
<PAGE>
interest on the Notes to be limited to the Maximum Rate, then any
subsequent reduction in the interest rate so selected or subsequently
selected shall not reduce the rate of interest on the Notes below the
Maximum Rate until the total amount of interest accrued on the Note equals
the amount of interest which would have accrued on the Notes if the rate or
rates selected pursuant to Sections 4(a)(i) or (ii), as the case may be,
had at all times been in effect.
5. SPECIAL PROVISIONS RELATING TO EURODOLLAR LOANS.
(a) Unavailability of Funds or Inadequacy of Pricing. In the event
------------------------------------------------
that, in connection with any proposed Eurodollar Loan, any Bank (i) shall
have determined that U.S. Dollar deposits of the relevant amount and for
the relevant Eurodollar Interest Period for Eurodollar Loans are not
available to such Bank in the London interbank market; or (ii) in good
faith determines that the Eurodollar Interest Rate will not adequately
reflect the cost to the Banks of maintaining or funding the Eurodollar
Loans for such Interest Period, the obligations of the Banks to make the
Eurodollar Loans, as the case may be, shall be suspended until such time
such Bank in its sole discretion reasonably exercised determines that the
event resulting in such suspension has ceased to exist. If any Bank shall
make such determination it shall promptly notify the Agent in writing, and
Agent shall promptly notify Borrowers in writing, and Borrowers shall
either repay the outstanding Eurodollar Loans, as the case may be, owed to
Banks, without penalty, on the last day of the current Interest Period or
convert the same to Base Rate Loans in the case of Eurodollar Loans on the
last day of the then current Interest Period for such Eurodollar Loan.
(b) Reserve Requirements. In the event of any change in any
--------------------
applicable law, treaty or regulation or in the interpretation or
administration thereof, or in the event any central bank or other fiscal
monetary or other authority having jurisdiction over any Bank or the loans
contemplated by this Agreement shall impose, modify or deem applicable any
reserve requirement of the Board of Governors of the Federal Reserve System
on any Eurodollar Loan or loans, or any other reserve, special deposit, or
some requirements against assets to, deposits with or for the account of,
or credit extended by, the Banks or shall impose on any Bank or the London
interbank market, as the case may be, any other condition affecting this
Agreement or the Eurodollar Loans and the result of any of the foregoing is
to increase the cost to any Bank in making or maintaining its Eurodollar
Loans or to reduce any amount (or the effective return on any amount)
received by any Bank hereunder, then Borrowers shall pay to the Banks upon
demand of any Bank as additional interest on the Notes evidencing the
Eurodollar Loans such additional amount or amounts as will reimburse the
Banks for such additional cost or such reduction. The Banks shall give
notice to Borrowers upon becoming aware of any such change or imposition
which may result in any such increase or reduction. A certificate of any
Bank setting forth the basis for the determination of such amount necessary
to compensate Banks as aforesaid
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<PAGE>
shall be delivered to Borrowers and shall be conclusive as to such
determination and such amount, absent error.
(c) Taxes. Both principal and interest on the Notes evidencing the
-----
Eurodollar Loans are payable without withholding or deduction for or on
account of any taxes. If any taxes are levied or imposed on or with
respect to the Notes evidencing the Eurodollar Loans or on any payment on
the Notes evidencing the Eurodollar Loans made to any Bank, then, and in
any such event, Borrowers shall pay to the Banks upon demand of any Bank
such additional amounts as may be necessary so that every net payment of
principal and interest on the Notes evidencing the Eurodollar Loans, after
withholding or deduction for or on account of any such taxes, will not be
less than any amount provided for herein. In addition, if at any time when
the Eurodollar Loans are outstanding any laws enacted or promulgated, or
any court of law or governmental agency interprets or administers any law,
which, in any such case, materially changes the basis of taxation of
payments to any Bank of principal of or interest on the Notes evidencing
the Eurodollar Loans by reason of subjecting such payments to double
taxation or otherwise (except through an increase in the rate of tax on the
overall net income of such Bank or Banks) then Borrowers will pay the
amount of loss to the extent that such loss is caused by such a change.
The Banks shall give notice to Borrowers upon becoming aware of the amount
of any loss incurred by any Bank through enactment or promulgation of any
such law which materially changes the basis of taxation of payments to one
or more of the Banks. The Banks shall also give notice on becoming aware of
any such enactment or promulgation which may result in such payments
becoming subject to double taxation or otherwise. A certificate of any Bank
setting forth the basis for the determination of such loss and the
computation of such amounts shall be delivered to Borrowers and shall be
conclusive of such determination and such amount, absent error.
(d) Change in Laws. If at any time any new law or any change in
--------------
existing laws or in the interpretation of any new or existing laws shall
make it unlawful for the Banks to maintain or fund its Eurodollar Loans
hereunder, then the Banks shall promptly notify Borrowers in writing and
Borrowers shall either repay the outstanding Eurodollar Loans owed to the
Banks, without penalty, on the last day of the current Interest Periods
(or, if any Bank may not lawfully continue to maintain and fund such
Eurodollar Loans, immediately), or Borrowers may convert such Eurodollar
Loans at such appropriate time to Base Rate Loans.
(e) Option to Fund. The Banks shall each have the option if the
--------------
Borrowers elect a Eurodollar Loan, to purchase one or more deposits in
order to fund or maintain its funding of the principal balance of its Note
to which such Eurodollar Loan is applicable during the Interest Period in
question; it being understood that the provisions of this Agreement
relating to such funding are included only for the purpose of determining
the rate of interest
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<PAGE>
to be paid under such Eurodollar Loan and any amounts owing hereunder and
under the Notes. Any Bank shall be entitled to fund and maintain its
funding of all or any part of that portion of the principal balance of the
Notes in any manner it sees fit, but all such determinations hereunder
shall be made as if such Bank have actually funded and maintained that
portion of the principal balance of the Notes to which a Eurodollar Loan is
applicable during the applicable Interest Period through the purchase of
deposits in an amount equal to the principal balance of the Notes to which
such Eurodollar Loan is applicable and having a maturity corresponding to
such Interest Period. Any Bank may fund the outstanding principal balance
of the Notes which is to be subject to any Eurodollar Loan from any branch
or office of such Bank as any Bank may designate from time to time.
(f) Indemnity. Borrowers shall indemnify and hold harmless the Banks
---------
against all reasonable and necessary out-of-pocket costs and expenses which
the Banks may sustain (i) as a consequence of any default by Borrowers
under this Agreement, or (ii) as a result of the making of any loan or
loans as a Eurodollar Loan under this Agreement.
(g) Payments Not at End of Interest Period. If the Borrowers make any
--------------------------------------
payment of principal with respect to any Eurodollar Loan on any day other
than the last day of the Interest Period applicable to such Eurodollar
Loan, then Borrowers shall reimburse the Banks on demand for any loss, cost
or expense incurred by the Banks as a result of the timing of such payment
or in redepositing such principal amount, including the sum of (i) the cost
of funds to the Banks in respect of such principal amount so paid, for the
remainder of the Interest Period applicable to such sum, reduced, if any
Bank is able to redeposit such principal amount so paid for the balance of
the Interest Period, by the interest earned by such Bank as a result of so
redepositing such principal amount, plus (ii) any expense or penalty
incurred by the Bank in redepositing such principal amount. A certificate
of any Bank setting forth the basis for the determination of the amount
owed by Borrowers pursuant to this Section 5(g) shall be delivered to the
Borrowers and shall be conclusive in the absence of manifest error.
6. COLLATERAL SECURITIES. To secure the performance by Borrowers of
their obligations hereunder, and under the Notes and Security Instruments,
whether now or hereafter incurred, matured or unmatured, direct or contingent,
joint or several, or joint and several, including extensions, modifications,
renewals and increases thereof, and substitutions therefore, Borrowers have
heretofore granted and assigned to Bank One a first and prior Lien on certain
of its Oil and Gas Properties, and certain related equipment, oil and gas
inventory and proceeds of the foregoing, and shall contemporaneously with or
prior to the execution of this Agreement and the Notes, grant and assign to
Agent for the ratable benefit of the Banks a first and prior security interest
and Lien on certain of their Oil and Gas Properties, general partnership
interest in the Sycamore Gas System and stock in Sycamore Pipeline, Inc. being
acquired as of the Effective Date. The Liens held by Bank One on the Oil and
Gas Properties shall be assigned, as of the Effective Date, to the Agent for
-24-
<PAGE>
the ratable benefit of the Banks. The Oil and Gas Properties heretofore and
herewith mortgaged to the Agent shall represent not less than 90% of the
Engineered Value (as hereinafter defined) of Borrower's Oil and Gas Properties
as of the Effective Date. All Oil and Gas Properties and other collateral in
which Borrowers have heretofore granted to Bank One, or herewith granted or
hereafter grants to Agent for the ratable benefit of the Banks a first and prior
Lien (to the satisfaction of the Agent) in accordance with this Section 6, as
such properties and interests are from time to time constituted, are hereinafter
collectively called the "Collateral."
The granting and assigning of such security interests and Liens by
Borrowers shall be pursuant to Security Instruments in form and substance
reasonably satisfactory to the Agent. Concurrently with the delivery of each of
the Security Instruments, Borrowers shall furnish to the Agent mortgage and
title opinions and other title information satisfactory to Agent with respect to
the title and Lien status of Borrowers' interests in not less than 90% of the
Engineered Value of the Oil and Gas Properties covered by the Security
Instruments as Agent shall have designated. "Engineered Value" for this purpose
shall mean future net revenues discounted at the discount rate being used by the
Agent as of the date of any such determination utilizing the pricing parameters
used in the engineering report furnished to the Agent for the ratable benefit of
the Banks, pursuant to Sections 7 and 12 hereof. Borrowers will cause to be
executed and delivered to the Agent, in the future, additional Security
Instruments if the Agent reasonably deems such are necessary to insure
perfection or maintenance of Banks' security interests and Liens in the Oil and
Gas Properties or any part thereof.
7. BORROWING BASE.
(a) Initial Borrowing Base. During the period from the date hereof to
----------------------
the first Determination Date (as hereinafter defined), the Borrowing Base
shall be $32,000,000.
(b) Subsequent Determinations of Borrowing Base. Subsequent
-------------------------------------------
determinations of the Borrowing Base shall be made by the Banks on June 1,
1997, and thereafter, at least semi-annually on April 1 and October 1 of
each year beginning October 1, 1997 or as Unscheduled Redeterminations. In
connection with, and as of, each determination of the Borrowing Base, the
Banks shall also redetermine the Monthly Commitment Reduction. The
Borrowers shall furnish to the Banks as soon as possible but in any event
no later than March 1 of each year, beginning March 1, 1997, with an
Engineering Report in form and substance satisfactory to the Agent prepared
by an independent petroleum engineering acceptable to Agent covering the
Oil and Gas Properties utilizing economic and pricing parameters used by
Agent as established from time to time, together with such other
information concerning the value of the Oil and Gas Properties as the Agent
shall deem necessary to determine the value of the Oil and Gas Properties.
By September 1 of each year, or within thirty (30) days after either (i)
receipt of notice from Agent that the Banks require an Unscheduled
Redetermination, or (ii) the Borrowers give notice to Agent of their
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<PAGE>
desire to have an Unscheduled Redetermination performed, an engineering
report in form and substance satisfactory to Agent prepared by Borrower's
in-house engineering staff valuing the Oil and Gas Properties utilizing
economic and pricing parameters used by the Agent as established from time
to time, together with such other information, reports and data concerning
the value of the Oil and Gas Properties as Agent shall deem reasonably
necessary to determine the value of such Oil and Gas Properties. Agent
shall by notice to the Borrowers no later than June 1, 1997, and thereafter
on April 1 and October 1 of each year, or within a reasonable time
thereafter (herein called the "Determination Date"), notify the Borrowers
of the designation by the Banks of the new Borrowing Base and Monthly
Commitment Reduction for the period beginning on such Determination Date
and continuing until, but not including, the next Determination Date. If an
Unscheduled Redetermination is made by the Banks, the Agent shall notify
the Borrowers within a reasonable time after receipt of all requested
information of the new Borrowing Base and Monthly Commitment Reduction, and
such new Borrowing Base and Monthly Commitment Reduction shall continue
until the next Determination Date. If the Borrowers do not furnish all such
information, reports and data by the date specified in this Section 7(b),
unless such failure is of no fault of the Borrowers, the Banks may
nonetheless designate the Borrowing Base and Monthly Commitment Reduction
at any amounts which the Banks determine in their discretion and may
redesignate the Borrowing Base and Monthly Commitment Reduction from time
to time thereafter until the Banks receive all such information, reports
and data, whereupon the Banks shall designate a new Borrowing Base and
Monthly Commitment Reduction as described above. Each Bank shall determine
the amount of the Borrowing Base and Monthly Commitment Reduction based
upon the loan collateral value which such Bank in its discretion (using
such methodology, assumptions and discounts rates as such Bank customarily
uses in assigning collateral value to oil and gas properties, oil and gas
gathering systems, gas processing and plant operations) assigns to such Oil
and Gas Properties of the Borrowers at the time in question and based upon
such other credit factors consistently applied (including, without
limitation, the assets, liabilities, cash flow, business, properties,
prospects, management and ownership of the Borrowers and their affiliates)
as such Bank customarily considers in evaluating similar oil and gas
credits, but such Bank in its discretion shall not be required to give any
additional positive value to any Oil and Gas Property over the current
economic and pricing parameters used by such Bank for such Determination
Date which additional value is derived directly from a hedging, forward
sale or swap agreement covering such Oil and Gas Property as of the date of
such determination. If the Banks cannot otherwise agree on the Borrowing
Base or the Monthly Commitment Reduction, each Bank shall submit in writing
to the Agent its proposed Borrowing Base and Monthly Commitment Reduction
and the Borrowing Base and Monthly Commitment Reduction shall be set on the
basis of the lowest Borrowing Base and the highest Monthly Commitment
Reduction proposed by any Bank. Notwithstanding any other provision herein
to the contrary, the amount of the Borrowing Base may not be increased at
any time without the approval of all Banks. If at
-26-
<PAGE>
any time any of the Oil and Gas Properties are sold, the Borrowing Base
then in effect shall automatically be reduced by a sum equal to the amount
of prepayment required to be made pursuant to Section 12(r) hereof. The
Borrowing Base shall be additionally reduced from time to time pursuant to
the provisions of Sections 2(e) and 2(f) hereof. It is expressly understood
that the Banks have no obligation to designate the Borrowing Base or the
Monthly Commitment Reduction at any particular amounts, except in the
exercise of their discretion, whether in relation to the Revolving
Commitment or otherwise. Provided, however, that the Banks shall not have
the obligation to designate a Borrowing Base in an amount in excess of its
legal or internal lending limits.
8. FEES.
(a) Unused Commitment Fee. The Borrowers shall pay to Agent for the
---------------------
ratable benefit of the Banks an unused commitment fee (the "Unused
Commitment Fee") equivalent to one-half of one percent ( 1/2%) per annum on
the daily average of the unadvanced amount of the Revolving Commitment.
The Unused Commitment Fee shall be payable in arrears on the last Business
Day of each calendar quarter beginning March 31, 1997 with the final fee
payment due on the Maturity Date for any period then ending for which the
Unused Commitment Fee shall not have been theretofore paid. In the event
the Revolving Commitment terminates on any date prior to the end of any
such monthly period, the Borrowers shall pay to the Agent for the ratable
benefit of the Banks, on the date of such termination, the total Unused
Commitment Fee due for the period in which such termination occurs.
(b) Borrowing Base Increase Fee. From and after the Effective Date,
---------------------------
Borrowers shall pay to the Agent for the ratable benefit of the Banks a
Borrowing Base increase fee (the "Borrowing Base Increase Fee") equal to
one-fourth of one percent (1/4%) of the amount of any increase in the
Borrowing Base from the amount of the Borrowing Base set as of the
preceding Determination Date (excluding in each case the amounts of the
Special Advance Facility and the Special Drilling Facility), said fee to be
payable upon notice to Borrowers of such increase.
(c) The Letter of Credit Fee. Borrowers shall pay to the Agent the
------------------------
Letter of Credit fees required above in Section 2(d).
(d) Agency Fees. The Borrowers shall pay to the Agent certain fees
-----------
for acting as Agent hereunder in amounts to be negotiated between the
Borrowers and the Agent.
(e) Special Advance Fee. Borrowers shall pay to Agent for the ratable
-------------------
benefit of the Banks, a Special Advance Fee (the "Special Advance Fee")
equal to one percent (1%) per annum of the amount of any Special Advance
Facility, such amount to be due upon
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<PAGE>
notice to Borrowers as provided in Section 2(h) hereof. No Special Advance
Fee shall be due at the Effective Date.
(f) Special Drilling Facility Fee. Borrowers shall pay to Agent for
-----------------------------
the ratable benefit of the Banks, a Special Drilling Facility Fee (the
"Special Drilling Facility Fee") equal to 1% per annum of the amount of any
Special Drilling Facility, such amount to be due upon notice to Borrowers
as provided in Section 2(i) hereof. No Special Drilling Facility Fee shall
be due at the Effective Date.
9. PREPAYMENTS.
(a) Voluntary Prepayments. The Borrowers may at any time and from
---------------------
time to time, without penalty or premium, prepay the Notes, in whole or in
part. Each such prepayment shall be made on at least one (1) Business
Day's notice to Agent and shall be in a minimum amount of $100,000 or any
larger multiple thereof or the unpaid balance on the Notes, whichever is
less, plus accrued interest thereon to the date of prepayment.
(b) Mandatory Prepayment For Borrowing Base Deficiency. In the event
--------------------------------------------------
the Total Outstandings ever exceed the Borrowing Base as determined by
Banks pursuant to Section 7(b) hereof, the Borrowers shall, within thirty
(30) days after notification from the Agent, either (A) by instruments
reasonably satisfactory in form and substance to the Bank, provide the
Agent with collateral with value and quality in amounts satisfactory to the
Majority Banks in their discretion in order to increase the Borrowing Base
by an amount at least equal to such excess, or (B) prepay, without premium
or penalty, the principal amount of the Notes in an amount at least equal
to such excess plus accrued interest thereon to the date of prepayment.
10. REPRESENTATIONS AND WARRANTIES. In order to induce the Banks to enter
into this Agreement, the Borrowers hereby, jointly and severally, represent and
warrant to the Banks (which representations and warranties will survive the
delivery of the Notes) that:
(a) Creation and Existence. Each Borrower is a corporation duly
----------------------
organized, validly existing and in good standing under the laws of the
jurisdiction in which it was formed and is duly qualified in all
jurisdictions wherein failure to qualify may result in a Material Adverse
Effect. Each Borrower has all power and authority to own its properties
and assets and to transact the business in which it is engaged.
(b) Power and Authority. Each Borrower is duly authorized and
-------------------
empowered to create and issue the Notes; and each Borrower is duly
authorized and empowered to execute, deliver and perform the Loan
Documents, including this Agreement; and all corporation action on each
Borrower's part requisite for the due creation and issuance of the
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<PAGE>
Notes and for the due execution, delivery and performance of the Loan
Documents, including this Agreement, has been duly and effectively taken.
(c) Binding Obligations. This Agreement does, and the Notes and other
-------------------
Loan Documents upon their creation, issuance, execution and delivery will,
constitute valid and binding obligations of each Borrower, enforceable in
accordance with its respective terms (except that enforcement may be
subject to any applicable bankruptcy, insolvency, or similar debtor relief
laws now or hereafter in effect and relating to or affecting the
enforcement of creditors rights generally).
(d) No Legal Bar or Resultant Lien. The Notes and the Loan Documents,
------------------------------
including this Agreement, do not and will not, to the best of each of the
Borrower's knowledge violate any provisions of any contract, agreement,
law, regulation, order, injunction, judgment, decree or writ to which each
Borrower is subject, or result in the creation or imposition of any lien or
other encumbrance upon any assets or properties of any Borrower, other than
those contemplated by this Agreement.
(e) No Consent. The execution, delivery and performance by each
----------
Borrower of the Notes and the Loan Documents, including this Agreement,
does not require the consent or approval of any other person or entity,
including without limitation any regulatory authority or governmental body
of the United States or any state thereof or any political subdivision of
the United States or any state thereof except for consents required for
federal, state and, in some instances, private leases, right of ways and
other conveyances or encumbrances of oil and gas leases (all of which
consents have been obtained by the Borrowers).
(f) Financial Condition. The audited Financial Statements of Energy
-------------------
dated December 31, 1995 and the unaudited consolidated and consolidating
Financial Statements of Energy dated September 30, 1996, which have been
delivered to Banks are complete and correct in all material respects, and
fully and accurately reflect in all material respects the financial
condition and results of the operations of the Borrowers as of the date or
dates and for the period or periods stated. No change has since occurred in
the condition, financial or otherwise, of the Borrowers which is reasonably
expected to have a Material Adverse Effect, except as disclosed to the
Banks in Schedule "3" attached hereto.
(g) Liabilities. No Borrower has any material (individually or in the
-----------
aggregate) liability, direct or contingent, except as disclosed to the
Banks in the Financial Statements and on Schedule "4" attached hereto. No
unusual or unduly burdensome restrictions, restraint, or hazard exists by
contract, law or governmental regulation or otherwise relative to the
business, assets or properties of any Borrower which is reasonably expected
to have a Material Adverse Effect.
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<PAGE>
(h) Litigation. Except as described in the Financial Statements, or
----------
as otherwise disclosed to the Banks in Schedule "5" attached hereto, there
is no litigation, legal or administrative proceeding, investigation or
other action of any nature pending or, to the knowledge of the officers of
any Borrower threatened against or affecting any Borrower which involves
the possibility of any judgment or liability not fully covered by
insurance, and which is reasonably expected to have a Material Adverse
Effect.
(i) Taxes; Governmental Charges. Each Borrower has filed all tax
---------------------------
returns and reports required to be filed and has paid all taxes,
assessments, fees and other governmental charges levied upon them or their
assets, properties or income which are due and payable, including interest
and penalties, the failure of which to pay could reasonably be expected to
have a Material Adverse Effect, except such as are being contested in good
faith by appropriate proceedings and for which adequate reserves for the
payment thereof as required by GAAP has been provided and levy and
execution thereon have been stayed and continue to be stayed.
(j) Titles, Etc. Each Borrower has good and defensible title to all
------------
of its respective assets, including without limitation, the Oil and Gas
Properties, free and clear of all liens or other encumbrances except
Permitted Liens.
(k) Defaults. No Borrower is in default and no event or circumstance
--------
has occurred which, but for the passage of time or the giving of notice, or
both, would constitute a default under any loan or credit agreement,
indenture, mortgage, deed of trust, security agreement or other agreement
or instrument to which any Borrowers is a party in any respect that would
be reasonably expected to have a Material Adverse Effect. No Event of
Default hereunder has occurred and is continuing.
(l) Casualties; Taking of Properties. Since the dates of the latest
--------------------------------
Financial Statements of the Borrowers delivered to Banks, neither the
business nor the assets or properties of any Borrower have been affected
(to the extent it is reasonably likely to cause a Material Adverse Effect),
as a result of any fire, explosion, earthquake, flood, drought, windstorm,
accident, strike or other labor disturbance, embargo, requisition or taking
of property or cancellation of contracts, permits or concessions by any
domestic or foreign government or any agency thereof, riot, activities of
armed forces or acts of God or of any public enemy.
(m) Use of Proceeds; Margin Stock. The proceeds of the Revolving
-----------------------------
Commitment will be used by the Borrowers for the purposes of (i)
acquisition and development of oil and gas properties, (ii) to refinance
existing debt, (iii) for letters of credit, and (iv) for general corporate
purposes. The proceeds of the Bridge Loan
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<PAGE>
commitment will be used to fund and close the Acquisitions. Borrowers are
not engaged principally or as one of their important activities in the
business of extending credit for the purpose of purchasing or carrying any
"margin stock" as defined in Regulation U of the Board of Governors of the
Federal Reserve System (12 C.F.R. Part 221), or for the purpose of reducing
or retiring any indebtedness which was originally incurred to purchase or
carry a margin stock or for any other purpose which might constitute this
transaction a "purpose credit" within the meaning of said Regulation U.
No Borrower nor any person or entity acting on behalf of any Borrower
has taken or will take any action which might cause the loans hereunder or
any of the Loan Documents, including this Agreement, to violate Regulation
U or any other regulation of the Board of Governors of the Federal Reserve
System or to violate the Securities Exchange Act of 1934 or any rule or
regulation thereunder, in each case as now in effect or as the same may
hereafter be in effect.
(n) Location of Business and Offices. The principal place of
--------------------------------
business and chief executive offices of the Borrowers are located at the
address stated in Section 16 hereof.
(o) Compliance with the Law. To the best of each Borrower's
-----------------------
knowledge, no Borrower:
(i) is in violation of any law, judgment, decree, order,
ordinance, or governmental rule or regulation to which any Borrower,
or any of its assets or properties are subject; or
(ii) has failed to obtain any license, permit, franchise or other
governmental authorization necessary to the ownership of any of its
assets or properties or the conduct of its business;
which violation or failure is reasonably expected to have a Material
Adverse Effect.
(p) No Material Misstatements. No information, exhibit or report
-------------------------
furnished by any Borrower to the Banks in connection with the negotiation
of this Agreement contained any material misstatement of fact or omitted to
state a material fact or any fact necessary to make the statement contained
therein not materially misleading.
