UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1998
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Commission File Number 0-20872
ST. MARY LAND & EXPLORATION COMPANY
(Exact name of Registrant as specified in its charter)
Delaware 41-0518430
(State or other Jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1776 Lincoln Street, Suite 1100, Denver, Colorado 80203
(Address of principal executive offices) (Zip Code)
(303) 861-8140
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ x ] No [ ]
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock as of the latest practicable date.
As of August 10, 1998, the registrant had 10,992,447 shares of Common Stock,
$.01 par value, outstanding.
<PAGE>
ST. MARY LAND & EXPLORATION COMPANY
INDEX
Part I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited)
Consolidated Balance
Sheets - June 30, 1998 and
December 31, 1997 ....................................... 3
Consolidated Statements of
Income - Three Months Ended
June 30, 1998 and 1997: Six Months
Ended June 30, 1998 and 1997 ............................ 4
Consolidated Statements of
Cash Flows - Six Months Ended
June 30, 1998 and 1997 .................................. 5
Notes to Consolidated Financial
Statements - June 30, 1998 .............................. 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations .......................................... 11
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders .... 22
Item 6. Exhibits and Reports on Form 8-K ....................... 22
Exhibits
--------
Exhibit 3.3 Certificate of Amendment to Certificate
of Incorporation
Exhibit 27.6 Financial Data Schedule
Exhibit 10.52 Credit Agreement dated June 30, 1998
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share amounts)
ASSETS
<TABLE>
June 30, December 31,
-------------- --------------
1998 1997
-------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,537 $ 7,112
Accounts receivable 17,315 24,320
Prepaid expenses and other 532 480
-------------- --------------
Total current assets 22,384 31,912
-------------- --------------
Property and equipment (successful efforts method), at cost:
Proved oil and gas properties 269,638 246,468
Unproved oil and gas properties, net of impairment
allowance of $3,184 in 1998 and $3,032 in 1997 30,737 28,615
Other 3,531 3,386
-------------- --------------
303,906 278,469
Less accumulated depletion, depreciation, amortization and impairment (132,919) (120,988)
-------------- --------------
170,987 157,481
-------------- --------------
Other assets:
Khanty Mansiysk Oil Corporation receivable and stock 12,003 12,003
Summo Minerals Corporation investment and receivable 6,686 6,691
Other assets 3,789 2,943
-------------- --------------
22,478 21,637
-------------- --------------
$ 215,849 $ 211,030
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 18,434 $ 21,943
Current portion of stock appreciation rights 358 351
-------------- --------------
Total current liabilities 18,792 22,294
-------------- --------------
Long-term liabilities:
Long-term debt 26,615 22,607
Deferred income taxes 17,999 16,589
Stock appreciation rights 691 989
Other noncurrent liabilities 1,083 619
-------------- --------------
46,388 40,804
-------------- --------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value: authorized - 50,000,000 shares in 1998 and
15,000,000 shares in 1997; issued and outstanding - 10,984,023
shares in 1998 and 10,980,423 shares in 1997 110 110
Additional paid-in capital 67,589 67,494
Retained earnings 82,970 80,328
-------------- --------------
Total stockholders' equity 150,669 147,932
-------------- --------------
$ 215,849 $ 211,030
============== ==============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
3
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ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share amounts)
<TABLE>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating revenues:
Oil and gas production $ 20,233 $ 15,302 $ 39,258 $ 36,332
Gain on sale of Russian joint venture - - - 9,691
Gain (loss) on sale of proved properties (14) 4,182 (14) 4,214
Other revenues 88 353 202 461
------------ ------------ ------------ ------------
Total operating revenues 20,307 19,837 39,446 50,698
------------ ------------ ------------ ------------
Operating expenses:
Oil and gas production 4,173 3,123 8,116 7,101
Depletion, depreciation and amortization 6,503 4,021 11,880 8,018
Impairment of proved properties 1,077 516 1,445 516
Exploration 3,052 1,630 6,473 3,019
Abandonment and impairment of unproved properties 312 332 615 482
General and administrative 1,477 1,547 4,424 4,568
Loss in equity investees 510 109 571 22
Other 57 71 92 36
------------ ------------ ------------ ------------
Total operating expenses 17,161 11,349 33,616 23,762
------------ ------------ ------------ ------------
Income from operations 3,146 8,488 5,830 26,936
Nonoperating income and (expense):
Interest income 371 289 526 467
Interest expense (360) (143) (754) (725)
------------ ------------ ------------ ------------
Income before income taxes 3,157 8,634 5,602 26,678
Income tax expense 1,121 3,041 1,896 9,490
------------ ------------ ------------ ------------
Income from continuing operations 2,036 5,593 3,706 17,188
Gain on sale of discontinued operations, net of taxes 34 296 34 296
------------ ------------ ------------ ------------
Net income $ 2,070 $ 5,889 $ 3,740 $ 17,484
============ ============ ============ ============
Basic earnings per common share:
Income from continuing operations $ .19 $ .51 $ .34 $ 1.68
Gain on sale of discontinued operations - .03 - .03
============ ============ ============ ============
Basic net income per common share $ .19 $ .54 $ .34 $ 1.71
============ ============ ============ ============
Diluted earnings per common share:
Income from continuing operations $ .18 $ .51 $ .33 $ 1.66
Gain on sale of discontinued operations - .03 - .03
============ ============ ============ ============
Diluted net income per common share $ .18 $ .54 $ .33 $ 1.69
============ ============ ============ ============
Basic weighted average common shares outstanding 10,984 10,945 10,984 10,255
============ ============ ============ ============
Diluted weighted average common shares outstanding 11,079 11,054 11,102 10,352
============ ============ ============ ============
Cash dividend declared per share $ 0.05 $ 0.05 $ 0.10 $ 0.10
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
4
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ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
For the Six Months Ended
June 30,
--------------------------------
1998 1997
------------ ------------
Reconciliation of net income to net cash provided by operating activities:
<S> <C> <C>
Net income $ 3,740 $ 17,484
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on sale of Russian joint venture - (9,691)
Loss (gain) on sale of proved properties 14 (4,214)
Depletion, depreciation and amortization 11,880 8,018
Impairment of proved properties 1,445 516
Exploration 2,945 (341)
Abandonment and impairment of unproved properties 615 482
Loss in equity investees 571 22
Deferred income taxes 1,410 8,435
Other 239 256
------------ ------------
22,859 20,967
Changes in current assets and liabilities:
Accounts receivable 7,081 1,453
Prepaid expenses and other (986) 253
Accounts payable and accrued expenses (1,600) 2,552
Stock appreciation rights 7 (1,567)
------------ ------------
Net cash provided by operating activities 27,361 23,658
------------ ------------
Cash flows from investing activities:
Proceeds from sale of oil and gas properties 59 7,144
Capital expenditures (29,391) (23,688)
Acquisition of oil and gas properties (2,026) (7,386)
Sale of Russian joint venture - 5,608
Investment in and loans to Summo Minerals Corporation (566) (251)
Receipts from restricted cash - 7,854
Deposits to restricted cash - (6,551)
Other (922) (164)
------------ ------------
Net cash used in investing activities (32,846) (17,434)
------------ ------------
Cash flows from financing activities:
Proceeds from long-term debt 24,395 4,975
Repayment of long-term debt (20,387) (41,149)
Proceeds from sale of common stock, net of offering costs - 51,190
Dividends paid (1,098) (985)
Other - (9)
------------ ------------
Net cash provided by financing activities 2,910 14,022
------------ ------------
Net (decrease) increase in cash and cash equivalents (2,575) 20,246
Cash and cash equivalents at beginning of period 7,112 3,338
------------ ------------
Cash and cash equivalents at end of period $ 4,537 $ 23,584
============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
5
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ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Continued)
Supplemental schedule of additional cash flow information and noncash
activities:
For the Six Months Ended
June 30,
1998 1997
------------ ------------
(In thousands)
Cash paid for interest $ 771 $ 936
Cash paid for income taxes 444 809
Cash paid for exploration expenses 6,425 2,541
Interest income included in restricted cash - 32
In February 1997, the Company sold its interest in the Russian joint venture for
$17,609,000, receiving $5,608,000 of cash, $1,869,000 of Khanty Mansiysk Oil
Corporation common stock, and a $10,134,000 receivable in a form equivalent to a
retained production payment.
The accompanying notes are an integral part of
these consolidated financial statements.
6
<PAGE>
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 1998
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. They do not include all information and notes required by
generally accepted accounting principles for complete financial statements.
However, except as disclosed herein, there has been no material change in the
information disclosed in the notes to consolidated financial statements included
in the Annual Report on Form 10-K of St. Mary Land & Exploration Company and
Subsidiaries (the "Company") for the year ended December 31, 1997. In the
opinion of Management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the periods presented are not necessarily indicative of the results
that may be expected for the full year.
The accounting policies followed by the Company are set forth in Note 1 to the
Company's financial statements in Form 10-K for the year ended December 31,
1997. It is suggested that these financial statements be read in conjunction
with the financial statements and notes included in the Form 10-K.
Certain amounts in the 1997 consolidated financial statements have been
reclassified to correspond to the 1998 presentation.
Note 2 - Investments
The Company, through subsidiaries, owned an 18% interest in a venture that is
developing the Chernogorskoye oil field in western Siberia (the "Russian joint
venture"). The Company accounted for its investment in the Russian joint venture
under the equity method of accounting. In February 1997, the Company sold its
interest in the Russian joint venture to Khanty Mansiysk Oil Corporation
("KMOC"), formerly known as Ural Petroleum Corporation. In accordance with the
Acquisition Agreement, the Company received cash consideration of $5,608,000
before transaction costs, KMOC common stock valued at $1,869,000, and a
receivable in a form equivalent to a retained production payment of $10,134,000
plus interest at 10% per annum from the limited liability company formed to hold
the Russian joint venture interest. The Company's receivable is collateralized
by the partnership interest sold. The Company has the right, subject to certain
conditions, to require KMOC to purchase the Company's receivable from the net
proceeds of an initial public offering of KMOC common stock or alternatively,
the Company may elect to convert all or a portion of its receivable into KMOC
common stock immediately prior to an initial public offering of KMOC common
stock. The Company recorded a gain on the sale of the Russian joint venture
interest of $9,671,000. The Company's equity in income for the Russian joint
venture for 1997 through the date of sale was $203,000.
The Company accounts for its 37% ownership interest in Summo Minerals
Corporation ("Summo") under the equity method of accounting. For the six months
ended June 30, 1998, the Company recorded a loss of $571,000 as its equity in
the losses of Summo. In May 1997, the Company entered into an agreement to
receive a 55% interest in Summo's Lisbon Valley Copper Project (the "Project")
in return for the Company contributing $4,000,000 in cash, all of its
outstanding stock in Summo, and $8,600,000 in letters of credit to a single
purpose company, Lisbon Valley Mining Company LLC, formed to own and operate the
Project. Summo will contribute the property, all project permits and contracts,
7
<PAGE>
$3,200,000 in cash, and a commitment for $45,000,000 of senior debt financing in
return for a 45% interest in the new company. The agreement is subject to
certain conditions, including final resolution of regulatory approvals and
project financing. Summo has completed tests of the ground water quality to
address concerns raised on appeal during the permitting process. The results of
these tests support the original conclusions and recommendations made by the
Bureau of Land Management when the Project was initially approved. A decision
from the Interior Board of Land Appeals is expected before the end of 1998. The
Company has agreed to provide interim financing of up to $2,950,000 for the
Project in the form of a loan to Summo due in June 1999. Interest accrues on the
amounts outstanding at the prime rate plus 1%. As of June 30, 1998, $2,647,000
was outstanding under this loan. Additional amounts totaling $48,000 have been
advanced to Summo under this loan since June 30, 1998. At the Company's option,
any principal and interest amounts outstanding are convertible into shares of
Summo common stock anytime after December 31, 1998, at a conversion price equal
to the weighted average trading price of Summo's common shares for the twenty
trading days leading up to and including December 31, 1998. Upon capitalization
of the new company the outstanding loan principal shall constitute a capital
contribution in partial satisfaction of the Company's capital commitments set
out in the May 1997 agreement, and any accrued interest on the loan shall be
forgiven. Although current copper prices are not sufficient to warrant
development of the Project at this time, management believes the long-term
outlook for copper prices is favorable and plans to continue providing interim
financing during 1998 until Summo receives regulatory approval and copper prices
recover adequately to justify construction using permanent financing. There can
be no assurance that the Company will realize a return on its investment in
Summo or the Project.
Note 3 - Capital Stock
On February 26, 1997, the Company closed the sale of 2,000,000 shares of common
stock at $25.00 per share. On March 12, 1997, the Company closed the sale of an
additional 180,000 shares pursuant to the underwriters' exercise of the
over-allotment option. These transactions resulted in aggregate net proceeds of
$51,200,000. The proceeds were used to fund the Company's exploration,
development and acquisition programs and to repay borrowings under its credit
facility.
In June 1998, the Company's shareholders approved an amendment to the Company's
Certificate of Incorporation to increase the number of authorized shares of
Common Stock from 15,000,000 to 50,000,000.
Note 4 - Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," effective for financial statements for fiscal years beginning after
December 15, 1997. The Statement establishes standards for reporting and display
of comprehensive income and its components in financial statements. The adoption
of this statement will not have a material impact on the Company's financial
statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," effective for financial statements for
fiscal years beginning after December 15, 1997. The Statement requires companies
to report certain information about operating segments in their financial
statements and certain information about their products and services, the
geographic areas in which they operate and their major customers. The Company is
currently reviewing the effects of the disclosure requirements of the Statement.
8
<PAGE>
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures about
Pensions and Other Postretirement Benefits," effective for fiscal years
beginning after December 15, 1997. The Statement standardizes the disclosure
requirements for pensions and other postretirement benefits to provide
information that is more comparable and concise. The Company is currently
reviewing the effects of the disclosure requirements of the Statement.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. The Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The Company
is currently reviewing the effects this Statement will have on the financial
statements in relation to the Company's hedging activities.
Note 5 - Earnings per Share
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share," which
requires a dual presentation of basic and diluted earnings per share. The
Company adopted SFAS No. 128 effective December 31, 1997. Under SFAS No. 128
basic net income per share of common stock is calculated by dividing net income
by the weighted average of common shares outstanding during each period, and
diluted net income per common share of stock is calculated by dividing net
income by the weighted average of outstanding common shares and other dilutive
securities. Dilutive securities of the Company consist entirely of outstanding
options to purchase the Company's common stock. The outstanding dilutive
securities for the three-month periods ended June 30, 1998 and 1997 were 95,255
and 108,421, respectively, and the outstanding dilutive securities for the
six-month periods ended June 30, 1998 and 1997 were 118,861 and 97,361,
respectively. All net income of the Company is available to common stockholders.
The adoption of SFAS No. 128 had no effect on diluted net income per share
compared to fully diluted net income per share as reported for the six months
ended June 30, 1997. Restated diluted net income per share for the three months
ended June 30, 1997 was $0.54 compared to fully diluted net income per share of
$0.53 as reported. Restated basic net income per share for the six months ended
June 30, 1997 was $1.71 compared to primary net income per share of $1.69 as
reported. Restated basic net income per share for the three months ended June
30, 1997 was $0.54 compared to primary net income per share of $0.53 as
reported.
Note 6 - Income Taxes
Federal income tax expense for 1998 and 1997 differs from the amount that would
be provided by applying the statutory U.S. Federal income tax rate to income
before income taxes primarily due to Section 29 credits and percentage depletion
in 1998 and the effect of state income taxes partially offset by Section 29 tax
credits and percentage depletion in 1997.
Note 7 - Long-Term Debt and Notes Payable
On June 30, 1998, the Company entered into a new long-term revolving credit
agreement that replaced the agreement dated March 1, 1993 and amended in April
1996. The new credit agreement specifies a maximum loan amount of $200,000,000
and has an initial aggregate borrowing base of $115,000,000. The lender may
periodically re-determine the aggregate borrowing base. The initial accepted
borrowing base is $40,000,000. The credit agreement has a maturity date of
December 31, 2005, and includes a revolving period that matures on December 31,
2000. The Company can elect to allocate up to 50% of available borrowings to a
short-term tranche due in 364 days. The Company must comply with certain
covenants including maintenance of stockholders' equity at a specified level and
limitations on additional indebtedness. As of June 30, 1998 $19,200,000 was
outstanding under this credit agreement.
9
<PAGE>
Effective June 30, 1998, interest on borrowings during the revolving period and
commitment fees on the unused portion of the accepted borrowing base are
calculated as follows:
INTEREST RATES:
Debt to Capitalization Ratio Interest Rate
- ---------------------------- -------------
Less than 0.3 to 1.0 The Company's option of (a) LIBOR + 0.50%
or (b) the higher of the Federal Funds
Rate + 0.5% or the Prime Rate
Greater than or equal to 0.3 to The Company's option of (a) LIBOR + 0.75%
1.0 but less than 0.4 to 1.0 or (b) the higher of the Federal Funds
Rate + 0.5% or the Prime Rate
Greater than or equal to 0.4 to The Company's option of (a) LIBOR + 1.00%
1.0 but less than 0.5 to 1.0 or (b) the higher of the Federal Funds
Rate + 0.5% or the Prime Rate
Greater than or equal to The Company's option of (a) LIBOR + 1.25%
0.5 to 1.0 or (b) the higher of the Federal Funds
Rate + 0.625% or the Prime Rate + 0.125%
COMMITMENT FEES:
Debt to Capitalization Ratio Short-Term Tranche Long-Term Tranche
---------------------------- ------------------ -----------------
Less than 0.5 to 1.0 0.125% 0.25%
Greater than or equal to 0.5 to 1.0 0.375% 0.50%
At June 30, 1998, the Company's debt to capitalization ratio as defined under
the credit agreement was 0.18 to 1.0.
Panterra, in which the Company has a 74% general partnership ownership interest,
has a separate credit facility with a $25,000,000 borrowing base as of July 1,
1998, and $10,000,000 and $11,000,000 outstanding as of June 30, 1998 and
December 31, 1997, respectively. In June 1997, Panterra entered into a credit
agreement replacing a previous agreement, which was due March 31, 1999. The new
credit agreement includes a two-year revolving period converting to a five-year
amortizing loan on June 30, 1999. During the revolving period of the loan, loan
balances accrue interest at Panterra's option of either the bank's prime rate or
LIBOR plus 3/4% when the Partnership's debt to partners' capital ratio is less
than 30%, up to a maximum of either the bank's prime rate or LIBOR plus 1-1/4%
when the Partnership's debt to partners' capital ratio is greater than 100%.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
St. Mary Land & Exploration Company ("St. Mary" or the "Company") was founded in
1908 and incorporated in Delaware in 1915. The Company is engaged in the
exploration, development, acquisition and production of crude oil and natural
gas with operations focused in five core operating areas in the United States:
The Mid-Continent region; the ArkLaTex region; south Louisiana; the Williston
Basin; and the Permian Basin.
Internal exploration, drilling and production personnel conduct the Company's
activities in the Mid-Continent and ArkLaTex regions and in south Louisiana.
Activities in the Williston Basin are conducted through Panterra Petroleum
("Panterra") in which the Company owns a 74% general partnership interest. The
Company proportionally consolidates its interest in Panterra. Activities in the
Permian Basin are primarily contracted through an oil and gas property
management company with extensive experience in the basin.
St. Mary has two principal equity investments, Summo Minerals Corporation
("Summo"), a North American copper mining company of which the Company owns 37%,
and until early 1997, the Company's Russian joint venture. The Company accounts
for its investments in Summo and the Russian joint venture under the equity
method and includes its share of the income or loss from these entities in its
consolidated results of operations. Effective February 12, 1997, the Company
sold its Russian joint venture.
The Company receives significant royalty income from its south Louisiana fee
lands. Management believes the Company's royalty income may increase in 1998
with the completion of the St. Mary Land & Exploration No. 3 well at South
Horseshoe Bayou in January 1998 which followed the completion of the discovery
well in the prospect in February 1997 and its subsequent recompletion in April
1998. The Company owns a 25% working interest and royalty interests between
approximately 19% and 22% in this field for combined net revenue interests of
between approximately 37% and 40%, depending on the depth of production. The
Company and the lessees have identified several geologic objectives for testing
in future years.
During 1995, 1996 and 1997 the Company acquired proved oil and gas properties
for a total of $56.4 million. The results of operations include these
acquisitions and the subsequent development of the properties. In December 1995,
the Company acquired two different interests in the Box Church Field in its
ArkLaTex region for $2.2 million and several additional interests in 1996 for
$580,000. Development of the field has occurred with the drilling and completion
of three wells in 1996 and eleven wells in 1997. In the first half of 1998 the
Company completed two of the three wells in progress at year-end 1997. Two of
the five wells anticipated to be drilled in 1998 to complete the development of
the field were in progress as of June 30, 1998. The Company purchased a 90%
interest in the producing properties of Siete Oil & Gas Corporation for $10.0
million in June 1996 and completed a series of follow-on acquisitions of smaller
interests in these properties totaling $5.8 million during 1996, 1997 and the
first two quarters of 1998. These properties are located in the Permian Basin of
New Mexico and west Texas. The successful implementation of a secondary recovery
plan during the first half of 1998 was completed as part of the Company's plan
to further develop these properties. Management expects to acquire additional
interests in the Siete properties as they become available. In May 1997, the
Company acquired an 85% working interest in certain Louisiana properties of
Henry Production Company for $3.8 million. In November 1997, the Company
acquired the interests of Conoco, Inc. in the Southwest Mayfield area in
Oklahoma for $20.3 million. Management anticipates drilling several wells in
1998 to test the geologic ideas identified at the time of acquisition of this
field, one such well was in progress at June 30, 1998. During the second quarter
of 1998, the Company entered into an exploration and development joint venture
in east Texas, which included the acquisition of interests in existing
properties for $521,000. Several smaller acquisitions were also completed during
1997 and 1996 totaling $560,000 and $2.8 million, respectively.
11
<PAGE>
In February 1997, the Company sold its interest in the Russian joint venture to
Khanty Mansiysk Oil Corporation ("KMOC"), formerly known as Ural Petroleum
Corporation, for $17.6 million. The Company received $5.6 million in cash before
transaction costs, $1.9 million of KMOC common stock and a convertible
receivable in a form equivalent to a retained production payment of $10.1
million plus interest at 10% per annum from the limited liability company formed
to hold the Russian joint venture interest.
In February 1997, the Company closed the sale of 2,000,000 shares of common
stock at $25.00 per share and closed the sale of an additional 180,000 shares in
March 1997, pursuant to the underwriters' exercise of the over-allotment option.
These transactions resulted in aggregate net proceeds of $51.2 million.
In May 1997, the Company sold its non-operated interests in south Texas for $5.4
million as part of its continuing strategy to focus and rationalize its
operations.
The Company seeks to protect its rate of return on acquisitions of producing
properties by hedging up to the first 24 months of an acquisition's production
at prices approximately equal to those used in the Company's acquisition
evaluation and pricing model. The Company also periodically uses hedging
contracts to hedge or otherwise reduce the impact of oil and gas price
fluctuations on production. The Company's strategy is to ensure certain minimum
levels of operating cash flow and to take advantage of windows of favorable
commodity prices. The Company generally limits its aggregate hedge position to
no more than 50% of its total production. The Company seeks to minimize basis
risk and indexes the majority of its oil hedges to NYMEX prices and the majority
of its gas hedges to various regional index prices associated with pipelines in
proximity to the Company's areas of gas production. The Company has hedged
approximately 3.2 million MMBtu of its remaining 1998 gas production at an
average fixed price of $2.20 per MMBtu. The Company has also purchased options
resulting in price collars and price floors on 840,000 MMBtu of the Company's
remaining 1998 gas production with price ceilings between $2.65 and $2.80 per
MMBtu and price floors between $1.95 and $2.00 per MMBtu. All of the Company's
existing oil hedges matured during the second quarter of 1998. The company has
not hedged any of its remaining 1998 oil production as of June 30, 1998.
This Quarterly Report on Form 10-Q includes certain statements that may be
deemed to be "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. All statements, other than statements of
historical facts, included in this Form 10-Q that address activities, events or
developments that the Company expects, believes or anticipates will or may occur
in the future, including such matters as future capital, development and
exploration expenditures (including the amount and nature thereof), drilling of
wells, reserve estimates (including estimates of future net revenues associated
with such reserves and the present value of such future net revenues), future
production of oil and gas, repayment of debt, business strategies, expansion and
growth of the Company's operations and other such matters are forward-looking
statements. These statements are based on certain assumptions and analyses made
by the Company in light of its experience and its perception of historical
trends, current conditions, expected future developments and other factors it
believes are appropriate in the circumstances. Such statements are subject to a
number of assumptions, risks and uncertainties, general economic and business
conditions, the business opportunities (or lack thereof) that may be presented
to and pursued by the Company, changes in laws or regulations, and other
factors, many of which are beyond the control of the Company. Readers are
cautioned that any such statements are not guarantees of future performance and
that actual results or developments may differ materially from those projected
in the forward-looking statements.
12
<PAGE>
Results of Operations
The following table sets forth selected operating and financial information for
the Company:
<TABLE>
Three Months Six Months
Ended June 30, Ended June 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
(In thousands, except BOE data)
<S> <C> <C> <C> <C>
Oil and gas production
Revenues:
Working interests $ 17,862 $ 13,323 $ 34,872 $ 31,834
Louisiana royalties 2,371 1,979 4,386 4,498
============ ============ ============ ============
Total $ 20,233 $ 15,302 $ 39,258 $ 36,332
============ ============ ============ ============
Net production:
Oil (MBbls) 370 276 692 572
Gas (MMcf) 7,255 5,529 13,614 10,999
============ ============ ============ ============
MBOE 1,579 1,197 2,961 2,405
============ ============ ============ ============
Average sales price (1):
Oil (per Bbl) $ 13.55 $ 18.91 $ 14.18 $ 19.67
Gas (per Mcf) 2.10 1.82 2.16 2.28
Oil and gas production costs:
Lease operating expense $ 3,118 $ 2,339 $ 5,959 $ 4,762
Production taxes 1,055 784 2,157 2,339
============ ============ ============ ============
Total $ 4,173 $ 3,123 $ 8,116 $ 7,101
============ ============ ============ ============
Additional per BOE data:
Sales price $ 12.81 $ 12.78 $ 13.26 $ 15.10
Lease operating expense 1.97 1.95 2.01 1.98
Production taxes .67 .65 .73 .97
------------ ------------ ------------ ------------
Operating margin $ 10.17 $ 10.18 $ 10.52 $ 12.15
Depreciation, depletion and
amortization $ 4.12 $ 3.36 $ 4.01 $ 3.33
Impairment of proved
properties .68 .43 .49 .21
General and administrative .94 1.29 1.49 1.90
</TABLE>
- ----------
(1) Includes the effects of the Company's hedging activities.