(q) Not A Utility. No Borrower is an entity engaged in the State of
-------------
Texas in the (i) generation, transmission, or distribution and sale of
electric power; (ii) transportation, distribution and sale through a local
distribution system of natural or other gas for domestic, commercial,
industrial, or other use; (iii) provision of telephone or telegraph service
to
-31-
<PAGE>
others; (iv) production, transmission, or distribution and sale of steam or
water; (v) operation of a railroad; or (vii) provision of sewer service to
others.
(r) ERISA. Each Borrower is in compliance in all material respects
-----
with the applicable provisions of ERISA, and no "reportable event", as such
term is defined in Section 403 of ERISA, has occurred with respect to any
Plan of any Borrowers.
(s) Public Utility Holding Company Act. No Borrower is a "holding
----------------------------------
company", or "subsidiary company" of a "holding company", or an "affiliate"
of a "holding company" or of a "subsidiary company" of a "holding company",
or a "public utility" within the meaning of the Public Utility Holding
Company Act of 1935, as amended.
(t) Subsidiaries. All of the Borrowers' Subsidiaries are listed on
------------
Schedule "6" hereto.
(u) Environmental Matters. Except as disclosed on Schedule "7", no
---------------------
Borrower (i) has received notice or otherwise learned of any Environmental
Liability which would be reasonably likely to individually or in the
aggregate have a Material Adverse Effect arising in connection with (A) any
non-compliance with or violation of the requirements of any Environmental
Law or (B) the release or threatened release of any toxic or hazardous
waste into the environment, (ii) has received notice of any threatened or
actual liability in connection with the release or notice of any threatened
release of any toxic or hazardous waste into the environment which would be
reasonably likely to individually or in the aggregate have a Material
Adverse Effect or (iii) has received notice or otherwise learned of any
federal or state investigation evaluating whether any remedial action is
needed to respond to a release or threatened release of any toxic or
hazardous waste into the environment for which any Borrowers are or may be
liable which may reasonably be expected to result in a Material Adverse
Effect.
(v) Liens. Except (i) as disclosed on Schedule "1" hereto and (ii)
-----
for Permitted Liens, the assets and properties of the Borrowers are free
and clear of all liens and encumbrances.
11. CONDITIONS OF LENDING.
(a) The effectiveness of this Agreement, and the obligation to make
the initial Advance under the Revolving Commitment shall be subject to
satisfaction of the following conditions precedent:
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<PAGE>
(i) Execution and Delivery. The Borrowers shall each have
----------------------
executed and delivered the Agreement and other required documents, all
in form and substance satisfactory to the Agent;
(ii) Legal Opinion. The Agent shall have received from
-------------
Borrowers' legal counsel a favorable legal opinion in form and
substance satisfactory to it (i) as to the matters set forth in
Subsections 10(a), (b), (c), (d), (e) and (h) hereof and (ii) as to
such other matters as Agent or its counsel may reasonably request,
including, but not limited to, matters relating to the stock of
Sycamore Pipeline, Inc. being acquired by Gas;
(iii) Corporate Resolutions. The Agent shall have received
---------------------
appropriate certified corporate resolutions of each Borrower;
(iv) Good Standing. The Agent shall have received evidence of
-------------
existence and good standing for each Borrower;
(v) Incumbency. The Agent shall have received a signed
----------
certificate of each Borrower, certifying the names of the officers of
such Borrower authorized to sign loan documents on behalf of such
Borrower, together with the true signatures of each such officer. The
Agent may conclusively rely on such certificate until the Bank
receives a further certificate of any Borrower canceling or amending
the prior certificate and submitting signatures of the officers named
in such further certificate;
(vi) Articles of Incorporation and Bylaws. The Agent shall
------------------------------------
have received copies of the Articles of Incorporation of each Borrower
and all amendments thereto, certified by the Secretary of State of the
State of its incorporation, and a copy of the bylaws of each Borrower
and all amendments thereto, certified by each Borrower as being true,
correct and complete;
(vii) Closing of the Norse, Huffman and Horizon Acquisitions.
------------------------------------------------------
The Agent shall have received satisfactory evidence of the closing of
the transactions described in the Sale and Purchase Agreements between
Horizon Gas Partners, L.P., HSRTW, Inc. and Energy dated January 22,
1997, between H. Huffman and Energy dated December 13, 1996 and Norse
Exploration, Inc., Sycamore Pipeline, Inc. and Energy dated December
11, 1996 (the "Acquisitions");
(viii) Documentation for the Convertible Promissory Note
-------------------------------------------------
Transactions. Agent shall have received copies of the documentation
------------
relating to the (i) promissory note dated February 18, 1997 in the
face amount of $1,800,000 executed by Gothic and payable to the order
of Loire Sextant, S.A. London, England (the "Sextant
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<PAGE>
Note"), (ii) the promissory note dated February 14, 1997, in the face
amount of $200,000 executed by Gothic and payable to the order of
Clarion Capital Corporation, Cleveland, Ohio (the "Clarion Note") and
(iii) the promissory note dated February 18, 1997, in the face amount
of $2,500,000 executed by Gothic and payable to the order of Loire
Sextant, S.A. of London, England (the "Second Sextant Note") (the
Sextant Note, the Clarion Note and the Second Sextant Note are
hereinafter collectively referred to as the "Convertible Promissory
Notes") executed by all parties thereto, said documents to be in form
and substance satisfactory to Agent;
(ix) Closing of Convertible Promissory Notes and Convertible
-------------------------------------------------------
Preferred Stock Transactions. Agent shall have received satisfactory
----------------------------
evidence of the closing and funding of the Convertible Promissory
Notes, said closings have occurred prior to the Effective Date;
(x) Title. The Agent shall have received satisfactory
-----
evidence to the state of the title to at least 90% of the Engineered
Value of the Oil and Gas Properties to be mortgaged to the Banks at
the Effective Date;
(xi) Payment of Fees. The Agent shall have received payment in
---------------
full of all fees due at the Effective Date.
(xii) Representation and Warranties. The representations and
-----------------------------
warranties of Borrowers under this Agreement are true and correct in
all material respects as of such date, as if then made (except to the
extent that such representations and warranties related solely to an
earlier date);
(xiii) No Event of Default. No Event of Default shall have
-------------------
occurred and be continuing nor shall any event have occurred or failed
to occur which, with the passage of time or service of notice, or
both, would constitute an Event of Default;
(xiv) Other Documents. Agent shall have received such other
---------------
instruments and documents incidental and appropriate to the
transaction provided for herein as Bank or its counsel may reasonably
request, and all such documents shall be in form and substance
reasonably satisfactory to the Agent; and
(xv) Legal Matters Satisfactory. All legal matters incident to
--------------------------
the consummation of the transactions contemplated hereby shall be
reasonably satisfactory to special counsel for Agent retained at the
expense of the Borrowers.
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<PAGE>
(b) The obligation of the Banks to make any Advance on the Revolving
Commitment (including the initial Advance) shall be subject to the
following additional conditions precedent that, at the date of making each
such Advance and after giving effect thereto:
(i) Representation and Warranties. The representations and
-----------------------------
warranties of Borrowers under this Agreement are true and correct in
all material respects as of such date, as if then made (except to the
extent that such representations and warranties related solely to an
earlier date);
(ii) No Event of Default. No Event of Default shall have
-------------------
occurred and be continuing nor shall any event have occurred or failed
to occur which, with the passage of time or service of notice, or
both, would constitute an Event of Default;
(iii) Other Documents. Agent shall have received such other
---------------
instruments and documents incidental and appropriate to the
transaction provided for herein as Agent or its counsel may reasonably
request, and all such documents shall be in form and substance
reasonably satisfactory to the Agent; and
(iv) Legal Matters Satisfactory. All legal matters incident to
--------------------------
the consummation of the transactions contemplated hereby shall be
reasonably satisfactory to special counsel for Agent retained at the
expense of the Borrowers.
12. AFFIRMATIVE COVENANTS. A deviation from the provisions of this
Section 12 shall not constitute an Event of Default under this Agreement if such
deviation is consented to in writing by Bank. Without the prior written consent
of Majority Banks, the Borrowers will at all times comply with the covenants
contained in this Section 12 from the date hereof and for so long as the
Revolving Commitment is in existence or any part of the Revolving Loan is
outstanding.
(a) Financial Statements and Reports. Each Borrower shall promptly
--------------------------------
furnish to the Agent from time to time upon request such information
regarding the business and affairs and financial condition of Borrowers, as
the Agent may reasonably request, and will furnish to the Agent:
(i) Annual Audited Financial Statements. As soon as
-----------------------------------
available, and in any event within ninety (90) days after the close of
each fiscal year beginning with the fiscal year ended December 31,
1996, the annual audited consolidated and consolidating Financial
Statements of Borrowers, prepared in accordance with GAAP accompanied
by an unqualified opinion rendered by an independent accounting firm
reasonably acceptable to the Agent;
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<PAGE>
(ii) Quarterly Financial Statements. As soon as available, and
------------------------------
in any event within forty-five (45) days after the end of each
calendar quarter of each year (except the last calendar quarter of any
fiscal year), beginning with the fiscal quarter ended March 31, 1997,
the quarterly unaudited consolidated and consolidating Financial
Statements of Borrowers prepared in accordance with GAAP;
(iii) Report on Properties. As soon as available and in any
--------------------
event on or before March 1 and September 1 of each calendar year, and
at such other times as any Bank, in accordance with Section 7 hereof,
may request, the engineering reports required to be furnished to the
Agent under such Section 7 on the Oil and Gas Properties;
(iv) Monthly Production Reports. Within 30 days after the end
--------------------------
of each month, a monthly report, in form and substance satisfactory to
the Agent, indicating the next preceding month's sales volume, sales
revenues, production taxes, operating expense and net operating income
from the Oil and Gas Properties, with detailed calculations and
worksheets, all in form and substance satisfactory to Agent;
(v) SEC Reports. As soon as available, and in any event
-----------
within five (5) days of filing, copies of all filings by Energy with
the Securities and Exchange Commission;
(vi) Additional Information. Promptly upon request of the
----------------------
Agent from time to time any additional financial information or other
information that the Agent may reasonably request.
All such reports, information, balance sheets and Financial Statements
referred to in Subsection 12(a) above shall be in such detail as the Agent
may reasonably request and shall be prepared in a manner consistent with
the Financial Statements.
(b) Certificates of Compliance. Concurrently with the furnishing of
--------------------------
the annual audited Financial Statements pursuant to Subsection 12(a)(i)
hereof and the quarterly unaudited Financial Statements pursuant to
Subsection 12(a)(ii) hereof for the months coinciding with the end of each
calendar quarter, Borrowers will furnish or cause to be furnished to the
Agent a certificate in the form of Exhibit "C" attached hereto, signed by
the President or Chief Financial Officer of each Borrower, (i) stating that
each Borrower has fulfilled in all material respects its obligations under
the Notes and the Loan Documents, including this Agreement, and that all
representations and warranties made herein and therein continue (except to
the extent they relate solely to an earlier date) to be true and correct in
all material respects (or specifying the nature of any change), or if an
Event of Default has occurred, specifying the Event of Default and the
nature and status thereof; (ii)
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<PAGE>
to the extent requested from time to time by the Agent, specifically
affirming compliance of each Borrower in all material respects with any of
its representations (except to the extent they relate solely to an earlier
date) or obligations under said instruments; (iii) setting forth the
computation, in reasonable detail as of the end of each period covered by
such certificate, of compliance with Sections 13(b), (c), (d) and (e); and
(iv) containing or accompanied by such financial or other details,
information and material as the Agent may reasonably request to evidence
such compliance.
(c) Accountants' Certificate. Concurrently with the furnishing of
------------------------
the annual audited Financial Statement pursuant to Section 12(a)(i) hereof,
Borrowers will furnish a statement from the firm of independent public
accountants which prepared such Financial Statement to the effect that
nothing has come to their attention to cause them to believe that there
existed on the date of such statements any Event of Default and
specifically calculating Borrowers' compliance with Sections 13(b), (c),
(d) and (e) of this Agreement.
(d) Taxes and Other Liens. The Borrowers will pay and discharge
---------------------
promptly all taxes, assessments and governmental charges or levies imposed
upon the Borrowers or upon the income or any assets or property of
Borrowers as well as all claims of any kind (including claims for labor,
materials, supplies and rent) which, if unpaid, might become a Lien or
other encumbrance upon any or all of the assets or property of any
Borrowers and which could reasonably be expected to result in a Material
Adverse Effect; provided, however, that no Borrower shall be required to
pay any such tax, assessment, charge, levy or claim if the amount,
applicability or validity thereof shall currently be contested in good
faith by appropriate proceedings diligently conducted, levy and execution
thereon have been stayed and continue to be stayed and if such Borrower
shall have set up adequate reserves therefor, if required, under GAAP.
(e) Compliance with Laws. Each Borrower will observe and comply, in
--------------------
all material respects, with all applicable laws, statutes, codes, acts,
ordinances, orders, judgments, decrees, injunctions, rules, regulations,
orders and restrictions relating to environmental standards or controls or
to energy regulations of all federal, state, county, municipal and other
governments, departments, commissions, boards, agencies, courts,
authorities, officials and officers, domestic or foreign.
(f) Further Assurances. The Borrowers will cure promptly any defects
------------------
in the creation and issuance of the Note and the execution and delivery of
the Notes and the Loan Documents, including this Agreement. The Borrowers
at their sole expense will promptly execute and deliver to Agent upon its
reasonable request all such other and further documents, agreements and
instruments in compliance with or accomplishment of the covenants and
agreements in this Agreement, or to correct any omissions in the Note or
more fully to state the obligations set out herein.
-37-
<PAGE>
(g) Performance of Obligations. The Borrowers will pay the Notes and
--------------------------
other obligations incurred by it hereunder according to the reading, tenor
and effect thereof and hereof; and Borrowers will do and perform every act
and discharge all of the obligations provided to be performed and
discharged by the Borrowers under the Loan Documents, including this
Agreement, at the time or times and in the manner specified.
(h) Insurance. The Borrowers now maintain and will continue to
---------
maintain insurance with financially sound and reputable insurers with
respect to its assets against such liabilities, fires, casualties, risks
and contingencies and in such types and amounts as is customary in the case
of persons engaged in the same or similar businesses and similarly
situated. Upon request of the Agent, the Borrowers will furnish or cause to
be furnished to the Agent from time to time a summary of the respective
insurance coverage of each Borrower in form and substance satisfactory to
the Agent, and, if requested, will furnish the Agent copies of the
applicable policies. Upon demand by Agent any insurance policies covering
any such property shall be endorsed (i) to provide that such policies may
not be canceled, reduced or affected in any manner for any reason without
fifteen (15) days prior notice to Agent, (ii) to provide for insurance
against fire, casualty and other hazards normally insured against, in the
amount of the full value (less a reasonable deductible not to exceed
amounts customary in the industry for similarly situated business and
properties) of the property insured, and (iii) to provide for such other
matters as the Agent may reasonably require. The Borrowers shall at all
times maintain adequate insurance with respect to all of their assets,
including but not limited to, the Oil and Gas Properties or any collateral
against its liability for injury to persons or property, which insurance
shall be by financially sound and reputable insurers and shall without
limitation provide the following coverages: comprehensive general liability
(including coverage for damage to underground resources and equipment,
damage caused by blowouts or cratering, damage caused by explosion, damage
to underground minerals or resources caused by saline substances, broad
form property damage coverage, broad form coverage for contractually
assumed liabilities and broad form coverage for acts of independent
contractors), worker's compobile liability. The Borrowers shall at all
times maintain cost of control of well insurance with respect to the Oil
and Gas Properties which shall insure the Borrowers against seepage and
pollution expense; redrilling expense; and cost of control of well; fires,
blowouts, etc., if deemed economical in the reasonable discretion of the
Borrowers. Additionally, the Borrowers shall at all times maintain adequate
insurance with respect to all of its other assets and wells in accordance
with prudent business practices.
(i) Accounts and Records. Each Borrower will keep books, records and
--------------------
accounts in which full, true and correct entries will be made of all
dealings or transactions in relation to its business and activities,
prepared in a manner consistent with prior years, subject to changes
suggested by such Borrower's auditors.
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<PAGE>
(j) Right of Inspection. Each Borrower will permit any officer,
-------------------
employee or agent of the Banks to examine such Borrower's books, records
and accounts, and take copies and extracts therefrom, all at such
reasonable times during normal business hours and as often as the Banks may
reasonably request. The Banks will keep all such information confidential
and will not without prior written consent disclose or reveal the
information or any part thereof to any person other than the Banks'
officers, employees, legal counsel, regulatory authorities or advisors to
whom it is necessary to reveal such information for the purpose of
effectuating the agreements and undertakings specified herein or as
otherwise required by law or in connection with the enforcement of the
Banks' and the Agent's rights and remedies under the Notes, this Agreement
and the other Loan Documents.
(k) Notice of Certain Events. The Borrowers shall promptly notify
------------------------
the Agent if any Borrower learns of the occurrence of (i) any event which
constitutes an Event of Default together with a detailed statement by such
Borrower of the steps being taken to cure the Event of Default; or (ii) any
legal, judicial or regulatory proceedings affecting any Borrower, or any of
the assets or properties of any Borrower which, if adversely determined,
could reasonably be expected to have a Material Adverse Effect; or (iii)
any dispute between any Borrower and any governmental or regulatory body or
any other person or entity which, if adversely determined, might reasonably
be expected to cause a Material Adverse Effect; or (iv) any other matter
which in Bank's reasonable opinion could have a Material Adverse Effect.
(l) ERISA Information and Compliance. The Borrowers will promptly
--------------------------------
furnish to the Agent immediately upon becoming aware of the occurrence of
any "reportable event", as such term is defined in Section 4043 of ERISA,
or of any "prohibited transaction", as such term is defined in Section 4975
of the Internal Revenue Code of 1954, as amended, in connection with any
Plan or any trust created thereunder, a written notice signed by the chief
financial officer of Borrowers specifying the nature thereof, what action
such Borrower is taking or proposes to take with respect thereto, and, when
known, any action taken by the Internal Revenue Service with respect
thereto.
(m) Environmental Reports and Notices. The Borrowers will deliver to
--------------------------------
the Agent (i) promptly upon its becoming available, one copy of each report
sent by any Borrower to any court, governmental agency or instrumentality
pursuant to any Environmental Law, (ii) notice, in writing, promptly upon
any Borrower's receipt of notice or otherwise learning of any claim,
demand, action, event, condition, report or investigation indicating any
potential or actual liability arising in connection with (x) the non-
compliance with or violation of the requirements of any Environmental Law
which reasonably could be expected to have a Material Adverse Effect; (y)
the release or threatened release of any
-39-
<PAGE>
toxic or hazardous waste into the environment which reasonably could be
expected to have a Material Adverse Effect or which release any Borrower
would have a duty to report to any court or government agency or
instrumentality, or (iii) the existence of any Environmental Lien on any
properties or assets of any Borrower, and such Borrower shall immediately
deliver a copy of any such notice to Agent.
(n) Compliance and Maintenance. The Borrowers will (i) observe and
--------------------------
comply in all material respects with all Environmental Laws; (ii) except as
provided in Subsections 12(o) and 12(p) below, maintain the Oil and Gas
Properties and other assets and properties in good and workable condition
at all times and make all repairs, replacements, additions, betterments and
improvements to the Oil and Gas Properties and other assets and properties
as are needed and proper so that the business carried on in connection
therewith may be conducted properly and efficiently at all times in the
opinion of the Borrowers exercised in good faith; (iii) take or cause to be
taken whatever actions are necessary or desirable to prevent an event or
condition of default by any Borrower under the provisions of any gas
purchase or sales contract or any other contract, agreement or lease
comprising a part of the Oil and Gas Properties or other collateral
security hereunder which default could reasonably be expected to result in
a Material Adverse Effect; and (iv) furnish Agent upon request evidence
satisfactory to Agent that there are no Liens, claims or encumbrances on
the Oil and Gas Properties, except laborers', vendors', repairmen's,
mechanics', worker's, or materialmen's liens arising by operation of law or
incident to the construction or improvement of property if the obligations
secured thereby are not yet due or are being contested in good faith by
appropriate legal proceedings or Permitted Liens.
(o) Operation of Properties. Except as provided in Subsection 12(p)
-----------------------
and(q) below, the Borrowers will operate, or use reasonable efforts to
cause to be operated, all Oil and Gas Properties in a careful and efficient
manner in accordance with the practice of the industry and in compliance in
all material respects with all applicable laws, rules, and regulations, and
in compliance in all material respects with all applicable proration and
conservation laws of the jurisdiction in which the properties are situated,
and all applicable laws, rules, and regulations, of every other agency and
authority from time to time constituted to regulate the development and
operation of the properties and the production and sale of hydrocarbons and
other minerals therefrom; provided, however, that the Borrowers shall have
the right to contest in good faith by appropriate proceedings, the
applicability or lawfulness of any such law, rule or regulation and pending
such contest may defer compliance therewith, as long as such deferment
shall not subject the properties or any part thereof to foreclosure or
loss.
(p) Compliance with Leases and Other Instruments. The Borrowers will
--------------------------------------------
pay or cause to be paid and discharge all rentals, delay rentals,
royalties, production payment, and indebtedness required to be paid by any
Borrower (or required to keep unimpaired in all
-40-
<PAGE>
material respects the rights of any Borrower in Oil and Gas Properties)
accruing under, and perform or cause to be performed in all material
respects each and every act, matter, or thing required of any Borrower by
each and all of the assignments, deeds, leases, subleases, contracts, and
agreements in any way relating to any Borrower or any of the Oil and Gas
Properties and do all other things necessary of any Borrower to keep
unimpaired in all material respects the rights of any Borrower thereunder
and to prevent the forfeiture thereof or default thereunder; provided,
however, that nothing in this Agreement shall be deemed to require any
Borrower to perpetuate or renew any oil and gas lease or other lease by
payment of rental or delay rental or by commencement or continuation of
operations nor to prevent any Borrower from abandoning or releasing any oil
and gas lease or other lease or well thereon when, in any of such events,
in the opinion of any Borrower exercised in good faith, it is not in the
best interest of the any Borrower to perpetuate the same.
(q) Certain Additional Assurances Regarding Maintenance and
-------------------------------------------------------
Operations of Properties. With respect to those Oil and Gas Properties
------------------------
which are being operated by operators other than the Borrowers, the
Borrowers shall not be obligated to perform any undertakings contemplated
by the covenants and agreement contained in Subsections 12(o) or 12(p)
hereof which are performable only by such operators and are beyond the
control of the Borrowers; however, the Borrowers agree to promptly take all
reasonable actions available under any operating agreements or otherwise to
bring about the performance of any such material undertakings required to
be performed thereunder.
(r) Sale of Certain Assets/Prepayment of Proceeds. The Borrowers
---------------------------------------------
will immediately pay over to the Agent for the ratable benefit of the Banks
as a prepayment of principal, an amount equal to 100% of the Release Price
received by any Borrower from the sale of the Oil and Gas Properties, which
sale has been approved in advance by the Majority Banks. The term "Release
Price" as used herein shall mean a price determined by the Majority Banks
in their discretion based upon the loan collateral value which Bank in its
discretion (using such methodology, assumptions and discounts rates as such
Banks customarily use in assigning collateral value to oil and gas
properties, oil and gas gathering systems, gas processing and plant
operations) assigns to such Oil and Gas Properties at the time in question.
(s) Title Matters. Within forty-five (45) days after the date hereof
-------------
with respect to the Oil and Gas Properties listed on Schedule "8" hereto,
furnish Agent with title opinions and/or title information reasonably
satisfactory to Agent showing good and defensible title of Borrowers to
such Oil and Gas Properties subject only to the Permitted Liens. As to any
Oil and Gas Properties hereafter mortgaged to Agent, Borrowers will
promptly (but in no event more than thirty (30) days following such
mortgaging), furnish Agent with title opinions and/or title information
reasonably satisfactory to Agent showing
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<PAGE>
good and defensible title of Borrowers to such Oil and Gas Properties
subject only to Permitted Liens.
(t) Curative Matters. Within sixty (60) days after the date hereof
----------------
with respect to matters listed on Schedule "9" and, thereafter, within
sixty (60) days after receipt by Borrowers from Agent or its counsel of
written notice of title defects the Agent reasonably requires to be cured,
Borrowers shall either (i) provide such curative information, in form and
substance satisfactory to Agent, or (ii) substitute Oil and Gas Properties
of value and quality satisfactory to the Agent for all of Oil and Gas
Properties for which such title curative was requested but upon which
Borrowers elected not to provide such title curative information, and,
within sixty (60) days of such substitution, provide title opinions or
title information satisfactory to the Agent covering the Oil and Gas
Properties so substituted.
(u) Change of Principal Place of Business. Each Borrower shall give
-------------------------------------
Agent at least thirty (30) days prior written notice of its intention to
move its principal place of business from the address set forth in Section
16 hereof.
(v) Cash Collateral Accounts. Borrowers shall establish and maintain
------------------------
with Agent one or more operating accounts for each Borrower (the "Operating
Accounts") and lockbox accounts for each Borrower ("Lockbox Accounts"), the
maintenance of each of which shall be subject to such rules and regulations
as the Agent shall from time to time specify. Such accounts shall be
maintained with the Agent until all amounts due hereunder and under the
Notes have been paid in full. Borrowers shall within ten (10) days of the
Effective Date instruct and cause all monetary proceeds of production from
the Oil and Gas Properties to be remitted to their respective Lockbox
Accounts. Such proceeds of production shall not be redirected without the
prior written consent of the Agent until such time as all indebtedness due
Banks by Borrowers has been paid in full. If no Event of Default (and no
event which, with notice or lapse of time or both, would become an Event of
Default) has occurred and is continuing, the full balance of the Lockbox
Accounts each day will be deposited into the Operating Accounts. The
Borrowers hereby grant a security interest to Banks in and to the Lockbox
Accounts and the Operating Accounts (collectively, the "Cash Collateral
Accounts") and all checks, drafts and other items ever received by any Bank
for deposit therein. If any Event of Default shall occur and be continuing,
Agent shall have the immediate right, without prior notice or demand, to
take and apply against the Borrowers' obligations hereunder any and all
funds legally and beneficially owned by the Borrowers then or thereafter on
deposit in the Cash Collateral Accounts for the ratable benefit of the
Banks.
(w) Hedging. As soon as practicable, but in any event within
-------
fourteen (14) days after the Effective Date, Borrowers will arrange for
hedges covering not less than 75% of Borrowers' proved developed production
of oil and natural gas for a period of not less than
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<PAGE>
twelve (12) months with minimum floor prices to be mutually agreed upon by
Borrowers and Agent for natural gas and for oil, with counterparties
acceptable to Banks. Contracts made in compliance with the foregoing shall
be deemed to be "Pre-Approved Contracts" (as such term is defined in
Section 13(m) hereof).
13. NEGATIVE COVENANTS. A deviation from the provisions of this Section
13 shall not constitute an Event of Default under this Agreement if such
deviation is consented to in writing by Majority Banks. Without the prior
written consent of Majority Banks, the Borrowers will at all times comply with
the covenants contained in this Section 13 from the date hereof and for so long
as the Revolving Commitment is in existence or any part of the Revolving Loan is
outstanding.
(a) Negative Pledge. Borrowers shall not without the prior written
---------------
consent of the Banks:
(i) create, incur, assume or permit to exist any Lien,
security interest or other encumbrance on any of its assets or
properties except Permitted Liens; or
(ii) sell, lease, transfer or otherwise dispose of, in any
fiscal year, any of its assets, except for sales, leases, transfers or
other disposition made in the ordinary course of the Borrowers' oil
and gas businesses.
(b) Current Ratio. The Borrowers will not allow their ratio of
-------------
Current Assets to Current Liabilities to be less than 1.0 to 1.0 as of the
end of any fiscal quarter.
(c) Debt Service Coverage Ratio. The Borrowers will not allow their
---------------------------
ratio of Net Cash Flow for the fiscal quarter being measured to the Monthly
Commitment Reductions required for such fiscal quarter to be less than 1.10
to 1.0, as of the end of any fiscal quarter.
(d) Minimum Tangible Net Worth. The Borrowers' Tangible Net Worth
--------------------------
will not, as of the end of any fiscal quarter, ever be less than
$10,250,000 plus fifty percent (50%) of Net Income, if positive, before
extraordinary gains but after extraordinary losses, for the period
commencing on January 30, 1996, and ending at the end of the fiscal quarter
being tested, plus seventy-five (75%) of the proceeds from the issuance of
common or preferred stock during such quarter, net of reasonable and
customary costs, expenses and commissions relating to such issue.
(e) General and Administrative Expenses. The Borrowers' consolidated
-----------------------------------
General and Administrative Expenses will not be more than (i) 25% of
Consolidated Net Revenues for the fiscal quarter ended March 31, 1997, and
(ii) thereafter, as of the end of
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<PAGE>
any fiscal quarter, ever be more than 20% of Consolidated Net Revenues for
the period being measured.
(f) Consolidations and Mergers. No Borrower will consolidate or
--------------------------
merge with or into any other Person, except that any Borrowers may merge
with another Person if such Borrower is the surviving entity in such merger
and if, after giving effect thereto, no Default or Event of Default shall
have occurred and be continuing.
(g) Debts, Guaranties and Other Obligations. No Borrower will incur,
---------------------------------------
create, assume or in any manner become or be liable in respect of any
indebtedness, nor will any Borrower guarantee or otherwise in any manner
become or be liable in respect of any indebtedness, liabilities or other
obligations of any other person or entity, whether by agreement to purchase
the indebtedness of any other person or entity or agreement for the
furnishing of funds to any other person or entity through the purchase or
lease of goods, supplies or services (or by way of stock purchase, capital
contribution, advance or loan) for the purpose of paying or discharging the
indebtedness of any other person or entity, or otherwise, except that the
foregoing restrictions shall not apply to:
(i) the Notes and any renewal or increase thereof, or other
indebtedness of the Borrowers heretofore disclosed to Banks in the
Borrowers' Financial Statements or on Schedule "4" hereto; or
(ii) taxes, assessments or other government charges which are
not yet due or are being contested in good faith by appropriate action
promptly initiated and diligently conducted, if such reserve as shall
be required by GAAP shall have been made therefor and levy and
execution thereon have been stayed and continue to be stayed; or
(iii) indebtedness (other than in connection with a loan or
lending transaction) incurred in the ordinary course of business,
including, but not limited to indebtedness for drilling, completing,
leasing and reworking oil and gas wells; or
(iv) indebtedness owed by one Borrower to another Borrower as a
result of intercompany loans or advances; or
(v) guaranties of the Paulk Note and the Rainwater Note by
Energy; or
(vi) Convertible Promissory Notes.
(h) Dividends. No Borrowers will declare or pay any dividend,
---------
purchase, redeem or otherwise acquire for value any of its stock now or
hereafter outstanding, return
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<PAGE>
any capital to its stockholders, or make any distribution of its assets to
its stockholders as such, except the foregoing shall not apply to (i) cash
dividends paid by Energy on its preferred stock or (ii) cash dividends paid
by one Borrower to another Borrower; provided, however, that immediately
before and after giving effect thereto no (i) default or Event of Default
or (ii) Borrowing Base deficiency pursuant to Section 9(b) hereof, shall
exist.
(i) Loans and Advances. No Borrower shall make or permit to remain
------------------
outstanding any loans or advances to or in any person or entity, except
that the foregoing restriction shall not apply to:
(i) loans or advances to any person, the material details of
which have been set forth in the Financial Statements of the Borrowers
heretofore furnished to Banks; or
(ii) advances made in the ordinary course of such Borrower's
oil and gas business; or
(iii) loans or advances among Borrowers.
(j) Sale or Discount of Receivables. No Borrower will discount or
-------------------------------
sell with recourse, or sell for less than the greater of the face or market
value thereof, any of its notes receivable or accounts receivable.
(k) Nature of Business. No Borrower will permit any material change
------------------
to be made in the character of its business as carried on at the date
hereof.
(l) Transactions with Affiliates. No Borrower will enter into any
----------------------------
transaction with any Affiliate, except transactions upon terms that are no
less favorable to it than would be obtained in a transaction negotiated at
arm's length with an unrelated third party.
(m) Hedging Transactions. No Borrower will enter into any
--------------------
transaction providing (i) for the hedging, forward sale, swap or any
deviation thereof of crude oil or natural gas or other commodities, or (ii)
for a swap, collar, floor, cap, option, corridor, or other contract which
is intended to reduce or eliminate the risk of fluctuation in interest
rates, as such terms are referred to in the capital markets, except the
foregoing prohibitions shall not apply to (x) transactions consented to in
writing by the Banks which are on terms acceptable to the Banks, or (y)
Pre-approved Contracts. The term "Pre-Approved Contracts" as used herein
shall mean any contract or agreement (i) to hedge, forward, sell or swap
crude oil or natural gas or otherwise sell up to 75% of the Borrowers'
monthly production forecast for all of Borrowers' proved and producing oil
and gas properties for the period covered by the proposed hedging
transaction, (ii) with a maturity of twelve (12)
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months or less, (iii) with "strike prices" per barrel greater than the
Agent's forecasted price in the most recent engineering evaluation of the
Borrowers' oil and gas properties, adjusted for the difference between the
forecasted price and the Borrowers' actual product price as determined by
Agent, and (iv) with counter-parties to the hedging agreement which are
approved by Agent.
(n) Investments. No Borrower shall make any investments in any
-----------
person or entity, except such restriction shall not apply to:
(i) investments and direct obligations of the United States of
America or any agency thereof;
(ii) investments in certificates of deposit issued by Agent or
certificates of deposit with maturities of less than one year, issued
by other commercial banks in the United States having capital and
surplus in excess of $500,000,000 and which have a rating of (A) 50 or
above by Sheshunoff and (B) "B" or above by Keef-Bruett; or
(iii) investments in insured money market funds, Eurodollar
investment accounts and other similar accounts at Agent or such
investment with maturities of less than ninety (90) days at other
commercial banks having capital and surplus in excess of $500,000,000
and which have a rating of (A) 50 or above by Sheshunoff and (B) "B"
or above by Keef-Bruett.
(o) Amendment to Articles of Incorporation or Bylaws. No Borrower
------------------------------------------------
will permit any amendment to, or any alteration of, its Articles of
Incorporation or Bylaws.
(p) Sale of Assets. No Borrower shall sell, transfer or otherwise
--------------
dispose of any of its assets, except for production from oil, gas and
mineral properties and other assets sold in the ordinary course of such
Borrower's business.
(q) Proceeds of Production. No Borrower shall redirect the payment
----------------------
of the proceeds of production from the Oil and Gas Properties to anyone or
any place other than to the Lockbox Account at the Agent.
(r) Amendments to Preferred Stock and Convertible Promissory Notes.
--------------------------------------------------------------
Borrowers shall not (i) amend the Convertible Promissory Notes, or (ii)
issue any additional Preferred Stock after the Effective.
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<PAGE>
14. EVENTS OF DEFAULT. Any one or more of the following events shall be
considered an "Event of Default" as that term is used herein:
(a) The Borrowers shall fail to pay when due or declared due the
principal of, and the interest on, the Notes, or any fee or any other
indebtedness of the Borrowers incurred pursuant to this Agreement or any
other Loan Document; or
(b) Any representation or warranty made by any Borrower under this
Agreement, or in any certificate or statement furnished or made to the
Banks pursuant hereto, or in connection herewith, or in connection with any
document furnished hereunder, shall prove to be untrue in any material
respect as of the date on which such representation or warranty is made (or
deemed made), or any representation, statement (including financial
statements), certificate, report or other data furnished or to be furnished
or made by any Borrower under any Loan Document, including this Agreement,
proves to have been untrue in any material respect, as of the date as of
which the facts therein set forth were stated or certified; or
(c) Default shall be made in the due observance or performance of any
of the covenants or agreements of the Borrowers contained in the Loan
Documents, including this Agreement (excluding covenants contained in
Section 13 of the Agreement for which there is not cure period), and such
default shall continue for more than thirty (30) days; or
(d) Default shall be made in the due observance or performance of the
covenants of Borrowers contained in Section 13 of this Agreement; or
(e) Default shall be made in respect of any obligation for borrowed
money, other than the Notes, for which any Borrower is liable (directly, by
assumption, as guarantor or otherwise), or any obligations secured by any
mortgage, pledge or other security interest, lien, charge or encumbrance
with respect thereto, on any asset or property of any Borrower or in
respect of any agreement relating to any such obligations unless such
Borrower is not liable for same (i.e., unless remedies or recourse for
failure to pay such obligations is limited to foreclosure of the collateral
security therefor), and if such default shall continue beyond the
applicable grace period, if any; or
(f) Any Borrower shall commence a voluntary case or other proceedings
seeking liquidation, reorganization or other relief with respect to itself
or its debts under any bankruptcy, insolvency or other similar law now or
hereafter in effect or seeking an appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or any substantial
part of its property, or shall consent to any such relief or to the
appointment of or taking possession by any such official in an involuntary
case or other proceeding commenced against it, or shall make a general
assignment for the benefit of creditors, or
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<PAGE>
shall fail generally to pay its debts as they become due, or shall take any
corporate action authorizing the foregoing; or
(g) An involuntary case or other proceeding, shall be commenced
against any Borrower seeking liquidation, reorganization or other relief
with respect to it or its debts under any bankruptcy, insolvency or similar
law now or hereafter in effect or seeking the appointment of a trustee,
receiver, liquidator, custodian or other similar official of it or any
substantial part of its property, and such involuntary case or other
proceeding shall remain undismissed and unstayed for a period of sixty (60)
days; or an order for relief shall be entered against any Borrower under
the federal bankruptcy laws as now or hereinafter in effect; or
(h) A final judgment or order for the payment of money in excess of
$100,000 (or judgments or orders aggregating in excess of $100,000) shall
be rendered against any Borrower and such judgments or orders shall
continue unsatisfied and unstayed for a period of thirty (30) days; or
(i) In the event the aggregate principal amount outstanding under the
Note shall at any time exceed the Borrowing Base established for the Note,
and the Borrowers shall fail to comply with the provisions of Section 9(b)
hereof; or
(j) A Change of Control shall occur; or
(k) A Change of Management shall occur.
Upon occurrence of any Event of Default specified in Subsections 14(f) and
(g) hereof, the entire principal amount due under the Note and all interest then
accrued thereon, and any other liabilities of the Borrowers hereunder, shall
become immediately due and payable all without notice and without presentment,
demand, protest, notice of protest or dishonor or any other notice of default of
any kind, all of which are hereby expressly waived by the Borrowers. In any
other Event of Default, the Agent, upon request of Majority Banks, shall by
notice to the Borrowers declare the principal of, and all interest then accrued
on, the Note and any other liabilities hereunder to be forthwith due and
payable, whereupon the same shall forthwith become due and payable without
presentment, demand, protest, notice of intent to accelerate, notice of
acceleration or other notice of any kind, all of which the Borrowers hereby
expressly waive, anything contained herein or in the Note to the contrary
notwithstanding. Nothing contained in this Section 14 shall be construed to
limit or amend in any way the Events of Default enumerated in the Note, or any
other document executed in connection with the transaction contemplated herein.
Upon the occurrence and during the continuance of any Event of Default, the
Banks are hereby authorized at any time and from time to time, without notice to
the Borrowers (any such
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<PAGE>
notice being expressly waived by the Borrowers), to set-off and apply any and
all deposits (general or special, time or demand, provisional or final) at any
time held and other indebtedness at any time owing by any of the Banks to or for
the credit or the account of the Borrowers against any and all of the
indebtedness of the Borrowers under the Notes and the Loan Documents, including
this Agreement, irrespective of whether or not the Banks shall have made any
demand under the Loan Documents, including this Agreement or the Notes and
although such indebtedness may be unmatured. Any amount set-off by any of the
Banks shall be applied against the indebtedness owed the Banks by the Borrowers
pursuant to this Agreement and the Notes. The Banks agree promptly to notify the
Borrowers after any such setoff and application, provided that the failure to
give such notice shall not affect the validity of such set-off and application.
The rights of the Bank under this Section are in addition to other rights and
remedies (including, without limitation, other rights of set-off) which the
Banks may have.
15. THE AGENT AND THE BANKS.
(a) Appointment and Authorization. Each Bank hereby appoints Agent
-----------------------------
as its nominee and agent, in its name and on its behalf: (i) to act as
nominee for and on behalf of such Bank in and under all Loan Documents;
(ii) to arrange the means whereby the funds of Banks are to be made
available to the Borrowers under the Loan Documents; (iii) to take such
action as may be requested by any Bank under the Loan Documents (when such
Bank is entitled to make such request under the Loan Documents); (iv) to
receive all documents and items to be furnished to Banks under the Loan
Documents; (v) to be the secured party, mortgagee, beneficiary, and similar
party in respect of, and to receive, as the case may be, any collateral for
the benefit of Banks; (vi) to promptly distribute to each Bank all material
information, requests, documents and items received from the Borrowers
under the Loan Documents; (vii) to promptly distribute to each Bank such
Bank's Pro Rata Part of each payment or prepayment (whether voluntary, as
proceeds of insurance thereon, or otherwise) in accordance with the terms
of the Loan Documents and (viii) to deliver to the appropriate Persons
requests, demands, approvals and consents received from Banks. Each Bank
hereby authorizes Agent to take all actions and to exercise such powers
under the Loan Documents as are specifically delegated to such Agent by the
terms hereof or thereof, together with all other powers reasonably
incidental thereto. With respect to its commitments hereunder and the Notes
issued to it, Agent and any successor Agent shall have the same rights
under the Loan Documents as any other Bank and may exercise the same as
though it were not the Agent; and the term "Bank" or "Banks" shall, unless
otherwise expressly indicated, include Agent and any successor Agent in its
capacity as a Bank. Agent and any successor Agent and its Affiliates may
accept deposits from, lend money to, act as trustee under indentures of and
generally engage in any kind of business with the Borrowers, and any person
which may do borrowers, all as if Agent and any successor Agent were not
Agent hereunder and without any duty to account therefor to the Banks;
provided that, if any payments in respect of any property (or the
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<PAGE>
proceeds thereof) now or hereafter in the possession or control of Agent
which may be or become security for the obligations of the Borrowers
arising under the Loan Documents by reason of the general description of
indebtedness secured or of property contained in any other agreements,
documents or instruments related to any such other business shall be
applied to reduction of the obligations of the Borrowers arising under the
Loan Documents, then each Bank shall be entitled to share in such
application according to its pro rata part thereof. Each Bank, upon request
of any other Bank, shall disclose to all other Banks all indebtedness and
liabilities, direct and contingent, of the Borrowers to such Bank as of the
time of such request.
(b) Note Holders. From time to time as other Banks become a party to
------------
this Agreement after receiving the consent of the Borrowers, Agent shall
obtain execution by the Borrowers of additional Notes in amounts
representing the Commitment of each such new Bank, up to an aggregate face
amount of all Revolving Notes not exceeding $75,000,000 and all such Bridge
Notes not exceeding $10,000,000. The obligation of such Bank shall be
governed by the provisions of this Agreement, including but not limited to,
the obligations specified in Section 2 hereof. From time to time, Agent may
require that the Banks exchange their Notes for newly issued Notes to
better reflect the Commitments of the Banks. Agent may treat the payee of
any Note as the holder thereof until written notice of transfer has been
filed with it, signed by such payee and in form satisfactory to Agent.
(c) Consultation with Counsel. Banks agree that Agent may consult
-------------------------
with legal counsel selected by Agent and shall not be liable for any action
taken or suffered in good faith by it in accordance with the advice of such
counsel.
(d) Documents. Agent shall not be under a duty to examine or pass
---------
upon the validity, effectiveness, enforceability, genuineness or value of
any of the Loan Documents or any other instrument or document furnished
pursuant thereto or in connection therewith, and Agent shall be entitled to
assume that the same are valid, effective, enforceable and genuine and what
they purport to be.
(e) Resignation or Removal of Agent. Subject to the appointment and
-------------------------------
acceptance of a successor Agent as provided below, Agent may resign at any
time by giving written notice thereof to Banks and the Borrowers, and Agent
may be removed at any time with or without cause by Majority Banks. If no
successor Agent has been so appointed by Majority Banks (and approved by
the Borrowers) and has accepted such appointment within 30 days after the
retiring Agent's giving of notice of resignation or removal of the retiring
Agent, then the retiring Agent may, on behalf of Banks, appoint a successor
Agent. Any successor Agent must be approved by Borrowers, which approval
will not be unreasonably withheld. Upon the acceptance of any appointment
as Agent hereunder by a successor Agent, such successor Agent shall
thereupon succeed to and become vested with
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<PAGE>
all the rights and duties of the retiring Agent, and the retiring Agent
shall be discharged from its duties and obligations hereunder. After any
retiring Agent's resignation or removal hereunder as Agent, the provisions
of this Section 15 shall continue in effect for its benefit in respect to
any actions taken or omitted to be taken by it while it was acting as
Agent.
(f) Responsibility of Agent. It is expressly understood and agreed
-----------------------
that the obligations of Agent under the Loan Documents are only those
expressly set forth in the Loan Documents and that Agent, as the case may
be, shall be entitled to assume that no Default or Event of Default has
occurred and is continuing, unless Agent, as the case may be, has actual
knowledge of such fact or has received notice from a Bank or the Borrowers
that such Bank or the Borrowers consider that a Default or an Event of
Default has occurred and is continuing and specifying the nature thereof.
Neither Agent nor any of their directors, officers, attorneys or employees
shall be liable for any action taken or omitted to be taken by them under
or in connection with the Loan Documents, except for its or their own gross
negligence or willful misconduct. Agent shall incur no liability under or
in respect of any of the Loan Documents by acting upon any notice, consent,
certificate, warranty or other paper or instrument believed by it to be
genuine or authentic or to be signed by the proper party or parties, or
with respect to anything which it may do or refrain from doing in the
reasonable exercise of its judgment, or which may seem to it to be
necessary or desirable.
Agent shall not be responsible to Banks for any of the Borrowers'
recitals, statements, representations or warranties contained in any of the
Loan Documents, or in any certificate or other document referred to or
provided for in, or received by any Bank under, the Loan Documents, or for
the value, validity, effectiveness, genuineness, enforceability or
sufficiency of or any of the Loan Documents or for any failure by the
Borrowers to perform any of their obligations hereunder or thereunder.
Agent may employ agents and attorneys-in-fact and shall not be answerable,
except as to money or securities received by it or its authorized agents,
for the negligence or misconduct of any such agents or attorneys-in-fact
selected by it with reasonable care.
The relationship between Agent and each Bank is only that of agent and
principal and has no fiduciary aspects. Nothing in the Loan Documents or
elsewhere shall be construed to impose on Agent any duties or
responsibilities other than those for which express provision is therein
made. In performing its duties and functions hereunder, Agent does not
assume and shall not be deemed to have assumed, and hereby expressly
disclaims, any obligation or responsibility toward or any relationship of
agency or trust with or for the Borrowers or any of its beneficiaries or
other creditors. As to any matters not expressly provided for by the Loan
Documents, Agent shall not be required to exercise any discretion or take
any action, but shall be required to act or to refrain from acting (and
shall be fully protected in so acting or refraining from acting) upon the
instructions of all Banks and such
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<PAGE>
instructions shall be binding upon all Banks and all holders of the Notes;
provided, however, that Agent shall not be required to take any action
which is contrary to the Loan Documents or applicable law.
Agent shall have the right to exercise or refrain from exercising,
without notice or liability to the Banks, any and all rights afforded to
Agent, as the case may be, by the Loan Documents or which Agent may have as
a matter of law; provided, however, Agent shall not (i) except as provided
in Section 7(b) hereof, without the consent of Majority Banks designate the
amount of the Borrowing Base (provided, however, that any increase in the
Borrowing Base shall require the consent of all Banks) or (ii) without the
consent of Majority Banks, take any other action with regard to amending
the Loan Documents, waiving any default under the Loan Documents or taking
any other action with respect to the Loan Documents which requires consent
of Majority Banks. Provided further, however, that no amendment, waiver, or
other action shall be effected pursuant to the preceding clause (ii)
without the consent of all Banks which: (i) would increase the Commitment
amount of any Bank, (ii) would reduce any fees hereunder, or the principal
of, or the interest on, any Bank's Note or Notes, (iii) would postpone any
date fixed for any payment of any fees hereunder, or any principal or
interest of any Bank's Note or Notes, (iv) would materially increase any
Bank's obligations hereunder or would materially alter Agent's obligations
to any Bank hereunder, (v) would release Borrowers from its obligation to
pay any Bank's Note or Notes, (vi) release any of the Collateral, or (vii)
would amend this sentence. For purposes of this paragraph, a Bank shall be
deemed to have consented to any such action by Agent upon the passage of
five (5) Business Days after written notice thereof is given to such Bank
in accordance with Section 17 hereof, unless such Bank shall have
previously given Agent notice, complying with the provision of Section 17
hereof, to the contrary. Agent shall not have liability to Banks for
failure or delay in exercising any right or power possessed by Agent
pursuant to the Loan Documents or otherwise unless such failure or delay is
caused by the gross negligence of the Agent.
(g) Independent Investigation. Each Bank severally represents and
-------------------------
warrants to Agent that it has made its own independent investigation and
assessment of the financial condition and affairs of the Borrowers in
connection with the making and continuation of its participation hereunder
and has not relied exclusively on any information provided to such Bank by
Agent in connection herewith, and each Bank represents, warrants and
undertakes to Agent that it shall continue to make its own independent
appraisal of the credit worthiness of the Borrowers while the Notes are
outstanding or its commitments hereunder are in force. Agent shall not be
required to keep itself informed as to the performance or observance by the
Borrowers of this Agreement or any other document referred to or provided
for herein or to inspect the properties or books of the Borrowers. Other
than as provided in this Agreement, Agent shall not have any duty,
responsibility or liability to
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<PAGE>
provide any Bank with any credit or other information concerning the
affairs, financial condition or business of the Borrowers which may come
into the possession of Agent.