13
<PAGE>
Oil and Gas Production Revenues. Oil and gas production revenues increased $4.9
million, or 32% to $20.2 million for the second quarter 1998 compared to $15.3
million for the second quarter 1997. Oil production volumes increased 34% and
gas production volumes increased 31% for the second quarter 1998 compared to
1997. Average net daily production reached 17.4 MBOE in the second quarter 1998
compared to 13.2 MBOE in the comparable quarter of 1997. This production
increase resulted from new properties acquired and drilled during the past year.
Major acquisitions included the Southwest Mayfield properties purchased from
Conoco, the acquisition of Louisiana properties from Henry Production Company,
and the additional interests purchased in the Siete properties. Successful
drilling results in the Box Church Field in Texas, the Haynesville Field in
Louisiana and in the Company's Oklahoma drilling program also contributed to the
second quarter 1998 production increase. Also contributing to the second quarter
1998 production increase were gas balancing adjustments and other non-recurring
adjustments which increased average daily production for the quarter by 1.1MBOE.
The average realized oil price for the second quarter 1998 decreased 28% to
$13.55 per Bbl, while realized gas prices increased 15% to $2.10 per Mcf, from
their respective 1997 levels.
Oil and gas production revenue increased $2.9 million, or 8% to $39.2 million
for the six months ended June 30, 1998 compared to $36.3 million in 1997. Oil
production volumes increased 21% and gas production volumes increased 24% for
the first six months of 1998 compared with the comparable 1997 period. Average
net daily production was 16.4 MBOE for the six months ended June 30, 1998
compared to 13.3 MBOE in 1997. This production increase resulted from new
properties acquired and drilled during the past year, including the acquisition
of the Southwest Mayfield properties in Oklahoma and the Louisiana properties
purchased from Henry Production Company. Successful drilling results in the Box
Church Field in Texas, the South Horseshoe Bayou and Haynesville fields in
Louisiana and the Company's Oklahoma drilling program contributed to the first
half of 1998 production increases. The average oil price for the six months
ended June 30, 1998 decreased 28% to $14.18 per barrel, and gas prices decreased
5% to $2.16 per Mcf, from their respective 1997 levels.
The Company hedged 30,000 Bbls of its oil production during the second quarter
1998 at an average NYMEX price of $17.95 per Bbl. The Company purchased options
resulting in price collars and price floors on 22,000 Bbls of its second quarter
1998 oil production with a price ceiling of $24.00 per Bbl and a price floor of
$20.00 per Bbl. The Company realized a $313,000 increase in oil revenue or $.45
per Bbl for 1998 on these contracts compared to a $219,000 decrease or $.38 per
Bbl in 1997. The Company also hedged 2.0 million MMBtu of its second quarter
1998 gas production at an average indexed price of $2.21 per MMBtu and purchased
options resulting in price collars and price floors on 1.1 million MMBtu of its
second quarter 1998 gas production with price ceilings between $2.55 and $3.00
per MMBtu and price floors between $1.95 and $2.00 per MMBtu. The Company
realized a $324,000 increase in gas revenues or $.02 per Mcf for 1998 from hedge
contracts compared to a $1.0 million or $.10 per Mcf decrease in 1997.
Oil and Gas Production Costs. Oil and gas production costs consist of lease
operating expense and production taxes. Total production costs increased $1.1
million or 34% for the second quarter 1998 from comparable 1997 levels. Higher
lease operating expenses were partially offset by lower production taxes on
wells drilled in 1998 qualifying for reduced production tax rates. Total oil and
gas production costs per BOE increased 1% to $2.64 in 1998 compared to $2.60 per
BOE in the second quarter 1997.
Total production costs increased $1.0 million or 14% for the six months ended
June 30, 1998 to $8.1 million as a result of new properties acquired and drilled
during the past year. However, total production costs per BOE declined 7% to
$2.74 for the six months ended June 30, 1998 compared to $2.95 for the six
months ended June 30, 1997, primarily due to lower lease operating expenses per
BOE from high volume properties such as South Horseshoe Bayou.
Depreciation, Depletion, Amortization and Impairment. Depreciation, depletion
and amortization expense ("DD&A") increased $2.5 million, or 62% to $6.5 million
in the second quarter 1998 compared with $4.0 million in 1997. DD&A per BOE
increased 23% to $4.12 in the second quarter 1998 compared to $3.36 in 1997.
This increase resulted from increased production volumes of new properties
acquired and drilled in the last half of 1997 and the first half of 1998 with a
higher cost basis, and from increased water production at South Horseshoe Bayou
and the adverse impact of low oil prices in the Williston Basin. The Company
recorded impairments of proved oil and gas properties of $1.1 million in the
second quarter 1998 compared with $516,000 in the comparable 1997 period. These
second quarter 1998 charges resulted from a high cost marginal well in Oklahoma
and another in Louisiana, as well as $580,000 of impairments associated with the
Company's properties in the Williston Basin due to low oil prices.
14
<PAGE>
DD&A increased 48% to $11.9 million for the six months ended June 30, 1998
compared with $8.0 million in 1997 because of increased production and reserve
declines from low oil prices and water production at South Horseshoe Bayou, and
due to higher cost properties in four fields in Oklahoma. DD&A per BOE increased
to $4.01 in the six months ended June 30, 1998 compared to $3.33 in 1997.
Impairment of producing oil and gas properties was $1.4 million for the six
months ended June 30, 1998 compared to $516,000 for the six months ended June
30, 1997, due to marginal wells drilled in Oklahoma and Louisiana and the
adverse affects of low oil prices in the Williston Basin.
Abandonment and impairment of unproved properties decreased $20,000 to $312,000
in the second quarter 1998 compared to $332,000 in 1997.
Abandonment and impairment of unproved properties increased $133,000 to $615,000
in the six months ended June 30, 1998 compared to $482,000 in the comparable
period in 1997 due to additional lease expirations during the first half of
1998.
Exploration. Exploration expense increased $1.4 million or 87% to $3.1 million
for the second quarter 1998 compared with $1.6 million in 1997 primarily as a
result of three unsuccessful exploratory wells in south Louisiana and Oklahoma.
Exploration expense increased $3.5 million or 114% to $6.5 million for the six
months ended June 30, 1998 compared to $3.0 million in 1997 due to six
unsuccessful exploratory tests in south Louisiana and Oklahoma and the payment
of $795,000 for delay rentals in the Company's Atchafalaya prospect area in the
six months ended June 30, 1998 compared with 1997.
General and Administrative. General and administrative expenses declined $70,000
or 5% to $1.5 million for the second quarter 1998 as compared to 1997. Increased
compensation and rent expenses were offset by declines in charitable
contributions, insurance and general corporate expenses.
General and administrative expenses decreased $144,000 or 3% to $4.4 million for
the six months ended June 30, 1998 compared to $4.6 million in 1997. Increased
compensation and rent expenses were offset by declines in charitable
contributions, insurance and general corporate expenses and increases in
overhead reimbursements from outside interest owners in properties operated by
the Company.
Other operating expenses consist of legal expenses in connection with ongoing
oil and gas activities and oversight of the Company's mining investments. This
expense decreased $13,000 to $58,000 in the second quarter 1998 compared with
the second quarter 1997.
Other operating expenses increased $56,000 to $92,000 in the first half of 1998
compared to the comparable 1997 period, primarily due to legal expenses in 1998
associated with the pending litigation that seeks to recover damages from the
drilling contractor for the St. Mary Land & Exploration No. 1 well at South
Horseshoe Bayou, and due to the benefit of a non-recurring insurance recovery of
$68,000 in 1997.
Equity in Income of Russian Joint Venture. The Company accounted for its
investment in the Russian joint venture under the equity method and included its
share of income from the venture in its results of operations up to the point of
sale. Therefore no equity in the net income of the Russian joint venture was
recorded in 1998 compared to $203,000 recorded in 1997. As discussed under
Outlook, the Company sold this investment in February 1997 resulting in a
partial year of equity income recorded in 1997.
15
<PAGE>
Equity in Loss of Summo Minerals Corporation. The Company accounts for its
investment in Summo under the equity method and includes its share of Summo's
income or loss in its results of operations. The Company's equity in the net
loss of Summo was $509,000 in the second quarter 1998 and $110,000 in 1997. This
increase is primarily due to the $447,000 impact of Summo's decision to
write-off its investment in its Cashin and Champion properties.
The Company's equity in the net loss of Summo was $571,000 for the six months
ended June 30, 1998 compared to $209,000 in 1997, primarily due to Summo's
decision to write-off its investment in its Cashin and Champion properties in
the second quarter 1998.
Non-Operating Income and Expense. Interest income increased $83,000 or 29% to
$372,000 for the second quarter 1998 from $289,000 for the second quarter 1997
due to $312,000 of interest income resulting from a favorable gas balancing
decision by the Oklahoma Supreme Court. Interest expense increased $218,000 or
152% to $361,000 for the second quarter 1998 compared to $143,000 in the 1997
period due to increased borrowings under the Company's and Panterra's credit
facilities in 1998. Debt under the Company's credit facility had been repaid in
the first quarter 1997 with the proceeds from the sale of the Company's common
stock in February 1997.
Interest income increased $59,000 or 13% to $526,000 in the six month period
ended June 30, 1998 compared to $467,000 for the comparable 1997 period due to
$312,000 of interest income from the favorable gas balancing decision in 1998.
Interest was earned in the six-month period ended June 30, 1997 on funds
available from the sale of the Company's common stock. Interest expense for the
six months ended June 30, 1998 increased $29,000 or 4% to $754,000 compared to
$725,000 for 1997 due to borrowings under Panterra's and the Company's credit
facilities.
Income Taxes. Income tax expense was $1.1 million in the second quarter 1998 and
$3.0 million in 1997, resulting in effective tax rates of 35.5% and 35.2%,
respectively. This reduced expense reflects lower net income from operations
before income taxes for 1998 due to lower oil prices, increased exploration and
DD&A expenses and a $4.2 million pre-tax gain on the sale of non-core properties
in south Texas in the second quarter 1997.
Income tax expense decreased $7.6 million to $1.9 million for the six months
ended June 30, 1998, primarily resulting from lower oil and gas prices,
increased exploration expense and DD&A expenses in 1998, and the $9.7 million
and $4.2 million gains on the sales of the Company's Russian joint venture and
non-core properties, respectively, in 1997. The effective tax rate for the six
months ended June 30, 1998 decreased to 33.8% compared to 35.6% in the 1997
period.
Net Income. Net income for the second quarter 1998 decreased $3.8 million or 65%
to $2.1 million compared to $5.9 million in 1997. Increases of 31% and 34% in
gas and oil volumes, respectively, partially offset by a 28% decrease in oil
prices resulted in a $4.9 million increase in oil and gas production revenues
for the second quarter 1998. A $4.2 million gain on the sale of non-core
properties in the second quarter 1997, increases in exploration expenses and
DD&A associated with increased production volumes and impairments of producing
properties in the second quarter 1998, contributed to a $3.6 million decrease in
income from continuing operations.
Net income for the six months ended June 30, 1998 decreased $13.7 million to
$3.7 million compared to $17.5 million in 1997. This decrease resulted from
increased oil and gas production, offset by lower oil and gas prices and
increases in exploration expense, DD&A and impairments of producing properties
in 1998, and from the $9.7 million gain on the sale of the Company's interest in
the Russian joint venture and the $4.2 million gain on the sale of the Company's
non-core south Texas properties in 1997.
16
<PAGE>
Liquidity and Capital Resources
The Company's primary sources of liquidity are the cash provided by operating
activities, debt financing and access to the capital markets. The Company's cash
needs are for the acquisition, exploration and development of oil and gas
properties and for the payment of debt obligations, trade payables, stockholder
dividends and for the repurchase of the Company's common stock. The company
generally finances its exploration and development programs from internally
generated cash flow, bank debt and cash and cash equivalents on hand. The
Company continually reviews its capital expenditure budget based on changes in
cash flow and other factors.
Cash Flow. The Company's net cash provided by operating activities increased
$3.7 million or 16% to $27.4 million in the six months ended June 30, 1998
compared to $23.7 million in 1997. Increased receipts for oil and gas revenues
due to higher production volumes, despite reduced oil and gas prices, were
offset by increased payments for lease operating expenses and significantly
higher payments related to exploration expenses. Also, in the first half of 1997
the Company made a cash payment of approximately $1.6 million in satisfaction of
liabilities previously accrued by the Company under its SAR plan compared to a
corresponding payment of $351,000 in the first half 1998.
Net cash used in investing activities in the six months ended June 30, 1998
increased $15.4 million or 88% to $32.8 million compared to $17.4 million in
1997. This increase was primarily due to a $5.7 million increase in capital
expenditures for the Company's drilling programs in 1998, a $5.4 million
decrease in acquisition expenditures in 1998, $ 5.6 million in cash received
from the sale of the Company's Russian joint venture in the first quarter 1997
and $7.1 million received in 1997 from the sale of oil and gas properties. Total
first half 1998 capital expenditures, including acquisitions of oil and gas
properties, were $31.4 million compared to $31.1 million in 1997.
The Company was able to apply the majority of the proceeds from the sales of oil
and gas properties in 1997 to acquisitions of oil and gas properties in 1997
allowing tax-free exchanges of these properties for income tax purposes. In a
tax-free exchange of properties the tax basis of the sold property carries over
to the new property. Gains or losses for tax purposes are recognized by
amortization of the tax basis of the new property throughout its remaining life
or when the new property is sold or abandoned.
Net cash provided by financing activities was $2.9 million in the six month
period ended June 30, 1998 resulting from net borrowing of long-term debt and
payments of dividends to shareholders compared to net cash provided by financing
activities of $14.0 million in the comparable 1997 period. The Company received
$51.2 million from the sale of common stock and had a net reduction of
borrowings of $35.7 million in the first quarter of 1997. The Company increased
its quarterly dividend 25% to $.05 per share effective with the quarterly
dividend declared in January 1997 and paid in February 1997.
The Company had $4.5 million in cash and cash equivalents and working capital of
$3.6 million as of June 30, 1998 compared to $7.1 million of cash and cash
equivalents and working capital of $9.6 million at December 31, 1997. The
reduction in cash and cash equivalents is primarily the result of payments for
capital expenditures, property acquisitions and exploration expenses, and to
reduce debt levels. Working capital decreased due to the reduction in cash and
cash equivalents and decreased accounts receivable, primarily for oil and gas
sales due to price declines, offset by a smaller decrease in accounts payable
and accrued expenses resulting from drilling activity.
17
<PAGE>
Credit Facility. On June 30, 1998, the Company entered into a new long-term
revolving credit agreement replacing its credit facility dated March 1, 1993 and
amended April 1, 1996. The new credit facility provides a maximum loan amount of
$200.0 million. The amount that may be borrowed from time to time will depend
upon the value of the Company's oil and gas properties and other assets. The
Company's borrowing base, which is redetermined annually, was increased from
$40.0 million to $60.0 million in February 1997 and further increased in May
1998 to $115.0 million based on increases in the Company's estimated net proved
reserves in 1996 and 1997. The initial accepted borrowing base is $40.0 million.
The maturity date of the new credit agreement is December 31, 2005, which
includes a revolving period maturing on December 31, 2000. The Company may elect
to allocate up to 50% of the available borrowings to a short-term tranche due in
364 days. Outstanding revolving loan balances under the Company's credit
facility, which were $19.2 million and $14.5 million at June 30, 1998 and
December 31, 1997, respectively, accrue interest at rates determined by the
Company's debt to total capitalization ratio. During the revolving period of the
loan, loan balances accrue interest at the Company's option of either (a) the
higher of the banks' prime rate or the Federal Funds Rate plus 1/2% or (b) LIBOR
plus 1/2% when the Company's debt to total capitalization is less than 30%, up
to a maximum of the Company's option of either (a) the higher of the banks'
prime rate plus 1/8% or the Federal Funds Rate plus 5/8% or (b) LIBOR plus
1-1/4% when the Company's debt to total capitalization ratio is equal to or
exceeds 50%. The credit facility provides for, among other things, covenants
requiring maintenance of stockholders' equity at a specified level and limits on
additional indebtedness of the Company.
Panterra, in which the Company has a 74% general partnership ownership interest,
has a separate credit facility with a $25.0 million borrowing base as of July 1,
1998, and $10.0 million and $11.0 million outstanding as of June 30, 1998 and
December 31, 1997, respectively. In June 1997, Panterra entered into a credit
agreement replacing a previous agreement, which was due March 31, 1999. The new
credit agreement includes a two-year revolving period converting to a five-year
amortizing loan on June 30, 1999. During the revolving period of the loan, loan
balances accrue interest at Panterra's option of either the bank's prime rate or
LIBOR plus 3/4% when the Partnership's debt to partners' capital ratio is less
than 30%, up to a maximum of either the bank's prime rate or LIBOR plus 1-1/4%
when the Partnership's debt to partners' capital ratio is greater than 100%. The
Company intends to use the available credit under the Panterra credit facility
to fund a portion of its 1998 capital expenditures in the Williston Basin.
Common Stock. In February 1997, the Company closed the sale of 2,000,000 shares
of common stock at $25.00 per share and closed the sale of an additional 180,000
shares in March 1997, pursuant to the underwriters' exercise of the
over-allotment option. These transactions resulted in aggregate net proceeds of
$51.2 million. The proceeds of these sales were used to fund the Company's
exploration, development and acquisition programs, and pending such use were
used to repay borrowings under its credit facility.
In June 1998, the Company's shareholders approved an increase in the number of
authorized shares of the Company's common stock from 15 million to 50 million
shares.
In August 1998, the Company's Board of Directors authorized a stock repurchase
program whereby the Company may purchase from time-to-time, in open market
purchases or negotiated sales, up to one million shares of its common stock.
Management anticipates that such purchases of shares by the Company may commence
at any time and will be funded with internal cash flow and borrowings under the
Company's credit facility.
Outlook. The Company believes that its existing capital resources, cash flow
from operations and available borrowings are sufficient to meet its anticipated
capital and operating requirements for 1998.
18
<PAGE>
The Company has reduced its 1998 capital budget by approximately $11.0 million
to a revised total of approximately $83.0 million. The reduction reflects a
reallocation of capital to the Company's stock repurchase program as well as a
response to lower oil prices and drilling results. Reductions of $3.0 million
arise from postponement of new drilling activities in the Williston Basin due to
low oil prices; $4.0 million due to suspension, pending further evaluation, of a
previously scheduled second deep test at the Company's Atchafalaya prospect; and
$4.0 million from re-balancing of the drilling program in the Anadarko Basin to
emphasize less costly and lower risk prospects.
The amount and allocation of future capital and exploration expenditures will
depend upon a number of factors including the number of available acquisition
opportunities, the Company's ability to assimilate such acquisitions, the impact
of oil and gas prices on investment opportunities, the availability of capital
and the success of its development and exploratory activity which could lead to
funding requirements for further development.
The Company continuously evaluates opportunities in the marketplace for oil and
gas properties and, accordingly, may be a buyer or a seller of properties at
various times.
The Company has added several new prospects to its pipeline of large target
exploration ideas and expects to commence the drilling of three significant
tests by the first quarter of 1999 at its Patterson, Stallion and South
Horseshoe Bayou projects in South Louisiana.
Volatile industry conditions and several exploration disappointments early in
the year are combining to make 1998 a particularly challenging year for the
Company as it consolidates the rapid growth in reserves and production achieved
during the past several years. Modest continued growth in production volumes is
expected during the balance of the year as the Company's Atchafalaya discovery
is brought online in August and additional wells in the Mid-Continent and
ArkLaTex regions are completed
The St. Mary Land & Exploration No. 3 (40 percent net revenue interest) at South
Horseshoe Bayou was completed in January 1998 in the 17,300-foot sand and has
experienced increasing water production since early June. Cumulative gross
production to date totals approximately 6.6 BCF of gas and 47,000 barrels of
condensate (approximately 2.6 BCF of gas and 18,800 barrels of condensate net to
the Company). Through early August 1998 the well has continued to produce
approximately 34 MMCF of gas and 200 barrels of condensate per day. However,
water production has continued to increase and presently exceeds 900 barrels per
day. The cause of this water production is unknown and the well's production
trends are being closely monitored.
The net proved reserves assigned to the 17,300-foot sand in the No. 3 well at
year-end 1997 were 33.1 BCF of gas and 177,000 barrels of condensate. Although
to date the water production has not adversely affected the well's productive
capacity, the ultimate impact on the Company's production and reserves at South
Horseshoe Bayou can not be determined at this time. Should water production
continue to increase substantially, the No. 3 well's future production and
recoverable reserves could be materially impaired.
The Company's depreciation, depletion and amortization rate per BOE is expected
to be somewhat higher than historical amounts as the Atchafalaya production
comes online beginning in August 1998.
In May 1997, the Company entered into an agreement to receive a 55% interest in
Summo's Lisbon Valley Copper Project (the "Project") in return for the Company
contributing $4.0 million in cash, all of its outstanding stock in Summo, and
$8.6 million in letters of credit for development of the Project. The Company
has agreed to provide interim financing of up to $2.95 million for the Project
in the form of a loan to Summo due in June 1999. As of June 30, 1998, $2.65
million was outstanding under this loan. Additional amounts totaling $48,000
have been advanced to Summo under this loan since June 30, 1998. Any principal
and interest amounts outstanding are convertible into shares of Summo common
stock anytime after December 31, 1998 at the option of the Company. Upon
capitalization of the Project, the outstanding loan principal shall constitute a
19
<PAGE>
capital contribution in partial satisfaction of the Company's capital
commitments set out in the May 1997 agreement. Future development and financial
success of the Project are largely dependent on the market price of copper,
which is determined in world markets and is subject to significant fluctuations.
Although current copper prices are not sufficient to warrant development of the
Project at this time, management believes the long-term outlook for copper
prices is favorable and plans to continue providing interim financing during
1998 until Summo receives final regulatory approval and copper prices recover
adequately to justify construction using permanent financing. There can be no
assurance that the Company will realize a return on its investment in Summo or
the Project.
In February 1997, the Company sold its Russian joint venture to KMOC. The
Company received approximately $5.6 million in cash consideration before
transaction costs, KMOC common stock valued at approximately $1.9 million, and a
receivable in a form equivalent to a retained production payment of
approximately $10.1 million plus interest at 10% per annum from the limited
liability company formed to hold the Russian joint venture interest. The
Company's receivable is collateralized by the partnership interest sold. The
Company has the right, subject to certain conditions, to require KMOC to
purchase the Company's receivable from the net proceeds of an initial public
offering of KMOC common stock or alternatively, the Company may elect to convert
all or a portion of its receivable into KMOC common stock immediately prior to
an initial public offering of KMOC common stock.
Impact of the Year 2000 Issue. The Year 2000 Issue is the result of computer
programs being written using two digits rather than four, or other methods, to
define the applicable year. Computer programs that have date-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
The Company has conducted a review of its computer systems and has determined
that the computer system used by Panterra will need to be replaced in order to
properly utilize dates beyond December 31, 1999. Panterra, after a review of
available replacement systems, is in contract negotiations to license a suitable
Year 2000 compliant system, and believes conversion can be completed, tested and
operational before December 31, 1999 at a cost that is not expected to have a
material effect on the Company's results of operations. If replacement of the
Panterra system is not completed timely, the Year 2000 Issue could have a
significant impact on the operations of Panterra. The Company presently believes
that other less significant systems can be upgraded to mitigate the Year 2000
Issue with modifications to existing software or conversions to new software.
Modifications or conversions to new software for the less significant systems,
if not completed timely, would have neither a material impact on the operations
of the Company nor on its results of operations.
The Company has initiated formal communications with its significant suppliers
and purchasers and transporters of oil and natural gas to determine the extent
to which the Company is vulnerable to those third parties' failure to remediate
their own Year 2000 Issues. There can be no guarantee that the systems of these
third parties will be converted timely, or that a failure to convert by another
company would not have a material adverse effect on the Company.
Accounting Matters
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," which requires a dual presentation of basic and diluted earnings per
share. The Company adopted SFAS No. 128 effective December 31, 1997. Under SFAS
No. 128 basic net income per share of common stock is calculated by dividing net
income by the weighted average of common shares outstanding during each year,
and diluted net income per common share of common stock is calculated by
dividing net income by the weighted average of common shares and other dilutive
securities.
20
<PAGE>
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
effective for financial statements for fiscal years beginning after December 15,
1997. The Statement establishes standards for reporting and display of
comprehensive income and its components in financial statements. The adoption of
this statement will not have a material impact on the Company's financial
statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," effective for financial statements for
fiscal years beginning after December 15, 1997. The Statement requires companies
to report certain information about operating segments in their financial
statements and certain information about their products and services, the
geographic areas in which they operate and their major customers. The Company is
currently reviewing the effects of the disclosure requirements of the Statement.
In February 1998, The FASB issued SFAS No. 132, "Employer's Disclosures about
Pensions and Other Postretirement Benefits," effective for fiscal years
beginning after December 15, 1997. The Statement standardizes the disclosure
requirements for pensions and other postretirement benefits to provide
information that is more comparable and concise. The Company is currently
reviewing the effects of the disclosure requirements of the Statement.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. The Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The Company
is currently reviewing the effects this Statement will have on the financial
statements in relation to the Company's hedging activities.
Effects of Inflation and Changing Prices
The Company's results of operations and cash flow are affected by changing oil
and gas prices. Within the United States inflation has had a minimal effect on
the Company. The Company cannot predict the extent of any such effect. If oil
and gas prices increase, there could be a corresponding increase in the cost to
the Company for drilling and related services, although offset by an increase in
revenues. Should oil and gas prices increase, the cost of acquisitions of
producing properties will increase, which could limit the Company's ability to
acquire properties that meet the Company's criteria.
During the first half of 1998 the Company experienced an increase in the cost to
the Company for drilling and related services resulting from shortages in
available drilling rigs, drilling and technical personnel, supplies and
services. However, since mid-year service costs appear to have stabilized or
begun to decline. If shortages persist, there could be continued increases in
the cost to the Company of exploration, drilling and production of oil and gas.
21
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's annual stockholders' meeting on June 3, 1998, the
shareholders approved management's current slate of directors,
approved the St. Mary Land & Exploration Company Employee Stock
Purchase Plan (adopted September 18, 1997 and previously submitted as
Exhibit 10.50), and approved an amendment to the Company's Certificate
of Incorporation to increase the number of authorized shares of Common
Stock from 15,000,000 to 50,000,000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Description
------- -----------
3.3 Certificate of Amendment to Certificate
of Incorporation
27.6 Financial Data Schedule
10.52 Credit Agreement dated June 30, 1998
(b) There were no reports on Form 8-K filed during the quarter
ended June 30, 1998.