(h) Indemnification. Banks agree to indemnify Agent, ratably
---------------
according to their respective Commitments on a Pro Rata basis, from and
against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements of any proper
and reasonable kind or nature whatsoever which may be imposed on, incurred
by or asserted against Agent in any way relating to or arising out of the
Loan Documents or any action taken or omitted by Agent under the Loan
Documents, provided that no Bank shall be liable for any portion of such
liabilities, obligations, losses, damages, penalties, actions, judgments,
suits, costs, expenses or disbursements resulting from Agent's gross
negligence or willful misconduct. Each Bank shall be entitled to be
reimbursed by the Agent for any amount such Bank paid to Agent under this
Section 15(h) to the extent the Agent has been reimbursed for such payments
by the Borrowers or any other Person. THE PARTIES INTEND FOR THE PROVISIONS
OF THIS SECTION TO APPLY TO AND PROTECT THE AGENT FROM THE CONSEQUENCES OF
ANY LIABILITY INCLUDING STRICT LIABILITY IMPOSED OR THREATENED TO BE
IMPOSED ON AGENT AS WELL AS FROM THE CONSEQUENCES OF ITS OWN NEGLIGENCE,
WHETHER OR NOT THAT NEGLIGENCE IS THE SOLE, CONTRIBUTING OR CONCURRING
CAUSE OF ANY SUCH LIABILITY.
(i) Benefit of Section 15. The agreements contained in this Section
---------------------
15 are solely for the benefit of Agent and the Banks and are not for the
benefit of, or to be relied upon by, the Borrowers, any affiliate of the
Borrowers or any other person.
(j) Pro Rata Treatment. Subject to the provisions of this Agreement,
------------------
each payment (including each prepayment) by the Borrowers and collection by
Banks (including offsets) on account of the principal of and interest on
the Notes and fees provided for in this Agreement, payable by the Borrowers
shall be made Pro Rata; provided, however, in the event that any Defaulting
Bank shall have failed to make an Advance as contemplated under Section 3
hereof and Agent or another Bank or Banks shall have made such Advance,
payment received by Agent for the account of such Defaulting Bank or Banks
shall not be distributed to such Defaulting Bank or Banks until such
Advance or Advances shall have been repaid in full to the Bank or Banks who
funded such Advance or Advances.
(k) Assumption as to Payments. Except as specifically provided
-------------------------
herein, unless Agent shall have received notice from the Borrowers prior to
the date on which any payment is due to Banks hereunder that the Borrowers
will not make such payment in full, Agent may, but shall not be required
to, assume that the Borrowers has made such payment in full to Agent on
such date and Agent may, in reliance upon such assumption, cause to be
distributed to each Bank on such due date an amount equal to the amount
then due such Bank. If and to the extent the Borrowers shall not have so
made such payment in full to
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<PAGE>
Agent, each Bank shall repay to Agent forthwith on demand such amount
distributed to such Bank together with interest thereon, for each day from
the date such amount is distributed to such Bank until the date such Bank
repays such amount to Agent, at the interest rate applicable to such
portion of the Revolving Loan.
(l) Other Financings. Without limiting the rights to which any Bank
----------------
otherwise is or may become entitled, such Bank shall have no interest, by
virtue of this Agreement or the Loan Documents, in (a) any present or
future loans from, letters of credit issued by, or leasing or other
financial transactions by, any other Bank to, on behalf of, or with the
Borrowers (collectively referred to herein as "Other Financings") other
than the obligations hereunder; (b) any present or future guarantees by or
for the account of the Borrowers which are not contemplated by the Loan
Documents; (c) any present or future property taken as security for any
such Other Financings; or (d) any property now or hereafter in the
possession or control of any other Bank which may be or become security for
the obligations of the Borrowers arising under any loan document by reason
of the general description of indebtedness secured or property contained in
any other agreements, documents or instruments relating to any such Other
Financings.
(m) Interests of Banks. Nothing in this Agreement shall be construed
------------------
to create a partnership or joint venture between Banks for any purpose.
Agent, Banks and the Borrowers recognizes that the respective obligations
of Banks under the Commitments shall be several and not joint and that
neither Agent, nor any of Banks shall be responsible or liable to perform
any of the obligations of the other under this Agreement. Each Bank is
deemed to be the owner of an undivided interest in and to all rights,
titles, benefits and interests belonging and accruing to Agent under the
Security Instruments, including, without limitation, liens and security
interests in any collateral, fees and payments of principal and interest by
the Borrowers under the Commitments on a Pro Rata basis. Each Bank shall
perform all duties and obligations of Banks under this Agreement in the
same proportion as its ownership interest in the Loans outstanding at the
date of determination thereof.
(n) Investments. Whenever Agent in good faith determines that it is
-----------
uncertain about how to distribute to Banks any funds which it has received,
or whenever Agent in good faith determines that there is any dispute among
the Banks about how such funds should be distributed, Agent may choose to
defer distribution of the funds which are the subject of such uncertainty
or dispute. If Agent in good faith believes that the uncertainty or dispute
will not be promptly resolved, or if Agent is otherwise required to invest
funds pending distribution to the Banks, Agent may invest such funds
pending distribution (at the risk of the Borrowers). All interest on any
such investment shall be distributed upon the distribution of such
investment and in the same proportions and to the same Persons as such
investment. All monies received by Agent for distribution to the Banks
(other than to the
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Person who is Agent in its separate capacity as a Bank) shall be held by
the Agent pending such distribution solely as Agent for such Banks, and
Agent shall have no equitable title to any portion thereof.
16. EXERCISE OF RIGHTS. No failure to exercise, and no delay in
exercising, on the part of the Agent or the Banks, any right hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise thereof
preclude any other or further exercise thereof or the exercise of any other
right. The rights of the Agent and the Banks hereunder shall be in addition to
all other rights provided by law. No modification or waiver of any provision of
the Loan Documents, including this Agreement, or the Note nor consent to
departure therefrom, shall be effective unless in writing, and no such consent
or waiver shall extend beyond the particular case and purpose involved. No
notice or demand given in any case shall constitute a waiver of the right to
take other action in the same, similar or other circumstances without such
notice or demand.
17. NOTICES. Any notices or other communications required or permitted to
be given by this Agreement or any other documents and instruments referred to
herein must be given in writing (which may be by facsimile transmission) and
must be personally delivered or mailed by prepaid certified or registered mail
to the party to whom such notice or communication is directed at the address of
such party as follows: (a) BORROWERS: c/o GOTHIC ENERGY CORPORATION, 5727 South
Lewis, Suite 700, Tulsa, Oklahoma 74105-7148, Attention: Michael Paulk,
President; and (b) BANKS: c/o AGENT, BANK ONE, TEXAS, N.A., 1717 Main Street,
Dallas, Texas 75201, Facsimile No. 214-290-2627, Attention: Mynan C. Feldman,
Vice President. Any such notice or other communication shall be deemed to have
been given (whether actually received or not) on the day it is personally
delivered or delivered by facsimile as aforesaid or, if mailed, on the third day
after it is mailed as aforesaid. Any party may change its address for purposes
of this Agreement by giving notice of such change to the other party pursuant to
this Section 17.
18. EXPENSES. The Borrowers shall pay (i) all reasonable and necessary
out-of-pocket expenses of the Banks, including reasonable fees and disbursements
of special counsel for the Agent, in connection with the preparation of this
Agreement, any waiver or consent hereunder or any amendment hereof or any
default or Event of Default or alleged default or Event of Default hereunder,
(ii) all reasonable and necessary out-of-pocket expenses of the Agent, including
reasonable fees and disbursements of special counsel for the Agent in connection
with the preparation of any participation agreement for a participant or
participants requested by the Borrowers or any amendment thereof and (iii) if a
default or an Event of Default occurs, all reasonable and necessary out-of-
pocket expenses incurred by the Banks, including fees and disbursements of
counsel, in connection with such default and Event of Default and collection and
other enforcement proceedings resulting therefrom. The Borrowers shall
indemnify the Banks against any transfer taxes, document taxes, assessments or
charges made by any governmental authority by reason of the execution, delivery
and filing of the Loan Documents.
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19. INDEMNITY. The Borrowers agree to indemnify and hold harmless the
Banks and their respective officers, employees, agents, attorneys and
representatives (singularly, an "Indemnified Party", and collectively, the
"Indemnified Parties") from and against any loss, cost, liability, damage or
expense (including the reasonable fees and out-of-pocket expenses of counsel to
the Banks, including all local counsel hired by such counsel) ("Claim") incurred
by the Banks in investigating or preparing for, defending against, or providing
evidence, producing documents or taking any other action in respect of any
commenced or threatened litigation, administrative proceeding or investigation
under any federal securities law, federal or state environmental law, or any
other statute of any jurisdiction, or any regulation, or at common law or
otherwise, which is alleged to arise out of or is based upon any acts, practices
or omissions or alleged acts, practices or omissions of the Borrowers or their
agents or arises in connection with the duties, obligations or performance of
the Indemnified Parties in negotiating, preparing, executing, accepting,
keeping, completing, countersigning, issuing, selling, delivering, releasing,
assigning, handling, certifying, processing or receiving or taking any other
action with respect to the Loan Documents and all documents, items and materials
contemplated thereby even if any of the foregoing arises out of an Indemnified
Party's ordinary negligence. It is understood and agreed that the foregoing
indemnity and hold harmless shall also apply to the Paulk Note and the Rainwater
Note, the Guaranty of the Paulk Note and the Rainwater Note by Energy and any
Claim incurred by Bank One, the Banks or the Agent investigating or preparing
for, defending against or providing evidence, producing documents taking any
other action in respect of any commenced or threatened litigation,
administrative proceeding or investigation under any federal or state statute or
other regulation of common law or otherwise which is alleged to arise out of or
based upon any acts, practices or omissions or alleged acts, practices or
omissions of the Borrowers or their agents or Bank One, the Banks, the Agent or
any other their agents arising in connection with any set of facts relating in
any respect to the Paulk Note or the Rainwater Note or theh notes by Energy.
The indemnity set forth herein shall be in addition to any other obligations or
liabilities of the Borrowers to the Banks hereunder or at common law or
otherwise, and shall survive any termination of this Agreement, the expiration
of the Loan and the payment of all indebtedness of the Borrowers to the Banks
hereunder and under the Notes, provided that the Borrowers shall have no
obligation under this Section to the Bank with respect to any of the foregoing
arising out of the gross negligence or willful misconduct of the Bank. If any
Claim is asserted against any Indemnified Party, the Indemnified Party shall
endeavor to notify the Borrowers of such Claim (but failure to do so shall not
affect the indemnification herein made except to the extent of the actual harm
caused by such failure). The Indemnified Party shall have the right to employ,
at the Borrowers' expense, counsel of the Indemnified Parties' choosing and to
control the defense of the Claim. The Borrowers may at their own expense also
participate in the defense of any Claim. Each Indemnified Party may employ
separate counsel in connection with any Claim to the extent such Indemnified
Party believes it reasonably prudent to protect such Indemnified Party. THE
PARTIES INTEND FOR THE PROVISIONS OF THIS SECTION TO APPLY TO AND PROTECT
EACH INDEMNIFIED PARTY FROM THE CONSEQUENCES OF ANY LIABILITY INCLUDING STRICT
LIABILITY IMPOSED OR THREATENED TO BE IMPOSED ON
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<PAGE>
AGENT AS WELL AS FROM THE CONSEQUENCES OF ITS OWN NEGLIGENCE, WHETHER OR NOT
THAT NEGLIGENCE IS THE SOLE, CONTRIBUTING, OR CONCURRING CAUSE OF ANY CLAIM.
20. GOVERNING LAW. THIS AGREEMENT IS BEING EXECUTED AND DELIVERED, AND IS
INTENDED TO BE PERFORMED, IN DALLAS, DALLAS COUNTY, TEXAS, AND THE SUBSTANTIVE
LAWS OF TEXAS SHALL GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND
INTERPRETATION OF THIS AGREEMENT AND ALL OTHER DOCUMENTS AND INSTRUMENTS
REFERRED TO HEREIN, UNLESS OTHERWISE SPECIFIED THEREIN.
21. INVALID PROVISIONS. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under present or future laws effective during
the term of this Agreement, such provisions shall be fully severable and this
Agreement shall be construed and enforced as if such illegal, invalid or
unenforceable provision had never comprised a part of this Agreement, and the
remaining provisions of the Agreement shall remain in full force and effect and
shall not be affected by the illegal, invalid or unenforceable provision or by
its severance from this Agreement.
22. MAXIMUM INTEREST RATE. Regardless of any provisions contained in this
Agreement or in any other documents and instruments referred to herein, the
Banks shall never be deemed to have contracted for or be entitled to receive,
collect or apply as interest on the Notes any amount in excess of the Maximum
Rate, and in the event any Bank ever receives, collects or applies as interest
any such excess, of if an acceleration of the maturities of any Notes or if any
prepayment by the Borrowers result in the Borrowers having paid any interest in
excess of the Maximum Rate, such amount which would be excessive interest shall
be applied to the reduction of the unpaid principal balance of the Notes for
which such excess was received, collected or applied, and, if the principal
balance of such Note is paid in full, any remaining excess shall forthwith be
paid to the Borrowers. All sums paid or agreed to be paid to the Banks for the
use, forbearance or detention of the indebtedness evidenced by the Notes and/or
this Agreement shall, to the extent permitted by applicable law, be amortized,
prorated, allocated and spread throughout the full term of such indebtedness
until payment in full so that the rate or amount of interest on account of such
indebtedness does not exceed the Maximum Rate. In determining whether or not
the interest paid or payable under any specific contingency exceeds the Maximum
Rate of interest permitted by law, the Borrowers and the Banks shall, to the
maximum extent permitted under applicable law, (i) characterize any non-
principal payment as an expense, fee or premium, rather than as interest; and
(ii) exclude voluntary prepayments and the effect thereof; and (iii) compare the
total amount of interest contracted for, charged or received with the total
amount of interest which could be contracted for, charged or received throughout
the entire contemplated term of the Note at the Maximum Rate.
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<PAGE>
23. AMENDMENTS. This Agreement may be amended only by an instrument in
writing executed by an authorized officer of the party against whom such
amendment is sought to be enforced.
24. MULTIPLE COUNTERPARTS. This Agreement may be executed in a number of
identical separate counterparts, each of which for all purposes is to be deemed
an original, but all of which shall constitute, collectively, one agreement. No
party to this Agreement shall be bound hereby until a counterpart of this
Agreement has been executed by all parties hereto.
25. CONFLICT. In the event any term or provision hereof is inconsistent
with or conflicts with any provision of the Loan Documents, the terms or
provisions contained in this Agreement shall be controlling.
26. SURVIVAL. All covenants, agreements, undertakings, representations
and warranties made in the Loan Documents, including this Agreement, the Notes
or other documents and instruments referred to herein shall survive all closings
hereunder and shall not be affected by any investigation made by any party.
27. PARTIES BOUND. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors, assigns, heirs,
legal representatives and estates, provided, however, that the Borrowers may
not, without the prior written consent of the Banks, assign any rights, powers,
duties or obligations hereunder.
28. ASSIGNMENTS AND PARTICIPATIONS.
(a) Each Bank shall have the right to sell, assign or transfer all or
any part of its Note or Notes, its Commitments and its rights and
obligations hereunder to one or more Affiliates, Banks, financial
institutions, pension plans, investment funds, or similar Persons or to a
Federal Reserve Bank; provided, that in connection with each sale,
--------
assignment or transfer (other than to an Affiliate, a Bank or a Federal
Reserve Bank), the applicable Bank will consider the opinion and
recommendation of Borrowers, which opinion and recommendation shall in no
way be binding upon such Bank, and each such sale, assignment, or transfer
(other than to an Affiliate, a Bank or a Federal Reserve Bank), shall
require the consent of Agent, which consent will not be unreasonably
withheld, and the assignee, transferee or recipient shall have, to the
extent of such sale, assignment, or transfer, the same rights, benefits and
obligations as it would if it were such Bank and a holder of such Note,
Commitments and rights and obligations, including, without limitation, the
right to vote on decisions requiring consent or approval of all Banks or
Majority Banks and the obligation to fund its Commitments; provided,
further, that (1) each such sale, assignment, or transfer (other than to an
Affiliate, a Bank or a Federal Reserve Bank) shall be in an aggregate
principal amount not less than $5,000,000, (2) each
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<PAGE>
remaining Bank shall at all times maintain Commitments then outstanding in
an aggregate principal amount at least equal to $5,000,000; (3) no Bank may
offer to sell its Note or Notes, Commitments, rights and obligations or
interests therein in violation of any securities laws; and (4) no such
assignments (other than to a Federal Reserve Bank) shall become effective
until the assigning Bank and its assignees delivers to Agent and Borrowers
an Assignment and Acceptance and the Note or Notes subject to such
assignment and other documents evidencing any such assignment. An
assignment fee in the amount of $2,500 for than to an Affiliate, a Bank or
the Federal Reserve Bank) will be payable to Agent by assignor or assignee.
Within five (5) Business Days after its receipt of copies of the Assignment
and Acceptance and the other documents relating thereto and the Note or
Notes, the Borrowers shall execute and deliver to Agent (for delivery to
the relevant assignee) a new Note or Notes evidencing such assignee's
assigned Commitments and if the assignor Bank has retained a portion of its
Commitments, a replacement Note in the principal amount of the Commitments
retained by the assignor (except as provided in the last sentence of this
paragraph (a) such Note or Notes to be in exchange for, but not in payment
of, the Note or Notes held by such Bank). On and after the effective date
of an assignment hereunder, the assignee shall for all purposes be a Bank,
party to this Agreement and any other Loan Document executed by the Banks
and shall have all the rights and obligations of a Bank under the Loan
Documents, to the same extent as if it were an original party thereto, and
no further consent or action by Borrowers, Banks or the Agent shall be
required to release the transferor Bank with respect to its Commitments
assigned to such assignee and the transferor Bank shall henceforth be so
released.
(b) Each Bank shall have the right to grant participations in all or
any part of such Bank's Notes and Commitments hereunder to one or more
pension plans, investment funds, financial institutions or other Persons,
provided, that:
(i) each Bank granting a participation shall retain the right
to vote hereunder, and no participant shall be entitled to vote
hereunder on decisions requiring consent or approval of Bank or
Majority Banks (except as set forth in (iii) below);
(ii) in the event any Bank grants a participation hereunder,
such Bank's obligations under the Loan Documents shall remain
unchanged, such Bank shall remain solely responsible to the other
parties hereto for the performance of such obligations, such Bank
shall remain the holder of any such Note or Notes for all purposes
under the Loan Documents, and Agent, each Bank and each Borrower shall
be entitled to deal with the Bank granting a participation in the same
manner as if no participation had been granted; and
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<PAGE>
(iii) no participant shall ever have any right by reason of its
participation to exercise any of the rights of Banks hereunder, except
that any Bank may agree with any participant that such Bank will not,
without the consent of such participant (which consent may not be
unreasonably withheld) consent to any amendment or waiver requiring
approval of all Banks.
(c) It is understood and agreed that any Bank may provide to
assignees and participants and prospective assignees and participants
financial information and reports and data concerning Borrowers' properties
and operations which was provided to such Bank pursuant to this Agreement.
(d) Upon the reasonable request of either Agent or any Borrower, each
Bank will identify those to whom it has assigned or participated any part
of its Notes and Commitment, and provide the amounts so assigned or
participated.
29. OTHER AGREEMENTS. THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
30. FINANCIAL TERMS. All accounting terms used in this Agreement which
are not specifically defined herein shall be construed in accordance with GAAP.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
BORROWERS:
GOTHIC ENERGY CORPORATION
a Delaware corporation
By:
-------------------------------------
Michael Paulk
President
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<PAGE>
GOTHIC ENERGY OF TEXAS, INC.
an Oklahoma corporation
By:
-------------------------------------
Michael Paulk
President
GOTHIC GAS CORPORATION
an Oklahoma corporation
By:
-------------------------------------
Michael Paulk
President
BANKS:
BANK ONE, TEXAS, N.A.,
a national banking association
By:
-------------------------------------
Mynan C. Feldman
Vice President
AGENT:
BANK ONE, TEXAS, N.A.,
a national banking association
By:
-------------------------------------
Mynan C. Feldman
Vice President
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<PAGE>
EXHIBIT "A"
NOTICE OF BORROWING
The undersigned hereby certifies that he is the ___________________ of
GOTHIC ENERGY CORPORATION, a Delaware corporation, and that as such he is
authorized execute this Notice of Borrowing on behalf of the Borrowers (as such
term is defined in the Agreement). With reference to that certain Restated Loan
Agreement dated as of February __, 1997 (as same may be amended, modified,
increased, supplemented and/or restated from time to time, the "Agreement")
entered into by and between Borrower and BANK ONE, TEXAS, N.A. ("Bank One"), as
Agent, for itself and the financial institutions party thereto (the "Banks"),
the undersigned further certifies, represents and warrants on behalf of the
Borrowers that all of the foregoing statements are true and correct (each
capitalized term used herein having the same meaning given to it in the
Agreement unless otherwise specified):
(a) Borrowers request that the Banks advance Borrowers on the
Revolving Loan _____________ the aggregate sum of $________________ by no
later than __________________. Immediately following such Advance, the
aggregate outstanding balance of Advances shall equal $_________________ on
the Revolving Loan.
(b) This Advance shall be a: Base Rate Loan ____________, or a
Eurodollar Loan ______________,(if Eurodollar please state requested
Interest Period ________ months).
(c) As of the date hereof, and as a result of the making of the
requested Advance, there does not and will not exist any Default or Event
of Default.
(d) Borrowers have performed and complied with all agreements and
conditions contained in the Agreement which are required to be performed or
complied with by Borrowers before or on the date hereof.
(e) The representations and warranties contained in the Agreement are
true and correct in all material respects as of the date hereof and shall
be true and correct upon the making of the Advance, with the same force and
effect as though made on and as of the date hereof and thereof.
(f) No change that would cause a Material Adverse Effect to the
condition, financial or otherwise, of Borrowers have occurred since the
most recent Financial Statement provided to the Banks.
<PAGE>
EXECUTED AND DELIVERED this _____ day of ___________ 199__.
GOTHIC ENERGY CORPORATION,
a Delaware corporation
By:
----------------------------------------
Name:
----------------------------------------
Title:
----------------------------------------
-2-
<PAGE>
EXHIBIT "B"
REVOLVING NOTE
$_____________ Dallas, Texas ___________, 1997
FOR VALUE RECEIVED, the undersigned GOTHIC ENERGY CORPORATION, an Oklahoma
corporation, GOTHIC ENERGY OF TEXAS, INC., an Oklahoma corporation and GOTHIC
GAS CORPORATION, an Oklahoma corporation (hereinafter referred to as the
"Borrowers") hereby unconditionally, jointly and severally, promise to pay to
the order of _____________________ (the "Bank") at the offices of BANK ONE,
TEXAS, N.A. (the "Agent") in Dallas County, Texas, the principal sum of
_____________________ AND __/100 DOLLARS ($______________), in lawful money of
the United States of America together with interest from the date hereof until
paid at the rates specified in the Loan Agreement (as hereinafter defined). All
payments of principal and interest due hereunder are payable at the offices of
Agent at 1717 Main Street, 4th Floor, Bank One Center, P.O. Box 655415, Dallas,
Texas 75265-5415, attention: Energy Department, or at such other address as
Bank shall designate in writing to Borrowers.
Notwithstanding anything to the contrary contained in this Note or any
other Loan Document executed in connection herewith, the liability of Gothic Gas
Corporation hereunder, when combined with Gas' obligations under all other Notes
issued pursuant to the Loan Agreement shall never exceed the maximum amount of
liability that can be incurred by Gas without rendering this Note and the other
Notes voidable under applicable law relating to fraudulent conveyance or
fraudulent transfer.
The principal and all accrued interest on this Note shall be due and
payable in accordance with the terms and provisions of the Loan Agreement.
This Note is executed pursuant to that certain Restated Loan Agreement
dated February 17, 1997 between Borrowers and Banks (the "Loan Agreement"), and
is one of the Notes referred to therein. Reference is made to the Loan
Agreement and the Loan Documents (as that term is defined in the Loan Agreement)
for a statement of prepayment, rights and obligations of Borrowers, for a
statement of the terms and conditions under which the due date of this Note may
be accelerated and for statements regarding other matters affecting this Note
(including without limitation the obligations of the holder hereof to advance
funds hereunder, principal and interest payment due dates, voluntary and
mandatory prepayments, exercise of rights and remedies, payment of attorneys'
fees, court costs and other costs of collection and certain waivers by Borrowers
and others now or hereafter obligated for payment of any sums due hereunder).
Upon the occurrence of an Event of Default, as that term is defined in the Loan
Agreement and Loan Documents, the holder hereof (i) may declare forthwith to be
entirely and immediately due and payable the principal balance hereof and the
interest accrued hereon, and (ii) shall have all rights and remedies of the Bank
under the Loan Agreement and Loan Documents. This Note may be prepaid in
accordance with the terms and provisions of the Loan Agreement.
<PAGE>
Regardless of any provision contained in this Note, the holder hereof shall
never be entitled to receive, collect or apply, as interest on this Note, any
amount in excess of the Maximum Rate (as such term is defined in the Loan
Agreement), and, if the holder hereof ever receives, collects, or applies as
interest, any such amount which would be excessive interest, it shall be deemed
a partial prepayment of principal and treated hereunder as such; and, if the
indebtedness evidenced hereby is paid in full, any remaining excess shall
forthwith be paid to Borrowers. In determining whether or not the interest paid
or payable, under any specific contingency, exceeds the Maximum Rate, Borrowers
and the holder hereof shall, to the maximum extent permitted under applicable
law (i) characterize any non-principal payment as an expense, fee or premium
rather than as interest, (ii) exclude voluntary prepayments and the effects
thereof, and (iii) spread the total amount of interest throughout the entire
contemplated term of the obligations evidenced by this Note and/or referred to
in the Loan Agreement so that the interest rate is uniform throughout the entire
term of this Note; provided that, if this Note is paid and performed in full
prior to the end of the full contemplated term thereof; and if the interest
received for the actual period of existence thereof exceeds the Maximum Rate,
the holder hereof shall refund to Borrowers the amount of such excess or credit
the amount of such excess against the indebtedness evidenced hereby, and, in
such event, the holder hereof shall not be subject to any penalties provided by
any laws for contracting for, charging, taking, reserving or receiving interest
in excess of the Maximum Rate.
If any payment of principal or interest on this Note shall become due on a
day other than a Business Day (as such term is defined in the Loan Agreement),
such payment shall be made on the next succeeding Business Day and such
extension of time shall in such case be included in computing interest in
connection with such payment.
If this Note is placed in the hands of an attorney for collection, or if it
is collected through any legal proceeding at law or in equity or in bankruptcy,
receivership or other court proceedings, Borrowers agree to pay all costs of
collection, including, but not limited to, court costs and reasonable attorneys'
fees.
Borrowers and each surety, endorser, guarantor and other party ever liable
for payment of any sums of money payable on this Note, jointly and severally
waive presentment and demand for payment, notice of intention to accelerate the
maturity, protest, notice of protest and nonpayment, as to this Note and as to
each and all installments hereof, and agree that their liability under this Note
shall not be affected by any renewal or extension in the time of payment hereof,
or in any indulgences, or by any release or change in any security for the
payment of this Note, and hereby consent to any and all renewals, extensions,
indulgences, releases or changes.
This Note shall be governed by and construed in accordance with the
applicable laws of the United States of America and the laws of the State of
Texas.
THIS WRITTEN NOTE, THE LOAN AGREEMENT AND THE OTHER LOAN DOCUMENTS
REPRESENT THE FINAL AGREEMENTS BETWEEN THE PARTIES AND
-2-
<PAGE>
MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT
ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN
THE PARTIES.
EXECUTED as of the date and year first above written.
BORROWERS:
---------
GOTHIC ENERGY CORPORATION
a Delaware corporation
By:
-------------------------------------
Michael Paulk
President
GOTHIC ENERGY OF TEXAS, INC.
an Oklahoma corporation
By:
-------------------------------------
Michael Paulk
President
GOTHIC GAS CORPORATION
an Oklahoma corporation
By:
------------------------------------
Michael Paulk
President
-3-
<PAGE>
EXHIBIT "C"
BRIDGE NOTE
$_____________ Dallas, Texas ___________, 1997
FOR VALUE RECEIVED, the undersigned GOTHIC ENERGY CORPORATION, an Oklahoma
corporation, GOTHIC ENERGY OF TEXAS, INC., an Oklahoma corporation and GOTHIC
GAS CORPORATION, an Oklahoma corporation (hereinafter referred to as the
"Borrowers") hereby unconditionally, jointly and severally, promise to pay to
the order of _____________________ (the "Bank") at the offices of BANK ONE,
TEXAS, N.A. (the "Agent") in Dallas County, Texas, the principal sum of
___________________ AND __/100 DOLLARS ($_____________), in lawful money of the
United States of America together with interest from the date hereof until paid
at the rates specified in the Loan Agreement (as hereinafter defined). All
payments of principal and interest due hereunder are payable at the offices of
Agent at 1717 Main Street, 4th Floor, Bank One Center, P.O. Box 655415, Dallas,
Texas 75265-5415, attention: Energy Department, or at such other address as
Bank shall designate in writing to Borrowers.
Notwithstanding anything to the contrary contained in this Note or any
other Loan Document executed in connection herewith, the liability of Gothic Gas
Corporation hereunder, when combined with Gas' obligations under all other Notes
issued pursuant to the Loan Agreement shall never exceed the maximum amount of
liability that can be incurred by Gas without rendering this Note and the other
Notes voidable under applicable law relating to fraudulent conveyance or
fraudulent transfer.
The principal and all accrued interest on this Note shall be due and
payable in accordance with the terms and provisions of the Loan Agreement.
This Note is executed pursuant to that certain Restated Loan Agreement
dated February 17, 1997 between Borrowers and Banks (the "Loan Agreement"), and
is one of the Notes referred to therein. Reference is made to the Loan
Agreement and the Loan Documents (as that term is defined in the Loan Agreement)
for a statement of prepayment, rights and obligations of Borrowers, for a
statement of the terms and conditions under which the due date of this Note may
be accelerated and for statements regarding other matters affecting this Note
(including without limitation the obligations of the holder hereof to advance
funds hereunder, principal and interest payment due dates, voluntary and
mandatory prepayments, exercise of rights and remedies, payment of attorneys'
fees, court costs and other costs of collection and certain waivers by Borrowers
and others now or hereafter obligated for payment of any sums due hereunder).
Upon the occurrence of an Event of Default, as that term is defined in the Loan
Agreement and Loan Documents, the holder hereof (i) may declare forthwith to be
entirely and immediately due and payable the principal balance hereof and the
interest accrued hereon, and (ii) shall have all rights and remedies of the Bank
under the Loan Agreement and Loan Documents. This Note may be prepaid in
accordance with the terms and provisions of the Loan Agreement.
<PAGE>
Regardless of any provision contained in this Note, the holder hereof shall
never be entitled to receive, collect or apply, as interest on this Note, any
amount in excess of the Maximum Rate (as such term is defined in the Loan
Agreement), and, if the holder hereof ever receives, collects, or applies as
interest, any such amount which would be excessive interest, it shall be deemed
a partial prepayment of principal and treated hereunder as such; and, if the
indebtedness evidenced hereby is paid in full, any remaining excess shall
forthwith be paid to Borrowers. In determining whether or not the interest paid
or payable, under any specific contingency, exceeds the Maximum Rate, Borrowers
and the holder hereof shall, to the maximum extent permitted under applicable
law (i) characterize any non-principal payment as an expense, fee or premium
rather than as interest, (ii) exclude voluntary prepayments and the effects
thereof, and (iii) spread the total amount of interest throughout the entire
contemplated term of the obligations evidenced by this Note and/or referred to
in the Loan Agreement so that the interest rate is uniform throughout the entire
term of this Note; provided that, if this Note is paid and performed in full
prior to the end of the full contemplated term thereof; and if the interest
received for the actual period of existence thereof exceeds the Maximum Rate,
the holder hereof shall refund to Borrowers the amount of such excess or credit
the amount of such excess against the indebtedness evidenced hereby, and, in
such event, the holder hereof shall not be subject to any penalties provided by
any laws for contracting for, charging, taking, reserving or receiving interest
in excess of the Maximum Rate.
If any payment of principal or interest on this Note shall become due on a
day other than a Business Day (as such term is defined in the Loan Agreement),
such payment shall be made on the next succeeding Business Day and such
extension of time shall in such case be included in computing interest in
connection with such payment.
If this Note is placed in the hands of an attorney for collection, or if it
is collected through any legal proceeding at law or in equity or in bankruptcy,
receivership or other court proceedings, Borrowers agree to pay all costs of
collection, including, but not limited to, court costs and reasonable attorneys'
fees.
Borrowers and each surety, endorser, guarantor and other party ever liable
for payment of any sums of money payable on this Note, jointly and severally
waive presentment and demand for payment, notice of intention to accelerate the
maturity, protest, notice of protest and nonpayment, as to this Note and as to
each and all installments hereof, and agree that their liability under this Note
shall not be affected by any renewal or extension in the time of payment hereof,
or in any indulgences, or by any release or change in any security for the
payment of this Note, and hereby consent to any and all renewals, extensions,
indulgences, releases or changes.
This Note shall be governed by and construed in accordance with the
applicable laws of the United States of America and the laws of the State of
Texas.
THIS WRITTEN NOTE, THE LOAN AGREEMENT AND THE OTHER LOAN DOCUMENTS
REPRESENT THE FINAL AGREEMENTS BETWEEN THE PARTIES AND
-2-
<PAGE>
MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT
ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN
THE PARTIES.
EXECUTED as of the date and year first above written.
BORROWERS:
---------
GOTHIC ENERGY CORPORATION
a Delaware corporation
By:
-------------------------------------
Michael Paulk
President
GOTHIC ENERGY OF TEXAS, INC.
an Oklahoma corporation
By:
-------------------------------------
Michael Paulk
President
GOTHIC GAS CORPORATION
an Oklahoma corporation
By:
-------------------------------------
Michael Paulk
President
-3-
<PAGE>
EXHIBIT "D"
CERTIFICATE OF COMPLIANCE
The undersigned hereby certifies that he is the ___________________ of
GOTHIC ENERGY CORPORATION, an Oklahoma corporation, the
_____________________________ of GOTHIC ENERGY OF TEXAS, INC., an Oklahoma
corporation and GOTHIC GAS CORPORATION, an Oklahoma corporation (collectively,
the "Borrowers"), and that as such he is authorized to execute this Certificate
of Compliance on behalf of the Borrowers and the other Borrowers. With
reference to that certain Restated Loan Agreement, dated as of February ___,
1997, (as same may be amended, modified, increased, supplemented and/or restated
from time to time, the "Agreement") entered into between the Borrowers and BANK
ONE, TEXAS, N.A. as "Agent" for itself and the Banks signatory thereto (the
"Banks"), the undersigned further certifies, represents and warrants on behalf
of the Borrowers that all of the following statements are true and correct (each
capitalized term used herein having the same meaning given to it in the
Agreement unless otherwise specified):
(a) The Borrowers have fulfilled in all material respects its
obligations under the Notes and Security Instruments, including the Loan
Agreement, and all representations and warranties made herein and therein
continue (except to the extent they relate solely to an earlier date) to be
true and correct in all material respects [if the representations and
warranties are not true and correct, the party signing this certificate
shall except from the foregoing statement the matters for which such
representations and warranties are no longer true specifying the nature of
any such change.]
(b) No Event of Default has occurred under the Security Instruments,
including the Loan Agreement [if an Event of Default has occurred, the
party certifying hereto shall specify the facts constituting the Event of
Default and the nature and status thereof].
(c) To the extent requested from time to time by the Agent, the
certifying party shall specifically affirm compliance of the Borrowers in
all material respects with any of its representations and warranties
(except to the extent they relate solely to an earlier date) or obligations
under said instruments.
(d) Financial Computations for the period ending ________________
(provide calculations on a consolidated basis):
(i) Current Ratio;
(ii) Debt Service Coverage Ratio;
(iii) General and Administrative Expenses; and
(iv) Tangible Net Worth.
<PAGE>
EXECUTED, DELIVERED AND CERTIFIED TO this ______ day of
____________________, 19__.
GOTHIC ENERGY CORPORATION
a Delaware corporation
By:
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Name:
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Title:
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GOTHIC ENERGY OF TEXAS, INC.
an Oklahoma corporation
By:
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Name:
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Title:
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GOTHIC GAS CORPORATION
an Oklahoma corporation
By:
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Name:
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Title:
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<PAGE>
EXHIBIT "E"
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ASSIGNMENT AND ACCEPTANCE AGREEMENT
This ASSIGNMENT AND ACCEPTANCE AGREEMENT (this "Assignment and
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Acceptance") dated as of __________, 199_ is made between ____________________
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(the "Assignor") and ____________________ (the "Assignee").
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RECITALS
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WHEREAS, the Assignor is party to that certain Amended and Restated
Loan Agreement dated as of February 17, 1997 (as extended, renewed, amended or
restated from time to time, the "Loan Agreement") by and among Gothic Energy
--------------
Corporation, an Oklahoma corporation ("Gothic"), Gothic Energy of Texas, Inc.,
an Oklahoma corporation ("Texas") and Gothic Gas Corporation, an Oklahoma
corporation ("Gas") (Gothic, Texas, and Gas are hereinafter collectively
referred to as the "Company"), the Banks signatory thereto (the "Banks") and
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Bank One, Texas, N.A., as Agent (in such capacity, the "Agent") (unless
-----
otherwise defined herein, capitalized terms used herein have the respective
meanings assigned to them in the Loan Agreement);
WHEREAS, as provided under the Loan Agreement, the Assignor has
committed to make Loans (the "Committed Loans") to the Company in aggregate
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amounts not to exceed (i) $_______ on the Revolving Loan (the "Revolving
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Commitment"), such Revolving Commitment being evidenced by a Revolving Note in
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the face amount of $____________ (the "Revolving Note") and (ii) $___________ on
the Bridge Loan (the "Bridge Loan Commitment"), such Bridge Loan Commitment
----------------------
being evidenced by a Bridge Note in the face amount of $___________ (the "Bridge
Note") (the Revolving Note and the Bridge Note are herein collectively referred
to as the "Notes"); the Revolving Commitment and the Bridge Loan Commitment are
hereinafter collectively referred to as (the "Commitment");
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WHEREAS, [the Assignor has made Committed Loans to the Company in the
aggregate principal amount of (i) $________ on the Revolving Commitment and
$_______ on the Bridge Loan Commitment] [no Committed Loans are outstanding
under the Loan Agreement]; and
WHEREAS, the Assignor wishes to assign to the Assignee [part] [all] of
the rights and obligations of the Assignor under the Loan Agreement in respect
of its Commitment, in an amount equal to $_______ on the Revolving Commitment
and $_______ on the Bridge Loan Commitment, for a total of $_______ for the
total Commitment (the "Assigned Amount") on the terms and subject to the
---------------
conditions set forth herein and the Assignee wishes to accept assignment of such
rights and assume such obligations from the Assignor on such terms and subject
to such conditions;
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements contained herein, the parties hereto agree as follows:
<PAGE>
1. Assignment and Acceptance.
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(a) Subject to the terms and conditions of this Assignment and
Acceptance , (i) the Assignor hereby sells, transfers and assigns to the
Assignee, and (ii) the Assignee hereby purchases, assumes and undertakes from
the Assignor, without recourse and without representation or warranty (except as
provided in this Assignment and Acceptance) __% (the "Assignee's Percentage
---------------------
Share") of (A) the Commitment [and the Committed Loans] of the Assignor, (B) the
- -----
Notes, and (C) all related rights, benefits, obligations, liabilities and
indemnities of the Assignor under and in connection with the Loan Agreement and
the Loan Documents.
[If appropriate, add paragraph specifying payment to Assignor by
Assignee of outstanding principal of, accrued interest on, and fees with respect
to, Committed Loans assigned.]
(b) With effect on and after the Effective Date (as defined in Section
5 hereof), the Assignee shall be a party to the Loan Agreement and succeed to
all of the rights and be obligated to perform all of the obligations of a Bank
under the Loan Agreement, including the requirements concerning confidentiality
and the payment of indemnification, with a Commitment in an amount equal to the
Assigned Amount. The Assignee agrees that it will perform in accordance with
their terms all of the obligations which by the terms of the Loan Agreement are
required to be performed by it as a Bank. It is the intent of the parties
hereto that the Commitment of the Assignor shall, as of the Effective Date, be
reduced by an amount equal to the Assigned Amount and the Assignor shall
relinquish its rights and be released from its obligations under the Loan
Agreement to the extent such obligations have been assumed by the Assignee.
(c) After giving effect to the assignment and assumption set forth herein,
on the Effective Date the Assignee's Commitment will be $_______, of which
$_______ is on the Revolving Commitment and $_______ is on the Bridge Loan
Commitment.
(d) After giving effect to the assignment and assumption set forth herein,
on the Effective Date the Assignor's Commitment will be $_______, of which
$_______ is on the Revolving Commitment and $________ is on the Bridge Loan
Commitment.
2. Payments.
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(a) As consideration for the sale, assignment and transfer contemplated in
Section 1 hereof, the Assignee shall pay to the Assignor on the Effective Date
in immediately available funds an amount equal to $_______, representing the
Assignee's Pro Rate Share of the principal amount of all Committed Loans.
(b) The [Assignor] [Assignee] further agrees to pay to the Agent a
processing fee in the amount specified in Section 28 of the Loan Agreement.
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<PAGE>
3. Reallocation of Payments. Any interest, fees and other payments
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accrued to the Effective Date with respect to the Commitment, the Committed
Loans and the Notes shall be for the account of the Assignor. Any interest, fees
and other payments accrued on and after the Effective Date with respect to the
Assigned Amount shall be for the account of the Assignee. Each of the Assignor
and the Assignee agrees that it will hold in trust for the other party any
interest, fees and other amounts which it may receive to which the other party
is entitled pursuant to the preceding sentence and pay to the other party any
such amounts which it may receive promptly upon receipt.
4. Independent Credit Decision. The Assignee (a) acknowledges that it has
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received a copy of the Loan Agreement and the Schedules and Exhibits thereto,
together with copies of the most recent financial statements referred to in
Section 12 of the Loan Agreement, and such other documents and information as it
has deemed appropriate to make its own credit and legal analysis and decision to
enter into this Assignment and Acceptance; and (b) agrees that it will,
independently and without reliance upon the Assignor, the Agent or any other
Bank and based on such documents and information as it shall deem appropriate at
the time, continue to make its own credit and legal decisions in taking or not
taking action under the Loan Agreement.
5. Effective Date; Notices.
-----------------------
(a) As between the Assignor and the Assignee, the effective date for this
Assignment and Acceptance shall be _________, 199__ (the "Effective Date");
--------------
provided that the following conditions precedent have been satisfied on or
- --------
before the Effective Date:
(i) this Assignment and Acceptance shall be executed and delivered by
the Assignor and the Assignee, together with the Notes;
(ii) the consent of the Agent required for an effective assignment of
the Assigned Amount by the Assignor to the Assignee under Section 28 of the
Loan Agreement shall have been duly obtained and shall be in full force and
effective as of the Effective Date;
(iii) the Assignee shall pay to the Assignor all amounts due to the
Assignor under this Assignment and Acceptance;
(iv) the processing fee referred to in Section 2(b) hereof and in
Section 28 of the Loan Agreement shall have been paid to the Agent; and
(v) the Assignor shall have assigned and the Assignee shall have
assumed a percentage equal to the Assignee's Percentage Share of the rights
and obligations of the Assignor under the Loan Agreement (if such agreement
exists).
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<PAGE>
(b) Promptly following the execution of this Assignment and Acceptance, the
Assignor shall deliver to the Company and the Agent for acknowledgement by the
Agent and the Company, a Notice of Assignment substantially in the form attached
hereto as Schedule 1.
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[6. Agent. [INCLUDES ONLY IF ASSIGNOR IS AGENT]
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(a) The Assignee hereby appoints and authorizes the Assignor to take such
action as agent on its behalf and to exercise such powers under the Loan
Agreement as are delegated to the Agent by the Banks pursuant to the terms of
the Loan Agreement.
(b) The Assignee shall assume no duties or obligations held by the Assignor
in its capacity as Agent under the Loan Agreement.]
7. Withholding Tax. The Assignee (a) represents and warrants to the
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Bank, the Agent and the Company that under applicable law and treaties no tax
will be required to be withheld by the Bank with respect to any payments to be
made to the Assignee hereunder, (b) agrees to furnish (if it is organized under
the laws of any jurisdiction other than the United States or any State thereof)
to the Agent and the Company prior to the time that the Agent or Company is
required to make any payment of principal, interest or fees hereunder, duplicate
executed originals of either U.S. Internal Revenue Service Form 4224 or U.S.
Internal Revenue Service Form 101 (wherein the Assignee claims entitlement to
the benefits of a tax treaty that provides for a complete exemption from U.S.
federal income withholding tax on all payments hereunder) and agrees to provide
new Forms 4224 or 1001 upon the expiration of any previously delivered form or
comparable statements in accordance with applicable U.S. law and regulations and
amendments thereto, duly executed and completed by the Assignee, and (c) agrees
to comply with all applicable U.S. laws and regulations with regard to such
withholding tax exemption.
8. Representations and Warranties.
------------------------------
(a) The Assignor represents and warrants that (i) it is the legal and
beneficial owner of the interest being assigned by it hereunder and that such
interest is free and clear of any Lien or other adverse claim; (ii) it is duly
organized and existing and it has the full power and authority to take, and has
taken, all action necessary to execute and deliver this Assignment and
Acceptance and any other documents required or permitted to be executed or
delivered by it in connection with this Assignment and Acceptance and to fulfill
its obligations hereunder; (iii) on notices to, or consents, authorizations or
approvals of, any Person are required (other than any already given or obtained)
for its due execution, delivery and performance of this Assignment and
Acceptance, and apart from any agreements or undertakings or filings required by
the Loan Agreement, no further action by, or notice to, or filing with, any
Person is required of it for such execution, delivery or performance; and (iv)
this Assignment and Acceptance has been duly executed and delivered by it and
constitutes the legal, valid and binding obligation of the Assignor, enforceable
against the Assignor in accordance with the terms hereof, subject, as to
enforcement, to bankruptcy, insolvency,
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<PAGE>
moratorium, reorganization and other laws of general application relating to or
affecting creditors' rights and to general equitable principles.
(b) The Assignor makes no representation or warranty and assumes no
responsibility with respect to any statements, warranties or representations
made in or in connection with the Loan Agreement or the execution, legality,
validity, enforceability, genuineness, sufficiency or value of the Loan
Agreement or any other instrument or document furnished pursuant thereto. The
Assignor makes no representation or warranty in connection with, and assumes no
responsibility with respect to, the solvency, financial condition or statements
of the Company, or the performance or observance by the Company, of any of its
respective obligations under the Loan Agreement or any other instrument or
document furnished in connection therewith.
(c) The Assignee represents and warrants that (i) it is duly organized and
existing and it has full power and authority to take, and has taken, all action
necessary to execute and deliver this Assignment and Acceptance any other
documents required or permitted to be executed or delivered by it in connection
with this Assignment and Acceptance, and to fulfill its obligations hereunder;
(ii) no notices to, or consents, authorizations or approvals of, any Person are
required (other than any already given or obtained) for its due execution,
delivery and performance of this Assignment and Acceptance; and apart from any
agreements or undertakings or flings required by the Loan Agreement, no further
action by, or notice to, or filing with, any Person is required of it for such
execution, delivery or performance; (iii) this Assignment and Acceptance has
been duly executed and delivered by it and constitutes the legal, valid and
binding obligation of the Assignee, enforceable against the Assignee in
accordance with the terms hereof, subject, as to enforcement, to bankruptcy,
insolvency, moratorium, reorganization and other laws of general application
relating to or affecting creditors' rights and to general equitable principles;
and (iv) it is an Eligible Assignee.
9. Further Assurances. The Assignor and the Assignee each hereby agree
------------------
to execute and deliver such other instruments, and take such other action, as
either party may reasonably request in connection with the transactions
contemplated by this Assignment and Acceptance, including the delivery of any
notices or other documents or instruments to the Company or the Agent, which may
be required in connection with the assignment and assumption contemplated
hereby.
10. Miscellaneous.
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(a) Any amendment or waiver of any provision of this Assignment and
Acceptance shall be in writing and signed by the parties hereto. No failure or
delay by either party hereto in exercising any right, power or privilege
hereunder shall operate as a waiver thereof and any waiver of any breach of the
provisions of this Assignment and Acceptance shall be without prejudice to any
rights with respect to any other or further breach thereof.
-5-
<PAGE>
(b) All payments made hereunder shall be made without any set-off or
counterclaim.
(c) The Assignor and the Assignee shall each pay its own costs and expenses
incurred in connection with the negotiation, preparation, execution and
performance of this Assignment and Acceptance.
(d) This Assignment and Acceptance may be executed in any number of
counterparts and all of such counterparts taken together shall be deemed to
constitute one and the same instrument.
(e) THIS ASSIGNMENT AND ACCEPTANCE SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAW OF THE STATE OF TEXAS. The Assignor and the Assignee
each irrevocably submits to the non-exclusive jurisdiction of any State or
Federal court sitting in Texas over any suit, action or proceeding arising out
of or relating to this Assignment and Acceptance and irrevocably agrees that all
claims in respect of such action or proceeding may be heard and determined in
such Texas State or Federal court. Each party to this Assignment and Acceptance
hereby irrevocably waives, to the fullest extent it may effectively do so, the
defense of an inconvenient forum to the maintenance of such action or
proceeding.
(f) THE ASSIGNOR AND THE ASSIGNEE EACH HEREBY KNOWINGLY, VOLUNTARILY AND
INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF
ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH
THIS ASSIGNMENT AND ACCEPTANCE, THE LOAN AGREEMENT, ANY RELATED DOCUMENTS AND
AGREEMENTS OR ANY COURSE OF CONDUCT, COURSE OF DEALING OR STATEMENTS (WHETHER
ORAL OR WRITTEN).
[Other provisions to be added as may be negotiated between the Assignor and
the Assignee, provided that such provisions are not inconsistent with the Loan
Agreement.]
IN WITNESS WHEREOF, the Assignor and the Assignee have caused this
Assignment and Acceptance to be executed and delivered by their duly authorized
officers as of the data first above written.
[ASSIGNOR]
By:
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Title:
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By:
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<PAGE>
Title:
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Address:
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[ASSIGNEE]
By:
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Title:
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By:
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Title:
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Address:
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<PAGE>
SCHEDULE 1 TO
NOTICE OF ASSIGNMENT AND ACCEPTANCE
-----------------------------------
______________, 1997
Bank One, Texas, N.A.
1717 Main Street, 4th Floor
Dallas, Texas 75201
Attn: Mynan C. Feldman, Vice President
Gothic Energy Corporation
Gothic Energy of Texas, Inc.