22
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
St. Mary Land & Exploration Company
August 12, 1998 By /s/ MARK A. HELLERSTEIN
---------------------------
Mark A. Hellerstein
President and Chief Executive Officer
August 12, 1998 By /s/ DAVID L. HENRY
----------------------------
David L. Henry
Vice President - Finance and
Chief Financial Officer
August 12, 1998 By /s/ RICHARD C. NORRIS
---------------------------
Richard C. Norris
Vice President - Accounting and
Administration and Chief Accounting
Officer
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
St. Mary Land & Exploration Company, a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, does hereby certify:
1. That at a regular meeting of the Board of Directors of St. Mary Land
& Exploration Company (the "Company") a resolution was adopted proposing an
amendment to the restated Certificate of Incorporation of the Company declaring
such amendment to be advisable and calling for a vote of its shareholders at the
annual meeting held on May 20, 1998 which was adjourned to June 3, 1998. The
resolution setting forth the proposed amendment was as follows:
RESOLVED, that Article Fourth of the Company's restated
Certificate of Incorporation is hereby amended to read as follows:
FOURTH: The total number of shares of capital stock which the
corporation shall have authority to issue is 50,000,000 shares of $.01
par value each.
FURTHER RESOLVED, that the officers of the Company are hereby
authorized and empowered to do or cause to be done all such acts or
things and to sign and deliver or cause to be signed and delivered all
such documents, instruments and certificates, in the name and on behalf
of the Company or otherwise, as such officers may deem necessary,
advisable or appropriate to effectuate and carry out the purpose and
intent of the foregoing resolutions.
2. That thereafter at the annual meeting of the shareholders called and
held on May 20, 1998 and adjourned to June 3, 1998 upon notice and accordance
with Section 222 of the General Corporation Law of the State of Delaware the
necessary number of shares as required by law were voted in favor of the
amendment.
3. That the amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, St. Mary Land and Exploration Company has caused
this certificate to be signed by Mark A. Hellerstein, its President, and
attested by David L. Henry, its Secretary, this 22nd day of June, 1998.
ST. MARY LAND & EXPLORATION
COMPANY, a Colorado
ATTEST:
/s/ DAVID L. HENRY By: /s/ MARK A. HELLERSTEIN
- ------------------------- ------------------------------
David L. Henry, Secretary Mark A. Hellerstien, President
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 4,537
<SECURITIES> 0
<RECEIVABLES> 17,315
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 22,384
<PP&E> 303,906
<DEPRECIATION> 132,919
<TOTAL-ASSETS> 215,849
<CURRENT-LIABILITIES> 18,792
<BONDS> 26,615
0
0
<COMMON> 110
<OTHER-SE> 150,559
<TOTAL-LIABILITY-AND-EQUITY> 215,849
<SALES> 39,258
<TOTAL-REVENUES> 39,446
<CGS> 8,116
<TOTAL-COSTS> 8,116
<OTHER-EXPENSES> 92
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 754
<INCOME-PRETAX> 5,602
<INCOME-TAX> 1,896
<INCOME-CONTINUING> 3,706
<DISCONTINUED> 34
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,740
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.33
</TABLE>
[EXECUTION]
CREDIT AGREEMENT
-------------------------------------------------------
ST. MARY LAND & EXPLORATION COMPANY
and
NATIONSBANK, N.A.
as Agent
and
CERTAIN FINANCIAL INSTITUTIONS
as Lenders
-------------------------------------------------------
$200,000,000
June 30, 1998
<PAGE>
TABLE OF CONTENTS
Page
CREDIT AGREEMENT...............................................................1
ARTICLE I - Definitions and References.........................................1
Section 1.1. Defined Terms................................................1
Section 1.2. Exhibits and Schedules; Additional Definitions..............12
Section 1.3. Amendment of Defined Instruments............................12
Section 1.4. References and Titles.......................................12
Section 1.5. Calculations and Determinations.............................12
ARTICLE II - The Loans........................................................13
Section 2.1. Commitments to Lend; Notes..................................13
Section 2.2. Requests for New Loans......................................14
Section 2.3. Continuations and Conversions of Existing Loans.............15
Section 2.4. Use of Proceeds.............................................16
Section 2.5. Interest Rates and Fees.....................................16
Section 2.6. Optional Prepayments........................................18
Section 2.7. Required Principal Payments.................................18
Section 2.8. Borrowing Base..............................................19
Section 2.9. Subsequent Determinations of Aggregate Borrowing Base.......19
Section 2.10. Acceptance and Application of Aggregate Borrowing Base......19
Section 2.11. Letters of Credit...........................................20
Section 2.12. Requesting Letters of Credit................................20
Section 2.13. Reimbursement and Participations............................20
Section 2.14. Letter of Credit Fees.......................................21
Section 2.15. LC Collateral...............................................21
ARTICLE III - Payments to Lenders.............................................22
Section 3.1. General Procedures..........................................22
Section 3.2. Increased Cost and Reduced Return...........................23
Section 3.3. Limitation on Types of Loans................................24
Section 3.4. Illegality..................................................24
Section 3.5. Treatment of Affected Loans.................................25
Section 3.6. Compensation................................................25
Section 3.7. Taxes.......................................................25
ARTICLE IV - Conditions Precedent to Lending..................................26
Section 4.1. Documents to be Delivered...................................26
Section 4.2. Additional Conditions Precedent.............................27
ARTICLE V - Representations and Warranties....................................28
Section 5.1. No Default..................................................28
Section 5.2. Organization and Good Standing..............................28
Section 5.3. Authorization...............................................28
Section 5.4. No Conflicts or Consents....................................28
Section 5.5. Enforceable Obligations.....................................28
Section 5.6. Initial Financial Statements................................28
Section 5.7. Other Obligations and Restrictions. ........................28
Section 5.8. Full Disclosure.............................................29
Section 5.9. Litigation..................................................29
Section 5.10. Labor Disputes and Acts of God..............................29
Section 5.11. ERISA Plans and Liabilities.................................29
Section 5.12. Environmental and Other Laws................................29
Section 5.13. Names and Places of Business................................30
Section 5.14. Borrower's Subsidiaries.....................................30
Section 5.15. Title to Properties; Licenses...............................30
Section 5.16. Government Regulation.......................................30
ARTICLE VI - Affirmative Covenants of Borrower................................30
Section 6.1. Payment and Performance.....................................30
Section 6.2. Books, Financial Statements and Reports.....................30
Section 6.3. Other Information and Inspections...........................31
Section 6.4. Notice of Material Events and Change of Address.............31
Section 6.5. Maintenance of Properties...................................32
Section 6.6. Maintenance of Existence and Qualifications.................32
Section 6.7. Payment of Trade Liabilities, Taxes, etc....................32
Section 6.8. Insurance...................................................32
Section 6.9. Performance on Borrower's Behalf............................33
Section 6.10. Interest....................................................33
Section 6.11. Compliance with Agreements and Law..........................33
Section 6.12. Environmental Matters.......................................33
Section 6.13. Evidence of Compliance......................................33
Section 6.14. Bank Accounts; Offset.......................................33
ARTICLE VII - Negative Covenants of Borrower..................................34
Section 7.1. Indebtedness................................................34
Section 7.2. Limitation on Liens.........................................34
Section 7.3. Burdensome Undertakings.....................................34
Section 7.4. Limitation on Mergers, Issuances of Securities..............35
Section 7.5. Limitation on Sales of Property.............................35
Section 7.6. Limitation on Investments and New Businesses................35
Section 7.7. Limitation on Credit Extensions.............................35
Section 7.8. Subsidiaries; Transactions with Affiliates..................35
Section 7.9. Multiemployer ERISA Plans...................................35
Section 7.10. Shareholder's Equity........................................35
Section 7.11. The Current Ratio...........................................36
ARTICLE VIII - Events of Default and Remedies.................................36
Section 8.1. Events of Default...........................................36
Section 8.2. Remedies....................................................38
ARTICLE IX - Agent............................................................38
Section 9.1. Appointment, Powers, and Immunities.........................38
Section 9.2. Reliance by Agent...........................................38
Section 9.3. Defaults....................................................38
Section 9.4. Rights as Lender............................................39
Section 9.5. Indemnification.............................................39
Section 9.6. Non-Reliance on Agent and Other Lenders.....................39
Section 9.7. Sharing of Set-Offs and Other Payments......................39
Section 9.8. Investments.................................................40
Section 9.9. Benefit of Article IX.......................................40
Section 9.10. Resignation.................................................40
ARTICLE X - Miscellaneous.....................................................40
Section 10.1. Waivers and Amendments; Acknowledgments...................40
Section 10.2. Survival of Agreements; Cumulative Nature.................42
Section 10.3. Notices...................................................42
Section 10.4. Payment of Expenses; Indemnity............................42
Section 10.5. Joint and Several Liability; Parties in Interest..........43
Section 10.6. Assignments and Participations............................43
Section 10.7. Confidentiality...........................................44
Section 10.8. Governing Law; Submission to Process......................45
Section 10.9. Limitation on Interest....................................45
Section 10.10. Termination; Limited Survival.............................45
Section 10.11. Severability..............................................46
Section 10.12. Counterparts..............................................46
Section 10.13. Waiver of Jury Trial, Punitive Damages, etc...............46
Section 10.14. Restatement...............................................46
<PAGE>
Schedules and Exhibits:
Schedule 1 - Lenders and Percentage Shares
Schedule 2 - Disclosure Schedule
Exhibit A-1 - Tranche A Note
Exhibit A-2 - Tranche B Note
Exhibit B - Borrowing Notice
Exhibit C - Continuation/Conversion Notice
Exhibit D - Certificate Accompanying Financial Statements
Exhibit E - Opinion of Counsel to Borrower
Exhibit F - Assignment and Acceptance Agreement
Exhibit G - Letter of Credit Application and Agreement
<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT is made as of June 30, 1998, by and among St.
Mary Land & Exploration Company, a Delaware corporation (herein called
"Borrower"), NationsBank, N.A., successor in interest by merger to NationsBank
of Texas, N.A., individually and as agent (herein called "Agent") and the
Lenders referred to below. In consideration of the mutual covenants and
agreements contained herein the parties hereto agree as follows:
ARTICLE I - Definitions and References
Section 1.1. Defined Terms. As used in this Agreement, each of the
following terms has the meaning given to such term in this Section 1.1 or in the
sections and subsections referred to below:
"Accounting Quarter" shall mean the three-month period ending three
calendar months preceding the calendar month in which a payment on a Loan is
due.
"Adjusted Base Rate" means the sum of (i) the Base Rate plus (ii) the
Base Rate Margin, provided that the Adjusted Base Rate charged by any Person
shall never exceed the Highest Lawful Rate.
"Adjusted Eurodollar Rate" means, for any Eurodollar Loan for any
Interest Period therefor, the per annum rate equal to the sum of (a) the
Eurodollar Margin plus (b) the rate per annum (rounded upwards, if necessary, to
the nearest 1/100 of 1%) determined by Agent to be equal to the quotient
obtained by dividing (i) the Eurodollar Rate for such Eurodollar Loan for such
Interest Period by (ii) 1 minus the Reserve Requirement for such Eurodollar Loan
for such Interest Period. The Adjusted Eurodollar Rate for any Eurodollar Loan
shall change whenever the Eurodollar Margin or the Reserve Requirement changes.
No Adjusted Eurodollar Rate charged by any Person shall ever exceed the Highest
Lawful Rate.
"Affiliate" means, as to any Person, each other Person that directly or
indirectly (through one or more intermediaries or otherwise) controls, is
controlled by, or is under common control with, such Person. A Person shall be
deemed to be "controlled by" any other Person if such other Person possesses,
directly or indirectly, power
(a) to vote 20% or more of the securities (on a fully diluted
basis) having ordinary voting power for the election of directors or
managing general partners; or
(b) to direct or cause the direction of the management and
policies of such Person whether by contract or otherwise.
"Agent" means NationsBank, N.A., as Agent hereunder, and its successors
in such capacity.
"Aggregate Borrowing Base" means (a) during the Tranche A Revolving
Period, the lesser of (i) the Maximum Loan Amount; (ii) the initial aggregate
borrowing base set forth in Section 2.8, or the amount determined by Lenders in
the exercise of their sole discretion in accordance with Section 2.9; or (iii)
the amount accepted by Borrower pursuant to Section 2.10; and (b) after the end
of the Tranche A Revolving Period, the lesser of (i) Aggregate Facility Usage on
the date of the Aggregate Borrowing Base determination, or (ii) the amount
determined by the Banks in the exercise of their sole discretion in accordance
with Section 2.9.
1
<PAGE>
"Aggregate Facility Usage" means, at the time in question, the
aggregate amount of outstanding Loans and existing LC Obligations at such time.
"Agreement" means this Credit Agreement.
"Base Rate" means, for any day, the rate per annum equal to the higher
of (a) the Federal Funds Rate for such day plus one-half of one percent (.5%)
and (b) the Prime Rate for such day. Any change in the Base Rate due to a change
in the Prime Rate or the Federal Funds Rate shall be effective on the effective
date of such change in the Prime Rate or Federal Funds Rate. As used in this
definition, "Prime Rate" means the per annum rate of interest established from
time to time by Agent as its prime rate, which rate may not be the lowest rate
of interest charged by Agent to its customers.
"Base Rate Loan" means a Loan which does not bear interest at the
Eurodollar Rate.
"Base Rate Margin" means, with respect to each Base Rate Loan:
(a) when the Debt to Capitalization Ratio in effect hereunder
is less than 0.5 to 1.0, zero, or
(b) when the Debt to Capitalization Ratio in effect hereunder
is greater than or equal to 0.50 to 1.0, 0.125%.
"Base Rate Payment Date" means the last day of March, June, September
and December.
"Borrower" means St. Mary Land & Exploration Company, a Delaware
corporation.
"Borrowing" means a borrowing of new Loans of a single Type pursuant to
Section 2.2 or a continuation or conversion of existing Loans into a single Type
(and, in the case of Eurodollar Loans, with the same Interest Period) pursuant
to Section 2.3.
"Borrowing Notice" means a written or telephonic request, or a written
confirmation, made by Borrower which meets the requirements of Section 2.2.
"Business Day" means a day, other than a Saturday or Sunday, on which
commercial banks are open for business with the public in Dallas, Texas. Any
Business Day in any way relating to Eurodollar Loans (such as the day on which
an Interest Period begins or ends) must also be a day on which, in the judgment
of Agent, significant transactions in dollars are carried out in the interbank
eurocurrency market.
"Cash Equivalents" means Investments in:
(a) marketable obligations, maturing within 18 months after acquisition
thereof, issued or unconditionally guaranteed by the United States of America or
an instrumentality or agency thereof and entitled to the full faith and credit
of the United States of America.
(b) demand deposits, and time deposits (including certificates of
deposit) maturing within 12 months from the date of deposit thereof, with any
office of any Lender.
(c) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in subsection (a) above entered
into with any commercial bank meeting the specifications of subsection (b)
above.
2
<PAGE>
(d) open market commercial paper, maturing within 270 days after
acquisition thereof, which are rated at least P-1 by Moody's or A-1 by Standard
& Poors.
(e) money market or other mutual funds substantially all of whose
assets comprise securities of the types described in subsections (a) through (d)
above.
"Change of Control" means the occurrence of either of the following
events: (a) any Person or two or more Persons acting as a group shall acquire
beneficial ownership (within the meaning of Rule 13d-3 of the Securities and
Exchange Commission under the Securities Act of 1934, as amended, and including
holding proxies to vote for the election of directors other than proxies held by
Borrower's management or their designees to be voted in favor of Persons
nominated by Borrower's Board of Directors) of 35% or more of the outstanding
voting securities of Borrower, measured by voting power (including both common
stock and any preferred stock or other equity securities entitling the holders
thereof to vote with the holders of common stock in elections for directors of
Borrower) or (b) one-third or more of the directors of Borrower shall consist of
Persons not nominated by Borrower's Board of Directors (not including as Board
nominees any directors which the Board is obligated to nominate pursuant to
shareholders agreements, voting trust arrangements or similar arrangements).
"Change of Management" means that Mark A. Hellerstein shall cease to
act as President and chief executive officer of Borrower or that Ronald D. Boone
shall cease to be Executive Vice President and chief operating officer of
Borrower.
"Consolidated" refers to the consolidation of any Person, in accordance
with GAAP, with its properly consolidated subsidiaries. References herein to a
Person's Consolidated financial statements, financial position, financial
condition, liabilities, etc. refer to the consolidated financial statements,
financial position, financial condition, liabilities, etc. of such Person and
its properly consolidated subsidiaries.
"Continuation/Conversion Notice" means a written or telephonic request,
or a written confirmation, made by Borrower which meets the requirements of
Section 2.3.
"Continuation" shall refer to the continuation pursuant to Section 2.3
hereof of a Eurodollar Loan as a Eurodollar Loan from one Interest Period to the
next Interest Period.
"Conversion" shall refer to a conversion pursuant to Section 2.3 or
Article III of one Type of Loan into another Type of Loan.
"Current Ratio" means the ratio of Borrower's (i) Consolidated current
assets to (ii) Consolidated current liabilities less current maturities of
long-term debt. For purposes of this section, Borrower's Consolidated current
assets will include the unused portion of the Borrowing Base which is then
available for Borrowing in an amount up to (but not in excess of) $5,000,000.
"Debt to Capitalization Ratio" means, at the time of determination, the
ratio of (i) Funded Debt to (ii) the sum of Funded Debt plus Shareholders'
Equity. Determination will be made in connection with the delivery of the
officer's certificate pursuant to Section 6.2(b) and may be made hereunder from
time to time.
"Deductible Lease Expenses" shall mean for the applicable Accounting
Quarter the following expenses, determined on a cash basis, relating to the Oil
and Gas Properties: (i) costs (other than depreciation, depletion or
amortization costs) incurred to operate and maintain or, to the extent not a
capital cost, to work over, wells and related equipment and facilities,
including applicable operating costs of support equipment and facilities,
incurred pursuant to a joint operating agreement (excluding delay rentals)
including management fees assessed for the administration of the Oil and Gas
properties; (ii) all royalty payments and other leasehold burdens payable out of
production; (iii) all severance, ad valorem, windfall profit and similar
taxes(excluding income taxes) assessed against either the proceeds of production
or the value of remaining reserves and related personal property; and (iv) all
reasonable out-of-pocket costs incurred to deliver the product to the purchaser
or to make it marketable (but not including capital expenditures relating to the
delivery of the product or making it marketable). Unless otherwise provided,
Deductible Lease Expenses shall not include expenses associated with any
amortization or impairment of capitalized costs.
3
<PAGE>
"Default" means any Event of Default and any default, event or
condition which would, with the giving of any requisite notices and the passage
of any requisite periods of time, constitute an Event of Default.
"Default Rate" means with respect to any Loan at any time when an Event
or Default has occurred and is continuing, the rate two percent (2%) above the
rate which otherwise would be in effect hereunder.
"Disclosure Report" means either a notice given by Borrower under
Section 6.4 or a certificate given by Borrower's chief financial officer under
Section 6.2(b).
"Disclosure Schedule" means Schedule 1 hereto.
"Domestic Lending Office" means, with respect to any Lender, the office
of such Lender specified as its "Domestic Lending Office" below its name on its
signature page hereto, or such other office as such Lender may from time to time
specify to Borrower and Agent; with respect to LC Issuer, the office, branch, or
agency through which it issues Letters of Credit; and, with respect to Agent,
the office, branch, or agency through which it administers this Agreement.
"Eligible Transferee" means a Person which either (a) is a Lender or an
Affiliate of a Lender, or (b) is consented to as an Eligible Transferee by Agent
and, so long as no Default or Event of Default is continuing, by Borrower, which
consents in each case will not be unreasonably withheld (provided that no Person
organized outside the United States may be an Eligible Transferee if Borrower
would be required to pay withholding taxes on interest or principal owed to such
Person).
"Engineering Report" means each engineering report delivered pursuant
to Section 2.8(b).
"Environmental Laws" means any and all Laws relating to the environment
or to emissions, discharges, releases or threatened releases of pollutants,
contaminants, chemicals, or industrial, toxic or hazardous substances or wastes
into the environment including ambient air, surface water, ground water, or
land, or otherwise relating to the manufacture, processing, distribution use,
treatment, storage, disposal, transport, or handling of pollutants,
contaminants, chemicals, or industrial, toxic or hazardous substances or wastes.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, together with all rules and regulations promulgated
with respect thereto.
"ERISA Affiliate" means Borrower and all members of a controlled group
of corporations and all trades or businesses (whether or not incorporated) under
common control that, together with Borrower, are treated as a single employer
under Section 414 of the Internal Revenue Code of 1986, as amended.
4
<PAGE>
"Eurodollar Loan" means a Loan that bears interest at a rate based upon
the Adjusted Eurodollar Rate.
"Eurodollar Margin" means
(a) during the Tranche A Revolving Period with respect to each
Eurodollar Loan
(i) when the Debt to Capitalization Ratio in effect hereunder
is less than 0.30 to 1.0, 0.50%, or
(ii) when the Debt to Capitalization Ratio in effect hereunder
is greater than or equal to 0.30 to 1.0 but less than 0.40 to 1.0,
0.75%, or
(iii) when the Debt to Capitalization Ratio in effect
hereunder is greater than or equal to 0.40 to 1.0 but less than 0.5 to
1.0, 1.00%, or
(iv) when the Debt to Capitalization Ratio in effect hereunder
is greater than or equal to 0.50 to 1.0, 1.25%; and
(b) after the Tranche A Revolving Period with respect to each
Eurodollar Loan:
(i) when the Debt to Capitalization Ratio in effect hereunder
is less than 0.30 to 1.0, 0.75%, or
(ii) when the Debt to Capitalization Ratio in effect hereunder
is greater than or equal to 0.30 to 1.0 but less than 0.40 to 1.0,
1.00%, or
(iii) when the Debt to Capitalization Ratio in effect
hereunder is greater than or equal to 0.40 to 1.0 but less than 0.5 to
1.0, 1.25%, or
(iv) when the Debt to Capitalization Ratio in effect hereunder
is greater than or equal to 0.50 to 1.0, 1.50%.
"Eurodollar Payment Date" means with respect to each Eurodollar Loan,
the last day of the Interest Period that is applicable thereto; provided that
with respect to Interest Periods longer than three months, the last day of the
third month of such Interest Period shall also be a Eurodollar Payment Date, and
provided further that if an Event of Default exists, the last day of each
calendar month shall also be a Eurodollar Payment Date.
"Eurodollar Rate" means, for any Eurodollar Loan within a Borrowing and
with respect to the related Interest Period therefor, the rate per annum
(rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on
Telerate Page 3750 (or any successor page) as the London interbank offered rate
for deposits in U.S. Dollars at approximately 11:30 a.m. (London time) two
Business Days prior to the first day of such Interest Period for a term
comparable to such Interest Period. If for any reason such rate is not
available, the term "Eurodollar Rate" shall mean, for any Eurodollar Loan within
a Borrowing and with respect to the related Interest Period therefor, the rate
per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing
on Reuters Screen LIBO Page as the London interbank offered rate for deposits in
U.S. Dollars at approximately 11:30 a.m. (London time) two Business Days prior
to the first day of such Interest Period for a term comparable to such Interest
Period; provided, however, if more than one rate is specified on Reuters Screen
LIBO Page, the applicable rate shall be the arithmetic mean of all such rates
(rounded upwards, if necessary, to the nearest 1/100 of 1%).
5
<PAGE>
"Evaluation Date" means each of the following:
(a) Each date which either Borrower or Lender, at their respective
options, specifies as a date as of which the Borrowing Base is to be
redetermined, provided that each such date must be the first or last date of a
current calendar month and that neither Borrower nor Lender shall be entitled to
request any such redetermination more than twice during any Fiscal Year; and
(b) March 1 of each year.
"Event of Default" has the meaning given to such term in Section 8.1.
"Federal Funds Rate" shall mean, for any day, the rate per annum
(rounded upwards, if necessary, to the nearest 1/100th of one percent) equal to
the weighted average of the rates on overnight Federal funds transactions with
members of the Federal Reserve System arranged by Federal funds brokers on such
day, as published by the Federal Reserve Bank of Dallas, Texas on the Business
Day next succeeding such day, provided that (i) if the day for which such rate
is to be determined is not a Business Day, the Federal Funds Rate for such day
shall be such rate on such transactions on the next preceding Business Day as so
published on the next succeeding Business Day, and (ii) if such rate is not so
published for any day, the Federal Funds Rate for such day shall be the average
rate quoted to Agent on such day on such transactions as determined by Agent.
"Fiscal Quarter" means a three-month period ending on March 31, June
30, September 30 or December 31 of any year.
"Fiscal Year" means a twelve-month period ending on December 31 of
any year.
"Funded Debt" means the aggregate of the following Indebtedness of
Borrower and its Subsidiaries, after elimination of intercompany items and other
Consolidation in accordance with GAAP: (a) Indebtedness (including the
Obligations) for borrowed money, regardless of maturity, (b) Indebtedness
constituting an obligation to pay the deferred purchase price of property, (c)
Indebtedness evidenced by a bond, debenture, note or similar instrument and, (d)
Indebtedness which is due and payable at the time in question, with respect to
Letters of Credit or reimbursement obligations therefor.
"GAAP" means those generally accepted accounting principles and
practices which are recognized as such by the Financial Accounting Standards
Board (or any generally recognized successor) and which, in the case of Borrower
and its Consolidated Subsidiaries, are applied for all periods after the date
hereof in a manner consistent with the manner in which such principles and
practices were applied to the audited Initial Financial Statements. If any
change in any accounting principle or practice is required by the Financial
Accounting Standards Board (or any such successor) in order for such principle
or practice to continue as a generally accepted accounting principle or
practice, all reports and financial statements required hereunder with respect
to Borrower or with respect to Borrower and its Consolidated Subsidiaries may be
prepared in accordance with such change only after notice of such change is
given to each Lender and Majority Lenders agree to such change insofar as it
affects the accounting of Borrower or of Borrower and its Consolidated
Subsidiaries.
"Gross Revenues" shall mean for the applicable Accounting Quarter and
determined on a cash basis Borrower's gross revenues from sales of oil and gas
production and related Hydrocarbons from all the Oil and Gas Properties for such
Accounting Quarter, as reflected on Borrower's unaudited financial statements
for such Accounting Quarter.
"Hazardous Materials" means any substances regulated under any
Environmental Law, whether as pollutants, contaminants, or chemicals, or as
industrial, toxic or hazardous substances or wastes, or otherwise.
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"Hedging Contract" means (a) any agreement providing for options,
swaps, floors, caps, collars, forward sales or forward purchases involving
interest rates, commodities or commodity prices, equities, currencies, bonds, or
indexes based on any of the foregoing, (b) any option, futures or forward
contract traded on an exchange, and (c) any other derivative agreement or other
similar agreement or arrangement.