Gothic Gas Corporation
5727 South Lewis, Suite 700
Tulsa, Oklahoma 74105
Attn: Michael Paulk, President
Ladies and Gentlemen:
We refer to that certain Restated Loan Agreement dated as of February 17,
1997 (as extended, renewed, amended or restated from time to time, the "Loan
----
Agreement") by and among Gothic Energy Corporation, an Oklahoma corporation
- ---------
("Gothic"), Gothic Energy of Texas, Inc., an Oklahoma corporation ("Texas") and
Gothic Gas Corporation, an Oklahoma corporation ("Gas")(Gothic, Texas, and Gas
are hereinafter collectively referred to as the "Company"), the Banks signatory
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thereto (the "Banks") and Bank One, Texas, N.A., as Agent (in such capacity, the
"Agent"). Unless otherwise defined herein, capitalized terms used herein have
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the respective meaning assigned to them in the Loan Agreement.
1. We hereby give you notice of the assignment by ___________ (the
"Assignor") to ____________________ (the "Assignee") of _____% of the right,
- --------- --------
title and interest of the Assignor in and to the Loan Agreement, including,
without limitation, the right, title and interest of the Assignor in and to the
commitments of the Assignor, and all outstanding Loans made by the Assignor
pursuant to the Assignment and Acceptance Agreement attached hereto (the
"Assignment and Acceptance"). The aforesaid assignment is subject to the
- --------------------------
consent of the Agent, which consent is hereby requested. Before giving effect
to such assignment, the Assignor's Revolving Commitment is $_____________ and
its Bridge Loan Commitment is $_________, for an aggregate commitment of
$____________, and the aggregate amount of its outstanding Revolving Loans is
$___________ and its outstanding Bridge Loans with $_____________, for total
outstandings of $____________.
-1-
<PAGE>
2. The Assignee agreed that upon receiving the consent of the Agent to
such assignment, the Assignee will be bound by the terms of the Loan Agreement
as fully and to the same extent as if the Assignee were the Bank originally
holding such interest in the Loan Agreement.
3. Tendered herewith are the Notes executed in connection with the Loan
Agreement representing the commitments of the Assignor.
4. The following administrative details apply to the Assignee:
(A) Notice Address:
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Assignee name:
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Address:
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Attention:
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Telephone:( )
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Telecopier:( )
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Telex (Answerback):
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(B) Payment Instructions:
Account No.:
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At:
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Reference:
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Attention:
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5. You are entitled to rely upon the representations, warranties and
covenants of each of the Assignor and Assignee contained in the Assignment and
Acceptance.
IN WITNESS WHEREOF, the Assignor and the Assignee have caused this Notice
of Assignment and Acceptance to be executed by their respective duly authorized
officials, officers or agents as of the date first above mentioned.
Very truly yours,
[NAME OF ASSIGNOR]
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<PAGE>
By:
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Title:
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By:
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Title:
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[NAME OF ASSIGNEE]
By:
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Title:
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By:
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Title:
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ACKNOWLEDGED:
GOTHIC ENERGY CORPORATION
By:
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Michael Paulk, President
GOTHIC ENERGY OF TEXAS, INC.
By:
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Michael Paulk, President
GOTHIC GAS CORPORATION
By:
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Michael Paulk, President
ACKNOWLEDGED AND
CONSENTED TO:
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<PAGE>
BANK ONE, TEXAS, N.A.,
as Agent
By:
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Mynan C. Feldman, Vice President
-4-
<PAGE>
SCHEDULE 1
LIENS
NONE
<PAGE>
SCHEDULE 2
LIST OF WELLS TO BE DRILLED
WITH SPECIAL DRILLING FACILITY
1. Six (6) wells in the Springer Field, Carter County, Oklahoma.
2. One (1) well in the Johnson Ranch Field, Loving County, Texas.
<PAGE>
SCHEDULE 3
FINANCIAL CONDITION
NONE
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<PAGE>
SCHEDULE 4
LIABILITIES
Liabilities incurred in connection with the Fifth Amendment to Loan Agreement
dated December 27, 1996 among Gothic, Texas and Bank One and other liabilities
incurred in the ordinary course of Borrowers' businesses.
<PAGE>
SCHEDULE 5
LITIGATION
Claim by Larry L. Terry, former Chief Financial Officer of the Borrowers in
which he claims an aggregate of $383,750.00 for breach of an employment
agreement.
<PAGE>
SCHEDULE 6
SUBSIDIARIES
1. Gothic Energy of Texas, Inc. and Gothic Gas Corporation are wholly-owned
subsidiaries of Gothic Energy Corporation.
2. Sycamore Pipeline, Inc. will be a wholly-owned subsidiary of Gothic Gas
Corporation on the Effective Date.
<PAGE>
SCHEDULE 7
ENVIRONMENTAL MATTERS
NONE
<PAGE>
SCHEDULE 8
TITLE MATTERS
1. Barbie 2-13, Beaver County, Oklahoma;
2. Mulberry 1-11, Beaver County, Oklahoma;
3. Goforth #1, Blaine County, Oklahoma;
4. Markham #1, Carter County, Oklahoma;
5. Garrison Unit, Grady County, Oklahoma;
6. Roetker #2, Harper County, Oklahoma;
7. Brown A-127, Kingfisher County, Oklahoma;
8. Billings, Major County, Oklahoma;
9. Jan, Major County, Oklahoma;
10. RM #1, Major County, Oklahoma;
11. Mamie Lou #1, Major County, Oklahoma;
12. Butler 1-11, Major County, Oklahoma;
13. James Trust 1-16, McClain County, Oklahoma;
14. Curtis Stock 1-20, Woods County, Oklahoma;
15. Leland 6-1, Loving County, Texas.
<PAGE>
SCHEDULE 9
CURATIVE MATTERS
Provide the following curative information within the time specified in Section
12(t):
1. The Outhier-B, Blaine County, Oklahoma. This opinion indicates that
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approximately .1303 of the working interest and .1210 of the net revenue
interest is attributable to your seller as a result of certain contractual
rights and requires that evidence of such contractual rights be provided.
Please provide this information so that we can confirm the interest being
conveyed both of record and contractually.
2. The Outhier-E, Blaine County, Oklahoma. The Pray Walker opinion covering
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this property indicates that there were unsatisfied requirements of old
opinions. Please provide information with regard to the nature and status
of these old requirements as reflected in Requirement #5 of the title
opinion.
3. The Robinson, Blaine County, Oklahoma. This opinion also has a requirement
-------------------------------------
with regard to outstanding requirements of old opinions. Please provide
information as to the nature and status of these requirements as reflected
in Requirement #5 of the title opinion.
4. The Strader, Blaine County, Oklahoma. There were two wells by this name on
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the mortgage list provided by the Bank. I identified the separate Strader
wells by comparing the interests shown to those shown on the opinion and
concluded that this was Item 38 on the Bank's list. The Pray Walker
opinion indicates that part of the interest shown is a contractual right
only and that right is to a .1368 working interest and a .1197 net revenue
interest. Please provide the source of the contractual rights so that we
can confirm the total interest being conveyed, both record and contractual.
5. The Hoskins 1-9, Kingfisher County, Oklahoma. This opinion also has a
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requirement with regard to outstanding requirements of old opinions.
Please provide information as to the nature and status of these
requirements as reflected in Requirement #5 of the title opinion.
6. The Bergman Unit Well 2, Major County, Oklahoma. The record interest in
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this property is less than that represented by the seller and less than
that shown on the mortgage list provided by the Bank. The record working
interest in this well is a .875 and the record net revenue interest is a
.8564. In addition, the well has a different record title interest for gas
which is a .8496. Please provide information as to the true interest to be
owned in this well.
7. The Kliewer, Major County, Oklahoma. The record title interest in this
-----------------------------------
well is less than the interest represented by the seller and included on
the mortgage and title list. The actual record interest is .75 working
interest and a .6563 net revenue interest while the represented
<PAGE>
interest is a .8883 working interest and a .7773 net revenue interest.
Please provide information with regard to the correct interest.
8. The Reames A, Major County, Oklahoma. Please provide a copy of the
------------------------------------
agreement referred to in Requirement 5 of the Pray Walker opinion covering
this property. That agreement is apparently between Shell and Pan American
and is dated April 6, 1960.
9. The Reames C, Major and Blaine Counties, Oklahoma. This well is in both
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counties although the mortgage list indicates it is only in Major County.
The title review on this property was performed only in Major County
although part of the leases are in Blaine County. Requirement 4 of the
Pray Walker opinion requires that a title review of the Blaine County
records be performed to cover the remaining title. Please provide a
supplemental or amended opinion covering the Blaine County leases.
10. The Burch, Carter County, Oklahoma. This property is mortgaged on eight
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separate mortgages which all apparently attach to the interest being
conveyed. These mortgages must be released. In addition, the record
interest is less than represented by the seller and, at least with regard
to the working interest, less than shown on the engineering list. The
record interest is a .4984 working interest and a .3913 net revenue
interest. The mortgage list indicates there should be a .5693 working
interest and a .0965 net revenue interest. It appears that the net revenue
interest shown on the mortgage list is clearly incorrect as the record
title is considerably more than that and the seller's represented net
revenue interest is .4856. Please provide information as to the correct
interest being conveyed.
11. The Pletcher, Carter County, Oklahoma. This property is subject to the
-------------------------------------
same eight mortgages that the Burch well referred to above was subject to.
These mortgages must be released. The record title interest in this
property is also less than that represented by the seller and shown on the
mortgage list. The record title is a .4828 working interest and a .3798
net revenue interest while the represented interest is a .663 working
interest and a .4842 net revenue interest and the mortgage list shows a
.5686 working interest and a .4379 net revenue interest. Please provide
information with regard to the correct interest on this well.
12. The City of Ardmore, Carter County, Oklahoma. The opinion furnished for
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this property does not reflect that Norse Exploration, Inc. and/or H.
Huffman & Co., the Sellers in the transaction with Gothic, had any record
net revenue interest in this property. The record working interest is
substantially less than the working interest represented by the Sellers.
Apparently a significant amount of the represented interest is supposedly
held as a result of unrecorded agreements. This property is apparently
subject to eight separate mortgages which must be released. Please provide
information with regard to the correct interests owned or to be owned in
this well.
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<PAGE>
13. The Seaman 1-12, Beaver County, Oklahoma. The interest shown in the Pray
----------------------------------------
Walker opinion is the before payout interest. The after payout interest for
this well is .8875 working interest and a .6925 net revenue interest. This
property is also still burdened by a mortgage from Triumph Resources, Inc.
to State Bank and Trust N.A. The interest covered by that mortgage is now
owned by Gothic. That mortgage must be released.
14. The Highland 1-11, Beaver County, Oklahoma. The Pray Walker opinion
------------------------------------------
indicates that this property is also subject to a mortgage from Triumph
Resources, Inc. to State Bank and Trust N.A. which encumbers part of the
interest now owned by Gothic. This mortgage must be released. In
addition, there are four UCC-1s filed by State Bank and Trust Co. in Beaver
County which encumber the personalty on this well. There are three
additional UCC-1s filed by Liberty Bank and Trust Co. which also encumber
the personalty. All 7 UCC-1s were granted Triumph Resources, Inc. All of
the UCC-1s must be released. In addition to the foregoing, the lease in
question requires the approval of the Oklahoma State Land Office for the
assignment into Gothic of the interest in this well. That consent must be
obtained. In addition, there is outstanding an old production payment on
this property from First Transportation Gas Corporation to Transwestern
Pipeline which has not been released. Please obtain the release of this
production payment or some indication that it has been paid in full. Last,
there is an outstanding preferential right to purchase held by Phillips
Petroleum dating back to 1986. Since this preferential right was in
existence when the property was sold to Gothic, please obtain a waiver from
Phillips of their preferential right in this property.
15. The Opal Majors 1-5, Caddo County, Oklahoma. There are two old mortgages
-------------------------------------------
encumbering this property which need to be released. The first was granted
by Comstock to Chemical Bank and the second was granted by Triumph
Resources, Inc. to State Bank and Trust N.A. The interest shown of record
for this property is less than that represented by Gothic. The net revenue
interest is approximately 4% less than represented. Please provide
information about the correct interest owned in this property.
16. The Grellner Nos. 1 and 2, Canadian County, Oklahoma. There are a number
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of old mortgages granted by Crawley Petroleum Corporation et al. to
Continental Illinois and/or Continental Bank which need to be released.
17. The Hayes #7-1, Dewey County, Oklahoma. The opinion indicates that there
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is filed of record in Dewey County the UCC-1 granted by Triumph Resources,
Inc. to State Bank and Trust which needs to be released.
18. The Boucher #1-32, Dewey County, Oklahoma. The opinion indicates that the
-----------------------------------------
net revenue interest of record is approximately 4% less than that
represented by Gothic. Please explain or provide information with regard
to the difference in the net revenue interest. The opinion
-3-
<PAGE>
also indicates that there are requirements from old opinions which remain
unsatisfied and should be satisfied. Please provide information with regard
to those requirements.
19. The James 1-1, Ellis County, Oklahoma. The opinion indicates that part of
-------------------------------------
Gothic's interest in this property is encumbered by a mortgage from Triumph
Resources, Inc. to State Bank and Trust N.A. and by a UCC-1 on the
personalty. Both the mortgage and the UCC-1 must be released.
20. The Rakestraw 1-4, Ellis County, Oklahoma. The opinion indicates that
-----------------------------------------
there is of record in Ellis County a UCC-1 filed in 1993 by State Bank and
Trust Company on Triumph Resources, Inc. The UCC attaches to the
personalty now owned by Gothic and must be released.
21. The Wayland #1-5, Ellis County, Oklahoma. There is a UCC-1 of record
----------------------------------------
encumbering personalty owned by Gothic in this well which was filed by
State Bank and Trust N.A. on Triumph Resources, Inc. This UCC-1 must be
released. The opinion also indicates that there are unsatisfied
requirements from prior opinions which should be satisfied. Please provide
information with regard to these requirements.
22. Louis Brown 1-27 and 2-27, Ellis County, Oklahoma. The opinion indicates
-------------------------------------------------
that there is a UCC filed for record in Ellis County by State Bank and
Trust Company which encumbers the personalty now owned by Gothic. These
UCC-1s must be released.
23. The Thornton Trust 1-32, Ellis County, Oklahoma. The opinion indicates
-----------------------------------------------
that the net revenue interest represented by Gothic is for gas only. The
net revenue interest for oil on this property is .8340. This is another of
the properties that has a UCC filed by State Bank and Trust N.A. against
Triumph Resources which must be released. It is also another one of the
properties where the opinion indicates that there are unsatisfied
requirements on prior opinions. Please provide information with regard to
those requirements.
24. The Lockhart 2-14, Harper County, Oklahoma. The opinion on this property
------------------------------------------
indicates that there are outstanding requirements on prior opinions which
should be satisfied. Please provide information with regard to these
requirements.
25. The Schoenhals 1-11, Harper County, Oklahoma. The opinion on this property
--------------------------------------------
indicates that there are outstanding requirements on prior opinions which
should be satisfied. Please provide information with regard to these
requirements.
26. The State 1-27, Harper County, Oklahoma. The opinion on this property
---------------------------------------
indicates that there are outstanding requirements on prior opinions which
should be satisfied. Please provide information with regard to these
requirements.
-4-
<PAGE>
27. The Richmond 1-31, Woodward County, Oklahoma. This is another property
--------------------------------------------
where part of Gothic's interest is encumbered by a mortgage and a UCC-1
from Triumph Resources to State Bank and Trust N.A. The mortgage and the
UCC-1 must be released.
28. The Anderson 1-27, Beaver County, Oklahoma. The opinion indicates there is
------------------------------------------
a mortgage from Triumph Resources, Inc. to State Bank and Trust and two
UCC-1s filed by State Bank and Trust in Beaver County which encumber the
interests of Gothic in this property. The mortgage and the UCC-1s must be
released.
29. The Pierce 1-28, Ellis County, Oklahoma. The opinion indicates there is a
---------------------------------------
UCC filed by State Bank and Trust covering the Gothic interest. The UCC
must be released.
-5-
<PAGE>
EXHIBIT 10.XXV
PROMISSORY NOTE
---------------
$200,000.00 February __, 1997
FOR VALUE RECEIVED, Gothic Energy Corporation, an Oklahoma
corporation, ("Borrower"), promises to pay to the order of Clarion Capital
Corporation, of Cleveland, Ohio, or assigns (the "Holder"), at the principal
office of Holder or such other place as Holder may specify in writing, on the
date hereinafter provided, the principal sum of Two Hundred Thousand Dollars
($200,000.00), in lawful currency of the United States of America, together with
simple interest thereon from the date hereof on the unpaid balance of principal
from time to time outstanding at the annual rate of twelve percent (12%).
Outstanding principal and accrued interest shall be payable on October 31, 1997
("Maturity Date").
If for any reason this Note is not paid in full on or before the
Maturity Date, then and in such event the entire unpaid principal and interest
accrued thereon at the Maturity Date shall automatically convert, without notice
or other action by either Borrower or Holder, into that number of fully paid and
nonassessable shares of Borrowers' voting common stock, par value $0.01 per
share, determined by dividing the amount of unpaid principal and accrued
interest due on the Maturity Date by a number equal to 75% of the closing bid
price of the Borrower's common stock as reported on the National Association of
Securities Dealers Automated Quotation System. Upon such conversion, Borrower
shall promptly prepare and issue to Holder a certificate representing the shares
of common stock issuable to Holder upon such conversion.
Except as set forth in the preceding paragraph, the only other method
of repayment or pre-payment of this note is if the Borrower repays to Bank One,
Texas N.A., the Bridge Loan Facility and Special Drilling Facility as such terms
are defined in that certain Restated Loan Agreement dated February 17, 1997,
among Bank One, Texas N.A., as Agent for itself and certain other Banks and
Borrower, Gothic Energy of Texas, Inc., and Gothic Gas Corporation, as
Borrowers, either through raising equity capital or debt refinancing and in the
event sufficient funds are raised thereby to pay this Note in full together with
all accrued interest, this Note and all accrued interest shall be due and
payable.
No course of dealing between Borrower and Holder or any delay on the
part of Holder in exercising any rights hereunder shall operate as a waiver of
any rights of Holder.
From time to time the Maturity Date of this Note may be extended or
this Note may be renewed, in whole or in part, or a new Note of different form
may be substituted for this Note, or changes may be made in consideration of
loan extensions, and the Holder, from time to time, may waive or surrender,
either in whole or in part, any rights given for the benefit of the Holder in
connection with the payment of this Note; but no such occurrences shall in any
manner affect, limit, modify, or otherwise impair any rights of the Holder not
specifically waived, released or surrendered in writing, nor shall any maker,
guarantor, endorser or any person who is or might be liable hereon, either
primarily or contingently, be released from such liability by reason of the
occurrence of any such events. The Holder, from time to time, shall have the
unlimited right to
<PAGE>
release any person who might be liable hereon; and such release shall not effect
or discharge the liability of any other person who is or might be liable
thereon.
Except as otherwise expressly specified in this Note, Borrower and
each surety, guarantor, endorser, or other party liable for payment on this Note
hereby waive diligence, presentment, demand, protest, and notice of any kind
whatsoever, and agree that their liability on this Note shall not be affected by
any renewal or extension in the time of payment hereof, by any indulgences, or
by any taking, release, or change in any security for payment of this Note.
If this Note is placed in the hands of an attorney for collection, or
if it is collected through legal or bankruptcy proceedings, Borrower agrees to
pay all costs of collection, including but not limited to court costs and
reasonable attorneys' fees.
All agreements between or among Borrower and Holder, whether now
existing or hereafter arising and whether written or oral, are hereby limited so
that in no contingency, whether by reason of demand or acceleration of the
maturity hereof or otherwise, shall the interest contracted for, charged,
received, paid, or agreed to be paid to Holder exceed the maximum amount
permissible under applicable law. If, from any circumstance whatsoever,
interest would otherwise be payable to Holder in excess of the maximum lawful
amount, the interest payable to Holder shall be reduced to the maximum amount
permitted under applicable law; and if from any circumstance Holder shall ever
receive anything of value deemed interest by applicable law in excess of the
maximum lawful amount, an amount equal to any excessive interest shall be
applied to the reduction of the principal hereof and not to the payment of
interest, or if such excessive interest exceeds the unpaid balance of principal
hereof, such excess shall be refunded to Borrower. All interest paid or agreed
to be paid to Holder shall, to the extent permitted by applicable law, be
amortized, prorated, allocated and/or spread throughout the full period until
payment in full of the principal (including the period of any renewal or
extension hereof) so that the interest hereon for such full period shall not
exceed the maximum amount permitted by applicable law. This paragraph shall
control all agreements between or among Holder and Borrower.
This Note shall be governed by and construed in accordance with the
laws of the State of Oklahoma, United States of America.
GOTHIC ENERGY CORPORATION
By:
-------------------------------------
Michael Paulk, President
2
<PAGE>
REGISTRATION RIGHTS AGREEMENT
-----------------------------
This Registration Rights Agreement is entered into this _______ day of
February, 1997, by and between Gothic Energy Corporation, an Oklahoma
corporation, and Clarion Capital Corporation, of Cleveland, Ohio.
For good and valuable consideration the receipt and sufficiency of
which are hereby acknowledged, the parties hereby agree as follows.
1. Certain Definitions. The following terms shall have the
-------------------
respective meanings indicated.
"Additional Registrable Securities" means (i) shares of Common
---------------------------------
Stock issued to Shareholder upon conversion of the Note in accordance with its
terms, and (ii) any securities issued in exchange for, as a dividend on, or in
replacement of, or otherwise issued in respect of (including securities issued
in a stock dividend, split or recombination or pursuant to the exercise of
preemptive rights, if any), any shares of Common Stock in clause (i) above,
until such time as such securities described in clauses (i) and (ii) above have
been (x) distributed to the public pursuant to a registration statement covering
such securities that has been declared effective by the Commission under the
Securities Act, (y) distributed to the public in accordance with the provisions
of Rule 144 (or any similar provision then in force) under the Securities Act or
(z) repurchased by the Company.
"Common Stock" means the common stock of the Company, par value
------------
$0.01 per share.
"Company" means Gothic Energy Corporation, an Oklahoma
-------
corporation.
"Commission" means the United States Securities and Exchange
----------
Commission and its successors.
"Note" means that certain Promissory Note dated February ______,
----
1997 from the Company to Shareholder in the principal amount of $200,000 due
October 31, 1997.
"Registrable Securities" means (i) 15,000 shares of Common Stock
----------------------
issued to Shareholder this date and (ii) any securities issued in exchange for,
as a dividend on, or in replacement of, or otherwise issued in respect of
(including securities issued in a stock dividend, split or recombination or
pursuant to the exercise of preemptive rights, if any), any shares of Common
Stock in clause (i) above, until such time as such securities described in
clauses (i) and (ii) above have been (x) distributed to the public pursuant to a
registration statement covering such securities that has been declared effective
by the Commission under the Securities Act, (y) distributed to the public in
accordance with the provisions of Rule 144 (or any similar provision then in
force) under the Securities Act or (z) repurchased by the Company.
<PAGE>
"Securities Act" means the Securities Act of 1933, as amended.
--------------
"Shareholder" means Clarion Capital Corporation, of Cleveland,
-----------
Ohio.
2. Piggyback Registration Rights.
-----------------------------
(a) In the event that at any time or from time to time the
Company proposes to register any class of equity securities under the Securities
Act other than a registration statement on Forms S-4 or S-8 (or their successor
forms), the Company will give prompt written notice (the "Registration Notice")
to the holder or holders of Registrable Securities of its intention to effect
such a registration and will, subject to the remaining provisions of this
Agreement, include in such registration all Registrable Securities with respect
to which the Company has received the written request from the holder thereof
for inclusion therein within 15 days after the receipt of the Registration
Notice (a "Piggyback Registration"). From and after receipt of such notice from
the holder, the Company shall cause the specified Registrable Securities to be
registered under the Securities Act and to effect and to comply with all such
qualifications, compliances and requirements as may be necessary to permit the
sale of such Registrable Securities in the manner described in the Registration
Notice including, without limitation, qualification under applicable state
securities laws (provided that the Company shall not be required in connection
therewith to qualify as a foreign corporation or to execute general consent to
service of process in any state.)
(b) If the registration described in this Section 2(a) is for
------------
the account of the Company, and the managing underwriters advise the Company in
writing that, in their opinion, the number of shares of Registrable Securities
requested to be included in such registration exceeds the number which can be
sold in such offering, the Company will include in such registration (i) first,
all of the securities the Company proposes to sell for its own account (but not
for the account of any other person) and (ii) second, such number of Registrable
Securities requested to be included therein which the managing underwriters
advise the Company can be sold in such offering; provided, that any reduction
imposed upon holders of Registrable Securities shall not be greater, on a
percentage basis with respect to the Registrable Securities requested to be
included, than the reduction imposed upon other persons with piggy-back
registration rights requesting to be included in such registration whose rights
are not expressly subordinate to those granted herein.
(c) If the registration described in this Section 2(a) is an
------------
underwritten secondary registration on behalf of the holders of the Company's
securities, and the managing underwriters advise the Company in writing that, in
their opinion, the number of shares of Registrable Securities requested to be
included in such registration exceeds the number which can be sold in such
offering, the Company will include in such registration such number of
Registrable Securities requested to be included therein which the managing
underwriters advise the Company can be sold in such offering; provided, that any
reduction imposed upon holders of Registrable Securities shall not be greater,
on a percentage basis with respect to the Registrable Securities requested to be
included, than the reduction imposed upon other persons with piggy-back
2
<PAGE>
registration rights requesting to be included in such registration whose rights
are not expressly subordinate to those granted herein.