"Highest Lawful Rate" means, with respect to each Lender, the maximum
nonusurious rate of interest that such Lender is permitted under applicable Law
to contract for, take, charge, or receive with respect to its Loan. All
determinations herein of the Highest Lawful Rate, or of any interest rate
determined by reference to the Highest Lawful Rate, shall be made separately for
each Lender as appropriate to assure that the Loan Documents are not construed
to obligate any Person to pay interest to any Lender at a rate in excess of the
Highest Lawful Rate applicable to such Lender.
"Hydrocarbons" shall mean oil, gas, casinghead gas and other
hydrocarbons, whether solid, liquid or gaseous, and all other associated or
related substances in, on, under or attributed to the Oil and Gas Properties.
"Indebtedness" of any Person means Liabilities in any of the following
categories:
(a) Liabilities for borrowed money,
(b) Liabilities constituting an obligation to pay the deferred
purchase price of property or services,
(c) Liabilities evidenced by a bond, debenture, note or similar
instrument,
(d) Liabilities which (i) would under GAAP be shown on such Person's
balance sheet as a liability, and (ii) are payable more than one year from the
date of creation thereof (other than reserves for taxes and reserves for
contingent obligations),
(e) Liabilities arising under Hedging Contracts or similar agreements,
(f) Liabilities constituting principal under leases capitalized in
accordance with GAAP,
(g) Liabilities arising under conditional sales or other title
retention agreements,
(h) Liabilities owing under direct or indirect guaranties of
Liabilities of any other Person or otherwise constituting obligations to
purchase or acquire or to otherwise protect or insure a creditor against loss in
respect of Liabilities of any other Person (such as obligations under working
capital maintenance agreements, agreements to keep-well, or agreements to
purchase Liabilities, assets, goods, securities or services), but excluding
endorsements in the ordinary course of business of negotiable instruments in the
course of collection,
(i) Liabilities (for example, repurchase agreements and sale/leaseback
agreements) consisting of an obligation to purchase securities or other
property, if such Liabilities arises out of or in connection with the sale of
the same or similar securities or property,
(j) Liabilities with respect to letters of credit or applications or
reimbursement agreements therefor,
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(k) Liabilities with respect to payments received in consideration of
oil, gas, or other minerals yet to be acquired or produced at the time of
payment (including obligations under "take-or-pay" contracts to deliver gas in
return for payments already received and the undischarged balance of any
production payment created by such Person or for the creation of which such
Person directly or indirectly received payment), or
(l) Liabilities with respect to other obligations to deliver goods or
services in consideration of advance payments therefor;
provided, however, that the "Indebtedness" of any Person shall not include
Liabilities that were incurred by such Person on ordinary trade terms to
vendors, suppliers, or other Persons providing goods and services for use by
such Person in the ordinary course of its business, unless and until such
Liabilities are outstanding more than 90 days past the original invoice or
billing date therefor.
"Initial Financial Statements" means the audited annual Consolidated
financial statements of Borrower dated as of December 31, 1997 and the quarterly
unaudited Consolidated financial statements of Borrower dated as of March 31,
1998.
"Insurance Schedule" means Schedule 2 attached hereto.
"Interest Period" means, with respect to each particular Eurodollar
Loan in a Borrowing, the period specified in the Borrowing Notice or
Continuation/Conversion Notice applicable thereto, beginning on and including
the date specified in such Borrowing Notice or Continuation/Conversion Notice
(which must be a Business Day), and ending one, two, three, or six months
thereafter, as Borrower may elect in such notice; provided that: (a) any
Interest Period which would otherwise end on a day which is not a Business Day
shall be extended to the next succeeding Business Day unless such Business Day
falls in another calendar month, in which case such Interest Period shall end on
the next preceding Business Day; (b) any Interest Period which begins on the
last Business Day in 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) shall end on the last Business Day in a calendar month; and (c)
notwithstanding the foregoing, any Interest Period selected for a Tranche A Loan
or a Tranche B Loan which would otherwise end after the last day of the Tranche
A Revolving Period or the Tranche B Revolving Period, as the case may be, shall
end on the last day of such period (or, if the last day of such period is not a
Business Day, on the next preceding Business Day).
"Interest Payment Date" means (a) with respect to each Base Rate Loan,
the last day of March, June, September and December, and (b) with respect to
each Eurodollar Loan, the last day of the Interest Period that is applicable
thereto and, if such Interest Period is six months in length, the date specified
by Agent which is approximately three months after such Interest Period begins;
provided that last day of each calendar month shall also be an Interest Payment
Date for each such Loan so long as any Event of Default exists under Section
8.1.
"Investment" means any investment, in cash or by delivery of property
made, directly or indirectly in any Person, whether by acquisition of shares of
capital stock, indebtedness or other obligations or securities or by loan,
advance, capital contribution or otherwise.
"Law" means any statute, law, regulation, ordinance, rule, treaty,
judgment, order, decree, permit, concession, franchise, license, agreement or
other governmental restriction of the United States or any state or political
subdivision thereof or of any foreign country or any department, province or
other political subdivision thereof.
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"LC Application" means any application for a Letter of Credit hereafter
made by Borrower to LC Issuer.
"LC Collateral" has the meaning given to such term in Section 2.16(a).
"LC Issuer" means NationsBank, N.A. in its capacity as the issuer of
Letters of Credit hereunder, and its successors in such capacity. Agent may,
with the consent of Borrower and the Lender in question, appoint any Lender
hereunder as an LC Issuer in place of or in addition to NationsBank, N.A.
"LC Obligations" means, at the time in question, the sum of all Matured
LC Obligations plus the maximum amounts which LC Issuer might then or thereafter
be called upon to advance under all Letters of Credit then outstanding.
"Lender Parties" means Agent, LC Issuer, and all Lenders.
"Lenders" means each signatory hereto (other than Borrower and any
Restricted Person that is a party hereto), including NationsBank, N.A. in its
capacity as a Lender hereunder rather than as Agent or LC Issuer, and the
successors of each such party as holder of a Note.
"Letter of Credit" means any letter of credit issued by LC Issuer
hereunder at the application of Borrower.
"Liabilities" means, as to any Person, all indebtedness, liabilities
and obligations of such Person, whether matured or unmatured, liquidated or
unliquidated, primary or secondary, direct or indirect, absolute, fixed or
contingent, and whether or not required to be considered pursuant to GAAP.
"Lien" means, with respect to any property or assets, any right or
interest therein of a creditor to secure Liabilities owed to it or any other
arrangement with such creditor which provides for the payment of such
Liabilities out of such property or assets or which allows such creditor to have
such Liabilities satisfied out of such property or assets prior to the general
creditors of any owner thereof, including any lien, mortgage, security interest,
pledge, deposit, production payment, rights of a vendor under any title
retention or conditional sale agreement or lease substantially equivalent
thereto, tax lien, mechanic's or materialman's lien, or any other charge or
encumbrance for security purposes, whether arising by Law or agreement or
otherwise, but excluding any right of offset which arises without agreement in
the ordinary course of business. "Lien" also means any filed financing
statement, any registration of a pledge (such as with an issuer of
uncertificated securities), or any other arrangement or action which would serve
to perfect a Lien described in the preceding sentence, regardless of whether
such financing statement is filed, such registration is made, or such
arrangement or action is undertaken before or after such Lien exists.
"Loans" means all Tranche A Loans and all Tranche B Loans.
"Loan Documents" means this Agreement, the Notes, the Letters of
Credit, the LC Applications, and all other agreements, certificates, documents,
instruments and writings at any time delivered in connection herewith or
therewith (exclusive of term sheets and commitment letters).
"Majority Lenders" means (a) Agent and (b) Lenders whose aggregate
Percentage Shares equal or exceed sixty-six and two-thirds percent (66_%).
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"Material Adverse Change" means a material and adverse change, from the
state of affairs presented in the Initial Financial Statements or as represented
or warranted in any Loan Document, to (a) Borrower's Consolidated financial
condition, (b) Borrower's Consolidated operations, properties or prospects,
considered as a whole, (c) Borrower's ability to timely pay the Obligations, or
(d) the enforceability of the material terms of any Loan Documents.
"Matured LC Obligations" means all amounts paid by LC Issuer on drafts
or demands for payment drawn or made under or purported to be under any Letter
of Credit and all other amounts due and owing to LC Issuer under any LC
Application for any Letter of Credit, to the extent the same have not been
repaid to LC Issuer (with the proceeds of Loans or otherwise).
"Maximum Drawing Amount" means at the time in question the sum of the
maximum amounts which LC Issuer might then or thereafter be called upon to
advance under all Letters of Credit then outstanding.
"Maximum Loan Amount" means the amount of $200,000,000.
"Moody's" means Moody's Investor Service, Inc., or its successor.
"Net Oil and Gas Revenues" for the applicable Accounting Quarter shall
mean Gross Revenues less Deductible Lease Expenses.
"Notes" means all Tranche A Notes and all Tranche B Notes.
"Obligations" means all Liabilities from time to time owing by Borrower
to any Lender Party under or pursuant to any of the Loan Documents, including
all LC Obligations. "Obligation" means any part of the Obligations.
"Oil and Gas Properties" shall mean those oil and gas properties and
related interests, whether now owned or hereafter acquired by Borrower, but only
to the extent included in the most recent reserve report delivered pursuant to
paragraph 6.2(d) or, until the first delivery of such report hereunder, the
Initial Engineering Reports, for the purpose of determining the Aggregate
Borrowing Base.
"Percentage Share" means, with respect to any Lender (a) when used in
Sections 2.1, 2.2 or 2.5, in any Borrowing Notice or when no Loans are
outstanding hereunder, the percentage set forth opposite such Lender's name on
Schedule 1, and (b) when used otherwise, the percentage obtained by dividing (i)
the sum of the unpaid principal balance of such Lender's Loans at the time in
question plus the Matured LC Obligations which such Lender has funded pursuant
to Section 2.13(c) plus the portion of the Maximum Drawing Amount which such
Lender might be obligated to fund under Section 2.13(c), by (ii) the sum of the
aggregate unpaid principal balance of all Loans at such time plus the aggregate
amount of LC Obligations outstanding at such time.
"Permitted Investments" means (a) Cash Equivalents, (b) Investments by
Borrower in any of its wholly owned Subsidiaries, and (c) so long as no Default
or Event of Default has occurred and is continuing and the Facility Usage does
not exceed the Borrowing Base then in effect, (1) loans to or guaranties of
obligations of or the acquisition of capital stock or equity interest in Summo
Minerals Corporation or a direct property interest in any property owned by
Summo Minerals Corporation provided that the aggregate amount of such loans,
guaranties of obligations of and consideration paid by Borrower for such capital
stock equity or property interest does not exceed the sum of $12,500,000 and (2)
repurchases of capital stock of Borrower provided that the aggregate amount paid
by Borrower in connection with such repurchases shall not exceed $5,000,000.
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"Permitted Lien" has the meaning given to such term in Section 7.2.
"Person" means an individual, corporation, partnership, limited
liability company, association, joint stock company, trust or trustee thereof,
estate or executor thereof, unincorporated organization or joint venture,
Tribunal, or any other legally recognizable entity.
"Rating Agency" means either S & P or Moody's.
"Regulation D" means Regulation D of the Board of Governors of the
Federal Reserve System as from time to time in effect.
"Reserve Requirement" means, at any time, the maximum rate at which
reserves (including any marginal, special, supplemental, or emergency reserves)
are required to be maintained under regulations issued from time to time by the
Board of Governors of the Federal Reserve System (or any successor) by member
banks of the Federal Reserve System against "Eurocurrency liabilities" (as such
term is used in Regulation D). Without limiting the effect of the foregoing, the
Reserve Requirement shall reflect any other reserves required to be maintained
by such member banks with respect to (a) any category of liabilities which
includes deposits by reference to which the Adjusted Eurodollar Rate is to be
determined, or (b) any category of extensions of credit or other assets which
include Eurodollar Loans.
"Restricted Person" means any of Borrower and each Subsidiary of
Borrower,
"S & P" means Standard & Poor's Ratings Group (a division of McGraw
Hill, Inc.) or its successor.
"Shareholders' Equity" means the remainder of (1) Borrower's
Consolidated assets minus (2) the sum of (x) Borrower's Consolidated liabilities
plus (y) all intangible assets (as defined by GAAP) of Borrower and its
Subsidiaries.
"Subsidiary" means, with respect to any Person, any corporation,
association, partnership, joint venture, or other business or corporate entity,
enterprise or organization which is directly or indirectly (through one or more
intermediaries) controlled by or owned fifty percent or more by such Person.
"Termination Event" means (a) the occurrence with respect to any ERISA
Plan of (i) a reportable event described in Sections 4043(b)(5) or (6) of ERISA
or (ii) any other reportable event described in Section 4043(b) of ERISA other
than a reportable event not subject to the provision for 30-day notice to the
Pension Benefit Guaranty Corporation pursuant to a waiver by such corporation
under Section 4043(a) of ERISA, or (b) the withdrawal of any ERISA Affiliate
from an ERISA Plan during a plan year in which it was a "substantial employer"
as defined in Section 4001(a)(2) of ERISA, or (c) the filing of a notice of
intent to terminate any ERISA Plan or the treatment of any ERISA Plan amendment
as a termination under Section 4041 of ERISA, or (d) the institution of
proceedings to terminate any ERISA Plan by the Pension Benefit Guaranty
Corporation under Section 4042 of ERISA, or (e) any other event or condition
which might constitute grounds under Section 4042 of ERISA for the termination
of, or the appointment of a trustee to administer, any ERISA Plan.
"Tranche A Commitment" means $200,000,000.
"Tranche A Excess Debt" has the meaning set forth in Section 2.7(a).
"Tranche A Facility Usage" means, at the time in question, the
aggregate amount of outstanding Tranche A Loans and existing LC Obligations at
such time.
"Tranche A Loan" has the meaning set forth in Section 2.1(a).
"Tranche A Maturity Date" means December 31, 2005.
"Tranche A Note" has the meaning given to such term in Section 2.1(a).
"Tranche A Revolving Period" means the period from and including the
date hereof until December 31, 2000.
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"Tranche B Commitment" means $50,000,000.
"Tranche B Excess Debt" has the meaning set forth in Section 2.7(b).
"Tranche B Facility Usage" means, at the time in question, the
aggregate amount of Tranche B Loans outstanding at such time.
"Tranche B Loan" has the meaning given to such term in Section 2.1(b).
"Tranche B Maturity Date" means the date which is 364 days after the
date hereof.
"Tranche B Note" has the meaning given to such term in Section 2.1(b).
"Tranche B Revolving Period" means the period from and including the
date hereof until the Tranche B Maturity Date.
"Tribunal" means any government, any arbitration panel, any court or
any governmental department, commission, board, bureau, agency or
instrumentality of the United States of America or any state, province,
commonwealth, nation, territory, possession, county, parish, town, township,
village or municipality, whether now or hereafter constituted and/or existing.
"Type" means, with respect to any Loans, the characterization of such
Loans as either Base Rate Loans or Eurodollar Loans.
Section 1.2. Exhibits and Schedules; Additional Definitions. All
Exhibits and Schedules attached to this Agreement are a part hereof for all
purposes.
Section 1.3. Amendment of Defined Instruments. Unless the context
otherwise requires or unless otherwise provided herein the terms defined in this
Agreement which refer to a particular agreement, instrument or document also
refer to and include all renewals, extensions, modifications, amendments and
restatements of such agreement, instrument or document, provided that nothing
contained in this section shall be construed to authorize any such renewal,
extension, modification, amendment or restatement.
Section 1.4. References and Titles. All references in this Agreement to
Exhibits, Schedules, articles, sections, subsections and other subdivisions
refer to the Exhibits, Schedules, articles, sections, subsections and other
subdivisions of this Agreement unless expressly provided otherwise. Titles
appearing at the beginning of any subdivisions are for convenience only and do
not constitute any part of such subdivisions and shall be disregarded in
construing the language contained in such subdivisions. The words "this
Agreement", "this instrument", "herein", "hereof", "hereby", "hereunder" and
words of similar import refer to this Agreement as a whole and not to any
particular subdivision unless expressly so limited. The phrases "this section"
and "this subsection" and similar phrases refer only to the sections or
subsections hereof in which such phrases occur. The word "or" is not exclusive,
and the word "including" (in its various forms) means "including without
limitation." Pronouns in masculine, feminine and neuter genders shall be
construed to include any other gender, and words in the singular form shall be
construed to include the plural and vice versa, unless the context otherwise
requires.
Section 1.5. Calculations and Determinations. All calculations under
the Loan Documents of interest chargeable with respect to Eurodollar Loans and
of fees shall be made on the basis of actual days elapsed (including the first
day but excluding the last) and a year of 360 days. All other calculations of
interest made under the Loan Documents shall be made on the basis of actual days
elapsed (including the first day but excluding the last) and a year of 365 or
366 days, as appropriate. Each determination by a Lender Party of amounts to be
paid under Article III or any other matters which are to be determined hereunder
by a Lender Party (such as any Eurodollar Rate, Adjusted Eurodollar Rate,
Business Day, Interest Period, or Reserve Requirement) shall, in the absence of
manifest error, be conclusive and binding. Unless otherwise expressly provided
herein or unless Majority Lenders otherwise consent all financial statements and
reports furnished to any Lender Party hereunder shall be prepared and all
financial computations and determinations pursuant hereto shall be made in
accordance with GAAP.
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ARTICLE II - The Loans and Letters of Credit
-------------------------------
Section 2.1. Commitments to Lend; Notes.
(a) Tranche A Loans. Subject to the terms and conditions hereof, each
Lender agrees to make loans to Borrower (herein called such Lender's "Tranche A
Loans") upon Borrower's request from time to time during the Tranche A Revolving
Period, provided that (a) subject to Sections 3.3, 3.4 and 3.6, all Lenders are
requested to make Tranche A Loans of the same Type in accordance with their
respective Percentage Shares and as part of the same Borrowing, (b) after giving
effect to such Tranche A Loans, the Tranche A Facility Usage does not exceed the
Tranche A Borrowing Base (as defined in Section 2.10) and (c) the Aggregate
Facility Usage does not exceed the Maximum Loan Amount. The aggregate amount of
all Loans in any Borrowing of Tranche A Loans that are Base Rate Loans must be
greater than or equal to $100,000 or must equal the remaining availability under
the Tranche A Borrowing Base. Borrower may have no more than five Borrowings of
Tranche A Loans that are Eurodollar Loans outstanding at any time. The aggregate
amount of all Loans in any Borrowing of Tranche A Loans that are Eurodollar
Loans must be greater than or equal to $500,000 or must equal the remaining
availability under the Tranche A Borrowing Base. The obligation of Borrower to
repay to each Lender the aggregate amount of all Tranche A Loans made by such
Lender, together with interest accruing in connection therewith, shall be
evidenced by a single promissory note (herein called such Lender's "Tranche A
Note") made by Borrower payable to the order of such Lender in the form of
Exhibit A-1 with appropriate insertions. The amount of principal owing on any
Lender's Tranche A Note at any given time shall be the aggregate amount of all
Tranche A Loans theretofore made by such Lender minus all payments of principal
theretofore received by such Lender on such Tranche A Note. Interest on each
Tranche A Note shall accrue and be due and payable as provided herein and
therein. Each Tranche A Note shall be due and payable as provided herein and
therein, and shall be due and payable in full on the Tranche A Maturity Date.
Subject to the terms and conditions hereof, Borrower may borrow, repay, and
reborrow Tranche A Loans hereunder during the Tranche A Revolving Period.
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(b) Tranche B Loans. Subject to the terms and conditions hereof, each
Lender agrees to make loans to Borrower (herein called such Lender's "Tranche B
Loans") upon Borrower's request from time to time during the Tranche B Revolving
Period, provided that (a) subject to Sections 3.3, 3.4 and 3.6, all Lenders are
requested to make Tranche B Loans of the same Type in accordance with their
respective Percentage Shares and as part of the same Borrowing, (b) after giving
effect to such Tranche B Loans, the Tranche B Facility Usage does not exceed the
Tranche B Borrowing Base (as defined in Section 2.10) and (c) the Aggregate
Facility Usage does not exceed the Maximum Loan Amount. The aggregate amount of
all Loans in any Borrowing of Tranche B Loans that are Base Rate Loans must be
greater than or equal to $100,000 or must equal the remaining availability under
the Tranche B Borrowing Base. The aggregate amount of all Loans in any Borrowing
of Tranche B Loans that are Eurodollar Loans must be greater than or equal to
$500,000 or must equal the remaining availability under the Tranche B Borrowing
Base. Borrowers may have not more than three Borrowings of Tranche B Loans that
are Eurodollar Loans outstanding at any time. The obligation of Borrower to
repay to each Lender the aggregate amount of all Tranche B Loans made by such
Lender, together with interest accruing in connection therewith, shall be
evidenced by a single promissory note (herein called such Lender's "Tranche B
Note") made by Borrower payable to the order of such Lender in the form of
Exhibit A-2 with appropriate insertions. The amount of principal owing on any
Lender's Tranche B Note at any given time shall be the aggregate amount of all
Tranche B Loans theretofore made by such Lender minus all payments of principal
theretofore received by such Lender on such Tranche B Note. Interest on each
Tranche B Note shall accrue and be due and payable as provided herein and
therein. Each Tranche B Note shall be due and payable as provided herein and
therein, and shall be due and payable in full on the Tranche B Maturity Date.
Subject to the terms and conditions hereof, Borrower may borrow, repay, and
reborrow Tranche B Loans hereunder.
(c) At any time and from time to time until the end of the Tranche A
Revolving Period, Borrower may elect, subject to the approval of the Majority
Lenders in the exercise of their sole discretion, to convert all or any portion
of the Tranche B Borrowing Base into the Tranche A Borrowing Base. Such election
shall be made in writing delivered to the Agent and, if approved by Lenders,
such conversion shall occur upon payment of the conversion fee described in
Section 2.5(e) and execution by Borrower of amendments to the Loan Documents in
form and substance satisfactory to Lenders. Any and all such conversion
elections shall be in the amount of $2,000,000 or more. Notwithstanding the
foregoing, if such election is made concurrently with a determination of the
Aggregate Borrowing Base, such election may be in any amount not to exceed the
limitations set forth in this Agreement and shall not require the payment of
such conversion fee.
Section 2.2. Requests for New Loans. Borrower must give to Agent
written notice (or telephonic notice promptly confirmed in writing) of any
requested Borrowing of new Tranche A Loans or new Tranche B Loans to be advanced
by Lenders. Each such notice constitutes a "Borrowing Notice" hereunder and
must:
(a) specify (i) the aggregate amount of any such Borrowing of new Base
Rate Loans and the date on which such Base Rate Loans are to be advanced, or
(ii) the aggregate amount of any such Borrowing of new Eurodollar Loans, the
date on which such Eurodollar Loans are to be advanced (which shall be the first
day of the Interest Period which is to apply thereto), and the length of the
applicable Interest Period; and
(b) be received by Agent not later than 11:30 a.m., Dallas, Texas time,
on (i) the day on which any such Base Rate Loans are to be made, or (ii) the
third Business Day preceding the day on which any such Eurodollar Loans are to
be made.
Each such written request or confirmation must be made in the form and substance
of the "Borrowing Notice" attached hereto as Exhibit B, duly completed. Each
such telephonic request shall be deemed a representation, warranty,
acknowledgment and agreement by Borrower as to the matters which are required to
be set out in such written confirmation. Upon receipt of any such Borrowing
Notice, Agent shall give each Lender prompt notice of the terms thereof. If all
conditions precedent to such new Loans have been met, each Lender will on the
date requested promptly remit to Agent at Agent's office in Dallas, Texas the
amount of such Lender's new Loan in immediately available funds, and upon
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receipt of such funds, unless to its actual knowledge any conditions precedent
to such Loans have been neither met nor waived as provided herein, Agent shall
promptly make such Loans available to Borrower. Unless Agent shall have received
prompt notice from a Lender that such Lender will not make available to Agent
such Lender's new Loan, Agent may in its discretion assume that such Lender has
made such Loan available to Agent in accordance with this section and Agent may
if it chooses, in reliance upon such assumption, make such Loan available to
Borrower. If and to the extent such Lender shall not so make its new Loan
available to Agent, such Lender and Borrower severally agree to pay or repay to
Agent within three days after demand the amount of such Loan together with
interest thereon, for each day from the date such amount was made available to
Borrower until the date such amount is paid or repaid to Agent, with interest at
(i) the Federal Funds Rate, if such Lender is making such payment and (ii) the
interest rate applicable at the time to the other new Loans made on such date,
if Borrower is making such repayment. If neither such Lender nor Borrower pay or
repay to Agent such amount within such three-day period, Agent shall in addition
to such amount be entitled to recover from such Lender and from Borrower, on
demand, interest thereon at the Default Rate, calculated from the date such
amount was made available to Borrower. The failure of any Lender to make any new
Loan to be made by it hereunder shall not relieve any other Lender of its
obligation hereunder, if any, to make its new Loan, but no Lender shall be
responsible for the failure of any other Lender to make any new Loan to be made
by such other Lender.
Section 2.3. Continuations and Conversions of Existing Loans. Borrower
may make the following elections with respect to Loans already outstanding: (a)
with respect to Tranche A Loans, to convert Tranche A Loans that are Base Rate
Loans to Tranche A Loans that are Eurodollar Loans, to convert Tranche A Loans
that are Eurodollar Loans to Tranche A Loans that are Base Rate Loans on the
last day of the Interest Period applicable thereto, and to Continue Tranche A
Loans that are Eurodollar Loans beyond the expiration of such Interest Period by
designating a new Interest Period to take effect at the time of such expiration;
and (b) with respect to Tranche B Loans, to convert Tranche B Loans that are
Base Rate Loans to Tranche B Loans that are Eurodollar Loans, to convert Tranche
B Loans that are Eurodollar Loans to Tranche B Loans that are Base Rate Loans on
the last day of the Interest Period applicable thereto, and to Continue Tranche
B Loans that are Eurodollar Loans beyond the expiration of such Interest Period
by designating a new Interest Period to take effect at the time of such
expiration. In making such elections, Borrower may combine existing Tranche A
Loans made pursuant to separate Borrowings into one new Borrowing or divide
existing Tranche A Loans made pursuant to one Borrowing into separate new
Borrowings, provided that Borrower may have no more than five Borrowings of
Tranche A Loans that are Eurodollar Loans and three Tranche B Loans that are
Eurodollars Loans outstanding at any time. To make any such election, Borrower
must give to Agent written notice (or telephonic notice promptly confirmed in
writing) of any such conversion or continuation of existing Loans, with a
separate notice given for each new Borrowing. Each such notice constitutes a
"Continuation/Conversion Notice" hereunder and must:
(a) specify the existing Loans which are to be Continued or converted;
(b) specify (i) the aggregate amount of any Borrowing of Base Rate
Loans into which such existing Loans are to be continued or converted and the
date on which such continuation or conversion is to occur, or (ii) the aggregate
amount of any Borrowing of Eurodollar Loans into which such existing Loans are
to be Continued or converted, the date on which such continuation or conversion
is to occur (which shall be the first day of the Interest Period which is to
apply to such Eurodollar Loans), and the length of the applicable Interest
Period; and
(c) be received by Agent not later than 11:30 a.m., Dallas, Texas time,
on (i) the day on which any such continuation or conversion to Base Rate Loans
is to occur, or (ii) the third Business Day preceding the day on which any such
continuation or conversion to Eurodollar Loans is to occur.