(d) If the Company has previously filed a registration statement
with respect to Registrable Securities pursuant to this Agreement and if such
previous registration has not been withdrawn or abandoned, the Company will not
file or cause to effected any other registration of any of its equity securities
or securities convertible or exchangeable into or exercisable for its equity
securities under the Securities Act (except on Form S-8 or any successor form),
whether on its own behalf or at the request of any holder or holders of its
securities, until a period of at least six months has elapsed from the effective
date of such previous registration.
3. Registration of Additional Registrable Securities. If the Company
-------------------------------------------------
shall not have paid the principal and accrued interest on the Note on or before
September 1, 1997, the Company shall cause to be prepared and filed with the
Commission and applicable state securities authorities a registration statement
to register the Additional Registrable Securities under and in accordance with
the provisions of the Securities Act and all applicable state securities laws
(the "Additional Registration"). The Company shall use its reasonable efforts to
cause the Additional Registration to become effective no later than the date the
Additional Registrable Securities are issued to Shareholder upon conversion of
the Company's indebtedness to Shareholder under the Note into Additional
Registrable Securities.
4. Registration Expenses. The Company will pay all expenses
---------------------
necessary to effect registration of Registrable Securities and Additional
Registrable Securities (other than underwriters' discounts and commissions and
brokerage commissions and fees, if any, payable with respect to Registrable
Securities and Additional Registrable Securities sold by the holders thereof),
including, without limitation, printing expenses, fees of the Securities and
Exchange Commission and the National Association of Securities Dealers, Inc.,
expenses of compliance with state securities laws, and accounting and legal fees
and expenses.
5. Indemnification. In the event of any registration pursuant to
---------------
this Agreement covering Registrable Securities or Additional Registrable
Securities, the Company will indemnify and hold harmless the holders and each
person, if any, who controls the holders within the meaning of the Securities
Act, against any losses, claims, damages, costs, expenses (including reasonable
attorneys' fees), or liabilities (or actions in respect thereof), under the
Securities Act or otherwise, which arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in any such
registration statement, any preliminary prospectus or final prospectus contained
therein, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading;
provided, however, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in said registration statement, said preliminary prospectus, said
prospectus, or any
3
<PAGE>
said amendment or supplement, in reliance upon and in conformity with written
information furnished by the holder specifically for use in the preparation
thereof. The Company also agrees to reimburse the holders and each such
controlling person for any legal or other expenses reasonably incurred by the
holders or such controlling person in connection with investigating or defending
any such loss, claim, damage, liability or action to the extent that the same
are not incurred in connection with the provisions of the preceding sentence.
6. Assignment. The registration rights provided herein may be
----------
assigned to any person holding shares of Registrable Securities as reflected on
the stock records of the Company.
7. Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of Oklahoma except to the extent the
laws of any other state are mandatorily applicable.
Witness the execution hereof this _______ day of February, 1997.
GOTHIC ENERGY CORPORATION
By:
-----------------------------------------
Michael Paulk, President
CLARION CAPITAL CORPORATION
By:
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
4
<PAGE>
STOCK SUBSCRIPTION AGREEMENT
----------------------------
THIS STOCK SUBSCRIPTION AGREEMENT is entered into this _____ day of
February, 1997, by and between Clarion Capital Corporation, of Cleveland, Ohio,
("Subscriber"), and Gothic Energy Corporation, an Oklahoma corporation (the
"Company").
WHEREAS, Subscriber desires to subscribe for 15,000 shares of the
Company's authorized but unissued common stock.
NOW, THEREFORE, the parties agree as follows:
1. Subscription for Stock. (a) Subscriber hereby tenders its
----------------------
subscription and irrevocably subscribes for 15,000 shares of the common stock
(the "Stock") of the Company at a price of $0.01 per share for a total of $150.
A check for good funds in payment of the total purchase price of the Stock
subscribed for, made payable to the Company, accompanies this Agreement. Upon
acceptance of this Subscription Agreement by the Company, Subscriber
specifically agrees to accept, adopt and be bound by each and every provision of
this Agreement.
(b) It is understood and agreed that the Company shall have the right
to accept or reject this subscription, in whole or in part, and that the same
shall be deemed to be accepted by the Company only when this Stock Subscription
Agreement is signed by the Company.
(c) Subscriber agrees that this subscription is irrevocable and that
Subscriber cannot cancel, terminate or revoke this subscription or any
agreements of Subscriber hereunder and that this subscription and such
agreements shall survive the death or disability of the undersigned.
2. Subscriber's Acknowledgements, Representations, Warranties and
--------------------------------------------------------------
Agreements. Subscriber hereby makes the following acknowledgements,
- ----------
representations, warranties and agreements.
(a) Suitability. Subscriber represents and warrants:
-----------
(i) That Subscriber is investing in Subscriber's own name or in
the capacity indicated herein;
(ii) That Subscriber is a corporation organized under the laws
of the State of Ohio, and has no present intention of becoming a
resident of any other state or jurisdiction;
(iii) That Subscriber, either alone or together with Subscriber's
legal, tax, business and financial advisors, has sufficient knowledge
and experience in business, financial and investment matters to
evaluate the merits and risks of an investment in the Company.
<PAGE>
(b) Speculative Nature and Risk. Subscriber understands and
---------------------------
acknowledges the speculative nature of and risks of loss associated with an
investment in the Stock, which may be subject to dilution. Subscriber represents
and warrants that the Stock subscribed for constitutes an investment which is
suitable and consistent with Subscriber's overall investment program and that
Subscriber's financial condition enables Subscriber to bear the risks of this
investment for an indefinite period of time, which may include the total loss of
all payments made to the Company. Subscriber further represents that Subscriber
has adequate means of providing for its current financial needs and personal
contingencies and no need for liquidity in this investment and that Subscriber
has sufficient financial and business experience to evaluate the merits and
risks of an investment in the Company.
(c) Federal or State Securities Laws. Subscriber understands and
--------------------------------
acknowledges that the Stock being subscribed for has not been, and will not be,
registered under the Securities Act of 1933, as amended (the "Act"), the
Oklahoma Securities Act or applicable securities laws of any other state and
Subscriber is aware that no federal or state agency has made any review, finding
or determination regarding the terms of the purchase of the Stock nor any
recommendation or endorsement of the Stock as an investment, and Subscriber must
forego the security, if any, that such a review would provide.
(d) Acquisition for Own Account. Subscriber understands and
---------------------------
acknowledges that the Stock is being offered and sold under an exemption from
registration provided by Section 4(2) of the Act, and exemptions provided by
applicable state securities laws and Subscriber warrants and represents that the
Stock subscribed for is being acquired by Subscriber solely for Subscriber's own
account, for investment purposes only, and not with a view to or for the resale,
distribution, subdivision or fractionalization thereof. Subscriber represents
and warrants that Subscriber has no agreement or other arrangement, formal or
informal, with any person to sell, transfer or pledge any part of the Stock
subscribed for or which would guarantee Subscriber any profit or protect
Subscriber against any loss with respect to the Stock. Further, Subscriber has
no plans to enter into any such agreement or arrangement, and, consequently,
Subscriber must bear the economic risk of an investment in the Stock for an
indefinite period of time.
(e) Limitations on Resale or Transfer. Subscriber understands and
---------------------------------
acknowledges that the Stock will be "restricted" as defined in Rule 144 under
the Act and that therefore Subscriber can not offer to sell or otherwise
transfer or distribute the Stock without registration thereof under both the Act
and any applicable state securities laws, or unless an exemption is, in the
opinion of the Company's counsel, available to Subscriber under the Act and any
applicable state securities laws. Subscriber further understands and
acknowledges that the restrictions on the transfer of the Stock will be noted on
the books of the Company and that the stock certificate representing the Stock
will bear a legend setting forth the restriction on the Stock's transferability
in the following form:
2
<PAGE>
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR APPLICABLE STATE
SECURITIES ACTS. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND
MAY NOT BE SOLD OR TRANSFERRED FOR VALUE IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION OF THEM UNDER THE SECURITIES ACT OF 1933 AND/OR
THE OKLAHOMA SECURITIES ACT, OR AN OPINION OF COUNSEL SATISFACTORY TO
THE ISSUER THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT OR
ACTS.
(f) Independent Investigation and Advisors. Subscriber represents and
--------------------------------------
warrants that in making the decision to purchase the Stock, Subscriber has
relied upon his independent investigation of the Company and those of
Subscriber's representatives, including Subscriber's own professional legal,
tax, business and advisors, and that Subscriber and Subscriber's representatives
have been given the opportunity to examine all relevant documents and to ask
questions of and receive answers from the Company, or person(s) acting on its
behalf, concerning the terms and conditions of Subscriber's purchase of the
Stock and any other matters concerning an investment in the Company, and to
obtain any additional information Subscriber deemed necessary to verify the
accuracy of the information provided.
3. Reliance by Company. Subscriber understands and acknowledges
-------------------
that the Company will rely upon the representations, warranties, agreements and
understandings made herein in making its decision whether to accept Subscriber's
subscription, and that the foregoing representations, warranties, agreements and
understandings shall survive any acceptance or rejection of a subscription for
the Stock.
4. Indemnification. Subscriber agrees to indemnify and hold
---------------
harmless the Company from and against any and all loss, damage or liability
(including attorney's fees) due to or arising out of a breach of any
representation or warranty of Subscriber contained in this Agreement.
5. Assignment. Subscriber agrees not to transfer or assign this
----------
Agreement, or any of Subscriber's interest herein.
6. Entire Agreement. This Agreement and all rights hereunder shall
----------------
be governed by, and interpreted in accordance with, the laws of the State of
Oklahoma. This Agreement constitutes the entire agreement between the parties
hereto with respect to the subject matter hereof and may be amended only by a
writing executed by all of the parties hereto.
IN WITNESS WHEREOF, Subscriber has executed and agrees to be bound by
this Agreement on the day and year first above written.
3
<PAGE>
CLARION CAPTAL CORPORATION
By: Ohio Savings Plaza, Suite 510
---------------------------------- 1801 East 9th Street
Signature of the Subscriber Cleveland, Ohio 44114
Title:
-------------------------------
- ------------------------------------- ----------------------------------------
Print name of the Subscriber as it Print the Subscriber's EIN Number
should appear on Stock Certificate
The foregoing subscription is hereby accepted on behalf of the Company this
______ day of February, 1997, by its President.
GOTHIC ENERGY CORPORATION
----------------------------------------
Michael Paulk, President
4
<PAGE>
PROMISSORY NOTE
---------------
$1,800,000.00 February __, 1997
FOR VALUE RECEIVED, Gothic Energy Corporation, an Oklahoma
corporation, ("Borrower"), promises to pay to the order of Loire Sextant, S.A.,
of London, England, or assigns (the "Holder"), at the principal office of Holder
or such other place as Holder may specify in writing, on the date hereinafter
provided, the principal sum of One Million Eight Hundred Thousand Dollars
($1,800,000.00), in lawful currency of the United States of America, together
with simple interest thereon from the date hereof on the unpaid balance of
principal from time to time outstanding at the annual rate of twelve percent
(12%). Outstanding principal and accrued interest shall be payable on October
31, 1997 ("Maturity Date").
If for any reason this Note is not paid in full on or before the
Maturity Date, then and in such event the entire unpaid principal and interest
accrued thereon at the Maturity Date shall automatically convert, without notice
or other action by either Borrower or Holder, into that number of fully paid and
nonassessable shares of Borrowers' voting common stock, par value $0.01 per
share, determined by dividing the amount of unpaid principal and accrued
interest due on the Maturity Date by a number equal to 75% of the closing bid
price of the Borrower's common stock as reported on the National Association of
Securities Dealers Automated Quotation System. Upon such conversion, Borrower
shall promptly prepare and issue to Holder a certificate representing the shares
of common stock issuable to Holder upon such conversion.
Except as set forth in the preceding paragraph, the only other method
of repayment or pre-payment of this note is if the Borrower repays to Bank One,
Texas N.A., the Bridge Loan Facility and Special Drilling Facility as such terms
are defined in that certain Restated Loan Agreement dated February 17, 1997,
among Bank One, Texas N.A., as Agent for itself and certain other Banks and
Borrower, Gothic Energy of Texas, Inc., and Gothic Gas Corporation, as
Borrowers, either through raising equity capital or debt refinancing and in the
event sufficient funds are raised thereby to pay this Note in full together with
all accrued interest, this Note and all accrued interest shall be due and
payable.
No course of dealing between Borrower and Holder or any delay on the
part of Holder in exercising any rights hereunder shall operate as a waiver of
any rights of Holder.
From time to time the Maturity Date of this Note may be extended or
this Note may be renewed, in whole or in part, or a new Note of different form
may be substituted for this Note, or changes may be made in consideration of
loan extensions, and the Holder, from time to time, may waive or surrender,
either in whole or in part, any rights given for the benefit of the Holder in
connection with the payment of this Note; but no such occurrences shall in any
manner affect, limit, modify, or otherwise impair any rights of the Holder not
specifically waived, released or surrendered in writing, nor shall any maker,
guarantor, endorser or any person who is or might be liable hereon, either
primarily or contingently, be released from such liability by reason of the
occurrence of any such events. The Holder, from time to time, shall have the
unlimited right to
<PAGE>
release any person who might be liable hereon; and such release shall not effect
or discharge the liability of any other person who is or might be liable
thereon.
Except as otherwise expressly specified in this Note, Borrower and
each surety, guarantor, endorser, or other party liable for payment on this Note
hereby waive diligence, presentment, demand, protest, and notice of any kind
whatsoever, and agree that their liability on this Note shall not be affected by
any renewal or extension in the time of payment hereof, by any indulgences, or
by any taking, release, or change in any security for payment of this Note.
If this Note is placed in the hands of an attorney for collection, or
if it is collected through legal or bankruptcy proceedings, Borrower agrees to
pay all costs of collection, including but not limited to court costs and
reasonable attorneys' fees.
All agreements between or among Borrower and Holder, whether now
existing or hereafter arising and whether written or oral, are hereby limited so
that in no contingency, whether by reason of demand or acceleration of the
maturity hereof or otherwise, shall the interest contracted for, charged,
received, paid, or agreed to be paid to Holder exceed the maximum amount
permissible under applicable law. If, from any circumstance whatsoever,
interest would otherwise be payable to Holder in excess of the maximum lawful
amount, the interest payable to Holder shall be reduced to the maximum amount
permitted under applicable law; and if from any circumstance Holder shall ever
receive anything of value deemed interest by applicable law in excess of the
maximum lawful amount, an amount equal to any excessive interest shall be
applied to the reduction of the principal hereof and not to the payment of
interest, or if such excessive interest exceeds the unpaid balance of principal
hereof, such excess shall be refunded to Borrower. All interest paid or agreed
to be paid to Holder shall, to the extent permitted by applicable law, be
amortized, prorated, allocated and/or spread throughout the full period until
payment in full of the principal (including the period of any renewal or
extension hereof) so that the interest hereon for such full period shall not
exceed the maximum amount permitted by applicable law. This paragraph shall
control all agreements between or among Holder and Borrower.
This Note shall be governed by and construed in accordance with the
laws of the State of Oklahoma, United States of America.
GOTHIC ENERGY CORPORATION
By:
-------------------------------------
Michael Paulk, President
2
<PAGE>
REGISTRATION RIGHTS AGREEMENT
-----------------------------
This Registration Rights Agreement is entered into this _______ day of
February, 1997, by and between Gothic Energy Corporation, an Oklahoma
corporation, and Loire Sextant, S.A., of London, England.
For good and valuable consideration the receipt and sufficiency of
which are hereby acknowledged, the parties hereby agree as follows.
1. Certain Definitions. The following terms shall have the
-------------------
respective meanings indicated.
"Additional Registrable Securities" means (i) shares of Common
---------------------------------
Stock issued to Shareholder upon conversion of the Note in accordance with its
terms, and (ii) any securities issued in exchange for, as a dividend on, or in
replacement of, or otherwise issued in respect of (including securities issued
in a stock dividend, split or recombination or pursuant to the exercise of
preemptive rights, if any), any shares of Common Stock in clause (i) above,
until such time as such securities described in clauses (i) and (ii) above have
been (x) distributed to the public pursuant to a registration statement covering
such securities that has been declared effective by the Commission under the
Securities Act, (y) distributed to the public in accordance with the provisions
of Rule 144 (or any similar provision then in force) under the Securities Act or
(z) repurchased by the Company.
"Common Stock" means the common stock of the Company, par value
------------
$0.01 per share.
"Company" means Gothic Energy Corporation, an Oklahoma
-------
corporation.
"Commission" means the United States Securities and Exchange
----------
Commission and its successors.
"Note" means that certain Promissory Note dated February ______,
----
1997 from the Company to Shareholder in the principal amount of $1,800,000 due
October 31, 1997.
"Registrable Securities" means (i) 135,000 shares of Common Stock
----------------------
issued to Shareholder this date and (ii) any securities issued in exchange for,
as a dividend on, or in replacement of, or otherwise issued in respect of
(including securities issued in a stock dividend, split or recombination or
pursuant to the exercise of preemptive rights, if any), any shares of Common
Stock in clause (i) above, until such time as such securities described in
clauses (i) and (ii) above have been (x) distributed to the public pursuant to a
registration statement covering such securities that has been declared effective
by the Commission under the Securities Act, (y) distributed to the public in
accordance with the provisions of Rule 144 (or any similar provision then in
force) under the Securities Act or (z) repurchased by the Company.
<PAGE>
"Securities Act" means the Securities Act of 1933, as amended.
--------------
"Shareholder" means Loire Sextant, S.A., of London, England.
-----------
2. Piggyback Registration Rights.
-----------------------------
(a) In the event that at any time or from time to time the
Company proposes to register any class of equity securities under the Securities
Act other than a registration statement on Forms S-4 or S-8 (or their successor
forms), the Company will give prompt written notice (the "Registration Notice")
to the holder or holders of Registrable Securities of its intention to effect
such a registration and will, subject to the remaining provisions of this
Agreement, include in such registration all Registrable Securities with respect
to which the Company has received the written request from the holder thereof
for inclusion therein within 15 days after the receipt of the Registration
Notice (a "Piggyback Registration"). From and after receipt of such notice from
the holder, the Company shall cause the specified Registrable Securities to be
registered under the Securities Act and to effect and to comply with all such
qualifications, compliances and requirements as may be necessary to permit the
sale of such Registrable Securities in the manner described in the Registration
Notice including, without limitation, qualification under applicable state
securities laws (provided that the Company shall not be required in connection
therewith to qualify as a foreign corporation or to execute general consent to
service of process in any state.)
(b) If the registration described in this Section 2(a) is for
------------
the account of the Company, and the managing underwriters advise the Company in
writing that, in their opinion, the number of shares of Registrable Securities
requested to be included in such registration exceeds the number which can be
sold in such offering, the Company will include in such registration (i) first,
all of the securities the Company proposes to sell for its own account (but not
for the account of any other person) and (ii) second, such number of Registrable
Securities requested to be included therein which the managing underwriters
advise the Company can be sold in such offering; provided, that any reduction
imposed upon holders of Registrable Securities shall not be greater, on a
percentage basis with respect to the Registrable Securities requested to be
included, than the reduction imposed upon other persons with piggy-back
registration rights requesting to be included in such registration whose rights
are not expressly subordinate to those granted herein.
(c) If the registration described in this Section 2(a) is an
------------
underwritten secondary registration on behalf of the holders of the Company's
securities, and the managing underwriters advise the Company in writing that, in
their opinion, the number of shares of Registrable Securities requested to be
included in such registration exceeds the number which can be sold in such
offering, the Company will include in such registration such number of
Registrable Securities requested to be included therein which the managing
underwriters advise the Company can be sold in such offering; provided, that any
reduction imposed upon holders of Registrable Securities shall not be greater,
on a percentage basis with respect to the Registrable Securities requested to be
included, than the reduction imposed upon other persons with piggy-back
2
<PAGE>
registration rights requesting to be included in such registration whose rights
are not expressly subordinate to those granted herein.
(d) If the Company has previously filed a registration statement with
respect to Registrable Securities pursuant to this Agreement and if such
previous registration has not been withdrawn or abandoned, the Company will not
file or cause to effected any other registration of any of its equity securities
or securities convertible or exchangeable into or exercisable for its equity
securities under the Securities Act (except on Form S-8 or any successor form),
whether on its own behalf or at the request of any holder or holders of its
securities, until a period of at least six months has elapsed from the effective
date of such previous registration.
3. Registration of Additional Registrable Securities. If the Company
-------------------------------------------------
shall not have paid the principal and accrued interest on the Note on or before
September 1, 1997, the Company shall cause to be prepared and filed with the
Commission and applicable state securities authorities a registration statement
to register the Additional Registrable Securities under and in accordance with
the provisions of the Securities Act and all applicable state securities laws
(the "Additional Registration"). The Company shall use its reasonable efforts to
cause the Additional Registration to become effective no later than the date the
Additional Registrable Securities are issued to Shareholder upon conversion of
the Company's indebtedness to Shareholder under the Note into Additional
Registrable Securities.
4. Registration Expenses. The Company will pay all expenses
---------------------
necessary to effect registration of Registrable Securities and Additional
Registrable Securities (other than underwriters' discounts and commissions and
brokerage commissions and fees, if any, payable with respect to Registrable
Securities and Additional Registrable Securities sold by the holders thereof),
including, without limitation, printing expenses, fees of the Securities and
Exchange Commission and the National Association of Securities Dealers, Inc.,
expenses of compliance with state securities laws, and accounting and legal fees
and expenses.
5. Indemnification. In the event of any registration pursuant to
---------------
this Agreement covering Registrable Securities or Additional Registrable
Securities, the Company will indemnify and hold harmless the holders and each
person, if any, who controls the holders within the meaning of the Securities
Act, against any losses, claims, damages, costs, expenses (including reasonable
attorneys' fees), or liabilities (or actions in respect thereof), under the
Securities Act or otherwise, which arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in any such
registration statement, any preliminary prospectus or final prospectus contained
therein, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading;
provided, however, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in said registration statement, said preliminary prospectus, said
prospectus, or any
3
<PAGE>
said amendment or supplement, in reliance upon and in conformity with written
information furnished by the holder specifically for use in the preparation
thereof. The Company also agrees to reimburse the holders and each such
controlling person for any legal or other expenses reasonably incurred by the
holders or such controlling person in connection with investigating or defending
any such loss, claim, damage, liability or action to the extent that the same
are not incurred in connection with the provisions of the preceding sentence.
6. Assignment. The registration rights provided herein may be
----------
assigned to any person holding shares of Registrable Securities as reflected on
the stock records of the Company.
7. Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of Oklahoma except to the extent the
laws of any other state are mandatorily applicable.
Witness the execution hereof this _______ day of February, 1997.
GOTHIC ENERGY CORPORATION
By:
------------------------------------
Michael Paulk, President
LOIRE SEXTANT, S.A.
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
4
<PAGE>
STOCK SUBSCRIPTION AGREEMENT
----------------------------
THIS STOCK SUBSCRIPTION AGREEMENT is entered into this _____ day of
February, 1997, by and between Loire Sextant, S.A., of London, England,
("Subscriber"), and Gothic Energy Corporation, an Oklahoma corporation (the
"Company").
WHEREAS, Subscriber desires to subscribe for 100,000 shares of the
Company's authorized but unissued common stock.
NOW, THEREFORE, the parties agree as follows:
1. Subscription for Stock. (a) Subscriber hereby tenders its
----------------------
subscription and irrevocably subscribes for 100,000 shares of the common stock
(the "Stock") of the Company at a price of $0.01 per share for a total of
$1,000. A check for good funds in payment of the total purchase price of the
Stock subscribed for, made payable to the Company, accompanies this Agreement.
Upon acceptance of this Subscription Agreement by the Company, Subscriber
specifically agrees to accept, adopt and be bound by each and every provision of
this Agreement.
(b) It is understood and agreed that the Company shall have the right
to accept or reject this subscription, in whole or in part, and that the same
shall be deemed to be accepted by the Company only when this Stock Subscription
Agreement is signed by the Company.
(c) Subscriber agrees that this subscription is irrevocable and that
Subscriber cannot cancel, terminate or revoke this subscription or any
agreements of Subscriber hereunder and that this subscription and such
agreements shall survive the death or disability of the undersigned.
2. Subscriber's Acknowledgements, Representations, Warranties and
------------------------------
Agreements. Subscriber hereby makes the following acknowledgements,
- ----------
representations, warranties and agreements.
(a) Suitability. Subscriber represents and warrants:
-----------
(i) That Subscriber is investing in Subscriber's own name or in
the capacity indicated herein;
(ii) That Subscriber is a corporation organized under the laws
of London, England, and has no present intention of becoming a
resident of any other state or jurisdiction;
(iii) That Subscriber, either alone or together with Subscriber's
legal, tax, business and financial advisors, has sufficient knowledge
and experience in business, financial and investment matters to
evaluate the merits and risks of an investment in the Company.
<PAGE>
(b) Speculative Nature and Risk. Subscriber understands and
---------------------------
acknowledges the speculative nature of and risks of loss associated with an
investment in the Stock, which may be subject to dilution. Subscriber represents
and warrants that the Stock subscribed for constitutes an investment which is
suitable and consistent with Subscriber's overall investment program and that
Subscriber's financial condition enables Subscriber to bear the risks of this
investment for an indefinite period of time, which may include the total loss of
all payments made to the Company. Subscriber further represents that Subscriber
has adequate means of providing for its current financial needs and personal
contingencies and no need for liquidity in this investment and that Subscriber
has sufficient financial and business experience to evaluate the merits and
risks of an investment in the Company.
(c) Federal or State Securities Laws. Subscriber understands and
--------------------------------
acknowledges that the Stock being subscribed for has not been, and will not be,
registered under the Securities Act of 1933, as amended (the "Act"), the
Oklahoma Securities Act or applicable securities laws of any other state and
Subscriber is aware that no federal or state agency has made any review, finding
or determination regarding the terms of the purchase of the Stock nor any
recommendation or endorsement of the Stock as an investment, and Subscriber must
forego the security, if any, that such a review would provide.
(d) Acquisition for Own Account. Subscriber understands and
---------------------------
acknowledges that the Stock is being offered and sold under an exemption from
registration provided by Section 4(2) of the Act, and exemptions provided by
applicable state securities laws and Subscriber warrants and represents that the
Stock subscribed for is being acquired by Subscriber solely for Subscriber's own
account, for investment purposes only, and not with a view to or for the resale,
distribution, subdivision or fractionalization thereof. Subscriber represents
and warrants that Subscriber has no agreement or other arrangement, formal or
informal, with any person to sell, transfer or pledge any part of the Stock
subscribed for or which would guarantee Subscriber any profit or protect
Subscriber against any loss with respect to the Stock. Further, Subscriber has
no plans to enter into any such agreement or arrangement, and, consequently,
Subscriber must bear the economic risk of an investment in the Stock for an
indefinite period of time.
(e) Limitations on Resale or Transfer. Subscriber understands and
---------------------------------
acknowledges that the Stock will be "restricted" as defined in Rule 144 under
the Act and that therefore Subscriber can not offer to sell or otherwise
transfer or distribute the Stock without registration thereof under both the Act
and any applicable state securities laws, or unless an exemption is, in the
opinion of the Company's counsel, available to Subscriber under the Act and any
applicable state securities laws. Subscriber further understands and
acknowledges that the restrictions on the transfer of the Stock will be noted on
the books of the Company and that the stock certificate representing the Stock
will bear a legend setting forth the restriction on the Stock's transferability
in the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
2
<PAGE>
APPLICABLE STATE SECURITIES ACTS. THE SECURITIES HAVE BEEN ACQUIRED
FOR INVESTMENT AND MAY NOT BE SOLD OR TRANSFERRED FOR VALUE IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION OF THEM UNDER THE SECURITIES ACT
OF 1933 AND/OR THE OKLAHOMA SECURITIES ACT, OR AN OPINION OF COUNSEL
SATISFACTORY TO THE ISSUER THAT SUCH REGISTRATION IS NOT REQUIRED
UNDER THE ACT OR ACTS.
(f) Independent Investigation and Advisors. Subscriber represents
--------------------------------------
and warrants that in making the decision to purchase the Stock, Subscriber has
relied upon his independent investigation of the Company and those of
Subscriber's representatives, including Subscriber's own professional legal,
tax, business and advisors, and that Subscriber and Subscriber's representatives
have been given the opportunity to examine all relevant documents and to ask
questions of and receive answers from the Company, or person(s) acting on its
behalf, concerning the terms and conditions of Subscriber's purchase of the
Stock and any other matters concerning an investment in the Company, and to
obtain any additional information Subscriber deemed necessary to verify the
accuracy of the information provided.
3. Reliance by Company. Subscriber understands and acknowledges
-------------------
that the Company will rely upon the representations, warranties, agreements and
understandings made herein in making its decision whether to accept Subscriber's
subscription, and that the foregoing representations, warranties, agreements and
understandings shall survive any acceptance or rejection of a subscription for
the Stock.
4. Indemnification. Subscriber agrees to indemnify and hold
---------------
harmless the Company from and against any and all loss, damage or liability
(including attorney's fees) due to or arising out of a breach of any
representation or warranty of Subscriber contained in this Agreement.
5. Assignment. Subscriber agrees not to transfer or assign this
----------
Agreement, or any of Subscriber's interest herein.
6. Entire Agreement. This Agreement and all rights hereunder shall
----------------
be governed by, and interpreted in accordance with, the laws of the State of
Oklahoma. This Agreement constitutes the entire agreement between the parties
hereto with respect to the subject matter hereof and may be amended only by a
writing executed by all of the parties hereto.
IN WITNESS WHEREOF, Subscriber has executed and agrees to be bound by
this Agreement on the day and year first above written.
LOIRE SEXTANT, S.A.
3
<PAGE>
By: 16 Savile Row
-------------------------------- London, England WIX IAE
Signature of the Subscriber
Title:
---------------------------
- ----------------------------------- ----------------------------------------
Print name of the Subscriber as it Print the Subscriber's EIN Number
should appear on Stock Certificate
The foregoing subscription is hereby accepted on behalf of the Company
this ______ day of February, 1997, by its President.
GOTHIC ENERGY CORPORATION
----------------------------------------
Michael Paulk, President
4
<PAGE>
PROMISSORY NOTE
---------------
$2,500,000.00 February _____, 1997
FOR VALUE RECEIVED, Gothic Energy Corporation, an Oklahoma
corporation, ("Borrower"), promises to pay to the order of Loire Sextant, S.A.,
of London, England, or assigns (the "Holder"), at the principal office of Holder
or such other place as Holder may specify in writing, on the date hereinafter
provided, the principal sum of Two Million Five Hundred Thousand Dollars
($2,500,000.00), in lawful currency of the United States of America, together
with simple interest thereon from the date hereof on the unpaid balance of
principal from time to time outstanding at the annual rate of five percent (5%).
Outstanding principal and accrued interest shall be payable on April 18, 1997
("Maturity Date").
If for any reason this Note is not paid in full on or before the
Maturity Date, then and in such event the entire unpaid principal and interest
accrued thereon at the Maturity Date shall automatically convert, without notice
or other action by either Borrower or Holder, into that number of fully paid and
nonassessable shares of Borrowers' voting common stock, par value $0.01 per
share, determined by dividing the amount of unpaid principal and accrued
interest due on the Maturity Date by a number equal to 75% of the average of the
previous five-day closing bid price of the Borrower's common stock as reported
on the National Association of Securities Dealers Automated Quotation System.
Upon such conversion, Borrower shall promptly prepare and issue to Holder a
certificate representing the shares of common stock issuable to Holder upon such
conversion. The Borrower shall use reasonable efforts to issue the stock in
compliance with Regulation S under the Securities Act of 1933.
Except as set forth in the preceding paragraph, the only other method
of repayment or pre-payment of this note is if the Borrower repays to Bank One,
Texas N.A., the Bridge Loan Facility and Special Drilling Facility as such terms
are defined in that certain Restated Loan Agreement dated February 17, 1997,
among Bank One, Texas N.A., as Agent for itself and certain other Banks and
Borrower, Gothic Energy of Texas, Inc., and Gothic Gas Corporation, as
Borrowers, either through raising equity capital or debt refinancing and in the
event sufficient funds are raised thereby to pay this Note in full together with
all accrued interest, this Note and all accrued interest shall be due and
payable.
No course of dealing between Borrower and Holder or any delay on the
part of Holder in exercising any rights hereunder shall operate as a waiver of
any rights of Holder.
From time to time the Maturity Date of this Note may be extended or
this Note may be renewed, in whole or in part, or a new Note of different form
may be substituted for this Note, or changes may be made in consideration of
loan extensions, and the Holder, from time to time, may waive or surrender,
either in whole or in part, any rights given for the benefit of the Holder in
connection with the payment of this Note; but no such occurrences shall in any
manner affect, limit, modify, or otherwise impair any rights of the Holder not
specifically waived, released or surrendered in writing, nor shall any maker,
guarantor, endorser or any person who is or might be
<PAGE>
liable hereon, either primarily or contingently, be released from such liability
by reason of the occurrence of any such events. The Holder, from time to time,
shall have the unlimited right to release any person who might be liable hereon;
and such release shall not effect or discharge the liability of any other person
who is or might be liable thereon.
Except as otherwise expressly specified in this Note, Borrower and
each surety, guarantor, endorser, or other party liable for payment on this Note
hereby waive diligence, presentment, demand, protest, and notice of any kind
whatsoever, and agree that their liability on this Note shall not be affected by
any renewal or extension in the time of payment hereof, by any indulgences, or
by any taking, release, or change in any security for payment of this Note.
If this Note is placed in the hands of an attorney for collection, or
if it is collected through legal or bankruptcy proceedings, Borrower agrees to
pay all costs of collection, including but not limited to court costs and
reasonable attorneys' fees.
All agreements between or among Borrower and Holder, whether now
existing or hereafter arising and whether written or oral, are hereby limited so
that in no contingency, whether by reason of demand or acceleration of the
maturity hereof or otherwise, shall the interest contracted for, charged,
received, paid, or agreed to be paid to Holder exceed the maximum amount
permissible under applicable law. If, from any circumstance whatsoever,
interest would otherwise be payable to Holder in excess of the maximum lawful
amount, the interest payable to Holder shall be reduced to the maximum amount
permitted under applicable law; and if from any circumstance Holder shall ever
receive anything of value deemed interest by applicable law in excess of the
maximum lawful amount, an amount equal to any excessive interest shall be
applied to the reduction of the principal hereof and not to the payment of
interest, or if such excessive interest exceeds the unpaid balance of principal
hereof, such excess shall be refunded to Borrower. All interest paid or agreed
to be paid to Holder shall, to the extent permitted by applicable law, be
amortized, prorated, allocated and/or spread throughout the full period until
payment in full of the principal (including the period of any renewal or
extension hereof) so that the interest hereon for such full period shall not
exceed the maximum amount permitted by applicable law. This paragraph shall
control all agreements between or among Holder and Borrower.
This Note shall be governed by and construed in accordance with the
laws of the State of Oklahoma, United States of America.
GOTHIC ENERGY CORPORATION
By:
----------------------------
Michael Paulk, President
2
<PAGE>
REGISTRATION RIGHTS AGREEMENT
-----------------------------
This Registration Rights Agreement is entered into this _______ day of
February, 1997, by and between Gothic Energy Corporation, an Oklahoma
corporation, and Loire Sextant, S.A., of London, England.
For good and valuable consideration the receipt and sufficiency of
which are hereby acknowledged, the parties hereby agree as follows.
1. Certain Definitions. The following terms shall have the
-------------------
respective meanings indicated.
"Additional Registrable Securities" means (i) shares of Common
---------------------------------
Stock issued to Shareholder upon conversion of the Note in accordance with its
terms, and (ii) any securities issued in exchange for, as a dividend on, or in
replacement of, or otherwise issued in respect of (including securities issued
in a stock dividend, split or recombination or pursuant to the exercise of
preemptive rights, if any), any shares of Common Stock in clause (i) above,
until such time as such securities described in clauses (i) and (ii) above have
been (x) distributed to the public pursuant to a registration statement covering
such securities that has been declared effective by the Commission under the
Securities Act, (y) distributed to the public in accordance with the provisions
of Rule 144 (or any similar provision then in force) under the Securities Act or
(z) repurchased by the Company.
"Common Stock" means the common stock of the Company, par value
------------
$0.01 per share.
"Company" means Gothic Energy Corporation, an Oklahoma
-------
corporation.
"Commission" means the United States Securities and Exchange
----------
Commission and its successors.
"Note" means that certain Promissory Note dated February ______,
----
1997 from the Company to Shareholder in the principal amount of $2,500,000 due
April 18, 1997.
"Registrable Securities" means (i) 100,000 shares of Common Stock
----------------------
issued to Shareholder this date and (ii) any securities issued in exchange for,
as a dividend on, or in replacement of, or otherwise issued in respect of
(including securities issued in a stock dividend, split or recombination or
pursuant to the exercise of preemptive rights, if any), any shares of Common
Stock in clause (i) above, until such time as such securities described in
clauses (i) and (ii) above have been (x) distributed to the public pursuant to a
registration statement covering such securities that has been declared effective
by the Commission under the Securities Act, (y) distributed to the public in
accordance with the provisions of Rule 144 (or any similar provision then in
force) under the Securities Act or (z) repurchased by the Company.
<PAGE>
"Securities Act" means the Securities Act of 1933, as amended.
--------------
"Shareholder" means Loire Sextant, S.A., of London, England.
-----------
2. Piggyback Registration Rights.
-----------------------------
(a) In the event that at any time or from time to time the
Company proposes to register any class of equity securities under the Securities
Act other than a registration statement on Forms S-4 or S-8 (or their successor
forms), the Company will give prompt written notice (the "Registration Notice")
to the holder or holders of Registrable Securities of its intention to effect
such a registration and will, subject to the remaining provisions of this
Agreement, include in such registration all Registrable Securities with respect
to which the Company has received the written request from the holder thereof
for inclusion therein within 15 days after the receipt of the Registration
Notice (a "Piggyback Registration"). From and after receipt of such notice from
the holder, the Company shall cause the specified Registrable Securities to be
registered under the Securities Act and to effect and to comply with all such
qualifications, compliances and requirements as may be necessary to permit the
sale of such Registrable Securities in the manner described in the Registration
Notice including, without limitation, qualification under applicable state
securities laws (provided that the Company shall not be required in connection
therewith to qualify as a foreign corporation or to execute general consent to
service of process in any state.)
(b) If the registration described in this Section 2(a) is for
------------
the account of the Company, and the managing underwriters advise the Company in
writing that, in their opinion, the number of shares of Registrable Securities
requested to be included in such registration exceeds the number which can be
sold in such offering, the Company will include in such registration (i) first,
all of the securities the Company proposes to sell for its own account (but not
for the account of any other person) and (ii) second, such number of Registrable
Securities requested to be included therein which the managing underwriters
advise the Company can be sold in such offering; provided, that any reduction
imposed upon holders of Registrable Securities shall not be greater, on a
percentage basis with respect to the Registrable Securities requested to be
included, than the reduction imposed upon other persons with piggy-back
registration rights requesting to be included in such registration whose rights
are not expressly subordinate to those granted herein.
(c) If the registration described in this Section 2(a) is an
------------
underwritten secondary registration on behalf of the holders of the Company's
securities, and the managing underwriters advise the Company in writing that, in
their opinion, the number of shares of Registrable Securities requested to be
included in such registration exceeds the number which can be sold in such
offering, the Company will include in such registration such number of
Registrable Securities requested to be included therein which the managing
underwriters advise the Company
2
<PAGE>
can be sold in such offering; provided, that any reduction imposed upon holders
of Registrable Securities shall not be greater, on a percentage basis with
respect to the Registrable Securities requested to be included, than the
reduction imposed upon other persons with piggy-back registration rights
requesting to be included in such registration whose rights are not expressly
subordinate to those granted herein.
(d) If the Company has previously filed a registration statement
with respect to Registrable Securities pursuant to this Agreement and if such
previous registration has not been withdrawn or abandoned, the Company will not
file or cause to effected any other registration of any of its equity securities
or securities convertible or exchangeable into or exercisable for its equity
securities under the Securities Act (except on Form S-8 or any successor form),
whether on its own behalf or at the request of any holder or holders of its
securities, until a period of at least six months has elapsed from the effective
date of such previous registration.
3. Indemnification. In the event of any registration pursuant to
---------------
this Agreement covering Registrable Securities, the Company will indemnify and
hold harmless the holders and each person, if any, who controls the holders
within the meaning of the Securities Act, against any losses, claims, damages,
costs, expenses (including reasonable attorneys' fees), or liabilities (or
actions in respect thereof), under the Securities Act or otherwise, which arise
out of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in any such registration statement, any preliminary
prospectus or final prospectus contained therein, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading; provided, however, that the Company will
not be liable in any such case to the extent that any such loss, claim, damage
or liability arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission made in said registration
statement, said preliminary prospectus, said prospectus, or any said amendment
or supplement, in reliance upon and in conformity with written information
furnished by the holder specifically for use in the preparation thereof. The
Company also agrees to reimburse the holders and each such controlling person
for any legal or other expenses reasonably incurred by the holders or such
controlling person in connection with investigating or defending any such loss,
claim, damage, liability or action to the extent that the same are not incurred
in connection with the provisions of the preceding sentence.
4. Assignment. The registration rights provided herein may be
----------
assigned to any person holding shares of Registrable Securities as reflected on
the stock records of the Company.
5. Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of Oklahoma except to the extent the
laws of any other state are mandatorily applicable.
3
<PAGE>
Witness the execution hereof this _______ day of February, 1997.
GOTHIC ENERGY CORPORATION
By:
-----------------------------------------
Michael Paulk, President
LOIRE SEXTANT, S.A.
By:
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
4
<PAGE>
STOCK SUBSCRIPTION AGREEMENT
----------------------------
THIS STOCK SUBSCRIPTION AGREEMENT is entered into this _____ day of
February, 1997, by and between Loire Sextant, S.A., of London, England,
("Subscriber"), and Gothic Energy Corporation, an Oklahoma corporation (the
"Company").
WHEREAS, Subscriber desires to subscribe for 135,000 shares of the
Company's authorized but unissued common stock.
NOW, THEREFORE, the parties agree as follows:
1. Subscription for Stock. (a) Subscriber hereby tenders its
----------------------
subscription and irrevocably subscribes for 135,000 shares of the common stock
(the "Stock") of the Company at a price of $0.01 per share for a total of
$1,350. A check for good funds in payment of the total purchase price of the
Stock subscribed for, made payable to the Company, accompanies this Agreement.
Upon acceptance of this Subscription Agreement by the Company, Subscriber
specifically agrees to accept, adopt and be bound by each and every provision of
this Agreement.
(b) It is understood and agreed that the Company shall have the right
to accept or reject this subscription, in whole or in part, and that the same
shall be deemed to be accepted by the Company only when this Stock Subscription
Agreement is signed by the Company.
(c) Subscriber agrees that this subscription is irrevocable and that
Subscriber cannot cancel, terminate or revoke this subscription or any
agreements of Subscriber hereunder and that this subscription and such
agreements shall survive the death or disability of the undersigned.
2. Subscriber's Acknowledgements, Representations, Warranties and
--------------------------------------------------------------
Agreements. Subscriber hereby makes the following acknowledgements,
- ----------
representations, warranties and agreements.
(a) Suitability. Subscriber represents and warrants:
-----------
(i) That Subscriber is investing in Subscriber's own name or in
the capacity indicated herein;
(ii) That Subscriber is a corporation organized under the laws
of London, England, and has no present intention of becoming a
resident of any other state or jurisdiction;
(iii) That Subscriber, either alone or together with Subscriber's
legal, tax, business and financial advisors, has sufficient knowledge
and experience in business, financial and investment matters to
evaluate the merits and risks of an investment in the Company.
<PAGE>
(b) Speculative Nature and Risk. Subscriber understands and
---------------------------
acknowledges the speculative nature of and risks of loss associated with an
investment in the Stock, which may be subject to dilution. Subscriber represents
and warrants that the Stock subscribed for constitutes an investment which is
suitable and consistent with Subscriber's overall investment program and that
Subscriber's financial condition enables Subscriber to bear the risks of this
investment for an indefinite period of time, which may include the total loss of
all payments made to the Company. Subscriber further represents that Subscriber
has adequate means of providing for its current financial needs and personal
contingencies and no need for liquidity in this investment and that Subscriber
has sufficient financial and business experience to evaluate the merits and
risks of an investment in the Company.
(c) Federal or State Securities Laws. Subscriber understands and
--------------------------------
acknowledges that the Stock being subscribed for has not been, and will not be,
registered under the Securities Act of 1933, as amended (the "Act"), the
Oklahoma Securities Act or applicable securities laws of any other state and
Subscriber is aware that no federal or state agency has made any review, finding
or determination regarding the terms of the purchase of the Stock nor any
recommendation or endorsement of the Stock as an investment, and Subscriber must
forego the security, if any, that such a review would provide.
(d) Acquisition for Own Account. Subscriber understands and
---------------------------
acknowledges that the Stock is being offered and sold under an exemption from
registration provided by Section 4(2) of the Act, and exemptions provided by
applicable state securities laws and Subscriber warrants and represents that the
Stock subscribed for is being acquired by Subscriber solely for Subscriber's own
account, for investment purposes only, and not with a view to or for the resale,
distribution, subdivision or fractionalization thereof. Subscriber represents
and warrants that Subscriber has no agreement or other arrangement, formal or
informal, with any person to sell, transfer or pledge any part of the Stock
subscribed for or which would guarantee Subscriber any profit or protect
Subscriber against any loss with respect to the Stock. Further, Subscriber has
no plans to enter into any such agreement or arrangement, and, consequently,
Subscriber must bear the economic risk of an investment in the Stock for an
indefinite period of time.
(e) Limitations on Resale or Transfer. Subscriber understands and
---------------------------------
acknowledges that the Stock will be "restricted" as defined in Rule 144 under
the Act and that therefore Subscriber can not offer to sell or otherwise
transfer or distribute the Stock without registration thereof under both the Act
and any applicable state securities laws, or unless an exemption is, in the
opinion of the Company's counsel, available to Subscriber under the Act and any
applicable state securities laws. Subscriber further understands and
acknowledges that the restrictions on the transfer of the Stock will be noted on
the books of the Company and that the stock certificate representing the Stock
will bear a legend setting forth the restriction on the Stock's transferability
in the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
2
<PAGE>
APPLICABLE STATE SECURITIES ACTS. THE SECURITIES HAVE BEEN ACQUIRED
FOR INVESTMENT AND MAY NOT BE SOLD OR TRANSFERRED FOR VALUE IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION OF THEM UNDER THE SECURITIES ACT
OF 1933 AND/OR THE OKLAHOMA SECURITIES ACT, OR AN OPINION OF COUNSEL
SATISFACTORY TO THE ISSUER THAT SUCH REGISTRATION IS NOT REQUIRED
UNDER THE ACT OR ACTS.
(f) Independent Investigation and Advisors. Subscriber represents and
--------------------------------------
warrants that in making the decision to purchase the Stock, Subscriber has
relied upon his independent investigation of the Company and those of
Subscriber's representatives, including Subscriber's own professional legal,
tax, business and advisors, and that Subscriber and Subscriber's representatives
have been given the opportunity to examine all relevant documents and to ask
questions of and receive answers from the Company, or person(s) acting on its
behalf, concerning the terms and conditions of Subscriber's purchase of the
Stock and any other matters concerning an investment in the Company, and to
obtain any additional information Subscriber deemed necessary to verify the
accuracy of the information provided.
3. Reliance by Company. Subscriber understands and acknowledges that
-------------------
the Company will rely upon the representations, warranties, agreements and
understandings made herein in making its decision whether to accept Subscriber's
subscription, and that the foregoing representations, warranties, agreements and
understandings shall survive any acceptance or rejection of a subscription for
the Stock.
4. Indemnification. Subscriber agrees to indemnify and hold harmless
---------------
the Company from and against any and all loss, damage or liability (including
attorney's fees) due to or arising out of a breach of any representation or
warranty of Subscriber contained in this Agreement.
5. Assignment. Subscriber agrees not to transfer or assign this
----------
Agreement, or any of Subscriber's interest herein.
6. Entire Agreement. This Agreement and all rights hereunder shall
----------------
be governed by, and interpreted in accordance with, the laws of the State of
Oklahoma. This Agreement constitutes the entire agreement between the parties
hereto with respect to the subject matter hereof and may be amended only by a
writing executed by all of the parties hereto.
IN WITNESS WHEREOF, Subscriber has executed and agrees to be bound by
this Agreement on the day and year first above written.
LOIRE SEXTANT, S.A.
3
<PAGE>
By: 16 Savile Row
------------------------------------ London, England WIX IAE
Signature of the Subscriber
Title:
------------------------------
- --------------------------------------- ---------------------------------
Print name of the Subscriber as it Print the Subscriber's EIN Number
should appear on Stock Certificate
The foregoing subscription is hereby accepted on behalf of the Company this
______ day of February, 1997, by its President.
GOTHIC ENERGY CORPORATION
---------------------------------
Michael Paulk, President
4
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<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 206,648
<SECURITIES> 0
<RECEIVABLES> 2,871,130
<ALLOWANCES> (68,990)
<INVENTORY> 0
<CURRENT-ASSETS> 3,349,246
<PP&E> 40,186,157
<DEPRECIATION> (3,636,414)
<TOTAL-ASSETS> 41,465,883
<CURRENT-LIABILITIES> 9,755,135
<BONDS> 0
0
277
<COMMON> 123,819
<OTHER-SE> 14,707,386
<TOTAL-LIABILITY-AND-EQUITY> 41,465,883
<SALES> 10,385,382
<TOTAL-REVENUES> 11,515,470
<CGS> 0
<TOTAL-COSTS> 6,588,480
<OTHER-EXPENSES> 2,856,000
<LOSS-PROVISION> 5,050,000
<INTEREST-EXPENSE> 1,528,598
<INCOME-PRETAX> (4,507,608)
<INCOME-TAX> 2,992,547
<INCOME-CONTINUING> 0
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<EXTRAORDINARY> (1,432,973)
<CHANGES> 0
<NET-INCOME> (3,328,909)
<EPS-PRIMARY> (.29)
<EPS-DILUTED> (.29)
</TABLE>