Each such written request or confirmation must contain the substance of the
"Continuation/Conversion Notice" attached hereto as Exhibit C, and be in a form
acceptable to Agent. Each such telephonic request shall be deemed a
representation, warranty, acknowledgment and agreement by Borrower as to the
matters which are required to be set out in such written confirmation. Upon
receipt of any such Continuation/Conversion Notice, Agent shall give each Lender
prompt notice of the terms thereof. Each Continuation/Conversion Notice shall be
irrevocable and binding on Borrower. During the continuance of any Default,
Borrower may not make any election to convert existing Loans into Eurodollar
Loans or Continue existing Loans as Eurodollar Loans. If (due to the existence
of a Default or for any other reason) Borrower fails to timely and properly give
any notice of continuation or conversion with respect to a Borrowing of existing
Eurodollar Loans at least three days prior to the end of the Interest Period
applicable thereto, such Eurodollar Loans shall automatically be converted into
Base Rate Loans at the end of such Interest Period. No new funds shall be repaid
by Borrower or advanced by any Lender in connection with any continuation or
conversion of existing Loans pursuant to this section, and no such continuation
or conversion shall be deemed to be a new advance of funds for any purpose; such
continuations and conversions merely constitute a change in the interest rate
applicable to already outstanding Loans.
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Section 2.4. Use of Proceeds. Borrower shall use all Loans to refinance
existing indebtedness, to acquire oil and gas companies and oil and gas
properties, to finance capital expenditures, to refinance Matured LC
Obligations, to provide working capital for its operations, for Permitted
Investments and for other general business purposes. Borrower shall use all
Letters of Credit for its general corporate purposes. In no event shall the
funds from any Loan or any Letter of Credit be used directly or indirectly by
any Person for personal, family, household or agricultural purposes or for the
purpose, whether immediate, incidental or ultimate, of purchasing, acquiring or
carrying any "margin stock" or any "margin securities" (as such terms are
defined in Regulation U promulgated by the Board of Governors of the Federal
Reserve System) or to extend credit to others directly or indirectly for the
purpose of purchasing or carrying any such margin stock or margin securities.
Borrower represents and warrants that Borrower is not engaged principally, or as
one of Borrower's important activities, in the business of extending credit to
others for the purpose of purchasing or carrying such margin stock or margin
securities.
Section 2.5. Interest Rates and Fees.
(a) Interest Rates. Each Base Rate Loan shall bear interest on each day
outstanding at the Adjusted Base Rate in effect on such day. Each Eurodollar
Loan shall bear interest on each day during the related Interest Period at the
related Adjusted Eurodollar Rate in effect on such day.
(b) Tranche A Loan Commitment Fee. In consideration of Lenders'
commitment to enter into this Agreement and to advance funds to Borrower as
Tranche A Loans, Borrower will pay to Agent, for pro rata distribution to each
Lender in accordance with its Percentage Share, a commitment fee determined on a
daily basis by applying the Tranche A Commitment Fee Rate to such Lender's
Percentage Share of the unused portion of the Tranche A Borrowing Base on each
day during the Tranche A Revolving Period, determined for each such day by
deducting from the amount of the Tranche A Borrowing Base at the end of such day
the Tranche A Facility Usage. Promptly at the end of each Fiscal Quarter and at
the end of the Tranche A Revolving Period, Agent shall calculate the commitment
fee then due and shall notify Borrower thereof. Borrower shall pay such
commitment fee to Agent within five Business Days after receiving such notice.
As used in this section, "Tranche A Commitment Fee Rate" means:
(i) when the Debt to Capitalization Ratio in effect hereunder
is less than 0.50 to 1.0, 0.25% per annum; or
(ii) when the Debt to Capitalization Ratio in effect hereunder
is greater than or equal to 0.50 to 1.0, 0.50% per annum.
For the purposes of this Section 2.5(b), any increase in the Tranche A
Borrowing Base pursuant to Section 2.1(c) shall be effective as of the first day
of the calendar quarter in which Borrower elects to increase the Tranche A
Borrowing Base.
(c) Tranche B Loan Commitment Fee. In consideration of Lenders'
commitment to enter into this Agreement and to advance funds to Borrower as
Tranche B Loans, Borrower will pay to Agent, for pro rata distribution to each
Lender in accordance with its Percentage Share, a commitment fee determined on a
daily basis by applying the Tranche B Commitment Fee Rate to such Lender's
Percentage Share of the unused portion of the Tranche B Borrowing Base on each
day during the Tranche B Revolving Period, determined for each such day by
deducting from the amount of the Borrowing Base at the end of such day the
Tranche B Facility Usage. Promptly at the end of each Fiscal Quarter and at the
end of the Tranche B Revolving Period, Agent shall calculate the commitment fee
then due and shall notify Borrower thereof. Borrower shall pay such commitment
fee to Agent within five Business Days after receiving such notice. As used in
this section, "Tranche B Commitment Fee Rate" means: (i) when the Debt to
Capitalization Ratio in effect hereunder is less than 0.50 to 1.0, 0.125% per
annum;
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(ii) when the Debt to Capitalization Ratio in effect hereunder
is greater than or equal to 0.50 to 1.0, 0.375% per annum
For the purposes of this Section 2.5(c), any decrease in the Tranche B
Borrowing Base pursuant to Section 2.1(c) shall be effective as of the first day
of the calendar quarter in which Borrower elects to increase the Tranche A
Borrowing Base thereby reducing the Tranche B Borrowing Base.
(d) Facility Fees. Each time the Aggregate Borrowing Base is
redetermined pursuant to Section 2.9 and the amount of the new Borrowing Base
exceeds the Aggregate Borrowing Base previously in effect hereunder (the amount
of such excess is herein called the "Increased Aggregate Borrowing Base
Amount"), Borrower shall pay to Agent, for pro rata distribution to each Lender
in accordance with its Percentage Share, a facility fee in an amount equal to
0.125% of the Increased Aggregate Borrowing Base Amount. All calculations of
facility fees made pursuant to this section shall be made after the acceptance
of the Aggregate Borrowing Base by Borrower pursuant to Section 2.10.
(e) Conversion Fee. Borrower shall pay to Agent for pro rata
distribution to each Lender in accordance with its Percentage Share a conversion
fee in the amount of 0.25% of that portion of the Tranche B Borrowing Base which
is being converted into the Tranche A Borrowing Base under Section 2.1(c).
(f) Other Fees. In addition to all other amounts due to Agent under the
Loan Documents, Borrower will pay fees to Agent as described in a letter
agreement of even date herewith between Agent and Borrower.
(g) Changes in Base Rate Margin, Eurodollar Margin, Tranche A
Commitment Fee Rate and Tranche B Commitment Fee Rate .
(i) Initial Debt to Capitalization Ratio. The Debt to
Capitalization Ratio in effect from the date hereof until changed as
herein provided is 0.125 to 1.0.
(ii) Decreases In Rates. Any reduction in the Adjusted Base
Rate, the Adjusted Eurodollar Rate, the Tranche A Commitment Fee Rate
or the Tranche B Commitment Fee Rate (in this section collectively
called the "Rates") as a result of a change in the Debt to
Capitalization Ratio shall be requested by Borrower in a certificate
delivered to Agent in which Borrower certifies as to the Debt to
Capitalization Ratio in effect on the date thereof. Together with any
such certificate, Borrower shall deliver to Agent true and correct
financial statements of Borrower, in form and substance satisfactory to
Agent, supporting Borrower's calculation of such Debt to Capitalization
Ratio. If Agent determines Borrower's calculation is correct, the
reduction in the Rates shall become effective on the fifth Business Day
following the date on which such notice is given to Agent or Lenders
otherwise become aware of such a change in the Debt to Capitalization
Ratio; provided that with respect to Committed Eurodollar Loans, such
decrease shall apply only to Eurodollar Loans Continued or converted
after such effective date.
(iii) Increases In Rates. With respect to any increase in the
Rates, Borrower must notify Agent of any change in the Rates as a
result of a change in the Debt to Capitalization Ratio. Any such
increase in the Rates shall become effective on the fifth Business Day
following the date on which such notice is given to Agent or Lenders
otherwise become aware of such a change in the Debt to Capitalization
Ratio; provided that with respect to Eurodollar Loans, such increase
shall apply only to Eurodollar Loans made, continued or converted after
such effective date.
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Section 2.6. Optional Prepayments. Borrower may, from time to time and
without premium or penalty prepay the Notes, in whole or in part, so long as the
aggregate amounts of all partial prepayments of principal on the Notes equals
$250,000 or any higher integral multiple of $50,000, and so long as any
prepayment of a Eurodollar Loan is accompanied by amounts owed under Section
3.6. Each partial prepayment of principal of the Tranche A Loans made after the
end of the Tranche A Revolving Period shall be applied to the regular
installments of principal due under the Notes in the inverse order of their
maturities. Any principal or interest prepaid pursuant to this section shall be
in addition to, and not in lieu of, all payments otherwise required to be paid
under the Loan Documents at the time of such prepayment.
Section 2.7. Required Principal Payments.
(a) Mandatory Prepayments. If at any time the Tranche A Facility Usage
is in excess of the Tranche A Borrowing Base (such excess being herein called
the "Tranche A Excess Debt"), Borrower shall, within ten Business Days after
Agent gives notice of such fact to Borrower, notify Agent that Borrower will do
one of the following:
(i) within thirty (30) calendar days, prepay the principal of
the Tranche A Loans in an aggregate amount at least equal to such
Tranche A Excess Debt (or, if the Tranche A Loans have been paid in
full, pay to LC Issuer LC Collateral as required under Section
2.15(a)), or
(ii) prepay the principal of the Tranche A Loans in up to six
monthly installments in an aggregate amount at least equal to the
Tranche A Excess Debt, with each such installment equal to or in excess
of one-sixth of such Tranche A Excess Debt, and with the first such
installment to be paid one month after the giving of such notice and
the subsequent installments to be due and payable at one month
intervals thereafter until such Tranche A Excess Debt has been
eliminated, or
(iii) within thirty (30) calendar days, convert the aggregate
outstanding principal amount of the Tranche A Notes to a term loan,
which shall be subject to the provisions of paragraph 2.7(c).
Borrower shall make the payment(s) or conversion selected by Borrower as
described above. Any principal or interest prepaid pursuant to this section
shall be in addition to, and not in lieu of, all payments otherwise required to
be paid under the Loan Documents at the time of such prepayment.
(b) Tranche B Loan. If at any time the Tranche B Facility Usage exceeds
the Tranche B Borrowing Base then in effect (such excess is hereinafter called
the "Tranche B Excess Debt"), Borrower shall take one of the following actions
within three Business Days following receipt of notice from the Agent of the
existence of such Tranche B Excess Debt:
(i) Convert the Tranche B Excess Debt to principal outstanding
under the Tranche A Loan, and execute and deliver to the Banks
amendments to the Loan Documents satisfactory to Lenders; or
(ii) Repay the Tranche B Loan in an amount equal to the
Tranche B Excess Debt.
Each prepayment of principal under this section shall be accompanied by all
interest then accrued and unpaid on the principal so prepaid. Any principal or
interest prepaid pursuant to this section shall be in addition to, and not in
lieu of, all payments otherwise required to be paid under the Loan Documents at
the time of such prepayment.
Failure to timely comply with this paragraph 2.7(b) shall be an immediate Event
of Default.
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(c) Regularly Scheduled Payments of Principal of Tranche A Note. The
principal of the Tranche A Note shall be due and payable in twenty (20)
quarterly installments, each of which shall be equal to the greater of (i)
one-twentieth (1/20) of the aggregate unpaid principal balance of the Tranche A
Note at the end of the Tranche A Revolving Period or (ii) sixty percent (60%) of
the Net Oil and Gas Revenues during the applicable Accounting Quarter, and shall
be due and payable on the last day of each Fiscal Quarter, beginning March 31,
2001 and continuing regularly thereafter until the Tranche A Maturity Date, at
which time the unpaid principal balance of the Tranche A Note and all interest
accrued thereon shall be due and payable in full.
Section 2.8. Borrowing Base.
(a) Initial Aggregate Borrowing Base; Limitations on Borrowing Base.
The initial borrowing base under this Agreement shall be $115,000,000.
(b) Engineering Reports. No later than March 1 of each year that this
Agreement is in effect, commencing March 1, 1999, Borrower shall submit to each
Lender, in a format and using the pricing and cost assumptions and discount
factors required by the Securities and Exchange Commission, a report, prepared
by a qualified independent or in-house engineer acceptable to Agent, setting
forth, as of December 31 of the immediately preceding year, all of the revenues
(and the future volumes of production to be derived therefrom) attributable to
all proved Oil and Gas Properties owned by Borrower as of such date.
Section 2.9. Subsequent Determinations of Aggregate Borrowing Base. By
each Evaluation Date Borrower shall furnish to each Lender all information,
reports and data which Agent has then requested concerning Borrower's business
and properties (including their oil and gas properties and interests and the
reserves and production relating thereto), together with the Engineering Report
described in Section 2.8(b) and Section 6.2(d), if then due. Within forty-five
days after receiving such information, reports and data, or as promptly
thereafter as practicable, Majority Lenders shall agree upon an amount for the
Aggregate Borrowing Base and Agent shall by notice to Borrower designate such
amount as the new Aggregate Borrowing Base available to Borrower hereunder,
which designation shall take effect immediately on the date such notice is sent
(herein called a "Determination Date") and shall remain in effect until but not
including the next date as of which the Aggregate Borrowing Base is
redetermined. If Borrower does not furnish all such information, reports and
data by the date specified in the first sentence of this section, Agent may
nonetheless designate the Aggregate Borrowing Base at any amount which Majority
Lenders determine and may redesignate the Aggregate Borrowing Base from time to
time thereafter until each Lender receives all such information, reports and
data, whereupon Majority Lenders shall designate a new Aggregate Borrowing Base
as described above. Majority Lenders shall determine the amount of the Aggregate
Borrowing Base based upon the loan collateral value which they in their
discretion assign to the various oil and gas properties of Borrower at the time
in question and based upon such other credit factors (including without
limitation the assets, liabilities, cash flow, hedged and unhedged exposure to
price, foreign exchange rate, and interest rate changes, business, properties,
prospects, management and ownership of Borrower and its Affiliates) as they in
their discretion deem significant. It is expressly understood that Lenders and
Agent have no obligation to agree upon or designate the Aggregate Borrowing Base
at any particular amount, whether in relation to the Maximum Loan Amount or
otherwise, and that Lenders' commitments to advance funds hereunder is
determined by reference to the Aggregate Borrowing Base from time to time in
effect, which Aggregate Borrowing Base shall be used for calculating commitment
fees under Section 2.5 and, to the extent permitted by Law and regulatory
authorities, for the purposes of capital adequacy determination and
reimbursements under Section 3.2.
Section 2.10. Acceptance and Application of Aggregate Borrowing Base.
Within ten days after the Agent has given written notice to Borrower of the
Aggregate Borrowing Base offered by the Agent for a period, Borrower shall give
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Agent written notice of Borrower's acceptance of all or a portion of the
Aggregate Borrowing Base for such period. In such notice, Borrower shall
allocate a portion of the Aggregate Borrowing Base so accepted by the Borrower
to the Tranche A Loan (the "Tranche A Borrowing Base") and the remaining portion
to the Tranche B Loan (the "Tranche B Borrowing Base"), provided, however, that
in no event shall (i) more than $200,000,000 of the Aggregate Borrowing Base be
allocated to the Tranche A Loan, (ii) more than $50,000,000 of the Aggregate
Borrowing Base be allocated to the Tranche B Loan or (iii) more than the lesser
of (x) the amount of the Tranche B Commitment or (y) 50% of Aggregate Borrowing
Base be allocated to the Tranche B Loan. Each such Tranche A Borrowing Base and
each such Tranche B Borrowing Base shall be effective as of the date so accepted
by Borrower until the date on which a new Tranche A borrowing Base and a new
Tranche B Borrowing Base is accepted by Borrower. The initial accepted Tranche A
Borrowing Base shall be $30,000,000; the initial accepted Tranche B Borrowing
Base shall be $10,000,000.
Section 2.11. Letters of Credit. Subject to the terms and conditions
hereof, Borrower may during the Tranche A Revolving Period request LC Issuer to
issue one or more Letters of Credit, provided that, after taking such Letter of
Credit into account:
(a) the Tranche A Facility Usage does not exceed the Tranche A
Borrowing Base at such time; and
(b) the Aggregate Facility Usage does not exceed the Aggregate
Borrowing Base; and
(c) the expiration date of such Letter of Credit is prior to the end of
the Tranche A Revolving Period.
LC Issuer has no obligation or commitment to issue any such Letter of Credit. LC
Issuer may choose to honor any such request for a Letter of Credit, and LC
Issuer may refuse to issue any requested Letter of Credit for any reason which
LC Issuer in its sole discretion deems relevant. The provisions of this
Agreement dealing with Letters of Credit have been agreed to only for the
convenience of the parties if LC Issuer does ultimately choose to issue any
Letter of Credit.
LC Issuer may choose to honor any such request for any other Letter of Credit
but has no obligation to do so and may refuse to issue any other requested
Letter of Credit for any reason which LC Issuer in its sole discretion deems
relevant.
Section 2.12. Requesting Letters of Credit. Borrower must make written
application for any Letter of Credit at least five Business Days before the date
on which Borrower desires for LC Issuer to issue such Letter of Credit. By
making any such written application Borrower shall be deemed to have represented
and warranted that the LC Conditions described in Section 4.2 will be met as of
the date of issuance of such Letter of Credit. Each such written application for
a Letter of Credit must be made in writing in the form and substance of Exhibit
G, the terms and provisions of which are hereby incorporated herein by reference
(or in such other form as may mutually be agreed upon by LC Issuer and
Borrower). If any provisions of any LC Application conflict with any provisions
of this Agreement, the provisions of this Agreement shall govern and control.
Section 2.13. Reimbursement and Participations.
(a) Reimbursement by Borrower. Each Matured LC Obligation shall
constitute a loan by LC Issuer to Borrower. Borrower promises to pay to LC
Issuer, or to LC Issuer's order, on demand, the full amount of each Matured LC
Obligation, together with interest thereon at the Default Rate, until repaid in
full.
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(b) Letter of Credit Advances. If the beneficiary of any Letter of
Credit makes a draft or other demand for payment thereunder then Lenders shall,
if all of the conditions precedent to making such Loans set forth in Section
2.1(a) and Article IV have been satisfied, make Loans to Borrower in the amount
of such draft or demand, which Loans shall be made concurrently with LC Issuer's
payment of such draft or demand and shall be immediately used by LC Issuer to
repay the amount of the resulting Matured LC Obligation; provided that for the
purposes of the first sentence of Section 2.1, the amount of such Loans shall be
considered, but the amount of the Matured LC Obligation to be concurrently paid
by such Loans shall not be considered.
(c) Participation by Lenders. LC Issuer irrevocably agrees to grant and
hereby grants to each Lender, and -- to induce LC Issuer to issue Letters of
Credit hereunder -- each Lender irrevocably agrees to accept and purchase and
hereby accepts and purchases from LC Issuer, on the terms and conditions
hereinafter stated and for such Lender's own account and risk an undivided
interest equal to such Lender's Percentage Share of LC Issuer's obligations and
rights under each Letter of Credit issued hereunder and the amount of each
Matured LC Obligation paid by LC Issuer thereunder. Each Lender unconditionally
and irrevocably agrees with LC Issuer that, if a Matured LC Obligation is paid
under any Letter of Credit for which LC Issuer is not reimbursed in full by
Borrower in accordance with the terms of this Agreement and the related LC
Application (including any reimbursement by means of concurrent Loans or by the
application of LC Collateral), such Lender shall (in all circumstances and
without set-off or counterclaim) pay to LC Issuer on demand, in immediately
available funds at LC Issuer's address for notices hereunder, such Lender's
Percentage Share of such Matured LC Obligation (or any portion thereof which has
not been reimbursed by Borrower). Each Lender's obligation to pay LC Issuer
pursuant to the terms of this subsection is irrevocable and unconditional. If
any amount required to be paid by any Lender to LC Issuer pursuant to this
subsection is paid by such Lender to LC Issuer within three Business Days after
the date such payment is due, LC Issuer shall in addition to such amount be
entitled to recover from such Lender, on demand, interest thereon calculated
from such due date at the Federal Funds Rate. If any amount required to be paid
by any Lender to LC Issuer pursuant to this subsection is not paid by such
Lender to LC Issuer within three Business Days after the date such payment is
due, LC Issuer shall in addition to such amount be entitled to recover from such
Lender, on demand, interest thereon calculated from such due date at the Default
Rate.
(d) Distributions to Participants. Whenever LC Issuer has in accordance
with this section received from any Lender payment of such Lender's Percentage
Share of any Matured LC Obligation, if LC Issuer thereafter receives any payment
of such Matured LC Obligation or any payment of interest thereon (whether
directly from Borrower or by application of LC Collateral or otherwise, and
excluding only interest for any period prior to LC Issuer's demand that such
Lender make such payment of its Percentage Share), LC Issuer will distribute to
such Lender its Percentage Share of the amounts so received by LC Issuer;
provided, however, that if any such payment received by LC Issuer must
thereafter be returned by LC Issuer, such Lender shall return to LC Issuer the
portion thereof which LC Issuer has previously distributed to it.
Section 2.14. Letter of Credit Fees. In consideration of LC Issuer's
issuance of any Letter of Credit, Borrower agrees to pay (a) to Agent, for the
account of all Lenders in accordance with their respective Percentage Shares, a
letter of credit issuance fee at a rate determined by applying the Eurodollar
Margin then in effect to the face amount of such Letter of Credit for the term
thereof, such issuance fee to be not less than $1,000 for each Letter of Credit,
and (b) to the LC Issuer for its own account, a letter of credit fronting fee at
a rate equal to one-eighth percent (.125%) per annum of the face amount of such
letter of credit. Each such fee will be payable quarterly in arrears.
Section 2.15. LC Collateral.
(a) LC Obligations in Excess of Borrowing Base. If the outstanding LC
Obligations exceed the Tranche A Borrowing Base, then in addition to prepayment
of the entire principal balance of the Loans pursuant to Section 2.7 Borrower
will immediately pay to LC Issuer an amount equal to such excess. LC Issuer will
hold such amount as security for the remaining LC Obligations (all such amounts
held as security for LC Obligations being herein collectively called "LC
Collateral") until such LC Obligations become Matured LC Obligations, at which
time such LC Collateral may be applied to such Matured LC Obligations. Neither
this subsection nor the following subsection shall, however, limit or impair any
rights which LC Issuer may have under any other document or agreement relating
to any Letter of Credit or LC Obligation, including any LC Application, or any
rights which any Lender Party may have to otherwise apply any payments by
Borrower and any LC Collateral under Section 3.1.
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(b) Acceleration of LC Obligations. If the Obligations or any part
thereof become immediately due and payable pursuant to Section 8.1 then, unless
Majority Lenders otherwise specifically elect to the contrary (which election
may thereafter be retracted by Majority Lenders at any time), all LC Obligations
shall become immediately due and payable without regard to whether or not actual
drawings or payments on the Letters of Credit have occurred, and Borrower shall
be obligated to pay to LC Issuer immediately an amount equal to the aggregate LC
Obligations which are then outstanding. All amounts so paid shall first be
applied to Matured LC Obligations and then held by LC Issuer as LC Collateral
until such LC Obligations become Matured LC Obligations, at which time such LC
Collateral shall be applied to such Matured LC Obligations.
(c) Investment of LC Collateral. Pending application thereof, all LC
Collateral shall be invested by LC Issuer in such Investments as LC Issuer may
choose in its sole discretion. All interest on (and other proceeds of) such
Investments shall be reinvested or applied to Matured LC Obligations. When all
Obligations have been satisfied in full, including all LC Obligations, all
Letters of Credit have expired or been terminated, and all of Borrower's
reimbursement obligations in connection therewith have been satisfied in full,
LC Issuer shall release any remaining LC Collateral. Borrower further agrees
that LC Issuer shall have all of the rights and remedies of a secured party
under the Uniform Commercial Code as adopted in the State of Colorado with
respect to such security interest and that an Event of Default under this
Agreement shall constitute a default for purposes of such security interest.
(d) Payment of LC Collateral. When Borrower is required to provide LC
Collateral for any reason and fails to do so on the day when required, LC Issuer
may without notice to Borrower provide such LC Collateral (whether by
application of proceeds of other Collateral, by transfers from other accounts
maintained with LC Issuer, or otherwise) using any available funds of Borrower
or any other Person also liable to make such payments.
ARTICLE III - Payments to Lenders
Section 3.1. General Procedures. Borrower will make each payment which
it owes under the Loan Documents to Agent for the account of the Lender Party to
whom such payment is owed. Each such payment must be received by Agent not later
than 11:30 a.m., Dallas, Texas time, on the date such payment becomes due and
payable, in lawful money of the United States of America, without set-off,
deduction or counterclaim, and in immediately available funds. Any payment
received by Agent after such time will be deemed to have been made on the next
following Business Day. Should any such payment become due and payable on a day
other than a Business Day, the maturity of such payment shall be extended to the
next succeeding Business Day, and, in the case of a payment of principal or past
due interest, interest shall accrue and be payable thereon for the period of
such extension as provided in the Loan Document under which such payment is due.
Each payment under a Loan Document shall be due and payable at the place
provided therein and, if no specific place of payment is provided, shall be due
and payable at the place of payment of Agent's Note. When Agent collects or
receives money on account of the Obligations, Agent shall distribute all money
so collected or received, and each Lender Party shall apply all such money so
distributed, as follows:
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(a) first, for the payment of all Obligations which are then due (and
if such money is insufficient to pay all such Obligations, first to any
reimbursements due Agent under Section 6.9 or 10.4 and then to the partial
payment of all other Obligations then due in proportion to the amounts thereof,
or as Lender Parties shall otherwise agree);
(b) then for the prepayment of amounts owing under the Loan Documents
(other than principal on the Notes) if so specified by Borrower;
(c) then for the prepayment of principal on the Notes, together with
accrued and unpaid interest on the principal so prepaid; and
(d) last, for the payment or prepayment of any other Obligations.
All payments applied to principal or interest on any Note shall be applied first
to any interest then due and payable, then to principal then due and payable,
and last to any prepayment of principal and interest in compliance with Sections
2.6 and 2.7. All distributions of amounts described in any of subsections (a),
(b), (c) or (d) above shall be made by Agent pro rata to each Lender Party then
owed Obligations described in such subsection in proportion to all amounts owed
to all Lender Parties which are described in such subsection; provided that if
any Lender then owes payments to LC Issuer for the purchase of a participation
under Section 2.13(c) hereof, any amounts otherwise distributable under this
section to such Lender shall be deemed to belong to LC Issuer, to the extent of
such unpaid payments, and Agent shall apply such amounts to make such unpaid
payments rather than distribute such amounts to such Lender.
Section 3.2. Increased Cost and Reduced Return.
(a) If, after the date hereof, the adoption of any applicable Law,
rule, or regulation, or any change in any applicable Law, rule, or regulation,
or any change in the interpretation or administration thereof by any
governmental authority, central bank, or comparable agency charged with the
interpretation or administration thereof, or compliance by any Lender Party with
any request or directive (whether or not having the force of Law) of any such
governmental authority, central bank, or comparable agency:
(i) shall subject such Lender Party to any tax, duty, or other
charge with respect to any Loans, its Note, or its obligation to make
Loans, or change the basis of taxation of any amounts payable to such
Lender Party under this Agreement or its Note in respect of any Loans
or Letters of Credit (other than taxes imposed on the overall net
income of such Lender Party by the jurisdiction in which such Lender
Party has its principal office;
(ii) shall impose, modify, or deem applicable any reserve,
special deposit, assessment, or similar requirement (other than the
Reserve Requirement utilized in the determination of the Adjusted
Eurodollar Rate) relating to any extensions of credit or other assets
of, or any deposits with or other liabilities or commitments of, such
Lender Party, including the commitments of such Lender Party hereunder;
or
(iii) shall impose on such Lender Party or the London
interbank market any other condition affecting this Agreement or its
Notes or any of such extensions of credit or liabilities or
commitments;
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and the result of any of the foregoing is to increase the cost to such Lender
Party of making, converting into, continuing, or maintaining any Eurodollar Rate
Loans or to reduce any sum received or receivable by such Lender Party within
fifteen (15) days after demand therefor, under this Agreement or its Notes with
respect to any Eurodollar Rate Loans, then Borrower shall pay to such Lender
Party such amount or amounts as will compensate such Lender Party for such
increased cost or reduction. If any Lender Party requests compensation by
Borrower under this Section 3.5(a), Borrower may, by notice to such Lender Party
(with a copy to Agent), suspend the obligation of such Lender Party to make or
continue Loans of the Type with respect to which such compensation is requested,
or to convert Loans of such Type into Loans of any other Type, until the event
or condition giving rise to such request ceases to be in effect; provided that
such suspension shall not affect the right of such Lender Party to receive the
compensation so requested.
(b) If, after the date hereof, LC Issuer or any Lender Party shall have
determined that the adoption of any applicable Law, rule, or regulation
regarding capital adequacy or any change therein or in the interpretation or
administration thereof by any governmental authority, central bank, or
comparable agency charged with the interpretation or administration thereof, or
any request or directive regarding capital adequacy (whether or not having the
force of Law) of any such governmental authority, central bank, or comparable
agency, has or would have the effect of reducing the rate of return on the
capital of such Lender Party or any corporation controlling such Lender Party as
a consequence the obligations of LC Issuer or such Lender Party hereunder to a
level below that which such Lender Party or such corporation could have achieved
but for such adoption, change, request, or directive (taking into consideration
its policies with respect to capital adequacy), then from time to time upon
demand Borrower shall pay to LC Issuer or such Lender Party such additional
amount or amounts as will compensate LC Issuer or such Lender Party for such
reduction, but only to the extent that such Lender Party has not been
compensated therefor by any increase in the Adjusted Eurodollar Rate.
(c) LC Issuer and each Lender Party shall promptly notify Borrower and
Agent of any event of which it has knowledge, occurring after the date hereof,
which will entitle LC Issuer or such Lender Party to compensation pursuant to
this Section. LC Issuer or any Lender Party claiming compensation under this
Section shall furnish to Borrower and Agent a statement setting forth the
additional amount or amounts to be paid to it hereunder which shall be
conclusive in the absence of manifest error. In determining such amount, LC
Issuer or such Lender Party shall act in good faith and may use any reasonable
averaging and attribution methods.
Section 3.3. Limitation on Types of Loans. If on or prior to the first
day of any Interest Period for any Eurodollar Rate Loan:
(a) Agent determines (which determination shall be conclusive) that by
reason of circumstances affecting the relevant market, adequate and reasonable
means do not exist for ascertaining the Eurodollar Rate for such Interest
Period; or
(b) Majority Lenders determine (which determination shall be
conclusive) and notify Agent that the Adjusted Eurodollar Rate will not
adequately and fairly reflect the cost to the Lender Parties of funding
Eurodollar Loans for such Interest Period;
then Agent shall give Borrower prompt notice thereof specifying the relevant
Type of Loans and the relevant amounts or periods, and so long as such condition
remains in effect, the Lender Parties shall be under no obligation to make
additional Loans of such Type, continue Loans of such Type, or to convert Loans
of any other Type into Loans of such Type and Borrower shall, on the last day(s)
of the then current Interest Period(s) for the outstanding Loans of the affected
Type, either prepay such Loans or convert such Loans into another Type of Loan
in accordance with the terms of this Agreement.
Section 3.4. Illegality. Notwithstanding any other provision of this
Agreement, in the event that it becomes unlawful for any Lender Party to make,
maintain, or fund Eurodollar Loans hereunder, then such Lender Party shall
promptly notify Borrower thereof and such Lender Party's obligation to make or
continue Eurodollar Loans and to convert other Types of Loans into Eurodollar
Loans shall be suspended until such time as such Lender Party may again make,
maintain, and fund Eurodollar Loans (in which case the provisions of Section 1.5
shall be applicable).
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Section 3.5. Treatment of Affected Loans. If the obligation of any
Lender Party to make a particular Type of Loan or to continue, or to convert
Loans of any other Type into, Loans of a particular Type shall be suspended
pursuant to Sections 3.2, 3.3, or 3.4 hereof (Loans of such Type being herein
called "Affected Loans" and such Type being herein called the "Affected Type"),
such Lender Party's Affected Loans shall be automatically converted into Base
Rate Loans on the last day(s) of the then current Interest Period(s) for
Affected Loans (or, in the case of a Conversion required by Section 3.2 hereof,
on such earlier date as such Lender Party may specify to Borrower with a copy to
Agent) and, unless and until such Lender Party gives notice as provided below
that the circumstances specified in Sections 3.2 or 3.3 hereof that gave rise to
such Conversion no longer exist:
(a) to the extent that such Lender Party's Affected Loans have been so
converted, all payments and prepayments of principal that would otherwise be
applied to such Lender Party's Affected Loans shall be applied instead to its
Base Rate Loans; and
(b) all Loans that would otherwise be made or continued by such Lender
Party as Loans of the Affected Type shall be made or continued instead as Base
Rate Loans, and all Loans of such Lender Party that would otherwise be converted
into Loans of the Affected Type shall be converted instead into (or shall remain
as) Base Rate Loans.
If such Lender Party gives notice to Borrower (with a copy to Agent) that the
circumstances specified in Section 3.2 or 3.3 hereof that gave rise to the
Conversion of such Lender Party's Affected Loans pursuant to this Section 3.5 no
longer exist (which such Lender Party agrees to do promptly upon such
circumstances ceasing to exist) at a time when Loans of the Affected Type made
by other Lender Parties are outstanding, such Lender Party's Base Rate Loans
shall be automatically converted, on the first day(s) of the next succeeding
Interest Period(s) for such outstanding Loans of the Affected Type, to the
extent necessary so that, after giving effect thereto, all Loans held by the
Lender Parties holding Loans of the Affected Type and by such Lender Party are
held pro rata (as to principal amounts, Types, and Interest Periods) in
accordance with their Percentage Shares of the Commitment.
Section 3.6. Compensation. Upon the request of any Lender Party,
Borrower shall pay to such Lender Party such amount or amounts as shall be
sufficient (in the reasonable opinion of such Lender Party) to compensate it for
any loss, cost, or expense (including loss of anticipated profits) incurred by
it as a result of:
(a) any payment, prepayment, or Conversion of a Eurodollar Rate Loan
for any reason (including, without limitation, the acceleration of the Loans
pursuant to Section 8.1) on a date other than the last day of the Interest
Period for such Loan; or
(b) any failure by Borrower for any reason (including, without
limitation, the failure of any condition precedent specified in Article IV to be
satisfied) to borrow, convert, continue, or prepay a Eurodollar Rate Loan on the
date for such borrowing, Conversion, Continuation, or prepayment specified in
the relevant notice of borrowing, prepayment, Continuation, or Conversion under
this Agreement.
Section 3.7. Taxes
(a) Any and all payments by Borrower to or for the account of any
Lender Party, Agent or LC Issuer hereunder or under any other Loan Document
shall be made free and clear of and without deduction for any and all present or
future taxes, duties, levies, imposts, deductions, charges or withholdings, and
all liabilities with respect thereto, excluding, in the case of each Lender
Party, Agent and LC Issuer, taxes imposed on its income, and franchise taxes
imposed on it, by the jurisdiction under the Laws of which such Lender Party or
Agent (as the case may be) is organized or any political subdivision thereof
(all such non-excluded taxes, duties, levies, imposts, deductions, charges,
withholdings, and liabilities being hereinafter referred to as "Taxes"). If
Borrower shall be required by Law to deduct any Taxes from or in respect of any
sum payable under this Agreement or any other Loan Document to any Lender Party,
Agent or LC Issuer, (i) the sum payable shall be increased as necessary so that
after making all required deductions (including deductions applicable to
additional sums payable under this section) such Lender Party, Agent or LC
Issuer receives an amount equal to the sum it would have received had no such
deductions been made and , (ii) Borrower shall make such deductions, (iii)
Borrower shall pay the full amount deducted to the relevant taxation authority
or other authority in accordance with applicable Law.
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(b) In addition, Borrower agrees to pay any and all present or future
stamp or documentary taxes and any other excise or property taxes or charges or
similar levies which arise from any payment made under this Agreement or any
other Loan Document or from the execution or delivery of, or otherwise with
respect to, this Agreement or any other Loan Document (hereinafter referred to
as "Other Taxes").
(c) Borrower agrees to indemnify each Lender Party, Agent and LC Issuer
for the full amount of Taxes and Other Taxes (including, without limitation, any
Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable
under this section) paid by such Lender Party or Agent (as the case may be) and
any liability (including penalties, interest, and expenses) arising therefrom or
with respect thereto.
(d) Without prejudice to the survival of any other agreement of
Borrower hereunder, the agreements and obligations of Borrower contained in this
section shall survive the termination of this Agreement and the payment in full
of the Notes.
ARTICLE IV - Conditions Precedent to Lending
Section 4.1. Documents to be Delivered. No Lender has any obligation
to make its first Loan, and LC Issuer has no obligation to issue the first
Letter of Credit unless Agent shall have received all of the following, at
Agent's office in Dallas, Texas, duly executed and delivered and in form,
substance and date satisfactory to Agent:
(a) This Agreement and any other documents that Lenders are to
execute in connection herewith.
(b) Each Note.
(c) Certain certificates of Borrower including:
(i) An "Omnibus Certificate" of the Secretary and of the
Chairman of the Board or President of Borrower, which shall contain the
names and signatures of the officers of Borrower authorized to execute
Loan Documents and which shall certify to the truth, correctness and
completeness of the following exhibits attached thereto: (1A a copy of
resolutions duly adopted by the Board of Directors of Borrower and in
full force and effect at the time this Agreement is entered into,
authorizing the execution of this Agreement and the other Loan
Documents delivered or to be delivered in connection herewith and the
consummation of the transactions contemplated herein and therein, (2A a
copy of the charter documents of Borrower and all amendments thereto,
certified by the appropriate official of Borrower's state of
organization, and (3A a copy of any bylaws of Borrower; and
(ii) A "Compliance Certificate" of the Chairman of the Board
or President and of the chief financial officer of Borrower, of even
date with such Loan or such Letter of Credit, in which such officers
certify to the satisfaction of the conditions set out in subsections
(a), (b), (c) and (d) of Section 4.2.
(d) A certificate (or certificates) of the due formation, valid
existence and good standing of Borrower in its state of organization, issued by
the appropriate authorities of such jurisdiction.
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(e) A favorable opinion of Cohen Brame & Smith Professional
Corporation, counsel for Borrower, substantially in the form set forth in
Exhibit E.
(f) The Initial Financial Statements.
(g) Certificates or binders evidencing Borrower's insurance in
effect on the date hereof.
(h) Payment of all commitment, facility, agency and other fees required
to be paid to any Lender pursuant to any Loan Documents and payment of fees and
disbursements of Agent's counsel.
Section 4.2. Additional Conditions Precedent. No Lender has any
obligation to make any Loan (including its first), and LC Issuer has no
obligation to issue any Letter of Credit (including its first), unless the
following conditions precedent have been satisfied:
(a) All representations and warranties made by any Borrower in any Loan
Document shall be true on and as of the date of such Loan or the date of
issuance of such Letter of Credit (except to the extent that the facts upon
which such representations are based have been changed by the extension of
credit hereunder) as if such representations and warranties had been made as of
the date of such Loan or the date of issuance of such Letter of Credit.
(b) No Default shall exist at the date of such Loan or the date of
issuance of such Letter of Credit.
(c) No Material Adverse Change shall have occurred to, and no event or
circumstance shall have occurred that could cause a Material Adverse Change to,
Borrower's Consolidated financial condition or businesses since the date of this
Agreement.
(d) Borrower shall have performed and complied with all agreements and
conditions required in the Loan Documents to be performed or complied with by it
on or prior to the date of such Loan or the date of issuance of such Letter of
Credit.
(e) The making of such Loan or the issuance of such Letter of Credit
shall not be prohibited by any Law and shall not subject any Lender or any LC
Issuer to any penalty or other onerous condition under or pursuant to any such
Law.
(f) Agent shall have received all documents and instruments which Agent
has then reasonably requested, in addition to those described in Section 4.1
(including opinions of legal counsel for Borrower and Agent; corporate documents
and records; documents evidencing governmental authorizations, consents,
approvals, licenses and exemptions; and certificates of public officials and of
officers and representatives of Borrower and other Persons), as to (i0 the
accuracy and validity of or compliance with all representations, warranties and
covenants made by Borrower in this Agreement and the other Loan Documents, (ii0
the satisfaction of all conditions contained herein or therein, and (iii0 all
other matters pertaining hereto and thereto. All such additional documents and
instruments shall be satisfactory to Agent in form, substance and date.
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ARTICLE V - Representations and Warranties
To confirm each Lender's understanding concerning Borrower and
Borrower's businesses, properties and obligations and to induce each Lender to
enter into this Agreement and to extend credit hereunder, Borrower represents
and warrants to each Lender that:
Section 5.1. No Default. Borrower is not in default in the performance
of any of the covenants and agreements contained in any Loan Document. No event
has occurred and is continuing which constitutes a Default.
Section 5.2. Organization and Good Standing. Borrower is duly
organized, validly existing and in good standing under the Laws of its
jurisdiction of organization, having all powers required to carry on its
business and enter into and carry out the transactions contemplated hereby.
Borrower is duly qualified, in good standing, and authorized to do business in
all other jurisdictions within the United States wherein the character of the
properties owned or held by it or the nature of the business transacted by it
makes such qualification necessary.
Section 5.3 Authorization. Borrower has duly taken all action
necessary to authorize the execution and delivery by it of the Loan Documents to
which it is a party and to authorize the consummation of the transactions
contemplated thereby and the performance of its obligations thereunder. Borrower
is duly authorized to borrow funds hereunder.
Section 5.4 No Conflicts or Consents. The execution and delivery by
Borrower of the Loan Documents, the performance by each of its obligations under
such Loan Documents, and the consummation of the transactions contemplated by
the various Loan Documents, do not and will not (i0 conflict with any provision
of (1) any Law, (2) the organizational documents of Borrower, or (3) any
agreement, judgment, license, order or permit applicable to or binding upon
Borrower, (ii) result in the acceleration of any Indebtedness owed by Borrower,
or (iii) result in or require the creation of any Lien upon any assets or
properties of Borrower. Except as expressly contemplated in the Loan Documents
no consent, approval, authorization or order of, and no notice to or filing
with, any Tribunal or third party is required in connection with the execution,
delivery or performance by Borrower of any Loan Document or to consummate any
transactions contemplated by the Loan Documents.
Section 5.5. Enforceable Obligations. This Agreement is, and the other
Loan Documents when duly executed and delivered will be, legal, valid and
binding obligations of Borrower, enforceable in accordance with their terms
except as such enforcement may be limited by bankruptcy, insolvency or similar
Laws of general application relating to the enforcement of creditors' rights.
Section 5.6 Initial Financial Statements. Borrower has heretofore
delivered to each Lender true, correct and complete copies of the Initial
Financial Statements. The Initial Financial Statements fairly present Borrower's
Consolidated financial position at the respective date thereof and the
Consolidated results of Borrower's operations and Borrower's Consolidated cash
flows for the respective period thereof. Since the date of the annual Initial
Financial Statements no Material Adverse Change has occurred, except as
reflected in the Disclosure Schedule. All Initial Financial Statements were
prepared in accordance with GAAP.
Section 5.7 Other Obligations and Restrictions. Borrower has no
outstanding Liabilities of any kind (including contingent obligations, tax
assessments, and unusual forward or long-term commitments) which are, in the
aggregate, material to Borrower or material with respect to Borrower's
Consolidated financial condition and not shown in the Initial Financial
Statements or disclosed in the Disclosure Schedule or a Disclosure Report.
Except as shown in the Initial Financial Statements or disclosed in the
Disclosure Schedule or a Disclosure Report, Borrower is not subject to or
restricted by any franchise, contract, deed, charter restriction, or other
instrument or restriction which could cause a Material Adverse Change.
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Section 5.8 Full Disclosure. No certificate, statement or other
information delivered herewith or heretofore by Borrower to any Lender in
connection with the negotiation of this Agreement or in connection with any
transaction contemplated hereby contains any untrue statement of a material fact
or omits to state any material fact known to Borrower (other than industry-wide
risks normally associated with the types of businesses conducted by Borrower)
necessary to make the statements contained herein or therein not misleading as
of the date made or deemed made. There is no fact known to Borrower (other than
industry-wide risks normally associated with the types of businesses conducted
by Borrower) that has not been disclosed to each Lender in writing which could
cause a Material Adverse Change.
Section 5.9. Litigatioin. Except as disclosed in the Initial Financial
Statements or in the Disclosure Schedule: (i) there are no actions, suits or
legal, equitable, arbitrative or administrative proceedings pending, or to the
knowledge of Borrower threatened, against any Restricted Person before any
Tribunal which could cause a Material Adverse Change, and (ii) there are no
outstanding judgments, injunctions, writs, rulings or orders by any such
Tribunal against Borrower or Borrower's stockholders/partners, directors or
officers which could cause a Material Adverse Change.
Section 5.10. Labor Disputes and Acts of God. Except as disclosed in
the Disclosure Schedule or a Disclosure Report, neither the business nor the
properties of Borrower, within the two years preceding the date hereof, has been
affected by any fire, explosion, accident, strike, lockout or other labor
dispute, drought, storm, hail, earthquake, embargo, act of God or of the public
enemy or other casualty (whether or not covered by insurance), which could cause
a Material Adverse Change.
Section 5.11. ERISA Plans and Liabilities. All currently existing ERISA
Plans are listed in the Disclosure Schedule or a Disclosure Report. Except as
disclosed in the Initial Financial Statements or in the Disclosure Schedule or a
Disclosure Report, no Termination Event has occurred with respect to any ERISA
Plan and all ERISA Affiliates are in compliance with ERISA in all material
respects. No ERISA Affiliate is required to contribute to, or has any other
absolute or contingent liability in respect of, any "multiemployer plan" as
defined in Section 4001 of ERISA. Except as set forth in the Disclosure Schedule
or a Disclosure Report: (i) no "accumulated funding deficiency" (as defined in
Section 412(a) of the Internal Revenue Code of 1986, as amended) exists with
respect to any ERISA Plan, whether or not waived by the Secretary of the
Treasury or his delegate, and (ii) the current value of each ERISA Plan's
benefits does not exceed the current value of such ERISA Plan's assets available
for the payment of such benefits by more than $500,000.
Section 5.12. Environmental and Other Laws. Except as disclosed in the
Disclosure Schedule or a Disclosure Report to the best of Borrower's knowledge:
(a) Borrower is conducting its businesses in material compliance with all
applicable Laws, including Environmental Laws, and has and is in compliance with
all licenses and permits required under any such Laws; (b) none of the
operations or properties of Borrower is the subject of federal, state or local
investigation evaluating whether any material remedial action is needed to
respond to a release of any Hazardous Materials into the environment or to the
improper storage or disposal (including storage or disposal at offsite
locations) of any Hazardous Materials; (c) Borrower has not and no other Person
has) filed any notice under any Law indicating that Borrower is responsible for
the improper release into the environment, or the improper storage or disposal,
of any material amount of any Hazardous Materials or that any Hazardous
Materials have been improperly released, or are improperly stored or disposed
of, upon any property of Borrower; (d) Borrower has not transported or arranged
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for the transportation of any Hazardous Material to any location which is (i)
listed on the National Priorities List under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, listed for
possible inclusion on such National Priorities List by the Environmental
Protection Agency in its Comprehensive Environmental Response, Compensation and
Liability Information System List, or listed on any similar state list or (ii)
the subject of federal, state or local enforcement actions or other
investigations which may lead to claims against Borrower for clean-up costs,
remedial work, damages to natural resources or for personal injury claims
(whether under Environmental Laws or otherwise); and (e) Borrower has otherwise
no known material contingent liability under any Environmental Laws or in
connection with the release into the environment, or the storage or disposal, of
any Hazardous Materials.
Section 5.13. Names and Places of Business. The chief executive office
and principal place of business of Borrower is (and for the preceding five years
has been) located at the address of Borrower set out in Section 10.3. Except as
indicated in the Disclosure Schedule or a Disclosure Report, Borrower has no
other office or place of business.
Section 5.14. Borrower's Subsidiaries. Borrower does not presently have
any Subsidiary or own any stock in any other corporation or association except
those listed in the Disclosure Schedule or a Disclosure Report. Borrower is not
a member of any general or limited partnership, joint venture or association of
any type whatsoever except those listed in the Disclosure Schedule or a
Disclosure Report. Except as otherwise revealed in a Disclosure Report, Borrower
owns, directly or indirectly, the equity interest in each of its Subsidiaries
which is indicated in the Disclosure Schedule.
Section 5.15. Title to Properties; Licenses. Borrower has good and
marketable title to at least seventy percent (70%), and good and defensible
title to at least thirty percent (30%) of the Oil and Gas Properties included in
the Aggregate Borrowing Base, subject only to Permitted Liens. As used herein,
"defensible title" means title subject to minor defects and irregularities which
are not such as to be likely to interfere materially with the benefit and
enjoyment of production from the properties. To the best of Borrower's
knowledge, Borrower possesses all licenses, permits, franchises, patents,
copyrights, trademarks and trade names, and other intellectual property (or
otherwise possesses the right to use such intellectual property without
violation of the rights of any other Person) which are necessary to carry out
its business as presently conducted and as presently proposed to be conducted
hereafter, and no Restricted Person is in violation in any material respect of
the terms under which it possesses such intellectual property or the right to
use such intellectual property.
Section 5.16. Government Regulation. To the best knowledge of Borrower,
Borrower is not subject to regulation under the Public Utility Holding Company
Act of 1935, the Federal Power Act, the Investment Company Act of 1940 (as any
of the preceding acts have been amended) or any other Law which regulates the
incurring by Borrower of Indebtedness, including Laws relating to common
contract carriers or the sale of electricity, gas, steam, water or other public
utility services.
ARTICLE VI - Affirmative Covenants of Borrower
To conform with the terms and conditions under which each Lender is
willing to have credit outstanding to Borrower, and to induce each Lender to
enter into this Agreement and extend credit hereunder, Borrower warrants,
covenants and agrees that until the full and final payment of the Obligations
and the termination of this Agreement, unless Majority Lenders have previously
agreed otherwise:
Section 6.1. Payment and Performance. Borrower will pay all amounts
due under the Loan Documents in accordance with the terms thereof and will
observe, perform and comply with every covenant, term and condition set forth in
the Loan Documents.
Sectin 6.2. Books, Financial Statements and Reports. Borrower will at
all times maintain full and accurate books of account and records. Borrower will
maintain and will cause its Subsidiaries to maintain a standard system of
accounting, will maintain its Fiscal Year, and will furnish the following
statements and reports to each Lender at Borrower's expense:
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(a) As soon as available, and in any event within one-hundred-twenty
(120) days after the end of each Fiscal Year, complete Consolidated financial
statements of Borrower together with all notes thereto, prepared in reasonable
detail in accordance with GAAP, together with an unqualified opinion, based on
an audit using generally accepted auditing standards, by an independent
certified public accountant selected by Borrower and acceptable to Majority
Lenders, stating that such Consolidated financial statements have been so
prepared. These financial statements shall contain a Consolidated balance sheet
as of the end of such Fiscal Year and Consolidated statement of earnings, of
cash flows, and of changes in owners' equity for such Fiscal Year, each setting
forth in comparative form the corresponding figures for the preceding Fiscal
Year.
(b) As soon as available, and in any event within sixty (60) days after
the end of each Fiscal Quarter, Borrower's Consolidated balance sheet as of the
end of such Fiscal Quarter and Consolidated statements of Borrower's earnings
and cash flows for the period from the beginning of the then current Fiscal Year
to the end of such Fiscal Quarter, all in reasonable detail and prepared in
accordance with GAAP, subject to changes resulting from normal year-end
adjustments. In addition Borrower will, together with each such set of financial
statements, furnish a certificate in the form of Exhibit D signed by the chief
financial officer of Borrower stating that such financial statements are
accurate and complete (subject to normal year-end adjustments), stating that he
has reviewed the Loan Documents, containing calculations showing compliance (or
non-compliance) at the end of such Fiscal Quarter with the requirements of
Section 7.10 and stating that no Default exists at the end of such Fiscal
Quarter or at the time of such certificate or specifying the nature and period
of existence of any such Default.
(c) Promptly upon their becoming available, copies of all financial
statements, reports, notices and proxy statements sent by Borrower to its
stockholders and all registration statements, periodic reports and other
statements and schedules filed by Borrower with any securities exchange, the
Securities and Exchange Commission or any similar governmental authority.
(d) As soon as available, and in any event within sixty (60) days after
the end of each Fiscal Quarter, production and expense reports on all
Hydrocarbons produced and marketed from the Oil and Gas Properties on an
aggregate basis during such quarter, including the quantities involved, the
actual revenues derived and ad valorem, production and severance taxes, together
with information reflecting on a property-by-property basis all material gas
imbalances and other material changes in working interests and net revenue
interests of Borrower with respect to the Oil and Gas Properties.
Section 6.3. Other Information and Inspections. Borrower will furnish
to each Lender any information which Agent may from time to time request in
writing concerning any covenant, provision or condition of the Loan Documents or
any matter in connection with Borrower's businesses and operations. Borrower
will permit representatives appointed by Agent (including independent
accountants, auditors, agents, attorneys, appraisers and any other Persons) to
visit and inspect during normal business hours any of such Borrower's property,
including its books of account, other books and records, and any facilities or
other business assets, and to make extra copies therefrom and photocopies and
photographs thereof, and to write down and record any information such
representatives obtain, and Borrower shall permit Agent or its representatives
to investigate and verify the accuracy of the information furnished to Agent or
any Lender in connection with the Loan Documents and to discuss all such matters
with its officers, employees and representatives.
Section 6.4. Notice of Material Events and Change of Address. Borrower
will promptly notify each Lender in writing, stating that such notice is being
given pursuant to this Agreement, of:
(a) the occurrence of any Material Adverse Change,
(b) the occurrence of any Default,
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(c) the acceleration of the maturity of any Indebtedness owed by
Borrower or of any default by Borrower under any indenture, mortgage, agreement,
contract or other instrument to which any of them is a party or by which any of
them or any of their properties is bound, if such acceleration or default could
cause a Material Adverse Change,
(d) the occurrence of any Termination Event,
(e) any claim of $500,000 or more, any notice of potential liability
under any Environmental Laws which might exceed such amount, or any other
material adverse claim asserted against any Restricted Person or with respect to
any Restricted Person's properties, and
(f) the filing of any suit or proceeding against any Restricted Person
in which an adverse decision could cause a Material Adverse Change.
Upon the occurrence of any of the foregoing Borrower will take all necessary or
appropriate steps to remedy promptly any such Material Adverse Change, Default,
acceleration, default or Termination Event, to protect against any such adverse
claim, to defend any such suit or proceeding, and to resolve all controversies
on account of any of the foregoing. Borrower will also notify Agent and Agent's
counsel in writing at least twenty Business Days prior to the date that Borrower
changes its name or the location of its chief executive office or principal
place of business or the place where it keeps its books and records.
Section 6.5. Maintenance of Properties. Borrower will keep all Oil and
Gas Properties and all other property used or useful in the conduct of its
business in good condition and in compliance with all applicable Laws, and will
from time to time make all repairs, renewals and replacements needed to enable
the business and operations carried on in connection therewith to be promptly
and advantageously conducted at all times.
Section 6.6. Maintenance of Existence and Qualifications. Borrower will
maintain and preserve its existence and its rights and franchises in full force
and effect and will qualify to do business in all states or jurisdictions where
required by applicable Law, except where the failure so to qualify will not
cause a Material Adverse Change.
Section 6.7. Payment of Trade Liabilities, Taxes, etc. Borrower will
(a) timely file all required tax returns; (b) timely pay all taxes, assessments,
and other governmental charges or levies imposed upon it or upon its income,
profits or property; (c) within ninety (90) days after the same becomes due pay
all Liabilities owed by it on ordinary trade terms to vendors, suppliers and
other Persons providing goods and services used by it in the ordinary course of
its business; (d) pay and discharge when due all other Liabilities now or
hereafter owed by it; and (e) maintain appropriate accruals and reserves for all
of the foregoing in accordance with GAAP. Borrower may, however, delay paying or
discharging any of the foregoing so long as it is in good faith contesting the
validity thereof by appropriate proceedings and has set aside on its books
adequate reserves therefor.
Section 6.8. Insurance. Borrower will keep or cause to be kept insured
by financially sound and reputable insurers all of its insurable property, real
and personal, against fire and against such other risks as are customarily
insured against by similar businesses of a comparable size, and fully insure
against its employer's and public liability risks in financially sound and
reputable insurance companies, all in such amounts and with such carriers as are
consistent with industry standards, and with agreements by each carrier that the
Agent shall receive at least 10 calendar days' notice prior to cancellation of
any such policy. In this regard, if the Agent so requests, Borrower shall
furnish to the Agent copies of all insurance policies relating to the Oil and
Gas Properties and shall cause the Agent to be named as loss payee thereof on
behalf of the Banks as its or their interests may appear.
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Section 6.9. Performance on Borrower's Belalf. If Borrower fails to pay
any taxes, insurance premiums, expenses, attorneys' fees or other amounts it is
required to pay under any Loan Document, Agent may pay the same. Borrower shall
immediately reimburse Agent for any such payments and each amount paid by Agent
shall constitute an Obligation owed hereunder which is due and payable on the
date such amount is paid by Agent.
Section 6.10. Interest. Borrower hereby promises to each Lender to
pay interest at the Default Rate on all Obligations (including Obligations to
pay fees or to reimburse or indemnify any Lender) which Borrower has in this
Agreement promised to pay to such Lender and which are not paid when due. Such
interest shall accrue from the date such Obligations become due until they are
paid.
Section 6.11. Compliance with Agreements and Law. Borrower will perform
all material obligations it is required to perform under the terms of each
indenture, mortgage, deed of trust, security agreement, lease, franchise,
agreement, contract or other instrument or obligation to which it is a party or
by which it or any of its properties is bound. Borrower will conduct its
business and affairs in compliance in all material respects with all Laws
applicable thereto.
Section 6.12. Environmental Matters
(a) Borrower will comply in all material respects with all
Environmental Laws now or hereafter applicable to Borrower and shall obtain, at
or prior to the time required by applicable Environmental Laws, all
environmental, health and safety permits, licenses and other authorizations
necessary for its operations and will maintain such authorizations in full force
and effect.
(b) Borrower will promptly furnish to Agent all written notices of
material violations, orders, claims, citations, complaints, penalty assessments,
suits or other proceedings received by Borrower, or of which it has notice,
pending or threatened against Borrower, by any governmental authority with
respect to any alleged violation of or non-compliance with any Environmental
Laws or any permits, licenses or authorizations in connection with its ownership
or use of its properties or the operation of its business.
(c) Borrower will promptly furnish to Agent all requests for
information, notices of claim, demand letters, and other notifications, received
by Borrower in connection with its ownership or use of its properties or the
conduct of its business, relating to potential responsibility with respect to
any material investigation or clean-up of Hazardous Material at any location.
Section 6.13. Evidence of Compliance. Borrower will furnish to each
Lender at Borrower's expense all evidence which Agent from time to time
reasonably requests in writing as to the accuracy and validity of or compliance
with all representations, warranties and covenants made by Borrower in the Loan
Documents, the satisfaction of all conditions contained therein, and all other
matters pertaining thereto.
Section 6.14. Bank Accounts; Offset. To secure the repayment of the
Obligations Borrower hereby grants to each Lender a security interest, a lien,
and a right of offset, each of which shall be in addition to all other
interests, liens, and rights of any Lender at common Law, under the Loan
Documents, or otherwise, and each of which shall be upon and against (a) any and
all moneys, securities or other property (and the proceeds therefrom) of
Borrower now or hereafter held or received by or in transit to any Lender from
or for the account of Borrower, whether for safekeeping, custody, pledge,
transmission, collection or otherwise, (b) any and all deposits (general or
special, time or demand, provisional or final) of Borrower with any Lender, and
(c) any other credits and claims of Borrower at any time existing against any
Lender, including claims under certificates of deposit. At any time and from
time to time after the occurrence of any Default, each Lender is hereby
authorized to foreclose upon, or to offset against the Obligations then due and
payable, any and all items hereinabove referred to. The remedies of foreclosure
and offset are separate and cumulative, and either may be exercised
independently of the other without regard to procedures or restrictions
applicable to the other.
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ARTICLE VII - Negative Covenants of Borrower
To conform with the terms and conditions under which each Lender is
willing to have credit outstanding to Borrower, and to induce each Lender to
enter into this Agreement and make the Loans, Borrower warrants, covenants and
agrees that until the full and final payment of the Obligations and the
termination of this Agreement, unless Majority Lenders have previously agreed
otherwise:
Section 7.1. Indebtedness. No Restricted Person will in any manner owe
or be liable for Indebtedness except:
(a) the Obligations;
(b) Indebtedness which is secured by properties or assets other than
Oil and Gas Properties included in the Aggregate Borrowing Base and for which
Borrower has no personal or recourse liability;
(c) Indebtedness outstanding under the instruments and agreements
described on the Disclosure Schedule, including any future advances which
Borrower is presently entitled to receive thereunder but excluding any renewals
or extensions of such Liabilities;
(d) Indebtedness arising under Hedging Contracts permitted under
Section 7.3;
(e) Indebtedness arising in the ordinary course of business as operator
or working interest owner of any of the Oil and Gas Properties;
(f) Endorsements of negotiable instruments for deposit or collection
and similar transactions in the ordinary course of its business and liabilities
of Panterra Petroleum arising solely due to Borrower being its general partner;
(g) Guaranties described in the definition of Permitted Investments in
Section 1.1 and other guaranties and contingent liabilities not to exceed
$500,000 in the aggregate;
(h) Miscellaneous items of Indebtedness not described in subsections
(a) through (h) which do not in the aggregate (taking into account all such
Indebtedness of all Restricted Persons) exceed $1,000,000 at any one time
outstanding.
Section 7.2. Limitation on Liens. No Restricted Person will create,
assume or permit to exist any Lien upon any of the Oil and Gas Properties
included in the Aggregate Borrowing Base except (i) liens for taxes not
delinquent or being contested in good faith and by appropriate proceedings and
for which adequate reserves have been set aside on Borrower's books; operator's,
mechanic's, workmen's. materialmen's and other like liens arising in the
ordinary course of business in respect of obligations not overdue or which are
being contested in good faith and by appropriate proceedings and for which
adequate reserves have been set aside on Borrower's books; or (ii) liens
supporting the indebtedness described in Section 7.1(b) which it now owns or
hereafter acquires.
Section 7.3. Burdensome Undertakings. Borrower will not undertake,
or become contractually bound to undertake, any action not in the ordinary
course of business that would materially adversely affect its business,
properties, prospects, assets, operations or condition (financial or otherwise).
Borrower will not be a party to or in any manner be liable on any Hedging
Contract, other than Hedging Contracts between Borrower and (i) Enron Capital &
Trade Resources Corp., (ii) Natural Gas Clearinghouse, (iii) N.M. Rothschild &
Son, Ltd., (iv) any Lender or any Affiliate thereof, or (v) one or more
financial institutions having a credit rating of Grade A or higher as defined by
Moody's.
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Section 7.4. Limitation on Mergers, Issuances of Securities. Except as
expressly provided in this section Borrower will not merge or consolidate with
or into any other business entity except (i) in connection with the acquisition
of oil and gas properties in the ordinary course of its business and after the
consummation of which Borrower is the surviving entity, and (ii) any
Consolidated subsidiary of the Borrower may merge, consolidate or combine with
or into, or transfer assets to the Borrower, provided that the Borrower shall be
the continuing or surviving entity; in both cases, so long as no Default or
Event of Default has occurred or is continuing or would be caused by the
consummation of such merger or consolidation or disposition of assets. Borrower
will not issue any securities other than shares of its common stock and any
options or warrants giving the holders thereof only the right to acquire such
shares.
Section 7.5. Limitation on Sales of Property. No Restricted Person will
sell, transfer, lease, exchange, alienate or dispose of any of the Oil and Gas
Properties included in the Aggregate Borrowing Base except Oil and Gas
Properties for which the aggregate sales price for all such properties sold
since the most recent Determination Date does not exceed $5,000,000.
Section 7.6. Limitation on Investment and New Businesses. No
Restricted Person will (i) make any expenditure or commitment or incur any
obligation or enter into or engage in any transaction except in the ordinary
course of business, (ii) engage directly or indirectly in any business or
conduct any operations except in connection with or incidental to its present
businesses and operations, (iii) make any acquisitions of or capital
contributions to or other Investments in any Person, other than Permitted
Investments, or (iv) make any significant acquisitions or Investments in any
properties other than oil and gas properties, provided that if (A) no Default or
Event of Default has occurred and is continuing and (B) the Facility Usage does
not exceed the Aggregate Borrowing Base then in effect, Restricted Person may
acquire or make a capital contribution to or other Investments in a Person not
to exceed an aggregate amount of $500,000 in any Fiscal Year.
Section 7.7. Limitation on Credit Extensions. Except for Permitted
Investments, Borrower will not extend credit, make advances or make loans other
than (i) normal and prudent extensions of credit to customers buying goods and
services in the ordinary course of business, which extensions shall not be for
longer periods than those extended by similar businesses operated in a normal
and prudent manner, and (ii) loans to Subsidiaries in the ordinary course of
business not to exceed $20,000 per month.
Section 7.8. Subsidiaries; Transactions with Affiliates. Borrower will
not form or acquire any Subsidiary except in connection with the acquisition and
development of oil and gas properties or the marketing of production in the
ordinary course of businesses. Neither Borrower nor any of its Subsidiaries will
engage in any material transaction with any of its Affiliates on terms which are
less favorable to it than those which would have been obtainable at the time in
arm's-length dealing with Persons other than such Affiliates, provided that such
restriction shall not apply to transactions among Borrower and its Subsidiaries.
Section 7.9. Multiemployer ERISA Plans. No ERISA Affiliate will incur
any obligation to contribute to any "multiemployer plan" as defined in Section
4001 of ERISA.
Section 7.10. Shareholder's Equity. Shareholder's Equity will never
be less than the sum of (a) $125,000,000 plus (b) Computed Net Income for the
period beginning January 1, 1998 and ending on the last day of the most recent
Fiscal Quarter as of the time in question. As used in this subsection, `Computed
Net Income' means fifty percent (50%) of Borrower's Consolidated net income for
each Fiscal Quarter, if positive, and zero percent (0%) if negative, determined
on a cumulative basis.
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Section 7.11. The Current Ratio. The Current Ratio will never be less
than 1.0 to 1.0.
ARTICLE VIII - Events of Default and Remedies
Section 8.1. Events of Default. Each of the following events
constitutes an Event of Default under this Agreement:
(a) Borrower fails to pay the principal component of any Obligation
when due and payable, whether at a date for the payment of a fixed installment
or as a contingent or other payment becomes due and payable or as a result of
acceleration or otherwise;
(b) Borrower fails to pay any Obligation (other than the Obligations in
subsection (a) above) when due and payable, whether at a date for the payment of
a fixed installment or as a contingent or other payment becomes due and payable
or as a result of acceleration or otherwise, within five Business Days after the
same becomes due;
(c) Any "default" or "event of default" occurs under any Loan Document
which defines either such term, and the same is not remedied within the
applicable period of grace (if any) provided in such Loan Document;
(d) Borrower fails to duly observe, perform or comply with any
covenant, agreement or provision contained herein.
(e) Borrower fails (other than as referred to in subsections (a), (b),
(c) or (d) above) to duly observe, perform or comply with any covenant,
agreement, condition or provision of any Loan Document, and such failure remains
unremedied for a period of thirty (30) days after notice of such failure is
given by Agent to Borrower;
(f) Any representation or warranty previously, presently or hereafter
made in writing by or on behalf of Borrower in connection with any Loan Document
shall prove to have been false or incorrect in any material respect on any date
on or as of which made, or any Loan Document at any time ceases to be valid,
binding and enforceable as warranted in Section 5.5 for any reason other than
its release or subordination by Agent;
(g) Any Restricted Person fails to duly observe, perform or comply with
any agreement with any Person or any term or condition of any instrument, if
such agreement or instrument is materially significant to Borrower or to
Borrower and its Subsidiaries on a Consolidated basis, and such failure is not
remedied within the applicable period of grace (if any) provided in such
agreement or instrument;
(h) Any Restricted Person (i) fails to pay any portion, when such
portion is due, of any of its Indebtedness in excess of $1,000,000, or (ii) if
such agreement or instrument is materially significant to Borrower or to
Borrower and its Subsidiaries on a Consolidated basis, breaches or defaults in
the performance of any agreement or instrument by which any such Indebtedness is
issued, evidenced, governed, or secured, and any such failure, breach or default
continues beyond any applicable period of grace provided therefor subject to the
materiality provision in (g) above;
(i) Either (i) any "accumulated funding deficiency" (as defined in
Section 412(a) of the Internal Revenue Code of 1986, as amended) in excess of
$1,000,000 exists with respect to any ERISA Plan, whether or not waived by the
Secretary of the Treasury or his delegate, or (ii) any Termination Event occurs
with respect to any ERISA Plan and the then current value of such ERISA Plan's
benefit liabilities exceeds the then current value of such ERISA Plan's assets
available for the payment of such benefit liabilities by more than $100,000 (or
in the case of a Termination Event involving the withdrawal of a substantial
employer, the withdrawing employer's proportionate share of such excess exceeds
such amount); and
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(j) Any Restricted Person:
(i) suffers the entry against it of a judgment, decree or
order for relief by a Tribunal of competent jurisdiction in an
involuntary proceeding commenced under any applicable bankruptcy,
insolvency or other similar Law of any jurisdiction now or hereafter in
effect, including the federal Bankruptcy Code, as from time to time
amended, or has any such proceeding commenced against it which remains
undismissed for a period of fifteen days; or
(ii) commences a voluntary case under any applicable
bankruptcy, insolvency or similar Law now or hereafter in effect,
including the federal Bankruptcy Code, as from time to time amended; or
applies for or consents to the entry of an order for relief in an
involuntary case under any such Law; or makes a general assignment for
the benefit of creditors; or fails generally to pay (or admits in
writing its inability to pay) its debts as such debts become due; or
takes corporate or other action to authorize any of the foregoing; or
(iii) suffers the appointment of or taking possession by a
receiver, liquidator, assignee, custodian, trustee, sequestrator or
similar official of all or a substantial part of its assets in a
proceeding brought against or initiated by it, and such appointment or
taking possession is neither made ineffective nor discharged within
thirty days after the making thereof, or such appointment or taking
possession is at any time consented to, requested by, or acquiesced to
by it; or
(iv) suffers the entry against it of a final judgment for the
payment of money in excess of $1,000,000 (not covered by insurance
satisfactory to Agent in its discretion), unless the same is discharged
within thirty days after the date of entry thereof or an appeal or
appropriate proceeding for review thereof is taken within such period
and a stay of execution pending such appeal is obtained; or
(v) suffers a writ or warrant of attachment or any similar
process to be issued by any Tribunal against all or any substantial
part of its assets, and such writ or warrant of attachment or any
similar process is not stayed or released within thirty days after the
entry or levy thereof or after any stay is vacated or set aside; and
(k) Any Change in Control occurs
(l) Any Change in Management occurs; and
(m) Any Material Adverse Change occurs.
Upon the occurrence of an Event of Default described in subsection (j)(i),
(j)(ii) or (j)(iii) of this section with respect to Borrower, all of the
Obligations shall thereupon be immediately due and payable, without demand,
presentment, notice of demand or of dishonor and nonpayment, protest, notice of
protest, notice of intention to accelerate, declaration or notice of
acceleration, or any other notice or declaration of any kind, all of which are
hereby expressly waived by Borrower and each Restricted Person who at any time
ratifies or approves this Agreement. Upon any such acceleration, any obligation
of any Lender to make any further Loans shall be permanently terminated. During
the continuance of any other Event of Default, Agent at any time and from time
to time may (and upon written instructions from Majority Lenders, Agent shall),
without notice to Borrower or any other Restricted Person, do either or both of
the following: (1) terminate any obligation of Lenders to make Loans hereunder,
and (2) declare any or all of the Obligations immediately due and payable, and
all such Obligations shall thereupon be immediately due and payable, without
demand, presentment, notice of demand or of dishonor and nonpayment, protest,
notice of protest, notice of intention to accelerate, declaration or notice of
acceleration, or any other notice or declaration of any kind, all of which are
hereby expressly waived by Borrower and each Restricted Person who at any time
ratifies or approves this Agreement.
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Section 8.2. Remedies. If any Default shall occur and be continuing,
each Lender may protect and enforce its rights under the Loan Documents by any
appropriate proceedings, including proceedings for specific performance of any
covenant or agreement contained in any Loan Document, and each Lender may
enforce the payment of any Obligations due it or enforce any other legal or
equitable right which it may have. All rights, remedies and powers conferred
upon Lender Parties under the Loan Documents shall be deemed cumulative and not
exclusive of any other rights, remedies or powers available under the Loan
Documents or at Law or in equity.
ARTICLE IX - Agent
Section 9.1. Appointment, Powers, and Immunities. Each Lender hereby
irrevocably appoints and authorizes Agent to act as its agent under this
Agreement and the other Loan Documents with such powers and discretion as are
specifically delegated to Agent by the terms of this Agreement and the other
Loan Documents, together with such other powers as are reasonably incidental
thereto. Agent (which term as used in this sentence and in Section 9.5 and the
first sentence of Section 9.6 hereof shall include its Affiliates and its own
and its Affiliates' officers, directors, employees, and agents): (a) shall not
have any duties or responsibilities except those expressly set forth in this
Agreement and shall not be a trustee or fiduciary for any Lender; (b) shall not
be responsible to Lenders for any recital, statement, representation, or
warranty (whether written or oral) made in or in connection with any Loan
Document or any certificate or other document referred to or provided for in, or
received by any of them under, any Loan Document, or for the value, validity,
effectiveness, genuineness, enforceability, or sufficiency of any Loan Document,
or any other document referred to or provided for therein or for any failure by
Borrower or any other Person to perform any of its obligations thereunder; (c)
shall not be responsible for or have any duty to ascertain, inquire into, or
verify the performance or observance of any covenants or agreements by Borrower
or the satisfaction of any condition or to inspect the property (including the
books and records) of Borrower or any of its Subsidiaries or Affiliates; (d)
shall not be required to initiate or conduct any litigation or collection
proceedings under any Loan Document; and (e) shall not be responsible for any
action taken or omitted to be taken by it under or in connection with any Loan
Document, except for its own gross negligence or willful misconduct. Agent may
employ agents and attorneys-in-fact and shall not be responsible for the
negligence or misconduct of any such agents or attorneys-in-fact selected by it
with reasonable care.
Section 9.2. Reliance by Agent. Agent shall be entitled to rely upon
any certification, notice, instrument, writing, or other communication
(including, without limitation, any thereof by telephone or telecopy) believed
by it to be genuine and correct and to have been signed, sent or made by or on
behalf of the proper Person or Persons, and upon advice and statements of legal
counsel (including counsel for any Restricted Person), independent accountants,
and other experts selected by Agent. Agent may deem and treat the payee of any
Note as the holder thereof for all purposes hereof unless and until Agent
receives and accepts an Assignment and Acceptance executed in accordance with
Section 10.6 hereof. As to any matters not expressly provided for by this
Agreement, 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
the Majority Lenders, and such instructions shall be binding on all of the
Lenders; provided, however, that Agent shall not be required to take any action
that exposes Agent to personal liability or that is contrary to any Loan
Document or applicable Law or unless it shall first be indemnified to its
satisfaction by Lenders against any and all liability and expense which may be
incurred by it by reason of taking any such action.
Section 9.3. Defaults. Agent shall not be deemed to have knowledge
or notice of the occurrence of a Default or Event of Default unless Agent has
received written notice from a Lender or Borrower specifying such Default or
Event of Default and stating that such notice is a "Notice of Default." In the
event that Agent receives such a notice of the occurrence of a Default or Event
of Default, Agent shall give prompt notice thereof to Lenders. Agent shall
(subject to Section 9.2 hereof) take such action with respect to such Default or
Event of Default as shall reasonably be directed by the Majority Lenders,
provided that, unless and until Agent shall have received such directions, Agent
may (but shall not be obligated to) take such action, or refrain from taking
such action, with respect to such Default or Event of Default as it shall deem
advisable in the best interest of Lenders.
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Section 9.4. Rights as Lender. With respect to its Percentage Share
and the Loans made by it, NationsBank (and any successor acting as Agent) in its
capacity as a Lender hereunder shall have the same rights and powers hereunder
as any other Lender and may exercise the same as though it were not acting as
Agent, and the term "Lender" or "Lenders" shall, unless the context otherwise
indicates, include Agent in its individual capacity. NationsBank (and any
successor acting as Agent) and its Affiliates may (without having to account
therefor to any Lender) accept deposits from, lend money to, make Investments
in, provide services to, and generally engage in any kind of lending, trust, or
other business with any Restricted Person or any of its Subsidiaries or
Affiliates as if it were not acting as Agent, and NationsBank (and any successor
acting as Agent) and its Affiliates may accept fees and other consideration from
any Restricted Person or any of its Subsidiaries or Affiliates for services in
connection with this Agreement or otherwise without having to account for the
same to Lenders.
Section 9.5. Indemnification. Lenders agree to indemnify Agent (to the
extent not reimbursed under Section 10.4(b) hereof, but without limiting the
obligations of Borrower under such section) ratably in accordance with their
respective Percentage Shares, for any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses (including
attorneys' fees), or disbursements of any kind and nature whatsoever that may be
imposed on, incurred by or asserted against Agent (including by any Lender) in
any way relating to or arising out of any Loan Document or the transactions
contemplated thereby or any action taken or omitted by Agent under any Loan
Document; provided that no Lender shall be liable for any of the foregoing to
the extent they arise from the gross negligence or willful misconduct of the
Person to be indemnified. Without limitation of the foregoing, each Lender
agrees to reimburse Agent promptly upon demand for its ratable share of any
costs or expenses payable by Borrower under Section 10.4(b), to the extent that
Agent is not promptly reimbursed for such costs and expenses by Borrower. The
agreements contained in this section shall survive payment in full of the Loans
and all other amounts payable under this Agreement.
Section 9.6. Each Lender agrees that it has, independently and without
reliance on Agent or any other Lender, and based on such documents and
information as it has deemed appropriate, made its own credit analysis of the
Borrower and decision to enter into this Agreement and that it will,
independently and without reliance upon Agent or any other Lender, and based on
such documents and information as it shall deem appropriate at the time,
continue to make its own analysis and decisions in taking or not taking action
under the Loan Documents. Except for notices, reports, and other documents and
information expressly required to be furnished to Lenders by Agent hereunder,
Agent shall not have any duty or responsibility to provide any Lender with any
credit or other information concerning the affairs, financial condition, or
business of any Restricted Person or any of its Subsidiaries or Affiliates that
may come into the possession of Agent or any of its Affiliates.
Section 9.7. Sharing of Set-Offs and Other Payments. Each Lender agrees
that if it shall, whether through the exercise of rights of banker's lien, set
off, or counterclaim against Borrower or otherwise, obtain payment of a portion
of the aggregate Obligations owed to it which, taking into account all
distributions made by Agent under Section 3.1, causes such Lender to have
received more than it would have received had such payment been received by
Agent and distributed pursuant to Section 3.1, then (a) it shall be deemed to
have simultaneously purchased and shall be obligated to purchase interests in
the Obligations as necessary to cause all Lender Parties to share all payments
as provided for in Section 3.1, and (b) such other adjustments shall be made
from time to time as shall be equitable to ensure that Agent and all Lenders
share all payments of Obligations as provided in Section 3.1; provided, however,
that nothing herein contained shall in any way affect the right of any Lender to
obtain payment (whether by exercise of rights of banker's lien, set-off or
counterclaim or otherwise) of indebtedness other than the Obligations. Borrower
expressly consents to the foregoing arrangements and agrees that any holder of
any such interest or other participation in the Obligations, whether or not
acquired pursuant to the foregoing arrangements, may to the fullest extent
permitted by Law exercise any and all rights of banker's lien, set-off, or
counterclaim as fully as if such holder were a holder of the Obligations in the
amount of such interest or other participation. If all or any part of any funds
transferred pursuant to this section is thereafter recovered from the seller
under this section which received the same, the purchase provided for in this
section shall be deemed to have been rescinded to the extent of such recovery,
together with interest, if any, if interest is required pursuant to Tribunal
order to be paid on account of the possession of such funds prior to such
recovery.
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Section 9.8. Investments. Whenever Agent in good faith determines that
it is uncertain about how to distribute to Lenders any funds which it has
received, or whenever Agent in good faith determines that there is any dispute
among Lenders 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 Lenders, Agent shall invest such funds pending
distribution; all interest on any such Investment shall be distributed upon the
distribution of such Investment and in the same proportion and to the same
Persons as such Investment. All moneys received by Agent for distribution to
Lenders (other than to the Person who is Agent in its separate capacity as a
Lender) shall be held by Agent pending such distribution solely as Agent for
such Lenders, and Agent shall have no equitable title to any portion thereof.
Section 9.9. Benefit of Article IX. The provisions of this Article
(other than the following Section 9.11) are intended solely for the benefit of
Lender Parties, and no Restricted Person shall be entitled to rely on any such
provision or assert any such provision in a claim or defense against any Lender.
Lender Parties may waive or amend such provisions as they desire without any
notice to or consent of Borrower or any Restricted Person.
Section 9.10. Resignation. Agent may resign at any time by giving
written notice thereof to Lenders and Borrower. Each such notice shall set forth
the date of such resignation. Upon any such resignation, Majority Lenders shall
have the right to appoint a successor Agent, which shall be, so long as no
Default or Event of Default, Tranche A Excess Debt or Tranche B Excess Debt
exists, subject to Borrower's approval, which shall not be unreasonably
withheld. A successor must be appointed for any retiring Agent, and such Agent's
resignation shall become effective when such successor accepts such appointment.
If, within thirty days after the date of the retiring Agent's resignation, no
successor Agent has been appointed and has accepted such appointment, then the
retiring Agent may appoint a successor Agent, which shall be a commercial bank
organized or licensed to conduct a banking or trust business under the Laws of
the United States of America or of any state thereof. Upon the acceptance of any
appointment as Agent hereunder by a successor Agent, the retiring Agent shall be
discharged from its duties and obligations under this Agreement and the other
Loan Documents. After any retiring Agent's resignation hereunder the provisions
of this Article IX shall continue to inure to its benefit as to any actions
taken or omitted to be taken by it while it was Agent under the Loan Documents.
ARTICLE X - Miscellaneous
Section 10.1. Waivers and Amendments; Acknowledgments.
(a) Waivers and Amendments. No failure or delay (whether by course of
conduct or otherwise) by any Lender in exercising any right, power or remedy
which such Lender may have under any of the Loan Documents shall operate as a
waiver thereof or of any other right, power or remedy, nor shall any single or
partial exercise by any Lender of any such right, power or remedy preclude any
other or further exercise thereof or of any other right, power or remedy. No
waiver of any provision of any Loan Document and no consent to any departure
therefrom shall ever be effective unless it is in writing and signed as provided
below in this section, and then such waiver or consent shall be effective only
in the specific instances and for the purposes for which given and to the extent
specified in such writing. No notice to or demand on Borrower shall in any case
of itself entitle Borrower to any other or further notice or demand in similar
or other circumstances. This Agreement and the other Loan Documents set forth
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the entire understanding between the parties hereto with respect to the
transactions contemplated herein and therein and supersede all prior discussions
and understandings with respect to the subject matter hereof and thereof, and no
waiver, consent, release, modification or amendment of or supplement to this
Agreement or the other Loan Documents shall be valid or effective against any
party hereto unless the same is in writing and signed by (i) if such party is
Borrower, by Borrower, (ii) if such party is Agent or LC Issuer, by such party,
and (iii) if such party is a Lender, by such Lender or by Agent on behalf of
Lenders with the written consent of Majority Lenders (which consent has already
been given as to the termination of the Loan Documents as provided in Section
10.10). Notwithstanding the foregoing or anything to the contrary herein, Agent
shall not, without the prior consent of each individual Lender, execute and
deliver on behalf of such Lender any waiver or amendment which would: (1) waive
any of the conditions specified in Article IV (provided that Agent may in its
discretion withdraw any request it has made under Section 4.2(f), (2) increase
the Maximum Loan Amount of such Lender or subject such Lender to any additional
obligations, (3) reduce any fees payable to such Lender hereunder, or the
principal of, or interest on, such Lender's Note, (4) postpone any date fixed
for any payment of any such fees, principal or interest, (5) amend the
definition herein of "Majority Lenders" or otherwise change the aggregate amount
of Percentage Shares which is required for Agent, Lenders or any of them to take
any particular action under the Loan Documents, or (6) release Borrower from its
obligation to pay such Lender's Note.
(b) Acknowledgments and Admissions. Borrower hereby represents,
warrants, acknowledges and admits that (i) it has been advised by counsel in the
negotiation, execution and delivery of the Loan Documents to which it is a
party, (ii) it has made an independent decision to enter into this Agreement and
the other Loan Documents to which it is a party, without reliance on any
representation, warranty, covenant or undertaking by Agent or any Lender,
whether written, oral or implicit, other than as expressly set out in this
Agreement or in another Loan Document delivered on or after the date hereof,
(iii) there are no representations, warranties, covenants, undertakings or
agreements by any Lender as to the Loan Documents except as expressly set out in
this Agreement or in another Loan Document delivered on or after the date
hereof, (iv) no Lender has any fiduciary obligation toward Borrower with respect
to any Loan Document or the transactions contemplated thereby, (v) the
relationship pursuant to the Loan Documents between Borrower, on one hand, and
each Lender, on the other hand, is and shall be solely that of debtor and
creditor, respectively, (vi) no partnership or joint venture exists with respect
to the Loan Documents between Borrower and any Lender, (vii) Agent is not
Borrower's Agent, but Agent for Lenders, (viii) should an Event of Default or
Default occur or exist, each Lender will determine in its sole discretion and
for its own reasons what remedies and actions it will or will not exercise or
take at that time, (ix) without limiting any of the foregoing, Borrower is not
relying upon any representation or covenant by any Lender, or any representative
thereof, and no such representation or covenant has been made, that any Lender
will, at the time of an Event of Default or Default, or at any other time,
waive, negotiate, discuss, or take or refrain from taking any action permitted
under the Loan Documents with respect to any such Event of Default or Default or
any other provision of the Loan Documents, and (x) all Lender Parties have
relied upon the truthfulness of the acknowledgments in this section in deciding
to execute and deliver this Agreement and to become obligated hereunder.
(c) Representation by Lenders. Each Lender hereby represents that it
will acquire its Note for its own account in the ordinary course of its lending
business; however, the disposition of such Lender's property shall at all times
be and remain within its control and, in particular and without limitation, such
Lender may sell or otherwise transfer its Note, any participation interest or
other interest in its Note, or any of its other rights and obligations under the
Loan Documents.
(d) Joint Acknowledgment. THIS WRITTEN AGREEMENT AND THE OTHER LOAN
DOCUMENTS REPRESENT 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.
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Section 10.2. Survival of Agreements; Cumulative Nature. All of
Borrower's various representations, warranties, covenants and agreements in the
Loan Documents shall survive the execution and delivery of this Agreement and
the other Loan Documents and the performance hereof and thereof, including the
making or granting of the Loans and the delivery of the Notes and the other Loan
Documents, and shall further survive until all of the Obligations are paid in
full to each Lender and all of Lender Parties' obligations to Borrower are
terminated. All statements and agreements contained in any certificate or other
instrument delivered by Borrower to any Lender under any Loan Document shall be
deemed representations and warranties by Borrower or agreements and covenants of
Borrower under this Agreement. The representations, warranties, indemnities, and
covenants made by Restricted Persons in the Loan Documents, and the rights,
powers, and privileges granted to Lender Parties in the Loan Documents, are
cumulative, and, except for expressly specified waivers and consents, no Loan
Document shall be construed in the context of another to diminish, nullify, or
otherwise reduce the benefit to any Lender of any such representation, warranty,
indemnity, covenant, right, power or privilege. In particular and without
limitation, no exception set out in this Agreement to any representation,
warranty, indemnity, or covenant herein contained shall apply to any similar
representation, warranty, indemnity, or covenant contained in any other Loan
Document, and each such similar representation, warranty, indemnity, or covenant
shall be subject only to those exceptions which are expressly made applicable to
it by the terms of the various Loan Documents.
Section 10.3. Notices. All notices, requests, consents, demands and
other communications required or permitted under any Loan Document shall be in
writing, unless otherwise specifically provided in such Loan Document (provided
that Agent may give telephonic notices to the other Lender Parties), and shall
be deemed sufficiently given or furnished if delivered by personal delivery, by
facsimile or telex, by delivery service with proof of delivery, or by registered
or certified United States mail, postage prepaid, to Borrower and Restricted
Persons at the address of Borrower specified on the signature pages hereto and
to each Lender at its address specified on the signature pages hereto (unless
changed by similar notice in writing given by the particular Person whose
address is to be changed). Any such notice or communication shall be deemed to
have been given (a) in the case of personal delivery or delivery service, upon
receipt, (b) in the case of facsimile or telex, upon receipt, or (c) in the case
of registered or certified United States mail, three days after deposit in the
mail; provided, however, that no Borrowing Notice shall become effective until
actually received by Agent.
Section 10.4. Payment of Expenses; Indemnity.
(a) Payment of Expenses. Whether or not the transactions contemplated
by this Agreement are consummated, Borrower will promptly (and in any event,
within 30 days after any invoice or other statement or notice) pay: (i) all
transfer, stamp, mortgage, documentary or other similar taxes, assessments or
charges levied by any governmental or revenue authority in respect of this
Agreement or any of the other Loan Documents or any other document referred to
herein or therein, (ii) all reasonable costs and expenses incurred by or on
behalf of Agent (including attorneys' fees) in connection with (1) the
negotiation, preparation, execution and delivery of the Loan Documents, and any
and all consents, waivers or other documents or instruments relating thereto,
(2) monitoring or confirming (or preparation or negotiation of any document
related to) Borrower's compliance with any covenants or conditions contained in
this Agreement or in any Loan Document, and (iii) all reasonable costs and
expenses incurred by or on behalf of any Lender Party (including attorneys'
fees, consultants' fees and accounting fees) in connection with the defense or
enforcement of any of the Loan Documents (including this section) or the defense
of any Lender Party's exercise of its rights thereunder.
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(b) Indemnity. Borrower agrees to indemnify each Lender Party, upon
demand, from and against any and all liabilities, obligations, claims, losses,
damages, penalties, fines, actions, judgments, suits, settlements, costs,
expenses or disbursements (including reasonable fees of attorneys, accountants,
experts and advisors) of any kind or nature whatsoever (in this section
collectively called "liabilities and costs") which to any extent (in whole or in
part) may be imposed on, incurred by, or asserted against such Lender Party
growing out of, resulting from or in any other way associated with any of the
Loan Documents and the transactions and events (including the enforcement or
defense thereof) at any time associated therewith or contemplated therein
(including any violation or noncompliance with any Environmental Laws by any
Restricted Person or any liabilities or duties of any Restricted Person or any
Lender Party with respect to Hazardous Materials found in or released into the
environment), provided only that no Lender Party shall be entitled under this
section to receive indemnification for that portion, if any, of any liabilities
and costs which is proximately caused by its own individual gross negligence or
willful misconduct, as determined in a final judgment. If any Person (including
Borrower or any of its Affiliates) ever alleges such gross negligence or willful
misconduct by any Lender Party, the indemnification provided for in this section
shall nonetheless be paid upon demand, subject to later adjustment or
reimbursement, until such time as a court of competent jurisdiction enters a
final judgment as to the extent and effect of the alleged gross negligence or
willful misconduct. As used in this section the term "Lender Party" shall refer
not only to the Persons designated as such in Section 1.1 but also to each
director, officer, agent, attorney, employee, representative and Affiliate of
such Persons.
Section 10.5. Joint and Several Liability; Parties in Interest. All
grants, covenants and agreements contained in the Loan Documents shall bind and
inure to the benefit of the parties thereto and their respective successors and
assigns; provided, however, that Borrower may not may assign or transfer any of
its rights or delegate any of its duties or obligations under any Loan Document
without the prior consent of Majority Lenders. Neither Borrower nor any
Affiliates of Borrower shall directly or indirectly purchase or otherwise retire
any Obligations owed to any Lender nor will any Lender accept any offer to do
so, unless each Lender shall have received substantially the same offer with
respect to the same Percentage Share of the Obligations owed to it. If Borrower
or any Affiliate of Borrower at any time purchases some but less than all of the
Obligations owed to all Lender Parties, such purchaser shall not be entitled to
any rights of any Lender under the Loan Documents unless and until Borrower or
its Affiliates have purchased all of the Obligations.
Section 10.6. Assignments and Participations
(a) Each Lender may assign to one or more Eligible Transferees all or a
portion of its rights and obligations under this Agreement (including, without
limitation, all or a portion of its Loans, its Note, and its Percentage Shares;
provided, however, that
(i) each such assignment shall be to an Eligible Transferee;
(ii) except in the case of an assignment to another Lender or
an assignment of all of a Lender's rights and obligations under this
Agreement, any such partial assignment shall be in an amount at least
equal to $20,000,000 or an integral multiple of $5,000,000 in excess
thereof;
(iii) each such assignment by a Lender shall be of a constant,
and not varying, percentage of all of its rights and obligations under
the Loan Documents; and
(iv) the parties to such assignment shall execute and deliver
to Agent for its acceptance an Assignment and Acceptance in the form of
Exhibit F hereto, together with any Note subject to such assignment and
a processing fee of $3,500.
Upon execution, delivery, and acceptance of such Assignment and Acceptance, the
assignee thereunder shall be a party hereto and, to the extent of such
assignment, have the obligations, rights, and benefits of a Lender hereunder and
the assigning Lender shall, to the extent of such assignment, relinquish its
rights and be released from its obligations under this Agreement. Upon the
consummation of any assignment pursuant to this section, the assignor, Agent and
Borrower shall make appropriate arrangements so that, if required, new Notes are
issued to the assignor and the assignee. If the assignee is not incorporated
under the Laws of the United States of America or a state thereof, it shall
deliver to Borrower and Agent certification as to exemption from deduction or
withholding of Taxes.
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(b) Agent shall maintain at its address referred to in Section 10.3 a
copy of each Assignment and Acceptance delivered to and accepted by it and a
register for the recordation of the names and addresses of Lenders and their
Percentage Shares of, and principal amount of the Loans owing to, each Lender
from time to time (the "Register"). The entries in the Register shall be
conclusive and binding for all purposes, absent manifest error, and Borrower,
Agent and Lenders may treat each Person whose name is recorded in the Register
as a Lender hereunder for all purposes of this Agreement. The Register shall be
available for inspection by Borrower or any Lender at any reasonable time and
from time to time upon reasonable prior notice.
(c) Upon its receipt of an Assignment and Acceptance executed by the
parties thereto, together with any Note subject to such assignment and payment
of the processing fee, Agent shall, if such Assignment and Acceptance has been
completed and is in substantially the form of Exhibit F hereto, (i) accept such
Assignment and Acceptance, (ii) record the information contained therein in the
Register and (iii) give prompt notice thereof to the parties thereto.
(d) Each Lender may sell participations to one or more Persons in all
or a portion of its rights and obligations under this Agreement; provided,
however, that (i) such Lender's obligations under this Agreement shall remain
unchanged, (ii) such Lender shall remain solely responsible to the other parties
hereto for the performance of such obligations, (iii) the participant shall be
entitled to the benefit of the yield protection provisions contained in Article
III and the right of offset contained in Section 6.14, and (iv) Borrower shall
continue to deal solely and directly with such Lender in connection with such
Lender's rights and obligations under this Agreement, and such Lender shall
retain the sole right to enforce the obligations of Borrower relating to its
Loans and its Note and to approve any amendment, modification, or waiver of any
provision of this Agreement (other than amendments, modifications, or waivers
decreasing the amount of principal of or the rate at which interest is payable
on such Loans or Note, extending any scheduled principal payment date or date
fixed for the payment of interest on such Loans or Note, or extending its
Tranche A Commitment or Tranche B Commitment).
(e) Notwithstanding any other provision set forth in this Agreement,
any Lender may at any time assign and pledge all or any portion of its Loans and
its Note to any Federal Reserve Bank as collateral security pursuant to
Regulation A and any Operating Circular issued by such Federal Reserve Bank. No
such assignment shall release the assigning Lender from its obligations
hereunder.
(f) Any Lender may furnish any information concerning Borrower or any
of its Subsidiaries in the possession of such Lender from time to time to
assignees and participants (including prospective assignees and participants),
subject, however, to the provisions of Section 10.7 hereof.
Section 10.7. Confidentiality. Each Lender Party agrees to keep
confidential any information furnished or made available to it by Borrower
pursuant to this Agreement that is marked confidential; provided that nothing
herein shall prevent any Lender Party from disclosing such information (a) to
any other Lender Party or any Affiliate of any Lender Party, or any officer,
director, employee, agent, or advisor of any Lender Party or Affiliate of any
Lender Party, (b) to any other Person if reasonably incidental to the
administration of the credit facility provided herein, (c) as required by any
Law, rule, or regulation, (d) upon the order of any court or administrative
agency, (e) upon the request or demand of any regulatory agency or authority,
(f) that is or becomes available to the public or that is or becomes available
to any Lender Party other than as a result of a disclosure by any Lender Party
prohibited by this Agreement, (g) in connection with any litigation to which
such Lender Party or any of its Affiliates may be a party, (h) to the extent
necessary in connection with the exercise of any remedy under this Agreement or
any other Loan Document, and (i) subject to provisions substantially similar to
those contained in this section, to any actual or proposed participant or
assignee.
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Section 10.8. Governing Law; Submission to Process. EXCEPT TO THE
EXTENT THAT THE LAW OF ANOTHER JURISDICTION IS EXPRESSLY ELECTED IN A LOAN
DOCUMENT, THE LOAN DOCUMENTS SHALL BE DEEMED CONTRACTS AND INSTRUMENTS MADE
UNDER THE LAWS OF THE STATE OF COLORADO AND SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF COLORADO AND THE LAWS
OF THE UNITED STATES OF AMERICA, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF
LAW.
Section 10.9. Limitation on Interest. Lender Parties, Borrower and any
other parties to the Loan Documents intend to contract in strict compliance with
applicable usury Law from time to time in effect. In furtherance thereof such
Persons stipulate and agree that none of the terms and provisions contained in
the Loan Documents shall ever be construed to create a contract to pay, for the
use, forbearance or detention of money, interest in excess of the maximum amount
of interest permitted to be charged by applicable Law from time to time in
effect. Neither Borrower nor any present or future guarantors, endorsers, or
other Persons hereafter becoming liable for payment of any Obligation shall ever
be liable for unearned interest thereon or shall ever be required to pay
interest thereon in excess of the maximum amount that may be lawfully charged
under applicable Law from time to time in effect, and the provisions of this
section shall control over all other provisions of the Loan Documents which may
be in conflict or apparent conflict herewith. Lender Parties expressly disavow
any intention to charge or collect excessive unearned interest or finance
charges in the event the maturity of any Obligation is accelerated. If (a) the
maturity of any Obligation is accelerated for any reason, (b) any Obligation is
prepaid and as a result any amounts held to constitute interest are determined
to be in excess of the legal maximum, or (c) any Lender or any other holder of
any or all of the Obligations shall otherwise collect moneys which are
determined to constitute interest which would otherwise increase the interest on
any or all of the Obligations to an amount in excess of that permitted to be
charged by applicable Law then in effect, then all sums determined to constitute
interest in excess of such legal limit shall, without penalty, be promptly
applied to reduce the then outstanding principal of the related Obligations or,
at such Lender's or holder's option, promptly returned to Borrower or the other
payor thereof upon such determination. In determining whether or not the
interest paid or payable, under any specific circumstance, exceeds the maximum
amount permitted under applicable Law, Lender Parties and Restricted Persons
(and any other payors thereof) shall to the greatest 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) amortize, prorate, allocate, and spread the total
amount of interest throughout the entire contemplated term of the instruments
evidencing the Obligations in accordance with the amounts outstanding from time
to time thereunder and the maximum legal rate of interest from time to time in
effect under applicable Law in order to lawfully charge the maximum amount of
interest permitted under applicable Law.
Section 10.10. Termination; Limited Survival. In its sole and absolute
discretion Borrower may at any time that no Obligations are owing elect in a
written notice delivered to Agent to terminate this Agreement. Upon receipt by
Agent of such a notice, if no Obligations are then owing this Agreement and all
other Loan Documents shall thereupon be terminated and the parties thereto
released from all prospective obligations thereunder. Notwithstanding the
foregoing or anything herein to the contrary, any waivers or admissions made by
any Restricted Person in any Loan Document, any Obligations under Sections 3.2
through 3.6, and any obligations which any Person may have to indemnify or
compensate any Lender shall survive any termination of this Agreement or any
other Loan Document. At the request and expense of Borrower, Agent shall prepare
and execute all necessary instruments to reflect and effect such termination of
the Loan Documents. Agent is hereby authorized to execute all such instruments
on behalf of all Lenders, without the joinder of or further action by any
Lender.
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Section 10.11. Severability. If any term or provision of any Loan
Document shall be determined to be illegal or unenforceable all other terms and
provisions of the Loan Documents shall nevertheless remain effective and shall
be enforced to the fullest extent permitted by applicable Law.
Section 10.12. Counterparts. This Agreement may be separately executed
in any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to constitute one
and the same Agreement.
Section 10.13. Waiver of Jury Trial, Punitive Damages, etc. BORROWER
AND EACH LENDER HEREBY KNOWINGLY, VOLUNTARILY, INTENTIONALLY, AND IRREVOCABLY
(A) WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE
TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR DIRECTLY OR
INDIRECTLY AT ANY TIME ARISING OUT OF, UNDER OR IN CONNECTION WITH THE LOAN
DOCUMENTS OR ANY TRANSACTION CONTEMPLATED THEREBY OR ASSOCIATED THEREWITH,
BEFORE OR AFTER MATURITY; (b) WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY
LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY SUCH LITIGATION ANY
"SPECIAL DAMAGES", AS DEFINED BELOW, (c) CERTIFIES THAT NO PARTY HERETO NOR ANY
REPRESENTATIVE OR AGENT OR COUNSEL FOR ANY PARTY HERETO HAS REPRESENTED,
EXPRESSLY OR OTHERWISE, OR IMPLIED THAT SUCH PARTY WOULD NOT, IN THE EVENT OF
LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS, AND (d) ACKNOWLEDGES THAT IT
HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS AND THE
TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY BY, AMONG OTHER THINGS, THE MUTUAL
WAIVERS AND CERTIFICATIONS CONTAINED IN THIS SECTION. AS USED IN THIS SECTION,
"SPECIAL DAMAGES" INCLUDES ALL SPECIAL, CONSEQUENTIAL, EXEMPLARY, OR PUNITIVE
DAMAGES (REGARDLESS OF HOW NAMED), BUT DOES NOT INCLUDE ANY PAYMENTS OR FUNDS
WHICH ANY PARTY HERETO HAS EXPRESSLY PROMISED TO PAY OR DELIVER TO ANY OTHER
PARTY HERETO.
Section 10.14. Restatement. This Agreement amends and restates in its
entirety that certain Amended and Restated Loan Agreement dated as of April 1,
1996 between Borrower and NationsBank of Texas, N.A., as Agent, and the lenders
named therein and the promissory notes issued pursuant to such agreement (the
"Prior Documents"). The parties hereto hereby agree that the terms and
conditions of this Agreement and the Loan Documents executed of even date
herewith replace and supersede in their entirety all of the Prior Documents, and
from the effective date hereof the covenants, obligations and rights among the
parties hereto shall be governed exclusively by the terms of this Agreement and
the Loan Documents executed pursuant to this Agreement. All security documents
which secure Borrower's Obligations under the Prior Documents which are
currently in Agent's possession shall be returned to Borrower.
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IN WITNESS WHEREOF, this Agreement is executed as of the date first
written above.
ST. MARY LAND & EXPLORATION COMPANY
By: /s/ DAVID L. HENRY
--------------------------------
Name: David L. Henry
Title: Chief Financial Officer
Address:
1776 Lincoln Street
Denver Colorado 80203
Attention: David L. Henry
Fax: (303) 861-0934
<PAGE>
55% NATIONSBANK, N.A.,
Agent, LC Issuer and Lender
By: /s/ DAVID C. RUBENKING
--------------------------------
Name: David C. Rubenking
Title: Senior Vice President
Address:
901 Main Street
Dallas, Texas 75202
Attention: Energy Finance Division Group
Fax: (214) 508-1285
with a copy to:
NationsBanc Energy Group Denver, Inc.
370 17th Street, Suite 3250
Denver, Colorado 80202
Telephone (303) 629-6969
Fax (303) 629-6303
Attention: David C. Rubenking
<PAGE>
30% U.S. BANK NATIONAL ASSOCIATION, a Lender
By: /s/ MARK E. THOMPSON
--------------------------------
Name: Mark E. Thompson
Title: Vice President
Address:
918 17th Street
Denver, Colorado 80202
Attention: Mark Thompson
Fax: (303) 585-4362
<PAGE>
15% NORWEST BANK COLORADO, N.A., a Lender
By: /s/ GARY W. VICK
--------------------------------
Name: Gary W. Vick
Title: Vice President
Address:
1740 Broadway
Denver, Colorado 80274-8699
Attention: Gary Vick
Fax: (303) 863-5196
